[House Hearing, 111 Congress]
[From the U.S. Government Publishing Office]




 
  H.R. 4489, THE FEHBP PRESCRIPTION DRUG INTEGRITY, TRANSPARENCY, AND 
                            COST SAVINGS ACT

=======================================================================

                                HEARING

                               before the

                   SUBCOMMITTEE ON FEDERAL WORKFORCE,
                    POSTAL SERVICE, AND THE DISTRICT
                              OF COLUMBIA

                                 of the

                         COMMITTEE ON OVERSIGHT
                         AND GOVERNMENT REFORM

                        HOUSE OF REPRESENTATIVES

                     ONE HUNDRED ELEVENTH CONGRESS

                             FIRST SESSION

                                   ON

                               H.R. 4489

 TO AMEND CHAPTER 89 OF TITLE 5, UNITED STATES CODE, TO ENSURE PROGRAM 
     INTEGRITY, TRANSPARENCY, AND COST SAVINGS IN THE PRICING AND 
 CONTRACTING OF PRESCRIPTION DRUG BENEFITS UNDER THE FEDERAL EMPLOYEES 
                        HEALTH BENEFITS PROGRAM

                               __________

                           FEBRUARY 23, 2010

                               __________

                           Serial No. 111-72

                               __________

Printed for the use of the Committee on Oversight and Government Reform


  Available via the World Wide Web: http://www.gpoaccess.gov/congress/
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              COMMITTEE ON OVERSIGHT AND GOVERNMENT REFORM

                   EDOLPHUS TOWNS, New York, Chairman
PAUL E. KANJORSKI, Pennsylvania      DARRELL E. ISSA, California
CAROLYN B. MALONEY, New York         DAN BURTON, Indiana
ELIJAH E. CUMMINGS, Maryland         JOHN L. MICA, Florida
DENNIS J. KUCINICH, Ohio             MARK E. SOUDER, Indiana
JOHN F. TIERNEY, Massachusetts       JOHN J. DUNCAN, Jr., Tennessee
WM. LACY CLAY, Missouri              MICHAEL R. TURNER, Ohio
DIANE E. WATSON, California          LYNN A. WESTMORELAND, Georgia
STEPHEN F. LYNCH, Massachusetts      PATRICK T. McHENRY, North Carolina
JIM COOPER, Tennessee                BRIAN P. BILBRAY, California
GERALD E. CONNOLLY, Virginia         JIM JORDAN, Ohio
MIKE QUIGLEY, Illinois               JEFF FLAKE, Arizona
MARCY KAPTUR, Ohio                   JEFF FORTENBERRY, Nebraska
ELEANOR HOLMES NORTON, District of   JASON CHAFFETZ, Utah
    Columbia                         AARON SCHOCK, Illinois
PATRICK J. KENNEDY, Rhode Island     BLAINE LUETKEMEYER, Missouri
DANNY K. DAVIS, Illinois             ANH ``JOSEPH'' CAO, Louisiana
CHRIS VAN HOLLEN, Maryland
HENRY CUELLAR, Texas
PAUL W. HODES, New Hampshire
CHRISTOPHER S. MURPHY, Connecticut
PETER WELCH, Vermont
BILL FOSTER, Illinois
JACKIE SPEIER, California
STEVE DRIEHAUS, Ohio
JUDY CHU, California

                      Ron Stroman, Staff Director
                Michael McCarthy, Deputy Staff Director
                      Carla Hultberg, Chief Clerk
                  Larry Brady, Minority Staff Director

Subcommittee on Federal Workforce, Postal Service, and the District of 
                                Columbia

               STEPHEN F. LYNCH, Massachusetts, Chairman
ELEANOR HOLMES NORTON, District of   JASON CHAFFETZ, Utah
    Columbia                         MARK E. SOUDER, Indiana
DANNY K. DAVIS, Illinois             BRIAN P. BILBRAY, California
ELIJAH E. CUMMINGS, Maryland         ANH ``JOSPEH'' CAO, Louisiana
DENNIS J. KUCINICH, Ohio
WM. LACY CLAY, Missouri
GERALD E. CONNOLLY, Virginia
                     William Miles, Staff Director


                            C O N T E N T S

                              ----------                              
                                                                   Page
Hearing held on February 23, 2010................................     1
Text of H.R. 4489................................................    26
Statement of:
    Adcock, Daniel, legislative director, National Active and 
      Retired Federal Employees; Jacqueline Simon, Public Policy 
      Director, American Federation of Government Employees; 
      Colleen Kelley, national president, National Treasury 
      Employees Union; John Calfee, resident scholar, American 
      Enterprise Institute; and..................................   108
        Adcock, Daniel...........................................   108
        Calfee, John.............................................   139
        Kelley, Colleen..........................................   126
        McNeely, Larry, II.......................................   150
        Simon, Jacqueline........................................   117
    O'Brien, John, Senior Advisor to the Director, U.S. Office of 
      Personnel Management; Patrick McFarland, Inspector General, 
      U.S. Office of Personnel Management; Sharon Treat, esq., 
      State Representative from Maine and Executive Director, 
      National Legislative Association on Prescription Drug 
      Prices; Jasmin Weaver, healthcare initiatives legislative 
      director, Change to Win; Jonathan Boehm, president and 
      chief executive officer, Argus Health Systems Inc.; and 
      Richard Beck, Texas Pharmacy Business Council..............    53
        Beck, Richard............................................    91
        Boehm, Jonathan..........................................    83
        McFarland, Patrick.......................................    58
        O'Brien, John............................................    53
        Treat, Sharon............................................    65
        Weaver, Jasmin...........................................    75
    Weiner, Hon. Anthony, a Representative in Congress from the 
      State of New York..........................................    44
Letters, statements, etc., submitted for the record by:
    Adcock, Daniel, legislative director, National Active and 
      Retired Federal Employees, prepared statement of...........   110
    Beck, Richard, Texas Pharmacy Business Council, prepared 
      statement of...............................................    93
    Boehm, Jonathan, president and chief executive officer, Argus 
      Health Systems Inc., prepared statement of.................    85
    Calfee, John, resident scholar, American Enterprise 
      Institute, prepared statement of...........................   141
    Connolly, Hon. Gerald E., a Representative in Congress from 
      the State of Virginia, prepared statement of...............    51
    Kelley, Colleen, national president, National Treasury 
      Employees Union, prepared statement of.....................   128
    Lynch, Hon. Stephen F., a Representative in Congress from the 
      State of Massachusetts, prepared statement of..............     4
    McFarland, Patrick, Inspector General, U.S. Office of 
      Personnel Management, prepared statement of................    60
    McNeely, Larry, II, health care advocate, U.S. PIRG, prepared 
      statement of...............................................   152
    O'Brien, John, Senior Advisor to the Director, U.S. Office of 
      Personnel Management, prepared statement of................    55
    Simon, Jacqueline, Public Policy Director, American 
      Federation of Government Employees, prepared statement of..   119
    Towns, Hon. Edolphus Towns, a Representative in Congress from 
      the State of New York, prepared statement of...............   173
    Treat, Sharon, esq., State Representative from Maine and 
      Executive Director, National Legislative Association on 
      Prescription Drug Prices, prepared statement of............    67
    Weaver, Jasmin, healthcare initiatives legislative director, 
      Change to Win, prepared statement of.......................    77
    Weiner, Hon. Anthony, a Representative in Congress from the 
      State of New York, prepared statement of...................    46


  H.R. 4489, THE FEHBP PRESCRIPTION DRUG INTEGRITY, TRANSPARENCY, AND 
                            COST SAVINGS ACT

                              ----------                              


                       TUESDAY, FEBRUARY 23, 2010

                  House of Representatives,
Subcommittee on Federal Workforce, Postal Service, 
                      and the District of Columbia,
              Committee on Oversight and Government Reform,
                                                    Washington, DC.
    The subcommittee met, pursuant to notice, at 2 p.m. in room 
2154, Rayburn House Office Building, Hon. Stephen F. Lynch 
(chairman of the subcommittee) presiding.
    Present: Representatives Lynch, Towns, Cummings, Clay, 
Connolly, Norton, Issa, Bilbray, Chaffetz, and Cao.
    Also present: Representative Driehaus.
    Staff present: William Miles, staff director; Aisha 
Elkheshin, clerk/legislative assistant; Jill Crissman, 
professional staff; Jill Henderson, detailee; Dan Zeidman, 
deputy clerk/legislative assistant; Adam Fromm, minority chief 
clerk and Member liaison; Howard Denis, minority senior 
counsel; Ashley Callen, minority counsel; and Molly Boyl, 
minority professional staff member.
    Mr. Lynch. Good afternoon. The Subcommittee on Federal 
Workforce, Postal Service, and the District of Columbia will 
now come to order. I want to welcome Ranking Member Chaffetz, 
members of the subcommittee hearing, witnesses, and all those 
in attendance.
    The purpose of today's hearing is to examine H.R. 4489, the 
Federal Employees Health Benefits Program Prescription Drug 
Integrity, Transparency, and Cost Savings Act. The Chair, 
ranking member, and subcommittee members will each have 5 
minutes to make opening statements, and all statements will be 
open for 3 days to submit amendments for the record.
    Before proceeding, I would like to ask unanimous consent 
that Representative Steve Driehaus be allowed to join us to ask 
questions and to offer testimony and appear before the 
subcommittee here today.
    Hearing no objections, that is so ordered.
    I would also like to ask unanimous consent that the 
testimonies of Mr. David Balto, navitist, the Coalition of 
Government Procurement, and the Pharmaceutical Care Management 
Association be submitted for the record.
    Again, hearing no objection, so ordered.
    Good afternoon everyone. Today the subcommittee convenes to 
examine H.R. 4489, the Federal Employees Health Benefits 
Program Prescription Drug Integrity, Transparency, and Cost 
Savings Act. Simply put, the reason I introduced this 
legislation was to lower the cost of prescription drugs in the 
Federal Employees Health Benefits Program [FEHBP]. I will try 
to avoid that acronym as much as possible.
    In these economically challenging times it is unacceptable 
to ask Federal employees and the American taxpayer to put up 
with some of the irregularities that exist in the pricing and 
contractual arrangement of the Federal Employees Health 
Benefits Plan, which accounts for nearly 30 percent of the 
Federal Government's total spend on the Federal Employees 
Health Benefits Program.
    If the Federal Employees Health Benefits Program wants to 
remain a model for providing health benefits, then legislative 
changes that allow for alternative prescription drug benefit 
contracting and pricing are needed.
    H.R. 4489 is the byproduct of nearly a year's worth of work 
and research. As many of you will recall, the subcommittee 
conducted an oversight hearing on this very issue back in June. 
Moreover, last fall we held a public policy forum with key 
stakeholders and public agencies to further analyze various 
approaches to fixing what I would describe as an opaque and 
flawed health benefit plan design.
    What we have discovered is that our Federal employees and 
retirees are not receiving nearly the best benefit at the best 
price as it relates to prescription drugs. In fact, when 
comparing Federal Employees Health Benefits Program drug prices 
to that of other Federal programs such as the Department of 
Veterans Affairs, the Department of Defense, Medicare, 
Medicaid, and the Public Health Service 340-B program, the 
Federal Employees Health Benefits Program is paying 
substantially more for its drugs. That is despite having 8 
million paying members.
    Even more alarming is that a recent study on the cost of 
generic drugs performed by one of our witnesses here today, 
Change to Win, shows that having no drug coverage beats having 
coverage under the Federal Employees Health Benefits Program. 
How can people state that Federal employees have the best 
health insurance in the country when people with no insurance 
are paying less for their prescription drugs?
    I am also baffled by the fact that even within the program 
we see larger plans charging far more for prescription drugs in 
comparison to smaller plans, despite having a sizable 
difference in the number of enrollees. Does the market-based 
concept of leverage not apply to Federal Employees Health 
Benefits Program?
    The legislation that my colleagues, Mr. Connolly and Mr. 
Cummings, and I introduced is intended to not only lower costs 
of prescription drugs in the Federal Employees Health Benefits 
Program, but to also provide our Federal employees with a 
safer, high-quality prescription drug benefit by affording the 
Office of Personnel Management greater oversight authority in 
the contracting and pricing of the Federal Employees Health 
Benefits Program, prescription drug benefits specifically.
    Prohibiting certain ownership relationships, requiring 
pharmacy benefit managers to return 99 percent of all the 
moneys received from manufacturers for Federal Employees Health 
Benefits Program business, capping prices paid by the health 
plan to the average manufactured price [AMP], restricting drug 
switching by pharmacy benefit managers and requiring enhanced 
transparency and disclosure of all contract terms and related 
information.
    In this day and age, when every effort is being made to 
reduce Federal spending and to find money to fund health care 
reform and other domestic policy priorities, the level of 
ambiguity around costs and drug prices under the Federal 
Employees Health Benefits Program is appalling, and this must 
change.
    As chairman of this subcommittee, I am committed to 
providing the best benefits to our Federal employees to the 
best price, and whether that is accomplished by the provisions 
contained in H.R. 4489 or by agency regulation and contractual 
changes like those issued by the Office of Personnel Management 
yesterday in the Carrier Call letter makes no difference to me. 
Let the end justify the means, as long as we aren't simply 
maintaining the status quo.
    I would like to thank today's witnesses for sharing their 
thoughts, insights, and expertise on this complex issue. I 
understand that several of you have come quite a way to be here 
with us today, and I deeply appreciate your willingness in 
helping the subcommittee determine how best to improve the 
Federal Employees Health Benefits Program prescription drug 
benefit for both the Federal employee and the American 
taxpayer.
    Again, I thank you for your participation and I look 
forward to hearing from today's witnesses.
    [The prepared statement of Hon. Stephen F. Lynch and the 
text of H.R. 4489 follow:]

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    Mr. Lynch. I would like to yield now to the ranking member, 
Mr. Chaffetz from Utah, for 5 minutes for an opening statement.
    Mr. Chaffetz. Thank you, Mr. Chairman. I simply want to 
thank you for holding this hearing. I want to thank our 
witnesses for coming and their expertise in sharing candidly 
their thoughts and perspectives. I, too, want to save money for 
Federal workers and, importantly, most importantly, the 
taxpayers' money, and hopefully we can achieve that.
    Again I thank you for being here.
    I yield back the balance of my time.
    Mr. Lynch. It is the custom of this subcommittee to swear 
witnesses. We are graced with the presence of Congressman 
Anthony Weiner. Mr. Weiner has represented New York's ninth 
Congressional District in the U.S. House of Representatives 
since 1999. He is currently a member of the Committee on the 
Judiciary and the Committee on Energy and Commerce, where he 
serves as the vice chair of the Subcommittee on Communications, 
Technology, and the Internet. Before entering Congress, 
Representative Weiner served in the New York City Council.
    I am going to ask my friend to please rise and raise your 
right hand.
    [Witness sworn.]
    Mr. Lynch. Let the record show that the witness has 
answered in the affirmative.
    My friend, Mr. Weiner, you now have 5 minutes for an 
opening statement.

STATEMENT OF HON. ANTHONY WEINER, A REPRESENTATIVE IN CONGRESS 
                   FROM THE STATE OF NEW YORK

    Mr. Weiner. Thank you very much. I have prepared testimony, 
but with your indulgence I would just like to submit that for 
the record and just make a few remarks.
    Mr. Lynch. Without objection.
    Mr. Weiner. It is important that we understand that PBMs do 
an important thing. They are a valuable tool. The way they work 
is that a big employer who has an insurance company might not 
want to be in the benefits management business and 
pharmaceuticals might not know the ins and outs, so they hire a 
PBM to take that market pool that they have that gives them 
some clout in the marketplace and have someone manage that 
clout.
    The only question here is: who should benefit from that? 
Should it be the person that hires the PBM, whether it be a 
labor union, whether it be an employer, or whether it be in 
this case the Federal Government? Or should it be the PBM, 
itself? That is the only question.
    The problem that we have is for us to figure out who should 
derive those benefits, we need to know what benefits there are. 
We don't have that knowledge right now. For example, if the 
employees of the Federal Government hire a PBM to go negotiate 
the best price for Lipitor, we don't know what that best price 
they are getting is; all we know is that the PBM says, here is 
the deal we got. It could very well be that there is an extra 
$2 or $3 a dose that the PBM benefited from. And we may make 
the decision as taxpayers, you know what, that is OK, we are 
willing to pay that price. The PBM is doing a valuable thing; 
they should get a piece of the action.
    Transparency is very important, and that is what your 
legislation seeks to do. I should point out that if there is a 
point of consensus in the health care debate--although 
sometimes my Republican friends don't acknowledge it--is we all 
agree with the idea of using market-based solutions. For those 
of us who support a single payer plan, we believe get the 
biggest possible market to be able to negotiate for lowest 
prices. All the health care plans that are out there take the 
idea of having a big market, to use that market strength to 
negotiate for lower prices, to use that. To do what Wal-Mart 
does: take their big market pool and negotiate for the lowest 
prices.
    PBMs do help us do that. I don't think that anyone should 
say that PBMs are not created for that purpose. The question 
is: are we getting the fullest benefit of it?
    Now, in the House version of the health care bill we have 
PBM transparency for everyone, not just for Federal employees. 
I believe in the Senate bill it is also in there, with the 
philosophy being the same thing: we may agree or disagree with 
what the PBMs are doing, but we should have transparency.
    I think if your bill becomes law here is what we will find 
that will happen: the PBMs will still have every incentive in 
the world to negotiate for the best prices for taxpayers, but 
we will have some insight. Did they get an extra rebate here 
that maybe we want more of? And your legislation, which says 
that 90 percent of what you save should go back to the taxpayer 
seems like a reasonable transaction fee. With 10 percent they 
are still going to do very well for themselves.
    So I think that your legislation is very important. I think 
that all of us should be able to agree. What is the point of 
having this big buying pool if we are not getting the benefit 
of it? That is what PBMs are in the business of doing; we just 
want to make sure they are in the business of doing it for the 
taxpayer, and that is the philosophy behind your bill and that 
is why I heartily support it.
    [The prepared statement of Hon. Anthony D. Weiner follows:]

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    Mr. Lynch. Thank you, Mr. Weiner.
    I realize that you have other committee obligations.
    Mr. Weiner. I am a very busy man, Mr. Lynch.
    Mr. Lynch. All right.
    Mr. Weiner. As you know, this health care debate will 
simply not proceed forward without my presence.
    Mr. Lynch. Exactly. [Laughter.]
    That is what I understand. So we are going to excuse you 
and we are going to accept your testimony in full, and we thank 
you for your attendance at this hearing.
    Mr. Weiner. Thank you for your indulgence.
    Mr. Lynch. And for assisting the committee with its work.
    Thank you.
    I would like to call our second panel, if we could.
    Before we proceed with the second panel, I would like to 
offer time to my colleagues for a brief opening statement. The 
Chair now recognizes the gentlelady from the District of 
Columbia, Eleanor Holmes Norton, for 5 minutes.
    Ms. Norton. Thank you very much, Mr. Chairman.
    Mr. Chairman, there are a quarter of a million Federal 
employees who are not covered by FEHBP at all, much less by its 
prescription drug program. That is a scandal. I am now talking 
about people who can't afford to be in a program where the 
Government presumably pays 70 percent of the cost, although 
there is great cost shifting in FEHBP. And of these programs, 
to have a benefit program or prescription benefit program where 
there is no regulation, no negotiation, and no transparency 
required by the FEHBP is beyond belief, especially when you 
consider that prices for drugs for Federal workers have been 
rising.
    I did some work on the FEHBP, which is now modeled for what 
we want to do in the health reform bill, and even the compact 
we have has not kept prices down with FEHBP in the picture. So 
I have no confidence in the prescription drug program, and I 
think your bill, Mr. Chairman, goes some distance, particularly 
in the transparency requirement--I would think that is 101 in 
any Federal bill--in moving us ahead.
    Mr. Chairman, I cannot believe. Let us analogize ourselves 
to the biggest Fortune 500 company. What is it, Wal-Mart? Can 
you believe that Wal-Mart, as the customer, would be buying 
drugs from the same set of sources at different prices? 
Wouldn't it be using its buying power to make sure that if it 
were, to chase this analogy further, the DOD or the VA, that 
those who work for the Federal Government were getting the very 
same deal. That also escapes my understanding.
    Mr. Chairman, what you are doing about what you took 
testimony on at the last hearing concerning the conflict of 
interest with some pharmacy owners could not be more important 
in your bill. This has become a matter of national disgrace 
because it is now all over the media about how these retail 
pharmacy owned companies are bilking the public.
    The time has come, Mr. Chairman, to move on your bill, and 
I can't thank you enough for, early in the year, bringing us to 
this point today where we are doing a direct hearing on your 
bill.
    Mr. Lynch. I thank the gentlelady.
    The Chair now recognizes the gentleman from Maryland, Mr. 
Cummings, for 5 minutes.
    Mr. Cummings. Thank you very much, Mr. Chairman.
    Chairman Lynch, I really do appreciate your holding this 
hearing on the Federal Employees Health Benefits Program 
Prescription Drug Integrity, Transparency, and Cost Savings 
Act.
    In June of last year, this subcommittee held a hearing to 
examine the contracting and pricing model used in the FEHBP, as 
well as trying to determine whether the program's drug benefit 
program was a good value. We concluded that for both taxpayers 
and for FEHBP subscribers, changes in the program's contracting 
and pricing of prescription drugs was necessary in order to 
ensure that the benefit was being administered in the most 
fiscally responsible manner.
    The FEHBP is the largest employer-sponsored health 
insurance program in the country, covering over 8 million 
workers, Members of Congress, and their families. Almost 30 
percent of FEHBP premium payments are for prescription drugs. 
One of the major discussions during the June hearing was around 
the FEHBP being charged more for its drugs than other Federal 
and commission programs.
    I would agree with you, Mr. Chairman, and certainly Ms. 
Norton that this is ridiculous.
    During that hearing it was disclosed that it was difficult 
to determine if the FEHBP health plans were receiving a good 
price for their drug benefits because of the complexity and the 
lack of transparency in these contracts.
    On January 24th, I joined you, Chairman Lynch and 
Congressman Connolly in sponsoring H.R. 4489, the FEHBP 
Prescription Drug Integrity, Transparency, and Cost Savings 
Act. This bill is designed to do several very important things: 
create greater oversight authority to OPM relating to 
prescription drug benefits. It will also require pharmacy 
benefit managers to return 99 percent of all moneys received 
from manufacturers to the FEHBP business. It will cap prices 
paid by the health plan to the average benefit price, and 
require total transparency and disclosure of all contract terms 
and related information.
    However, I understand that there are some concerns around 
the bill in its current form claiming a reduction in the choice 
and competition. Before we pass this legislation, we must look 
at this bill very carefully from all angles, consider all of 
the consequences, intentional and unintentional, and what 
effect it will have on our care and health benefits program.
    The subcommittee has worked with several groups with vested 
interest in the legislation. The hearing will discuss this bill 
and specific ways to amend the bill going forward and efforts 
to strengthen it and ensure its intended purpose.
    I anxiously look forward to the testimony of today's 
witnesses and thank the chairman for his leadership.
    I also remind all of us that our Federal employees give 
their blood, their sweat, their tears to support all of us, and 
in our economy today every dime that they can save on 
prescription drugs or anything else is very, very important.
    So with that, Mr. Chairman, I yield back.
    Mr. Lynch. I thank the gentleman.
    The Chair now recognizes the distinguished chairman of our 
full committee, Mr. Towns of Brooklyn, for 5 minutes.
    The Chairman. Thank you, Mr. Chairman. I don't plan to use 
5 minutes, because I am actually here to thank you and, of 
course, Mr. Chaffetz, for holding this hearing, and to say to 
you, which is something you probably never heard me say before, 
I am here to listen.
    Mr. Lynch. I thank the gentleman.
    The Chair now recognizes the gentleman from northern 
Virginia, Mr. Connolly, for 5 minutes.
    Mr. Connolly. I thank the Chair and thank the Chair of the 
full committee. I am privileged and pleased to join with you, 
Mr. Lynch, and with you, Mr. Cummings, as an original co-
sponsor of this legislation, which I think has the opportunity 
to create enormous efficiencies and to save hundreds of 
millions of dollars potentially in health care costs--something 
I think all of us can unite behind.
    This legislation does three things. First, it precludes a 
single company from controlling both the PBM and the retail 
pharmacy. The regulation is important because vertical 
integration between the two eliminates market incentives 
wherein the pharmacist negotiates for lower prices. Eliminating 
this incentive through consolidation creates market conditions 
in which prices will rise disproportionately.
    Second, the bill prohibits PBM from switching prescription 
drugs without a physician's consent. This important provision 
ensures that Federal employees and their doctors, not 
bureaucrats in the insurance industry, maintain control over 
health care. For too long, PBMs have been able to switch to 
more lucrative drugs without the physician approval, even if 
those drugs are not as efficacious or beneficial to the 
patient.
    Third, the bill requires PBMs to return 99 percent of money 
received from pharmaceutical manufacturers for business 
conducted under the FEHBP. This provision ensures that 
taxpayers' money is not being used to subsidize middle men who 
don't actually contribute much to health care services. It also 
protects Federal employees from predatory pricing in which PBMs 
have reimbursed pharmacies for less than the amount paid for 
the health care plan.
    As Dan Adcock said in NARFE's prepared testimony on this 
subject, we strongly believe that nothing should be left to 
chance regarding OPM's ability to access information. For that 
reason, we believe that transparency should ultimately be 
legislated. When we had hearings, it couldn't have been clearer 
that, frankly, we have to tighten up the regulation and 
oversight of PBMs to make sure that, in fact, they are 
delivering quality services for our employees and the requisite 
savings we know are there.
    I thank the Chair for holding this hearing and look forward 
to continued collaboration with him.
    [The prepared statement of Hon. Gerald E. Connolly 
follows:]

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    Mr. Lynch. I thank the gentleman.
    As with the previous panel, Mr. Weiner, you understand that 
it is the custom before this committee to swear all witnesses, 
so I want to welcome our witnesses and ask you all to rise and 
raise your right hands.
    [Witnesses sworn.]
    Mr. Lynch. Let the record show that all of the witnesses 
have each answered in the affirmative.
    What I will do is I will offer a very brief introduction of 
each of the witnesses, and then we will have testimony from 
each.
    Mr. John O'Brien is the Director of Planning and Policy 
Analysis at the Office of Personnel Management. He joined with 
OPM in April 2009. Prior to that, Mr. O'Brien was the deputy 
director for research and methodology at the Maryland Health 
Services Cost Review Commission.
    Mr. Patrick McFarland was nominated Inspector General of 
the Office of Personnel Management in 1990. As Inspector 
General, Mr. McFarland is responsible for providing leadership 
that is independent, nonpartisan, and objective, and is 
dedicated to identifying fraud and mismanagement in programs 
administered by the Office of Personnel Management. Mr. 
McFarland is also a member of the Council of Inspectors General 
on Integrity and Efficiency.
    Representative Sharon Treat is currently in her fifth non-
consecutive term in the Maine State House of Representatives. 
Previously she serve four terms in the Maine State Senate, 
including two as Senate Majority Leader. Representative Treat 
is also the executive director of the National Legislative 
Association on Prescription Drug Prices, a nonpartisan 
organization of State legislators working jointly across State 
lines to reduce prescription drug prices and to expand access.
    Ms. Jasmin Weaver is the Healthcare Initiatives legislative 
director of Change to Win, where she has been working on health 
care policy, addressing issue including patient privacy, 
medication errors, and PBM transparency and reform. Before 
joining Change to Win, Jasmin worked for the Chair of the House 
Health Care Committee in Washington State and worked on higher 
education policy issues at Harvard University.
    Mr. Jonathan Boehm has been president and chief executive 
officer of Argus Health Systems, Inc., since 2006. As president 
and CEO, Mr. Boehm is responsible for all aspects of pharmacy 
benefit solutions offered to market by Argus Health Systems, 
including nearly 600 million claims processed annually, and 20 
percent of all Medicare Part D claims processed in the United 
States.
    Mr. Richard Beck is the executive director of the Texas 
Pharmacy Business Council, a new independent pharmacy advocacy 
organization dedicated to ensuring patient access to quality 
pharmacy care services. Mr. Beck is also the vice president of 
Pharmacy Affairs at American Pharmacies, which is a member-
owned, independent pharmacy buying co-op.
    Welcome to all. Mr. O'Brien, you are now recognized for 5 
minutes.
    Let me just back up a little bit. You see this little box 
in front of you? The green light signals that you may proceed 
with your testimony; a little yellow light will indicate that 
you should probably wrap up, you have about a minute; and then 
the red light would mean that your time has expired.
    Thank you.
    Mr. O'Brien, 5 minutes.

  STATEMENTS OF JOHN O'BRIEN, SENIOR ADVISOR TO THE DIRECTOR, 
    U.S. OFFICE OF PERSONNEL MANAGEMENT; PATRICK MCFARLAND, 
INSPECTOR GENERAL, U.S. OFFICE OF PERSONNEL MANAGEMENT; SHARON 
  TREAT, ESQ., STATE REPRESENTATIVE FROM MAINE AND EXECUTIVE 
DIRECTOR, NATIONAL LEGISLATIVE ASSOCIATION ON PRESCRIPTION DRUG 
   PRICES; JASMIN WEAVER, HEALTHCARE INITIATIVES LEGISLATIVE 
 DIRECTOR, CHANGE TO WIN; JONATHAN BOEHM, PRESIDENT AND CHIEF 
EXECUTIVE OFFICER, ARGUS HEALTH SYSTEMS INC.; AND RICHARD BECK, 
                TEXAS PHARMACY BUSINESS COUNCIL

                   STATEMENT OF JOHN O'BRIEN

    Mr. O'Brien. Chairman Lynch, Ranking Member Chaffetz, and 
members of the subcommittee, I am pleased to be here on behalf 
of Director John Berry of the Office of Personnel Management to 
discuss H.R. 4489, the Federal Employees Health Benefits 
Program Prescription Drug Integrity, Transparency, and Cost 
Savings Act.
    I would like to submit a written statement for the record, 
and I will summarize briefly here.
    OPM commends Chairman Lynch and the subcommittee is 
continued efforts to strengthen the agency is oversight 
authority regarding FEHB prescription drug benefits. 
Prescription drugs represent a significant portion of the $39 
billion FEHB program, comprising almost 30 percent of all 
expenditures, and are a valuable benefit to enrollees. In light 
of its importance, we are committed to ensuring that the FEHB 
prescription drug benefit is cost effective, transparency, and 
provides enrollees with a comprehensive quality coverage.
    The bill attempts to expand OPM's authority to regulate 
drug benefits offered by FEHB insurance carriers, including 
relationships with pharmacy benefits managers, pharmaceutical 
manufacturers and pharmacies. The bill outlines a uniform 
purchasing strategy for all FEHB carriers, including price-
based, on-average manufactured price. It prohibits certain 
ownership relationship, restricts non-generic drug 
substitutions by PBMs, and requires PBM transparency and 
disclosure of all contract terms and related information.
    OPM agrees with the subcommittee that transparency and 
ethical business practices are an essential element of an 
effective FEHB prescription drug program. Since 2005, our 
carrier contracts have included PBM transparency requirements. 
These requirements include restrictions and protocols relating 
to PBM drug substitutions similar to those in the bill.
    We are currently in the process of updating these 
contractual transparency requirements and we are concerned that 
this bill legislates PBM pricing and purchasing terms for FEHB 
carriers. Requiring the use of specific contracting models and 
pricing methods via legislation will not allow the program 
flexibility in an industry where business practices are rapidly 
evolving.
    We believe that these models and methods would be better 
addressed in the contracts with our carriers, allowing the 
program and its health plans to accommodate changing industry 
practices.
    Additionally, there may be administrative costs for OPM as 
well as carriers that would be passed on to enrollees as a 
result of certain sections of the bill. For example, the bill 
requires PBMs to comply with extensive reporting requirements 
to the agency, carrier, and the enrollee. While we believe that 
disclosure is important, a balance must be struck to ensure 
that these administrative requirements do not impose 
significant costs upon enrollees and the Government. We do 
recognize that further efforts are needed to improve cost and 
pricing transparency related to FEHB prescription drug 
benefits.
    Following the hearing that this committee had last June and 
going forward, an agency work group, including representatives 
of the OPM's Inspector General's Office, has been working on 
contracting requirements using administrative authority 
currently available to us. The Inspector General's Office was 
instrumental in developing requirements for large providers, 
including PBMs, that were incorporated in 2005. Their onsite 
audit experience has proven very useful to the current work 
group discussions.
    The work group developed a set of transparency principles 
to be followed when negotiating specific contracts by carriers. 
These principles were spelled out in OPM's February 22nd 
carrier letter which was sent out to carriers and has been 
shared with the committees. One example is requiring pass-
through transparent pricing in contracts with PBMs in which the 
carrier receives the full value of the PBM's negotiated 
discounts, rebates, and other credits.
    We will continue to work with the OPM Inspector General to 
ensure that FEHB contracts are regularly updated and reflect 
the changing marketplace, that transparency principles are 
adhered to and enforceable.
    In addition, we are reviewing a broad range of options for 
improving our current contractual procedures and redesigning 
how prescription drug services may be purchased. Many of the 
options that we are investigating were identified by this 
committee in its September forum. Our goal is to obtain the 
best and most affordable product for our enrollees.
    As the subcommittee continues to examine this important 
issue, our agency remains willing to work with you. We would be 
glad to provide technical assistance to address our concerns 
with the specific issues in the bill.
    Thank you for this opportunity to testify on the provisions 
of H.R. 4489.
    [The prepared statement of Mr. O'Brien follows:]

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    Mr. Lynch. Thank you, Mr. O'Brien.
    Mr. McFarland, you are now recognized for 5 minutes.

                 STATEMENT OF PATRICK MCFARLAND

    Mr. McFarland. Good afternoon, Mr. Chairman and members of 
the subcommittee.
    To best serve the committee's goals of establishing 
transparency and equity in the many protocols of prescription 
drug costs, my testimony and discussion today will attempt to 
contrast the work progress of OPM with the intent and vision of 
your proposed legislation, providing, hopefully, a value-added 
component for your final decisionmaking.
    In our estimation, the single most important FEHBP issue 
which OPM must resolve is the fact that it is dealing with PBMs 
from a perspective in which the cost structure of the PBMs are 
utterly non-transparent. This means that there is no objective 
basis to determine now or in the future if the terms being 
offered to an FEHBP carrier by a PBM represent an advantageous 
arrangement.
    From our perspective as the agency's audit component, we 
find the absence of transparency to be deeply troubling; 
however, with the recent work progress of OPM, I believe that 
the agency is now moving with a firm purpose of amendment 
regarding the PBM industry. For years, real corrective action 
has been dormant, at best. OPM has certainly not been a strong 
player in wrestling with the rising cost of prescription drugs.
    Today, however, separate entities are responsible for a 
forward thrust of enthusiasm. Namely, the health care expertise 
of two senior advisors to the Director of OPM and the strong 
focus and hard work of this committee to get something 
meaningful accomplished.
    Specifically, OPM, in concert with our office, will advance 
certain principles that will be incorporated into existing and 
future contracts with fee-for-service health plan carriers such 
as the Blue Cross/Blue Shield Association. These principles 
will require the PBMs pass all discounts, rebates, and other 
financial incentives or payments through to the carriers, and 
that the PBM's only remuneration in connection with the 
contract is from the FEHBP carrier, itself. In effect, the drug 
cost passed through the carrier would be based on the cost of 
the drug plus a reasonable fee for the PBM's services, such as 
administrative fees. All relevant documents, including 
contracts with drug manufacturers, would be available to my 
office for audit.
    If these principles are quickly and properly implemented by 
OPM, I believe most, if not all, of my concerns about the lack 
of transparency in the FEHBP PBM contracts will be resolved; 
however, as always, the devil is in the details. For example, 
without additional resources, it is difficult to see how OPM 
will be able to fully implement these principles. Also, I am 
concerned that the existing PBM contracts may be allowed to 
continue for years before the new principles are incorporated. 
It may be more prudent to require the fee-for-service carriers 
to comply with the principles no later than 2012 plan year.
    Finally, I am concerned that the principles may be changed 
before they are incorporated into the FEHBP FFS contracts. 
Presently, there are several proposed contract changes that 
serve to implement the principles being introduced into the 
FEHBP's pharmacy benefit program. The revisions are grouped 
into the following categories: pricing requirements, document 
access, electronic data access, the selling of utilization 
data, financial benefit administration, and sanctions.
    I have also several minor concerns with the act, itself. 
For example, OPM may not have the resources or expertise to 
determine maximum allowable dispensing fees. The heading 
``civil monetary penalties'' is somewhat confusing because the 
section deals primarily with False Claims Act rather than civil 
monetary penalties.
    The ability of PBMs to retain 1 percent of rebates may 
result in current discount arrangements being converted to 
rebates. Providing incentives to PBMs to reduce overall drug 
cost is an excellent strategy; however, legislation should be 
careful not to strictly limit incentive options.
    It is questionable whether interim final regulations can be 
issued within 6 months of enactment because of the complexity 
of the subject matter and the lack of agency resources.
    Despite my concerns, the status quo must be changed. I 
believe that the amendment to the Federal Employees Health 
Benefits Act on Pharmacy Benefits can be beneficial, 
particularly if OPM does not quickly require FFS FEHBP carriers 
to enter into the PBM contracts that require clear, pass-
through transparent pricing. A pass-through pricing model, in 
our opinion, would be easier to administer and fair to all 
parties.
    All this having been said, I would respectfully suggest 
that during further deliberations this committee might give 
favorable consideration to the following: that the principles 
presently being proposed by OPM be also addressed in this 
legislation. My primary concern for making this request is that 
if, in fact, OPM may be directed to be an integral part of the 
health care reform, said inclusion of these stated principles 
in legislation would guarantee that the issue would remain a 
high priority.
    In closing, I want to express a most noteworthy thank you 
to this committee for this proposed legislation. Regardless of 
the outcome, whether it be enacted into law or a decision is 
made to allow OPM's substantive proposals to prevail, I can 
state first-hand that this Office of the Inspector General, 
especially our entire audit staff, applauds this particular 
pursuit of accountability resulting in better Government.
    Thank you.
    [The prepared statement of McFarland follows:]

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    Mr. Lynch. Thank you, sir.
    Representative Sharon Treat, I bid you welcome. You are now 
recognized for 5 minutes.

                   STATEMENT OF SHARON TREAT

    Ms. Treat. Thank you very much.
    Chairman Lynch and members of the subcommittee, my name is 
Sharon Treat. I am an attorney, a Member of the House of 
Representatives in the State of Maine, and director of the 
National Legislative Association on Prescription Drug Prices, 
where I work with over 400 legislators who receive our 
electronic newsletter and provide information around the 
country on a variety of prescription drug legislation, but a 
good deal of it focused on pharmacy benefit managers.
    I hope to provide a bit of a State perspective on H.R. 
4489, which I wholeheartedly support, and also to offer a few 
suggestions which I think would improve the legislation and 
assure its effectiveness.
    In 2003 I sponsored Maine's PBM law, which was the first in 
the country to very comprehensively regulate pharmacy benefit 
managers, imposing a fiduciary duty and requiring PBMs to 
disclose possible conflicts of interest and pass through to 
their clients, including the State of Maine and the State 
Employee Health Plan, the full monetary value of the rebates 
that they negotiate.
    At least 18 States and the District of Columbia now require 
oversight and/or regulation of pharmacy benefit managers. These 
vary from very prescriptive legislation to fairly minimal 
registration provisions. The States are responding to the 
nearly absent Federal role regulating PBMs and the PBM business 
model that relies on secrecy, convoluted payment transactions 
that virtually no one can understand, and a model that is rife 
with conflicts of interest.
    I note that the Maine legislation that I worked on I did 
with our then Attorney General, Steve Roe, at a time when we 
had a consent decree ongoing with Medco, which imposed many of 
the same provisions into the consent decree.
    The Federal District Court decision which upheld the Maine 
law, which actually went all the way up to the U.S. Supreme 
Court, which denied cert, stated, I think particularly well, 
what the problems are with the PBM business model, and it 
addressed the advantages of regulation. The court stated: 
whether and how a PBM actually saves an individual benefits 
provider money with respect to the purchase of a particular 
prescription drug is largely a mystery to the benefits 
provider. This lack of transparency also has a tendency to 
undermine a benefit provider's ability to determine which is 
the best proposal among competing proposals from a PBM.
    For example, if a benefits provider has proposals from 
three different PBMs for pharmacy benefits management services, 
each guaranteeing a particular dollar amount of rebate per 
prescription, the PBM proposal offering the highest rebate for 
each prescription filled could actually be the worst proposal 
as far as net savings are concerned, because that PBM might 
have a deal with the manufacturer that gives it an incentive to 
sell or restrict its formulary to the most expensive drugs.
    In other words, although PBMs afford a valuable bundle of 
services to benefit providers, they also introduce a layer of 
fog to the market that prevents benefit providers from fully 
understanding how best to minimize their net prescription drug 
cost.
    I would note that H.R. 4489 appropriately addresses many of 
these issues, including drug switching, failure to pass through 
the value of rebates and other discounts, discriminatory 
practices toward independent pharmacies, and lack of 
transparency.
    Based on the State's experience, regulation of Federal PBM 
contracts will reduce employee health insurance costs and avoid 
consumer harms caused by drug switching, errors, and conflicts 
of interest.
    Nonetheless, I believe there is room for improvement in 
this legislation. One thing I would just parenthetically note, 
in reading through the background materials on this 
legislation, pharmacy costs making up 25 percent of this 
Federal health employee plan, the fee-for-service plan, is a 
very high percentage spent on pharmacy. It is really out of 
whack when you look at what the percentage is in other 
programs, other policies nationwide, in terms of a percentage 
of health care costs, and also Medicaid.
    So specifically what I think this legislation should be 
doing, though, in addition is that I think that the conflict of 
interest provisions need to be tightened up. It is great that 
the legislation prevents conflicts that involve a controlling 
interest; however, there are many conflicts of interest built 
into the PBM business model which result in higher prices or 
have other negative impacts which don't rise to a controlling 
interest. At the very least, H.R. 4489 should explicitly 
require PBMs to disclose in writing ``any activity, policy, or 
practice that directly or indirectly presents any conflict of 
interest.'' This is language currently in Maine law, so you 
won't be breaking any ground.
    And then, in addition, we would ask that you consider 
adding a fiduciary duty provision to ensure that a PBM is 
actually acting on behalf of the plan. For example, Maine law 
requires a PBM to perform its duties with care, skill, 
prudence, and diligence in accordance with the standards of 
conduct applicable to a fiduciary in an enterprise of like 
character with like aims.
    In conclusion, I commend the sponsor for tackling this 
important and rather difficult issue and taking a comprehensive 
approach. We look forward to working with you and making sure 
that comprehensive legislation is enacted that will cut the 
cost of prescription drugs for Federal employees.
    Thank you.
    [The prepared statement of Ms. Treat follows:]

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    Mr. Lynch. Thank you, Representative.
    Ms. Jasmin Weaver, you are now recognized for 5 minutes.

                   STATEMENT OF JASMIN WEAVER

    Ms. Weaver. Good afternoon, Chairman Lynch and members of 
the committee. My name is Jasmin Weaver, and I am the 
healthcare initiatives legislative director at Change to Win, a 
6 million member partnership of five unions: SEIU, UFCW, 
Teamsters, the Laborers, and the Farm Workers. Four of our five 
affiliate unions represent Federal workers, and our members 
across the country are facing rising prescription drug costs, 
so we have a strong interest in improving the FEHBP and the PBM 
industry.
    We are thrilled to be here today to voice our unqualified 
support for H.R. 4489. We believe this bill will save Federal 
workers and the Federal Government hundreds of millions of 
dollars, and we thank Chairman Lynch and the subcommittee for 
your work on this important issue.
    This bill is necessary because, although PBM can provide a 
useful service, they are also in a position of trust that makes 
it possible for them to engage in a variety of troubling 
practices.
    First, many PBMs provide virtually no transparency to the 
health plans that they serve, refusing to disclose such basic 
information, as you have heard today, as how much they pay for 
the drugs that they help to provide.
    Second, some PBMs engage in spread pricing, charging the 
health plans they serve more for the drugs than they paid 
pharmacies that then distribute those drugs to patients.
    Third, PBMs may also switch a patient's drug to a drug 
other than the ones their doctor prescribed, a drug more 
expensive for the health plan and the patient, because that PBM 
is getting rebates from drug manufacturers.
    And, finally, some PBMs have merged with retail drug stores 
or drug manufacturers, creating serious conflicts of interest.
    This bill addresses all of these problems. It totally 
enhances transparency, it bans spread pricing, it prohibits 
drug switching that is designed solely to enhance the profits 
of the PBM, and it reduces conflicts of interest in FEHBP drug 
contracting by extending OPM's current ban on PBM contracts 
that are with a PBM that is owned by a drug manufacturer, to 
also extend that ban to PBMs that are owned by retail drug 
stores.
    By fixing these problems, this bill should significantly 
reduce drug costs for Federal employees and the Federal 
Government. Although the FEHBP is the largest employer-
sponsored health plan in the country, and thus should receive 
the best prices, as you have heard today it is currently 
spending 15 to 45 percent more for prescription drugs than 
other Federal programs. Many other Government plans and private 
employers have saved millions by switching to more transparent 
PBM contracting. The Federal Government cannot afford to pass 
up these savings, as the FEHBP currently spends over $10 
billion a year on prescription drugs for the FEHBP.
    Change to Win recently released a report that further 
highlights the need for this bill. Our report focused on CVS 
Caremark, a PBM drug store combination that currently manages 
80 percent of the pharmacy benefit within the FEHBP. CVS offers 
a generic discount program that any person can sign up for. 
After paying $10, you get access to hundreds of generic drugs 
for $9.99. So we compared this $9.99 price to the price that 
Federal employees and the Federal Government pay under the Blue 
Cross/Blue Shield Federal employee program, which is the 
largest health plan within the FEHBP. What we found is that, 
remarkably, FEP members and the Government together pay more 
than $9.99 for 85 percent of the drugs on this discount generic 
list, and sometimes far more--up to $200 more for the exact 
same drug. Thus, FEP members and the Government are actually 
made worse off by using their insurance to buy these drugs.
    This underscores the need for greater transparency in the 
FEHBP. It is hard to imagine that OPM and Federal employees 
would agree to this situation if they knew what they were 
really being charged. In fact, a recent poll of FEHBP members 
found that 74 percent of them think that more should be done to 
lower the cost of their prescription drugs, and 73 percent of 
plan members surveyed would support legislation to do this.
    In conclusion, the reforms in this bill take the FEHBP a 
huge step forward, and that is why we wholeheartedly support 
it.
    Thank you for your time.
    [The prepared statement of Ms. Weaver follows:]

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    Mr. Lynch. Thank you.
    Mr. Boehm, you are now recognized for 5 minutes.

                  STATEMENT OF JONATHAN BOEHM

    Mr. Boehm. Good afternoon, Chairman Lynch and members of 
the subcommittee. Thank you for inviting me to testify today.
    Again, my name is Jonathan Boehm, and I am president and 
CEO of Argus Health Systems. Argus is one of the largest 
pharmacy benefit administrators, processing over 500 million 
claims in each of the last 4 years. This total includes a 
significant portion of Medicare Part D. We process 24 percent 
of all Part D claims in the United States. We process claims 
for customers with 5 million Part D members and 25 million 
commercial members.
    Our business model, however, is very different than many of 
our competitors. We generally offer services on a fee-for-
service, fully disclosed, auditable basis. We refer to our 
model as a transparent model, and we have been doing business 
this way since 1999.
    To provide context regarding transparency in the pharmacy 
benefit, let me define what I mean by transparency. David 
Calabrese stated in the May 1, 2006, issue of Managed Care 
Executive, ``True transparency is a model in which all PBM 
revenue streams are fully disclosed to the payer, the full 
value of retail and mail order pharmacy discounts is passed on 
to the client, data is shared with the client, and the client 
is given ultimately decisionmaking control over its drug 
benefit design and formulary management.'' At Argus we embrace 
this business model and this definition.
    In our transparent model we provide fully auditable access 
to data, enabling our customers to comprehensively manage their 
business for the benefit of their members. Consistently our 
customers have told us when they transitioned to our model from 
a traditional PBM they save 8 to 10 percent on their drug spend 
day one.
    Our customers achieve generic dispensing rates of well over 
70 percent, compared to mid-60 percent industry averages, 
because access to their data enables them to make more-informed 
decisions and work with providers and members to achieve the 
desired expense and health outcomes.
    Another difference in the Argus transparent model is that 
we do not own a mail order facility or drive members to mail 
order; rather, we support 90-day prescription strategies that 
support mail order and 90 days at retail, whatever method the 
member deems most convenient for them. This is a significant 
difference from PBMs that own mail order and drive utilization 
to this distribution method, regardless of member preference.
    There clearly are divergent views regarding the impact of 
transparency on managing the pharmacy benefit. This committee 
has heard and I have reviewed testimony from both sides of the 
argument. After reviewing available Federal-Government-related 
material, it is clear there is no consensus regarding the 
impact of transparency on ultimate cost. There have been 
reports of estimated increased costs, unknown impact on cost, 
and the CBO recently scored the Cantwell transparency amendment 
as budget neutral.
    The position that the disclosure of sensitive price 
information would negatively impact negotiating leverage of 
pharmaceutical manufacturers and pharmacies appears to be 
predicated on the premise that this information would be 
generally available for public consumption. This bill clearly 
treats this information as confidential and could only be used 
by OPM, and I think invalidates the premise that it would raise 
costs.
    The final point that I would make regarding the importance 
of transparency is I would suggest that it is more important in 
the pharmacy benefit management than even in other industries, 
and that is because the products and services are not procured 
at a specific price but rather a pricing construct. Without 
visibility into the true cost and rebate arrangements, the 
pricing construct cannot only not be validated or audited, but 
it is invalid by the premise that it is based on the 
unknowable.
    The Inspector General, Patrick McFarland, testified before 
this committee in June and reiterated again today that the 
single most important issue which OPM must resolve is that PBMs 
are utterly non-transparent. He went on to say that we find the 
absence of transparency to be deeply troubling.
    In conclusion, it is my view that effective management of 
pharmacy benefits is fundamental to reducing prescription drug 
costs and improving the quality of health care outcomes in both 
the public and private sector. Effective management of this 
benefit is dependent on transparent access to the relevant 
information.
    Chairman Lynch, it is my view, given our customers' 
experience as well as my research into the issues, that your 
proposed legislation will be beneficial to OPM by enabling them 
to have access to information so better decisions regarding 
health care costs and outcome management can be made on behalf 
of the Federal employees and ultimately the taxpayers. The 
confidentiality provision that you have included will mitigate 
the risk that disclosure of sensitive price information will 
result in increased costs to administer prescription benefits.
    Thank you.
    [The prepared statement of Mr. Boehm follows:]

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    Mr. Lynch. Thank you, Mr. Boehm.
    Mr. Beck, you are now recognized for 5 minutes.

                   STATEMENT OF RICHARD BECK

    Mr. Beck. Good afternoon, Chairman Lynch and members of the 
subcommittee. My name is Richard Beck, and I am testifying here 
before you today on behalf of the National Community 
Pharmacists Association in support of H.R. 4489. NCPA 
represents the interests of pharmacists, owners, managers, and 
employees of more than 22,700 independent pharmacies across the 
United States. We appreciate the opportunity to address the 
topic of pharmacy benefits management regulation. I am also 
executive director of the Texas Pharmacy Business Council, 
which represents approximately 1,700 community pharmacies in 
Texas.
    Today I will share with you the reasons we support this 
bill, as well as some of our experiences and lessons learned 
from our PBM advocacy activities in the State of Texas.
    Both NCPA and TPBC have long championed the need for both 
Federal and State oversight of pharmacy benefit managers. That 
is because our members and their patients continue to face 
significant problems in dealing with these unregulated 
entities. PBMs have been permitted to operate virtually 
unchecked since their inception, slowed only by the increasing 
amount of litigation alleging fraudulent and deceptive 
practices filed against the PBMs each year, including the 
Federal Government.
    First I would like to speak in support of H.R. 4489, a 
crucial piece of legislation that would provide OPM with 
greater insight into the inner workings of the various PBMs 
that currently manage the prescription drug benefits for FEHBP. 
That is a tough one, isn't it, Mr. Chairman. We strongly 
support H.R. 4489 for many reasons. It would require the 
reporting and pass-through of the rebates that PBMs receive 
from manufacturers. It would expose some of the questionable 
practices that PBMs frequently engage in, including repackaging 
and assigning different reimbursement rates for drugs dispensed 
by their own mail order pharmacies.
    It would prohibit PBM ownership of retail pharmacies, 
thereby eliminating the inherent conflicts of interest that 
results in higher costs and impaired quality of care. One has 
to look no farther to justify this prohibition than looking at 
the anti-competitive and anti-consumer activities exhibited by 
the CVS Caremark Corp. merger.
    Let me now talk about our experiences in the State of Texas 
and how our legislature and Governor have been supportive of 
PBM transparency in State contracts.
    A few years ago the State of Texas concluded that the 
disclosure of the business practices of PBMs in their dealings 
with government entities is essential to ensuring that the 
government entity is receiving high-quality, cost-effective 
services. In 2006, a joint legislative committee issued a 
report that detailed many of the questionable drug prices used 
by the PBMs and recommend the State take steps to ensure that 
they were getting the most bang for their buck with regard to 
PBM services. Representative Treat testified before that 
committee.
    The State auditor followed up with its own study in 2008 
and delved more deeply into the specific PBM contracts held by 
various State agencies. The results of the study clearly 
indicated that the State agencies needed to include in all 
future PBM contracts provisions that clearly specified the 
costs, discounts, and other fees associated with services 
provided by the PBM, as well as provisions that would preserve 
their ability to audit the PBM.
    In 2009, after several years of considering various pieces 
of legislation, the legislature passed PBM transparency 
legislation. The passage of Senate Bill 704 now enables Texas 
State agencies to share the terms and conditions of their PBM 
contracts with other State agencies, as well as grant them full 
audit rights over those contracts. In Texas we plan to pursue 
followup legislation to buildupon the 2009 legislation.
    The Texas PBM studies and consideration of related 
legislation has provided an invaluable education to State 
legislators and decisionmakers, alike, about the need for PBM 
regulation, and has had a positive impact on the content and 
terms of subsequent PBM contracts to the State of Texas.
    The Texas State Employees' Retirement System, who 
initially, along with CVS Caremark, opposed the 2007 PBM 
transparency legislation in Texas, recently reported that the 
terms of their contract include many of the elements of that 
legislation, including 100 pass-through of rebates, and is 
projecting a $260 million savings over 4 years.
    Curiously, although CVS Caremark has apparently agreed to 
these contract provisions, they and other large PBMs still 
continue to oppose legislation to recognize these same 
principles in State and Federal law.
    In conclusion, I strongly urge you to pass the bill before 
you today. The PBM industry, as they have done in Texas, is 
likely to use scare tactics in an effort to convince you and 
the American taxpayers that transparency may be harmful and 
expensive and that they require secrecy to administer the drug 
benefits of FEHBP. There is simply no credible evidence that 
transparency has increased costs or will do so in the future.
    I urge you to reject this paradoxical reasoning and insist 
that OPM be afforded the disclosures necessary to negotiate a 
fair contract in order to curb unnecessary prescription drug 
spending.
    Thank you.
    [The prepared statement of Mr. Beck follows:]

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    Mr. Lynch. Thank you, Mr. Beck.
    I want to thank you all for your very helpful testimony. 
Let me begin. I yield myself 5 minutes.
    It is confounding, at best, to listen to the arguments of 
some of the opponents of this bill to say that, as they have in 
the past, that transparency is over-rated, and that somehow if 
we let people know what things cost, then prices are going to 
go up.
    Ms. Treat, you have been terrific in offering some very 
helpful suggestions to improve our legislation, and we really 
do appreciate that. Let me ask you, you hit right on the point 
of fiduciary responsibility, and putting fiduciary 
responsibility on our PBMs so that their duty is clear and the 
duty is enforceable on the part of the subscriber, in this case 
the Federal employee.
    How do you see this conflict that we have here, at least in 
the case of CVS Caremark, where we have the PBM owned--the PBM 
which I believe even now, without the legislation, has a duty 
to the Federal employee to get the best price, while at the 
same time they are owned by a pharmacy chain that is trying to 
drive people in the door to maximize profit, which is clearly a 
fine and noble and capitalistic motive, but it seems, at least 
to me, that those interests are in conflict. I think that your 
suggestion of imposing a fiduciary responsibility on the part 
of the PBM gets right at that conflict. Could you offer your 
own thoughts on that?
    Ms. Treat. Yes. Thank you for the question.
    I sponsored the legislation back in 2003. It took several 
years in and out of the courts, actually, and it was the 
fiduciary provision that was litigated, and it related to ERISA 
plans, something you don't have a problem with in this case. 
Nonetheless, we won that litigation. But that bill came out of 
a similar situation involving a drug manufacturer, Merck, which 
at that time owned MedCo, and so you had a conflict of interest 
between a manufacturer with whom the PBM was supposedly 
negotiating good discounts and rebates on behalf of whoever 
hired them and a drug company, which had an appropriate goal of 
maximizing its profits.
    I think that there is a very similar problem now where you 
have retail pharmacies and PBMs which also their ownership 
overlaps.
    We see now that one of the fastest growing segments of the 
pharmaceutical drug spend is for specialty drugs, and there is 
a real effort on the part of a number of entities to get into 
that market and to have controlling or partial interest in the 
specialty drug pharmacy area. There are a number of areas where 
there could be conflicts of interest that would perhaps 
dissuade a PBM from perhaps negotiating the toughest deal they 
could with those entities.
    Mr. Lynch. Right.
    Ms. Treat. I think the reason that I am really recommending 
looking at the language that you use in asking for disclosure 
on conflicts of interest and perhaps having something of a 
catchall provision with the fiduciary language is that we 
cannot know today what new business models are going to be 
dreamt up tomorrow.
    Mr. Lynch. Right.
    Ms. Treat. We often know that legislation that we pass and 
regulation that we pass end up, a response is, well, what is a 
good way to get around that to do something different. I think 
the value of the Maine language is that it is designed to not 
enumerate every single possible conflict of interest in 
advance, but to have general enough language that, if something 
arises in the future, it will be addressed.
    Ms. Treat. Right. That is great. Thank you very much.
    My time is pretty much expired. I was neglectful, however, 
in failing to recognize the gentleman from California, Mr. 
Bilbray, earlier for an opening statement and questions, so, 
Mr. Bilbray, you are recognized.
    Mr. Bilbray. Thank you, Mr. Chairman.
    Just curiosity, Representative Treat. What is the 
population of Maine today, just for my own information?
    Ms. Treat. It has been hovering around 1.3 million for the 
past decades, many decades.
    Mr. Bilbray. Thank you. Everybody keeps moving out and 
coming over to visit us in San Diego. Just shows you how the 
shift has gone. Our county is 3.5 million, but the population 
the way it shifts, I am just trying to remember the sizes here. 
As a local legislator, I am interested in a lot of how these 
work and how the process works through different levels.
    Mr. Lynch. I thank the gentleman.
    The Chair recognizes the gentlelady from the District of 
Columbia, Ms. Eleanor Holmes Norton, for 5 minutes.
    Ms. Norton. Thank you, Mr. Chairman.
    Mr. McFarland, you have in your testimony some claims costs 
per member. You note them increasing almost twice the amount 
paid in 1999. Compared to what? How would that compare to 
claims costs for other programs? Are there figures that would 
allow us to measure those increases? You say, for example, drug 
costs increase is an average 13.5 percent. That is cost as 
opposed to claim cost per member. But in either case, how do 
those compare with those not in a program like the prescription 
drug program of the FEHBP? Mr. O'Brien.
    Mr. O'Brien. In terms of the pharmacy cost for the FEHBP 
program compared to other programs that would exist, one issue 
that needs to be clear is it was stated earlier that the FEHBP 
share of pharmacy spend compared to a large private employer 
appears very high. That is always the case, because the FEHBP 
program includes the coverage of Federal retirees, which a 
typical private program would not.
    Ms. Norton. The Federal program is what?
    Mr. O'Brien. The Federal program includes Federal retirees, 
in which case most of their costs are, in fact, drug costs, so 
our percentage of drug costs relative to a large company----
    Ms. Norton. Most of whose costs are drug costs? I am sorry?
    Mr. O'Brien. Most Federal retirees, those who are over 65.
    Ms. Norton. Oh, because of retirees?
    Mr. O'Brien. So our drug cost----
    Ms. Norton. Wasn't that true for many programs, retirees as 
well as current employees are in the same program?
    Mr. O'Brien. The FEHBP program is somewhat unique in that 
when you look at our total costs, the retiree cost is with all 
the other costs in there, so the statement that our pharmacy 
spend as a percentage is very high is really comparing apples 
and oranges.
    Ms. Norton. I see. Since they are all in the same program.
    Mr. O'Brien. Yes.
    Ms. Norton. I understand. I am somewhat confused by your 
testimony, Mr. McFarland, because it seems to say let us do it, 
we are doing it, but there is a section of the testimony where 
it does say that we will need some legislation, and you seem to 
oppose legislation mostly because there were administrative 
costs, which leads me to ask what about the administrative 
costs that are built into what OPM does with FEHBP.
    Mr. McFarland. Well, my understanding of----
    Ms. Norton. I mean, are you, in fact, doing what the Lynch 
bill does, perhaps stimulated by the Lynch bill? Or do you 
concede that we do need legislation?
    Mr. McFarland. As I said in my testimony, the previous 
testimony that is on record and the shortened version that was 
made today, is that I would suggest that what OPM is presently 
doing--and that is that they are identifying the principles 
that are very important to making transparency happen--that 
those principles per se be considered to be put in the 
legislation that we are presently discussing. So in no way did 
I say that we shouldn't have legislation.
    Ms. Norton. So you are saying it is important enough to 
have them and to have them in statutory language?
    Mr. McFarland. Well, and my particular reason for 
suggesting that is that if, by chance, the direction is given 
to OPM to be an integral player in the health reform act, then 
I think that so much could fall between the cracks, and if it 
is in legislation I think that probably would be very helpful 
to maintain its priority.
    Ms. Norton. In DOD and VA, are there multiple plans to 
choose from, as with FEHBP?
    Mr. McFarland. No, I don't believe that they have the same 
program that we do.
    Ms. Norton. I am sure they don't, but I am saying they buy 
as a single customer. I am asking that, for those who 
subscribe, is there one plan and only one plan for DOD and for 
VA?
    Mr. McFarland. Well, I think the DOD and the VA have 
different approaches to their prescription drugs than what we 
are talking about for the FEHBP.
    Ms. Norton. Mr. Chairman, I realize my time is up, but I do 
need to know whether or not----
    Mr. Lynch. I will give you another 2 minutes.
    Ms. Norton. Thank you.
    I do need to know if veterans, if the largest part of the 
bureaucracy, the DOD, maybe they are so different that they 
really are apples and oranges. If so, I would like you to 
explain.
    Mr. McFarland. Well, the DOD and the VA, they each have 
their separate plans.
    Ms. Norton. I understand. Staff says--is it VA that has 
three or four plans?
    Mr. McFarland. They have regional plans, like four 
regional.
    Ms. Norton. What I am trying to find out, if they have 
multiple plans, is--and perhaps this information could be 
transmitted to the chairman. I am wondering how they do 
transparency, how they assure.
    Mr. McFarland. Well, I am not sure at all that they are 
able to identify transparency.
    Ms. Norton. Well, then, I would ask you to find out. That 
is to say I am very bothered by the fact that such a large 
percentage of the prescription drug dollar is, in fact, in 
another section of the Federal Government. I simply want to 
know if there is something we can learn from them or if we are 
reinventing the wheel here. And, if so, then that has to be the 
case.
    Mr. O'Brien.
    Mr. O'Brien. Congresswoman Norton, thank you. Again, urged 
on by this committee, OPM staff has, in fact, met with DOD and 
the individuals who run the Tri Care program to try and learn 
about how their pharmacy program works. It is much more of a 
single contract for pharmacy benefits that they run nationwide 
with separate regional sub-contracts. Again, we are actively 
studying it, and we have had some very good feedback from the 
Tri Care folks, and it is a very interesting model that we are 
learning a lot more about.
    Ms. Norton. And you think that some of that model may be 
transferrable to some of what you are trying to do today?
    Mr. O'Brien. Again, we are actively studying that, as well 
as the other options that were offered by this committee in its 
forum in September. We haven't completed our analysis, but we 
are actively looking at it, and when we have completed it we 
look forward to working with you more on those issues.
    Ms. Norton. Thank you, Mr. Chairman.
    Mr. O'Brien. But thank you, Tri Care is a very useful model 
for us to look at.
    Ms. Norton. I thank you, and I thank you, Mr. Chairman, for 
the additional time, because it is becoming more and more 
difficult, given the scarcity of Federal dollars, for us to 
rationalize different treatment of large sections of the 
Federal budget for essentially the same purpose.
    Thank you, Mr. Chairman.
    Mr. Lynch. I thank you.
    I yield to myself 5 minutes.
    Mr. O'Brien, part of your testimony is more than a little 
disappointing, I think, for us in that previous testimony from 
OPM has been of a similar vein. At one point one of the 
witnesses from OPM said that ``transparency is over-rated.'' 
That is a tough thing for an oversight committee to hear.
    We are intensely interested in getting to the bottom of 
what costs actually are for our health care system, and I know 
that you came out with a very positive carrier letter 
yesterday, though, in advance of this hearing. Sometimes I feel 
like I am pulling you folks along toward the road of reform, 
and I just wish we were working more closely together trying to 
get to the same object, and that troubles me somewhat, and I am 
concerned that the agency has become captive to the current 
system and is resistant to change.
    As you heard Mr. McFarland say, the most troubling aspect 
of the current FEHBP program is the utter lack of transparency, 
how it is so opaque and so complex. We are not mapping the 
genome here. We are selling pharmaceuticals to Federal 
employees. In my other capacity on the Financial Services 
Committee, I am dealing with complex derivatives, currency to 
fall swaps, credit to fall swaps, financial engineering that is 
increasingly and incredibly complex. It pales in comparison to 
what we have going on here in selling pharmaceuticals to 
Federal employees.
    That is all we are doing here, and we have this construct 
that is just mind boggling and mind numbing. I think that is 
exactly why it was constructed the way it is, to resist change. 
It resists the threat of being understood by its complexity. We 
are trying to drill down and straighten this up. We need your 
help. We really do.
    This current system, we have just got to blow it up and get 
rid of it and get on to something else, because this is not 
working for the American taxpayer. I think the estimate that 
Ms. Weaver has put out there of several hundred millions of 
dollars in savings, that is probably conservative, what I see 
here.
    I think it is probably closer to $1 billion what we can 
save. In light of the difference in formularies that we pointed 
out here this morning, what we are paying, we have 8 million 
participants and we don't use that collective clout, that 
buying power, at all in our systems, and we allow these PBMs to 
really abuse what I think is honorable service by our Federal 
employees. We are just letting them take advantage of us, and 
we cannot do that any more. Our budget will not allow it. So we 
have to find some savings, and if we are looking for waste, 
fraud, and abuse, the FEHBP is a target-rich environment 
because of the arrangements that we have going on here.
    This stinks. If I was a hound dog, I would be pointing 
right here. Here is where some savings are. Here is where some 
waste, fraud, and abuse is going on and I know it, and we are 
trying to dig down and get at it.
    We can save the taxpayer a ton of money. We could bring a 
more competitive model and better serve. We have wonderful 
Federal employees. I am an advocate for Federal employees. They 
do wonderful work. They provide a valuable public service. We 
cannot let this go on. This is just unacceptable. We can't do 
this any more.
    So I am really looking for your help. I know we have a new 
Director over there, Mr. Berry, who is on the right. He is part 
of the solution. He is not part of the problem, he is part of 
the solution. But we have some inertia over there. Inertia, at 
best, and then resistance, at worst, and we have to get at it.
    Since I am the chairman and there are no other witnesses, I 
am going to extend myself another 5 minutes.
    Let me ask you, Mr. Boehm, you have been terrific on this 
and you have a unique perspective. In terms of transparency, 
you addressed this in part in your original testimony about the 
concern that has been raised by the PBMs that if people know 
what they are paying for then prices will go up and it will 
destroy competition, but can you talk a bit more about your own 
experience, and also about some of the protections in the bill 
so that this is not publicly available information that would 
undermine their competitive advantage?
    Mr. Boehm. The argument, as I understand it, they put forth 
is that if the information is publicly available that the 
competitors, the manufacturers, and the other chains would 
actually increase their prices because they would have more 
information available. It is a difficult argument to debate 
because it is not publicly available now. In many other 
industries I think we have seen transparency lowers costs, not 
raise it.
    But rather than debate that particular topic, I think the 
most important thing is you have provisions in your bill that 
make it only available for OPM's use. It is not posted on Web 
sites, so the manufacturers can't see what the deals are, so I 
don't think there is any risk in the way you have constructed 
your confidentiality that it would be publicly available 
information.
    And then I would question, even if it was publicly 
available, whether that really would increase costs, because, 
again, I think you can go through a number of retail markets. 
You can look at computers on the Internet. You can look at cars 
as more transparent pricing information has been made 
available. Costs generally go down in those environments. But 
rather than debate the economic principle, I think you can just 
protect them against the disclosure of the information.
    Mr. Lynch. OK. Mr. Beck, you mentioned that your experience 
in Texas, $260 million in 4 years. We have 8 million 
participants. What is the size of the market there?
    Mr. Beck. Mr. Chairman, I am not real sure. I know it is 
extremely large. I think that estimate is low. I agree with 
you. I think that the estimate is a little short at half a 
billion. I think it is over a billion.
    Mr. Lynch. Yes.
    Mr. Beck. One thing I wanted to mention. Back in 2002 there 
was a lawsuit brought by the FEHBP and I believe the mail 
carriers, I was reviewing it this morning, against Advance PCS, 
which is----
    Mr. Lynch. Was that Mail Handlers?
    Mr. Beck. Mail Handlers. Yes, sir.
    Mr. Lynch. OK.
    Mr. Beck. Advance PCS, which is now no longer. It was 
bought by CVS Caremark. And out of that was $179 million 
settlement. In addition to that, there were provisions in the 
settlement that was a 5-year requirement for transparency 
standards to be followed. That has now expired. So basically, 
your legislation just extends that Federal lawsuit settlement 
and puts it in legislation that has to do with all PBM 
contracts.
    Mr. Lynch. Yes. Thank you.
    Ms. Weaver, I think you mentioned some of this in your 
testimony about drug switching and the abuses. You laid out 
that very cogent analysis between what folks were paying for 
that formulary, the $9.99 comparison. Can you drill down that a 
little bit and elaborate on that analysis that you came up 
with?
    Ms. Weaver. Absolutely. So essentially, what we did is we 
took CVS's generic discount program, which is a list of over 
300 drugs that they offer for $9.99. As everybody said today, 
it is very hard to figure out what drugs cost, right, so you 
need a baseline to figure out if you are getting a good deal. 
So one of the reasons we decided to look at this is this is a 
baseline. It is the walk-up price. You pay $10 to join this 
program, and anybody can get access to 300-plus generic drugs 
for $9.99.
    So what we wanted to do was look at Blue Cross/Blue 
Shield's FEP program. It is the largest plan within the FEHBP. 
We can compare the prices that the Government and those Federal 
employees are paying for every single one. We tested every drug 
on that list. What we found, as I mentioned, was that 85 
percent of the drugs on the list cost the Federal Government or 
Federal employees--and/or, sometimes both. It depends on the 
cost structures--more than that $9.99 price. So it was a little 
bit----
    Mr. Lynch. So the people with insurance are paying more 
than the people without insurance?
    Ms. Weaver. Exactly, for 85 percent of the drugs on the 
list.
    Mr. Lynch. How wacky is that?
    Ms. Weaver. It is pretty wacky.
    Mr. Lynch. Yes. Unbelievable.
    Ms. Weaver. And we have heard from Federal employees that 
actually don't use their insurance when they go into a retail 
store because they know that they can get a better deal. That 
is pretty absurd, as well, because those people are paying 
premiums that are supposed to give them prescription drug 
coverage.
    Mr. Lynch. Right. They are paying premiums.
    Ms. Weaver. It is really sad.
    Mr. Lynch. And the American taxpayer is paying 72 percent 
of that plan, in addition to what the user is paying. So that 
is what has me absolutely furious over what is going on here.
    Mr. McFarland, I appreciate your work on this. This has 
been tough, and you have expressed at earlier hearings your 
frustration in being able to determine what we are getting for 
our money and whether there is an advantage here being had by 
the Federal Employees Health Benefits Plan and its 8 million 
participants in our arrangement with these PBMs. Is there 
anything that is not in the bill that you think might help your 
position in terms of understanding what is going on behind the 
scenes and the real cost between all these relationships, the 
commissions, the rebates, and that whole relationship between 
manufacturers and PBMs and pharmacies, as well?
    Mr. McFarland. No, Mr. Chairman. I don't think that there 
is anything in particular that should be additionally placed in 
the bill. I think it is very complete as it is. That doesn't 
mean that there might not be, after further deliberation, some 
more thinking about add-ons. But at this point I wouldn't say 
anything specific. What we are dealing with, I think, your bill 
clearly covers.
    If I can, let me make a point on something that was 
presented to me earlier today when we were discussing, as we 
have been for a few weeks, preparing for the testimony today.
    Mr. Lynch. Please.
    Mr. McFarland. This is just a little excerpt from the audit 
staff, what they noticed after the large provider agreement was 
brought into effect, I think in 2005, and that simply meant to 
us that we were able then to get into those PBM contracts. But 
as it turned out, it was only in a compliance mode. We still 
could not get to where we needed to be with that large provider 
requirement. And my understanding of large provider agreement 
was simply whoever ends up paying at least 5 percent, then they 
would consider large provider. Of course, the prescription 
drugs, 25 or more percent. So that was an easy identification 
there.
    But here is what was given to me. This is from the audit 
staff. We have noticed a distinct shift in how the PBMs have 
contracted with FEHBP carriers. What we saw as pass-through 
pricing initially with administrative fees and rebates 
returned, did a complete 180 degrees. After the large provider 
agreement, the contracts became based on a percentage off of 
the average wholesale price for the drugs, with no 
administrative fees charged and the PBM keeping most, if not 
all, of the rebates.
    Because the drugs are priced off a percentage of AWP, our 
audits consisted of verifying the price charged to the FEHBP; 
however, we could not compare that price to the actual price 
paid by the PBM.
    Mr. Lynch. Right.
    Mr. McFarland. So it was just obvious----
    Mr. Lynch. Yes. I understand what they are doing there. The 
average wholesale price is a moving target. It means something 
different to everybody, so you don't have a solid benchmark 
there by which you can make that determination.
    What we are actually looking for here is the actual price.
    Mr. McFarland. Yes.
    Mr. Lynch. How much the actual cost is and how much we are 
being charged. That is all we want to know. We just want a fair 
deal. That is all. And one we can understand on behalf of the 
people that we represent, and we can't get there with the way 
this thing is working right now.
    Mr. McFarland. Well, we presently receive confidential 
proprietary information from the PBMs as a data base on 
prescription claims, and we protect that with our heart and 
soul.
    Mr. Lynch. Yes.
    Mr. McFarland. We make sure that is as safe as possible in 
our particular environs. But then, on the other hand, they are 
saying, ``But you don't need to see our financial records, but 
we can give you the personal identification information of our 
claims people.'' So it is saying one thing and doing another.
    Mr. Lynch. That is right. That is exactly right. Some of 
the information that is being sold out there and marketed is 
quite detailed, so it is counter-intuitive that they can't give 
it to you in a form that you can use.
    All right. I think you people have suffered enough. I want 
to thank you on behalf of the committee. We have a lot going on 
here today. As you know, there are a few major hearings going 
on here. I want to thank you for coming before this committee 
and helping us with our work. I would like the opportunity to 
continue to work with you.
    Look, I am not saying that our legislation is perfect. Not 
by any means. That is why we are having this hearing and that 
is why we are trying to get input from you. I think actually 
you have all been helpful in making this legislation better. We 
appreciate your testimony and your help with this. We are going 
to allow Members who may have had questions to offer you 
inquiries that you will, if you are willing, would have to have 
you respond in writing within 5 days if Members so choose. But 
other than that, I want to thank you for your attendance today 
and you are free to go. Thank you.
    Can we ask our third panel to come up?
    Good afternoon. I am sorry if we have delayed you with the 
length of the previous panels. I do appreciate your attendance 
here.
    It is the custom of this committee to swear all witnesses 
who are to offer testimony, so could I please ask you all to 
rise and raise your right hands?
    [Witnesses sworn.]
    Mr. Lynch. Let the record indicate that all of the 
witnesses each has answered in the affirmative.
    As with the previous panel, we will offer a brief 
introduction before we ask witnesses to offer testimony.
    Mr. Daniel Adcock is currently legislative director of the 
National Active and Retired Federal Employees Association. 
Before going outstanding that Association, Mr. Adcock worked 
for the House Committee on Education and Labor's Subcommittee 
on Employment Opportunities and its Subcommittee on Human 
Resources and was an Executive Assistant to the Assistant 
Secretary for Aging, Jeanette Takamura.
    Dr. Jacqueline Simon is the public policy director for the 
American Federation of Government Employees [AFGE]. AFGE 
watches over the rights of some 600,000 Federal and D.C. 
Government employees. An economist by training, Ms. Simon has 
worked to protect the interest of Federal employees at AFGE for 
over 20 years.
    Ms. Colleen Kelley is the president of the National 
Treasury Employees Union, the Nation's largest independent 
Federal sector union, representing employees in 31 different 
Government agencies. President Kelley, a former IRS revenue 
agent, was first elected to the union's top post in 1999.
    I do want to add my condolences and that of the committee. 
We understand, Ms. Kelley, the incident last week where your 
colleagues' offices were attacked in Austin, TX. I am aware 
that your organization suffered a loss of Vernon Hunter, a 
Social Security Administration Manager who was killed in that 
attack in Austin, so our prayers are with your members and 
especially the Hunter family. I understand they had six kids, 
and I know that Mr. Hunter's wife also is an IRS employee, as 
well.
    Ms. Kelley. Yes.
    Mr. Lynch. That makes it even more difficult, but we do 
offer our condolences in that respect and we appreciate the 
fact that you were down there helping with those employees. I 
know we had quit a few injured, as well.
    Mr. John E. Calfee is a resident scholar at the American 
Enterprise Institute for Public Policy Research who studies the 
pharmaceutical industry and the Food and Drug Administration. 
He previously worked at the Federal Trade Commission Bureau of 
Economics, and has also taught marketing and consumer behavior 
at the Business Schools of the University of Maryland at 
College Park and Boston University.
    Mr. Larry McNeely is a U.S. Public Interest Group's health 
care advocate, advocating the organization's Federal level 
advocacy, communication, and organizing on health care reform. 
Mr. McNeely lobbies Congress for legislation that will tame 
rising health care costs and offer consumers better choices in 
the health care marketplace.
    As was indicated earlier, the little box there in front of 
you will be green when you should be speaking, yellow when you 
should think about wrapping up, and red when you should stop 
offering testimony.
    Mr. Daniel Adcock, you are now recognized for 5 minutes.

  STATEMENTS OF DANIEL ADCOCK, LEGISLATIVE DIRECTOR, NATIONAL 
ACTIVE AND RETIRED FEDERAL EMPLOYEES; JACQUELINE SIMON, PUBLIC 
 POLICY DIRECTOR, AMERICAN FEDERATION OF GOVERNMENT EMPLOYEES; 
COLLEEN KELLEY, NATIONAL PRESIDENT, NATIONAL TREASURY EMPLOYEES 
   UNION; JOHN CALFEE, RESIDENT SCHOLAR, AMERICAN ENTERPRISE 
INSTITUTE; AND LARRY MCNEELY II, HEALTH CARE ADVOCATE U.S. PIRG

                   STATEMENT OF DANIEL ADCOCK

    Mr. Adcock. Chairman Lynch, I appreciate the opportunity to 
testify. I am Daniel Adcock, legislative director of the 
National Active and Retired Federal Employees Association.
    Two important issues to our membership are access to the 
latest in pharmaceutocology technology and ways to manage the 
costs associated with life-saving and life-enhancing drugs.
    Under the expected technological revolution in medicines, 
diseases that were once fatal or debilitating will become 
chronic and manageable. Ailments once requiring surgeries or 
stays in hospitals or nursing homes will be treated by 
pharmacology at home.
    Due to advances in human genomics, our medicines will now 
be tailored to our own DNA. This means drugs will be more 
likely to treat our ailments while mitigating side effects and 
drug interactions.
    Many women suffering from breast cancer had been prescribed 
tamoxifin have already been the beneficiary of this new age of 
medicine. This is only the beginning.
    The medicine bottle cap may be able to tell your cell phone 
or home computer where you mislaid the bottle or alert you if a 
child or other unauthorized person has opened it. Your doctor's 
office or family member may be able to know if the bottle was 
opened and your daily dose removed.
    Then there is the pill, itself. Embedded in the very tablet 
there is likely to be a computer chip to remind you or someone 
else that you took the medicine and the correct dosage and 
whether it was metabolized correctly.
    The role the PBM will play in this evolutionary change will 
only become more critical in providing access to cutting-edge 
drugs while containing costs. Transparency and oversight will 
become even more important. We can accept the cost of advanced 
drugs as long as we can be assured that they are safe and 
effective and that the process of pricing such drugs is fair. 
That is why NARFE is particularly interested in guaranteeing 
that the savings achieved by PBMs are passed on to enrollees. 
We are pleased that H.R. 4489 tackles this issue.
    We are heartened to see that the President's budget 
emphasizes and continues the responsibility of OPM's Inspector 
General in auditing reprimand benefits and the role of PBMs. 
Hopefully, this will improve the contract negotiation process, 
hold costs in check, and ensure against fraudulent claims.
    For the 2010 FEHBP contract year, OPM has now requested 
more information from carriers as they contract with PBMs for 
their services. Let us hope this brings further information to 
OPM and the beneficiaries.
    Drug pricing is very complex. With the processes that 
involve the drug formulary and the choices between generics and 
brand names, plus the costs associated with disease management 
and patient information. Although drug formularies can help to 
contain costs, they can also prevent patients from getting the 
most efficacious medication. For that reason we are glad that 
H.R. 4489 gives physicians the final say on which drugs should 
be dispensed.
    Still, OPM is not alone in seeking greater transparency. In 
fact, human resource professionals outside Government are 
developing transparency standards to ensure the PBMs are 
sharing manufacturer rebates and negotiating the lowest 
possible cost of specific drugs. This experience could be 
helpful to OPM.
    It appears that some of what has been proposed in H.R. 4489 
could be implemented under OPM's regulatory authority. For that 
reason, OPM could get a jump start on enhancing its oversight 
of PBMs before H.R. 4489 becomes law and codifies the 
additional authority that would be provided to the agency.
    Still, we strongly believe that nothing should be left to 
chance regarding OPM's ability to access PBM information. For 
that reason, we believe that transparency should ultimately be 
legislated.
    As we continue to work with you on this important 
legislation, NARFE would be interested in information from OPM 
or the Congressional Budget Office on cost savings, formulary 
development, and administrative costs that might arise from 
such regulatory or legislative initiatives. Beyond H.R. 4489 we 
believe that the FEHBP plan should buy prescription drugs for 
enrollees at the discount mandated by the Federal supply 
schedule. However, if the FSS were to be used, FEHBP plans must 
have the option of buying off-formulary medications.
    NARFE would also support your proposal to designate FEHBP 
PBMs as subcontractors under Federal acquisition rules.
    We commend you for your interest in fair prescription drug 
pricing in the FEHBP, and we look forward to working with you 
on this issue. Your prescription for the future of our health 
insurance program is a welcome addition, and we thank you for 
your effort.
    [The prepared statement of Mr. Adcock follows:]

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    Mr. Lynch. Thank you, Mr. Adcock.
    Dr. Simon, you are now recognized for 5 minutes.

                 STATEMENT OF JACQUELINE SIMON

    Ms. Simon. Chairman Lynch, thank you very much for the 
opportunity to testify today.
    Focusing on the operations of pharmacy benefit managers is 
an excellent place to begin improving the affordability of 
FEHBP, since the costs they impose are a big cause of the 
program is continuously rising prices and its lack of 
affordability for so many of our members.
    Although AFGE strongly supports H.R. 4489, I would like to 
focus my statement today on one provision of the bill that, if 
altered slightly, could have a significant impact on the cost 
of FEHBP. Specifically, that provision involves limiting the 
prices that PBMs can charge to FEHBP carriers. The maximum 
price for prescription drugs in the bill it says would be an 
amount that is equal to the average manufacture price for the 
drug as disclosed by the manufacturer. However, given the size 
of FEHBP, AFGE believes that the Government and plan 
participants should receive the full advantages of their 
purchasing power, and that means a better bargain than average 
prices.
    The PBMs may be currently charging FEHBP higher than 
average prices for drugs is unconscionable. AFGE supports a 
much stronger pricing standard than that which is set forth in 
the proposed legislation. We would recommend limiting these 
prices to the amounts provided for in the prescription drug 
price schedules used by the Department of Veterans Affairs 
[DVA]. Alternatively, the legislation could limit the maximum 
reimbursement to a ``most favored customer'' pricing model.
    Technically, the General Services Administration [GSA], 
delegates authority to negotiate these prices and has done so 
for DVA. There is no reason why the same authority could not be 
extended to OPM with regard to FEHBP, but it would be far more 
efficient for OPM to simply use the VA prescription drug 
pricing schedule.
    We have heard the arguments from the organized 
pharmaceutical industry that extending statutory pricing 
schedules to additional Federal health care programs will 
result in higher prices for all Government purchasers. They 
seem confident that no one can or will expect pharmaceutical 
companies to accept lower aggregate profits.
    AFGE believes that we should all call their bluff. Even if 
the drug companies do succeed in raising prices for all Federal 
purchasers as the price of selling to all Federal programs at a 
uniform price, it is likely that the Government will still save 
money. FEHBP is large enough that a substantial decrease in its 
drug prices could offset retaliatory price increases that the 
drug companies might try to impose.
    A final concern involves pricing transparency, which has 
been discussed a lot here today. AFGE believes that in order 
for the legislation to have meaningful price transparency, the 
requirements of TINA, the Truth in Negotiations Act, should be 
applied to the program. Both FEHBP carriers and PBMs utilized 
by the carrier should be required to make available to 
Government agencies all cost and pricing data relating to the 
purchase or reimbursement of prescription drugs by these 
entities. They provide it to other Federal agencies in other 
contracting situations, and there is no reason they shouldn't 
be required to provide that same data in this context.
    In addition, AFGE believes that the application of cost 
accounting standards should specifically be applied to the 
FEHBP carriers and PBMs in order to ensure that accounting for 
the pricing and reimbursement of prescription drug costs is 
performed in a uniform and consistent manner.
    The President's fiscal year 2011 budget proposal indicates 
that OPM's Office of the Inspector General intends to develop 
its ability to audit PBMs. The budget cites OPM estimates that 
prescription drugs make up 26 percent of FEHBP's costs and will 
total $11 billion next year. The benefits of more thorough 
auditing should be substantial.
    Requiring FEHBP carriers and the PBMs to adhere to the cost 
accounting standards will give the OPM IG the tools it needs to 
carry out these audits in a way most advantageous to taxpayers 
and enrollees.
    This concludes my testimony, and I would be happy to answer 
any questions you may have.
    [The prepared statement of Ms. Simon follows:]

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    Mr. Lynch. Thank you, Dr. Simon.
    President Kelley, you are now recognized for 5 minutes.

                  STATEMENT OF COLLEEN KELLEY

    Ms. Kelley. Thank you very much, Chairman Lynch.
    I am here on behalf of NTEU members who participate in 
FEHBP and diligently pay their ever-rising premiums for health 
insurance only to receive reduced coverage and higher co-pays 
and coinsurance costs for their prescription drugs. We were 
very pleased to participate in the subcommittee's drug pricing 
forum last September that aptly highlighted the incongruity in 
FEHBP, a program with one of the largest enrollee pools of 8 
million people, as we have heard, yet one that gets the worst 
prescription drug prices in Government.
    H.R. 4489 takes a giant step forward in addressing the 
problems of why OPM has been unable thus far to better leverage 
what should be a significant advantage. According to OPM's 
Inspector General, as we have heard, the cost structures of the 
pharmacy benefit managers in FEHBP are utterly non-transparent. 
Because the contracts cannot be audited properly under the 
current system, OPM does not have all of the information it 
needs to make any substantive improvements. Common sense 
dictates that U.S. taxpayers, and especially FEHBP enrollees, 
who saw their premiums rise roughly by 9 percent this year or 
15 percent if they were a single enrollee in the popular Blue 
Cross/Blue Shield standard plan, deserve better than that.
    H.R. 4489 says if a PBM and carrier want to participate in 
FEHBP, certain conditions need to be met. NTEU supports this 
approach and the accompanying goals of transparency and 
accountability.
    A tentative transparency and accountability is increased 
disclosure. Just as the administration calls for greater 
disclosure in Government through information and data sharing 
by Federal agencies and individuals, it is only fitting for 
these billion dollar private companies who make a profit from 
Government business to become more transparent through 
disclosing relevant information, as well. If PBMs want to 
participate in FEHBP, they should be held accountable, as H.R. 
4489 proposes to do.
    Therefore, NTEU supports section 2(H) of the bill, which 
would allow OPM to access information on arrangements that PBMs 
have with manufacturers and pharmacies. The range of 
information that OPM would have available through these kinds 
of disclosures would include corporate-wide rebate reports, 
rebate allocation methodology, benchmark pricing, and various 
fees at different stages. These will all put the agency in a 
position to better do its job. We are not advocating public 
dissemination of proprietary information, but we are advocating 
disclosure to OPM as needed so it can monitor the Federal 
program.
    We also support the bill's approach to prescription drug 
rebates in section 2(C) and believe the language could be 
clarified even further to improve FEHBP. PBMs were originally 
intended to handle administrative functions associated with 
drug claims; now PBMs negotiate for discounted drug rates and 
receive hidden payments and rebates from manufacturers, as well 
as other fees and payments from carriers.
    Under section 2(C), with 99 percent of rebates and fees 
being returned to the insurance carriers, NTEU would also 
recommend additional clarifying language to ensure that the 
funds recaptured will be dedicated to the FEHBP program and be 
used to keep enrollee costs down, as we understand, DOD's Tri 
Care health plan does. Under Tri Care, rebates are put back 
into the insurance program and the PBM receives an 
administrative fee for services.
    NTEU also believes the consumers protections in H.R. 4489 
are a very positive step, the ones on drug switching and on 
selling claims data and on timely explanation of benefits. The 
PBM does not know what is best for patients, so the drug 
switching issues should go away, and the only way that should 
be able to occur is with appropriate medical input. We support 
an end to that practice.
    Now, on selling claims, while we question the practice of 
selling FEHBP claims data at all, at a minimum OPM's 
concurrence should be a part of that process.
    On EOBs, FEHBP enrollees will benefit from this added 
disclosure of prescription drug costs, enhancing their ability 
to choose the best plans for their needs.
    Finally, NTEU would support adding language to H.R. 4489 to 
provide a pilot test of statutory pricing. We have long 
believed that OPM should investigate the possibility of buying 
prescription drugs off of the Federal supply schedule, as we 
have heard that the VA and Defense do. Their drug prices are 
substantially lower than FEHBP. Ten years ago I testified 
before Congress in favor of a small pilot that OPM had approved 
for the SAMBA health care plan to allow access to the Federal 
supply schedule for its mail order drug program. SAMBA argued 
it could save 3 percent annually in enrollees' premium shares 
by directly buying from the Government. Overall savings would 
have been $2.4 million annually, and that was back in 2000 
dollars.
    Despite OPM's approval, the pharmaceutical industry, whose 
profits 12 years ago were estimated at $26 billion, pulled out 
and they refused to participate in the plan. NTEU would support 
a demonstration project to examine hard numbers associated with 
the direct purchase of drugs through the FSS and we would 
support adding a provision to H.R. 4489 to make that happen. I 
believe this approach offers a real opportunity for cost 
savings.
    I thank you for the opportunity to testify today and will 
be glad to answer any questions.
    [The prepared statement of Ms. Kelley follows:]

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    Mr. Lynch. Thank you.
    Mr. Calfee, you are now recognized for 5 minutes.

                    STATEMENT OF JOHN CALFEE

    Mr. Calfee. Thank you, Mr. Chairman. It is a privilege to 
speak at these hearings. The views I present are my own, not 
those of any organization, including the American Enterprise 
Institute, which does not take institutional positions on 
specific legislation, litigation, or regulatory proceedings.
    H.R. 4489 focuses on the role of pharmacy benefit managers 
[PBMs], as we have heard, in Federal Employees Health Benefits 
Plans. On the whole, the provisions of H.R. 4489 would do far 
more harm than good for consumers and patients, and it would 
increase health care costs.
    This bill is based on the assumption that competition does 
not work well in the PBM market. The facts belie this premise. 
Competition is vigorous and multi-faceted. Stand-alone PBMs 
compete among themselves and also compete with retail 
pharmacies, large health insurance plans, large employers, and 
even pharmaceutical manufacturers, themselves.
    In this highly competitive environment, employers and 
insurance plans have negotiated a rich variety of PBM contracts 
that reflect the specific preferences of the contracting 
parties.
    Another indicator of vigorous competition is the fact that 
a detailed investigation by the FTC, the Federal Trade 
Commission, found very little evidence of favoritism or self 
dealing on the parts of PBMs, regardless of who owned the PBMs.
    H.R. 4489 would force nearly complete transparency in the 
financial arrangements between PBMs and their partners. This 
would be difficult to achieve. But if the legislation does 
bring this kind of transparency, it would undermine the 
incentives of PBMs to negotiate discounts from pharmaceutical 
manufacturers. This has been recognized by the FTC staff and by 
other economists.
    H.R. 4489 would also require PBMs to pass on virtually all 
the savings they realize from aggressive cost cutting. This 
would undermine the incentives to cut costs in the first place. 
This cost cutting comes primarily from negotiating rebates from 
pharmaceutical manufacturers. Undermining these incentives 
would raise cost. This adverse consequence of regulation has 
also been recognized by FTC economists and by others.
    H.R. 4489 would also establish price controls, which 
rarely, if ever, does good in competitive markets. The 
prohibition on negotiating a spread between payments to 
manufacturers and to pharmacies would discourage PBMs from 
seeking to reduce drug prices and costs. Giving OPM the power 
to set ceilings on pharmacy dispensing fees would require OPM 
to uncover the true costs and benefits of dispensing for 
pharmacies. This is not easily done, and it could easily 
disrupt access or even increase costs.
    H.R. 4489 would prohibit health plans from reimbursing more 
than what is called the average manufacturer price [APM], and 
OPM would be granted new oversight powers on drug pricing. 
There is no reason to think this would reduce price directly, 
and prices directly, because manufacturers can adjust prices 
outside of the FEHBP system, but this measure could easily set 
the stage for direct price controls over pharmaceuticals, as we 
have already heard. This would have extremely adverse 
consequences for researching and developing new drugs and new 
uses for approved drugs.
    H.R. 4489 would also impose restrictions on who can own a 
PBM. This would tend to reduce competition. In addition, these 
restrictions would deprive the marketplace of the benefits of 
vertical integration. For example, ownership restrictions would 
sometimes add extra steps in the pricing of drugs as they 
proceed through various channels from manufacturers to 
patients.
    H.R. 4489 would also expand regulation of drug formularies. 
Little, if any, evidence indicates that PBMs harm patients 
through the design and operation of formularies. New 
restrictions are more likely to raise costs than to improve 
health.
    Finally, H.R. 4489 would grant OPM the power to prevent PBM 
from selling information on drug utilization and sales. This 
would be unfortunate. This kind of information can play an 
important role in the larger task of improving pharmaceutical 
targeting and use. And, again, there is little, if any, 
evidence of consumer harm from these practices.
    For all these reasons, I respectfully urge this committee 
to reconsider H.R. 4489. There is no reason to prevent 
employers, health plans, and pharmaceuticals from negotiating 
whatever arrangements they wish with PBMs.
    Thank you, Mr. Chairman.
    [The prepared statement of Mr. Calfee follows:]

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    Mr. Lynch. Mr. McNeely, you are now recognized for 5 
minutes.

                 STATEMENT OF LARRY MCNEELY II

    Mr. McNeely. Thank you, Mr. Chairman.
    Mr. Chairman, members of the committee, I very much 
appreciate the opportunity to come before you today and testify 
about this bill and its effort to control the cost of drugs in 
the Federal Employees Health Benefits Program.
    As I said, my name is Larry McNeely. I am the health care 
advocate with the U.S. Public Interest Research Group. U.S. 
PIRG, as we call it, is a national federation of State-based 
consumer advocacy organizations. We have a 35-year history of 
standing up for consumers, and we are convinced that both 
strong competition and strong consumer protection are essential 
to the functioning of any market. Unfortunately, the pathway 
for pharmaceutical delivery in this country, the market for 
pharmaceutical benefit managers [PBMs], lacks that adequate 
competition and it lacks the consumer protections that are 
required, and that is why the reforms envisioned in H.R. 4489 
are so necessary to help bring down costs.
    In explaining the benefits of transparency, I think a lot 
has been said in this panel and in previous panels. I just want 
to refer to the comments of assistant attorney general for 
Antitrust, Christine Varney, who highlighted its importance 
when she said: I am a firm believer in what Justice Brandeis 
said in another context: Sunlight is said to be the best of 
disinfectants; electric light the most efficient policeman. 
Markets work better and attempted harms to consumers are more 
likely to be thwarted when there is increased transparency to 
consumers and Government about what is going on in an industry. 
I could not say it better.
    In my written testimony I go into more detail, but, just to 
outline a couple of the essential points, if the three 
essential elements of any competitive marketplace are choice, 
transparency, and a lack of conflict of interest, the PBM 
market actually lacks each one of those three. It is highly 
concentrated. We actually have some evidence which I detail in 
here of legal action to stop deceptive and fraudulent 
practices. And we continue to see these practices of drug 
switching and self-dealing, which are not only unfair to 
Federal employees in this particular context, but are spread 
more broadly across the health care market and we really think 
needs addressing in other legislation.
    We believe enacting H.R. 4489 will lead to significant cost 
savings for taxpayers. The proposed legislation will actually 
lead to a reduction in pharmaceutical costs by requiring the 
pass-through of rebates and prohibiting the practices of drug 
switching and spread pricing, and it will protect employees and 
taxpayers by preventing conflicts of interest that we have run 
into in cases like CVS Caremark, where a PBM is owned by a 
retail chain.
    These assertions are backed up by a growing body of 
evidence that demonstrates that plan transparency does allow 
plan sponsors to monitor and curb their prescription drug 
spending. I detail a number of examples, but in one case in New 
Jersey when they switched to a pharmaceutical benefit manager 
contract that was transparent for 600,000 covered employees, 
they are now projected to find $558.9 million in savings over 6 
years. If we are talking about 8 million Federal employees, 
certainly a substantial amount of resources are available.
    And just to sum up, I think our attitude and why we are, I 
think, so grateful to the sponsors of this legislation for 
moving it forward is that without the protection afforded in 
H.R. 4489 it is as if the pharmaceutical benefit management 
industry is saying to taxpayers, saying to Federal employees, 
give us $10 billion of your money and trust us. The PBM 
industry, as a whole, as we have demonstrated in some of the 
lawsuits I detail in my testimony, has not earned that trust, 
and we should make sure--I hope this legislation gets favorable 
consideration by the committee.
    Thank you.
    [The prepared statement of Mr. McNeely follows:]

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    Mr. Lynch. Thank you, Mr. McNeely.
    I now yield myself 5 minutes.
    I want to thank you all for your testimony. I really 
appreciate your willingness to come before the committee.
    Mr. Calfee, I have great respect for the American 
Enterprise Institute. They have long been advocates of good 
Government, I think. I am a little puzzled. I know that you 
testified previously before the House Energy and Commerce 
Committee to the effect that prescription drugs in the Medicaid 
program should more closely reflect cost.
    Now, here in today's hearing, you have heard both 
Republican and Democratic Members express the frustration that 
we cannot determine what the costs are of the drugs in the 
FEHBP program. We have heard from the customers, the users, 
that they cannot determine what the costs are of the drugs 
offered in the FEHBP program. We have heard from the Office of 
Personnel Management responsible for oversight of the FEHBP 
program, that they, indeed, cannot determine what the costs are 
of the drugs in the FEHBP program.
    We have heard from the Inspector General of OPM who says--
and he is principally responsible for the oversight here--that 
he cannot determine what the costs are in the drugs for the 
FEHBP program, and we even have an example of a program where 
300 drugs are offered to the general public with no insurance, 
with no insurance, and they are paying less money than insured 
individuals are paying through their pharmacy benefit managers 
in the FEHBP program, which is funded on an average 72 percent 
by the taxpayer, roughly 28 percent by premiums paid for by the 
individual.
    Why would you support the principle that Medicaid drugs 
should be as closely as possible priced based on cost, and yet 
your testimony here today seems to be at variance with that, if 
not directly opposed to it.
    Mr. Calfee. You are referring to my own testimony in 
connection with Medicaid?
    Mr. Lynch. Yes.
    Mr. Calfee. I am trying to remember what I said, but I 
imagine what I said was that Medicaid should pay market prices 
rather than getting a special fixed discount from market 
prices. But they should go out in the market.
    Mr. Lynch. You testified in 2005 before the House Energy 
Commerce Committee that says closely reflect cost.
    Mr. Calfee. By cost I was referring to market prices. 
Certainly I was not referring to the cost of manufacturing the 
drugs, because those costs are very, very small compared to any 
prices.
    But my understanding, especially from the testimony of Mr. 
O'Brien earlier today, is that all of these plans are free to 
reach contracts with PBMs that do provide for disclosure. In 
fact, I believe that is what Argus Systems specializes in. And 
so my understanding is if a plan wants to have transparency, if 
they want to have the rebates passed through to them, they can 
arrange for that through contracts.
    So I think the issue here is whether or not they have their 
freedom to either have a contract that does provide for 
transparency and pass-through rebates or to have a contract 
that doesn't do that. And what we have heard in the private 
sector outside of FEHBP is you get both kinds of contracts. You 
get contracts with transparency, ones without, etc. The plans 
experiment with different ones. Sometimes they save money from 
when they switch from one approach to another, and sometimes 
they don't.
    Mr. Lynch. But, sir, in this case we are the customer. I am 
a Federal employee. I am an oversight officer on behalf of the 
Federal employees. It is not as if we said we want a contract 
with no transparency. We are demanding transparency and we 
can't get it, nor can the Office of the Inspector General. We 
can't get that transparency. Nor can the Office of Personnel 
Management. We can't get that. The PBMs and the contracting 
parties are saying that it is a matter of proprietary advantage 
and they don't want to disclose that.
    So we have had instances where it has gone to court, in the 
State of Maine example, where I think the heat of that 
litigation broke the case open for the State of Maine, and that 
was a great advantage. But absent that urgency and the consent 
decree that was rendered in that case, that transparency would 
not be forthcoming.
    So it is not like, oh, we'd prefer transparency or we would 
not prefer transparency; we are demanding it and we cannot get 
it. That is the truth of the matter here on behalf of everyone 
that I mentioned, Republican and Democrat, so far.
    Mr. Calfee. Again, I know in the private sector outside of 
FEHBP it is fairly common. It is not the rule, but it is fairly 
common. It does happen that a plan will have a contract for 
transparency, such as with Argus Systems that we heard about 
earlier.
    But if you think about negotiating, a PBM negotiating with 
a drug manufacturer, if it wants to get a discount on a certain 
drug, and if that manufacturer knows that any discount he 
provides will instantly be communicated through the plans to 
other drug manufacturers and the other manufacturer will 
probably offer to match that price, then what the manufacturer 
knows during the negotiating process is there really isn't much 
to be gained by the manufacturer by providing a discount 
because they will end up having to give that discount to 
everyone.
    So I think economic reasoning does suggest that if you 
force transparency you can make these negotiations more 
difficult, discounting more difficult to obtain, and I think 
that is fairly close. I wouldn't call it a consensus, but I 
would say the bulk of economists follow that line of reasoning, 
including specifically the Federal Trade Commission and also 
the CBO.
    Mr. Lynch. I appreciate that, but I think we did hear 
testimony here today, and in my bill specifically it is not 
requiring public dissemination of proprietary interests here. 
We are talking about you need to tell the Office of the 
Inspector General for OPM. They already receive proprietary 
information. They guard that jealously. In fact, if that 
information got out, it would hurt their credibility enormously 
and effect negatively their ability to do their job. So that is 
why we are suggesting it just be limited disclosure.
    Let me go on, though. Mr. Adcock, I know that you mentioned 
earlier the number of NARFE employees that are included under 
the FEHBP program. Let me ask you, what is the general 
assessment in terms of your own members' attitudes toward the 
current FEHBP program, specifically toward OPM's oversight of 
prescription drug programs within the FEHBP?
    Mr. Adcock. Well, I think it is kind of a love/hate 
relationship. On one hand, I think that they are happy that 
they have health insurance that is equivalent to what other 
large employers provide, but I think they hate the fact that 
they are paying premiums in the double digits for the last 
several years.
    With regard to prescription drugs, I mean, I think they 
understand very clearly that is one of the huge cost drivers in 
the program and is responsible for huge premium increases. Now, 
I think that over the years, because of the fact that several 
years ago they were encouraged through cost sharing to start 
using mail order prescription drugs and thereby pharmaceutical 
benefit managers, they are now accustomed to doing that.
    I think that where there are concerns that we hear most 
often is that when we hear examples that individuals that don't 
have any insurance at all can go into a drug store and get a 
better price on a specific type of drug than they can through 
the insurance, that is troublesome to them. When they hear 
about that State Attorney Generals all over the country are 
involved with legal action against pharmaceutical benefits, 
that is troublesome.
    So, on one hand, I think that when you are talking about 
customer service that they have with pharmaceutical benefit 
managers and arranging for their drugs to be purchased, I think 
a lot of these PBMs have very good customer service, but when 
they hear about these stories they want to know what is going 
on behind the curtain. That is why I think for a lot of them 
they are very interested in the subject matter of this 
legislation and transparency.
    Mr. Lynch. Dr. Simon, could I ask you the same question? I 
know the American Federation of Government Employees has a 
tremendous amount of employees affected, as well. What are the 
attitudes? I don't know if you are close to that level of 
feedback.
    Ms. Simon. I am, but I just want to say, especially in 
light of the oath that we took at the beginning of the panel 
here, I never finished my dissertation so I am not Dr. Simon.
    Mr. Lynch. OK.
    Ms. Simon. But in any case----
    Mr. Lynch. All right. We won't hold that against you.
    Ms. Simon. But thank you for the presumption.
    In fact, AFGE is holding its annual legislative conference 
this week, and during the issues briefing this weekend I don't 
think there was any subject that raised peoples' hackles more 
than what has been going on in FEHBP.
    Mr. Lynch. Wow.
    Ms. Simon. Part of that is because of the national health 
care reform bills that would impose a so-called Cadillac Tax on 
their FEHBP plans, and I think today's hearing shows that there 
is nothing about the benefits that make it a Cadillac. It is 
the fact that we pay too much. The price is too high, but the 
benefits aren't necessarily luxurious or comprehensive. And so, 
if that goes forward, they would get hit again for something 
that is completely beyond their control.
    We often, when we testify on FEHBP, note the fact that we 
don't know the number exactly, but there are at least a couple 
hundred thousand, if not more, Federal employees who are 
eligible to participate in FEHBP but don't participate and 
don't have insurance from another source because they can't 
afford the premiums that are on average now 30 percent for the 
enrollee, and they keep going up.
    And so, many of our members work in veterans' hospitals or 
in prisons and DOD medical facilities where they may be 
providing these prescription drugs to inmates or patients, 
veterans, or patients in the DOD hospitals, and they know that 
the same Government that is paying for their health insurance 
through FEHBP is paying one price if they were prescribed that 
drug and a completely different price when they are dispensing 
it in a VA hospital or a prison or through the Indian Health 
Service.
    They are very, very aware of the fact that FEHBP has not 
been run in a way that would minimize the cost to taxpayers or 
enrollees. And as it gets more and more expensive, and each 
year a higher and higher percentage of overall premiums is 
shifted onto the employees, they are livid. They are livid. 
They are getting a small pay increase and their FEHBP premiums 
are going up, up, up, and they like this legislation.
    Mr. Lynch. OK. Thank you.
    President Kelley, I know you have a pile of employees that 
are also affected all over the place, right?
    Ms. Kelley. We do. We do, Chairman Lynch. But it does come 
down to the single issue of the cost of the plan, because 
everything points to the fact that these annual increases are 
so directly tied to the cost of prescriptions.
    I would also say that the forum that you held last 
September, on this issue, for those who did not know about the 
Federal supply schedule and the prices that were being paid so 
differently at DOD and VA, they know that now and they have 
more questions about why that would be allowed to continue to 
happen and why OPM--the question has always been what OPM will 
do to better leverage the 8 million enrollees. Of course, like 
I said, it always comes back to the prescription drugs as the 
one element that is always pointed to when the annual prices, 
the annual increases are announced each year.
    Mr. Lynch. Let me ask you about that, then. We had this 
forum. I guess I had an inclination to try to do the simplest 
thing, which we have a Government purchasing system under the 
FSS, that Federal supply schedule, and it is well known. It is 
well used. It is established. It is used in general Government 
purchasing. And it is fairly transparent. You put out there 
what you are going to charge the Government for providing a 
certain material or service. And it is competitive.
    My thought was, rather than this very, very Rube Goldberg-
type construction that we have for Federal employees health 
benefits on the pharmacy side, let's just put it out there like 
we would for widgets, and you offer your price to the 
Government and we accept it or reject it. We can consider 
quality and level of service. Let's just do that. The PBMs were 
the loudest critics of that system because it would eliminate 
them from the whole process, basically.
    Now, that is a very crude solution to our problem. It 
simplifies things, but I will take for granted that widgets are 
not the same as pharmaceuticals being recommended by a 
physician for the health care of that individual. There are 
some important differences there.
    However, when you look at the VA system that is out there 
that works pretty well, they have a fixed formulary, however, 
so there is a more limited choice, although there are waivers 
under certain circumstances.
    How would your members respond to that if there was a fixed 
formulary, because that is going to reduce, conceivably, it is 
going to reduce some level of choice for some of these exotics 
or some of these less commonly used pharmaceuticals? It is 
going to be a limitation on choice. How are they going to 
balance the likes and dislikes of a system that might have a 
fixed formulary but a much lower price across the board?
    Ms. Kelley. I don't know how they will react to change in 
general, but any kind of a positive change I think would be 
received. But one of the things that NTEU has recommended is 
that this be done as a pilot, that it not just be an across-
the-board, because then all of the benefits that we already 
know exist, such as the transparency, for those who oppose it, 
it is already there. The obstacles that they are raising have 
already been overcome with the use of the FSS.
    Mr. Lynch. Yes.
    Ms. Kelley. So let's try it in a pilot and one or two of 
the plans in the program and see exactly what kind of an impact 
it would have and if there are other issues that are created 
that haven't been thought about.
    Mr. Lynch. Like I said, there are waivers or there are 
ways, if something is not on the formulary, if you make a 
showing that this is needed then there is a way to get around 
that, but it does put sort of a gatekeeper on the formulary.
    Mr. McNeely, you had some great testimony earlier on about 
competitiveness and transparency. Are there items, as you look 
from U.S. PIRG's standpoint, that should be added to this 
legislation that we may have forgotten or that you might think 
would be helpful?
    Mr. McNeely. Yes, and we would be happy to work with you, 
but we generally believe that there are some steps that are to 
be taken to strengthen the consumer protections within FEHBP by 
establishing an ombudsman and some other measures which I would 
be happy to work with the committee in terms of those 
suggestions.
    Mr. Lynch. Yes. An ombudsman in what respect? With appeals 
to which body, the carrier, the pharmacy, the PBM? That is OK. 
I am getting a little deep in the weeds here and I don't want 
to put you on the spot.
    Mr. McNeely. OK. Thank you.
    Mr. Lynch. Are there any other matters that we have 
overlooked here in terms of trying to--as I said at the outset, 
this legislation is not etched in stone, and we have heard from 
all three panels I think constructive recommendations that we 
could improve our bill, and we are happy to do that. But are 
there other items? How about the suggestion that was made by 
Representative Treat from Maine about importing a standard of 
fiduciary responsibility on the part of the PBM to act as 
fiduciary on behalf of the plan, of the insured, the 
participants? Any thoughts on that?
    Mr. Adcock. Imposing a fiduciary duty on the insurance 
carrier or on the PBM?
    Mr. Lynch. PBM.
    Mr. Adcock. On the PBM. I guess I don't know enough about 
what kind of responsibilities that would involve and what the 
checks would be in terms of the oversight on the employer to 
ensure that they were actually complying with those fiduciary 
duties. I mean, obviously, as an employer you are a fiduciary 
or should be, at least, a fiduciary of your health plan on 
behalf of your employees and retirees, but I am not sure 
exactly how that would work with a PBM.
    Mr. Lynch. I think what they are trying to get at is this: 
you are hiring a pharmacy benefit manager to get you the best 
deal. That PBM goes out there, negotiates a deal for you as 
your agent, but, unbeknownst to you because of the way the 
system works right now, they pocket part of the advantage that 
you paid them. You have already paid them as your agent to go 
out there and get a good deal. Then they get you a good deal, a 
great deal maybe, but then they pocket part of the advantage 
and come back to you and give you some measure less than what 
you paid them to get you.
    And so, that sort of gives a little bit of a snapshot on 
the problem here, that these deals are all going on and you 
never know the real cost. As Mr. Weiner testified, you never 
know what that bottom-line cost was, but with a fiduciary 
responsibility it would make it clearer that the benefits flow 
to you, that PBM is out there negotiating for your benefit as 
your agent, and it would require full disclosure of any 
advantageous relationship that they engaged in that may be in 
contravention of your own interest.
    Mr. Adcock. I guess my question would be is if there is 
such a fiduciary duty what sanctions would be made against the 
PBM if they breached that duty.
    Mr. Lynch. Well, there is a great deal of case law that has 
been developed around the responsibility of fiduciary 
responsibility, and I think that would all be imported. Those 
standards would be applied if we import the fiduciary 
relationship with respect to a PBM and the people that you 
represent.
    I just want to ask you each if you have anything that you 
would like to add. We have a series of roll calls. I would 
rather be able to dismiss the panel and adjourn the hearing 
than come back. I think we are probably at that point anyway. 
You have suffered enough.
    Ms. Simon.
    Ms. Simon. I just would say very quickly I think that this 
idea of imposing fiduciary responsibility on the PBM makes it 
even more important that we would have the cost and pricing 
data that would be triggered by application of TINA, the Truth 
in Negotiations Act. We would find out what prices they were 
charging to all their customers and what the actual cost of 
production of these drugs is, in many cases when you are buying 
drugs it is a sole source contract, and that is what triggers 
the applicability of TINA, where you find out this data--again, 
proprietary data that would be held by the agency, so it 
wouldn't be made public, but it would allow the Government to 
enforce this fiduciary standard on the PBM. So either way we 
need this data. We need this information.
    Mr. Lynch. OK. Great. President Kelley.
    Ms. Kelley. I will be looking more at the Maine experience 
and at that language, but it just seems to me that language on 
fiduciary responsibility would add to the transparency, which 
is the goal of the legislation, and that would be an 
enhancement to it.
    Mr. Lynch. Yes. That is my reading, as well.
    Mr. Calfee, please?
    Mr. Calfee. Yes. I would suggest that the most dangerous 
and counterproductive part of this legislation is the pass-
through. If you say to a PBM we want you to go out and 
negotiate a really good discount, negotiating discounts is not 
a straightforward thing. If anyone can walk into a pharma firm 
and say give me a 25 percent discount and they would give it to 
them, everyone would get the discount. It is a tricky business.
    If you say to the PBM, We want you to go out there and do 
all this work and negotiating a discount and figure out these 
clever things, working with formularies and so on, and then 
give all the returns to us, you are not going to get any 
discounts.
    What it really does is it puts the onus on the plan to 
negotiate the discount. If they can do that, fine. Sometimes 
they can. But sometimes they can't.
    Mr. Lynch. OK. Mr. McNeely.
    Mr. McNeely. Yes. I just wanted to weigh in on the 
fiduciary responsibility piece.
    We would have to take another look at the Maine 
legislation, but I think we are generally inclined to support 
that direction if that is the direction the committee moves 
with.
    Mr. Lynch. Great. Thank you.
    As you notice, we have several hearings going on at one 
time, and I am going to leave the record open in case any of 
the Members have any questions for members of the panel.
    I do want to thank you very, very much for your willingness 
to come before the committee and help us with our work. This is 
tough stuff, very complicated, but I think you are each in a 
position that has a unique perspective, and it is very helpful 
to us in trying to figure out what the intended and unintended 
consequences might be.
    I want to thank you for your testimony here. You are free 
to go. This hearing is now adjourned.
    [Whereupon, at 4:33 p.m., the subcommittee was adjourned.]
    [The prepared statement of Hon. Edolphus Towns and 
additional information submitted for the hearing record 
follow:]

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