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








     PRESCRIPTION DRUG PRICE INFLATION: ARE PRICES RISING TOO FAST?

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

                                HEARING

                               BEFORE THE

                         SUBCOMMITTEE ON HEALTH

                                 OF THE

                    COMMITTEE ON ENERGY AND COMMERCE
                        HOUSE OF REPRESENTATIVES

                     ONE HUNDRED ELEVENTH CONGRESS

                             FIRST SESSION

                               __________

                            DECEMBER 8, 2009

                               __________

                           Serial No. 111-87




[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]






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                    COMMITTEE ON ENERGY AND COMMERCE

                 HENRY A. WAXMAN, California, Chairman

JOHN D. DINGELL, Michigan            JOE BARTON, Texas
  Chairman Emeritus                    Ranking Member
EDWARD J. MARKEY, Massachusetts      RALPH M. HALL, Texas
RICK BOUCHER, Virginia               FRED UPTON, Michigan
FRANK PALLONE, Jr., New Jersey       CLIFF STEARNS, Florida
BART GORDON, Tennessee               NATHAN DEAL, Georgia
BOBBY L. RUSH, Illinois              ED WHITFIELD, Kentucky
ANNA G. ESHOO, California            JOHN SHIMKUS, Illinois
BART STUPAK, Michigan                JOHN B. SHADEGG, Arizona
ELIOT L. ENGEL, New York             ROY BLUNT, Missouri
GENE GREEN, Texas                    STEVE BUYER, Indiana
DIANA DeGETTE, Colorado              GEORGE RADANOVICH, California
  Vice Chairman                      JOSEPH R. PITTS, Pennsylvania
LOIS CAPPS, California               MARY BONO MACK, California
MICHAEL F. DOYLE, Pennsylvania       GREG WALDEN, Oregon
JANE HARMAN, California              LEE TERRY, Nebraska
TOM ALLEN, Maine                     MIKE ROGERS, Michigan
JANICE D. SCHAKOWSKY, Illinois       SUE WILKINS MYRICK, North Carolina
CHARLES A. GONZALEZ, Texas           JOHN SULLIVAN, Oklahoma
JAY INSLEE, Washington               TIM MURPHY, Pennsylvania
TAMMY BALDWIN, Wisconsin             MICHAEL C. BURGESS, Texas
MIKE ROSS, Arkansas                  MARSHA BLACKBURN, Tennessee
ANTHONY D. WEINER, New York          PHIL GINGREY, Georgia
JIM MATHESON, Utah                   STEVE SCALISE, Louisiana
G.K. BUTTERFIELD, North Carolina
CHARLIE MELANCON, Louisiana
JOHN BARROW, Georgia
BARON P. HILL, Indiana
DORIS O. MATSUI, California
DONNA M. CHRISTENSEN, Virgin 
Islands
KATHY CASTOR, Florida
JOHN P. SARBANES, Maryland
CHRISTOPHER S. MURPHY, Connecticut
ZACHARY T. SPACE, Ohio
JERRY McNERNEY, California
BETTY SUTTON, Ohio
BRUCE L. BRALEY, Iowa
PETER WELCH, Vermont

                                  (ii)
                         Subcommittee on Health

                FRANK PALLONE, Jr., New Jersey, Chairman
JOHN D. DINGELL, Michigan            NATHAN DEAL, Georgia,
BART GORDON, Tennessee                   Ranking Member
ANNA G. ESHOO, California            RALPH M. HALL, Texas
ELIOT L. ENGEL, New York             JOHN B. SHADEGG, Arizona
GENE GREEN, Texas                    STEVE BUYER, Indiana
DIANA DeGETTE, Colorado              JOSEPH R. PITTS, Pennsylvania
LOIS CAPPS, California               MARY BONO MACK, California
JANICE D. SCHAKOWSKY, Illinois       MIKE FERGUSON, New Jersey
TAMMY BALDWIN, Wisconsin             MIKE ROGERS, Michigan
MIKE ROSS, Arkansas                  SUE WILKINS MYRICK, North Carolina
ANTHONY D. WEINER, New York          JOHN SULLIVAN, Oklahoma
JIM MATHESON, Utah                   TIM MURPHY, Pennsylvania
JANE HARMAN, California              MICHAEL C. BURGESS, Texas
CHARLES A. GONZALEZ, Texas
JOHN BARROW, Georgia
DONNA M. CHRISTENSEN, Virgin 
    Islands
KATHY CASTOR, Florida
JOHN P. SARBANES, Maryland
CHRISTOPHER S. MURPHY, Connecticut
ZACHARY T. SPACE, Ohio
BETTY SUTTON, Ohio
BRUCE L. BRALEY, Iowa











                             C O N T E N T S

                              ----------                              
                                                                   Page
Hon. Frank Pallone, Jr., a Representative in Congress from the 
  State of New Jersey, opening statement.........................     1
Hon. Nathan Deal, a Representative in Congress from the State of 
  Georgia, opening statement.....................................     4
Hon. Henry A. Waxman, a Representative in Congress from the State 
  of California, opening statement...............................     5
    Prepared statement...........................................     7
Hon. John Shimkus, a Representative in Congress from the State of 
  Illinois, opening statement....................................    13
Hon. Anna G. Eshoo, a Representative in Congress from the State 
  of California, opening statement...............................    14
    Prepared statement...........................................    16
Hon. Steve Buyer, a Representative in Congress from the State of 
  Indiana, opening statement.....................................    17
.................................................................
Hon. Gene Green, a Representative in Congress from the State of 
  Texas, opening statement.......................................    18
Hon. Lois Capps, a Representative in Congress from the State of 
  California, opening statement..................................    19
Hon. Michael C. Burgess, a Representative in Congress from the 
  State of Texas, opening statement..............................    19
Hon. Jane Harman, a Representative in Congress from the State of 
  California, opening statement..................................    21
Hon. Tim Murphy, a Representative in Congress from the 
  Commonwealth of Pennsylvania, opening statement................    21
Hon. Janice D. Schakowsky, a Representative in Congress from the 
  State of Illinois, opening statement...........................    22
Hon. Betty Sutton, a Representative in Congress from the State of 
  Ohio, opening statement........................................    23
Hon. John D. Dingell, a Representative in Congress from the State 
  of Michigan, prepared statement................................   129
Hon. Kathy Castor, a Representative in Congress from the State of 
  Florida, prepared statement....................................   132
Hon. Donna M. Christensen, a Representative in Congress from the 
  Virgin Islands, prepared statement.............................   134
Hon. Joe Barton, a Representative in Congress from the State of 
  Texas, prepared statement......................................   137

                               Witnesses

Stephen Schondelmeyer, Professor and Head, Department of 
  Pharmaceutical Care and Health Systems, Director, Prime 
  Institute, University of Minnesota.............................    25
    Prepared statement...........................................    28
Richard I. Smith, Senior Vice President for Policy, Research, and 
  Strategic Planning, Pharmaceutical Research and Manufacturing 
  Association....................................................    42
    Prepared statement...........................................    44
Kathleen Stoll, Deputy Executive Director, Families USA..........    60
    Prepared statement...........................................    63
John Vernon, Professor, Department of Health Policy and 
  Management, University of North Carolina at Chapel Hill, 
  Faculty Research Fellow, National Bureau of Economic Research..    69
    Prepared statement...........................................    72
Bonnie Cramer, Chair, Board of Directors, AARP...................    82
    Prepared statement...........................................    84

                           Submitted material

Financial records of AARP, submitted by Mr. Shimkus..............   141

 
     PRESCRIPTION DRUG PRICE INFLATION: ARE PRICES RISING TOO FAST?

                              ----------                              


                       TUESDAY, DECEMBER 8, 2009

                  House of Representatives,
                            Subcommittee on Health,
                          Committee on Energy and Commerce,
                                                    Washington, DC.
    The subcommittee met, pursuant to call, at 9:39 a.m., in 
Room 2123, Rayburn House Office Building, Hon. Frank Pallone, 
Jr., [chairman of the subcommittee] presiding.
    Present: Representatives Pallone, Dingell, Eshoo, Green, 
Capps, Schakowsky, Matheson, Harman, Barrow, Christensen, 
Castor, Sarbanes, Space, Sutton, Waxman (ex officio), Deal, 
Shimkus, Buyer, Pitts, Murphy of Pennsylvania, Burgess, and 
Gingrey.
    Also Present: Representative Welch.
    Staff Present: Brian Cohen, Senior Investigator and Policy 
Advisor; Jack Ebeler, Senior Advisor on Health Policy; Karen 
Lightfoot, Communications Director and Senior Policy Advisor; 
Earley Green, Chief Clerk; Bruce Wolpe, Senior Advisor; Bobby 
Clark, Policy Advisor; Virgil Miller, Professional Staff; Jeff 
Wease, Deputy Information Officer; Erika Smith, Professional 
Staff; Katie Campbell, Professional Staff; Sharon Davis, Chief 
Legislative Clerk; Allison Lorr, Special Assistant; Lindsay 
Vidal, Press Assistant; Elizabeth Letter, Special Assistant; 
Mitchell Smiley, Special Assistant; Justine Italiano, Staff 
Assistant; Matt Eisenberg, Staff Assistant; Ryan Long, Minority 
Chief Health Counsel; Clay Alspach, Minority Counsel; Brandon 
Clark, Minority Professional Staff; Melissa Bartlett, Minority 
Counsel; and Chad Grant, Minority Legislative Analyst.

OPENING STATEMENT OF HON. FRANK PALLONE, JR., A REPRESENTATIVE 
            IN CONGRESS FROM THE STATE OF NEW JERSEY

    Mr. Pallone. The meeting of the subcommittee is called to 
order. And today we are having a hearing on ``Prescription Drug 
Price Inflation: Are Drug Prices Rising Too Fast?'' And I will 
first recognize myself for an opening statement.
    Every day in America, a life is saved, an illness is 
averted, or the effects of a disabling condition are mitigated 
thanks to the innovative medicines produced by the 
pharmaceutical industry.
    And I also think that it is important to mention the 
constructive role that the pharmaceutical industry and 
individual companies have played over the past few years amid 
various health care debates. The industry was an early and 
active proponent for the reauthorization and strengthening of 
SCHIP, which we were finally able to achieve earlier this year. 
In addition, I want to recognize their efforts to ensure 
comprehensive health reform is enacted this year. While I know 
that we all have not seen eye to eye on every issue, I 
appreciate the fact that the industry acknowledged very early 
on that they have a stake in making sure health-care reform 
succeeds and they are willing to make a contribution towards 
paying for it.
    Unfortunately, for all the good the pharmaceutical and 
biotech industry do, it is often overlooked or eclipsed by 
reports of behavior designed to maximize profits at the expense 
of individual patients, employers, and American taxpayers.
    Indeed, according to a 2008 public opinion poll conducted 
by the Kaiser Family Foundation, negative views of the 
pharmaceutical industry appear to be driven by perceptions 
about the cost of prescription drugs and pharmaceutical company 
profits. The Kaiser poll shows that seven in 10 adults say 
pharmaceutical companies are too focused on profits and not 
enough on helping people. And nearly eight in 10, 79 percent, 
believe that high profits are a major factor in the price of 
prescription drugs, and the same proportion feels that drug 
prices are unreasonable.
    The poll further suggests that these opinions about 
prescription drug prices are driven by people's real-life 
struggles paying for drugs. Four in 10 adults report some 
serious problem paying for medication, either that it is a 
serious problem for their family to pay for drugs they need or 
not filling a prescription or skipping doses because of cost.
    And new evidence suggests that prescription drug prices are 
increasing rapidly. Most recently, the New York Times reported 
on November 15th that drug prices had increased by 
approximately 9 percent over the last year. And, by at least 
one analysis, it is the highest annual rate of inflation for 
drug prices since 1992.
    At the same time, general inflation, as measured by the 
Consumer Price Index, has fallen over the past year, which 
means that, while people are paying less for other types of 
goods and services, they are paying more for brand-name 
prescription drugs at a time when they are least able to afford 
to do so. And, as you know, millions of Americans are out of 
work, millions are losing their homes, millions are without 
health care coverage. So it should come as little surprise that 
Members of Congress would be alarmed about the idea of drug 
companies raising prices at a time when so many of our 
constituents are already unable to afford the medical care they 
need.
    Now, some researchers, including Dr. Schondelmeyer, who we 
are going to hear from today, has suggested there is a link 
between spikes in prescription drug prices and when there is 
legislation pending that impacts the pharmaceutical industry's 
bottom line, such as the various health-care reform bills 
currently moving through Congress.
    I know that the pharmaceutical industry disagrees with this 
claim and has suggested that any increases in drug prices are a 
result of investments in research and developments that are 
necessary to keep new and innovative drugs moving through the 
pipeline. And I would be unfair if I didn't point out the 
industry--you know, that this is not, you know--how should I 
say it--one broad stroke. I mean, there are companies that are 
increasing prices, and there are others that are not. But, 
according to Dr. Schondelmeyer's research, some drugs saw no 
increase, some increases were below the average, but other drug 
prices increased by almost 20 percent, such as Flomax, which 
appears excessive, in my opinion.
    Furthermore, these surveys on drug prices are unable to 
account for discounts and rebates provided by manufacturers to 
wholesalers or purchasers. Hence, there is a level of 
uncertainty that is inherent in these numbers, and that is why 
we are basically supportive of better price transparency. And 
when it comes to prescription drugs, I think that that is 
something that we really need, more transparency. And I have 
been advocating that for a long time.
    I think that better reporting and more transparency will 
help us make sure that drug prices are not rising arbitrarily 
or to maximize profits and that every American has access to 
affordable prescription drugs. And that is a goal that we all 
share.
    So we are here today to try to get to the bottom of this 
latest price increase. And we obviously have people that will 
be talking about some of the reports that have come out, and 
also from the industry. And so I want to thank our panel of 
witnesses in advance for being here today.
    I do have to mention, though, that I know there is some 
issue with regard to Dr. Schondelmeyer because we just received 
his testimony this morning at 9:30. And I am very upset by that 
because the rules actually provide that we have to have the 
testimony much sooner. I think it is 2 days' notice. When we 
get it at the last minute--you know, it literally is the last 
minute--I know there are some Members here that are going to 
suggest that he shouldn't testify at all.
    I was sort of inclined initially to say that, as well, 
because I haven't had anybody that submitted their testimony so 
late. But I would ask--I guess it is my prerogative to make the 
decision, and I am going to ask him to speak this morning, only 
because a lot of this hearing came about because of his initial 
survey. And I think if we don't have the opportunity to hear 
from him, the panel and the hearing this morning won't be as 
productive.
    But I don't want to sound like a teacher chastising a 
student or something, but it is a problem when we get the 
testimony this late.
    Mr. Shimkus. Would the chairman yield for 1 second?
    Mr. Pallone. Yes.
    Mr. Shimkus. Just trying to understand the historical 
aspect of this, did this happen last year with another health 
care briefing from Dr. Schondelmeyer, where we didn't get the 
briefing but all we got was a PowerPoint?
    Mr. Pallone. You know, I am not sure. I know that--look, 
let's be honest--and I don't want to get into an argument with 
anybody, because I agree with you. Unfortunately, we are 
getting testimony late. Like, I know that one of your 
witnesses, I think we got it yesterday, which, you know, is not 
as bad as getting it at the last minute. But it is getting to 
be a pattern that, you know, we are getting some of this 
testimony a day earlier rather than 2 days. And so I think we 
need to be a little more--I don't know what the word is--tough 
on the witnesses and remind them that we need it, you know, 48 
hours in advance.
    Mr. Shimkus. If the chairman would yield just for 1 more 
second.
    Mr. Pallone. Sure.
    Mr. Shimkus. It is my understanding that last year in the 
Government Reform Committee the same thing happened.
    Mr. Pallone. I am just told he hasn't testified before.
    Mr. Shimkus. And so my issue is, it is a pattern now. It is 
not a one-time mistake.
    Mr. Pallone. Well, not in his case.
    Mr. Shimkus. I am just making a point that it might be a 
pattern, and we ought to be a little bit more----
    Mr. Pallone. Well, he has not testified before so I don't 
want to say that it is a pattern on his behalf.
    But I do want to mention that it is important for both 
Democrat and Republican witnesses to try to get the testimony 
in, not just even 24, but 48 hours. The rules provide for the 
48.
    But, anyway, let me yield to our ranking member, Mr. Deal.

  OPENING STATEMENT OF HON. NATHAN DEAL, A REPRESENTATIVE IN 
               CONGRESS FROM THE STATE OF GEORGIA

    Mr. Deal. Thank you, Chairman Pallone. Thank you for 
holding this hearing on the cost of prescription drugs.
    If the subcommittee is intent on addressing the high cost 
of pharmaceuticals, I believe that approval of the follow-on 
biologic legislation, which fairly balances consumer access 
with strong incentives to innovate, is essential to achieving 
this goal.
    In 2007, global sales of these drugs reached $75 billion. 
Current estimates suggest that half of all drugs, both small- 
and large-molecule-based, will be biopharmaceutical's best 
year, while statistics further indicate that spending on 
biologic drugs is expected to grow 20 percent annually.
    It is very disappointing that this committee, during markup 
of health reform legislation earlier, fell short on its 
commitment to achieve this goal. Unfortunately, provisions 
which aim to truly encourage competition, reduce cost, and, 
most importantly, increase access to critical drugs that 
currently fall out of the reach of countless Americans every 
day were not included as a part of the bill, as Chairman Waxman 
and I both tried to get done.
    Instead of government price controls, which have a proven 
track record of declining research-and-development spending 
among those nations who have adopted it, appropriate incentives 
which spur research and development and enhance access to 
cutting-edge drugs is essential. As we all know, incentives to 
invest in R&D projects are highly dependent upon legislation 
this Congress puts into place. We must ensure appropriate 
provisions are put in place which continue to promote world-
class pharmaceutical research and development in the fight for 
new cures here at home and abroad while ensuring continued 
access to these drugs by the American people. It is, indeed, a 
delicate balance.
    I also look forward to AARP's testimony and appreciate the 
opportunity to discuss their decision to support H.R. 3962, 
particularly in light of significant cuts which are prescribed 
by the legislation within the Medicare program. I look forward 
to learning more about the reasons that led them to endorse 
this health care bill, which, as Chairman Waxman and I would 
probably say, did not embrace some of the cost savings in the 
pharmaceutical area that perhaps it should have included.
    Again, thank you, Chairman Pallone, for holding the hearing 
today. I yield back my time.
    Mr. Pallone. Thank you, Mr. Deal.
    Chairman Waxman.

OPENING STATEMENT OF HON. HENRY A. WAXMAN, A REPRESENTATIVE IN 
             CONGRESS FROM THE STATE OF CALIFORNIA

    Mr. Waxman. Thank you, Mr. Chairman, for holding this 
hearing.
    This is an important hearing. We are in the process of 
reforming health care, and one of our goals in doing so should 
be to hold down costs.
    Well, our economy is in a slump. The Consumer Price Index 
has actually gone down. Yet, for pharmaceutical prices in the 
last year, there has been a 9 percent increase. I must say 
that, when it comes to prescription drugs and the drug 
industry, nothing surprises me anymore, but increases of this 
magnitude is really pretty shocking.
    Our Nation sees that when drug prices are raised by 9 
percent or more over a year, that increases the out-of-pocket 
cost for drugs, it drives up insurance premiums, it increases 
the cost of the Medicare D program, means more and more 
citizens--some with insurance, some without--are forced to go 
without the drugs they need to remain healthy.
    And reports indicate that this problem is getting worse, 
not better. The drug price increases over the last year are the 
biggest we have seen in a very, very long time. It is hard to 
escape the conclusion that the industry is positioning itself--
positioning its pricing for enactment of the new health reform 
legislation. They were met with great acclaim when they 
announced with the White House and the Senate that they were 
going to take an 80-percent reduction in their profits over the 
next 10 years, $80 billion. Well, a 9 percent increase in 
prices over this last year comes to $20 billion that they are 
getting in just 1 year. So let us keep this in perspective.
    When Americans hear about these soaring drug prices, they 
are absolutely right to demand to know what Congress is doing 
about it. In the House, led by members of our committee, we are 
trying to tackle this problem. Last month, the House passed 
historic health-care reform legislation, and I am confident the 
Senate is going to follow our example in a very short period of 
time.
    In our legislation, we provided that health insurance, 
including drug coverage for 36 million citizens who would be 
otherwise without it, and we closed the Part D donut hole, 
meaning that seniors would no longer have to stop taking drugs 
when their coverage runs out. What we did in the pharmaceutical 
area is that these companies will not just get a blank check as 
we form our health care system. We tried to strike an important 
balance that put consumers and taxpayers first.
    We require the drug industry to provide additional 
discounts for the Medicaid program. We end the multi-billion-
dollar windfall that the industry received when dual-eligible 
enrollees were switched from Medicaid to Medicare Part D drug 
coverage. We are requiring that discounts be provided when the 
government pays for low-income people to get health care 
coverage.
    The House bill uses this money that would otherwise go to 
the drug companies to help millions of Americans afford health 
care coverage and to close the Part D donut hole. That is a 
good policy outcome. It is good for America, and it is the 
right prescription for PhRMA.
    The drug industry made over $50 billion in profits in 
2008--$50 billion in profits. Some of that went to increase 
their research and development. Most of it--or let's put it 
this way--more of it went to marketing drugs than into R&D.
    So when we look at a drug price increase of 9 percent over 
the last year, it is the highest increase in recent memory. And 
as we try to climb out of our massive recession, as more and 
more Americans struggle with the loss of health care coverage 
and high insurance costs, everyone has to pay more costs for 
drugs. This is not right. We can't afford it.
    The drug companies are playing a shell game when they tell 
us they are going to take reductions in government expenditure, 
yet they are going to get millions of new customers paying for 
drugs, and yet what we see is, at the same time, they are 
increasing their drug prices at a record rate. I hope this 
hearing will help us inform the people who are working on 
health care reform so that we don't let them get away with this 
blank check.
    Thank you, Mr. Chairman.
    [The prepared statement of Mr. Waxman follows:]


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    Mr. Pallone. Thank you, Chairman Waxman.
    The gentleman from Illinois, Mr. Shimkus.

  OPENING STATEMENT OF HON. JOHN SHIMKUS, A REPRESENTATIVE IN 
              CONGRESS FROM THE STATE OF ILLINOIS

    Mr. Shimkus. Thank you, Mr. Chairman.
    And I do appreciate the chairman of the full committee's 
letter requesting a CBO analysis. I just wish we had that in 
hand prior to having this hearing, which bespeaks of the timing 
of this hearing for the purposes of whatever the majority wants 
to deem without having a proper analysis.
    Having said that, Medicare D has been one of the most 
successful Federal health care programs. Originally scored in 
first-year costs at $49 billion; it came in at $41 billion. 
Overall, since its inception, it is 40 percent under projected 
cost. Seniors have more choices.
    And it is a distinct difference in the direction that we 
are heading in 3962, where Medicare D incentivizes private 
insurers to provide access to prescription drugs so people can 
choose, and you let the market work, which is just the opposite 
of what we plan to do when we eventually move to a government 
takeover of health care in 3962.
    Every health care hearing that we are going to have is 
going to be, as the chairman of the full committee says, in the 
parameters of the health care bill that is moving through both 
chambers. And rightly it should be. So there will be a lot of 
great questions because of the calling of this hearing, and we 
look forward to discussing those.
    Let me end on just talking about comments made last week 
which was disparaged but has been proved correct by a paper 
called The Californian. Last week we had the breast cancer 
decision from 40 to 49. And a lot of us said, this will start 
the road down to the government making determinations based 
upon cost. And the headline here, ``State Ends Subsidy for 
Mammograms to Low-Income Women Under 50.'' And they also say, 
``The State's decision, announced December 1st and effective 
January 1st, follows a controversial Federal recommendation 
last month that mammograms before the age of 50 are generally 
not needed. However, the private health care system has 
rejected the Federal task force recommendations.''
    So here you have the public health agency say, we are going 
to accept these to save costs; the private insurers are going 
to keep them, which is an incentive for us to stop disparaging 
private insurance and really be concerned about government-run.
    Here is what Dr. Klausen says. ``What makes me really 
worried is that the California Department of Public Health 
wants to save money by taking away a cancer detection 
program,'' Klausen said. ``That discriminates against a gender, 
also discriminates against an income level, and it also 
discriminates against how community clinics can practice 
medicine.''
    That is the road we are heading. I reject this path. It 
will be harmful to public health. And we will get a chance to 
ask questions of those people who are in the room, the closed-
door meetings with the White House and other leaderships, on 
their role in H.R. 3962.
    And I yield back my time.
    Mr. Pallone. The gentlewoman from California, Ms. Eshoo.

 OPENING STATEMENT OF HON. ANNA G. ESHOO, A REPRESENTATIVE IN 
             CONGRESS FROM THE STATE OF CALIFORNIA

    Ms. Eshoo. Thank you, Mr. Chairman, for holding this very 
important and timely hearing today.
    Like most of my colleagues, I, too, am very concerned to 
see reports of artificially increased drug prices on the heels 
of a promise made by the drug manufacturers to decrease prices 
for consumers.
    Last month, the AARP released a study which found brand-
name drugs increased by 9.3 percent, the highest drug inflation 
since 2002. Just a few months earlier, a much-touted 
announcement by the White House and PhRMA promised $80 billion 
in savings on drug costs, most notably to help seniors who are 
struggling to pay for medications in the donut hole.
    At a time when everyone in the health care industry is 
being asked to put something on the table to contribute 
something to the reform effort, the drug companies were some of 
the most vocal in touting the, quote, ``sacrifice'' they were 
making for the cause of health-care reform.
    Last April, IMS predicted that drug sales might actually go 
down. But IMS Health, a consulting firm paid for by the drug 
companies to advise them, reported a significant increase in 
prices.
    I certainly understand the need to couple profits with 
innovation in order to promote science and encourage new 
therapies and treatments. I think that that is essential, not 
only to advance what we want to advance but that we retain an 
American position where we are first in the world, because our 
people benefit from it. But, as I understand it, the House 
PhRMA agreement called for reduced drug costs to support 
comprehensive health-care reform and not discounts from jacked-
up prices.
    I know that we are going to be hearing from PhRMA, who I 
understand will testify that reports of rapidly increasing drug 
prices are false and that the increase was based solely on the 
listed price of drugs, not the discounted prices most Americans 
or the government pay. I am eager to hear their explanation and 
be able to report these explanations back to my constituents, 
if they are worthy of being reported, if they really hold 
something.
    I am also eager to hear from AARP, which fueled much of the 
drug pricing debate with their recently released report. As 
both an interest group for seniors and an insurance company, 
their report may have different implications.
    I would just like to add, too, that the gentleman from 
Georgia made some comments about biologics. And I know that he 
is not pleased with the outcome of what is in the bill. I do 
believe very, very firmly that by treating biologics in a new 
way, bringing them into biosimilars, that this will make 
biologics--move them into generics. And, thereby, more and more 
Americans will be able to not only afford them, but that that 
pathway is a very robust one, a smart way to go.
    I don't want to lose this to other countries. I think that 
America is in a position today where it can ill-afford that. 
And, most frankly, we have two major biologics companies today. 
We have to do this the right way so that this can reach 
patients. And it really represents, I think, the most hope in 
medicine. Because, as good as pharmaceutical drugs may be, they 
only treat symptoms, they don't go to the cause of a disease. 
So biologics are really where the most hope lies.
    So I thank you again, Mr. Chairman, for holding this 
hearing. I look forward to the testimony, the important 
testimony of the witnesses. And I yield back.
    [The prepared statement of Ms. Eshoo follows:]


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    Mr. Pallone. I thank the gentlewoman.
    The gentleman from Indiana, Mr. Buyer.

  OPENING STATEMENT OF HON. STEVE BUYER, A REPRESENTATIVE IN 
               CONGRESS FROM THE STATE OF INDIANA

    Mr. Buyer. I thank the chairman for the hearing today.
    And I don't mind receiving input from anyone, at this 
point, because there is such great uncertainty out there, 
especially regarding your very aggressive health agenda. And it 
is an agenda that I think is on the verge to hurt the industry 
and which we are going to discuss here today, and there, in 
turn, hurting the health of America and to the world.
    I think it is important to look at what we know about drug 
prices and their relationship with regulations, such as price 
controls, which are supported by the majority. It is what is 
included in their health reform legislation that was passed by 
the House and is being debated by the Senate.
    What we ought to be doing is we ought to be looking at the 
effect of price controls. And we can look at the model that is 
by European countries between 1986 and 2004. During this time, 
these countries strengthened their price controls, and the 
controls had a devastating impact upon research-and-development 
spending. And all of that investment then began to shift to 
America.
    Before the strident price controls were implemented in the 
mid-1980s, spending in Europe for research and development of 
the new life-saving drugs exceeded that of the United States by 
24 percent. By 2004, spending in Europe on research and 
development of drugs trailed the United States by 15 percent. 
So what did this dramatic decline in research-and-development 
investment in Europe amount to? Well, they have 50 fewer new 
drugs approved in Europe and about 1,700 fewer scientists 
employed in Europe.
    Europe's pharmaceutical industry research and development 
grew at merely one-half of the rate of that here in the United 
States. As economists John Vernon and Joseph Golec found, 
quote, ``Whereas European Union firms introduced about twice as 
many new medicines as U.S. firms between 1987 and 1991, they 
introduced about 20 percent fewer than U.S. firms between 2000 
and 2004.''
    So here we sit, with potential price controls that will be 
similar to Europe. I think America ought to pause--actually, I 
think America ought to wake up. Because there is a wave of 
socialism that is truly coming to the shores of America. And we 
better wake up.
    Now, all of us either have friends or someone or a family 
member that has a narrow disease. So when you think of types of 
narrow disease--adenoid cystic carcinoma, Alpers' disease, 
Bell's palsy, Dandy-Walker malformation, Hodgkin's disease, 
sickle-cell disease, sudden infant death syndrome--there is a 
very long list. And so, what is the demand when someone has a 
narrow spectrum of a disease? Well, they want the 
pharmaceutical companies to find that drug that can help.
    Well, if it is very narrow and there is not any ability to 
have a profit, what is the incentive for industries to go? So 
government tries to provide the incentive. If we are going to 
wipe out and move to price controls and wipe out incentives in 
R&D, then many of these disease groups, people are going to be 
left on the outside. And that is not how we define compassion 
for public health for America.
    I yield back.
    Mr. Pallone. Thank you.
    The gentleman from Texas, Mr. Green.

   OPENING STATEMENT OF HON. GENE GREEN, A REPRESENTATIVE IN 
                CONGRESS FROM THE STATE OF TEXAS

    Mr. Green. Mr. Chairman, thank you for having this hearing 
on prescription drug prices.
    We have seen many reports on the high cost and rising 
prices of prescription drugs. The most recent report released 
by AARP Policy Institute in November found that, between 
October 2008 and September 2009, the brand-name drug prices 
increased 9.3 percent, the highest drug inflation since 2002. 
Prices for specialty drugs used by Medicare beneficiaries 
increased even more, by 10.3 percent. Over the same time, 
prices for generic drugs declined by 8.7 percent. The high cost 
of these prescription drugs has an impact on Medicare, due to 
the increased taxpayer expenditures and increased premiums.
    I am also concerned that every member of this committee has 
heard from seniors in their district who are enrolled in 
Medicare Part D who have fallen into the donut hole, which is a 
result of the Medicare Modernization Act of 2003. This forced 
Medicare Part D enrollees to pay 100 percent of drugs between 
$2,700 and $6,154. Each year, 4,400 seniors in our district hit 
the donut hole and are forced to pay their full drug costs 
despite having Part D drug coverage.
    Throughout the country, seniors pay thousands in out-of-
pocket expenditures they are unprepared for with fixed incomes. 
The donut hole often causes seniors to choose between 
purchasing medication and food, which is not something they 
should ever have to do. This is not the kind of benefit seniors 
deserve, and it needs to be corrected by Congress.
    The House passed a health reform bill, H.R. 3962, which 
makes several major changes in prescription drug programs to 
ensure seniors and low-income individuals receive the 
prescription drug medication they need at an affordable cost. 
H.R. 3962 increases current Medicaid drug rebates that 
manufacturers pay to the government and closes a program 
loophole that prevent full rebate payments.
    It also ensures the drug prices for dual-eligible and other 
low-income enrollees are no higher for Medicare Part D than 
they are under Medicaid. H.R. 3962 reduces the donut hole by 
$500 immediately and institutes a 50 percent discount for 
brand-name drugs in the donut hole upon passage. It actually 
eliminates that donut hole over a period of years by 2019.
    The legislation gives the Secretary of HHS the ability to 
negotiate with pharmaceutical manufacturers to get the best 
deal possible for Medicare Part D beneficiaries. This allows 
the Secretary to obtain large discounts and rebates on drugs 
used by seniors, passing on that savings to Part D enrollees 
and to the taxpayers.
    The Senate is working on their health care bill right now, 
but their bill does not allow the Secretary to negotiate the 
lower Part D prices and does not create new Part D drug rebates 
and does not close the Part D donut hole. If we want to make 
real health-care reforms, we must address the problems that 
exist in Medicare, particularly those that cost our seniors 
thousands of dollars each year.
    And, again, I want to thank the witnesses and appreciate 
them for appearing before our committee, Mr. Chairman.
    Mr. Pallone. Thank you.
    The gentleman from Georgia, Mr. Gingrey.
    Dr. Gingrey. Mr. Chairman, I will waive my opening 
statement in the interest of having more time for questions. 
Thank you.
    Mr. Pallone. Thank you.
    Our vice chair, the gentlewoman from California, Mrs. 
Capps.

   OPENING STATEMENT OF HON. LOIS CAPPS, A REPRESENTATIVE IN 
             CONGRESS FROM THE STATE OF CALIFORNIA

    Mrs. Capps. Thank you, Chairman Pallone, for holding this 
hearing on such a timely and urgent situation.
    As we move forward with health-care reform efforts, we need 
to ensure that we aren't just providing access to health care 
services in theory, but we need to actually make it affordable, 
both for individuals and for the government. With prescription 
drugs accounting for 10 percent of medical expenditures, it is 
imperative that we assure affordability for the people who rely 
on them.
    I am particularly concerned with the impact of rising drug 
costs on our seniors, who, for the most part, live on fixed 
incomes. I am sure all of our colleagues have heard from 
constituents who have literally had to decide each week between 
medication and groceries because the costs are so prohibitive; 
or other constituents who decide to take only half of their 
prescription, their dosage, because they can't afford to pay 
for the entire amount.
    While there are assistance programs to help individuals pay 
for their medications, they aren't always reliable, and they 
don't always apply to the particular medication that the senior 
needs. And that is why it is so important that we have this 
hearing today to look into the possible reasons for the rapidly 
increasing costs of medication.
    I certainly understand that drug manufacturers must recoup 
the expensive costs of research and development. But, at the 
same time, isn't it unconscionable for us to be watching as 
drug companies' profits rise the way they are, while more and 
more of their patients with chronic disease lose their ability 
to afford life-saving medications? I look forward to hearing 
our witnesses' thoughts on why these price increases are 
occurring and how we can address the costs as we move forward.
    And I yield back. Thank you.
    Mr. Pallone. Thank you.
    The gentleman from Texas, Mr. Burgess.

OPENING STATEMENT OF HON. MICHAEL C. BURGESS, A REPRESENTATIVE 
              IN CONGRESS FROM THE STATE OF TEXAS

    Dr. Burgess. Thank you, Mr. Chairman.
    I am sure if there are people watching this hearing this 
morning, they are wondering what in the world is the purpose of 
what we are doing here this morning. If it is to answer the 
question, ``Are prescription drug prices rising too fast?'' 
then they probably have a couple of concerns.
    And the first is, why have we not waited until the report 
requested by Chairman Waxman from the General Accountability 
Office on this very question was received? We really can't 
debate the proper increase in prices, what they should look 
like, until we know the facts--not the facts as reported by the 
New York Times or an advocacy group with a policy agenda, but 
that provided by an independent entity which has the 
responsibility of providing Congress with information.
    And the second concern is, why in the world did we not 
initiate this in the Subcommittee on Oversight and 
Investigations where we have subpoena power if necessary and 
can take testimony under oath? If the concern is that prices 
are being manipulated and causing harm to Americans on programs 
under this committee's jurisdiction, then that would seem to be 
the natural place to hold that hearing.
    Maybe this is all about that monstrosity of a bill that we 
passed late in the night a couple of Saturdays ago. Again, it 
is just hard to know. But you do have to ask the question, 
where is the General Accountability Office, where is the 
Congressional Budget Office, where are the actuaries at the 
Center for Medicare and Medicaid Services that could make sense 
of some of this for us? None of those people are testifying 
today. Mr. Chairman, why is that?
    Now, I know some people look at drug prices and say, ``All 
drug companies are evil, and they shouldn't make a profit, and 
we need to take those away from them.'' This government's 
history, in the past year, of manipulating in the market is 
wrong on so many principles. I don't think we should encourage 
that type of behavior in this committee today.
    But you know what we really don't know? If this 
manipulation does exist, what part of it was fostered by those 
secret negotiations that occurred down at the White House in 
May and June? And why has this committee had absolutely no 
curiosity about what was going on in those secret negotiations 
in May and June? And why is it that so many of these things 
were stumbled upon in the workup of the legislation in this 
committee and on the Senate Finance Committee? Why is it that 
pharmacy prices can't be changed? Why is it that the American 
Hospital Association has some of the things that it has brought 
to the table that are judged to be pretax? What other deals 
were struck? What deals with the AMA? What about AHIP? What 
about the Service Employees International Union?
    We know nothing about that because this committee has had 
no curiosity about what might have been happening down at the 
White House under the cloak of darkness. This was supposed to 
be a transparent process available to the American people on C-
SPAN from start to finish. And we can't get the most basic 
information about what was given up and what was given away 
during those secret negotiations in May or June.
    Now, we can also do a lot of stuff on Medicare Part D. I 
have to tell you that the fact that we decided in 2006 to work 
with the market rather than dictate to the market has been 
responsible for a significant amount of success in the Part D 
program.
    But I suspect we will hear some of the same arguments that 
we have heard for years about why that program is not working, 
despite the fact that 90 percent of Americans aged 65 and over 
have access or have prescription drug coverage today compared 
to 75 percent before we started in 2004 and that the 
satisfaction with that program is at an all-time high. I am not 
going to say that the program can't be improved, but it has 
worked and it has exceeded expectations. And I think we need to 
be careful before we start tinkering around the edges with that 
program.
    Thank you, Mr. Chairman, for holding this hearing. And I 
yield back.
    Mr. Pallone. Thank you.
    The gentlewoman from California, Ms. Harman.

  OPENING STATEMENT OF HON. JANE HARMAN, A REPRESENTATIVE IN 
             CONGRESS FROM THE STATE OF CALIFORNIA

    Ms. Harman. Thank you, Mr. Chairman, for holding this 
hearing.
    Let me say to Dr. Burgess that I sat through the tens of 
hours of markups of the health care bill, and I heard people on 
our side complain fiercely about the so-called deal that the 
White House struck with PhRMA, the $80 billion deal. And I 
remember voting for parts of the health care bill that were 
reported by this committee that scuttled that deal and that 
required, for example, negotiations for better drug prices 
under Medicare Part D. So I think whatever it is that the White 
House did, I want to applaud this committee for looking 
independently at some of those deals.
    And I think the reason we are here today is because we are 
still enormously concerned about the escalation in drug prices. 
According to the AARP, the wholesale prices, not the retail 
prices, of brand-name drugs have risen by 9.3 percent in the 
last year, the highest annual increase since 1992. And this 
comes at a time when the Consumer Price Index has dropped by 
1.3 percent.
    As we head into the holidays and people are strapped to buy 
anything for their families over the holidays, I think it is 
just unconscionable and immoral that a basic necessity of life, 
which is drugs, is having this unexplained escalation in 
prices.
    We already spend nearly $300 billion a year on prescription 
drugs. It is one of the fastest growing areas of health-care 
spending. And, frankly, since the very beginning, I have 
maintained that reducing the cost of prescription medications 
is the one reform that will have the biggest impact on people.
    So I am very glad that we are holding this hearing. And I 
just want to say to our witnesses and to others who are looking 
at this problem that consumers are watching, and right now what 
I think they are seeing is price gouging.
    I yield back.
    Mr. Pallone. Thank you.
    The gentleman from Pennsylvania, Mr. Murphy.

   OPENING STATEMENT OF HON. TIM MURPHY, A REPRESENTATIVE IN 
         CONGRESS FROM THE COMMONWEALTH OF PENNSYLVANIA

    Mr. Murphy of Pennsylvania. Thank you, Mr. Chairman.
    This is a hearing that we have long awaited, as with many 
other hearings of this type, to find out accurate information 
with regard to pharmaceutical companies and what they do. I am 
particularly concerned here about making sure that we are not 
having hearings on why drug companies are not inventing drugs 
to cure disease. That would be a sad state of affairs, indeed.
    Many of my constituents are senior citizens, and we know 
they struggle to pay their high medical bills. We know that we 
have had opportunities, sometimes squandered, with regard to 
how we could reduce medical bills by reducing costs of health 
care through preventative services, through making sure that we 
maintain disease management, by making sure we reduce waste in 
health care.
    However, one thing we don't want to do is eliminate drugs 
that can help cure problems. After all, drugs that are not 
affordable offer little consolation, and a drug that is not 
invented offers little cure. And, as a combined thing, we have 
to make sure this committee does not stand in the way of coming 
up with those cures.
    It is easy to go after companies that make money--oil 
companies, pharmaceutical companies, anybody else who makes a 
profit--as a for-profit or nonprofit company and say that they 
should not be making that kind of money if the cost is passed 
on to the consumer. I understand, and we need to be sensitive 
to that area and make sure that these prices of any item is not 
inflated to the point that people cannot afford them.
    However, it is also important that this committee, nor this 
Congress, nor this country stands in the way of coming up with 
these cures to treat diseases. There was a--certainly, other 
things that we have done here. We have looked after the 
consumers. We want to make sure we continue to look after the 
consumers and making sure that these are things that they have.
    Generic drugs also are a critical function. They have grown 
massively in their use. They provide some good choices for 
people. And we need to continue to support generic drug use. 
However, they are not involved in the research-and-development 
sector, and we have to make sure that the research and 
development continues on.
    Congress funds much of that through NIH, through NIMH, 
through a lot of studies that take place, and we need to 
continue to do that, as well. And somehow we have to look at 
how combining these efforts to fund research and development, 
to fund all levels of research continue on so that this country 
leads the way in coming up with ways that we can find 
affordable prescription drugs.
    And, to that end, I am looking forward to hearing the 
testimony of the panelists here and seeing if they can offer us 
some solutions that is based upon how we can maintain this 
search for cures as well as search for affordable costs.
    I yield back.
    Mr. Pallone. Thank you.
    The gentlewoman from Illinois, Ms. Schakowsky.

       OPENING STATEMENT OF HON. JANICE D. SCHAKOWSKY, A 
     REPRESENTATIVE IN CONGRESS FROM THE STATE OF ILLINOIS

    Ms. Schakowsky. Thank you, Chairman Pallone. I appreciate 
your having this hearing today to better understand why 
prescription drug costs are rising exponentially at a time when 
millions of Americans are struggling to make ends meet.
    I assure you my constituents applaud the fact that we are 
having this hearing today. A recent AARP survey of Illinois 
seniors confirmed the concerns that I hear from my constituents 
every single day. Sixty-three percent of AARP members in 
Illinois said they were concerned about affording their 
prescription drugs. Close to 20 percent reported having to cut 
back on necessities to pay for prescriptions. Twenty-one 
percent reported not filling or delaying a filled prescription 
because they simply couldn't afford it. And one in five said 
they took less than the prescribed amount to make their 
medicines last longer.
    Facing a severe budget deficit, our State took the bold 
step of expanding its prescription drug program, called 
Illinois Cares Rx, designed to benefit seniors and people with 
disabilities. When asked about the reason for the expansion of 
the Illinois--when asked for a reason, we asked Barry Maram, 
who is head of the Illinois Health Care and Family Services 
Division, and he said, quote, ``The cost of prescription drugs 
has escalated to the point of being unaffordable for many of 
the people who rely on them most, especially seniors and people 
with disabilities. No one should have to go without medication 
that keeps them healthy,'' unquote.
    The cost of brand-name prescription drugs are rising at a 
pace that far exceeds price increases for other consumer 
products. My constituents, both as consumers and as taxpayers, 
want to know whether the pharmaceutical industry is preparing 
for health-care reform by trying to squeeze every bit of profit 
they can now.
    Health consumers are desperate for health-care reform, and 
there are many provisions in H.R. 3962 that would lower drug 
prices, including the language that I had the honor of offering 
to this committee to eliminate the ban on Medicare negotiating 
for drug prices. But they can't afford to have the drug 
industry use the time between now and the implementation to 
artificially raise prices and profit at their expense.
    Again, I thank you, Mr. Chairman. And I yield back.
    Mr. Pallone. I thank the gentlewoman.
    Next is the gentlewoman from Ohio, Ms. Sutton.

  OPENING STATEMENT OF HON. BETTY SUTTON, A REPRESENTATIVE IN 
                CONGRESS FROM THE STATE OF OHIO

    Ms. Sutton. Thank you, Mr. Chairman. And I appreciate you 
holding this hearing today.
    I would like to be able to say that I am shocked that we 
are here talking about this, but, sadly, I am not. Americans 
pay the highest drug prices in the world. We pay between 35 
percent and 55 percent higher than people in other developed 
countries. And we have been paying these exorbitant prices for 
a long time. Drug prices account for 10 percent of all health-
care spending.
    Over the past year, we have been working hard in this 
committee and in Congress to make health care more affordable 
for families, businesses, and individuals. And the ``Affordable 
Health Care for America Act'' health care bill contains a 
number of initiatives aimed at curbing the out-of-control drug 
prices for America's families and seniors.
    And yet, during this period, drug companies increased 
prices by over 9 percent at a time when inflation was negative. 
Increased drug prices hurt us all. They hurt older Americans on 
fixed incomes, who saw their drug bills increase by $550 last 
year. They hurt people who have insurance and who now have 
higher co-pays. They hurt taxpayers and the government, who are 
now paying higher drug prices. And, more than anyone else, they 
hurt the uninsured, who do not have anyone to negotiate on 
their behalf.
    There is something wrong when Americans are paying record-
high drug prices and drug companies are reporting such high 
profits. The CEO salaries at some of the largest drug makers 
are evidence enough that something is seriously wrong. At 
Abbott Laboratories, the CEO made over $28 million last year. 
At Merck, the CEO made over $25 million. And at Pfizer, the CEO 
made over $15 million.
    And it does not end there. Drug companies often claim that 
they must charge higher prices in order to fund research and 
development for new drugs. But the truth is, drug companies 
spend more on advertising than they do on R&D. It is time for 
some answers. It is time for the drug companies to explain why 
they are raising prices, especially right now.
    And I yield back.
    Mr. Pallone. Thank you.
    The gentleman from Pennsylvania, Mr. Pitts, waives.
    The gentleman from Georgia, Mr. Barrow.
    Mr. Barrow. Thank you, Mr. Chairman. I will waive.
    Mr. Pallone. Thank you.
    I think that concludes our opening statements from the 
Members, so we will now turn to our witnesses. We have just one 
panel today, and I would ask the panel to come forward at this 
time.
    Welcome. And thank you for being here today.
    Let me just introduce each of you. Starting on my left is 
Professor Stephen Schondelmeyer, who is professor and head of 
the Department of Pharmaceutical Care and Health Systems and 
director of the PRIME Institute at the University of Minnesota. 
Second is Mr. Rick Smith, who is senior vice president for 
policy, research, and strategic planning at PhRMA, which is the 
Pharmaceutical Research and Manufacturing Association. And then 
we have Kathleen Stoll, who is deputy executive director of 
Families USA. And Dr. John Vernon, who is a professor, 
Department of Health Policy and Management, at the University 
of North Carolina at Chapel Hill, and he is a faculty research 
fellow with the National Bureau of Economic Research. And 
finally is Ms. Bonnie Cramer, who is Chair of the Board of 
Directors of AARP.
    Thank you all for being here today. We have 5-minute 
opening statements. They become part of the record. And you 
may, of course, with our discretion, submit additional 
statements in writing. And you may get some additional 
questions after the hearing, too, to respond to in writing.
    And I will start with Dr. Schondelmeyer.

   STATEMENTS OF STEPHEN SCHONDELMEYER, PROFESSOR AND HEAD, 
DEPARTMENT OF PHARMACEUTICAL CARE AND HEALTH SYSTEMS, DIRECTOR, 
  PRIME INSTITUTE, UNIVERSITY OF MINNESOTA; RICHARD I. SMITH, 
   SENIOR VICE PRESIDENT FOR POLICY, RESEARCH, AND STRATEGIC 
      PLANNING, PHARMACEUTICAL RESEARCH AND MANUFACTURING 
    ASSOCIATION; KATHLEEN STOLL, DEPUTY EXECUTIVE DIRECTOR, 
  FAMILIES USA; JOHN VERNON, PROFESSOR, DEPARTMENT OF HEALTH 
 POLICY AND MANAGEMENT, UNIVERSITY OF NORTH CAROLINA AT CHAPEL 
  HILL, FACULTY RESEARCH FELLOW, NATIONAL BUREAU OF ECONOMIC 
    RESEARCH; BONNIE CRAMER, CHAIR, BOARD OF DIRECTORS, AARP

               STATEMENT OF STEPHEN SCHONDELMEYER

    Mr. Schondelmeyer. Thank you, Mr. Chairman.
    And my apologies for being late with my testimony. I was 
rather pressed with time and short notice on this particular 
hearing.
    I am here to speak on my own behalf as a researcher and one 
who has studied this marketplace for more than 30 years. I am 
not here representing AARP or even the University of Minnesota 
other than the fact that I am a professor there and that is 
where I do my research.
    And, also, let me comment that the Medicare Part D drug 
program has expanded coverage for prescription drugs for people 
who would not otherwise have had such coverage, and it has 
provided many benefits, and we have made some progress in that 
area.
    Realizing that drugs and drug prices and drug expenditures 
were an issue, the AARP and others, such as myself, researchers 
in the marketplace, determined that we need to, kind of, follow 
the advice, for example, of President Reagan when he said, with 
respect to nuclear disarmament, ``Trust and verify.'' One, 
let's trust that there is a reason for the price changes, but 
let's track them and see what they are and report that and 
reflect those price changes in the marketplace. And so, 
individuals at the AARP Public Policy Institute had an interest 
in tracking drug prices, and I had been doing that for a number 
of years in the marketplace, and we decided to get together and 
collaborate.
    That collaboration has led to a series of studies of drug 
prices over the last 5 or 6 years with AARP, one of which was 
the study that got reported in the New York Times back about a 
month ago. The details of that study and how we conduct our 
reports can be found in the reports that are available on 
AARP's Web site. And so the detailed methodology, I would refer 
you to those reports rather than take time today to go through 
them, but I would be happy to answer any questions.
    Just to put it in perspective, though, we used actual 
Medicare Part D prescription data and identified the most 
frequently prescribed, the highest expenditure drugs, and the 
drugs that accounted for the most days of therapy. And, with 
548 individual drug products in our market basket, we were able 
to account for over 81 percent of all prescription expenditures 
under Medicare Part D, over 79 percent of the prescriptions 
dispensed, and over 91 percent of the days of therapy. So this 
market basket represents virtually all of the Medicare Part D 
market with the exception of a very small set.
    The data that we use is a price called the wholesale 
acquisition price. And let me remind you that wholesale 
acquisition price is a price that is set by the manufacturer 
and reported to the price databases such as Blue Book, Red 
Book, or Medispan, and these prices are the manufacturers' set 
price. On the one hand, even the wholesale acquisition cost is, 
in a sense, a type of a list price, but this list price very 
directly affects the price that is paid for prescription drugs 
at the retail level for virtually all third-party programs in 
the U.S., including the Medicare Part D plan which is in the 
private market as well.
    So let's get down to the meat. What has the trend been for 
prescription drug prices in the past year? And here we are 
comparing prices from October of 2008 up through September of 
2009, so I am talking about annualized prices, a 12-month 
period. And we use a rolling average which actually levels out 
and actually pulls down, in some cases, the price increase that 
is reported.
    Brand-name drug prices--that is, largely patented single-
source drugs--increased on average from this Medicare market 
basket 9.3 percent in the 12 months ending in September 2009. 
That 2009 increase of 9.3 percent was the highest that we have 
seen in at least 7 years prior to this for that same market 
basket of drugs. The previous years, we saw 5.3 to 8.7 percent 
increases, nothing to brag about, but now we are up to 9.3 
percent.
    The average cost of just one brand-name medication if a 
patient is taking it on a chronic basis would be over $2,000. 
And this 9.3 percent increase then means that the individual 
taking just one chronic medication experienced a $200 increase 
in the cost of that medication last year. The average elderly 
person is on two to three medications, so they would have 
experienced a $400 to $600 increase in expense.
    Ninety-six percent of the brand-name drugs that we tracked 
experienced a price increase. None had a price decrease.
    The annual price increases of individual brand drugs that 
were notable--and there were many, and I will only give a few 
examples: Ambien CR, a heavily advertised drug, increased 20.8 
percent; Aricept, an anti-dementia drug with generic 
competition, increased 17.2 percent; Zetia, a drug with a 
questionable value and efficacy, increased 14.3 percent; 
Nexium, a heavily advertised drug with a patent until 2020, 
increased 7.1 percent.
    That is brand-name drugs. We also pulled out specialty 
drugs. These are often the drugs you are talking about in terms 
of biologicals or biosimilars. Not all of them are, but the 
vast majority of specialty drugs are biologicals. The 
biologicals and specialty drugs experienced a 10.3 percent 
average increase in 2009. And there, we can look--for example, 
the drug Betaseron, used for multiple sclerosis, had an 
increase of 28.2 percent.
    There were five drugs--actually, four drugs and five 
different presentations of those drugs in our market basket. 
All five of the multiple sclerosis drugs increased more than 17 
percent, ranging from 17.5 up to 28.2 percent increase in 
price. There were 12 cancer drugs in our specialty database. 
They ranged from a low of 4.9 percent up to 20.8 percent. And, 
again, remember, inflation overall was negative last year.
    The bright spot is we also tracked generic drugs, and 
generic drugs actually went down 8.7 percent. This is one of 
the few----
    Mr. Pallone. I am going to ask you to summarize because you 
are, like, a minute and a half over.
    Mr. Schondelmeyer. OK, I will.
    Generic drugs are one of the few sectors that truly has a 
marketplace and has economic competition, and generics have 
continually gone down in price. The question isn't what do we 
use to measure price inflation, the Consumer Price Index for Rx 
drugs or the AARP index. Each of them provides information that 
is unique and different. Our index was created to show the 
difference between brand names and specialty and generic, not 
just the aggregate index. And my full report--and I would be 
glad to answer in questions the role that rebates and 
discounts--that other methodological issues have in how we 
viewed this.
    The bottom line, though, is the average senior last year 
got a zero percent cost-of-living increase for Social Security 
income.
    They experienced an 11 percent increase in the premiums 
they had to pay for their Part D plans. That is for the drug 
benefit plan. They also face a 9.3 percent for brand name and 
10.3 percent increase for specialty drugs. The only bright spot 
there is the 8.7 decrease in generic drug prices.
    These prices are real. They are felt by your constituents.
    Mr. Pallone. Thank you.
    [The prepared statement of Mr. Schondelmeyer follows:]


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    Mr. Pallone. Mr. Smith.

                    STATEMENT OF RICK SMITH

    Mr. Smith. Thank you, Mr. Chairman, Ranking Member Deal, 
members of the committee; thanks for the invitation to testify 
today.
    CBO reports that the pharmaceutical research sector is one 
of the most research-intensive industries in the United States. 
Companies' investment in discovering new medicines is yielding 
results. Also, according to CBO, many examples exist of major 
therapeutic gains achieved by the industry in recent years. The 
rapid increases that have been observed in R&D spending have 
been accompanied by major therapeutic gains. Extensive research 
also reports that medicines often reduce spending on other 
health care services.
    The committee requested that I provide information on 
prescription drug pricing. As a trade association, PhRMA 
maintains a strict antitrust compliance policy. We can neither 
obtain nor discuss our members' proprietary information related 
to prices, negotiations, or discount strategies. My testimony, 
therefore, reflects only aggregate market data and publicly 
available information.
    Recent government reports demonstrate that prescription 
drug cost growth has slowed dramatically. Findings about drug 
costs in the government's most recent national health 
expenditures data are summed up in the CMS report's title, 
national Health Spending in 2007: Slower Drug Spending 
Contributes to Lowest Rate of Overall Growth Since 1998.
    According to CMS, prescription drug cost growth in 2007 was 
4.9 percent, the lowest rate since 1963, and slower than health 
care overall. 2007 was not a 1-year blip; between 2003 and 
2007, the average annual growth rate for prescription medicines 
dropped by half compared to the 1998 to 2002 period, and CMS's 
most recent 10-year projection reduced expected growth in 
prescription drug spending by $515 billion, or 14 percent, 
compared to 3 percent for the rest of health care. Likewise, 
CBO reports, from 2004 to 2007 drug expenditures grew by an 
average of just 3.2 percent per year, slightly less than the 
rate of growth in overall health care spending.
    Since 1964, IMS Health has found that the U.S. Market grew 
by less than 5 percent only twice--2007 and 2008--and it now 
projects that growth will remain at historically low 4.5 to 5.5 
percent in 2009, and will be 5 percent or less in each of the 
next 5 years.
    At the same time the drug cost growth has slowed sharply; 
reports like those issued by AARP reach conclusions that 
conflict with government data and is skewed toward finding high 
price growth. These reports exaggerate drug price trends by 
failing to reflect the way public policy and the prescription 
drug market function. Our system is designed to fund the next 
generation of medical advances through innovator drugs that 
have a limited time on the market before going generic and to 
achieve cost savings through the high use of generics. Large, 
powerful payers use a variety of tools such as tiered 
formularies to negotiate lower brand prices while driving high 
use of generics, which now account for about 70 percent of all 
prescriptions.
    We don't believe that each tool used by a purchaser always 
yields the best possible outcome, and we are encouraged by 
forward-looking purchasers who are looking at alternatives that 
make better use of medicines to improve care and control costs. 
Nonetheless, under the current system, drug costs as a whole 
are growing slowly, not fast, and consumers use drugs that were 
once innovator molecules as generics in large volume for many 
years with little or no return to the innovator.
    The importance of understanding how the market operates 
when interpreting pricing data is evident in AARP's most recent 
report. Eight of the drugs on AARP's list of the top 25 brand 
drugs are sold as generics. These drugs are counted in AARP's 
brand price calculation as though patients continue to use them 
at brand prices, even though brand drugs typically lose nearly 
all of their sales after going generic.
    In one example, for a statin, 99 percent of the utilization 
for that statin on AARP'S list of top-used brand drugs is now 
generic, and the cost per day of therapy has dropped by 58 
percent over 3 years, not reflected in the AARP report.
    The Federal Government CPI data on prescription medicines 
includes a market basket of brand and generics that reflects 
what consumers actually buy. In the 3 years ended October, 
2009, drug prices rose by an average of 2.3 percent per year, 
compared to 3.8 percent for all medical care. For the most 
recent year, the government's measure of drug price growth was 
2.7 percent.
    The implicit message of reports on brand prices seems to be 
that the pharmaceutical research companies stand to be in a 
uniquely favorably position. In fact, the sector is currently 
characterized by slow growth, rapid substitution of generics 
for brand medicines, a projected $90 billion in sales facing 
generic entry over the next 5 years, and the exceptional 
challenges inherent in discovering new medicines that safely 
and effectively treat disease.
    Through October of this year, 58,000 job cuts have been 
announced in the industry, on top of cuts in 2007 and 2008. 
Nonetheless, there is reason for optimism that new medicines 
will continue to improve medical care in the future. Investment 
in pursuing these objectives accounted for by the 10 percent of 
health spending going to medicines is repaid to society in 
longer, healthier, more productive lives.
    Mr. Chairman, in conclusion, I will note that the National 
Economic Council recently published a document titled Strategy 
for American Innovation: Driving Towards Sustainable Growth and 
Quality Jobs, which identifies new treatments such as smart 
anticancer therapeutics and personalized medicine as among the 
21st century's grand challenges. Achieving these challenges is 
viewed as important to improving the quality of life and 
establishing the foundation for industries and jobs of the 
future. The biopharmaceutical research sector looks forward to 
its role in bringing these goals to fruition.
    Again, Mr. Chairman, Ranking Member Deal, thank you for the 
invitation to testify.
    Mr. Pallone. Thank you, Mr. Smith.
    [The prepared statement of Mr. Smith follows:]


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    Mr. Pallone. Ms. Stoll.

                  STATEMENT OF KATHLEEN STOLL

    Ms. Stoll. Thank you, Chairman, and thank you, Ranking 
Member Deal, members of the subcommittee. My voice isn't quite 
as loud as the previous gentleman.
    I think we have heard a lot of numbers. I am going to 
actually give us a little pause from the numbers. I have got a 
few stats, but I also want to paint a picture of what it means 
to have rising prescription drug spending and prices for 
consumers. Let me just give you a few numbers, but let me mix 
in some stories.
    Increasing access to affordable prescription drug coverage 
is a top issue for Families USA. We have seen prescription drug 
spending by consumers more than double in the last 10 years.
    Now, it is fair to say that that spending is driven by more 
than just price increases. People are using more drugs, and in 
many cases that is a good thing. Prescription drug use has 
increased 72 percent while the population is only growing by 11 
percent. That is a pretty good business proposition, I think.
    Utilization has also changed. That means the kinds of drugs 
people take has changed. And some of the drugs, the new drugs 
on the market, the biologics, are more expensive. That is not 
necessarily a bad thing because many of them are real 
breakthrough drugs. But we do see statistics that show that 
spending on biologic drugs is growing nearly twice as quickly 
as other traditional chemical drugs.
    And the third element of why consumers are spending more on 
drugs--or are trying to spend more on drugs--is the cost of 
prescription drugs, and that is what this hearing is about; and 
drugs are becoming more expensive.
    We can go back and forth with stats. I think we should be 
careful that we understand that reduction in the rate of growth 
still means you have a rate of growth. What we have seen is 
that between 1997 and 2007, retail drug prices, which is what 
counts for consumers, have increased an average of about 6.9 
percent a year. That is about 2\1/2\ times faster than general 
consumer inflation. It seems like that trend might be 
accelerating; it is really hard to say, and I leave that to 
Steve.
    So what does this mean for consumers? If you look at 
uninsured consumers, uninsured adults, half report that they 
don't get their prescription drugs filled. They don't get their 
prescriptions filled and don't seek needed refills. And I pause 
here now to tell you a story, and I'm not going to tell you a 
story of a dramatic disease--perhaps a rare disease with a 
dramatic cure.
    Let me just tell you about a single mom that came to our 
attention. She has a severe problem with migraines. They are 
debilitating. Her vision is impaired by them. And she is really 
left unable to function. And because of her migraines, she 
misses many days of work and many days with her son.
    She doesn't have insurance. She does work full time. And 
she finally went to a headache specialist and they went through 
a couple of different drugs. He had some samples. After three 
or four, they found one that works. It is actually like a 
miracle drug for her. So we do thank the pharmaceutical 
industry for this breakthrough drug. I am not going to name it. 
The problem is that this brand name drug that provides her 
tremendous relief for debilitation migraines is very, very 
expensive. So you know where the story is going.
    She can get the prescription filled. She gets six at a 
time. And it really takes hundreds of dollars to fill this 
prescription for six pills. So what she has told us is that she 
saves her pills and if she gets a real severe migraine, her 
doctor said, Take it right away, don't wait; but she holds on 
to those pills because they are so expensive. And she will go 
ahead and have a migraine because she doesn't take it early 
when she should.
    The end of the story is what she shared with me, which is 
she had one pill left 1 month, and she knew it was very 
expensive, she wouldn't be able to replace it, and her son pays 
the trumpet and he had a recital coming. So she held on to that 
pill, went through three severe migraines, missed time at work, 
missed paychecks, in order to be able to take that pill on the 
day of the son's recital. She ended up not having a headache 
that day, but she wanted the insurance.
    So that is what we are dealing with at the consumer level. 
If we could bring down the name of that brand drug, it would 
mean a tremendous difference for this woman who is uninsured.
    She's uninsured. Many Americans who have health insurance 
are still unable to afford prescription drugs. You all know 
that as premiums go up, people are buying plans with higher 
deductibles, higher copays. They may have special deductibles 
and copays just for prescription drugs. So they end up 
underinsured when it comes to prescription drug coverage. They, 
too, make difficult decisions. They paid for coverage; because 
they are underinsured or may not have prescription drug 
coverage at all, two out of five of these folks underinsured 
actually go without filling their prescriptions as well. So, a 
problem of the uninsured and the underinsured.
    Of course, some folks don't have coverage through their 
employer. They are in the individual market. I would just point 
out that in the unregulated individual insurance market 
consumers are four times less likely to have prescription drug 
coverage at all. Certainly, for people with chronic conditions, 
that is where we see the most impact in terms of high 
prescription drug spending. A person with a single chronic 
condition can spend--about 36 percent of their out-of-pocket 
costs will be for prescription drugs. If it is a person with 
two or more chronic conditions, their out-of-pocket spending 
for drugs can be six times higher than their hospital costs.
    Now that is not necessarily a bad thing. I am just giving 
you a sense of the impact on consumers. It may be those 
prescription drugs are keeping them out of the hospital. 
Certainly, we know that there is a toll in terms of reduced 
quality of life, reduced productivity; and sometimes it means 
death not to have access to prescription drugs. It also means 
that our health care system has higher costs long term.
    I will tell you one more story. It is a story of a child 
with asthma. Both of this child's parents work full time. They 
have pretty good insurance coverage for themselves. They have 
no dependent insurance coverage. So their kid is not covered. 
Their son has asthma. He needs a maintenance drug that costs a 
couple hundred dollars a month. Because they don't have 
dependent coverage for their son--and they don't qualify for 
CHIP, by the way--their son doesn't get the asthma medication 
on a regular basis. They can't afford it. It is hundreds of 
bucks a month. These are low-wage working parents.
    They have tried things like making their fifth-grade son 
wear a mask when he goes to school to help with the maintenance 
and the management of the asthma. If you have ever tried to 
send a fifth-grade boy off to school with a mask, you know that 
is probably not going to work too well.
    So the end of the story is, obviously, the child without 
regular asthma medication to maintain and monitor his asthma to 
keep it under control, he ended up in the emergency room and he 
had a very high-cost hospitalization, and it had a very hard 
financial impact on the family.
    Mr. Pallone. I appreciate it. I am going to ask you to stop 
now because you are almost 3 minutes, but thank you.
    [The prepared statement of Ms. Stoll follows:]


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    Mr. Pallone. Professor Vernon.

               STATEMENT OF JOHN A. VERNON, Ph.D.

    Mr. Vernon. Mr. Chairman and members of the committee, 
thank you for the invitation to testify today. My name is John 
Vernon and I am a professor in the Department of Health Policy 
and Management at the University of North Carolina at Chapel 
Hill and a Faculty Research Fellow with the National Bureau of 
Economic Research.
    In addition to discussing the issue of rising drug prices, 
I will also discuss the role drug prices pay in firm- and 
industry-level R&D investment. The latter is of critical 
importance because considering drug prices in isolation is not 
useful. The tradeoff between drug prices, industry profits, and 
innovation is what is relevant. My research on this point is 
based on unfunded research published in the peer-reviewed 
economics literature.
    Regarding the issue of rising drug prices in the U.S., the 
conclusions drawn by the AARP report are based on flawed 
methods and, thus, are misleading. Some of the more serious 
flaws with the analysis are:
    The AARP report is based on wholesale prices, not retail 
prices or transaction prices, which are often substantially 
lower than wholesale prices. This is because PBMs and insurers 
negotiate discounts, often steep discounts, and rebates with 
manufacturers.
    Second, the AARP report is an analysis of branded products 
only. The burden to U.S. consumers of prescription medications 
associated with access to prescription drugs should also 
consider generic drugs, which in the U.S. have among the lowest 
prices in the world and the highest utilization rate.
    For example, approximately 70 percent of all prescription 
drugs dispensed are generic drugs. So we have both the highest 
utilization rate and the lowest prices. Much of this credit 
goes, of course, to the 1984 Waxman-Hatch Act, which did a nice 
job of balancing innovation with generic competition.
    Three, in the AARP report, 10 of the top 25 branded 
pharmaceuticals in their study actually have generic versions 
currently on the market. Mandatory generic substitution laws in 
most States implies that the lower-cost generic versions of 
these 10 brands drugs are dispensed to consumers, not the 
branded versions.
    In my opinion and based on my experience as both an 
academic journal editor and peer-reviewer for academic 
journals, this study, as it stands, does not meet the peer-
review standard for economic publication--and that is the 
hallmark of academic research. A better measure, in my opinion, 
of drug price trends in the U.S., one that is based on retail 
prices, not wholesale prices, and which also captures the cost 
savings from generic competition and substitution, is the 
prescription drug Consumer Price Index reported by the U.S. 
Bureau of Labor Statistics. The BLS prescription drug inflation 
rate for 2009 is approximately 3 percent, or roughly one-third 
of the 9 percent inflation rate reported by the AARP.
    Moreover, the change in drug price inflation was 
approximately half that in the most recent year of the change 
in the inflation rate for nonprescription drugs and medical 
supplies. This suggests a small increase in prescription drug 
prices may reflect broader health sector market dynamics and 
not an isolated increase in prescription drug prices.
    As previously mentioned, the consideration of prescription 
drug prices in isolation is an incomplete and misleading 
exercise. What must be considered are the costs and the 
benefits of higher or lower prescription drug prices and, 
specifically, the economic tradeoff between access to existing 
medicines and access to future, yet-to-be-discovered medicines.
    The expected returns on individual R&D projects are 
directly related to expected pharmaceutical prices and 
profitability; price controls or indirect price controls via 
such mechanisms as reimportation or technology assessment 
rationing lower expected net returns for firm shareholders. The 
result will be a decline in the rate of pharmaceutical 
innovation, fewer drugs developed, and it will take a longer 
time to find cures for many diseases.
    Unlike the benefits of the price control policy, which 
clearly would be to improve access for today's consumers and 
seniors--implicit price controls, which will produce immediate 
and observable cost savings through lower drug prices--the 
costs of a price control policy in terms of forgone innovation 
is much more difficult to appreciate and quantify.
    What might we have discovered? How much more quickly would 
we have found a cure for Alzheimer's disease? These are very 
nebulous and difficult to appreciate and certainly to quantify, 
but that does not justify not considering these very important 
costs. A full economic analysis considers both the costs and 
benefits of any policy or health care reform.
    The sensitivity of R&D spending to pharmaceutical prices 
and profits has been studied with a variety of different 
research methods, including standard retrospective statistical 
analyses of industry- and firm-level data, protective 
simulation analyses, and financial event studies. The research 
findings have been strikingly consistent and robust. I will 
summarize the results from two recent studies published in the 
economics literature that I authored by myself and with 
coauthors.
    The first study utilized publicly available firm-level 
financial data and exploited observable differences in the U.S. 
and non-U.S. pharmaceutical profit margins. Outside the U.S., 
most countries have some form of price regulation, explicit or 
implicit. Using established economic models and statistical 
techniques, we estimated that a new policy that reduces 
pharmaceutical profit margins in the U.S. to non-U.S. levels 
will cause firm R&D spending to decline by between 25 and 35 
percent, all things considered.
    A policy that regulates prices in the U.S.--for example, 
reimportation from foreign markets with forced sale clauses, 
those foreign markets, of course, having price regulation--will 
theoretically have this effect on U.S. profit margins.
    The second study adopted a slightly different approach and 
utilized publicly available industry-level data to study the 
direct link between U.S. drug prices and industry-level R&D 
spending. In this study, we estimated that for every 10 percent 
reduction in U.S. prices, industry R&D spending will decline by 
approximately 6 percent. We call that an elasticity estimate of 
R&D with respect to real drug prices in the U.S. This finding 
is also consistent with an earlier study by Harvard economist, 
F.M. Scherer.
    In sum, the empirical evidence suggests that firm R&D 
spending is very sensitive to pharmaceutical prices and profits 
and to prices, as the economic theory would predict and the 
empirical literature supports. The key point is that the 
benefits associated with lower drug prices--and it cannot be 
argued that there would be benefits and improved access to 
medicines that are currently on the market and available--would 
unequivocally come at a cost: lower levels of R&D investment 
and a reduced rate of pharmaceutical innovation. It is critical 
that these costs be balanced carefully against the benefits of 
associated regulation, explicitly or implicitly, that regulates 
drug prices. This is particularly true in light of the recent 
evidence on the significant contributions of pharmaceutical and 
medical R&D to human health and life expectancies in the U.S., 
research that suggests the U.S. is currently underinvesting in 
medical and pharmaceutical research based upon the benefits 
that we enjoy in America as a result of improved quality of 
life and extended life expectancies. Thank you very much.
    Mr. Pallone. Thank you, Professor.
    [The prepared statement of Mr. Vernon follows:]


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    Mr. Pallone. Ms. Cramer.

                   STATEMENT OF BONNIE CRAMER

    Ms. Cramer. Thank you, Mr. Chairman and members of the 
Health Subcommittee. I am Bonnie Cramer. I am chairman of 
AARP's all-volunteer board of directors, and on behalf of our 
40 million members, thank you for including AARP in this 
discussion of brand-name prescription drug prices.
    As you know, AARP is deeply committed to making 
prescription drugs affordable for our members and for all 
Americans; and whether we are ready to admit it or not, the 
United States is aging at an unprecedented rate. Starting on 
January 1, 2011, 10,000 people will turn age 65 every day, and 
this will continue for the next 20 years. When combined with 
the rapidly escalating brand-name prescription drug prices and 
the fact that older Americans use prescription drugs more than 
any other segment of the population, it seems evident that many 
Americans will soon find themselves unable to access the drugs 
they need at a price they can afford. And that, we believe, is 
not acceptable.
    As part of these efforts, AARP's Public Policy Institute, 
working with Dr. Schondelmeyer, has been reporting on 
manufacturer price changes for prescription drugs. Since 2004 
we have done our prescription drugwatchdog report. Our latest 
report found, as you have heard, that average manufacturer 
prices for widely used brand-name and specialty prescription 
drugs continued to increase substantially between October of 
2008 and September of 2009, rising by 9.3 percent and 10.3 
percent respectively.
    Now it has been twice said that 70 percent of all 
prescription drugs are generic, but you need to know that 76 
percent of all spending is for brand drugs.
    Rising prescription drug prices are a source of concern for 
many of our members and it can impact their health. The 
inability to afford needed prescription drugs has been shown to 
negatively impact patient adherence to drug regimens. Many 
consumers report that they have not filled prescriptions, they 
skip doses, and they cut pills in half as a result of high 
prescription prices. These are stories that we hear from our 
members every day. This type of behavior in turn can lead to 
more expensive health care needs in the future.
    Problems paying for prescription drugs are more common 
among those taking a larger number of medications, such as 
older adults. Approximately 20 million AARP members are over 
the age of 65 and eligible for Medicare. The Part D benefit, 
which AARP fought very hard to enact, provides much-needed 
prescription drug coverage for Medicare beneficiaries, but 
unfortunately, the Part D benefit currently contains a doughnut 
hole, where the beneficiary must shoulder the entire cost of 
the drug as well as continuing to pay their premiums. More than 
3 million Americans are at risk of falling into the doughnut 
hole each year and feeling, firsthand, the impact of rising 
prescription drug prices.
    Unfortunately, because the doughnut hole is indexed to 
prescription drug spending, the doughnut hole is growing larger 
each year; as a result, more people will fall into the doughnut 
hole in the future. And that is why we at AARP have made 
closing the doughnut hole one of our top priorities as part of 
health care reform.
    But price increases also impact Medicare Part D enrollees. 
It impacts their cost sharing for their brand-name prescription 
drugs.
    A recent AARP Public Policy Institute analysis of most 
national Part D plans shows that in 2010, more plans will 
require copayments of close to $100 per drug for certain brand-
name drugs. Other plans will use coinsurance or a percentage of 
the drug's cost for brand-name medicines as high as 65 percent 
of the drugs cost.
    We are greatly concerned about the future of Medicare's 
Parts D and B, which are financed through premiums and general 
revenues. As prescription drug prices continue to increase, 
spending will grow correspondingly, which means that all 
Medicare beneficiaries as well as all taxpayers will be 
required to pay more in order to keep the program solvent.
    Now, AARP was pleased to endorse the Affordable Health Care 
for Americans Act, H.R. 3962, that recently passed the House of 
Representatives. For years, AARP has been fighting to make sure 
that our members and all Americans have access to affordable 
health care coverage. Key to our endorsement was provisions 
that would close the doughnut hole, which the House would begin 
to do next year, and fully close the doughnut hole by 2019.
    We also support the House health bill's provisions that 
would grant the Secretary of Health and Human Services the 
authority to negotiate on behalf of Medicare beneficiaries. We 
have also supported provisions that would promote medication 
therapy management services.
    So, Mr. Chairman, thank you for your continuing efforts to 
improve the Nation's health care system. At AARP we look 
forward to continuing to work with you to ensure that 
prescription drugs remain affordable for our members and all 
health care payers.
    I appreciate the opportunity to be with you today, and I 
look forward to your questions.
    Mr. Pallone. Thank you, Ms. Cramer.
    [The prepared statement of Ms. Cramer follows:]


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    Mr. Pallone. We are going to have questions now from the 
members, and I am going to start with myself. I am going to try 
to get in two topics here with you, Mr. Schondelmeyer.
    When we passed or when we finalized the health care reform 
legislation, it will mark the second time in 6 years Congress 
has passed important legislation affecting the prescription 
drug market. In 2003, we passed the legislation creating Part 
D; and you have analyzed drug prices before and after Part D 
went into effect.
    So what happened in the months before Part D went into 
effect, and are we seeing the same thing happening now with 
this health care reform legislation?
    Mr. Schondelmeyer. Well, I would respond by providing 
observation and pointing you to figure 5 in the testimony that 
I prepared. Basically, it shows in the time period prior to 
Medicare Part D being first passed and then later enacted--
remember, there was a delay time between when it was passed and 
when Part D actually got implemented, 2003 to 2006--
prescription drug prices did increase during that time period 
substantially. They leveled out, if 6-plus percent is leveling 
out, in terms of price increases for a brief period, and then 
after last fall's elections in November when it appeared that 
health care reform might be a topic that comes into play again, 
we saw an increase.
    Now, this is not a cause-and-effect relationship, but if 
one looks at the graphs, it is pretty apparent there is an 
increase.
    Mr. Pallone. So you don't think it is a coincidence, 
obviously.
    Mr. Schondelmeyer. I don't think it is. There are multiple 
factors that affect the drug companies' choice to raise their 
prices, but I think this is certainly one that weighs in.
    The mentality that may be going into effect is, if R&D is 
as important to them as they say it is--and I believe it is; 
and I want, we as a society want, the innovation and R&D and 
other factors. So if they rationalize, if they are going to 
start controlling or affecting my prices by having a more 
effective market in some way, and I have a less controlled 
market right now, I am going to push the price as much as I can 
so when they start squeezing, I am at a higher point on the 
mountain when they are trying to bump me down a little bit. So 
it makes sense to do that.
    Mr. Pallone. Mr. Smith, I will let you have an opportunity 
to respond, but I have to go back to him. So if you could just 
spend about a minute or so.
    Mr. Smith. Mr. Chairman, thank for the opportunity to 
respond.
    Unlike Dr. Schondelmeyer, I am not going to speculate about 
motives. As I made clear in my statement, I can't discuss 
pricing decisions and so forth. But what I can say is that, 
number one, the Consumer Price Index, as has already been 
discussed, has, for the year ended with the period that AARP 
looked at, was up about 2.7 percent.
    I can also tell you that the prices are negotiated with 
purchasers who are large, sophisticated and powerful and have 
many tools. My guess would be, and I have to underline guess, 
my guess would be if a company went to one of these purchasers 
and said, We need you to pay us more because health reform is 
coming, they would be laughed out of the room.
    Mr. Pallone. OK. Now I am going back to you, Dr. 
Schondelmeyer.
    At some point--I don't know if it was in your testimony or 
in your written statement--you mentioned that the wholesale 
acquisition cost does not include discounts or rebates that are 
provided by the manufacturers to wholesalers. When these 
discounts were factored in, it has the effect of lowering the 
price paid.
    You stated in your footnotes that there are no consistent 
comprehensive and publicly reported data sources for this 
discount and rebate information. That gets to the issue of 
transparency. That is my question.
    How would better drug pricing transparency help patients? I 
mean, what would you suggest in terms of trying to create more 
transparency?
    Mr. Schondelmeyer. First, if we are really talking about an 
economic market and making wise decisions, we need to avoid 
asymmetric markets, where the seller knows a whole lot more 
about their product than the buyer. Asymmetric markets were 
defined by Nobel economists who described the market for 
lemons, or used cars.
    In a sense, drug companies, thankfully, know a lot more 
about our drug product than we do, but that gives them extreme 
economic power in the marketplace. Rebates and discounts are 
out there, and they may lower the actual price, but they don't 
lower the rate of increase unless the rebates and discounts are 
increasing as a proportion.
    Mr. Pallone. What do you suggest in terms of what we could 
do on transparency?
    Mr. Schondelmeyer. Well, one, for example in Medicare Part 
D, you could require that Part D plans disclose the amount of 
rebates that they get. Apparently, the committee in the past 
couple of years has done studies of the Part D plans. The Part 
D plans have reported that they get rebates on about 10 to 14 
percent of the drugs; and they may get some rebates, but they 
have admitted they don't pass them on to the consumer. And, 
apparently, it doesn't lower the premiums, because this last 
year Part D premiums went up 11 percent, and last year they 
went up 17 percent.
    So the only two places I can see that rebates can benefit 
either the Medicare beneficiary or the taxpayer would be in 
lower premiums or lower prescription prices. And they don't 
appear to show up in either of those.
    I don't know where they went.
    Mr. Pallone. Thank you.
    Mr. Deal.
    Mr. Deal. Ms. Cramer, I am told that 52 percent of AARP's 
annual revenues come from royalty fees from insurance company 
profits, and less than 20 percent of it comes from your 
membership dues. In 2008, I am told that AARP generated $414 
million in royalty fees from United Health Care Corporation.
    Could you tell me what percentage of those revenues came 
from the sale of AARP Medicare supplemental insurance plans 
that were offered by United Health Care Corporation?
    Ms. Cramer. I don't have that figure with me. I will be 
glad to get it for you. Those numbers you cited are 
approximately correct.
    But let me just say that AARP is not an insurance company; 
we contract with United Health Care to provide insurance to our 
members, and we provide market-changing policies. We make sure 
that our members have the best policies that we can have under 
State and Federal law.
    Providing insurance to AARP members is the reason AARP was 
formed over 50 years ago, when our founder--the private market 
was not serving older people, and it was not serving retired 
teachers. Our founder was a retired teacher. It is the 
beginning of our organization.
    But I do want to say one other thing, which I have heard 
said in Congress numerous times, especially over the weekend. I 
am the chairman of the all-volunteer board. We had over 15 to 
20 meetings on health care reform--detailed meetings. Not once, 
not once, did the AARP board talk about the money we might make 
on our insurance products or the money we would lose. We would 
gladly forgo----
    Mr. Deal. You will get us information to the question that 
I have asked.
    Ms. Cramer. I will get the information on what portion is 
related to Medicare supplement.
    Mr. Deal. When you announced your endorsement of the 
immediate health care reform plan, you cited the fact that 
preexisting conditions would be excluded under that 
legislation, yet the supplemental plan that you sell has a 6-
month waiting period. And the way the legislation has been 
crafted is that your supplemental insurance plan will still 
continue to have the opportunity for a 6-month waiting period 
as an exclusionary period.
    Was that a condition that was negotiated with the White 
House as a condition of endorsement?
    Ms. Cramer. It was not a condition that was negotiated with 
the White House. And AARP has been on record for a long time of 
supporting guaranteed issue for Medicare beneficiaries.
    Mr. Deal. But do you think it is fair for your supplemental 
plan to have a preexisting condition exclusion, whereas other 
plans in the basic coverage would not?
    Ms. Cramer. That is something that we can look at. It was 
not a deal with anyone. And certainly we do support guaranteed 
issue.
    Mr. Deal. All right. Let me ask the panel, and this would 
be something that any of you could address.
    We are concerned here about trying to figure out how to get 
consumers in the United States the best value for the dollar 
they are paying for prescription drugs. Do you believe that 
U.S. consumers are paying a disproportionate share of R&D costs 
compared with the rest of the consumers in the world?
    Does anyone want to take a shot?
    Mr. Smith. Mr. Deal, I will note that other countries 
clearly underfund their R&D. They are not paying their share of 
R&D, particularly other developed countries, and I believe the 
result is, less R&D occurs and fewer new drugs are discovered, 
and that is a loss to Americans as well as people in their own 
country.
    Mr. Deal. Aren't you shifting those costs to American 
consumers?
    Mr. Smith. Mr. Deal, I can't speculate about how pricing 
might occur cross-nationally.
    Mr. Deal. Dr. Schondelmeyer, do you have an observation?
    Mr. Schondelmeyer. Well, again, in terms of the individual 
decisions of companies and specific decisions, it is hard to 
say. But if you look at the market, and as described by Mr. 
Smith, if other countries are underfunding and we are paying a 
substantially higher price and we are getting R&D, which we 
value, we are overpaying; we are essentially letting other 
countries be free riders on the R&D that we are paying.
    What we do with that is a different issue. I think we 
probably need to look for a new model of funding R&D. Rather 
than funding 10 years from now the new drugs based on the high 
price of drugs today to the degree that some people can't 
afford them, I am not sure that model is working today.
    Mr. Deal. I want to go to your analysis that brand-name 
drugs increased 9.3 percent in your study. Specialties, which 
you say were primarily biologics, increased by 10.3 percent.
    Isn't it logical that in the brand names, where their 
patents will expire, that those prices will drop in the future; 
whereas if we grant, in addition to patent protection, some 12 
or more years of market exclusivity on biologics, that you are 
going to see that increase in the biologic arena continue to be 
an escalation?
    Mr. Schondelmeyer. I don't recall more than two or three 
brand-name drugs that I have ever seen drop their price, and 
those were under political pressure. It was pointed out that 
some of the drugs in our index have generic competitors in the 
market, and yet those brand-name drugs continue going up in 
price, sir.
    Mr. Deal. Yes. But if you build in a 12-year exclusivity 
period that prolongs any ability for follow-on biologic, don't 
we compound that problem?
    Mr. Schondelmeyer. Not necessarily. I think one has to do 
an assessment of what is an appropriate time for recovering 
that innovation cost and R&D cost. I think if you make it too 
short, you can stifle innovation. I think if you make it too 
long, you can stifle innovation. If you make it too long, you 
allow companies to rely on cash cows, which is much of what we 
see now, products they just keep hanging on to and riding, 
rather than--what they find is Nexium instead of Prilosec, 
which isn't a new drug, it's just a right-handed version; or 
Ambien CR instead of Ambien, which isn't a new drug, it is just 
a manipulation.
    So if we let the period be too long, it can be just as 
damaging as too short. I think the period that is currently in 
the bill at 12 years is on the long side. 
    Mr. Pallone. Chairman Waxman.
    Mr. Waxman. We have heard the estimate that the amount of 
prescription drugs over a 10-year period has increased 72 
percent. That is a big increase in people using drugs, or at 
least a number of prescriptions. So the market for drugs has 
increased over the last 10 years.
    Dr. Schondelmeyer, you say that the drugs in the past year 
have increased, on an average, 9 percent; is that a correct 
statement?
    Mr. Schondelmeyer. It is, but we need to parse out 
increased expenditures from increased prices. Expenditures go 
up because of increased utilization and increased price and 
increased changes in the mix.
    The price index I report with AARP is a pure price index. 
Price only. The actual utilization of prescription drugs in the 
last year to 2 years has flattened out or even decreased 
slightly in some therapeutic markets, yet the prices keep going 
up. And the private payers, the large PBMs, report price 
increases similar to the 5.4 percent that we show for our 
aggregate composite index, rather than the 2.7 percent that CPI 
has.
    Dr. Vernon commented that my study only looked at brand-
name drugs. Apparently, he has only read the New York Times 
version of my study, because if you read the full study, you 
will see that we look at brand names and specialties and 
generics, and we calculate a composite index.
    Mr. Waxman. So you have a composite index of all those 
drugs. Let's parse them out.
    Are brand-name drugs where the drug manufacturer still 
holds a patent, which means it has a monopoly, going up faster 
than the increase for the prices for those drugs than generic 
drugs competing with a brand-name drug?
    Mr. Schondelmeyer. In our index, brand-name drugs can be 
either patented, single-source products or it can be brand-name 
drugs. The originator, the original NDA holder, they may not 
have discovered the drug at all; they may have licensed it in. 
But the original NDA holder, even after the drug is off patent, 
may still be in our index, in some cases, because those 
products are still on the market and the prices are going up.
    So we track those prices and then we track generics, and 
they are going in opposite directions--9.3 percent up and 8.7 
down for generics.
    Mr. Waxman. So where there is competition from generics, 
the generics are going down in price? And where there is no 
competition, the price of drugs is increasing?
    Mr. Schondelmeyer. It is increasing. And even the brand 
name, when it has generic competition, doesn't enter into the 
economic competition by lowering its price. It may lose volume, 
but it doesn't lower its price.
    Mr. Waxman. This seems to be happening whether the economy 
is booming or in a recession, whether the number of uninsured 
is going up or down; it doesn't make any difference.
    Mr. Schondelmeyer. It doesn't appear to have done so over 
the last decade, and we have had both of those periods, some 
booms and some busts.
    Mr. Waxman. Over the last decade, I assume that the 
increases are every year. Are they pretty level or is this 9 
percent higher than the general increase over the last 10 
years, let's say?
    Mr. Schondelmeyer. The rate of increase is the highest, at 
least from the data I have done with AARP I have seen in the 
last 7 years. When I look at other similar data going back even 
15 years or more, this is the highest level we have been at for 
quite some time.
    Mr. Waxman. Now let me go back to the question Mr. Deal 
asked you. The specialty drugs, which really biologic, these 
are the new breakthrough drugs, but they are very expensive 
drugs, aren't they?
    Mr. Schondelmeyer. Yes. These, on average, cost thousands 
to tens of thousands of dollars, if not in some cases, hundreds 
of thousands of dollars per year.
    Mr. Waxman. For the most part, these drugs have no 
competition?
    Mr. Schondelmeyer. They do not have competition directly 
and in an economic sense.
    Mr. Waxman. In an economic sense? What does that mean?
    Mr. Schondelmeyer. In a sense it would lower their price. 
There may be two drugs for multiple sclerosis, and the drug 
companies may very vehemently compete through advertising and 
through calls on the doctors that treat those patients, but it 
hasn't had an effect on the price, an appreciable effect on the 
price.
    Mr. Waxman. Is that because one is not substitutable for 
the other?
    Mr. Schondelmeyer. Substitution has been a major mechanism 
to bring about economic decline of generic prices in the 
regular drug market, and that is not available for the 
biological products. There is no equivalent of an ANDA for a 
biological license applicant.
    Mr. Waxman. Now there is a bill that promises the developer 
of a generic drug 12 years of exclusivity and then there can be 
competition. But that competition may not be a substitutable 
competitor. So we are not guaranteed a reduction in prices even 
after 12 years; isn't that right?
    Mr. Schondelmeyer. That is probably correct. It depends on 
the terms of how that bill would bring about or allow other 
products in the marketplace.
    What you need is an equivalent of the FDA therapeutic 
equivalence evaluation for normal pharmaceuticals to be 
developed for the biological markets.
    Mr. Waxman. They claim they have to have a 12-year 
exclusivity because competition is going to drive down the 
price of that drug so dramatically. But, in effect, they are 
going to have much longer than 12 years to be recouping a huge 
amount for their drug.
    So what we are really talking about is not just a 12-year 
period, but a much longer period of time in which this drug 
will have market dominance; isn't that correct?
    Mr. Schondelmeyer. That is quite likely. In addition, they 
are likely to come out with alternate dosage forms and remarket 
the drug in a different dosage form that has a new patent, has 
a new exclusivity.
    Mr. Waxman. We have ``evergreening'' in the bill that 
passed the House and the Senate, which means there is no end to 
the monopoly control they are going to have over these biologic 
drugs.
    Monopoly control, is it fair to say, in your experience, 
means higher prices?
    Mr. Schondelmeyer. Yes.
    Mr. Waxman. Thank you, Mr. Chairman.
    Mr. Pallone. Thank you, Chairman Waxman.
    The gentleman from Illinois, Mr. Shimkus.
    Mr. Shimkus. Thank you, Mr. Chairman. I think we are 
developing more questions through this hearing, but that is a 
positive thing.
    Ms. Stoll, I would just request that if you have these 
constituents' stories, one, I would ask if they have gone to 
their Member of Congress to ask for assistance. We deal with 
folks in many of these similar situations.
    I would also highlight the fact that if that Member is not 
willing, if you provide those names to my office, we will try 
to intervene. Because I know the pharmaceutical companies have 
options in which they can provide discounted or low-cost or 
drugs for free; and we use those operations frequently in my 
congressional service.
    I have limited time, but I want to throw that out as on 
option for these stories that you have given us today.
    To Mr. Smith, we have heard a lot about the ``deal'' 
between PhRMA and the White House. Can you explain what that 
deal is?
    Mr. Smith. Congressman, what I can do is--I wasn't asked to 
come and explain the deal today. I can try to give you sort 
of----
    Mr. Shimkus. I have been told it is pretty well public 
knowledge.
    Mr. Smith. There have been public announcements by the 
White House. I believe AARP attended a public announcement of 
the initiative at the White House. There are public 
announcements from the Finance Committee.
    Our board concluded that in line with its longstanding 
support for moving forward health reform, that was mentioned by 
the chairman in his opening comments, that we wanted to support 
moving forward----
    Mr. Shimkus. I am actually looking for more of the 
specifics.
    Do you know if the Senate health bill reform reflects the 
negotiations?
    Mr. Smith. The Senate bill is so much in flux, it would be 
hard for me to make an assessment.
    Mr. Shimkus. I would like for you all--these are questions 
that I would like to get answered. I would hope that you would. 
My concern is H.R. 3962, there are negotiations behind closed 
doors, and I want to know if those have negotiated, which then 
turns me to AARP.
    Ms. Cramer, you said that--Mr. Chairman, I would like the 
consolidated financial statements from December 31, 2008, and 
2007, and the IRS form 990 for 2008 submitted for the record, 
with your approval.
    Mr. Pallone. Can I just take a look at it, because I am not 
sure I know what you are talking about.
    Mr. Shimkus. It will be followed up with these questions.
    Ms. Cramer, you stated that you all don't have an insurance 
plan, but on the 990 you list one. On the IRS Form 990, it says 
``the AARP insurance plan.'' So my question is, do you have an 
insurance plan or do you not?
    Ms. Cramer. What I said is that we contract with United and 
other health insurers to provide insurance to our members. We 
also contract with Aetna for the 50- to 64-year-old product.
    We contract with Genworth to provide long-term care 
insurance to our members. We even provide homeowners insurance 
and car insurance to our members.
    Mr. Shimkus. Reclaiming my time, what it says on the IRS 
Form 990, At the direction of third-party insurance carriers, 
the plan pays AARP, Inc., a portion of the total premiums 
collected for the use of its intellectual property, which is 
reported as royalties in the consolidated statements of 
activities. Is that correct?
    Ms. Cramer. It is correct that we make royalties off the 
sale of insurance plans.
    Mr. Shimkus. So you are acting as a grant or trust. And, in 
essence, when these profits are made through the selling of 
this insurance, the net then goes back to you all. In fact, 
AARP benefits from selling the most costly insurance because 
that portion then goes to operate AARP at a major profit; is 
that correct?
    Ms. Cramer. It goes back to support the advocacy and 
education efforts of AARP, yes.
    Mr. Shimkus. And I would say in about current operations 
that is about $653 million in annual revenue, based upon this 
portion, which was stated by Mr. Deal as. What, three-fourths 
of the operating budget?
    Ms. Cramer. The budget is about $1.3 billion, but that 
amount is approximately correct, yes.
    Mr. Shimkus. Fifty-two percent of your fees or annual 
revenues come from these insurance fees, and 20 percent of 
AARP's annual revenues come from membership dues, correct?
    Ms. Cramer. About 24 percent.
    Mr. Shimkus. Could you operate without this $653 in annual 
revenue?
    Ms. Cramer. I have already answered that question. We were 
founded on providing----
    Mr. Shimkus. Can you operate currently without this revenue 
that you all receive based upon selling insurance, yes or no?
    Ms. Cramer. We have never looked at that. I don't know how 
to answer that.
    Mr. Shimkus. So if you are without $653 million, you don't 
know if your operations will change?
    Ms. Cramer. Well, obviously, it would change if it is 52 
percent of the revenues.
    Mr. Shimkus. Thank you. I yield back.
    Mr. Pallone. The gentleman from Illinois has asked for 
unanimous consent to enter into the record AARP's consolidated 
financial statements from December 31, 2008 and 2007. Without 
objection, so ordered.
    [The information appears at the conclusion of the hearing.]
    Mr. Pallone. Next is the gentlewoman from California, Ms. 
Eshoo.
    Ms. Eshoo. Thank you, Mr. Chairman. I can't help but 
observe the following. It is always interesting around here 
when advocacy organizations endorse legislation. I remember not 
that many years ago when my friends on the other side of the 
aisle had their arms wrapped around AARP, hugging them so 
tight, because they were supporting Medicare Part D and all 
that came with it.
    Today, they are attacking the hell out of AARP because they 
have endorsed this side of the aisle's health care--universal 
health plan for the American people. So I guess, as Kurt 
Vonnegut said, ``And so it goes.''
    But I can't help but make the observation; I guess that is 
the way it goes around here.
    Thank you, each one of you, for coming to testify. I think 
if we could stay away from good guys and bad guys, we would 
just be much better off. What we need to do is to scratch below 
the surface and see what it is that is causing the prices to be 
what they are, which we all know is a burden to the American 
people and especially older citizens in our country.
    I believe in research and development. I believe in 
science. It is at the heart of all of the work that I have done 
here in Congress. Some say that favors some and doesn't help 
others. I think that that is a source of pride to our country, 
and I want to keep that and innovation alive. But I also think 
we can do a much better job with what the costs are.
    Now, the House has already passed the health care reform 
legislation, and hopefully the Senate is going to do the same. 
As we go to conference, I think it is important we get some 
perspective in how provisions in these bills will help to 
reduce drug costs. The House bill has numerous provisions to 
protect taxpayers and all citizens from increasing drug prices. 
It increases Medicaid rebates; it provides drug coverage with 
36 million citizens; it requires pharmaceutical manufacturers 
to give a 50 percent rebate for drugs in the doughnut hole; it 
closes the Part D doughnut hole, which the other side all 
created, together with AARP, and thought it was terrific then. 
Now it is costly and we are being attacked for what it costs to 
plough back and fill this hole, but fill this hole we must do 
because of what it is doing to senior citizens. It allows the 
Secretary to negotiate for lower Part D drug costs.
    Now the Senate bill contains some of these provisions, but 
not all. It doesn't close the Part D doughnut hole, doesn't 
allow the Secretary to negotiate, and it doesn't create new 
Part D rebates.
    So, to Dr. Schondelmeyer, let me ask you generally, do you 
believe the provisions in the House bill or the Senate bill 
will do a better job of protecting seniors and taxpayers from 
rising drug prices? I mean, it is a softball question, but I 
think we need to get the answer on the record.
    Mr. Schondelmeyer. I believe there are many useful 
provisions in the House bill that would assist in that goal. As 
with many tools that we have in society, it all depends on how 
they are implemented.
    Ms. Eshoo. Ms. Cramer, do you agree?
    Ms. Cramer. We have strongly supported the House bill. We 
are working every day in the Senate to try to get the doughnut 
hole closed completely.
    Ms. Eshoo. Let me ask about a specific provision in both 
bills. It is a provision that requires manufacturers to provide 
a 50 percent discount on brand-name drugs in the doughnut hole. 
My understanding is that this offer was made by the drug 
manufacturers as part of their negotiations with the Senate and 
the White House.
    Now this is not a bad provision. We have it in the House 
bill as well. But it seems to me that it has some problems. 
What manufacturers give, which in this case is a 50 percent 
discount, manufacturers can take away by increasing the base 
price of their drugs.
    So, to Dr. Schondelmeyer, am I understanding this 
correctly? As manufacturers increase prices, can they also wipe 
out many of the benefits of this 50 percent discount?
    Mr. Schondelmeyer. I believe they can, and they have the 
market power to do so. Their current price increases for this 
year may have come close to wiping out the whole $80 billion 
over the next 10 years.
    Ms. Eshoo. Let me ask the panel, whoever would like to step 
up and answer this, what do you think is the best way to 
protect us from what I just described?
    Mr. Smith. Congresswoman, thank you for the opportunity to 
answer.
    Ms. Eshoo. Keep it short.
    Mr. Smith. I will, absolutely.
    Part D, as you know, has come in at much lower cost than 
expected. That is because of the competition and the 
negotiation that goes on. Contrary to Dr. Schondelmeyer's 
point, of course, the 50 percent discount that will be provided 
in the coverage gap is a 50 percent discount off of the 
negotiated price. So I think that there is a real benefit to 
seniors there.
    Ms. Eshoo. Dr. Schondelmeyer, do you want to respond?
    Mr. Schondelmeyer. You tell me how much discount you want, 
and I will tell you what the price is. That is kind of the way 
the market works today. Yes, there is some negotiation, but it 
is at the margins. It is mostly about retail prices, not about 
meeting the retail margin and the retail dispensing fees. It is 
not much about brand-name, single-source drug product 
negotiations.
    I work with major buyers in the marketplace with my own 
university, and we don't get discounts on those brand-name 
prices.
    Mr. Smith. Congresswoman, can I get 5 seconds of your time, 
please?
    Ms. Eshoo. You have to ask the chairman, not me.
    Mr. Pallone. Yes, and then we are going to finish.
    Mr. Smith. I will simply note, contrary to Dr. 
Schondelmeyer's assertions, if you look in the Medicare 
trustees' report, they will note that while generics don't 
carry rebates, I believe their phrasing is many brand-name 
drugs carry rebates, often 20 to 30 percent.
    Mr. Schondelmeyer. Generics are priced so low, a rebate 
still doesn't get the brand name close to the generic price.
    Ms. Eshoo. Mr. Chairman, I think this whole issue of the 
increase of the prices says to us that we need to get socks on 
this octopus. Because if the rate continues to rise as much as 
it already has, and the predictions of the industry itself 
underscoring that, then by the time the entire national plan 
for universal health care takes place, then that whole new 
floor--a whole new floor is established.
    This is about bringing prices down across the board so we 
have affordability for people. I think that we have got to 
press hard, look hard on a provision that will be placed in the 
bill.
    You know what I would be willing to do is to say that by 
such and such a date this is what you have to do, and a hammer 
comes down by that year. If you haven't, then the prices are 
just going to drop.
    Thank you.
    Mr. Pallone. Thank you. And I apologize for turning the 
clock off. I wanted to make sure Mr. Gingrey got his 8 minutes, 
since he didn't have an opening.
    I recognize the gentleman from Georgia.
    Dr. Gingrey. Mr. Chairman, thank you very much, and thank 
you for allowing me the extra time for questions.
    I am going to direct all my questions to AARP and to Mrs. 
Cramer.
    Ms. Cramer, my first question, to your knowledge, has AARP 
been contacted by the Justice Department concerning alleged 
large kickbacks--well, actually, you call them ``royalties''--
that you receive from insurance companies for your Medigap 
plans, a matter that, as you know, Chairman Rangel suggested he 
would be referring to the Justice Department during the Rules 
Committee hearing on H.R. 3962 last month?
    Ms. Cramer. To my knowledge, today, no.
    Dr. Gingrey. Well, if you do hear of that and have that 
information, that the Justice Department is looking into that, 
would you be willing to let the committee know that you have 
been informed by the Justice Department?
    Ms. Cramer. Surely.
    Dr. Gingrey. Good. Thank you.
    The second question: Today, roughly a million customers 
purchase Medicare Advantage plans, roughly 8 percent of the 
market, and 2.8 million Medigap plans, representing roughly 30 
percent of the Medigap market, bearing the AARP logo. Under the 
House and Senate health reform bills, Medicare Advantage plans 
would be cut--again, I am sure you know this--by as much as 
$160 billion, yet Medigap plans do not endure these same cuts. 
Under the House and Senate bills, Medicare Advantage plans 
would be forced to pay 85 percent of revenues received for 
medical claims, yet Medigap would only be subject to pay 65 
percent of its revenues on claims.
    Are you aware that Medigap plans are not held to the same 
85 percent standard as all other insurance products but 
Medicare and non-Medicare policies under the House or the 
Senate health reform bills, yes or no?
    Ms. Cramer. No, I was not aware of that.
    Dr. Gingrey. Would AARP be willing to forego this 
sweetheart exemption that clearly favors AARP and their Medigap 
plans in order to help reduce the cost of health care for its 
members who receive their insurance from the Medicare program?
    Ms. Cramer. I can't answer that on Medigap. I can say that 
on Medicare Advantage we have supported the reduction. We also 
contract for Medicare Advantage plans and----
    Dr. Gingrey. Well, reclaiming my time, I don't understand 
how you could say that you are not sure or that you wouldn't 
support that.
    Ms. Cramer. I am just telling you, we have not discussed 
that and so I just can't answer that today. I don't have that 
information. We haven't even discussed that among the board.
    Dr. Gingrey. Well, Ms. Cramer, in the interest of your 40 
million AARP beneficiaries, including myself, don't you think 
it would be your responsibility as a board, all-volunteer 
board, to discuss things like that?
    Ms. Cramer. As I indicated, I would be glad to get back 
with you on that.
    Dr. Gingrey. Well, I am glad to hear that.
    My third question: Representative Deal mentioned Medigap 
plans would not be subject to preexisting-condition coverage 
like every other insurance product sold in this country if H.R. 
3962 were to become law.
    Considering that an AARP member in New York has actually 
brought suit against you in January on this very issue, would 
you be willing to tell this committee today that AARP would 
like that provision changed in order to ensure that your 
members who currently receive their health care from the 
Medicare program would not be forced to purchase a Medigap plan 
with a preexisting condition?
    Ms. Cramer. As I indicated previously, we have for years 
supported guaranteed issue of Medicare policies.
    Dr. Gingrey. Well, then your answer is, yes, you would be--
--
    Ms. Cramer. I believe I answered that we would discuss that 
within our board. I can't answer that today, but we do support 
guaranteed issue.
    Dr. Gingrey. Well, I certainly would hope so, and I thank 
you for that response.
    Next question: The House and the Senate health reform bills 
would cut Medicare Advantage plans by as much as $160 billion, 
cuts that CBO figures will force 3 million seniors to lose that 
coverage and then revert to the traditional Medicare, and 8 
million more if insurance companies are forced to stop selling 
altogether by the health choices czar, if he or she chooses.
    As we all know, Medicare Advantage plans offer seniors 
benefits that traditional Medicare doesn't, services like 
dental, hearing, and vision, just to name a few. Therefore, 
seniors will be forced to purchase a Medigap policy to make up 
for those lost services, policies for which AARP has a 
significant market share and would stand to gain substantially.
    I see a significant conflict of interest in your support of 
legislation that would allow you, AARP, to gain customers, and 
therefore further royalties, from a product in which you have a 
significant market share, namely Medigap plans, because seniors 
are being forced off of Medicare Advantage plans, plans for 
which AARP products do not have a particular market advantage, 
as I think you said in your testimony.
    In light of these concerns, would AARP be willing today to 
rescind its support of H.R. 3962, of the Pelosi health reform 
act, if changes to bring Medigap policies in line with all 
other insurance products are not made, yes or no?
    Ms. Cramer. We have supported the House bill. We have also 
supported the cuts to the Medicare Advantage. We also contract 
for Medicare Advantage. And we would willingly forego any 
revenue to get those changes in place to get affordable health 
care for our members.
    Dr. Gingrey. Let me ask you one last question in my 
remaining time.
    I have seen recent reports that AARP supports the Senate 
Democratic version of health-care reform. One of the ways in 
which a Senate health reform bill pays for the reforms it seeks 
is through a payroll tax on all those making $250,000 or more 
each year.
    Unfortunately, this payroll tax is not pegged for 
inflation, meaning that it will negatively impact your members, 
including myself, aged 50 to 64 today, and over time cause 
those making well below $250,000 a year to pay this additional 
payroll tax of .5 percent, increasing the Medicare payroll tax 
from 2.9 to 3.4.
    Does AARP support the use of a payroll tax to pay for 
health care reform?
    Ms. Cramer. We have not endorsed the Senate bill. We are 
working to get the age rating provision in the Senate bill. It 
does not meet what we would like to have. It is 3 to 1. We do 
not support that. And the Senate bill does not fully close the 
donut hole, which is our top priority. We have not----
    Dr. Gingrey. Ms. Cramer, reclaiming my time, are you saying 
that you do not support the version of health-care reform in 
the Senate bill that raises a payroll tax a half a percent?
    Ms. Cramer. I am saying that we have not endorsed the 
Senate bill as of this time.
    Dr. Gingrey. Again, I want to ask you specifically a yes-
or-no question. As the chairman of the board of AARP, do you or 
do you not support increasing the payroll tax 0.5 percent to 
help pay for health-care reform, whether that is in the Senate 
version, the House version, or in a conference report that 
comes back to us later in the year or the 1st of the year?
    Ms. Cramer. We believe that revenues will have to be raised 
to provide all Americans affordable health care.
    Dr. Gingrey. Last point in my remaining few seconds: Would 
you support a change in the final bill indexing this tax for 
inflation if, indeed, that increased payroll tax is in there?
    Ms. Cramer. We have not discussed that. I cannot speak to 
that today.
    Dr. Gingrey. Well, I am disappointed that you can't speak 
to that as being a responsible board member, volunteer board 
member, advocating on behalf of 40 million seniors to try to 
keep costs down. Because, clearly, this is not a partisan 
question; this is just an issue of doing the responsible thing 
on behalf of your membership.
    Mr. Chairman, with that, thank you for the additional time, 
and I will yield back.
    Mr. Pallone. Thank you, Mr. Gingrey.
    Next is the gentleman from Texas, Mr. Green.
    Mr. Green. Thank you, Mr. Chairman.
    And, Ms. Cramer, I appreciate AARP's support for the House-
passed bill that doesn't have the payroll taxes the Senate 
does.
    But, Dr. Schondelmeyer, you conducted the study that found 
the brand-name drug prices increased 9 percent in the last 
year. We heard a lot of criticism of that study by Dr. Vernon 
and Mr. Smith in your testimony. How do you respond to that 
criticism? Does your study present a true picture of what is 
going on with prescription drug prices?
    Mr. Schondelmeyer. I believe it does.
    First of all, the price data we used are prices actually 
reported by the drug companies. And I would ask, if they are so 
concerned about those prices not being accurate, why are they 
reporting inaccurate prices in the market and to the price 
databases?
    Second, the Consumer Price Index is a very useful measure, 
but it measures a market aggregate only for the retail market. 
The CPI doesn't even include most specialty drugs in the 
marketplace. And the CPI--and, by the way, I would correct 
another number people have thrown around, that drugs are 10 
percent of our health-care expenditures. That is retail 
outpatient prescription drugs are 10 percent. Drugs in all 
settings--in hospitals, in physician's offices, and every other 
setting--are about 17 percent of the total national health 
expenditures. And yet we keep fooling ourselves saying they are 
only 10 percent.
    So I think our market basket reflects the full spectrum of 
drugs in the marketplace, in the places where they are used, 
and it is based on prices reported by the manufacturers.
    Mr. Green. They also say that your study does not take the 
discounts and rebates provided by drug manufacturers into 
account. Does that skew the results?
    Mr. Schondelmeyer. I have offered opinions that I don't 
think it appreciably skews the results because I don't see in 
the marketplace where consumers get the benefit of either those 
rebates or discounts. I have never met a consumer nor have I, 
myself, directly received a rebate from a drug company, and I 
have never met a consumer who says they have.
    Supposedly, the Medicare Part D plans do negotiate rebates, 
and it is supposed to either lower the premiums or the drug 
product price. But when the Office of the Inspector General for 
HHS evaluated Medicaid prices versus the Medicare prices back 
in 2007, he found that for brand-name drugs the Medicaid price 
was actually on average 0.6 percent lower than the Medicare 
prices before rebates were taken into account. When rebates 
under Medicaid were taken into account, it would have reduced 
the price by about 30 percent, but those rebates don't exist 
and aren't paid to the government on the Medicare side.
    So they can have an impact, but the way they are 
implemented under Medicaid Part D, they don't appear to get 
passed to the consumer or the taxpayer.
    Mr. Green. Well, I know we can look at the big picture, but 
prescription drug prices have increased at rates beyond the 
inflation rate in the last few years.
    Mr. Schondelmeyer. Absolutely. I have no doubt of that.
    Mr. Green. OK.
    Mr. Smith, your testimony states that Medicare Part D costs 
are not as high as projected, and I tend to think just because 
we created the donut hole, forcing seniors to pick up that 
majority of the tab of their prescription drug medications. 
Additionally, Medicare Part D plans--the Secretary of HHS 
cannot negotiate drug prices with manufacturers. This forces 
seniors in the Part D to pay much higher drug prices. Under 
H.R. 3962, the health care bill, we close that donut hole by 
2019.
    A PhRMA statement from Senior Vice President Ken Johnson 
following the release of the AARP report on prescription drug 
prices states, ``What is more, AARP fails to mention that 50 
percent discount that companies will provide to most seniors 
and disabled Americans who hit the so-called donut hole in 
Medicare Part D. That provision alone is expected to save 
beneficiary spending in the coverage gap as much as $1,800 in 
2011.''
    My office has contacted many companies on behalf of our 
seniors who have entered into the donut hole, and these 
discounts are not guaranteed and should not be advocated as a 
benefit to seniors as a way to curb the cost of drugs. Now, we 
try to work with individual drug companies because we see the 
ads on TV just like our seniors does, but oftentimes they are 
not qualified for those discounts when they fall in that donut 
hole.
    Do you have information on how many companies provide such 
discounts to seniors in the donut hole and the average discount 
they provide?
    Mr. Smith. Congressman, thank you for the question.
    I do not have information about the number of companies 
that provide discounts in the donut hole. I can say that, under 
the initiative that we undertook, all companies would be 
providing the 50-percent discount on brand drugs in the donut 
hole.
    Mr. Green. Well, I know the quote I gave you from Vice 
President Ken Johnson talked about $1,800. Believe me, I have 
seniors I talked to Friday in Houston that would love to have 
that because they fell in that donut hole.
    If you could get us more information from PhRMA on where 
they came up with that $1,800, I would really appreciate it, 
because I think all of us would like to make sure our seniors--
because we do constituent casework, and that is our next option 
when they hit that donut hole, outside of eliminating the donut 
hole, as our health care bill does.
    Thank you, Mr. Chairman. I know I am out of time.
    Mr. Pallone. Thank you, Mr. Green.
    The gentleman from Texas, Mr. Burgess.
    Dr. Burgess. Thank you, Mr. Chairman.
    I think Mr. Shimkus's questioning just a few moments ago 
really showed to us why this hearing should be on the 
Subcommittee of Oversight and Investigations where we can, 
indeed, swear people in, get them under oath, so that we get 
answers that we can depend upon, because we have heard some 
conflicting information today.
    I still remain troubled by the fact that we had PhRMA, AMA, 
AHIP, SEIU, AdvaMed down at the White House in May and June 
doing these deals, some of them, to be sure, part of the public 
record, but we don't have the phone logs, we don't have the e-
mails, we don't have the minutes from those meetings, and we 
are in the dark as to what was struck.
    So what I read in the newspaper is that PhRMA created an 
$80 billion deal to help the health care bill get through. OK, 
that sounds like a good thing, but I don't know what PhRMA gave 
up, I don't know what the White House gave up. It is just 
difficult to evaluate that.
    And then, of course, you do have the Congressional Budget 
Office sitting back there and saying, ``Wait a minute, if you 
are doing something you should have been doing in the first 
place, we don't actually score that as a savings.'' So does 
that $80 billion decline?
    I would just like to point out, since I was criticized 
about the aspect of negotiation from the Secretary of HHS with 
Part D, I mean, the Congressional Budget Office--who we should 
have at this hearing, by the way; they should be here--but they 
sat at that very table last fall in a secret meeting that we 
had that wasn't open to the press. The Congressional Budget 
Office reiterated that direct negotiation from the Secretary of 
Health and Human Services on Part D prescription drugs would 
not result in any significant savings. They have said this over 
and over again. I don't know what we need to do to kill that 
notion, but it is one that certainly deserves to die.
    On the issue of the donut hole, Ms. Cramer, I will just ask 
you, if we did away with that, what would be the effect, the 
practical effect, on those very low-priced policies that are 
available to people? Now, in my State of Texas, I think there 
are some 40 policies that are available for Medicare Part D. 
What is the practical effect of those very low-cost policies if 
the donut hole goes away and essentially everything is the 
same?
    Ms. Cramer. If I understand your question, I believe only 
about 20 percent of the Part D drug plans provide coverage in 
the donut hole. And I believe, at that point, it is primarily 
for generic drugs.
    Dr. Burgess. But a person does have that option to buy 
coverage that would provide coverage in the gap if they so 
chose. Is that correct? I mean, that happens today. There is no 
donut hole for that individual, is that correct?
    Ms. Cramer. Well, that is correct. And, as I said, 20 
percent----
    Dr. Burgess. But a person who doesn't use much in the way 
of medications is free to purchase one of these very low-cost 
policies that costs a minimal amount each month. And if 
something happens during the course of that year, yes, then 
their out-of-pocket expenditure may not be covered, but they 
also do have a maximum catastrophic coverage above which their 
drug costs are covered.
    But because the way Part D is set up, next year in the open 
enrollment period, they may switch to one of those programs 
that provides coverage in the gap. Will we lose that 
flexibility if we go down this road of closing the donut hole, 
as has been outlined in the House bill?
    Ms. Cramer. Well, I don't believe so, Congressman. You 
know, our top priority is to completely close the donut hole 
because 26 percent of people enter that donut hole; only about 
3 to 4 percent really exit that. And during that coverage gap, 
you have heard the stories about what people do with their 
drugs when they don't follow their drug regimen. So we think it 
is extremely important to----
    Dr. Burgess. Now, I need to interrupt you there for just a 
moment because there are other options. And my office certainly 
works with individuals on an individual basis, as Mr. Shimkus 
pointed out. There is the option, though--next year, during the 
open enrollment period, you don't have to stay on that 
particular policy under which you have been covered previously 
that has allowed you to end up in the donut hole. There are 
policies that provide coverage in the gap which would be 
available to that individual in the years ahead.
    I am going to have to move on because there is some other 
things that I just need to get asked. And, first off, Ms. 
Stoll, I have to ask you the name of that medicine for 
migraines, because I am just dying of curiosity.
    Ms. Stoll. Of course I won't be telling you the name of 
that product. Maybe we can have a private chat later.
    Dr. Burgess. See, this is why this has to be on Oversight 
and Investigations, because we could put Ms. Stoll under oath 
and she would be required to tell me the name of the medicine 
and I wouldn't be left in the dark here.
    Ms. Stoll. I will leave my colleagues to do the paid 
advertising for specific drugs. But, you know, I just want to 
raise an issue about----
    Dr. Burgess. Well, hold that thought. We will talk about 
that privately, because I do have to get one last thought in to 
our two participants at the end.
    We talk about what may be a causal relationship and what 
may be a casual relationship. I do think it is important, and 
one of the things we can't know at this hearing, because we 
don't have access to all the information, we can't know what is 
just a casual relationship between the $80 billion that PhRMA 
said they are going to give up and a causal relationship, 
``Hey, if we give up $80 billion, then we are going to be able 
to have price flexibility to make up some of that ground on 
something else.'' We just don't know.
    So where is the line drawn between what is a casual 
relationship and what is causal?
    Mr. Schondelmeyer. Well, that is more of a scientific or 
statistical question. But I think, just from a policy 
observational perspective, we have never seen drug prices go up 
this high in the last decade and a half. And this is a time 
when there is the most risk for drug companies--that is, having 
either price controls or a change in the market structure in a 
way that affects their prices. And so, it would be logical that 
they are looking for ways to buffer their revenue for as much 
as they can and as long as they can.
    Dr. Burgess. Well, again, that is speculation. It would be 
better if we were all on the record and under oath.
    Let me just ask you one last thing. You said you have not 
seen a drug price go down. We did have Prevacid which went 
over-the-counter this past month, and the price drop has been 
dramatic, and it still sold under a brand name.
    Mr. Pallone. Can we ask you to respond in writing? Because 
we have a number of Members, and we have a vote coming up.
    Dr. Burgess. Mr. Chairman, with all due respect, I sat here 
while many of our panelists--and I appreciate them being here--
went significantly over time. This is an important issue.
    Mr. Pallone. I understand that the panel went over time, 
but I am trying to keep the Members to the minute. We are going 
to have a vote at 12:15. We have a lot of Members, so respond 
to us in writing, if you will.
    Next is Chairman Dingell.
    Mr. Dingell. Thank you, Mr. Chairman.
    This question is to Mr. Schondelmeyer.
    Mr. Schondelmeyer, I am not sure you or the panel members 
remember years ago but we made some changes in the food and 
drug law which banned the imports of pharmaceuticals which 
could not be certified as safe by the Secretary of HHS. Do you 
remember that?
    Mr. Schondelmeyer. Yes. I think that was back in the 1980s.
    Mr. Dingell. So the law now says you cannot import 
pharmaceuticals unless they can be certified as being safe. Is 
that right?
    Mr. Schondelmeyer. I believe the law says that. It has not 
been implemented.
    Mr. Dingell. That is what the law says. So pharmaceuticals 
can be imported, but they have to be certified as being safe. 
Is that right?
    Mr. Schondelmeyer. I believe that is the case.
    Mr. Dingell. OK. Now, we have the nice problem that, if we 
change that, unsafe pharmaceuticals could be imported. Is that 
right?
    Mr. Schondelmeyer. It depends on your certification process 
and how good it is.
    Mr. Dingell. Well, if the Secretary can't certify that they 
are safe, they can't come in. Isn't that right?
    Mr. Schondelmeyer. Well, they may not be able to certify 
for political reasons or for practical reasons.
    Mr. Dingell. Dear friend, I wrote the legislation. It 
didn't say political reasons. It just says you can't import 
them unless they are certified and safe. Are you in accord with 
that?
    Mr. Schondelmeyer. In what sense?
    Mr. Dingell. Do you agree that that is good public policy?
    Mr. Schondelmeyer. I believe there are processes by which 
an appropriate certification process could be undertaken.
    Mr. Dingell. Well, and I have no objection. But, up until 
now, they have not been able to do it. And I don't want to 
engage in a great big toe dance here, I just want to get the 
record clear, because everybody is trying to reimport, and I am 
keep trying to tell them, ``You can do so if the 
pharmaceuticals are safe and the Secretary can so certify.'' 
And I just want to get that into the record.
    Am I correct in my appreciation on this matter or not?
    Mr. Schondelmeyer. I believe you are, but, again, I am not 
a lawyer.
    Mr. Dingell. OK. Thank you very, very much.
    Now, I note several things here, and very quickly I would 
like to get them. There is no trap here, so just please give me 
a yes-or-no answer.
    H.R. 2962 will provide assistance for millions of other 
Americans to ensure that they can afford prescription drugs. 
This would have a substantial impact on medical adherence. Is 
that correct?
    Mr. Schondelmeyer. I don't know the bills by their number, 
as you have quoted it, so I can't answer that, sir.
    Mr. Dingell. All right. Now, H.R. 3962 will also close the 
donut hole. Is that not so, yes or no?
    Mr. Schondelmeyer. Again, I don't recall the specific 
provisions of the bill.
    Mr. Dingell. I am not trying to trap you, I am just asking 
you facts. You are my expert here, and I would like to get your 
help on this thing.
    All right. Let's go to Mr. Smith.
    With regard to H.R. 3962, it will provide financial 
assistance for millions of other Americans to ensure that they 
can afford their prescription drugs. Is this so or not?
    Mr. Smith. Congressman, it provides assistance. 
Respectfully, as you know, we oppose the bill.
    Mr. Dingell. Thank you.
    H.R. 3962 will also close the donut hole. Is that not so?
    Mr. Smith. Same answer, Congressman.
    Mr. Dingell. OK.
    Now, Ms. Stoll, if you please, we sometimes overlook the 
problems that confront millions of Americans with insurance 
that fails to cover adequate benefits and protection from 
financial bankruptcy. These are the underinsured.
    You mention a 60 percent increase in the number of 
underinsured from 2003 to 2007. Could you tell us what are the 
major causes for this jump?
    Ms. Stoll. Well, there are about 25 million underinsured. 
As we figure it, a major cause of that is lack of solid 
prescription drug coverage. A lot of plans in the individual 
market don't cover prescription drugs. We will fix that with 
H.R. 3962, so I applaud that.
    Mr. Dingell. Now, we include a number of important 
provisions in H.R. 3962 such as the minimum benefit package 
that includes prescription drug coverage, elimination of the 
annual and lifetime caps, assistance for premium and out-of-
pocket costs. Would these provisions help address the problems 
of the underinsured?
    Ms. Stoll. Absolutely.
    Mr. Dingell. Thank you.
    Ms. Cramer, if you please, I would like to highlight your 
comments on Medicare Part D, the donut hole, the point at which 
beneficiaries are responsible for the full cost of their 
prescription drugs. You state, ``Under current law, the donut 
hole is projected to almost double by 2016 to more than $6,000. 
This means that Part D beneficiaries can find themselves paying 
the full cost of their drugs far longer in the future.'' This 
is quite unsettling to me.
    H.R. 3962 provides a 50-percent discount on brand-name 
drugs in the donut hole, reduces the donut hole by $500 in 
2010, and eliminates the donut hole entirely by 2019, and 
authorizes the Secretary to negotiate on behalf of seniors for 
lower drug prices in Part D.
    Give me your judgment. Are these steps sufficient to avert 
the substantial donut-hole growth that you have referred to by 
2016 and to provide necessary and needed relief for our 
seniors?
    Ms. Cramer. Yes, Congressman, it completely closes the 
coverage gap.
    Mr. Dingell. Thank you.
    Mr. Chairman, my time has expired, and I thank you for your 
courtesy.
    Mr. Pallone. Thank you, Chairman Dingell.
    The gentleman from Pennsylvania, Mr. Murphy.
    Mr. Murphy of Pennsylvania. Thank you, Mr. Chairman.
    Dr. Schondelmeyer, do you have any research that is funded 
by NIH? Are you involved in any of the research funded by NIH?
    Mr. Schondelmeyer. No, I have not conducted research in the 
lab, which is primarily the type of research conducted by NIH.
    Mr. Murphy of Pennsylvania. NIMH, National Science 
Foundation, anything of that sort?
    Mr. Schondelmeyer. I have had research funded by the 
Centers for Medicare and Medicaid Services.
    Mr. Murphy of Pennsylvania. OK. When that is done, what 
percentage of that research is there to cover overhead costs?
    Mr. Schondelmeyer. What percentage----
    Mr. Murphy of Pennsylvania. What percentage of your 
research grant just funds overhead costs, do you know?
    Mr. Schondelmeyer. The University of Minnesota has a 
negotiated rate with the government----
    Mr. Murphy of Pennsylvania. How much?
    Mr. Schondelmeyer. --that is like 51 percent, I believe.
    Mr. Murphy of Pennsylvania. So 51 percent is not involved 
in the actual research but it goes to the overhead?
    Mr. Schondelmeyer. That is negotiated between the 
government and the university.
    Mr. Murphy of Pennsylvania. That is a standard, actually, 
for NIH grants, too, across the country, about 51 percent. As a 
matter of fact, I found it interesting that some universities, 
such as Harvard, have a 71 percent overhead rate; MIT, 67 
percent; University of Minnesota is around 50 percent. It 
concerns me that so much money is set out to do actual research 
but over 50 percent goes to things that have nothing to do with 
research.
    Should we stop giving universities money for their overhead 
at these outrageous rates of nearly two-thirds or half or more 
that doesn't even go to taking care of the things they are 
supposed to do? What do you think?
    Mr. Schondelmeyer. Well, first, as a mischaracterization, 
the 51 percent overhead means about a third of the money goes 
to overhead. It is 51 percent on the direct----
    Mr. Murphy of Pennsylvania. With facilities and 
administrative, yes, we are paying for buildings. But I am just 
asking, should we cut that so that universities should only use 
their research money to go directly to research and not go to 
pay the things to run the university? What do you think?
    Mr. Schondelmeyer. No. Those overhead costs do pay direct 
costs that are--or indirect costs that are related to the cost 
of conducting that research. In fact, the University of 
Minnesota estimates----
    Mr. Murphy of Pennsylvania. A lot of the costs that the 
universities get in these things are not necessarily going to 
the research, which is helping save lives and develop new 
drugs, things like that, but we should keep paying that when it 
is not really going? I mean, some of it goes to a university 
president's salary. Some of them make quite a bit of money, I 
understand. Should we stop doing it?
    Mr. Schondelmeyer. I am not a university president, so I 
don't know what----
    Mr. Murphy of Pennsylvania. OK. All right. Well, we will 
just keep you within your line.
    Ms. Cramer, on the AARP board of directors, you have 
responsibility of oversight over the insurance plans that AARP 
contracts with, some of these companies. Does AARP have a 
Medicare Part D plan?
    Ms. Cramer. Yes, we do.
    Mr. Murphy of Pennsylvania. And who do you contract that 
with? Or do you run it yourselves?
    Ms. Cramer. With United Health Group.
    Mr. Murphy of Pennsylvania. How much do they pay AARP in 
royalties or whatever you would call it to offer that plan?
    Ms. Cramer. I don't have that number with me.
    Mr. Murphy of Pennsylvania. You are a member of the board. 
You just told me you have oversight over that. You tell me that 
something that is a massive amount of the income for AARP, you 
don't know how much it is?
    Ms. Cramer. I don't know what portion is for the Part D 
plan.
    Mr. Murphy of Pennsylvania. A dollar amount, you don't 
know.
    Ms. Cramer. Congressman, I have answered. I don't know what 
portion is for the Part D plan.
    Mr. Murphy of Pennsylvania. No, you haven't answered my 
question. You said that over half of your income comes from 
insurance plans but you have no idea how much it is and you are 
on the board? I think you are chair of the board. And you are 
telling me you don't know what kind of money AARP makes? I 
don't understand that.
    Ms. Cramer. Well, I have answered----
    Mr. Murphy of Pennsylvania. No. Well, let me ask another 
question because I am trying to get an answer to that. So do 
you have a donut hole in your plan?
    Ms. Cramer. I am sorry?
    Mr. Murphy of Pennsylvania. Do you have a donut hole in 
your Medicare Part D plan?
    Ms. Cramer. Yes, we do.
    Mr. Murphy of Pennsylvania. You do. And yet you make 
millions and millions and millions of dollars out of your 
Medicare Part D plan. Why don't you use that money to fill the 
donut hole?
    Ms. Cramer. Our plans operate under Federal and State laws 
just like any other plan does.
    Mr. Murphy of Pennsylvania. But I am asking you, if Federal 
or State law allows you to have a plan that does not have a 
donut hole, why don't you fill the donut hole with the profits 
you make? After all, you are a nonprofit organization. Why 
don't you use that money--I understand your executive director 
makes how much money for AARP?
    Ms. Cramer. I am sorry?
    Mr. Murphy of Pennsylvania. How much does your executive 
director get paid per year at AARP?
    Ms. Cramer. He doesn't get paid what the Senate said he got 
paid.
    Mr. Murphy of Pennsylvania. How much does he get paid?
    Ms. Cramer. I would be glad to answer that offline.
    Mr. Murphy of Pennsylvania. I don't understand why we can 
talk about everybody else's salaries but AARP's. And you are 
here criticizing other companies.
    Ms. Cramer. It is around $800,000.
    Mr. Murphy of Pennsylvania. It is my time. The drug 
companies--I am concerned about the cost of drugs, and I am 
concerned how much it costs people. But I want to get to the 
bottom of this. And so you have the cost of manufacturing the 
drug. You have the profits companies make. You have research 
and development for those drugs. You have advertising. I want 
to get to the bottom of that. But there is also the cost of 
administering plans.
    And AARP is not an innocent partner in this, because you 
also make a lot of money from this. And when I ask you how much 
your director makes, suddenly that is off limits. But we can 
talk about----
    Ms. Cramer. It is around $800,000.
    Mr. Murphy of Pennsylvania [continuing]. How much money 
pharmaceutical companies make. I don't know how much money AARP 
is putting into your pockets and how much is going to doing 
such things as eliminating the donut hole or reducing prices. 
What this committee needs to do is look at all of these levels.
    And I think it is disingenuous for AARP to come in here and 
say, ``When it comes to AARP, we are not telling you how much 
money we make or what we do with it,'' or, for some reason, the 
chairman of the board doesn't understand that stuff. When it 
comes to talking about----
    Ms. Cramer. Congressman, I believe our----
    Mr. Murphy of Pennsylvania. No. When it comes to talking 
about these prices, everything should be on the table.
    I am deeply concerned about senior citizens who cannot 
afford drugs. I am deeply concerned about members of AARP who 
cannot afford drugs. But you are telling me a lot of this goes 
into your profits, you won't tell me how much your executives 
make in salaries, and you won't close your own donut hole.
    And I yield back the balance of my time.
    Ms. Cramer. Congressman, I believe our----
    Mr. Murphy of Pennsylvania. I yield back the balance of my 
time. If you are not going to answer my questions, you don't 
have a right to answer.
    Ms. Cramer. And the executive director's salary----
    Mr. Murphy of Pennsylvania. Mr. Chairman, she is not going 
to answer my questions.
    Mr. Pallone. Look, if she wants to answer the question----
    Mr. Murphy of Pennsylvania. Mr. Chairman, she has told me 
she doesn't have the answers to these questions that I have 
asked.
    Mr. Pallone. Ms. Cramer, if you would like to answer, you 
can.
    Ms. Cramer. Well, as I said, I believe our audited report 
moments ago was entered into your record, which would include 
the information the congressman is asking. And also the 990, 
which is public document, would include information on our 
executive director's salary. I also said that it is around 
$800,000 per year.
    Mr. Murphy of Pennsylvania. Why don't you use that money to 
close the donut hole?
    Mr. Pallone. She tried to answer your questions as best she 
could, and we do have the documents that were entered into the 
record by Mr. Shimkus.
    We have about--I guess we still have another 13 minutes or 
so, so I would like to get a couple more people in. Mrs. Capps 
is next.
    Mrs. Capps. Thank you, Mr. Chairman.
    And I want to spend most of my precious 5 minutes on the 
topic of medications used to treat cancer. But I want to give 
you a chance, Ms. Cramer, to talk 1 more minute or less, 
hopefully less, on the donut hole. Because, in your written 
statement, you reference AARP's donut hole calculator. Just to 
get it on the record for today's discussion, would you very 
briefly tell us what that is?
    Ms. Cramer. It is a new online tool that became effective 
in July. It is found at donuthole.aarp.org. It helps 
individuals calculate and track their out-of-pocket expenses. 
It helps individuals locate cheaper alternatives for their 
condition. It provides a personal medication record. And it 
also provides personalized letters; if individuals decide they 
want to pursue cheaper generics, it helps them begin the 
conversation with their doctor.
    It is extremely popular. We have served over 180,000 people 
since it came online in July. That is a thousand people a day.
    Mrs. Capps. Thank you very much.
    There was an article in the New York Times this weekend, a 
pretty disturbing one, about the high cost of drugs treating 
cancer. And it reported that a new medication called Folotyn is 
going to be sold for about $30,000 a month.
    Now, for the record, drug companies should be able to make 
a profit. We need a profitable and successful domestic 
pharmaceutical industry.
    But I am going to ask you, Mr. Smith, what good do 
breakthrough treatments do when they are unattainable for 
almost all the people who need them most? Is there any point at 
which your industry simply says, ``No, we can't charge this 
much''?
    Mr. Smith. Congresswoman, drugs absolutely need to be 
accessible for them to do good. That is one of the reasons that 
we are trying to, you know, help support a health reform bill.
    So, you know, in terms of this particular issue, I don't 
know anything about this drug, I don't know this company. But 
what I can say is that there are certainly cases where there 
are high-cost drugs, and these medicines--you know, patients 
need high-cost medicines at times, just like they need high-
cost hospitalization----
    Mrs. Capps. Let me ask you--go ahead.
    Mr. Smith. And part of what we do with insurance is spread 
the risk across the entire population for the few people who 
need high-cost services.
    Mrs. Capps. Well, this is a pretty big risk for a few 
people whose lives are hanging by a thread.
    Here is the shocking part of the story, as it was reported 
in the newspaper. The drug hasn't even been shown to increase 
the life expectancy of those who take it. If a manufacturer is 
going to charge $30,000 a month for a drug, I would think that 
they would want to be able to show that it at least helps 
patients live a little bit longer.
    Now, you have answered, and I want to use whatever time, 
and it is only 2 minutes, to see if others on the panel would 
like to respond to this particular issue, either using this 
story or one other one. But I am focusing particularly on life-
threatening diseases that are lumped together as cancer and the 
way the cost of treatment has gone up.
    Dr. Schondelmeyer, you might want to speak to it or maybe 
Ms. Stoll, too, as well.
    Mr. Schondelmeyer. Sure, I would. First of all, I did not 
see that article in New York Times this weekend. I will go back 
and look for that.
    In our own study, the 12 cancer drugs that we had in the 
specialty area, those 12 drugs all went up in price, and the 
price increase in 1 year ranged between 4.9 percent up to as 
much as 20.8 percent increase in price in a single year. And 
then that compounds over time, of course, as prices keep going 
up.
    I think the point you raise is one of, we have to assess 
what is the real margin of value that a drug adds to society. 
And I am going to shift away from a cancer drug, but I think it 
is the same principle. A drug called Zetia, which is supposedly 
used for cholesterol, we recently found that that drug really 
is not as effective as we thought and not as effective as an 
old drug that is very inexpensive even though it has a slight, 
small convenience-type side effect perhaps. But Zetia, itself, 
was able to raise their price dramatically in the marketplace 
even though it is not even effective.
    Mrs. Capps. Let me see if Ms. Stoll--what do you think we 
should do now? How can this legislation of health reform 
address this particular egregious issue?
    Ms. Stoll. Well, there are a number of drugs that are 
expensive like this one in the New York Times article. I think 
part of the answer is, again, we need to get everyone into the 
system; we need to have a pooled program where we are sharing 
costs. Not everyone is going to need these expensive drugs. We 
need prescription drug coverage with annual and lifetime 
limits. And we need special and lower limits for low-income 
people to protect them so that their access to this drug and 
other drugs like it are not limited.
    And I think that is where you find, in this sort of back 
and forth between good and bad today, some common ground among 
all of us in wanting to see that everyone is in the system and 
has out-of-pocket protections so they can have access to drugs.
    Now, drugs should be evaluated to make sure they bring more 
value and new value to what is already on the marketplace.
    Mrs. Capps. Thank you very much.
    I yield back.
    Mr. Pallone. We have 7 minutes left. I would like to get 
Mr. Buyer in, if that is OK. I am assuming that the other 
Members will come back after the votes. We have four votes.
    Mr. Buyer.
    Mr. Buyer. I have two questions of two different witnesses, 
one of Professor Vernon. I want to you think about this. And 
then I have some questions of Ms. Cramer.
    In my opening statement, I made some comments regarding the 
impact of price controls in the European Union that has been 
part of your studies. And now that you have had a chance to 
examine H.R. 3962 and some of the price controls and the 
comparative effectiveness that is in that bill, I want you to 
talk a little bit further about the potential impact of those 
controls upon drug pricing and whether it has a positive or 
negative impact upon public health. OK?
    Secondly, Ms. Cramer, I would like for you to respond--
number one, I would like to know whether AARP, whether your 
organization has produced requests or received any estimates 
about how much additional revenue per annum will be created to 
your organization by H.R. 3962. That is number one.
    Number two, I also would like to know whether your 
organization had any contact with this committee, any contact 
with this committee, or their staff relative to the sweetheart 
deal that you have in Section 102 of H.R. 3962. Most insurance 
plans are required to have a medical loss ratio of 85 percent. 
However, this bill that passed the House allows Medicare 
supplemental insurance plans, such as AARP's Medicare 
supplemental insurance plan, to have a medical loss ratio of 65 
percent. I would like to know whether or not your organization 
had any contact in the advocacy of that. And I will give you a 
chance to respond.
    Professor.
    Mr. Vernon. Thank you, Congressman.
    I would begin by saying, you had referenced my study with 
Professor Golec at the University of Connecticut regarding the 
exodus of R&D investment from Europe to the U.S. That is 
certainly true. I mean, we have seen regulations of 
pharmaceutical prices in the EU become more stringent, the U.S. 
now being largely the only price-unregulated market for 
pharmaceuticals in the world. And, certainly, you know, the 
prize in terms of both basic research, which could be done 
globally, but specifically later-stage research, large clinical 
trials, and, you know, marketing networks, as well as a 
familiarity with how to get through the FDA process has 
resulted in a lot of R&D leaving Europe and coming to the U.S. 
And, as a result, we have seen a dramatic change in the levels 
of R&D comparing the two markets.
    And then, also, generally speaking, regarding the 
legislation, any attempt, implicit or explicit, to control drug 
prices--there have been bills on reimportation, technology 
assessment, and perhaps negotiated drug prices--does represent 
a very serious threat to the incentives to undertake R&D. And, 
to be frank, it is remarkable, research by economists at Yale 
and the University of Chicago have shown that the benefits of 
pharmaceutical innovation and medical innovation have been 
astounding and far exceed the levels of investment and the cost 
of that investment, suggesting we should be doing more medical 
research, more pharmaceutical research, because the benefits 
exceed the costs.
    Now, that being said, I am not denying the fact that cost-
containment measures would benefit consumers of existing 
medicines that are on the market. It would make them more 
affordable, improve access and utilization, and improve health. 
But I think we have to consider that cost and that benefit, and 
specifically that benefit of lower-cost medicines today, with 
what it would mean for the rate of innovation in the future. 
And I think the latter is an order of magnitude greater than 
the former, based upon the empirical research out there.
    Mr. Buyer. All right. Thank you.
    Ms. Cramer.
    Ms. Cramer. The answer to both of your questions is no. We 
have not, to my knowledge, had any estimate of revenues that 
AARP would lose or gain under House bill 3962. And I have 
checked with staff; to my knowledge, there has been no contact 
with the committee looking at the medical loss ratio we 
advocate on behalf of members.
    Mr. Buyer. The Congressional Budget Office has said that 
H.R. 3962 will result in fewer people enrolled in Medicare 
Advantage--``fewer'' really is 3 million--and more people 
enrolled in Medicare Part D.
    Isn't it true that the vast majority, probably up to 80, 90 
percent, of people enrolled in Medicare Part D by a 
supplemental insurance policy, such as the AARP Medicare 
supplemental insurance plan offered by United Health Care?
    Ms. Cramer. Are you asking me?
    Mr. Buyer. Wow. Who else would I be asking?
    Ms. Cramer. Well, Congressman, I don't work for United 
Health Care, so I don't know that I can answer that question.
    Mr. Buyer. Well, I find it really hard to believe--well, 
first of all, there is going to be a tremendous shift to 
supplementals which you offer. And I cannot believe that you 
run an organization that you have never really calculated what 
the potential income flow to your organization will be. That is 
really, really surprising to me.
    I guess you are just trying to guard yourself in exchange 
for questions about why you endorse the overall packet, but I 
think it is now obvious.
    I yield back.
    Mr. Pallone. Thank you.
    Now, we are going to have four votes on the floor, maybe 
half an hour, a little more. I am assuming that some Members 
are going to come back. So, if you would wait, we would ask you 
to wait. And the subcommittee will stand in recess.
    [Recess.]
    Mr. Pallone. The subcommittee will reconvene, and I will 
ask the witnesses to come back to the table. I don't think we 
will be much longer. Thank you for bearing with us.
    Next is the gentlewoman from the Virgin Islands, Ms. 
Christensen.
    Ms. Christensen. Thank you, Mr. Chairman. I didn't have an 
opening statement, so let me thank you for holding this 
hearing.
    As a physician, I am, of course, well aware of the key 
importance that pharmaceutical companies have made to the 
advances which have made and will continue to make in our 
health and health care. Overall, Americans, including the 
patients I have served over my lifetime, are living longer with 
better quality lives because of the products that the companies 
have created.
    Unfortunately, that is not true for all. Although Medicare 
Part D has made a substantial improvement, people of color, the 
elderly, disabled and the poor continue to not be able to 
afford medications that they need to keep them healthy, despite 
some of the free and discount programs.
    I know that medication costs are not the only cause of 
increasing health care spending. I am also not against profits. 
And most definitely I support the research and development 
which has resulted in better lives for all of us. But I do not 
discount the AARP report either, as it tells a true story of 
people across this country who cannot afford to take all their 
medications every day as prescribed. So I don't think we should 
make light of that report at all.
    I will start with Ms. Cramer on my first question. AARP 
pays a critical role in advocating for its membership for 
seniors and really for everyone one in health care, retirement 
security, and things that all of us care about. I would assume 
the membership dues alone don't support these activities.
    Is it safe to say that the royalties we have heard so much 
about this morning are used to make important services 
available to your members and to fund advocacy efforts on 
issues that even some of those companies that are paying with 
those royalties may not agree with AARP on?
    Ms. Cramer. Yes, that is safe to say. We often have 
disagreements with the providers, but the royalties do support 
AARP--our education, our advocacy, our member engagement--not 
only in Washington, D.C., but as you know, with the 53 State 
offices in the Territories and the States.
    Ms. Christensen. And we thank you for the support that AARP 
has given to the Virgin Islands.
    Mr. Smith and Professor Vernon, this is on pricing, so I 
can understand this better. At the point at which generics come 
on the market, has the brand-name producer generally recouped 
their cost to research and develop those products, and if so, 
why then do the costs continue to go up after that point, 
especially in excess of what the inflation is?
    I ask that because when we see the new technologies come on 
the market, they are usually really expensive. And after a few 
years their prices go down. But it is the opposite for 
pharmaceuticals. Can you explain that for me?
    Mr. Vernon. Madam Congresswoman, first, I would say that 
recent research undertaken by myself suggests that only two out 
of every ten pharmaceutical products that reach the market 
generate after-tax present value returns in excess of average 
R&D costs. I would also say we have very intense generic 
competition at patent expiration for very large, successful 
products.
    The price of generics is driven very rapidly down to the 
marginal manufacturing cost of pharmaceuticals. We have the 
most competitive, lowest price, highest utilization rate of 
generics in the world, very successful as a result largely of 
the Waxman-Hatch Act.
    I would also say that there is some uncertainty whether 
pharmaceutical prices have indeed been rising as fast as has 
been purported in this hearing.
    And also I would add one more point, and that is that the 
suggestion that firms are raising prices in anticipation of 
health care reform is not at all clear. Certainly, the most 
comparable recent legislation to the current legislation was 
the Clinton Health Security Act, where we saw firms pledging 
publicly--that got them in trouble with the FTC--to restrain 
drug prices.
    There are other factors like compressed product lifecycle 
cash flows as a result of patent challenges, intensified 
generic competition, that could be driving what we are 
observing in the pricing of pharmaceuticals, as well as the mix 
of biologics and pharmaceuticals, a shift towards more-costly-
to-develop biologics, which have higher prices, versus fewer 
pharmaceuticals.
    Ms. Christensen. Well, it may be 12 years, we hope, but 
wouldn't you expect to get back what you have put into R&D and 
begin to make a profit in that period of time? That is what we 
are assuming.
    I just wonder why the prices keep going up when a product 
has been on the market for years; technology has the same kind 
of competition, but their prices go down.
    Mr. Vernon. Well, I think there are a lot of dynamic 
factors, and certainly the market is very different now. As I 
said, we have much more intensive generic competition; we have 
a higher rate of patent challenges; we have lower productivity 
with respect to pharmaceuticals; and we are seeing more 
biologics on market, which have a higher financial cost of 
capital and higher manufacturing costs. So we are seeing that 
mix shift between pharmaceuticals and biologics.
    Ms. Christensen. Let me try to get another question in to 
Ms. Stoll and Dr. Schondelmeyer.
    I will acknowledge that our health status in this country 
would not be where it is were it not for the investment in 
research and development that the pharmaceutical countries 
make, although it would be a lot higher and better if all of us 
were able to participate in access to those drugs.
    Do you believe there has to be a tradeoff between research 
and development and lowering the cost to consumers? Research 
and development always is what comes up when you talk about 
lower costs.
    Mr. Schondelmeyer. I believe there is a tradeoff we are 
making already, but we are not doing it very consciously. We 
are doing it more implicitly rather than explicitly.
    In America we may generate much of the R&D for the world 
that finds new medicines, but we probably have a higher 
percentage of our population as a developed country who don't 
have access to medications than any other developed country, 
and so that is why our health status overall is down around 
20th instead of at the top of the list.
    So we are making that tradeoff already and some people are 
paying the price. Others derive the benefit of the wonderful 
medicines that are discovered.
    Mr. Pallone. We are going to have to stop, only because I 
can't allow the others.
    All right.
    Ms. Christensen. Thank you.
    Mr. Pallone. Thank you.
    The gentleman from Maryland, Mr. Sarbanes.
    Mr. Sarbanes. Thank you, Mr. Chairman, and I appreciate you 
all coming back or staying while we came back.
    Dr. Schondelmeyer, is the cost of R&D something that is 
accounted for before the profit numbers or something that 
happens with the profits?
    Mr. Schondelmeyer. As I understand the way drug companies 
keep their books and the profits they report to Wall Street, 
R&D has already been costed out at that point.
    Mr. Sarbanes. Right. So we are looking at profits of $51 
million in 2008 and a 19 percent return on revenue, and since 
2005, $180 billion in profits. This is after the R&D. So that 
makes this kind of R&D justification for where the pricing is 
less compelling to me, if I am understanding sort of how the 
books are kept on that.
    I have to say, Mr. Smith, I know you can't comment on the 
motives, but I have no doubt that the pharmaceutical companies 
are running up the price in anticipation of health reform, 
based on past experience with them doing that. We see it also 
happening with the health insurance industry. There is evidence 
that the premiums for next year's renewals have been sky high 
with the recent notices that have gone out.
    The disappointing thing with the--I guess it cuts both 
ways. I am disappointed maybe that the health insurance 
industry didn't make a deal the way PhRMA did, but I am 
disappointed that PhRMA, having made a deal, appears to be 
price gouging in anticipation of what is coming so they can 
establish a new baseline.
    My question was, ``the deal,'' as it is referred to, I 
guess, was about $80 billion. Is that represented by the 50 
percent discount that is expected to be offered to people in 
the doughnut hole, or does that account for some other things 
as well?
    Mr. Smith. Congressman, as I mentioned earlier, I didn't 
come prepared today to testify about ``the deal,'' but at a 
broad level the industry's contribution towards the cost of 
health reform would include the 50 percent discounts in the 
coverage gap.
    As you know, both bills--both House and what we see in the 
Senate--include very substantial increases in the Medicaid 
rebate, very substantial extensions of the Medicaid rebate 
across to much broader a population than it applies to today, 
beyond the currently uninsured population that would become 
eligible for Medicaid.
    As you know, the Senate bill includes some other fees, and 
as you know, both bills include provisions to create a pathway 
for follow-on biologics. It also comes with a pretty sizable 
government score.
    Mr. Sarbanes. I would hope the contribution that PhRMA is 
willing to make would increase in relationship with the change 
in the baseline on the drug pricing that is appearing to occur 
right now. In other words, if at the time the deal was made, 
the pricing was here, and that meant that a 50 percent 
contribution to the cost in the doughnut hole at that pricing 
represented this amount of money, then if the pricing is going 
up substantially, then the amount needed to cover a 50 percent 
discount would also go up; and beyond that, the amount needed 
to get you back to the anticipated discount for the consumer 
would even be more.
    So I just hope that PhRMA is ready to stick with the deal 
it made in terms of the effect or the benefit it would have on 
the consumer in relationship to the increase in the baseline 
that seems to be occurring as a result of, again, what I view 
as a kind of price gouging scheme in these last few weeks and 
months.
    With that, I will yield back.
    Mr. Pallone. Thank you.
    Let me thank all of you for coming today. This is not an 
easy issue. The way it works is, members can still submit 
written questions through the clerk. I think the clerk is 
supposed to get back to you within 10 days or so.
    So we still may get additional written questions. I know 
that a number of you said you were going to respond in writing 
to some of the questions that were asked by the members as 
well. But, in any event, we do appreciate you coming.
    Dr. Burgess. Mr. Chairman, can I ask unanimous consent--we 
are up against the clock here at the end of the year, and to 
the extent possible, could we have these written responses 
within 5 days so we would have an opportunity to evaluate those 
before we get into this ping-pong match with the Senate with 
whatever they are going to do at the end of the year?
    Mr. Pallone. The way the rules are, we usually have 10 days 
for Members to submit the questions and then we send them to 
the witnesses. I don't think 5 days is enough time.
    I would ask that you get back to us fairly quickly, but I 
don't want to put a date on it because I think it depends on 
how complex they are. But please get back to us as quickly as 
you can, once you get the questions.
    Dr. Burgess. Mr. Chairman, further inquiry: I think you 
would acknowledge it is unlikely this health care bill is going 
to go to a conference.
    Mr. Pallone. If it is passed by the Senate by the holiday, 
we will probably go to conference in January. It all depends on 
when the Senate passes it. But the intention is to go to 
conference. I don't know how we could avoid that, given there 
are probably going to be major differences.
    Dr. Burgess. The way we would avoid it is, your Speaker 
would say we simply have to accept what the Senate does, and we 
acquiesce to the Senate bill by the end of the year.
    Mr. Pallone. You know, Dr. Burgess, I can't predict that. 
Everyone is saying there will be a conference. I think it is 
likely that there will be.
    Dr. Burgess. Well, I am depending upon you as my 
subcommittee chairman to advocate that there be a conference 
and that it be a real conference.
    Mr. Pallone. You do not have to worry about my advocating 
for a conference. I will advocate for a conference, I assure 
you.
    Dr. Burgess. The same way you advocated for a subcommittee 
markup.
    I yield back.
    Mr. Pallone. I guess we are done. Without objection, this 
subcommittee is adjourned.
    [Whereupon, at 1:28 p.m., the subcommittee was adjourned.]
    [Material submitted for inclusion in the record follows:]


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