[Senate Hearing 111-483]
[From the U.S. Government Publishing Office]


                                                        S. Hrg. 111-483
 
                          COMPETITION IN THE 
                         HEALTHCARE MARKETPLACE 

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

                                HEARING

                               before the

   SUBCOMMITTEE ON CONSUMER PROTECTION, PRODUCT SAFETY, AND INSURANCE

                                 of the

                         COMMITTEE ON COMMERCE,
                      SCIENCE, AND TRANSPORTATION
                          UNITED STATES SENATE

                     ONE HUNDRED ELEVENTH CONGRESS

                             FIRST SESSION

                               __________

                             JULY 16, 2009

                               __________

    Printed for the use of the Committee on Commerce, Science, and 
                             Transportation

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       SENATE COMMITTEE ON COMMERCE, SCIENCE, AND TRANSPORTATION

                     ONE HUNDRED ELEVENTH CONGRESS

                             FIRST SESSION

            JOHN D. ROCKEFELLER IV, West Virginia, Chairman
DANIEL K. INOUYE, Hawaii             KAY BAILEY HUTCHISON, Texas, 
JOHN F. KERRY, Massachusetts             Ranking
BYRON L. DORGAN, North Dakota        OLYMPIA J. SNOWE, Maine
BARBARA BOXER, California            JOHN ENSIGN, Nevada
BILL NELSON, Florida                 JIM DeMINT, South Carolina
MARIA CANTWELL, Washington           JOHN THUNE, South Dakota
FRANK R. LAUTENBERG, New Jersey      ROGER F. WICKER, Mississippi
MARK PRYOR, Arkansas                 JOHNNY ISAKSON, Georgia
CLAIRE McCASKILL, Missouri           DAVID VITTER, Louisiana
AMY KLOBUCHAR, Minnesota             SAM BROWNBACK, Kansas
TOM UDALL, New Mexico                MEL MARTINEZ, Florida
MARK WARNER, Virginia                MIKE JOHANNS, Nebraska
MARK BEGICH, Alaska
                    Ellen L. Doneski, Chief of Staff
                   James Reid, Deputy Chief of Staff
                   Bruce H. Andrews, General Counsel
   Christine D. Kurth, Republican Staff Director and General Counsel
              Brian M. Hendricks, Republican Chief Counsel
                                 ------                                

   SUBCOMMITTEE ON CONSUMER PROTECTION, PRODUCT SAFETY, AND INSURANCE

MARK PRYOR, Arkansas, Chairman       ROGER F. WICKER, Mississippi, 
BYRON L. DORGAN, North Dakota            Ranking
BARBARA BOXER, California            OLYMPIA J. SNOWE, Maine
BILL NELSON, Florida                 JIM DeMINT, South Carolina
CLAIRE McCASKILL, Missouri           JOHN THUNE, South Dakota
AMY KLOBUCHAR, Minnesota             JOHNNY ISAKSON, Georgia
TOM UDALL, New Mexico                DAVID VITTER, Louisiana




















                            C O N T E N T S

                              ----------                              
                                                                   Page
Hearing held on July 16, 2009....................................     1
Statement of Senator Pryor.......................................     1
Statement of Senator Wicker......................................     2
Statement of Senator Nelson......................................     3
Statement of Senator Rockefeller.................................     4
Statement of Senator Cantwell....................................    87
Statement of Senator Thune.......................................    89

                               Witnesses

Richard A. Feinstein, Director, Bureau of Competition, Federal 
  Trade Commission...............................................     6
    Prepared statement...........................................     8
Len M. Nichols, Ph.D., Director, Health Policy Program, New 
  America Foundation.............................................    15
    Prepared statement...........................................    17
David Balto, Senior Fellow, Center for American Progress Action 
  Fund...........................................................    28
    Prepared statement...........................................    30
Mark Riley, National Treasurer, National Community Pharmacists 
  Association (NCPA).............................................    55
    Prepared statement...........................................    59
Grace-Marie Turner, President, Galen Institute...................    66
    Prepared statement...........................................    68

                                Appendix

Pharmaceutical Care Management Association, prepared statement...    97
Response to written questions submitted by Hon. David Vitter to 
  Grace-Marie Turner.............................................    98


                          COMPETITION IN THE 
                         HEALTHCARE MARKETPLACE

                              ----------                              


                        THURSDAY, JULY 16, 2009

                               U.S. Senate,
      Subcommittee on Consumer Protection, Product 
                             Safety, and Insurance,
        Committee on Commerce, Science, and Transportation,
                                                    Washington, DC.
    The Subcommittee met, pursuant to notice, at 10:05 a.m. in 
room SR-253, Russell Senate Office Building, Hon. Mark L. 
Pryor, Chairman of the Subcommittee, presiding.

           OPENING STATEMENT OF HON. MARK L. PRYOR, 
                   U.S. SENATOR FROM ARKANSAS

    Senator Pryor. I'll go ahead and call this Subcommittee to 
order. This is the Subcommittee on Consumer Affairs, Insurance, 
and Automotive Safety.
    I want to thank my colleagues for coming. We're going to 
have some coming-and-going today, given the events on the Hill 
relating to healthcare, and Supreme Court nominee, et cetera. 
We're going to have a little bit of in-and-out with our 
Senators today.
    I want to thank all of you for attending today's hearing on 
healthcare competition. Anticompetitive practices among 
healthcare industry players are an overlooked component of 
skyrocketing healthcare costs. When these players manipulate 
the market through price-fixing, collusion, anticompetitive 
mergers, and tactics that block new entrants to the market, 
prices artificially increase for consumers and patients, 
businesses, and governments that pay America's rising 
healthcare bills. In fact, a more competitive market for 
healthcare services would significantly reduce costs, and that 
would mean that, if we do healthcare reform this year, and 
we're able to accomplish that, it'd be a lot less we'd have to 
pay for over time. I think it's one of those issues that you 
can't just throw money at and solve the problem; you also have 
to change the system, and that's what we're talking about 
today.
    There are several problems with the healthcare market. It 
lacks transparency; consumers have limited choice; there is 
unequal bargaining power among healthcare industry sectors; and 
conflicts of interest abound. Because the healthcare market is 
so much more complicated than selling something like television 
sets, we need to have strong government regulators watching for 
anticompetitive conduct and market manipulation. I believe that 
having a more vibrant, transparent healthcare system will help 
Americans make better-informed, more cost-conscious decisions.
    Today's witnesses are uniquely qualified to discuss a wide 
array of issues relating to competition in healthcare, ranging 
from what options of health plans are available to consumers, 
to how doctors and hospitals should compete to deliver quality, 
cost-efficient care, to transparency for patients and payers of 
healthcare costs related to prescription medications. I also 
look forward to hearing insights from all the participants 
concerning what we can do to make the healthcare marketplace 
work better for patients.
    We look forward to hearing today from the Federal Trade 
Commission about the manipulative behavior they see within the 
healthcare market. We also want to hear what actions the FTC 
has taken to date, and where they may be focused in their new 
areas of concern.
    I look forward to hearing from our healthcare policy 
analysts about the problems they see with competition in the 
healthcare market, and what ideas they may have to make the 
healthcare marketplace work better for consumers.
    And I especially look forward to hearing the local 
perspective from Mark Riley, a pharmacist from Arkansas who was 
kind enough to join us today. Mark is in the trenches of this 
every day, and he's going to tell a common story that, 
probably, any pharmacist in the country could tell today, but 
Mark was kind enough to travel to Washington to be before the 
Subcommittee, and we appreciate it very much.
    Everyone wants fair competition in healthcare. They want a 
market that reduces costs. They want to provide better patient 
care. But, from what I've learned, the healthcare market is 
permeated with the opportunity for collusion, price-fixing, and 
conflicts of interest that inherently create an unfair market. 
And that unfair market is bleeding scarce resources for patient 
care from businesses, governments, and patients. We need to 
find out today how we can fix, and how we can address, these 
problems.
    With that, I'd like to call on my distinguished colleague, 
Senator Wicker of Mississippi, the Ranking Member of this 
Subcommittee, and ask him for his opening statement.

              STATEMENT OF HON. ROGER F. WICKER, 
                 U.S. SENATOR FROM MISSISSIPPI

    Senator Wicker. I thank my friend.
    Of all the complex issues the United States will deal with 
in this Congress, none will be more important than healthcare 
reform. If we get it right, we could devise a program that 
makes healthcare more accessible and affordable; provides 
health coverage to millions of Americans who are currently 
without health insurance; relieves Americans from worry about 
the effect changing jobs will have on their healthcare; saves 
lives through an increased focus on prevention and wellness; 
saves money by curbing the out-of-control growth in government 
healthcare programs; keeps patients and families in control of 
their healthcare choices; and makes doctors the decisionmakers 
on treatment options.
    We have a great opportunity before us to improve the 
American healthcare system, but we run a perilous risk if we do 
not act wisely and carefully. We can fix our broken healthcare 
system by making it more accessible and affordable for 
Americans, and we can do so without jeopardizing quality, 
individual choice, and personalized care.
    There is common ground to be found that would continue the 
opportunity for the United States to be the world leader in 
quality. Congress and the American people need to pay close 
attention as we proceed, this summer and this fall, on one of 
the most important debates of our time. Above all, we must 
remember that healthcare in America is not just an economic 
issue, it is a personal issue. Working together, we can fix our 
broken healthcare system by making it more accessible and 
affordable for every person in our country, without 
jeopardizing quality, individual choice, or personalized care.
    The healthcare marketplace is extremely complex. Until I 
became an elected official dealing with healthcare issues, I 
did not realize how arcane and complex the system is. I hope 
our witnesses today will help us understand better the 
intricacies of the marketplace; where free market principles 
and competition are working, and what steps need to be taken as 
we move forward to achieve a market-based approach on reform.
    So I look forward to today's testimony, and I thank the 
Chairman for holding this hearing.
    Senator Pryor. Thank you. Thank you very much.
    Senator Nelson?

                STATEMENT OF HON. BILL NELSON, 
                   U.S. SENATOR FROM FLORIDA

    Senator Nelson. Thank you, Mr. Chairman, and thank you for 
having this hearing.
    I just want to say, since we're dealing with the question 
of competition in the healthcare marketplace, that's one of the 
most important things that we can be discussing right now, 
because there's a lot of anticompetition in the healthcare 
marketplace.
    There's something known as ``adverse selection.'' And that 
is that, when insurance companies just go and cherry-pick the 
desirable health-insured population so that they don't have to 
pay claims, that's, in effect, some of the worst 
anticompetition that you've ever seen. Or, where groups are not 
subject to regulation, such as--since regulation is normally 
done at the State level, by the State Department of Insurance--
and their so-called out-of-State groups, not subject to that 
regulation, and they go in and get a group of people to insure 
by enticing them with very low rates, and then, over time, as 
that group gets older and older, and therefore it gets sicker 
and sicker, and they don't have any other place to turn to, and 
that insurer is unregulated--what do they do? They jack the 
rates up, and it puts the consumer in the position of not being 
able to afford the health insurance, and, now that they're 
older and sicker, they don't have any other place to turn to.
    Now, what are--the practices going on in America today 
among health insurance are the most anticompetitive that we 
have--that you can imagine, that you could conjure up. And this 
is supposed to be--we embrace the free-market-competition 
model, and yet it doesn't work.
    So, thank you for calling this hearing.
    Senator Pryor. Thank you.
    I want to introduce our panel today, and I want--again, I 
want to thank everyone for being here, making special 
arrangements to be here today.
    And, what we're asking the panel to do is, if possible, 
limit their opening statements to 5 minutes. Then we will 
probably do a couple of rounds of questions.
    And I want to thank you all for being here, but before I 
introduce the panel, I'd like to ask the Chairman of the full 
committee, Senator Rockefeller, if he'd like to make an opening 
statement.

           STATEMENT OF HON. JOHN D. ROCKEFELLER IV, 
                U.S. SENATOR FROM WEST VIRGINIA

    The Chairman. Mindreader.
    [Laughter.]
    Senator Pryor. Senator Rockefeller.
    The Chairman. You sure it's OK? Has everybody made them? Am 
I interrupting protocol here?
    Senator Pryor. No. No, no, you're timing is good.
    The Chairman. It's only--it's very short. It's only 4 
pages.
    OK. Good morning everyone. And I do apologize for messing 
things up.
    Healthcare is just so dominant these days, and some days we 
seem to surge ahead and some days we seem to surge backward. 
But, I do think there is going to be a healthcare bill, and 
actually, you all are very much a part of it, but not very much 
discussed as a part of it.
    I think we've got to start with the soaring costs. The 
average American family pays twice as much for healthcare as 
they did 10 years ago. Just the mathematics of that are 
stunning. Healthcare is one of the top two reasons that people 
go into bankruptcy. They can't pay their healthcare premiums, 
bills, whatever, and can't pay off the insurance companies, and 
so, they go into bankruptcy. It's true in Florida, West 
Virginia, Arkansas, and Mississippi.
    I've heard stories from countless constituents forced into 
impossible circumstances by rising prices. My mind goes to a 
family in Fairmont whose 9-year-old son has leukemia and needs 
a bone marrow transplant, but they've reached their insurance 
policy premium--or limit--of what they can be paid, of $1 
million. And yes, that's a lot of money. But, insurance 
companies, whose profits have gone from something like $2 
billion to $12 or $14 billion in the last 6 years--health 
insurance--they won't budge, so the kid can't get any 
assistance, the parents have to live with this, the kid has to 
live with this, and it's just--it's heartbreaking and it's 
infuriating. One million is a lot, but leukemia is a lot, too.
    Now, many factors contribute to these rising prices, and we 
all know that. The horrible reality is that a big reason behind 
rising healthcare costs is the coercive practices that 
manipulate the market, mask the true cost, burden healthcare 
consumers with even greater risks, while others reap the 
profits.
    I have to let the record show that I'm very, very angry at 
insurance companies--health insurance companies. They're always 
the shark, swimming under the water, which can pull people 
down, and do.
    Last month, as our distinguished Chairman Pryor here knows, 
we had a series of Commerce hearings about a particular type of 
consumer, and that is consumers who go outside the plan. And 
people say, ``Well, that must be 15- or 20,000.'' No, it's 100 
million people. It's 100 million people. And without going into 
it a whole lot, it was all kinds of monopolistic and 
fraudulent, from my point of view, practices. Andrew Cuomo, the 
Attorney General of New York, caught that and allowed them to 
settle for $350 million rather than what you perfectly well 
know would have happened; they would have been taken to court 
and charged with fraud and would have had to pay probably a lot 
more.
    So, I'm not neutral on insurance companies. And it's clear 
that, for a decade or more, many of the largest insurance 
companies have plotted to fix those prices, skew their rates 
downward, significantly shortchange patients and doctors so 
that they could make more money.
    And I'm very proud, Mr. Chairman, of what the Committee did 
on that. We put out a wonderful report, which Bill Nelson can 
quote, from beginning to end. And this question of eliminating 
market manipulation, eliminating competition, is profoundly 
disturbing to me. It's one part of my unrelenting motivation to 
make insurance market reforms a fundamental piece of 
comprehensive healthcare reform, which it is not yet. It is not 
yet. For all the talk we've had in the Finance Committee and 
elsewhere, as Bill Nelson well knows--Senator Nelson well 
knows--there's been very little talk about insurance regulation 
and what we're going to do about it.
    So, just to conclude, the FTC, which has already taken 
significant action, needs to be, in my judgment, much more 
aggressive with doctors and hospitals and pharmaceutical 
manufacturers and medical suppliers who manipulate the market, 
as well as insurance companies. The Commission needs resources 
and tools to maintain this downward pressure, and I want to 
question you on that. The Justice Department has been utterly 
lax over the last 8 years. I think of 400 merger cases that 
came before them, they turned down only three. It's just, ``Let 
good times roll. Whoever can make the money, fine.''
    So, for too long, too many healthcare decisions have been 
made behind closed doors, with industry profits--not the 
patient's best interests--in mind. And if you come from any of 
the States we come from--and you have some very, you know, poor 
parts in your State--you have some wealthy parts, but you have 
some poor parts--people are poor, and it can--this cannot 
sustain itself. Government is here for a reason. And if you let 
insurance companies self-regulate, God help us all.
    End of my statement.
    Thank you Mr. Chairman.
    Senator Pryor. Thank you, Mr. Chairman. I'm glad you're 
here today, and I'm glad you're going to ask good questions. I 
appreciate your attendance here.
    I would now like to introduce the panel. We have five very 
distinguished participants on the panel today. First is Mr. 
Richard Feinstein, Director of the Bureau of Competition, 
Federal Trade Commission. Then we have Dr. Len Nichols--and 
it's good to see you again. He's Director of the Health Policy 
Program, New America Foundation. Then we have Mr. David Balto, 
Senior Fellow, Center for American Progress. And then we have 
Mark Riley, Executive Vice President of the Arkansas 
Pharmacists Association. And last, and certainly not least, we 
have Ms. Grace-Marie Turner, President of the Galen Institute.
    Again, I want to welcome you all, and I'd like to recognize 
you for your 5-minute opening.
    Mr. Feinstein?

         STATEMENT OF RICHARD A. FEINSTEIN, DIRECTOR, 
        BUREAU OF COMPETITION, FEDERAL TRADE COMMISSION

    Mr. Feinstein. Thank you very much.
    Chairman Rockefeller, Chairman Pryor, Ranking Member 
Wicker, and Members of the Subcommittee, I'm Richard Feinstein, 
Director of the Bureau of Competition at the FTC. I appreciate 
the opportunity to testify today on behalf of the Commission 
about the relationship between competition and antitrust 
enforcement, on the one hand, and lower healthcare costs and 
higher healthcare quality, on the other hand.
    I should note for the record that the prepared written 
statement, which has been submitted for this hearing, 
represents the views of the Federal Trade Commission. My oral 
statement and my answers to questions today would represent my 
own views, but not necessarily those of the Commission, or any 
individual Commissioner.
    I want to start by assuring you that, at the FTC, we share 
your deep concerns about the healthcare sector in the United 
States, and we have, frankly, no higher priority than 
protecting and promoting competition in that sector.
    Antitrust enforcement contributes to the goal of delivering 
high-quality, cost-effective healthcare in at least two ways. 
First, it prevents, or stops, anticompetitive agreements to 
raise prices, thus saving money that consumers, employers, and 
governments otherwise would spend on healthcare. Second, 
competition spurs innovation that improves care and expands 
access.
    The FTC has a long history of enforcing the antitrust laws 
in the healthcare sector and working to promote competition and 
efficient procompetitive arrangements. Today, I would like to 
briefly describe some of the Commission's recent efforts to 
promote competition in the healthcare sector, and, in 
particular, I want to address clinical integration among 
healthcare providers, healthcare mergers, and pharmacy benefit-
management services, beginning with price-fixing agreements and 
clinical integration.
    The FTC recognizes that certain forms of collaboration 
among healthcare providers, such as clinical integration, have 
the potential to foster proconsumer innovations in healthcare 
organization. The FTC also works, however, to prevent 
anticompetitive agreements to fix the prices that healthcare 
providers charge. Such arrangements typically involve competing 
providers agreeing to charge the same high prices, and 
collectively refusing to serve a health plan's patients unless 
the health plan meets their fee demands. These agreements are 
likely to raise prices for the provider services without 
improving care. Such conduct was upheld as illegal by the U.S. 
Supreme Court in its 1982 Maricopa decision and just last year, 
the Fifth Circuit, citing Maricopa, affirmed the FTC's 
conclusion that similar activities of a physician group in 
Texas were unlawful.
    Now, appropriate enforcement of the antitrust laws should 
not impede new and potentially more efficient ways of 
delivering and financing healthcare services that can arise and 
compete effectively in the marketplace. Properly applied, 
antitrust standards distinguish between price-fixing by 
healthcare providers, which is likely to increase costs, and 
effective clinical integration among providers that has the 
potential to achieve cost savings and improve outcomes.
    When analyzing these types of collaborations, we ask two 
basic questions. First, does the proposed collaboration offer 
the potential for proconsumer cost savings or qualitative 
improvements in the provision of the services? And second, are 
any price agreements--or other agreements among the 
participants regarding the terms on which they will deal with 
health plans--reasonably necessary to achieve those benefits? 
If the answer to both of those questions is ``yes,'' then we 
consider any likely procompetitive or anticompetitive effects 
from the collaboration.
    As long as the collaboration cannot exercise market power, 
which is typically what we have found, it is unlikely to raise 
significant antitrust concerns, because it has the potential to 
benefit consumers rather than harm them. Such collaborations 
often use electronic health records, and administrative and 
clinical support for care management and quality improvement, 
as means to achieve efficiencies and improve quality--to 
achieve efficiencies and improve quality. These are the same 
types of measures proposed by advocates of healthcare reform as 
ways to reduce costs and improve quality.
    To aid providers considering these types of collaborations, 
the FTC and the Department of Justice Antitrust Division has 
issued statements of enforcement policy in healthcare to 
provide guidance. And we have also issued detailed advisory 
opinions on specific programs, when requested.
    Let me turn now to healthcare mergers. The Commission has 
also worked vigorously to preserve competition in healthcare 
markets by challenging a number of proposed mergers and 
acquisitions involving hospitals, kidney dialysis clinics, drug 
manufacturers, pharmaceutical companies, and medical device 
manufacturers. A couple of recent examples: In 2007, the 
Commission found that a consummated merger in the Evanston, 
Illinois, area was anticompetitive because it resulted in 
substantially higher prices and a substantial lessening of 
competition in that market. More recently, a joint enforcement 
action by the FTC and the Virginia attorney general stopped a 
merger of two hospitals in Northern Virginia that, according to 
the complaint, would have resulted in control of 73 percent of 
the licensed beds in the area.
    I realize I've hit 5 minutes. If I might just have another 
minute or two. Thank you.
    And most recently, in May of this year, the Commission 
successfully challenged the proposed $3.1-billion merger of two 
firms that supply plasma-derivative protein therapies.
    Now let me turn to pharmacy benefit-management services or 
PBMs. Pharmacy services represent an important area of 
competitive concern, just like other parts of the chain of 
pharmaceutical marketing--manufacturing, marketing, and 
distribution. Thus, the FTC has engaged in law enforcement and 
competition advocacy to protect competition in the PBM sector, 
and to ensure that this competition benefits consumers. As 
described in more detail in the Commission's written testimony, 
there are circumstances where PBMs can help healthcare plans 
manage the cost and quality of the prescription drug benefits 
they provide to their enrollees. In the U.S., the PBM industry 
has evolved from one of numerous, small-claims processing 
firms, to a more mature industry with comprehensive service 
offerings. Roughly 95 percent of patients in the United States 
with a drug benefit receive their benefits through a PBM. The 
FTC is mindful of the potential harm from aggregations of 
market power by purchasers in the healthcare sector, and 
actively monitors mergers in this industry.
    Additionally, in 2005 the FTC conducted a conflict-of-
interest study, at the request of Congress, regarding PBM 
practices. Among other things, the study examined whether PBM 
ownership of mail-order pharmacies served to maximize 
competition and lower prescription drug prices for plan 
sponsors. In its report, the Commission found, among other 
things, that competition affords health plans substantial tools 
with which to safeguard their interests in lower prescription 
drug prices. The FTC staff has also analyzed and commented on 
proposed PBM legislation in several states.
    Finally, the Commission's oversight of PBM industry 
participants is not confined to antitrust matters, but also 
includes vigorous enforcement of the FTC Act to protect 
consumer privacy. For example, CVS Caremark recently settled 
FTC charges that it had failed to take reasonable and 
appropriate security measures to protect the sensitive 
financial and medical information of its customers and 
employees, in violation of the FTC Act.
    I appreciate this opportunity to share our views on these 
vitally important issues. We look forward to working with you, 
and I look forward to answering your questions.
    Thank you very much, and thank you for your indulgence on 
the extra time.
    [The prepared statement of Mr. Feinstein follows:]

         Prepared Statement of Richard A. Feinstein, Director, 
            Bureau of Competition, Federal Trade Commission
I. Introduction
    Chairman Pryor, Ranking Member Wicker, and members of the 
Subcommittee. I am Richard A. Feinstein, Director of the Bureau of 
Competition at the Federal Trade Commission (FTC). I appreciate the 
opportunity to testify on behalf of the Commission about the 
relationship between competition and antitrust enforcement, on the one 
hand, and lower health care costs and higher health care quality, on 
the other.\1\ The magnitude of health care costs and the importance of 
health care quality demand our urgent attention. On a daily basis, 
millions of Americans require health care goods and services to 
maintain their basic quality of life. We have all seen the stories 
about the 46 million uninsured,\2\ and the fact that the U.S. health 
care system spends more per person, yet generates lower health care 
quality than health care services in many other developed countries.\3\ 
Health care costs burden both employees and employers, large and small, 
as well as Federal, state, and local governments that pay for care 
under various government programs.
---------------------------------------------------------------------------
    \1\ This written statement represents the views of the Federal 
Trade Commission. My oral presentation and responses are my own and do 
not necessarily reflect the views of the Commission or of any 
Commissioner.
    \2\ See U.S. Dep't of Commerce, U.S. Census Bureau, Income, 
Poverty, and Health Insurance Coverage in the United States: 2007, 19-
20 (2008), available at http://www.census.gov/prod/2008pubs/p60-235.pdf 
(noting slight decrease from 2006-07, but a general increase in 
uninsured from 1987-2007).
    \3\ See, e.g., The Business Roundtable, The Business Roundtable 
Health Care Value Comparability Study, Executive Summary at 2 (2009), 
available at http://businessroundtable.org/sites/default/files/
BRT%20exec%20sum%20FINAL%20FOR%20PRINT.pdf (observing 23 percent 
``value gap'' relative to five leading economic competitors--Canada, 
Japan, Germany, the United Kingdom and France).
---------------------------------------------------------------------------
    Antitrust enforcement improves health care in two ways. First, by 
preventing or stopping anticompetitive agreements to raise prices, 
antitrust enforcement saves money that consumers, employers, and 
governments otherwise would spend on health care. Second, competition 
spurs innovation that improves care and expands access. Congress has 
charged the FTC with preventing unfair methods of competition and 
unfair or deceptive acts or practices in or affecting commerce,\4\ and 
the FTC has been a cop on the beat in this area for the past 30 years.
---------------------------------------------------------------------------
    \4\ Federal Trade Commission Act, 15 U.S.C.  45.
---------------------------------------------------------------------------
    The touchstone of the Commission's enforcement in this industry has 
been to stop practices that are likely either to increase costs or to 
limit competition that could improve the quality of health care. For 
example, the FTC has prevented anticompetitive agreements among health 
care providers to fix the prices they charge to a health insurance 
plan, conduct likely to raise prices without improving care.\5\ The 
Commission's enforcement efforts also have helped assure that new and 
potentially more efficient ways of delivering and financing health care 
services can arise and compete in the marketplace.\6\ The FTC has 
challenged hospital mergers that the Commission believed were likely to 
increase costs to consumers, such as the recently proposed merger of 
Inova-Fairfax and Prince William County Hospitals. After the Commission 
sued to enjoin that proposed merger in Federal district court, the 
parties decided to drop the deal.\7\ The FTC and its staff also have 
issued studies and reports regarding various aspects of the health care 
industry \8\ and have analyzed competition issues raised by proposed 
state and Federal regulation of health care markets.\9\
---------------------------------------------------------------------------
    \5\ See Federal Trade Commission, FTC Antitrust Actions in Health 
Care Services and Products, available at http://www.ftc.gov/bc/
hcupdate031024.pdf.
    \6\ See id.
    \7\ See infra note 30 and accompanying text.
    \8\ See, e.g., Federal Trade Commission, Pharmacy Benefit Managers: 
Ownership of Mail-order Pharmacies (Aug. 2005), available at http://
www.ftc.gov/reports/pharmbenefit05/050906
pharmbenefitrpt.pdf [hereinafter PBM Study]; Federal Trade Commission, 
the Strength of Competition in the Sale of Contact Lenses: an FTC Study 
(2005), available at http://www.ftc.gov/reports/contactlens/
050214contactlensrpt.pdf; Federal Trade Commission and Department of 
Justice, Improving Health Care : a Dose of Competition (2004), 
available at http://www.ftc.gov/reports/healthcare/
040723healthcarerpt.pdf [Improving Health Care].
    \9\ See Prepared Statement of the Federal Trade Commission Before 
the Antitrust Task Force of the H. Comm. the Judiciary, Concerning H.R. 
971, ``the Community Pharmacy Fairness Act of 2007,'' 110th Cong. (Oct. 
18, 2007), available at http://www.ftc.gov/os/testimony/
P859910pharm.pdf [hereinafter FTC Statement Concerning H.R. 971] 
(criticizing proposal to exempt non-publicly traded pharmacies from 
antitrust scrutiny).
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    Not surprisingly, some health care providers have long sought 
antitrust exemptions that would protect them against competitive 
pressures to lower costs and improve quality.\10\ The Commission 
consistently has opposed legislative proposals to exempt certain types 
of conduct, such as price fixing, from antitrust scrutiny, because such 
conduct will increase health care costs without benefiting 
consumers.\11\ At the same time, as detailed below, the Commission has 
provided extensive guidance on how health care providers can 
collaborate in ways consistent with the antitrust laws, precisely 
because such collaborations have the potential to reduce costs and 
improve quality.
---------------------------------------------------------------------------
    \10\ Some have argued that health care is ``different,'' and that 
competition principles do not apply to the provision of health care 
services. Similar arguments that competition fundamentally does not 
work and is harmful to public policy goals have been uniformly rejected 
by the Supreme Court. See, e.g., F.T.C. v. Superior Court Trial Lawyers 
Ass'n, 493 U.S. 411 (1990); National Society of Professional Engineers 
v. U.S., 435 U.S. 679 (1978). Beginning with the seminal 1943 decision 
in American Medical Association v. United States, 317 U.S. 519, 528, 
536 (1943), the Supreme Court has recognized the importance of 
competition and the application of antitrust principles to health care.
    \11\ See, e.g., FTC Statement Concerning H.R. 971, supra note 9 
(criticizing proposal to exempt non-publicly traded pharmacies from 
antitrust scrutiny); Testimony of Robert Pitofsky, Chairman, Federal 
Trade Commission, on H.R. 1304, the ``Quality Health-Care Coalition Act 
of 1999'' (June 22, 1999), available at http://www.ftc.gov/os/1999/06/
healthcaretestimony.htm (regarding Federal legislation that would have 
exempted all health care workers from antitrust scrutiny); Letter from 
Federal Trade Commission Staff to the Hon. Dennis Stapleton, Ohio House 
of Representatives (Oct. 16, 2002) (criticizing proposed antitrust 
exemption for home health care providers), available at http://
www.ftc.gov/os/2002/10/ohb325.htm.
---------------------------------------------------------------------------
    The Commission recognizes that competition alone is not a panacea 
for all of the problems in health care markets. Although FTC antitrust 
enforcement has prevented anticompetitive conduct that would further 
increase health care costs, maintaining competition cannot alone 
achieve the health care reform goals on which Congress may agree. The 
Commission's purpose here is to explain that the FTC is a partner in 
efforts to reduce costs and improve quality in the delivery of health 
care. The testimony will describe how our activities in three important 
areas--(1) health care provider clinical integration, (2) proposed 
health care mergers involving hospitals, pharmaceutical manufacturers, 
and medical device manufacturers, and (3) pharmacy benefit management 
services (PBMs)--further those goals.\12\
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    \12\ On multiple occasions, the Commission has provided Congress 
testimony on the dangers of pay-for-delay patent settlements between 
brand and generic companies and the costs they impose on consumers, 
employers, and the government. To day, the Commission is providing 
testimony on other important areas of health care competition.
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II. Physician Services: Price Fixing vs. Clinical Integration
    Some have suggested that the antitrust laws act as barriers to 
health care provider collaborations that could lower costs and improve 
quality.\13\ That is simply wrong. Properly applied, antitrust 
standards distinguish between price fixing by health care providers, 
which is likely to increase health care costs, and effective clinical 
integration among health care providers that has the potential to 
achieve cost savings and improve health outcomes.
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    \13\ See, e.g., Letter from Michael D. Maves, MD, Exec . Vice 
President, CEO, American Medical Ass'n, to the Hon. William E. Kovacic, 
Chairman, Federal Trade Commission, regarding Physician Network 
Integration and Joint Contracting (June 20, 2008), available at http://
www.ftc.gov/bc/healthcare/checkup/pdf/AMAComments.pdf (``We are 
extremely concerned with what we see as the significant regulatory 
barriers that restrict physicians' ability to collaborate in ways 
crucial to improving quality and containing costs''); cf. Timothy 
Stolzfus Jost and Ezekiel J. Emmanuel, Commentary: Legal Reforms 
Necessary to Promote Delivery System Innovation, 299 JAMA 2561, 2562 
(2008) (suggesting that uncertainty about forms of clinical integration 
permitted under the antitrust laws ``could deter attempts to create 
accountable health systems.'')
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A. Price Fixing and Group Boycotts Are Likely to Raise Prices and Harm 
        Consumers.
    For more than 25 years, the Commission has challenged price-fixing 
and boycott agreements through which health care providers jointly seek 
to increase the fees that they receive from health care plans.\14\ Such 
arrangements typically involve competing health care providers agreeing 
to charge the same high prices and collectively refusing to serve a 
health plan's patients unless the health plan meets their fee demands. 
Such conduct is considered to be per se unlawful because it is so 
likely to harm competition and consumers by raising prices for health 
care services and health care insurance coverage. Hence, in its 1982 
Maricopa decision, the U.S. Supreme Court held that agreements among 
competing physicians regarding the fees they would charge health 
insurers for their services constituted per se unlawful horizontal 
price fixing.\15\ Just last year, the Fifth Circuit, citing Maricopa, 
affirmed the Commission's conclusion that the activities of the North 
Texas Specialty Physicians, an organization of independent physicians 
and physician groups, amounted to horizontal price fixing that was 
unrelated to achieving any efficiencies such as cost savings or 
increased health care quality.\16\
---------------------------------------------------------------------------
    \14\ See FTC Bureau of Competition, Overview of FTC Antitrust 
Actions in Health Care Services and Products, available at http://
www.ftc.gov/bc/0608hcupdate.pdf.
    \15\ Arizona v. Maricopa County Medical Soc'y, 457 U.S. 332, 356-57 
(1982).
    \16\ In the Matter of North Texas Specialty Physicians, FTC Dkt. 
No. 9312 (Nov. 2005) (Opinion of the Commission), available at http://
www.ftc.gov/os/adjpro/d9312/051201opinion.pdf, aff'd sub nom. NTSP v. 
F.T.C., 528 F.3d 346 (5th Cir. 2008), cert. denied, 129 S. Ct. 1313 
(U.S., Feb. 23, 2009) (No. 08-515).
---------------------------------------------------------------------------
    The Commission explained the clear consumer harms of health care 
price fixing agreements in 2007 testimony before Congress regarding a 
proposed antitrust exemption for this type of conduct by certain health 
care providers:\17\
---------------------------------------------------------------------------
    \17\ See FTC Statement Concerning H.R. 971, supra note 9.

        The Commission's experience indicates that the conduct that the 
        proposed exemption would allow could impose significant costs 
        on consumers, private and governmental purchasers, and 
        taxpayers, who ultimately foot the bill for government-
        sponsored health care pro grams. Past antitrust challenges to 
        collective negotiations by health care professionals show that 
        groups have often sought fee increases of 20 percent or more. 
        For example, in 1998, an association of approximately 125 
        pharmacies in northern Puerto Rico settled FTC charges that the 
        association fixed prices and other terms of dealing with third-
        party payers, and threatened to withhold services from Puerto 
        Rico's program to provide health care services for indigent 
        patients. According to the complaint, the association demanded 
        a 22 percent increase in fees, threatened that its members 
        would collectively refuse to participate in the indigent care 
        program unless its demands were met, and thereby succeeded in 
        securing the higher prices it sought.\18\
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    \18\ See FTC Statement Concerning H.R. 971, supra note 9 (internal 
citations omitted).

    As this excerpt shows, antitrust enforcement against agreements 
that have no purpose except to increase the fees received by the health 
care providers involved are not only consistent with, but also 
reinforce, the cost-reducing goals of any health care reform.
B. The Antitrust Laws Promote Health Care Collaborations that Can 
        Reduce Costs and Improve Quality.
    The antitrust laws treat collaborations among health care providers 
that are bona fide efforts to create legitimate, efficiency-enhancing 
joint ventures differently. The Commission asks two basic questions 
with respect to such collaborations. First, does the proposed 
collaboration offer the potential for pro-consumer cost savings or 
qualitative improvements in the provision of health care services? 
Second, are any price or other agreements among participants regarding 
the terms on which they will deal with health care insurers reasonably 
necessary to achieve those benefits? If the answer to both of those 
questions is ``yes,'' then the collaboration is evaluated under an 
antitrust standard that takes into account any likely procompetitive or 
anticompetitive effects from the collaboration.\19\ As long as such 
collaborations cannot exercise market power, they are unlikely to raise 
significant antitrust concerns, precisely because they have the 
potential to benefit, not harm, consumers.
---------------------------------------------------------------------------
    \19\ This standard is known as the ``rule of reason.'' See Maricopa 
County Medical Soc., supra note 15, at 343 (``since Standard Oil Co. of 
New Jersey v. United States, 221 U.S. 1 (1911), we have analyzed most 
restraints under the so-called `rule of reason.' As its name suggests, 
the rule of reason requires the factfinder to decide whether under all 
the circumstances of the case the restrictive practice imposes an 
unreasonable restraint on competition.'')
---------------------------------------------------------------------------
    The FTC and the Department of Justice Antitrust Division is sued 
Health Care Statements in 1993, and supplemented them in 1994 and 
1996,\20\ to provide guidance about the antitrust analysis the agencies 
will apply to various types of health care arrangements. As noted in 
the 1996 Health Care Statements, ``[n]ew arrangements and variations on 
existing arrangements involving joint activity by health care providers 
continue to emerge to meet consumers', purchasers', and payers' desire 
for more efficient delivery of high quality health care services.'' 
\21\ Statement 8 explains that bona fide clinical integration by health 
care providers with the potential for significant cost savings and 
quality improvements may be demonstrated by:
---------------------------------------------------------------------------
    \20\ U.S. Dep't of Justice & Fed. Trade Comm'n, Statements of 
Antitrust Enforcement Policy In Health Care (1996), available at http:/
/www.ftc.gov/bc/healthcare/industryguide/policy/index.htm [hereinafter 
Health Care Statements].
    \21\ Id. at 2.

        the network [of health care providers] implementing an active 
        and ongoing program to evaluate and modify practice patterns by 
        the network's physician participants and create a high degree 
        of interdependence and cooperation among the physicians to 
        control costs and ensure quality. This program may include: (1) 
        establishing mechanisms to monitor and control utilization of 
        health care services that are designed to control costs and 
        assure quality of care; (2) selectively choosing network 
        physicians who are likely to further these efficiency 
        objectives; and (3) the significant investment of capital, both 
        monetary and human, in the necessary infrastructure and 
        capability to realize the claimed efficiencies.\22\
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    \22\ Health Care Statements at Statement 8,  B.1.

    In recent years, FTC staff have issued detailed advisory opinions 
on such programs to help inform the industry and demonstrate that the 
antitrust laws are not a barrier to bona fide arrangements to improve 
quality and control costs through clinical integration.\23\ In 
evaluating health care collaborations that claim likely efficiencies 
from clinical integration, FTC staff have focused on the programs' 
structural capabilities, systems, and processes for achieving such 
efficiencies, and the motivations and incentives for the participants 
to embrace the programs' goals.\24\ Such collaborations often use 
programs such as electronic health records \25\ and administrative and 
clinical support for care management and quality improvement, as means 
to achieve efficiencies and improved quality through, for example, 
collaboration among clinicians to create guidelines, measure their 
performance in relation to those guidelines, and agree on remedial 
measures and consequences for failures to achieve certain performance 
goals. These are the same types of measures proposed by advocates of 
health care reform as ways to reduce costs and improve quality.\26\ As 
shown here, antitrust standards for evaluating health care 
collaborations also are consistent with and supportive of the goals of 
health care reform to reduce costs and improve quality.
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    \23\ See, e.g., Letter from Markus H. Meier, Assistant Director, 
Bureau of Competition, Federal Trade Commission to Christi J. Braun, 
Ober, Kaler, Grimes & Shriver 8 (April 13, 2009) [hereinafter TriState 
Letter], available at http://www.ftc.gov/os/closings/staff/090413tri
stateaoletter.pdf; Letter from Markus H. Meier, Assistant Director, 
Bureau of Competition, Federal Trade Commission to Christi J. Braun & 
John J. Miles, Ober, Kaler, Grimes & Shriver 7 (Sept. 17, 2007) 
[hereinafter GRIPA letter], available at http://www.ftc.gov/bc/adops/
gripa.pdf.
    \24\ See note 25 supra.
    \25\ Clinical integration programs frequently use sophisticated 
health information technology (HIT) systems to help them implement 
their programs. However, the use of HIT systems or electronic health 
records alone is not sufficient to establish that a group has 
clinically integrated. It is how the collaboration uses those tools 
that counts for the antitrust analysis.
    \26\ Elliot S. Fisher et al., Achieving Health Care Reform--How 
Physicians Can Help, 360 New Eng. J. Med. 2495, 2496 (2009); see also, 
e.g., TriState Letter, supra note 23 (discussing web-based HIT system, 
software, and clinical guidelines and review proposal); GRIPA Letter 
supra note 23 (regarding GRIPA's tablet computer, HIT system, and data 
sharing proposal).
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III. Increased Merger Scrutiny
    The Commission has worked vigorously to preserve competition in 
health care markets via merger scrutiny as well. The FTC has challenged 
a number of proposed mergers and acquisitions involving, for example, 
hospitals, drug manufacturers, and medical device manufacturers.
    Several recent hospital merger enforcement actions highlight the 
Commission's ongoing focus on competition among hospitals. If a 
hospital acquisition deprives patients of choices for health care, it 
can increase the health care costs to both patients and employers that 
purchase health insurance. For example, in 2007, the Commission ruled 
that Evanston Northwestern Healthcare Corporation's consummated 
acquisition of its competitor, Highland Park Hospital, was 
anticompetitive \27\ because the acquisition resulted in substantially 
higher prices and a substantial lessening of competition for acute care 
inpatient hospital services in parts of Chicago's northern suburbs.\28\ 
This challenge was based, in part, on information gathered during an 
empirical review of various consummated hospital mergers to examine 
their impact on markets; that review has found compelling evidence of 
adverse effects from mergers in certain instances.\29\ More recently, a 
joint enforcement action by the FTC and the Virginia Attorney General 
stopped a merger of two hospitals in northern Virginia that, according 
to the complaint, would have resulted in control of 73 percent of the 
licensed hospital beds in the area.\30\
---------------------------------------------------------------------------
    \27\ In the Matter of Evanston Northwestern Healthcare Corp., FTC 
Docket No. 9315 (Aug. 6, 2007) (Opinion of the Commission), available 
at http://www.ftc.gov/os/adjpro/d9315/070806opinion.pdf (upholding with 
some modifications an October 2005 Initial Decision by an FTC 
Administrative Law Judge).
    \28\ In the Matter of Evanston Northwestern Healthcare Corp., FTC 
Docket No. 9315 (Oct. 20, 2005) (initial decision), available at http:/
/www.ftc.gov/os/adjpro/d9315/051021id
textversion.pdf.
    \29\ See, e.g., Farrell, J., Pautler, P., and Vita, M, Economics at 
the FTC: Retrospective Merger Analysis With a Focus on Hospitals, Rev. 
of Indus. Org. (2009, forthcoming) (reviewing project and related FTC 
working papers); Steven Tenn, The Price Effects of Hospital Mergers: A 
Case Study of the Sutter-Summit Transaction, Federal Trade Commission 
Bureau of Economics Working Paper No. 293 (2008), available at http://
www.ftc.gov/be/workpapers/wp293.pdf; Deborah Haas-Wilson and 
Christopher Garmon, Two Hospital Mergers on Chicago's North Shore: A 
Retrospective Study, Federal Trade Commission, Bureau of Economics 
Working Paper No. 294 (2009), available at http://www.ftc.gov/be/
workpapers/wp294.pdf; Aileen Thompson, The Effect of Hospital Mergers 
on Inpatient Prices: A Case Study of the New Hanover-Cape Fear 
Transaction, Federal Trade Commission Bureau of Economics Working Paper 
No. 295 (2009), available at http://www.ftc.gov/be/workpapers/
wp295.pdf.
    \30\ See In the matter of Inova Health System Foundation and Prince 
William Health Systems, Inc., FTC Docket No. 9326 (Jun. 17, 2008) 
(Order dismissing complaint), available at http://www.ftc.gov/os/
adjpro/d9326/080617orderdismisscmpt.pdf.
---------------------------------------------------------------------------
    The Commission also has acted to protect competition among kidney 
dialysis clinics to provide services to dialysis patients. In September 
2007, the Commission challenged an agreement between two major dialysis 
clinics with facilities in the northeastern United States, American 
Renal Associates, Inc. (ARA) and Fresenius Medical Care Holdings, Inc. 
(Fresenius). Pursuant to that agreement, ARA would have paid Fresenius 
to close certain clinics nearby to competing ARA clinics, and ARA would 
have acquired other competitive Fresenius clinics. The Commission 
alleged that this agreement would have eliminated direct competition 
between ARA and Fresenius and resulted in ARA operating the only 
dialysis clinics in certain local markets in Rhode Island and 
Massachusetts. The parties terminated their agreement after Commission 
staff objected, and a Commission order prevents the parties from 
entering into similar agreements in the future.\31\
---------------------------------------------------------------------------
    \31\ In the Matter of American Renal Associates, Inc., FTC Dkt. No. 
C-4202 (Oct. 17, 2007) (decision and order), available at http://
www.ftc.gov/os/caselist/0510234/071023decision.pdf.
---------------------------------------------------------------------------
    The Commission's merger scrutiny extends to other health care 
markets as well, including pharmaceuticals and medical device 
manufacturing. For example, in 2006, the Commission settled charges 
that Barr's proposed acquisition of Pliva would have eliminated current 
or future competition between Barr and Pliva in certain markets for 
generic pharmaceuticals treating depression, high blood pressure and 
ruptured blood vessels, and in the market for organ preservation 
solutions by requiring that Barr divest itself of certain key 
products.\32\ In the medical device arena, the Commission charged that 
the merger of Boston Scientific and Guidant would have harmed 
competition and consumers in several coronary medical device 
markets.\33\ In that matter, a consent agreement was achieved under 
which Guidant divested itself of intellectual property, plants, 
manufacturing technology, and other assets that had raised competitive 
concerns.\34\
---------------------------------------------------------------------------
    \32\ In the Matter of Barr Pharmaceuticals, Inc., FTC Dkt. No. C-
4171 (decision and order) (Nov. 22, 2006), available at http://
www.ftc.gov/os/caselist/0610217/0610217barrdo
_final.pdf.
    \33\ In the Matter of Boston Scientific Corp. and Guidant Corp., 
FTC Dkt. No. C-4164 (complaint) (Apr. 20, 2006), available at http://
www.ftc.gov/os/caselist/0610046/0610046cmp
060420.pdf
    \34\ In the Matter of Boston Scientific Corp. and Guidant Corp., 
FTC Dkt. No. C-4164 (decision and order) (Jul. 21, 2006), available at 
http://www.ftc.gov/os/caselist/0610046/060725
do0610046.pdf.
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IV. Pharmacy Benefit Management (PBM) Services
    PBM services are another health care industry area in which the 
Commission has engaged in law enforcement, competition advocacy, and 
policy development, to ensure that competition benefits consumers. PBMs 
can help health care plans manage the cost and quality of the 
prescription drug benefits they provide to their enrollees. To varying 
degrees PBMs:

   negotiate rebates from pharmaceutical manufacturers;

   provide access to mail order pharmacies for health plan 
        enrollees on maintenance medications;

   develop drug formularies \35\ and help plan sponsors 
        determine which drugs should be on the plan's formulary and 
        whether and how to provide co-payment incentives to the plan's 
        enrollees to use those drugs;
---------------------------------------------------------------------------
    \35\ A formulary is a list of plan sponsor-approved drugs for 
treating various diseases and conditions. This list will often be 
broken down into ``tiers,'' which correspond to different co-payment 
levels for enrollees. For instance, a three-tier formulary may consist 
of a generic tier, a preferred brand tier, and a non-preferred brand 
tier. Whether a brand is preferred may depend on whether a generic 
alternative is available and also upon the financial terms available to 
the PBM on drugs in the same therapeutic class.

   provide drug utilization reviews that include analyses of 
        physician prescribing patterns to identify physicians 
        prescribing high-cost drugs when lower cost, therapeutically 
---------------------------------------------------------------------------
        equivalent alternatives are available; and

   provide disease management services by offering treatment 
        information to and monitoring of patients with certain chronic 
        diseases.

    In the U.S., the PBM industry has evolved from one of numerous, 
small claims processing firms to a more mature industry with 
comprehensive service offerings. Roughly 95 percent of patients in the 
United States with a drug benefit receive their benefits through a PBM. 
There are approximately 40 to 50 PBMs operating in the United States, 
with three large, full-service PBMs of national scope: Medco, Express 
Scripts, and Caremark.\36\ In addition to these three PBMs, several 
large insurers manage pharmacy benefits internally. Large retail 
supermarket/pharmacy chains also own PBMs, and several local and 
regional PBMs can compete with national PBMs for contracts with smaller 
employers or health plans that are geographically limited.\37\ The 
three large national PBMs are the major players in many regional 
markets, but typically one-third to one-half of each market is serviced 
by other, smaller PBMs. The FTC found, in its most recent antitrust 
investigation of the PBM industry, that competition among PBMs for 
contracts with plan sponsors is ``vigorous.'' \38\
---------------------------------------------------------------------------
    \36\ See PBM Study, supra note 8, at 2-3.
    \37\ See Improving Health Care: a Dose of Competition, supra note 
8, at 14-15 (2004), available at http://www.ftc.gov/reports/healthcare/
040723healthcarerpt.pdf; Kaiser Family Foundation, Follow the Pill: 
Understanding the U.S. Commercial Pharmaceutical Supply Chain, at 16 
(Mar. 2005), at http://www.healthstrategies.net/research/docs/
Follow_the_Pill.pdf.
    \38\ In the Matter of Caremark Rx, Inc./AdvancePCS, File No. 
0310239 n. 6 (Feb. 11, 2004) (statement of the Commission), available 
at http://www.ftc.gov/os/caselist/0310239/040211
ftcstatement0310239.pdf. The Commission closed the investigation 
because it concluded that the transaction was unlikely to reduce 
competition.
---------------------------------------------------------------------------
    Pharmacy services--like other parts of the chain of pharmaceutical 
manufacturing, marketing, and distribution--represent an important area 
of competitive concern, given the large and increasing share of health 
care spending devoted to pharmaceuticals. Ongoing Commission scrutiny 
of competitive issues in the PBM area--including those posed by both 
private conduct and public intervention--is essential to maintaining 
the benefits of competition for consumers.
    Of particular relevance is the Commission's ``Conflict of Interest 
Study'' regarding PBM practices. In response to a request from 
Congress, the FTC analyzed data on PBM pricing, generic substitution, 
therapeutic interchange, and repackaging practices. The study examined 
whether PBM ownership of mail-order pharmacies served to maximize 
competition and lower prescription drug prices for plan sponsors. In 
its 2005 report based on the study (PBM Study), the FTC found, among 
other things, that competition affords health plans substantial tools 
with which to safeguard their interests in lower prescription drug 
prices.\39\
---------------------------------------------------------------------------
    \39\ PBM Study, supra note 8, at 58 (noting diverse audit rights 
and reporting under PBM contracts).
---------------------------------------------------------------------------
    The FTC is mindful of the potential harm from aggregations of 
market power by purchasers in the health care sector. In 2004, the FTC 
conducted a thorough investigation of Caremark Rx's acquisition of 
Advance PCS, two large national PBM firms. As part of its analysis, the 
agency carefully considered whether the proposed acquisition would be 
likely to create monopsony power with regard to PBM negotiations with 
retail pharmacies and ultimately determined it would not. The 
Commission closed the investigation because it concluded that the 
transaction was unlikely to reduce competition.\40\ In addition, FTC 
staff have analyzed and commented on proposed PBM legislation in 
several states.\41\
---------------------------------------------------------------------------
    \40\ In the Matter of Caremark Rx, Inc./AdvancePCS, File No. 
0310239 n. 6 (Feb. 11, 2004) (statement of the Commission), available 
at http://www.ftc.gov/os/caselist/0310239/040211
ftcstatement0310239.pdf.
    \41\ See, e.g., Letter from FTC staff to Hon. Nellie Pou, New 
Jersey Assembly (Apr. 17, 2007), available at http://www.ftc.gov/be/
V060019.pdf; Letter from FTC staff to Virginia Delegate Terry G. 
Kilgore (Oct. 2, 2006), available at http://www.ftc.gov/be/V060018.pdf.
---------------------------------------------------------------------------
    The Commission's oversight of PBM industry participants is not 
confined to antitrust matters, but also includes vigorous enforcement 
of the FTC Act to protect consumer privacy. For example, CVS Caremark 
recently settled FTC charges that it had failed to take reasonable and 
appropriate security measures to protect the sensitive financial and 
medical information of its customers and employees in violation of the 
FTC Act.\42\ The Commission will remain vigilant not only in policing 
competitive markets, but also in engaging in strong consumer protection 
enforcement.
---------------------------------------------------------------------------
    \42\ In the Matter of CVS Caremark Corp., FTC Dkt. No. C-4259 (Feb. 
18, 2009) (decision and order), available at http://www.ftc.gov/os/
caselist/0723119/090623cvsdo.pdf (respondent allegedly ``discarded 
materials containing personal information in clear readable text (such 
as prescriptions, prescription bottles, pharmacy labels, computer 
printouts, prescription purchase refunds, credit card receipts, and 
employee records) in unsecured, publicly-accessible trash dumpsters on 
numerous occasions.'') Respondent independently agreed to pay $2.25 
million to resolve HHS allegations that it violated HIPAA.
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IV. Conclusion
    Thank you for this opportunity to share the Commission's views on 
these vitally important issues. The Commission looks forward to working 
with the Subcommittee to ensure that competitive health care markets 
deliver on the promise of competitively priced health care goods and 
services and increased innovation and quality.

    Senator Pryor. Thank you.
    Dr. Nichols?

         STATEMENT OF LEN M. NICHOLS, Ph.D., DIRECTOR, 
         HEALTH POLICY PROGRAM, NEW AMERICA FOUNDATION

    Dr. Nichols. Chairman Pryor, Chairman Rockefeller, Ranking 
Member Wicker, indeed an honor to be here today to be talking 
about competition in the healthcare marketplace. It's a 
particular honor to be before you, Chairman Pryor, because we 
share roots. I met your father in my father's store when I was 
8 years old, so we go way back.
    [Laughter.]
    Dr. Nichols. When you think about the healthcare 
marketplace, you know, you think we do have some of the very 
best clinicians and hospitals, nurses, in the world. The Saudi 
princes still do come here. But, we don't get anywhere near the 
market performance we should be getting. Fundamentally, we have 
prices way above costs, we are not delivering the right quality 
at the right time, we're probably doing too much of a lot of 
stuff and not enough of other stuff. And our cost structures 
are not efficient. The most amazing thing, though, to an 
economist is, there's no natural self-correcting mechanism. In 
most markets, when those prices are out of line, entry occurs, 
something changes, and we move price to cost, and indeed, 
often, technology lowers cost over time. In healthcare, we're 
stuck.
    And when prices are stuck, policymakers basically have 
three options. You can use antitrust and some kind of 
competitive innovation, like a public plan; you could use the 
buying power of the Federal Government, if you can--and in our 
case, we can, because of the Medicare program; and you could 
use direct regulation of prices.
    Now, I know everyone on this panel--I know Grace-Marie very 
well--we work very hard to avoid direct price regulations. 
That's why we're here. We're trying to figure out ways to 
change the rules so we don't have to use price controls, 
because there are better ways. But, it's all about you being 
able to change the rules to channel self-interest to serve the 
public interest in a way we all share--the goals.
    So, let me spend the rest of my time talking about the 
three markets where I think we have the biggest problems, and 
then I'll be glad to answer questions later.
    The first market is the one where we spend the most money, 
and that is in hospitals. Now, let me hasten to add, all the 
people who work in hospitals are doing the best they can under 
the circumstances they operate under. They don't have time to 
think about the economist's criteria for optimal pricing. But, 
what we know is--and it's stunning to a simple country health 
economist like myself, to learn this--the variance in 
efficiency across our Nation's hospitals is stunningly large. 
The Medicare Pricing Advisory Commission, MedPAC, just put out 
some data that I think all of you should just go home and 
absorb. And it shows that two-thirds of our hospitals today 
lose money on Medicare. Yet they conclude--and I certainly 
agree--that does not mean Medicare underpays. It means that 
two-thirds of our hospitals are actually not very efficient at 
all, because one-third of our hospitals do make money on 
Medicare. But, here's the amazing thing. Of those hospitals who 
lose money on Medicare, they end up making the largest net 
margin, because they charge private payers so much more, 
because they can.
    Let me say that one more time. Our least efficient 
hospitals in our Nation have the largest average margins, in 
total, because they make up for what, for them, is the 
Medicare, and often Medicaid, underpayment with higher prices 
in the private sector, which is why healthcare costs so much 
and why so many people are becoming uninsured all the time. So, 
that's a clear, fundamental problem.
    Now, in--what the MedPAC did was analyze these margins by 
competitive market. So, what they discovered was, the least 
competitive markets are the markets where the Medicare margins 
are the lowest--in some cases, minus-20 percent. But, they make 
it up by charging more than 20 percent higher than cost to the 
private sector, and therefore they end up with the largest 
margins. What--that's only possible when those hospitals have 
incredible local market power. Hence, the cry for antitrust 
relief.
    The problem is--and I will just say, for the record, these 
guys tried, and they failed, because a lot of judges couldn't 
quite get around the prospect that nonprofit hospitals can do 
this. And so, they just basically lost the cases, even though 
the evidence was overwhelming. And now, I understand they're 
doing retrospective studies, which I highly support.
    And my point is, antitrust can't really help us solve the 
problem of local market power if there's just one hospital 
system that dominates. We have got to think about other tools.
    Simply put, we have no choice but to do Medicare payment 
reform. And Medicare payment reform is not about whacking 
prices, because we already know these hospitals are losing 
money off Medicare. They'll just charge private payers more. 
What you've got to do--and this is what I urge you to do in 
this Committee--think hard about incentives. We've got to 
change the way we pay--not so much the level, but the way we 
pay--to change incentives. And that's the general theme I'll 
apply across all these markets.
    In the physician marketplace, I think it's fair to say, we 
all would agree very quickly, we underpay primary care. And 
there's lots of ways to think about how to fix that, so I'm not 
going to belabor that point, because we all agree. The place 
that I think that we've had not enough attention is--when you 
think about payment reform and prices that are distorted, we 
want to think beyond just the doctor's office. We've got to 
think the incentives that have been created to invest in 
certain kinds of capital equipment, which lead to too much 
utilization, which lead to too much spending.
    You know, I grew up in the Delta. I know a lot about that 
Mississippi/Arkansas/Louisiana corridor. You look at the data 
on where we spend a lot more per capita than other places in 
the country, and it pretty much follows the river. Now, why is 
that? Well, it's because a lot of people down there have 
invested in machines that are--you know, they think they're 
doing the right thing and all that, but they're doing too much 
of an awful lot, and we're beginning to figure that out, and 
we've got to figure out how to deal with that.
    The final market I'll talk about is insurance, because I 
think Senator Rockefeller and Senator Nelson, in their opening 
statements, absolutely hit the ball out of the park, here. If 
we don't fix the insurance market, none of the rest of this is 
going to work. And we clearly need to change regulation. And I 
won't belabor the point, because we probably agree about that. 
They've got to sell to all comers and they can't discriminate 
based on health.
    But, a more, I would say, difficult problem to solve is the 
problem where they have effective monopoly power and there's no 
competition where they are. And I'll give you a prime example 
right there in Arkansas, where we're from. BlueCross of 
Arkansas--fine company--has a 75-percent market share in the 
small-group market. United, today, has a 6-percent market 
share. That's the single closest competitor. Five years ago, 
when I studied that market professionally, it had a 12-percent 
market share, so BlueCross is gaining.
    Now, what is the deal? Why isn't there entry to try to 
bring more competition? Because in Arkansas, BlueCross 
BlueShield of Arkansas pays physicians--I'll just put it this 
way--very, very well, far above what Medicare pays. So, the 
competitor companies can't entice physicians to join a new 
network, so their dominance continues. Well, they're not doing 
anything illegal, and they're fine people, they buy full-color 
ads in every high school yearbook, you know; they're good 
people. But we're stuck with this very high price. People of 
Arkansas are uninsured. Twenty-nine percent of small businesses 
in Arkansas offer, compared to 43 percent nationwide, because 
prices are so high relative to income.
    So, what do you do? Well, in my view, you--that's where the 
public plan is in, sort of, the perfect intervention, because 
what the public plan can do--let's just imagine, when you 
change market rules, who's going to not like that? It's going 
to be the companies that are doing very well right now. So, we 
change market rules. They're going to say, ``Hmm. I'm still a 
big, dominant seller. I'm going to bid high, and blame 
government regulation on this high premium.'' And you know, it 
would work, if we had no counterargument. But, if you had the 
possibility of having an actuarially fair premium bid by a 
company competing on a level playing field--got to be created 
by you, but it can then be on a level playing field--that 
actuarially fair bid threat will prevent BlueCross from having 
total power to charge what they want. And therefore, it'll make 
BlueCross bid the right amount. In a sense, the threat of the 
public plan means you don't really need it, but if you don't 
have the threat, you will not have an outcome that you like.
    So, I submit to you, there are lots of things you can do to 
make markets work better, and that's what we want to do and 
avoid price regulation.
    Thanks for the indulgence. Thank you very much.
    [The prepared statement of Dr. Nichols follows:]

        Prepared Statement of Len M. Nichols, Ph.D., Director, 
             Health Policy Program, New America Foundation
Introduction
    Chairman Pryor, Ranking Member Wicker and other distinguished 
Members of this Committee and Subcommittee, thank you for inviting me 
to offer my thoughts today about how to improve the performance of 
health service markets. My name is Len M. Nichols. I am a health 
economist and I direct the Health Policy Program at the New America 
Foundation, a non-profit, non-partisan public policy research institute 
based in Washington, D.C., with offices in Sacramento, California. Our 
program seeks to nurture, advance, and protect an evidence-based 
conversation about comprehensive health care reform. We remain open 
minded about the means, but not the goals: all Americans should have 
access to high-quality, affordable health insurance and health care 
that is delivered within a politically and economically sustainable 
system. The best way, though not the only way, to accomplish these 
goals is to ensure reform legislation earns bipartisan support. I am 
happy to share ideas for your consideration today and hereafter with 
you, other members of the Committee, and staff.
    The United States has some of the best clinicians and facilities in 
the world. We are the source of much of the world's innovations in 
health care products and services. Yet, despite the fact that more than 
16 percent of our population is uninsured,\1\ we spend almost twice as 
much per person as our competitors. In addition, the United States has 
considerably shorter life expectancy and performs poorly on other 
population health summary measures. The World Health Organization ranks 
us number 32 (between Slovenia and Costa Rica) in terms of overall 
system performance, countries with 64 percent and 23 percent of our per 
capita GDP respectively.\2\
---------------------------------------------------------------------------
    \1\ The uninsured also receive roughly half as much as care as the 
insured.
    \2\ International Monetary Fund, ``World Economic Outlook Data 
base--April 2009,'' Accessed on July 12, 2009. Data refer to the year 
2008.
---------------------------------------------------------------------------
    In economic terms, we pay more on average than the cost of 
efficient production. In fact, much of our production is amazingly 
inefficient. As a consequence of both problems, many patients receive 
care that is of sub-optimal quality. In short, we get very poor value 
for our health care dollars.
U.S. Health Care Markets
Why do U.S. health care markets underperform?
    Asymmetric information among insurers, clinicians, and patients, 
third-party payment incentives, and local provider market power are 
known to be the root causes of poor health service market 
performance.\3\ These causes are very complicated to explain. Indeed, 
since ``one person's excess cost is someone else's income,'' \4\ our 
cultural reluctance to intervene in markets allows this poor 
performance to perpetuate itself.
---------------------------------------------------------------------------
    \3\ Martin Gaynor, ``What Do We Know About Competition and Quality 
in Health Care Markets?'' National Bureau for Economic Research, April 
5, 2006; Paul B. Ginsburg, ``Cut Medicare with a Scalpel,'' New York 
Times, July 12, 2009; Len M. Nichols, Paul B. Ginsburg, Robert A. 
Berenson, Jon Christianson, and Robert E. Hurley, ``Are Market Forces 
Strong Enough To Deliver Efficient Health Care Systems? Confidence Is 
Waning,'' Health Affairs 23, no. 2 (March/April 2004): 8-21.
    \4\ A wonderfully apt phrase first coined by Prof. Uwe Reinhardt of 
Princeton University.
---------------------------------------------------------------------------
    In addition, our health care markets lack a natural self-correcting 
mechanism to help drive prices to the efficient cost level and 
quantities to optimal quality quantities over time. In most markets, 
deviations from optimal price and quality levels are reduced or erased 
by new competitors, changes in market share, or technical innovations 
that lower the cost of production over time. In the U.S. health care 
system, however, poor market performance is perpetuated decade after 
decade after decade.
To what extent do U.S. health care markets underperform?
    Algebra can help us estimate the order of magnitude of our sub-par 
performance. Let P be the average price level of health services, and 
P* be the level we want. Let Q be the quantity of services, and Q* the 
optimal quantity of appropriate quality services. Let C be the average 
cost of a unit of Q, and C* the efficient cost of producing Q. In 
textbook equilibrium, P* = C*.

                 Table 1. Health Care Spending Variables
------------------------------------------------------------------------
      Variable                            Definition
------------------------------------------------------------------------
P                    The average price level of health services. This
                      tells us what a given procedure is likely to cost.
------------------------------------------------------------------------
P*                   The optimal price level of health services. This is
                      the price level that would maximize the efficiency
                      of our health care markets--where prices would be
                      equal to costs. The goal is to move from price
                      level P to level P*.
------------------------------------------------------------------------
Q                    The quantity of health care services currently
                      provided. Q measures how much health care is
                      provided within a marketplace.
------------------------------------------------------------------------
Q*                   The optimal quantity of appropriate quality health
                      services. This quantity of services would be the
                      most efficient level where we are still receiving
                      high-quality care.
------------------------------------------------------------------------
C                    The average cost of a unit of Q. In effect, this
                      measures the cost to provide a unit of health
                      care, which is distinct from the price we pay for
                      a unit of health care.
------------------------------------------------------------------------
C*                   The efficient cost of producing a unit of Q. This
                      would be the cost at which we are providing
                      enough, high-quality care at the most efficient
                      cost.
------------------------------------------------------------------------
PQ                   Actual health spending (price times the quantity of
                      health care provided).
------------------------------------------------------------------------
P*Q*                 The optimal level of health spending (optimal price
                      times the optimal quantity of care provided).
------------------------------------------------------------------------

    In a perfectly competitive market that is performing optimally, 
prices would be driven to the efficient cost level.\5\ Spending would 
be P*Q* = C*Q*. By contrast, actual health spending is PQ. Therefore, 
the ratio of actual health spending to optimal health spending is
---------------------------------------------------------------------------
    \5\ Where cost includes a normal profit to cover the cost of 
capital.

---------------------------------------------------------------------------
        PQ/C*Q* = (P/C)(Q/Q*)(C/C*)

    This is a symbolic way of illustrating that our excess spending can 
be split into three distinct parts:

   Non-competitive pricing: the ratio of price to cost (P/C)

   Poor quality: the degree to which quantity or the wrong 
        quantity does not make patients healthier (Q/Q*)

   Inefficiency: the ratio of actual average cost to efficient 
        average cost (C/C*)

    Specific research quantifies each of the three areas:

   Non-competitive pricing: the McKinsey Global institute 
        estimates that our health service and product prices are 50 
        percent higher than those of other countries (P/C = 1.5) \6\
---------------------------------------------------------------------------
    \6\ Note: I assume other countries are not efficient producers 
either * > C* there, too); McKinsey Global Institute, ``Accounting for 
the Cost of U.S. Health Care: A New Look at Why American Spend More,'' 
November 2008.

   Poor quality: researchers at Dartmouth, the National Academy 
        of Engineering, and the Institute of Medicine agree that about 
        30 percent of our services do not improve health (Q/Q* = 1.3) 
        \7\
---------------------------------------------------------------------------
    \7\ Elliott S. Fisher et al, ``The Implications of Regional 
Variations in Medicare Spending. Part 1: The Content, Quality, and 
Accessibility of Care,'' Annals of Internal Medicine 138 (2003): 273-
287; Elliott S. Fisher et al, ``The Implications of Regional Variations 
in Medicare Spending. Part 2: Health Outcomes and Satisfaction with 
Care,'' Annals of Internal Medicine 138 (2003): 288-298; National 
Academy of Engineering and Institute of Medicine, Building a Better 
Delivery System, (Washington D.C.: National Academies Press, 2005).

   Inefficiency: the Medicare Pricing Advisory Commission 
        (MedPAC) estimates that efficiency in our hospital sector, 
        which represents the single largest share of our health 
        dollars, varies by at least 25 percent (C/C* = 1.25) \8\
---------------------------------------------------------------------------
    \8\ Medicare Pricing Advisory Committee, ``Report to the Congress: 
Medicare Payment Policy,'' March 2009.

    It is not unreasonable to argue that we pay roughly 2.4 times more 
than we should for health care when you combine these estimates by 
---------------------------------------------------------------------------
using the equation developed above.

        PQ/C*Q* = (P/C)(Q/Q*)(C/C*)

        2.4 = (1.5) (1.3) (1.25)
Tools for Reform
    This decomposition--non-competitive pricing, poor quality, and 
inefficiency--helps illustrate that it will be necessary for specific 
policies to be aimed at each element of our excess spending problem. It 
also shows how cost, quality, and prices are linked.
    When prices are stuck far from the efficient cost level, 
policymakers have three basic tools at their disposal:

        1. Change rules related to market entry and structure to 
        engender more market competition (e.g., antitrust)

        2. Use countervailing market buying power (monopsony) to 
        counter local provider market power and resistance to change

        3. Impose direct regulation of prices or specific behaviors of 
        competitors

    In the remainder of my testimony, I will argue that all three are 
necessary to address specific market problems and achieve the salient 
goals of health system reform: cover all Americans and make our 
delivery system sustainable. Specifically, I will explore hospital, 
physician, and insurance markets to illustrate how each policy approach 
can be useful in improving health care markets.
Hospital Markets
Impact of Competition on Medicare Efficiency
    Let me be clear: most hospitals and the people who work in them do 
not have time to worry about the economic optimality \9\ of market-wide 
performance. In many ways, they are doing the best they can by their 
patients given our inefficient system and its perverse incentives. Some 
leaders and organizations do amazingly well. By and large, however, we 
are getting the results we should expect from the rules and incentives 
our policies have created.
---------------------------------------------------------------------------
    \9\ To be perfectly optimal, the market must have distributed all 
goods and services in a way that maximize everyone's happiness. In a 
non-optimal situation, even just one person's happiness could be 
increased by a different distribution of goods.
---------------------------------------------------------------------------
    Hospital markets are heterogeneous. In general, they illustrate 
both the promise and problems in health service markets. The March 2009 
MedPAC report to Congress helps illustrate how price, efficiency, 
quality, and competition are linked. The report finds that 72 percent 
of hospitals lose money on Medicare. Some infer from this that Medicare 
underpays hospitals. Thus, the solution must be for Medicare to adjust 
its prices upward. This is not, however, how MedPAC interprets the full 
set of data at their disposal.
    Instead, MedPAC characterizes hospitals by the competitiveness of 
the marketplace in which they operate.\10\ According to MedPAC, a 
hospital is in a ``high-pressure'' market if their non-Medicare 
operating margin \11\ is 1 percent or less and if their net worth would 
grow by 1 percent or less if their Medicare margin were zero. These 
hospitals depend on Medicare for growth and financial success. By 
contrast, a market is ``low pressure'' if hospitals have non-Medicare 
margins of at least 5 percent and if their net worth would grow by more 
than 1 percent if their Medicare margin were zero. These hospitals lose 
money on Medicare and depend on private payers for financial strength. 
``Medium pressure'' hospitals are those whose margins and net worth 
paths fall in between.
---------------------------------------------------------------------------
    \10\ They do not judge competitiveness like antitrust authorities 
(e.g., using Herfindahl-Hirshman index scores), but rather they adopt a 
more performance-based standard.
    \11\ The non-Medicare margin includes private, Medicaid, and 
uninsured patients.

    Table 2. Median Hospital Operating Margins In Markets Arrayed By
                          Competitive Pressure
------------------------------------------------------------------------
                                    High         Medium
                                  pressure      pressure    Low pressure
------------------------------------------------------------------------
Medicare margin                        4.2%       -3.8%        -11.7%
------------------------------------------------------------------------
Non-Medicare margin                 -2.4%            4.5%         13.5%
------------------------------------------------------------------------
Share of all hospitals                  28%           14%           58%
------------------------------------------------------------------------
Share of large teaching                 53%           18%           29%
 hospitals
------------------------------------------------------------------------
Share of all discharges                 27%           37%           36%
------------------------------------------------------------------------
Source: MedPAC March 2009 Report to Congress, table 2A-7, p. 61.

    Hospitals with negative Medicare margins compensate for Medicare 
shortfalls by charging other payers more to achieve very large non-
Medicare margins. This is possible because of their local market power 
vis-a-vis private payers, commercial insurers, and self-insured 
employers alike.
    In the most competitive markets, however, non-Medicare margins are 
negative. As a result of competition in these markets, hospitals cannot 
compensate for negative Medicare margins with large, positive non-
Medicare margins. Therefore, their positive operating margins are 
solely a result of their relative efficiency in serving Medicare 
patients. Thus, they are highly motivated to become efficient enough to 
make money off Medicare payments.
    These data show that competitive pressure leads hospitals to be 
more efficient. The 28 percent of hospitals in high pressure markets 
find that Medicare payments are more than enough to cover the costs of 
delivering care to Medicare beneficiaries. This is proof, to MedPAC and 
to me, that Medicare payments are adequate. We need new tools, however, 
to engender inefficient hospitals in non-competitive markets to 
improve.
Range of Efficiency in Medicare
    The range of efficiency (or inefficiency) in Medicare is 
considerable. In March 2009, MedPAC also examined median Medicare 
margins for those hospitals with Medicare margins less than -10 percent 
and those hospitals with positive Medicare margins. The median Medicare 
margin among those hospitals with a Medicare margin less than -10 
percent was -20 percent. For those hospitals with a positive Medicare 
margin, the median Medicare margin was +7.6 percent.

             Table 3. Medicare Margins By Hospital Category
------------------------------------------------------------------------
Category of Hospital   Median Medicare Margin    Average Overall Margin
                             of Category               of Category
------------------------------------------------------------------------
Medicare margins                       -20%                        4.6%
 less than -10%
------------------------------------------------------------------------
Positive Medicare                        7.6%                      3.4%
 margins
------------------------------------------------------------------------
Source: MedPAC March 2009 Report to Congress

    Thus, the median efficiency differential for the same \12\ patients 
is 27.6 percent. The complete range of the efficiency distribution 
across hospitals must be much larger.
---------------------------------------------------------------------------
    \12\ The ``same'' patients means that they are case-mix adjusted 
Medicare patients.
---------------------------------------------------------------------------
    In general, the stunning fact is total margins (including all 
patients) are highest for the least efficient hospital group. For those 
hospitals with Medicare margins below -10 percent, the average overall 
margin is 4.6 percent. Hospitals with positive Medicare margins have 
overall margins of 3.4 percent. Private market pricing power of 
inefficient hospitals must be considerable. This pricing power has a 
larger effect on their bottom line than efforts at cost cutting by 
hospitals in more competitive markets.
Solutions
    Before I discuss specific solutions below, it is important to 
identify three potential approaches that will fall short of 
comprehensively addressing the underlying problems driving inefficient 
hospital markets:

   Increased anti-trust regulation alone is not enough. Some 
        local payers have lamented the relative absence of antitrust 
        enforcement in hospital mergers.\13\ Since the FTC and Thomas 
        Greaney are also testifying today, I will merely note that in 
        many cases the underlying source of local market power for 
        hospitals (and sometimes for single specialty or large multi-
        specialty physician groups) cannot be remedied effectively with 
        traditional antitrust tools such as stopping a merger or a 
        divestiture order. This is because the hospital (or physician 
        group) is likely to either be a de facto monopoly (natural or 
        not) or have an outsized quality reputation, a form of product 
        differentiation that is impossible or difficult to calibrate 
        and divest.
---------------------------------------------------------------------------
    \13\ Antitrust authorities tried and largely failed to win for the 
wrong reasons in the 1990s; Len M. Nichols, Paul B. Ginsburg, Robert A. 
Berenson, Jon Christianson, and Robert E. Hurley, ``Are Market Forces 
Strong Enough To Deliver Efficient Health Care Systems? Confidence Is 
Waning,'' Health Affairs 23, no. 2 (March/April 2004): 8-21.

    Quality reputation and actual quality are not necessarily the same. 
        The last step in MedPac's analysis of these different hospitals 
        examined and compared performance quality by efficiency class. 
        Predictably, they found that the most efficient hospitals also 
        consistently produced higher quality patient outcomes.\14\ \15\ 
        Patient satisfaction, however, was statistically 
        indistinguishable between efficiency groups. Therefore, people 
        on average do not know (or care) about true quality 
        differentials. This is what makes quality reputation so 
        difficult to change by antitrust or any other traditional 
        means.
---------------------------------------------------------------------------
    \14\ The patient outcomes were measured by risk adjusted mortality 
for a variety of conditions.
    \15\ This is one more bit of evidence supporting the conclusion 
that we can lower costs while improving quality nationwide.

   Simply paying providers less will not solve the 
        inefficiencies driving health care cost growth. The solution is 
        not just about paying hospitals and providers less. It is about 
        changing the incentives of health service delivery so that we 
        move from a volume-based to a value-based system. If we did 
        nothing but just pay hospitals less, hospitals in low and 
        medium pressure markets would raise private payer rates even 
        more. We must have a system-wide solution to the three problems 
        of prices higher than cost, sub-optimal quality, and 
        inefficient cost structures, or we will have no solution at 
---------------------------------------------------------------------------
        all.

   Market forces alone cannot solve the problem. In much of the 
        country, there are insufficient market forces to drive prices 
        to the efficient cost level without policy intervention.\16\ 
        This does not mean there is no role for market forces, but we 
        must be realistic about their potential and limits. Smarter 
        Medicare payment policy, coupled with information and teaching 
        tools, more transparency, and evidence-based regulatory changes 
        can actually make latent market forces far more effective than 
        they have been heretofore.
---------------------------------------------------------------------------
    \16\ This was the conclusion of a team of researchers from the 
Center for Studying Health System Change 5 years ago. Len M. Nichols, 
Paul B. Ginsburg, Robert A. Berenson, Jon Christianson, and Robert E. 
Hurley, ``Are Market Forces Strong Enough To Deliver Efficient Health 
Care Systems? Confidence Is Waning,'' Health Affairs 23, no. 2 (March/
April 2004): 8-21.

    The only buyer with enough market clout to challenge hospitals or 
physician groups with considerable local market power is Medicare. 
Therefore, Medicare payment reform is the key to optimizing hospital 
market competition. A growing chorus is calling for significant 
restructuring of the Medicare payment structure.\17\
---------------------------------------------------------------------------
    \17\ Health CEOs for Health Reform, the Bi-Partisan Policy Center, 
noted scholars like Robert Berenson and Larry Casalino, David Cutler 
and Judy Feder, Elliott Fisher, Mark McClellan, and John Bertko, MEDPAC 
itself (more gently), the Center for Payment Reform, and very recently 
the New York Times Editorial Page all support it. The Obama White House 
and OMB Director Peter Orzag are also generally supportive, judging by 
their proposals in the President's Budget and beyond and by continuing 
policy statements linking health reform with economic sustainability 
and fiscal balance which will clearly require Medicare cost 
trajectories to be brought under control. Early health reform 
legislation and proposals in the Congress also include some elements 
that would move toward serious payment reform in the Medicare program, 
but many commentators are hoping you will all be emboldened by our 
arguments and logic, and in particular by the credibility of the health 
system stakeholders who are willing to embrace this approach, so that 
you will go even further in the final legislation that is sent to the 
President's desk to sign this fall.
    See for examples: Health CEOs for Health Reform, ``Realigning U.S. 
Health Care Incentives to Better Serve Patients and Taxpayers,'' New 
America Foundation, June 12, 2009. For more information, visit: http://
www.newamerica.net/hc4hr; Howard Baker, Tom Dashcle, and Bob Dole, 
``Crossing Our Lines: Working Together to Transform the U.S. Health 
System,'' Bipartisan Policy Center, June 17, 2009; Len M. Nichols and 
Robert Berenson, eds., Making Medicare Sustainable, (Washington, D.C.: 
New America Foundation, 2009); Melinda Beeuwkes Buntin and David M. 
Cutler, ``The Two Trillion Dollar Solution: Saving Money by Modernizing 
the Health Care System,'' Center for American Progress, June 24, 2009; 
Ellen-Marie Whelan and Judy Feder, ``Payment Reform to Improve Health 
Care: Ways to Move Forward,'' Center for American Progress, June 24, 
2009;Elliott S. Fisher, Mark B. McClellan, John Bertko, Steven M. 
Lieberman, Julie J. Lee, Julie L. Lewis, and Jonathan S. Skinner, 
``Fostering Accountable Health Care: Moving Forward In Medicare,'' 
Health Affairs 28, no.2 (March/April 2009): w219-w231;Medicare Payment 
Advisory Committee, ``Report to the Congress: Reforming the Delivery 
System,'' June 2008; Center for Payment Reform, ``Principles,'' http://
www.centerforpayment
reform.org/Principles.html, Accessed July 2009; ``Financing Health Care 
Reform,'' New York Times, July 6, 2009; Senate Finance Committee, 
``Transforming the Health Care Delivery System: Proposals to Improve 
Patient Care and Reduce Health Care Costs,'' Description of Policy 
Options, April 29, 2009; House Committees on Ways and Means, Energy and 
Commerce, and Education and Labor, ``Key Features of the Tri-Committee 
Health Reform Draft Proposal in the U.S. House of Representatives,'' 
June 9, 2009.

    The overall strategy of fundamental payment reform in Medicare is 
complex. I will summarize key elements here since Medicare payment 
reform is not under the direct jurisdiction of this committee. Payment 
reform is, however, highly relevant to discussions of competitive 
performance in health care markets.\18\
---------------------------------------------------------------------------
    \18\ For more elaboration, read: Health CEOs for Health Reform, 
``Realigning U.S. Health Care Incentives to Better Serve Patients and 
Taxpayers,'' New America Foundation, June 12, 2009; Len M. Nichols and 
Robert Berenson, eds., Making Medicare Sustainable, (Washington, D.C.: 
New America Foundation, 2009).
---------------------------------------------------------------------------
    A few observations at the outset:

   Getting prices to efficient cost levels quickly will be 
        difficult. Therefore, we should focus first on achieving 
        optimal levels of quantity and quality, while we try to bring 
        costs down to their efficient levels over time.

   The current Medicare payment structure drives inefficiency. 
        Separate payment for 8,000 Current Procedural Terminology (CPT) 
        codes and 745 diagnosis related groups (DRGs) is not likely to 
        facilitate optimal quantity or quality.

   Some organizations and communities actually do provide 
        something close to optimal quantities and optimal cost levels 
        today. Examples include well-integrated systems like the 
        Billings Clinic, Geisinger Health System, Denver Health, 
        Intermountain Health Care, Kaiser Permanente in Northern 
        California and Colorado, Mayo, Marshfield Clinic, Virginia 
        Mason Medical Center and Group Health Cooperative (both in 
        Seattle), and collaborative communities without integrated 
        systems, like Grand Junction, Colorado.

    Combining these observations leads me to the following conclusions.

   Fee-for-service payment methods are unsustainable. Medicare 
        should announce that it will lead the transition away from fee-
        for-service payment within a specified timeframe. Medicare 
        payment should move toward more bundled payment structures that 
        are adjusted for patient acuity and tied to efficient 
        quantities and cost structures.\19\ This announcement will also 
        be catalytic in moving the broader health system toward more 
        value-based payment incentives.
---------------------------------------------------------------------------
    \19\ Bundled payment means combining the payments to hospitals and 
physicians--and a sufficient amount to purchase appropriate drugs, 
devices, and ancillary tests along the way--into one patient acuity-
adjusted amount that will then be shared.

   We must give providers the tools they need to succeed. 
        Moving away from fee-for-service payment will be welcomed by 
        many if it includes a commitment to coordinate the production 
        and dissemination of best practice knowledge across private and 
        public sectors through a program similar in scope to the 
        Cooperative Extension Service in agriculture. In addition, this 
        will require public investments in electronic medical records, 
        decision support tools, best practice research, and 
---------------------------------------------------------------------------
        interoperability standards.

   We must reduce the barriers to high quality and efficient 
        practice styles wherever they exist. Evidence based regulation 
        is just as essential to our health system's future as evidence 
        based medicine. We must consolidate and streamline the 
        monitoring and oversight of providers into distinct but 
        complete quality, financial, and educational dimensions. 
        Malpractice reform will protect clinicians who utilize agreed 
        upon best practice protocols.

   Clinicians must be able to share in the savings from high-
        quality, efficient care. Existing antitrust laws, anti-kickback 
        statutes, anti-bribing laws, and other laws and regulations 
        often make it difficult for clinicians and hospitals to share 
        in the savings realized when costs and utilization are 
        reduced--sometimes known as ``gainsharing.'' In order to move 
        toward more bundled payment models, we must develop statutory 
        and ``safe harbor'' solutions so that clinicians and hospitals 
        can negotiate and share in resource savings when quality and 
        patient care standards are met. Antitrust and regulatory 
        authorities may feel these rules are clear and optimal already. 
        Many clinicians and hospitals, in my experience, do not agree.

   Medicare Advantage plans should bid competitively. We must 
        stop overpaying Medicare Advantage plans by formula. The 
        Medicare Advantage plan should move toward a competitive 
        bidding payment structure that also rewards high-quality care 
        and patient satisfaction.

   Medicaid must also be held to quality and efficiency 
        standards. Once Medicaid payment rates are increased (as they 
        must be), providers and managed care plans should be expected 
        and required to meet the same quality standards as they do for 
        private and Medicare enrollees. Our goal should be nothing less 
        than complete parity and equity across insured and ethnic 
        groups.

    Innovations in Medicare payment structures should spread to the 
private sector. Yet, provider market power outweighs payer power in 
most markets today. As a result, even if Medicare moves to value-based 
payment rules there is a real danger that hospitals could simply 
``charge'' their way out of efforts to drive efficiency.
    All payer rate setting does come to mind. Savvy analysts have 
recently recommended this tool be added back into the policy 
arsenal.\20\ It is a logical solution to the problem of local provider 
market power. However, it would require a far more elaborate regulatory 
apparatus than we have today. It would also tilt the playing field 
against providers and toward private insurers at a time when we really 
need providers to help usher in a value-based not volume-based health 
system. We might also benefit from innovation in private payer 
incentive contracts. These innovations could be foreclosed by a rapid 
push to all payer rate setting. It is hard to know which problem to 
tackle first, but perhaps a good rule of thumb is to not adopt the 
experiment that could end all experimentation.
---------------------------------------------------------------------------
    \20\ Stuart H. Altman, ``Financing Comprehensive Health Care 
Reform,'' Testimony Before the U.S. Senate Committee on Finance, May 
12, 2009.
---------------------------------------------------------------------------
    Another potential solution to poor private market performance 
because of local market power is making Medicare bundling software, 
incentive forms, data reporting, shared savings contracts (with 
providers), and bundled price levels completely transparent and 
available to all. This would allow private insurers to quickly adopt 
them, piggybacking on Medicare's processes. Medicare could provide a 
bonus payment to providers who agreed to use similar bundling and 
incentive contracts with all or a critical mass of private insurers. 
This would likely improve the quality and efficiency of care delivery 
throughout the health care system, including for Medicare beneficiaries 
themselves.
Physicians
    The top two problems with physician market performance at the 
current time are:

        1. Too little payment for care coordination, evaluation, and 
        management services. This results in the undersupply of these 
        services and presents a serious threat to the long-term 
        viability of primary care physician practices.\21\
---------------------------------------------------------------------------
    \21\ Thomas Bodenheimer, ``Primary Care--Will it Survive?'' New 
England Journal of Medicine 355, no. 1 (August 31, 2006): 861-864.

        2. Distorted prices from physician-owned capital equipment and 
        facilities, which lead to too much diagnostic testing, 
        technical procedures, and excess system costs.
Flaws in Relative Physician Payment
    As a result of flaws in the way Medicare and private payers pay 
physicians, we pay too much for some things and not enough for others. 
These distorted prices are ``stuck,'' and do not adjust.
    The Medicare physician pricing rule, resource based relative value 
scale (RBRVS), determines the time cost of each procedure in the 8000 
CPT code manual and ``values'' a physician's time in proportion to the 
length of their training. By definition, this favors specialists over 
primary care. This technique is essentially an application of the labor 
theory of value. As such, it tries to build a market value by valuing 
only supply side inputs, without taking into account the value to 
patients and payers.
    Adjustments to the RBRVS have been made repeatedly over the years. 
Yet, the all-physician committee that recommends updates is heavily 
dominated by specialists. All changes to the fee schedule must be 
budget neutral for the program. Payments to specialists would need to 
be cut in order to raise the fees of primary care providers. The Center 
for Payment Reform is leading an effort to get this RBRVS update 
committee (RUC) process changed to be more representative of all 
physicians and of payer interests.\22\ More importantly, this effort is 
seeking to reassess the RBRVS to account for the value of services from 
the perspective of patients and payers.
---------------------------------------------------------------------------
    \22\ Peter V. Lee, ``Health Care Reform: Creating a Sustainable 
Path to High Quality Health Care for All Americans,'' Testimony before 
the U.S. House of Representatives Committee on Ways and Means, June 24, 
2009; Peter V. Lee, ``Payment Reform: Getting the Payments Right Means 
Getting the Process Fixed,'' Pacific Business Group on Health, June 12, 
2009.
---------------------------------------------------------------------------
    Most private payers effectively use the RBRVS as the basis for 
their fee schedule's relative payments to physicians, as the Medicare 
program's analytic work is like a public good which others can use for 
free. Private payers do use a different multiplier or ``conversion 
factor'' to translate the RVS per CPT code into dollar prices. Most 
often they pay more than Medicare, but not always.\23\ This wholesale 
adoption of RBRVS by private payers has had the unintended effect of 
making the powerful force of inertia oppose making adjustments to pay 
primary care physicians more.
---------------------------------------------------------------------------
    \23\ Paul Ginsburg, ``Comparing the Traditional Medicare Program to 
Private Insurance,'' Testimony before the U.S. Senate Committee on 
Finance, May 12, 1999.
---------------------------------------------------------------------------
    Why more private insurers do not deviate from the RBRVS on their 
own is unclear. This could be a result of simple economics. Because 
most payers effectively follow RBRVS, insurers do not have to pay more 
and go to the trouble of adjusting the RBRVS schedule because they can 
attract the primary care physicians they need by paying the lower 
rates. Yet, we face single digit percentages of new doctors going into 
primary care. This is a truly unsatisfactory result and one we must 
change to build the 21st Century health system we want and need.
    No single private insurer has a large enough market share to 
reverse the underpayment of primary care physicians caused by the 
RBRVS. One insurer paying more than ``market'' rates cannot deliver 
enough market share to enable primary care physicians to raise their 
reservation price (i.e., refuse to accept patients from all insurers 
that have not raised payment rates). Therefore, the first payer would 
end up just increasing its costs relative to its competitors with no 
salient effect. That just will not happen. Once again, fundamental 
payment reform within Medicare must be part of the solution. Medical 
home models \24\ are promising. But perhaps the most promising 
development are bundled payments that span the ambulatory,\25\ acute, 
post-acute, drug, and ancillary costs of treating specific patients 
combined with shared savings models to encourage collaboration, 
coordination, efficiency, and quality care.
---------------------------------------------------------------------------
    \24\ American College of Physicians, ``Patient-Centered Medical 
Home,'' Accessed July 2009: http://www.acponline.org/running_practice/
pcmh/; American Academy of Family Physicians, ``Patient-Centered 
Medical Home,'' Accessed July 2009: http://www.aafp.org/online/en/home/
membership/initiatives/pcmh.html; Patient-Centered Primary Care 
Collaborative, ``Joint Principles of the Patient-Centered Medical 
Home,'' February 2007.
    \25\ Primary and specialist
---------------------------------------------------------------------------
    For shared savings, bundled payment, and some pay-for-performance 
payment models to work in settings outside a completely integrated 
delivery system, guidance and exemptions from some antitrust 
enforcement impulses may be necessary. I expect Thomas Greaney or the 
Federal Trade Commission (FTC) to have more insight. But I do want to 
make clear that revisiting antitrust prohibitions on collaborative \26\ 
price incentive negotiations is warranted. I would recommend a task 
force jointly chaired by the Attorney General, the Chairman of the FTC, 
and the Secretary of HHS be formed as soon as possible. This should not 
wait for comprehensive health reform legislation to pass. We must 
pursue this type of payment reform regardless of potential coverage 
reforms.
---------------------------------------------------------------------------
    \26\ multi-insurer and multi-provider
---------------------------------------------------------------------------
Physician-owned Capital Equipment and Facilities
    The second big physician market problem is one wherein some 
physicians' entrepreneurial impulses, combined with incentives 
partially created by past attempts to prevent self-referral, leads to 
growth in use and total cost that is not improving patient outcomes. 
This phenomenon has been masterfully described by Atul Gawande in his 
recent New Yorker article.\27\ Currently, physicians can maximize 
income by investing in equipment and even facilities like specialty 
hospitals or labs rather than focus on delivering high quality evidence 
based care as efficiently as possible. This illustrates that payment 
reform must be considered broadly. Facility fee distortions to returns 
on investment, assumptions about percent time used, and proper 
depreciation schedules of physician-owned diagnostic equipment must all 
be on the table.
---------------------------------------------------------------------------
    \27\ Atul Gawande, ``Annals of Medicine: The Cost Conundrum,'' New 
Yorker, June 1, 2009.
---------------------------------------------------------------------------
    One option could be to consider allowing physicians who have 
overinvested in imaging equipment to have a one time immediate complete 
depreciation allowance and then find other uses for the machines 
elsewhere. These currently overused machines are kind of like toxic 
assets. We must get rid of them--or move them to more productive 
locations--before we can achieve the efficiencies we need.
Insurance Markets
    Another witness is focusing on insurers so I will address two 
problems I think are most important about insurance market competition 
very briefly.
    Exclusion of sick from risk pools. This must be solved through 
insurance market reforms, specifically requiring all insurers to sell 
to everyone (guaranteed issue) and prohibiting health status rating 
(guaranteed renewal, modified or pure community rating). To make 
insurance markets both more efficient and fairer, everyone must be 
required to purchase or obtain coverage.\28\ This set of reforms will 
force insurers to compete based on price, value, and customer 
satisfaction rather than marketing and underwriting.
---------------------------------------------------------------------------
    \28\ Len M. Nichols, Reforming the Health Care Delivery System,'' 
U.S. Senate Committee on Finance, April 21, 2009; Len M. Nichols, 
``Addressing Insurance Market Reform in National Health Reform,'' U.S. 
Senate Committee on Health, Education, Labor, and Pension, March 24, 
2009.
---------------------------------------------------------------------------
    Many insurance markets lack adequate competition, especially in the 
small group market. The consolidation of the insurance industry is 
well-documented.\29\ Therefore, I will focus on Arkansas. I grew up in 
Arkansas and had the opportunity to study the Little Rock market 
professionally while Vice President of the Center for Studying Health 
System Change from 2001-2004. The most recent data available show that 
Blue Cross Blue Shield of Arkansas has a market share of 75 percent in 
total. Its closest competitor, United, has a market share of 6 
percent.\30\ United's position has deteriorated since 2003 when I 
studied the Little Rock market.\31\
---------------------------------------------------------------------------
    \29\ John E. Dicken, ``Private Health Insurance: 2008 Survey 
Results on Number and Market Share of Carriers in the Small Group 
Health Insurance Market,'' Government Accountability Office, February 
27, 2009.
    \30\ Ben Furnas and Rebecca Buckwalter-Poza, ``Health Care 
Competition: Insurance Market Domination Leads to Fewer Choices,'' 
Center for American Progress, June 2009; American Medical Association, 
``2007 Update: Competition in Health Insurance, A Comprehensive Study 
of U.S. Markets: 2007 Update,'' http://www.ama-assn.org/ama1/pub/
upload/mm/368/compstudy_52006.pdf.
    \31\ Aaron Katz, Joy Grossma, Robert Hurley, Jessica May, Len M. 
Nichols, and Bradley Strunk, ``Little Rock Providers Vie for Revenues, 
as High Health Care Costs Continue,'' Community Report 3, Center for 
Studying Health System Change, July 2005.
---------------------------------------------------------------------------
Competition in the Arkansas Small Group Market
    How does Blue Cross Blue Shield of Arkansas maintain their 
dominance? During the Center for Studying Health System Change study in 
2003, we were told by many respondents in Little Rock that Blue Cross 
Blue Shield of Arkansas reimbursed physicians at very high levels, 
substantially more than Medicare rates. This level of payment made 
physicians reluctant to contract with other plans such as United, 
Cigna, or Aetna who reimburse at lower rates. If physicians insist on 
``market'' or ``Blue Cross Blue Shield'' payment levels, it makes it 
very difficult for other insurers to enter or grow in the market.
    There is nothing illegal about this. In fact, at first glance 
premiums in Arkansas do not look unreasonably high. Premiums in 
Arkansas are about 21 percent lower than the national average.\32\ Of 
course, this reflects the fact that median household income in Arkansas 
is 21 percent below the national average as well.\33\
---------------------------------------------------------------------------
    \32\ Agency for Healthcare Research and Quality, ``Medical 
Expenditure Panel Survey: Insurance Component,'' 2006.
    \33\ Carmen DeNavas-Walt, Bernadette D. Proctor, and Jessica C. 
Smith, Income, Poverty, and Health Insurance Coverage in the United 
States: 2007, U.S. Census Bureau, Current Population Reports, P60-235, 
(U.S. Government Printing Office: Washington, D.C., 2008).
---------------------------------------------------------------------------
    Yet, the average deductible in Arkansas in the small group market--
the market where competition is lacking in so many states--is 23 
percent of the premium.\34\ This compares with 17 percent nationwide. 
In other words, Arkansans are buying less-generous-than-average 
policies.
---------------------------------------------------------------------------
    \34\ Agency for Healthcare Research and Quality, ``Medical 
Expenditure Panel Survey: Insurance Component,'' 2006.
---------------------------------------------------------------------------
    Another indicator of poor insurance market performance in Arkansas 
is the fact that only 29 percent of small employers with fewer than 50 
workers offer health insurance in Arkansas. This is compared to 43 
percent nationwide. Finally, Blue Cross Blue Shield of Arkansas reports 
that their overall ``loss ratio'' is about 85 percent, which means they 
charge an average load of 15 percent across all their business.\35\ In 
other words, 15 percent of premiums collected by Blue Cross Blue Shield 
of Arkansas are not used to pay for patient care.
---------------------------------------------------------------------------
    \35\ Quick Health Insurance Group, Inc., ``Blue Cross Blue Shield 
of Arkansas,'' http://quickhealthinsurance.com/
bluecrossblueshieldarkansas.htm ,accessed July 14, 2009.
---------------------------------------------------------------------------
    Firms with fewer than 50 workers represent just 14 percent of the 
insurance market. Sixty percent of the market is made up of firms with 
more than 1,000 workers \36\ who pay administrative loads between 
roughly 7 and 10 percent. Therefore, we must infer the average load in 
the small group market in Arkansas, as it is in most states, is 
considerably higher than 20 percent. In short, workers and small firms 
in Arkansas are paying very high loads for policies that are less 
generous than the already parsimonious national averages for small 
firms.
---------------------------------------------------------------------------
    \36\ Agency for Healthcare Research and Quality, ``Medical 
Expenditure Panel Survey: Insurance Component,'' 2006.
---------------------------------------------------------------------------
    This is not to condemn Blue Cross Blue Shield of Arkansas--they are 
doing what our laws and incentives allow and encourage them to do. They 
are earning a healthy surplus (high load) off most sales, but why would 
they not, given their opportunities?
Public Health Insurance Plan
    This scenario explains why so many people support the introduction 
of a competing public health insurance plan in addition to the 
insurance market reforms discussed earlier.\37\ Insurance markets like 
Arkansas' are the indisputable reason competition will be well-served 
by a public health insurance plan competing on a level playing field 
with private plans.
---------------------------------------------------------------------------
    \37\ Len M. Nichols and John M. Bertko, ``A Modest Proposal for a 
Competing Public Health Plan,'' New America Foundation, March 2009; 
Linda Blumberg and John Holahan, ``Can a Public Insurance Plan Increase 
Competition and Lower the Costs of Health Reform,'' Urban Institute, 
2008; Jacob Hacker, ``The Case for Public Plan Choice in National 
Health Reform: Key to Cost Control and Quality Coverage,'' Institute 
for America's Future, December 2008.
---------------------------------------------------------------------------
    Imagine year one of a new health insurance market (or exchange) 
without a public health insurance plan. Currently, dominant insurers do 
not want competition or the insurance reforms that will reduce their 
``loads'' or margins. In the absence of a credible competitor that will 
compete on a level playing field and bid actuarially fairly, I worry 
that an unhappy but unchallenged dominant insurer will bid very high 
and blame the high bid on ``excessive regulation.''
    However, if the dominant insurer knows that an actuarially fair bid 
is forthcoming from a public health insurance plan with the network 
capacity necessary to actually take substantial market share away from 
the dominant insurer, then I predict the insurer will be much more 
likely to bid competitively and low. In effect, the existence of a 
public health insurance plan could ``keep insurers honest'' in the 
absence of another way to engender competition in particular 
marketplaces.
Administrative Costs
    The McKinsey Global Institute estimated that in 2006, the United 
States spent $650 billion more on health care than we should have, 
given our demographics and wealth. Of this $650 billion, $91 billion or 
almost 15 percent is excess spending on administrative activities.\38\ 
There are more than 1,100 insurers in the United States. The complexity 
of so many insurers requiring slightly different forms and information 
is considerable and results in very large costs for providers and 
patients.
---------------------------------------------------------------------------
    \38\ McKinsey Global Institute, ``Accounting for the Cost of U.S. 
Health Care: A New Look at Why American Spend More,'' November 2008.
---------------------------------------------------------------------------
    Some commentators report that non-clinical personnel are the 
fastest growing category of hospital employees. Credible aggregate 
estimates approximate that 21 percent of hospital costs and 27 percent 
of physician office costs are spent on administration, half of that on 
billing and insurance related costs alone.\39\ So as we work to change 
payment rules and incentives to engender better performance in health 
service markets, we should remember there is a lot of money to be saved 
in administration as well. Addressing these administrative burdens 
would boost clinician morale instantaneously.
---------------------------------------------------------------------------
    \39\ J.G. Kahn, et al., ``The Cost of Health Insurance 
Administration in California: Estimates for Insurers, Physicians, and 
Hospitals,'' Health Affairs 24, no. 6 (2005): 1629-1639.
---------------------------------------------------------------------------
    A task force convened by the Secretary of Health and Human Services 
that includes payer and provider representatives should be given a 
deadline of 6 months to report on concrete ways to streamline 
administration, save money, and improve the efficiency and quality of 
data transmission. United Health Group recently released a working 
paper which concluded that known administrative processes could save as 
much as $332 billion over 10 years, half of which would accrue to 
providers, another 20 percent of which would accrue to Federal and 
state governments. Some regulations and standards may be necessary to 
capture these savings, but the United paper would suggest the solutions 
are known.
Conclusion
    I hope the ideas and opinions in this testimony are useful to you 
as you consider how to make health markets perform better. I do 
recommend relying primarily on Medicare payment (and insurance market) 
reform as the lynchpin of any comprehensive effort. However, in each 
case the intent and designed effect is to use information and realigned 
incentives to improve the chances all Americans will soon be getting 
high-quality care consistently, and paying prices closer to the 
efficient cost level. I would be glad to answer any questions you or 
your staff may have at any time.

    Senator Pryor. Thank You.
    Mr. Balto?

           STATEMENT OF DAVID BALTO, SENIOR FELLOW, 
            CENTER FOR AMERICAN PROGRESS ACTION FUND

    Mr. Balto. Chairman Rockefeller, Chairman Pryor, Ranking 
Member Wicker, thank you for the privilege of testifying before 
you today.
    I'm a Senior Fellow at the Center for American Progress, 
and I spent over 15 years in the antitrust enforcement 
agencies. In the Clinton Administration I was the Policy 
Director of the FTC. When I was there, I learned that there are 
three essential elements for a market to work: choice--
alternatives; transparency; and a lack of conflicts of 
interest. In each of these respects, the health insurance 
market is clearly broken. This Committee deserves a lot of 
credit for the spotlight it has put on Ingenix and the 
relationship between Ingenix and United HealthCare, and how 
that has harmed patients and doctors.
    I have a simple message for you today. The Ingenix example 
is only the tip of the iceberg. Few markets are as 
concentrated, opaque complex, and subject to rampant 
anticompetitive and deceptive conduct as the insurance market. 
As the healthcare debate progresses, you'll hear people call 
for some limited reform of the health insurance system. Their 
belief is that this is fundamentally a sound market, and you 
just need a little more regulation. They could not be more 
mistaken. Trying to correct the market with some slight 
regulatory reform is like trying to cure cancer with a bushel 
of Band-Aids.
    Unfortunately, this is also a story of regulatory neglect, 
where the Federal enforcers have dropped the ball. During the 
Bush Administration, there were no enforcement actions by 
health insurers against anticompetitive, deceptive, or 
fraudulent activity. No challenges to mergers in the health 
insurance industry. And the same thing is true for pharmacy 
benefit managers and GPOs.
    What is the result? The health insurance markets are 
tremendously concentrated. The PBM market has three firms with 
effectively an 80-percent market share. And what--how has that 
impacted consumers? Insurance premiums have increased by 87 
percent over the last 6 years. The number of uninsured has 
skyrocketed.
    How has that affected these market participants, who are 
supposed to squeeze every penny and represent the interests of 
the plans and consumers? Well, the profits for insurance 
companies have skyrocketed by over 400 percent over the past 6 
years, to over $13 billion. The same is true for PBMs. Those 
profits have increased almost $3 billion, an increase of over 
300 percent. As a former antitrust enforcer, when I see profits 
increasing like that, that tells me those markets aren't 
working, that tells me those people have market power, that 
tells me antitrust enforcement is necessary. But, we haven't 
gotten that.
    Let me mention one thing about where the Federal enforcers, 
not--rather than even supporting efforts to make these market 
work, have inhibited that. And that's in the area of pharmacy 
benefit managers. State enforcers have stepped into the breach 
of no Federal enforcement, and a coalition of over 30 States 
have brought actions against each of the three major PBMs, 
securing over $370 million of damages. Can you imagine what a 
large sum of money that is?
    State legislators, in response to that, have proposed 
legislation to do two things--eliminate conflicts of interest 
and provide transparency--the two things that were problematic 
in Ingenix. And when they proposed that legislation, unions and 
plan sponsors and consumers lined up in support. And you know 
who's on the other side, opposing that legislation? The Federal 
Trade Commission. Whereas the sponsors of that legislation have 
actual real-world facts to support the need for that 
legislation, the FTC is there, weighing in on behalf of PBMs, 
using theoretical arguments to support these egregious 
anticonsumer practices. That simply makes no sense.
    This record of regulatory neglect must be reversed. There 
needs to be greater enforcement actions against health 
insurers, PBMs, and GPOs. If you think the Ingenix case is a 
problem, PBMs are Ingenix on steroids. They are a vastly more 
significant problem.
    I have a set of recommendations to the end. Let me just 
highlight four of them:
    First, the Federal antitrust agencies need to readjust 
their enforcement priorities. They spend their time prosecuting 
negotiations by doctor groups. There is no evidence in the 
literature that suggests that collective negotiations by 
doctors are a significant, or any, source of higher prices that 
consumers have to pay. What they're doing is handcuffing the 
doctors, who are the best advocate for the patients. Those 
doctors do have a fiduciary duty, those doctors do represent 
the patients' interests. Those resources need to be spent in a 
more balanced fashion, as they were in the Clinton 
Administration, attacking both clearly egregious conduct by 
providers, and by also going after insurance companies.
    Second, this Committee should build on its important study 
of Ingenix, and look at pharmacy benefit managers and how 
conflicts of interest and a lack of transparency cause similar 
types of problems in the PBM market.
    Third, to the extent that the FTC believes it does not have 
jurisdiction over health insurance, this Committee must act 
immediately to make sure the FTC has that jurisdiction. There 
are no FTC health insurance enforcement actions whatsoever on 
the consumer protection side. You can't find the words ``health 
insurance'' on the FTC Consumer Protection website. That has to 
change. If there's a jurisdictional bar, let's get rid of it.
    And then, finally, for the problems involving group 
purchasing organizations, Congress should act to eliminate the 
anti-kickback safe harbor for group purchasing organizations.
    Thank you for your time, and I look forward to working with 
this Committee on addressing these important issues.
    [The prepared statement of Mr. Balto follows:]

           Prepared Statement of David Balto, Senior Fellow, 
              Center for American Progress Action Fund \1\
---------------------------------------------------------------------------
    \1\ I was a public servant in the Antitrust Division and the 
Federal Trade Commission for over 15 years. In the Clinton 
Administration, I was the Assistant Director for Policy in the FTC's 
Bureau of Competition. I represent consumers, consumer groups, and a 
wide variety of entities, including health care providers, in the 
health care antitrust matters.
---------------------------------------------------------------------------
    Chairman Pryor, Ranking Member Wicker and other Members of the 
Committee, I appreciate the opportunity to come before you today and 
testify about health care competition and consumer protection 
enforcement. As a former antitrust enforcement official I strongly 
believe the mission of the Federal Trade Commission and Antitrust 
Division of the Department of Justice is vital to protecting consumers 
and competition. However in the past administration the priorities of 
those enforcement agencies were not effectively aligned with the 
critical priorities in the health care market, with the result that 
there is substantial anticompetitive and fraudulent activity that 
raises prices and costs for consumers and the American taxpayer, 
especially conduct by certain health care intermediaries--Health 
Insurers, Pharmacy Benefit Managers (``PBMs'') and Group Purchasing 
Organizations (``GPOs'').
    This Committee, like the rest of Congress has been devoting 
considerable resources to health care reform. This Committee, under the 
leadership of Chairman Rockefeller, has led the way in making the 
public aware of the deceptive and fraudulent conduct of health 
insurers, particularly by shining a spotlight on the egregious activity 
of Ingenix, the United HealthCare subsidiary which has harmed thousands 
of patients and doctors by distorting the usual and customary rates of 
those health care providers. Thanks to the efforts of New York Attorney 
General Cuomo this fraudulent scheme activity is being reformed.
The Problem of Regulatory Neglect
    I have a simple and vital message for this Committee: the Ingenix 
example is only the tip of the iceberg. The fundamental elements for a 
competitive market are transparency and choice and in both respects, 
health insurance markets are clearly broken. Few markets are as 
concentrated, opaque and complex, and subject to rampant 
anticompetitive and deceptive conduct. As the health care debate 
progresses, many advocate for limited reform of the health insurance 
system. Their belief is that it is a fundamentally sound market and 
with a little dose of additional regulatory oversight, all the ills of 
the market will be cured. They could not be more mistaken.
    The Ingenix example is important for other efforts at managing 
health care costs--PBMs and GPOs. Some suggest these entities serve an 
important function in controlling health care costs. But like the 
Ingenix example, they often are subject to deceptive conduct and 
conflicts of interest and can be used to forestall competition, rather 
than promote it. Again because of a lack of choice and transparency, 
and the existence of conflicts of interest, these intermediaries have 
failed to fulfill their mission and foster competition and choice.
    The FTC has accomplished tremendous things with its enforcement 
actions in the health care sector over the past 50 years, from opening 
up the practice of medicine to innovative forms of practice, to 
challenging conduct that has impeded entry of generic drugs. In a 
recent paper for the Center for American Progress, I detailed the 
positive results of the efforts of the FTC in expanding access to 
affordable generic drugs. By taking action against the deceptive 
strategies which allow drug companies to artificially extend the life 
of their patent-protected drugs, the FTC has given consumers wider 
choice in the drugs available to them. Consumers save billions of 
dollars annually because of these efforts.
    Unfortunately, the same attention has not been given to health 
insurers, PBMs, and GPOs. As I describe in my testimony much of the 
reason for the lack of competition and transparency, and the existence 
of conflicts of interest, is the failure of Federal antitrust and 
consumer protection enforcement in the health insurance industry. 
During the Bush Administration, there were no enforcement actions 
against health insurers' anticompetitive, deceptive or fraudulent 
conduct. None. There was tremendous consolidation in the market, and 
the Justice Department simply required minor restructuring of two 
mergers. There were no cases against anticompetitive conduct by health 
insurers. There were no Federal consumer protection enforcement 
actions. A similar record of regulatory neglect exists for PBMs and 
GPOs.
    State enforcement officials have frequently tried to fill the void 
created by this regulatory neglect. State legislators have tried to 
reform these markets through legislation. When they have they often 
face the FTC as an adversary, repeating the theory that the best 
regulation is no regulation. In the PBM market, the only segment of the 
health care industry that is unregulated, a coalition of over 30 states 
brought 5 enforcement actions against the three major PBMs attacking 
deceptive conduct and securing over $370 million in penalties and 
damages. When legislators have tried to enact legislation to address 
these problems identified in these cases in a comprehensive fashion, 
the FTC files letters opposing the legislation--opposing the efforts of 
consumer groups, unions, and other supporters of the legislation and 
taking the side of these firms that have engaged in these egregious 
anticonsumer practices. That makes no sense.
    This record of regulatory neglect must be reversed. Health 
insurers, PBMs, and GPOs can play a vital role in controlling health 
care costs and facilitating health care reform. Their size affords them 
strong purchasing power, and these savings can, in turn, be passed on 
to consumers and plan enrollees, where there is adequate choice and 
transparency and protections against conflicts of interest. But these 
are for-profit entities whose first obligation is to the bottom line. 
Where the regulators are asleep at the switch, or there is a lack of 
adequate regulation, these firms will exploit that opportunity. 
Frequently, these firms engage in deceptive and fraudulent conduct, the 
purpose of which is to build profits rather than control costs. A lack 
of competition and consumer protection regulation and enforcement means 
that the rigor of the competitive market is absent.
    Why is there an imbalance in enforcement and a lax position on the 
conduct of health care intermediaries such as insurers and PBMs? 
Perhaps that is because the agencies treat the insurer or PBM as if it 
is the consumer. If they do, that is a mistake. Insurers and PBMs do 
attempt to control costs for employers and other purchasers of health 
plans. While these entities may attempt to control cost they are also 
for profit entities with an overriding incentive to maximize profits. 
When there are battles between healthcare providers and insurers, the 
FTC always weighs in on the side of the insurers. But insurers are not 
the consumers. When there are battles between pharmacies and PBMs, the 
FTC always weighs in on the side of the PBM. But PBMs are not the 
consumers. Increasingly unions and consumer groups are raising the most 
serious concerns over the conduct of insurers and PBMs. When 
organizations like Change to Win, which represents over 10 million 
union members who have to pay the cost of health care, speak up against 
the egregious conduct of CVS/Caremark in a landmark study, it is time 
for the FTC to take notice. When consumer groups and public interest 
advocates speak up against the egregious conduct of insurers, or seek 
legislation to regulate PBMs, the FTC should recognize the legitimate 
representatives of the consumer interest.\2\
---------------------------------------------------------------------------
    \2\ In the Bush Administration there was a mixed record, at best, 
in securing the input of consumer groups in important policy issues. In 
the FTC/DOJ hearings on dominant firm conduct there was no testimony 
from consumer groups. In the FTC hearings on collaboration by 
healthcare providers, the FTC declined participation by consumer 
groups.
---------------------------------------------------------------------------
    Are health insurers and PBMs an appropriate proxy for the consumer 
interest? Obviously the ability to manage health care costs is critical 
for plans, and the insurance companies and PBMs have the potential for 
aiding that process significantly. However, any objective perception of 
the results of health insurer and PBM activity over the past several 
years would severely question whether these entities truly do act in 
the interest of the ultimate consumers. As documented in the hearings 
this Committee has held in the past several months there are rampant 
anticompetitive and fraudulent activities by health insurers. The 
primary goal of these for profit insurers and PBMs is to serve their 
shareholders and their profit margins, and not consumers. They are not 
the representative of the consumer interest.
    My testimony proceeds as follows. I first describe how the 
competition and consumer protection missions of the FTC have failed to 
adequately address the problems of health care intermediaries, 
including health insurers, PBMs and GPOs. For each, I describe how a 
lack of competition enforcement has led to highly concentrated markets 
across the country and high costs for consumers. I identify significant 
anticompetitive practices by insurers, PBMs, and GPOs that have gone 
unchallenged. In addition, I describe how a lack of consumer protection 
enforcement has created an environment in which deceptive conduct has 
flourished. To a certain extent, state enforcers and private litigants 
have filled the void from the lack of enforcement on the Federal level, 
but this is not an adequate substitute for Federal enforcement. 
Finally, I provide several recommendations for reversing the regulatory 
neglect of these important markets. Enforcement priorities must be 
realigned to build a sound structure from which the FTC can pursue its 
health care competition and consumer protection missions.
    My recommendations include:

   Enforcement priorities should be readjusted with a greater 
        focus on bringing enforcement actions against health insurers, 
        PBMs and GPOs.

   The FTC should significantly increase health insurance 
        consumer protection enforcement and create a separate division 
        for health insurance consumer protection enforcement.

   The FTC should reinvigorate enforcement against 
        anticompetitive conduct by health insurers, PBMs and GPOs, 
        focusing on those which lead to higher costs and increase entry 
        barriers. The FTC should conduct a retrospective study of 
        health insurer mergers to identify those that have harmed 
        consumers.

   The FTC should take a more fully informed and balanced 
        position on PBM advocacy, recognizing substantial enforcement 
        actions brought by states against PBMs for fraud and deceptive 
        conduct.

   The enforcement agencies need to recognize that insurers and 
        PBMs often do not reflect the interests of consumers, and are 
        not proxies of the public interest.

   Congress should clarify the jurisdiction of the FTC to be 
        able to bring enforcement against health insurers.
Rampant Competitive and Consumer Protection Problems in Health 
        Insurance
    Let me return to my earlier observation--the importance of choice 
and transparency to assure a competitive marketplace. Why are choice 
and transparency important? It should seem obvious. Consumers need 
meaningful alternatives to force competitors to vie for their loyalty 
by offering lower prices and better services. Transparency is necessary 
for consumers to evaluate products carefully, to make informed choices, 
and to secure the full range of services they desire. Only where these 
two elements are present can we expect free market forces to lead to 
the best products, with the greatest services at the lowest cost. Where 
these factors are absent, consumers suffer from higher prices, less 
service, and less choice. As the Health Care for America Now report 
observed ``Without competition among insurers, insurers have no reason 
to drive down costs, and without additional choices in the marketplace, 
consumers have no choice but to pay inflated prices.'' \3\
---------------------------------------------------------------------------
    \3\ Health Care for America Now, ``Premiums Soaring in Consolidated 
Health Insurance Market: Lack of Competition Hurts Rural States, Small 
Businesses.'' May 2009. Available at http://hcfan.3cdn.net/
dadd15782e627e5b75_g9m6isltl.pdf.
---------------------------------------------------------------------------
    As I describe below there has been no meaningful Federal antitrust 
or consumer protection enforcement against health insurers. The result 
of the lack of health insurance enforcement is profound. The number of 
uninsured has skyrocketed: more than 47 million Americans are 
uninsured, and according to Consumer Reports, as many as 70 million 
more have insurance that doesn't really protect them. In the past 6 
years alone, health insurance premiums have increased by more than 87 
percent, rising four times faster than the average American's wages. 
Health care costs are a substantial cause of three of five personal 
bankruptcies. At the same time from 2000 to 2007, the 10 largest 
publicly-traded health insurance companies increased their annual 
profits 428 percent, from $2.4 billion to $12.9 billion.
    Minimal antitrust enforcement. Any reasonable assessment would 
conclude that adequate choice and transparency are clearly lacking from 
today's health insurance markets. Study after study has found that 
health insurance markets are overly consolidated: in a recent report by 
Health Care for America Now, in 39 states two firms control at least 50 
percent of the market, and in nine states a single firm that controls 
at least 75 percent of the market.\4\ A 2007 AMA study found almost 95 
percent of all markets are highly concentrated.\5\ Industry advocates 
claim that many markets have several competitors. But the reality is 
these small players are not a competitive constraint on the dominant 
firms, but just follow the lead of the price increases of the larger 
firms.
---------------------------------------------------------------------------
    \4\ Ibid.
    \5\ American Medical Association, ``Competition in Health 
Insurance: A Comprehensive Study of U.S. Markets, 2007 Update.''
---------------------------------------------------------------------------
    During the past Administration there was massive consolidation of 
health insurance markets. As then Presidential candidate Obama 
observed,

        There have been over 400 health care mergers in the last 10 
        years. The American Medical Association reports that 95 percent 
        of insurance markets in the United States are now highly 
        concentrated and the number of insurers has fallen by just 
        under 20 percent since 2000. These changes were supposed to 
        make the industry more efficient, but instead premiums have 
        skyrocketed, increasing over 87 percent over the past 6 
        years.\6\
---------------------------------------------------------------------------
    \6\ Statement of Senator Barack Obama for the American Antitrust 
Institute, September 27, 2007. Accessed at http://
www.antitrustinstitute.org/archives/files/aai-%20Presidential%20
campaign%20-%20Obama%209-07_092720071759.pdf.

    There is little evidence that this wave of consolidation led to 
significant efficiencies, or lower costs, or other benefits. In fact, 
the fact that insurance premiums continued to rapidly increase suggests 
that any efficiencies were simply pocketed by the companies, rather 
than resulting in lower premiums or other consumer benefits.
    As Vermont Senator Patrick Leahy observed in hearings before the 
Senate Judiciary Committee in 2006 on health insurance consolidation:

        A concentrated market does reduce competition and puts control 
        in the hands of only a few powerful players. Consumers--in this 
        case patients--are ultimately the ones who suffer from this 
        concentration. As consumers of health care services, we suffer 
        in the form of higher prices and fewer choices.\7\
---------------------------------------------------------------------------
    \7\ Senator Patrick Leahy. Statement before the Senate Judiciary 
Committee Hearing: ``Examining Competition in Group Health Care.'' 
September 6, 2006. Accessed at http://judiciary.senate.gov/hearings/
testimony.cfm?id=2046&wit_id=2629.

    Competition matters: A recent study noted that insurance premiums 
are 12 percent lower in those markets in which there is comparatively a 
lower level of concentration than in more concentrated markets.\8\
---------------------------------------------------------------------------
    \8\ Dan Vukmer, General Counsel, University of Pittsburgh Medical 
Center Health Plan. Statement before the Commonwealth of Pennsylvania 
House of Representatives Insurance Committee. Public Hearing on 
Proposed Merger between Independence Blue Cross and Highmark. August 
25, 2008.
---------------------------------------------------------------------------
    The Bush Administration reviewed numerous mergers, but approved all 
of them, requiring some modest restructuring in only two mergers. In 
one case--Highmark's proposed acquisition of Independence Blue Cross--
it chose not even to engage in an extensive investigation, despite the 
fact that, if the two insurers merged, the new insurer would have held 
over 70 percent of the Pennsylvania market and formed the sixth-largest 
insurer in the country. Allowing such a large firm to dominate a single 
market would make the barriers to entry nearly insurmountable, and 
consumers would be faced with few options.\9\ Ultimately, the 
Pennsylvania Insurance Commissioner was poised to challenge the merger 
and found such severe competitive problems that the parties were forced 
to abandon the acquisition.\10\ It is not unusual for the states to 
step in where the Federal enforcers fail to effectively challenge these 
mergers. As shown in appendix A, there have been several cases where 
state insurance commissioners have secured remedies even where the 
Federal enforcers have failed to act.
---------------------------------------------------------------------------
    \9\ Ario, Joel. ``Statement of Pennsylvania Insurance Commissioner 
Joel Ario on Highmark and IBC Consolidation.'' January 22, 2009.; 
Balto, David. Testimony before the Senate Judiciary Committee, 
Subcommittee on Antitrust, Competition Policy and Consumer Rights. 
``Consolidation in The Pennsylvania Health Insurance Industry: The 
Right Prescription?'' July 31, 2008.
    \10\ Von Bergen, Jane M. and Angela Couloumbis, ``Insurers IBC, 
Highmark withdraw merger plan.'' The Philadelphia Inquirer, January 15, 
1990, accessed at http://www.philly.com/philly/news/homepage/
38128494.html.
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    Similarly, the Bush Administration did not bring a single case 
challenging anticompetitive conduct by insurance companies. Certainly 
there are various types of conduct by dominant insurers that deserve 
very careful scrutiny because they reinforce dominance and prevent 
rivals from entering and expanding.
    Practices such as most favored nations provisions, all products 
clauses, and silent networks, which limit the ability of providers to 
enter into arrangements with rival insurers, increase the power of the 
insurer at the expense of the health care provider and limit the 
ability of rival insurers to enter and expand in the market. For 
example, a most favored nations provision prevents providers from 
entering into more attractive arrangements with new entrants into the 
insurance market. Other provisions may prevent physicians from making 
consumers aware of more attractive insurance products which may provide 
better coverage. Some of these practices were challenged in the Clinton 
Administration, but the Bush Administration, which took a mistakenly 
permissive view to conduct by dominant firms throughout the economy did 
not mount a single challenge.
    Moreover, dominant insurers rarely invade each other's territories. 
This is disturbing since these firms certainly have the resources, 
incentives, and ability to enter new markets. The fact they choose not 
to raises serious concerns of market allocations. Take, for example, 
the fact that Blue Cross and Blue Shield plans hide behind a 
complicated system of licensed-based territorial allocations to claim 
that they don't compete with one another, even when there are multiple 
plans in the same state. This territorial allocation claim may have 
been what prompted the Bush Administration to take a pass on 
challenging the proposed Highmark/Independence Blue Cross merger in 
Pennsylvania. These allocations eliminate important sources of 
potential competition. The FTC should investigate and challenge these 
practices. It seems doubtful that a court looking at the Pennsylvania 
situation would have viewed such territorial allocations as 
procompetitive.
    Overall, the total lack of antitrust enforcement results in rapidly 
increasing premiums, increasing profits, greater numbers of uninsured 
and noncompetitive market structures in all but a handful of markets.
    Mistaken enforcement priorities. The lack of enforcement was not 
due to a lack of resources, but a serious misjudgment in enforcement 
priorities. During the Bush administration the FTC spent a hugely 
disproportionate amount of time, money and effort prosecuting 
relatively small groups of doctors who impermissibly attempted to 
collectively bargain with insurers. It brought 31 enforcement cases 
against health care providers, frequently small groups of doctors. The 
disproportionate focus on physician groups seems somewhat puzzling. 
There was no evidence that higher physician costs were a significant 
force in increasing health care expenditures. In fact, one can scan the 
entire literature on rising health care costs and see little mention of 
efforts by physicians to collectively negotiate as being a substantial 
contributing factor to higher health care costs. All of these cases 
were settled, probably because of the high cost of being subject to a 
government investigation for these modest-sized groups of physicians. 
There was little evidence in the complaints filed by the government 
that these groups actually secured higher prices or that consumers were 
harmed. In fact, in none of the cases did insurers or consumers file 
any antitrust suits seeking damages for the alleged illegal conduct.
    Over 40 percent of the enforcement actions were in rural areas 
which often face significant problems of securing adequate providers. 
These enforcement actions only increased the problems of providing 
adequate access and service in these markets.
    These comments are not intended to condone illegal conduct. But the 
missions of the enforcement agencies should be focused on those areas 
which have the greatest impact on the economy and consumers. And it 
seems relatively clear that the anticompetitive and deceptive conduct 
by health insurers has a far more profound impact.
    No Federal consumer protection enforcement. The consumer protection 
story is also distressing. There were no FTC enforcement actions 
against deceptive or fraudulent conduct by health insurers. Enforcement 
is an absolute necessity in this market. The hearings held by this 
Committee have demonstrated that consumers also face an astounding lack 
of transparency in the marketplace. Health insurance products are 
complex and terms are not uniform, making it near impossible for 
consumers to meaningfully compare their options. Insurers make special 
efforts to prevent transparency and information. As Wendell Potter, a 
former insurance executive, testified before the full Committee, 
``Insurers make promises they have no intention of keeping, they flout 
regulations designed to protect consumers, and they make it nearly 
impossible to understand--or even to obtain--information we need.'' 
\11\
---------------------------------------------------------------------------
    \11\ Wendell Potter. Statement before the U.S. Senate Committee on 
Commerce, Science & Transportation Hearing: ``Consumer Choices and 
Transparency In the Health Insurance Industry.'' June 24, 2009. 
Accessed at http://commerce.senate.gov/public/_files/PotterTestimony
ConsumerHealthInsurance.pdf.
---------------------------------------------------------------------------
    In a June letter to several key Congressional leaders, Consumer 
Watchdog called for Congress to enact a ``Patient Bill of Rights'' and 
detailed a number of ways in which health insurers deliberately mislead 
and underpay patients, including: issuing excessive fine print that 
allows them to deny coverage for common procedures, failing to define 
``medical necessity'' and ``experimental treatment,'' creating junk 
policies that are ``not worth the paper they're printed on,'' and 
manipulating risk to refuse coverage for ailments while charging higher 
rates.\12\ Health insurers allege that they have largely abandoned the 
practice of forcing ``gag clauses'' on physicians that prohibit them 
from discussing insurance alternatives or reimbursement procedures; 
however, many physicians report having their hands similarly tied by 
``business clauses'' that require many of the same concessions.\13\ 
Consumers cannot access certain information about their benefits and 
insurers adjudicate claims based on inscrutable and even fraudulent 
formulas.
---------------------------------------------------------------------------
    \12\ Letter from Jamie Court and Jerry Flanagan, Consumer Watchdog, 
to House Members Nancy Pelosi, Henry Waxman, George Miller, Pete Stark 
and Charles Rangel and Senators Max Baucus, Ted Kennedy, and Chris Dodd 
(June 4, 2009). Accessed at http://www.consumer
watchdog.org/resources/PatientsBillofRightsHouseSenate.pdf.
    \13\ Fogoros, Richard N. ``Why Gag Clauses are Obsolete.'' The 
Covert Rationing Blog, June 20, 2007. Accessed at http://
covertrationingblog.com/gekkonian-rationing/why-gag-clauses-are-
obsolete.
---------------------------------------------------------------------------
    Consider, for example, the Ingenix matter--the recent scandal over 
abuse of an industry price-setting database that health insurers used 
to artificially depress reimbursements to consumers. For several years, 
United Health Care used its wholly owned subsidiary, Ingenix Corp., to 
calculate reimbursement rates for out-of-network coverage. These rates 
were artificially deflated, allowing United to lowball payments to 
customers. Consumers were systematically underpaid by millions of 
dollars. The New York State Attorney General's Office sued United over 
Ingenix and has secured over $94.6 million so far, and a class action 
suit by the American Medical Association settled for $400 million.\14\ 
Numerous private suits continue.\15\ As New York Attorney General 
Andrew Cuomo stated in testimony before the Senate Commerce Committee 
in March, Ingenix was ``a huge scam that affected hundreds of millions 
of Americans [who were] ripped off by their insurance companies.'' \16\
---------------------------------------------------------------------------
    \14\ Cook, Bob. ``Final health plan reaches settlement over Ingenix 
data base.'' American Medical News. July 6, 2009. Accessed at http://
www.ama-assn.org/amednews/2009/06/29/bisc0629.htm.
    \15\ Senate Committee on Commerce, Science and Transportation, 
Office of Oversight and Investigations. ``Underpayments to Consumers by 
the Health Insurance Industry.'' Staff Report for Chairman Rockefeller. 
June 24, 2009.
    \16\ Senator John D. Rockefeller, IV, Remarks at the Senate 
Judiciary Hearing: Part II: Deceptive Health Insurance Industry 
Practices: Are Consumers Getting What They Paid For?'' (March 31, 
2009). Accessed at http://commerce.senate.gov/public/
index.cfm?FuseAction=Hearings.
Statement&Statement_ID=8704a1ba-d058-4ad6-b6ff-3031bd2f0aef.
---------------------------------------------------------------------------
    Instead of a vibrant, competitive marketplace, the lack of a sound 
regulatory and enforcement regime has allowed the development of a 
highly concentrated system in which deceptive and abusive practices 
flourish with inadequate checks from rivalry or regulation. With 
insufficient choice and severely limited transparency in the market, 
how do consumers fare? Let's examine Montana, where the single largest 
insurer, Blue Cross and Blue Shield of Montana, holds a 75 percent 
market share. According to a report by Health Care for America Now, the 
average annual combined premium for employers and employees in Montana 
rose from $6,220 in 2000 to $11,743 in 2007--over half of that year's 
average annual salary in the state, $22,170.\17\ Montana is a leader in 
health insurer consolidation, but it is far from an outlier--similar 
markets exist in almost every state nationwide.\18\
---------------------------------------------------------------------------
    \17\ Health Care for America Now, ``Premiums Soaring in 
Consolidated Health Insurance Market: Lack of Competition Hurts Rural 
States, Small Businesses.'' May 2009. Available at http://
hcfan.3cdn.net/dadd15782e627e5b75_g9m6isltl.pdf.
    \18\ Center for American Progress Action Fund. ``Every State Needs 
Health Care Reform: 50 State Fact Sheets.'' July 7, 2009. Accessed at 
http://www.americanprogressaction.org/issues/2009/07/
health_factsheets.html.
---------------------------------------------------------------------------
    Why aren't health insurance markets working for American families? 
The answer, at least initially is regulatory failure. Health insurers 
are governed by a hodge-podge of local, state and Federal regulations. 
Moreover, these companies have fought tooth and nail over the last 
decade against any regulators' attempts to institute even basic 
consumer protection measures--including, crucially, killing the 
original patients' bill of rights legislation in 2001.
    The Federal consumer protection enforcement record is as bleak as 
the competition record. The FTC has not brought a single case against 
deceptive or fraudulent conduct by health insurers. All of the FTC's 
health care consumer protection enforcement actions were brought 
against advertising of sham products, such as miracle diet pills, that 
capitalize on consumers' willingness to be deceived.
    This lack of Federal oversight and the insurers' successful battle 
against regulation gave insurers great latitude to invent deceptive and 
fraudulent schemes to harm consumers. Insurers engage in a veritable 
laundry list of deceptive and abusive conduct such as egregious 
preapproval provisions, deception about scope of coverage, 
unjustifiably denying or reducing payments to patients and physicians, 
and other coercive and deceptive conduct.
    In addition to the aforementioned Ingenix case, insurers have been 
found liable or settled charges for a wide variety of fraudulent and 
deceptive conduct including: utilizing falsified data to calculate 
reimbursements, refusing to pay for visits to providers erroneously 
listed as in-network; wrongfully denying claims for sick patients; 
failing to pay reimbursements in a timely manner; overcharging 
customers for premiums; refusing to cover emergency treatment; failing 
to provide notice of rate increases; ignoring customer complaints; and 
various other similar methods of denying needed care while maximizing 
profit. There are countless complaints by hospitals and physicians that 
preapproval provisions prevent them from providing adequate and safe 
care. In testimony before the Senate Commerce Committee, Consumers' 
Union characterized the insurance payer system as plagued by ``a swamp 
of financial shenanigans''--including a lack of transparency, conflicts 
of interest, and deceptive practices--and called on regulators and 
enforcers to step up actions to ``prevent egregious consumer ripoffs.'' 
\19\
---------------------------------------------------------------------------
    \19\ Bell, Charles, Program Director, Consumers Union. ``Testimony 
Before the Committee on Commerce, Science and Transportation, U.S. 
Senate, Hearing on Consumer Reimbursement for Health Care Services.'' 
March 26, 2009.
---------------------------------------------------------------------------
    To combat this conduct, State Attorneys Generals, Insurance 
Commissioners, and private parties have brought over 50 cases securing 
potentially over $1 billion in damages and fines since 2000. Although 
these state actions are laudable, state enforcement is episodic and can 
only repair a problem involving a single company in a single state. 
Trying to fix these endemic problems with lawsuits is like treating 
cancer with a bushel of Band-Aids.
    These numerous enforcement actions do not suggest however that 
state enforcement is an adequate substitute for Federal enforcement. 
Indeed the contrary is true. As this Committee has heard, the level of 
enforcement resources that insurance commissioners possess varies 
significantly from state to state. Most states have relatively limited 
resources at best to police the insurance industry.\20\ In addition, 
state laws serve at best as a patchwork quilt to address consumer 
protection issues. In addition, self-insured health care plans, which 
account for over 40 percent of the private health insurance market, are 
not subject to state regulation. Thus state regulation is far from an 
adequate substitute for Federal regulation of health insurance.
---------------------------------------------------------------------------
    \20\ Karen Pollitz. Statement before the U.S. Senate Committee on 
Commerce, Science & Transportation Hearing: ``Consumer Choices and 
Transparency In the Health Insurance Industry.'' June 24, 2009. 
Accessed at Wendell Potter. Statement before the U.S. Senate Committee 
on Commerce, Science & Transportation Hearing: ``Consumer Choices and 
Transparency In the Health Insurance Industry.'' June 24, 2009. 
Accessed at http://commerce.senate.gov/public/_files/
PotterTestimonyConsumerHealthInsurance.pdf.
---------------------------------------------------------------------------
    The Federal enforcers have not restricted the drive for 
consolidation nor limited the extent to which insurers could abuse the 
resulting market power. The result was the tsunami of health insurer 
consolidation and the accompanying wave of abusive business practices 
that have stuck small businesses and consumers with unreasonably high 
premiums and inadequate coverage. Indeed, a report by the Medicare 
Payment Advisory Commission, an expert panel appointed by Congress, 
found that insurers ``have been able to pass costs on to the purchasers 
of insurance and maintain their profit margins.'' \21\ Moreover, as 
health insurers have used their market clout to reduce reimbursement 
for smaller health care providers, those providers--disproportionately 
concentrated in rural or urban underserved areas--have been forced into 
offering assembly-line health care.
---------------------------------------------------------------------------
    \21\ Medicare Payment Advisory Commission, ``Report to the 
Congress: Medicare Payment Policy,'' March 2009. Accessed at http://
www.medpac.gov/documents/Mar09_EntireReport.pdf.
---------------------------------------------------------------------------
Anticompetitive and Deceptive Practices by Pharmacy Benefit Managers
    PBMs can play an important function in health care markets by 
setting up pharmaceutical benefit networks and adjudicating 
pharmaceutical claims. But the same story of regulatory neglect is true 
for PBMs. The FTC has not challenged any PBM mergers, or 
anticompetitive or fraudulent conduct by PBMs. This is a particularly 
serious concern since PBMs are the only segment of the health insurance 
market that is unregulated.
    First, like the insurance market, there has been tremendous 
consolidation among PBMs. In the Bush Administration, there were 
several large PBM mergers, so the three major PBMs (CVS/Caremark, 
Express Scripts and Medco) now have over 80 percent of the national PBM 
market. The FTC has not undertaken any enforcement activity in the face 
of this market consolidation. In fact, the past two substantial PBM 
mergers--Caremark's acquisition of AdvancePCS and CVS's acquisition of 
Caremark--were approved without a significant investigation, despite 
leading to a significant increase in market power.\22\ While consumers 
have faced rapidly increasing costs and inadequate access to 
pharmaceuticals, from 2003 to 2007, the three largest PBMs--Medco, 
Caremark and Express Scripts--nearly tripled their annual profits from 
$966 million to over $2.7 billion.
---------------------------------------------------------------------------
    \22\ The American Antitrust Institute provided a white paper 
assessing the structural issues posed by the proposed Express Scripts/
Caremark merger. See American Antitrust Institute, (2007), available at 
Express Scripts' Proposed Acquisition of Caremark available at http://
www.antitrustinstitute.org/archives/files/
AAI_Express%20scripts_Caremark_2-14_021520071110.pdf. The law firm that 
represented one of the parties in the Caremark/AdvancePCS merger 
observed that the investigation was closed on a ``quick look'' review. 
See Jonesday.com, Experience Details: Caremark, http://
www.jonesday.com/experience/experience_detail.aspx?exID=S9298 (last 
visited July 1, 2008). The CVS/Caremark merger was resolved without the 
FTC's issuing a second request.
---------------------------------------------------------------------------
    Today the Committee will hear testimony of the problematic conduct 
CVS has engaged in after acquiring Caremark. This combination of the 
largest pharmacy chain with the largest PBM poses significant 
competitive concerns. The pharmacist testifying today is not alone in 
expressing these concerns. Consumer groups including the Consumer 
Federation of American and U.S. PIRG, Change to Win (a coalition of 
unions), and the National Legislative Alliance on Prescription Drugs (a 
bipartisan group of state legislators) have called on the FTC to 
investigate allegations of anticompetitive and deceptive conduct that 
have increased prices and reduced choices for consumers.
    The concerns raised about the CVS/Caremark alliance bear a striking 
and disturbing resemblance to the Ingenix situation. In order for the 
health insurance system to function effectively, there needed to be an 
honest, independent broker to determine usual and customary rates. That 
was the purpose of Ingenix. United's ownership of Ingenix, however, 
distorted that relationship and created a conflict of interest. That is 
why the New York Attorney General required the divestiture of Ingenix 
and the creation of a non-profit entity to perform its function. 
Similarly, CVS' ownership of Caremark distorts Caremark's incentive and 
ability to be an honest broker. There is a clear conflict of interest 
and an ability to manipulate the relationship to harm CVS' rivals and 
consumers. Moreover, controlling health care costs and health care 
reform is dependent on PBMs being honest brokers. Caremark, because it 
is a CVS subsidiary, is unlikely to function as an honest broker.
    More generally, PBM consumer protection issues have an important 
impact on the potential for the government to control health care 
costs, and for many of the issues that the government will struggle 
with in health care reform. As described in other testimony presented 
to this Committee, today there is a significant lack of transparency in 
PBM markets. Because of this lack of transparency, PBMs are able to 
``play the spread'' between pharmaceutical manufacturers, pharmacies 
and the health care plans. As the union coalition Change to Win noted, 
``A lack of transparency is one of the key problems in the pharmacy 
benefit management industry. For example, PBMs often charge the health 
plans they serve significantly more for the drugs than they pay the 
pharmacies that distribute the drugs to patients. PBMs also may switch 
patients to a drug other than the one their doctor prescribed sometimes 
a drug more expensive for the health plan and patient to take advantage 
of rebates the PBM receives from drug manufacturers, which are often 
hidden from the PBM's customers.'' \23\ By playing the spread, PBMs can 
artificially decrease the level of reimbursement to pharmacies. This 
conduct is clearly similar to the types of fraudulent and deceptive 
conduct that United Healthcare engaged in with its Ingenix subsidiary.
---------------------------------------------------------------------------
    \23\ Change to Win. Letter to Chairman Lynch and the members of the 
Subcommittee on Federal Workforce, Postal Service, and the District of 
Columbia, Committee on Oversight and Government Reform. June 24, 2009. 
Available at http://Federalworkforce.oversight.house.gov/documents/
20090625153554.pdf.
---------------------------------------------------------------------------
    The lack of PBM transparency harms the government's efforts at 
controlling health care costs. The House Committee on Oversight in 
Government Affairs recently held hearings on the lack of PBM 
transparency and its impact on Federal Governmental programs. Change to 
Win and numerous other witnesses testified that the lack of oversight 
and transparency have led to higher drug costs for the Federal 
Government. Change to Win in particular noted how the CVS/Caremark 
relationship deterred the ability to effectively control costs.
    There are numerous other competitive concerns raised by PBMs. Some 
PBMs secure rebates and kickbacks in exchange for exclusivity 
arrangements that may keep lower priced drugs off the market. This is 
similar to the concerns raised over kickbacks in the GPO context. More 
recently there have been a series of acquisitions by PBMs to acquire 
specialty pharmaceutical companies. These specialty pharmaceuticals are 
higher-priced drugs that need special handling. After these 
acquisitions, many of these PBMs rapidly increased the price of these 
specialty pharmaceuticals.\24\
---------------------------------------------------------------------------
    \24\ Freudenheim, Milt. ``The Middleman's Markup.'' The New York 
Times. April 19, 2008. (Attachment C)
---------------------------------------------------------------------------
    Yet there have been no FTC enforcement actions against 
anticompetitive or deceptive conduct by PBMs. As in the health 
insurance market, both private parties and states have attempted to 
fill the void. In the past four years alone, cases brought by a 
coalition of over 30 state attorneys general have brought several cases 
attacking unfair, fraudulent and deceptive conduct. Between 2004 and 
2008, the three major PBMs have been the subject of six major Federal 
or multidistrict cases over allegations of fraud; misrepresentation to 
plan sponsors, patients, and providers; unjust enrichment through 
secret kickback schemes; and failure to meet ethical and safety 
standards. These cases listed below, resulted in over $371.9 million in 
damages to states, plans, and patients so far.

   United States v. Merck & Co., Inc., et. al.--$184.1 million 
        in damages for government fraud, secret rebates, drug 
        switching, and failure to meet state quality of care standards.

   United States v. AdvancePCS (now part of CVS/Caremark)--
        $137.5 million in damages for kickbacks, submission of false 
        claims, and other rebate issues.

   United States v. Caremark, Inc.--pending suit alleging 
        submission of reverse false claims to government-funded 
        programs.

   State Attorneys General v. Caremark, Inc.--$41 million in 
        damages for deceptive trade practices, drug switching, and 
        repacking.

   State Attorneys General v. Express Scripts--$9.5 million for 
        drug switching and illegally retaining rebates and spread 
        profits and discounts from plans.

    A group of state attorneys general and the DOJ are continuing to 
conduct several investigations of the three major PBMs, and several 
private actions challenging their conduct have been brought by unions 
and other customers. The current concentration of the national full-
service PBM market only exacerbates these problems, increasing the need 
for government enforcement and potential regulation of the industry.
    PBMs' promise of controlling pharmaceutical costs has been undercut 
by a pattern of conflicts of interest, self-dealing, deception, and 
anticompetitive conduct. The dominant PBMs have been characterized by 
opaque business practices, limited market competition, and widespread 
allegations of fraud. As a bipartisan group of state legislators noted:

        We know of no other market in which there have been such a 
        significant number of prominent enforcement actions and 
        investigations, especially in a market with such a significant 
        impact on taxpayers. Simply put, throughout the United States, 
        numerous states are devoting considerable enforcement resources 
        to combating fraudulent and anticompetitive conduct by PBMs. 
        This is because those activities are taking millions of 
        taxpayer dollars and denying government buyers the opportunity 
        to drive the best bargain for the state.\25\
---------------------------------------------------------------------------
    \25\ Letter from Mass. State Senator Mark Montigny to FTC Chairman 
Deborah Platt Majoras. May 11, 2005. (Attachment D).

    In an important decision upholding state regulation of PBMs, one 
Federal court observed ``[w]hether and how a PBM actually saves an 
individual benefits provider money with respect to the purchase of a 
particular prescription drug is largely a mystery to the benefits 
---------------------------------------------------------------------------
provider.'' The court elaborated:

        This lack of transparency also has a tendency to undermine a 
        benefits provider's ability to determine which is the best 
        among competing proposals from PBMs. For example, if a benefits 
        provider had proposals from three different PBMs for pharmacy 
        benefits management services, each guaranteeing a particular 
        dollar amount of rebate per prescription, the PBM proposal 
        offering the highest rebate for each prescription filled could 
        actually be the worst proposal as far as net savings are 
        concerned, because that PBM might have a deal with the 
        manufacturer that gives it an incentive to sell, or restrict 
        its formulary, to the most expensive drugs. In other words, 
        although PBMs afford a valuable bundle of services to benefits 
        providers, they also introduce a layer of fog to the market 
        that prevents benefits providers from fully understanding how 
        to best minimize their net prescription drug costs.\26\
---------------------------------------------------------------------------
    \26\ Pharm. Care Mgmt. Ass'n v. Rowe, 2005 U.S. Dist. LEXIS 2339, 
at *7-8 (D. Me. Feb. 2, 2005), aff'd, 429 F.3d 294 (1st Cir. 2005).

    Some of the problematic practices challenged in these cases 
---------------------------------------------------------------------------
include:

   secretly retaining most manufacturer payments, e.g., 
        rebates, discounts and other fees, instead of passing through 
        such payments to clients;

   switching plan members from low- to high-cost drugs;

   favoring higher-cost drugs on their formularies;

   manipulating generic (maximum allowable cost) pricing;

   entering into exclusivity arrangements with specialty 
        pharmaceutical manufacturers that raise the prices of those 
        drugs;

   conspiring with manufacturers to violate Omnibus Budget 
        Reconciliation Act and ``best pricing'' regulations; and

   committing other contract or fiduciary breaches.

    One chronic problem with PBMs is that of self-dealing. Plan 
sponsors purchase PBM services with the assumption they are an ``honest 
broker'' that will select the lowest cost, best product on an objective 
basis. These concerns of self-dealing were part of the reason the FTC 
challenged the acquisition of PBMs by pharmaceutical manufacturers in 
the mid-1990s--Merck's acquisition of Medco and Lilly's acquisition of 
PCS. The concern was that the pharmaceutical manufacturers would favor 
their own drugs on the PBM formulary. These cases were resolved with 
orders that protected plan sponsors from the risks of self-dealing.
    Unfortunately, these problems of self-dealing have continued to 
exist for PBMs. Almost all PBMs have their own mail order operations. 
Often, PBMs may favor drugs in which they receive a greater margin 
because they are dispensed by mail order, even though the plan sponsor 
or consumer may pay more. PBMs often seek to drive consumers to more 
highly profitable mail order distribution and away from independent 
pharmacies that offer the level of quality, advice and personal service 
consumers prefer. Consumers often suffer from the conversion to mail 
order: they are given little choice, there is a greater chance of 
adverse medical reactions, and there is little if any consumer service. 
Any consumer who has spent hours on the phone waiting for an answer on 
a mail order prescription sees little ``efficiency'' from these efforts 
to drive independent pharmacies from the market. Although an FTC study 
appeared to find little evidence of these problems of self-dealing, 
recent state enforcement actions have demonstrated that these problems 
are ongoing.
    Unfortunately, the FTC has failed to investigate or take any 
enforcement action against this anticompetitive, fraudulent, and 
deceptive conduct. Even more troubling, in response to the substantial 
deceptive and fraudulent conduct uncovered in these state enforcement 
actions, several state legislatures have considered legislation to 
regulate PBMs. Many of the proposed statutes: (1) require transparency 
so the health plans can secure adequate information so they can receive 
the full benefits of any rebates paid to the PBM and (2) establish a 
fiduciary duty between the PBM and a plan to address the problems of 
conflicts of interest and self-dealing. When states have attempted to 
regulate PBMs to address the lack of enforcement, increase transparency 
or address forms of this deceptive conduct, the FTC has advocated on 
the side of the PBM industry in opposition to the proposed legislation. 
This is a mistake. As the American Antitrust Institute report to the 
Obama transition team observed: ``[c]onsidering the substantial number 
of enforcement actions and the severity of the PBM conduct, we believe 
these efforts at regulating PBMs are well founded and that the FTC's 
advocacy has been ill-advised.'' \27\
---------------------------------------------------------------------------
    \27\ The Next Antitrust Agenda: The American Antitrust Institute's 
Transition Report on Competition Policy to the 44th President (Albert 
A. Foer ed., 2008).
---------------------------------------------------------------------------
    In many cases the FTC has placed itself in opposition both to 
consumer groups and union plan sponsors that support the legislation. 
Opposing efforts to reign in conflicts of interest and improve 
transparency seem questionable. If there is anything the Ingenix 
example must teach us, it is that there is a significant potential for 
fraud and deception by health care intermediaries. Efforts to either 
clarify the duties of those intermediaries by establishing legal 
provisions making it clear they have a fiduciary duty to the plans, and 
providing adequate transparency so that plans can effectively monitor 
the PBMs' activities, would seem to be crucial elements for managing 
and controlling health care costs.
Anticompetitive Conduct by Group Purchasing Organizations
    GPOs negotiate contracts on behalf of their member hospitals with 
numerous entities, including medical device manufacturers. The original 
purpose of GPOs was to obtain better pricing on products than hospitals 
could obtain individually, and to provide value-added services. 
Although GPOs have the potential to reduce purchase costs by giving 
hospitals greater bargaining power, growing GPO consolidation and 
market power has increased the exclusionary potential of some of the 
GPO contracting practices.\28\ Moreover, the payment of kickbacks is 
pervasive and undermines the product selection system.
---------------------------------------------------------------------------
    \28\ See Hospital Group Purchasing: Has the Market Become More Open 
to Competition?: Hearing Before the S. Comm. on the Judiciary, 107th 
Cong. 3-4 (2003) (statement of Lynn James Everard).
---------------------------------------------------------------------------
    Many small medical device manufacturing start-ups have demonstrated 
that contracting practices by GPOs have effectively foreclosed them 
from entering the market. Examples of alleged exclusionary practices 
include kickbacks, sole-source contracts, market share discounts, auto-
substition and bundling of products so hospitals must purchase the bulk 
of their supplies from a single vendor to qualify for a discount on any 
one product. Small manufacturers argue that incumbent suppliers, 
together with GPOs, use these practices to eliminate competition and 
preserve their market share.\29\
---------------------------------------------------------------------------
    \29\ See, e.g., Hospital Group Purchasing: Lowering Costs at the 
Expense of Patient Health and Medical Innovation?: Hearing Before the 
S. Comm. on the Judiciary, 107th Cong. (2002) (statement of Joe E. 
Kiani, President and CEO, Masimo Corp.).
---------------------------------------------------------------------------
    Particularly problematic are kickbacks paid by manufacturers to the 
GPOs. These kickbacks deceive buyers and third parties (including 
government entities) that are responsible for payment for the products 
of the real costs of the products. They may distort demand and provide 
the opportunity to artificially increase prices. Although there are 
regulations that prohibit kickbacks in many health care markets, the 
GPO payments fall into a safe harbor. In the past 7 years, the Senate 
Judiciary Committee has held four hearings concerning kickbacks and 
other exclusionary conduct by GPOs. The FTC also addressed the issue in 
its 2003 health care competition hearings.\30\ Over a dozen private 
suits have been brought, some successfully, by small innovative medical 
device manufacturers against exclusionary practices by GPOs and device 
manufacturers.\31\ Yet the FTC has failed to bring any enforcement 
actions in this area.
---------------------------------------------------------------------------
    \30\ Fed. Trade Comm'n, Health Care and Competition Law and Policy 
Public Comments (2003), available at http://www.ftc.gov/os/comments/
healthcarecomments2/index.shtm.
    \31\ See Masimo Corp. v. Tyco Healthcare Group, LP, Case No. 02-CV-
4770 (C.D. Cal. 2002). See also Genico, Inc. v. Ethicon, Inc., No. 04-
CV-00229 (E.D. Texas 2004); Rochester Medical Corp. v. C.R. Bard Inc., 
Case No. 5:04-CV-060 (E.D. Tex. 2004); Applied Med. Res. Corp. v. 
Johnson & Johnson, Inc., No. 03-CV-1329 (C.D. Cal. 2003); ConMed Corp. 
v. Johnson & Johnson, Inc., No. 03-CV-8800 (S.D.N.Y. 2003); Medtronic 
AVE Inc. v. Cordis Corp., Case No. 03-CV-212 (E.D. Tex. 2003); 
Retractable Techs., Inc. v. Becton Dickinson & Co., Case No. 
5:01CV00036 (E.D. Tex. 2001); Kinetic Concepts, Inc. v. Hillenbrand 
Industries, Inc., Case No. 5:95CV00755 (W.D. Tex. 1995).
---------------------------------------------------------------------------
    That is particularly unfortunate because of the FTC's unique 
statutory powers. The FTC brings competition enforcement actions under 
Section 5 of the FTC Act which prohibits ``unfair or deceptive acts or 
practices.'' Section 5 is broader than the more traditional antitrust 
laws and enables the FTC to attack practices or conduct that are not 
necessarily a violation of the Sherman or Clayton Act.
    Section 5 may provide a useful tool in two respects to cure the 
harmful practices in the medical device market. First, to the extent 
that potential enforcement actions against market share discounts, or 
other forms of de facto exclusivity seem deficient for some element 
necessary for a Sherman Act challenge, Section 5 may enable the FTC to 
overcome that deficiency. Second, the practices of kickbacks can be 
addressed under Section 5 as an unfair method of competition. A gap in 
enforcement currently exists because of the difficulty in proving that 
a kickback scheme constitutes a violation of the Sherman Act. The Ninth 
Circuit, after acknowledging the existence of a kickback scheme by an 
alleged health insurance monopolist caused higher co-payments and 
premium payments, found no antitrust violation because of a lack of 
evidence of harm to the relevant market.\32\ Carried to its logical 
extreme that decision would mean that the antitrust laws would not 
prevent every insurance company from engaging in kickbacks that raised 
costs to consumers. However, under Section 5 a kickback scheme could be 
an unfair method of competition, particularly where there is evidence 
of consumer harm. The FTC should use Section 5 to challenge these 
kickbacks.
---------------------------------------------------------------------------
    \32\ See Forsyth v. Humana, Inc., 114 F.3d 1467, 1477-79 (9th Cir. 
1997) (rejecting a claim that an insurance company's alleged kickback 
scheme caused antitrust injury to group health insurance customers 
where the evidence showed the scheme caused higher co-payments and 
premium payments, but did ``not explain how the scheme reduced 
competition in the relevant market''), aff'd on other grounds, 525 U.S. 
299 (1999).
---------------------------------------------------------------------------
    More generally, Congress needs to address the GPO kickback issue. 
Congress created a ``safe harbor'' from the Medicare anti-kickback 
statute in 1987, permitting dominant suppliers to pay billions of 
dollars to GPOs. These payments are often used to exclude competitors 
resulting in increased cost and decreased quality of medical devices 
over the past two decades. In order to restore competition in the 
procurement of medical supplies, this safe harbor must be repealed and 
suppliers must no longer be permitted to fund the GPOs.
    As a 2002 GAO reports suggests, GPOs have evolved from neutral 
buying units to ``gateways'' which permit manufacturers to enter into 
arrangements that may raise entry barriers, ultimately leading to 
higher prices and less innovation. The report noted that ``a 
manufacturer dominant in a product line may contract with a GPO, or 
agree to a favorable contract, to preserve its market share and exclude 
competition.''
    Sole-source contracts, exclusive-dealing relationships and bundling 
or rebate programs are not necessary for hospitals to obtain costs 
savings and can cause market inefficiencies. In fact, the GAO found in 
its 2002 pilot study that in a number of instances ``GPOs' prices were 
not always lower and were often higher than prices paid by hospitals 
negotiating with vendors directly.'' The GAO's follow-up report in 2003 
concluded that ``when used by GPOs with a large market share, these 
contracting strategies have the potential to reduce competition . . . 
[and] discourage other manufacturers from entering the market.''
    Besides greater antitrust enforcement, Congress should repeal the 
kickback safe harbor that permits GPOs to engage in this conduct that 
harms consumers and competition.
Recommendations for Revitalizing Competition and Consumer Protection 
        Enforcement
        1. The FTC should change the enforcement priorities to focus on 
        the segments of the market with the greatest potential for 
        harm: health insurance, PBMs and GPOs. The areas of the market 
        that seem to pose the greatest competitive problems are health 
        care payment intermediaries, such as insurers and PBMs. These 
        are the entities that operate in the most concentrated markets, 
        and the complexity and opaque nature of their practices make 
        these markets a fertile medium for anticompetitive and 
        deceptive conduct.

        2. The FTC should create a vigorous health insurance consumer 
        protection enforcement program. The FTC's health care consumer 
        protection enforcement currently focuses on marketers of 
        clearly sham and deceptive products. This is unfortunate. In 
        many other areas, such as financial services, the FTC uses a 
        broad range of powers, including studies, workshops, policy 
        hearings, legislative testimony, and industry conferences to 
        better inform marketplace participants of how to properly abide 
        by the law. The FTC should adjust its healthcare consumer 
        protection enforcement to focus on health insurers and PBMs. 
        These efforts should focus both on enforcement to prevent 
        egregious and fraudulent practices and to assure that there is 
        a sufficient amount of information and choice so that consumers 
        can make fully informed decisions. Because of the importance of 
        these issues, especially in controlling health care costs, the 
        FTC should establish a new division for health insurance 
        consumer protection.

        3. Reinvigorated enforcement against anticompetitive conduct. 
        The FTC also needs to reinvigorate enforcement against 
        anticompetitive conduct by health insurers, PBMs, and GPOs. The 
        FTC should scrutinize anticompetitive conduct and use its 
        powers under Section 5 of the FTC Act. As this Committee knows, 
        Section 5 of the FTC Act can attack practices that are not 
        technical violations of the traditional antitrust laws, the 
        Sherman and Clayton Acts. Thus the FTC can use that power under 
        Section 5 to address practices that may not be technical 
        violations of the Federal antitrust laws, but still may be 
        harmful to consumers. As I have testified elsewhere, the FTC 
        should begin to use that power under Section 5 to attack a wide 
        range of anticompetitive and egregious practices by health 
        insurers, PBMs, and GPOs. \33\
---------------------------------------------------------------------------
    \33\ David Balto. ``Reviving Competition in Healthcare Markets: The 
Use of Section 5 of the FTC Act.'' Statement before the FTC Workshop: 
Section 5 of the FTC Act as a Competition Law. October 17, 2008. 
Accessed at http://www.americanprogress.org/issues/2008/10/pdf/
section5testimony.pdf.

        4. Stronger health insurance and PBM merger enforcement. During 
        the Bush administration there was significant consolidation in 
        both of these markets, and now these markets are incredibly 
        concentrated. If the FTC and/or Justice Department lacks 
        sufficient resources to effectively challenge anticompetitive 
        mergers, they should be given those resources. If the current 
        merger standards do not appropriate to effectively challenge 
        these mergers, those standards should be reevaluated. Simply, 
        the public cannot afford any greater consolidation in either 
---------------------------------------------------------------------------
        health insurance or PBM markets.

        5. Conduct a retrospective study of health insurer mergers. I 
        have suggested elsewhere that one approach to this issue would 
        be for the FTC or the DOJ to conduct a study of consummated 
        health insurer mergers. One of the significant accomplishments 
        of the Bush administration was a retrospective study of 
        consummated health insurance mergers by the Federal Trade 
        Commission. This study led to an important enforcement action 
        in Evanston, Illinois, which helped to clarify the legal 
        standards and economic analytical tools for addressing health 
        insurance mergers. A similar study of consummated health 
        insurance mergers would help to clarify the appropriate legal 
        standards for health insurance mergers and identify mergers 
        that have harmed competition.

        6. Greater studies of competitive problems in health insurance. 
        The FTC performs an important function in providing studies on 
        key public policy issues. The FTC should provide studies on 
        health insurance and begin its efforts with a long-overdue 
        examination of the McCarran-Ferguson exemption, the elimination 
        of which would increase the potential for competition between 
        insurance companies in health insurance and in other areas.

        7. A more fully informed and balanced position in advocacy. In 
        many cases the FTC has placed itself in opposition both to 
        consumer groups and in union plan sponsors in proposed 
        legislation to regulate PBM markets by improving transparency 
        and giving plan sponsors tools to prevent conflicts of 
        interest. As a general matter, I question the FTC's approach 
        about criticizing proposed legislation seeking greater 
        transparency and preventing conflicts of interest. If there is 
        anything the Ingenix example must teach us, it is that there is 
        a significant potential for fraud and deception by health care 
        intermediaries. Efforts to either clarify the duties of those 
        intermediaries by establishing legal provisions making it clear 
        they have a fiduciary duty to the plans, and providing adequate 
        transparency so that plans can effectively monitor the PBMs' 
        activities, would seem to be crucial elements for managing and 
        controlling health care costs.

        8. Recognizing that the insurer and the PBM do not represent 
        the consumer. Although insurers and PBMs do help to control 
        cost, they are not the consumer. The consumer is the individual 
        who ultimately receives benefits from the plan. It is becoming 
        increasingly clear that insurers and PBMs do not act in the 
        interest of the ultimate beneficiary. They are not the proxy 
        for the consumer interest, but rather exploit the lack of 
        competition, transparency, and the opportunity for deception to 
        maximize profits.

        9. Clarify the jurisdiction of the FTC to bring enforcement 
        actions against health insurers. Some may suggest that the FTC 
        lacks jurisdiction over health insurance. I urge this Committee 
        to ask the FTC to clarify their position on this issue. Is the 
        claim of no jurisdiction the law or simply an urban legend? As 
        I understand it, there is a limitation in Section 6 of the FTC 
        Act that prevents the FTC from performing studies of the 
        insurance industry without seeking prior Congressional 
        approval. This provision does not prevent the FTC from bringing 
        either competition or consumer protection enforcement actions. 
        There may be arguments that the McCarran-Ferguson Act limits 
        jurisdiction, but that exemption is limited to rate making 
        activity. In addition, some people might argue that the FTC's 
        ability to attack anticompetitive conduct by nonprofit 
        insurance companies might be limited under the FTC Act. The 
        solution to this problem is simple, straightforward and 
        critical. If the FTC lacks jurisdiction in any respect to bring 
        meaningful competition and consumer protection enforcement 
        actions against health insurers, Congress must act immediately 
        to provide that jurisdiction. There is no reason why health 
        insurance should be immunized from the Federal Trade Commission 
        Act. Nor is there any reason why the agencies' recent failure 
        to deploy enforcement resources should create a de facto 
        exemption from antitrust or consumer protection enforcement for 
        insurers or PBMs.
Conclusion
    Ultimately, the current health insurance and PBM markets suffer 
from anticompetitive and fraudulent activity practically unknown in any 
other market. The current market structure and the control of health 
care payment systems by for-profit entities raise serious questions if 
meaningful reform can ever be accomplished.\34\ At least we should 
start by assuring that the full resources of Federal antitrust and 
consumer protection enforcement are utilized to begin to reform these 
markets.
---------------------------------------------------------------------------
    \34\ In a forthcoming paper I argue that the public plan is 
necessary for meaningful reform of health insurance markets.
---------------------------------------------------------------------------
    Before it is too late.

                                      Comparison of State Insurance Mergers
----------------------------------------------------------------------------------------------------------------
                                                                             PacifiCare Life
  Requirement       United-Sierra     Blue Cross of CA    PacifiCare of CO   and Health of CA   PacifiCare of CA
----------------------------------------------------------------------------------------------------------------
Continued role   HPN must continue   BCC will continue   N/A                Practices and      PCC will continue
 in marketplace   serving the same    its historic role                      methodologies      its historic
                  Nevada              in serving the                         for indemnity/     role in serving
                  marketplace using   California                             PPO, self-         the California
                  the same market     marketplace, and                       directed health    marketplace, and
                  place approach.     its same                               plans, and         will continue
                  (P. 26).            marketplace                            Medicare           its same
                                      approach with                          Supplement         marketplace
                                      regard to Medi-                        products will      approach (P.
                                      Cal, Health                            not vary post-     12).
                                      Families Program,                      merger from
                                      Access for                             PLHIC's pre-
                                      Infants and                            merger practices
                                      Mothers, and                           and
                                      California Major                       methodologies.
                                      Risk Medical                           (P. 2).
                                      Insurance
                                      Program,
                                      individual and
                                      small group
                                      markets. (PP. 5-
                                      6).
----------------------------------------------------------------------------------------------------------------
Compliance       HPN must file an    For a period of 3   United must file   PLHIC shall file   PCC shall file a
 reports          Annual Compliance   years following     an annual report   annually a         report annually
                  Report, detailing   the merger          certifying,        report             with the DMHC
                  compliance with     closing, BCC        among other        demonstrating      demonstrating
                  the requirements    shall file annual   things, that no    compliance with    compliance with
                  set forth in the    reports             debt financing     each of the        the
                  Commitment Letter   demonstrating       factors or         Undertakings.      Undertakings.
                  (HPN must prove     compliance with     merger costs       (P. 14).           (P.10).
                  it has not          the Undertakings    have been
                  changed practices   and what it         included as part
                  and                 believes to be      of any premium
                  methodologies,      the benefits of     rates. (P. 1).
                  post                the Merger. (P.
                  acquisition). (P.   12).
                  27).
----------------------------------------------------------------------------------------------------------------
Premium          Premiums paid by    N/A                 Merger costs will  UnitedHealth and   Represents and
 stability        HPN individual or                       not be passed      PLHIC undertake    warrant that
                  groups shall not                        onto Colorado      that premiums      premiums payable
                  increase (fee                           consumers in the   payable by PLHIC   by PCC enrollees
                  stability). (P.                         form of higher     policyholders      will not
                  29).                                    premiums (P. 1).   will not           increase as a
                                                                             increase as a      result of Merger
                                                                             result of the      costs. (P. 6)
                                                                             Merger. (P.1).
----------------------------------------------------------------------------------------------------------------
Underserved      Must participate    N/A                 N/A                PLHIC will
 markets/small    in the                                                     maintain its
 and individual   ``Reinsurance                                              current level of
 markets          Program'' to                                               efforts in
                  attract and                                                offering and
                  enable                                                     renewing
                  competition and                                            individual and
                  product choice in                                          small group
                  the Nevada                                                 medical
                  market. (PP. 29-                                           products. (PP. 8-
                  30). HPN must                                              9).
                  maintain its
                  efforts to
                  provide services
                  to underserved
                  communities
                  including
                  Medicare and
                  Medicaid markets,
                  and to offer and
                  renew individual
                  and small group
                  products. (P.
                  27).
PCC will
 maintain
 support for
 commercial HMO
 product
 development
 with emphasis
 on products
 appealing to
 small groups
 and
 individuals
 (P.15).
----------------------------------------------------------------------------------------------------------------
Claims           Practices and       N/A                 N/A                N/A                N/A
 platforms        methodologies
                  with respect to
                  adjudicating and
                  paying commercial
                  and Medicare
                  claims after the
                  acquisition shall
                  not vary from pre-
                  Acquisition
                  practices. (P. 30-
                  31).
----------------------------------------------------------------------------------------------------------------
Medicare         Must offer          N/A                 N/A                N/A                N/A
 business         substantially the
                  same Medicare
                  products and
                  benefit designs
                  during the
                  Acquisition
                  period. (P. 31).
----------------------------------------------------------------------------------------------------------------
Payments         All payments        All of the change   N/A                UnitedHealth has   All of the
 related to       relating to the     in control                             paid for all       executive
 change in        change in control   severance                              executive change   compensation by
 control          (severance          payments and                           in control         reason of the
                  payment,            retention bonus                        severance          Merger,
                  retention bonus     payments payable                       payments and       including change
                  payments) shall     by reason of the                       retention bonus    in control
                  be the sole         merger will be                         payments by        payments . . .
                  responsibility of   the sole payment                       reason of the      will be the sole
                  Applicant. (P.      responsibility of                      Merger, and is     responsibility
                  31).                Anthem. (P. 1).                        solely the         of UnitedHealth.
                                                                             responsibility     (P. 2).
                                                                             of United. (PP.
                                                                             1, 6).
----------------------------------------------------------------------------------------------------------------
Dividends/       During the          BCC will not        N/A                PLHIC will not     PCC will not
 distributions    Acquisition         declare or pay                         declare or pay     declare or pay
                  Period, neither     dividends, make                        dividends, make    dividends, make
                  HPN nor             other                                  other              other
                  PacifiCare of       distributions of                       distributions of   distributions of
                  Nevada, shall       cash or property,                      cash or            cash or
                  declare or pay      or in any other                        property, or in    property, or in
                  dividends, or       way upstream any                       any other way      any way upstream
                  similar             funds or property                      upstream any       any funds or
                  distributions of    to Anthem or any                       funds or           property to
                  cash or property    of its                                 property to its    UnitedHealth (P.
                  in respect to its   affiliates. (P.                        corporate          2).
                  capital stock.      2).                                    parents. (P. 6).
                  (P. 32).
----------------------------------------------------------------------------------------------------------------
Indebtedness or  During the          BCC will not take   N/A                PLHIC will not     PCC will not take
 obligations      Acquisition         any of the                             take any of the    any of the
                  period, HPN shall   following actions                      following          following
                  not co-sign or      without the                            actions: co-sign   actions: co-sign
                  guarantee any       Departments prior                      or guarantee any   or guarantee any
                  loans, permit any   approval: co-sign                      portion of any     portion of any
                  portion of loans    or assume any                          current or         current or
                  obtained by         current or future                      future loans       future loans by
                  Applicant to be     loans entered                          entered into by    United, or
                  assumed by HPN,     into by Anthem or                      United or its      permit any
                  borrow any funds    its Affiliates.                        affiliates,        portion of loans
                  for the purpose     (P. 4).                                permit a portion   obtained by
                  of making a                                                of loans           UnitedHealth or
                  Parent Company                                             obtained by        any of its
                  Distribution. (P.                                          United to be       affiliates to be
                  33).                                                       assumed by         assumed by PCC.
                                                                             PLHIC. (P. 7).     (P. 5).
----------------------------------------------------------------------------------------------------------------
Health plan      During the          BCC shall renew,    N/A                PLHIC will         PCC will renew
 offering         Acquisition         and shall not                          maintain its       and not
 stability        Period, HPN shall   terminate, any                         current level of   terminate any
                  renew and not       group or                               efforts in         group or
                  terminate any       individual health                      offering and       individual
                  health benefit      care service plan                      renewing           commercial
                  plan for any        contract prior to                      individual and     health care
                  commercial          the expiration of                      small group        benefit plan
                  insured and shall   its term unless                        Medical            contract. (P. 11-
                  not terminate any   otherwise                              Products. (P.      12).
                  health benefit      permitted under                        8).
                  plan before the     the Knox-Keene
                  end of its          Act. (PP. 5, 11).
                  contract term.
                  (P. 33-34).
----------------------------------------------------------------------------------------------------------------
Retention of     During the          BCC will maintain   United has no      N/A                PCC will maintain
 local            Acquisition         its organization    current plans to                      its
 operations       Period, Applicant   and                 reduce in any                         organizational
                  shall ensure that   administrative      material respect                      and
                  such affiliates     capacity, and       or intention to                       administrative
                  maintain, at a      will maintain a     change the                            capacity, and
                  minimum, the        number of           executive and                         unless the
                  following           administrative      operational                           Department
                  organizational      processes, e.g.,    presence of                           otherwise grants
                  and                 prior               PacifiCare in                         prior approval,
                  administrative      authorization,      CO. for the                           this
                  functions in        enrollee            foreseeable                           administrative
                  Nevada for HPN's    grievance,          future. (P. 8).                       capacity
                  commercial          Independent                                               includes
                  business: medical   Medical Review,                                           clinical
                  decision-making;    provider dispute                                          decision-making
                  prior               resolution. (PP.                                          and medical
                  authorization;      6-7).                                                     policy
                  independent                                                                   development,
                  medical review                                                                prior
                  processes;                                                                    authorization,
                  enrollee                                                                      enrollee
                  grievance;                                                                    grievance
                  provider dispute                                                              system,
                  resolution. (P.                                                               independent
                  34).                                                                          medical review.
                                                                                                (P. 8).
----------------------------------------------------------------------------------------------------------------
Local record     During the          BCC agrees that it  N/A                PLHIC agrees that  PCC agrees that
 retention        Acquisition         shall not remove,                      it shall not       it shall not
                  period, all         require the                            remove, or         remove, require,
                  parties shall not   removal, permit,                       require, permit,   permit, or cause
                  remove, or          or cause the                           or cause the       the removal of
                  require, permit,    removal of BCC's                       removal of         PCC's books and
                  or cause the        books and                              PLHIC's books      records. (P. 9).
                  removal of HPN's    records. (P. 7).                       and records. (P.
                  books and                                                  9).
                  records. (P. 34).
----------------------------------------------------------------------------------------------------------------
Administrative   If HPN decides to   Any proposed        N/A                If PLHIC decides   If there are any
 services         materially amend,   changes to the                         to amend,          changes to an
 agreements/      change,             reimbursement                          change,            administrative
 reimbursement    terminate, or       rates or method                        terminate or       service
 under ASAs       replace any         for reimbursement                      replace its        agreement to
                  administrative      under BCC's                            administrative     which PCC is a
                  services            administrative                         services           party with any
                  agreement(s) with   services                               agreement(s)       PCC affiliate,
                  any of the          agreements with                        with PacifiCare,   PCC will file
                  parties involved,   WellPoint, Anthem                      CDI must first     notice of the
                  HPN must file the   or any of their                        approve. (P. 9).   changes, and
                  changes with the    affiliates is                                             must obtain
                  Commissioner. (P.   changed, BCC must                                         prior approval
                  34-35).             obtain prior                                              from the DMHC.
                                      approval from                                             (P. 9).
                                      DMHC. (P. 7).
----------------------------------------------------------------------------------------------------------------


                                      Comparison of State Insurance Mergers
----------------------------------------------------------------------------------------------------------------
                                                                             PacifiCare Life
  Requirement       United-Sierra     Blue Cross of CA    PacifiCare of CO   and Health of CA   PacifiCare of CA
----------------------------------------------------------------------------------------------------------------
Tax sharing      After the closing   If BCC decides to   N/A                If PLHIC decides   If PCC desires to
 agreements       date, if HPN        change its tax                         to amend,          amend, change,
                  decides to amend,   sharing                                change,            terminate or
                  change,             agreements, as                         terminate or       replace its tax
                  terminate, or       previously filed                       replace its tax    sharing
                  replace any tax     with, and                              sharing            agreements, as
                  sharing             approved by, the                       agreements,        previously
                  agreements, HPN     Department, BCC                        PLHIC will file    filed, PCC can
                  shall file tax-     will file any                          any changes to     only do so upon
                  sharing             changes to those                       those tax          prior DMHC
                  agreements with     tax-sharing                            sharing and must   approval. (PP. 9-
                  the Commissioner.   agreements with                        have prior         10).
                  (P. 36).)           the Department.                        approval by CDI.
                                      (P. 7).                                (P. 9).
----------------------------------------------------------------------------------------------------------------
Administrative   Medical Expense     The percentage of   N/A                PLHIC represents   PCC's
 medical          Ratio assumptions   BCC's                                  that it will       administrative
 expense ratio    for commercial      administrative                         maintain its       expense ratio
                  rate filings        costs to premium                       ``Administrative   shall not exceed
                  (e.g., the          revenue will not                       Expense Ratio''    10 percent,
                  schedule of         exceed 13.31                           for its products   measured on an
                  changes) shall      percent that                           for the prior 3    annual basis,
                  not change during   reflects the                           years. (PP. 9-     which reflects
                  the Acquisition     average of the                         10).               the average of
                  Period from those   annual percentage                                         the annual
                  used previously.    that BCC's                                                percentage over
                  (P. 30).            administrative                                            the years 2002-
                 HPN's                costs bear to its                                         2004. (P. 10).
                  Administrative      premium revenues
                  Expense Ratio for   for the years
                  its commercial      2001-2003. (P.
                  products will not   7).
                  materially exceed
                  HPN's average
                  Administrative
                  Expense Ration
                  for commercial
                  products for the
                  years 2003
                  through 2006.
                  (PP. 35-36).
----------------------------------------------------------------------------------------------------------------
Management       Certain current     BCC and Anthem      The present        N/A                N/A
 continuity/      executives with     will promptly       executive
 executive        Sierra who will     provide the         officers and
 agreements       join the combined   Department with     directors of
                  business shall      copies of the       PacifiCare will
                  continue to be      written             not change as a
                  located in          agreements of the   result of the
                  Nevada. (PP. 36-    executive           merger. (P. 8).
                  37).                officers of
                                      WellPoint and
                                      BCC. (P. 12).
----------------------------------------------------------------------------------------------------------------
Retention of     Applicant shall     N/A                 United has no      N/A                N/A
 employees        maintain at least                       current plans to
                  seventy-five                            reduce the
                  percent (75                             number of
                  percent) of HPN's                       PacifiCare
                  current number of                       employees, and
                  employees in the                        compensation
                  State of Nevada                         will equal what
                  during the                              employees
                  Acquisition                             received prior
                  Period. (P. 37).                        to the merger or
                                                          to what
                                                          similarly-
                                                          situation United
                                                          employees
                                                          receive. (P. 8).
----------------------------------------------------------------------------------------------------------------
Distribution     Applicant and HPN   N/A                 N/A                N/A                N/A
 channels         each work
                  extensively with
                  agents, brokers,
                  and other
                  distribution
                  channels in
                  Nevada. (PP. 37-
                  38).
----------------------------------------------------------------------------------------------------------------
Social           Applicant is        BCC and Anthem      United Healthcare  See next column    United will
 responsibility   expected to         undertake to        has agreed to                         contribute $50
                  maintain, and       implement the       contribute $7.5                       to benefit
                  build on, its and   Investment in a     million to                            California
                  Sierra's            Healthy             improve access                        health care
                  community           California          to care to rural                      consumers
                  presence,           Program. (P. 10).   and underserved                       (Charitable
                  including          The WellPoint        Coloradans.                           Commitment). (P.
                  charitable giving   Foundation has                                            18).
                  and philanthropic   agreed to commit                                         UnitedHealth, PCC
                  and community       $5 million in                                             and their
                  endeavors, in       each of 3 years                                           affiliates agree
                  Nevada. (P. 38).    (for a total of                                           to invest $200
                                      $15 million) to                                           million in CA's
                                      its Insuring                                              health care
                                      Healthy Futures                                           infrastructure
                                      initiative. (P.                                           (Investment
                                      10).                                                      Commitment). (P.
                                                                                                15-16).
----------------------------------------------------------------------------------------------------------------
Laboratory       During the          N/A                 N/A                N/A                N/A
 protocol         Acquisition
                  Period, Applicant
                  shall not
                  implement the $50
                  sanction
                  laboratory
                  protocol, or any
                  similar monetary
                  out-of-network
                  laboratory
                  referral
                  sanctions. (PP.
                  38-39).
----------------------------------------------------------------------------------------------------------------
Assumption of    N/A                 BCC undertakes to   N/A                PLHIC will pay     PCC shall
 regulatory                           promptly pay for                       for the costs of   promptly pay for
 costs                                the costs arising                      all reviews the    the costs
                                      from activities                        CDI determines     arising from
                                      of the Department                      are necessary to   activities of
                                      in connection                          confirm            the Department
                                      with the                               compliance with    in determining
                                      Undertakings. (P.                      the                the PCC's
                                      12).                                   Undertakings.      compliance with
                                                                             (P. 9).            the
                                                                                                Undertakings.
                                                                                                (P. 11).
----------------------------------------------------------------------------------------------------------------
Provider         There is not to be  There is not to be  N/A                N/A                In the event
 reimbursements   a change in the     a change in the                                           there are
                  structure,          structure,                                                reductions in
                  composition, and    composition and                                           the level of
                  reimbursements      reimbursement                                             provider
                  payable to the      payable to the                                            reimbursements,
                  health care         health care                                               such reductions
                  providers           providers                                                 shall not be
                  supporting HPN's    supporting BCC's                                          attributable to
                  provision of        provision of                                              Merger costs.
                  products and        products. (P. 6).                                         (P. 6).
                  services. (P.                                                                PCC is also
                  27).                                                                          required to
                                                                                                maintain
                                                                                                currently
                                                                                                capitated PCC
                                                                                                contracts with
                                                                                                wiling and
                                                                                                capable
                                                                                                physician
                                                                                                groups, subject
                                                                                                to mutual
                                                                                                agreement on
                                                                                                contract terms,
                                                                                                including upon
                                                                                                renewal. (P.
                                                                                                13).
----------------------------------------------------------------------------------------------------------------
Quality          N/A                 BCC undertakes to   N/A                See next column    United agrees to
 initiatives                          implement the                                             implement and/or
                                      Patient Advocate                                          maintain certain
                                      Improvement                                               quality programs
                                      Program (PAI                                              or reporting
                                      Program) . . . a                                          mechanisms,
                                      comprehensive                                             e.g., reporting
                                      effort by BCC to                                          quality of care
                                      bring                                                     results,
                                      demonstrable                                              improving
                                      improvements to                                           PacifiCare's
                                      the quality of                                            performance on
                                      care delivered to                                         all CCHRI
                                      BCC members. (PP.                                         scores. United
                                      8-10).                                                    will structure
                                                                                                the PacifiCare
                                                                                                P4P program so
                                                                                                that eligible
                                                                                                programs will
                                                                                                receive an
                                                                                                additional
                                                                                                $13.76 million,
                                                                                                and will promote
                                                                                                HIT
                                                                                                infrastructure.
                                                                                                (P. 13).
----------------------------------------------------------------------------------------------------------------
Benefit design/  HPN's practices                         N/A                PLHIC's            PCC's practices
 premium          and methodologies                                          methodologies      and
 calculation      for determining                                            for determining    methodologies
                  commercial                                                 premium rates      for determining
                  products and                                               and benefit        products and
                  benefit designs                                            designs must       benefits designs
                  and premiums                                               remain             and premium
                  cannot vary                                                unchanged. (P.     prices must
                  materially from                                            2.)                remain
                  pre-Acquisition                                                               unchanged. (P.
                  status. (P. 28).                                                              6).
----------------------------------------------------------------------------------------------------------------
Duration         2 years             Until terminated    3 years            4 years            4 years
                                      by agreement of
                                      BCC, Anthem, and
                                      the DMHC. (P.
                                      13).
----------------------------------------------------------------------------------------------------------------
Specific         N/A                 N/A                 United and         PLHIC shall        N/A
 physician-                                               PacifiCare will    maintain
 protection                                               convene a          compliance with
 provisions                                               Colorado           specific
                                                          Physician          metrics, and
                                                          Advisory Council   shall report
                                                          which will meet    quarterly its
                                                          regularly to       performance
                                                          discuss            against metrics
                                                          physician          relating to
                                                          concerns. (P.2).   complaint
                                                         United and          resolution,
                                                          PacifiCare will    appeals
                                                          appoint an         resolution,
                                                          ombudsman for      claims
                                                          the Colorado       processing
                                                          Medical Society    within 30 days,
                                                          to address         and auto-
                                                          physician          adjudication (PP
                                                          concerns. (P.      14-15).
                                                          2).
                                                         For the duration
                                                          of the
                                                          Undertakings,
                                                          United and
                                                          PacifiCare must
                                                          comply with
                                                          specific
                                                          physician-
                                                          service metrics,
                                                          e.g., deadlines
                                                          within which to
                                                          resolve
                                                          physician
                                                          complaints,
                                                          limitation on
                                                          time periods
                                                          within which to
                                                          recoup
                                                          overpayments.
                                                          (PP. 2-3).
----------------------------------------------------------------------------------------------------------------

                                 ______
                                 

    Federal and State Litigation Regarding Pharmacy Benefit Managers

                             David A. Balto

    From 2004--2008, the three major PBMs (Medco, CVS Caremark, and 
Express Scripts) faced six major Federal or multidistrict cases over 
allegations of fraud; misrepresentation to plans, patients, and 
providers; unjust enrichment through secret kickback schemes; and 
failure to meet ethical and safety standards. These cases resulted in 
over $371.9 million in damages to states, plans, and patients so far. 
Below is a summary of these six cases. Note that the regulatory 
provisions of many of these settlements will expire within 2-10 years.
1. United States v. Merck & Co., Inc., et al., (also cited as United 
        States of America v. Merck-Medco Managed Care L.L.C., et al.) 
        (E.D. Pa.)
Settled: October 23, 2006
Damages: $184.1 million
    States participating: Arizona, California, Connecticut, Delaware, 
Florida, Illinois, Iowa, Louisiana, Maine, Maryland, Massachusetts, 
Nevada, New York, North Carolina, Oregon, Pennsylvania, Texas, Vermont, 
Virginia, and Washington.
Claims:
    Whistleblower lawsuits, filed under the Federal False Claims Act 
and state False Claims Acts against Medco Health Solutions, Inc., 
alleged that Medco:

   systematically defrauded government-funded health insurance 
        by accepting kickbacks from manufacturers in exchange for 
        steering patients to certain products;

   secretly accepted rebates from drug manufacturers;

   secretly increased long term drug costs by switching 
        patients away from cheaper drugs; and

   failed to comply with state-mandated quality of care 
        standards.
Settlement:
   A preliminary settlement in April of 2004:

     Required Medco to pay $29.1 million to participating 
            states and affected patients;

     Placed restrictions on the company's ability to switch 
            drugs;

     Imposed measures to increase transparency; and

     Required Medco to adopt the American Pharmacists 
            Association code of ethics for employees.

   The final settlement, brokered in October 2006 required 
        Medco to:

     Pay an additional $155 million;

     Enter into a consent degree regulating drugs switching 
            and mandating greater transparency; and

     Enter into a Corporate Integrity Agreement (CIA) as a 
            condition of Medco's continued participation in government 
            health programs.

    The Corporate Integrity Agreement will expire in 2011.
2. United States of America, et al., v. AdvancePCS, Inc. (Case No. 02-
        cv-09236)(E.D. Pa.)
Filed: 2002
Settled: September 8, 2005
Damages: $137.5 million
Claims:
    Whistleblower lawsuit, filed under the Federal False Claims Act, 
alleging that Advance PCS (now part of CVS Caremark):

   Knowingly solicited and received kickbacks from drug 
        manufacturers in exchange for favorable treatment of those 
        companies' products;

   Paid improper kickbacks to existing and potential customers 
        to induce them to sign contracts with the PBM;

   Submitted false claims in connection with excess fees paid 
        for fee-for-service agreements; and

   Received flat fee rebates for inclusion of certain heavily 
        utilized drugs.
Settlement:
    A settlement in September, 2005 required Advance PCS, Inc., to:

   Pay a $137.5 million settlement and face a five-year 
        injunction;

   Submit to regulations designed to promote transparency and 
        restrict drug interchange programs;

   Enter into a five-year Corporate Integrity Agreement; and

   Develop procedures to ensure that any payments between them 
        and pharmaceutical manufacturers, clients, and others do not 
        violate the Anti-Kickback Statute of Stark Law.
3. United States of America, et al. v. Caremark, Inc. (Case No. 99-cv-
        00914)(W.D. Tex.)
Filed: 1999
Pending as of January 2009
    States participating: Arkansas, California, District of Columbia, 
Florida, Hawaii, Illinois, Louisiana, Massachusetts, Nevada, New 
Hampshire, New Mexico, North Carolina, Tennessee, Texas, Utah and 
Virginia.
Claims:
    Filed by an ex-employee, this case was prosecuted under the Federal 
False Claims Act and numerous state False Claims Statutes. It alleges 
that Caremark (now part of CVS Caremark):

   Submitted reverse false claims to the Government in order to 
        avoid, decrease or conceal their obligation to pay the 
        government under several Federal health insurance programs 
        including Medicaid, Indian Health Services, and Veterans 
        Affairs/Military Treatment Facilities.
4. States Attorneys General v. Caremark, Inc.
Filed: February 14, 2008
Settled: February 14, 2008
Damages: $41 million
    States participating: Arizona, Arkansas, California, Connecticut, 
Delaware, District of Columbia, Florida, Illinois, Iowa, Louisiana, 
Maryland, Massachusetts, Michigan, Mississippi, Missouri, Montana, 
Nevada, New Mexico, North Carolina, Ohio, Oregon, Pennsylvania, South 
Carolina, South Dakota, Tennessee, Texas, Vermont, Virginia and 
Washington.
Claims:
    Complaint decrees and consent orders against Caremark issued by 29 
Attorneys General on February 14, 2008 allege that Caremark:

   Engaged in deceptive trade practices by encouraging doctors 
        to switch patients from originally prescribed brand drugs to 
        different brand name drugs.

   Did not inform clients that Caremark retained all the 
        profits reaped from these drug switches; and

   Restocked and re-shipped previously dispensed drugs that had 
        been returned to Caremark's mail order pharmacies.
Settlement:
    In conjunction with the complaints, states issued a consent decree/
final judgment that required Caremark to:

   Pay a collective settlement of $41 million;

   Significantly change its business practices by imposing 
        restrictions on drug switches and creating greater 
        transparency;

   Apply a code of ethics and professional standards; and

   Refrain from restocking and re-shipping returned drugs 
        unless permitted by law.
5. State Attorneys General v. Express Scripts
Settled: May 27, 2008
Damages: $9.3 million to states, plus up to $200,000 to affected 
        patients
    States participating: Arizona, Arkansas, California, Connecticut, 
Delaware, District of Columbia, Florida, Illinois, Iowa, Louisiana, 
Maine, Maryland, Massachusetts, Michigan, Mississippi, Missouri, 
Montana, Nevada, New Mexico, North Carolina, Ohio, Oregon, 
Pennsylvania, South Carolina, South Dakota, Tennessee, Texas, Vermont, 
Virginia, and Washington.
Claims:
    State Attorneys general settled consumer protection claims alleging 
that Express Scripts:

   Engaged in deceptive business practices by illegally 
        encouraging doctors to switch their patients to different brand 
        name drugs; and

   Illegally increased their spreads and rebates from 
        manufacturers without passing the savings on to the plans.
Settlement:
    The settlement required Express Scripts to:

   pay $9.3 million to the states, plus up to $200,000 in 
        reimbursements to affected patients.

   Accept restrictions on drug switching practices;

   Increase transparency for plans, patients and providers; and

   Adopt a certain code of professional standards.
6. Local 153 Health Fund v. Express Scripts (In re Express Scripts, 
        Inc. Pharmacy Benefits Management Litigation) (Case No. 4:05-
        md-01672-SNL)
Case consolidated: April 29, 2005
Pending as of January 2009
Claims:
    This case, filed in the Eastern District of Missouri, alleges that 
Express Scripts:

   Retained undisclosed rebates from manufacturers;

   Enriched itself by creating a differential in fees;

   Failed to pass on or disclose discounted drug rates and 
        dispensing fees;

   Gained kickbacks from drug manufacturers in exchange for 
        favoring certain drugs on the formulary;

   Circumvented ``Best Pricing'' rules to artificially inflate 
        AWP; and

   Enriched itself with bulk purchase discounts that it failed 
        to pass on to the plaintiffs.
                                 ______
                                 

                   The New York Times--April 19, 2008

                         The Middleman's Markup

                          By Milt Freudenheim

    Doctors treating children with a rare and severe form of epilepsy 
were stunned by the news. A crucial drug, H.P. Acthar Gel, that had 
been selling for $1,600 a vial would now cost $23,000.
    The price increase, put in place over last Labor Day weekend, also 
jolted employers that provide health benefits to their workers and bear 
the brunt of drug costs.
    As it turned out, the exclusive distributor of H.P. Acthar Gel is 
Express Scripts, a company whose core business is supposed to be 
helping employers manage their drug insurance programs and get 
medicines at the best available prices.
    But in recent years, drug benefit managers like Express Scripts 
have built lucrative side businesses seemingly at odds with that best-
price mission. A growing portion of their revenue comes from acting as 
exclusive or semi-exclusive distributors of expensive specialty drugs 
that can cost thousands of dollars. And the prices of such medicines 
are rising much faster than for the mainstream prescription drugs 
available through a wide variety of distributors.
    Critics say that distributing specialty drugs with ever-higher 
prices runs counter to the best interests of the employers that hire 
companies like Express Scripts.
    ``We are headed right down into conflict alley with these exclusive 
arrangements,'' said Gerry Purcell, an Atlanta-based health benefits 
consultant to big employers. As exclusive or semi-exclusive 
distributors of specialty drugs, the benefit managers ``can raise the 
prices at will,'' Mr. Purcell said, ``and the employer will have little 
chance but to pay the bill.''
    Express Scripts' main competitors, CVSCaremark and Medco Health 
Solutions, have also built lucrative side businesses in specialty 
drugs. So have some of the biggest insurers that provide medical 
benefits to corporate America, including UnitedHealth Group, Wellpoint, 
Aetna and Cigna.
    When asked about the potential conflicts, Express Scripts and the 
other companies--which are known as pharmacy benefit managers--tend to 
describe themselves as mere middlemen with little influence over what 
the drug makers choose to charge.
    Steve Miller, an Express Scripts executive vice president, said of 
the H.P. Acthar Gel episode: ``The increase was a manufacturing 
decision. I can't comment on that.''
    The pharmacy benefit managers say that keeping a lid on employers' 
drug costs is still their top priority. And they defend their 
involvement with specialty drugs, saying it helps them keep better 
track of the medicines' use.
    ``I don't believe it is a conflict,'' said Dave Rickard, an 
Executive Vice President of CVS Caremark. ``We saved clients $115 
million last year that would have been spent on specialty drugs that 
were not appropriate.''
    But CVS Caremark, meanwhile, sold nearly $6 billion in specialty 
drugs last year through its pharmacy benefit management business--
nearly 14 percent of the company's annual revenue.
    The main drug benefit managers make as much as 10 to 15 percent on 
each sale of a specialty drug, whose prices can range from $5,000 a 
year for certain anemia drugs to $389,000 in the case of Soliris, a 
drug for a rare blood disorder, whose distributors include Express 
Scripts' specialty drug unit, CuraScript.
    Spending on specialty drugs rose 16.5 percent in 2006, growing 
twice as fast as traditional drug spending, and totaled about $62 
billion--which was about 23 percent of overall drug sales in this 
country, according to Charles Boorady, a Citigroup health care analyst.
    Big employers and organizations including General Motors, 
Caterpillar and Calpers, the large California public employees health 
and pension group, say their spending on specialty drugs is growing at 
double the rate of the rest of their drug benefits for employees.
    In some cases, employers are starting to push back. A group of 
large- and medium-size companies like Kinder Morgan Energy, a Houston 
pipeline company, and Enodis, an international restaurant equipment 
maker with United States headquarters in Florida, recently pushed CVS 
Caremark to agree to hand back $15 to the employers on each 
prescription filled for all specialty drugs listed in a Caremark 
contract.
    The giveback is meant to let the employers share a portion of the 
rebates that the pharmacy benefit managers often collect from drug 
makers in addition to keeping a portion of sales. But the giveback is 
relatively minuscule, acknowledged David Dross, a drug benefits 
specialist at the Mercer benefits consulting group who helped organize 
the employer effort.
    With specialty drugs, the pharmacy benefit managers are ``getting a 
lot more than the $15 in rebates,'' Mr. Dross said.
    Susan A. Hayes, a drug benefits consultant based in Lake Zurich, 
Ill., said she had seen rebate contract terms that give the pharmacy 
benefit managers rebates of 3 percent to 10 percent of the selling 
price.
    Specialty drugs are aimed at diseases that include cancer, multiple 
sclerosis and hepatitis C. Some, for rarer disorders, may have Federal 
``orphan drug'' status that gives a manufacturer exclusive marketing 
rights for a certain period. Specialty drugs also include medications 
whose distribution is tightly regulated as federally controlled 
substances, like the narcolepsy treatment Xyrem, which is distributed 
through Express Scripts.
    Makers of specialty drugs can command lofty prices mainly because 
patients have few alternatives, and there is typically little or no 
competition--whether because the medicine still has patent protection 
or the drug is difficult to make. Or it may be, as with H.P. Acthar 
Gel, that the patent has long since lapsed but there is a relatively 
small number of patients.
    With specialty drugs representing about 60 percent of the new 
medicines submitted for approval by Federal regulators, their overall 
cost will probably keep pushing up drug expenses well into the future.
    Express Scripts is smaller than Medco and CVS Caremark, but it gets 
a bigger share of its revenue from specialty medicines--19.8 percent of 
its 2007 revenue of $18.3 billion.
    That compared with about 13 percent of Medco's $44.5 billion total 
revenue last year. And it compared with about 13.9 percent of CVS 
Caremark's total of $43.3 billion, not counting $2 billion sales of 
specialty prescriptions filled at CVS retail drugstores.
    Express Scripts also has a larger number of exclusive distribution 
deals, with sole rights to 7 specialty drugs, all of which have orphan 
drug designation, as well as 11 more that are available through only 
one or two other national distributors.
    Medco's specialty unit, Accredo Health, lists 4 orphan drug 
exclusives and 21 more drugs it shares with one or two other 
distributors. CVS Caremark said it had one exclusive and 35 drugs 
available from a limited group of specialty pharmacies.
    In the case of H.P. Acthar Gel, an injectable anti-seizure 
medication derived from hog hormones, the fourteen-fold price increase 
came after the maker, Questcor Pharmaceuticals, gave exclusive 
distribution rights to Express Scripts' CuraScript unit last summer.
    ``This sort of puts the spotlight on the greed angle of the 
business,'' said Dr. Robert R. Clancy, a pediatric neurologist at 
Children's Hospital of Philadelphia. He has been using H.P. Acthar Gel 
to treat a severely ill 3-year-old girl, Reegan Schwartz. Employer 
health plans bear most of the drug's steep cost, with individuals in 
many cases making only a standard co-payment. In the case of the two 
courses of Acthar treatments for Reegan, the cost to her father's 
health plan was about $226,000. Her father, Mike Schwartz, who works 
for a large pharmaceutical company, Merck, that has no ties to Acthar 
or its manufacturer, said he ended up paying only $60 out of pocket for 
the Acthar therapy.
    Steve Cartt, a Questcor Executive Vice President, said the new 
price was chosen by looking at the prices of other specialty drugs and 
estimating how much insurers and employers would be willing to bear.
    ``We did some market research,'' Mr. Cartt said. Talking to 
pediatric neurologists and others about various pricing options ``gave 
us some comfort that the strategy would work, and physicians would 
continue to use the drug, and payers would pay,'' he said. ``The 
reality was better than we expected.''
                                 ______
                                 
                                                       May 11, 2005
Hon. Deborah Platt Majoras,
Chair,
Federal Trade Commission,
Washington, DC.

        Re: FTC Advocacy on Pharmaceutical Benefit Managers

Dear Chair Majoras:

    I am writing to you as Chair of the National Legislative 
Association on Prescription Drug Prices (``the Association''), a 
nonpartisan alliance of state legislators from 10 states and the 
District of Columbia.\1\ The goal of the Association is to foster 
efforts by state legislators to effectively manage pharmaceutical 
costs. As you know pharmaceutical costs are a rapidly increasing amount 
of state budgets and control of these costs is vital to the fiscal 
well-being of the states.
---------------------------------------------------------------------------
    \1\ Current membership includes the following legislative bodies: 
Connecticut, District of Columbia, Hawaii, Maine, Massachusetts, New 
Hampshire, New York, Pennsylvania Senate, Rhode Island, West Virginia, 
Vermont. In addition, legislators from over 20 other states participate 
in the Association's meetings, in working groups, and subscribe to our 
newsletter.
---------------------------------------------------------------------------
    On May 6, 2005, the members of the Association met and discussed 
the FTC's recent opposition to bipartisan legislation seeking to 
regulate Pharmaceutical Benefit Managers (PBMs). As you know, PBMs have 
the capability of enabling buyers to secure lower priced 
pharmaceuticals. However, there have been numerous state and Federal 
investigations and enforcement actions which have uncovered a variety 
of deceptive and fraudulent practices by PBMs. Our own experience as 
state legislators dealing with state agencies which must negotiate with 
PBMs has shown that PBMs often act contrary to the interests of the 
buyers they represent.
    PBMs often direct individuals to drugs that provide the PBM with 
the highest rebates, and the greatest margins, while failing to pass 
those savings on to purchasers. These practices can be dangerous, 
especially when the PBM directs an individual to a drug that is less 
beneficial to that individual than the prescribed drug. The operations 
of PBMs are often not transparent, which enables them to engage in 
these practices without regulation from market forces. There have been 
numerous state and Federal investigations and enforcement actions that 
have uncovered a variety of deceptive and fraudulent practices by PBMs.
    In several states, state legislators have sought to address the 
problem of this deceptive and fraudulent activity by introducing 
legislation to require PBMs to provide a certain level of transparency 
on the rebates and side payments they receive. The purpose of this 
legislation is to enable buyers, both governmental and private, to be 
fully informed and be able to effectively bargain for lower prices and 
better service.
    At our meeting the Association voted to express our profound 
concern about the FTC's recent efforts to oppose this bipartisan 
legislation. As state legislators we appreciate the efforts of the FTC 
to inform the legislative debate, especially when based on solid 
empirical information. The FTC's advice is particularly useful when the 
FTC has taken enforcement actions in an area and through those actions 
has extensive experience in the market. Unfortunately, the FTC's recent 
efforts opposing state legislation concerning PBM practices fails to 
meet these standards and the past practice of the Commission. Indeed, 
the FTC's comments ignore the strong evidence of deceptive practices in 
the market, the need for state regulation, and the inability of buyers, 
including governmental entities, to secure information about these 
practices.\2\ The comments appear to be based on economic theory, but 
theory not backed up by empirical evidence is not particularly helpful 
in this environment. Moreover, by failing to speak with the elected 
officials advocating this legislation the FTC creates the appearance of 
being one-sided and denies the advocates the ability to make their case 
for the legislation.
---------------------------------------------------------------------------
    \2\ See Letter to Assembly Member Greg Aghazarian, Sept. 4, 2004; 
Letter to Senator Richard T. Brown, March 8, 2005.
---------------------------------------------------------------------------
    Deceptive, Fraudulent and Anticompetitive Activities by PBMs. As 
state legislators we are keenly aware of the types of deceptive and 
fraudulent practices engaged in by PBMs. We know that many of our state 
agencies which contract with PBMs have been victimized by fraudulent 
conduct by PBMs. In numerous states there are ongoing investigations on 
this type of activity and some cases have been brought. As you know, 
many of the major PBMs are under investigation by a multi-state 
coalition of state attorneys general. Some of these investigations have 
been joined by the U.S. Attorney's offices in Massachusetts and 
Pennsylvania.
    Let me focus on the most significant enforcement action to date. On 
April 26, 2004, the United States, 20 state attorneys generals 
(including six states that are members of the Association), and the 
defendants Merck & Co., Inc., Merck-Medco Managed Care, L.L.C., and 
Medco Health Solutions, Inc. (together referred to as ``Medco''), 
agreed to a settlement of claims for injunctive relief and violations 
of unfair trade practice laws.\3\ The complaint attacked a wide variety 
of fraudulent and deceptive conduct by Medco, documenting at length 
Medco's efforts to prefer higher priced drugs, engage in unwarranted 
and harmful ``therapeutic interchange'' (in other words, drug 
switches), and fail to pass on payments to the covered entities.
---------------------------------------------------------------------------
    \3\ Consolidated Case No. 00-cv-737; U.S. District Court for the 
Eastern District of Pennsylvania. The United States and the following 
state Attorneys Generals joined in the settlement: Arizona, California, 
Connecticut, Delaware, Florida, Illinois, Iowa, Louisiana, Maine, 
Maryland, Massachusetts, Nevada, New York, North Carolina, Oregon, 
Pennsylvania, Texas, Vermont, Virginia, and Washington.
---------------------------------------------------------------------------
    For this fraudulent and deceptive conduct the states secured $20 
million in damages, $6.6 million in fees and costs, and about $2.5 
million in restitution to patients who incurred expenses related to 
drug switching between a set of cholesterol controlling drugs. As 
important is the injunctive relief. This settlement prohibits Medco 
from soliciting drug switches when:

   The net drug cost of the proposed drug exceeds the cost of 
        the prescribed drug;

   The prescribed drug has a generic equivalent and the 
        proposed drug does not;

   The switch is made to avoid competition from generic drugs; 
        or

   The switch is made more often than once in 2 years within a 
        therapeutic class of drugs for any patient.

    The settlement requires Medco to:

   Disclose to prescribers and patients the minimum or actual 
        cost savings for health plans and the difference in co-payments 
        made by patients;

   Disclose to prescribers and patients Medco's financial 
        incentives for certain drug switches;

   Disclose to prescribers material differences in side effects 
        between prescribed drugs and proposed drugs;

   Reimburse patients for out-of-pocket costs for drug switch-
        related health care costs and notify patients and prescribers 
        that such reimbursement is available;

   Obtain express, verifiable authorization from the prescriber 
        for all drug switches;

   Inform patients that they may decline the drug switch and 
        receive the initially prescribed drug;

   Monitor the effects of drug switches on the health of 
        patients; and

   Adopt the American Pharmacists Association code of ethics 
        and principles of practice for pharmaceutical care for 
        employees at its mail order and call center pharmacies.

    This case and its settlement was a significant step forward in 
holding PBMs accountable for their actions, making their activities 
more transparent, and ensuring that consumers are protected. The 
settlement resolved only some of the charges in the Medco complaint. 
Further enforcement actions are expected as investigations by two U.S. 
Attorney's Offices and over 20 attorneys general continue. For your 
review and consideration, I attach an index of recent Federal and state 
enforcement actions.
    The recent decision of the Federal District Court in Pharmaceutical 
Care Management Association (PCMA) v. Rowe, Civil No. 03-153-B-H (April 
13, 2005), which upheld the Maine law that regulates PBM practices such 
as drug switching and requires greater transparency in transactions 
between PBMs and their clients affirmed the advantages of such 
regulation. The court noted that ``(w]hether and how a PBM actually 
saves an individual benefits provider money with respect to the 
purchase of a particular prescription drug is largely a mystery to the 
benefits provider.'' In fact, the court stated,

        This lack of transparency also has a tendency to undermine a 
        benefits provider's ability to determine which is the best 
        proposal among competing proposals from PBMs. For example, if a 
        benefits provider had proposals from three different PBMs for 
        pharmacy benefits management services, each guaranteeing a 
        particular dollar amount of rebate per prescription, the PBM 
        proposal offering the highest rebate for each prescription 
        filled could actually be the worst proposal as far as net 
        savings are concerned, because that PBM might have a deal with 
        the manufacturer that gives it an incentive to sell, or 
        restrict its formulary, to the most expensive drugs. In other 
        words, although PBMs afford a valuable bundle of services to 
        benefits providers, they also introduce a layer of fog to the 
        market that prevents benefits providers from fully 
        understanding how to best minimize their net prescription drug 
        costs.\4\
---------------------------------------------------------------------------
    \4\ Pharmaceutical Care Management Association (PCMA) v. Rowe, 
Civil No. 03-153-B-H (April 2005)(at 4-5).

    We know of no other market in which there has been such a 
significant number of prominent enforcement actions and investigations, 
especially a market with such a significant impact on taxpayers. Simply 
put, throughout the United States, numerous states are devoting 
considerable enforcement resources to combating fraudulent and 
anticompetitive conduct by PBMs. This is because those activities are 
taking millions of taxpayer dollars and denying state government buyers 
the opportunity to drive the best bargain for the state.
    Despite this growing body of hard evidence of at worst fraudulent 
activity, and at best merely obfuscating behavior, the FTC has either 
remained on the sidelines or weighed in apparently in support of the 
PBM industry. We are unaware of any significant competition or consumer 
protection investigations of PBMs in recent years, nor has the FTC 
joined in any of the state or Federal investigations. We recognize that 
the FTC has limited resources. But we question the decision by the FTC 
to expend those limited resources actively opposing bipartisan PBM 
legislation pending in state legislatures around the country, while 
abstaining from involvement in these enforcement actions and 
investigations. Moreover, the FTC's comments have been used by the PBM 
industry's advocates in these legislative debates to suggest that the 
FTC has given the PBM market a ``clean bill of health.'' That is belied 
by our actual experience in the marketplace.
    The FTC Comments Lack an Empirical Basis for their Broad 
Conclusions. The FTC comments fundamentally argue that transparency 
would be harmful because it would limit the ability of PBMs to engage 
in selective contracting and offer limited formularies. The comments 
also suggest that transparency may lead to tacit collusion and higher 
drug prices. As you have acknowledged, the FTC's advocacy comments are 
most effective when they are based on a sound empirical foundation.\5\ 
In this case, the comments are primarily based on general economic 
theory. As far as we know there was no effort by the FTC to analyze the 
market environment in either North Dakota or California, two of the 
states in which the FTC has intervened in the legislative debate. Nor 
was there any effort to analyze how transparency has affected the 
market in those states where it is required or in other health care 
environments (such as Federal regulation of group purchasing 
organizations) where transparency is mandated.
---------------------------------------------------------------------------
    \5\ See Remarks of Chairman Deborah Majoras, ``A Dose of our Own 
Medicine: Applying a Cost/Benefit Analysis to the FTC's Advocacy 
Program.'' (Feb. 8, 2005).
---------------------------------------------------------------------------
    As far as we know, most of the FTC's ``empirical basis'' for its 
understanding of the PBM market was its investigation of the Caremark/
Advance PCS merger. Of course, that was a merger investigation which 
focused on the likelihood of anticompetitive price increases and not 
fraudulent activity in the market.\6\ Although the PBM industry uses 
the approval of that merger to suggest there are no competitive 
problems in the market, as far as we know it did not address any of the 
consumer protection and deceptive conduct investigations being 
investigated by the states and the U.S. Attorney's offices. We presume 
the fact that a market is competitive does not suggest that there can 
not be deceptive and unfair conduct in the market.
---------------------------------------------------------------------------
    \6\ We note that the lawyers for one of the parties in the merger 
claimed that the investigation was completed after only a ``quick 
look'' review. See http://www.jonesday.com/experience/
experience_detail.aspx?exid=1718903.
---------------------------------------------------------------------------
    The lack of real world analysis is most apparent in the FTC's 
comments on the supposed potential for transparency to facilitate 
collusion among pharmaceutical manufacturers. The FTC's speculation in 
this area rests on the assumption that prescribers will share rebate 
information with manufacturers. The FTC does not, however, provide any 
empirical basis for that assumption. It seems questionable that 
prescribers would have any incentive to share this information. Nor 
does the FTC identify that this type of information sharing has 
actually happened in the states where transparency is mandated.
    The FTC comments fundamentally argue that transparency would be 
harmful because it would limit the ability of PBMs to engage in 
selective contracting and offer limited formularies. The comments also 
suggest that transparency may lead to tacit collusion and higher drug 
prices.
    The FTC's comments rest upon a misunderstanding of the dynamics of 
the prescription drug market. The FTC argues that competition among 
PBMs will bring about the efficient level of disclosure and 
transparency. We can not concur with the assessment of vigorous rivalry 
in the market. Health plans, both government and commercial, face high 
PBM-switching costs, which prevent them from reaping the benefits of 
this supposed competition. The market is highly concentrated in the 
hands of the three largest PBMs, which are insulated from potential 
competition by high barriers to entry. But even if the assessment of 
active rivalry was correct, the major PBMs have declined to provide a 
significant degree of transparency. Finally, as the FTC and the courts 
have noted in several instances, lack of transparency denies 
information to consumers, which in turn prevents markets from 
functioning efficiently. See FTC v. Indiana Federation of Dentists, 476 
U.S. 447, 454-55 (1986). Even if a market is competitive, it may 
nonetheless contain deceptive or unfair conduct that would justify 
legislation by the states and the Federal Government.
    We believe that there should be a fully informed debate about the 
effect of transparency on competition in the market. To the extent 
transparency may be harmful, by facilitating collusion, for example, 
those concerns could be addressed by protections against sharing the 
information. The FTC could provide a valuable role by explaining how 
transparency could be implemented with safeguards to prevent 
inadvertent collusion. Significantly, the only court decision to 
address the issue head on, based on an evidentiary record, found that a 
greater degree of transparency would benefit consumers by lifting the 
``layer of fog'' PBMs introduce.
    Finally, we believe it is important for the FTC to know the on-the-
ground facts before commenting on proposed legislation. Information 
such as whether a state's market is dominated by a single PBM is 
relevant to the question of whether states, pharmacies and health plans 
have any bargaining power when negotiating with the dominant PBM. Other 
information such as allegations that PBMs have engaged in therapeutic 
substitution which ultimately lead to the use of higher priced drugs is 
also relevant to the legislative debate, and it would be helpful if the 
FTC would investigate these and other allegations prior to opining that 
regulation is unnecessary or even harmful to consumers.
    The Process of Making Fully Informed Advocacy Comments. As duly 
elected state legislators, we strongly believe in the legislative 
process and the opportunity for a fully informed and balanced debate. 
We are therefore concerned about the fact that in its comments to the 
North Dakota and California legislatures, the FTC failed to speak to 
the advocates of the legislation. Such a discussion may have provided 
better information about the reasons for the legislation, the 
alternatives considered, the specific ``on-the-ground'' facts that led 
to the legislation, and the unique circumstances of the markets in 
those states. The discussion would have highlighted problems that state 
buyers have had in securing even a moderate level of transparency and 
concerns about inappropriate therapeutic substitutions. Such a dialogue 
may have better informed the FTC staff's perspective on the legislation 
in question. The FTC's failure to seek this input has created the 
impression that its comments are not balanced or fully informed.
    We hope you find these comments helpful. We look forward to the 
opportunity to work together with the FTC to assist it in obtaining a 
balanced and fully informed perspective on proposed state legislation.
            Respectfully submitted,
                                     Senator Mark Montigny,
                                                Chair of the Board.
Attachment: Appendix of legal actions
cc. FTC Commissioners

    Senator Pryor. Thank you.
    Mr. Riley?

         STATEMENT OF MARK RILEY, NATIONAL TREASURER, 
       NATIONAL COMMUNITY PHARMACISTS ASSOCIATION (NCPA)

    Mr. Riley. Good morning, Chairman Rockefeller, Chairman 
Pryor, and Ranking Member Wicker. Thank you for allowing me the 
opportunity to speak before you this morning on the critical 
issue of fair competition in the community pharmacy industry, 
particularly the independent community pharmacy industry.
    My name is Mark Riley and I've been an independent 
pharmacist for over 30 years, and I currently serve as national 
treasurer of the National Community Pharmacy Association, or 
NCPA. In addition to my duties as a national officer for NCPA, 
I have owned East End pharmacy in a small town outside of 
Little Rock for--Little Rock, Arkansas--for the last 26 years. 
I currently serve as the Executive Vice President of the 
Arkansas Pharmacy Association, where I've been for the last 6 
years.
    I've spent my entire career serving patients in the 
independent community pharmacy marketplace, and advocating for 
a level playing field throughout the pharmacy industry. I've 
also worked as a pharmacy consultant for 10 years within the 
pharmacy benefit manager industry, the PBM industry. My 
background has afforded me the opportunity to work on a variety 
of challenges and problems that are anticompetitive--that have 
an anticompetitive nature within our healthcare industry, and I 
would like to take this opportunity to discuss just a few of 
those with you today, particularly concerning the PBM industry.
    The first issue I'd like to address is the retail class of 
trade pricing. In the United States, pharmaceuticals are sold 
by the pharmaceutical manufacturers at different prices to 
different entities, such as retail pharmacies, hospital 
pharmacies, long-term care pharmacies, and mail-order 
pharmacies. Historically, the differences in pricing have not 
substantially affected retail pharmacies, because retail 
pharmacies are not competing for patients in hospitals or in 
long-term care facilities.
    However, mail-order pharmacies pose a different threat to 
retail pharmacies, because mail-order pharmacies are competing 
for the same patients as retail pharmacies. And the mail-order 
pharmacies are doing so using preferentially priced 
prescription medications. This results in mail-order pharmacies 
buying prescription medications at prices that retail 
pharmacies cannot access, and this is why we're so concerned 
with mail-order pricing being included in the calculation of 
average manufacture price, or AMP. This discrepancy in pricing 
is fundamentally unfair, and does not promote true competition.
    This leads to my second issue today: mail-order pharmacies. 
Now, I'm going to reverse myself a little bit. Because of the 
preferential pricing afforded mail-order pharmacies, one might 
assume that mail-order prescriptions are cheaper. This seems to 
be the general consensus. However, in my experience, this is 
not the case. Mail-order is steeped in deceptive pricing 
schemes that are intended to dupe employers into believing that 
they are saving money.
    If you would turn to Exhibit 1 in your handout, I will walk 
you through how pharmacy benefit managers, PBMs, and their 
mail-order pharmacies deceive their clients.

[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

    Prescription medications are currently priced on average 
wholesale prices, AWPs, which are determined by the drug 
manufacturer. The PBMs have devised ways to change their AWPs 
to their advantage.
    If you will look at this sheet, in front of you, you see--
that's about Lipitor. We took the number-one drug in the United 
States--Lipitor--and what you'll see on the left column is 
what--the price that the retail pharmacies typically pay for 
this drug. And we'll use a typical retail pharmacy 
reimbursement that is 15 percent off of the AWP.
    The AWP of this drug at retail pharmacies, the size they 
get, is $4.58 a tablet. For 30 of those tablets, if you 
multiply, the sheet shows it's $137.40. Does everybody have 
that? The $137 minus the 15 percent, which comes to $20.61--and 
the number you need to remember is $116.79--would be paid to 
the retail pharmacy for the drug portion of that product. They 
would also get a $2 dispensing fee, a meager $2 dispensing fee. 
But the drug portion would be $116.79.
    In the next column, mail-order will offer a 22-percent 
discount--AWP minus 22 percent--and spout about having no fee. 
AWP of--we took a middle-of-the-road product that had been 
repackaged. The way this is done is, the drugs are bought in 
bulk, they're repackaged, given a new NDC number, and a--and 
given a whole new set of pricing--AWPs that are elevated. The 
range was from the $4.58 up to about $11 in the Red Book, 
which--it lists those.
    We picked one in the middle. It's $7.08. So you see the 
math. Thirty times $7.08 is $212.40. Take away the 22-percent 
discount of $46.73, and the final price to the payer is 
$165.67.
    So, we have a payer who thinks they're getting a better 
deal, they've gotten a 22-percent discount instead of a 15-
percent discount, and yet they paid $48.88 more, in final, for 
the drug. This happens in about 30 to 35 percent of the 
prescriptions, we believe, in mail-order prescriptions today, 
which actually runs the cost higher, not lower, while the 
employer thinks they got a better deal.
    As you can see, PBMs sell their so-called savings in terms 
of percentages, not real dollars. This is only one of the games 
the PBMs use to deceive purchasers of prescription drugs.
    This leads to the third issue I want to address today, PBM 
spread pricing. Spread pricing is another game that the PBM's 
use, which thwarts competition by making local community 
pharmacy prices look inflated. Simply put, the PBMs pay the 
pharmacy one amount and charge the purchaser a larger amount, 
but lead the purchasers to believe that the larger amount was 
actually paid to the pharmacy. In reality, the PBM pockets the 
difference.
    If you'll look at Schedule 2--Exhibit 2, very quickly, this 
is an example of--we worked with an employer in Hot Springs who 
was--and to make this very simple, these are showing the 
spreads--and we'll go over this later, if you'd like to--but, 
the bottom line was that employer, small employer with 200 
employees, about 500 lives, was paying $22.25 a prescription 
more than they were paying the pharmacists on their generic 
prescriptions. It was extremely egregious, as to what was 
happening to that employer, and they had no idea. Essentially, 
the pharmacy was being paid about $22-and-some-change, on 
average; they were adding $22-and-some-change, for a total 
price of $45 to the employer on their generics.

[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

    Let me move on and finish. One of the examples, we didn't 
even put on here, the most egregious example. Pharmacy was paid 
$14.40 for a cholesterol-lowering drug, but the PBM charged the 
employer $126.72 for a drug they paid the pharmacy $14.
    This leads to the final issue. So, how can a community 
pharmacy compete fairly, when the true amount paid to them is 
virtually irrelevant to the ultimate cost of the purchaser?
    This leads to the final issue I want to address this 
morning, and it's the CVS Caremark merger. This ill-advised 
merger, approved by the FTC, takes the smoke-and-mirrors 
practices of the PBMs to a whole new level, and its effects are 
obviously anticompetitive.
    In additions to the acts I have previously discussed, the 
merger now allows CVS Caremark to monitor and utilize every 
aspect of the community pharmacy transaction to their own 
advantage. Please, imagine a business that gets to determine 
which of its competitors can compete for the customers, how 
much the competitor will be paid, and then captures all of the 
data from the competitor's transaction, and uses this data to 
solicit the competitor's customers.
    This scenario is exactly what CVS Caremark is doing. CVS 
Caremark, in its PBM capacity, controls the pharmacy network, 
controls the amount paid to its competing community pharmacies, 
and controls all the data from the transaction which is being 
supplied to its retail pharmacy division--to its own retail 
pharmacy division.
    Mr. Chairman, these are just a few of the problematic 
anticompetitive issues that community pharmacies and their 
patients are facing due to the PBMs. I thank you for the 
opportunity to speak before the Committee today, and I welcome 
any questions you may have.
    [The prepared statement of Mr. Riley follows:]

         Prepared Statement of Mark Riley, National Treasurer, 
           National Community Pharmacists Association (NCPA)
    Chairman Pryor, Ranking Member Wicker, and Members of the Consumer 
Protection, Product Safety, and Insurance Subcommittee of the Senate 
Commerce, Science, and Transportation Committee. The National Community 
Pharmacists Association (NCPA) and I appreciate you conducting this 
hearing on ``Competition in the Health Care Marketplace'', and for 
giving me this opportunity to testify on behalf of independent 
community pharmacists. My name is Mark Riley. I have been an 
independent pharmacist for over thirty years, and I currently serve as 
national treasurer of NCPA. From my perspective, in order to increase 
the quality of care and the number of people receiving care, there must 
be transparency and the elimination of self-dealing, so that 
competition is fair and ensures that both private and public health 
care expenditures are used efficiently.
    NCPA was founded in 1898 as the National Association of Retail 
Druggists (NARD) to promote pharmacy as a profession and the role of 
independent community pharmacy in delivering quality prescription and 
related health care to their patients. NCPA represents the 55,000 
pharmacists, pharmacist owners, managers and 300,000 employees of more 
than 23,000 independent community pharmacies across the United States. 
Independent pharmacists provide prescription drug and related health 
care services to millions of patients, many of them in underserved 
areas.
    In addition to my duties as a national officer for NCPA, I have 
owned East End Pharmacy in a small town outside of Little Rock, 
Arkansas for the last 26 years. I currently serve as the executive vice 
president of the Arkansas Pharmacists Association, where I have been 
for the last 6 years.
    I have spent my career serving patients in the independent 
community pharmacy marketplace and advocating for a level playing field 
throughout the pharmacy industry. I've also worked as a pharmacy 
consultant for 10 years within the Pharmacy Benefit Manager (PBM) 
industry. During that time as a PBM consultant, I saw the industry 
change from a claims processing industry, to an industry veiled in 
secrets that often deceives its own clients for the sake of corporate 
profits. In addition, they have created an environment of anti-
competitiveness where self-dealing is the norm. Simply put, the 
unregulated, anticompetitive practices of the PBMs are costing our 
healthcare system so much money that I absolutely do not believe it is 
possible to control costs in the prescription drug sector without 
exposing their egregious business tactics.
    Mr. Chairman, NCPA proposes reforms that will make their PBM 
operations transparent, thus ensuring that PBMs can no longer keep 
these excessive profits from patients and the government. Second, I 
will discuss the need for the correct ``class of trade'' pricing to 
ensure that the appropriate sectors of the pharmacy market are measured 
according to the same terms. These discussions naturally lead to a 
third issue, the FTC's unbalanced study of mail order pharmacy 
operations. I will present the drawbacks of the study and mail order. 
Finally, I will close with a discussion of the anti-competitive merger 
of CVS, the Nation's largest chain pharmacy, and Caremark, one of the 
Nation's three largest PBMs. The non-transparency and the self-dealing 
aspects of these areas skew the health care market and prevent the 
implementation of level competition, to the detriment of the health 
care system, patients and taxpayers.
    Mr. Chairman, the result of the current system is that powerful 
competitors (chain pharmacies aligned with large PBMs) know the prices 
at which we buy pharmaceuticals, they know to whom we sell our 
prescription drugs, and they know the prices at which we sell them. I 
can think of no other industry--health care or otherwise--in which 
there is such a gross imbalance of power that skews the market, to the 
detriment of most of the stakeholders in it and those people and 
entities affected by it.
I. The Need for PBM Reforms
A. The Problems and Proposed Reforms
    Through its purely administrative actions, a PBM plays a critical 
role in both gathering patient eligibility information from the payer 
and providing this information to the pharmacy to allow for online 
processing of prescriptions claims. As part of these transactions, the 
PBM often makes critical decisions about the patient's health care 
including determining the benefit plan design, and determining the 
amount the patient is responsible for paying, commonly referred to as 
the copay.
    Besides these key functions, PBMs also fix pricing for the retail 
pharmacies who participate in their networks. This creates a huge 
conflict of interest because the PBMs also own mail-order pharmacies 
that compete directly with the retail pharmacies with whom they are 
contracted. This leads to the PBM being able to collect not only 
pricing information from the retail pharmacy, but also to collect 
patient specific data. PBMs have become increasingly aggressive with 
the large amount of data that they have and they are using this data to 
steer patients away from the community-based pharmacy into a mail-order 
pharmacy that the PBM owns.
    This type of self-dealing is becoming more and more prevalent in 
the marketplace and is at its heart anticompetitive. In the Medicare 
Part A & B worlds, this type of physician self-dealing would be 
illegal. PBMs simply call it part of their everyday business plan. Due 
to the large volume of prescriptions that are managed by PBMs, 
transparency of these intermediaries is much needed to shed light on 
the many deceiving acts that add unneeded expense to our healthcare 
system. This transparency will provide substantial savings to patients 
and plan sponsors.
    There are two markets for prescription drug pricing. The first 
market is where the PBM and the plan sponsor negotiate regarding how 
much the plan sponsor will pay the PBM for prescriptions dispensed to 
patients covered under that plan. The second market is between the PBM 
and the pharmacy network, where the PBMs are able to set the rates at 
which community pharmacies will be reimbursed for dispensing 
medications to the patient under that health plan. Due to inadequate 
transparency regarding PBMs, they are able to engage in ``spread 
pricing'' where they charge the plan sponsor a rate substantially 
higher than what is paid to the pharmacy for services rendered. These 
spreads can vary dramatically on individual prescription drugs, and 
represent a substantial additional cost to plan sponsors, yet provide 
no added value to the health of patients. It has also been argued by 
many experts that PBMs use vague and inadequate language when defining 
what constitutes a ``brand'' and a ``generic'' prescription drug, 
allowing these intermediaries to maximize their revenue by charging the 
brand name while artificially increasing their reported generic 
utilization rate.\1\
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    \1\ Learner, N. ``PBMs Allegedly Manipulate Definitions of `Brand' 
and `Generic' Rx at Payers' Expense. 2008; http://www.aishealth.com/
DrugCosts/DBN_PBMs_Generic_Brand.html.
---------------------------------------------------------------------------
    Lack of transparency and inadequate auditing also allows these 
PBM's to keep payments from pharmaceutical manufacturers, rather than 
passing these rebates on to plan sponsors. For example, an audit was 
performed for the Federal Employees Health benefits Program (FEHBP) 
Retail Pharmacy Drug Program, for the years 2000 through 2005. It found 
that the PBM administering that program had collected over $13 million 
in administrative fees, which should have been considered drug rebates 
and hence subsequently returned the FEHBP Program.\2\ Such audits are 
difficult to administer, due to a severe lack of transparency.\3\
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    \2\ Testimony for Susan A. Hayes for the Committee on Oversight and 
Government Reform, Subcommittee on Federal Workforce. June 24, 2009.
    \3\ Drug Benefit News. ``PBM Auditing Increasing as Rx Costs Rise, 
But Critics Allege PBMs Are Foiling Audits.'' September 5, 2009.
---------------------------------------------------------------------------
    I also want to bring to your attention an article published by the 
Creighton University Medical Center, titled ``Spread Pricing in the 
Prescription Benefit.'' \4\ This document provides examples from actual 
claims data for four different employers, detailing the spreads charged 
by PBMs for a sample of prescription drugs. As an example, looking at 
atenolol, a blood pressure drug, the PBM charged the plan sponsor $80, 
but paid the pharmacy only $7, creating a spread of $73, equal to 91 
percent of the entire cost that the PBM charged the plan sponsor. In 
another example, the PBM charged the plan sponsor $104 for 
propoxyphene, a pain medicine, but only paid the pharmacy $40, creating 
a spread of $64, equal to 62 percent of the entire cost.
---------------------------------------------------------------------------
    \4\ Garis RI, Mohammad A. ``Mail-order prescription pricing: a 
critical examination.'' Creighton University Medical Center School of 
Pharmacy and Health Professions. http://www.pbdsuite.com/documents/
spread_brochure.pdf.
---------------------------------------------------------------------------
    It is important to note that the plan sponsor is not made aware of 
the spread and is charged an administrative fee by the PBM on top of 
that. One expert has argued that the spread retained by PBMs is 
responsible for as much as 5 percent of prescription drug spending, and 
is done with little knowledge of the plan sponsor due to inadequate 
transparency.\5\ These serve as but two examples of the wide 
variability that can exist when analyzing spread pricing. There are, 
however, multiple peer-reviewed studies and commentaries from many 
experts demonstrating this same wide range in spread prices, thus 
indicating the need for transparency.
---------------------------------------------------------------------------
    \5\ Testimony for Susan A. Hayes for the Committee on Oversight and 
Government Reform, Subcommittee on Federal Workforce. June 24, 2009.
---------------------------------------------------------------------------
    To provide an example from my home state of Arkansas, the Arkansas 
Pharmacists Association had an opportunity to review 103 claims for a 
small self-insured business in central Arkansas. This company was 
paying a per claim administrative fee to the PBM for the PBM's 
``services.'' What we found was shocking. After comparing the 
employer's PBM invoice with the pharmacy's payments, we found that the 
employer was being charged, on average, $45.50 per generic 
prescription. The pharmacies were only paid, on average, $22.95 per 
generic prescription. In this example, the PBM was blindly charging 
this small, self-insured business, on average $22.55 more than the 
prescription actually cost. In essence, the PBM added $22.55 per 
prescription in worthless healthcare expenses. Attached is a two-page 
PowerPoint power that outlines these dramatic differences.
    These expenses did not improve outcomes, they did not help manage 
chronic diseases, they did not help to provide additional medications 
to the patients. Instead these added expenses went solely to pad the 
corporate profits of the PBMs. The most egregious example from this 
employer was the drug Simvastatin, a medication commonly used to lower 
cholesterol. The pharmacy was paid $14.40 for this drug, while the PBM 
charged the small, sell-insured employer $126.72. That's an 880 percent 
overcharging of the employer. And remember, no added benefit was 
provided to the healthcare system in this example, just corporate 
profits run rampant at the expense of our healthcare system. And 
perhaps the single most disgusting aspect of this business practice is 
that the PBM leads the small, self-insured employer to believe that the 
local pharmacy was actually paid the full $126.72.
    To address this spread pricing issue and other key PBM issues, NCPA 
proposes the following four reforms, the third of which would eliminate 
these inflated costs by mandating that the PBM cannot reimburse the 
pharmacy less than what they are billing the payor for covered 
medications. Each reform requires that a group health plan, and a 
health insurance issuer providing health insurance coverage in 
connection with a group health plan, cannot enter into a contract with 
any pharmacy benefit manager (PBM) to manage the prescription drug 
coverage provided under such plan or insurance coverage, unless the PBM 
satisfies the following requirements:

        1. The group health plan provides to the patient an explanation 
        of benefits (EOB) statement;

        2. The PBM uses equal payment bases and disclosure of 
        reimbursement amounts for mail order and retail in order to 
        avoid unfair steering to mail order.

        3. The PBM can not engage in spread pricing, which occurs when 
        a PBM charges the group health plan or health insurance issuer 
        a higher price for a drug than the amount the PBM pays the 
        pharmacy for the same drug.

        4. The PBM must identify and pass along in the form of lower 
        copays or premiums any cost savings it negotiates with a 
        manufacturer.

    Plan sponsors will also realize additional health care savings by 
mandating that PBMs keep a verifiable and transparent account of all 
rebates received from pharmaceutical manufacturers. Due to inadequate 
transparency, it is difficult to know the amount of revenue collected 
by PBMs from pharmaceutical manufacturers, making it difficult to 
ensure that these payments are passed on to the plan sponsor. As an 
example, according to Winkelman Management Consulting, in 2004 Medco 
collected over $3 billion in revenue from pharmaceutical manufacturers 
through prescription drug rebates, but failed to pass along $1.3 
billion (44 percent) of this revenue to their plan sponsors.\6\ One 
expert has testified that as much as 50 percent of drug manufacturer 
rebate payments are kept by the PBM and never paid to the plan 
sponsor.\7\ Also, one-sided PBM/client contracts give PBMs undue 
influence on audits in many cases. PBMs generally restrict the number 
of rebate agreements that can be audited.
---------------------------------------------------------------------------
    \6\ Winkelman Management Consulting. April 2005.
    \7\ Testimony for Susan A. Hayes for the Committee on Oversight and 
Government Reform, Subcommittee on Federal Workforce. June 24, 2009.
---------------------------------------------------------------------------
    PBMs should therefore be required to meet the following fiduciary 
duties to health plans:

        1. The PBM must annually provide to the group health plan or 
        health insurance issuer all financial and utilization 
        information requested by them, and must annually provide all 
        financial terms and arrangements for remuneration between it 
        and a drug manufacturer;

        2. PBMs must also disclose, before signing an agreement with a 
        prospective client plan, its methodology of soliciting and 
        receiving payment from drug manufacturers; and

        3. PBMs owned by a retail pharmacy are prohibited from sharing 
        with that pharmacy any patient identifiable data that may be 
        sent to the PBM by competing pharmacists to process 
        prescription drug claims for enrollees.

    NCPA is not alone in seeing the need to address these concerns. 
PBMs have been subject to a remarkable number of enforcement actions by 
state attorneys generals and the Justice Department. There are over 6 
key pending and settled government enforcement actions brought against 
the three major PBMs. Many of these cases have been brought by a 
coalition of over 30 state attorneys generals securing monetary 
penalties of over $370 million. As the National Legislative Association 
on Prescription Drug Prices (NLARx), a bipartisan alliance of state 
legislators, has observed ``we know of no other market in which there 
has been such a significant number of prominent enforcement actions and 
investigations, especially a market with such a significant impact on 
taxpayers.'' \8\ The enforcement actions address:
---------------------------------------------------------------------------
    \8\ Letter from Senator Mark Montigny, on behalf of NLARx, to 
Deborah Platt Majoras, FTC Chair, May 11, 2005.

        1. conflicts of interest because PBMs both manage drug benefits 
---------------------------------------------------------------------------
        and dispense drugs;

        2. improper prescription drug switching to a higher priced drug 
        without medical justification and without the authorization of 
        the prescribing physician; and

        3. failing to disclose and pass on the full extent of rebates 
        and other incentives received from drug manufacturers, and 
        failing to pass through such discounts to pharmacies and 
        consumers.

    The tremendous amount of litigation by employers, insurers, 
consumer groups and others demonstrate the chronic conflicts of 
interest and the lack of transparency. Regulation to create some sort 
of market transparency is crucial to the proper functioning of this 
market. The First Circuit Court of Appeals that upheld Maine's 
regulatory statute noted that PBMs ``introduce a layer of fog to the 
market that prevents benefits providers from fully understanding how to 
best minimize their net prescription drug costs.'' Over the past 4 
years, more than twenty states either have passed or are considering 
regulation of PBMs to address these problems.
    PBMs harm consumers by using their market power to reduce 
compensation to pharmacies. As noted below the PBM market is highly 
concentrated and that enables them to exercise ``monopsony'' or buyer 
power to reduce compensation to the pharmacies that provide dispensing 
services. Although a reduction in compensation may appear attractive 
from the perspective of a buyer of PBM services, that attraction is 
misleading. The savings from reducing compensation is not passed on to 
buyers in lower prices because of the market power of PBMs. Moreover, 
ultimately the consumer of drugs is harmed because there are fewer 
pharmacies available because of reduced reimbursement rates, or other 
forms of pharmacy services diminish.\9\ Leaving the PBM scheme 
unfettered and without oversight to ensure true open competition, along 
with leaving matters to litigation, is unworkable.
---------------------------------------------------------------------------
    \9\ This monopsony power that PBMs enjoy is similar to that of 
health insurers, which have the ability to impose take-it-or-leave it 
contracts on physicians.
---------------------------------------------------------------------------
B. FTC Study
    The FTC has spoken today about its report, ``Pharmacy Benefit 
Managers: Ownership of Mail-Order Pharmacies'' August 2005. (The 
Study).\10\ As part of the Medicare Prescription Drug, Improvement and 
Modernization Act of 2003, which became law in November, 2003, Congress 
requested that the Federal Trade Commission determine whether PBMs that 
own a mail-order pharmacy act in a manner that maximizes competition 
and results in lower prescription drug prices for its plan sponsor 
members. The FTC acknowledged that ``in theory they (PBMs) could have 
incentives to increase costs and generate additional profits through 
mail-order pharmacies. However, the FTC concludes that, in 2002 and 
2003, PBM's ownership of mail-order pharmacies generally did not 
disadvantage plan sponsors.'' (The Study, Executive Summary, p. ii).
---------------------------------------------------------------------------
    \10\ http://www.ftc.gov/reports/pharmbenefit05/
050906pharmbenefitrpt.pdf.
---------------------------------------------------------------------------
    The Study, however, contained many methodological structural flaws, 
including (but not limited to) its methods of assessing costs and 
Generic Dispensing Rates (GDRs) for owned-mail order, non-owned 
(independent) mail order and retail pharmacy and by therapeutic class 
between mail order and retail, in comparing Generic Substitution Rates 
(GSRs); in assessing brand-to-brand therapeutic interchange; in failing 
to fairly determine conflicts of interests and in simply 
mischaracterizing its analyses. (An Assessment of the Federal Trade 
Commission Conflict of Interest Study, John N. Demos and Stewart 
Stewart, April 2006, particularly pages ii-iv of the executive summary, 
found at: http://www.ncpanet.org/pdf/ftcassessment-exsum.pdf). (An 
Assessment).
    More specifically, I would highlight that:

        1. In assessing payments and their plans for drugs dispensed by 
        mail order operations which are owned by PBMs, compared to 
        mail-order operations not owned by PBMs and retail pharmacies, 
        costs may be lower at retail pharmacies. In addition, mail 
        order cannot accomplish the face-to-face counseling and 
        medication management, which are especially important for 
        elderly patients taking multiple drugs, which is featured at 
        retail community pharmacies.'' \11\
---------------------------------------------------------------------------
    \11\ An Assessment at vii.

        2. In response to the question of whether plans are acting in a 
        manner that maximizes competition and results in lower 
        prescription drug prices for enrollees, PBMs suffer from a 
        conflict of interest created, to a large extent, by retention 
        of pharmaceutical manufacturer payments.\12\
---------------------------------------------------------------------------
    \12\ Id. at vii, viii.

        3. Mail-order pharmacies that are owned by PBMs (or by entities 
        that own PBMs) dispense ``significantly fewer'' generic drugs 
        compared with mail-order pharmacies that are not owned by 
        PBMs.''The FTC's assessment of PBM spreads at mail-order is 
        erroneous in that it looks at spreads on average rather than 
        assessing specific transactions.'' \13\
---------------------------------------------------------------------------
    \13\ Id. at x, xi.

        4. Therapeutic interchange is a prevalent practice at PBM mail-
        order pharmacies, which helps explain the lower generic 
        dispensing rates at these facilities.\14\
---------------------------------------------------------------------------
    \14\ Id. at xiv.

        5. If PBMs pursue their interest in mail-order, ``it will have 
        a substantial impact on the national cost of drug benefits and 
        the burden on the taxpayer.'' \15\
---------------------------------------------------------------------------
    \15\ Id. at xv-xvii.
---------------------------------------------------------------------------
II. The Need for Uniform Application of Class of Trade Pricing
    A reoccurring issue for community pharmacy is that there are 
increasingly harmful, illogical inclusions of various pharmacy pricing 
structures where a well-defined retail pharmacy class of trade should 
be used. A ``retail pharmacy class of trade'' has traditionally been 
defined to mean any independent pharmacy, independent pharmacy 
franchise, independent chains, independent compounding pharmacy, 
traditional chain pharmacy--including each traditional chain pharmacy 
location, mass merchant pharmacy and supermarket pharmacy.
    Unfortunately, government programs are increasingly expanding the 
class of trade to include areas such as low cost drug pricing under the 
340B program. Congress created the program to provide low cost drugs to 
low income and uninsured individuals. Lack of a strong regulatory 
structure has created situations, however, where the low cost drugs are 
provided by 340B (health care) entities, such as 340B hospitals, to 
their own employees, many or perhaps all of whom are not the type of 
individuals for which the program was designed to assist. If different 
pricing structures, such as the 340B program, mail order drug 
operations, and various hospital price programs, are included in 
different drug programs, then market forces will not work correctly, as 
there will be differently priced products ``competing'' for purchase 
within the same program. Lumping together differently priced drugs runs 
counter to the purposes of each individual program/pricing structure, 
and inappropriately mixes the types of patients each is designed to 
reach.
    In the United States, pharmaceuticals are sold by the 
pharmaceutical manufacturers at different prices to different entities, 
such as retail pharmacies, hospital pharmacies, long-term care 
pharmacies, and mail-order pharmacies. Historically, the differences in 
pricing have not substantially affected retail pharmacies because 
retail pharmacies are not competing for patients in hospitals or long 
term care facilities. However, mail order pharmacies pose a different 
threat to retail pharmacies because mail order pharmacies are competing 
for the same patients as retail pharmacies, and mail order pharmacies 
are doing so using preferentially priced prescription medications. This 
results in mail order pharmacies buying prescription medications at 
prices that retail pharmacies cannot access and this is why we are 
concerned with mail order pricing being included in the calculation of 
Average Manufacturer Price (AMP). This discrepancy in pricing in 
fundamentally unfair and does not promote true competition.
    In sum, Retail Class of Trade should focus on the class of patients 
being served, and not on who is sending the pharmaceutical product. 
Medicaid AMP is a situation where putting mail order in the same class 
of trade as retail pharmacy class of trade makes no sense, as there are 
differentials in the pricing structure of each category.
    The problem of mixing pricing structures is also highlighted by the 
self-dealing that is inherent in the merger of CVS and Caremark.
III. Problems of the CVS-Caremark Merger
    The merger of CVS, the Nation's largest retail pharmacy, and 
Caremark, the Nation's largest pharmacy benefits manager (PBM), has 
produced a prescription services giant. The resulting company operates 
more than 6,800 pharmacies, affects 134 million consumers and fills or 
manages 1.2 billion prescriptions annually--controlling or influencing 
the prescription benefit of an estimated 1 out of 3 Americans. With $9 
billion in incremental earnings last year and a nearly $50 billion 
market cap, CVS/Caremark has created a virtual monopoly limiting 
consumer options.
    PBMs do have a role to play through their ``pharmacy benefit 
administer'' role. When a giant PBM is owned by a pharmacy, however, 
there is the ability and incentive for the pharmacy to misuse this 
relationship to diminish competition among non-CVS pharmacies. With the 
substantial market share CVS possesses in numerous markets, such 
conduct may raise significant competitive concerns.
    On May 13, 2009, the Federal Trade Commission (FTC) met with more 
than 80 independent community pharmacists and several patients to 
discuss the negative impact of the March 2007 CVS/Caremark merger and 
to urge the FTC to re-examine it. At the meeting, NCPA members 
explained how their patients experienced higher costs, fewer choices 
and less privacy since the merger took effect. NCPA therefore urged the 
FTC to take a number of steps, including investigating allegations of 
anticompetitive and deceptive conduct by CVS/Caremark; requiring CVS/
Caremark to treat all pharmacies in a nondiscriminatory fashion; and 
ensuring that the company creates an ironclad barrier between CVS and 
Caremark so that competitively sensitive Caremark information cannot be 
used by its retail operations.
    Some of the recent conduct by CVS/Caremark that raises these 
concerns includes the following activities and examples which were 
discussed at the May 13 meeting. Due to the potential for retaliation 
by CVS/Caremark through excluding pharmacies from their network, the 
patient and pharmacy names have been withheld.

   CVS/Caremark has significantly increased the copay for 
        members when they seek to fill prescriptions at non-CVS 
        pharmacies. This clearly raises the costs for members for using 
        non-CVS pharmacies;

     In New England, Pharmacist D. was appalled when his 
            patient's co-pay on a monthly refill suddenly increased 
            from approximately $5 to $50. When D. asked her if she knew 
            why, he learned she had been receiving letters that said 
            she would have to either pay a ``penalty co-pay'' or 
            transfer her prescriptions to CVS retail or Caremark mail 
            order. CVS/Caremark was also requiring her to get a 3-month 
            supply of a liquid drug which was much too heavy for the 
            94-year-old patient to lift. Instead, D. offered her the 
            drug at cash price--less than half the price CVS/Caremark 
            wanted her to pay.

   CVS/Caremark has adopted a program to attempt to steer 
        consumers to CVS pharmacies. When a Caremark member fills a 
        prescription at a CVS pharmacy, the CVS pharmacist is informed 
        through the Caremark electronic system of whether the recipient 
        uses another non-CVS pharmacy. In those situations, the CVS 
        pharmacist is instructed to inform the consumer of the dangers 
        of using multiple pharmacies. Obviously the only way the CVS 
        pharmacists knows the consumer uses multiple pharmacies is 
        through the misuse of consumer information possessed by 
        Caremark; and

     A longtime patient of Pharmacist R. in Louisiana was 
            shocked when her monthly refill was denied and the system 
            claimed the drugs had already been processed--at a CVS/
            pharmacy two towns over. When R. called to ask why the 
            drugs had been filled at a different pharmacy without the 
            patient's request, the CVS pharmacy refused to comment and 
            only said, ``We'll back them out [reverse the prescription 
            claims].''

   CVS/Caremark co-brands its prescription drug card in such a 
        fashion to confuse consumers that the benefit card can only be 
        used at CVS.

   From Pharmacist K. in Wisconsin: ``Today we attempted to 
        fill a medication for a customer who needed it to coincide with 
        her chemotherapy. Her plan does cover the medication but when 
        we attempted to fill she was told it had to come from their 
        [CVS/Caremark] mail-order service. This delay will affect her 
        chemo cycles and possibly her whole recovery.''

   One North Carolina patient on a Medicare Part D plan 
        operated by CVS Caremark switched his and his wife's 
        prescriptions to CVS pharmacy in March 2009, expecting lower 
        costs, as advertised. Instead, he had an extra $302 billed to 
        his plan in pharmacy reimbursements, in addition to $12 in 
        extra co-pay. At the local pharmacy, the plan paid a total of 
        $11.08 for seven of their drugs; at CVS, it paid $313.17. These 
        actions raised the government's payments by more than 2,800 
        percent, pushing seniors to the donut hole coverage gap sooner.

    NCPA hopes that these examples and the previous discussion of the 
vital need for PBM transparency reforms will spur the Subcommittee, the 
Committee, and Congress to call on the FTC to carefully re-examine the 
CVS-Caremark merger. For your reference, we are attaching a copy of the 
May 12, 2009 letter of NCPA President Holly Henry to FTC Chairman Jon 
Liebowitz in which she outlines how the merger and recent CVS/Caremark 
actions might diminish pharmacy competition, and also asks for specific 
relief.\16\ We believe that CVS/Caremark's actions may be violations of 
Section 5 of the FTC Act, and the original acquisition may be a 
violation of Section 7 of the Clayton Act.
---------------------------------------------------------------------------
    \16\ http://www.ncpanet.org/pdf/needftcinvestigation.pdf.
---------------------------------------------------------------------------
    It is not too late for the FTC to investigate the merger and 
challenge any anticompetitive conduct. They have done so in the past on 
numerous occasions. In 1998, for example, the FTC investigated Merck's 
acquisition of the Medco PBM 5 years after its approval and found ``the 
merger has made it possible for Medco to share with Merck sensitive 
pricing information it gets from Merck's competitors.'' The company 
signed a consent agreement to settle the FTC investigation, agreeing to 
refrain from sharing proprietary or other non-public information they 
receive from one another's competitors.
    NCPA knows about some of CVS/Caremark's practices which, for profit 
making motives, migrate customers from low value behaviors to higher 
value behaviors. NCPA does not, however, have full knowledge of CVS/
Caremark's operations, yet CVS/Caremark has full knowledge of the 
operations of independent community pharmacies. CVS/Caremark knows the 
prices at which we buy pharmaceutical products, who we are selling the 
product to, and at what prices we are selling. I respectfully submit 
that the Subcommittee should be extremely concerned about this 
concentration of power and the impact it has upon fair competition in 
the pharmaceutical industry. As I have tried to highlight by stating 
some ``real life'' examples, the problem is not an obscure accounting 
practice--it is that profits are kept from those providing services in 
this health care industry and grossly overly rewarding the PBM sector 
for merely providing administrative services. Instead, the manager of 
the transaction takes large profits at the expense of patient care.
    Finally, I wish to highlight that CVS/Caremark's actions include 
breaches of privacy rights:

   In October 2007, a Massachusetts judge condemned CVS for 
        advising patients to switch drugs in a direct-to-consumer 
        mailing that was secretly financed by manufacturers and by 
        which CVS profited.\17\
---------------------------------------------------------------------------
    \17\ Change to Win report, ``CVS Caremark: An Alarming 
Prescription.'' Page 16.

   In June 2008, CVS/Caremark sent a letter to one doctor 
        urging that physician to switch several patients--mentioned 
        specifically by name, patient identification number, and date 
        of birth--to Januvia, a Merck diabetes medication that costs 
        between 5 and 11 times more than other comparable 
        treatments.\18\
---------------------------------------------------------------------------
    \18\ Marley Seaman, ``Unions Accuse CVS Caremark of Pushing Merck 
Drug,'' Forbes 11/14/08, .

    I thank you for the opportunity to speak before you today to 
provide this testimony and I want to submit to you one final statement. 
Independent retail pharmacists know how to save money and how to 
maximize healthcare expenses. We do it every day. We are quite 
literally the only providers in the entire healthcare system that 
understand both the therapeutics of the medications and their 
economics. When we have a chance to compete on a level playing field 
with all the huge companies, we save the healthcare system money.
    I would be pleased to answer any questions.

    Senator Pryor. Thank you.
    Ms. Turner?

               STATEMENT OF GRACE-MARIE TURNER, 
                   PRESIDENT, GALEN INSTITUTE

    Ms. Turner. Thank you, Chairman Pryor. Thank you, Chairman 
Rockefeller. Thank you, Ranking Member Wicker and Senator 
Cantwell, for the opportunity to testify today.
    I'm going to bring a slightly different perspective to the 
discussion today. I think there are, indeed, huge problems in 
our health sector that need to be addressed. But I think that 
it's important, also, to look at some of the things that are 
working so that we can build on those successes in making the 
changes that we will actually encourage more competition and 
give consumers greater control over their health care 
decisions.
    In my written testimony, I highlight many examples of 
innovations in care delivery, creative benefit designs that 
lower the cost of care, and I would like to highlight a few of 
them here in my testimony today.
    There are so many changes happening in the medical 
profession, with patient-centered medicine, micro-targeting of 
treatments that are tailored to individual genetic codes. 
Advances in medical science, I think, demand that this progress 
continue without being blocked by regulatory obstacles that 
could have unintended consequences.
    Also, Americans consistently tell public-opinion pollsters 
that they don't want a larger role for government in the health 
sector, but that they do want policies that build on private-
sector initiatives. Looking at some of those initiatives and 
highlighting strengths of our health sector could be very 
useful.
    It's also important to recognize, as the panel has so well 
described today, the need for change, including the need for 
more consumer-friendly information, greater transparency, and 
more individual control over health care decisions and health 
coverage. For example, individuals and small businesses 
purchasing health insurance find their choices are limited by a 
lack of competition among insurers in their States--as in 
Arkansas, in particular, as Len mentioned. Further, most people 
with employment-based coverage have limited choices of plans 
offered by their employers. The lack of control over decisions 
and the lack of transparency limits consumers' choices and, 
rightly, this often angers them.
    We do need to change--changes that would bring more 
discipline into our health sector, yet it's instructive to 
build on some of these innovative ideas.
    A few examples: Safeway's CEO, Steve Burd, has become an 
evangelist for wellness incentives in the company's health 
plans. In the first year after they were introduced, Safeway's 
health costs went down by 11 percent.
    Target offers its employees a range of health insurance 
choices. One health savings account option costs them as little 
as $20 a month, and this company deposits $800 a year into 
families' health spending accounts. It also offers decision 
guides to help employees compare price and quality and estimate 
their costs, access to wellness programs, a nurse hotline, and 
other support tools.
    Whole Foods deposits up to $1800 a year into spending 
accounts for each employees. Any unspent money in the account 
rolls over to the next year. Some employees have accumulated as 
much as $8,000 in their accounts, and yet, Whole Foods still 
saves money on its health costs, while still covering 100 
percent of its employees' health insurance premiums.
    These companies have used incentives to engage consumers in 
their health spending decisions. The health costs of these 
consumer-directed plans increased by only 2.6 percent in 2006. 
That's about a third of price increases for traditional 
insurance.
    Private firms also have responded to consumer demands for 
more convenient access to more affordable medical care. 
TelaDoc, for example, offers its customers telephone 
consultations with physicians from anywhere in the country--
really anywhere in the world--for $35 for a call. Also, about 
1,200 retail health clinics have opened up in big-box stores 
and retail pharmacies around the country, giving people 7-day-
a-week access to nurse practitioners, primarily, to treat 
common illnesses. Prices are a fraction of emergency rooms' 
charges.
    Competition among insurers is also leading to more choices 
for consumers. I know there is a lot of criticism of the health 
insurance industry, but it's important to look at some of the 
things they're doing right. For example, Aetna has launched a 
program to help patients find physicians, compare costs and 
quality, and get personalized information about their care. 
Four years of evidence shows sustained savings for their client 
companies, more patient engagement in managing health care 
costs, and greater utilization of preventive services.
    Competition, primarily from the use of generic drugs, also 
is helping to moderate prescription drug spending. We all know 
about Wal-Mart and its $4 for a month's supply of prescription 
drugs that led to a lot of competition from other insurers, as 
well. Safeway and some other food stores now will fill a 
prescription for antibiotics for free. Largely as a result of 
greater use of generics, prescription drug spending increased 
by only 1.6 percent in 2007, the lowest rate since 1974.
    There are many more options and descriptions of other 
innovative health plans in the private sector that I describe 
in my testimony. One in particular, I think, in the public 
sector that's worth mentioning is the way that the Medicare 
prescription drug benefit was structured. It gives people a 
choice of competing private plans and--for the first time--is 
lowering the cost of a new government entitlement program, 
coming in about 40 percent under the expected cost of the 
program. A lot of that is because consumers were smart shoppers 
and went to the plans that provided the best value for the 
dollar.
    In conclusion, I commend you and the many other members of 
Congress who are working so hard to expand access to health 
coverage for the uninsured, to modernize our health care 
system, and provide relief for private and public payers to 
rising health care costs. I believe that it's important to 
focus on the innovation in our health sector--as Len 
mentioned--the quality of clinicians, hospitals. We must build 
on this system, look at what's working in our private sector, 
and then begin to think about how we can bring more discipline 
into our health sector so that these kinds of innovations can 
continue.
    Thank you very much.
    [The prepared statement of Ms. Turner follows:]

  Prepared Statement of Grace-Marie Turner, President, Galen Institute
    Thank you Chairman Pryor, Ranking Member Wicker, and Members of the 
Committee for the opportunity to testify today on the issue of 
competition in the health care marketplace. My name is Grace-Marie 
Turner, and I am president and founder of the Galen Institute, a non-
profit research organization devoted to advancing an informed debate 
over market-based health reform ideas.
    There are many problems in our health sector that require careful 
and deliberative change, including the issue you are exploring today 
involving the lack of competition in many parts of the health sector. I 
would argue that many of the problems the country is facing involving 
cost, quality, and access to health care could be addressed by 
encouraging more competition and empowering consumers to have greater 
control over decisions involving their care and coverage.
    In my testimony, I will highlight some of the progress that is 
being made through innovations in care delivery, in creative benefit 
offerings, and even in lowering the cost of treatments to show that the 
competitive market can respond to the demands of consumers for better 
quality care at more affordable prices.
    While health care is different than other sectors of our economy 
and requires special consideration, there are many areas where 
consumers can and want to have more control over their health care 
choices. I believe the evidence shows that competition can work by 
engaging consumers as partners in getting better value for their health 
care dollars.
Change Is Indeed Needed
    Congress is attempting to address in major health reform 
legislation the many problems in our health sector: Health insurance 
and health care still cost too much. As a result, tens of millions of 
Americans don't have health insurance, and many more are worried they 
are one pink slip away from losing their coverage. The lack of 
competition in health insurance in many states limits the options for 
coverage and over-regulation drives up costs. And the costs of Medicare 
and Medicaid are swallowing up a growing share of Federal and state 
revenues, compromising other functions of government and threatening 
huge tax increases just to pay for current entitlement commitments.
    But because Americans consistently tell public opinion pollsters 
they do not want a larger role for government in the health sector, 
policies that build on the private sector are much more likely to gain 
public acceptance.
    Consider, for example, the progress that has been made in 
moderating costs over the last several years:

   In 2007, U.S. health spending grew at its slowest rate since 
        1998, increasing just 6.1 percent, with year-over-year 
        increases of 6.7 percent and 6.8 percent in 2006 and 2005.\1\ 
        These increases are still higher than the general inflation 
        rate, but not the double-digit spikes seen over the last 
        several decades.
---------------------------------------------------------------------------
    \1\ Micah Hartman, Anne Martin, Patricia McDonnell, Aaron Catlin, 
and the National Health Expenditure Accounts Team, ``National Health 
Spending in 2007: Slower Drug Spending Contributes to Lowest Rate of 
Overall Growth Since 1998,'' Health Affairs, January/February 2009, 
at http://content.healthaffairs.org/cgi/content/abstract/28/1/246.

   Premiums for private health insurance also rose by only 6 
        percent in 2007, the same rate as in 2006, but much lower than 
        the peak of nearly 11 percent in 2002.\2\
---------------------------------------------------------------------------
    \2\ Ibid.

   Premiums for new consumer-directed health insurance plans 
        introduced in this decade increased by much smaller amounts--
        2.8 percent in 2005 and 2.6 percent in 2006--helping to 
        moderate costs overall.\3\
---------------------------------------------------------------------------
    \3\ ``Reducing Corporate Health Care Costs: 2006 Survey,'' Human 
Capital Practice of Deloitte Consulting LLP and the Deloitte Center for 
Health Solutions, 2006, at http://www.deloitte.com/
dtt/cda/doc/content/us_chs_red_cor_hea_costs_0106.pdf.
---------------------------------------------------------------------------
A Climate Friendly to Innovation
    The private sector is much more adept at innovation and 
evolutionary change than government-dominated programs. Continued 
innovation is vital to progress in health care. The medical profession 
is moving toward patient-centered medicine, with micro-targeting of 
treatments tailored to the individual genetic code of individual 
patients. Advances in medical science demand that progress continue 
without being blocked by regulatory obstacles and restrictive payment 
systems.
Two Segments of the Health Sector
    The U.S. health economy has two distinct segments--the public and 
private sectors--and each operates under different sets of rules. About 
46 percent of the U.S. health sector is largely financed with tax 
revenues through government-operated programs, such as Medicare, 
Medicaid, the State Children's Health Insurance Program, the Veterans 
Health Administration, community health centers, and others. The rest 
of health care is financed privately, largely through businesses' 
contributions to support employment-based health insurance but also 
through direct purchase of insurance and out-of-pocket payments by 
patients.
    Many analysts refer to our public and private health sectors as a 
health care system, but we do not have anything approaching a health 
system in the U.S. Rather, it is made up of conjoined twins, with one 
run by various government agencies and the other more reliant upon 
market forces. As health policy analysts attempt to achieve consensus 
on reforms for our health sector, it is becoming increasingly clear 
that this operational divide is one reason compromise is so difficult.
    The government sector works primarily on a model that provides 
people eligible for public programs with an entitlement to a 
government-determined set of benefits within government-determined 
payment structures. Some patients receive care from physicians employed 
by the government in government-owned facilities, but most obtain care 
through private hospitals and physicians who are paid at government-
determined rates.
    Within the public sector, private health plans also are involved. 
For example, many states have contracted with private managed care 
companies to offer care through their Medicaid and SCHIP programs, and 
Medicare allows participation by private plans in Medicare Advantage 
and the Part D prescription drug benefit program. But the majority of 
publicly-financed health care is delivered through the fee-for-service 
(FFS) model that the private sector largely left behind in the 1980s as 
unacceptably expensive and inefficient. The response of the public 
sector to these problems has been to place restrictions on benefits and 
payments to providers in an effort to restrain costs, which often 
result in patients having difficulty accessing services and providers.
    The private health sector is much more diverse in its range of 
options and payment systems, representing an alphabet soup of program 
options from PPOs, POSs, MCOs, and HMOs to HSAs, HRAs, FSAs and even 
FFS.\4\ Private health plans, employers, and countless other companies 
in the health sector are continually innovating to provide more options 
for care and coverage. But the centralized control of health care even 
in these private sector plans limits and restricts consumer choices, 
giving them fewer options than they would have in a more competitive 
and open marketplace, as we have written in numerous papers, articles, 
and our book, Empowering Health Care Consumers through Tax Reform. (For 
more information see www.galen.org.)
---------------------------------------------------------------------------
    \4\ PPO: Preferred Provider Organization
    POS: Point of Service Organization
    MCO: Managed Care Organization
    HMO: Health Maintenance Organization
    HSA: Health Savings Account
    HRA: Health Reimbursement Account
    FSA: Flexible Spending Account
    FFS: Fee-For-Service
    Benefits and Compensation Glossary, 11th Edition, Judith A. Sankey, 
Ed., International Foundation of Employee Benefit Plans, March 30, 
2005, at http://www.ifebp.org/Resources/
News/ResearchTools/Glossary/default.htm.
---------------------------------------------------------------------------
    For example, most people with employment-based coverage have 
limited choices of plans offered by their employers. And many of these 
plans contract with a limited number of pharmacy benefit managers (PBM) 
who determine which drugs will be covered and what copayments will be. 
Patients can be given incentives to purchase one drug over another, not 
because it may be the one their doctor thinks is best for them, but 
because the PBM has a special deal with a particular drug company to 
push their product. This lack of transparency limits consumers' choices 
and rightly often angers them.
    We do need changes that would make the private market for health 
care in the United States more open and transparent. Yet, it is 
instructive to look at the innovative ideas coming from the private 
sector for improvements in the delivery and financing of health care 
where competition, transparency, and consumer choice are working.
Private Sector Innovation
    Entrepreneurs and private investors have been making significant 
investments in new health care solutions: MinuteClinics, TelaDoc, 
specialty hospitals, innovative medical practices, and employer plans 
that empower consumers to engage in their health care and spending 
decisions are just a few examples.
    Here is a summary of some of the other countless private sector 
initiatives in care, financing, and delivery:
Employer Innovations
    Many leading employers are working to get better value for spending 
on health care and health insurance for their employees in order to 
shape their health insurance offerings to fit their resources and work 
forces. A few examples:

   Safeway chief executive Steve Burd has become an evangelist 
        for wellness incentives in the company's health insurance 
        arrangements. In the first year after these plans were 
        introduced, the company's health costs went down 11 percent. 
        ``If you design a health care plan that rewards good behavior, 
        you will drive costs down,'' he said.\5\ The company shared its 
        cost savings with employees, cutting their costs by 25 percent 
        or more. Safeway introduced a program called Healthy Measures 
        that encourages employees to get health assessments and 
        provides support and incentives for responsible health 
        behaviors. Safeway also covers the full cost of recommended 
        preventive care.\6\
---------------------------------------------------------------------------
    \5\ Victoria Colliver, ``Preventive health plan may prevent cost 
increases,'' San Francisco Chronicle, February 11, 2007, at http://
www.sfgate.com/cgi-bin/article.cgi?f=/c/a/2007/02/11
/BUG02O20R81.DTL&type=printable.
    Scott Shreeve, ``Safeway uses incentives and transparency to 
improve employee health,'' The Health Care Blog, October 29, 2008, at 
http://www.thehealthcareblog.com/the_health
_care_blog/2008/10/safeway-uses-in.html.
    \6\ Ibid.

   Target offers its employees a range of health insurance 
        choices. One Health Savings Account option costs them as little 
        as $20 a month, and Target contributes $400 a year to health 
        spending accounts for individuals and $800 for families.\7\ 
        ``We've seen, and national research supports, that team members 
        make more cost-conscious decisions when they participate in a 
        consumer-based plan,'' according to John Mulligan, Target's 
        vice president for pay and benefits. ``These plans engage our 
        team members in a decision-making process that gives them 
        greater ownership and control of their health care dollars.'' 
        The company offers its 360,000 employees Decision Guides to 
        help them compare price and quality and estimate their costs, 
        plus access to wellness programs, a nurse hotline, and other 
        support tools.\8\
---------------------------------------------------------------------------
    \7\ ``Target Offers Employees Health Savings, Reimbursement 
Accounts, Plans to Eliminate Traditional Health Plans, USA,'' Medical 
News Today, May 18, 2006, at http://www.medical
newstoday.com/articles/43453.php.
    \8\ ``Thought Leaders: John Mulligan, Vice President, Pay & 
Benefits, Target Corporation,'' hub Magazine, Summer 2008, at http://
www.hubmagazine.net/printer.php?ID=180.

   Wal-Mart offers dozens of health plan options to its 
        employees, one with premiums as low as $5 a month. For this, 
        employees receive a $100 health care credit, more than 2,400 
        generic drugs available for $4 a month, and major medical 
        coverage with no lifetime maximum that starts at $2,000--
        basically the moment they step into a hospital. Employees can 
        choose to pay higher premiums for lower deductibles and more 
        comprehensive coverage.\9\ For $62 a month, employees can 
        choose a $500 deductible policy with a $100 health care credit 
        and no lifetime maximum on their insurance coverage.
---------------------------------------------------------------------------
    \9\ ``Wal-Mart Announces Improvements to 2008 Health Benefits 
Package,'' Wal-Mart Stores, Inc., September 18, 2007, at http://
walmartstores.com/PrintContent.aspx?id=6731.

   Whole Foods' CEO John Mackey toured the country talking to 
        employees about health benefits options. Afterward, employees 
        voted to switch to new account-based health plans with higher-
        deductible insurance coverage. Whole Foods deposits up to 
        $1,800 a year into a spending account for each employee, with 
        Mackey pointing out that this is not charity but part of the 
        employee's compensation package. If they don't spend the money 
        on medical care, it rolls over and the company adds more the 
        next year. Some workers have as much as $8,000 in their 
        accounts.\10\ Whole Foods saves money and still covers 100 
        percent of its employees' health insurance premiums.
---------------------------------------------------------------------------
    \10\ John Stossel, ``Control Your Own Health Care,'' 
RealClearPolitics, October 3, 2007, at 
http://www.realclearpolitics.com/articles/2007/10/
control_your_own_health_care.html.

   ``Whole Foods Market Benefits,'' Whole Foods Market, at 
        http://www.whole
---------------------------------------------------------------------------
        foodsmarket.com/careers/benefits_us.php.

    These companies and many others have worked extraordinarily hard to 
find the delicate balance between getting health benefit costs under 
control and continuing to provide coverage that satisfies their 
workers. There simply is no way that a benefit or cost structure 
dictated by Washington could achieve these same results. Maintaining 
ERISA protection is crucial to allowing companies to continue to 
innovate.

[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

    Source: Mercer's National Survey of Employer-Sponsored Health 
Plans; Bureau of Labor Statistics, Consumer Price Index, U.S. City 
Average of Annual Inflation (April to April) 1988-2008; Bureau of Labor 
Statistics, Seasonally Adjusted Data from the Current Employment 
Statistics Survey (April to April) 1988-2008.
New Health Care Financing Options
    Several new private sector health coverage options are available to 
companies and individuals. For example, the Medicare Modernization Act 
authorized the creation of Health Savings Accounts (HSAs) \11\ in 2004, 
with further enhancements enacted in 2006 and before that with creation 
of Health Reimbursement Arrangements (HRAs).
---------------------------------------------------------------------------
    \11\ Introduced by Rep. Paul Ryan, R-WI.
---------------------------------------------------------------------------
    HSAs permit individuals to combine health insurance with a tax-free 
health spending and savings account. The account is used to pay for 
routine health care expenses, such as doctor's visits, for services not 
covered by insurance, and to create a cushion to pay premiums in lean 
economic times. The high-deductible insurance policy covers larger 
medical expenses such as hospitalization and surgeries. Federal law 
also allows the insurance contract to cover preventive care, such as 
cancer screenings.
    Eight million Americans had health insurance that qualifies holders 
to open HSAs as of January 2009.\12\
---------------------------------------------------------------------------
    \12\ ``January 2009 Census Shows 8 Million People Covered by HSA/
High-Deductible Health Plans,'' America's Health Insurance Plans, May 
2009, at http://www.ahipresearch.org/
pdfs/2009hsacensus.pdf.
---------------------------------------------------------------------------
    The older sisters of HSAs, Health Reimbursement Arrangements, were 
created via a regulatory interpretation in 2002 to give employers more 
flexibility in structuring health coverage for their workers. HRAs 
operate much like HSAs but can be offered only through the workplace. 
They are generally account-based plans accompanied by health insurance. 
While the money in HSAs is truly portable to the employee or individual 
holder, access to HRA funds is generally restricted after an employee 
leaves a company. But HRAs give employers more flexibility in shaping 
their benefit packages, including providing incentives for prevention 
and wellness activities.
    Both products are helping to make health insurance more affordable 
and are helping companies lower their health costs. Health insurance 
premiums generally are lower than average because deductibles are 
higher, and the savings on premiums can help fund the HSA or HRA.
    Companies that have introduced health plans with new incentives for 
consumers to be engaged as partners in managing health costs generally 
have seen lower-than-average health cost increases. Annual premium 
increases for employment-based coverage averaged about 6 percent for 
the last 3 years, down from double digits earlier in the decade.\13\ 
The most impressive results have come from consumer-directed plans such 
as HSAs and HRAs.
---------------------------------------------------------------------------
    \13\ Total U.S. health benefit cost rose by 6.1 percent in 2007. 
``Mercer National Survey of Employer-Sponsored Health Plans,'' Mercer 
LLC, November 19, 2007, at http://www.mercer.com/
summary.jhtml?idContent=1287790.
---------------------------------------------------------------------------
    Deloitte's Center for Health Solutions found that cost of consumer-
directed health plans (CDHPs) increased by only 2.6 percent in 2006 
among the 152 major companies it surveyed. This is about a third the 
rate of increase for traditional plans.\14\
---------------------------------------------------------------------------
    \14\ ``Reducing Corporate Health Care Costs: 2006 Survey,'' Human 
Capital Practice of Deloitte Consulting LLP and the Deloitte Center for 
Health Solutions, 2006, at http://www.deloitte.com/
dtt/cda/doc/content/us_chs_red_cor_hea_costs_0106.pdf.

[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

    Source: ``Reducing Corporate Health Care Costs: 2006 Survey,'' 
Human Capital Practice of Deloitte Consulting LLP and the Deloitte 
Center for Health Solutions, 2006.
Lower Costs of Insurance Coverage
    Consumer-directed health products have helped to moderate health 
cost increases overall.

   UnitedHealthcare found that employer health benefit costs 
        were more than 15 percent lower in 2007 for its HRAs than for 
        traditional PPO plans. Importantly, 85 percent of the cost 
        savings were attributable to lower utilization costs, such as 
        avoiding hospitalizations and greater use of generic drugs--and 
        not from cost shifting to employees.\15\
---------------------------------------------------------------------------
    \15\ Meredith Baratz and Todd Berkley, ``Consumerism in Health: A 
Conversation with Galen Institute and the Consensus Group,'' 
UnitedHealthcare, January 7, 2009.

   A Mercer study found that consumer-directed health plans 
        delivered substantially lower cost per employee than either 
        PPOs or HMOs in 2008. CDHP medical plans averaged $6,207 per 
        employee, compared to $7,768 for HMOs and $7,815 for PPOs.\16\
---------------------------------------------------------------------------
    \16\ ``Mercer National Survey of Employer-Sponsored Health Plans,'' 
Mercer LLC, November 19, 2008, at http://www.mercer.com/
summary.htm?idContent=1328445.

   In addition, health insurance that people purchase in the 
        individual market is often more affordable than employment-
        based coverage. eHealthInsurance, the largest online broker for 
        individually-purchased and small-group health insurance, found 
        that the average yearly health insurance premium in 2007 was 
        $1,896 for individuals and $4,392 for a family.\17\
---------------------------------------------------------------------------
    \17\ ``Costs and Benefits of Individual and Family Health Insurance 
Plans,'' Forrester Research and eHealthInsurance, November, 2008, at 
http://www.ehealthinsurance.com/content/expert
centerNew/eHealthCBreport2008FINAL.pdf.
---------------------------------------------------------------------------
Other Benefits
    In addition to moderating cost increases, HSAs also are providing 
new options for the uninsured. Up to 43 percent of those enrolling in 
HSA-qualifying health insurance were previously uninsured, showing that 
uninsured Americans in particular have been looking for an affordable 
alternative to traditional health insurance, according to Assurant 
Health.\18\ Assurant Health's most recent data show that they have 
broad appeal:
---------------------------------------------------------------------------
    \18\ ``Quick Facts: Health Savings Accounts,'' Assurant Health, at 
http://www.assurant
health.com/corp/ah/AboutAssurantHealth/HSAFactSheet.htm.
    Maureen E. Sullivan, ``Health Plan Initiatives, Trends and Research 
in Consumer-Driven Care,'' BlueCross BlueShield Association, October 
20, 2008, at http://www.bcbs.com/news/
bluetvradio/consumerdriven2008/.

---------------------------------------------------------------------------
   66 percent of HSA purchasers are families with children

   63 percent of HSA purchasers are over age 40

   52 percent of all HSA purchasers have high school or 
        technical school training as their highest level of education

   30 percent of HSA purchasers have family incomes of less 
        than $50,000

    UnitedHealthcare found, based upon a survey of 300,000 HSA owners, 
that the average account holder had household income of $55,500, and 25 
percent of those with an HSA had income of less than $39,000.\19\ 
Changes in Federal law in 2006 allowing employers to make larger 
deposits for lower-income workers also are apparently succeeding, since 
UnitedHealthcare found that they were more likely to have employer 
contributions in their HSAs than higher-income HSA holders.
---------------------------------------------------------------------------
    \19\ Meredith Baratz and Todd Berkley, ``Consumerism in Health: A 
Conversation with Galen Institute and the Consensus Group,'' 
UnitedHealthcare, January 7, 2009.
---------------------------------------------------------------------------
Other Private Insurance Options
    Many other employers are offering innovative programs to help their 
employees get and stay healthier and spend health care dollars wisely. 
They are offering incentive programs to encourage employees to get 
health assessments to detect problems early and health coaching to help 
those with chronic illnesses better manage their care. These companies 
generally work in partnership with health plans to design the consumer-
based products, manage the finances, educate employees about using 
them, and provide wellness programs and support for employees with 
chronic conditions.
    For example, in 2005, Aetna launched a program that offers a range 
of consumer-support tools to help patients find physicians, compare 
costs and quality, and get personalized information about medical 
conditions and treatment. Its personalized search engine provides 
health information tailored to patients' individual needs.\20\
---------------------------------------------------------------------------
    \20\ ``Aetna and Healthline Networks Announce First Ever 
Personalized Health and Health Benefits Search Engine--Aetna 
SmartSource,'' Aetna Inc., March 12, 2008, at 
http://www.aetna.com/news/newsReleases/2008/0312.html.
---------------------------------------------------------------------------
    The results show this patient engagement works. Aetna is following 
health care claims and utilization of 1.6 million members of its Aetna 
HealthFund consumer-directed plans. Four years of evidence show 
sustained savings, more patient engagement in managing health, and 
greater utilization of preventive services. Employers who offered an 
Aetna HealthFund plan lowered their health care spending trend and 
saved money through all 4 years with the plan, across all Aetna 
products they offered.\21\
---------------------------------------------------------------------------
    \21\ ``Aetna Research Identifies Four Keys to Success for Consumer-
Directed Health Plans,'' Aetna Inc., January 31, 2008, at http://
www.aetna.com/news/2008/0131.htm.
---------------------------------------------------------------------------
    Aetna studied its members to identify the keys to successful 
implementation and found the keys were greater spending on preventive 
care, including wellness programs; focusing on employee communication 
and education; and carefully structuring benefits packages with 
appropriate levels of employee responsibility.\22\
---------------------------------------------------------------------------
    \22\ Ibid.
---------------------------------------------------------------------------
    Many companies are offering turnkey solutions to health plans and 
employers. U.S. Preventive Medicine, for example, offers employers 
packages of services they can tailor to fit the needs of their work 
forces for preventive care services.\23\
---------------------------------------------------------------------------
    \23\ U.S. Preventive Medicine, http://www.uspreventivemedicine.com/

---------------------------------------------------------------------------
    In addition, a galaxy of websites has evolved to offer everything 
from treatment information to diet advice. EverydayHealth has just 
surpassed WebMD as the most-visited site for medical information, and 
new sites appear every day to help patients find the best doctors, the 
lowest cost medicines, and the most cost-effective diagnostics.
Lower drug costs
    Competition, primarily from greater use of generic drugs, helped to 
moderate prescription drug spending. Prescription drug spending 
increased only 1.6 percent in 2007, the slowest rate since 1974.\24\ 
Part of the reason is increased use of lower-cost generic drugs, but 
private competition over drug pricing in the Medicare Part D program 
also contributed. And retail establishments also have engaged in 
private price wars. In 2006, Wal-Mart began offering 30-day supplies of 
several hundred generic drugs for just $4. Competitors quickly followed 
suit, with some even offering to fill prescriptions for antibiotics for 
free. It's impossible to imagine this happening in a price-controlled, 
government-regulated environment.
---------------------------------------------------------------------------
    \24\ Murray Aitken, Ernst R. Berndt, and David M. Cutler, 
``Prescription Drug Spending Trends in the United States: Looking 
Beyond the Turning Point,'' Health Affairs Web Exclusive, December 16, 
2008, at http://content.healthaffairs.org/cgi/content/abstract/
hlthaff.28.1.w151.
---------------------------------------------------------------------------
    There also has been active engagement by pharmaceutical companies 
in creating programs for low-income and uninsured people to obtain 
their products at little or no cost. Pharmaceutical companies have made 
significant investments to develop, expand, and promote patient 
assistance programs like Together Rx Access, Pfizer Helpful Answers, 
Partnership for Prescription Assistance, and many others. New private 
partnerships, like the Asheville Project and the Ten Cities Challenge, 
also have been created to help patients with chronic illnesses, 
including diabetes, get the medicines and counseling they need to 
manage their diseases.\25\
---------------------------------------------------------------------------
    \25\ Grace-Marie Turner, ``Gold Standard,'' Health Policy Matters 
Newsletter, Galen Institute, March 14, 2008, at http://www.galen.org/
component,8/action,show_content/id,14/blog
_id,1030/category_id,0/type,33/.
    Carole W. Cranor, Barry A. Bunting, and Dale B. Christensen, ``The 
Asheville Project: Long-Term Clinical and Economic Outcomes of a 
Community Pharmacy Diabetes Care Program,'' Journal of the American 
Pharmaceutical Association, Vol. 43, No. 2, March/April 2003, at 
http://www.aphafoundation.org/searchable_files/filemanager/
JAPhA_Long%20term.pdf.
    Toni Fera, Benjamin M. Bluml, William M. Ellis, Cynthia W. 
Schaller, and Daniel G. Garrett, ``The Diabetes Ten City Challenge: 
Interim Clinical and Humanistic Outcomes of a Multisite Community 
Pharmacy Diabetes Care Program,'' Journal of the American 
Pharmaceutical Association, Vol. 28, No. 2, March/April 2008, at http:/
/www.diabetestencitychallenge.com/
pdf/DTCCInterimReport.pdf.
---------------------------------------------------------------------------
    The private sector also has demonstrated its responsiveness to 
crisis. After Hurricane Katrina, more than a million people were 
displaced. They not only lost their homes, but also their support 
communities, including their physicians whose offices were literally 
washed away in the storm. Many were on important medications but the 
records of their prescriptions were lost.
    Pharmacy chains, pharmaceutical companies, pharmacy benefit 
managers, physicians, technical experts, and philanthropic groups came 
together to create KatrinaHealth.org, a website that compiled pharmacy 
records and allowed physicians anywhere to access through a secure 
website the medical records of displaced patients who came to them for 
help. It was a remarkable achievement that showed the power of private 
enterprise to respond quickly in a crisis.
Innovation in Medical Treatment
    The lists of innovations in medical treatment could consume a 
library. From pharmaceuticals to biologics and new medical devices, 
diagnostics, and surgeries, the list is endless.
    For example, proton beam therapy can vaporize tumors with no damage 
to nearby tissue, and DNA mapping already is allowing doctors to 
determine before chemotherapy is begun which cancer patients will 
respond to which treatments. Telemedicine is extending the reach of 
medical skills to rural areas, into people's homes, and even to other 
countries.
    Modern pharmaceuticals are dramatically expanding life expectancy 
and quality of life. Pharmaceutical research continues to be one of the 
most costly--and risky--investments in the health sector. In 2007, the 
pharmaceutical industry spent nearly $59 billion on research and 
development. Yet only 24 new drugs were approved last year.\26\ For 
every 5,000 to 10,000 compounds tested, just five will make it to 
clinical trials. And only one of those will receive FDA approval. And 
then, only two out of every 10 drugs that reach the market will recoup 
the costs invested in creating and developing the drug.
---------------------------------------------------------------------------
    \26\ Jared A. Favole and Jennifer Corbett Dooren, ``FDA Approved 
More Drugs in 2008,'' The Wall Street Journal, January 2, 2009, at 
http://online.wsj.com/article/SB1230846938
42347229.html.
---------------------------------------------------------------------------
    Yet innovation in this sector is particularly important to overall 
cost savings as every additional dollar spent on newer drugs in the 
United States saves $7 in other costs.\27\
---------------------------------------------------------------------------
    \27\ Frank Lichtenberg, ``Benefits and costs of newer drugs: An 
update,'' National Bureau of Economic Research Working Paper #8996, 
June 2002, at http://papers.nber.org/papers/w8996.pdf.
---------------------------------------------------------------------------
    The U.S. continues to lead the world in medical research. In 2007, 
more than 2,700 compounds were in development in the United States, 
compared to 1,700 in the rest of the world, 1,400 of which were under 
development in Europe.\28\ The U.S. is indeed the medicine chest for 
the world.
---------------------------------------------------------------------------
    \28\ Pharmaceutical Research and Manufacturers of America, 
Pharmaceutical Industry Profile 2008. Washington, D.C.: PhRMA, March 
2008, at http://www.phrma.org/files/2008%
20Profile.pdf.
---------------------------------------------------------------------------
    The most important role for government is to support this 
innovation in life-saving and life-enhancing medicines. Policies that 
would tax away the money that pharmaceutical companies spend on 
research would lower the quality of care for this generation and future 
generations.
Care Delivery
    Private health care firms have responded to consumer demand for 
more convenient, accessible medical care. For example:

   TelaDoc offers its customers telephone consultations with 
        physicians from wherever they are, anytime of day, 365 days a 
        year. The average patient gets a call returned by a doctor in 
        less than 40 minutes, and the cost per call is just $35. 
        TelaDoc physicians also use electronic prescribing to minimize 
        errors and keep a record of patients' medications.\29\
---------------------------------------------------------------------------
    \29\ TelaDoc, http://www.teladoc.com.

   There also has been an increase in the number of low-cost 
        walk-in medical clinics like RediClinic, Take Care, and 
        MinuteClinic. There are now more than 1,175 retail clinics 
        nationwide, a net increase of 274 new clinics opening in 
        2008.\30\ They are usually located in malls or chain stores and 
        are typically staffed by nurse practitioners working in 
        conjunction with local doctors and hospitals to diagnose and 
        treat common illnesses. They are open 7 days a week, before and 
        after work, and prices are a fraction of emergency room 
        charges.
---------------------------------------------------------------------------
    \30\ ``Merchant Medicine News: U.S. Retail Clinic Market Report,'' 
Merchant Medicine, Volume 2, Number 1, January 1, 2009, at http://
www.merchantmedicine.com/home.cfm.

    These clinics use Mayo Clinic and Cleveland Clinic protocols to 
        diagnose and treat a range of routine health problems, from 
        allergies and bronchitis to poison ivy, ear and bladder 
        infections, and strep throat, usually for a fraction of the 
        cost of hospital emergency rooms. Wal-Mart found that about 
        half of the people visiting its in-store clinics were uninsured 
        and did not have other sources of care. Wal-Mart partners with 
        local hospitals and doctors' groups to create the clinics in 
        many areas, but it insists that all of them create electronic 
        health records for every patient that are accessible at any 
---------------------------------------------------------------------------
        other clinic in the chain.

   Specialty hospitals owned by physicians are showing the 
        value of focused care in delivering high-quality, efficient 
        care with greater patient satisfaction and better health 
        outcomes.

   Physician practices also are innovating to become more 
        consumer-friendly. Some are opening an hour or more a day for 
        same-day appointments. Others are working with employers to 
        staff on-site clinics so employees can see a doctor without 
        taking time off work.

   Hospitals are experimenting with new ways to ease crowding 
        in their emergency rooms, visited by an estimated 119 million 
        patients in 2006. There are more than 8,000 walk-in urgent care 
        facilities nationwide staffed by practicing physicians. Inova 
        Health System and Shady Grove Adventist in the Washington, 
        D.C., area and dozens of other hospitals nationwide are opening 
        free-standing emergency facilities to treat everything from 
        lacerations to heart attacks and gunshot wounds. Patients are 
        seen faster, and if they need to be admitted, they are 
        transported by ambulance to nearby hospitals.\31\
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    \31\ ``ER Care, Stat!,'' Sandra G. Boodman, The Washington Post, 
September 16, 2008.

   A growing number of physicians are experimenting with 
        innovative medical practice design,\32\ including direct 
        medical practices. Physicians, generally internists or family 
        practitioners, contract directly with their patients to offer a 
        medical home, providing medical care, consultation, and 
        coordination with specialists for a fixed fee. The fees range 
        from $60 to $15,000 in some practices, but generally cost about 
        $1,500 a year.\33\ Other physicians are bypassing insurance and 
        simply posting prices for medical services. They find they can 
        charge patients much less because they save on the 
        administrative overhead of insurance billing.
---------------------------------------------------------------------------
    \32\ Society for Innovative Medical Practice Design at http://
www.simpd.org/.
    \33\ David Albenberg, MD, ``Concierge Medicine: The Pitfalls and 
the Pendulum,'' Fall 2008, 
at http://pri-med.com/DigitalAssets/Shared%20Files/
Syllabus%20Files_Fall08/C&E/Mid-
Atlantic/Practice%20solutions/Session11-
Concierge%20Medicine%20Part%201FNL.pdf.

   Health Advocate, a Pennsylvania-based company, helps 
        consumers find the right doctor for their ailments, work with 
        insurance companies on coverage, and manage other 
        administrative headaches. This service helps consumers, via 
        call centers, who are being given more responsibility to 
        navigate the world of health care and health coverage.\34\
---------------------------------------------------------------------------
    \34\ Mike Stobbe, ``Booming Business Helps Patients Navigate 
Medicine,'' Associated Press, July 25, 2008.
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Innovation in Public Programs
Medicare Modernization Act
    The structure of the drug benefit created by the Medicare 
Modernization Act of 2003 (MMA) has been an unusual success, with costs 
coming in significantly under estimates and with strong approval among 
Medicare beneficiaries.\35\
---------------------------------------------------------------------------
    \35\ The President also had the wisdom to appoint Mark McClellan, 
M.D., Ph.D., as administrator of the Centers for Medicare and Medicaid 
Services to implement the MMA. His leadership and belief in the value 
of market-based policies were a transformative force in the success of 
the MMA. Dr. McClellan convinced private plans to participate and one 
of the only criticisms is that he was too successful because seniors 
had so many choices of plans.
---------------------------------------------------------------------------
    The MMA created a market-based delivery system for the drug 
benefit. Many opponents wanted the drug benefit to be delivered like 
other Medicare benefits, with government deciding what products would 
be available and how much suppliers and providers would be paid.
    Instead, Congress created a new, private sector model for delivery 
of this largely publicly-funded benefit. Private drug plans compete for 
the business of seniors, vying to offer the most generous benefit 
packages for the lowest costs. The result has surprised even the most 
optimistic observers: Average premium costs are $28 a month this year, 
down from the $44 expected this year when the legislation was 
originally passed.\36\
---------------------------------------------------------------------------
    \36\ ``Lower Medicare Part D Costs Than Expected in 2009,'' Centers 
for Medicare and Medicaid Services, August 14, 2008, at http://
www.cms.hhs.gov/apps/media/press/release.asp?Counter
=3240&intNumPerPage=10&checkDate=&checkKey=&srchType=1&numDays=3500&srch
Opt=0&
srchData=&keywordType=All&chkNewsType=1%2C+2%2C+3%2C+4%2C+5&intPage=&sho
wAll=
&pYear=&year=&desc=&cboOrder=date.
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    The competitive model is saving taxpayers hundreds of billions of 
dollars. The 10-year cost of the prescription drug program, originally 
estimated at $634 billion, has been revised to about $395 billion. The 
Centers for Medicare and Medicaid Services (CMS) credits competition 
among plan providers and consumers selecting lower-priced drugs. Health 
and Human Services Secretary Michael Leavitt also credits the slowing 
of drug cost trends and higher rebates from drug manufacturers.
    In addition, more seniors are benefiting from the program. CMS 
estimates that the total number of Medicare beneficiaries with drug 
coverage now is approximately 39.5 million.\37\
---------------------------------------------------------------------------
    \37\ ``Medicare Prescription Drug Benefit's Projected Costs 
Continue to Drop,'' Centers for Medicare and Medicaid Services, January 
31, 2008, at http://www.cms.hhs.gov/pf/print
page.asp?ref=http://www.cms.hhs.gov/apps/media/press/
release.asp?Counter=2868&chkNews
Type=1%2C+2%2C+3%2C+4%2C+5&intPage=&intNumPerPage=10&srchOpt=0&checkDate
=&
checkKey=2&pYear=&srchType=2&numDays=0&showAll=1&srchData=part+d&keyword
Type=
All&year=0&cboOrder=date&desc=.
---------------------------------------------------------------------------
    This experience shows that the forces that work in the private 
sector to drive down costs and increase choice also can be integrated 
into public programs.
Satisfaction
    News reports were highly critical after the launch of the drug 
benefit in January of 2006, particularly in switching those dually-
eligible for Medicare and Medicaid to MMA drug plans. But much of the 
confusion was attributable to the difficulties in synchronizing 
Medicare and Medicaid data bases to track each of the seniors.
    Today, the highest satisfaction rates with Part D are among dual-
eligible patients. These beneficiaries previously received their drug 
coverage through Medicaid and who therefore have the most experience 
with traditional government-run drug coverage. More than 9 out of 10 
dual-eligible enrollees say they are satisfied with their new and less-
restrictive Part D coverage, and 95 percent say the coverage is working 
well for them, according to a study by KRC Research.\38\
---------------------------------------------------------------------------
    \38\ ``Seniors' Opinions About Medicare Rx: Third Year Update,'' 
KRC Research and Medicare Today, October 2008, at http://
www.Medicaretoday.org/pdfs/2008Survey.pdf.
---------------------------------------------------------------------------
    Nonetheless, there are still calls for the government to 
``negotiate'' drug prices with the plans. Yet independent experts at 
both the Office of the Actuary at HHS \39\ and the Congressional Budget 
Office \40\ have said that government involvement in price negotiation 
would not lead to lower costs for taxpayers. In fact, it could lead to 
significant restrictions in access to drugs for seniors. Further, the 
private plans offering Medicare drug coverage are companies with 
decades of experience in negotiating prices--experience the government 
does not have.\41\
---------------------------------------------------------------------------
    \39\ Memo from Richard S. Foster, Chief Actuary, Centers for 
Medicare & Medicaid Services, to Mark B. McClellan, Administrator, 
Centers for Medicare & Medicaid Services, February 11, 2005.
    \40\ Letter from CBO Director Douglas Holtz-Eakin to Senate 
Majority Leader William H. Frist, January 23, 2004. http://www.cbo.gov/
showdoc.cfm?index=4986&sequence=0
    \41\ ``The Facts: Medicare Part D and Prescription Drug Prices,'' 
This fact sheet was jointly prepared by health policy experts from the 
American Enterprise Institute, the Center for Medicine in the Public 
Interest, the Galen Institute, The Heritage Foundation, the Institute 
for Policy Innovation, the Institute for Research on the Economics of 
Taxation, the National Center for Policy Analysis, and the Pacific 
Research Institute, January 9, 2007, at http://www.galen.org/
fileuploads/PartDandPrices.pdf.
---------------------------------------------------------------------------
Private Plan Competition in Medicare Advantage
    Another success of the MMA was keeping private plans in Medicare 
through the Medicare Advantage Program.
    Medicare Advantage gives seniors the option of receiving their 
health coverage through private plans, including health maintenance 
organizations (HMOs), preferred provider organizations (PPOs), Medicare 
medical savings accounts (MSAs), and private fee-for-service (PFFS) 
plans. In addition, private special needs plans (SNPs) provide 
comprehensive coordinated care for beneficiaries with severe and 
chronic illnesses.
    Because Medicare Advantage plans offer more comprehensive benefits, 
most MA enrollees pay less for full medical coverage than they would 
under traditional Medicare supplemented with individual Medigap 
coverage. MA plans are particularly attractive to those who do not have 
other sources of supplemental coverage and are more sensitive to 
price.\42\ As a result, seniors with the most limited resources have 
been most attracted to the broader coverage and more predictable costs 
of MA plans.
---------------------------------------------------------------------------
    \42\ Marsha Gold, Sc.D., Maria Crupples Hudson, and Sarah Davis, 
``2006 Medicare Advantage Benefits and Premiums,'' Mathematica Policy 
Research, Inc., November 2006, at 
http://assets.aarp.org/rgcenter/health/2006_23_Medicare.pdf.
---------------------------------------------------------------------------
    In 2008, Medicare Advantage enrollees received basic prescription 
drug coverage at a lower cost than stand-alone Part D plans. For basic 
coverage, MA plan drug premiums were, on average, about $6 less than 
average prescription drug plan premiums for basic coverage.\43\ Many 
Medicare beneficiaries have the option of enrolling in MA plans that 
provide a drug benefit at no extra cost.
---------------------------------------------------------------------------
    \43\ The Hon. Kerry Weems, Acting Administrator, Centers for 
Medicare and Medicaid Services, testimony before the House Ways and 
Means Subcommittee on Health, February 28, 2008, at http://
waysandmeans.house.gov/media/pdf/110/Weems.pdf
---------------------------------------------------------------------------
    While MMA boosted payments for MA plans, it also provides more than 
$1,000 a year in added health services to the average beneficiary 
enrolled, or an average of $96 a month over standard Medicare 
coverage.\44\
---------------------------------------------------------------------------
    \44\ Ibid.
---------------------------------------------------------------------------
    The MMA also offers new incentives for private plans to provide 
health care to Medicare beneficiaries with serious and chronic 
illnesses through Special Needs Plans. Special Needs Plans provide 
specialized care for patients with severe and chronic illnesses, 
including diabetes, mental disorders, congestive heart failure, and 
HIV/AIDS.\45\ Many SNP patients are eligible for both Medicare and 
Medicaid, and some are institutionalized. Similar to other types of 
plans, SNPs receive risk-adjusted payments to ensure that the greater 
health needs of these patients are met.
---------------------------------------------------------------------------
    \45\ Centers for Medicare and Medicaid Services, ``Special Needs 
Plans: Fact Sheet and Data Summary,'' at http://www.cms.hhs.gov/
SpecialNeedsPlans/Downloads/finalSNPfactsheetsum
2-14-06.pdf.
---------------------------------------------------------------------------
    Enrollment in all private Medicare health plans has now reached an 
all-time high of more than 10 million beneficiaries, up from 5.3 
million in 2003,\46\ and the percentage of beneficiaries who have 
chosen Medicare Advantage has grown from 12.1 percent of all Medicare 
beneficiaries in 2004 to 20 percent in 2008.\47\
---------------------------------------------------------------------------
    \46\ ``Medicare: A Primer 2009,'' The Henry J. Kaiser Family 
Foundation, January 2009, at http://www.kff.org/Medicare/upload/7615-
02.pdf.
    \47\ The Hon. Kerry Weems, Acting Administrator, Centers for 
Medicare and Medicaid Services, testimony before the House Ways and 
Means Subcommittee on Health, February 28, 2008, at http://
waysandmeans.house.gov/media/pdf/110/Weems.pdf.
    Robert E. Moffit, Ph.D., ``Medicare Advantage: The Case for 
Protecting Patient Choice,'' Web Memo #1836, The Heritage Foundation, 
March 6, 2008, at http://www.heritage.org/Research/
HealthCare/wm1836.cfm.
    ``Medicare Advantage: Increased Spending Relative to Medicare Fee-
for-Service May Not Always Reduce Beneficiary Out-of-Pocket Costs,'' 
Government Accountability Office, February 2008, at http://www.gao.gov/
new.items/d08359.pdf.
---------------------------------------------------------------------------
    Now, seniors who rely on these plans once again risk losing their 
source of more comprehensive medical and drug coverage as Congress 
threatens to cut payments to Medicare Advantage.\48\
---------------------------------------------------------------------------
    \48\ ``The Facts: Medicare Advantage,'' This fact sheet was jointly 
prepared by health policy experts from the American Enterprise 
Institute, the Center for Medicine in the Public Interest, the Galen 
Institute, The Heritage Foundation, the Institute for Policy 
Innovation, the Institute for Research on the Economics of Taxation, 
the National Center for Policy Analysis, the Pacific Research 
Institute, and Project HOPE, March 21, 2007, at http://www.galen.org/
fileuploads/
MAFactSheet.pdf.
---------------------------------------------------------------------------
Medicaid and SCHIP
    Many patients on Medicaid and SCHIP find they have an extremely 
difficult time finding a private physician who will see them because 
reimbursement rates are so low in many states. As a result, Medicaid 
recipients often are forced to get care in crowded hospital emergency 
rooms, depriving them of continuity of care. Giving Medicaid patients 
more choices of care and coverage would allow them to have the dignity 
of private coverage.
    The Deficit Reduction Act, enacted in early 2006, provided new 
flexibility to the states in designing their Medicaid program. As a 
result, Governors have been policy entrepreneurs. For example, in 
Indiana, Gov. Mitch Daniels has created a new program that allows the 
uninsured to obtain coverage in a model that looks like an HSA.\49\ In 
Oklahoma, Gov. Brad Henry has helped the uninsured and low-income 
workers purchase private health coverage with Medicaid dollars.
---------------------------------------------------------------------------
    \49\ Grace-Marie Turner, ``Indiana's Free-Market Idea to Help the 
Uninsured Get Coverage,'' Galen Institute, December 31, 2008, at http:/
/www.galen.org/component,8/action,show_
content/id,13/category_id,8/blog_id,1139/type,33/.
---------------------------------------------------------------------------
    The Medicaid Commission on which I served provided a number of 
recommendations about modernizing this program so it can be more 
responsive to patients and more financially sustainable for the 
future.\50\
---------------------------------------------------------------------------
    \50\ Medicaid Commission, ``Final Report and Recommendations,'' 
December 29, 2006, at http://aspe.hhs.gov/Medicaid/122906rpt.pdf.
---------------------------------------------------------------------------
Unfinished Agendas
    I commend you and the many other Members of Congress who are 
working to expand access to health coverage for the uninsured, 
modernize our health care delivery system, and provide relief for 
private and public payers to rising health costs.
    The challenges are enormous. Health costs are expected to double by 
2017.\51\ The costs of public programs threaten to squeeze out other 
public services provided by Federal and state governments. Millions of 
Baby Boomers are aging into Medicare, putting new pressures on the 
system. Millions of people continue to lose their health insurance when 
they lose or change jobs. There is a growing need for electronic 
medical records and better chronic care management, and more incentives 
are needed for people to purchase long-term care coverage. These are 
all huge challenges to tackle.
---------------------------------------------------------------------------
    \51\ Sean Keehan, Andrea Sisko, Christopher Truffer, Sheila Smith, 
Cathy Cowan, John Poisal, M. Kent Clemens the National Health 
Expenditure Accounts Projections Team, ``Health Spending Projections 
Through 2017: The Baby-Boom Generation Is Coming to Medicare,'' Health 
Affairs, Vol. 27, No. 2, March/April 2008, at http://
content.healthaffairs.org/cgi/content
/abstract/hlthaff.27.2.w145.
---------------------------------------------------------------------------
The Path Forward
    Addressing the health care needs of 300 million Americans for 
better quality at more affordable prices requires modernizing our 
health sector to become more efficient and innovative. It is not 
possible to expect that one piece of legislation could be written 
carefully enough to accommodate these needs and also continue to 
provide a platform for future innovation to enhance the quality of 
medical care in the future.
    While we face major problems with cost and access to coverage, the 
evidence shows that careful reform that respects the diverse needs of 
our population is crucial. As the examples I have offered here show, 
competition can work in public and private programs and force the 
system to be more responsive to consumers. By properly structuring 
incentives and creating a climate friendly to this innovation, Congress 
could put us on a path to uniquely American health care solutions. As I 
believe the evidence shows, competition works, even in health care.

    Senator Pryor. Thank you. I'll go ahead and start, here.
    Dr. Nichols, let me start with you, if I may. In a recent 
New York Times column, the economist Paul Krugman wrote that 
the health insurance marketplace, quote, ``is currently a 
collection of local monopolies and cartels,'' end quote. And, 
you're pretty familiar with healthcare, health insurance 
options around the country in various markets. Do agree or 
disagree with Mr. Krugman's characterization?
    Dr. Nichols. In general, Mr. Chairman, I agree that the 
fundamental problem that has been least--not noticed, is local 
monopoly power. It's not necessarily that they have a 100-
percent market share, but it is that they have a large enough 
market share that they're dominant. And there are just so many 
examples that we don't have time to go through them all. I 
definitely agree.
    Senator Pryor. Why has that happened? I mean, what is it in 
our system that promotes this kind of market power in the 
health insurance industry?
    Dr. Nichols. Well, there are a number of sources, you know, 
as you know quite well--this is a big old country and there's 
lots of reasons, but the two that I think are probably most 
important are--there are good reasons to have collaboration, 
and cooperation, and growth. I mean, sometimes the growth is 
absolutely natural. You want to have a hospital that can treat 
all diseases and all illnesses, because you don't know what 
people have when they come in. So, that community-hospital 
concept means it's got to be of a certain size, and in some 
places there are just not enough patients to have more than one 
big community hospital. And so, fundamentally, you end up with 
kind of a--what we call in the profession a ``natural 
monopoly'' situation. And that's the case in a lot of places. 
There might be one big one and some little ones that don't 
really compete in an effective way.
    Another reason we got into this place is that, frankly, 
Senator, we've done a very bad job of measuring quality. And as 
Grace-Marie points out, we don't really do a great job of 
disseminating information about that quality, and that's what 
some of those innovations she's talking about are doing very, 
very well. We need to do more of that. Because what happens is 
that a place might get a reputation for quality. It doesn't 
actually have the data and the outcomes to back it up, but no 
one knows it. And so, we end up with a de facto--everybody's 
got to have that hospital, everybody's got to have that 
physician group, but they may not be performing as well as we 
would like. I believe in Ronald Reagan's phrase, ``Trust, but 
verify.''
    Senator Pryor. Let me ask Dr. Nichols and Mr. Balto sort of 
a legal question, and that is--the McCarran-Ferguson Act 
largely exempts insurance companies from Federal antitrust 
laws. And I think the practical effect of that is, the Federal 
Trade Commission currently has very little jurisdiction over 
the insurance industry. How important a factor is that in the 
way the health insurance marketplace is today?
    Dr. Nichols?
    Dr. Nichols. Boy, that's a great question, and I'm sure my 
colleague is going to have more to say on this than I am. But, 
I will tell you, I know a little bit about McCarran-Ferguson's 
origins. Because you go back to the--it came out of an 
antitrust case, actually--right?--U.S. versus Southeast 
Underwriters--where the deal was, they were using a rating 
bureau to fix prices. And in 1944, that decision came down on 
the Supreme Court, and Congress was a little busy with World 
War II, and said, ``Maybe we should put the regulation of 
insurance in the State level.''
    What they said was, ``We're going to leave it with the 
States, as long as what the States do is consistent with 
Federal purpose.'' 1944, Federal purpose was, prevent price 
fixing. I think it's fair to say we've done that. What we 
haven't done is promoted effective competition. And there are 
lots of reasons why we don't have that competition, but I would 
say, in today's world, antitrust may have a role to play. It's 
not what I would call the first option, because, more 
importantly, it seems to me, is, we haven't really tried what I 
would call ``open competition,'' where individuals have a lot 
of choice, and that's really what, in some ways, these 
insurance reforms that we're talking about are doing.
    But, think about how FEHBP works, versus the way the small-
group market works. In FEHBP, you've got 9 million people 
picking among, in every market in the United States, at least 
eight choices. And that's because the market's so big, 
everybody wants to compete in there. Well, that Arkansas small-
group market's not big enough, and we already talked about the 
pricing problem.
    So, it really is not so much antitrust, as it is the way 
we've structured how the markets are organized.
    Senator Pryor. Mr. Balto?
    Mr. Balto. I think it's important to distinguish between 
urban legend and what the law really is. And I think there's an 
urban legend that the FTC doesn't have jurisdiction over 
insurance, but I'm not sure that the law really prevents them 
from having jurisdiction over insurance. If there is an 
obstacle, the Committee should act promptly to eliminate that. 
The McCarran-Ferguson act creates obstacles to effective 
insurance competition, and that's unfortunate. But I'm not 
convinced that the Federal Trade Commission could not have gone 
after Ingenix.
    And we--you should recognize, there's this huge regulatory 
gap here. You know, if there's no Federal enforcement here, 
we're left to a patchwork quilt of State insurance 
commissioners, who you've heard have limited resources--Karen 
Pollitz, in testimony a month ago--how limited their resources 
are. That's why we need a strong Federal enforcement agency 
against insurance companies.
    Senator Pryor. I've gone over my time, but I would like to 
hear from Mr. Feinstein and Ms. Turner on the McCarran-Ferguson 
and the FTC. Can you comment on that?
    Mr. Feinstein. Certainly. And I agree, in part, but not 
completely, with my old friend David Balto. There is no 
question that the McCarran-Ferguson Act does limit the ability 
of both the FTC and the Justice Department, or, for that 
matter, private plaintiffs, to bring antitrust actions 
involving what's called ``the business of insurance'' that is 
regulated at the State level.
    There are--it's also the case that the Federal antitrust 
enforcement agencies would have jurisdiction over aspects of 
the health insurance marketplace that do not fit into the 
``business of insurance'' definition. So, for example, mergers 
among health insurers are not in any way immunized by McCarran-
Ferguson. Historically, as a result of the, sort of, informal 
arrangement between the Justice Department and the FTC to avoid 
duplicating effort and to promote developing expertise, the 
Justice Department has had primary responsibility for antitrust 
enforcement in the health insurance industry. Conversely, the 
FTC has had primary responsibility, for example, in 
pharmaceuticals, where we've also been extremely aggressive, 
and, we also think, successful in many instances.
    It is--there's no question that there's been enormous 
consolidation in the health insurance industry. You know, I 
think it's likely that the--I guess I began my remarks by 
saying I don't speak for the Commission. I certainly don't 
speak for the Justice Department. But, I do think it's likely 
that the new administration, at the Justice Department, is 
going to, you know, take a very careful look at additional 
consolidation in the health insurance industry.
    Now, I've departed a bit from your question. The short 
answer is, there are aspects of the insurance industry that the 
FTC does have jurisdiction over, notwithstanding McCarran-
Ferguson. However, there are limitations, entirely apart from 
McCarran-Ferguson, on the FTC's ability to operate in that 
sphere. For example, section 6 of the FTC Act authorizes the 
FTC, generally, to conduct reports and issue compulsory--issue 
subpoenas and compulsory process to get information, even if 
it's not in the context of a law enforcement--of a case, or an 
investigation. We can conduct industry studies. There is an 
exemption, relating specifically to the insurance industry, 
which provides that only when specifically requested by one of 
the committees with oversight of the FTC can it conduct such a 
study in the insurance industry. That's an example.
    So it is certainly the case that the FTC's jurisdiction 
over the insurance industry is limited.
    Senator Pryor. Ms. Turner, did you have any comments on----
    Ms. Turner. Just----
    Senator Pryor.--McCarran-Ferguson?
    Ms. Turner.--very briefly. I think that the consolidation 
and centralization of the health sector is really determined by 
the way we finance healthcare. We have large public programs--
primarily Medicare, Medicaid--that purchase coverage, basically 
through price-control led and tightly structured benefit 
package design but also employer-based health insurance, where 
so many people don't have a choice in the individual market and 
don't have a choice of policies on their own in an FEHBP-like 
environment, because the policies are purchased for them by 
large employers and by--through health plans negotiating 
prices. So, the lack of transparency--the lack of individual 
choice--has really led to greater centralization, greater 
consolidation, and greater centralized control. Change in the 
financing mechanism would give people more power to begin to 
change this to be more responsive to consumers.
    Senator Pryor. Senator Wicker?
    Senator Wicker. Dr. Nichols and Ms. Turner, you start on 
this. What if we just let people in Arkansas, for example, 
purchase insurance across State lines? Wouldn't that be an 
amendment to Federal law that this Congress could do that would 
open up States to a lot more competition choices?
    Dr. Nichols. You know, Ranking Member Wicker, it's a good 
idea to think that way, in terms of ``Let's get more--let's 
take a crowbar and open up this market and get more competitors 
in there.'' The difficulty we have goes back to McCarran-
Ferguson, goes back to State regulation. If you said, ``We're 
going to allow competition across State lines,'' and in 
Arkansas they might have a rule that says, ``Well, you have to 
cover X, for sure, then a company can locate''----
    Senator Wicker. Mandates.
    Dr. Nichols. A mandate.
    Senator Wicker. Yes.
    Dr. Nichols. They might locate in another place, where they 
don't have that rule, and they'll come in and offer a lower 
price to those who aren't worried about that service. So, what 
you'll have is a kind of a ``tail wagging the dog,'' until 
eventually you get down to no regulation of any kind. And the 
thing about ``no regulation of any kind,'' in an insurance 
market that's voluntary, is that they're not going to sell to 
the sick, they don't want to sell to those who have any kind of 
health condition that's a big risk, and you end up having that 
kind of market work very well for the healthy--it would work 
very well for the healthy--but, it won't work for the 
unhealthy. And the thing is, as you know, over time we all 
become in that unhealthy state. So, it would lower prices for 
the healthy in the short run, and I'm afraid, in the long run, 
it would be even more unsatisfactory than what we've got now.
    So, that's my view of across State lines.
    Senator Wicker. Ms. Turner?
    Ms. Turner. To take a somewhat contrary view, actually, Dr. 
Ken Thorpe of Emory University has done some important studies 
about the hypothesis of adverse selection in the Federal 
Employee Health Benefit Program, which he says does not 
actually turn out, in reality--I think it is possible for 
Congress to carefully structure the rules so that you can avoid 
the kind of adverse selection that Len is talking about. But if 
you were to allow health insurance to be purchased across State 
lines, you would have a mechanism for breaking down State 
monopolies to give people more options in purchasing coverage. 
We have interstate commerce in virtually every other sector of 
the economy. I think one of the reasons that we have so much 
centralized power at the State level is because of the lack of 
ability, if somebody lives in the highly regulated State of New 
Jersey, for example, to be able to purchase health insurance 
across the State line, in Pennsylvania, or in West Virginia, to 
find a more affordable policy. This would begin to bring 
discipline to the market by giving people more choices.
    And I also think the adverse-selection issue could be 
mitigated significantly by giving people resources to purchase 
health insurance, so people who are young and healthy have just 
as much of an incentive to purchase health insurance as anyone 
else does, to begin to get them into the pool.
    I think purchasing health insurance across State lines 
could be a very beneficial part of health reform.
    Senator Wicker. So, it would be purchasing across State 
lines, plus some added provisions----
    Ms. Turner. I don't think----
    Senator Wicker.--to address the----
    Ms. Turner.--that in isolation----
    Senator Wicker.--problems that Dr. Nichols----
    Ms. Turner.--I think that it needs to be done in a more 
disciplined market, with better regulation, and with subsidies 
to get everybody into the system in a fairer way.
    Senator Wicker. Mr. Balto?
    Mr. Balto. Let me just add one thing. I wouldn't bank on 
that idea. In part, the dominant health insurance companies 
don't invade each other's territories now. In fact, the Blue 
plans, which are very dominant in many States, have a system of 
territorial allocations, licensing arrangements, which, prevent 
them from entering each other's markets. That is a subject that 
the enforcement agencies should look at to see whether or not 
it's an antitrust violation.
    Senator Wicker. Ms. Turner, you mentioned the great steps 
that Safeway is taking, Whole Foods, innovations at Target and 
Wal-Mart. What does Congress need to do to encourage this type 
of success story, which I think we can all agree is a success 
story?
    Ms. Turner. I think that the most crucial thing is allowing 
employers, who really are invested in trying to get better 
value for health dollars, to help make sure that their 
employees stay healthy and get healthy, and to allow these 
innovations to continue. Employers have channels of 
communication with their----
    Senator Wicker. We allow it now.
    Ms. Turner.--employees--We allow it now through ERISA 
protection. I'm worried that if ERISA were opened up, it would 
significantly compromise the ability and the incentive of 
companies to be able to continue these kinds of innovations. I 
also am concerned about some of the proposals that would have a 
government-mandated benefits package that would severely 
restrict the kind of innovation that these companies have 
demonstrated can save them money and keep their work forces 
healthier. In many cases, trusting the employers to continue to 
do what they have done, and using the resources and the tools 
they have, is tremendously important. New Federal regulation 
that drives them into a more centralized, highly regulated 
market, I think, would backfire in losing many of these 
innovations that are benefiting both companies and their 
employees.
    Senator Wicker. What do you get for $20 a month at Target?
    Ms. Turner. The benefits package is basically real 
insurance. So, if you show up in the hospital--if you have to 
go to the hospital--then you're going to be able to get the 
care that you need. It's returning to the concept of real 
insurance. But Target has put $800 into a spending account so 
that employees do have money to access routine care. Many 
Target stores also have retail health clinics on site, so 
employees can go on their break, and they don't even have to 
take a half-day off of work to go see a physician. So, there 
are a lot of these concepts. Obviously that's an employee's 
choice to use that kind of mechanism. The important thing is 
that they have a broad range of options so that employees can 
pick the kind of system and the kind of services that work 
best. It's very likely going to be people who are the young and 
healthy who you really want in that pool--who will say, ``OK, 
for $20 a month, I'll be able to afford that policy, to make 
sure that I have hospital care and hospital coverage if I need 
it.''
    Senator Wicker. Thank you.
    Senator Pryor. Senator Rockefeller?
    The Chairman. Thank you, Mr. Chairman.
    There's a lot of misconception going around. This is sort 
of a statement in general, you can react to it as you will--
about the public option. And people hear the word ``public'' 
and they think, ``Oh, my heavens, here comes the slippery 
slope, here comes the beginning of socialized medicine, here 
comes the''--you know. And what they fail to recognize is, the 
public option is exactly that; it's an option, it's simply an 
option. If you like the healthcare that you have, you keep it. 
If you're paying more for the healthcare that you have than you 
would under the public option, because you're simply 
comfortable with your healthcare insurer, you keep it. I mean, 
there's just nothing mandatory. You can opt in, you can opt 
out.
    But, I want to ask a question, and to you, Mr. Feinstein--
well, to anybody, but--one of the problems about the public 
option, which is easy to fix, but I'd like to get your advice 
on it, is that if you do a public option, people are going to 
say, ``Well, everybody is just going to--you know, employers 
are going to dump their people, because they're just going to 
figure that the public option is going to totally undersell, 
and there's no way they can catch up.'' And a couple of you 
have made reference to that. I mean, it was--I can remember, 
with the Chairman's father, when we made a ``public plan,'' so 
to speak, out of the Veterans Administration, and the 
prescription drugs went down 50 percent, you know, when it took 
effect. Medicare, as far as I know, is a ``public plan,'' which 
people kind of like. Medicaid is a ``public plan,'' which most 
people who, you know, care about people who are vulnerable, 
like. And they're not leading to anything bad. They're good. 
People love them. In fact, Medicare is--other than Social 
Security, is the most popular program in the government.
    So, my question to you is, If we were to do a public 
option--and I think that will happen--I think the wisdom today 
is that it won't happen, but I think it will happen, because it 
has to happen, and because it's the only way that you really 
are able to begin to control some costs--that means you're 
offering competition. Now, if you offer competition too 
quickly, then people don't have a chance to respond, and they 
either panic and just write it off forever, or they jump in 
before knowing what they're doing. So, my instinct on a public 
option would be to phase it in over a period of years so that 
people had a chance to find out what it was.
    Because one of our problems is that the American people 
suffer horrendously, often, in healthcare, but aren't aware of 
how they're being had, or how much better they could do, or how 
they, you know, could measure the outcomes, Dr. Nichols, that 
you were talking about.
    So, would you recommend it--regardless of what you think of 
a public option--that taking 4 or 5 years to let it come in, so 
that the rest of the healthcare market had a chance to adjust 
to its fact, and people had a chance to learn more about it, 
would be a good idea, rather than just having it take effect, 
and not being sure exactly, you know, how people would react?
    Mr. Feinstein. Let me take the first cut at that one. I 
mean, I think, to some degree, that's a health policy question, 
but I'm going to answer it in terms of competition, which is 
sort of where I'm coming from.
    I view the public option as a form of competition and an 
additional choice in the marketplace, which I view as a good 
thing. And in this sense, I think the goals of competition 
policy, and antitrust enforcement, are entirely harmonious with 
the goals of health reform, including the public option, 
because so much of it turns on having meaningful choices. And 
for those choices to be meaningful, there has to be competition 
among them. So, that's sort of where I start.
    In terms of whether it would be more advisable to phase it 
in, as opposed to doing it immediately, again, from--you know, 
from my perspective, I think the--I think that that judgment 
ought to be informed by what the impact on competition would be 
by doing it one way or the other. If we--if, for example, we 
were to conclude that, in the long run, the promotion of choice 
and competition would be more robust if it were phased in, then 
I would--yes, I would think that would be the way to go. If, on 
the other hand there were a conclusion that, starting at the--
you know, all at once, would have, potentially, anticompetitive 
effect--and it's not clear to me what that would be, but it 
could, I suppose--then I think that should be given some 
weight.
    The Chairman. So, knowledgeable competition is a virtue, in 
your view.
    Mr. Feinstein. Yes, well, competition is a virtue. 
Knowledgeable competition is even more virtuous, I would say.
    [Laughter.]
    The Chairman. OK.
    Mr. Feinstein. I mean--and because that's--you know, for 
competition to work best, the participants in the marketplace, 
on both sides--consumers and providers of goods and services--
should be informed by knowledge.
    The Chairman. It is stunning to me--and I'm over my time 
already--but, people in healthcare policy look for what to be 
afraid of--or, what it is they don't know, they assume is going 
to come back to hurt them. There's never the view that--I mean, 
people really don't realize that the VA--that we were able to 
do that very simply, back in 1993, with the Chairman's father 
leading the way, that--you know, we did that with--we simply 
had all veterans hospitals all across the country, and clinics, 
and everybody else who purchased pharmaceuticals--they all 
joined together as a single buyer, which created a rather 
large--rather a large leverage for them, and they got these 
huge competitions. Now, there's nothing wrong with that; it was 
very good. It was very good for veterans.
    Medicare, Medicaid work very well. To the extent that 
States have problems with Medicaid sometimes, they don't work 
so well. But, the instinct to try and find out what's wrong, as 
opposed to the instinct to say, ``Could this, maybe, help? 
Could this, maybe, be a good thing?'' is just a reflection, on 
my part, of the concern that the American people have about 
change in any aspect of their life which is really fundamental 
to them. I mean, 71 percent of the people are saying, ``We 
favor public options,''--61 percent, 71 percent--under the 
Clinton plan, it was always 72 percent, no matter who took the 
poll. Problem was, they didn't mean it, when it came down to 
actually confronting the possibility of a fundamental change in 
their lives.
    How do we get people to understand that change can be a 
good thing? Either of you. You're both excellent. This is a 
terrific panel, incidentally.
    Dr. Nichols. Well, Mr. Chairman, I would say that you hit 
something really, really, really important here, and I would 
describe it as--all bad behavior is based on fear. And so, what 
we've got to do is reassure the fearful. And I like your idea, 
I just would like to say, of having this public plan come in 
gently, maybe even, not in year one, but to have it there in 
reserve, if it turns out we don't get the competition we want. 
The point would be to reassure the people who do worry about 
that this might be some kind of Trojan horse or stalking horse, 
for all the stuff you have alluded to. But, in fact, I know 
that's not your intent. In fact, I know that can't be your 
intent. And I know, in fact, that's not the intent of the vast 
majority of Senators and people in Congress. They want 
competition to keep insurers honest, because we have all these 
examples where insurance markets don't work. Yet, there's 
legitimate concern that this could be some kind of backdoor 
stalking horse for a government takeover.
    So, how do you deal with that, Senator? I would agree with 
you, you have to prove it to them. But, you can't prove it to 
them if you don't get it started.
    So, create it. Walk it gently. Maybe have a trigger, 
something like that and go for--and keep those rules such that 
you've got a level playing field. That's extremely important.
    The Chairman. Yup.
    You had a comment.
    Mr. Balto. Yes, Mr. Chairman. I frequently represent 
consumer groups. And if I was here on behalf of consumer 
groups, I would say the problem right now is reaching crisis 
proportions and--you know, with thousands of people becoming 
uninsured every day. So, you know, there's really a need for 
some type of urgent action.
    I want to deal with one of the reasons why people say, ``Go 
slow.'' Sometimes people say ``Go slow'' because the public 
plan is going to go there and it's going to drive the--all 
these insurance companies out of the market.
    Let's be realistic, here. These insurance companies, just 
the largest for-profit ones, have over $13 billion in profits. 
The nonprofit ones are very well funded. I do advocacy against 
mergers when there's a merger investigation. I get to go and 
actually investigate these markets. These insurance firms have 
a stranglehold. A public plan is necessary to get some other 
entity in there--in a market like Arkansas, where there's 
failed entity entry--to get some other entity in there to 
provide some new form of competition.
    The Chairman. I thank you.
    And I thank you, Mr. Chairman, for allowing me to go on at 
such length.
    Senator Pryor. Thank you.
    Senator Cantwell?

               STATEMENT OF HON. MARIA CANTWELL, 
                  U.S. SENATOR FROM WASHINGTON

    Senator Cantwell. Thank you, Mr. Chairman, and thank you 
for holding this important hearing. And obviously, Senator 
Rockefeller, thank you for the Committee's interest in 
something that I think is critically important to the American 
consumers.
    And as the Chairman discussed, moving forward on healthcare 
legislation, I think it's critically important that we have 
transparency in drug pricing, so I certainly will be offering a 
previous legislation that I have sponsored, requiring PBM 
disclosure information, to make sure that we are getting the 
best price.
    But, it seems to me that we're talking about this gap that 
exists with the FTC, certainly just applying antitrust issues, 
and we have this merger happening. I mean, to me, PBMs are the 
great negotiator of a discount. And the issue is, Who are they 
passing the discount on to? And how much of it are they 
pocketing? And the previous States going after the fact that 
pharmaceutical manufacturers owned PBMs--and as someone was 
saying, you know, passing these laws about evergreening of--
stopping evergreening of patents and stopping the purchasing--
the--basically, the fact that there was this tight relationship 
between manufacturers and producers. But, now we're replicating 
that with, basically, PBMs; and CVS being, like, one in three 
on prescription drugs. And who is passing--and how much of the 
discount is being passed on to the consumer?
    So, to me, I think that's a very fair question in a merger, 
and I think that we ought to have transparency on that, and at 
least from the perspective of the FTC investigating whether 
those benefits are being passed on to the consumer or not, 
whether that information is public.
    So, Mr. Balto, could you comment on how you think that we 
get transparency, here, and still protect, you know, what is 
private market functions, but clearly a need by government to 
make sure that the structure here isn't being abused on the 
benefit of just gouging consumers?
    Mr. Balto. Thank you, Senator.
    First, what this Committee's work in Ingenix has shown that 
is, for these middlemen markets to work, we need three things: 
transparency, choice, and something to prevent conflicts of 
interest. That's what Ingenix was about. All of those things 
are problems in the PBM market. And because those are problems 
in the PBM market, the PBMs are doing fabulous. Their profits 
have skyrocketed over 300 percent, to almost $3 billion. That 
tells you where the money is going. That money shouldn't be 
going to the PBMs' bottom line, it should be going to the 
health plan so that they can help lower their drug costs.
    By the way, this isn't just a private issue. This is a 
public issue. The Federal Health Benefits Program has the same 
problems, as highlighted in recent hearings of the House 
Government Oversight Committee. We need transparency so plan 
sponsors--as Mr. Riley has documented in his testimony--plan 
sponsors have the necessary information to derive the best 
bargain and make sure that those benefits really go to them so 
that they can reduce their costs of healthcare.
    Senator Cantwell. Well, we certainly want to make sure 
that, in the new healthcare reform bill, that that transparency 
is there. We've tried to sponsor this before, but I think now 
we have a different opportunity.
    But why can't it also be a discussion of mergers? To be 
asked, in a merger, OK, ``What percentage of discount are you 
passing on to the consumer? And how much are you pocketing?'' I 
mean, we do this when we look at telecom mergers. We look at 
the structure and whether the consumer's best interest is going 
to be met or not, and whether we're going to allow the merger 
to happen. Why can't we look at this way, as well, and ask, 
What kind of benefits are the consumers really going to get?
    Mr. Balto. I think that's absolutely the right question. 
The agencies have not challenged any insurance mergers or PBM 
mergers. There is little evidence that any of those mergers 
have benefited consumers in lower premiums or lower 
pharmaceutical costs, in terms of PBMs. I don't know why they 
haven't been able to bring those challenges, but clearly the 
evidence isn't that consumers are better off because of them.
    Senator Cantwell. Mr. Riley, I don't know if you have any 
comments, but I think, from these cases that were brought by 
States when pharmacy manufacturers could own PBMs, they were 
finding instances where you were negotiating a discount, but 65 
or 70 percent of the negotiated discount went to the PBM and 
back to the parent company, and only, you know, a very small 
percent got passed on to the consumer.
    Mr. Riley. Thank you. If I may speak to this.
    This goes back to the Hauser family's testimony before FTC 
committees recently, where the family was--had been going to 
their local community pharmacy, and the pharmacy was paid $9 
for the prescription, approximately, and the patient had a $5 
copay. CVS Caremark then informed them, under their plan, they 
had to go to a CVS or get it mail-order. The CVS store was 
reimbursed $67 for the prescription, instead of the $9, a local 
pharmacy, $5 copay for the patient made them not notice it, 
they thought. But, the bottom line is--and it was in the 
Medicare Part-D plan, so their TrOOP amount, their total 
amount, they were driven toward the doughnut hole by another 
$62. And when they got to the doughnut hole, they would have to 
pay $67, not $9. And so, it's those kinds of things that 
concerns us.
    I think the real important part, Senator Cantwell, is that 
30 years ago--25 or 30 years ago, we looked at a prescription, 
and we said, there's the amount the drug costs, there's the 
amount the pharmacy is paid for the dispensing services, and 
that's the total cost. For 15 or 20 years, we've been in a 
situation where it's the amount the drug costs, the amount the 
middleman makes, plus what little bit the pharmacy gets is the 
total, and we have not adjusted to that. And within this 
marketplace, everyone in the prescription drug chain is highly 
regulated except the PBM. And while we, none of us, like 
regulations--and fair trade practice rules certainly are in 
order here to stop some of the things that's going on.
    I would like just to add, real quickly, that in Arkansas we 
just passed a law. It applies only to public dollars, but--
right now--but, that law says, very simply--it puts some simple 
regulation that says, when a PBM gives an invoice to an 
employer or a payer of what the prescription costs, they have 
to tell them how much of it went to the pharmacy. It's just one 
piece of information that they have, and that alone creates 
some transparency.
    Senator Cantwell. Well, I thank you, and I thank the Chair.
    I certainly believe there's price-gouging going on, and we 
shouldn't have Federal agencies be the last to figure it out. 
And so, I hope that our committee can figure out how to get 
better protections for consumers.
    Mr. Balto. Can I just add one thing, just--the practical 
thing, here. The pharmacist, here, who deals with a patient, 
who's opening his store any time of the day the patient needs 
help, the pharmacist, here, may be getting $5 a prescription. 
The PBM may be getting $30 or $40 a prescription. Who's really 
providing the value when a prescription drug is dispensed? Why 
should the PBM be getting that much more than the pharmacist, 
who really does help the consumer and represents the consumer's 
interest?
    Senator Pryor. Thank you.
    Senator Thune?

                 STATEMENT OF HON. JOHN THUNE, 
                 U.S. SENATOR FROM SOUTH DAKOTA

    Senator Thune. Thank you Mr. Chairman. And I appreciate our 
Committee engaging in the debate about healthcare. I think it's 
the issue that everybody seems to be talking about around here, 
and lots of action in other committees, in terms of legislation 
that we may be, at some time, voting on in the Senate.
    I guess I don't argue, for a minute, the importance of 
taking this issue on, and trying to reform our healthcare 
system in a way that lowers costs. I think that's the main 
issue for most Americans. Obviously, if you're one of the 
people who doesn't currently have insurance, that's a big 
issue, too, and one that we need to address to make sure that 
we provide access for all Americans. But, for most Americans, 
it is the issue of cost and affordability, and seeing these 
continual increases in the overall cost of healthcare. I think 
that that's where they want to see some action. And, of course, 
there are lots of different ideas out there about how best to 
tackle the problem.
    My State of South Dakota is a fairly low-cost and, I would 
argue, high-quality healthcare region, but we have some big 
challenges delivering healthcare in rural areas of the country. 
For example, access to insurance for small businesses or self-
employed farmers, adequate reimbursements for hospitals and 
doctors, are all significant challenges.
    I would argue that creating a government program is not the 
correct way to address these challenges. But, I do think that 
we have to--we do have to make some changes.
    I would be curious in knowing--and maybe I'd direct this to 
Ms. Turner--your thoughts about steps that Congress might be 
able to take that would improve the overall access to 
healthcare in this country, and provide more opportunities for 
small businesses to cover their employees that would be based 
in the market, in the private-sector delivery system, if you 
will, as opposed to coming up with a government plan.
    Ms. Turner. Thank you, Senator.
    The market is so stacked against individuals and small 
businesses right now. And it's primarily, as I mentioned 
earlier, because of the way that we finance and reward the 
purchase of health coverage in this country.
    The logo of the Galen Institute is actually a chart that 
describes, I think, the real problem we have. People who are at 
the lowest end of the income scale generally have access to 
Medicaid and SCHIP. This is true in every state, of course, but 
generally, as people move up the income scale, they fall out of 
public programs, but don't yet have the better, higher-paying 
jobs that come with health insurance, or that give them the 
resources to purchase coverage themselves.
    I think one of the most important things--and I know it's 
not in this Committee's jurisdiction, but it's part of the 
larger package of reform--is to equalize these subsidies so 
that people that are most likely to be in lower-income 
categories have the opportunity to purchase coverage and to 
create new markets so that they don't just have to rely only on 
their employer to provide coverage. That could mean allowing 
the purchase of health insurance across State lines. It could 
mean new kinds of groups, such as church groups, or 
professional associations, labor unions, affinity groups that 
give people a sense of security with their association.
    And I think a lot needs to be done to deal with helping 
people with preexisting conditions to be able to get coverage. 
Some states have very innovative programs to help people 
purchase health insurance. It's a kind of a guaranteed issue 
program, but run privately by the states.
    I think the most important thing is looking at the 
innovation in the States. What are people doing well? Where is 
centralization and the lack of competition not helping? How 
could states help to give everybody an equal chance of getting 
into the system?
    Senator Thune. And I appreciate your thoughts in that 
regard. Those are many things that we've been trying to do 
here, for some time, and reforms that I think would help lower 
costs, and provide greater access to people in the country. And 
so, those are all things that I think ought to be part of any 
kind of a reform proposal that we move through here, that don't 
include a government takeover or a government plan, if you 
will, that, in my view, is going to create more government 
interference, intervention, and impose government making a lot 
of decisions that I think rightfully ought to be made by 
patients and their physicians.
    I appreciate the focus, too, on pharmaceutical issues, and 
how pharmacies would be impacted. We've got a lot of small-town 
retail pharmacies in my State. And I guess the question I'd 
direct to anybody on the panel, is given some of the challenges 
that some of your members face with Medicare Part D, and with 
inadequate reimbursements from Medicaid, Medicare D, M, and E 
accreditation, and the list goes on--do you have reservations 
with having all of your consumers on government insurance if we 
were to create a new government-run plan? And maybe you've 
already been asked some of those questions. If you have, I 
apologize, but I'd be curious to get some reaction.
    Mr. Riley?
    Mr. Riley. Thank you, Senator Thune.
    I think our pharmacists want two things. I think they want 
a level playing field, and I think they want fair 
reimbursement. And I think--we believe that, in prescription 
drugs now, the most important aspect of what we need to do is 
to have transparency, so we see where all the money's going, 
money that--for instance, employers pay $40 a prescription, and 
pharmacies pay $20; they don't know that. They think they paid 
the pharmacy $40, but the middleman, the PBMs pocketed the half 
of the money, or whatever, in that case. And so, I don't think 
pharmacists are as concerned about fairness in government, as 
long as there's transparency, so that we can see where the 
money really went and who got that money. I think that's the 
concern we have right now.
    Senator Thune. Mr. Chairman, I am out of time. Thank you.
    Senator Pryor. Thank you.
    Senator Thune. Thank you all very much for your testimony.
    Senator Pryor. Thank you.
    Let me, if I may, talk about something, Mr. Riley, that you 
mentioned in your statement, and that is the Caremark/CVS 
merger. And you alluded to this in your statement, but I just 
want to be clear. Tell the Subcommittee, here, how you believe 
the merger has harmed patients and consumers.
    Mr. Riley. Well, I gave you the example, Senator Pryor, 
that was--the testimony before FTC recently, but we have--the 
NCPA has several examples from pharmacies where prescriptions 
were filled at their pharmacies and, within hours, there was 
contact by CVS about how the consumer could supposedly save 
money if they bought it from their mail-order, or went to their 
stores. In reality, in the case the Hausers showed, the PBM--
CVS Caremark is very careful to keep the copays the same, so 
maybe the patient doesn't see it, but the--but increases the 
price, which is--increases the cost of the overall system 
significantly, and differentiates between what they will pay 
their pharmacy, but what--and what they will pay--pay their 
pharmacy much more than they'll pay any other pharmacy.
    So, we think, one of the things that Medicare Part D has 
brought to the system is, finally the consumer needs to changes 
their thinking to understand the total cost of the program, 
because of TrOOP and all, ultimately, is what's driving 
healthcare costs, not just what they pay. And so, many cases in 
the mail-order situations, which are very close to CVS 
Caremark, the PBM sells the employer on a lower copay for mail-
order. Well, essentially, that makes the consumer--you know, 
they do--they are getting a better deal if you do that. It 
doesn't lower costs to the program. Those other copays are just 
paid by the employer, or whoever the payer is, and the costs of 
the program really go up.
    And so, I think what we're facing, is about 20 years of 
where we've tended to remove the consumer from the cash 
register, if you will, with steady copays, while the costs of 
prescription drugs have gone from about 6 percent of the 
healthcare dollar, in 1985, to almost 18 percent, by the turn 
of the century. And all that's not the PBMs' fault. But the 
model that the PBMs have set up to line their own pockets have 
created those kind of costs.
    I believe we've got--I think this fits into the equation, 
that we've really, essentially, got a situation where the PBMs 
and the drug manufacturers, in some sense, are playing ``I 
scratch your back, you scratch mine.''
    ``I don't care what the drugs cost,'' the PBMs are saying, 
``as long as I get my piece of it when it flows through.'' And 
so, I think that particular thing cost--overall costs to run 
through the roof.
    I would like to say one other thing, and that is, I commend 
CMS for making the changes in their program, that January 1, 
2010, there will be no more spreads in prescription drug 
pricing for the Medicare Part D plan. I think that will have a 
major effect. Basically, they said to the plans, ``You can pay 
the PBMs all the money you want to pay them, but you're not 
going to wrap those hidden costs into the prescription drug 
costs that run the consumers' cost up. You can only charge 
against the consumers' TrOOP what was paid to the pharmacy.'' 
And I think that's the kind of regulation, and--that's helpful 
so the consumer doesn't get charged higher for prescription, 
without knowing it.
    Senator Pryor. Mr. Feinstein, let me follow up, if a may, 
on the CVS/Caremark merger. And I know there's probably limits 
to what you can say about that, but let me just ask if the 
Federal Trade Commission analyzed that merger before it was 
consummated.
    Mr. Feinstein. There are limits to what I can say about 
that, for two reasons. Number one, I've been at the FTC for 10 
weeks, so I wasn't actually there. But, I will say that it's 
certainly my understanding that the--that merger was submitted, 
in the premerger notification filings in the ordinary course, 
to the Commission, and was analyzed by the staff.
    If I could elaborate a bit----
    Senator Pryor. Sure.
    Mr. Feinstein. And I know you have a second question of me. 
I don't know whether this will anticipate it or not.
    At the time that a merger is being presented for review, by 
either the Justice Department or the FTC, essentially the 
analysis is making--trying to make a prediction. You know, what 
is this--how is this merger--and our focus is on competition--
how is this merger going to impact competition? And if it's 
going to reduce competition, you know, our primary focus is on 
consumers. It's not our only focus, but that's our primary 
focus.
    It is also the case, sometimes, that, after mergers are not 
challenged and are completed, that they may have 
anticompetitive effects. I'm speaking generally, now. And we 
receive--when we receive complaints, whether it's before, 
during, or after the consideration of the merger, we take them 
seriously.
    I can't comment on, you know, any ongoing--the presence or 
absence of any ongoing investigations, except to say that a 
month or two ago, Mr. Balto and a number of his clients had a 
meeting at the FTC--which is a matter of public record, that's 
why I can comment on that--and they made a number of 
complaints, and--you know, with, again, the focus on what's--
the primary focus on, How is this impacting competition and 
consumers? As well as once--I suppose there could also be, at 
least in theory, a consumer-protection aspect to the analysis, 
which goes beyond the competition analysis. In other words, you 
could have a circumstance where the conduct is problematic in 
ways that wouldn't necessarily violate the antitrust laws, but 
might raise some other consumer protection issues. Again, I'm 
speaking in the abstract----
    Senator Pryor. Right.
    Mr. Feinstein.--now. But, that's my preliminary response. 
Now, I don't know whether I've already answered your second 
question, or not.
    Senator Pryor. Well, you did. And let me ask my final 
question, with the Committee's indulgence, here, to Mr. Riley, 
and that is--I recently toured the prescription drug program in 
Arkansas, the evidence-based prescription drug program that 
we've done--and, just for the Subcommittee's background, as I 
understand it--I think the numbers they told me were--3 years 
ago, the State legislature decided to spend $1 million a year 
on this evidence-based prescription drug program, and it goes 
to look at Medicaid and the State employee system, which 
includes more than just your pure State employees, like maybe 
university people, et cetera. But, nonetheless, they've spent 
$3 million, and they calculate now that they've saved $70 
million, just by going for pure, evidence-based 
recommendations.
    And just--Mr. Riley, is that consistent with what you know 
about the program? And how is that program working for the 
average pharmacist out there?
    Mr. Riley. Thank you, Senator Pryor.
    And, yes, it is working that way, and I appreciate the 
opportunity to comment on this, because I think it's the type 
of model that we need to adopt nationwide, because it works.
    When I came in the--first of all, the Medicaid program 
works a little bit differently, and it's saved them a ton of 
money just on the drug costs. But I'd like to focus on the 
State employees' program more, because it was more like a 
private sector--what most of the other businesses are. The 
State employees in Arkansas, in 2003 when I came to my job, I 
began to meet with Sharon Dickerson, who was then the director 
of that program--they had had--their program had essentially 
tripled in cost in 4 years. They had 4 years of the big PBMs--2 
with one PBM and 2 with another, that were the big three--and 
their costs were out of control, and the legislature, that you 
once served in, had served them notice that, ``If you don't do 
something, we're going to cut this program off.'' So--but, they 
were doing everything that the PBMs recommended, and their 
costs continued to rise.
    So, I began to meet with her. And over about a 6-month 
period, we educated them to understand what was really 
happening to them, and what was being--that they didn't know, 
that was going on.
    On March 1, 2004, they made the first recommendation that 
the pharmacy community recommended. The savings were so great 
from that, that, within a year, they kicked out their 
consultants they were paying $600,000 a year to, they got rid 
of their PBM, they--we helped them write a completely 
transparent contract. And the bottom line is what you want to 
know. The 4 years previous, from 1999 to 2004, their cost 
increases had been over $62 million, just the increases. The 4 
years since then, we have the data, and the cost increases have 
been $12 million to $13 million. We helped them reduce their 
rate of increase by 80 percent, just by two things: getting rid 
of the big PBMs; second--and getting them good, sound 
information so they could make good, evidence-based decisions. 
And they used--because that consultant became the College of 
Pharmacy, which just gave them good information about what were 
the drugs.
    The other thing about evidence-based medicine, I think is 
important, is that the patient is considered first. You make 
sure you're using the right drug, then you talk about 
competition between the costs of those drugs. And so, the 
patient's never disadvantaged in that principle; as opposed to 
the PBM model, where the biggest rebate, that they keep most of 
is, is what drug gets chosen, whether it's the best drug or 
not.
    So, thank you for your question. I think it's a glowing 
example of what you can do once you get the information that we 
think we need in the--in this market.
    Senator Pryor. Thank you.
    Senator Wicker?
    Senator Wicker. Thank you.
    Ms. Turner and Dr. Nichols, I'd like for you to discuss the 
idea of a public plan a little more. And it may not be fear on 
my part, but it's alarm, I think, based on the fact there are 
slippery slopes out there, and anything that might lead to a 
Canadian-style, or British-style, or Western European-style 
healthcare system, I want to try to avoid. And it's not just 
folks from the center-right, like me, it's the Washington 
Post--last Friday in their lead editorial, that urged the 
Democrats to abandon, or not insist on, the public plan, and 
mentioned that it is risky, and it doesn't need to be done on a 
partisan basis.
    Now, Ms. Turner, you talked about Part D, with approval, as 
an entitlement program where we actually cut costs, and stated 
that it's 40 percent under the expected cost. There is plenty 
of private competition in Medicare Part D. Is there an 
alternative public plan in the law that never kicked in? And if 
so, why is that? And why, then--if it never kicked in, why 
should we be concerned about the public plan proposal that is 
before us now in the Congress?
    Ms. Turner. An excellent question.
    When the Medicare Prescription Drug Benefit was being 
debated in 2003, there was a proposal to allow private, 
competing drug plans to offer this benefit. There really wasn't 
anything in the market like that at the time. In private health 
insurance, health benefits are generally part of the overall 
health benefit plan. Congress decided to have the public plan 
be a backstop in case no other plans came forward to offer this 
freestanding drug benefit.
    Well, as we all know, so many of them came forward that it 
really caused a confusion of its own, giving seniors many 
choices of these competing plans.
    This, I think, is very different than in talking about a 
new government health insurance plan because we do have private 
insurance out there already. We don't need to create something 
new. And all of the evidence, from the Congressional Budget 
Office to the Lewin Group, shows that if you introduce this 
new, government, public plan into the marketplace, it 
absolutely will crowd out private insurance. Even if the rules 
initially are set to create a level playing field, there will 
be such an incentive to change the rules as it goes along, that 
it will be like having the referee say, ``I'm going to set the 
rules and I'm going to go on the playing field, and I can 
change them as the game goes on.'' The pubic plans will have 
Federal price-control authority, they will use Federal 
subsidies, and will have Federal money to create the public 
plan, which doesn't have to be raised in the open market, like 
a private insurance company would.
    Senator Wicker. How can we structure a Part-D-like 
backstop? And I think Dr. Nichols said it'd be OK with him if 
it never kicked in.
    Ms. Turner. Well, you know----
    Senator Wicker. Can we put you two in a room and get----
    Ms. Turner. We actually----
    Dr. Nichols. Sir, I've written that----
    Ms. Turner.--have much less----
    Senator Wicker.--and get----
    Ms. Turner. Can I offer an idea to Senator Rockefeller's 
point, earlier, about why people are so afraid of change? Well, 
maybe we don't need the new government public plan. Maybe what 
we need is to allow State employee health plans, that already 
exist, to be the backstop. If the private marketplace does not 
come forward after subsidies are offered and new insurance 
regulations are put into place, then State employee health 
plans, which already are out there, could be the backstop. This 
doesn't require putting all the infrastructure of the Federal 
Government into play to give people a backstop. Len and I 
actually had lunch last week and explored this idea.
    Dr. Nichols. We talk all the time. And we'd be glad to go 
in any room you want. But, I----
    [Laughter.]
    Dr. Nichols. Here's what I honestly believe. Fundamentally, 
what we're talking about here is, let's change the rules of the 
way the individual and small-group markets work now, because I 
think we all agree those markets don't work very well for the 
consumer. A large-group market does work. And the whole point 
in--at least in my interpretation, sir--the whole point of an 
exchange and a new marketplace, all that stuff, is about giving 
individuals in small groups access to same economies of scale, 
and the same ability to pool risk, and buy lots of choices, 
that the big people have now.
    Senator Wicker. I think every member of the House and 
Senate wants that.
    Dr. Nichols. There you go. So, what we--I'm more than happy 
to say, let's set that up, see how it goes, and have the public 
plan kick in later. The difficulty you're going to have is, if 
you--if some people want to constrain that other new 
marketplace to be so small, and to not let it really be 
robust--it's got to be big enough--it's got to have enough 
people there to entice the entry. We all agree we've got to get 
more competition. The question is, How do you get the entry? 
You were here when I described Arkansas, you know it quite 
well; Mississippi's probably not all that different. So, at the 
end of the day, we've got to figure out how to get more 
competition on the ground.
    And I--my recent proposal, sir, for the public-plan option 
was to think about the way States do it now for their State 
employees. What they typically do is, they have a number of 
competing plans, and then they have one self-insured plan for 
which the State bears the insurance risk, the State picks the 
managers, so that it reassures those people--and there are 
some, I'm sure you know--who do worry about private insurance 
managers having an incentive to deny care and all that. You 
remove that fear, but then that competes on a level playing 
field, because those people are paying market rates, there's no 
compulsion to join, there's no compulsion for providers to 
participate. It really is, in my opinion, a level playing 
field.
    We could do that, and you could have it as a backup, if 
people didn't like what the options were. I think you can open 
that door.
    Senator Wicker. Do you agree that, in Part D, dozens of 
profit-oriented insurance companies have competed, have 
provided coverage, and have come in 40 percent below the 
estimated cost?
    Dr. Nichols. Yes, sir. I think Part D worked in that way. 
And all I'm trying to say is, let's think about reproducing the 
conditions of the competition that engendered that entry--that 
engendered that competition. And what I'm trying to say to you 
is, in a lot of markets today, right now, we don't have enough 
competition on the ground. So, the enticement of the public 
plan is to get more competition on the ground as soon as 
possible.
    But I would agree, if you change the way the markets are 
structured, which I think we're all talking about, make the 
exchange big enough and have enough lives there, you could run 
it like FEHBP, like State employee plans, like very, very large 
employers do. And then you probably wouldn't need a public 
plan. But, if you had it as a backup, it would reassure people. 
And again, you could use the existing creatures, if you will, 
as the fallback, if you wanted to.
    So, I think there's a lot more common ground, sir, than 
sometimes the headlines might imply.
    Senator Wicker. Thank you, Mr. Chairman.
    Senator Pryor. Thank you.
    And I want to thank the panel, again, for being here. It's 
very informative, very helpful. I had several of my colleagues, 
on the way out, just tell me they really appreciated the panel 
for your thoughts and insights.
    What we're going to do is, we're going to keep the record 
open for 2 weeks, and--because of various things going on here 
in the Senate today, not all of our members could be here, but 
it's very possible that we will be sending you some more 
questions in writing, and we'd appreciate those back within 2 
weeks. And the Committee staff will be working with you on that 
as they come. I actually may have a few to submit in writing 
myself.
    Senator Pryor. But, again, thank you all for doing this. 
This is very helpful, very important topic.
    And with that, we'll adjourn the hearing. Thank you.
    [Whereupon, at 12 p.m., the hearing was adjourned.]
                            A P P E N D I X

  Prepared Statement of the Pharmaceutical Care Management Association
    The Pharmaceutical Care Management Association (PCMA) is the 
national association representing America's pharmacy benefit managers 
(PBMs), which administer prescription drug plans for more than 210 
million Americans with health coverage provided through Fortune 500 
employers, health insurers, labor unions, Medicare, Medicaid, and the 
Federal Employees Health Benefits Program (FEHBP). PCMA appreciates the 
opportunity to submit written testimony to the U.S. Senate Commerce 
Subcommittee on Consumer Protection, Product Safety, and Insurance.
    Health reform faces four major challenges: reducing costs, 
improving care, expanding access and ensuring, if nothing else, to ``do 
no harm.'' These are things America's PBMs do every day for a diverse 
client base. In health reform, the key is to avoid policies that make 
it harder or more expensive to deliver benefits while pursuing policies 
that actually improve health care.
    PBMs typically reduce drug benefit costs by 30 percent \1\ for 
public and private payers by encouraging the use of generic drug 
alternatives, negotiating discounts from manufacturers and drug stores, 
saving money with home delivery, and using health information 
technology like e-prescribing to reduce waste and improve patient 
safety. Prior to the advent of these tools, there was no system wide 
approach to fully address the real dangers and costs of misuse, 
overuse, or under-use of prescription drugs. In the Medicare Part D 
program, PBMs have used these tools to help keep overall program costs 
30 percent below original projections.\2\
---------------------------------------------------------------------------
    \1\ PricewaterhouseCoopers, ``Medicare Part D: An Assessment of 
Plan Performance and Potential Savings,'' analysis prepared for the 
Pharmaceutical Care Management Association, January 2007.
    \2\ Centers for Medicare and Medicaid Services press release, 
``Medicare Part D Plan Premiums for 2008 Show Continued Impact of 
Strong Competition,'' August 13, 2007.
---------------------------------------------------------------------------
    PBMs achieve savings for the Federal Government as well as 
thousands of different employer and health plan clients who have 
different needs and different resources available to finance health 
benefits. However, all PBM clients--private and public sector alike--
share the goal of wanting benefits that provide great access, are 
affordable and, in the case of the private sector, help retain and 
recruit top-notch personnel.
    The Federal Trade Commission (FTC) has extensively evaluated the 
PBM industry and confirmed that it is both highly competitive and 
provides savings. It should be noted that the FTC found in its most 
recent antitrust analysis of the PBM industry that competition among 
PBMs for contracts with plan sponsors is ``vigorous.'' \3\
---------------------------------------------------------------------------
    \3\ U.S. Federal Trade Commission, In the Matter of Caremark Rx, 
Inc./AdvancePCS, File No. 0310239 n. 6, February 11, 2004, statement of 
the Commission, available at http://www.ftc.gov/os/caselist/0310239/
040211ftcstatement0310239.pdf
---------------------------------------------------------------------------
    According to the FTC, there are 40 to 50 PBMs operating in the 
United States including those owned by supermarkets, large pharmacy 
chains, and large insurers.\4\ In addition, the commission states that 
one-third to one-half of each regional market is serviced by smaller 
PBMs.\5\
---------------------------------------------------------------------------
    \4\ U.S. Federal Trade Commission, ``Pharmacy Benefit Managers: 
Ownership of Mail-Order Pharmacies,'' August 2005, available at http://
www.ftc.gov/reports/pharmbenefit05/050906pharmbenefitrpt.pdf
    \5\ U.S. Federal Trade Commission, ``The Importance of Competition 
and Antitrust Enforcement to Lower-Cost, Higher-Quality Health Care,'' 
Statement before the Subcommittee on Consumer protection, Products 
Safety, and Insurance Committee on Commerce, Science, and 
Transportation, U.S. Senate, July 16, 2009.
---------------------------------------------------------------------------
    In evaluating mail-order pharmacy, the FTC also determined that 
PBM-owned mail-order pharmacies save payers money and that allegations 
of PBMs' conflict of interest were ``without merit.'' Specifically, FTC 
found that PBM-owned mail-order pharmacies:

   Offer lower prices on prescription drugs than retail 
        pharmacies and non-PBM owned mail pharmacies;

   Are very effective at capitalizing on opportunities to 
        dispense generic medications; and

   Have incentives closely aligned with their customers: the 
        third-party payers who fund prescription drug care.

    Policymakers need to be wary of other policies that could undermine 
the incentives and tools PBMs use to lower costs and enhance quality. 
It would be a mistake, for example, to force PBMs to publicize the 
discounts they negotiate with drug manufacturers and drug stores. If 
sensitive pricing information is made public, the greatest benefactors 
are not consumers or taxpayers, but drug manufacturers, drug retailers 
and others who learn their competitors' negotiating strategies and 
raise prices accordingly.
    The Federal Trade Commission and others have explored this issue 
and found that the wrong kind of transparency increases, rather than 
decreases, costs.\6\ The Congressional Budget Office concluded that 
such a policy would have increased Medicare Part D's costs by 10 
percent if it had been included in the program.\7\
---------------------------------------------------------------------------
    \6\ U.S. Federal Trade Commission and U.S. Department of Justice 
Antitrust Division, ``Improving Health Care: A Dose of Competition,'' 
July 2004.
    \7\ Congressional Budget Office, ``Cost Estimate: S. 1, 
Prescription Drug and Medicare Improvement Act of 2003,'' page 15. July 
22, 2003.
---------------------------------------------------------------------------
    In addition, we caution against any policy which would grant 
special antitrust exemptions to independent pharmacies. During 
testimony before the U.S. House Judiciary Committee Antitrust Task 
Force on this issue, the FTC stated: ``Giving heath care providers . . 
. a license to engage in price fixing and boycotts in order to extract 
higher payments from third -party payers would be a costly step 
backward, not forward, on the path to a better health care system.'' 
\8\
---------------------------------------------------------------------------
    \8\ U.S. Federal Trade Commission, Concerning the ``Community 
Pharmacy Fairness Act of 2007,'' Statement before the Antitrust Task 
Force of the Committee on the Judiciary, U.S. House of Representatives, 
October 18, 2007.
---------------------------------------------------------------------------
    As policymakers seek specific ways to improve competition and 
reduce costs, there are several common-sense policies that can 
accomplish this without restricting access to medications or shifting 
costs from one part of the health care system to another. These 
include:

   Real Biogenerics Reform: Real biogenerics legislation is 
        strongly supported by AARP, AFL-CIO, the Ford Motor Company, 
        PCMA, and dozens of other consumer, labor, and employer 
        organizations concerned about runaway health care costs in both 
        the private and public sectors. This proposal--which allows 
        generics to compete with expensive biotech medicines the way 
        they already do with conventional brand-name drugs--is one of 
        the few proposals that actually delivers score-able savings and 
        is a good bellwether for health reform prospects overall.

   Reduce waste by making formularies in Medicare Part D more 
        closely resemble those in FEHBP. This could include eliminating 
        so-called ``protected drug classes'' in Medicare. These Part D 
        provisions eliminate price competition among manufacturers 
        without providing seniors greater access to those drugs. This 
        reform alone would save Medicare $4.2 billion over 10 years, 
        according to CMS.\9\
---------------------------------------------------------------------------
    \9\ CMS interim final rule ``Medicare Program; Medicare Advantage 
and Prescription Drug Programs MIPPA Drug Formulary & Protected Classes 
Policies,'' January 2009.

   Increase efficiency and save billions by allowing greater 
        use in Medicare of home delivery for refills of long-term, 
        chronic medications. Seniors appreciate the convenience and are 
        more likely to stay on their drug regimens if their long-term 
---------------------------------------------------------------------------
        maintenance medications are delivered right to their homes.

    Ensuring and improving competition will continue to be critical 
aspects in any revised health care system. These recommendations, 
coupled with PBMs' proven track record of improving quality, reducing 
costs, and expanding access to affordable prescription drugs, are true 
steps toward enhancing competition in health care reform.
                                 ______
                                 
    Response to Written Questions Submitted by Hon. David Vitter to 
                           Grace-Marie Turner
    Question 1. I have long advocated for opening the health care 
market to allow Americans to shop across state lines for their health 
care. Do you believe allowing Americans to shop across state lines for 
health care would lower costs, and has the Galen Institute conducted 
any studies or analysis to show any cost-lowering benefits?
    Answer. As many as 18 million people purchase health insurance in 
the individual market. They are trapped by the rules and regulations 
set by their state legislatures. The markets for individual and small 
group insurance are highly regulated in many states and lack genuine 
competition that would allow consumers more choices of more affordable 
coverage.
    According to an August 19, 2009, article in The New York Times, 
``there are nine states where a single insurer covers 70 percent or 
more of the people. In Hawaii, one insurer covers 78 percent. In 
Alabama, it's 83 percent. And in at least 17 other states one insurer 
covers at least half the population.''
    This lack of competition means that companies that dominate the 
market can charge higher prices for coverage. There also is less 
incentive for state legislators to curtail regulations such as 
community rating and guaranteed issue or coverage mandates that dry up 
competition and drive up the cost of health insurance. A policy 
purchased in a lightly-regulated state like Iowa can cost a fraction of 
the price of a similar policy purchased in a highly-regulated, non-
competitive state like New York or New Jersey. Our health insurance 
system is Balkanized, much to the detriment of consumers who most need 
help in purchasing affordable health insurance.
    A study by Stephen Parente and Roger Feldman, both health 
economists with the University of Minnesota, found that 12 million 
previously uninsured people would be able to get insurance if there 
were competition between and among states. The study was presented in 
August of 2008 during an American Enterprise Institute conference on 
ways to increase access to the uninsured through interstate competition 
for individual insurance.
    I commend Senator Vitter for seeing the value of allowing people to 
purchase health insurance across state lines. This would significantly 
increase the choices available to consumers and would force insurance 
companies to provide more affordable options or to consumers by 
increasing competition among health insurers. This policy change, which 
clearly is allowed by the Commerce Clause of the Constitution, would be 
an important change that could significantly increase access to health 
insurance without any new costs to the Federal Government.

    Question 2. What has been the impact of the Stark law on healthcare 
competition and structural innovation?
    Answer. An entire industry has developed to help providers and 
health care institutions comply with the quagmire of Stark law. This 
forces doctors and hospitals to spend tens of millions of dollars 
trying to figure out how to comply with increasingly complex laws. This 
in turn dries up innovation and forces doctors and hospitals to focus 
on navigating the regulatory maze rather than figuring out how to 
provide better, more efficient care to patients.
    A recent report by Kathleen Boozang, Associate Dean and Professor 
of Law at Seton Hall University, provides important insights. She 
writes about a recent Whitepaper entitled: ``A Public Policy 
Discussion: Taking Measure of the Stark Law'' analyzing the ``Ethics in 
Patient Referrals Act'' (and its progeny), more commonly known 
collectively as the ``Stark Law,'' after its primary sponsor, 
Congressman Pete Stark. The whitepaper was released by ``The American 
Health Lawyers Association's Public Interest Committee. Boozang writes:
    ``Stark was enacted in response to empirical studies showing that 
physicians who hold an equity interest in an entity that provides 
ancillary health care services, such as a clinical laboratory or MRI, 
more frequently order those services for their patients, referring 
them, unsurprisingly, to the entity they own (the Whitepaper notes that 
no studies indicated that this higher use equated to over-utilization). 
The implication, then, is that the opportunity for additional profit 
causes excessive referrals, whether consciously or unconsciously. Thus, 
Stark sought to establish a bright line test regarding the propriety of 
physician referrals. Stark prohibits a physician from referring 
patients to entities in which the physician (or a family member) holds 
an equity interest. Congress seeks to ensure that patients are referred 
only for tests and other health care services that are medically 
necessary and appropriate. The law also prohibits the entity actually 
providing the services to the patient (the recipient of the referral) 
from billing Medicare if the patient care resulted from an 
impermissible referral (even if the patient needed the service).
    ``But a basic prohibition proved too broad to be practicable. For 
example, how should the law treat rural areas where the only potential 
investors in an MRI for the community are all of the local physicians? 
While many of situations crying for exceptions have been legitimate, 
virtually every single business relationship that seems justified 
requires the adoption of a new exception--which, the Whitepaper points 
out, stymies innovation in a dynamic health care market.''
    It is imperative that Congress assess and correct the damage the 
Stark law is doing to innovation, cost, and quality patient care in any 
health reform measure it considers.

    Question 3. What are the effects on hospital competition and 
patients of the proposed ban on physician-owned hospitals?
    Answer. In 2003, Congress imposed an 18-month ban on development of 
new physician-owned specialty hospitals, the majority of which provide 
cardiac or orthopedic care. The moratorium expired on June 8 of 2005, 
but now there are efforts to reinstitute and expand the ban in a way 
that would eventually strangle any physician-owned hospitals.
    A ban on physician-owned hospitals would have serious detrimental 
effects on the quality of care delivered in communities across the 
country. They set a higher standard for care--producing better outcomes 
because physicians are able to create environments where they can 
provide higher quality, more efficient care to their patients. Rather 
than emulate them, many large community hospitals are working to shut 
down physician-owned hospitals, not because they don't provide superior 
care, but because they don't want the competition.
    Senator Tom Coburn of Oklahoma, wearing his hats both as a 
legislator and physician, spoke at an event the Galen Institute hosted 
on Capitol Hill in 2005 to explore the issue of specialty hospitals. 
Dr. Coburn said that quality patient care must come first, and many 
doctors prefer to practice in specialty hospitals because they believe 
they can provide better care. ``Competition helps to lower costs and 
improve quality, in health care as in the rest of the economy,'' he 
said. Harvard Professor Reggie Herzlinger also spoke and stressed that 
specialization is key to productivity growth and that ownership by 
experts is key to innovation. Other speakers used analogies from 
telecommunications, retailing, and automobiles to stress the value of 
competition and specialization. She said that extending the ban on 
specialty hospitals would ``strangle an innovation that holds great 
promise for productivity gains in health care.''
    Current legislation would reinstate the moratorium as well as 
revoke the entire hospital exemption to the Stark laws under which 
physician hospitals operate. This would mean there could never be 
another physician-owned hospital that could receive Medicare 
certification. Competition and access to quality care would be 
negatively affected.
    Hospitals already in existence could not grow--they could not add 
new beds, operating rooms, emergency departments, and would not be able 
to add new procedures or respond appropriately to technological 
advances. Existing physician-owned hospitals would eventually become 
obsolete.
    In addition, there are currently more than 100 physician hospitals 
under development. If proposed legislation passes, communities and 
patients would suffer direct economic hardship.
    As Congress attempts major changes to our health sector, 
improvements in care delivery and access are high on the list of 
priorities. It only makes sense to look at the hospitals that are 
providing high quality care with lower infection and readmission rates, 
as physician-owned hospitals do, to learn from them, not shut them 
down.

    Question 4. How have physician-owned hospitals affected the 
communities they serve?
    Answer. Physician-owned hospitals provide communities with options 
for top-quality care and inject much-needed competition into the health 
care market.
    A study this summer by Consumer Reports rates physician-owned 
hospitals as among the best in the country. The Consumer Reports study 
was based on responses from more than one million patients. In the 
report, physician-owned hospitals were ranked as the top hospital by 
consumers in 19 states (20 states do not have physician-owned 
hospitals).
    Physician-owned hospitals received the top ranking, according to 
the report, in:

   Arkansas (the top two and four of the top seven are 
        physician-owned);

   Arizona (four of the top five hospitals)

   California (the top two hospitals)

   Idaho (the top two and three of the top four hospitals)

   Indiana (the top two and four of the top five hospitals)

   Kansas (the top five and 10 of the top 13 hospitals)

   Louisiana (the top nine hospitals)

    Clearly, we need more of the quality of care offered to patients at 
doctor-owned hospitals, not fewer.
    Physician-owned hospitals are improving access to health care 
services by sometimes ``rescuing'' existing hospitals that are 
struggling financially. Frequently, physicians are purchasing hospitals 
that are threatened with bankruptcy or being let go by larger systems 
that don't find them profitable enough. Physicians are spending their 
personal money, putting themselves and their practices at risk, to make 
certain that hospitals are kept open and that communities continue to 
have local access to healthcare. Many of these hospitals are in rural 
or inner city areas that would not have access to care if the local 
physicians did not step up and take action. If the pending legislation 
passes, this option will no longer exist.
    Large, multi-specialty hospitals have argued that physician-owned 
hospitals, especially those that specialize in cardiac care, are taking 
the less sick and most profitable patients and leaving them with more 
complex cases and more uncompensated care. But the Centers for Medicare 
and Medicaid Services (CMS) released a study in 2005 analyzing this 
claim. Two key facts emerged from the report: ``The notion that 
specialty cardiac hospitals are systematically screening out more 
severely ill patients using the ED [emergency department] is not 
supported by our findings.'' And the notion that physicians are 
profiting from these referrals certainly is called into question: ``The 
average ownership share per physician in a cardiac hospital is only 0.9 
percent, based upon hospitals in our study,'' CMS said.
    The health care system needs more competition, efficiency, and 
specialization, and specialty hospitals offer all three.

                                  
