[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
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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
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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.
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\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).
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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.
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\4\ Federal Trade Commission Act, 15 U.S.C. 45.
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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\
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\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.
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\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.
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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\
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\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).
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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\
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\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.
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\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.'')
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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\
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\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.
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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\
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\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.
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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\
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\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;
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\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.
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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\
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\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\
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\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.
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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.
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\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\
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\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.
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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.
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\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.
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\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.
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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.
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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\
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\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.
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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\
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\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).
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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.
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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.
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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.
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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.
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\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\
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\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.
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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\
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\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.
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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\
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\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.
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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.
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\4\ Ibid.
\5\ American Medical Association, ``Competition in Health
Insurance: A Comprehensive Study of U.S. Markets, 2007 Update.''
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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\
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\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\
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\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\
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\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.
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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.
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\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\
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\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.
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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.
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\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.
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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\
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\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.
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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\
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\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.
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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\
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\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.
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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.
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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.
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\21\ Medicare Payment Advisory Commission, ``Report to the
Congress: Medicare Payment Policy,'' March 2009. Accessed at http://
www.medpac.gov/documents/Mar09_EntireReport.pdf.
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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.
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\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.
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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.
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\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.
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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\
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\24\ Freudenheim, Milt. ``The Middleman's Markup.'' The New York
Times. April 19, 2008. (Attachment C)
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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\
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\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\
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\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
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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\
---------------------------------------------------------------------------
\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.
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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.
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\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.
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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\
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\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\
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\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\
---------------------------------------------------------------------------
\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.
---------------------------------------------------------------------------
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.
---------------------------------------------------------------------------
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.
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\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/.
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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\
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\50\ Medicaid Commission, ``Final Report and Recommendations,''
December 29, 2006, at http://aspe.hhs.gov/Medicaid/122906rpt.pdf.
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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.
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\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.
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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\
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\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.
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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\
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\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
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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\
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\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.
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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\
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\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.
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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\
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\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.
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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\
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\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
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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.