[Senate Hearing 111-552]
[From the U.S. Government Publishing Office]


                                                        S. Hrg. 111-552
 
 SENIORS FEELING THE SQUEEZE: RISING DRUG PRICES AND THE PART D PROGRAM 

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

                                HEARING

                               before the

                       SPECIAL COMMITTEE ON AGING
                          UNITED STATES SENATE

                     ONE HUNDRED ELEVENTH CONGRESS

                             SECOND SESSION

                               __________

                             WASHINGTON, DC

                               __________

                             MARCH 17, 2010

                               __________

                           Serial No. 111-15

         Printed for the use of the Special Committee on Aging



  Available via the World Wide Web: http://www.gpoaccess.gov/congress/
                               index.html

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                       SPECIAL COMMITTEE ON AGING

                     HERB KOHL, Wisconsin, Chairman
RON WYDEN, Oregon                    BOB CORKER, Tennessee
BLANCHE L. LINCOLN, Arkansas         RICHARD SHELBY, Alabama
EVAN BAYH, Indiana                   SUSAN COLLINS, Maine
BILL NELSON, Florida                 GEORGE LeMIEUX, FLORIDA
ROBERT P. CASEY, Jr., Pennsylvania   ORRIN HATCH, Utah
CLAIRE McCASKILL, Missouri           SAM BROWNBACK, Kansas
SHELDON WHITEHOUSE, Rhode Island     LINDSEY GRAHAM, South Carolina
MARK UDALL, Colorado                 SAXBY CHAMBLISS, Georgia
KIRSTEN GILLIBRAND, New York
MICHAEL BENNET, Colorado
ARLEN SPECTER, Pennsylvania
AL FRANKEN, Minnesota
                 Debra Whitman, Majority Staff Director
             Michael Bassett, Ranking Member Staff Director

                                  (ii)


















                            C O N T E N T S

                              ----------                              
                                                                   Page
Opening Statement of Senator Herb Kohl...........................     1
Opening Statement of Senator Bill Nelson.........................     3
Opening Statement of Senator Bob Corker..........................     9

                           Panel of Witnesses

Statement of Gerard Anderson, M.D., Director, Center for Hospital 
  Finance and Management, Johns Hopkins Bloomberg School of 
  Public Health, Baltimore, MD...................................    12
Statement of John Dicken, Director, Healthcare, Government 
  Accountability Office, Washington, DC..........................    41
Statement of Gregory Hamilton, MBA, Consultant, Algonquin, IL....    61
Statement of Willafay McKenna, Medicare Part D Participant, 
  Williamsburg, VA...............................................    65
Statement of Jack Calfee, Ph.D., Resident Scholar, The American 
  Enterprise Institute, Washington, DC...........................    72

                                APPENDIX

Statement of Senator Al Franken..................................    97
Mr. Anderson's Responses to Senator McCaskill's Questions........   100
Mr. Anderson's Responses to Senator Franken's Questions..........   100
Mr. Dicken's Responses to Senator McCaskill's Questions..........   101
Mr. Dicken's Responses to Senator Franken's Questions............   102
Mr. Hamilton's Responses to Senator McCaskill's Questions........   104
Mr. Hamilton's Responses to Senator Franken's Questions..........   104
Mr. Calfee's Responses to Senator McCaskill's Questions..........   105
Mr. Calfee's Responses to Senator Franken's Questions............   106
Statement submitted by Medicare Rights Center President Joe Baker   108
Statement submitted by Medicare Access for Patients Rx (MAPRx)...   111
Statement submitted by Curt D. Gurberg, MD, PhD, Advance, NC.....   115

                                 (iii)

  


 SENIORS FEELING THE SQUEEZE: RISING DRUG PRICES AND THE PART D PROGRAM

                              ----------                              --



                       WEDNESDAY, MARCH 17, 2010

                                       U.S. Senate,
                                Special Committee on Aging,
                                                    Washington, DC.
    The Committee met, pursuant to notice, at 2:49 p.m. in room 
SD-562, Dirksen Senate Office Building, Hon. Herb Kohl 
(chairman of the committee) presiding.
    Present: Senators Kohl, Nelson, McCaskill, Corker, and 
LeMieux.

        OPENING STATEMENT OF SENATOR HERB KOHL, CHAIRMAN

    The Chairman. Good afternoon to one and all, and we thank 
the witnesses who are with us today.
    We are pleased to have Senator Bill Nelson chair today's 
hearing on the effect of high drug prices on America's seniors 
and the Medicare Part D program.
    Senator Nelson is a most valuable member of this committee, 
who hails from a State that understands very well the unique 
challenges and opportunities posed by an aging population. He 
has been a leader on this issue, and we are very happy to have 
him leading the charge for the Aging Committee.
    Before I turn over the gavel to Senator Nelson, I want to 
make sure we all understand that prices for brand-name drugs 
are higher in this country than anywhere else in the world. 
This affects seniors severely, both because they tend to need 
more medications and because of the doughnut hole in Medicare 
Part D, which can cost individuals up to $4,400 out-of-pocket 
every year.
    But ultimately, the high price of drugs does affect each 
and every one of us. Americans pay as much as two to three 
times as much for the same medications as people in other 
industrialized countries. This is one of the reasons healthcare 
costs so much more in this country.
    I have written letters to the top six drug makers to find 
out why. Why must American consumers pay so much more, when the 
bulk of drug research and innovation happens right here in the 
United States, and much of it is subsidized by our Federal 
Government? The Aging Committee looks forward to taking a look 
at the answers to these questions later on this spring.
    In the meantime, today's hearing is getting at an ongoing 
issue that is crucial to our seniors. I would like again to 
thank Senator Nelson for all his work on closing the doughnut 
hole and will now turn over the gavel and the remainder of the 
hearing to Senator Bill Nelson from Florida.
    [The prepared statement of Senator Kohl]

    [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
    
            OPENING STATEMENT OF SENATOR BILL NELSON

    Senator Nelson. Thank you, Mr. Chairman.
    Late last year, the AARP released a report that showed that 
while the Nation was in a recession and the overall inflation 
rate was negative, brand-name drugs were seeing some of their 
highest price increases in years. According to the report, the 
price of brand-name drugs most commonly used by Medicare 
beneficiaries increased 9.3 percent in 2009, a much higher 
increase than any of the previous 7 years.
    For some drugs, their price increase was markedly higher. 
Aricept, a drug that treats dementia, saw a 17 percent 
increase. Ambien, a sleep aid, 19 percent increase. The price 
of Flomax, a drug used by men with enlarged prostates, 
increased 20 percent.
    Just yesterday, the Kaiser Family Foundation released a 
report confirming these trends. According to their report, 9 of 
the top 10 drugs in Medicare Part D saw an increase between 
2009 and 2010, and for half of those drugs, the increase was 5 
percent or more.
    Kaiser also highlights some particularly egregious cases. 
Between 2006 and 2010, for Medicare Part D beneficiaries in the 
so-called doughnut hole, they paid 20 percent to 25 percent 
more for Lipitor, Plavix, Nexium, Lexapro, and paid 39 percent 
or more for Actonel, and paid 41 percent more for Aricept.
    In comparison, the Consumer Price Index, which is the 
general price increase of consumer goods, increased by 9 
percent between 2006 and 2010. Even the price of most medical 
care, which we call the health inflation--and of course, we 
know that that is increasing rapidly--well, that grew by 16 
percent. So you can see the comparisons.
    Now these reports show us that a time when people's 
pocketbooks are getting squeezed, seniors are being asked to 
pay more and more for their prescription drugs. So, in this 
hearing, which you have given me, Mr. Chairman, the 
graciousness of planning the hearing and chairing it--and I 
thank you. In this hearing, I hope that our witnesses are going 
to be able to help us look at these drug price increases, try 
to understand what is happening, and consider how they affect 
seniors in Medicare prescription drug Part D plans, and then 
discuss policy options for addressing these high and increasing 
costs.
    In order to understand how increasing drug prices affect 
seniors, it is important to understand the standard Part D 
prescription drug plan and how it works. Now a standard Part D 
plan in 2010--can you hold that up a little higher--starts with 
a $310 deductible, which the senior pays right at the outset. 
This then is followed up to an amount of total cost of drugs of 
$2,830 in total spending, where the senior pays an average of 
25 percent, and the prescription drug Part D plan pays 75 
percent up to that level.
    All right. Then this is known as the doughnut hole. Because 
under what was passed back in 2003 in order to establish a new 
prescription drug plan and for it not to cost the Federal 
Government more than a certain amount, someone devised this 
crazy plan that then has the doughnut hole all the way up to 
$6,440 in total drug costs that the senior citizen is paying 
100 percent of that hole, known as the doughnut.
    I suppose they call it a doughnut, although it is not 
closed on all sides, because you have got some coverage down 
here on this side of the doughnut and then up there on the 
doughnut. That is what is basically the catastrophic coverage, 
of which the senior citizen pays 5 percent, the prescription 
drug Part D plan pays 15 percent, and Medicare pays 80 percent. 
Now that is the doughnut, and that is the hole.
    So, you can see on out-of-pocket costs, the senior is 
paying $310 right off the bat on the bottom. By the time they 
get to where they are paying 100 percent of the drug cost in 
the doughnut hole, they have expended $940 out-of-pocket costs. 
By the time they got through the doughnut hole, they are now 
out of pocket $4,550 out-of-pocket costs.
    Over in the House, Congressman Pete Stark requested a 
report from the Government Accountability Office on the 
prescription drug program drug price increases, and we are 
going to discuss that today. This report gives us an example of 
a cancer drug called Gleevec, and the price was increased by 46 
percent between 2006 and 2009, from about $31,200 per year to 
about $45,500 per year.
    Average out-of-pocket cost for this drug per year increased 
for a senior citizen of $4,900 back in 2006 to more than $6,300 
in 2009. That, over 3 years, is not a trivial amount of 
increase.
    If drug prices were increasing for some underlying 
necessary reason, such as scarcity of resources or excessive 
increase in demand, then we would be able to understand the 
increases a lot better. But these very same drugs are sold all 
over the world, and they are sold for far less than they cost 
here in the United States.
    The 30 most commonly prescribed drugs cost 27 percent less 
in Canada and 66 percent less in New Zealand, the 30 most 
commonly prescribed drugs. The drugs are approximately 50 
percent less in the United Kingdom, the Netherlands, and 
France.
    So, while pharmaceutical companies are giving other 
countries deep discounts, they are still able to maintain a 
tidy profit due to their high prices in the U.S. Let us go to 
Chart 3. Between 2006 and 2009, the profits of the top drug 
makers grew by up to 201 percent. Between 2006 and 2009, the 
top drug makers, and there they are listed, and here their 
profits grew over that period of time, starting at 96 percent 
here up to 201 percent.
    Now health reform legislation provided unprecedented 
opportunity to control prescription drug prices, and the House 
of Representatives is going to get a chance to vote on what we 
provided in the Senate. What came out in the Senate-passed bill 
was something that was agreed to early on between the White 
House and some of the leadership in the Congress and the drug 
companies. In the Senate-passed bill, the doughnut hole is not 
eliminated.
    Let us go back to that chart with the doughnut hole. 
Instead, the brand-name drug manufacturers are mandated to give 
seniors a 50 percent discount on drugs when they are in the 
doughnut hole. Remember, the senior pays 100 percent here. In 
the Senate-passed bill, if you thought the doughnut hole was 
closed, it wasn't.
    The drug companies will give a 50 percent discount for the 
brand-name drugs to seniors. It doesn't say what the price is. 
It says that they will give a 50 percent discount to the 
seniors.
    Now there is talk, and it is supposed to be published on 
the Internet tonight, this additional proposal, and we will see 
once it gets up on the Internet, for a bill that would come to 
the Senate from the House next week, after the Senate bill is 
signed into law. That is that the Federal Government kicks in 
an additional 25 percent to expand the discount to 75 percent 
for brand-name drugs, as well as a 75 percent discount on 
generics. It is not the drug companies that are kicking in the 
additional 25 percent for the doughnut hole. It is the Federal 
Government.
    Proponents of the plan argue that this achieves full 
coverage since seniors are paying 25 percent co-insurance, but 
when the drug manufacturers are required to give a discount, 
what happens? Do they raise their prices? By basing this 
doughnut hole policy on a discount, beneficiaries and the 
Federal Government are still going to be subject to working off 
the base price of whatever the pharmaceutical company has 
established as the price of the brand-name drug.
    So, is this policy going to prevent manufacturers from 
raising their prices? Well, I certainly would encourage them to 
do so, but there is no guarantee.
    Now, since this whole thing was created back in 2003, and 
the prescription drug benefit, been a lot of folks talking 
about eliminating the doughnut hole. While this proposal that 
is coming back to the Senate next week is not going to stop 
manufacturers from raising their prices, it will provide 
additional protection to seniors that would otherwise 
experience having to pay the whole freight in the doughnut 
hole.
    Why do I get exercised about this? Because back in the 
Finance Committee, I offered an amendment that was not accepted 
on a 10 to 13 vote, 13 votes against and 10 for, that would 
have caused there to be a rebate for only dual eligibles, those 
people who were eligible for Medicaid because either they were 
poor or disabled, and they were eligible also dually because 
they were of Medicare age.
    Back in the old days before the prescription drug benefit, 
the dual eligibles got the same rebate that is in law from drug 
manufacturers for Medicaid recipients because they qualified 
for Medicaid, even though they were of retirement age for 
Medicare. Uh-uh, not after the 2003 prescription drug benefit. 
If you went and got your drugs through Medicare in the new 
plan, prescription drug benefit D, you didn't get a rebate to 
the Federal Government. You had to go through this scheme.
    So, today, taxpayers pay higher cost for the same drugs for 
the same seniors that they used not to do before the 
prescription drug benefit. So, we want our panel to discuss all 
of this. We want you to tell us your personal experiences.
    I am sorry to have taken as long as I have, but we needed 
to get into the technicalities on this to set the table for 
this discussion. We have a distinguished panel.
    Dr. Gerard Anderson is an expert on healthcare payment 
policy. He is currently a Professor of Johns Hopkins. Dr. 
Anderson also directs Johns Hopkins Center for Hospital Finance 
and Management. He co-directs the Program for Medical 
Technology and Practice Assessment, and previously, he was the 
National Program Director for the Robert Wood Foundation-
sponsored program Partnership for Solutions. I could go on and 
on.
    I will finish introducing the panel, and then I am going to 
turn to you, Senator Corker, as the ranking member? Let me 
finish introducing the panel.
    John Dicken is the Director for healthcare issues at the 
U.S. Government Accountability Office, where he directs 
evaluations of private health insurance, long-term care quality 
and financing, and prescription drug pricing issues. Prior to 
working at the GAO, Mr. Dicken was a Senior Analyst for the 
Presidential Advisory Commission on Consumer Protection and 
Quality in the Healthcare Industry. I could go on and on with 
his lengthy resume.
    Greg Hamilton has worked in the pharmaceutical industry for 
31 years. Mr. Hamilton's areas of expertise include product 
reimbursement, as well as pharmaceutical issues in Medicaid and 
Medicare. Mr. Hamilton worked for major drug manufacturers as a 
pharmaceutical, nutritional, and biological account executive 
for 20 years. He has experience in marketing, sales, business 
development, and Government contracting. He was a Senior 
Product Manager for Bayer, and I could go on and on with his 
resume.
    Ms. Willafay McKenna is a Medicare beneficiary all too 
familiar with the challenges of what we have been talking 
about. Ms. McKenna has diabetes, and she controls that with 
insulin. Every year, her insulin costs push her into the 
Medicare Part D doughnut hole that we described where she has 
to pay 100 percent of those medications out of her pocket. She 
is from Williamsburg, VA.
    Finally, John Calfee, listed here as Jack Calfee. He is a 
resident scholar and Economist at American Enterprise 
Institute, where he studies the pharmaceutical industry and the 
Food and Drug Administration, along with the economics of 
tobacco tort liability and patents. He was previously a 
visiting senior fellow at Brookings, previously worked at the 
Federal Trade Commission's Bureau of Economics. He has taught 
marketing and consumer business behavior at a number of schools 
and has a very lengthy resume.
    So, Mr. Chairman, with those introductions, if you want me 
to chair the meeting or throw it back to you, I would like to 
call on Senator Corker for his opening comments.
    [The prepared statement of Senator Nelson follows:]

    [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
    
            OPENING STATEMENT OF SENATOR BOB CORKER

    Senator Corker. Thank you, Mr. Chairman.
    I typically don't give opening comments. However, our staff 
had written such an outstanding one, I was going to give one 
today. I am not going to do that because of the time. I respect 
the witnesses too much and want to hear from them.
    I know we have a vote at 3:30 p.m. So let me just say, 
though, I, too, have been concerned about the cost of brand 
drugs. We met with the Obama administration's trade 
representative just recently to see if there are ways of 
getting at the fact that Americans pay so much more for brand 
name drugs than other folks. With that, I will stop.
    I look forward to hearing the testimony, Mr. Chairman. 
Thank you for calling this.
    [The prepared statement of Senator Corker follows:]

    [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
    
    Senator Nelson. OK. All of the witnesses have been briefed 
ahead of time. We want to really dig into some questions. So we 
have asked each of you to keep your comments to 5 minutes. That 
will take some time, and I would encourage you to talk to us 
instead of reading a statement.
    Of course, your full statement will be entered as a part of 
the record, and we will start just in the order that I 
introduced you.
    So, Dr. Anderson?

   STATEMENT OF GERARD ANDERSON, M.D., DIRECTOR, CENTER FOR 
HOSPITAL FINANCE AND MANAGEMENT, JOHNS HOPKINS BLOOMBERG SCHOOL 
                OF PUBLIC HEALTH, BALTIMORE, MD

    Dr. Anderson. Thank you, Mr. Chairman and members of the 
committee----
    Senator Nelson. Make sure your microphone is on.
    Dr. Anderson. OK. The rising prices of prescription drugs, 
especially brand-name drugs, is an important issue for 
America's seniors and for the Medicare program. Let me begin by 
following up with Senator Kohl and Senator Nelson on the price, 
the international perspective.
    In 2007, the prices for brand-name drugs in the United 
States were about double the prices in other industrialized 
countries. For example, the average price of one dose of 
Lipitor in the United States was $2.82. The U.S. was paying 54 
percent more than Canada, more than twice as much as most other 
industrialized countries, and four times the price for Lipitor 
in New Zealand.
    The story, however, is quite different for generic drugs. 
Most other countries pay two to three times what we pay for 
generic drugs. Countries have devised a whole variety of 
different ways to try to control drug prices, and some of them 
seem to be much more effective price negotiators than other 
countries. The U.S. seems to be not very good at brand-name 
drugs and very good on generic drugs.
    These price differentials have very important public policy 
implications. In 2006, I coauthored an article, which said if 
the United States was paying the same prices as these other 
countries, we could completely eliminate the doughnut hole.
    Ms. McKenna, who you are going to hear from in a moment, is 
typical of the about 4 million Medicare beneficiaries that 
enter the doughnut hole each and every year. The Kaiser Family 
Foundation, looking at this data, found that once people 
entered the doughnut hole, about 10 percent of the diabetics 
stopped taking their medications and about 18 percent of people 
with osteoporosis stopped taking their medications.
    In 2008, I coauthored an article in JAMA discussing how 
Medicare beneficiaries could respond to the financial 
incentives created by the doughnut hole. We did not recommend 
that they stop taking their medications. Changing medications 
or eliminating medications for financial reasons can lead to 
very severe adverse outcomes, higher emergency rooms, more 
preventable hospitalizations, a whole series of things.
    Between 2007 and 2017, the size of the doughnut hole is 
projected to double, exposing more beneficiaries to even higher 
out-of-pocket expenditures and increasing the costs of cost-
related noncompliance. It is now virtually impossible to get 
insurance coverage that fills in the doughnut hole.
    There is basically two categories of drugs, brands and 
generics. On average, brand-name drugs are about four times as 
expensive as generic drugs. Brand-name drugs are the ones that 
are most likely to push people into the doughnut hole. 
Beneficiaries who enter the doughnut hole are the ones who are 
most likely to be using these brand-name drugs.
    According to the--and it was already talked about, 
according to a report by AARP, overall drug prices increased 
about 9 percent in 2008 and 2009. What this means is that about 
300,000 Medicare beneficiaries are added to the doughnut hole 
each time drug prices go up by about 9 percent.
    According to the GAO, the prices for the most expensive 
brand-name drugs increased an average of 12 percent between 
2006 and 2009. MedPAC has found that Part D plans were unable 
to negotiate significant drug prices with drug companies for 
brand-name drugs. GAO found pretty much the same thing for 
specialty drugs.
    One reason the drug companies argue that they need more 
money is to do more research and development. But what you have 
got to recognize is they only spend about 15 percent of their 
resources on research and development. They spend 30 percent on 
marketing.
    The 50 percent deal, or now maybe 75 percent deal, is to 
get the prices down. If beneficiaries enter the doughnut hole 
and they can leave, they will have a benefit. They will 
probably save about $522 under this. Over the course of the 10 
years, that is a savings of about $17 billion, but not the $80 
billion promised.
    If, however, you enter the doughnut hole, it is very 
important that you get full credit for all the expenditures, 
not the 25 percent that you pay. Otherwise, you are going to 
remain in the doughnut hole forever.
    So what are the implications of rising drug prices for 
Medicare beneficiaries? Between 2006 and 2010, their premiums 
increased 10 percent per year. The beneficiaries that used 
brand-name drugs are the ones most likely to enter the doughnut 
hole quickly and to stay in the doughnut hole.
    What are the implications for the Medicare program? Between 
2006 and 2009, the cost of reinsurance--that is what happens 
when you enter the doughnut hole and where the Medicare program 
pays 80 percent of the bill--increased an average of 22 percent 
per year. For low-income beneficiaries, the Medicare program 
pays almost all of the bill, and therefore, all of the costs 
for brand-name drugs basically is paid for by the Medicare 
program.
    Thank you for your time.
    [The prepared statement of Dr. Anderson follows:]

    [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
    
    Senator Nelson. Thank you, Dr. Anderson.
    Mr. Dicken.

  STATEMENT OF JOHN DICKEN, DIRECTOR, HEALTHCARE, GOVERNMENT 
             ACCOUNTABILITY OFFICE, WASHINGTON, DC

    Mr. Dicken. Mr. Chairman and members of the committee, I am 
pleased to be here today to provide highlights from GAO's 
recent report entitled, ``Medicare Part D: Spending, 
Beneficiary Cost-Sharing, and Cost Containment Efforts for 
High-Cost Drugs Eligible for a Specialty Tier.''
    This report focuses on drugs covered by Medicare Part D 
that have particularly high costs, sometimes exceeding tens of 
thousands of dollars per year, and how beneficiaries who take 
these drugs often face high out-of-pocket costs.
    Part D plans can assign covered drugs to special distinct 
tiers with different levels of cost-sharing, such as separate 
tiers for generic and brand-name drugs. CMS also allows Part D 
plans to establish a specialty tier when the total cost for a 
drug exceeds a certain threshold, set at $600 per month for 
2010.
    Drugs eligible to be placed on specialty tiers are among 
the most expensive drugs on the market and are used by a small 
proportion of Medicare beneficiaries. Examples include 
immunosuppressant drugs, such as CellCept for transplant 
recipients; those used to treat cancer, such as Gleevec for 
leukemia; and antiviral drugs, such as Truvada for HIV. We 
found that specialty tier eligible drugs account for $5.6 
billion, or about 10 percent of Medicare Part D spending in 
2007.
    Medicare beneficiaries who received a low-income subsidy 
account for about 70 percent of this total spending. This is 
noteworthy because the cost-sharing for these beneficiaries is 
largely paid by Medicare.
    While most of the spending for these drugs was for 
beneficiaries who received a low-income subsidy, most Medicare 
beneficiaries are responsible for paying the full cost-sharing 
amounts required by their plans. Given the high costs, most 
Medicare beneficiaries taking a specialty tier eligible drug 
are likely to reach the catastrophic coverage threshold by 
spending at least $4,550 in out-of-pocket costs in 2010.
    Over half of all beneficiaries who used at least one 
specialty tier eligible drug reached the catastrophic coverage 
threshold in 2007, compared to only 8 percent of Part D 
beneficiaries who filed claims but did not use any specialty 
tier eligible drugs.
    Let me walk through an example of a beneficiary's expected 
out-of-pocket cost for a specialty tier eligible drug costing 
$1,100 per month, the median cost in 2007 for these drugs. 
Initially, out-of-pocket costs are likely to vary because some 
Part D plans may place the drug on a tier with a flat copayment 
while other plans may require co-insurance.
    In this example, excluding any deductibles, out-of-pocket 
costs during this initial coverage period could range from a 
flat $25 monthly copayment to $363 per month for a plan with a 
33 percent co-insurance. Under either cost-sharing approach, 
within 3 months, the beneficiary will typically reach the 2010 
coverage gap threshold of $2,830 in total drug costs and be 
responsible for paying 100 percent of the drug's costs. This is 
commonly referred to as the doughnut hole.
    Once out-of-pocket costs reach $4,550 in 2010, in about 6 
months for this example, most beneficiaries will pay 5 percent 
of the drug's negotiated price for the remainder of the 
calendar year. At this point, beneficiaries' out-of-pocket 
costs will be similar, regardless of the plan's initial 
requirement for a flat copayment or for co-insurance.
    Variations in negotiated prices between drugs across plans 
for the same drug and from year-to-year can also affect out-of-
pocket costs for beneficiaries. As Senator Nelson noted, for 
example, for seven plans we reviewed, the average negotiated 
price for the cancer drug Gleevec increased by 46 percent from 
about $31,000 in 2006 to more than $45,000 in 2009.
    Correspondingly, the average out-of-pocket cost for a 
beneficiary taking Gleevec for the entire year will have risen 
from about $4,900 in 2006 to more than $6,300 in 2009.
    Finally, let me close by noting that Part D plan sponsors 
report having little leverage to negotiate price concessions, 
such as rebates from manufacturers, for most specialty tier 
eligible drugs. All 7 of the plan sponsors we surveyed reported 
they were unable to obtain price concessions from manufacturers 
on 8 of the 20 drugs in our sample.
    For most of the other 12 drugs, plan sponsors report that 
they were able to obtain price concessions that averaged 10 
percent or less. Reasons plan officials cited for limited 
leverage include the lack of market competitors, CMS formulary 
requirements, and very low utilization.
    Mr. Chairman, this concludes my statement. I would be happy 
to answer any questions that you or other members may have.
    [The prepared statement of Mr. Dicken follows:]

    [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
    
    Senator Nelson. Thank you, Mr. Dicken.
    Mr. Hamilton.

 STATEMENT OF GREGORY HAMILTON, MBA, CONSULTANT, ALGONQUIN, IL

    Mr. Hamilton. I remembered to turn my mike on.
    Mr. Chairman and members of the Aging Committee, thank you 
for inviting me here this afternoon. My name is Greg Hamilton, 
and I am a consultant in the healthcare industry in which I 
have been working for over 35 years.
    Most of my clients are Qui Tam attorneys working with 
whistleblowers, the DOJ, and States to recover monies lost 
through fraud. I have been asked here today to discuss with you 
the effect on seniors of the 2008 and 2009 drug price 
increases, which you have described quite well.
    A couple quick points, the Wall Street Journal article on 
April 15 quoted one of my former employers, Express Scripts, 
saying it saw prices rise more than 10 to 15 percent over the 
past 12 months. The New York Times reported that wholesale 
prices for brand-name drugs rose about 9 percent last year, and 
this was all in the face of, as you noted, the Consumer Price 
Index decrease by 1.3 percent.
    Analysts in these articles believe these unusual increases 
were preemptive attacks on anticipated cost containment under 
healthcare reform, coupled with a drive to maintain profits as 
patents on many popular brand drugs are set to expire soon.
    These price increases will harm seniors--seniors in Part D, 
seniors in retirement plans, seniors paying cash. Pretty much 
anybody that goes to buy a prescription is going to be affected 
by these price increases. Here is why. It all has to do with 
the system in which they get paid.
    Pharmacies are not paid by the insurance companies. Almost 
all pharmacy claims are paid by a middleman called a pharmacy 
benefit manager, or PBM, as in one of my former employers. 
Insurance companies, unions, and other payers hire PBMs to 
maintain networks of retail pharmacies, create formularies, 
configure copay tiers, collect rebates, and adjudicate claims.
    PBMs begin this process by contracting with retail 
pharmacies. They negotiate reimbursement rates for prescription 
drugs at some discount off of average wholesale price, 
otherwise known as AWP, also commonly called ``ain't right 
price.'' Many of you here might be familiar with all the 
Federal and State lawsuits revolving around AWP. There have 
been many multimillion dollar settlements.
    The problem is that our industry continues to use that 
system, and it is that system that will continue to pass these 
price increases along to the consumer. We should also note that 
all the Medicaid programs predominantly use AWP for their own 
reimbursement also. The typical reimbursement, by the way, just 
for on average for State Medicaids and for what the PBMs 
negotiate, is about 14 percent as a discount off of AWP that 
they actually pay the pharmacy.
    AWP is directly related to wholesale price. It is typically 
20 percent or 25 percent above wholesale price. So when 
wholesale price increase, so does AWP, which, in turn, drives 
up the reimbursement to the pharmacy and, consequently, the 
patients' copay.
    Price increases to both patients and payers, can, 
theoretically, be offset through rebates. PBMs combine AWPs 
with rebates to determine the total cost of a drug to the 
payer. Lower-cost drugs are sometimes placed in a lower copay 
category to encourage patient selection and thus reduce their 
cost and the cost to the payer.
    The New York Times article cites analysts and a 2007 
congressional study as saying these rebates often accrue to the 
middlemen and not to consumer. My experience in the industry 
supports this claim.
    Although PhRMA Senior Vice President Ken Johnson has 
claimed that the pricing studies were incomplete because they 
did not consider the rebates, he is wrong. He forgets the basic 
nature of rebates. These rebates are not paid out of generosity 
or altruism. They are negotiated vigorously on relative prices 
for drugs within specific therapeutic categories.
    The eight largest pharmaceutical companies all had 
comparable increases. So if all the prices went up at about the 
same rate in the same time period, there would be no rationale 
for new or additional rebates as the relative prices would 
remain constant. Payers would have no leverage with which to 
pit one company against another in order to derive new rebates.
    Under this regime and with the system that we use, the 
payers and the patients will just have to pay more for the 
drugs, seniors included.
    Thank you.
    [The prepared statement of Mr. Hamilton follows:]

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    Senator Nelson. Thank you, Mr. Hamilton.
    Ms. McKenna.

  STATEMENT OF WILLAFAY MCKENNA, MEDICARE PART D PARTICIPANT, 
                        WILLIAMSBURG, VA

    Ms. McKenna. I want to thank each of you for allowing me to 
speak this afternoon very briefly on what my experience with 
Medicare Part D has been.
    I anticipated this program with a great deal of hope as it 
was debated in Congress in the months before it passed. I was 
pretty horrified at the thought of the doughnut hole, but one 
thing that saved me in the first year was that I found or I 
misunderstood the bill and thought that the out-of-pocket 
expenses that would take me to the doughnut hole were my own 
expenses.
    But of course, they include the insurance company payments. 
So when I went into it, it was a big shock. That was my first 
year.
    Just before I went into the Part D program, I purchased one 
of my prescriptions for insulin, and I paid a total of $77. 
That was $44 for the drug and a modest copay under the plan 
that I had at the time. As you will see from the information I 
submitted, at this time, the drug that I paid $44 and a copay 
for in 2005 is now selling for $239.99.
    I have also experienced the doughnut hole in each year that 
I have been with the program. Each year, as the doughnut hole 
has changed in its breadth and its range, even though the drug 
prices may have stayed the same or if they go up a little, they 
never quite match what the doughnut hole has done. So it has 
been a constant problem.
    I have insulin-dependent diabetes. I am on two different 
insulins, which I take several times a day. In addition, I am 
on three other medications that are used generally with 
diabetics for the maintenance or prevention of the typical 
kinds of side effects and other complications that you can have 
with the disease.
    There is no generic insulin, and that is a definite 
criticism. Surely the copyrights or the patents or whatever 
controls the drug manufacturers has run out now. Here we are in 
2010 with what is basically a simple drug that is made up of 
some kind of RNA or DNA, but there is no protocol to allow a 
drug company to come in and know how to get approval through 
the FDA. That is part of the problem.
    Also I would say that the transparency that has not been 
available to seniors in examining the plans each year, that is 
being addressed now. The first year that they were included on 
the Medicare website, they were quite inaccurate. This year, 
they were much better, and I think that Medicare has done a 
marvelous job with its Plan Finder. It is very, very helpful, 
and I do have some suggestions about that later.
    The one last thing I would like to address with you is that 
this year because something happened with one of my drug 
manufacturers, I am now purchasing one of my drugs from Canada. 
The manufacturer of one of the cartridges that I use for 
insulin discontinued those as of December 31st. They are sold 
all over the country, but they are no longer available in the 
United States.
    I was switched to a different insulin by my 
endocrinologist, and as with a series of insulins before that, 
I developed an injection site reaction that was a horrible 
thing, and I was taken off that drug. I contacted the drug 
manufacturer, the FDA, Medicare, everybody else, and I kept 
sending letters. Finally, in late December, I received a letter 
from the FDA, which did not guide me and direct me but let me 
discover for myself that it would be legal for me to purchase 
this drug in Canada.
    Even though I went through the process with fear that it 
would never arrive because it would be confiscated and within a 
very, very uneasy feeling when I had to go to the post office 
to pick it up, absolutely certain that out of the door with the 
package would come a bunch of Federal agents and spirit me 
away. I got through that, and I am now using it. The packaging 
is exactly the same. The only difference is that it is printed 
in English on one side and French on the other.
    The information contained within the package, it is the 
same writing. It says the same thing. It is all the same, but 
the price--$65 is the full price for the Canadian prescription. 
Then I paid $10 for insulated packaging to get it here, and 
that is remarkable to me. That expense that I will bear myself 
will probably keep me out of the doughnut hole this year.
    I very quickly want to go through, as somebody who deals 
with the program but is not professionally involved in it, some 
suggestions that I have. I really think this is a laudable 
thing to do. Medicare people being the senior citizens of this 
country, many of them on a limited income, particularly with 
the people who are now experiencing it because they grew up in 
a time when Social Security was offered as the way to retire. 
Remember the old ad? Retire on $300 a month in Florida?
    Well, anyway, the first thing is I think that allowing 
Medicare to negotiate with the pharmaceutical companies for the 
drug costs is just about the only way that may give some relief 
in this thing, in this whole program. Permitting Medicare, and 
if you want to keep the private drug companies involved or the 
insurance companies involved, let Medicare contract with them 
to process the claims, but not to run the program.
    I would also note that Medicare pays faster on its medical 
bills and provides more information to the Medicare 
participants than any of the insurance companies do. We may get 
a statement once a quarter from the private insurance company, 
but we get them constantly from Medicare.
    Encourage the FDA to issue rules for development of generic 
biologics like insulin. It is absolutely ridiculous that a 
simple drug, a basic, simple, biologic drug could undoubtedly 
be put on the market here for a very minimal price. It was a 
low price even 10 years ago, and it has gone sky high and it 
hasn't changed.
    Consider a modest increase in the withholding tax for 
Medicare. Obviously, when Medicare was made available decades 
ago, the anticipated costs could never--didn't anticipate 
pharmaceuticals. It didn't anticipate the higher cost. But like 
for my secretary, I think I deduct like $6.08 out of a pay 
period. I would go to $7 at least without--I wouldn't think 
twice about that.
    Finally, consider a grading part for Part D programs, a 
grading similar to what Medicare used to do when it did the A 
to F groupings for the Medigap insurance that was sold some 
time ago. But that way, if the participant could identify the 
specific health problems they are having and get those programs 
that are graded for them, that might be helpful.
    I would just say one more thing, and that is Mr. Dicken, I 
think, mentioned the big tier of the drugs. One of the years, 
my insulin was in that tier, and I certainly can't understand 
that. It never costs $600 a month. It is not a rare drug. It is 
not a controlled substance. But it was in Tier 4. Of course, 
that upped the price.
    Senator Nelson. Yes.
    Ms. McKenna. Thank you very much, and I appreciate the 
opportunity again.
    [The prepared statement of Ms. McKenna follows:]

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    Senator Nelson. Thank you, Ms. McKenna.
    Before you go, Senator, what we will do, we have got about 
6\1/2\ minutes to get over to the floor to vote. We will recess 
right now. We will pick up with Mr. Calfee, and then I am going 
to flip it to you for questions first, Senator Corker.
    Thank you. We will stand in recess.
    [Recessed.]
    Senator Nelson. Good afternoon. The committee will resume, 
and sorry for the interruption. But when it is time to vote, it 
is time to vote.
    Mr. Calfee, you are recognized.

STATEMENT OF JACK CALFEE, PH.D., RESIDENT SCHOLAR, THE AMERICAN 
              ENTERPRISE INSTITUTE, WASHINGTON, DC

    Dr. Calfee. Thank you, Mr. Chairman.
    I would like to thank you and the committee for inviting me 
to testify. The views I present are my own, not those of the 
American Enterprise Institute, which does not take 
institutional positions on specific legislation, litigation, or 
regulatory proceedings.
    My testimony focuses on three topics--price trends for the 
most-used drugs among the elderly, the influence of the 
Medicaid drug price rebate program, and international patterns 
in drug pricing.
    A series of reports from AARP on price changes for the 
most-used drugs for the elderly has attracted considerable 
attention, including in these hearings. These reports find that 
branded drugs typically have annual price increases 
substantially greater than increases in the Consumer Price 
Index.
    For example, the April 2009 report said that during years 
2002 through 2008, price increases for branded drugs ranged 
from 5.3 percent to 8.7 percent. These results are very 
misleading. The AARP reports failed to describe the impact of 
the ongoing wave of patent expirations and generic entry for 
many blockbuster drugs. These reports disguise the dramatic 
price declines that have occurred for such widely prescribed 
molecules as Ambien, Aricept, Flomax, Fosamax, Neurontin, 
Norvasc, Pravachol, Prevacid, Protonix, and Zocor.
    Instead, the AARP tables track prices for the branded 
versions of these drugs, even though the market has shifted 
dramatically to generic versions. Notwithstanding the AARP 
reports, which seem to show steadily increasing drug costs for 
seniors, actual events demonstrate a central characteristic of 
the pharmaceutical market, which is that a period of profitable 
prices for drugs under patent is followed by dramatic price 
reductions that permit patients to obtain some of the best 
drugs we have at very low prices for years to come.
    So-called specialty drugs are also important. These are 
usually, although not always, biologics rather than chemical 
compounds. Created through biotechnology methods, they are 
often very expensive. Although they are presently not subject 
to generic competition, through application of the Hatch-Waxman 
Act, a regulatory pathway for post-patent competition may well 
be created soon by new legislation.
    The price effects would come relatively slowly, however, 
because of the complex nature of these products. On the other 
hand, specialty drugs typically address longstanding unmet 
therapeutic needs. They have revolutionized the treatment of, 
to cite a few examples, MS, rheumatoid arthritis, some forms of 
cancer, and the leading cause of blindness in the elderly. 
Despite their costs, specialty drugs remain an example of how 
the competitive marketplace creates previously unobtainable 
medical solutions despite the tremendous costs and 
uncertainties of the R&D process.
    A very different set of economic issues is raised by a 
proposal introduced in the Medicaid drug rebate, which pertains 
the dual eligibles who qualify for both Medicaid and Medicare 
Part D. Research has demonstrated that the Medicaid rebate has 
tended to increase prices in the private sector. An expansion 
of the scope of the Medicaid rebate seems likely to reinforce a 
tendency to bring higher drug prices in the private sector even 
as the Medicaid system gets lower prices.
    Finally, there is the matter of international disparities 
in patented drug prices. Research has consistently found large 
differences, sometimes more than twofold, although this is 
usually not true for specialty drugs. These disparities arise 
from three factors--the tendency to charge higher prices in 
wealthier nations, and the United States is the wealthiest 
nation; the fact that some drugs save money in healthcare 
services, which cost more in the U.S., making these drugs more 
valuable here than elsewhere; and most important, Government 
price controls that have been implemented in all rich nations 
other than the United States.
    The result is that the U.S. market provides a 
disproportionate share of worldwide pharmaceutical profits. 
This means that other wealthy nations are, to a significant 
extent, free riding on U.S. R&D investment that is motivated by 
the search for profits and which remains a dominant source of 
valuable new treatments. Unfortunately, there is no easy 
solution to this problem, although there are some measures that 
could provide some help.
    Mr. Chairman, that concludes my oral testimony. Additional 
details are provided in my written testimony.
    [The prepared statement of Dr. Calfee follows:]

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    Senator Nelson. Thank you, Mr. Calfee.
    Senator Corker?
    Senator Corker. Thank you. I want to thank each of you for 
your testimony, and I have a--like we always do, I have got a 
conflict. I am going to leave very briefly, but I think your 
testimony has been outstanding.
    Senator Nelson, I appreciate you calling this hearing and 
for the explanation you gave on the front end.
    Let me say, generally speaking, I have concerns, as I 
mentioned on the front end, about the high cost of brand name 
drugs here. We have talked to trade representatives from both 
administrations, explored things like ``most favored nations'' 
clauses and those kind of things to deal with it.
    But I am going to ask some questions to sort of look at the 
other side of this, not that I am in any way debunking what is 
before us today. But when I was in Tennessee as commissioner of 
finance, we had a program called TennCare, and in that program, 
we did not have things like the doughnut hole or appropriate 
copays. What we found was that drug utilization just went 
through the roof, OK?
    While I have--my heart goes out to Ms. McKenna and the 
issues that she is dealing with, sometimes we have unintended 
consequences with policies like this. I wondered if you might 
comment as to the effect, if you will, of not having some of 
the financial constraints that exist, which are very difficult 
for some people, but what the unintended consequences might be 
as it relates to actual drug utilization?
    Mr. Anderson.
    Dr. Anderson. Sure. Thank you.
    What I am really concerned about is that I think you 
definitely need to have co-insurance, and at the beginning of 
the doughnut hole, you have 25 percent co-insurance, which I 
think is quite high compared to what we have from other goods 
and services. But essentially, that is the co-insurance.
    The problem is, obviously, the doughnut hole, and what 
happens when you enter the doughnut hole is that your 
incentives change dramatically. As I said, 10 percent of the 
diabetics stop taking their medications when they entered the 
doughnut hole. Eighteen percent of the people with osteoporosis 
stop taking their thing, and that leads to further expenditures 
in the Medicare program because now they are going to be 
hospitalized. They are going to need emergency room care. They 
are going to need a whole set of things.
    So it is really penny wise and pound foolish in a number of 
instances to have this doughnut hole and have these people 
paying so much, and they can't afford it. I mean, $5,000 for a 
Medicare beneficiary making $20,000 a year is a quarter of 
their income. That is an awful lot of money to pay just on 
prescription drugs.
    Senator Corker. You know, we hear a lot about the fact that 
the reason drug prices are so high here is that we do so much 
research and development in this country of new drugs, and we 
get them to the markets quicker here. Our seniors actually take 
advantage of them more quickly.
    At the same time, you look around the world in other places 
where prices are negotiated and set, and there is a lot of 
research and development that is taking place in those other 
places. Is that because they are able to still sell into the 
U.S. market, or is the whole issue that we talk about as far as 
research and development one that is a myth?
    I guess I will ask whoever is most qualified to answer 
that.
    Dr. Anderson. Well, let me try again. Basically, what we 
are spending is 15 percent of our drug budgets in most 
pharmaceutical companies on research and development. We are 
spending 30 percent of our budgets on marketing.
    So I am all for more research, and I think we really need 
to change the incentives for pharmaceutical industries to spend 
more than 15 percent. If we had higher drug prices and they 
were spending 50 percent of their things on new research and 
development, I think that would be great. But at 15 percent on 
research and development, I just don't think we are getting 
value. The other countries are just getting all that.
    So if we had unlimited money, if we didn't have a deficit 
in the Federal Government, a trade deficit with the rest of the 
world, I think that would be fine. But we do.
    Senator Corker. Mr. Dicken, I read a report, CBO report, I 
guess, talking about the fact that if we had actually 
negotiated--if we negotiated prices for our brand drugs, that 
at the end of the day, which seemed like it was 
counterintuitive to what much has been said about the actual 
negotiation for brand drug prices. But I read a report that 
said there would actually be very little saved if we did that, 
and I wondered if you might respond to that?
    Mr. Dicken. Well, I think part of what CBO's analysis was, 
was that one of the things that will drive how much plans or in 
this case the Government, could negotiate in savings, is 
dependent on the formularies and to what extent they can steer 
particular utilization to particular manufacturers. I think 
CBO's estimate was based on an assumption that it would not be 
within the Medicare program's ability for the Government to 
negotiate with having restrictive limited formularies.
    Senator Corker. Mr. Chairman, I have a number of questions 
I want to submit for the record. I have got to go on. I know 
that these witnesses have been waiting a long time, but I thank 
you for the hearing and look forward to the results.
    Senator Nelson. Thank you, Senator Corker.
    Mr. Chairman Kohl?
    The Chairman. Thank you very much, Mr. Chairman.
    I would like to ask each and every one, or one or two on 
the panel, is there any justification in your mind, in terms of 
the people of our country, for Americans to be paying twice as 
much for the same product as is sold in other countries when 
particularly we manufacture the product here? In many cases, 
the costs of a product's development is paid for by tax dollars 
through the NIH? Is there any justification for that?
    How we get to an answer might be another question, but is 
there any way that you can justify that in terms of the 
American consumer? Anybody think that there is a justification 
for it? We should pay twice or three times as much?
    Yes, Mr. Calfee?
    Dr. Calfee. Well, I guess it depends partly upon what you 
mean by ``a justification.'' I mean, the reason those prices 
are so low is because of price controls that are implemented by 
those nations. In most cases, the manufacturers would like very 
much to charge higher prices in some developed nations but are 
prohibited from doing so.
    I think it is worth bearing in mind that in a normal world 
in which you didn't have any kind of price controls at al, 
prices in the U.S. would be higher than they are in those 
countries for a couple of different reasons, which I mentioned 
earlier. Some of these drugs are just worth a lot more in the 
U.S. than they are in France or Switzerland or Germany because 
when they save days of healthcare here, which they often do, 
the cost of the healthcare services they save is much higher 
here than it is over there. So, the drugs are more valuable 
here than they are there.
    The Nation is wealthier, wealthier people tend to pay more 
for products generally. There would be a disparity, but it 
wouldn't be as big as it is now. There are some elements of 
unfairness, just as you suggest.
    I think one thing is worth paying attention to, and Gerry 
Anderson mentioned this in his remarks, and that is that the 
U.S. market for generics is extremely competitive and extremely 
efficient. It is that way because we have a very open market.
    There are a number of European nations which make it rather 
difficult for generic manufacturers to enter into the market. 
They tend to favor their domestic generic manufacturers, and in 
fact, several years ago, Mark McClellan, who was then the 
Commissioner of the FDA, gave a speech in which he pointed out 
that for many European nations, if they were to open up their 
generic market to competition instead of favoring their 
domestic manufacturers, generic prices would drop so much that 
they could go a long ways in raising branded prices toward U.S. 
prices without actually paying anything more.
    So, there is an element of trade restrictions there, that I 
think is probably worth pursuing at some level.
    The Chairman. Anybody want to make a--is there any 
justification in your minds for we who represent the American 
people defending two and three times as much being charged for 
those brand-name drugs here as they are anywhere else.
    Mr. Anderson.
    Dr. Anderson. I can't think of one. I mean, I think, 
basically, the problem is that we have many people that are 
paying lots of money, $5,000, to get through the doughnut hole. 
That is a huge amount of money. It really affects their access, 
and most of the reason why they are in that doughnut hole is 
the price and the utilization of brand-name drugs.
    So it really affects the American senior substantially to 
pay these high prices, and I think--I wouldn't mind paying it 
if we didn't have a trade deficit and if all the seniors were 
getting drugs free of charge. But they are not.
    The Chairman. OK. I wanted to get that clear. I assume you, 
Ms. McKenna, believe there is no real justification other than 
it is just happening, not that you believe it is right. Is that 
true?
    Ms. McKenna. I have heard a lot of the comments about the 
research and development, and I understand that. But when I 
think about the last 5 to 10 years when we were bombarded with 
advertisements on television, ``Ask your doctor about this, 
that, and the other thing,'' that is so offensive when as just 
one person in Part D out of, what is it, 40 million people who 
are using Part D, one of us has a concern about that and is 
confronted with it every day, why isn't that spent on providing 
the drugs at less cost to the large group of people who are 
elderly?
    The Chairman. Yes, Mr. Calfee?
    Dr. Calfee. If I could say something about marketing and 
R&D? A couple of things: First, is the 30 percent figure 
mentioned by Gerry Anderson. That number is inflated because it 
includes the samples that are provided, the free samples that 
are provided to doctors. Those are valued at wholesale prices, 
and that is a pretty big chunk. On the order of half of all 
marketing consists of giving away samples, which doesn't really 
cost the manufacturers very much at all.
    If you correct for those numbers, they probably spend more 
in R&D than they do on marketing. But you have to remember that 
they do marketing in order to make money. They do it in order 
to increase their profits. Those profits are the source of 
their R&D.
    Large manufacturers, don't go out and sell bonds in order 
to fund their R&D. They fund their R&D out of the cash that 
they bring in from selling their drugs. If you eliminate their 
marketing, you probably reduce sales. You reduce their profits, 
and you reduce the money that is available for R&D. It is not a 
tradeoff between the two.
    Now 15 percent doesn't sound like very much for research 
out of total revenues, but in fact, it is extraordinarily high. 
I don't think there is any other industry that comes close to 
that level. Now we can sit here and we can try to figure out 
what that percentage ought to be, but I don't think anyone 
knows what that percentage ought to be. It is really a matter 
of how manufacturers want to spend their money in order to try 
to figure out what they can do to find a new cure.
    It is a very, very difficult business, and there are a lot 
of drugs that we need that manufacturers are not working on, 
like new antibiotics, malaria drugs, and so on. No one else is 
coming up with these drugs. So, I think we have to remember it 
is a chase for profits that is the source of the drugs that we 
are getting, and it makes sense that we should at least pay 
attention to whether or not we are going to be getting a lot 
more new drugs in the future because there are a lot of 
unsolved problems, such as the illness that Ms. McKenna is 
dealing with.
    The Chairman. Yes, sir, Mr. Hamilton?
    Mr. Hamilton. First of all, I am not going to try and 
justify those prices. But I can offer a couple of explanations.
    One is that in the pharmaceutical industry, absent of 
generics--I am talking the brand-name world--cost to 
manufacturer to bring a product to market is only considered 
when you first look to launch a drug. Pharmaceutical companies 
will scope the market. How big is the market? How many patients 
could take this? How many pills or tablets or injections can I 
sell?
    It may be some idea of what kind of price, and that will 
help them decide whether to pursue that drug or not. But once 
the drug is on the market, the cost of the drug has nothing to 
do with its price. As Jack said, talked about the cost of 
samples, samples cost a lot more than yet the drug does going 
to the pharmacy, and that is because of basically the packaging 
and storage and shipment to reps.
    So cost, unlike many other situations, you know, if you are 
going to make something, you think, ``What is it going to cost 
me, and therefore, how much am I going to sell it for?'' It 
doesn't exist in the pharmaceutical industry. You sell a 
product for whatever the market will bear.
    Another factor that comes into play in domestic marketing 
is several other nations, I see many other nations benchmark 
their U.S. pricing. They will pay a percentage for a drug based 
off of the average selling price, calculated quarterly on 
domestic products. So the higher you can keep your price here 
in the United States, the more money you are going to make 
abroad.
    The Chairman. Thank you.
    Thank you, Mr. Chairman.
    Senator Nelson. Thank you, Senator Kohl.
    Senator LeMieux.
    Senator LeMieux. Thank you, Mr. Chairman.
    Thank you to my colleague Senator Nelson for having this 
hearing today.
    Thank you all for being here to testify, especially you, 
Ms. McKenna. I appreciate your good words, and it is important 
for us to put a face on these problems.
    Senator Nelson and I represent Florida, and this issue 
comes home loud and clear in our State, with the highest per 
capita population of seniors, more than 3 million folks on 
Medicare.
    Now the issue that I want to focus on with you is just the 
cost and why it is so expensive and why it continues to be more 
expensive, and there has already been some good testimony on 
this today.
    Mr. Hamilton, in a prior life, I was the deputy attorney 
general in Florida, and we dealt with AWP cases, and I guess 
they are AMP now, and I have been through those cases that we 
have tried to figure out in the Medicaid program in Florida why 
we weren't getting the best price. Really is average wholesale 
price truly the best price, or is there some discount, as you 
say in your testimony, 25 percent perhaps, below that?
    So I am familiar with the work that you have done and know 
that the struggles that both the Federal Government and the 
State governments deal with in trying to make sure that we are 
getting the best price.
    I think, Mr. Dicken, I want to ask you the first question, 
and that is, you know, the Federal Government representing, in 
a way, so many consumers of pharmaceuticals should be able to 
negotiate better prices on these drugs for Medicare and 
Medicaid and veterans recipients.
    I understand the analysis you did, and I understand on a 
drug-by-drug basis those discounts don't seem so appealing. 
They might be 10 percent or so. But why can't the Government, 
when representing so many consumers, be able to go to a 
particular drug company and say we are not going to just 
negotiate on Lipitor, we are going to negotiate on all of the 
drugs?
    Based upon the volume of the people that we represent in 
our consumer pool, we are going to get the best prices. Are we 
doing as much as we can to negotiate?
    Mr. Dicken. As you know, there are a variety of different 
approaches that different Federal programs use to attempt to 
negotiate or set prices for drugs. So, certainly, the Part D 
program in Medicare is relying on private plans to do those 
negotiations. Many of them will establish formularies within 
guidelines that are established by CMS that limit the ability 
to restrict drugs in certain classes, and so the Medicare 
program is relying on the private plans to do those 
negotiations.
    Senator LeMieux. Is that through their PBMs?
    Mr. Dicken. Often contracting with a PBM that would do the 
negotiations with the manufacturers.
    Senator LeMieux. How do we know that they are getting the 
best price? If we are segmenting the market, are we not getting 
the best price when they have a smaller volume of people that 
they are negotiating on behalf of than the entire Federal 
Government would be able to have that ability to negotiate?
    Mr. Dicken. Well, it is a very different approach for Part 
D that does rely on multiple different Part D plans to be 
negotiating. They may have differences in their formularies and 
the price that consumers may find on Plan Finder for different 
plans. So, it is relying on both those plans to negotiate and 
for consumers to choose the plan that would best meet their 
needs.
    That may be different from, say, a VA program which does 
have a formulary and set prices that may look different from 
what may be existing in Medicare. So the Federal Government, 
through a number of different programs, has a number of 
different prices for the same drugs.
    Senator LeMieux. Let me go to Mr. Hamilton and then to Dr. 
Anderson.
    Mr. Hamilton. A couple of things. First of all, the Federal 
Government, through two different programs--one is the Federal 
supply schedule, which is the VA, DoD, and Indian health, and 
the 340B program--through both of those programs, they 
negotiate on a national level, and they do a very good job of 
it. If that was applied to Part D, you would see discounts far 
better than anybody is getting right now.
    But they also have an advantage in that they have a formula 
for the Federal supply schedule and the 340B runs off of the 
Medicaid rebate program. So they start off with a certain 
discount off of every drug, regardless of the number of 
competitors or what leverage a particular plan might have based 
on utilization or anything. They start off with a basic 
discount no matter what. Then they negotiate from there. That 
is called the ceiling price.
    So we already have in place two systems that work very, 
very well to drive down the cost of drugs for patients. The 
DoD, for example, has a mail-order facility. As a matter of 
fact, they hired my former employer, Express Scripts runs it in 
Arizona, where they have literally massive machineries and 
canisters and gazillions of pills. They fill the scripts and 
send them out to DoD recipients at a fraction of what you would 
pay anywhere else. They do that because they buy off the 
Federal supply schedule, which starts with a discount and then 
negotiates after that.
    So, certainly, regionalization of plans reduces their 
ability to negotiate. Remember, they don't start with a given 
discount. They start at retail.
    Senator LeMieux. Dr. Anderson.
    Dr. Anderson. Thank you.
    If you look at the 2003 Medicare law that created Part D, 
there is something called ``noninterference.'' Basically, that 
says that the Medicare program can't negotiate directly with 
the drug companies. So that is essentially the answer to your 
question why Medicare doesn't do it.
    If you look across the Federal programs, what you will see 
is that they are paying a two-to-one difference. The DoD and 
the VA typically pay the least. The Medicare program typically 
pays the most for most things, and there is the two-to-one 
difference.
    So if you are talking market power, the Federal Government 
is the largest purchaser of drugs in the world, and it should 
be getting a very good deal. But it is totally splintered in 
that it is buying all sorts of things in all sorts of different 
ways, which means that it is not using its market power or its 
regulatory power to its fullest. The seniors and everybody else 
is paying very different amounts.
    Senator LeMieux. Mr. Calfee.
    Dr. Calfee. Yes, I think it is worth remembering that the 
ability to negotiate lower prices has almost nothing to do with 
the size of the entity that is doing the negotiating. Gerry 
Anderson mentioned that some of the lowest prices in the world 
are from New Zealand. New Zealand is a very small country. The 
entire population of New Zealand is probably less than the 
Medicare population of Florida alone.
    What gives them the ability to negotiate these things is to 
look at several different competing drugs in a therapeutic 
category and to play off one manufacturer against another. The 
VA does very well in its negotiations, because it tends to have 
very narrow formularies.
    In Medicare Part D, for many therapeutic categories, the 
formularies cannot be very narrow. It is against the law. You 
have to include every drug in a particular category. So that is 
what really drives the ability to negotiate lower prices.
    I think it is also worth remembering that if you start out 
with a policy of having just a percentage discount, where does 
the price come from, the original price that you are 
discounting from? At some point, if all the drugs sold to the 
Federal Government are going to be 30 or 50 percent less than 
the prices in the private sector, those prices in the private 
sector are going to adjust, because manufacturers know that 
whenever they set those prices, they are setting a much lower 
price for the Federal Government.
    So it is very hard to solve these things through just 
simple formulas, I think.
    Senator LeMieux. Well, I appreciate the testimony, and I 
agree that these formulas, it is hard to set them, and they 
certainly can be gamed once you do set them. But the comments 
that were made, I think, from Dr. Anderson and Mr. Hamilton is 
that we are losing our ability, based upon the size of the 
Government. I don't mean the size of our entity. I mean the 
size and the number of people that we represent, which is 
volume, and certainly that has something to do with the ability 
to negotiate.
    Maybe not the only factor, Mr. Calfee, but certainly a 
factor, that this noninterference clause makes no sense to me. 
That we would give up our right to have that ability to 
negotiate doesn't make sense to me.
    I mean, it occurs to me, Mr. Chairman, that we want to hit 
the sweet spot of allowing these companies to develop the best 
drugs in the world. We don't want to stifle that. We don't want 
to put this in a situation--we can't be Canada, where the 
research is not happening and just take, cap these prices and 
say, well, we will buy them at this price, and we won't buy 
them at any other. We can't do that because we are doing the 
innovation.
    You have to applaud these companies for doing the 
innovation. It is saving lives around the world. But at the 
same time, we want to get the very best price. It is appalling 
to me that these other countries are freeloading off of our 
R&D. I wonder, Mr. Chairman, that our U.S. Trade Representative 
shouldn't be talking about these issues when he is dealing with 
folks from other countries.
    I want to talk about what has been called the doughnut 
hole, and I know that my colleague from Florida will recognize 
doughnuts are--everybody likes doughnuts. I think we have named 
it the wrong thing. We should call it the black hole or the 
sink hole because a senior who falls into it has a tough time 
of getting out of it, and words matter.
    What can we do under the existing law--I mean, maybe we can 
change the law. But what can we do under the existing law, if 
anything, to help seniors who are in this hole? They are 
struggling. They are certainly struggling in our State. Ms. 
McKenna has given us great testimony about that. Is there 
anything we can currently do, or do we just have to change the 
law?
    Who wants to take a stab at that?
    Dr. Anderson. Well, I think price transparency is an 
important thing and a Republican thing as well. I mean, we just 
don't know the prices for these drugs, and we should. I mean, 
it is important for the Medicaid program, as you know, in the 
past. It is important for the Medicare program.
    We also don't know the level of cost-sharing. So I looked 
at Part D drugs, and sometimes the Medicare beneficiary is only 
paying 5 percent of the cost because the drug company is paying 
95--I am sorry. The Part D plan is paying 95 percent of it. In 
other drugs, they are paying 60 percent of the cost.
    So, it is sort of the Part D plan is making a judgment of 
what the beneficiary should pay for different drugs, and I 
can't understand a rhyme nor reason for it. But if I am a 
person that is going to sign up for one of these Part D plans, 
I want to know what the plan is going to pay, and we don't know 
that.
    Senator LeMieux. Mr. Dicken.
    Mr. Dicken. I think certainly Dr. Anderson mentions a good 
point with price transparency. Just a couple of other things to 
think about. Some of the drugs that have high costs that lead 
individuals into the doughnut hole may be ones with a lack of 
therapeutic alternatives, and so, if there were options to have 
more competition there.
    The other thing is one of the ways that plans that we have 
just talked about will attempt to reduce costs is through 
negotiating rebates. Those rebates may reduce the costs overall 
and are passed onto the programs through lower premiums but 
aren't affecting the costs that the individuals pay at the 
drugstore. Those will be reduced by discounts that are 
negotiated with the pharmacy.
    But the rebates don't necessarily go to that individual who 
is showing up at the drugstore other than reducing the overall 
program cost.
    Senator LeMieux. Can I just ask you one question about 
that? Does the pharmacy have any incentive under that rebate 
program to pass those savings along to the customer?
    Mr. Dicken. Well, there are different types of price 
concessions here. So I was speaking about rebates from the 
manufacturers that would go back directly to the plan or the 
PBMs. Certainly, the plans are also negotiating discounts with 
the pharmacies and competitive and trying to encourage, in some 
cases, networks of pharmacies where they will negotiate lower 
prices. That would be the incentive for the pharmacies to 
participate in those discounts.
    Senator LeMieux. Mr. Hamilton.
    Mr. Hamilton. Those discounts you are talking about, the 
rebates. The rebates are typically negotiated by a PBM. Some 
insurance companies have their own PBM internally. So they 
would do it. But the PBM function negotiates the rebate, 
collects the rebate, sometimes passes those rebates on to the 
plan. Sometimes they keep them. It depends on what their 
contract with the plan is.
    But those rebates don't go back to the pharmacy, to answer 
your question. No, the pharmacy doesn't get those rebates. 
Those rebates are kept by either the PBM or the plan. The PBMs 
negotiate network contracts with the pharmacies at some 
discount, again, off of AWP. There we go back to the problem of 
AWP.
    Senator LeMieux. I remember a line of cases about 
pharmacies and AWP. That is why I remembered to ask that 
question.
    Mr. Hamilton. That is what happens. The PBM goes out, 
develops a network, and they pay, let us say, 14.5 percent is 
what they negotiate with the CVS or Walgreen's to pay them. 
Then they go back to their plans, and they say, all right, I 
will reimburse your claims, but I am going to charge you 14.6 
percent. So, the plan pays one thing, the pharmacy gets 
another. But the rebates don't go back to the pharmacy. That 
amount is calculated based on AWP, and there again, we go back 
to the problem with the system.
    Senator LeMieux. Anything on the first question that you 
think we can do without changing the law to help with this 
problem of people who are in this hole?
    Mr. Hamilton. I think--like John said, I think the best 
thing without changing the law is to negotiate more rebates and 
negotiate them in a way that guarantees they go back to 
patients.
    Senator LeMieux. Thank you. Anyone else want to comment on 
that?
    Ms. McKenna. I would just say a couple of things about 
that. I feel that the basic amount that is paid for the 
participation in Part D could be adjusted. Maybe increase that 
a tiny bit, but then have just a standard drug plan. Get rid of 
the tiers and the formulas and everything else. These are 
impossible for most seniors to understand.
    I have a lot of seniors who come to me in my practice, and 
continually, it is more and more questions each year that I get 
from them. Even from a neighbor who came, and I spent almost 2 
hours with a person who is a college professor and couldn't 
understand the choices because it is foreign. It is not like 
any other insurance.
    But that way, yes, there are going to be very expensive 
drugs. But probably on the low end of the scale, everybody is 
going to pay a little too much for the very inexpensive drugs. 
But those payments for those at a reasonable rate are going to 
accrue to the benefit of all the others who are participating 
and who are on higher drugs.
    The formularies have a great deal of difference in how your 
copay is calculated. The higher your drug is on the formulary, 
the more you are going to pay. But I think that would be 
helpful.
    Senator LeMieux. Thank you, ma'am.
    Mr. Calfee.
    Dr. Calfee. Yes, just very briefly, I think it is worth 
remembering that when Part D was first created in the 2003 law 
and was implemented in 2006, there were a lot of estimates 
coming out of CBO and elsewhere about how much that program 
would cost. It ended up costing a lot less than was expected, 
and that undershooting of cost continued for several years.
    It was because of the extraordinary level of competition 
amongst the Medicare Part D plans, partly because of the 
activities of the PBMs. That competition has resulted in pretty 
good deals. Premiums have been down. Drug costs have been down. 
Medicare costs have been down below what they would have been.
    So I would just exercise some caution when contemplating 
doing away with a lot of that competition. You might end up 
with something that would be very, very much simpler and easier 
to deal with, but it might be more expensive, too.
    Senator LeMieux. Mr. Chairman, I want to give you an 
opportunity. I know you have questions to ask, and I thank you 
again for having this hearing.
    I would like to just take a moment of State privilege, 
which I know you will appreciate, is that I was reading the 
Lakeland Ledger the other day, and our friends at the company 
of Publix are now offering some diabetic drugs for free. So 
there are good folks out there trying to do the right thing.
    Thank you, Mr. Chairman.
    Senator Nelson. You recall one of the major retailers in 
the country a few years ago turned the pharmaceutical world 
upside down, when Wal-Mart came out with a group of about five 
commonly used drugs, and they were offering them for something 
like 10 bucks. So, Mr. Calfee, what we are trying to do, 
regardless of what happened with the prescription drug bill 
back in 2003, we are trying to figure out how we can make it 
more affordable for folks that are on fixed incomes.
    Dr. Calfee. I certainly appreciate that, and as you know, 
the Part D program is, to some extent, means tested. I mean, if 
you are below a certain income, then drugs cost quite a bit 
less. In some cases, a lot less. Of course, if you are eligible 
for Medicaid, that is a different story, and we get into all 
these squirrelly problems of dual eligibles.
    I think there is a strong case for means-tested subsidies 
generally. Maybe there is a case--it has been a while since I 
have looked at all the parameters of Medicare Part D, but maybe 
there is a case for extending those means-tested subsidies. So, 
there are fewer people who face the difficulties that have been 
described by Gerry Anderson and by Willafay McKenna. That, to 
me, strikes me as a reasonable way for addressing the Part D 
doughnut hole.
    The reason it was there to begin with, I believe, was to 
have something that was structured in such a way that it would 
not exceed certain cost levels, but would also be attractive to 
almost every Medicare beneficiary because you wanted to have 
wide participation in this plan because that was going to keep 
down costs. That part of it actually worked pretty well, but it 
has generated all these other problems.
    I don't think there is a simple solution without spending 
an awful lot more money, but there may be some middle ground in 
which there could be more in the way of means-tested subsidies 
without an extraordinary increase in costs.
    Senator Nelson. Well, in your written testimony, you cited 
an article that argues that Medicaid rebate increases, that the 
Medicaid rebate that I offered in the committee, in the Finance 
Committee that was defeated for dual eligibles, that that 
increases the price of drugs in the private sector. I want you 
to please follow up on that.
    Do you think that the private sector doesn't have the 
ability to keep prices low if the Government is obtaining a 
lower price?
    Dr. Calfee. The private sector negotiates prices with PBMs 
and other people, and they do that in competition with other 
manufacturers of similar drugs. When they are doing that, they 
take into account all of the pricing that is affected by their 
decisions.
    For example if Pfizer is negotiating Lipitor price with 
Express Scripts on behalf of some large client, say, General 
Electric or something like that, they know that if they are 
going to give an extra discount for that particular buyer and 
that discount becomes their lowest price, they are going to 
have to go back and reduce all their prices in Medicaid.
    While the dual eligible situation is a rather strange 
situation. Under your proposal, there would be more people who 
would be getting the Medicaid rebates. So, Pfizer and any other 
manufacturer when they are negotiating prices, would think 
about that, and they would know that when they are giving 
someone an exceptional discount, that exceptional discount is 
going to be very costly to them because of the Medicaid rebate. 
Consequently, they are not going to go as far in discounting 
prices, and that is more or less the logic that has been 
documented.
    Now the paper that I cited did not look explicitly at your 
proposal. It simply looked at what has been happening in the 
past.
    Senator Nelson. Well, let me give you the other side of 
that.
    Dr. Calfee. Sure.
    Senator Nelson. Had my amendment, and this is an academic 
discussion because it didn't pass. Had it passed, dual 
eligibles would get the same rebate when they got their drugs 
in Medicare that they were eligible to get those same prices 
under Medicaid. In fact, CBO scored it, and it would produce 
over $100 billion over 10 years. What we could have done with 
that is we could have filled the doughnut hole for seniors and 
had money left over to apply to the Federal deficit.
    Now here is what would have happened, Mr. Calfee. When you 
fill the doughnut hole, that means more people are going to get 
up into the catastrophic coverage up here. More people get up 
into catastrophic coverage, the pharmaceutical industry is 
going to sell more drugs, and as a result of that, the 
pharmaceutical companies are going to make more money as a 
result of saving the American taxpayer over $100 billion of 
paying less by Medicaid folks that are getting their drugs 
through this Medicare program.
    So, there are a lot of arguments that are common sense. We 
will have to see what comes out on the Internet tonight on the 
way that they are talking about filling this doughnut hole. But 
surely, one of the results is going to be more people will get 
that coverage like Ms. McKenna, or as Dr. Anderson had 
testified, they get into that doughnut hole. They can't afford 
it. They stop taking.
    You fill that doughnut hole that the Government is going to 
pay for it. It gets them on up into the catastrophic coverage, 
and at the end of the day, more pharmaceutical products are 
going to be available to more people.
    Now that is not a bad thing because these drug companies 
are doing wonderful things with some of the miracle drugs that 
they are coming out with. But at the end of the day, the drug 
companies are not going to be hurting. They are going to be 
making a lot more money.
    Mr. Hamilton.
    Mr. Hamilton. I don't know if you know this or not, but 
there is a precedent. What you are suggesting in a way has 
already been done. The Veterans Healthcare Act of 1992 has a 
program called 340B, and the 340B program provides drugs at 
basically the Medicaid discount to certain clinics and 
disproportionate share hospitals, and it is all outpatient drug 
stuff.
    But what that bill did, what that legislation did was 
basically take all the patients that were being treated at the 
outpatient facilities of disproportionate share hospitals--
there are about 105 of those in the country, plus all the 
clinics. They did all the inner-city clinics and such and 
county health facilities--and turn them all into Medicaid 
patients.
    So, consequently, when you are in a drug company--and Mr. 
Calfee is right--you do have to calculate if I give somebody a 
discount or a rebate, which amounts to a discount, then my 
Medicaid rebate is the amount of rebate per unit is going to go 
up. At the same time, your price to the 340B entities is going 
to go down.
    But we have already seen all those 340B entities added to 
basically what is the Medicaid population, starting back in 
1992, and that program actually is administered by the Office 
of Pharmacy Affairs that, in addition to taking the Medicaid 
rebate discount, they also negotiate prices so that it is 
another entity that has done basically what you are talking 
about with a different set of people.
    Senator Nelson. I want to ask Ms. McKenna, you had 
testified that when the drug that you were taking for diabetes 
was not available in the United States, your doctor first put 
you on another one. It didn't work out for you, and you 
realized that you needed to go back on the original drug. You 
then got approval so that you could get that drug from Canada, 
and you said it cost you $65, plus $10 shipping?
    Ms. McKenna. That is right.
    Senator Nelson. Now what was that compared to the price 
that you were buying it when it was available in the U.S.?
    Ms. McKenna. Two hundred thirty-nine dollars and ninety-
nine cents.
    Senator Nelson. Two thirty-nine, ninety-nine to 65. What 
was the name of that drug?
    Ms. McKenna. Novolin N. N-O-V-O-L-I-N N.
    Senator Nelson. Let me ask all of you, anyone, do you 
believe--hold up this chart. Since there is no limitation on 
what can be charged for the brand-name drugs for seniors, if 
tonight we find on the Internet that the President's proposal 
is that 75 percent of this is going to be covered for seniors, 
do you think the price of those drugs in the doughnut hole that 
are going to be more available to seniors because of the 
payment of 75 percent, with a senior paying 25 percent, do you 
think the price of those drugs are going to go up?
    Dr. Calfee. If you maintain the competitive Part D 
mechanism that you have right now, so that each individual PDP 
is competing with every other one in trying to gain sales from 
seniors, they will still have an incentive to negotiate lower 
prices. I think on the whole, all else being equal, if you 
increase Federal subsidies to that extent, which is a pretty 
big increase, it certainly isn't going to push prices down. It 
might push them up somewhat.
    I think that the existence of competition would tend to 
moderate whatever price increase there might be. If you 
eliminate that competition, then, yes, you are asking for big 
price increases.
    Dr. Anderson. Medicare beneficiaries are not buying some of 
these drugs because they can't afford them, and that may be 
that the pharmaceutical industry is saying we have got to keep 
our prices down in order to allow people in the doughnut hole 
to afford these drugs. If you make--if you reduce the price 
effectively to them, of course, the pharmaceutical industry is 
going to raise their prices, and they are going to raise it so 
that the beneficiary pays about the same amount as they are 
doing now. That would just be good economic sense on their 
part.
    Senator Nelson. Any other comments on anything that we have 
covered here?
    Mr. Dicken, are certain types of drugs more vulnerable to 
steep price increases for Part D beneficiaries?
    Mr. Dicken. Well, certainly, in the group of drugs that we 
looked at that were very high-cost drugs to begin with, we did 
see price increases that could be--I think the example that you 
cited was 46 percent over a 3- or 4-year period, and an average 
over 36 percent.
    We had also done a separate report looking at drugs that 
faced truly extraordinary drug price increases. These are drugs 
that went up 100 percent, literally doubling in price 
overnight, not a cumulative increase, but a one-time increase.
    The types of issues that we saw that led to those dramatic 
price increases were things like lack of therapeutic 
alternatives, and so that there was not enough competition in 
that market. There could be consolidation and mergers, and so 
the pricing strategies that manufacturers were using changed.
    In a few cases--this was not the typical--there were some 
unusual manufacturing issues such as disruptions in raw 
materials, or handling of hazardous materials that led to some 
of those very high increases. So those are the types of drugs 
that have had the most dramatic increases.
    Senator Nelson. Mr. Hamilton?
    Mr. Hamilton. When you are looking at controlling price 
increases, you could look at the Medicaid rebate program. The 
Medicaid rebate program calculates every quarter what is called 
the AMP, which starts when the drug is first marketed, and they 
add the CPI-U to that every quarter. Any increase above the 
CPI-U is added to the Medicaid rebate.
    So within the Medicaid rebate program, price increases are 
restricted to the CPI-U. Whether or not something like that 
could be done with Part D, I don't know. But it certainly works 
in the Medicaid rebate program.
    Senator Nelson. In the Senate-passed healthcare bill, the 
amount of the rebate for brand-name drugs is being increased 
for Medicaid from 15 percent to 23 percent, in addition to what 
you just stated about the increase of the differential between 
the health inflation cost and the Consumer Price Index cost.
    Now my question to you is what happened if we just changed 
the total Part D prescription drug, and we made it a rebate 
program like Medicaid drugs? What would happen to prices?
    Dr. Calfee. Well, my own view is that what would happen 
would be the same thing that happened with the Medicaid rebate. 
Manufacturers will take this discount into account when they 
are negotiating their own prices in the private sector, and 
those prices will tend to go up because every time they think 
about providing a discount, they will have to remember that 
there are several million Medicare patients whose prices will 
automatically go down along with whatever discount they are 
offering.
    So I think that it would tend to disrupt prices in the 
private market significantly.
    Senator Nelson. Even though the price of the drugs would be 
cheaper for Medicare beneficiaries, and therefore, there would 
be a lot more drugs sold?
    Dr. Calfee. Well, that is part of the mix, too. One of the 
more difficult things to predict is how much more you sell when 
that happens to prices. Gerry Anderson has a good point. There 
are some customers who right now don't buy drugs that would be 
bought if there were some subsidies.
    Estimating the magnitude of that can be pretty tricky. In 
general, if everyone is in Medicare, their drugs are being paid 
for by the Government, yes, that is going to increase demand. 
If there is a mandatory discount from private sector prices, 
then I think it would tend to push those private sector prices 
up.
    That is a little bit different from the last question you 
asked me which is what would happen to total sales and profits? 
That is a little bit trickier to answer.
    Senator Nelson. Dr. Anderson.
    Dr. Anderson. I think the problem here is that the private 
sector really can't negotiate drug prices very well. The CBO 
says this. The GAO essentially says this. MedPAC has said this. 
Basically, they are not able to get good discounts.
    So, Jack Calfee is correct. I mean, they may have to pay a 
little higher prices, but it is because they are not very 
effective negotiators with the drug companies in getting 
prices. They can get some more rebates, but they don't get 
lower prices. I think it is uniform that they just can't get 
lower prices for brand-name drugs. They do very well for 
generics. They cannot do it for brands.
    Senator Nelson. I thought in Economics 101, the free 
marketplace, competition, supply and demand, I thought we 
learned that the more that you bought in bulk, huge purchases, 
the more negotiating power that you had. Therefore, you could 
bring the price down by purchasing a lot of things instead of a 
few things.
    With regard to the purchase of drugs for ultimately a 
population of some 44 million seniors through the Medicare drug 
program, although that is not how many are in it now, that is a 
lot of negotiating power, and the private sector marketplace 
could function. But that is not the way it is, and that is not 
the way it was designed in the prescription drug law of 2003. 
So, we are where we are.
    You all have illuminated this complicated issue enormously. 
I am very grateful to you.
    Thank you all for being public servants and especially 
sharing your expertise with us today.
    The hearing is adjourned.
    [Whereupon, at 4:46 p.m., the hearing was adjourned.]
















                            A P P E N D I X

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       Mr. Anderson's Responses to Senator McCaskill's Questions

    Question. Importation: According to a Congressional Budget 
Office (CBO) cost estimate from 2007 importation of 
prescription drugs would have saved the government itself more 
than $5 billion from 2009 to 2017 by allowing it to purchase 
cheaper drugs for Medicare and Medicaid recipients. In 
addition, the legislation would have increased federal revenues 
by about $5 billion by reducing the cost of private health 
insurance, which would end up increasing the share of 
employees' salary that can be taxed. Should we not be pursuing 
this as an option? Can we afford not to do this? Are any of the 
pharmaceutical industry concerns related to safe reimportation 
legitmate? How do we do it safely and effectively?
    Answer. Drugs are made all over the world not just in the 
United States. The FDA already has a process to make sure that 
drugs made overseas are safe and effective. We should make sure 
that the drugs that are imported from places like Canada are 
the same drugs that are dispensed in the US already.
    We do not have any evidence that the drugs dispensed in 
Canada, the European Union or Australia and New Zealand have 
undergone any less rigorous testing or are any less safe than 
the drugs dispensed in the US. The only difference is that they 
are much less expensive. I discuss this in my written 
testimony.
    There are legitimate concerns that internet dispensing of 
drugs could be dangerous. This would apply to both internet 
dispensing in the US and in other countries. It is critical for 
the internet companies to demonstrate that they have 
appropriate safeguards in place to make sure that the correct 
drug in the correct dose is dispensed and that it is the drug 
is legitimate. Some of the recent robberies in the US of 
warehouses full of pharmaceuticals suggest that tighter 
surveillance in the US is also needed.
    Question. Role of Direct Marketing? (Only two countries--
New Zealand and the U.S. allow direct to consumer drug 
marketing) Drug company spending on direct to consumer (DTC) 
advertising has increased twice as fast as spending on 
promotion to physicians or on the research and development of 
new drugs. Advertising is known to cause many consumers to go 
to their doctor and ask for the advertised brand name 
medication. One study of physicians found that in 5% of the 
cases when patients requested specific medications after seeing 
an advertisement, physicians prescribed the medication to 
accommodate the patients request despite thinking that another 
drug or treatment option would be more effective. Clearly, that 
is wasteful. I am trying to get a handle on how much this 
practice represents in unnecessary spending by the federal 
government. Is there a credible estimate that you know of 
regarding the cost to the taxpayer because of Direct To 
Consumer advertising? What measures would you suggest we take 
to try to crack down on this waste?
    Answer. A study published in the New England Journal of 
Medicine in 2007 entitled ``A Decade of Direct-to-Consumer 
Advertising of Prescription Drugs'' by Julie M. Donohue, Ph.D., 
Marisa Cevasco, B.A., and Meredith B. Rosenthal, Ph.D. found 
that real spending on direct-to-consumer advertising increased 
by 330% from 1996 to 2005.
    I do not have an estimate of the cost to the taxpayer of 
direct to consumer advertising. From a research perspective 
this would be a very difficult number to develop since it would 
require estimating what would happen if direct to consumer 
advertising was not permitted--something where there is no 
data.
    Currently direct to consumer advertising for drugs is no 
different from direct to consumer advertising for hamburgers--
both attempt to make you feel good about the product and do not 
attempt to convey any factual information about the product. A 
simple suggestion would be for them to be required to 
demonstrate the efficacy of their product instead of 
demonstrating that the person taking the drug is able to walk 
with their husband or to play with their grandchild. Insist 
that the information that is being conveyed be factual not 
inferential.
                                ------                                


        Mr. Anderson's Responses to Senator Franken's Questions

    Question. Dr. Anderson, like most Minnesotans, I'm baffled 
by the wide variation in drug prices between countries. It's 
profoundly unfair that we continue to pay so much more for the 
same drugs. We invest billions of dollars in federal research 
and drug companies are making record profits. So it just 
doesn't make sense that all of the excess costs are going to 
research and development of new drugs. Can you please discuss 
the key factors that result in such wide price variation 
between countries?
    Answer. Direct Negotiation. Most other countries have 
direct negotiation with the drug companies and they pay \1/3\ 
to \1/2\ what the US pays for the same drugs. It is also well 
known that only 15-18 percent of the revenues that drug 
companies receive go for research and development.
    I have testified in the Senate Finance Committee and in the 
House Government Oversight Committee that we should have direct 
negotiation with the drug companies. There is no reason why the 
seniors in the US should be paying higher prices than other 
people in the US or in other countries.
    I would go a step further. I would have the federal 
government negotiate one price for all drug purchases. 
Currently the Medicare program has many different prices under 
Part D, the states have 50 different prices, the Public Health 
Service has a different price, the VA and DOD have different 
prices, and the prisons have their own prices. There is no 
reason why each government entity should be paying different 
prices when the funds all come from the taxpayers.
    Wide Variations in prices. We pay 2-3 times more for brand 
name drugs than other countries. The reason is quite clear. 
Other countries have direct negotiation with the drug companies 
and the US does not. The drug companies are able to negotiate 
better deals with multiple payors than with a single payor.
    We are the richest country in the world and as a result we 
may want to pay a higher amount than other countries. The 
amount should reflect our higher income and not our inability 
to negotiate a fair rate. If we as the richest country in the 
world can afford to pay more it would allow the drug companies 
to provide drugs to the poorest countries (e.g. Africa) at the 
marginal cost of producing the drugs.
    Question. Dr. Anderson recommends that Medicare increase 
transparency and begin to report to beneficiaries the amount 
the Part D plans actually paid. Can you please discuss changes 
we can make at the federal level to ensure that rebates accrue 
to consumers and not to middlemen?
    Answer. Middlemen. If the price transparency provisions 
that I recommended to the Senate Finance Committee were enacted 
it would be possible for the Secretary to protect the prices 
that individual drug companies negotiate with pharmacies and 
PBMs. What the Secretary would know is when a drug is much more 
expensive in Part D than it is in Canada or the VA. It would 
then ask the CEO of the company to explain the reasons for the 
price differential. If you had a top ten list (think David 
Letterman) of the most over priced drugs in Part D then it 
would be possible to put pressure on just these drugs. Since no 
drug company would want their drug on the top 10 list, the 
prices would drop in Part D.
    In that way you would not need to have middlemen getting 
the rebates instead of the consumers'.
                                ------                                


        Mr. Dicken's Responses to Senator McCaskill's Questions

    Question. Importation: According to a Congressional Budget 
Office (CBO) cost estimate from 2007 importation of 
prescription drugs would have saved the government itself more 
than $5 billion from 2009 to 2017 by allowing it to purchase 
cheaper drugs for Medicare and Medicaid recipients. In 
addition, the legislation would have increased federal revenues 
by about $5 billion by reducing the cost of private health 
insurance, which would end up increasing the share of 
employees' salary that can be taxed. Should we not be pursuing 
this as an option? Can we afford not to do this? Are any of the 
pharmaceutical industry concerns related to safe reimportation 
legitimate? How do we do it safely and effectively?
    Answer. We have not conducted work directly on the issue of 
cost savings and safety issues related to importation of 
prescription drugs. However, in a 2004 report we identified 
several safety concerns with prescription drugs obtained 
through Internet pharmacies located outside the United 
States.\1\ Specifically, GAO identified problems associated 
with the handling, Food and Drug Administration approval 
status, and authenticity of samples received from such 
pharmacies.
---------------------------------------------------------------------------
    \1\ GAO, Internet Pharmacies: Some Pose Safety Risks for Consumers, 
GAO-04-820 (Washington, D.C.: June 17, 2004).
---------------------------------------------------------------------------
    Question. Help in choosing the right plan: There are over 
1,000 different plans nationwide. In Missouri, there are just 
under 50 Part D plans to choose from. We know that there are 
widespread differences in benefits offered, copayments, 
formularies, donut hole coverage and so on. This makes it 
nearly impossible for seniors to choose the plan that is most 
cost-effective for them and in turn, most cost-effective for 
the government. In addition to frustration for seniors, these 
inefficiencies lead to significant wasteful spending. If 
seniors are not in the right plan, they enter into the donut 
hole faster, come out faster, and the taxpayers end up footing 
a higher bill. Ms. McKenna, I know that you suggest a grading 
system for plans, though I am not sure that such a system is 
detailed enough for individual seniors.
    Question a. Are there other suggestions for what can be 
done to get beneficiaries in the best plan?
    Answer. We have not conducted work that focuses on what can 
be done to get beneficiaries in the best Medicare Part D plans. 
As you may know, Medicare offers a Prescription Drug Plan 
Finder (http://www.medicare.gov/mpdpf) as a tool to help 
beneficiaries determine which plan best suits their needs based 
on their unique circumstances. Among other features, the Plan 
Finder allows beneficiaries to input lists of specific drugs 
that they take, and provides information about plan options 
based on these specific lists of drugs.
    While this tool provides specific information on 
beneficiaries' plan options, our work suggests that for certain 
beneficiaries--those taking high-cost drugs eligible for a 
specialty-tier--plan choice has only limited effects on out-of-
pocket costs. Across plans with different cost-sharing 
structures, out-of-pocket costs for these beneficiaries vary 
initially but then become similar if beneficiaries' out-of-
pocket costs reach the catastrophic coverage threshold, which 
was $4,350 in 2009.\2\
---------------------------------------------------------------------------
    \2\ The catastrophic coverage threshold is $4,550 in 2010.
---------------------------------------------------------------------------
    Question b. Also, it is my understanding that low income 
beneficiaries are automatically enrolled in a plan by CMS. By 
law, the assignment of a plan is random. Do any of you have a 
handle on how much the government could be saving simply by 
placing those beneficiaries into a more cost-effective plan, 
particularly since these are the highest cost enrollees?
    Answer. We have not conducted work on the potential savings 
from placing low-income subsidy beneficiaries into certain 
plans. However, in 2007, contractors produced a report for the 
Medicare Payment Advisory Commission that considers the 
potential impact on beneficiaries and the federal government of 
using random assignment for Part D plans compared to other 
options.\3\
---------------------------------------------------------------------------
    \3\ J. Hoadley, L. Summer, J. Thompson, E. Hargrave, and K. 
Merrill, ``The Role of Beneficiary-Centered Assignment for Medicare 
Part D,'' (special report prepared at the request of the Medicare 
Payment Advisory Commission), June 2007.
---------------------------------------------------------------------------
    Question. We have heard that the U.S. pays more than 
Canada, Europe and the rest of the world in general.
    a. What policies enable this and what policies could we 
enact to discourage this disparity?
    b. Have other countries seen the same increase in prices or 
is part of the rise in U.S. prices caused by cost shifting from 
other countries to the U.S.?
    Answer. A wide range of approaches is used by other 
countries, such as those affiliated with the Organization for 
Economic Co-operation and Development (OECD),\4\ to negotiate 
drug prices that include the following:
---------------------------------------------------------------------------
    \4\ The OECD includes 30 member countries that ``share a commitment 
to democratic government and the market economy,'' and OECD's work 
includes developing publications and statistics on economic and social 
issues.
---------------------------------------------------------------------------
    Ceiling prices restrict market negotiations by setting 
maximum prices purchasers can pay for drugs. Ceiling prices 
allow purchasers to negotiate lower prices directly with drug 
manufacturers.
    Reference prices use local or international price 
comparisons of drugs classified in a group as therapeutically 
similar to determine a single or maximum price for all drugs in 
that group.
    Profit limits establish controls on drug manufacturers' 
profits that require manufacturers to pay rebates or lower 
prices if profits exceed certain levels.
    Other factors--such as scope of coverage and national 
formularies, which are generally lists of preferred drugs--
influence drug price negotiations.\5\ We have not examined the 
effects of applying policies used in other countries to 
negotiate drug prices to the United States.
---------------------------------------------------------------------------
    \5\ GAO, Prescription Drugs: An Overview of Approaches to Negotiate 
Drug Prices Used by Other Countries and U.S. Private Payers and Federal 
Programs, GAO-07-358T (Washington, D.C.: Jan. 11, 2007).
---------------------------------------------------------------------------
    We have not conducted any recent work on drug pricing in 
other countries and cannot comment on the extent or causes of 
price increases in other countries.
                                ------                                


         Mr. Dicken's Responses to Senator Franken's Questions

    Question. Mr. Dicken, GAO did a 2009 study for the late 
Senator Kennedy comparing copayments for specialty medicines in 
private Part D plans to the Federal Employee Health Benefit 
Plan. It's my understanding that federal employees get 
specialty drugs for a copayment of $60 per month, while most 
Medicare Part D beneficiaries pay a percentage-based share of 
the cost. This can add up to hundreds, even a thousand dollars 
per month. As a member of Congress, I'm embarrassed that we're 
giving ourselves better coverage than our seniors get. Can you 
please comment on how this discrepancy occurs?
    Answer. We found that some plans participating in each 
program--the Federal Employees' Health Benefits Program (FEHBP) 
and Medicare Part D--use varying cost-sharing requirements for 
specialty-tier eligible drugs, with some using a fixed 
copayment and others using a percentage-based coinsurance. Both 
programs provide consumers with information on the plans cost-
sharing requirements to consider as they decide which plan to 
select during open enrollment. Also, while enrollees in 
Medicare Part D and FEHBP plans can be responsible for paying 
hundreds of dollars a month out-of-pocket, Part D plans have a 
catastrophic coverage threshold whereby Medicare covers most 
additional costs and nearly all FEHBP plans we studied have 
maximum out-of-pocket limits. However, for high-cost drugs such 
as those eligible for specialty tiers, the total annual out-of-
pocket costs for enrollees in FEHBP depends on the plan chosen, 
whereas for Medicare Part D beneficiaries, the total annual 
out-of-pocket costs are generally similar regardless of the 
Part D plan chosen.
    Specifically, GAO's 2009 correspondence to Senator Kennedy 
described the cost-sharing requirements and limits for 
specialty drugs covered by FEHBP plans.\6\ We found that 
enrollees in FEHBP plans were subject to varying cost-sharing 
requirements for the 18 specialty drugs we reviewed. Most FEHBP 
enrollees--more than 6.6 million of the nearly 7.8 million 
enrollees in the plans we reviewed (86 percent)--were generally 
subject to copayments that limit enrollee costs to about $55 on 
average for a 30-day supply of the drugs. Nearly 900,000 
enrollees (11 percent) were subject to coinsurance for more 
than 1 of the 18 specialty drugs, which required the enrollees 
to pay on average nearly 31 percent of the cost of the drugs. 
These FEHBP enrollees' coinsurance costs for specialty drugs 
were typically limited by per prescription dollar maximums or 
annual out-of-pocket limits, but depending on the plan, these 
varying requirements can result in a wide range of costs for 
enrollees for the same drug. For example, we estimate that 
under 3 different FEHBP plans with different cost-sharing 
requirements, an enrollee taking the multiple sclerosis drug 
Betaseron could pay $420 per year if subject to a copayment, 
$2,400 per year if subject to a coinsurance with a per-
prescription dollar maximum, or $6,000 per year if subject to a 
coinsurance with an annual out-of-pocket maximum.
---------------------------------------------------------------------------
    \6\ GAO, Federal Employees Health Benefits Program: Enrollee Cost 
Sharing for Selected Specialty Prescription Drugs, GAO-09-517R 
(Washington, D.C.: Apr. 30, 2009).
---------------------------------------------------------------------------
    Similarly, in our recent study on beneficiary out-of-pocket 
costs for certain high-cost drugs covered under Medicare Part 
D,\7\ we found that plans included in our sample of high-
enrollment plans from various regions offered a variety of 
cost-sharing structures for the specialty tier-eligible drugs 
in our sample, including flat copayments as well as various 
percentage-based coinsurance rates. However, in contrast to the 
variation in annual out-of-pocket costs in FEHBP, our analysis 
showed that various cost-sharing structures--whether copayments 
or percentage-based coinsurance--utilized by Part D plans in 
2006 through 2009 made very little difference in annual 
beneficiary out-of-pocket costs for beneficiaries using these 
drugs over an entire calendar year. Once Medicare beneficiaries 
reached the catastrophic coverage threshold of $4,350 in out-
of-pocket costs in 2009 ($4,550 in 2010), they generally paid 
only 5 percent of the negotiated drug price for the remainder 
of the year regardless of the plan selected.
---------------------------------------------------------------------------
    \7\ GAO, Medicare Part D: Spending, Beneficiary Cost Sharing, and 
Cost-Containment Efforts for High-Cost Drugs Eligible for a Specialty 
Tier, GAO-10-242 (Washington, D.C.: Jan. 29, 2010).
---------------------------------------------------------------------------
    Question. Mr. Dicken, in my opinion, a primary purpose of 
Medicare--and all insurance--is to protect Americans against 
unforeseen costs from an unexpected illness like cancer or 
multiple sclerosis.
    Do you think when seniors sign up for Medicare Part D that 
they truly understand the potential financial exposure they 
face if they get sick and end up needing a drug that's in a 
specialty tier?
    Answer. We have not conducted work on beneficiaries' level 
of understanding of specialty tier drug coverage under Medicare 
Part D. However, our testimony included information on the out-
of-pocket costs that one group of beneficiaries--those taking 
high-cost drugs eligible for a specialty-tier--may be subject 
to paying. Across plans with different cost-sharing structures, 
out-of-pocket costs for these beneficiaries may vary initially 
but then become similar if beneficiaries reach the catastrophic 
coverage threshold, which occurred in 2009 when total drug 
costs reached $6,153.75, with beneficiary out-of-pocket drug 
costs accounting for $4,350 of that total.\8\ After the 
threshold is reached, most beneficiaries are responsible for 5 
percent of any additional drug costs. For example, in 2009, 
beneficiaries responsible for full cost-sharing amounts who 
take drugs with a total negotiated price of $1,100 per month, 
or $13,200 per year, would face out-of-pocket costs of 
approximately $4,700, regardless of their plans' cost-sharing 
structures.
---------------------------------------------------------------------------
    \8\ In 2010, the catastrophic coverage threshold is reached when 
beneficiary out-of-pocket costs total $4,550.
---------------------------------------------------------------------------
                                ------                                


       Mr. Hamilton's Responses to Senator McCaskill's Questions

    Question. Importation: According to a Congressional Budget 
Office (CBO) cost estimate from 2007 importation of 
prescription drugs would have saved the government itself more 
than $5 billion from 2009 to 2017 by allowing it to purchase 
cheaper drugs for Medicare and Medicaid recipients. In 
addition, the legislation would have increased federal revenues 
by about $5 billion by reducing the cost of private health 
insurance, which would end up increasing the share of 
employees' salary that can be taxed. Should we not be pursuing 
this as an option? Can we afford not to do this? Are any of the 
pharmaceutical industry concerns related to safe reimportation 
legitimate? How do we do it safely and effectively?
    Answer. The safe importation of prescription drugs is an 
option to help lower US drug costs. However, how and/or if it 
can be safely accomplished is a science issue and beyond my 
scope.
    Question. We have heard that the U.S. pays more than 
Canada, Europe and the rest of the world in general.
    a. What policies enable this and what policies could we 
enact to discourage this disparity?
    b. Have other countries seen the same increase in prices or 
is part of the rise in U.S. prices caused by cost shifting from 
other countries to the U.S.?
    Answer. 2) I have had only limited experience with foreign 
market drug pricing and have no data on their price changes. 
Consequently , I do not believe I'm in a position to 
appropriately answer this question.
    Question. Role of direct marketing? (Only two countries--
New Zealand and the U.S. allow direct to consumer drug 
marketing) Drug company spending on direct to consumer (DTC) 
advertising has increased twice as fast as spending on 
promotion to physicians or on the research and development of 
new drugs. Advertising is known to cause many consumers to go 
to their doctor and ask for the advertised brand name 
medication. One study of physicians found that in 5% of the 
cases when patients requested specific medications after seeing 
an advertisement, physicians prescribed the medication to 
accommodate the patients request despite thinking that another 
drug or treatment option would be more effective. Clearly, that 
is wasteful. I am trying to get a handle on how much this 
practice represents in unnecessary spending by the federal 
government. Is there a credible estimate that you know of 
regarding the cost to the taxpayer because of Direct To 
Consumer advertising? What measures would you suggest we take 
to try to crack down on this waste?
    Answer. a) I am unaware of any estimate of the cost to the 
taxpayer because of Direct To Consumer Advertising. b) In a 
free market the cost would not be considered a waste. So, it's 
a question of lese fair vs free market politics.
    Question. Comparative effectiveness research. Drug 
companies have to prove that their drugs are safe and are 
better than a sugar pill to get approval, but the drug 
companies rarely compare their drugs to other drugs. What role 
does comparative effectiveness research have in making sure 
that doctors not only are prescribing a drug that works, but 
the best drug? Would this type of research just improve 
outcomes or would it also cut spending? Should we include price 
when comparing drugs against each other?
    Answer. a) I'm not sure- it's a science question. b) It 
could affect spending if it went beyond the science into 
pricing. c) If by ``we'' you mean the government, then we 
already do include pricing when comparing drugs against each 
other. Examples include Medicaid and the VA. Also, in the 
commercial market Pharmacy Benefit Managers (PBM'S ) include 
drug price in their formulary decisions.
                                ------                                


        Mr. Hamilton's Responses to Senator Franken's Questions

    Question. Mr. Hamilton AARP Minnesota held a series of 
teletown halls on health reform during the past year. More than 
92,000 Minnesota seniors participated and the single most 
common question they brought up was--why doesn't the federal 
government negotiate directly with pharmaceutical companies for 
Part D drugs? Can you please discuss the potential effects of 
direct negotiation on U.S. drug prices and what you think holds 
us back from adopting this policy?
    Answer. a) Direct negotiation by the government with drug 
manufacturers would result in a significant reduction in the 
cost of Part D drugs. b) I believe Mr.Calfee addressed the risk 
of such negotiations in saying he suspected the drug companies 
would respond by raising their commercial prices.
    Question. Mr. Hamilton, you mentioned that some price 
increases in Part D can be offset by rebates, but we're hearing 
that these rebates aren't getting back to consumers. Do we know 
if any portion of the rebates is getting back to beneficiaries?
    Answer. I do not know if any portion of rebates gets back 
to beneficiaries. It may (EG thru flat co pays), but it would 
be difficult to determine.
    Question. Mr. Hamilton, I'd like to ask you the same 
question--do you believe the increases were a response to the 
potential of federal health reform? If so, what can we do so 
drug companies don't retaliate against federal reform with 
runaway drug pricing?
    Answer. a) I can't read Pharma's collective mind, but given 
the facts and the timing it certainly appears the unusual price 
increases were in anticipation of federal health reform. b) 
Nothing short of government intervention (regulation).
                                ------                                


        Mr. Calfee's Responses to Senator McCaskill's Questions

    Question. You repeatedly warned of the danger posed by 
pushing prices down in government plans, arguing that prices 
elsewhere, primarily in the private sector, would 
correspondingly increase to compensate for lost profits from 
the government programs. This assumes an inflexibility for 
pharmaceutical industry business model and profits and 
secondarily implies that the U.S. government should contribute 
the bulk of the pharmaceutical industry's profit as opposed to 
other countries or the private sector. Do you have support that 
pharma's business model is as inflexible as you imply and if it 
is inflexible is there any reason why the U.S. government 
should fill the role as the primary profit center for this 
industry?
    Answer. This question is about how drug prices in the 
private sector adjust to prices paid by the federal government. 
In my testimony, I had not intended to suggest that 
pharmaceutical firms increase private sector prices to 
compensate for lower Medicaid prices. Rather, the Medicare drug 
price rebate mechanism penalizes manufacturers if they 
aggressively discount their prices in the private sector. This 
tends to keep private sector prices higher than they would 
otherwise be.
    Question. We have heard that the U.S. pays more than 
Canada, Europe and the rest of the world in general.
    a. What policies enable this and what policies could we 
enact to discourage this disparity?
    b. Have other countries seen the same increase in prices or 
is part of the rise in U.S. prices caused by cost shifting from 
other countries to the U.S.?
    Answer. This question is about international price 
disparities between the U.S. and Canada, Europe, and other 
nations. I am unaware of policies that the U.S. could pursue to 
attack these disparities directly, because those disparities 
are largely the result of price controls that are constructed 
in each of those nations. U.S. authorities have in the past 
pointed out to those nations that their price controls tend to 
suppress innovation (such as in speeches by then FDA 
Commissioner Mark McClellan and in a 2004 report on 
international pharmaceutical prices). Such appeals seem not to 
have an effect. The reason seems to be that each nation is 
aware that because pharmaceutical revenues in their own nation 
comprise only a small percentage of international revenues, 
their own price controls have minimal impact on drug R&D (which 
is performed in search of worldwide profits rather than profits 
in a single nation). I myself would be glad to see new 
proposals to address the impact of international price controls 
on pharmaceutical R&D.
    This question also asks whether foreign prices have 
increased apace with U.S. prices or firms have been raising 
U.S. prices in order to shift costs. Past research on 
international prices has usually found that foreign prices 
increase less rapidly than U.S. prices and sometimes decline as 
controls become tighter. But U.S. price levels are almost 
certainly not the result of cost shifting, but are simply 
reflect attempts to maximize prices (which as a general rule do 
not involve cost shifting).
    Question. Comparative effectiveness research. Drug 
companies have to prove that their drugs are safe and are 
better than a sugar pill to get approval, but the drug 
companies rarely compare their drugs to other drugs. What role 
does comparative effectiveness research have in making sure 
that doctors not only are prescribing a drug that works, but 
the best drug? Would this type of research just improve 
outcomes or would it also cut spending? Should we include price 
when comparing drugs against each other?
    Answer. This question asks about comparative effectiveness 
research on pharmaceuticals. First, CER could help assure that 
physicians prescribe the best drug for each patient, but there 
are limits to the ability of CER to achieve this result. It is 
very difficult to perform CER that provides valid results for 
current practice, which is continually changing as new drugs 
and new information about drugs become available. Also, CER 
often focuses on the average effects of competing drugs, 
whereas a drug that is equal or worse on average (in terms of 
efficacy, side-effects, or both) may still be better for some 
patients. Solid, timely CER could in principle both improve 
medical treatments and cut spending, but again, it is all too 
easy for CER to discourage the best treatments for some 
patients or to encourage cost-cutting that could work to the 
disadvantage of some patients. Finally, CER does not involve 
drug prices as opposed to clinical outcomes. Incorporating 
prices into CER would shift the research toward cost-
effectiveness analysis, which again can be very useful but is 
fraught with difficulties.
                                ------                                


         Mr. Calfee's Responses to Senator Franken's Questions

    Question. Mr. Calfee, in your testimony, you close by 
stating that the path forward to lower drug prices is unclear. 
I'd like to point out that from 1997 to 2007, retail 
prescription prices increased an average of 7 percent annually, 
much faster than the average inflation rate of 2.6%. During 
this same time, pharmaceutical companies increased their 
spending on direct-to-consumer advertising by an average of 65 
percent annually, spending $4.7 billion in 2007 alone. Of 
course, these companies have the right to advertise, but do you 
believe this is excessive?
    Answer. This question is about the relationship between 
drug prices and direct-to-consumer advertising. So far, 
econometric studies have failed to reveal a connection between 
DTC advertising and drug prices. This is not surprising. As the 
question points out, DTC advertising totaled $4.7 billion in 
2007, which is only a few per cent of total drug spending of 
perhaps $200 billion. With the possible exception of a few 
heavily advertised brands, it is most unlikely that consumer 
advertising could have a significant impact on prices. Also, I 
do think that DTC advertising is excessive. Not only is it 
quite small relative to the size of the market, it usually 
focuses on therapeutic classes that are often under-used, 
partly because consumers need to be made aware of, or be 
reminded of certain medical conditions for which drug therapy 
is effective.
    Question. Mr. Calfee, last April, the Wall Street Journal 
ran a story entitled ``Drug Makers, Hospitals Raise Prices.'' 
This article describes double digit increases compared to a 
year before on a dozen top-selling drugs. Then in November, a 
spokesperson from Merck was quoted in the New York Times 
stating that ``Price adjustments for our products have no 
connection to health care reform.'' Do you believe these 
increases were a response to potential federal health reform?
    Answer. This question asks whether drug prices were 
increased as ``a response to potential federal health reform.'' 
I have heard nothing from anyone in the industry on this topic. 
I would point out, however, that if manufacturers are already 
charging prices that are designed to make as much profit from 
innovative drugs as possible, there is probably little 
incentive to increase prices simply because a sweeping version 
of health care reform might be passed. Nonetheless, I have no 
way to plumb all the ways in which pharmaceutical firms might 
anticipate the highly varied effects that would come from 
comprehensive health care reform.
    Question. Mr. Calfee, I'm sure you're aware that the 
federal government invests significant funds in R&D. National 
Institutes of Health received more than $30 billion in 2010 
alone. Not every dollar goes for drug development but right 
now, Americans don't receive any direct return on these 
investments. Instead, the research is used to develop new 
products in the private market that make billions of dollars in 
profits. Your testimony doesn't mention the significant 
investment we make in R&D with taxpayer dollars. If you're 
making the argument that programs like Medicaid underpay for 
drugs, it's important to point out that most of these drugs 
wouldn't exist without the initial federal investment. Would 
you agree?
    Answer. This question is about private vs public returns 
from taxpayer investment in medical research by the National 
Institutes of Health. Much of that research eventually 
undergirds research that leads directly to new drugs. I would 
emphasize, however, that almost never does NIH actually develop 
a new drug all the way to FDA approval. Hence private industry 
is responsible for transforming NIH research into useful 
therapies. It is true that the public receives no ``direct 
return'' on NIH investments in the sense of manufacturer 
payments to the federal government. But research (including a 
book by Jena and Philipson published by the American Enterprise 
Institute) has demonstrated that the total benefits from 
pharmaceutical innovation are huge and that most of those 
benefits actually go to patients and payers rather than to the 
manufacturers. Nonetheless, I agree that NIH investment has 
been very important and valuable, not just to Americans but to 
residents of essentially every other nation.

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