[Senate Hearing 112-125]
[From the U.S. Government Publishing Office]


                                                        S. Hrg. 112-125
 
      A PRESCRIPTION FOR SAVINGS: REDUCING DRUG COSTS TO MEDICARE 

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

                                HEARING

                               BEFORE THE

                       SPECIAL COMMITTEE ON AGING

                          UNITED STATES SENATE

                      ONE HUNDRED TWELFTH CONGRESS


                             FIRST SESSION

                               __________

                             WASHINGTON, DC

                               __________

                             JULY 21, 2011

                               __________

                            Serial No. 112-7

         Printed for the use of the Special Committee on Aging


         Available via the World Wide Web: http://www.fdsys.gov

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                       SPECIAL COMMITTEE ON AGING

                     HERB KOHL, Wisconsin, Chairman

RON WYDEN, Oregon                    BOB CORKER, Tennessee
BILL NELSON, Florida                 SUSAN COLLINS, Maine
BOB CASEY, Pennsylvania              ORRIN HATCH, Utah
CLAIRE McCASKILL, Missouri           MARK KIRK III, Illnois
SHELDON WHITEHOUSE, Rhode Island     DEAN HELLER, Nevada
MARK UDALL, Colorado                 JERRY MORAN, Kansas
MICHAEL BENNET, Colorado             RONALD H. JOHNSON, Wisconsin
KRISTEN GILLIBRAND, New York         RICHARD SHELBY, Alabama
JOE MANCHIN III, West Virginia       LINDSEY GRAHAM, South Carolina
RICHARD BLUMENTHAL, Connecticut      SAXBY CHAMBLISS, Georgia
                              ----------                              
                 Debra Whitman, Majority Staff Director
             Michael Bassett, Ranking Member Staff Director






















                                CONTENTS

                              ----------                              

                                                                   Page

Opening Statement of Senator Herb Kohl...........................     1
Statement of Senator Bob Corker..................................     2

                           PANEL OF WITNESSES

Statement of Jonathan Blum, Deputy Administrator and Director, 
  Center for Medicare, Centers for Medicare and Medicaid 
  Services, U.S. Department of Health and Human Services, 
  Washington, DC.................................................     3
Statement of Philip Rosenfeld, M.D., Ph.D., Professor of 
  Opthamology, Bascom Palmer Eye Institute, Miami, FL............    19
Statement of Anthony Adamis, M.D., Vice President, Global Head of 
  Opthamology, Genentech, Inc., South San Francisco, CA..........    21
Statement of Sean Tunis, M.D., MSc., Founder and Director, Center 
  for Medical Technology Policy, Baltimore, MD...................    23
Statement of Lisa Swirsky, Senior Policy Analyst, Consumers 
  Union, Washington, DC..........................................    25
Statement of Scott Gottlieb, M.D., Resident Fellow, American 
  Enterprise Institute, Washington, DC...........................    27

                                APPENDIX
                   Witness Statements for the Record:

Jonathan Blum, Deputy Administrator and Director, Center for 
  Medicare, Centers for Medicare and Medicaid Services, U.S. 
  Department of Health and Human Services, Washington, DC........    42
Philip Rosenfeld, M.D., Ph.D., Professor of Ophthalmology, Bascom 
  Palmer Eye Institute, Miami, FL................................    53
Anthony Adamis, M.D., Vice President, Global Head of 
  Ophthalmology, Genentech, Inc., South San Francisco, CA........    61
Sean Tunis, M.D., MSc, Founder and Director, Center for Medical 
  Technology Policy, Baltimore, MD...............................    69
Lisa Swirsky, Senior Policy Analyst, Consumer Union, Washington, 
  DC.............................................................    79
Scott Gottlieb, M.D., Resident Fellow, American Enterprise 
  Institute, Washington, DC......................................    83

                    Additional Committee Documents:

``Prescription Drug Prices: Findings from International 
  Comparisons and a Domestic Story,'' A Report of the Majority 
  Staff of the Special Committee on Aging........................    97

            Additional Statements Submitted for the Record:

Senator Robert P. Casey, Jr. (D-PA)..............................   109
Senator Jay Rockefeller (D-WV)...................................   111
Senator Mark Udall (D-CO)........................................   114
Academy of Managed Care Pharmacy, Alexandria, VA.................   115
Alliance for Aging Research, Washington, DC......................   118
AMD Alliance International, Woodstock, MD........................   121
National Community Pharmacists Association, Alexandria, VA.......   124
National Venture Capital Association, Arlington, VA..............   129


      A PRESCRIPTION FOR SAVINGS: REDUCING DRUG COSTS TO MEDICARE

                              ----------                              


                        THURSDAY, JULY 21, 2011

                                       U.S. Senate,
                                Special Committee on Aging,
                                                    Washington, DC.
    The Committee met, pursuant to notice, at 2:08 p.m. in Room 
SD-106, Dirksen Senate Office Building, Hon. Herb Kohl, 
Chairman of the Committee, presiding.
    Present: Senators Kohl [presiding], Whitehouse, Udall, 
Manchin, Blumenthal, Corker, and Kirk.
    Also Present: Senator Brown.

        OPENING STATEMENT OF SENATOR HERB KOHL, CHAIRMAN

    The Chairman. Good afternoon. This hearing will come to 
order, and we thank you all for being here.
    As we all know, rising health care costs are threatening 
our economy. While the health care reform bill of last year was 
a start, it certainly has not done enough to address costs at 
this point. We need to do more, and we need to look at every 
option as we seek to provide quality care for all Americans at 
a cost that we can afford.
    According to testimony provided by the Special Committee on 
Aging by the Organization for Economic Cooperation and 
Development, OECD, in 2009 the average price of pharmaceutical 
drugs in the U.S. was 30 percent higher than in the other 30 
OECD countries. These are the most advanced and developed 
countries.
    Another study found, the McKinsey study, that the 
difference in price may actually be as high as 50 percent 
between what we charge for pharmaceutical drugs here in this 
country versus those other 29 countries.
    As I'm sure we can all agree and understand, rising health 
care costs are hurting America's global competitiveness and are 
a drag on family wages as potential increases have been used to 
pay for the rising costs of health care and prescription drugs 
instead of augmenting the wages of our working families.
    In 2010, the American people spent more than $300 billion 
on prescription drugs, and a third of that was paid for by 
Medicare and Medicaid. Left unchecked, these costs threaten our 
country, our economy, and every American family, and we all, I 
think, would agree that this kind of a condition is not 
acceptable.
    Today's hearing will focus on one aspect of health costs, 
namely prescription drugs, and provide an opportunity to talk 
about possible solutions. The committee will also release an 
investigative report that indicates that drug companies charge 
American consumers more because we lack the negotiating power 
used by other countries.
    We already have prescription drug programs in place which 
do cut costs through negotiation, including the Veteran's 
Administration and a program in Wisconsin called Senior Care, 
and we should look, I believe, to emulate those examples.
    The 91,000 beneficiaries enrolled in Senior Care in my 
state cost the Federal government a third of what it would cost 
for them to be enrolled in Medicare Part D with the same 
benefits.
    By negotiating prices, Senior Care in Wisconsin did save my 
constituents $80 million in 2010. The VA demands a minimum 
discount of 24 percent on wholesale drug prices. If Medicare 
were able to save 24 percent, taxpayers would then save more 
than $350 billion over 10 years.
    We also need to look at giving the government the ability 
to address sizeable price differences between drugs that are 
similarly effective. The National Institutes of Health recently 
sponsored a lengthy comparative clinical trial between two 
highly effective drugs used to treat macular degeneration, a 
condition that often causes blindness among seniors. The trial 
found that both drugs worked equally well in treating this 
condition. However, one cost $2,000 a dose, while the other 
cost $50. So we will be hearing testimony today about these two 
drugs on which Medicare is spending more than a billion dollars 
a year.
    Today we'll be releasing a number of additional cost 
savings policy options suggested by experts to hugely reduce 
prescription drug costs. Some of these options would save 
billions, while others would be more modest. These options 
include ways to increase transparency and expand discount 
programs and reduce the financial incentives for doctors to 
prescribe the most unnecessary or expensive drugs.
    This morning, the Judiciary Committee passed on one of 
these bipartisan proposals which would limit delays in getting 
generic prescription drugs to consumers. Several of our 
witnesses will discuss how these and other policies result in 
lower costs without sacrificing access, choice, or quality of 
care. I urge my colleagues to be open to considering all of 
these ideas, and I hope that together we can put additional 
solutions on the table.
    We thank you all again for being here today.
    And now we turn to the ranking member of this committee, 
Senator Bob Corker.

                STATEMENT OF SENATOR BOB CORKER

    Senator Corker. Mr. Chairman, thank you for having the 
hearing, and I want to thank all of our witnesses who are here. 
I know that we have two panels. We had expected actually 
numbers of Senators on both sides of the aisle, and in order 
that we not have a lot of long, drawn-out opening comments, I'd 
rather hear from the witnesses. I'm not going to make an 
opening statement.
    I will say that I think all of us are concerned about the 
cost of prescription drugs. Obviously, we may have differing 
views as to how to solve those, but I think that's the purpose 
of our hearing today. I look forward to hearing the witness 
testimony and thank the chairman for calling the hearing.
    The Chairman. I thank you very much, Senator Corker.
    Senator Kirk, do you have a comment or two to make?
    Senator Kirk. I do not, Mr. Chairman. I'll be brief, and 
let's go.
    The Chairman. Thank you very much.
    So now we turn to Panel 1 and our one witness. He is 
Jonathan Blum, the Deputy Administrator and Director of 
Medicare at the Centers for Medicare and Medicaid Services. Mr. 
Blum previously served at the Office of Management and Budget, 
and for the Senate Finance Committee. Mr. Blum is also the 
former vice president of Avalere Health.
    We welcome you back, and we look forward to your testimony. 
Go right ahead.

STATEMENT OF JONATHAN BLUM, DEPUTY ADMINISTRATOR AND DIRECTOR, 
    CENTER FOR MEDICARE, CENTERS FOR MEDICARE AND MEDICAID 
    SERVICES, U.S. DEPARTMENT OF HEALTH AND HUMAN SERVICES, 
                         WASHINGTON, DC

    Mr. Blum. Chairman Kohl, Ranking Member Corker, Senator 
Kirk, thank you for the opportunity to talk about Medicare's 
payments for prescription drugs.
    All four parts of the Medicare program, Part A, Part B, 
Part C, and Part D, pay for drugs in some form or fashion. All 
use different payment systems under different statutory 
authorities and frameworks.
    I'd like to focus today on payments for drugs under our 
Part B and Part D payment systems, the two payment streams that 
receive the most policy attention.
    All of our payment systems for drugs are similar in one 
respect. The Medicare program does not reimburse drug 
manufacturers directly for drugs provided to Medicare 
beneficiaries. Instead, Medicare pays physicians, hospitals, 
dialysis facilities, and insurance plans, who in turn purchase 
drugs or pay a pharmacist for drugs provided to Medicare 
beneficiaries. That is, we have no direct payment relationship 
with drug manufacturers.
    Under Medicare Part B, the most common payment for drugs is 
to physicians who provide drugs to their patients. The program 
also pays outpatient hospital departments for drugs provided 
during outpatient procedures such as chemotherapy drugs, and 
dialysis facilities for drugs provided in the context of 
dialysis care.
    The Congress has authorized the Part B program to pay for 
only certain drugs through Part B. These drugs include drugs 
administered by a physician or under the supervision of a 
physician; drugs provided through durable medical equipment 
such as nebulizers or IV pumps; and drugs that are directed by 
statute. These include certain drugs provided to dialysis 
patients, oral cancer drugs, and certain vaccines.
    The Part B program covers about 800 drugs total that fall 
under these three categories. In 2010, CMS spent $12.5 billion 
for Part B-covered drugs, and the CMS actuaries project that 
total spending for these drugs will double over the next 10 
years.
    Today's spending for Part B drugs is highly concentrated in 
a relatively few number of drugs. Thirteen drugs account for 
half of the total spending. About $6.25 billion is comprised of 
13 drugs, and the top spending drug is Lucentis, that accounted 
for 16 percent of total Part B drug spending.
    Congress reformed the payment system for these drugs in 
2005, or most of these drugs in 2005. Prior to 2005, Medicare's 
payments for these drugs were based on the so-called average 
wholesale price, or the sticker price. There were numerous 
studies finding that payments to physicians under this pricing 
system far exceeded physicians' own costs to purchase the 
drugs. This created a payment spread for physicians.
    Congress changed the system in 2005. CMS now uses a system 
based upon the average sales price, or ASP. The ASP is the 
average of each manufacturer's sales price net of most 
discounts and rebates and other price concessions. The ASP 
accounts for most sales from manufacturers to entities in the 
U.S. who purchase the drug from the manufacturer.
    CMS, for the Medicare Part B program, pays physicians who 
administer these drugs a payment of ASP plus 6 percent.
    The Part D prescription drug program works somewhat 
differently. Private insurance plans compete to provide 
outpatient drug coverage to beneficiaries who choose to 
participate in the Part D drug program. CMS contracts with 
hundreds of drug plans which must meet program requirements.
    Virtually all Part D plans build their own drug formularies 
or lists of preferred and non-preferred drugs. CMS must approve 
plan formularies, and plans must cover at least two drugs in 
each therapeutic class, and the formularies must be deemed by 
CMS not to discriminate.
    Today, Part D plans cover more than 6,000 drugs, and the 
average Part D private plan formulary includes about 1,000 
drugs on average. CMS pays Part D plans a fixed monthly payment 
which is based upon the average premium bid of all 
participating Part D plans. Medicare also provides other 
payments to these Part D plans to offset the insurance risk 
that these plans bear, and Part D plans that enroll low-income 
beneficiaries receive greater subsidies from the Medicare 
program.
    According to the CMS actuaries, total Part D costs were 
about $62 billion in 2010, and the CMS actuaries project that 
total Part D spending will rise to $156 billion by 2020, an 
average growth rate of about 10 percent per year.
    The rising cost of drugs will consume a greater overall 
share of Medicare spending over the next 10 years. This 
spending growth will require all of us to work together to 
ensure that costs remain affordable while maintaining access to 
necessary treatments.
    I'd be happy to answer your questions.
    [The prepared statement of Jonathan Blum appears in the 
Appendix on page 42.]
    The Chairman. Thank you, Mr. Blum. I'm sure you are 
familiar with the general fact that many of these prescription 
drugs are available in other countries for much less than what 
they cost here in the United States. Why do you think this is 
so?
    Mr. Blum. Well, I think a couple of reasons. One is that 
the public programs, Medicare and Medicaid, operate our payment 
systems according to very strict statutory formularies. 
Different countries use other payment mechanisms. We have a 
policy within CMS not to require formularies. Private Part D 
plans are able to implement formularies. So we have different 
statutory frameworks than I think other countries can operate 
under.
    The Chairman. Well, would that suggest that, in a sense, 
we're shooting ourselves in the foot?
    Mr. Blum. Pardon me. I don't understand the question.
    The Chairman. Would that suggest that we are making 
mistakes in how we operate our programs here in this country if 
our goal is to provide the product at the least possible cost?
    Mr. Blum. Well, I think one thing that we observe within 
both the Part B and the Part D payment systems is that when 
drugs have competition, meaning they have generic alternatives 
or they have multiple drugs competing in the same therapeutic 
class, we see much more pricing pressure. We see less pricing 
pressure for drugs that don't have competition, that don't have 
generic substitutes. So I think that's one observation.
    And I think to CMS' observation, when we have competition 
for drugs in particular classes, when we have generic 
alternatives, we see greater pricing pressure through both the 
Part B payment system and also the Part D payment system.
    The Chairman. Mr. Blum, as you know, I sent your agency a 
letter yesterday requesting that Medicare ensure that Avastin 
is available to all patients who choose to use it as a 
treatment for macular degeneration. As you note in your 
testimony, Avastin was recently shown by an NIH trial to be 
similarly safe and effective to Lucentis. I hope that CMS will 
bring immediate attention to this matter and make an 
affirmative national coverage decision for Avastin.
    Mr. Blum. We currently cover both drugs. Both drugs are 
covered through the Part B program. We note that the majority 
of physicians that treat this condition choose to use Avastin. 
Lucentis is an on-label drug, and the Avastin for the condition 
that you're concerned about is an off-label marketed drug. CMS 
currently pays for both drugs, and physicians have the option 
to use both drugs.
    But while the majority of physicians use Avastin, a vast 
majority of the spending is for Lucentis, a higher priced drug 
through our payment system.
    The Chairman. Why doesn't CMS obtain discounts on the much 
more expensive drug, Lucentis?
    Mr. Blum. We don't have any authority to do so under our 
current law. The pricing system is based upon the average sales 
price, which takes into account more or less the private 
purchasers of these drugs. I think what is true is that for 
Lucentis, this is a condition that's particularly focused 
within the Medicare program that I believe about 75 percent or 
so of the drug is delivered to Medicare beneficiaries through 
our fee-for-service program.
    But the statutory construct is such that CMS pays based 
upon the average sales price, but we also note that the 
Medicare program is by far the largest part of the spending for 
this particular drug.
    The Chairman. Thank you very much, Mr. Blum.
    And now we turn to Senator Corker.
    Senator Corker. Thank you, Mr. Blum, for being here and for 
your testimony.
    You mentioned that Part D plans negotiate rebates, and 
there's been some legislation put forth by a couple of Senators 
looking at that ceiling issue and other kinds of things that 
introduce Medicaid-style drug rebates into Medicare Part D. Is 
that something you support or do not support?
    Mr. Blum. Well, I think what the President has said is that 
he is open to all ideas in the context of the debt ceiling 
discussions. In April, the President put out a framework----
    Senator Corker. I was asking you specifically, since this 
is what you do, whether you support Medicaid-style rebates or 
not. I understand what the President may or may not----
    Mr. Blum. Sure. Well, as an official of CMS, I have to 
support the official position of the administration.
    Senator Corker. So did the President take a position on 
Medicaid-style rebates?
    Mr. Blum. I think what the President said is that he's open 
to all ideas in the context to reduce overall costs, both in 
the Medicare----
    Senator Corker. Just sort of let me move away from the 
talking points. Do you, as an official that deals with health 
care issues on the issue of prescription drugs, which is why 
we're all here, do you or do you not support Medicaid-style 
rebates for Medicare Part D?
    Mr. Blum. I believe that the Medicare program has proven 
successful in lowering drug costs through competition. I also 
believe that there are certain drugs that are provided through 
the Medicare program that don't have as much competition, and 
there are more opportunities for us to reduce costs.
    Senator Corker. So I think what you're saying is in the 
overall Medicare Part D program, you think it's worked pretty 
well. There may be some isolated cases where you would 
recommend a different type of approach.
    Mr. Blum. I believe that the Congressional Budget Office 
has scored a policy that would require Medicaid-level rebates 
for certain drugs at about $120 billion savings for the next 10 
years. The President has said that he's open to all ideas and 
offered that as one suggestion to reduce overall Medicare 
spending.
    Senator Corker. Would it make any sense in those areas to 
maybe have the same type of competitive structure that we have 
in Medicare Part D now?
    Mr. Blum. In terms of the parts of the program? We know 
that when we structure competition in parts of the program, 
like durable medical equipment, that we get lower costs, get 
better prices for both the beneficiaries and for taxpayers. The 
Part D program in general has produced much lower Part D 
premiums than I think our actuaries had predicted when the 
program was enacted.
    But at the same time, in order to get competition, you have 
to pick winners and losers. In cases where there aren't 
alternatives or there isn't competition for products or 
suppliers, it's very difficult to get lower prices through 
competition. Where you have lots of choice and you have lots of 
suppliers, like in the durable medical equipment context, or in 
the Part D plan context where we have 25 or 30 stand-alone drug 
plans competing in the same market, we see that competition 
produces good results. In the cases where we have a single item 
for a single product, it's very hard to get lower prices 
through competition.
    Senator Corker. Thank you. I think, again, to restate what 
you're saying is Medicare Part D works really, really well as 
far as the competition goes in lowering prices for seniors, but 
there are some isolated cases where when only one type of drug 
is available, we might look at some other ways of dealing with 
that.
    Mr. Blum. The total cost of Part D is certainly lower I 
think than the actuaries for the Congressional Budget Office 
estimate. I think part of that is that we have seen much more 
rapid generic diffusion through the Part D program than I think 
the actuaries would have said. I can't speak for the actuaries, 
but I think what they would say is that the main reason we're 
seeing lower costs than expected is that we have much more 
generic competition and diffusion than they had predicted back 
in 2003 when the benefit was enacted.
    We also see robust premium competition for Part D plans, 
and we see beneficiaries gravitate to the plans that offer the 
most competitive premiums.
    So I think to my observation, the number one reason why 
Part D costs remain low is that we have more generic use 
through the Part D program than in other payment systems, but 
we also see very robust premium competition for Part D plans, 
and we have a very rich market.
    Senator Corker. Thank you. That's quite an endorsement.
    Let me ask you, on the Medicaid programs in general where 
we have a different type of situation, we've seen tremendous 
cost increases on the prescription drug side of Medicaid, which 
has a very different type mechanism. Is that not true?
    Mr. Blum. My observation is that when you compare Medicaid 
paid net prices to other purchasers, that oftentimes Medicaid 
is a lower price. I don't know the reasons why Medicaid drug 
spending is growing like you say, but I would guess that most 
of that growth is due to the fact that we have more 
beneficiaries in the program, not necessarily higher prices for 
prescription drugs.
    Senator Corker. I see my time is up, and I thank you again 
for answering the questions the way you have. I appreciate it.
    Mr. Blum. Thank you.
    The Chairman. We turn now to the Senator from Ohio, Sherrod 
Brown.
    Senator Brown. Thank you, Mr. Chairman, and Ranking Member 
Corker. I appreciate especially being here at the request of 
the chairman because I'm not on this committee, and I 
appreciate the opportunity to share some information and ask 
you something.
    I first appreciate the chairman's work on Avastin/Lucentis.
    I want to bring another issue to you on a progesterone 
called P17, marketed by KV Pharmaceuticals out of St. Louis as 
a drug called Makena. I think you know the story, that for 
several years women, at the cost of $10 to $20 a dose and 20 
doses, 20 weeks once a week of a shot they get typically in a 
hospital or doctor's office. So the cost overall of $200 or 
$300 for the whole regimen of this P17 progesterone has 
dramatically cut the rate of low birth weight babies born in 
this country. Medicaid pays for about 42 percent of the 
nation's more than 4 million annual births. Twelve percent of 
live births involve a preterm baby.
    So compounding pharmacists were making these drugs. Often 
one in a community or in a major city hospital or whatever were 
producing these drugs, and women's lives or babies' lives were 
saved in many cases. Babies were born full course, full term 
much more often.
    KV Pharmaceuticals, a company I'd not heard of before this, 
went to FDA, got approval for exclusivity for seven years. They 
raised this $10 to $20 a dose for 20 weeks, $200 to $300, $200 
to $400, to $1,500 a dose times 20. Do the math. Under pressure 
from many of us, they dropped the price to $690. That's still a 
significant public health problem. Call it greed, call it 
gaming the system, call it what you want, it's a significant 
public health problem.
    It's also a significant insurance company and Medicaid/
taxpayer problem.
    We have seen a similar kind of gaming the system on a drug 
called Colcrys, as you know, treating gout. It used to be 4 
cents a pill. After URL Pharma went to get FDA approval, the 
price went from 4 cents a pill to $5 a pill. Gout is a serious 
problem for a lot of people in this country.
    My question is--oh, one more thing. The FDA--oh, I'm sorry. 
Yes, the FDA did something that is highly unusual. FDA, when KV 
Pharmaceuticals sent a cease and desist order to compounding 
pharmacists all over America, the FDA stepped in and said we 
will not enforce that cease and desist order, implicitly saying 
carry on and keep compounding this drug.
    Now, there is not a public safety issue here. There's never 
been any accusation the compounding pharmacies, pharmacists and 
pharmacies have contaminated this drug, have made it in a way 
that's not safe for these women, never that I've read any 
accusation about that.
    So my question is what do you do about this? On Colcrys, on 
Makena, it's such a public health issue, it's such a taxpayer 
issue where even today, after CMS or--I'm sorry, after FDA 
stepped in, only three states, according to the American 
College of Obstetricians and Gynecologists, only three states 
are solely covering 17P. Five are covering only Makena. Twenty 
are covering both. So if the physician is not on her toes here, 
and if the ultimate buyer of this drug or the user of this drug 
or the hospital is not paying enough attention, they're paying 
more like $690 a dose instead of the $10 to $20 that 
compounding pharmacists are still making this for.
    What is your role and what is CMS really going to do to 
make sure the public health isn't at risk and taxpayers aren't 
paying billions of dollars more, whether it's Colcrys, whether 
it's Makena, whether it's the next drug that some 
opportunistic--I won't use the word ``greedy'' but 
opportunistic drug company decides to move forward on?
    Mr. Blum. A couple of observations on the examples that you 
raised. I think it shows that when a drug or a product that 
doesn't face competition from other products or generics, that 
they can exercise monopoly pricing power, and that's the 
incentive to do so.
    So I think one thing that CMS and every other part of the 
public health infrastructure needs to do is to ensure that we 
create consistent and quick pathways consistent with the law to 
generics to ensure that we have competition. But outside of----
    Senator Brown. That's not--sorry to interrupt. That's not 
good enough here because they have seven years of exclusivity. 
So that's an answer in some cases. I don't think it's an answer 
to the chairman's issue, and it's certainly not an answer to 
these two drugs.
    Mr. Blum. I think, in complete frankness, Senator, the 
authorities that you're suggesting aren't authorities that CMS 
has today. If Congress would like CMS to exercise those 
authorities, the law would have to be changed in order for us 
to do so.
    Senator Brown. You have no role in negotiating drug prices 
in that narrow window?
    Mr. Blum. No part of my testimony said that our payment 
systems don't tie to drug manufacturers directly. CMS pays 
physicians. CMS pays drug plans. CMS pays hospitals, who in 
turn purchase drugs, and our payment systems are set based upon 
very tight statutory constructs. So, today, CMS does not have 
any negotiating authority directly with drug manufacturers.
    Senator Brown. Thank you, Mr. Chairman, for your time. 
Thank you.
    The Chairman. Thank you very much, Senator Brown.
    Now we turn to Senator Kirk.
    Senator Kirk. Thank you, Mr. Chairman. Thank you for having 
me on this committee.
    I'd like to raise--I've got a chart here. I'd like to raise 
an issue with regard to IPAB, the Independent Payment Advisory 
Board, and the British equivalent, the National Health Service. 
Their equivalent of IPAB is called the National Institute for 
Health and Clinical Excellence, called NICE.
    And what I'm worried about is NICE is not so nice, 
generating clinical outcomes significantly worse for patients 
who are unfortunately under its jurisdiction rather than 
American seniors, who are under Medicare.
    When you look at several of the indicated medicines that 
are available, you see, for example, in postmenopausal women, 
Herceptin is indicated and is available under Medicare for 
treatment. But NICE denies this, and that would total about 
46,000 women in the United Kingdom that are not allowed 
Herceptin because a British bureaucrat has said to all British 
doctors, under every circumstance, no matter what your clinical 
judgment regarding this patient is, you may not provide this. 
Luckily, we still give this freedom to U.S. physicians.
    For liver cancer, the indicated treatment may be Nexavar. 
And in England, the NICE bureaucrats have now denied authority 
for all British physicians to provide this.
    This may be one of the reasons why the United Kingdom now 
ranks 16th out of 18 EU states in cancer survival in this area. 
They simply are dying, and part of the reason might be that 
what is indicated and especially could be provided by a 
physician under Medicare is not allowed.
    In colorectal cancer, we all understand Avastin, and 
Avastin has been shown as being clinically indicated to cut off 
the blood supply of a tumor. For Americans suffering from 
kidney cancer, they may be prescribed with Affinitor. Affinitor 
is indicated if the other drugs are not working, and it has 
also been helpful when you have a transplant. It helps the body 
accept this.
    In the case of British patients, they are denied Affinitor 
and its benefits.
    Probably a bigger disease, leukemia, the cancer of white 
blood cells, for Spyrocel, this is used if Gleevec is not seen 
as effective. American physicians under Medicare are allowed to 
do this. NICE under the NHS then denies all care for this.
    And then for lung cancer, Tarceva, which is used for small 
cell cancer if other chemotherapy fails, and also in pancreatic 
cancer, denied.
    Here's my question. What is going to prevent IPAB from 
metastasizing--and I use that word directly--into NICE? Because 
I think for many Americans, we go to England, especially on 
holidays, and normally an American will not get on a plane and 
leave the United States for a holiday unless they're in a good 
health status. And so Americans' personal experience with the 
NHS is minimal to none.
    I lived and worked in Britain for three years, and I can 
tell you my first experience inside a British hospital was 
shocking as to its level of physical infrastructure, some 
hospitals being not improved or expanded since the blitz, and 
then the denial of care and lack of technical expertise, as 
opposed to what I saw at Evanston Hospital near my own town.
    What actions are you taking to make sure that IPAB can 
never metastasize into NICE?
    Mr. Blum. I think a couple of things. One is that as the 
Affordable Care Act structured the IPAB, that it was structured 
as an independent body from CMS. And I think that the goal, as 
I understand it, of the legislation was to create mechanisms to 
ensure that overall costs of the Medicare program and other 
parts of the health care system remain affordable. And I think 
we can all agree that the ultimate goal is to ensure that per 
capita cost growth remains affordable to ensure that the 
Medicare program remains strong, and for current 
beneficiaries----
    Senator Kirk. Wait, wait. When you lay out that mission, 
NICE's view is NICE is connected to a bankrupt government. The 
British government has almost as many debt loads as we do. And 
so the bureaucrats then use comparative effectiveness research 
to then support the kind of decisions that I just laid out that 
then deny care, driving cancer survival rates in Britain to the 
lowest in the EU.
    Mr. Blum. Sure. Well, my understanding of the legislation 
is that the IPAB provides recommendations to the Congress. 
Congress has the right to choose to accept those 
recommendations or not. The Congress can overrule those 
recommendations.
    Senator Kirk. And then this is regardless of what a 
physician thinks is indicated for their patient. What if the 
physician disagrees with what IPAB recommends?
    Mr. Blum. Well, I think a couple of things. One is that the 
IPAB legislation, consistent with the Medicare framework today, 
I believe prohibits coverage decisions or any coverage decision 
from factoring costs to those coverage decisions. So I think 
the chart that you're suggesting suggests that NIHCE takes into 
account cost considerations for particular drugs.
    The current coverage authority that CMS operates under in 
the Medicare program does not allow us to consider cost in 
making coverage decisions, and I believe the IPAB legislation 
doesn't change that framework that we currently operate under 
today.
    Senator Kirk. Mr. Chairman, I would just say I'm highly 
worried that before the legislation we didn't even have an 
IPAB. Now we have an IPAB, and I think its goal inevitably will 
be to metastasize into what the British have.
    Thank you, Mr. Chairman.
    The Chairman. Thank you, Senator Kirk.
    Now we turn to Senator Udall.
    Senator Udall. Thank you, Mr. Chairman.
    I listened to my colleague from Illinois with interest.
    I do understand, Mr. Blum, that if the IPAB recommendations 
are not acceptable to the Congress, we can simply override them 
with our own ideas and our own proposals about how to contain 
costs. Is that correct?
    Mr. Blum. That's my understanding, Senator, yes.
    Senator Udall. That's your understanding? And I also 
understand that we have had a similar advisory committee 
attached to CMS, MedPac some have called it, which has made a 
series of insightful recommendations in retrospect about ways 
in which to contain costs but also maintain quality of 
treatment.
    Mr. Blum. Right.
    Senator Udall. Would you agree?
    Mr. Blum. MedPac serves the Congress. They don't serve CMS. 
So they're an independent agency that provides the Congress 
recommendations about how to improve Medicare/Medicaid payment 
policy. They provide recommendations to the Congress each year 
that the Congress can choose to accept or not.
    I think what is different about the IPAB is that, if the 
Congress does not act upon the recommendations, the Secretary 
of Health and Human Services would have the authority to 
implement those recommendations.
    But you're absolutely correct that the recommendations go 
to Congress. Congress can choose to accept or to suggest other 
ways. And so I see it as a body that serves the Congress to 
provide recommendations to contain overall per capita spending.
    Senator Udall. And that's the point of the hearing today, 
and I want to thank Senator Kohl and Senator Corker for 
convening this.
    If I might, Mr. Chairman, I'd like to ask unanimous consent 
that my initial statement be included in the----
    The Chairman. Without objection.
    Senator Udall [continuing]. In the record.
    And if I could, I'd just like to turn to the earlier 
comments you made about generic drugs. They're obviously a 
focus of the Medicare Part D, and I know there's some good news 
on that front.
    Would you talk about your sense of how branded drug costs 
have affected costs at CMS, as opposed to generics?
    [The prepared statement of Senator Mark Udall appears in 
the Appendix on page 114.]
    Mr. Blum. Sure. Well, I think we operate under different 
statutory frameworks and different competition within different 
therapeutic frameworks in the Part B program and the Part D 
program.
    What is driving Part B drug spending? These are drugs 
largely provided through physician offices. The spending is 
concentrated on a handful of drugs. They're often new drugs 
coming on the market that I think are in the brand category.
    In the Part D program, we continue to see robust generic 
competition for many of the most commonly prescribed drugs for 
conditions like diabetes, heart care, et cetera. In the Part D 
context we see very strong generic competition, less so in the 
Part B drug context. Many of the drugs that we pay for in Part 
B are drugs used to treat cancer that are new treatments that 
still are in their market exclusivity. But on the Part B side, 
we have a concentration of spending in a handful of drugs due 
to the newness of the treatments, and due to the popularity of 
the treatment.
    Senator Udall. On balance, do you see a flattening out of 
the costs on whatever metric is the most useful on the branded 
side?
    Mr. Blum. Well, I think----
    Senator Udall. Again, the point of the hearing is how do we 
maintain quality, how do we encourage the pharmaceutical sector 
to innovate and take some risks, but how do we get a handle on 
the enormous cost of providing drugs to Americans.
    Mr. Blum. And I think one observation is that while we need 
to have strong incentives for manufacturers to bring new 
markets to market, we see that when drugs do face competition 
from generics or other treatments, that the prices that are fed 
through our payment system reflect that competition.
    So I think the question is how do you always find the right 
balance between creating strong incentives to ensure that new 
markets come to market, and also that competition can happen 
when it's appropriate for it to happen.
    Senator Udall. Let me turn to outcomes. The Affordable Care 
Act was focused in part on outcomes. What are you doing to pay 
for services based on health care outcomes, and how does 
evidence on health care outcomes affect CMS determinations on 
what drugs they cover?
    Mr. Blum. Well, a couple of things. One is the Affordable 
Care Act clearly gives CMS a very strong direction for us to 
develop the next generation of payment systems for hospitals or 
for physicians to really focus on the overall value of care 
rather than the volume of care. We have different authorities 
that we're implementing, or different programs that we're 
implementing with this direction.
    One is accountable care organizations to ensure that 
physicians working with all parts of the health care system 
really focus on the long-term outcomes of the patient rather 
than a single episode of the payment. We are starting to 
receive stronger evidence that, when beneficiaries continue to 
follow drug regimens, when beneficiaries have access to drug 
benefits, that it saves the program long term. I think these 
are initial studies. I'm not sure that our actuaries have given 
them kind of absolute certainty, but there is stronger evidence 
that, when we focus on the overall preventive care, that we 
save long-term costs.
    And so, hopefully with our direction, and I think the 
health care system's direction of focusing payment on the 
outcome of the patient, the value of the care rather than the 
volume of the care, that physicians will make the best possible 
choices with their patients to ensure that care is better 
coordinated, better managed for the long term.
    Senator Udall. Thank you, Mr. Blum.
    Mr. Blum. Thank you.
    The Chairman. Thank you very much, Senator Udall.
    Now we turn to Senator Manchin.
    Senator Manchin. Thank you, Mr. Chairman, appreciate it. 
Thank you, Mr. Blum.
    Basically, with rising costs, especially of Medicaid or 
Medicare Part D costs, they're estimated to rise about 9.7 
percent, I think, for the next nine years. And with the waste, 
fraud and abuse that we see an awful lot throughout government 
and throughout basically the programs that we're responsible 
for, what are you all's intentions and what do you think can be 
done within your confines in order to remove or eliminate or 
reduce significantly the waste that's in as far as the billing, 
overbilling, or wrong prescription?
    And rebates, I think, as I had done a little bit of 
investigation, the Inspector General's findings suggest that 
the underreporting of drug rebates has led to excess rebate 
payments of approximately $1.9 billion per year. And do you 
all, are you looking at that? Do you have a group or a task 
force to eliminate that?
    Mr. Blum. Sure. I think the Part D program is administered 
through private Part D plans, private insurance plans, who then 
pay pharmacists and then sign up beneficiaries and operate the 
benefit through pharmacy benefit managers.
    Part of our strategy to address the concern that you're 
raising is to ensure that we set very strong requirements for 
our Part D plans, to have compliance programs in place to share 
data. So when we see a fraud issue on the fee-for-service side, 
we share that information with private insurance companies so 
they can act accordingly.
    We're doing a lot more with sophisticated data, data 
analysis, to highlight and kind of bring to bear when spending 
is concentrated within a particular physician or a particular 
pharmacy.
    So our strategy I think is twofold. One is to ensure that 
we incent and require our Part D plans that are providing the 
benefit on behalf of our beneficiaries to have the strongest 
compliance programs in place. When we see plans have weak 
compliance programs, we take action very quickly. But also our 
strategy is to share information, to share data so it's not 
just the fee-for-service Medicare program that's responding to 
a fraud hot spot. We're sharing that information with all of 
our partners to ensure they can respond as well.
    But if we know that folks that are trying to commit fraud, 
if one spigot gets cut off, they move to another spigot, so our 
strategy is to make sure we're working in unison to ensure that 
all the spigots get cut off, to the extent possible.
    Senator Manchin. With the cost of drugs, prescription 
versus generics, do you all play a role in your rulemaking as 
far as what we are to prescribe first, or go to low cost?
    Mr. Blum. We allow Part D plans, consistent with the 
statutory framework, to establish formularies, to set 
differential cost-sharing policies, to encourage beneficiaries 
to use generic drugs or lower-cost drugs relative to higher-
cost brands. So those formularies have to run through our 
checks and balances to ensure that they're fair for our 
patients, but we provide the incentives, and also we provide 
the framework for private Part D plans to set those cost-
sharing policies to encourage the----
    Senator Manchin. So you're telling me that basically our 
prescription prices for our drugs are anywhere from 30 to 50 
percent higher than most other nations.
    Mr. Blum [continuing]. We operate within current statutory 
frameworks, and our payments are consistent with those 
statutory frameworks.
    Senator Manchin. Do you have any opinions on that? Do we 
have the right statutory provisions in place, or do we need to 
make some adjustments?
    Mr. Blum. I think what----
    Senator Manchin. To reduce the costs, just to lower the 
costs so we're able to provide to more people in need.
    Mr. Blum. What I can say, Senator, is that the President 
has made it very clear that lowering Medicare costs and all 
costs in the health care system is one of our highest health 
care challenges, and he has said that all ideas and options are 
on the table in the context of the overall debt ceiling 
discussions.
    Senator Manchin. Would you agree basically that if you 
would use prescriptions, that you would have a reduced cost if 
they were available for the same type of treatment where a 
higher-cost drug is available?
    Mr. Blum. I'm sorry. I don't understand the question.
    Senator Manchin. Well, basically if you all had a policy or 
if you want us to change the law that would require you all to 
use the lowest-cost provider or the lowest-cost drugs for their 
treatment, then there would be tremendous cost savings.
    Mr. Blum. I think the overall framework that CMS operates 
under is that the physician and the patient should make those 
choices together.
    Senator Manchin. We're paying for it, though.
    Mr. Blum. Absolutely. And so our payment policy should 
support the physician and the patient to make those best 
possible choices. We also know that, due to our cost-sharing 
policies, higher-priced drugs generally have higher-priced 
copayments attached to them. And so we have to be very 
sensitive that it's not just the taxpayers who are paying 
higher prices, but it's out-of-pocket costs that are also 
impacted as well.
    And so our payment framework pays for drugs indirectly, but 
we also have coverage policies that support physicians and 
patients making the best possible choices, and hopefully part 
of that discussion is taking into account the out-of-pocket 
costs that are being borne by our beneficiaries.
    Senator Manchin. I'd like to go into it in more depth with 
you, because I think in these budgetary-constrained times that 
we have, we should be looking at trying to get the best bang 
for our buck, and right now it doesn't seem that we're doing 
that.
    Mr. Blum. I'd be happy to follow up with that, Senator.
    Senator Manchin. Thank you.
    The Chairman. Thanks a lot, Senator Manchin.
    Now we turn to Senator Blumenthal.
    Senator Blumenthal. Thank you, Senator Kohl, and thank you 
for again having a very, very informative and useful hearing. 
And thank you, Mr. Blum for your testimony here today.
    Would you agree with me that the Veterans' Administration 
has greater leeway or authority to negotiate lower drug prices?
    Mr. Blum. The VA operates I think relative to the Medicare 
program but with a much tighter what I would call formulary or 
drug list, and that provides them more negotiating leverage 
than I think what we operate within the Medicare program. And 
so the way that the statutory construct for the VA payment 
system has been constructed is giving the VA the freedom to 
kind of manage a much tighter formulary, which gives them more 
negotiating leverage to extract overall lower prices than what 
the Medicare program would pay.
    Senator Blumenthal. And in effect, just cutting through 
what you just said and putting it in layman's terms, the VA can 
negotiate lower drug prices by using the Federal Government's 
bargaining power on its formulary. Is that not correct?
    Mr. Blum. Sure, and I think----
    Senator Blumenthal. And under Medicare, that practice, that 
use of the Federal Government's bargaining power is essentially 
barred; correct?
    Mr. Blum. Correct.
    Senator Blumenthal. And don't we have an obligation to 
enable taxpayers and seniors to have lower drug prices by using 
the Federal Government's bargaining power to lower those drug 
prices?
    Mr. Blum. I think it's fair that we have an obligation at 
CMS in the Medicare program to ensure that we are managing 
costs throughout the program to the best of our ability, and we 
pay for drugs today within the confines of the statute that's 
been given to us.
    Senator Blumenthal. And it really is, in fairness to you, 
Mr. Blum, the confines of the statute that, in effect, 
straightjacket you. There's really no other word for it, in my 
view, straightjacket you from serving the public interest by 
saving taxpayers and seniors money by using the Federal 
Government's bargaining power to lower drug prices.
    Mr. Blum. Sure. My observation is that the payment system 
that we use for Part B drugs is set very clearly by statutory 
formulas. CMS operates those payment systems, but we cannot 
influence those payment systems.
    Senator Blumenthal. And there's no other way to view it 
than as a kind of loophole, giveaway, sweetheart deal that 
raises the cost of drugs at a time when the cost of drugs is 
already spiraling upward; correct?
    Mr. Blum. I'm sorry. I don't understand the question.
    Senator Blumenthal. Well, let me put it a different way. 
Wouldn't you recommend that the confines of the statute, as you 
have adroitly put it, be changed so that the public interest 
could be better served to lower drug prices?
    Mr. Blum. I can't speak to a specific policy 
recommendation, but what I can say is that if we--the Congress 
believes that the pricing mechanisms or the pricing outcomes 
should be different, then I believe that the statutory 
construct would have to be changed.
    Senator Blumenthal. Just to put it in very practical terms, 
my understanding is that, in FY 2010, the VA in fact spent $3.9 
billion in drugs and realized cost savings from negotiations of 
$700 million. If you were to extrapolate from the current 
expenditures on Medicare and prescription drugs, there would 
literally be billions of dollars in savings; correct?
    Mr. Blum. Well, I think you'd also have to extrapolate the 
coverage that the VA programs provide relative to the Medicare 
program. And it's my understanding that the VA operates a 
tighter formulary, if you will, which gives them more leverage. 
In order to have leverage, you have to say yes to one product 
and no to another product to create that negotiating clout.
    Senator Blumenthal. But even with--and I apologize for 
interrupting, but my time is about to expire. Let me just make 
the point, whether the formulary is tight or expansive, 
negotiations enable lower prices; correct?
    Mr. Blum. When there's competition, yes.
    Senator Blumenthal. And the Federal Government, it seems to 
me, has an obligation to taxpayers and seniors to take 
advantage of competition where it exists, or enhance it where 
it should be more robust in order to achieve those savings. I 
recognize you operate within the confines of the statute, so I 
am not asking these questions in a way that is meant to be 
hostile to you personally, but I thank you very much for your 
testimony today.
    Mr. Blum. Thank you, Senator.
    The Chairman. Just one point before we turn to Senator 
Whitehouse. Senator Blumenthal, of course, you were on 
legislation that would authorize Medicare to negotiate directly 
with the pharmaceuticals. Is that right?
    Senator Blumenthal. I am indeed, and thank you for your 
leadership on that legislation, Mr. Chairman.
    The Chairman. Thank you.
    Senator Whitehouse.
    Senator Whitehouse. Thank you, Chairman, and thank you for 
holding this important committee hearing.
    Why is it, Mr. Blum, that you aren't prepared to make a 
policy recommendation to this committee? Is that a restriction 
related to your position at CMS?
    Mr. Blum. Well, I think I can speak for the 
administration's position, and what the President has said is 
that he is open to all ideas. He has suggested some possible 
ways in April for us to reduce Medicare and Medicaid costs. One 
suggestion was to think about requiring that the Medicare 
program receive deeper discounts for certain drugs that are 
provided through the Medicare program. But that is a statement 
that I'm prepared to say here today.
    Senator Whitehouse. We're often told that government should 
try to run more like a business. Can you think of any business 
that doesn't exercise its buying power to achieve price 
advantages?
    Mr. Blum. I would assume the answer is yes, that businesses 
have a clear incentive to maximize revenue and lower costs, and 
part of that would be through negotiations.
    Senator Whitehouse. And you can't think of an example to 
the contrary. I mean, that is the way business behaves; 
correct?
    Mr. Blum. That is my understanding.
    Senator Whitehouse. So it is unusual for government to be, 
at least with respect to the business model, it is a departure 
from government operating more like a business to have 
government be constrained by the statutory confines you talked 
about and forbidden as it was in the Part D act from exercising 
its negotiating leverage.
    Mr. Blum. Well, the Part D legislation that was enacted in 
2003 provides CMS the leverage to negotiate with Part D plans. 
That authority was expanded through the Affordable Care Act. 
The leverage that we have is through our contracting with Part 
D private plans. But you're correct, we have no authority to 
negotiate with manufacturers to receive better prices paid or 
provided to our private Part D plans.
    Senator Whitehouse. And does that relate back to the 
Medicare Modernization Act of 2003 and its so-called 
noninterference provision?
    Mr. Blum. The noninterference provision prohibits Medicare 
CMS from interfering with private negotiations, with private 
health plans, with pharmaceutical companies, hospitals, any 
other service that is being purchased by the private plan. Our 
authority is to contract with the plan, but by and large we 
cannot interfere with the negotiations with the plan and their 
other providers or suppliers. We have authority to make sure 
that the benefits are consistent with the program's 
requirements, but the prices that are contracted with the plan 
and the manufacturer are outside of CMS' purview.
    Senator Whitehouse. Setting aside the merits or the policy 
recommendations just for a moment, the National Committee to 
Preserve Social Security and Medicare has estimated that nearly 
$240 billion could be saved in the Medicare program over 10 
years if the Secretary were authorized to negotiate drug 
prices. As an estimate, do you have any comment on its 
accuracy?
    Mr. Blum. I've seen different estimates on such authority, 
but I had not personally seen that estimate that you cite.
    Senator Whitehouse. What estimate do you have or do you 
credit that is out there that would reflect the potential 
savings from such a change in law?
    Mr. Blum. I believe the Congressional Budget Office may 
have scored a similar policy. I don't recall the results, but I 
believe it was lower than the numbers that you have cited.
    Senator Whitehouse. One of the things that I hear from 
Rhode Island seniors pretty often is that they have signed on 
to a Part D plan, and once they were signed on, the formulary 
then changed and the drug or drugs that they're using and 
dependent on, or the reason they signed on to that Part D plan, 
are suddenly either no longer available or require a different 
and higher copay. In any event, they signed up for one thing, 
and in midterm they got dealt another set of conditions that 
they had never agreed to.
    Can you tell me what role CMS can play to ensure that Part 
D plans have to--can't make these midterm changes and that they 
can only become effective after a period has expired that would 
allow the senior to make a different set of choices, and that 
you basically get what you signed up for and you're guaranteed 
to get what you signed up for until you can find something 
different?
    Mr. Blum. Sure. What CMS requires, I believe, and this may 
not be 100 percent accurate, that when that drug plan changes a 
drug that's provided on the formulary midyear, the plan is 
required to notify the patient, to provide a transition fill to 
ensure that the beneficiary can go back to their physician to 
get a new prescription.
    But I--but drug prices change throughout the year, and some 
manufacturers have the freedom to raise and lower prices 
throughout the year. So I would be hesitant, in the interest of 
ensuring that prices remain low and affordable, both for the 
program and for the taxpayers, to take away Part D plans' 
ability to change formularies for different circumstances, 
whether the drug is deemed not effective, whether the price 
goes up and the Part D plan needs to respond to keep premiums 
affordable.
    So our policies require that the plans provide notice and 
transition, but at the same time I would be hesitant, 
personally, given that we want to make sure that Part D plans 
have the freedom to respond to different circumstances.
    Senator Whitehouse. Thank you, Chairman.
    The Chairman. Thank you very much, Senator Whitehouse.
    Mr. Blum, we thank you for being here. You've been very 
helpful, very informative. We're looking forward to continuing 
our work with you.
    Mr. Blum. Thank you very much, Senator.
    Senator Corker. Mr. Chairman, could I make one comment?
    The Chairman. Go ahead.
    Senator Corker. I want to thank you for coming, too. And I 
think in spite of the push by many of my colleagues on the 
other side of the aisle to push you into direct negotiations on 
Medicare Part D, I think what you said is that it has been 
very, very successful at keeping prices low because of the 
tremendous amount of competition that exists, and that there 
may be a need in some isolated cases where only one type of 
drug is available to look at a different type of arrangement.
    But in Medicare Part D, generally speaking, the costs are 
far lower than ever imagined, seniors have far more choices 
than they ever would have, including the VA I think as you 
mentioned, and from your perspective this competitive nature of 
Medicare Part D has been very, very successful, and messing 
with it in any way would likely lead to some unintended 
negative consequences. So I thank you very much for being here 
and appreciate your testimony.
    The Chairman. Thank you.
    We'll turn now to our second panel, if you would approach 
the witness stand.
    First we'll be hearing from Dr. Philip Rosenfeld, Professor 
of Ophthalmology at the University of Miami. Dr. Rosenfeld has 
worked on many clinical trials involving innovative treatments 
for eye diseases.
    Next we'll be hearing from Dr. Anthony Adamis, who serves 
as a Global Head of Ophthalmology at Genentech. Dr. Adamis was 
formerly a professor at Harvard Medical School and is cofounder 
of Eyetech Pharmaceuticals.
    Next we'll be hearing from Dr. Sean Tunis, who is founder 
and director of the Center for Medical Technology Policy.
    After that we'll be hearing from Lisa Swirsky. She is a 
senior policy analyst for Consumers Union Health.
    Finally, we'll be hearing from Dr. Scott Gottlieb. Dr. 
Gottlieb is a resident fellow at the American Enterprise 
Institute.
    We welcome you all. We're looking forward to what you have 
to say, and we'll now start with you, Dr. Rosenfeld.

   STATEMENT OF PHILIP ROSENFELD, M.D., Ph.D., PROFESSOR OF 
     OPHTHALMOLOGY, BASCOM PALMER EYE INSTITUTE, MIAMI, FL

    Dr. Rosenfeld. Chairman Kohl, Ranking Member Corker and 
other distinguished members of the committee, thank you for 
inviting me today to testify on this important topic. I'm Dr. 
Philip Rosenfeld, Professor of Ophthalmology at the Bascom 
Palmer Eye Institute of the University of Miami Miller School 
of Medicine. This statement represents my own opinion and not 
those of the University of Miami or the Bascom Palmer Eye 
Institute.
    I bring to the discussion today a real-world perspective of 
the forces influencing the choice between two commonly used 
drugs for the treatment of wet macular degeneration. By 
studying this example, I believe we can better understand how 
the current incentives in our health care system promote the 
use of the most costly alternatives.
    These drugs are being used to treat wet macular 
degeneration, a leading cause of irreversible blindness among 
the elderly worldwide. When I say wet macular degeneration, I'm 
talking about the abnormal growth of blood vessels in the back 
of the eye. These blood vessels leak, they bleed, and they 
accelerate vision loss.
    Genentech performed groundbreaking scientific research that 
led to the discovery of two fabulous drugs, Avastin and 
Lucentis. Both drugs block the factor that causes the blood 
vessels to grow. Both drugs are derived from the same mouse 
monoclonal antibody. Avastin is a full-length antibody; 
Lucentis is a fragment of that antibody. Avastin is infused 
through an arm vein every two weeks in cancer patients; 
Lucentis is injected into the eye as often as every month. 
Avastin was FDA approved for colon cancer therapy in February 
of 2004; Lucentis for eye injections for wet macular 
degeneration in June of 2006.
    I don't have time to go into the background of why I first 
injected Avastin into an eye, but it was clinically and 
scientifically justified. This off-label injection was 
successful and led to the international use of Avastin for a 
wide range of eye diseases. The rapid spread in 2005 was fueled 
by the availability of Avastin, its apparent efficacy and 
safety, its low cost, and the fact that Lucentis was not yet 
available, though everyone was seeking Lucentis. Even after 
Lucentis was approved, though, Avastin continued to be used as 
the low-cost alternative to Lucentis.
    When a pharmacy follows strict USP--that's United States 
Pharmacopeia--guidelines, Avastin can be prepared for $20 to 
$40. Lucentis costs $2,000 a dose. Since 2005, 1,500 scientific 
papers have appeared in peer-reviewed journals exploring the 
safety and efficacy of Avastin. However, definitive data was 
not available until the CATT trial results were published in 
the New England Journal of Medicine in May of this year. Dr. 
Dan Martin, chairman of the Cole Eye Institute of the Cleveland 
Clinic and chairman of this National Eye Institute-sponsored 
multicenter clinical trial, is here in the audience today.
    In this two-year study, injections of Avastin and Lucentis 
were compared in 1,200 wet AMD patients. After one year, the 
Lucentis injections given monthly were comparable to the 
Avastin injections given monthly. When Lucentis was given as 
needed, it was comparable to Avastin given as needed. Overall, 
the two treatments seemed equivalent.
    There were no apparent expected adverse event differences 
between the two drugs. However, Avastin was associated with an 
increase in unexpected adverse events that are not thought to 
be drug-related. However, these adverse events are closely 
being studied in the second year of the trial.
    To understand how these drugs are used in the United 
States, I collaborated with Ross Brechner at Medicare, and we 
found that 60 percent of physicians in 2008 used Avastin, 40 
percent used Lucentis. This is looking at 100 percent database 
from Part B Medicare. We saved Medicare approximately $800 
million in 2008 alone by the use of Avastin.
    So what determines why clinicians use one drug or the 
other? We have found there are several incentives in the system 
that promote Lucentis use. First, Medicare promotes the use by 
the 6 percent average sales price reimbursement to physicians. 
Not only does Medicare cover the cost of the drug, but they 
also add 6 percent of the average sales price. That's $115 
every month for a $2,000 investment. That investment is 
returned every month. So overall, the physician makes a 70 
percent return on that initial $2,000 on Lucentis.
    In addition, CMS decreased the reimbursement for Avastin 
from $50 to $7 in a hospital-based setting. This was part of a 
bigger reduction that was blocked by a number of my colleagues, 
specialty societies, and government officials. However, the $7 
reimbursement in a hospital-based setting is still in effect. 
In addition, in what's called a disproportionate share 
hospital, the 340B discount program allows Lucentis to be 
purchased at $1,600 and get reimbursed at $2,000. That makes a 
$400 profit for each injection of Lucentis. This profit or this 
rebate should go to Medicare.
    Finally, Genentech has two incentive programs. One is a 
rebate program reported by Andy Pollack of the New York Times, 
November 2010. It's very lucrative to clinical practices. It's 
based on volume use and increase in usage of Lucentis. This 
rebate should not go to the clinician. It should be going to 
Medicare.
    And Genentech also allows the direct purchase using a 
credit card, allows cash back up to 2 percent to the physician. 
This rebate should go to Medicare and not the clinician. A 
transaction fee should be charged by Genentech.
    So while these historical details surrounding the use of 
Avastin and Lucentis are unique in the annals of medicine, the 
financial incentives driving the use of expensive drugs and 
procedures are not. These incentives and disincentives should 
be eliminated.
    And finally, I inject over 4,000 eyes per year. I use about 
half Lucentis, half Avastin, and as a clinician I don't want 
Medicare telling me which drug to use, but I don't want my 
patients worrying that my decision to inject their eyes is 
being influenced by these incentives. The choice between drugs 
should be based between the physician and the patient based on 
efficacy, safety, and cost. It is noteworthy that, despite all 
of these financial incentives, most ophthalmologists use 
Avastin. This suggests that most ophthalmologists really do 
care about the cost of health care.
    Thank you again for this invitation, and for your 
attention. Thank you.
    [The prepared statement of Dr. Philip Rosenfeld appears in 
the Appendix on page 53.]
    The Chairman. Yes. We'll turn now to Dr. Adamis.
    Before I do, did I hear you say you inject half of your 
patients with one and half of your patients with the other?
    Dr. Rosenfeld. When I look at my 4,000 eyes that are 
injected, I use on average half Avastin in those eyes and half 
Lucentis, and the decision is based between discussions with my 
patient and their decision after all the options are presented 
whether they want one or the other drug.
    The Chairman. You let your patient make that decision?
    Dr. Rosenfeld. Once they're given all that information. I 
strongly believe that full disclosure is required for a patient 
to understand the reasons why a needle is going to be stuck 
into their eye.
    The Chairman. I understand. You seem to be indicating your 
independent opinion is that the drugs are similar.
    Dr. Rosenfeld. That's my clinical opinion.
    The Chairman. Okay. Thank you very much.
    Dr. Adamis.

STATEMENT OF ANTHONY ADAMIS, M.D., VICE PRESIDENT, GLOBAL HEAD 
   OF OPHTHALMOLOGY, GENENTECH, INC., SOUTH SAN FRANCISCO, CA

    Dr. Adamis. Chairman Kohl, Ranking Member Corker, honorable 
members of the committee, thank you for inviting me here today. 
I ask my full written testimony be submitted for the record.
    My name is Tony Adamis. I'm the Vice President, Global Head 
of Ophthalmology at Genentech. I'm an ophthalmologist and 
vascular biologist by training. Prior to joining Genentech in 
2009, I served in other positions in the biotech industry, as 
well as 11 years at the Harvard Medical School where I treated 
patients and conducted research.
    Genentech is based in South San Francisco and as part of 
the Roche group currently employs over 30,000 people in the 
United States. Our commitment to innovation is unparalleled 
within the industry, with more than 100 projects in clinical 
development. In 2009 alone, Genentech Roche spent $9.1 billion 
on R&D, an amount greater than any other company in the world.
    Genentech's mission is to develop innovative medicines to 
treat serious diseases. One of the most impactful medicines 
we've ever developed is Lucentis. Before Lucentis was 
available, wet AMD was the leading cause of blindness in older 
Americans. The average patient lost central vision until the 
ability to read, recognize faces and drive was lost.
    In addition to the personal suffering and loss of 
independence, the total annual cost to the U.S. GDP was 
estimated to be $5.4 billion. Everything changed with the 
development of Lucentis. For the first time, the average 
patient with wet AMD recovered vision. When the results were 
first presented at a major medical meeting, Lucentis was 
publicly compared to the discovery of penicillin.
    Since then, Lucentis has reduced the rate of legal 
blindness by 72 percent. As a result, wet AMD may no longer be 
the leading cause of blindness in older Americans. Subsequent 
investments in Lucentis trials by Genentech have demonstrated 
sustained gains in vision in two additional serious diseases, 
retinal vein occlusion and diabetic macular edema. So to date, 
Lucentis has exhibited heretofore unseen efficacy in three of 
the major causes of blindness in the United States.
    Drug development is lengthy, expensive, and risky. Drugs 
entering clinical development have a 92 percent failure rate. 
Lucentis was one of the 8 percent that succeeded. The price of 
Lucentis therefore funds not only its own development but also 
the 92 percent that fail and our future successes. Eleven years 
and almost $1.4 billion have been spent on the development of 
Lucentis, involving over 18 clinical trials and 7,100 patients 
in the United States, and over 10,000 around the world.
    In 1989, Napoleone Ferrara discovered vascular endothelial 
growth factor, or VEGF, at Genentech. His research showed that 
blocking VEGF might prove useful in the treatment of cancer, a 
line of research that eventually resulted in Avastin. Around 
the same time, my colleagues and I working with Dr. Ferrara 
determined that VEGF was also a potential target for eye 
disease. Dr. Ferrara, however, was concerned that Avastin may 
not be ideal for the eye, so his team set out to create 
something better. That drug became Lucentis.
    For his work on Lucentis, Dr. Ferrara was awarded the 
Lasker Prize in 2010. Seventy-six Lasker laureates have gone on 
to win a Nobel Prize in medicine.
    There are four scientific reasons why Lucentis was created. 
Today I will focus on one of them, systemic safety. When drugs 
are administered to the eye, they often find their way into the 
bloodstream. When that happens, side effects are more likely.
    Avastin was designed to last a long time in the bloodstream 
so that it can have sustained activity against tumors. 
Lucentis, however, was designed to exit the bloodstream very 
quickly.
    VEGF-blocking drugs can result in rare but serious side 
effects. When an interim safety analysis in 2007 revealed a 
potential stroke risk with the use of Lucentis, Genentech sent 
a letter to doctors, notified the FDA, updated the package 
insert, and presented the data to the medical community.
    Today, there's a growing body of data that suggests off-
label Avastin may pose a greater risk than Lucentis. Two large 
Medicare claim studies, one from Duke and a second from Johns 
Hopkins, both identified a potentially greater risk of stroke 
and death when using Avastin in wet AMD. The CATT trial also 
showed a safety difference. A 29 percent increased risk of 
serious side effects was seen with Avastin, with over 80 
percent requiring hospitalization. Genentech's internal 
analysis indicates that part of the increased risk is 
consistent with VEGF blockade in the blood stream.
    These data are not yet conclusive. However, it is notable 
that the three largest studies to date have shown statistically 
significant safety risks with the use of Avastin in wet AMD. As 
the data emerge, we agree with the American Academy of 
Ophthalmology and the written testimony of the American Society 
of Retinal Specialists that a treatment plan must be selected 
by an ophthalmologist and a patient, considering important 
benefit/risk information that empowers them to make evidence-
based decisions.
    Genentech is also committed to ensuring that no patient 
goes without treatment due to financial barriers. Since 1985, 
we have donated $2.3 billion in free medicine to uninsured 
patients and more than $550 million to various independent 
nonprofit organizations for copay assistance.
    We're committed to working with the Congress, public health 
agencies, CMS and the FDA to ensure the safety and 
effectiveness of our products. Today, innovation continues at 
Genentech as we seek to improve Lucentis and develop additional 
breakthrough medicines. This work depends in part on the 
success of Lucentis.
    Thank you for the opportunity to provide my views today, 
and I look forward to your questions.
    [The prepared statement of Dr. Anthony Adamis appears in 
the Appendix on page 61.]
    The Chairman. Thank you very much, Dr. Adamis.
    Now we'll hear from Dr. Tunis.

   STATEMENT OF SEAN TUNIS, M.D., MSC, FOUNDER AND DIRECTOR, 
      CENTER FOR MEDICAL TECHNOLOGY POLICY, BALTIMORE, MD

    Dr. Tunis. Mr. Chairman, Senator Corker, thanks for the 
invitation to appear before the committee today. My name is 
Sean Tunis. I'm the founder and CEO of the Center for Medical 
Technology Policy, which is an independent nonprofit that works 
to improve the quality and relevance of clinical research. I 
was previously chief medical officer at the Centers for 
Medicare and Medicaid Services, and I was there at the time 
when some of the predecessor treatments to Avastin and Lucentis 
for macular degeneration were introduced.
    I just wanted to mention what hasn't been mentioned today, 
that prior to Avastin or Lucentis, the treatments that were 
available for macular degeneration only slowed the rate of 
degradation of vision. None of them actually reversed it, and 
yet Medicare was paying $2,000 to $3,000 a dose for those 
drugs. So Genentech deserves some credit for having developed 
the first two effective treatments for macular degeneration 
that actually improve vision.
    The Medicare program can almost certainly spend less on 
drugs without any negative impact on health outcomes for 
Medicare beneficiaries. In my view, there are at least three 
important strategies that can be pursued to achieve that, at 
least one of which has been discussed today.
    First, Medicare should have the authority to link drug 
prices more directly to health outcomes. Secondly, Medicare 
should implement additional policies to promote high-priority 
clinical research such as the CATT trial, which has provided 
invaluable information that would support any sort of 
additional clinically sensitive policies that Medicare might 
introduce. And third, Medicare should develop a systematic 
policy approach to promoting drug innovation. The agency is 
certainly tremendously impactful on biomedical innovation, and 
there's a number of potential tools that the agency could use 
to promote innovation. Drug pricing is only one potential tool 
and probably not the most efficient tool for promoting 
innovation.
    I recognize that the approaches to reducing drug spending 
that we're going to talk about today are not going to save the 
Medicare program from bankruptcy. These are going to require 
more fundamental payment reforms and systems innovations. 
However, I think it's still worth pursuing policy interventions 
that can save $100 million a year or $500 million a year, et 
cetera, even though by themselves, obviously, much more 
significant cost savings are going to need to be pursued.
    So one relatively straightforward approach to reducing 
Medicare spending on drugs without negatively affecting patient 
outcomes would be to restore the agency's authority to pay the 
same price for drugs that produce similar benefits and harms. 
Medicare's regional contractors have been adjusting prices 
based on clinical effectiveness evidence for more than 15 years 
through their authority called least costly alternative.
    The policy rationale is that Medicare, beneficiaries, and 
taxpayers should not pay more for a service or a drug when a 
similar drug can be used to treat the same condition and 
produce the same outcome at lower cost. There is no statutory 
provision giving specific authority or prohibiting the 
application of least costly alternative. CMS has considered its 
reasonable and necessary statutory authority to provide the 
needed legislative basis for this approach.
    However, a recent court decision has constrained Medicare's 
ability to use LCA determinations, and therefore restoring that 
authority legislatively would restore Medicare's ability to 
adjust the prices of drugs to reflect their clinical outcomes. 
And as John Blum said earlier today, Medicare is moving towards 
a policy approach that links payment to outcomes, and there's 
no reason that that should not also apply to the outcomes for 
specific technologies, not just the outcomes that providers, 
hospitals, and others achieve.
    The CATT trial underscores the importance for Medicare of 
having the capacity to rapidly identify, design, and implement 
trials on questions of substantial importance to the Medicare 
program. Senator Kohl was actually instrumental in addressing 
the challenges with handling copays for patients enrolled in 
the CATT trial and helped to craft language addressing this 
problem in the Medicare Improvements for Patients and Providers 
Act of 2008. It is my understanding that that statutory 
language has not been the basis for developing implementing 
instructions for Medicare, and therefore it remains as 
difficult as it was before to address those problems.
    So one step that Medicare could take would be to develop 
implementing instructions for the language that you develop, 
Senator Kohl, in order to facilitate future trials like the 
CATT trial, which are still quite difficult to do.
    Medicare could also promote critical research by making 
more systematic use of coverage with evidence development. 
Coverage with evidence development is a policy tool that links 
coverage of a drug or device or procedure with a requirement 
that patients receiving the service are enrolled in prospective 
clinical studies that would inform future decisions.
    Medicare has the authority to implement coverage with 
evidence development, but because it's a vague statutory 
authority, the agency is reluctant to use that approach, and 
therefore their ability to support the costs of new clinical 
interventions in the context of clinical trials is extremely 
limited, and giving them explicit statutory authority to do so 
would substantially improve their ability to generate the kind 
of evidence that would give not only the Medicare program but 
patients and clinicians more of the kind of information they 
need to make good judgments based on clinical effectiveness.
    And last, I see my time has expired, but I just wanted to 
make the point that Medicare does have an important influence 
on biomedical innovation just by the virtue of the huge role 
that it plays on the use of devices and other biomedical 
services globally. So it's impossible for them to avoid having 
an impact on innovation, and I think it would be extremely 
valuable for the Medicare program to take a comprehensive 
approach to looking at the relationship between various medical 
policies and biomedical intervention, think about the range of 
policy mechanisms through which innovation could be promoted, 
including potentially differential drug prices. But again, it 
seems that it would be useful to systematically look at ways 
that this could be done rather than defaulting to a singular 
approach of drug pricing.
    So again, I thank you for the opportunity to share some 
ideas with the committee today.
    [The prepared statement of Dr. Sean Tunis appears in the 
Appendix on page 69.]
    The Chairman. Thank you very much, Dr. Tunis.
    Ms. Swirsky.

  STATEMENT OF LISA SWIRSKY, SENIOR POLICY ANALYST, CONSUMERS 
                     UNION, WASHINGTON, DC

    Ms. Swirsky. Good afternoon. Consumers Union is the 
nonprofit publisher of Consumer Reports magazine. It has a long 
history of advocating for improving health care and lowering 
costs of drugs for consumers. So I very much appreciate the 
opportunity to testify in front of the committee today.
    Our popular Best Buy Drugs report reaches 100,000 readers 
per month and provides rigorous evidence-based comparative 
effectiveness information on a range of commonly used drugs 
through our website. It's available through our website at 
www.consumerreportshealth.org. We're proud to say that we make 
that available free and that we do not accept any advertising.
    Best Buy Drugs reports rely on credible systematic reviews 
of available clinical evidence conducted by expert researchers. 
We use price information from a leading health care data and 
analytics company. The value added that we think we bring to 
the table is that our editors and writers then translate this 
very complicated clinical evidence for our readers into 
consumer-friendly language and format, which is the hallmark of 
our publications.
    To earn a Best Buy Drug designation, a drug must generally 
be at least as effective and safe as other medications in its 
class and less expensive. If the data show that the brand name 
drug is notably safer or works better than a lower cost 
medicine, that drug gets the Best Buy designation, and I think 
that's important to stress.
    We have done a lot of work in the area of statins. Consumer 
Reports has found that for cholesterol lowering drugs, one of 
the most common medications, lower cost generics are just as 
effective and safe as more expensive brands. If you are taking 
this type of medicine for preventive reasons and you have not 
yet had a heart attack, the generic lovastatin is as effective, 
just as safe, and considerably less expensive than the brand 
Lipitor. A daily dose of Lipitor will cost an individual 
without insurance about $112 a month, compared to $4 a month 
for lovastatin.
    Diabetes medication is another area where our organization 
has found low-cost alternatives to be effective and safe, and 
actually in this instance even safer. An older diabetes drug, 
generic metformin, is our Best Buy recommendation. It clocks in 
at about $4 a month and is a bargain compared to the pricey 
drug Actos, which would cost consumers $280 a month. Metformin 
is also the safest. Newer medications Actos and Avandia both 
carry a higher risk of increased heart failure. It's worth 
noting that FDA restricted Avandia's use, proving that you 
don't always get what you pay for when it comes to drugs.
    We have found similar findings when it comes to pain 
medications, which you can read more about in our prepared 
testimony.
    These real-life examples show how effective and safe 
generic drugs are and how they can save consumers precious 
dollars, and purchasers by the way. Our organization strongly 
believes that Congress should pursue policies that improve 
access to generic drugs, including passing Senator Kohl's and 
Senator Grassley's bill to end collusion between brand and 
generic companies to delay generic competition. CBO and the FTC 
have found that these paid-for delay agreements cost Americans 
billions of dollars.
    In addition to promoting generics, Congress should do more 
about the safety and efficacy of drugs, including reforming 
Medicare and Medicaid payment processes to make use of 
available evidence that lower-cost drugs are as effective as 
more expensive drugs. We agree with Dr. Tunis that Congress 
should consider legislation to authorize CMS to reinstate the 
least costly alternative policy.
    Congress may also create incentives to ensure that Part D 
formularies and state Medicaid formularies carry the generic as 
a preferred drug when there's strong evidence of comparability. 
Of course, it goes without saying that doctors must always have 
the ability to specify a brand alternative if that's in the 
best interest of the patient.
    Finally, Congress should act to improve the way 
pharmaceutical companies convey safety and efficacy information 
to consumers so that they can better understand and use 
available clinical evidence to make better choices about their 
treatments. Consumers Union looks forward to working with 
Congress to improve the way patient safety and efficacy 
information is presented to consumers so that they can make 
better informed decisions about their choices. We believe in a 
lot of instances when consumers are provided and armed with 
good information, they will often choose the lower-cost option. 
A lot of times, that's just not what they're getting from the 
marketing.
    In conclusion, I wanted to thank the committee for hearing 
me out, and we look forward to working with the committee.
    [The prepared statement of Ms. Lisa Swirsky appears in the 
Appendix on page 79.]
    The Chairman. Thank you very much, Ms. Swirsky.
    Now Dr. Gottlieb.

 STATEMENT OF SCOTT GOTTLIEB, M.D., RESIDENT FELLOW, AMERICAN 
              ENTERPRISE INSTITUTE, WASHINGTON, DC

    Dr. Gottlieb. Thank you, Chairman Kohl, Ranking Member 
Corker. Thank you for the opportunity to testify before this 
committee.
    Over the past decade, the drug space stands apart from 
other segments of the healthcare industry in terms of how much 
the underlying business model has changed. The life sciences 
sector has undergone a fundamental transformation to focus on 
delivering more value and more basic innovation to consumers.
    Industry pipelines have also had more new compounds in 
late-stage development than at any time before. More of these 
new drugs are aimed at fundamentally new targets, and more 
address unmet needs in medicine, including many orphan 
diseases.
    But despite recent progress, challenges remain. There are 
still consumers priced out of health care. The cost of 
developing drugs is rising sharply, and new biotech company 
formation has fallen off. Too many diseases remain poorly 
treated.
    So we must craft policies that provide proper incentives 
for new technology while making sure we are getting more value 
for programs like Medicare.
    Any discussion of policies that have worked to bring more 
price competition to the prescription drug market and lower 
overall spending has to begin with Medicare's Part D 
prescription drug program. Competition between more than 1,000 
drug plans has resulted in costs that are substantially less 
than what was first envisioned, wider use of generic medicines 
and deep discounts on branded drugs.
    Now, I know there is discussion around imposing mandatory 
rebates in the Part D program. These are a form of price 
controls that distort commercial forces. Mandatory rebates 
create a strong incentive for companies to launch drugs at 
higher prices in anticipation of the payments that they will 
have to provide. These rebates also discourage additional 
discounting.
    Moreover, as more beneficiaries come under these kinds of 
tacit price control regimes, it will erode the ability of 
health plans to use competitive negotiations to move their 
market share and improve profit margins. This in turn will 
reduce their incentive to try and drive hard bargains with drug 
companies.
    I know members of this committee have also considered 
proposals to give the staff of Medicare least costly 
alternative authority. There is nothing inherently wrong with a 
payer carefully judging the clinical data supporting the use of 
a particular medical product or service to determine what it 
will reimburse, but Medicare is no ordinary payer. Its 
decisions are widely followed. As such, Medicare has an 
outsized impact on what the U.S. patients will have access to.
    If Medicare were to make clinical judgments about new 
technology at the time of their launch, it would also undermine 
the way innovation unfolds in the life sciences. In many cases, 
much of the innovation takes place post-market as new 
technology is introduced and demonstrate additional benefits 
from real-world use. Demanding early life cycle demonstrations 
of value, however measured, skews heavily against this sort of 
postmarket innovation.
    We should also consider how past treatments we now view as 
profound advances would have fared under an LCA policy, and we 
should also consider how such a construct would affect future 
investment decisions.
    Policies that encourage more price competition and more 
clinical competition between similar drugs can help drive more 
value for beneficiaries while encouraging more opportunities 
for new innovation. This gets me to the idea of merging 
Medicare's drug and medical benefits, folding Part B into Part 
D. There is good clinical and economic rationale for providing 
drugs under a single unified program. Many private plans have 
already merged their drug and medical benefits. Folding Part B 
into Part D could provide substantial savings to Medicare. The 
savings would be a result of greater therapeutic substitution 
between oral and injectable drugs, and more price competition 
between similar agents.
    Now, moving Part B into Part D is enormously complex and 
full of potential damaging unintended consequences. It would 
need to be considered carefully. It is also worth noting that 
if doing it only invites more temptation to import price 
controls into the resultant drug program, that will erode 
competitive forces that ultimately drive value.
    Moreover, not all the savings would actually accrue to 
Medicare. Some of it would need to be used to help offset the 
rise in premiums and out-of-pocket costs incurred by 
beneficiaries. Medicare would also have to create new codes to 
compensate doctors directly at a fair and sustainable rate for 
the cost of infusing drugs in their offices.
    In conclusion, the drugs that are in late-stage development 
and have recently been launched are more promising than at any 
time in recent memory. Yet the model that has made life science 
successes possible is fragile. The decisions that we make about 
how we regulate these products and pay for their cost have 
direct effects on whether these endeavors get undertaken in the 
first place.
    Thank you.
    [The prepared statement of Dr. Scott Gottlieb appears in 
the Appendix on page 83.]
    The Chairman. Thank you very much, Dr. Gottlieb.
    We'll start now by asking everybody on the panel to respond 
to the question of where do we have the greatest opportunities, 
in your opinion, in Medicare to help lower the costs?
    We'll start with you, Dr. Rosenfeld.
    Dr. Rosenfeld. Well, I think in my testimony today I've 
outlined some important measures that Medicare can take. 
Medicare can address the 6 percent average sales price payment 
to physicians. It's really preposterous, if we think about it, 
that we should be paid a percentage of the cost of the drug. It 
develops a codependency between the clinician and the 
pharmaceutical industry.
    Moreover, we should look at this disproportionate share 
hospital discount and ask why that isn't passed through to 
Medicare. And we should look at these unusual decreases in 
reimbursement that are still in place that incentivize the use 
of Lucentis in hospital-based settings.
    Moreover, if drug companies offer rebates for increased use 
and the rate of increased use to physicians, it implies that 
physicians are not injecting the patients they should be and 
they have to be incentivized to do that. I doubt that's the 
case. Those rebates are really focusing on increased 
utilization by the physician, and if there is a rebate, it 
should be passed on to Medicare, and there should be a limit on 
how physicians purchase drugs with credit cards, and there 
should be an added transaction fee or that cost should be 
rebated directly to Medicare.
    The Chairman. Thank you so much.
    Dr. Adamis.
    Dr. Adamis. It's beyond my area of expertise to make 
recommendations how we could lower costs for Medicare, but 
whatever is chosen by the committee and by Congress, we should 
make sure that it preserves a physician's ability to choose 
which medication they feel is most appropriate for a patient. I 
think that's very important.
    And then the second piece of it, because this is my job, is 
to make sure that the incentives are still there to develop new 
therapies. We're working on drugs that have to be dosed just 
twice a year as opposed to injections every month, and we're 
working on drugs that work better than Lucentis, hopefully. I 
want to make sure those incentives stay in place so that we can 
consider those programs.
    The Chairman. Thank you.
    Dr. Tunis.
    Dr. Tunis. Yes, I think the several ideas offered in my 
testimony were some of the notions that I had in terms of what 
might, both in the short term and long term, lead to reductions 
in prices, and that included least costly alternative, giving 
the CMS, taking a more proactive role in promoting the kinds of 
studies like the CATT trial, and also looking at ways in which 
they could specifically incentivize high-value innovation.
    The only thing I would add is you heard numerous times from 
John Blum how constrained they are with their existing 
statutory authority to do anything around negotiating drug 
prices or responding to or setting drug prices in any way to 
reflect the clinical benefits of a drug. I suspect if John was 
sitting here in a few years, no longer working for the 
administration, he would have told you more explicitly what 
kind of authorities that they would like, but I imagine they 
would be things like least costly alternative authority and 
perhaps something like the ability to vary patient cost-sharing 
according to the value of a drug.
    So a drug that's highly cost effective would have a very 
low copay so that patients would be inclined to prefer that for 
economic reasons, and drugs that are extremely expensive and 
produce very small incremental benefits would have higher 
copays so that the patients would have to take on more of the 
incremental costs, and that way the patients and clinicians are 
still free to make choices. It's just not all of the financial 
responsibility for the difference falls on the taxpayer; some 
of it falls on the patients as well.
    Currently they have no ability to vary cost-sharing based 
on some judgment about the clinical effectiveness and costs of 
a drug.
    The Chairman. Thank you very much, Dr. Tunis.
    Ms. Swirsky.
    Ms. Swirsky. I just would kind of highlight some of the 
same things that Dr. Tunis said about least costly alternative 
policy as being a ripe avenue. I also would agree with earlier 
comments about changing incentives in the Medicare program so 
that physicians aren't incentivized to promote or prescribe a 
higher-cost drug.
    I'd also kind of reiterate or maybe go back to some of the 
examples we weren't able to use in my testimony because of 
time. But I think a lot of our examples of statins, proton pump 
inhibitors, which are basically heartburn medications which we 
can use very inexpensive generics as opposed to the expensive 
version of Nexium and so forth, all of these things are used by 
seniors, many seniors on a daily basis and I think are all 
really ripe for policies that promote their use.
    The Chairman. Thank you, Ms. Swirsky.
    Dr. Gottlieb.
    Dr. Gottlieb. Thank you. I think the problems with Medicare 
are long-term problems, and they need long-term solutions with 
respect to changes in the structure of how Medicare pays for 
services. I think a lot of what we've done in recent years in 
terms of just across-the-board cuts or targeting individual 
products or freezing market basket rate increases doesn't 
tackle the long-term underlying problems in the Medicare 
program. In some cases, I think it makes true, fundamental 
reform more difficult.
    I think Medicare looking for ways to try to tie what it 
pays for and how it reimburses to notions of value and looking 
at outcomes are the kinds of payment reforms we need to pursue. 
I think most of the spending, if you look at it, and most of 
the waste is probably on the services side and not on the 
technology side. I think it becomes much more, much easier to 
target the technologies and the introduction of technologies 
because you typically have one product and one sponsor, as 
opposed to trying to tackle reimbursement that affects 
hundreds, if not thousands of providers across the country. So 
that becomes politically much more difficult, even though that 
I think is what we need to ultimately address.
    On the drug side, ultimately I think we need to concede the 
Part D plan is working. The competitive structures in Part D 
are bringing down the rate of inflation on small molecule 
spending and driving higher generic drug utilization. If we 
accept that, then most of the growth, if there is growth, is on 
the Part B side, and Mr. Blum testified that most of that is 
confined to just a handful of drugs. And quite frankly, those 
are oncology products. I think as a political matter it's going 
to be hard to really address some of the utilization in 
oncology. I think it will be hard to tackle that.
    If I put forward one competitive market-based reform that I 
think could work to try to drive some higher-value utilization 
of drugs, it would be moving B to D. It would address the 
injectable drugs, but this would be a very hard reform, 
frankly, to implement.
    The Chairman. Dr. Rosenfeld, as you know now in his 
prepared testimony, Dr. Adamis made reference to a study funded 
by his company, Genentech, which shows safety concerns for 
Avastin. I think you're in some disagreement with that, but do 
you want to talk a little bit about that?
    Dr. Rosenfeld. At our annual research meeting, which is 
called ARVO, held in Ft. Lauderdale at the end of April, 
beginning of May, Dr. Gower presented data which had been much 
publicized before the presentation which has not been submitted 
for publication as far as I know, and it certainly isn't peer 
reviewed yet as far as I know, that there was increased risk of 
hemorrhagic stroke with Avastin.
    When I attended that presentation, that's not what I heard. 
What I heard, and it's a common problem with Medicare 
databases--and I want to thank Dr. Ross Brechner from Medicare 
because he's taught me a lot about looking at Medicare 
databases and all the confounding variables that one needs to 
be concerned with, because the Medicare databases show you what 
doctors claim happened to their patient, but you know nothing 
about the patient.
    So what Dr. Gower presented was that the overall stroke 
rate in the United States for Medicare beneficiaries was 0.4 
percent. The stroke rate among patients getting Avastin was 0.4 
percent, the same, but it was lower for the Lucentis patients, 
which was 0.26 percent, a difference of .15 percent.
    Now, for those of us working with the Medicare databases, 
and in particular knowing the distribution of how Avastin is 
used and how Lucentis is used, those patients with Medicare and 
full secondary insurance are more likely to get Lucentis than 
Avastin. If you don't have secondary insurance and you have to 
pay out of pocket, you get Avastin. These are less wealthy 
patients and generally less healthy patients.
    So looking at Dr. Gower's data, the Lucentis rate was lower 
than the average Medicare patient, while the Avastin rate was 
the same, suggesting either Lucentis protects against stroke, 
which seems unlikely, or it's a different population. And that, 
in fact, is what we're finding in our analysis of the Medicare 
database. There are so many confounding variables. You have to 
adjust particularly for wealth and concomitant diseases.
    Now, the other report that was talked about was a report 
out of Duke, and contrary to what we heard today--in fact, I 
brought the paper along. And when these confounding variables 
are addressed, the concluding paragraph is as follows: ``In 
conclusion, we found no evidence of increased risks of 
mortality, myocardial infarction, bleeding or stroke among 
Medicare beneficiaries who received intravitreous Lucentis or 
Avastin for wet AMD.''
    So when authorities who deal with Medicare databases 
analyze the data, they understand that you have to do this 
analysis, this adjustment for confounding variables. It's an 
ongoing problem and something that we're acutely aware of in 
our ongoing analysis of the Medicare database.
    So to answer your question, I do not believe there's any 
data at this point in time to suggest an increased risk with 
Avastin, though it needs to be monitored and studied further.
    The Chairman. Dr. Adamis, your company has paid for a 
research study that purports to show safety concerns with the 
use of Avastin for macular degeneration. But the National 
Institutes of Health has provided the committee with a written 
statement that indicates they may not agree with these 
findings. Other experts consulted by the committee also believe 
that there are shortcomings in the methodology of the study 
that you all conducted. Is Genentech willing to address these 
criticisms?
    Dr. Adamis. Of course. These were Medicare claims database 
studies. The first was the one that was sponsored by us at 
Johns Hopkins. It was an unrestricted grant, which means that 
Dr. Gower had full control over the data and the conclusions 
that she made. We had that study done because, to date, prior 
to CATT, there was zero data on the safety of Avastin versus 
Lucentis in large populations.
    So if, for instance, the drug increases the risk of stroke 
by 1 percent, you can't learn that unless you study tens of 
thousands of patients. You don't have the power in the small 
number of patients studied in some other trials to detect that 
difference. And so the only way you can do that is with a 
Medicare claims database study.
    And Medicare claims database studies are not conclusive. I 
agree with that. However, it was the best way to look to see if 
there is a safety signal. What was surprising to us was, when 
Dr. Gower completed her analysis, she in fact found the same 
signal that was found in the Duke study, and that was an 
increased risk of both stroke and death.
    So when two studies that are very large--the Duke study 
looked at the 2006 patient Medicare claims database, and the 
Gower study looked at 2008 and 2009--show you the exact same 
signal, although not conclusive, you don't ignore it.
    And then it was surprising when the CATT data came out; and 
although CATT was a 1,200 patient trial, it wasn't powered to 
detect those 1 percent differences. Nonetheless it showed this 
29 percent increased risk of serious side effects, with 80 
percent of them landing the patient in the hospital.
    So now you have three large studies showing this, none of 
them definitive, but I don't think we can ignore them.
    The Chairman. Okay. All right, Dr. Tunis, many people 
believe that more needs to be done to give the government the 
tools to address rising drug costs. In your time at CMS as 
chief medical officer, Dr. Tunis, what did you find were the 
biggest policy barriers to lowering drug costs and preserving 
high quality?
    Dr. Tunis. Again, I think this comes back to the statutory 
formulas that determine what Medicare, what price Medicare has 
to pay for a new drug that are completely insensitive to how 
much incremental clinical benefit it provides. And one example 
that's fairly well known was the example of the drug Aranesp 
for anemia that was caused by cancer chemotherapy, which was a 
new version of a previous and very closely related to another 
drug called Procrit, which treated the same problem, anemia 
from cancer chemotherapy.
    Because of the pricing systems in place at the time, 
Procrit would have been a substantially cheaper approach and 
achieve the same clinical outcomes as patients treated with 
Aranesp. But because Medicare was forced by statutory formula 
to pay 95 percent of average wholesale price for Aranesp, the 
Medicare program would end up spending $150 to $200 million 
more per year with no additional clinical benefit, no better 
treatment of anemia than if the program used only Procrit.
    The agency, CMS, had no statutory authority to do anything 
about that, other than pay 95 percent of average wholesale 
price. What happened at the time was they used an authority in 
the outpatient payment system called the equitable adjustment 
authority to try to come up with a price for Aranesp that was 
what was appropriate based on getting the same clinical 
results. That was actually put in place. But then because of 
that approach and the Medicare Modernization Act, there was 
language put in that actually prohibited Medicare from ever 
doing that again.
    And so it seems to me that whether it's the least costly 
alternative or some other version of statutory flexibility to 
set prices of drugs in some way sensitive to how much 
additional benefit, if any, is provided, would be a very 
important way for Medicare to be able to spend less on drugs 
and not harm Medicare beneficiaries in any way at all. It 
wouldn't be rationing. It would just be paying the least that 
the program could pay for a given level of clinical benefit.
    The Chairman. All right. Before I turn it over to Senator 
Corker, Ms. Swirsky, Consumers Union recently advocated to 
instill a fiduciary responsibility on the pharmacy benefit 
managers, the PBMs. It would require them to work for employers 
and insurers rather than drug companies. So why did you take 
that position, and how important do you think it is?
    Ms. Swirsky. I'm not sure where that information came from. 
We have not done anything on PBM since I've been there. It may 
be that that was something done prior to my coming on board. 
I've been at the organization for about a year. But I will be 
happy to find out and to make that----
    The Chairman. Are you familiar with the issue?
    Ms. Swirsky. A little bit, but I don't--we have not done 
anything on that recently.
    The Chairman. All right.
    Senator Corker.
    Senator Corker. Thank you, Mr. Chairman.
    It's interesting sitting up here and listening to 
testimony, and Dr. Rosenfeld and Dr. Adamis seem like very good 
folks who have a very strong disagreement, yet the testimony 
from both of you is very credible.
    The issue that Dr. Rosenfeld brought up regarding the 
rebates and the fact that physicians shouldn't be paid those 
rebates on some of the drugs he was mentioning that you make as 
a company, what is your response to that?
    Dr. Adamis. When I was practicing medicine, you would 
prescribe a medicine based on what you thought was best for 
your patient, and you never thought about what it meant for 
your practice or your hospital, and I think that's the way it 
should be done around the country.
    There are these rebates, and this can't be looked at in a 
vacuum because I have colleagues in South Carolina who don't 
prescribe Lucentis because there's a $140 tax on it when you 
use it, so it's a money loser every time you give it.
    So as I said at the outset, if we could set the system up 
so we're not incenting or disincenting people one way or the 
other, and that really you approach the issue with equipoise 
and a doctor can just be free to choose based on the evidence, 
the scientific evidence, I think that would be the best of all 
worlds.
    Senator Corker. And so this is really--what you're leading 
to is that this is something that the Federal Government has 
set up regarding the rebates, not something your specific 
company is doing relative to trying to drive this product.
    Dr. Adamis. No. I didn't mean to convey that. So there are 
rebates that the company provides, but they're----
    Senator Corker. But let me just say, if it's not to--if 
physicians should make decisions based on what's good for their 
patient, and you say the physicians really don't make decisions 
based on their own economic benefit, then why do you guys do 
that?
    Dr. Adamis. So the rebates actually lower the cost of the 
drug to Medicare, because what happens is you're required to 
report that to Federal authorities, and that goes into a 
formula--and this is getting beyond my area of expertise--that 
calculates that average sales price. So the average sales price 
actually moves down, and the amount that Medicare reimburses 
moves down. So the rebates actually lead to a lower cost of the 
drug.
    Senator Corker. But this is not something that you're 
required to do; is that correct? By the Federal Government.
    Dr. Adamis. No, but it's something that is pretty routine 
in the industry. But we're not required to do it.
    Senator Corker. Wouldn't it also lower the price to 
Medicare if you just charged a lower price without the rebate 
to the physician?
    Dr. Adamis. Correct, it would.
    Senator Corker. I mean, again, you sounded pretty credible 
on the front end, but what you're telling me right now is not 
particularly credible.
    Dr. Adamis. In what sense, sir?
    Senator Corker. Well, if the purpose in doing this is to 
lower the cost of the drug to the end user or the end payer, 
and you could get there the same way by just charging 6 percent 
less or giving a rebate to the physician who, I guess, keeps 
that, it seems to me that you are, in fact, paying that rebate 
to drive physicians to use your drug.
    Dr. Adamis. I can't say that that is the purpose behind it. 
The way it's structured--and I'm getting out of my area of 
expertise because I don't set these programs up, and I don't 
work in the commercial area of the organization. But it's for 
high-volume users of the drug. They're the ones who are 
eligible for the rebate.
    Senator Corker. So they make even more money by prescribing 
your drug, and yet your testimony was that their compensation 
isn't what drives them to use your drug.
    Dr. Adamis. I think the rebate, in a vacuum, if you looked 
at it that way, could be viewed as an incentive. But as I said, 
there are some jurisdictions, South Carolina being one of them, 
where actually even with the rebate it's a money loser. So in a 
perfect world it would be great if docs had an opportunity to 
prescribe what they want without any incentives.
    Senator Corker. But in a perfect world, you could do that 
yourself, right? I mean, in the world we live in today, which 
is not perfect----
    Dr. Adamis. I can't control, our company can't control 
South Carolina's taxes.
    Senator Corker. But let's say in Tennessee, where I live--
--
    Dr. Adamis. I don't know, sir.
    Senator Corker. I mean, am I missing something here? Am I--
--
    Dr. Adamis. I'm just getting into an area that is not my 
area of expertise. I'm the scientist in the company. I work in 
development, and I came primarily to discuss CATT and the 
differences between Lucentis and Avastin.
    Senator Corker. And I really didn't come to chase the 
rebate issue. I just heard you mention it. So am I missing 
something, Dr. Rosenfeld?
    Dr. Rosenfeld. Well, Dr. Adamis is correct. In South 
Carolina, it's a unique situation where there's a state tax on 
drug revenues, even Medicare Part B drug revenues. But in the 
rest of the country, the rebate is focused on high-volume users 
with the intent to increase their use even more.
    Senator Corker. So that a physician like you would 
prescribe that drug more than another drug because you'd make 
more money?
    Dr. Rosenfeld. Well, I'm not in the rebate program, but I 
know several large-volume practices that make a lucrative sum 
every month from the rebate program.
    Senator Corker. I wasn't really planning to chase that, but 
it was a comment made, and I appreciate the discussion.
    So, Mr. Gottlieb, on the idea of combining Parts B and D in 
Medicare and some of the difficulties you mentioned that might 
come with that, you threw it out there. It's a pretty big idea. 
What are some of the immediate issues you think that might be 
problematic with that type of a combination?
    Dr. Gottlieb. I think the discussion around rebates gets us 
some of both the attraction of doing it and the complexities of 
doing it. I mean, part of why the rebates exist in the market 
at all, or even the spread on ASP, is to help compensate 
physicians for the cost of delivering drugs.
    And I think the existence of these rebates in the market, 
it's hard to look at them in isolation around a particular 
product because the existence of rebates market-wide, and they 
exist marketwide, creates terrible distortions in the market.
    If you look at what's going on in the 340B program, which 
was mentioned here, that has resulted in terrible gaming where 
the 340B hospitals are buying up local oncology practices for 
the purposes of capturing the spread on the drugs that they're 
able to acquire at a lower price and then reselling them at a 
higher price. And so they're capturing that revenue. So you're 
seeing oncology practices consolidating around 340B hospitals, 
which is probably the last thing we want to see as a public 
health matter.
    So I think the existence of these things in the market 
across the board is creating bad distortions.
    In terms of just moving Part B into Part D, I think it 
would be enormously complex but doable, and we've talked about 
it in the past. I worked at Medicare and Medicaid in the 2004-
2005 timeframe, and it was something that was talked about, and 
talked about even in the context of MMA. Premiums would go up, 
out-of-pocket costs would go up for beneficiaries, so you'd 
have to offset that. You'd have to figure out a way to pay 
physicians directly for the true costs of the administration of 
the drugs. Somehow you'd have to, if you still do it under a 
buy and build model, where the physicians acquire the drug, 
somehow you'd have to offset the cost of that acquisition for 
the physician. There are probably financial arrangements that 
could do that, but you'd have to also pay for the 
infrastructure for the physician to be able to do that. Those 
are just some of the complexities that would ensue.
    You'd also have the reality that for certain products that 
are truly breakthrough products for which there is no 
competition, under the Part D scheme you'd probably potentially 
see prices go up. I don't think that's necessarily a bad thing 
because I think it would reflect the fact that they're able to 
take price increases because they represent true innovation in 
the marketplace. But in other cases where there might be oral 
drugs that compete with injectable drugs, you might see more 
utilization of the oral agents, which would invariably provide 
cost savings to Medicare because it would be cheaper to 
deliver.
    The last thing to keep in mind is that we're also entering 
an era right now where there's going to be multiple drugs on 
the market to attack a particular target. So if you have a 
target like VEGF or other kinds, CD20, CD30, there might be 
multiple agents that all attack the same target. You want the 
decision about using a particular agent to be driven by the 
clinical circumstances and what's best for the patient, not 
which scheme it's in. And right now you have examples where a 
decision might be driven by what scheme it's in, Part B versus 
Part D.
    Senator Corker. So those are a lot of complications. They 
seem like vague ones. As to the idea of combining B and D, it's 
a real idea, or is that just a throw-out idea?
    Dr. Gottlieb. I think it's a real idea, and it's an idea 
we've talked about in the past. The reason I caveat it with all 
the complications is----
    Senator Corker. Sounds like one of these advertisements for 
drugs on television.
    Dr. Gottlieb. What concerns me is that once it gets into a 
political context, some of these things that need to be 
addressed might not be adequately addressed.
    So, for example, where is going to be the assurance that 
physicians are compensated for the cost of truly delivering the 
drugs in their office? We've seen under the physician payment 
scheme that physician costs have increased and payments have 
stayed stagnant, so their effective income has been eroded.
    So those are the kinds of things that worry me, that once 
this kind of idea gets in the political context, the things 
that will truly make it successful and competitive won't be 
adequately addressed. What's the assurance that a future 
Congress two years from now isn't going to want to impose price 
controls in the Part D scheme to address the previously Part B 
drugs? There is no assurance there. And so you would want to 
see those things addressed in the legislation.
    Senator Corker. Dr. Tunis, you mentioned--you may have 
adequately discussed the notion of prescribing drugs based on 
outcomes, or paying for them based on outcomes, and we hear 
that a lot. You know, there was a lot of debate about that 
during the discussions regarding health care reform, and those 
of us who do what we do up here never were able to grasp a real 
way of making that happen with other providers. I know that CMS 
is working towards that end now, but do you want to expand any 
more on that notion? It's hard for me as a layman to understand 
how you really make that happen, especially as it relates to 
prescribing drugs.
    Dr. Tunis. So there's complicated versions of it, I guess, 
but in some ways the simplest----
    Senator Corker. And those probably won't work on us.
    Dr. Tunis. Right. I won't give you that one.
    But the simplest version again I think comes back to some 
notion of reference pricing, least costly alternative, or what 
we did back in Medicare with the anemia drugs, which was called 
functional equivalence at the time, which is--but I'll give the 
example of what led to the court case that took away Medicare's 
ability to use this least costly alternative approach.
    It was for two drugs to treat asthma in children and 
adults. But basically there was one drug that was a generic 
drug that was 10 cents to inhale it, and then there was another 
drug that was developed which was very closely chemically 
related that was $1.10, so 10 times the price. And when you 
actually looked at the clinical studies to see how much they 
opened up the lung airways, how much they freed up people's 
ability to breathe, it was close to identical. There was no 
clear information to suggest that there was a clinical reason 
for either a patient or a physician to want to use the more 
expensive one.
    And so under those circumstances, after very careful 
review, the Medicare contractors tried to apply the least 
costly alternative approach, and basically to pay essentially 
10 cents and you pick your drug. We'll pay 10 cents whether you 
use the really expensive one or the cheap one based on the fact 
that there's no clinical difference, and that was taken to 
court. And the reason, as I understand it, that the court 
decided that Medicare could not do that was because the 
Medicare Modernization Act told Medicare you have to pay ASP 
plus 6 percent, and ASP plus 6 percent for the more expensive 
drug was 10 times the price.
    So, you know, that's why in my testimony it seems that at a 
minimum, in situations where there's a pretty good level of 
confidence that you get the same clinical benefits for 10 cents 
or for $1.10 per treatment, there's no reason that the Medicare 
program should pay $1.10. The only argument that I've ever 
heard about why they should is that that extra money can then 
be circulated back to support innovation, or it creates an 
incentive for pharmaceutical companies to invest in new 
treatments, and that's why I added the last part of my 
testimony, which was, well, that certainly does encourage 
innovation. If you spend more money for things, people are 
going to want to invest more money to create them. But if it's 
not creating any more value for the Medicare beneficiaries, 
that doesn't seem like the best way to incentivize innovation 
necessarily.
    I don't know if that cleared it up at all, but that's the--
--
    Senator Corker. It seems like that a competitive market and 
keeping things competitive, much as has been alluded to in 
earlier testimony regarding Medicare Part D, would actually 
drive towards that end anyway, would it not?
    Dr. Tunis. I think because in Medicare Part D the 
prescription drug plans have a lot more freedom to use pricing 
tools to manage their benefits. That's exactly how they get the 
costs down. When you have drugs that are paid for under Part B 
and under the statutory constraints or lack of statutory 
flexibility is where you get these what seem like unjustifiable 
price differences, I don't think that would happen if those 
were products----
    Senator Corker. In Medicare Part D.
    Dr. Tunis. Yes, exactly.
    Senator Corker. So we had another Senator talk about some 
of his concerns about IPAB and just decisions that can be made 
by groups of unelected folks, if you will.
    But using the same line of thinking, if you were a patient 
who needed chemotherapy of some type and, to use the same 
analogy, there was only a 20 percent chance that it was going 
to be effective for you but it was the only thing left, the 
only chance left, if you will, for some type of treatment that 
might work on that type of disease, how would you employ the 
kind of thing you're talking about?
    Dr. Tunis. What I'm talking about wouldn't really come into 
play there just because we're talking about two choices that 
are clearly equivalent. In the case where you're talking about 
something that's better, a drug that's better by some measure 
and lots more expensive, so it comes up questions about is it 
actually worth the money, for example, the recent Medicare 
decision to pay for Provenge to treat prostate cancer is a good 
example, where it's $90,000 or $100,000 for a treatment that 
maybe on average extends life for three to four months, and 
that's the kind of situation where really nobody wants to touch 
it. And the fact that the National Institute of Clinical 
Excellence in the U.K. might well decide that that's not a 
cost-effective use of collective resources doesn't seem to me 
like a place that you all want to venture into or I would 
really want to venture into.
    When you really look at it in terms of all of the downward 
pressure that there's going to be on finding some way to 
constrain spending in the Medicare program over the next 10 
years, it's hard to believe we're going to be able to do all of 
that without getting into some sensitive areas of not being 
able to provide everything that doctors and patients might 
decide is what's in their best interests. But I'm not able to 
provide a lot of solutions today.
    On that kind of example, the one thing I will say is, to 
some degree, all of the different options that are out there 
for trying to constrain spending are just a matter of who you 
decide is going to take on their shoulders the weighing of 
costs against benefits. And when the government does it, it's 
government bureaucrats interfering with clinicians and 
patients. When you put financial incentives on doctors to be 
cost conscious, then essentially--there's no polite way of 
saying it--doctors don't want to ration care for their 
patients. And if you put more cost sharing on patients by 
higher deductible plans or adjusting benefit designs, you're 
just asking patients to ration their own care.
    So it's not a matter of whether or not you ration. It's 
just who you decide is going to be the rationer.
    Senator Corker. Mr. Chairman, I want to thank you for the 
hearing. It's amazing to me. I know that most of these 
witnesses were chosen by the majority, which is the way things 
work around here. But it's amazing to me that in every case, it 
seems like they believe that competitive market forces like we 
have in Medicare Part D are what drive choice and drive better 
decisions, and that rebates or things that are distortive like 
government getting involved in setting rebate levels and making 
choices really foul the process up tremendously.
    So I thank you for this very clear signal that everything 
we need to do, from these witnesses anyway, that everything we 
need to do needs to move us towards much, much greater 
competition and innovation, and I couldn't agree with that 
more, and I thank you for providing these outstanding 
witnesses.
    The Chairman. Well, I too think, Senator Corker, that we've 
had a great hearing and shed much light on the question of 
prescription drugs, their costs, and what we might do to 
alleviate those costs on behalf of consumers. I think that my 
conclusions might be somewhat different than Senator Corker's, 
but that's why we're here and that's why we debate and 
hopefully move the ball forward.
    But you've all done a great job of shedding light on the 
issue, and we thank you for coming.
    [Whereupon, at 4:14 p.m., the hearing was adjourned.]















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