[Senate Hearing 112-729]
[From the U.S. Government Publishing Office]
S. Hrg. 112-729
SHORT-SUPPLY PRESCRIPTION DRUGS: SHINING A LIGHT ON THE GRAY MARKET
=======================================================================
HEARING
before the
COMMITTEE ON COMMERCE,
SCIENCE, AND TRANSPORTATION
UNITED STATES SENATE
ONE HUNDRED TWELFTH CONGRESS
SECOND SESSION
__________
JULY 25, 2012
__________
Printed for the use of the Committee on Commerce, Science, and
Transportation
U.S. GOVERNMENT PRINTING OFFICE
79-524 WASHINGTON : 2013
-----------------------------------------------------------------------
For sale by the Superintendent of Documents, U.S. Government Printing Office,
http://bookstore.gpo.gov. For more information, contact the GPO Customer Contact Center, U.S. Government Printing Office. Phone 202�09512�091800, or 866�09512�091800 (toll-free). E-mail, [email protected].
SENATE COMMITTEE ON COMMERCE, SCIENCE, AND TRANSPORTATION
ONE HUNDRED TWELFTH CONGRESS
SECOND SESSION
JOHN D. ROCKEFELLER IV, West Virginia, Chairman
DANIEL K. INOUYE, Hawaii KAY BAILEY HUTCHISON, Texas,
JOHN F. KERRY, Massachusetts Ranking
BARBARA BOXER, California OLYMPIA J. SNOWE, Maine
BILL NELSON, Florida JIM DeMINT, South Carolina
MARIA CANTWELL, Washington JOHN THUNE, South Dakota
FRANK R. LAUTENBERG, New Jersey ROGER F. WICKER, Mississippi
MARK PRYOR, Arkansas JOHNNY ISAKSON, Georgia
CLAIRE McCASKILL, Missouri ROY BLUNT, Missouri
AMY KLOBUCHAR, Minnesota JOHN BOOZMAN, Arkansas
TOM UDALL, New Mexico PATRICK J. TOOMEY, Pennsylvania
MARK WARNER, Virginia MARCO RUBIO, Florida
MARK BEGICH, Alaska KELLY AYOTTE, New Hampshire
DEAN HELLER, Nevada
Ellen L. Doneski, Staff Director
James Reid, Deputy Staff Director
John Williams, General Counsel
Richard M. Russell, Republican Staff Director
David Quinalty, Republican Deputy Staff Director
Rebecca Seidel, Republican General Counsel and Chief Investigator
C O N T E N T S
----------
Page
Hearing held on July 25, 2012.................................... 1
Statement of Senator Rockefeller................................. 1
Statement of Senator Boozman..................................... 39
Statement of Senator Klobuchar................................... 84
Statement of Senator Lautenberg.................................. 86
Statement of Senator Begich...................................... 87
Statement of Senator Thune....................................... 89
Witnesses
Virginia Herold, Executive Officer, California Board of Pharmacy. 41
Prepared statement........................................... 44
Hon. Tom Harkin, U.S. Senator from Iowa.......................... 46
Prepared statement...........................................
Dr. David Mayhaus, Chief Pharmacy Director, Cincinnati Children's
Hospital Medical Center; Member, Executive Committee,
Children's Hospital Association Pharmacy Forum................. 47
Prepared statement........................................... 49
Hon. Elijah E. Cummings, Ranking Member, U.S. House Committee on
Oversight and Government Reform................................ 51
Prepared statement........................................... 53
John Coster, Ph.D., R.Ph., Senior Vice President, Government
Affairs and Director, NCPA Advocacy Center, National Community
Pharmacists Association........................................ 55
Prepared statement........................................... 57
John M. Gray, President and CEO, Healthcare Distribution
Management Association (HDMA).................................. 60
Prepared statement........................................... 61
Patricia Earl, Industry Analyst, National Coalition of
Pharmaceutical Distributors (NCPD)............................. 62
Prepared statement........................................... 64
Appendix
Allan Coukell, Director, Medical Programs, Pew Health Group, The
Pew Charitable Trusts, prepared statement...................... 95
Letter dated August 2, 2012 to Chairman John D. Rockefeller IV,
Committee on Commerce, Science, and Transportation from Curtis
Rooney, President, Healthcare Supply Chain Association......... 98
Letter dated August 31, 2012 to Hon. John D. Rockefeller,
Committee on Commerce, Science, and Transportation from John M.
Gray, President and CEO, Healthcare Distribution Management
Association.................................................... 111
Mark Snyder, Chief Executive Officer, Superior Medical Supply,
Inc., prepared statement....................................... 99
Response to written questions submitted by Hon. Roger F. Wicker
to:
Virginia Herold.............................................. 107
Dr. David Mayhaus............................................ 109
Dr. John Coster.............................................. 109
John M. Gray................................................. 112
Patricia Earl................................................ 112
Response to written questions submitted by Hon. John Boozman to:
Virginia Herold.............................................. 108
Dr. David Mayhaus............................................ 109
Dr. John Coster.............................................. 111
John M. Gray................................................. 112
Patricia Earl................................................ 114
SHORT-SUPPLY PRESCRIPTION DRUGS: SHINING A LIGHT ON THE GRAY MARKET
----------
WEDNESDAY, JULY 25, 2012
U.S. Senate,
Committee on Commerce, Science, and Transportation,
Washington, DC.
The Committee met, pursuant to notice, at 2:35 p.m. in room
SR-253, Russell Senate Office Building, Hon. John D.
Rockefeller IV, Chairman of the Committee, presiding.
OPENING STATEMENT OF HON. JOHN D. ROCKEFELLER IV,
U.S. SENATOR FROM WEST VIRGINIA
The Chairman. Good afternoon. This hearing will come to
order, and it should be an interesting hearing. Others will be
appearing, do not despair.
We are holding this hearing today because some, I would
say, very unscrupulous people have figured out a way to make a
quick buck at the expense of sick patients, hospitals, and, in
the end, our entire health care system. For the past few years,
hospitals all over the country have been struggling with the
terrible problems of drug shortages: they don't have certain
drugs when they need them.
The drugs that have been in short supply are not allergy
drugs. They're not blood pressure pills. They tend to be cancer
drugs, powerful drugs that doctors need to treat cancer
patients and/or to perform surgery. These drugs, in their
shortage, make it very difficult and sometimes impossible for
doctors and for hospitals and nurses and other health care
professionals to do their job, which is to care for us when
we're critically ill.
A West Virginia hospital recently told me about two young
ovarian cancer patients who traveled several hours to reach the
hospital and start their treatment. When they arrived, the
hospital had to send them home. The hospital had to send them
home because it didn't have the needed drug. They didn't say it
didn't exist. They just didn't have it.
The main purpose of this hearing today is not to talk about
the causes of drug shortages on a general scale. There have
been hearings in other committees about this issue. I know that
the Food and Drug Administration and the drug industry are
working hard to avert shortages, and I applaud them and urge
them to keep up their work. There would be nothing more
terrifying than to think about being in a hospital and needing
a drug, and you can't get it, because somebody else is hoarding
it and jacking up the price on it.
What we are here to talk about today are the opportunists
who suddenly appear when drugs are in short supply. They are
profiteers, people who exploit the misery of sick patients to
make a quick buck. We usually call them gray market companies.
There are other names that are ascribed to them, but we'll
stick with gray market companies.
These gray market companies seem to know when drugs are in
shortage--that is their leverage, their key to success--even
before the hospitals know it. And they always seem to be able
to get their hands on short-supply drugs, even when authorized
prescription drug distributors don't have them in stock.
For the past few months, my friends, Senator Harkin, who I
believe is coming, and Congressman Elijah Cummings, who I'm
pretty sure is coming--he's running a meeting now but I think
he wants to make a statement, and I want him to. I'm hopeful
also that Senator Enzi might be here. He certainly is invited.
We would be honored to have him. And myself--all of us have
been investigating who these gray market companies are and
where they're getting their drugs.
At this point, I ask unanimous consent to insert our staff
report on this investigation into the record of this hearing.
What we have found is that our drug distribution system has
weak points, and gray market companies know exactly how to
exploit weak points. We have learned that there are people in
the drug supply chain who ignore their professional and
business obligations and sell their drugs to gray market
companies instead of to doctors and to patients or hospitals.
This is the report.
We have carefully mapped out dozens of cases where
prescription drugs that should have been delivered to hospitals
and administered to sick patients instead spent weeks
circulating in the gray market. We're not sure about everything
that happens to the drugs when they are being passed from hand
to hand in the gray market, but here's one thing we do know.
Every company in the chain charges a big markup.
By the time the gray market has done its work, a cancer
drug that originally costs maybe $10 or $12 has become a drug
that costs $500 or even $1,000. You're talking about markups of
1,000 percent or more. And the person who makes the drug, the
distributor who distributes the drug, to the hospital who needs
the drug--but in between is the gray market, these little boxes
of people who are using shortages to drive up the cost of--the
profit they can make.
This kind of price gouging is disgusting to me and,
obviously, indefensible. Not even gray market companies
themselves are willing to defend it. I invited the five
companies we looked at in this investigation to testify at this
hearing. They all declined my invitation, and that's because
they all know what they're doing is wrong. I could subpoena
them. We've subpoenaed some of their records, and maybe some
day I'll subpoena them, just because I like to see people who
don't do good things squirm.
We need to close down this gray market, I would suggest to
you, and do a better job making sure that prescription drugs
are safe and affordable. And that's what I look forward to
talking about today.
[The information previously requested follows:]
``Shining Light on the Gray Market''
An Examination of Why Hospitals Are Forced to Pay Exorbitant Prices for
Prescription Drugs Facing Critical Shortages
Staff Report prepared for: Senator John D. Rockefeller IV, Chairman,
Senate Committee on Commerce, Science, and Transportation, Senator Tom
Harkin, Chairman, Senate Committee on Health, Education, Labor, and
Pensions, Representative Elijah E. Cummings, Ranking Member, House
Committee on Oversight and Government Reform--July 25, 2012
Table of Contents
Executive Summary
I. The Growing Shortages of Drugs Used to Treat Critically Ill Patients
A. The Impact of Drug Shortages on Patients and Hospitals
B. The Causes of Drug Shortages
C. The Appearance of Gray Market Companies
D. How Drug Distribution Chains Typically Work
E. Background on Congressional Investigation
II. Findings
A. Exorbitant Prices Charged for Drugs in Gray Market
1. Significant Markups Throughout Gray Market Distribution
Chains
2. Similar Results Found for All Five Shortage Drugs Examined
3. Additional Information on Gray Market Chains
B. How Drugs Enter the Gray Market
1. Drugs Entering Gray Market Primarily Through Pharmacies
2. Some Pharmacies Selling Their Entire Inventories Into Gray
Market
3. Using Pharmacies as Purchasing Agents for Shortage Drugs
4. Establishing Fake Pharmacies
5. Common Ownership and Shared Employees
6. Wholesalers Handling the Drugs Have Disciplinary or Licensing
Problems
Conclusion
Appendix
______
Executive Summary
This investigation has examined a group of companies that buy and
sell prescription drugs that hospitals and other health care providers
urgently need to treat their sick patients. Operating outside of
authorized distribution networks, these ``gray market'' companies take
advantage of drug shortages to charge exorbitant prices for drugs used
to treat cancer and other life-threatening conditions. These companies'
questionable business practices put patients at risk and cost the
United States health care system hundreds of millions of dollars each
year.
The Role of Gray Market Companies in Drug Shortages
Over the past several years, a growing number of prescription drugs
sold in the United States have experienced supply shortages. Because
these shortages have been most severe among a group of injectable drugs
used to treat patients with cancer and other serious illnesses, they
have had a particularly serious impact on hospitals. Hospitals across
the country have struggled to provide appropriate care to their
patients and have spent hundreds of millions of dollars managing the
administrative and clinical problems drug shortages cause.
During drug shortages, hospitals are sometimes unable to buy drugs
from their normal trading partners, usually one of the three large
national ``primary'' distributors, AmerisourceBergen, Cardinal Health,
or McKesson. At the same time, hospitals are deluged by sales
solicitations from gray market companies offering to sell the shortage
drugs for prices that are often hundreds of times higher than the
prices they normally pay. Hospital pharmacists have been both angered
and confused by these offers. They have asked, ``why the hospitals
can't get these products but the `scalpers' can.''
Gray Market Drugs ``Leak'' Out of Authorized Distribution Chains
The drug ``pedigree'' documents reviewed in this investigation show
that some short-supply injectable drugs do not reach health care
providers through the manufacturer-wholesaler distributor-dispenser
chain that policymakers and industry stakeholders present as the
typical model for drug distribution. Instead, these drugs ``leak'' into
longer gray market distribution networks, in which a number of
different companies--some doing business as pharmacies and some as
distributors--buy and re-sell the drugs to each other before one of
them finally sells the drugs to a hospital or other health care
facility.
In more than two-thirds (69 percent) of the 300 drug distribution
chains reviewed in this investigation, prescription drugs leaked into
the gray market through pharmacies. Instead of dispensing the drugs in
accordance with their professional duties, state laws, and the
expectations of their trading partners, these pharmacies re-sold the
drugs to gray market wholesalers. Some pharmacies sold their entire
inventories into the gray market. The wholesalers in turn sold the
drugs--usually at significant markups - to other gray market companies.
In the drug chain illustrated below, which documents the shipment
of 25 vials of a chemotherapy drug called fluorouracil in September
2011, the leakage point was a Maryland pharmacy called Priority
Healthcare. Instead of dispensing the drug to patients, the owner of
this company, Marianna Pesti, sold the vials to a New Jersey
distributor called Tri-Med America, which was owned by Ms. Pesti's
husband, Gabor Szilagyi. The drugs were sold five more times before
reaching their end user, a hospital in California.
Gray Market Companies Aggressively Mark Up Drug Prices
As the drugs pass through these gray market distribution chains,
they are significantly marked up, sometimes to prices that are hundreds
of times higher than the prices that hospitals and other health care
providers normally pay. The markups in these chains often bear no
relation to the companies' cost of purchasing, shipping, or storing the
drugs. Instead, they reflect an intent to take advantage of the acute
demand for short-supply drugs by charging health care providers
exorbitant prices.
In the example above, each company in the chain marked up the vials
by large margins, two by more than 100 percent, even if they never took
physical custody of the vials or only held them for a short time. The
hospital that purchased the drug ended up paying $600 per vial for a
drug that a pharmacy had purchased for $7 per vial. Hospitals purchase
short-supply drugs at these exorbitant prices because, as one hospital
explained, ``We have no other choice . . . We have to take care of our
patients.''
Other significant findings of this investigation are:
``Fake Pharmacies'' Acquire Prescription Drugs from Authorized
Distributors and then Sell Them Into the Gray Market. The
investigation has identified a number of businesses holding
pharmacy licenses that do not dispense drugs, but instead
appear to operate for the sole purpose of acquiring short-
supply drugs that can be sold into the gray market.
``Drug Brokers'' Recruit Pharmacies to Purchase Drugs for the
Gray Market. Some gray market wholesalers gain access to
shortage drugs by recruiting pharmacies to act as their
purchasing agents.
Gray Market Business Practices Are Widespread. Pedigree and
price information collected for five different short-supply
injectable drugs, documenting the activities of 125 different
companies, showed similar patterns of leakage and aggressive
gray market price markups. For all five drugs, units normally
costing $10 to $20 were regularly marked up to prices of $200
or more while they traveled through the gray market.
Gray Market Drugs Are Marked Up as They Quickly Pass from Owner
to Owner. On average, the prescription drugs examined in this
investigation were owned by three to four different gray market
businesses before being sold to a hospital; most of the drugs
traveled through the gray market in five days or less.
Gray Market Companies Sometimes Charge Hospitals Significantly
Different Prices for the Same Drug Product on the Same Day.
Gray market companies sold units of the exact same drug product
to different hospitals on the same day at significantly
different prices. On the same day, for example, a gray market
company sold a drug to a U.S. military hospital for $315 per
unit, and sold the exact same drug product to another hospital
for $215 per unit.
I. The Growing Shortages of Drugs Used to Treat Critically Ill Patients
The Food and Drug Administration (FDA) defines a drug shortage as
``a situation in which the total supply of all clinically
interchangeable versions of an FDA-regulated drug is inadequate to meet
the current or projected demand at the patient level.'' \1\ Federal
government officials and health care professionals have observed a
growing rate of shortages in recent years. According to drug shortage
tracking conducted by the FDA's Center for Drug Evaluation and Research
(CDER) and the American Society of Health-System Pharmacists, drug
shortages more than quadrupled between 2005 and 2011. For example, CDER
reported that drug shortages increased from 61 in 2005 to 251 in
2011.\2\
---------------------------------------------------------------------------
\1\ U.S. Food and Drug Administration, A Review of FDA's Approach
to Medical Product Shortages, 8 (Oct. 31, 2011).
\2\ Id. at 9 (2005-10 shortage numbers). See also U.S. Food and
Drug Administration, Overview: U.S. Drug Shortage Trends, Reasons for
Drug Shortages, FDA's Role, View of the Future, 10 (July 2012) (2011
shortage numbers). ASHP defines a drug shortage as ``a supply issue
that affects how the pharmacy prepares or dispenses a drug product or
influences patient care when prescribers must use an alternative
agent,'' Rola Kaakeh, et al., Impact of Drug Shortages on U.S. Health
Systems, Vol. 68 American Journal of Health-Systems Pharmacy, 1811
(Oct. 1, 2011).
---------------------------------------------------------------------------
Figure I--FDA Count of U.S. Drug Shortages
The rising number of drug shortages has been concentrated primarily
in the area of generic sterile injectable drugs, liquids packaged in
sterile glass vials that are ``parenterally'' administered to the body
through syringes or an intravenous (i.v.) administration set. Drugs
administered in this manner reach their target treatment area more
quickly than oral drugs, but also carry greater risks of infection and
complications caused by incorrect dosages.\3\ Administering a drug
intravenously usually requires a trained health care professional who
can carefully monitor the dosage and the patient's reaction to the
drug.\4\
---------------------------------------------------------------------------
\3\ David E. Golan, et al., Principles of Pharmacology, 3rd
Edition, 30-31 (2012).
\4\ Id.
---------------------------------------------------------------------------
Of the 251 drug shortages the CDER reported in 2011, 182 of the
shortages (73%) involved sterile injectables.\5\ An October 2011
analysis of short-supply drugs conducted by the IMS Institute for
Healthcare Informatics also found that most of the reported shortages
involved generic sterile injectable drugs. The largest number of drugs
in this group (20) were sterile injectables used in chemotherapy
treatment for cancer patients.\6\ In its report, IMS noted the group of
patients who were most directly affected by these shortages:
---------------------------------------------------------------------------
\5\ U.S. Food and Drug Administration, supra note 2, at 10.
\6\ IMS Institute for Healthcare Informatics, Drug Shortages: A
Closer Look at Products, Suppliers, and Volume Volatility, 7 (Nov.
2011).
The drug shortage problem is almost entirely affecting generic
injectable drugs, which means that the impacted patients are
mostly acute care patients being treated by providers in
hospitals and out-patient facilities. Of the total generic
injectable market, half are on the shortages list.\7\
---------------------------------------------------------------------------
\7\ Id. at 3.
The sterile injectables in shortage have also included frequently-
used items such as anesthetics for surgery, ``crash cart'' drugs used
in emergency rooms, and electrolytes for intravenous feeding.\8\ A
representative of the American Society of Health-System Pharmacists
recently commented that the shortages have ``the potential to affect
almost every patient that comes into a hospital.'' \9\
---------------------------------------------------------------------------
\8\ See, e.g., Senate Committee on Health Education Labor &
Pensions, Prescription Drug Shortages: Examining a Public Health
Concern and Potential Solutions, 112th Cong. (Dec. 15, 2011) (written
statement of Sherry Glied, Ph.D., Assistant Secretary for Planning and
Evaluation, Department of Health and Human Services).
\9\ Waning Cancer Drug Supplies a Growing Concern at St. Jude
Children's Research Hospital, The Commercial Appeal (Mar. 25, 2012).
---------------------------------------------------------------------------
A. The Impact of Drug Shortages on Patients and Hospitals
According to many health care professionals, the recent widespread
shortage of sterile injectable drugs has had a serious impact on
patients suffering from cancer and other life-threatening conditions.
Nearly all hospitals across the country (99.5%) reported experiencing
at least one serious drug shortage from January to June 2011.\10\ When
drugs are unavailable, health care providers are sometimes forced to
delay treatments or procedures, or to make the difficult choice to use
an alternative treatment. Either choice can lead to negative
consequences. Delaying treatment can allow conditions to worsen or can
even lead to death, while alternative therapies may be less effective
than shortage drugs or may cause more significant side effects.\11\
---------------------------------------------------------------------------
\10\ American Hospital Association, AHA Survey on Drug Shortages
(July 12, 2011).
\11\ See, e.g., Senate Committee on Health Education Labor &
Pensions, Prescription Drug Shortages: Examining a Public Health
Concern and Potential Solutions, 112th Cong. (Dec. 15, 2011) (statement
of Dr. John Maris, Chief of the Division of Oncology, Children's
Hospital of Philadelphia); Senate Committee on Finance, Drug Shortages:
Why They Happen and What They Mean, 112th Cong. (Dec. 7, 2011)
(statement of Dr. Patrick Cobb, Oncologist, Frontier Cancer Center,
Billings, MT); Chemotherapy Shortage Prevents Patients from Getting
Treatment, The Daily Oklahoman (Aug. 26, 2011) (quoting Erin Fox,
Pharm.D, Manager, Drug Information Service, University of Utah
Hospitals and Clinics, on the difficulty of using alternative
treatments during drug shortages: ``That's what makes a chemo shortage
very difficult. These aren't easy drugs to switch out like Legos.'').
---------------------------------------------------------------------------
Hospitals also spend a significant amount of money and
administrative resources managing drug shortages. A 2011 American
Society of Health-System Pharmacists (ASHP) report estimated that drug
shortages cost hospitals more than $400 million a year, including the
higher costs that hospitals pay to purchase shortage drugs and the cost
of labor that is dedicated to managing the shortages.\12\ Increased
labor costs associated with drug shortages include time that
pharmacists, physicians, nurses, and other staff spend searching for
shortage drugs or alternative treatments. Some hospitals have dedicated
staff members to managing shortages on a full-time basis.
---------------------------------------------------------------------------
\12\ Kaakeh, supra note 2, at 1818.
---------------------------------------------------------------------------
B. The Causes of Drug Shortages
Policymakers have offered a number of different explanations for
why drug shortages occur. The short-term supply of a drug may drop
because a manufacturer shuts down a production line to investigate a
quality problem, or upgrade or repair its facilities. In the case of
sterile injectables, which are usually manufactured by only two or
three companies and require specialized equipment and processes, it is
difficult for competitors to quickly increase their production to make
up for this lost production.\13\ In some cases, manufacturers stop or
slow down production because they cannot obtain the Active
Pharmaceutical Ingredients (API) they need to produce the drugs.\14\
---------------------------------------------------------------------------
\13\ U.S. Department of Health and Human Services, Office of the
Assistant Secretary for Planning and Evaluation (ASPE), Office of
Science and Data Policy, ASPE Issue Brief: Economic Analysis of the
Causes of Drug Shortages (Oct. 2011).
\14\ Id.
---------------------------------------------------------------------------
According to an FDA review of 127 drug shortages reported in 2010
and 2011, the most common cause for shortages was manufacturers'
decisions to shut down facilities to address drug quality problems.\15\
A Government Accountability Office (GAO) analysis of 15 drug shortages
occurring in 2009 and 2010 found that 12 of the shortages were caused
by ``manufacturing problems.'' \16\ Manufacturers themselves have
reported to ASHP that the top reason for these shortages was
``production-related issues and increased demand.'' \17\
---------------------------------------------------------------------------
\15\ Id.
\16\ U.S. Government Accountability Office, Drug Shortages: FDA's
Ability to Respond Should be Strengthened, 22-23 (Nov. 2011) (GAO-12-
116).
\17\ IMS Institute for Healthcare Informatics, supra note 6, at 9.
---------------------------------------------------------------------------
Other observers have pointed to the broader business dynamics of
the generic sterile injectable market to explain the recent shortages.
They argue that the strong bargaining power of group purchasing
organizations (GPOs) and Medicare Part B reimbursements tied to the
``Average Sales Price'' cause manufacturers to operate with only very
small profit margins.\18\ According to these observers, manufacturers
do not make the investments necessary to increase their capacity to
produce the drugs, and potential competitors have no financial
incentive to enter the market, because they have little or no ability
to raise the prices of their products.\19\
---------------------------------------------------------------------------
\18\ Group purchasing organizations, or ``GPOs,'' are organizations
that act as purchasing intermediaries between medical product vendors
and the hospitals, pharmacies, and other health care providers that are
members of the GPOs. Among other things, GPOs negotiate the prices for
which drug manufacturers sell prescription drugs to GPO members.
Typically, drug manufacturers ship their products to wholesalers who
then sell the drugs to health care providers at GPO-negotiated prices.
\19\ See e.g., Senate Committee on Finance, Drug Shortages: Why
They Happen and What They Mean, 112th Cong. (Dec. 7, 2011) (statement
of Rena M. Conti Ph.D., Assistant Professor of Health Policy and
Economics, University of Chicago); See also Ali Yurukoglu, Medicare
Reimbursement and Shortages of Sterile Injectable Pharmaceuticals
(National Bureau of Economic Research, Working Paper No. 17987 at 7)
(April 2012)) (online at http://www.nber.org/papers/
w17987.pdf?new_window=1).
---------------------------------------------------------------------------
C. The Appearance of Gray Market Companies
As a growing number of sterile injectable drugs went into short
supply in 2010 and 2011, hospitals around the country began receiving
increasing numbers of telephone, fax, and e-mail solicitations from
``gray market'' drug companies.\20\ These companies claimed to have
supplies of short-supply drugs that the hospitals could not obtain
through their normal distribution channels. The companies' offers
generally mentioned the fact that the drugs were in short supply and
often suggested that their supplies were very limited.\21\
---------------------------------------------------------------------------
\20\ Institute for Safe Medication Practices (ISMP) Medication
Safety Alert, Gray Market, Black Heart: Pharmaceutical Gray Market
Finds a Disturbing Niche during the Drug Shortage Crisis (Aug. 25,
2011). More than half of respondents reported daily solicitations.
\21\ Premiere Healthcare Alliance, Buyer Beware: Drug Shortages and
the Gray Market (Aug. 2011) (quoting one solicitation as stating ``[w]e
only have 20 of this drug left and quantities are going fast'').
---------------------------------------------------------------------------
The gray market companies appeared to be taking advantage of supply
shortages to sell the drugs at prices much higher than hospitals paid
their normal suppliers. An analysis by the Premier Healthcare Alliance
of 636 solicitations made to hospitals in early 2011 found that gray
market companies were selling short-supply drugs at prices that were on
average 650% higher than the prices hospitals paid for the drugs
through their group purchasing agreements. In some cases, companies
were selling the drugs at markups as high as 3,000% to 4,000% over
their typical contract prices.\22\
---------------------------------------------------------------------------
\22\ Id.
---------------------------------------------------------------------------
In May 2011, for example, Mark Richerson, the pharmacy director of
Christus Santa Rosa Health Care in San Antonio, Texas, reported that
Allied Medical Supply, a gray market company based in Miami, had
offered to sell him 2-gram vials of the shortage cancer drug cytarabine
for $995 per vial.\23\ The hospital's normal average purchase price for
the drug was $15.76 per vial. Mr. Richerson told the San Antonio
Express-News:
---------------------------------------------------------------------------
\23\ Drug Shortages, Skyrocketing Prices Anger Pharmacists, San
Antonio Express-News (May 3, 2011).
I don't understand this shortage, and it makes me angry because
the drug is unavailable for patients who need it. . .What I
want to know is, how did these distributors get this drug when
no one else has it, and what is the basis for their pricing?
Isn't this kind of price gouging illegal? \24\
---------------------------------------------------------------------------
\24\ Id.
Many hospital pharmacists and purchasing agents like Mr. Richerson
were frustrated and angered by gray market solicitations. When the
Institute for Safe Medication Practices (ISMP) surveyed a large group
of hospitals in July and August 2011, it received hundreds of comments
complaining about the gray market solicitations and asking ``why
hospitals can't get these products, but the `scalpers' can.'' \25\
Hospital pharmacists also ``reported feeling pressured by physicians
and hospital administrators to purchase medications from the gray
market.'' \26\
---------------------------------------------------------------------------
\25\ Institute for Safe Medication Practices, supra note 20.
\26\ Id.
---------------------------------------------------------------------------
Choosing between having no supply of a drug or purchasing the drug
at an exorbitant price from an unknown gray market company raised
difficult ethical and business questions for hospitals. While some
hospitals set policies to buy drugs only through their regularly
trusted networks,\27\ others decided to buy drugs from gray market
companies because, as one hospital pharmacist explained, ``[w]e have no
other choice . . . We have to take care of our patients.'' \28\
According to a report in a recent newsletter of the National
Association of Children's Hospitals and Related Institutions (NACRI):
---------------------------------------------------------------------------
\27\ See, e.g., Eric T. Rosenthal, Frustration Over Gray-Market
Drugs Lingers Throughout Nation, Journal of the National Cancer
Institute (Feb. 22, 2012) (``Our pharmacy purchasing department
receives [gray market] solicitations every day, but we disregard them
all. We have a very conservative, black-and-white approach and will not
use any drugs that come from outside our regular wholesalers or
manufacturers.'').
\28\ San Antonio Express-News, supra note 23. See also Shortages
Are Often Costly for Hospitals, West Central Tribune (Nov. 17, 2011)
(quoting the pharmacy director at Rice Memorial Hospital in Willmar,
Minnesota as saying that the hospital tries to avoid purchasing
prescription drugs from secondary wholesalers ``if at all possible''
and has only made such purchases ``on occasion where there literally
were no other options'').
Some children's hospitals refuse to deal with the gray market
in any capacity. Others only purchase from gray market
distributors when they've exhausted all other outlets for
access to a drug critical in a life-threatening situation for a
patient and if the pedigree contains documented proof of origin
and transfer. There are risk management and quality and
efficacy issues in addition to the exorbitant cost of gray
market drugs. The astronomical cost of the gray market cannot
be passed on to the patient or payer, so it must be absorbed by
the hospital.\29\
---------------------------------------------------------------------------
\29\ John VanEeckhout, Financial Implications of the Drug Shortage
Crisis, Children's Hospitals Today (Winter 2012).
Many hospitals and other stakeholders expressed concern about the
safety of drugs purchased from gray market companies because they did
not understand how gray market vendors obtain short-supply prescription
drugs. During a recent FDA workshop on drug shortages, an executive of
drug manufacturer APP Pharmaceuticals explained, ``we don't know how it
gets there either. We're as perplexed as the customers are, the health
care professionals are.'' \30\ A representative of the University of
Utah Health System explained during the workshop why it had implemented
a policy not to purchase prescription drugs from gray market vendors:
---------------------------------------------------------------------------
\30\ Transcript of Workshop, Food and Drug Administration, Center
for Drug Evaluation and Research, Drug Shortage Workshop (Sept. 26,
2011) at 316-17 (statement of Scott Meacham, Executive Vice President &
Chief Commercial Officer, APP Pharmaceuticals).
Now we feel like there are very significant safety issues with
these products. We don't know where they've come from. We don't
know if they've stored [sic] properly, so it's been our
hospital's policy not to purchase from these companies, and we
have not ever purchased from those companies.\31\
---------------------------------------------------------------------------
\31\ Id. at 69 (statement of Erin R. Fox, Pharm.D, Manager, Drug
Information Service University of Utah Hospitals & Clinics).
The Fox Chase Cancer Center in Philadelphia will not purchase
prescription drugs in the gray market for the same reason: ``It's not
because of the cost issues, but the main thing is: If I can't be
absolutely sure of the integrity of the drug, then I can't administer
it to a patient.'' \32\
---------------------------------------------------------------------------
\32\ Jaimy Lee, Providers Fuel Gray Market: Some Sell While Others
Buy During Drug Shortage, Modern Healthcare (Sept. 5, 2011).
---------------------------------------------------------------------------
Some hospital pharmacists believe that gray market wholesalers
contact them to learn which drugs the hospitals are having trouble
acquiring so that the gray market wholesalers can quickly attempt to
buy quantities of those drugs. A drug buyer at All Children's Hospital
in St. Petersburg, Florida, explained, ``[t]hey will ask you, `What are
you having a hard time getting?' '' She said that answering the
question is ``the worst thing you can do, because then they will go and
buy it all up from the manufacturers.'' \33\
---------------------------------------------------------------------------
\33\ Short of Drugs, Hospitals Wary of `Gray Market,' St.
Petersburg Times (Nov. 7, 2011).
---------------------------------------------------------------------------
D. How Drug Distribution Chains Typically Work
A typical drug distribution chain has three elements: (1) a
manufacturer, which creates and sells a prescription drug to (2) a
wholesale distributor, which then sells the drug to (3) a hospital or
pharmacy, which dispenses it to patients. (See Figure II).
Figure II--Commonly Understood Drug Distribution Model
In some cases, additional authorized parties might be involved in
these chains. Drug manufacturers sometimes sell their products to
``repackagers,'' before the drugs are distributed.\34\ In addition,
large ``primary'' distributors sometimes sell drugs to ``secondary''
distributors, which then sell the drugs to pharmacies or hospitals.
Such sales to secondary distributors comprise only a small percentage
of primary distributors' sales. Distributors that have an ongoing
relationships with manufacturers serve as ``authorized distributors of
record'' (ADR) for the manufacturers.\35\ About 85 percent of all
revenues in the wholesale market are generated by three national
distributors--AmerisourceBergen, Cardinal Health, and McKesson--that
serve as ADRs for many manufacturers.\36\ Distributors that
predominantly buy prescription medicines from the manufacturers and
predominantly distribute them directly to health care providers such as
hospitals and pharmacies are called ``primary'' distributors.\37\
``Secondary'' distributors are also sometimes ADRs, and they obtain
access to drugs from primary distributors or other sources.\38\ Figure
III shows the FDA's illustration of a typical distribution chain.
---------------------------------------------------------------------------
\34\ ``In the U.S., wholesale drugs in bulk containers are often
repackaged into smaller containers prior to sale to an end user.
Repackaging operations are performed by independent entities, wholesale
distributors, or by distribution centers owned by large pharmacies.''
Food and Drug Administration, Counterfeit Drug Task Force Report
(October 2003).
\35\ Authorized distributors of record are ``distributors with whom
a manufacturer has established an ongoing relationship to distribute
such manufacturer's products.'' 21 U.S.C. Sec. 353(e)(3)(A).
\36\ Pew Charitable Trusts, Pew Health Group, After Heparin:
Protecting Consumers from the Risks of Substandard and Counterfeit
Drugs, 63 (July 12, 2011) (online at http://www.pew
health.org/reports-analysis/reports/after-heparin-85899367953).
\37\ Healthcare Distribution Management Association, HDMA Fact
Sheet on PDMA (online at http://www.healthcaredistribution.org/
press_room/pdma_facts.asp).
\38\ Id.
---------------------------------------------------------------------------
Figure III--FDA Drug Distribution Model
Distributors and pharmacies play distinct roles in the distribution
chain and are subject to different regulatory and licensing
requirements. Under Federal law, distributors have the authority to
purchase drugs from manufacturers and deliver them to pharmacies,
hospitals, and other parties that are not patients.\39\ Pharmacies are
the end point of the chain, responsible for dispensing the drug in a
manner that is consistent with the appropriate treatment of a
patient.\40\
---------------------------------------------------------------------------
\39\ Under Federal law, the wholesale distribution of drugs is
defined as the ``distribution of drugs . . . to other than the consumer
or patient.'' 21 U.S.C. Sec. 353(e)(3)(B).
\40\ According to the Model Pharmacy Act, the ``Practice of
Pharmacy'' means ``the interpretation, evaluation, and implementation
of Medical Orders; the Dispensing of Prescription Drug Orders;
participation in Drug and Device selection; Drug Administration; Drug
Utilization Review (DUR); the Practice of Telepharmacy within and
across state lines; Drug or Drug-related research; the provision of
Patient Counseling; the provision of those acts or services necessary
to provide Pharmacist Care in all areas of patient care, including
Primary Care, Medication Therapy Management, Collaborative Pharmacy
Practice, the ordering, conducting, and interpretation of appropriate
tests, and the recommendation and administration of immunizations.''
National Association of Boards of Pharmacy, Model State Pharmacy Act
Sec. 104.
---------------------------------------------------------------------------
In addition to the obligations that come with their licenses as
distributors or pharmacies, companies involved in drug distribution
chains often also have contractual obligations to their trading
partners. Most large distributors purchase drugs from manufacturers
pursuant to ADR agreements, which sometimes restrict the distributors'
freedom to buy and sell the drugs. The drug manufacturer Hospira, for
example, requires its ADRs to commit that ``they will purchase Hospira
products directly from Hospira, and only sell Hospira products to end
users of our products.'' \41\
---------------------------------------------------------------------------
\41\ Letter from Brian J. Smith, Senior Vice President, General
Counsel and Secretary, Hospira, to Senate Commerce Committee Chairman
Rockefeller, Senate Health, Education, Labor, and Pensions Committee
Chairman Harkin, and House Oversight and Government Reform Committee
Ranking Member Cummings (Jan. 5, 2012).
---------------------------------------------------------------------------
Primary wholesale distributors commonly place similar ``own use''
restrictions on their customers. For example, one of the primary
wholesale distributors requires most of its customers that hold
themselves out as ``Final Dispensers,'' such as pharmacies, to certify
``that they do not and will not redistribute prescription
pharmaceuticals purchased from [that primary wholesale distributor]
into the Secondary Market.'' \42\ The same primary wholesale
distributor also requires its secondary wholesaler customers to sell to
``Final Dispensers'' the pharmaceutical products they purchase from
that primary wholesale distributor.\43\ Another primary wholesale
distributor typically requires its final dispenser customers to agree
to use purchased products for their ``own use'' and its secondary
wholesaler customers to agree to sell purchased products only to final
dispensers.\44\
---------------------------------------------------------------------------
\42\ Primary Wholesale Distributor, Policy Statement on Secondary
Market Sales.
\43\ Primary Wholesale Distributor, Wholesaler Safe Product
Practices.
\44\ E-mail from Primary Wholesale Distributor to Senate Committee
on Commerce, Science, and Transportation Staff (July 19, 2012).
---------------------------------------------------------------------------
Ensuring that drugs pass through as few hands as possible on their
way to patients helps to ensure the integrity and safety of the drug
supply chain. According to the FDA, counterfeit drugs are most likely
to be introduced as part of a drug supply chain involving multiple
wholesalers.\45\ Dr. Michael Link, Immediate Past President of the
American Society of Clinical Oncology, has expressed the same concern
about drugs that pass through multiple gray market vendors, ``[i]t's
not just the price gouging and taking advantage of patients, it's also
the idea that when you buy gray market drugs it doesn't have the legacy
of the drug. It's not the same quality assurance and you don't know its
authenticity.'' \46\
---------------------------------------------------------------------------
\45\ Food and Drug Administration, Counterfeit Drug Task Force
Report (October 2003).
\46\ Eric T. Rosenthal, The `Gray Market' Raises Concerns about
Cost, Safety, Ethics, Journal of the National Cancer Institute (Feb. 8,
2012).
---------------------------------------------------------------------------
E. Background on Congressional Investigation
In October 2011, House Committee on Oversight and Government Reform
Ranking Member Elijah Cummings opened this investigation by sending
information request letters to five gray market companies that were
aggressively marketing five prescription drugs to hospitals that were
at the time in short-supply, according to the FDA.\47\ Four of the
drugs are used to treat various forms of cancer, and one is used to
treat seizures during pregnancy. The letters asked the companies where
they had obtained the short-supply drugs they were offering for sale
and how much they were charging hospitals for the drugs.
---------------------------------------------------------------------------
\47\ U.S. House Committee on Oversight and Government Reform
Democrats, Cummings Investigates Potential Prescription Drug Price
Gouging (Oct. 5, 2011) (online at http://democrats.oversight.house.gov/
index.php?option=com_content&view=article&id=5445:gray-
market&catid=146:democratic-agenda&Itemid=107).
------------------------------------------------------------------------
Distributor
Manufacturers Treatment Receiving
Information Request
------------------------------------------------------------------------
Cytarabine APP, Bedford, Leukemia in Allied Medical
Hospira children and Supply, Inc.,
adults Miami, FL
------------------------------------------------------------------------
Fluorouracil APP, Mylan, Teva Colon, stomach, PRN
breast, and Pharmaceuticals,
pancreatic Rockville, MD
cancer
------------------------------------------------------------------------
Leucovorin APP, Bedford, Advanced colon Premium Health
Teva cancer Services Inc.,
Columbia, MD
------------------------------------------------------------------------
Magnesium American Regent, Seizures during Reliance Wholesale,
Sulfate APP, Hospira pregnancy Inc., Miami, FL
------------------------------------------------------------------------
Paclitaxel APP, Bedford, Breast and Superior Medical
Hospira, Sagent, ovarian cancer Supply, Inc.,
Sandoz, Teva, Superior, CO
Pfizer (started
in 2012)
------------------------------------------------------------------------
In December 2011, Senator John D. Rockefeller IV, Chairman of the
Senate Committee on Commerce, Science, and Transportation, and Senator
Tom Harkin, Chairman of the Senate Health, Education, Labor, and
Pensions Committee, joined Ranking Member Cummings in the
investigation.\48\ Since that time, the three Members of Congress have
requested information from more than 50 prescription drug
manufacturers, distributors, and pharmacies.\49\ Staff has also talked
to a large number of industry experts, regulators, and stakeholders
about how short-supply prescription drugs are distributed, marketed,
and sold.
---------------------------------------------------------------------------
\48\ Senate Committee on Commerce, Science, and Transportation,
Senate Chairmen Join Cummings' Investigation of ``Gray Market'' Drug
Companies (Dec. 15, 2011).
\49\ Senator Rockefeller issued a Senate Commerce Committee
subpoena to one company, Superior Medical Supply, that refused to
respond voluntarily to an information request.
---------------------------------------------------------------------------
A key source of information in this investigation has been ``drug
pedigree'' documents, which record the distribution route a drug has
traveled since it left the manufacturer. Many businesses that
distribute drugs in the United States are required, either by state or
Federal laws, to provide these pedigrees to their customers.\50\
---------------------------------------------------------------------------
\50\ See 21 U.S.C. Sec. 353(e)(1)(A). Drug manufacturers and
authorized distributors of record are exempt from the Federal pedigree
requirement.
---------------------------------------------------------------------------
Congressional investigators carefully studied 300 of these ``paper
pedigrees,'' which list the names of all parties that purportedly took
possession of the drug and the dates of their possession. The 300
pedigrees show 125 different companies that were involved in selling
short-supply prescription drugs. Staff used the pedigrees to
reconstruct how and when drugs entered gray market distribution chains
and contacted companies listed in the pedigrees to collect information
regarding the prices for which they purchased and re-sold the drugs.
Staff obtained specific information from the companies listed on 58 of
the pedigrees, including the prices for which they purchased and sold
the drugs and the dates they possessed them.
II. Findings
A. Exorbitant Prices Charged for Drugs in Gray Market
Documents obtained during the investigation demonstrate that drug
wholesalers often charge exorbitant prices to health care providers for
drugs facing critical national shortages that are used to treat cancer
and other life-threatening illnesses. These inflated prices are often
the result of unnecessarily long distribution chains that include
significant markups at almost every level.
1. Significant Markups Throughout Gray Market Distribution Chains
The short-supply generic injectable drugs examined in this
investigation did not reach doctors and patients through the typical
distribution chain model described above. Instead of following the
distribution route policymakers and industry stakeholders expect them
to follow, these drugs were diverted into longer ``gray market''
distribution networks in which a number of different companies bought,
sold, and transferred them.
Figure IV--``Gray Market'' Drug Distribution Model
As Figure IV demonstrates, the drugs were not dispensed directly to
the hospitals, but instead ``leaked out'' of their authorized
distribution chains and were bought and sold by additional companies
before reaching the hospitals. As they traveled through these longer
gray market chains, the drugs were marked up to prices that were often
hundreds of times higher than the prices the hospitals and other health
care providers normally paid for them.
Figure V--``Gray Market'' Shipment of 25 Vials of 2.5g/50mL Vials of
Fluorouracil
Figure V illustrates how 25 vials of fluorouracil, a sterile
injectable drug used to treat colon, stomach, breast, and pancreatic
cancer, traveled from its manufacturer, APP Pharmaceuticals, to Sonora
Regional Medical Center in Sonora, California. At the time of these
transactions, September 2011, fluorouracil was on the FDA's list of
shortage drugs.
On September 20, 2011, the primary distributor, McKesson, sold the
vials to Priority Healthcare, a pharmacy that was then licensed in
Maryland.\51\ Instead of dispensing the drug to a doctor treating
cancer patients, on September 22, 2011, Priority sold the vials to a
New Jersey distributor called Tri-Med America, which in turn sold the
vials to DTR, another New Jersey distributor. In total, eight companies
in four different states took ownership of the drug before a gray
market distributor sold it to the California hospital on September 27,
2011.
---------------------------------------------------------------------------
\51\ See section II.B.4. of this report for further discussion of
Priority Healthcare.
---------------------------------------------------------------------------
As Figure V shows, there were significant price markups at each
level of this gray market distribution chain. McKesson originally sold
the vials to Priority Healthcare for $7 per vial. As they moved through
the gray market distribution chain, the vials increased in price to
$600 per vial, about 85 times their initial price, at an increase of
8,471%.\52\
---------------------------------------------------------------------------
\52\ Gray market drug distributors sometimes cite shipping costs as
one of the reasons they mark up the per unit price of the drugs they
sell. But in many transactions examined in this investigation, the gray
market companies billed shipping as a separate line item cost on their
invoices. The shipping costs varied, but generally were less than $100
per invoice. In some transactions, the gray market companies never took
physical possession of the drugs and instead arranged for drugs to be
``drop shipped,'' directly from the company from which they purchased
the drugs, to the customer to which they sold them.
---------------------------------------------------------------------------
2. Similar Results Found for All Five Shortage Drugs Examined
The pedigree and price information that was collected on the five
sterile injectable drugs that were the subject of this investigation
show a similar pattern. In almost all instances, the drugs were sold by
a primary distributor to a buyer that the primary distributor expected
to act as a dispenser, at prices that reflected the negotiated rates of
manufacturers, distributors, and dispensers. Instead of dispensing the
drugs to doctors and patients, however, the expected dispensers re-sold
the drugs to gray market companies, which marked up the drugs to
exorbitant prices before selling them to hospitals. In other words,
gray market companies diverted part of the existing scarce supply of
drugs, and then sold it back to legitimate end users at highly inflated
prices.
The price markups examined in the course of this investigation bear
little or no relation to the companies' costs of purchasing, shipping,
or storing the drugs. Instead, they reflect an intent to take advantage
of the acute demand for short-supply drugs by charging health care
providers exorbitant prices. The appendix to this report provides
examples of gray market distribution chains through which each of the
five drugs traveled to hospitals in 2011.
Exhibit IV in the Appendix for example, documents how two vials of
cytarabine, a sterile injectable drug used to treat leukemia patients,
were marked up by almost 4,900% by a succession of gray market
distributors before being sold to the Mississippi Baptist Health System
for $995 per vial on March 18, 2011. Allied Medical Supply, the gray
market company that sold the vials to the hospital, had purchased the
vials two days earlier for $399 per vial. Allied added $596 to the cost
of each vial before selling them to Mississippi Baptist Health
System.\53\
---------------------------------------------------------------------------
\53\ Allied may have been able to charge such a high markup for
cytarabine while the drug was in shortage, in part, because there is no
alternative drug for treating the form of leukemia known as acute
myeloid leukemia. Shortage Worsens of Leukemia Drugs, Wall Street
Journal (Apr. 14, 2011).
---------------------------------------------------------------------------
Exhibit III in the Appendix shows that price markups could be
substantial even in cases where small numbers of gray market actors
handled the drug. In the transaction shown there, 30 vials of
paclitaxel, which is used to treat breast and ovarian cancer patients,
were sold to the Heartland Regional Medical Center in St. Joseph,
Missouri on July 20, 2011 for $185 per vial. The New Jersey pharmacy
that leaked these vials into the gray market had purchased them on June
15, 2011 for $8 per vial from the drug wholesaler H.D. Smith. The two
gray market parties that handled the vials before they were sold to the
hospital--a New Jersey distributor called Investigational Drug Delivery
(IDD) and a Colorado distributor called Superior Medical Supply--marked
them up by $177 per vial, or 2,213%.\54\
---------------------------------------------------------------------------
\54\ As discussed below in section II.B.5., Edison Pharmacy and IDD
share common ownership. The common ownership likely explains why Edison
Pharmacy was willing to ``sell'' paclitaxel to IDD without marking the
price up. As discussed in Section II.B.6., the owner of IDD pleaded
guilty to Federal criminal charges in 2011.
---------------------------------------------------------------------------
3. Additional Information on Gray Market Chains
As part of the investigation, congressional investigators carefully
analyzed 58 drug distribution chains from beginning to end; these
``vertical reviews'' included establishing purchase and sale prices for
all of the individual transactions within the 58 chains. Some of the
most significant results of this analysis were the following:
In more than half of the transactions, prices for the drugs
increased by $200 per unit or more while traveling through the
gray market. In six chains, the price increase was $500 or more
per unit. The largest increase was $975 per unit.
On average, drugs traveling through these gray market chains
were owned by three to four separate business entities before
reaching the hospital or provider that administered the drugs
to a patient.
Most of the drugs traveling through the gray market (60.8%)
were sold to hospitals within five days or less after they
entered the gray market.\55\ In 13 chains, the drugs remained
in the hands of gray market companies longer than 10 days.
---------------------------------------------------------------------------
\55\ Staff were able to determine the number of days during which
the drugs traveled through the gray market in 51 of the 58 drug
distribution chains that were part of the ``vertical review.''
Figure VI--Distribution of Number of Days in the Gray Market, from
Authorized Distributor to Hospital or Provider's Office
The drug distribution chains that congressional investigators
examined also showed that gray market wholesalers sometimes sold units
of the exact same drug to different hospitals on the same day at
significantly different prices. For example:
Reliance Wholesale charged Madigan Army Medical Center in
Washington $315 per unit for a magnesium sulfate product when
it charged Twin Cities Community Hospital in California $215
per unit for the same product. Reliance Wholesale had purchased
the magnesium sulfate for $100 per unit.
Reliance Wholesale charged the VA Medical Center-Reno $450
per unit for a magnesium sulfate product when it charged Sacred
Heart-St. Mary's Hospital in Wisconsin $349 per unit. Reliance
Wholesale had paid $245 per unit for the product.
Superior Medical Supply charged Children's National Medical
Center in Washington, DC, $400 per vial for a paclitaxel
product when it charged Heartland Regional Medical Center in
Missouri $325 per vial for the same product. Superior had
purchased the product for $200 per vial.
The hospitals that purchased short-supply drugs through the 300
gray market chains staff reviewed include a range of small and large
hospitals, urban and rural hospitals, for-profit hospitals, and
military, veteran, and other nonprofit hospitals located in all regions
of the United States. To estimate the financial impact that gray market
purchases have on hospitals, congressional investigators compared
actual gray market prices for one form of each of the five drugs
reviewed to hospitals' contract price for the same drug product. The
per-unit costs in the gray market were dramatically higher than the
hospitals would have incurred to purchase the same drugs from their
primary wholesale distributors:
Staff's analysis revealed that hospitals overspent nearly
$750,000 on over 2,100 units of the five prescription drugs
examined as a result of purchasing the drugs from the gray
market instead of their normal distributors. The more than
2,100 units included in this analysis are just a fraction of
the total number of drug units that were sold in the 300 gray
market chains.
For example, hospitals that usually pay $12 to purchase a 2
g, 20 mL vial of the cancer drug cytarabine instead paid an
average of $736 per vial to purchase that product in the gray
market.
Instead of paying $9 per 500 mg/mL, 2 mL vial package of
magnesium sulfate, hospitals paid an average of $307 per
package to purchase them on the gray market.
B. How Drugs Enter the Gray Market
Based on a review of documents obtained during the investigation,
it appears that shortage drugs are leaking into the gray market
primarily through entities that hold pharmacy licenses. It also appears
that gray market drug companies are taking advantage of a patchwork of
inconsistent state regulations to obtain drugs through questionable and
sometimes illegal means.
1. Drugs Entering Gray Market Primarily Through Pharmacies
In more than two-thirds (69 percent) of the 300 short-supply drug
distribution supply chains reviewed in this investigation, the drugs
entered the gray market through pharmacies. These pharmacies purchased
their drugs from manufacturers' ADRs, but instead of dispensing the
drugs in accordance with their state laws, their professional duties,
and their contractual obligations, these pharmacies re-sold the drugs
to wholesalers.\56\ The wholesalers in turn sold the drugs--usually at
significant markups--to other gray market entities. The pharmacies do
not appear to have had any other reason for purchasing these drugs--all
of which are predominantly used by health care professionals in a
hospital setting -than to sell them into the gray market.
---------------------------------------------------------------------------
\56\ The pharmacies that purchased drugs from ADRs and sold them to
secondary distributors included members of the independent pharmacy
networks of each of the three national primary distributors.
---------------------------------------------------------------------------
For example, in the distribution chain involving fluorouracil
illustrated in Exhibit I of the Appendix and described in Section
II.A.1 above, a company called Priority Healthcare, which held a
pharmacy license issued by the State of Maryland, was the first entity
to purchase the drug from the authorized primary distributor, McKesson.
Rather than selling the drug to a health care provider or to patients,
Priority Healthcare sold it to a gray market wholesaler, Tri-Med
America, at a significant markup.\57\ In addition to the manufacturer,
seven entities owned the drug before a gray market distributor finally
sold it to a medical center for $600 per vial.
---------------------------------------------------------------------------
\57\ As noted in section II.B.4. below, a husband-wife team owned
both Tri-Med America and Priority Healthcare.
---------------------------------------------------------------------------
2. Some Pharmacies Selling Their Entire Inventories into Gray Market
Evidence that some pharmacies are selling short-supply injectable
drugs to gray market wholesalers suggests that these pharmacies are not
complying with their states' pharmacy laws that limit re-sales. Some
states allow pharmacies to re-sell portions of their inventories in
emergency circumstances, while other states permit up to 5% of
pharmacies' annual sales to come from re-selling their drugs. The
parameters of these exceptions rules vary from state to state. Some
states' rules appear to be intended to resolve local supply problems by
allowing pharmacies to sell drugs to each other, while other states'
rules may permit pharmacies to re-sell their drugs to wholesalers.
Documents obtained during the investigation indicate that some
pharmacies are clearly exceeding these limited re-sale exceptions. For
example, in a letter to Ranking Member Cummings, the owners of a
Maryland pharmacy called HealthRite Pharmaceuticals reported that from
March 2011 to February 2012, the pharmacy sold 100 percent of its
products to a distributor business they also owned.\58\ These sales
appear to violate a Maryland law that requires pharmacies to obtain
separate wholesaler licenses if they re-sell more than 5 percent of
their products.\59\ On April 10, 2012, HealthRite Pharmaceuticals
informed the Maryland Board of Pharmacy that it had ceased
operations.\60\
---------------------------------------------------------------------------
\58\ Letter from Mackie A. Barch, Managing Director of HealthRite
Pharmaceuticals to Ranking Member Elijah E. Cummings, House Oversight
and Government Reform Committee (Apr. 20, 2012).
\59\ Code of Maryland Regulations 10.34.22.02(23) (defining a
``wholesale distributor'' as ``[a] retail pharmacy that conducts
wholesale distribution, if the wholesale distribution business accounts
for more than 5 percent of the retail pharmacy's annual sales'').
\60\ E-mail from Maryland Board of Pharmacy to House Committee on
Oversight and Government Reform, Minority Staff (Apr. 25, 2012).
---------------------------------------------------------------------------
Similarly, a New Jersey pharmacy, Morningstar Pharmacy, reported
that, from March 2011 to February 2012, all of its revenues came from
re-sales,\61\ which appears to violate New Jersey pharmacy laws. New
Jersey law permits pharmacies to engage in ``the sale, purchase or
trade of a prescription drug, or an offer to sell, purchase or trade a
prescription drug for emergency medical reasons.'' \62\
---------------------------------------------------------------------------
\61\ E-mail from Alton Chatmon, Owner, Morning Star Pharmacy, to
House Committee on Oversight and Government Reform, Minority Staff
(Apr. 17, 2012).
\62\ New Jersey Statutes Sec. 24:6B-14.
---------------------------------------------------------------------------
In addition, some pharmacies appear to sell to wholesalers portions
of their inventories that exceed the 5 percent thresholds. For example,
B&C Health, a Maryland pharmacy, reported that 21 percent of its gross
sales came from drug sales to wholesalers.\63\
---------------------------------------------------------------------------
\63\ Letter from Prince Dennis, Owner, B&C Health Services, to
House Committee on Oversight and Government Reform, Minority Staff
(Mar. 27, 2012).
---------------------------------------------------------------------------
3. Using Pharmacies as Purchasing Agents for Shortage Drugs
Documents obtained during the investigation indicate that
wholesalers and independent brokers often approached pharmacies and
convinced them to purchase shortage drugs on their behalf, promising
significant profits.\64\ Twenty-one of the 25 pharmacies that responded
to requests for information about their purchases and sales of shortage
drugs stated that wholesalers or brokers representing wholesalers had
asked them to purchase shortage drugs for them.\65\
---------------------------------------------------------------------------
\64\ According to a 2011 survey of hospital pharmacists, ``[m]ore
than 13% of respondents reported receiving solicitations, mostly
weekly, from gray market vendors who wanted to purchase vital
medications in short supply from the hospital, presumably to sell to
other hospitals at steeply inflated prices. Institute for Safe
Medication Practices, supra note 20.
\65\ Three pharmacies refused to respond to this information
request: PMO Pharmacy of Pearl, Mississippi, Polk's Discount Drugs of
Brandon, Mississippi, and Ranch Pharmacy of Scottsdale, Arizona.
---------------------------------------------------------------------------
For example, an e-mail from a pharmaceutical consultant to a
pharmacy owner, dated June 13, 2011, states, ``[w]e guarantee our
Pharmacies 20 percent or more every time.'' \66\ Another e-mail from an
outside buyer to a pharmacy owner on August 19, 2011, stated, ``please
look at your distributor site as soon as you can for these items. The
more you find, the more you make.'' \67\
---------------------------------------------------------------------------
\66\ E-mail from broker to pharmacy owner (June 13, 2011).
\67\ E-mail from broker to pharmacy owner (Aug. 19, 2011).
---------------------------------------------------------------------------
Pharmacy owners told congressional investigators that brokers
sometimes approached them directly to try to convince them to buy
shortage drugs. One pharmacy owner stated that a broker came into her
pharmacy and conducted ``a presentation and provided credentials'' to
convince her to buy shortage drugs on his behalf.\68\ Another
pharmacist told investigators that a broker approached the pharmacist
at a trade show, introduced the pharmacist to other pharmacy owners
that had purchased shortage drugs for him, and promised a 20 percent
profit margin for doing the same.\69\ Other pharmacy owners who sold
drugs to wholesalers were motivated by the desire to alleviate
shortages. For example, the president of one pharmacy told
investigators that his pharmacy was ``approached by a wholesaler/
distributor . . . with the idea to redistribute the pharmaceuticals to
vendors and pharmacies in need.'' \70\
---------------------------------------------------------------------------
\68\ E-mail from pharmacy owner to House Committee on Oversight and
Government Reform, Minority Staff (Apr. 14, 2012).
\69\ E-mail from pharmacist to House Committee on Oversight and
Government Reform, Minority Staff (June 7, 2012).
\70\ E-mail from pharmacy owner to House Committee on Oversight and
Government Reform, Minority Staff (May 22, 2012).
---------------------------------------------------------------------------
Brokers and consultants who convinced pharmacists to purchase
shortage drugs on their behalf established close relationships with
routine contact. One pharmacist informed investigators that pharmacists
were placed on e-mail distribution lists ``sometimes twice a day''
circulating ``a list of drugs they are looking for.'' \71\ One such e-
mail from a broker to a pharmacist dated September 22, 2011, directed
the pharmacist as follows, ``[p]lease check your distributors as soon
as possible and let me know what's available how much and the price.''
\72\ Attached to the e-mail was a spreadsheet that contained a list of
drugs. According to the Drug Information Service at the University of
Utah, virtually all of the drugs listed in the spreadsheet were in
short supply as of that date.\73\
---------------------------------------------------------------------------
\71\ E-mail from pharmacy owner to House Committee on Oversight and
Government Reform, Minority Staff (Mar. 29, 2012).
\72\ E-mail from broker to pharmacy owners (Sept. 22, 2011).
\73\ E-mail from Erin Fox, Manager of the University of Utah Drug
Information Service, to House Committee on Oversight and Government
Reform, Minority Staff (July 22, 2012).
---------------------------------------------------------------------------
Figure VII is a ``protocol'' document obtained during the
investigation that guides a pharmacy owner through the purchase and
subsequent sale of shortage drugs to gray market drug companies.\74\ As
the document indicates, brokers sometimes placed orders directly using
a pharmacy's account.\75\ In addition, brokers created invoices for the
pharmacies to facilitate the shipping process.
---------------------------------------------------------------------------
\74\ Fax from broker to pharmacy owner (Sept. 15, 2011).
\75\ E-mail from pharmacy owner to House Oversight and Government
Reform, Minority Staff (June 12, 2012).
---------------------------------------------------------------------------
According to a report in the Bakersfield Californian, the
California Board of Pharmacy recently cited more than 50 pharmacies for
acting as purchasing agents for gray market companies. The Board cited
the pharmacies for unlawfully selling short-supply prescription drugs
to a San Diego-based drug distributor named Priority Pharmaceuticals
and, in some instances, other distributors.\76\ According to the Board,
the pharmacies received lists of drugs that Priority Pharmaceuticals
wanted them to order and used their ``ordering ability with a [primary]
wholesaler to purchase [the] drugs'' for the purpose of reselling them
to Priority Pharmaceuticals.\77\ The distributors then distributed the
drugs ``to government hospitals and other health care facilities at''
what the Board described as ``exceedingly high mark-ups.'' \78\ The
Board determined that the pharmacies violated the California Business
and Professional Code by acting as ``purchasing agents'' for Priority
Pharmaceuticals.\79\
---------------------------------------------------------------------------
\76\ Local Pharmacy Faces a Barrage of Charges, The Bakersfield
Californian (Mar. 22, 2012).
\77\ Id.
\78\ Id.
\79\ See, e.g., California Department of Consumer Affairs, Board of
Pharmacy, Citation and Fine, Citation Number CI 2011 49887, Medical
Arts Pharmacy, Phy 45941 (citing and fining Medical Arts Pharmacy for
acting as a purchasing agent for Priority Pharmaceuticals, Dubin
Medical, Gulf Coast Pharmaceuticals, and Vital Healthcare); California
Department of Consumer Affairs, Board of Pharmacy, Citation and Fine,
Citation Number CI 2011 49813, Los Altos Pharmacy at El Camino
Hospital, Phy 50153 (citing and fining Los Altos Pharmacy at El Camino
Hospital for acting as a purchasing agent for Priority
Pharmaceuticals).
---------------------------------------------------------------------------
Figure VII: Protocol for Brokers' Use of Pharmacies as Purchasing
Agents
Below is the proper protocol for the entire operation
I will place an order via log-in or drop ship (``Ardie''
will be the PO name)
When the product arrives, immediately send me the invoice/
packing slip with lot #, exp date, and your pharmacy cost via
fax or email (remember time is of the essence)
Within a couple hours I will send a PO & Fed EX Label for
the product via fax or email
I will schedule a pick up Fed Ex and verify this with my
contact at the pharmacy
The pharmacy will then make sure the product is packed
properly, place the pre-paid label on the box, and make sure it
ships. If a Packing Slip is provided, place the packing slip in
the box with the product. The Purchase Order will stay at the
pharmacy.
Documents obtained during the investigation also reveal that
brokers and consultants monitor the release of new drug shipments from
manufacturers and their distributors. For example, on January 20, 2012,
one broker sent an e-mail indicating that a new batch of metoprolol had
been released, and asked various pharmacies to buy up the shortage
drug, ``we jsut [sic] found some it's been a release find it get sale
it [sic].'' \80\ Metoprolol is a drug used to improve survival after a
heart attack and in the treatment of heart failure.
---------------------------------------------------------------------------
\80\ E-mail from broker to pharmacy owner (Jan. 20, 2012).
---------------------------------------------------------------------------
Wholesalers operating in the gray market purchased a significant
portion of prescription drugs through pharmacies. For example, Vital
Healthcare, a gray market company based in Georgia, estimated that it
uses brokers to locate approximately 25 percent to 35 percent of its
annual 123,700 unit prescription drug sales volume.\81\ Similarly,
Harford Health Services, a Maryland company, purchased 25 percent of
its $2 million prescription drug volume from pharmacies between March
2011 and February 2012.\82\ During the same time frame, California-
based Optimal Pharmaceuticals told investigators that it purchased 44%
of its total volume from pharmacies.\83\
---------------------------------------------------------------------------
\81\ Letter from J. Patrick Connell, Ellis, Painter, Ratterree &
Adams LLP, representing Vital Healthcare to Minority Staff, House
Committee on Oversight and Government Reform (May 31, 2012).
\82\ Letter from Jose Torres, Harford Health Services, Inc., to
Senate Committee on Commerce, Science, and Transportation, Majority
Staff (June 11, 2012).
\83\ E-mail from Ismail Kabook, Optimal Pharmaceuticals, to House
Committee on Oversight and Government Reform, Minority Staff (May 29,
2012).
---------------------------------------------------------------------------
4. Establishing Fake Pharmacies
Documents obtained during the investigation identified numerous
entities that appear to have established ``fake pharmacies'' to gain
greater access to shortage drugs. After obtaining these drugs, the
``pharmacies'' typically did not dispense the drugs to patients
pursuant to their pharmacy licenses, but instead sold them to
wholesalers they also owned or in which they had interests.
LTC Pharmacy and International Pharmaceuticals: LTC Pharmacy, a
pharmacy in Durham, North Carolina, purchased drugs in short
supply and transferred them to International Pharmaceuticals, a
wholesaler located in the same building, which then sold them
into the gray market. Jessica Hoppe owned both companies.
Between May 23, 2011 and Sept. 19, 2011, a quarter of the
prescription drug products invoiced to International by LTC
were on the FDA shortage list as of April 2012.\84\ State
regulators in North Carolina found that, ``International
Pharmaceuticals and LTC Pharmacy willfully violated NC
wholesaler prescription drug distribution laws,'' \85\ and LTC
Pharmacy ``is not an operating pharmacy.'' \86\ Licenses for
both companies have recently been surrendered or denied.\87\
Figure VIII below shows photos that the North Carolina Board of
Pharmacy Inspectors took of LTC Pharmacy.
---------------------------------------------------------------------------
\84\ E-mail from North Carolina Department of Agriculture and
Consumer Services to Minority Staff, House Committee on Oversight and
Government Reform (June 12, 2012).
\85\ E-mail from North Carolina Department of Agriculture and
Consumer Services to former International Pharmaceuticals employee
(Jan. 3, 2012).
\86\ North Carolina Board of Pharmacy, Miscellaneous Inspection
Report (Sept. 19, 2011).
\87\ E-mail from North Carolina Department of Agriculture and
Consumer Services to former International Pharmaceuticals employee
(Jan. 3, 2012).
---------------------------------------------------------------------------
Figure VIII--Photos of LTC Pharmacy Taken by North Carolina Board of
Pharmacy Inspectors
Priority Healthcare and Tri-Med America: A husband and wife
team, Marianna Pesti and Gabor Szilagyi, established a pharmacy
and a wholesale company. On multiple occasions, the couple
purchased the cancer drug fluorouracil, transferred it to their
own wholesaler, and then sold it to another gray market drug
company at significant markups, sometimes on the same day as
the original purchase. Exhibit I in the Appendix illustrates
one such transaction.\88\ New Jersey officials have recently
revoked Tri-Med America's license.\89\ Maryland state
regulators found that Priority Healthcare committed numerous
violations of state law.\90\ Priority Healthcare is no longer
in business.\91\
---------------------------------------------------------------------------
\88\ This transaction is also discussed in section II.A.1.
\89\ State of New Jersey Department of Health and Senior Services,
Wholesale Drug Project Revocations (online at http://nj.gov/health/
foodanddrugsafety/rev_sus.shtml) (accessed June 7, 2012).
\90\ Maryland Board of Pharmacy, Consent Order: In the Matter of
Priority Healthcare, LLC (Oct. 19, 2011) (online at http://
www.dhmh.maryland.gov/pharmacy/docs/FormalOrders/P/
Priority%20Healthcare,%20LLC%2010-19-11.pdf).
\91\ Maryland Board of Pharmacy, Establishment Detail (online at
https://license.mdbop.org/verification/veri/
establishmentDetail.asp?PermitNo=PW0275) (accessed June 10, 2012).
Columbia Med Services and Columbia Medical Distributors:
Columbia Med Services, a pharmacy in Maryland, transferred
short-supply drugs without a wholesaler license to Columbia
Medical Distributors, a wholesaler in Maryland, which then sold
them into the gray market. The companies were owned by the same
person and were located in the same industrial office
complex.\92\ Figure IX below shows photos of Columbia Med
Services' location.
---------------------------------------------------------------------------
\92\ See Maryland Secretary of State, Articles of Incorporation for
a NonStock Corporation (filed Aug. 5, 2005) (listing Brenda Marshall as
the incorporator for Columbia Med Services, LTD at 9693 Gerwig Lane
Unit 1R, Columbia MD 21046); Maryland Secretary of State, Articles of
Organization of Columbia Medical Distributors, LLC (filed Jan. 22,
2002) (listing Brenda Lee Marshall as the initial member of Columbia
Medical Distributors at 9687-C Gerwig Lange, Columbia, MD 21045).
---------------------------------------------------------------------------
Figure IX--Photos of Columbia Med Services
J&A Pharmaceutical Services and North, Inc.: J&A Pharmaceutical
Services, a pharmacy in North Carolina, sold drugs without a
wholesaler license to North, a licensed wholesaler. Both
entities were located at the same address and had the same
owner.\93\ The North Carolina Board of Pharmacy found that J&A
Pharmaceutical Services ``ordered numerous injectable medicals,
also found on the FDA Drug Shortage List, with no records of
dispensation for any of them from June 2011 through December
2011.'' \94\ J&A voluntarily surrendered its pharmacy license
in March 2012.\95\
---------------------------------------------------------------------------
\93\ North Carolina Department of Agriculture and Consumer
Services, Inspection Report (Apr. 23, 2012).
\94\ E-mail from North Carolina Board of Pharmacy to North Carolina
Department of Agriculture and Consumer Services (Mar. 22, 2012).
\95\ North Carolina Department of Agriculture and Consumer
Services, Inspection Report (Mar. 28, 2012).
HealthRite Pharmaceuticals and AmeriSure Pharmaceuticals:
According to its owner, AmeriSure Pharmaceuticals ``was
established and licensed under Maryland law to act as a
wholesaler for any drug procured by HealthRite,'' a pharmacy
licensed in Maryland. Both companies were owned by the same
individual and were located in the same address. HealthRite
informed Ranking Member Cummings that the company sold all of
its drugs to AmeriSure.\96\
---------------------------------------------------------------------------
\96\ Letter from Mackie A. Barch, Managing Director of HealthRite
Pharmaceuticals, to Ranking Member Elijah E. Cummings, House Committee
on Oversight and Government Reform (Apr. 20, 2012).
---------------------------------------------------------------------------
5. Common Ownership and Shared Employees
Pedigree chains reviewed in this investigation reveal that groups
of companies routinely worked together to procure shortage drugs. In
some cases, these business dealings were not arms-length transactions
because the companies had common owners or shared employees.
For example, a network of seven companies in New Jersey all located
within a 30-mile radius routinely worked together to obtain and sell
drugs that were in short supply. Companies with pharmacy licenses--
Avenel Pharmacy, Old Bridge Drug and Surgicals, Red Bank Pharmacy,
Sewaren Innovative Pharmaceutical Packaging (SIPP), Colonia Natural
Pharmacy, and Edison Pharmacy--used their pharmacy licenses to obtain
shortage drugs from various ADRs.\97\ As Figure X illustrates, rather
than dispensing these drugs to patients, the pharmacies sold the
shortage drugs to one of the network's wholesalers, Avenel Pharmacy or
Investigational Drug Delivery (IDD), which operated as the network hub.
These wholesalers then re-sold the shortage drugs to other secondary
wholesalers at a markup. Exhibit III in the Appendix shows how 30 vials
of the cancer drug paclitaxel traveled through this network and were
later sold to a hospital in Missouri.
---------------------------------------------------------------------------
\97\ Several pharmacies outside of this local area also sold drugs
into this network through Avenel Pharmacy.
---------------------------------------------------------------------------
Hank Incognito was an owner, officer, and/or director of four of
these companies, IDD, Avenel Pharmacy, SIPP, and Edison Pharmacy, at
the time of the transactions examined in this investigation.\98\ Nunzio
Gallo was an owner or director of Avenel Pharmacy and Edison Pharmacy
when the transactions occurred.\99\
---------------------------------------------------------------------------
\98\ See New Jersey Department of the Treasury, Division of
Revenue, Certificate of Formation for Investigational Drug Delivery
Limited Liability Company (filed Jan. 14, 2011) (listing Hank Incognito
and Stephen F. Corba, Jr. as members/managers); New Jersey Certificate
of Incorporation for Avenel Pharmacy, Inc. & Registration of Alternate
Name of Avenel Pharmacy, Inc., d/b/a Avenel Surgical & Pharmaceuticals
(filed July 7, 2003 & July 7, 2010) (listing Hank Incognito as
president and director & Nunzio Gallo as director); New Jersey
Department of the Treasury, Division of Revenue, Certificate of
Formation for Investigational Drug Delivery Limited Liability Company
(filed Jan. 14, 2011) (listing Hank Incognito and Stephen F. Corba as
members/managers); New Jersey Department of the Treasury, Division of
Revenue, Certificate of Formation for Sewaren Innovative Pharmaceutical
Packaging Limited Liability Company (filed Feb. 4, 2011) (listing Hank
Incognito as authorized representative); New Jersey Certificate of
Incorporation for N G H I, Inc. & New Jersey Department of the
Treasury, Division of Revenue, Renewal Notice and Filing Form for
Alternate Business Name for N G H I, Inc., d/b/a Edison Pharmacy (filed
Dec. 19, 2003 & Dec. 29, 2003) (listing Hank Incognito as director &
Nunzio Gallo as owner & director); Service a Priority at Edison
Pharmacy, Courier News (June 6, 2011) (identifying Hank Incognito and
Nunzio Gallo as the co-owners of Avenel Pharmacy and Edison Pharmacy).
\99\ Id.
---------------------------------------------------------------------------
The investigation also uncovered a network of Kentucky pharmacies
that purchased shortage drugs for the same Kentucky wholesaler. In this
case, a licensed wholesaler, Central Compound Pharmacy Supply,
routinely purchased drugs from local pharmacies--Bluegrass Pharmacy,
the Medicine Shoppe of Springfield, Hurst Discount Drugs and Medicine
Centre Pharmacy.\100\ Gary Smith signed pedigree documents for these
pharmacies and identified himself as the ``compliance manager'' for the
pharmacies. Central Compound Pharmacy Supply's website identifies Gary
Smith as part of its ``team.'' \101\
---------------------------------------------------------------------------
\100\ All of these listed pharmacies also held Kentucky wholesale
distribution licenses.
\101\ Central Compound Pharmacy Supply website, Meet The Team!
(online at http://centralpharmacysupply.com/career.html) (accessed July
22, 2012).
---------------------------------------------------------------------------
Figure X--Network of New Jersey Companies that Sell Shortage Drugs
6. Wholesalers Handling the Drugs Have Disciplinary or Licensing
Problems
Some of the pedigree chains congressional investigators examined
include secondary distributors whose owners have a history of
disciplinary actions.
For example, Alliance Wholesale Distributors of Richton Park,
Illinois purchased and sold cytarabine and leucovorin. Phil Giannino,
its owner, was sentenced in Federal court in late 2009 for conspiracy
to defraud the United States by distributing diverted pharmaceutical
drugs. The court ordered him to pay almost $4 million in
restitution.\102\ Based on this conviction, Illinois revoked Mr.
Giannino's pharmacist license and Alliance Wholesale Distributors' drug
distributor license in 2011, stating that, ``Giannino is prohibited
from being employed or otherwise working for an Illinois wholesale drug
distributor in any capacity.'' \103\
---------------------------------------------------------------------------
\102\ United States v. Phillip Giannino, Case No. 05-00315-16-CR-W-
ODS (W.D. Mo. entered Dec. 15, 2009).
\103\ Illinois Department of Financial and Professional Regulation,
News (Apr. 28, 2011) (online at http://www.idfpr.com/Forms/DISCPLN/
1103_dis.pdf).
---------------------------------------------------------------------------
Stephen F. Corba, Jr., a managing member of Investigational Drug
Delivery (IDD), was involved in the purchase and sale of magnesium
sulfate and paclitaxel. In August 2011, Mr. Corba pleaded guilty to
conspiracy to commit wire fraud and conspiracy to commit money
laundering in a $40 million mortgage fraud case.\104\ His sentence is
pending, and he has already agreed to a $489,000 forfeiture order.\105\
---------------------------------------------------------------------------
\104\ The United States Attorney's Office, District of New Jersey,
Fourth Man Pleads Guilty in $40.8 Million Mortgage Fraud Scheme (Aug.
16, 2011) (online at www.justice.gov/usao/nj/Press/files/
Williams,%20Michael%20Plea%20News%20Release.html).
\105\ Defendant's Plea Agreement, United States v. Stephen F.
Corba, Jr., Case No. 1:11-cr-00523-JEI-1 (D.N.J. May 13, 2010).
---------------------------------------------------------------------------
It is difficult for state regulatory agencies to stay abreast of
disciplinary actions, revocations, and non-renewals of wholesalers
entities operating in other states. For example, the state of North
Carolina chose not to renew the wholesaler license for International
Pharmaceuticals in December 2011 as a result of the company ``willfully
violat[ing] NC wholesale prescription drug distribution laws for an
extended period of time during 2011.'' \106\ As of March 2012,
International Pharmaceuticals still had active wholesaler licenses in
at least 23 other states; these other state licenses referenced the
company's primary license in North Carolina. In addition, the owner and
sales manager of International Pharmaceuticals and LTC Pharmacy
recently opened a new wholesaler business called ``KY Meds'' in
Kentucky.\107\ This company has already obtained wholesaler licenses in
Kentucky as well as two other states.\108\
---------------------------------------------------------------------------
\106\ E-mail from North Carolina Department of Agriculture and
Consumer Services to former International Pharmaceuticals employee
(Jan. 3, 2012).
\107\ Commonwealth of Kentucky Articles of Incorporation for KY
Meds Inc. (filed Jan. 10, 2012) (listing Jennifer Colon, former Sales
Manager for International Pharmaceuticals, as the President and Owner);
E-mail from Jessica Hoppe, Sales Manager for KY Meds Inc., to pharmacy
owner (July 13, 2012).
\108\ Kentucky Board of Pharmacy, License Verification Details;
Ohio Board of Pharmacy, License Center; and Pennsylvania Department of
Health, Drug Device and Cosmetic Program Public Lookup (July 16, 2012).
---------------------------------------------------------------------------
Conclusion
This investigation has found that gray market companies that
operate outside of authorized distribution networks take advantage of
drug shortage situations to charge exorbitant prices for drugs used to
treat cancer and other life-threatening conditions. Gray market drugs
leak out of authorized distribution chains, often through pharmacies
that sell to wholesale distributors, and are sold to end users at
aggressively marked-up prices. The questionable business practices of
the distributors and pharmacies engaged in gray market sales result in
higher health care costs and potential risks to patients.
______
______
______
______
______
______
______
I turn now to my esteemed Ranking Member, Senator Boozman,
from the great state of Arkansas.
STATEMENT OF HON. JOHN BOOZMAN,
U.S. SENATOR FROM ARKANSAS
Senator Boozman. Thank you, Mr. Chairman, very much. And I
appreciate your efforts and appreciate that of the staff
working so hard in this particular area.
I agree with Chairman Rockefeller. It is indefensible that
we have cancer patients that have to wait to get chemotherapy.
No hospital should pay $1,000 for a drug that only costs a few
bucks. But I think we are missing the bigger picture. Drug
shortages are the root of the problem. I hear about shortages
all across Arkansas nearly every day. Shortages create
significant problems.
This hearing is really about supply and demand. No one pays
$250 for a loaf of bread. There are no 8,000 percent markups in
a competitive market. In this investigation, four of the five
cases involve generic injectable cancer drugs. These drugs are
very inexpensive. Some cost $5 or $6. Some have been around for
many, many years, and they save lives.
There should be no shortage of life-saving $6 drugs,
period. But today, companies are producing dozens of these
generic cancer drugs at or near a loss. This is the real
danger. This is the real threat to patients. Artificial
Medicare drug pricing caps have created this problem.
Aggressive FDA oversight has exacerbated this problem. And
Ezekiel Emanuel, President Obama's health advisor said, ``the
long-term solution is to make the production of generic cancer
drugs more profitable.''
We need to reform Medicare pricing and address the root of
the problem. It's not a complicated problem. It's not an
expensive problem. But it's a very, very serious problem.
Second, before we use this investigation as a justification
for new Federal rules, I think we should stop and ask, are
state pharmacy boards and regulators enforcing the laws on the
books?
The fact is, people have oversight responsibilities under
current law. There's no reason to expect people to comply with
new layers of rules if they're violating the ones that
currently exist.
Yes, we can create a new Federal agency. We can pass
restrictions and burden manufacturers, distributors, and
pharmacists with red tape. But, again, there's no substitute
for people fulfilling their responsibilities. Shell pharmacies
simply should not exist. If they do, someone is not doing their
job.
In addition, as we talk about secondary distributors and
reselling, there is a story that we should keep in mind, and I
actually was part of this. In 2005, Hurricane Katrina hit New
Orleans. It was a disaster in every sense of the word. Thirteen
thousand evacuees were sent to Fort Smith, Arkansas. Many
needed medical attention. Time was short, and the Federal
Government was unresponsive.
Thankfully, a pharmacist named John Vinson coordinated an
incredible emergency response. Community leaders, independent
pharmacists, secondary distributors, chain pharmacies, and
wholesalers all came together. It was all hands on deck. They
aggregated, resold, and dispensed drugs. Their actions kept
many out of the hospital, and they saved many lives.
As we move forward, let's not forget that secondary
distributors and intermediary drug markets serve a critical
role. In times of tightened supply and limited stockpiles, they
help address gaps in the supply chain. Across Arkansas, we have
compound pharmacists who register as distributors and
pharmacists. They have been critical throughout the drug
shortage emergency. Without them, doctors could not perform
needed surgeries. In rural or neglected areas, distributors can
plug holes in the system or address needs that may go
overlooked.
Like nearly every industry, pharmacists also need backup
options. They need tools to unload excess stock and flexibility
to address sudden spikes in demand. So, again, let's not forget
the necessary role that distributors and pharmacists play.
Last, it's time we learn our lesson about healthcare
consolidation. From the manufacturing plant through the
distribution system, pharmacy, clinic, and hospital, we've seen
so much consolidation. If we expect to meet the growing
healthcare needs of every American, we need choices. Choices
satisfy niche markets. Choices facilitate competition.
Regulations that crowd out smaller actors eliminate choices. So
we've got to move carefully.
Mr. Chairman, again, I thank you so much for your efforts
in regard to bringing this important problem forward, and I
really look forward to our witnesses today.
The Chairman. Thank you very much, Senator Boozman.
Actually, I'm looking at an interesting situation, because
Elijah Cummings is doing exactly this kind of work in the
House, and I'm looking at his name plate. But the Congressman
is not here. So let's decide this is what we're going to do. I
want, please, Virginia Herold, Dr. David Mayhaus, John Coster,
John Gray, and Patricia Earl all to come forward and take a
seat at the table.
Senator Boozman. Mr. Chairman, as they come forward, can I
ask that the hearing be kept open for 2 weeks for additional
statements and questions for the record?
The Chairman. Absolutely.
Senator Boozman. Thank you, Mr. Chairman.
The Chairman. And then I thought also if Senator Harkin
comes--I've been to his committee on coal-related things, coal
mine safety, and he has me sit at the dais. So I'm inviting him
to sit at the dais. And I think if Senator Enzi comes, he
should also sit at the dais and ask questions and stay as long
as they want.
If Elijah Cummings comes--he's conducting a hearing and
will be continuing to after he makes a statement. So I may have
him come to the dais and just make his statement. But there's
still plenty left to do.
So, Virginia Herold, let's start with you. You're the
Executive Officer of the California Board of Pharmacy.
STATEMENT OF VIRGINIA HEROLD, EXECUTIVE OFFICER, CALIFORNIA
BOARD OF PHARMACY
Ms. Herold. Chairman Rockefeller and members of the
Committee, thank you for the invitation to come and speak
before you today. I'm Virginia Herold. I'm the Executive
Officer of the California State Board of Pharmacy.
The Board of Pharmacy in California licenses pharmacies,
pharmacists, drug wholesalers. We are the largest regulator of
pharmacists in the country. We have over 40,000 pharmacists
licensed with us. Within the state of California, we have 6,200
community pharmacies, another 500 hospital pharmacies, and 500
wholesalers located within the state. We have another 700
wholesalers located out of state that are licensed to ship into
California legally.
The Board's paramount mandate, which is expressly stated in
California law, is consumer protection. So, above all else,
that is our focus.
California state law provides the limited circumstances
under which a pharmacy may provide prescription drugs to any
entity. You have a copy at the back of my testimony. One of the
provisions provides that a pharmacy may furnish prescription
drugs to another pharmacy or wholesaler to alleviate a
temporary shortage of a dangerous drug that could result in the
denial of healthcare and only in quantities sufficient to
alleviate the shortage. Violations can be charged up to $5,000
per occurrence. This would mean per invoice, for example.
In the fall of 2011, the Board initiated an investigation
following a pharmacist's inquiry to the Board about the
legality of the pharmacy ordering prescription drugs from
another wholesaler in short supply. These sales would be
initiated at the behest and solicitation of the second
wholesaler who informed the pharmacy that the prescription
drugs were declared as temporarily short. Thus it would be OK.
We have a provision in California state law that very much
limits when a pharmacy can sell drugs to a wholesaler.
The pharmacy's role would be to act as a purchasing agent
for the wholesaler, purchasing drugs specifically on a list of
prescription drugs in short supply that the wholesaler provided
the pharmacy. The arrangement between the pharmacy and
wholesaler was financial. The pharmacy would be paid an agreed
amount, typically 10 percent over invoice plus shipping
expenses.
As of today, the Board has identified cases in which 55
pharmacies purchased drugs in short supply for this one
wholesaler on 514 occasions, totaling wholesale prices over
$330,000. Each of the pharmacies and their pharmacists in
charge have been cited and fined in various amounts up to
$70,000 for violation of California law. Appeals of these
citations and fines are currently pending, and the wholesaler
has not yet had discipline completed. So we are still going
through the process.
However, these actions and investigations are very
important, we believe, to share with the Committee. And we are
hoping and looking to the Committee as finding ways to secure
additional means to provide safeguards into the supply chain.
The Board's investigations generally identified that, one,
a pharmacy would be visited by a sales agent representative of
the wholesaler, who explained the dire impact that the drug
shortages presented to the patients and healthcare providers
and stressed the inability of the wholesaler to obtain these
drugs on its own. The soliciting wholesaler advised it was
another source of pharmaceuticals for medical facilities and
needed these medications.
Sales were triggered from a list that the wholesaler
released each week to the pharmacies that was titled ``Items We
Are Looking For.'' The pharmacies involved were all independent
community pharmacies. The drugs were principally medication
that would be used by hospitals and rarely would be needed by
community pharmacies.
The Board did not find cases where the pharmacies purchased
drugs for their own patients as well. All drugs were purchased
exclusively for the wholesaler, using the list. The pharmacies
had no independent knowledge of the shortage. They would
sometimes verify once they were told there was a shortage of
the drug. But, generally, that shortage was made at the time of
purchase from their primary wholesaler.
Some of the pharmacies seemingly circumvented the
allocation that was set up by manufacturers by making multiple
orders on the same day at different times so that they could
maximize what they purchased. For example, one pharmacy ordered
one drug 12 times in 1 day to maximize the amount purchased.
Other times, very large orders were made. For example, we had
another case where 30 boxes--each box had 25 units or vials--of
a particular short-supply drug--were purchased, which is far in
excess of what the community pharmacy would have ever needed,
in fact, this particular drug is used in hospitals for infants.
It's a very select drug.
Pharmacies were typically paid 10 percent over the invoice
for the drugs they purchased for the wholesaler. However, the
wholesaler also sought direct access to the pharmacy's primary
wholesaler ordering systems, which was granted by 23 of the 55
pharmacies. This allowed the wholesaler to directly order the
drugs it sought without the active involvement of the pharmacy.
For this access, the pharmacy was paid 12 to 15 percent, a
higher rate.
Several pharmacies also sold drugs in short supply to
several other wholesalers, including several wholesalers out of
California who are not licensed to do business in the state.
The wholesaler made considerably more when it resold the short-
supply drugs than the 10 to 15 percent it paid the pharmacy to
obtain the drugs.
Some of the extreme examples include a Naval hospital that
paid 6,246 percent markup for a drug over what----
Senator Rockefeller. Could you repeat that?
Ms. Herold.--6,246 percent, and it was very much like the
situation you gave. This was a drug that was $1.50 per
container. They charged over a hundred and something dollars
per vial for that. There was another hospital that had another
drug that they paid over 1,200 percent markup to get the drug.
So this was a distortion of the market allocation system that
was set up to ensure everyone had fair access.
The wholesaler also resold over 10 percent of the short-
supply drugs it had purchased to other wholesalers, not to
pharmacies or healthcare providers. Hence, they're now
reshipping the product throughout the supply chain. The Board
also documented cases where the wholesaler resold the entire
quantity it purchased from the pharmacy to another wholesaler.
The Board moved forward with these cases because instead of
alleviating the shortage of drugs, the wholesaler instead
removed more drugs from the availability in the legitimate
supply chain which had allocations in place to most equitably
distribute the product. We believe that it increased the
shortage of the drugs and dramatically increased the cost of
these drugs to other healthcare entities and thus to patients.
That concludes my remarks.
[The prepared statement of Ms. Herold follows:]
Prepared Statement of Virginia Herold, Executive Officer,
California State Board of Pharmacy
Dear Chairman Rockefeller, Ranking Member Hutchison and Committee
Members:
Good afternoon.
I am Virginia Herold, Executive Officer of the California State
Board of Pharmacy. It is a privilege to be given this opportunity to
address the Committee on California's efforts to address some of the
unethical and illegal behavior surrounding manipulation of prescription
drug shortages by wholesalers and pharmacies, to the detriment of the
public health. As I speak today, our investigations and resultant
enforcement activities that I describe below are not yet fully
completed.
The California State Board of Pharmacy licenses pharmacies,
pharmacists, drug wholesalers and other entities that dispense, ship,
transport or store prescription drugs and devices into, throughout and
from California. The board is the largest licenser of pharmacies and
pharmacists in the country--nearly 40,000 pharmacists, 6,200 community
pharmacies and 500 wholesalers are located in California and licensed
by the board. The board's paramount mandate, which is expressly stated
in the California Business and Professions Code, is consumer
protection.
California state law provides the limited circumstances under which
a pharmacy may provide prescription drugs to any entity. One of the
provisions provides that a pharmacy may furnish prescription drugs to
another pharmacy or wholesaler to alleviate a temporary shortage of a
dangerous (or prescription) drug that could result in the denial of
health care and only in quantities sufficient to alleviate the
temporary shortage. Violations can be charged up to $5,000 per
occurrence (e.g., invoice). A copy of this code section is provided as
an attachment to this testimony.
In the fall of 2011, the board initiated an investigation following
a pharmacist's inquiry about the legality of the pharmacy ordering
prescription drugs in short supply from its primary wholesaler,
expressly for sale to another wholesaler. These sales would be
initiated at the behest and solicitation of the second wholesaler, who
informed the pharmacy that the prescription drugs were declared as
temporarily short and thus these sales were legal.
The pharmacy's role would be to act as a purchasing agent for the
wholesaler, purchasing drugs specifically on a list of prescription
drugs in short supply that the wholesaler provided to the pharmacy. The
arrangement between the pharmacy and wholesaler was financial: the
pharmacy would be paid an agreed amount, typically 10 percent over
invoice, plus shipping expenses.
The board initiated an investigation of the California wholesaler
making this solicitation, which yielded hundreds of invoices from 55
California pharmacies that had sold prescription drugs in short supply
to this wholesaler, at the wholesaler's request. The board next
investigated each of the 55 pharmacies, interviewing the pharmacists-
in-charge or others who had knowledge of the sales. Again, invoices
were obtained from each pharmacy.
As of today, the board has identified cases in which 55 pharmacies
purchased drugs in short supply for the wholesaler on 514 occasions,
totaling wholesale prices of over $330,000. Each of the pharmacies and
their pharmacist-in-charge have been cited and fined in various amounts
up to $70,000 for violation of California law. Appeals of these
citations and fines are currently pending. The wholesaler has not yet
had discipline completed. Thus none of these actions and investigations
is fully concluded. However, we are sharing this information to the
Committee in hopes of securing enhanced ways to stop the practices
identified by the board.
The board's investigations generally identified that:
1. A pharmacy would be visited by a sales agent/representative of
the wholesaler, who explained the dire impact that drug
shortages presented to patients and health care providers, and
stressed the inability of the wholesaler to obtain these drugs
on its own. This soliciting wholesaler advised that it was
another source of pharmaceuticals for medical facilities, and
needed these medications.
2. Sales were triggered from a list the wholesaler released each
week to the pharmacies titled ``Items we are looking for.''
3. The pharmacies involved were all independent, community
pharmacies.
4. The drugs were principally medication that that would be used by
hospitals and rarely would be needed by community pharmacies.
The board did not find cases where the pharmacies purchased
drugs for their own patients needs'--all drugs were purchased
exclusively for the wholesaler using the list.
5. The pharmacies had no independent knowledge of the shortage.
6. Some of the pharmacies seemingly circumvented the allocation
system set up by manufacturers by making multiple orders on the
same day at different times. For example, one pharmacy ordered
acetylcysteine 12 times in one day to maximize the amount
purchased. Other times, large orders were made (30 boxes of 25
vials of magnesium sulfate).
7. Pharmacies were typically paid 10 percent over invoice for the
drugs they purchased for the wholesaler.
8. However, the wholesaler also sought direct access to the
pharmacies' primary wholesaler ordering systems, which was
granted by 23 pharmacies--allowing the wholesaler to directly
order the drugs it sought without the active involvement of the
pharmacy. For this access, typically the pharmacy was paid 12
to 15 percent over invoice.
9. Several pharmacies also sold drugs in short supply to other
several other wholesalers, including several wholesalers out of
California who were not licensed to do business in the state.
The wholesaler made considerably more when it resold the short
supply prescription drug than the 10 to 15 percent it paid the
pharmacy. Some of the extreme examples include:
1. Labetalol sold to a Naval hospital: 6,246 percent markup.
2. Leucovorin sold to a hospital: 996 percent markup.
3. Famotidine sold to a hospital in Georgia: 1240 percent markup.
4. Calcium gluconate sold to a hospital in Los Angeles: 441 percent
markup.
The wholesaler also resold about10 percent of the short supply
drugs it had purchased to other wholesalers, not to pharmacies or
health care providers. These wholesalers were charged lower fees (e.g.,
sometimes 40 percent over the price paid by the wholesaler). The board
also documented cases where the wholesaler resold the entire quantity
purchased to another wholesaler.
The board moved forward with these cases because instead of
alleviating the shortage of these drugs, the wholesaler instead removed
more drug from availability in the legitimate supply chain, which had
allocations in place to most equitably distribute the product. We
believe that it increased the shortage of the drugs and dramatically
increased the cost of these drugs to other health care entities, and
thus to patients.
This concludes my statement. Thank you again for this opportunity.
Attachment of Section 4126.5, California Business and Professions Code
4126.5. (a) A pharmacy may furnish dangerous drugs only to the
following:
(1) A wholesaler owned or under common control by the wholesaler
from whom the dangerous drug was acquired.
(2) The pharmaceutical manufacturer from whom the dangerous drug
was acquired.
(3) A licensed wholesaler acting as a reverse distributor.
(4) Another pharmacy or wholesaler to alleviate a temporary
shortage of a dangerous drug that could result in the denial of
health care. A pharmacy furnishing dangerous drugs pursuant to
this paragraph may only furnish a quantity sufficient to
alleviate the temporary shortage.
(5) A patient or to another pharmacy pursuant to a prescription or
as otherwise authorized by law.
(6) A health care provider that is not a pharmacy but that is
authorized to purchase dangerous drugs.
(7) To another pharmacy under common control.
(b) Notwithstanding any other provision of law, a violation of this
section may subject the person or persons who committed the
violation to a fine not to exceed the amount specified in
Section 125.9 for each occurrence pursuant to a citation issued
by the board.
(c) Amounts due from any person under this section on or after
January 1, 2005, shall be offset as provided under Section
12419.5 of the Government Code. Amounts received by the board
under this section shall be deposited into the Pharmacy Board
Contingent Fund.
(d) For purposes of this section, ``common control'' means the power
to direct or cause the direction of the management and policies
of another person whether by ownership, by voting rights, by
contract, or by other means.
The Chairman. You did OK.
Ms. Herold. I came in under 5 minutes, and I wasn't sure
I'd do it. I talked as quickly as I could.
The Chairman. Thanks a lot. You did a good job.
At this point, I'd like to interrupt and have Chairman Tom
Harkin, who is head of Labor, Education, Health, and several
other things--chairs that committee--and he's very much
involved in this, and I want him to--and if Mike Enzi comes, I
hope--and Elijah Cummings is also coming a few minutes out.
But we welcome any words you have to say.
STATEMENT OF HON. TOM HARKIN,
U.S. SENATOR FROM IOWA
Senator Harkin. Well, thank you, Mr. Chairman, and I thank
the panel for letting me intervene at this moment. I'm sorry
I'm a bit late in getting here.
But, first of all, I want to thank you, Chairman
Rockefeller, for your great leadership in this area and for
working with us on our committee and also with the House
committee, also. This truly is a problem that cries out for
something to be done. It's not just costs that I heard you
commenting about on these huge markups. It's also about patient
safety, too. How do we know just how safe some of these drugs
are when they go through four or five or six different hands?
And we've had instances in our committee of people saying
that expiration dates were changed. Different things were taken
out of vials and put into other vials. So it has to do with
safety, also.
Mr. Chairman, when we did the FDA reauthorization bill
recently that the president just signed into law, we had great
bipartisan agreement on the upstream side of the drug safety
issue in terms of where the drugs come from to the
manufacturer. And we gave the FDA a lot more authority to
police that and to make sure that both the non-pill form type
of drugs, the bulk drugs coming in, but also the finished drugs
coming in were under heightened scrutiny from here on.
What we did not have bipartisan agreement on--general
agreement on--was the downstream side, which you're looking at
right here, and that is from the manufacturer on down to the
patient, to the purchaser. And, hopefully, we can find
agreement on how to move ahead. It's very complicated. I've
looked at this in great detail. It's a very complicated issue,
but that doesn't mean it's not solvable. It is solvable, and we
just have to do it.
Just last week, the FBI and the U.S. Attorney in Manhattan
charged 48 people in connection with a massive scheme in which
crooks bought HIV/AIDS medications from Medicaid patients and
then sold them to prescription drug wholesalers, who got the
drugs back into the hands of pharmacies and patients. So a
system where drugs sold for cash on street corners can make
their way back to legitimate pharmacies--a system that is
crying out for some kind of reform.
So your hearing today moves us a step forward. In that way,
the work done by your committee, Chairman Rockefeller, and mine
and Congressman Cummings', I believe, will better define the
problem. And I'm committed to work with you, Mr. Chairman, and
our ranking members to practice and to get a system in there
where--we've got the upstream, and now we have to make sure
that we get this gray market thing out of the system so that we
can keep the price of drugs down and also make sure they're
safe for patients.
So thank you very much, Mr. Chairman. And I thank our panel
for letting me intervene.
The Chairman. Thank you very much, Chairman Harkin.
Chairman Harkin and I came into the Senate the same year,
and we're fairly inseparable.
Senator Harkin. That was in the last century, wasn't it?
The Chairman. Yes, it was. All right.
Now, Dr. Mayhaus, I'm having a trauma over pronouncing your
name correctly.
Dr. Mayhaus. You are pronouncing it correctly--Mayhaus.
The Chairman. Good. OK. You are the Chief Pharmacy Director
of the Cincinnati Children's Hospital Medical Center, where my
wife and my children all got tested for allergies.
Dr. Mayhaus. I hope they had a great experience.
The Chairman. Just a little plug.
Dr. Mayhaus. OK. Good.
The Chairman. Please go ahead.
STATEMENT OF DR. DAVID MAYHAUS, CHIEF PHARMACY
DIRECTOR, CINCINNATI CHILDREN'S HOSPITAL MEDICAL CENTER;
MEMBER, EXECUTIVE COMMITTEE, CHILDREN'S HOSPITAL ASSOCIATION
PHARMACY FORUM
Dr. Mayhaus. Chairman Rockefeller and members of the
Committee, my name is David Mayhaus, and I am Chief Pharmacy
Director at Cincinnati Children's Hospital Medical Center. I am
grateful for the opportunity to speak to you today, not only on
behalf of Cincinnati Children's, but also as a member of the
Executive Committee for the Children's Hospital Association
Pharmacy Forum.
My goal today is to describe the process Cincinnati
Children's uses for managing drugs when they reach critical
shortages and how these issues have impacted our pharmacy
operations over the past 5 years.
Cincinnati Children's is a tertiary care research facility
that was recently ranked third in the nation among all Honor
Roll Hospitals in U.S. News and World Report's Best Children's
Hospital ranking. Within Cincinnati Children's, the Division of
Pharmacy is an extremely busy unit, dispensing approximately
7,500 doses per day. When there is a sudden drug shortage
crisis, the impact can be felt throughout our entire system.
Today, at Cincinnati Children's, there are currently 30
drugs that we are actively managing on a daily basis. The
buyers that work for me check our primary wholesaler or the
manufacturer on a daily basis. We meet several times a day to
discuss where we are and possible mitigation plans. Our buyers
spend 30 percent of their time just dealing with drug shortages
and trying to prevent Cincinnati Children's from experiencing a
crisis.
As Chief Pharmacy Director, approximately 10 percent of my
time is also dedicated to these issues, including what I am
doing here today, appealing to you to assure an adequate supply
of medications to our patients. Everything we do is in the best
interest of our pediatric patients.
Once a drug is determined to be in shortage, our clinical
pharmacists identify our utilization pattern and estimate the
number of base supplies that we have in inventory. If the
anticipated length of the shortage exceeds our current supply,
we develop a mitigation plan which could include purchase of
the gray market in extreme cases.
Our goal at this point is to extend the amount of inventory
until the drug is released to the market. Work also begins at
this stage with the impacted medical divisions to explore if
various safe alternatives and treatments exist.
The vast majority of drugs purchased for Cincinnati
Children's are from two primary wholesalers. At the point all
inventory of the affected drug has been exhausted, regular
wholesalers and manufacturers have no product, and the
mitigation plan has run its course, Cincinnati Children's has
in the past looked for alternative wholesalers for the product.
Let me be clear. Cincinnati Children's only uses these
alternative wholesalers as a last resort when it is determined
that the absence of the drug could cause harm to one of our
small patients.
In these extreme cases, Cincinnati Children's has very
specific due diligence procedures for obtaining drugs from
alternate wholesalers, which includes an examination of the
drug pedigree. Over the past 12 months, Cincinnati Children's
has purchased only nine out of the 2,800 different line item
drugs from these alternative wholesalers.
As a medical team, it was determined that all these drugs
were critical. In fact, three of them are drugs used to
maintain life support during a code. Cincinnati Children's
believed running out of the stock of these drugs was not an
option and would have the potential to cause significant harm
to our patients.
Critical chemotherapy drugs have been frequently reported
in short supply. One specific example is when we needed to
purchase a very important chemotherapy called Cytarabine that
was in short supply. Cytarabine is used to treat acute
lymphoblastic leukemia and is the drug our oncology division
firmly believes has the most efficacy for treatment.
After careful consideration and the due diligence described
above, and because there is no treatment alternative for this
particular disease, Cincinnati Children's did, in fact,
purchase this drug from alternative wholesalers. Because of
this purchase, we did not run out of this important drug, and
all the patients received all the appropriate doses.
It is a daily reality that our buyers in the division
receive e-mails and phone calls from alternative wholesalers.
It is our experience that the call activity increases when a
new or critical drug goes into a shortage situation. The prices
vary from wholesaler to wholesaler. Cincinnati Children's has
had the experience of the price changing rapidly, even between
phone calls, within the same alternative wholesaler, depending
on the market activity and the critical nature of the drug.
These business practices are not the normal procedure for
our primary wholesaler or any other of our activities within
the practice of pharmacy. As you can surmise, it is also a fact
that in all of our purchases through alternative wholesalers,
Cincinnati Children's did, in fact, pay substantially more than
our normal contracted price. In some cases, the price exceeded
35 times the normal pricing.
Finally, on behalf of my colleagues at the other children's
hospitals across the country, I would like to conclude by
thanking this committee for its efforts to gain a full
understanding of the complexity of this issue. As Cincinnati
Children's has seen over the past 5 years, the fragile nature
of the pharmaceutical supply chain does have a direct
correlation to the treatment of our patients. At Cincinnati
Children's, safety is paramount, and there is nothing more
important to the institution than making sure a child gets the
right care in the appropriate setting with the very best
quality and competency that can be delivered.
Thank you for allowing me to share our experiences with you
today, and I would be happy to respond to questions later.
[The prepared statement of Dr. Mayhaus follows:]
Prepared Statement of Dr. David Mayhaus, Chief Pharmacy Director,
Cincinnati Children's Hospital Medical Center; Member, Executive
Committee, Children's Hospital Association Pharmacy Forum
Chairman Rockefeller and members of the Committee, my name is David
Mayhaus and I am the Chief Pharmacy Director at Cincinnati Children's
Hospital Medical Center. I am grateful for the opportunity to speak to
you today not only on behalf of Cincinnati Children's, but also as a
member of the Executive Committee for the Children's Hospital
Association Pharmacy Forum. My goal today is to describe the process
Cincinnati Children's uses for managing drugs when they reach critical
shortage and how these issues have impacted our pharmacy operations
over the past five years.
Cincinnati Children's was recently ranked third in the Nation among
all Honor Roll hospitals in U.S. News and World Report's Best
Children's Hospitals ranking. Our institution is ranked in the top 10
for all of the pediatric specialties ranked. On the research side,
Cincinnati Children's is one of the top two pediatric recipients of
grants from the National Institutes of Health. In FY 2011 there were
over 1 million patient encounters at Cincinnati Children's from 48
states and over 50 countries. Cincinnati Children's operates over 570
registered beds including a Heart Institute, a Perinatal Institute and
a Cancer and Blood Disease Institute. Cincinnati Children's division of
pharmacy is a large facility which dispenses approximately 7,500 doses
per day. When there is a sudden drug shortage crisis the impact can be
felt through our entire system.
Our division of pharmacy consists of 150 FTEs. Three of these FTE
are pharmacy buyers. These buyers are responsible for managing the
inventory of approximately 2800 line items of drugs. Over the past
several years, more and more time has been dedicated to management of
medications that are in short supply. Over time I have seen it grow to
the point where today our buyers spend 30 percent of their day just
dealing with drug shortages and trying to prevent Cincinnati Children's
from experiencing a crisis. In addition to our drug buyers; clinical
pharmacists and directors spend an inordinate portion of their time
monitoring drug supply which can range from modification of therapy, to
alternative medications. Our pharmacists have contacted manufacturers,
wholesalers and alternative suppliers to get what we need. As Chief
Pharmacy Director approximately 10 percent of my time is also dedicated
to these issues including what I am doing today, appealing to you to
assure adequate supply of medications for our patients.
Today at CCHMC there are currently 30 drugs being actively managed
on a daily basis and approximately an additional 70 where there have
been concerns about shortage in the recent past. The buyers who report
to me check our primary wholesaler on a daily basis for the 30 drugs on
the critical list. We meet informally several times a day as a group
and discuss where we are and possible mitigation plans. As a pediatric
institution, it is vitally important to continually monitor the drug
shortage market and react quickly to the changes.
There are several mechanisms to determine new and ongoing drug
shortages. The 3 most important are the American Society of Health-
System Pharmacists (ASHP) website, The FDA website and the Children
Hospital's Association's pharmacy directors and buyers list serve.
Other less helpful mechanisms are the primary wholesaler and
manufacturer notifications. It is the experience of Cincinnati
Children's that these last two tend to be delayed in their announcement
of shortages. For these reasons we applaud the Senate for their passage
of the Senate Bill 3187, the FDA user fee legislation, which will
create an early-warning notice system that will give providers like
myself more timely notice ahead of a critical shortage.
Everything we do is in the best interest of our pediatric patients.
Once a drug is determined in shortage, our clinical pharmacists
identify our utilization pattern and an estimate for days supply is
developed. If the anticipated length of the shortage exceeds our
current supply, we meet to develop a mitigation plan which could
include purchase from the gray market in extreme circumstances. Our
goal at this point is to extend the amount of inventory until the drug
is released to the market. Work also begins at this stage with the
impacted medical divisions to explore if various safe alternatives in
treatment exist. Mitigation plans could include: reducing the dosing
guidelines within medical staff approval for the affected drug,
changing the current distribution from readily available to pharmacy
dispensed therefore maximizing product or changing to a similar drug in
the pharmaceutical class. None of these decisions would be made without
complete and thorough consultation with the medical team.
The vast majority of the drugs purchased from Cincinnati Children's
are from two primary wholesale companies. At the point all inventory of
the affected drug has been exhausted, regular wholesalers have no
product and the mitigation plan has run its course, Cincinnati
Children's has in the past looked to alternative wholesalers for
product. Let me be clear, Cincinnati Children's only use these
alternative wholesalers as a last resort when it is determines that the
absence of the drug could cause harm to our patients.
In those situations where Cincinnati Children's decides to purchase
a drug from an alternative wholesaler, we follow extensive due
diligence procedures including checking the prescription drug pedigree.
Over the past 12 months Cincinnati Children's has purchased only 9
out of 2,800 different line item drugs from these alternative
wholesalers. As a medical team it was determined that all of these
drugs were critical and in fact three of them are drugs used to
maintain life support during a code. Cincinnati Children's believes
running out of stock of these drugs is not an option and would have had
the potential to cause significant harm to our patients.
Critical chemotherapy drugs have been frequently reported to be in
short supply. One specific example is approximately 18-24 months ago
the institution needed to purchase a very important chemotherapy
(Cytarabine) that was in short supply. Cytarabine is used to treat
Acute Lymphoblastic Leukemia (ALL) and is the drug that our number
three ranked oncology division firmly believes has the most efficacy
for treatment. After careful consideration and the due diligence
described above and because there is no treatment alternative for this
particular drug, Cincinnati Children's did in fact purchase this drug
from alternative wholesalers. Because of the purchase, we did not run
out of this important drug and all patients received the appropriate
dose.
It is a daily reality that the buyers in our division receive e-
mails and phone calls from alternative wholesalers. It is our
experience that the call activity increases when a new or critical drug
goes into a shortage situation. The prices vary from wholesaler to
wholesaler. Cincinnati Children's has had the experience of the price
changing rapidly, even between phone calls, within the same alternative
wholesaler depending on the market activity and the critical nature of
the drug. These business practices are not the normal procedure for our
primary wholesaler or for any other activity within the practice of
pharmacy. As you can surmise, it is also a fact that in all of our
purchases through alternative wholesalers, Cincinnati Children's paid
substantially more than our normal contracted price. In some cases this
price exceeded 35 times more than normal pricing.
Finally, on behalf of my colleagues at the other children's
hospitals across the country, I would like to conclude by thanking this
Committee for its efforts to gain a full understanding of the
complexity of these issues. As Cincinnati Children's has seen over the
past five years the fragile nature of the pharmaceutical supply chain
does have a direct correlation to treatment for patients. At Cincinnati
Children's safety is paramount and there is nothing more important to
the institution than making sure a child gets the right care, in the
appropriate setting with the very best quality and competence that can
be delivered.
Thank you for allowing me to share our experiences with you today
and I will be happy to respond to questions.
The Chairman. Thank you very much, Dr. Mayhaus. You spoke
in a quiet manner, but your testimony was very potent.
And now I would once again call upon my colleagues and our
witnesses to allow a very distinguished visitor, Elijah E.
Cummings, who is Ranking Member of the Oversight and Government
Reform Committee in the House, who has been working on this and
so many other issues. We've done a number of things together,
and we've been in each other's daises, so to speak. But he has
something he would like to say on this, and I hope that my
colleagues and the witnesses will listen carefully to what he
has to say, because then he has to go right back and continue
chairing a hearing.
STATEMENT OF HON. ELIJAH E. CUMMINGS,
RANKING MEMBER, U.S. HOUSE COMMITTEE ON OVERSIGHT AND
GOVERNMENT REFORM
Mr. Cummings. Thank you very much Chairman Rockefeller and
Ranking Member Hutchison and members of the Committee, and I
thank you for inviting me to testify here today. Let me also
extend my personal thanks to Chairman Rockefeller and Chairman
Harkin and their staffs for their great work during this
investigation and for their comprehensive report issued today.
If I may, I would like to focus briefly on why I launched
this investigation and what we found so far and what we can do
about it. I initiated this investigation last year after
receiving a heartfelt letter from Brenda Frese. Brenda is the
head coach of the women's basketball team at the University of
Maryland, and these are pictures of Brenda and her son, Tyler.
Brenda wrote to me about a critical shortage in a drug
called Cytarabine, which treats leukemia in children. Let me
read what she wrote. ``Without Cytarabine, many leukemia
patients won't be cured and they will die. What makes this hit
home even more for me and my family is that my 3-year-old son,
Tyler, is a leukemia patient who has benefited from
Cytarabine,'' end of quote.
As we began investigating this shortage, we found something
very disturbing. Hospitals such as Johns Hopkins, the
University of Maryland, and others told us that even though
they could not get the drug from their authorized distributors,
they were being inundated with phone calls, e-mails, and faxes
from gray market companies offering the shortage drugs and
others at highly inflated prices. They were outraged by this
and so was I.
Based on the information provided by the hospitals, we
started with five drugs facing critical shortages, and we
identified five gray market companies marketing them at
exorbitant prices. We asked these companies where they were
getting these drugs and how much money they were making by
selling them. Based on their initial responses, we expanded our
investigation to cover 125 different companies, and we reviewed
300 different drug transaction chains.
The report issued today does a terrific job laying out the
facts in detail. So let me highlight one example that
illustrates our findings.
First, let me put up a chart that shows how things are
supposed to work. Under normal circumstances, drugs go from
manufacturers to distributors to hospitals, pharmacies, or
other healthcare providers that dispense them to patients. But
that is not what happens in the gray market. In the gray market
transactions, shortage drugs are being diverted into a much
longer distribution chain.
Let me show you an example, the transaction involving
Fluorouracil. This drug is used to treat various forms of
cancer, including colon cancer, stomach cancer, breast cancer,
and pancreatic cancer. As you can see, instead of the three
stops, in this case there are nine. The main problem is that
each one of these entities marked up the price of the drug. Let
me show you how much.
This is the same chart now listing the prices for each
transaction. The drug started at $7--listen to what I'm
saying--$7 per vial when it was sold by the authorized
distributor. It was later sold for $50, then $69, then $95,
then $275, then $375. And, remember, it started at $7, and it
was sold finally to a hospital at an astonishing $600.
Something is wrong with that picture. That was for a single
vial of this cancer drug, more than 85 times its initial price.
This was not an isolated incident. We found this same
pattern with all the drugs we examined. This system makes
absolutely no sense for patients who need these critical drugs
or for hospitals that treat them. The current system allows
this network of private companies to boost their profits, and
for what? For doing nothing but charging offensively high
prices, increasing the overall cost of our nation's healthcare
system, and raising significant safety concerns as these drugs
criss-cross the country with markups at every single stop.
So how could this happen? How do these gray market drug
companies get their hands on these drugs when our hospitals
cannot? And I guarantee you almost every single hospital in
this country, if you ask them about it, will tell you they're
experiencing the same thing.
The answer is through pharmacies. In more than two-thirds
of the drug sale chains we examined, gray market companies were
able to buy shortage drugs from entities with pharmacy
licenses. In the same chain we have been discussing, you can
see that the third company was a pharmacy named Priority
Healthcare. Rather than dispensing the drug to patients, this
pharmacy sold it to a gray market wholesaler called Tri-Med
America, which then sold it down the line.
During our investigation, we discovered that Priority was
actually a fake pharmacy. It sold all of its drugs to Tri-Med
and none, absolutely none, to patients. We also discovered that
the owner of the pharmacy was married to the owner of Tri-Med,
the gray market wholesaler. State regulators found that the
pharmacy committed numerous violations of state law, and the
wholesaler's license has now been revoked.
Again, this was not an isolated incident. In North
Carolina, for example, an individual named Jessica Hoppe set up
two companies, LTC Pharmacy and International Pharmaceuticals,
a pharmacy and wholesaler. But when state regulators went to
inspect these companies, this is what they found. They reported
that LTC Pharmacy, and I quote, ``was not an operating
pharmacy,'' and that, quote, ``no dispensing has taken place
since opening,'' end of quote. Licenses for both companies have
now been surrendered or denied. However, just last week, we
learned that the owner has now opened a new company, just under
a different name and in a different state.
Even legitimate pharmacies are being used by unscrupulous
gray market companies to obtain access to shortage drugs. Gray
market companies and their brokers have been approaching
pharmacies, asking them to buy drugs on their behalf and
promising big profits in return.
For example, an e-mail to one pharmacy said, and I quote,
``We guarantee our pharmacies 20 percent or more every time,''
end of quote. Another e-mail encouraged a pharmacy to locate
shortage drugs, saying, and I quote, ``The more you find, the
more you make,'' end of quote. Some gray market companies even
dupe pharmacies into believing that buying shortage drugs for
them would help needy patients obtain drugs faster. In fact,
all they were doing is artificially driving up prices.
The good news is that there is something we can do about
this, and we must do something about it. In May, I introduced
legislation, and there are two provisions I would just like to
highlight as I close.
First, my bill would prohibit wholesalers from buying drugs
from pharmacies. There is no legitimate reason for wholesalers
to do this, and this is how many shortage drugs are being
diverted into the gray market.
Second, my bill would create a national wholesaler data
base that would allow state boards of pharmacy to share
information more easily. One of the biggest challenges state
regulators face is monitoring enforcement actions in other
states. We have already found examples of gray marketers being
shut down in one state, only to open their doors in another.
Let me close by emphasizing again why this investigation is
so very, very important. As Brenda Frese said to me in her
letter last year, this is a matter of life and death. And
nobody, absolutely nobody, should be allowed to profiteer at
the expense of patients by jacking up the price of drugs in
critically short supply.
We're talking about kids, with leukemia in some cases,
children with life threatening illnesses. And these companies
are taking advantage of them to boost their own bottom lines.
Again, I want to thank Chairman Rockefeller and Chairman
Harkin, and I want to thank you for lending to us and helping
us with your phenomenal staffs. They have been absolutely
incredible, and we really do appreciate them. Without your
direct involvement and your sustained leadership, there is
absolutely no way we would have uncovered as much as we did
during this investigation.
And I apologize because I have to run back to the House.
I'm managing a bill. But, again, thank you and may God bless.
[The prepared statement of Mr. Cummings follows:]
Prepared Statement of Hon. Elijah E. Cummings, Ranking Member, U.S.
House of Representatives, Committee on Oversight and Government Reform
Chairman Rockefeller, Ranking Member Hutchinson, and Members of the
Committee, thank you for inviting me to testify. Let me also extend my
personal thanks to Chairman Rockefeller, Chairman Harkin, and their
staffs for their great work during this investigation and for the
comprehensive report issued today.
If I may, I would like to focus briefly on why I launched this
investigation, what we have found so far, and what we can do about it.
[Figure 1: http://democrats.oversight.house.gov/images/stories/
GrayMarketFigur
e1%283%29.pdf] I initiated this investigation last year after receiving
a heartfelt letter, http://democrats.oversight.house.gov/images/
stories/freselettertocummings.pdf, from Brenda Frese. Brenda is the
head coach of the women's basketball team at the University of
Maryland, and these are pictures of Brenda and her son Tyler. Brenda
wrote to me about a critical shortage in a drug called cytarabine,
which treats leukemia in children. Let me read what she wrote:
Without cytarabine, many leukemia patients won't be cured and
will die. What makes this hit home even more for me and my
family is that my three year old son Tyler is a leukemia
patient who has benefited from cytarabine.
As we began investigating this shortage, we found something very
disturbing. Hospitals told us that even though they could not get the
drug from their authorized distributors, they were being inundated with
phone calls, e-mails, and faxes from gray market companies offering
this shortage drug and others at highly inflated prices. They were
outraged by this, and so was I.
Based on information provided by the hospitals, we started with
five drugs facing critical shortages, and we identified five gray
market companies marketing them at exorbitant prices. We asked these
companies where they were getting these drugs, and how much money they
were making by selling them. Based on their initial responses, we
expanded our investigation to cover 125 different companies, and we
reviewed 300 different drug transaction chains.
The report issued today does a terrific job laying out the facts in
detail, so let me highlight one example that illustrates our findings.
[Figure 2: http://democrats.oversight.house.gov/images/stories/
GrayMarketFigure2%283%29.pdf]
First, let me put up a chart that shows how things are
supposed to work. Under normal circumstances, drugs go from
manufacturers to distributors to hospitals, pharmacies, or other health
care providers that dispense them to patients. But that is not what
happens in the gray market. In gray market transactions, shortage drugs
are being diverted into much longer distribution chains.
[Figure 3: http://democrats.oversight.house.gov/images/stories/
GrayMarketFigure3%283%29.pdf]
Let me show you an example. This transaction involved
fluorouracil, which is used to treat various forms of cancer, including
colon, stomach, breast, and pancreatic cancer. As you can see, instead
of three stops in this case, there were nine. The main problem is that
each one of these entities marked-up the price of the drug.
[Figure 4: http://democrats.oversight.house.gov/images/stories/
GrayMarketFigure4%283%29.pdf]
Let me show you how much. This is the same chart, now
listing the prices for each transaction. This drug started at $7 per
vial when it was sold by the authorized distributor. It was later sold
for $50 . . . $69 . . . $95 . . . $275 . . . $375 . . . In the end, it
was finally sold to a hospital for an astonishing $600. That was for a
single vial of this cancer drug--more than 85 times its initial price.
This was not an isolated incident. We found this same pattern with
all of the drugs we examined. This system makes absolutely no sense for
patients who need these critical drugs or for hospitals that treat
them. The current system allows this network of private companies to
boost their profits. And for what? For doing nothing but charging
offensively high prices, increasing the overall costs to our Nation's
health system, and raising significant safety concerns as these drugs
crisscross the country with mark-ups at every stop.
So how could this happen? How do these gray market drug companies
get their hands on these drugs when hospitals cannot? The answer is
through pharmacies. In more than two-thirds of the drug sale chains we
examined (69 percent), gray market companies were able to buy shortage
drugs from entities with pharmacy licenses.
[Figure 5: http://democrats.oversight.house.gov/images/stories/
GrayMarketFigure5%283%29.pdf]
In the same chain we have been discussing, you can see
that the third company was a pharmacy named Priority Healthcare. Rather
than dispensing the drug to a patient, this pharmacy sold it to a gray
market wholesaler called Tri-Med America, which then sold it down the
line.
During our investigation, we discovered that Priority was actually
a fake pharmacy. It sold all of its drugs to Tri-Med and none to
patients. We also discovered that the owner of this pharmacy was
married to the owner of Tri-Med, the gray market wholesaler. State
regulators found that the pharmacy committed numerous violations of
state law, and the wholesaler's license has now been revoked.
Again, this was not an isolated incident. In North Carolina, for
example, an individual named Jessica Hoppe set up two companies--LTC
Pharmacy and International Pharmaceuticals, a pharmacy and a
wholesaler. But when state regulators went to inspect these companies,
this is what they found.
[Figure 6: http://democrats.oversight.house.gov/images/stories/
GrayMarketFigure6%283%29.pdf]
They reported that LTC Pharmacy was ``not an operating
pharmacy'' and that ``no dispensing has taken place since opening.''
Licenses for both companies have now been surrendered or denied.
However, just last week, we learned that the owner has now opened a new
company, just under a different name and in a different state.
Even legitimate pharmacies are being used by unscrupulous gray
market companies to obtain access to shortage drugs. Gray market
companies and their brokers have been approaching pharmacies, asking
them to buy drugs on their behalf, and promising big profits in return.
For example, an e-mail to one pharmacy said this: ``We guarantee our
Pharmacies 20 percent or more every time.'' Another e-mail encouraged a
pharmacy to locate shortage drugs, saying this: ``The more you find,
the more you make.''
Some gray market companies even duped pharmacies into believing
that buying shortage drugs for them would help needy patients obtain
drugs faster, when in fact all they were doing is artificially driving
up prices.
The good news is that there is something we can do about this. In
May, I introduced legislation, and there are two provisions I would
like to highlight. First, my bill would prohibit wholesalers from
buying drugs from pharmacies. There is no legitimate reason for
wholesalers to do this, and this is how many shortage drugs are being
diverted into the gray market.
Second, my bill would create a national wholesaler database that
would allow state boards of pharmacy to share information more easily.
One of the biggest challenges state regulators face is monitoring
enforcement actions in other states. We have already found examples of
gray marketers being shut down in one state only to open their doors in
another.
Let me close by emphasizing again why this investigation is so
important. As Brenda Frese said to me in her letter last year, this is
a matter of life and death. Nobody should be allowed to profiteer at
the expense of patients by jacking up the price of drugs in critically
short supply. We're talking about kids with leukemia in some cases--
children with life-threatening illnesses--and these companies are
taking advantage of them to boost their bottom-line.
I would like to thank Chairman Rockefeller and Chairman Harkin once
again, as well as your staffs. Without your direct involvement and your
sustained leadership, there is no way we would have uncovered as much
as we did during this investigation. Thank you.
The Chairman. Thank you very much, Congressman Cummings.
You're a remarkable person, and we wish you well.
Again, I've never sort of done this before. So, again, I
want to apologize to my colleagues that were all sort of
looking at me in a slightly skeptical way. But, fortunately, we
work on the seniority system here, so there's not much you can
do about it.
[Laughter.]
The Chairman. However, now I want to go to John Coster, who
is Senior Vice President of Government Affairs and Director of
the NCPA, which is the National Community Pharmacists
Association.
Please.
STATEMENT OF JOHN COSTER, Ph.D., R.Ph., SENIOR VICE PRESIDENT,
GOVERNMENT AFFAIRS AND DIRECTOR, NCPA ADVOCACY CENTER, NATIONAL
COMMUNITY PHARMACISTS ASSOCIATION
Dr. Coster. Chairman Rockefeller, Senator Boozman, members
of the Senate Commerce Committee, I'm John Coster, Senior Vice
President of Government Affairs for the National Community
Pharmacists Association. I am also a licensed pharmacist in the
states of New York, Maryland, and Virginia. Thank you for
conducting this hearing and for allowing us to submit our views
on this very important and timely issue.
NCPA represents the owners and operators of 23,000
independent community pharmacies in the United States. We
appreciate your focusing this hearing on the issues surrounding
the shortages of prescription drugs. While most of the drug
shortages to date have been experienced by hospitals and other
institutional settings for injectable and infusion drugs, many
community pharmacies also experience daily shortages of vital
prescription medications.
How do community pharmacies manage an inventory of
thousands of drug products on their shelves and also handle
drug shortages? Pharmacy inventory is a function of many
factors, including local prescribing patterns and patient
populations served. Pharmacies do their very best to
efficiently manage their inventories because drug products are
very expensive.
A typical independent community pharmacy has a great deal
of capital invested in inventory items, likely hundreds of
thousands of dollars. Over 90 percent of the average
independent pharmacy's dollar inventory is tied up in
prescription products. However, the last message a pharmacist
wants to deliver to a patient standing at the counter is that
their drug is not in stock or, worse, temporarily unavailable.
The relationship between community pharmacies and their
wholesale distributors is one of critical importance to manage
inventory and prevent shortages. Community pharmacists rely
heavily on their wholesalers to ensure that they have the
necessary access to virtually all medications at all times in
order to ensure that their patients' needs are met.
Most community pharmacies rely on a primary wholesaler to
meet the majority of their ongoing prescription drug needs.
However, community pharmacies typically need to have at least
one or more backup or secondary wholesalers that they can call
upon in the event that there is a shortage.
Recently, there have been troubling reports of shell
pharmacies, fake pharmacies, paper pharmacies that seem to have
been established for the sole purpose of buying medications in
short supply from primary wholesalers in order to sell them to
unethical secondary wholesalers. NCPA condemns these activities
and applauds the Committee for its investigative work in this
area. No pharmacy, whether fake or legitimate, should be in the
business of acting as a conduit to facilitate the activities of
an illegitimate gray market. These few pharmacies cast a pall
over all the good community pharmacies that do work in their
communities.
It is our understanding that the Committee's investigation
focuses mainly on injectable and infusion drugs that are not
typically sold to or dispensed by community pharmacies. These
aberrant purchases by these pharmacies should have been a
warning signal to wholesalers selling these drugs that
something could be wrong.
How was it that some of these pharmacies could open and
operate in the first place? Typically, state boards conduct an
onsite investigation of any new pharmacy. However, sometimes in
certain situations boards may issue a temporary license with
the permanent license withheld pending the results of an actual
inspection.
Beyond the appreciated actions already taken by Congress to
address drug shortages in the recently enacted FDA bill,
Congress continues to examine ways to further secure the supply
chain. We support these discussions and want to continue to
serve as a resource on the best way to achieve these objectives
in a seamless, efficient, patient-oriented manner.
What practices do pharmacies currently use to address
shortages of medications? First, it is in the normal course of
business that community pharmacies return outdated or short-
dated products to wholesalers or distributors. We need a way to
do this in order to return product because of the significant
amount of capital tied up in these returns.
Second, at times, where permitted by law, pharmacies do
sell inventory to other pharmacies. For example, some state
practice acts allow retail pharmacies to sell a small amount of
their inventory in certain situations. Pharmacies will do this
on occasion to alleviate temporary shortages.
Finally, some states permit appropriate licensed pharmacy
sales to wholesalers. These sales are also permitted to
alleviate a temporary shortage of drugs. In surveying our
members, however, we have found very few that actually do this.
We want to work with the Committee to assure that community
pharmacies can continue to manage their inventories while being
able to meet their individual prescription drug needs. For
example, we support the implementation of Federal standards for
wholesale distributors. In addition, there should be greater
emphasis on the importance for all participants in the supply
chain to perform their due diligence with respect to business
partners.
In conclusion, it is necessary for pharmacies to have
options to address temporary shortages in the marketplace. We
urge Congress to not take actions that might limit the ability
of pharmacies to take care of their patients. The primary and
secondary wholesale markets play an important role in ensuring
that all patients have seamless access to virtually all
products they require. Having said that, it is unethical for
pharmacists to act as a conduit for the illegitimate gray
market, which is contrary to the goals of providing the best
patient care.
We appreciate the opportunity to provide our views to the
Committee, and I look forward to answering any questions.
[The prepared statement of Dr. Coster follows:]
Prepared Statement of John Coster, Ph.D., R.Ph., Senior Vice President,
Government Affairs and Director, NCPA Advocacy Center, National
Community Pharmacists Association
Chairman Rockefeller, Senator Boozman, and Members of the Senate
Commerce Committee. I am John Coster, Ph.D., R.Ph., Senior Vice
President of Government Affairs for the National Community Pharmacists
Association. I am a licensed pharmacist in the states of New York,
Maryland, and Virginia. Thank you for conducting this hearing and for
allowing us to submit our views on this very important and timely
issue. NCPA represents the owners and operators of more than 23,000
independent community pharmacies in the United States. Our members
provide about 40 percent of all outpatient prescription drugs in the
United States. We are also major providers of pharmacy services to long
term care and assisted living facilities. Our members are also
prevalent in urban and rural areas.
We appreciate your focusing this hearing on the issues surrounding
the shortages of prescription drugs. While most of the drug shortages
to date have been experienced by hospitals and other institutional
settings for injectable and infusion drugs, many community pharmacies
also experience daily shortages of vital prescription medications. In
particular, recently there have been critical shortages of medications
to treat ADD and ADHD. The newly enacted FDA law will take important
steps to help address these types of shortages, as well as require
better coordination between FDA and the Drug Enforcement Administration
(DEA) on determining and updating the quotas for the production of
these medications. We appreciate the bipartisan steps that Congress
took to address this shortage situation.
Pharmacies Rely on Combination of Wholesalers
How do community pharmacies manage an inventory of the thousands of
drug products on their shelves and handle drug shortages? Pharmacy
inventory is a function of many factors, including local prescribing
patterns and the patient population served. Pharmacies do their best to
efficiently and effectively manage their inventories because drug
products are very expensive.
A typical independent community pharmacy has a great deal of
capital invested in inventory items, likely hundreds of thousands of
dollars. Over 90 percent of the average independent pharmacy's dollar
inventory is tied up in prescription products. However, the last
message a pharmacist wants to deliver to a patient standing at the
counter is that their drug is not in stock, or worse, is temporarily
unavailable.
The relationship between community pharmacists and their wholesale
distributors is one of critical importance to manage inventory and
prevent shortages. Community pharmacists rely heavily on their
wholesalers to ensure that they have the necessary access to virtually
all medications at all times in order to ensure that patient needs are
met. Most community pharmacists rely on a primary wholesaler to meet
the majority of their on-going prescription drug supply needs. However,
community pharmacists typically need to have at least one or more
``back-up'' or secondary distributors that they can call upon in the
event that their primary distributor for some reason cannot meet their
needs at any particular time.
The term ``primary wholesaler'' generally describes entities that
purchase the vast majority of their product directly from drug
manufacturers. This market is highly concentrated, as the ``big three''
wholesalers generate approximately 85 percent of all revenues from
pharmaceutical wholesaling in the United States. Most manufacturers
typically limit the number of entities that they will sell to directly
and most do not sell directly to smaller companies that are not
interested in purchasing extremely large, bulk amounts
The term ``secondary'' wholesaler generally describes distributors
that do not purchase the majority of their products directly from a
pharmaceutical manufacturer. They often play an important role for
patients and pharmacies by serving as a ``back-up'' source of supply to
pharmacies who may use a primary wholesaler for their usual and
expected day-to-day needs. They also provide necessary competition for
the primary wholesalers which helps keep costs down.
Illicit Activities by ``Shell'' Pharmacies and Gray Market Distributors
Unethical
Recently, there have been troubling reports of ``shell pharmacies''
or ``paper pharmacies'' that seem to have been established for the sole
purpose of buying medications in short supply from primary wholesalers
in order to sell them to seemingly unethical secondary wholesalers.
NCPA condemns these activities and applauds the Committee for its
investigative work in this area. No pharmacy should be in the business
of acting as a conduit to facilitate the activities of an illegitimate
gray market.
It is our understanding that the Committee's investigation focuses
mainly on injectable and infusion drugs that are not typically sold to
or dispensed by most community pharmacies. The aberrant purchases by
these pharmacies should have been a strong warning signal to
wholesalers selling these drugs to these pharmacies that something
could be wrong.
How was it that these shell pharmacies could even open and operate
in the first place? Typically, state boards of pharmacy conduct an on-
site inspection of any new pharmacy; however, sometimes boards may
issue a temporary license with the permanent license withheld pending
the results of an actual inspection.
Efforts to Curb Unacceptable Practices Should Not Harm Patient Care
Beyond the actions already taken by Congress to address drug
shortages in the recently-enacted FDA bill, Congress continues to
examine ways to furthers secure the pharmaceutical supply chain. We
support these discussions and want to continue to serve as a resource
to Congress on the best ways to achieve these objectives in a seamless,
efficient, patient-oriented manner. What current practices allow
pharmacies to address shortages of medications to meet patient needs,
while managing their inventory?
First, it is in the normal course of business that community
pharmacies return outdated or short dated products to wholesalers or
distributors, or products that were sent to the pharmacy in error.
Pharmacies need a way to return products because of the significant
amount of pharmacy capital tied up in these returns. We appreciate that
our business partners work with us on taking back these returns, and we
urge Congress to continue to allow us to return these products.
Second, at times, where permitted by law, community pharmacies do
sell pharmaceutical products to other pharmacies. For example, some
state pharmacy practice laws allow retail pharmacies to sell a small
amount of their inventory in certain situations. Pharmacies will do
this on occasion to alleviate temporary shortages, to assure that
patients are able to receive needed drugs, or to assure that ``short
dated'' drugs will not be wasted before they expire. We believe that
this is an appropriate practice. This helps to facilitate the
functioning of the market and helps to assure timely and appropriate
cost effective patient care. This is particularly important in rural
areas where daily wholesaler deliveries may be more sporadic.
Finally, some states permit pharmacy sales to wholesalers. These
sales are permitted to alleviate a temporary shortage of drugs. In
surveying our members, however, we have found very few that hold both
types of licenses. Having said that, we think that this situation
contrasts with the unethical practices found by the Committee where a
pharmacy was knowingly buying short supply inventory it knew it would
not use and did not need, with the intended purpose of selling it into
the illegitimate gray market.
However, one of the options discussed to address the issues
identified by the Committee is a potential prohibition of pharmacies
selling drug products to wholesalers. While this would appear to be a
logical solution to the problem, we ask the Committee to carefully
consider whether this option would have unintended consequences for
patients.
Supply Chain Partners Need to Know Their Customers
We would want to work with the Committee to assure that community
pharmacies can continue to manage their pharmaceutical inventories,
while being able to meet the prescription drug needs of individual
patients, including in shortage situations.
For example, NCPA supports the implementation of Federal standards
for wholesale distributors, as well as a proposed lot-level tracking
system for prescription drugs that will make it much easier to keep
track of the purchase and sale of pharmaceuticals. Uniformly raising
the bar for all entities that wish to engage in this line of business
should provide a greater assurance for all participants in the supply
chain that they are doing business with a legitimate entity.
In addition, there should be greater emphasis on the importance for
all participants in the supply chain to also perform their ``due
diligence'' with respect to their business partners. NCPA currently
publishes a manual that provides assistance to pharmacists who are
seeking to open their own pharmacy and a portion of this document deals
with the selection of a wholesaler or wholesaler(s). The manual
includes a list of questions that each pharmacy should ask before
retaining the services of any wholesaler. Notably, NCPA also stresses
the fact that every pharmacy needs to have more than one wholesaler
``because no wholesaler can offer every product that you may need to
stock.''
In conclusion, it is necessary for pharmacies to have options to
address temporary shortages in the marketplace. We urge Congress to not
take actions that might limit the ability of pharmacies to take care of
their patients. The primary and secondary wholesaler markets both play
an important role in ensuring that all patients have seamless access to
virtually any product that they may require.
Having said that, it is unethical for pharmacists to act as a
conduit for the illegitimate gray market, which is contrary to the goal
of providing the best patient care at the lowest cost. Problems or
questionable practices should certainly be investigated and addressed,
but any solution needs to be carefully tailored so that the
pharmaceutical supply chain is not unduly disrupted and patients do not
suffer due to shortages that may occur. We appreciate the opportunity
to provide our views to the Committee and I look forward to answering
any questions.
The Chairman. Thank you very much, Mr. Coster.
And now Mr. John Gray, who is President and CEO of
Healthcare Distribution Management Association.
STATEMENT OF JOHN M. GRAY, PRESIDENT AND CEO, HEALTHCARE
DISTRIBUTION MANAGEMENT ASSOCIATION (HDMA)
Mr. Gray. Thank you. Good afternoon, Chairman Rockefeller,
Ranking Member Boozman, members of the Senate Commerce
Committee. I'm John Gray, President and CEO of the Healthcare
Distribution Management Association. I want to thank you for
the opportunity to come here and provide an overview of the
pharmaceutical distribution system with respect to the
critically important issue of drug shortages.
We applaud the Committee's efforts to address the shortage
issue and some of the resulting symptoms, including gray market
diversion of products in short supply. For purposes of the
discussion today, I'll reference a recent report from the
Premier Healthcare Alliance that defines the gray market as a
parallel market that is, quote, ``unofficial, unauthorized, or
unintended by the original manufacturer,'' end quote.
Given that context, and to distinguish HDMA members from
the gray market, I'll share with you information about the
primary pharmaceutical distribution industry. HDMA is the
national association representing those primary healthcare
distributors, which we consider the vital link between
manufacturers and providers in our nation's healthcare system.
Approximately 90 percent of all pharmaceutical product
sales in the United States today flow through HDMA's 34
distributor members. Each business day, HDMA member companies
ensure that more than nine million prescriptions and healthcare
products from more than 1,100 manufacturers are delivered
safely and efficiently to nearly 200,000 healthcare providers,
which include pharmacies, hospitals, nursing homes, clinics,
and other healthcare entities. Our provider customers generally
place orders for prescription medicines by 8 p.m. in the
evening and receive deliveries from the distributors the next
morning.
Wholesale distribution is defined as, quote ``the
distribution of prescription drugs to persons other than a
consumer or a patient.'' HDMA members are these primary
wholesalers. That is, our members are predominantly Authorized
Distributors of Record, as designated by the pharmaceutical
companies themselves. Our members purchase the majority of
product directly from pharmaceutical manufacturers and sell
only to appropriately licensed healthcare providers and
entities.
In 1988, the Prescription Drug Marketing Act, PDMA, was
enacted to increase safeguards in the drug distribution system
by preventing the introduction and retail sale of substandard,
ineffective, or counterfeit drugs. It has also helped define
the pharmaceutical distribution industry as we know it today.
Our distributor members operate in accordance with the
requirements set forth in the PDMA as well as licensing rules
and standards in all 50 separate states.
HDMA and its members are strong advocates for increased
wholesale licensure standards and a uniform Federal pedigree
system to enhance the safety and security of the pharmaceutical
supply chain. In addition to fundamentally addressing
counterfeit and diverted medicines, Federal pedigree, we
believe, will be a major tool and useful in discouraging gray
market activities associated with drug products in short
supply.
Effectively addressing the drug shortage problem is a
difficult and complex challenge for the entire healthcare
community, in large part because the shortage typically appears
with little or no warning and often requires significant
resources to manage. HDMA member companies are working hard to
improve communications within our supply chain and, where
possible, to mitigate the impact of these shortages.
Distributors do not manufacture the products, so we can do
little about the root causes of the shortages. However, we do
play an important role in helping coordinate and share
information about the shortages when they arise. Distributors
are typically notified of a shortage by a manufacturer or
provider partner.
Once that information is received, our distributors
communicate with their manufacturer partners about product
availability to understand the scope and expected duration of
the shortage. They then work as quickly as possible with
customers to fill orders, to the extent they are able, based
usually upon each customer's historical purchasing patterns.
And, if necessary, distributors work with customers and the
manufacturers to identify alternative product options.
HDMA, in collaboration with all its distributor members,
manufacturers, and providers, recently completed voluntary
industry guidelines on improving communications with the supply
chain in the event of these kinds of shortages. We hope this
effort, combined with the enhanced wholesale licensure
standards and a uniform federal pedigree system, will
contribute to the better management of product shortage issues
in the future.
HDMA is committed as an organization to work with the
Congress, all relevant regulatory agencies, and the entire
supply chain to develop the necessary collaborative solutions
that mitigate the impact of drug shortages and the impact that
these have on the most important stakeholder, our patients.
I thank you again for the invitation to participate, and I
look forward to the Committee's questions. Thank you very much.
[The prepared statement of Mr. Gray follows:]
Prepared Statement of John M. Gray, President and CEO, Healthcare
Distribution Management Association
Good morning Chairman Rockefeller, Ranking Member Hutchison and
Members of the Senate Commerce Committee. I am John Gray, president and
CEO of the Healthcare Distribution Management Association (HDMA). Thank
you for the opportunity to provide an overview of the pharmaceutical
distribution system with respect to the critically important issue of
drug shortages.
We applaud the Committee's efforts to address the drug shortage
issue and some of the resulting symptoms, including gray market
diversion of products in short supply.
For the purposes of our discussion today I will reference a recent
report from the Premier Healthcare Alliance that defines the gray
market as a parallel market, ``that is unofficial, unauthorized or
unintended by the original manufacturer.'' Given that context, and to
distinguish HDMA members from the gray market, I will share with you
information about the primary pharmaceutical distribution industry.
HDMA is the national association representing America's primary
healthcare distributors--the vital link between manufacturers and
providers in our Nation's healthcare system. Approximately 90 percent
of all pharmaceutical product sales in the United States flow through
HDMA's 34 distributor members. Each business day, HDMA member companies
ensure that more than nine million prescription medicines and
healthcare products from more than 1,100 manufacturers are delivered
safely and efficiently to nearly 200,000 healthcare providers
including, pharmacies, hospitals, nursing homes, clinics and other
healthcare entities. Our provider customers generally place orders for
prescription medicines by 8 p.m. in the evening and receive deliveries
from their distributors the next morning.
Wholesale distribution is defined as the ``distribution of
prescription drugs to persons other than a consumer or patient.'' HDMA
members are primary wholesalers, that is our members are predominantly
Authorized Distributors of Record (ADRs), as designated by
pharmaceutical manufacturers. Our members purchase the majority of
product directly from pharmaceutical manufacturers and sell only to
appropriately licensed healthcare providers and entities.
In 1988, the Prescription Drug Marketing Act (PDMA) was enacted to
increase safeguards in the drug distribution system by preventing the
introduction and retail sale of substandard, ineffective or counterfeit
drugs. It also helped define the pharmaceutical distribution industry
as we know it today. Our distributor members operate in accordance with
the requirements set forth in the PDMA, as well as licensing rules and
standards in all 50 states.
HDMA and its members are strong advocates for increased wholesaler
licensure standards and a uniform Federal pedigree system to enhance
the safety and security of the pharmaceutical supply chain. In addition
to fundamentally addressing counterfeit and diverted medicines, Federal
pedigree may be a useful tool in discouraging gray market activities
associated with drug products in short supply.
Effectively addressing a drug shortage is a difficult and complex
challenge for the entire healthcare community, in large part because a
shortage typically appears with little or no warning and often requires
significant resources to manage. HDMA member companies are working hard
to improve communications within the supply chain and, where possible,
to mitigate the impact of drug shortages. Distributors do not
manufacture product and so can do little about the root causes of
shortages. However, distributors do play an important role by helping
to coordinate and share information about drug shortages when they
arise.
Distributors are typically notified of a shortage by a manufacturer
or provider partner. Once information is received, distributors
communicate with their manufacturer partners about product availability
to understand the scope and expected duration of any shortage. They
then work as quickly as possible with their customers to fill orders,
to the extent they are able, usually based upon each customer's
historical purchasing patterns. If necessary, distributors work with
customers and manufacturers to identify alternative product options.
HDMA, in collaboration with its distributor members, manufacturers
and providers, recently completed voluntary industry guidelines on
improving communication between supply chain partners in the event of a
product shortage. We hope this effort, in conjunction with enhanced
wholesale licensure standards and a uniform Federal pedigree system,
will contribute to the better management of product shortage issues in
the future.
HDMA is committed to working with the Congress, all relevant
regulatory agencies and the entire supply chain to develop
collaborative solutions that mitigate the impact drug shortages have on
the most important stakeholder: the patient.
I thank you again for the invitation to participate in this hearing
and hope this overview was valuable to the Committee as it explores
this important and timely topic.
The Chairman. Thank you very much, sir.
And, finally, Ms. Patricia Earl, who is the Industry
Analyst for the National Coalition of Pharmaceutical
Distributors.
STATEMENT OF PATRICIA EARL, INDUSTRY ANALYST,
NATIONAL COALITION OF PHARMACEUTICAL DISTRIBUTORS
(NCPD)
Ms. Earl. Great. It's great to be last. Good afternoon. I
would first like to thank Chairman Rockefeller, Senator
Boozman, and distinguished members of the Ccommittee for the
Committee's strong leadership in addressing the critical
problem of short-supply prescription drugs in the supply chain.
I have submitted a more complete statement. But in this portion
of my testimony, I would like to discuss the issues you have
brought to light.
I have more than a quarter century of experience in the
pharmaceutical supply chain and understand all sides of the
distribution model. In addition to my experience in the
distribution industry, I have served as an industry expert in
Federal court proceedings involving supply chain practices.
I'm here today to represent the views of the National
Coalition of Pharmaceutical Distributors, NCPD, and its
members, which are predominantly small and independent
pharmaceutical companies. I cannot emphasize enough the value
that small, or secondary, pharmaceutical distributors bring to
the healthcare system. These organizations are there when no
one else is, in the middle of the night, on the weekends, and
in remote parts of the country where no one else wants to
deliver because it's not considered profitable.
As a result, small distributors help save lives every
single day. They save lives by making it their business to
ensure that quality medicines reach a patient in the safest,
fastest, and most cost-effective way possible, no matter the
time or location. Few others can say the same thing. Their
value is so profound that we have e-mail after e-mail from
customers, including the NIH, thanking them for the help that
they have provided to find medicine or deliver it at the last
minute to save a life and at a reasonable price, a function
primary wholesalers are simply not geared to perform.
Despite their value, small secondary distributors have come
under fire recently because few people really understand them
or have the time to see where they fit in the supply chain. The
arguments have ranged from accusations of price gouging to
shifting product between multiple companies as a means to
increase profit to working with fake pharmacies.
These allegations are not grounded in reality. What's more,
these characterizations fail to reflect one basic fact of the
market. There are thousands of small distributors that work
with hospitals across the Nation. To remain competitive, they
must comply with all laws, follow pedigree and handling
requirements to the letter, and still offer an economical price
point that allows for only a modest profit margin. If they do
anything else, they run the risk of permanently losing a
customer.
See, hospitals comparison shop. If they don't like a price
offered by one company, they will call another. When it comes
to working with secondaries, healthcare providers don't face
the same restrictions they do with the big three wholesalers.
They are free to move their accounts elsewhere. This is a
reality that every small distributor out there is well aware
of. And they know that if they were to engage in the types of
activities you accuse them of, they would not be in business
very long.
As you learn more about this industry which represents less
than 1 percent of all drugs bought and sold across the nation,
you will see that the activities being painted as nefarious
actually have legitimate and reasonable explanations. On the
subject of price gouging, or markups, secondary distributors
pay the highest prices for drugs in the entire U.S. supply
chain, sometimes as much as 91 percent more than one of the big
three wholesalers would ultimately pay for the same product.
What's more, many people look at a pedigree and compare the
cost the distributor paid for a drug to the price he sold it
for and assume the entire amount was pocketed as profit. That's
the furthest thing from the truth. Pedigrees do not show how
much was spent on things like shipping, which can be much more
expensive than the drug itself if the hospital needs it
delivered overnight.
On the subject of several companies being involved in the
handling of a product, we are aware, Mr. Chairman, that you are
in possession of a handful of pedigrees that show multiple
distributors handled a product before it got to the patient. I
do not know the circumstances that led to these situations, so
I can't defend these pedigrees specifically. But what I can say
is that these incidents are anomalies.
Our members work tirelessly to make sure that the route
from the distributor to the customer is as straight as
possible, because they want to get the product to those who
need it as fast as possible, and because they know that they
face stiff competition. Even when a drug is in short supply,
more than one distributor can get it, and, as I said, hospitals
comparison shop.
So for every one pedigree you find that shows multiple
touch points, we have literally tens of thousands of pedigrees
that show only one or two distributors were involved and with a
nominal profit realized. In fact, one NCPD distributor handles
1.2 million pedigrees every year. The handful of pedigrees in
your possession do not even equal one-tenth of 1 percent of the
number of products he handles in one year.
Finally, on the subject of fake pharmacies, by law,
pharmacies are allowed to sell a small portion, 5 percent or
less, of their inventory to distributors as long as they comply
with state regulatory requirements. In most cases, pharmacies
take advantage of this law to sell drugs that will expire
within 90 days that they do not believe they can dispense in
that timeframe.
Instead of letting them go to waste, many pharmacies will
sell the products to an authorized distributor, both small
independent companies as well as large wholesalers. The
authorized distributor, in turn, will sell it to a medical
provider that can use it immediately. Ultimately, this practice
is a win-win. Drugs don't go to waste. Pharmacies don't lose
large quantities of money on products that are expiring, and
providers are able to get pharmaceuticals at a discounted rate.
This is a legitimate and necessary practice and is not a
fake pharmacy. Our members will not work with fake pharmacies
or pharmacies that do not dispense drugs to patients and will
report them to the proper authorities when they encounter them.
That ends my oral presentation, and I urge you to read the
more comprehensive testimony that I submitted.
Thank you, Mr. Chairman, Senator Boozman, and members of
this Committee.
[The prepared statement of Ms. Earl follows:]
Prepared Statement of Patricia Earl, Industry Analyst,
National Coalition of Pharmaceutical Distributors
Good afternoon, first I would like to thank Chairman Rockefeller,
Ranking Member Hutchison and distinguished Members of the Committee for
the Committee's strong leadership in addressing the critical problem of
short-supply prescription drugs in the supply chain. The record
shortage of drugs we are currently experiencing has had an adverse
effect on the health and safety of communities across the country, and
is a contributing factor to rising healthcare costs.
I am here today to represent the views that the National Coalition
of Pharmaceutical Distributors (NCPD) and its members, which are
predominantly small and independent pharmaceutical distributors, have
regarding the distribution of short-supply prescription drugs and the
role that the coalition's members play in distributing the drugs in the
U.S. supply chain. The three key issues presented in this discussion
are ones that NCPD believes the Committee has brought to light for this
hearing.
I can offer this insight because I am an expert in the
pharmaceutical distribution supply chain, having spent more than
twenty-six years in the industry, working with large and small
distributors as a senior executive on supply chain management as it
relates to hospitals and group purchasing contracts, as well as running
distribution centers. My background has resulted in me being called as
an expert witness in Federal court cases
Introduction
In recent months, there has been a great deal of controversy and
speculation swirling around the entire distribution chain offered by
people who do not understand or have first-hand knowledge of how the
health care supply chain fits together. The issues raised fit into
three basic categories:
1. So-called ``price gouging'' or mark-ups
2. Several companies being involved in the handling of a product
3. Fake pharmacies
I will address each of these objections in turn, but I wanted to
start by helping everyone here understand the various companies
involved in supply chain management.
Drug sales and distribution is a complex market with many key
players, including ``primary'' traditional wholesalers, who are members
of HDMA, group purchasing organizations--otherwise known as (GPOs), and
``secondary'' distributors, members of NCPD. All play a vital role in
ensuring that quality medicines reach a patient in the safest, fastest
and most cost-effective way possible. Small distributors fill a gap in
the market, offering versatility and flexibility that primary
distributors can't provider while also serving less profitable rural
regions of the country.
Role of Small Distributors--Filling A Gap
I cannot emphasize enough the value that small--or secondary--
pharmaceutical distributors bring to the health care system. These
organizations are there when no one else is--in the middle of the
night, on the weekends and in remote parts of the country where no one
else wants to deliver because it's not considered profitable. As a
result, small distributors help save lives every single day. They save
lives by making it their business to ensure that quality medicines
reach a patient in the safest, fastest and most cost-effective way
possible--no matter the time or location.
Few others can say the same thing.
Their value is so profound that we have e-mail after e-mail from
customers--including the NIH--thanking them for the help they have
provided to find medicine or deliver it at the last minute to save a
life (and at a reasonable price)--a function primary distributors are
simply just not geared to perform.
Our members do this work as part of long standing relationships
they have with health care providers in which they fill in the gaps
when the primary has a drug shortage. The secondary distribution
industry primarily serves smaller medical facilities, doctor's offices
and pharmacies, many of which are found in rural or other underserved
locations around the country. As a practical matter, large distributors
are organized to take advantage of volume sales; therefore, they set
prohibitively high minimum monthly purchasing requirements for a health
care provider to have an account with them and they organize their
supply network around major population centers, where they are more
likely to find facilities that meet their minimum requirements. They
are not well suited to cost-effectively distribute medication to more
remote locations.
This is where secondary distributors come in. Hospitals, health
care centers and pharmacies in rural locations and those too small to
meet the minimums of large distributors rely on secondary distributors
to fill critical needs for life-saving medicine. What's more, every
sector of the health care industry depends critically upon secondary
distributors because they act as the safety-net in times of national
shortages to secure and distribute scarce drugs in short supply.
While they are crucial in getting life-saving drugs to critically
ill patients, small distributors are on an individual basis, one of the
smallest customers of ``traditional'' wholesalers. These same
wholesalers do billions of dollars of sales to large hospitals, but
will not supply smaller clinics and facilities. In addition, small
distributors are required to pay the highest acquisition cost offered
in the U.S. supply chain, putting them at a competitive disadvantage.
Despite their value, small, secondary distributors have come under
fire recently because few people really understand them or have taken
the time to see where they fit in the supply chain. The arguments have
ranged from accusations of price gouging to shifting product between
multiple companies as a means to increase profits to working with fake
pharmacies.
These allegations are little more than character assassinations and
are not grounded in reality. What's more, these characterizations fail
to reflect one basic fact of this market: There are thousands of small
distributors that work with hospitals across the Nation. To remain
competitive, they must comply with all laws, follow pedigree and
handling requirements to the letter and still offer an economical price
point that allows for only a modest profit margin. If they do anything
else, they run the risk of permanently losing a customer.
That's because hospitals comparison shop. If they don't like a
price offered by one company, they will call another.
This is a reality that every small distributor out there is well
aware of. And they know that if they were to engage in the types of
activities you accuse them of, they would not be in business very long.
As you learn more about this industry you will see that the
activities you are trying to paint as nefarious actually have
legitimate and reasonable explanations:
1. So-Called ``Price Gouging'' Or Mark-Ups
Drug prices are established on an intricate system that is far more
complex than most free markets. Manufacturers set a number of price
points for a product, including the Wholesale Acquisition Cost--or
WAC--which is the lowest price at which a wholesaler or distributor can
buy the product. As with many markets, hospitals and physicians can
negotiate the price they are willing to pay for a drug. The more
product a hospital or doctor expects to use, the more power they have
in securing to negotiate a lower price. Neither large nor small
distributors have the ability to influence drug price negotiations. To
secure the best prices for patients, most hospitals belong to one of
the major GPO's, which leverage the strength of the collective buying
power of their members when negotiating contracts with manufacturers.
GPOs require hospitals to adhere to specific rules, such as select a
primary wholesaler--generally one of the Big3: McKesson, Cardinal or
AmerisourceBergen--and if their primary does not have a drug, they are
prohibited from using another primary. Instead, they must contact their
second-line--or ``secondary--distributor to supply their needs.
Secondary distributors are able to work with all of the primary
wholesalers, plus their network of small distributors to locate and
secure drugs, even those that are in short-supply. Because small
distributors are not restricted by GPO contracts, they are able to use
avenues that hospitals cannot, such as large distributors that compete
with the hospital's primary wholesalers.
Small distributors have been inaccurately portrayed when it comes
to the price of products. As I noted before, secondary distributors pay
the highest prices for drugs in the entire U.S. supply chain--sometimes
as much as 91 percent more than one of the Big 3 would ultimately pay
for the same product. What's more, many people will look at a pedigree
and compare the cost a distributor paid for a drug to the price he sold
it for and assume the entire amount was pocketed as profit. That's the
furthest thing from the truth. The reality is that the pedigree does
not show how much was spent on things like shipping, which can be much
more expensive than the drug itself if the hospital needs it delivered
overnight.
As I said before, every small distributor knows that the hospitals
they work with are going to comparison shop. If a hospital doesn't like
the price that one secondary distributor quotes to them, they will call
another. Or, if they need it right away and can't risk losing it, they
will buy it, but will find another secondary distributor to work with
moving forward. When it comes to working with secondaries, health care
providers do not face the restrictions they do with the Big 3. They are
free to move their account elsewhere, so secondary distributors have to
remain competitive and will often sacrifice their own profit margins to
make sure they keep a customer.
2. Number of Companies Involved in Distribution of A Single Product
We are all aware, Mr. Chairman, that you are in possession of a
handful of pedigrees that show multiple distributors handled a product
before it made its way to a patient. While I cannot defend these
pedigrees specifically because I do not know the circumstances that led
to this situation, what I can say is that these incidents are
anomalies. Our members work tirelessly to make sure that the route from
distributor to customer is as straight as possible. No detours, no
additional mark-ups, no changing of hands multiple times. Why? Because
our members are concerned about making sure the products get to those
who need it as fast as possible, and because they know that they face
stiff competition. Even when a drug is in a shortage situation, more
than one distributor will still be able to get it, and hospitals
comparison shop--looking for new ways to get the product at a lower
price.
So, for every one pedigree you can find that shows multiple touch
points, we have literally thousands of pedigrees that show a straight
line in which only one or two distributors were involved with only a
nominal profit realized. In fact, one distributor that I work with
handles 1.2 million pedigrees every year--enough to stretch more than
680 miles if laid end-to-end. And that's just one distributor. The
handful that you have shown would not even equal one-tenth of 1 percent
of what the number of products he handles every single year.
His focus--and the focus of all of our members--is to provide much-
needed products at the most competitive price they can while still
making a modest profit. If they did anything else, they would be out of
business very quickly.
3. Fake Pharmacies
Under law, pharmacies are allowed to sell a small portion--5
percent or less--of their inventory to distributors, as long as they
comply with state regulatory requirements. In most cases, pharmacies
take advantage of this law to sell drugs that will expire within 90
days that they do not believe they can dispense in that timeframe.
Instead of letting them go to waste, many pharmacies will sell the
products to an authorized distributor--both small, independent
companies, as well as large wholesalers--at a discounted rate. The
authorized distributor, in turn, will sell it to a hospital, medical
clinic or physician office that can use it immediately.
Ultimately, this practice is a win-win--drugs don't go to waste,
pharmacies don't lose large quantities of money on products that are
expiring and providers are able to get pharmaceuticals at a discounted
rate. This is a legitimate and necessary practice, and is not a fake
pharmacy.
Unfortunately, there is a small group of people out there who have
discovered this and have set up a few ``fake pharmacies'' across the
Nation. Fake pharmacies are those that buy and sell pharmaceutical
products, but do not actually dispense drugs to patients. Let's be
clear here--dispensing pharmacies that exercise their right to sell a
small portion of their inventories are legitimate. Only those that do
not dispense drugs are fake pharmacies.
It is the position of the NCPD that fake pharmacies are detrimental
to the integrity of the entire health care supply chain. The coalition
and its member companies constantly looking for companies operating in
the black market and report any company they believe is operating a
fake pharmacy.
Further, it is the position of NCPD that legitimate pharmacies that
sell a small portion of inventory into the supply chain are working to
ensure that every drug in the supply chain is available to people in
need and these operations should not be under scrutiny.
Role That NCPD Members Played In Distributing Short-Supply Drugs
Much activity has driven these secondary relationships that have
been the realities for the pharmaceutical supply chain during this
period of increasing short-supply of critical drugs. One of the
practical circumstances that have fed the expansion of these
relationships in the secondary distribution industry is the fact that
this industry of small suppliers primarily serves as a safety-net or
back-up supplier to all hospitals, both large and small in the U.S. Add
to that, the fact that this industry is the primary supplier of all
drugs to smaller medical facilities, doctor's offices and pharmacies.
Despite their crucial role in getting life-saving drugs to critically
ill patients, they are also on an individual basis, one of the smallest
customers of the ``traditional'' wholesalers that do billions of
dollars of sales to these large hospitals and are required to pay the
highest acquisition cost offered in the U.S. supply chain. As a
practical matter, every sector of the healthcare industry depends
critically upon secondary distributors due to the fact that they act as
the safety-net in times of national shortages to secure and distribute
scarce drugs in short supply.
During the protracted recent drug shortages, customers of the Big 3
wholesalers were placed on product rationing based upon historical
purchase volumes. For the secondary distributors, who may by necessity
have much smaller average monthly purchase volumes, this often meant
receiving only a handful of items each month under rationing process--
certainly not enough to satisfy the demands of the smaller facilities
who depend upon the secondary distribution industry. Importantly, it
also meant that secondary distributors were unable to meet the monthly
purchasing minimums required to maintain a Big 3 account (not to
mention those direct manufacturer accounts with similar minimums). The
Big 3, other large ADR distributors and many manufacturers used the
inability of secondary distributors to meet these minimums as the
justification for broadly terminating or closing secondary
distributor's accounts during 2010, 2011 and 2012. The real impetus
underlying these terminations, however, appeared to be a desire of
these larger entities to distance themselves from the widespread
negative publicity about secondary distributors that had been
engendered by the media and other's false and misleading report
alleging ``price gouging.''
Despite losing their primary Big 3 accounts, the primary customer
base and their loyal, secondary customer base continued to need
critical medications to treat their patients. As a result secondary
distributors found themselves clamoring to develop new supplier
relationships that could replace the loss of their Big 3 accounts and
ensure that these medications continued to be available for the health
and welfare of underlying patients. These practical realities, as much
as anything, drove increasing use by the secondary distribution
industry of accepting short-supply drugs from multiple distributor
links reflected on a small number of pedigrees that have surfaced
during this committee's investigations. However, given that these
secondary suppliers do thousands for transactions per month leading to
hundreds of thousands on annual basis, only a handful of these
transactions seem to have been outside their normal distribution
channels that in reality are pedigreed from the manufacturer . . . to
an ADR wholesaler . . . to a distributor . . . to another distributor .
. . and ultimately to the end dispenser.
Doing The Right Things
Many of the assertions made in recent reports include activities
that are illegal and would cause a small distributor to lose its
license, but more importantly would cause them to lose their loyal
customers that support the business model of their entire segment.
The NCPD members have stayed in business for the last 20 to 30
years (and even longer for some) because they bring a valuable service
to their loyal customers. They know if they are perceived as ``price
gougers'' and ``profiteers'', they will not get repeat business and
their goals depend on that customer coming back to them month-in and
month-out, not just in times of drug shortages. Again as a practical
analysis of this segment would show, primary wholesalers guarantee to
supply 98 percent of the non-backordered products 98 percent of the
time, not 100 percent. Therefore, the business model for secondary
distributors depends on them doing the right things, at the right times
and keeping their customers coming back every month.
If the implications that these companies routinely charge prices
that are in excess of their usual and customary cost of the drugs plus
a mark up that covers their higher cost of ordering, receiving,
handling, packaging, shipping and special delivery that equates to
their business model based on price gouging and profiteering, they
would not have repeat customers--nor would NCPD be standing here today
defending that practice.
What we are saying is that drug sales and distribution is a complex
market with many key players and at times on the surface, an analysis
will find the anomalies, the special circumstances where higher mark-
ups were passed from one distributor to another or a cost averaging
model is used to achieve an average net profit on all items in certain
categories. These selected examples are just samplings that reflect an
example of what happens in a situation where a reaction to supply and
demand rarely has anything to do with suppliers taking advantage of
customers, but more to do with reacting to market conditions that
included rationing, loss of access to products from normal supply chain
and finding a solution to getting a critically needed product to fill a
high demand request of a hospital that had a patient in life-
threatening situations.
NCPD represents the interests of small and independent reputable
distributors. All member distributors go through a thorough background
check and must meet all licensing standards. The NCPD and its members
condemn all drug distribution activities conducted by ``gray market'
distributors including stealing and selling drugs, setting up ``fake''
pharmacies, buying back drugs and reselling them, stockpiling drugs
that are needed, and gross ``profiteering.'' The NCPD is actively and
aggressively lobbying in support of the most comprehensive and
stringent Federal pedigree standard for the industry. As part of this,
the NCPD has pushed for enhanced licensure standards and penalties for
all distributors who fail to comply with laws and standards.
The NCPD recommends that hospitals work with their trusted
secondary distributor to fill needs that primary distributors may not
be able to provide and to report offers from a distributor they do not
know or medicine that is offered at priced well below or well above
that offered by other distributors to regulatory agencies.
Thank you Mr. Chairman, Ms. Ranking Member and members of this
committee.
______
______
______
______
______
______
______
______
______
______
______
______
______
______
______
______
______
The Chairman. Thank you very much, Ms. Earl. And from my
point of view, you represent the gray market. From your point
of view, we're talking about just a few--I should tell you that
we have at least 300 pedigrees in our possession, and there are
plenty more where they came from.
Now, I want to--because we made life more difficult--to
call first upon Senator Klobuchar and then Senator Lautenberg
and then Senator Begich.
STATEMENT OF HON. AMY KLOBUCHAR,
U.S. SENATOR FROM MINNESOTA
Senator Klobuchar. Very nice. Thank you, Mr. Chairman, and
thank you to the witnesses here.
I got involved in this issue a few years ago and introduced
the first bill on this in the Senate on drug shortage. We had
only a few authors and got more and more support as we went on.
Senator Harkin agreed to do a hearing, and I think from there,
we were able to get the early notification requirements in
place, and I thank those of you who helped us with that issue.
And this really came from patients and pharmacists in my
state--where we believe you should always have excellent
medical care, in Minnesota--that came to me, and we were able
to get this done.
But I thank the Chairman for continuing this fight and
looking at this critical issue of the gray market, which is
clearly a major part of the problem. It's bad enough that we
have the shortages. It's even worse to think that there are
people who are preying on those shortages and making money off
of them.
So my first question is of you, Ms. Herold. Distributors
and pharmacies all need to be licensed by the states that they
practice in. These licenses dictate the rules by which these
companies and providers practice. California is known to have
one of the most stringent set of regulations when it comes to
the prescription drug supply chain. Even with these rules, your
testimony describes a situation where a wholesaler was able to
recruit pharmacies to purchase drugs in short supply and then
divert them into the gray market.
Is the investigation you described in your testimony an
unfortunate anomaly, or is it a frequent occurrence? And how do
you think we should fix this?
Ms. Herold. I most certainly hope it is not a frequent
occurrence. The difficulty we have with 6,200 pharmacies in the
state, 400 million prescriptions dispensed within the state
during the course of a year, and 500 wholesalers, not to
mention what's coming in from outside through mail order or
other sources--it's a busy place. We only know what we know.
And we exist for the bad 5 percent, let's say, that can't
operate without having a regulator in the space to assure that
they follow laws, behave themselves, and that the public safety
is enhanced by the healthcare providers.
I don't know. I will tell you that we have--I believe it's
three other investigations involving the very same thing. We
did not find shell pharmacies in this case doing the kind of
thing that your committee and Mr. Cummings has found. But we do
have shell pharmacies that are bilking our state's Medicaid
program for millions of dollars. And when they go out and do an
audit--surprise, there's no pharmacy there. Now, where those
drugs go, we don't know, either.
Senator Klobuchar. Thank you. I appreciate that and your
work.
Dr. Mayhaus, we have a hospital that spent in excess of
$1.5 million in extra fees for short-supply products and during
the last year had to assign three full time pharmacists to
handle the sourcing, shortage guidelines, alternatives, and
communications around the shortages. Can you talk about what
you think this is costing your hospital?
Dr. Mayhaus. I think we've spent about $100,000 only over
the last year. We've been very good in being able to maintain
an adequate supply of drugs. So from a dollar amount of cost of
goods sold, it's only about that amount. We spend about 30
percent of our technician time in overtime to manage the drug
shortage issue.
Senator Klobuchar. Thank you. And as you know, we have such
limited funds right now for care. I just don't think we should
be spending it on that.
Ms. Earl, as with any industry, there are good actors and
bad actors, and your testimony clearly defends the actions of
the distributors. However, what we're trying to do is to figure
out how to address the bad actors. We're clearly seeing, as
Representative Cummings' chart showed and Senator Rockefeller's
investigation has shown, that there are people that are
gouging. How do you think we weed out the bad actors from the
good actors and get at this problem?
Ms. Earl. You know, one of the aspects of our association,
the National Coalition of Pharmaceutical Distributors, is our
distributors that are part of our organization all are licensed
by the States' Board of Pharmacies. They all work with the FDA
if they need to and the DEA. There's a lot of regulations today
that guide pharmacies and that could be used to weed out the
bad actors.
We do not support the bad actors, you know, the fake
pharmacies or anyone who does price gouge. We would just like
the paint brush that has been brushed against all small
distributors, secondary distributors, to basically take into
effect that there are a lot of--you know, hundreds and
thousands of small distributors that have been working for 20
years, that they----
Senator Klobuchar. You do acknowledge, though, if we see a
case of a 750 percent markup in cost that we have a problem.
Ms. Earl. Well, yes. I would say we have a problem. But I
wouldn't say that just because you can look at a pedigree and
an invoice that you have found the root of that problem. You
know, we have distributors today that have given us some
documentation on some of the pedigrees that--when a hospital
calls them--and I will give you--you know, I will say thank you
to Dr. Mayhaus. My children go to that hospital.
But yesterday or Monday, when we were on the phone for this
hearing, getting ready for it, we had an e-mail come to five of
our distributors that work with his hospital looking for
pharmaceuticals, you know, on a secondary basis. And our
distributors do that every day, and they do not price gouge,
you know, in the routine normal business. Otherwise, they
wouldn't have repeat customers, like Children's Hospital of
Cincinnati, come looking for them.
However, there are a lot of complexities and abnormalities
in the way drugs are priced and the cost of shipping to receive
an order. The inbound shipping to get the order to be able to
process it and ship it out overnight to a hospital is sometimes
100 percent or even more for that drug. And that's not taken
into effect on a lot of the pedigrees that you're looking at,
because you can't see the actual cost of the inbound freight.
Senator Klobuchar. I have to turn my time over here to
other people. But, I mean, clearly, there must be some problem
here when we're seeing these markups. Or you don't see a
problem at all?
Ms. Earl. I see that there's a problem in the way that the
system is designed today. First of all, for secondary
distributors, for the small distributors, because of the price
that they do have to pay, it is the highest price out there.
You know, they don't have the advantage of being able to
acquire and sell drugs at the lower price that Dr. Mayhaus's
hospital is used to buying them at. So they've got to buy them
at a much higher price. And then they've got to pay the cost of
processing that drug and the freight to get it there, because
it's----
Senator Klobuchar. OK. I just think we are dealing with a
lot more than the cost of the freight. And I will turn it over
to my colleague.
Thank you.
The Chairman. Thank you, Senator Klobuchar.
Senator Lautenberg.
STATEMENT OF HON. FRANK R. LAUTENBERG,
U.S. SENATOR FROM NEW JERSEY
Senator Lautenberg. Thanks, Mr. Chairman. When I think of
the situation that's presented, it's the equivalent of having a
gun pointed at a person and threatening their health at every
turn and seeing, apparently, a network that prospers with this
kind of activity.
Ms. Earl, in your written testimony, you claim that your
members work tirelessly to make sure that the route from the
distributor to the customer is as straight as possible. So
you're saying that the price differentials are fair. But this
investigation shows that drugs sometimes change hands half a
dozen times before reaching patients. Some of these companies
never sell drugs to hospitals or patients. They're effectively
middle men. It's like a trading market.
How does having so many middle men benefit the patients?
Ms. Earl. I do want to say, you know, we do not support the
multiple transactions where it goes through multiple
distributors before it gets to the patient. In the norm, our
distributors--you know, most of our pedigrees, the thousands of
pedigrees that we have that are done, are usually between one
or two. You'll see one or two distributors on there.
The multi-pedigrees that you're seeing now are anomalies.
They're extreme cases. I saw the one that's up on the board
there, and, you know, the first several distributors in there--
where you've got five distributors in that chain outside of the
manufacturer to the large wholesaler to the pharmacy, you know,
they're not our members. They're not in our network.
So how that's getting into their hands--I think we do need
to stop what's happening on the fake pharmacies, the shell
pharmacies----
The Chairman. Then don't say they're anomalies. Cancer is
an anomaly, but it hurts, and it costs, and people die. So be
straight with us.
Excuse me, Senator Lautenberg.
Senator Lautenberg. That's all right, because the questions
here are being raised. I mean, is the gray marketplace a
legitimate part of a mechanism that sells material when they
have it, and upping the price, gouging the price? I've learned
in this committee that drugs can be marked up as much as 85
times their original price.
Is it your testimony that a markup of that magnitude is
justified and appropriate?
Ms. Earl. I do not believe that a markup--I think that
there's a lot more that goes into a markup than what you're
seeing.
Senator Lautenberg. Such as?
Ms. Earl. A markup is not all profit. A lot of that markup
is expense that is incurred to acquire that drug and ship that
drug.
Senator Lautenberg. Well, then, they're part of a price-
gouging ring. I mean, if you're saying divide it up enough and
everybody gets a piece of it, that's not so bad. But it's what
the final outcome is that's the distressing part of this.
Ms. Earl. Well, I didn't say divide it up and everybody
should put a markup----
Senator Lautenberg. No, but I said it, because that's the
way you frame it. You said that no one is making these gigantic
profits, or you intimate that no one is getting these gigantic
profits. But, nevertheless, there is this chain of people
standing there, hands out, taking a little nip in part of this.
And so you have to make up your mind. Is it justifiable
that at the end, the patient is there, begging for mercy,
begging for life, and having to pay an outrageous price? Now,
you may not think it's outrageous, but I think the chairman was
very clear to say that it's outrageous to the person who is, in
many cases, breathlessly awaiting the medication to arrive that
they can afford.
Thanks, Mr. Chairman.
The Chairman. Thank you, Senator Lautenberg.
Senator Begich to be followed by Senator Thune.
STATEMENT OF HON. MARK BEGICH,
U.S. SENATOR FROM ALASKA
Senator Begich. Thank you very much, Mr. Chairman.
And, Senator Klobuchar, to answer your question, in Alaska,
our large medical hospital system has chosen to limit their
activity, if at all, with the gray market. But it costs another
$15 million for operations to deal with the pharmaceutical
components of ensuring where they get it and all the things--so
just to add that as part of your question to the individual
here.
Ms. Earl, I'm struggling here with your testimony. Let me
ask you this. If the Committee gave you the list of the 300
folks, companies, would you submit to us if any of those are
your members? I know associations like to hold their membership
lists. So if we give you a list, will you tell us if any of
these are your members? Yes or no? It's not a complicated
question.
Ms. Earl. I would ask my NCPD, and they would have to give
us permission to do that.
Senator Begich. OK. Mr. Chairman, I'd want to put that on
the record.
Second, have you ever, out of your association, kicked
someone out for this type of activity?
Ms. Earl. I'm not aware.
Senator Begich. Have you ever kicked anyone out for any
activities that might violate or come in question of their
business practices?
Ms. Earl. I will tell you that before we take new members
in, we do vet the new----
Senator Begich. That's not what I asked you.
Ms. Earl. I know that's not what you asked me.
Senator Begich. So of members that are part of your
organization----
Ms. Earl. I am not aware that we have kicked any members
out.
Senator Begich. So all your members are perfect.
Ms. Earl. No. I'm not saying all of our members are
perfect.
Senator Begich. Can I ask you for the record--I've got
limited time here, a very short time here. Can you provide to
me or to the Committee, however it works here, anybody within
your organization that has violated these types of issues--
maybe law or ethically--that you just said this is not our
practice--and submit that to the Committee so we can understand
how your organization works?
Ms. Earl. I believe we have some members that would be
willing to share with you. But we haven't seen the data, so I--
--
Senator Begich. Well, that's what I'm asking. Forget about
the report. What I'm asking you--you understand the problem.
You said here on the record that seldom do your folks have more
than one or two stops to the customer. OK? I'll take you at
that, and so show me the data. You must have lots of members
who have never done this, so just show me that.
We're asking you now for the data, because you don't
necessarily like this data. So I want your data to prove
differently. OK? That's my question.
I don't know, Mr. Chairman. I'll just put that out there. I
don't know what the right approach is.
Also, you made a comment, ``We don't price gouge in the
normal situation.'' Now, I'm assuming you meant you don't price
gouge at all.
Ms. Earl. I meant we do not price gouge. It is not a
practice of our members to price gouge. If they did, they would
be out of business and they wouldn't, you know----
Senator Begich. Would they be out of your association?
Ms. Earl. If we had proof that they were price gougers.
Senator Begich. And let me just say this. As someone from
Alaska, I understand shipping, you know. We're still not part
of the United States for some reason for some companies. So I'd
buy your argument for a certain point of the debate, but
there's no way, because thanks to Congress, we have bypass now
that gets to every village in our state at a reasonable rate to
deliver products, especially pharmaceutical products. That's
why bypass mail is in place.
So we are the most expensive place to get products to, and,
you know, you're shipping--pharmaceuticals are easy to ship.
And when you talk about overnight in the worse conditions and
having to deliver it to the hardest places in the country,
Alaska is it. So I do not buy from a $7 product--and, again,
this is one example--to $600. I mean, you have to agree that
there is a reasonableness we have to have in the pricing of
product. Yes?
Ms. Earl. Yes. I agree there's a reasonable----
Senator Begich. Do you believe in a standard--I don't know
if this is the right question--but that we should be able to
track the pedigree through an electronic system, like FedEx can
track everything--I mean, the minute I place an order, within
15 seconds, I know where that order is, to the time it gets
delivered to my door from a small company that I've ordered
something from. Do you believe in that kind of tracking system?
Ms. Earl. Yes, we do. In fact, our association----
Senator Begich. So you support it.
Ms. Earl. Our association supports track-and-trace all the
way down to the unit level, which Ginny's state is also
supporting at this point. Yes, I do believe that electronic
track-and-trace is important. Our association does.
Senator Begich. Mr. Chairman, I know my time is up here.
But I guess on the flip side, Ms. Earl, I do recognize
there is a need for some of these distributors in small
amounts, because the large ones do control a lot of the market.
I understand that. And your pricing question--I would encourage
you, as many groups that I have worked with--when I was mayor
of Anchorage, small cities joined together to create co-ops to
buy products at a higher volume, lower price. But put that
aside. I recognize that there is a role.
But somehow we have to get at this, because, you know, you
talk about people angry, when I caught onto this issue, it
wasn't long--I mean, I don't know how many e-mails I've
received from Alaskans about drug shortages and pricing of the
drug shortages. And for people to take advantage of the
situation is outrageous.
Now, maybe a small amount--the point is it's still
happening, and we can argue at what degree it's happening. But
we need to figure this out, because the supply chain of
pharmaceutical goods for health is critical. So I'll just leave
it at that.
Mr. Chairman, thank you very much for allowing me a few
minutes here.
The Chairman. Thank you, Senator Begich.
Senator Thune.
STATEMENT OF HON. JOHN THUNE,
U.S. SENATOR FROM SOUTH DAKOTA
Senator Thune. Thank you, Mr. Chairman.
This issue does seem to be quite wrapped up in the issue of
drug shortages. And I serve on the Finance Committee with
Senator Rockefeller, as well, and the Finance Committee held a
hearing last fall on the topic of drug shortages. And one issue
that came up was the current pricing structure in Medicare for
injectable medications that uses average sales price. I'm
wondering if anybody would like to comment about whether you
think that drug shortage issues can be attributed in any way to
the pricing structure within Medicare.
Dr. Coster. Senator Thune, I can tell you from the
community pharmacy perspective that those reimbursements for
products both in Medicare and Medicaid come down. You tend to
see some of the suppliers get driven out of the market, because
as the pressure is put on us, we try to put the pressure on
them. And as they get driven out of the market because of the
pricing pressures, you will see manufacturers leave the market,
which may create a shortage situation.
So we do think reimbursement policy in Medicare and
Medicaid can have a direct effect on, at least, pharmacies'
abilities to buy certain medications, because if the
manufacturers are not able to recoup some of their investments
and maintain all the processes they need to comply with Federal
regulations, they may just leave the market or go out of
business. So we agree that reimbursement can have a direct
impact on short-supply drugs.
Senator Thune. And it also seems that part of the problem
stems from questions about the supply chain, which you've
mentioned. And I'm curious as to whether you could give your
opinion on what measures might be taken to tighten that supply
chain. Does anybody want to take a stab at that?
Ms. Herold?
Ms. Herold. In California, we have on the books--it will
take effect in 2015 on a staggered basis out to 2017 and a
half--an electronic pedigree requirement that must start with
the manufacturer. Every change of ownership has to be certified
into the electronic pedigree, and not only just the change of
ownership. The seller certifies into the pedigree that it sold
the product to the specific buyer. The buyer specifically
certifies to the seller that it's buying the product. That's
creating a chain of custody.
And, thus, when we, as a regulator, walk in and scan a
product, we can see everywhere that product has been. And if
there should be a gap in, suddenly, where the drug was acquired
from, for example, we know that the point prior to that is
where the introduction occurred. And so it allows us to police
the distribution of drugs in California as well as across the
nation, because Federal regulators are going to be looking at
this, too, that they can use in investigations, because once
that product goes across state lines, it's very difficult to
track.
And there are rings of these things set up--much like what
the FBI did in New York last week. Those products are moving
from one location to another location, but almost always across
multiple state lines. So it's virtually impossible to track
them as a state regulator.
Senator Thune. How many states have electronic pedigrees?
Ms. Herold. We are the only state that has the depth of the
requirement that we have. And it is a complex process----
Senator Thune. Process to get there?
Ms. Herold. Yes, it really is. But without that--you need
to put the onus on each member of the supply chain to certify
they are a legitimate and ethical buyer, and you do that every
time you buy or sell a product, because without that, people
will slip things in, and you won't be able to do anything about
it. And, regrettably, it needs to be done at the unit level,
much like the FedEx tracking is. You have to track every single
one of those packages, or else you don't know where it is or
where it's been.
Senator Thune. Anybody else?
Mr. Gray?
Mr. Gray. In our organization, we've been working with
Ginny for six or 7 years back to the development of the
California law and, most recently, at the direction of the
Congress here, for a uniform Federal pedigree. Our position has
been since the adoption of California that what we need is a
Federal system. It's not enough to do something in California.
Our members dealing in all 50 states need some consistency in
the business process by which we ship drugs into every state.
And Florida, for example, has a completely different paper-
based pedigree system, quite different from California's, but,
nonetheless, it's a pedigree system. So we have been proponents
of, hopefully, getting the Congress to approve a national
uniform pedigree system and work out the technology
requirements to do that.
But our members have been advocating this since 2004. And
we got perilously close a month ago. We're not giving up the
fight on this one yet. We think this can have a large impact,
just as Ginny described, as far as how we can keep an eye on
all six of those steps and know where these drugs have been and
whose hands they've exchanged for security reasons as well as
cost.
Senator Thune. When did California put its pedigree system
in?
Ms. Herold. Initially, 2004. Then it was pushed back with
respect to implementation four times. It started in 2007. It
was then moved via legislation to 2009. The Board pushed it to
2011, which it did. And then, finally, in 2008, the current
dates were established on a staggered basis so the supply piece
could come up in stages. As the product moves through the
supply chain, each stage of that supply chain will have an
opportunity to make sure their component in it is working.
Senator Thune. Great. I see my time has expired.
Thank you, Mr. Chairman.
Senator Boozman. Ms. Herold, I was impressed with your
testimony. It sounds like you are doing your very best to
police a very difficult situation. We appreciate the community
pharmacies so much. In places like West Virginia and Arkansas
and much of the country, that is the source of healthcare in
very small communities. That's one of the most respected
professions in the country.
We in Congress are at about 18 percent now. We've worked
our way up from 12. So, again, we do appreciate it. This is an
important hearing. But we shouldn't lose sight of that.
In your testimony, it sounds like the activities that were
going on--and, again, I think Senator Rockefeller described
them as despicable and things like that. We would all agree.
But those were illegal under the current statutes that exist,
weren't they? I mean, it sounded like you got very aggressive
and moved on them.
Ms. Herold. Our first pedigree law in 2004 included the
very provision that we're prosecuting these pharmacies and the
wholesaler under--that you don't want a pharmacy in the
business of wholesaling drugs. And when it gets over a nominal
amount and very limited to address a specific shortage, they've
crossed over, and profit becomes the motive, not healthcare.
And when that occurs, that becomes a problem, and so we have--
we are able to use that.
The problem is in some cases, it's the buyer, the hospital,
pharmacy, that has to buy those drugs. It has no way of knowing
where that product has been. And we do not believe that a paper
pedigree is a complete solution, because how do you know this
piece of paper goes to that bottle?
Senator Boozman. The pedigree--was that put in place for $2
injectables to treat cancer, or was that more put in place for
the tremendous problem that we've got now with prescription
pain killers and things like that?
Ms. Herold. It was actually put in place because patients
would go to California pharmacies with a legitimate
prescription and often for AIDS or cancer drugs and walk out
with a fake drug, because the drug was very valuable. And we
couldn't detect where this product came from with any
certainty, and we couldn't prosecute at a level we needed to to
ensure the safety of the California public. So every single
product, whether it's $1 or $6,000 a dose--that product itself
has to be pedigreed, with a few exceptions, but pretty much
every single unit.
Senator Boozman. Right. And, again, what I'm trying to do
is get at the root of the problem, not to address, really, Dr.
Mayhaus's problem so much of the $1 or $2 drugs that it seems
like are so cheap now--they've been around forever--that it's
simply--because of the fact that Medicare and, thus, insurance
companies will only pay so much, it gets to the point it's not
profitable to make them.
The other problem that I see is if we add another layer--
and, again, you guys are doing such a good job in California,
and we could encourage the other states. My fear is if we layer
more regulation and more hassle on the pharmacists, that
increases their cost to the point where they don't want to fool
with them because they are such low priced drugs.
Dr. Mayhaus, when you get in these terrible situations, you
know, where you're trying to supply medicines to your
oncologists in treating these kids, when you reach out to
people, what percentage do you feel like are people that are
acting in good faith, you know, really busting their tails,
trying to get out, to call around and see where the drugs are
available, as opposed to the kind of people that we'd like to
get rid of?
Dr. Mayhaus. We would definitely prefer 100 percent of our
drugs to come through our primary wholesaler. And as I stated
in my testimony, when we determine there's a shortage and we
run through our mitigation plan and there's no drug in the
market, then we do sometimes call the alternative wholesalers
to see if they have a market for that. But we have paid an
exorbitant amount of money for some of those drugs.
The Cytarabine situation that I described earlier--our cost
was about $12 through our buying group, and we did pay $966 for
that. We bought six doses of that drug. It was for one
particular patient, and if that patient would not have received
Cytarabine, we believe that the outcome of that patient would
have suffered.
Senator Boozman. Again, I'm glad that you mentioned that
story, because that highlights the terrible problem that we've
got and the problem that you face. I guess what I'm wondering
is if we get rid of all of the secondary folks, are you still
going to face that problem or not?
Dr. Mayhaus. I believe that the drugs will be available in
the primary wholesaler. So if the drug is there, the primary
wholesaler or those distributors should have the drug and not
the alternative wholesaler.
Senator Boozman. So you feel like the alternative
wholesalers are stocking the drug to the extent that it's
causing a shortage.
Dr. Mayhaus. I do not think that, no. I think the drug is
short, and somehow they react to the market. I'm not sure how
that happens, but they tend to get the drug sometimes before we
even know there's a shortage. But they are not causing the
shortage of the drugs, no.
Senator Boozman. Good. And, again, I guess my point is that
we can address this problem and we should. I'd like to see the
state boards address it--and, again, the pedigrees--for lots of
reasons, in the sense of the other problems that we're dealing
with with prescription drugs, pain killers, you know, things
like that, which would greatly help in that regard.
But I think we're misleading ourselves if we feel that
dealing with the secondary issue, which needs to be dealt with
for other reasons--to me, it's like a big football game. If
West Virginia and Arkansas were playing, and we were both
undefeated, you're going to have scalping because you're going
to have a shortage of tickets.
So, hopefully, we can work together to make it such--if we
can deal with this without overregulating--but also make it so
that you're not put in a position where you've got some child
that desperately needs care and you're faced with an $8 drug or
whatever, paying $900 for it.
Thank you, Mr. Chair.
The Chairman. Thank you very much, Senator Boozman. Ms.
Herold, you don't have this situation in California?
Ms. Herold. Actually, we do. But, as I said, we have not
found the shell pharmacies operating in this realm, but,
regrettably, we have pharmacies that are buying drugs at the
behest of a secondary wholesaler. The pharmacy is buying the
full allocation available to it from that wholesaler, and if it
can, it will buy multiple times from that primary wholesaler so
that it can maximize the amount of drug.
They were told in a face-to-face meeting with the sales
agent from the wholesaler--and I can't call it anything else
but a sales agent--that ``we will pay you 10 percent over
invoice, but you are helping alleviate a shortage. Patients are
desperate, providers are desperate, and you can help.''
The Chairman. But I'm reading here that you have a new law
in California that will prevent these abuses.
Ms. Herold. It won't prevent them. It allows us to
discipline when we identify them.
The Chairman. And when you discipline them, what does that
mean?
Ms. Herold. Well, in this particular case, it means we
cited and fined up to $70,000 the pharmacies, each, for their
behavior. We cited and fined the pharmacists in charge, and, in
many cases, they're going to be required to take a 20-hour
ethics course so this does not occur. And with the wholesaler,
that's still currently under investigation. We have not
disciplined the wholesaler yet.
The Chairman. So whether it's an anomaly or not, if it's
just 1 percent or 2 percent or 3 percent, whatever, you treat
it seriously, and you find them and find ways to try to stop
them.
Ms. Herold. I don't think we would become involved with a 1
percent or a 2 percent over invoice that they bought from the
pharmacy and then----
The Chairman. No. I mean of the total pharmacy population.
Ms. Herold. Yes. We don't believe it's everyone.
The Chairman. I know it isn't everyone. But for those who
it does affect, you have in whatever your new law is ways to
find them and to discourage them from doing that, because
they're often--the wife may be the distributor and the husband
may be the pharmacist. Right?
Ms. Herold. We found exactly what your results of the
Committee was in our investigations. And, early on, we reached
out to Mr. Cummings, because at the same time he initiated his,
we were doing ours, and we found pretty much the same thing.
The only thing different was they were different players.
The Chairman. Very well. We are meant to have a vote
starting now, which means we'd better head down.
Mr. Coster, you worked together with David Pryor, didn't
you?
Dr. Coster. I did, Senator, many years ago, and with many
of your staff as well.
The Chairman. I did get a letter a week ago. I wrote him
back two nights ago. He's well.
Dr. Coster. He's doing well? Thank you.
The Chairman. Yes.
Dr. Coster. He's a great man.
The Chairman. A great influence on my life.
I want to thank you all. One thing I regret about this
hearing is that there was so much--so many questions were
addressed to Ms. Earl, because it means that we didn't--I mean,
for example, Dr. Mayhaus, there's a whole bunch of questions I
would have liked to have asked you. And you don't really have a
problem, so to speak. You always have what you need on hand,
and that bears investigation, as to how you manage a hospital
successfully like that.
But, anyway, hearings are what hearings are. And in this
case, what we're trying to do--we're an oversight and
investigations committee here, in terms of this particular
hearing. And we're trying to root out bad behavior and disallow
bad behavior. We've done that with the health insurance
industry, and, as a result of that, they have now refunded
about $4 billion of what they thought they could get away with
charging to the premium payers.
So, anyway, that's what we do. And I very much appreciate
you all taking the time to be here, and I'm sorry we didn't do
the questioning more thoughtfully. No, that's not what I mean.
Well, we'll leave it at that.
The hearing is adjourned.
[Whereupon, at 4:10 p.m., the hearing was adjourned.]
A P P E N D I X
Prepared Statement of Allan Coukell, Director, Medical Programs,
Pew Health Group, The Pew Charitable Trusts
Chairman Rockefeller, Ranking Member Hutchison, and members of the
Commerce Committee, thank you for the opportunity to present testimony.
I thank you for holding this hearing and for your efforts to reveal and
address risks to our pharmaceutical supply.
Through research and analysis, the Pew Health Group seeks to
improve the health and well-being of all Americans by reducing
unnecessary risks to the safety of medical and other consumer products
and supporting medical innovation.
The focus of my testimony today is the drug distribution system--
the weaknesses in the system and the risks of counterfeit and stolen
drugs.
In July of 2011, Pew released a report entitled ``After Heparin:
Protecting Consumers from the Risks of Substandard and Counterfeit
Drugs.'' \1\ The report, which underwent extensive external review, was
based upon information from regulatory and public documents, peer-
reviewed journal articles and interviews with dozens of supply chain
experts from numerous perspectives. It was informed by a two-day
conference we hosted in March 2011 that included representatives of
brand and generic pharmaceutical manufacturers, active drug ingredient
makers, major and secondary pharmaceutical wholesalers, chain and
independent pharmacies, consumer and health professional organizations,
the U.S. Food and Drug Administration (FDA), state regulators and
independent supply chain experts.
---------------------------------------------------------------------------
\1\ Pew Health Group. ``After Heparin: Protecting Consumers from
the Risks of Substandard and Counterfeit Drugs.'' (2011) http://
www.prescriptionproject.org/after_heparin_report.
---------------------------------------------------------------------------
In our report we explain that numerous entities are involved in
drug distribution, and the routes to market are not always simple.
Drugs can be bought and sold by one wholesaler or by many before
reaching a pharmacy. Drugs may be traded between distributors, and may
travel back from distributors and pharmacies in local markets to major
wholesalers through sales or returns before ultimately reaching
patients. Some drugs travel through repackagers; some are transported
by third-party logistics providers who do not actually purchase the
drug; that is, the physical movement of drugs does not always conform
to transfers of ownership, further complicating drug tracking. This
potential for complexity is not inherently problematic, but absent
sufficient safeguards bad actors are able to take advantage of weak
links in the chain.
Risks to the Drug Distribution System
One of our key findings is that incidents of counterfeiting and
drug diversion in this country--while thankfully far less common here
than in other parts of the world--are a matter of serious concern.
Just last week, on July 17th, the U.S. Attorney for the Southern
District of New York charged 48 individuals in a large-scale criminal
scheme to buy prescription drugs ``on the street'' from patients, re-
package them and re-sell them back into distribution through licensed
pharmaceutical wholesalers, who in turn sold the drugs to
pharmacies.\2\
---------------------------------------------------------------------------
\2\ United States Attorney's Office, Southern District of New York.
Manhattan U.S. Attorney Announces Charges Against 48 Individuals in
Massive Medicaid Fraud Scheme Involving the Diversion and Trafficking
of Prescription Drugs. July 17, 2012. http://www.justice.gov/usao/nys/
pressreleases/july12/prescriptiondrugs.html. Accessed July 20, 2012.
---------------------------------------------------------------------------
The scheme included medicines for HIV, schizophrenia, and asthma.
If the patient labeling was apparent, the criminals would use solvents
to remove it. If the medicine's label was damaged or said the drugs
were expired, a new, fake label would be printed and applied.\3\
---------------------------------------------------------------------------
\3\ United States Attorney's Office, Southern District of New York.
Manhattan U.S. Attorney Announces Charges Against 48 Individuals in
Massive Medicaid Fraud Scheme Involving the Diversion and Trafficking
of Prescription Drugs. July 17, 2012. http://www.justice.gov/usao/nys/
pressreleases/july12/prescriptiondrugs.html. Accessed July 20, 2012.
---------------------------------------------------------------------------
This scheme cost the Medicaid program an estimated half-billion
dollars. But this crime is also a serious patient safety issue. Drugs
were allegedly stored in inappropriate, sometimes egregious conditions.
In some cases pills were removed from the bottles and handled loose
\4\--creating a risk for contamination. Disturbingly, we do not know
the frequency and extent of crimes like this, but numerous, similar
examples have been brought to light over the past decade.
---------------------------------------------------------------------------
\4\ United States Attorney's Office, Southern District of New York.
Manhattan U.S. Attorney Announces Charges Against 48 Individuals in
Massive Medicaid Fraud Scheme Involving the Diversion and Trafficking
of Prescription Drugs. July 17, 2012. http://www.justice.gov/usao/nys/
pressreleases/july12/prescriptiondrugs.html. Accessed July 20, 2012.
---------------------------------------------------------------------------
The United States currently has no national system to detect or
prevent such incidents. The U.S. pharmaceutical distribution system is
sometimes described as a ``closed'' system, meaning that it is not
legal to import drugs that were not manufactured for the U.S. market.
However, the system is not closed in the sense that we have over a
thousand individual licensed wholesalers, large and small, providing
multiple points of entry to the legitimate distribution system.
Sometimes medicines are bought and sold numerous times before reaching
a pharmacy. Today we have learned about cases where pharmacies are not
the last stop in the supply chain, selling drugs to wholesalers for
further distribution.
Legitimate companies--manufacturers, wholesalers, and pharmacies--
work together to keep drug distribution safe, secure and efficient. But
bad actors exist that are willing to take advantage of supply chain
weaknesses for profit.
A few additional examples will help to illustrate the nature of the
risks.
In another series of arrests this spring, the New York Attorney
General announced that a pharmacy in New York had allegedly accepted
bribes to purchase drugs sourced from the black market worth over $247
million from shell companies.\5\
---------------------------------------------------------------------------
\5\ New York State Office of the Attorney General. A.G.
Schneiderman Announces Arrests In $274 Million Black Market
Prescription Drug Operation. April 4, 2012. http://www.ag.ny.gov/press-
release/ag-schneiderman-announces-arrests-274-million-black-market-
prescription-drug-operation. Accessed July 20, 2012.
---------------------------------------------------------------------------
Another threat is drug theft. In 2009, thieves stole a tractor-
trailer containing 129,000 vials of insulin. This drug, which needs to
be refrigerated, disappeared for a number of months before being sold
back into distribution.\6\ While most of the stolen drug was never
recovered, the FDA has said that some of it was found at retail chain
pharmacies in Texas, Georgia and Kentucky, having passed through the
hands of licensed wholesalers in at least two other states.\7\
---------------------------------------------------------------------------
\6\ U.S. Food and Drug Administration. Update to FDA Alert About
Stolen Insulin. August 26, 2009. http://www.fda.gov/ForConsumers/
ConsumerUpdates/ucm180320.htm. Accessed November 12, 2010.
\7\ Ciolek, Michelle M., Special Agent, Office of Criminal
Investigations, U.S. Food and Drug Administration. Affidavit in support
of search warrant. July 21, 2009. USA v. Altec Medical Inc. and RX
Healthcare Inc. Document number: 8:09-cr-00814-WMC.
---------------------------------------------------------------------------
In another case, thieves stole $75 million worth of pharmaceuticals
from an Eli Lilly warehouse in Connecticut. It was a sophisticated
operation, the largest dollar-value loss from a warehouse in U.S.
history.\8\ The theft was in 2010. Just this spring, those stolen drugs
were discovered stored in South Florida.\9\ One investigator who spoke
at the Pew conference and who is an expert in pharmaceutical
distribution crime believes that a scheme of drug thieves is to steal
the product then hold it, hidden, for a year or two, letting the alarm
die down before selling it back in to the system.
---------------------------------------------------------------------------
\8\ Forsaith, Chuck. Corporate Director, Supply Chain Security,
Purdue Pharma L.P. ``Cargo Theft.'' Presentation, 2010 PDA/FDA
Pharmaceutical Supply Chain Workshop. Bethesda, MD. April 26-28, 2010.
\9\ United States Attorney's Office, Southern District of Florida.
Eleven Indicted in Pharmaceutical Thefts. May 3, 2012. http://
www.justice.gov/usao/fls/PressReleases/120503-01.html. Accessed July
20, 2012.
---------------------------------------------------------------------------
Finally, we have incidents of outright counterfeits reaching
unsuspecting American patients. This spring cancer patients in the U.S.
were exposed to counterfeit Avastin--a critical chemotherapy agent
used to treat numerous types of the disease. In 2001, counterfeit
Serostim, a human growth hormone used to treat AIDS-related wasting,
was found in at least seven states and passed through multiple
wholesalers.\10\ \11\ \12\ EMD Serono, the manufacturer of Serostim,
has since put in place a secured distribution program, with a unique
serial number assigned to each vial that must be verified by the
dispensing pharmacy.\13\ It is an example of how drug distribution
security can, and should, be improved.
---------------------------------------------------------------------------
\10\ Serono, Inc. Serostim [somatropin (rDNA origin) for
injection]. Press Release, January 2001. http://www.fda.gov/Safety/
MedWatch/SafetyInformation/SafetyAlertsforHumanMedicalProducts/
ucm173895.htm. Accessed February 17, 2011.
\11\ Otto, Alex. Counterfeit Serostim Found Nationwide. Pharmacy
Today. American Pharmacists Association. March 1, 2001. http://
www.medscape.com/viewarticle/406804. Accessed October 13, 2010.
\12\ Dutchess Business Services Inc. v. Nevada State Board of
Pharmacy. No. 46345. September 11, 2008. http://caselaw.findlaw.com/nv-
supreme-court/1219556.html. Accessed February 17, 2011.
\13\ Williamson, Joyce P. Statement of Serono before the task force
on drug importation. http://archive.hhs.gov/importtaskforce/session2/
presentations/Serono.pdf, Accessed February 17, 2011.
---------------------------------------------------------------------------
Finally, your own investigation highlights the potential of the
drug shortage crisis to exacerbate existing supply chain weaknesses.
When a pharmacy or hospital can't obtain an essential drug from usual
channels, they may purchase from unfamiliar sources. This supply chain
flexibility is a good thing, and secondary wholesalers play an
important role in optimizing distribution. But it also creates an
opportunity for bad actors to introduce illegitimate product. We
currently lack national standards for wholesaler licensure. Any such
standards should address pharmacies that function as de facto
wholesalers.
A National Serialization and Traceability System to Secure Distribution
The United States lacks strong uniform national standards for
licensure of pharmaceutical wholesalers, and we lack a standard system
for companies to keep track of our pharmaceuticals during distribution.
There is currently no way to check whether an individual vial or bottle
is authentic or counterfeit.
Some state laws exist. California has put in statute a
comprehensive system that would require manufacturers to put a serial
number on each bottle or vial, and would require wholesalers and
pharmacies to check the drugs they buy and sell to ensure they are
authentic. California's law is scheduled to come into effect three
years from now. Despite the strength of the law, a patchwork of state
requirements is not ideal either for companies or for consumers.
Congress is now considering Federal requirements for drug
distribution security. However a national standard that preempts state
laws like California's must not replace them with a weaker standard,
especially one that would not prevent patients from receiving the kind
of stolen and counterfeit drugs I have just described.
To protect patients, a system must include the following two
components:
1. Unit-level Traceability
The key to improved security of drug distribution is knowing who
handles the drugs as they move from manufacturer, through a succession
of wholesalers, to the pharmacy or hospital and, ultimately, the
patient.
Some have proposed a system to track drugs by the lot number, but a
lot can contain numerous cases of many thousands of individual bottles
or packs of vials. Each case or vial may be sold separately, and
tracking by lot does not allow industry or regulators to ever know who
bought and sold a given drug through distribution.
Maintaining data about lots may provide an incremental benefit over
the status quo, but it would fail to catch unsafe drugs in many
scenarios.
For example, if a bad-acting pharmacy agrees to sell expensive
injectables out the back door to drug diverters, regulators that
discover those drugs will not be able to tell where the vials left the
legitimate system. They will only know the lot number--and this lot of
drugs could have traveled through multiple distributors and reached
multiple pharmacies.
Also, if part of a lot is stolen and illicitly reintroduced into
commerce, a pharmacist or patient will have no way to tell if the
product on their shelf is compromised. However if unit-level data is
kept, specific stolen unit serials could be identified. Even if
manufacturers are willing to recall an entire lot when only part is
stolen, shortage situations create a compelling public health argument
that recalls be as targeted as possible.
Today, some companies are required to track a drug's transaction
history through paper ``pedigrees''. An electronic system would be a
welcome replacement to this paper-based paradigm--Congress should
certainly not replace pedigrees with a structure that does less to
capture chain of custody than today's imperfect system.
2. Routine Checking to Identify Diverted and Counterfeit Drugs
Most stakeholders agree that drug packages should bear unique
serial numbers. A key reason to do this is so that pharmacies and
others who handle the drugs use the numbers to verify the authenticity
of the drugs. However, Congress is considering a proposal that would
not require these serials to be checked before a drug reaches a
patient. This act of checking alone could have prevented the massive
criminal recycling of government subsidized drugs--a serial number that
has been retired because it has already reached a pharmacy would be
caught on its second trip around. Without required checking, a criminal
could sell a recycled drug or a counterfeit drug with a fake serial
number, and no one would detect it. They could also sell thousands of
fake vials with the exact same serial number--real or phony.
Pew supports required authentication of drug products by companies
involved in distribution. Required checking would help ensure fake or
otherwise flagged serials are caught, and not allowed to make it to
patients. In addition to preventing crime, such a requirement would
support enforcement of responsible purchasing by wholesalers and
pharmacies
Conclusion
The risk of stolen or counterfeit products reaching and harming
patients through the drug distribution system is small, but real.
Recently, both the U.S. Counterfeit Pharmaceutical Inter-agency Working
Group and the office of the U.S. Intellectual Property Enforcement
Coordinator have recommended implementation of a track-and-trace system
to secure drug distribution against counterfeits in separate March 2011
reports.\14\ \15\ The impending implementation of California's law
creates momentum for a single national standard. We urge Congress to
create a robust national system--one that protects patients today and
provides the flexibility to ensure we can build upon it in the future.
---------------------------------------------------------------------------
\14\ Counterfeit Pharmaceutical Inter-Agency Working Group Report
to the Vice President of the United States and to Congress. March 2011.
http://www.whitehouse.gov/sites/default/files/omb/IPEC/
Pharma_Report_Final.pdf. Accessed April 22, 2011.
\15\ Administration's White Paper on Intellectual Property
Enforcement Legislative Recommendations. March 2011. http://
www.whitehouse.gov/sites/default/files/ip_white_paper
.pdf. Accessed April 22, 2011.
---------------------------------------------------------------------------
Thank you, and I welcome your questions.
______
Healthcare Supply Chain Association
Washington, DC, August 2, 2012
Chairman John D. Rockefeller IV,
Committee on Commerce, Science, and Transportation,
Washington, DC.
Dear Chairman Rockefeller:
I am writing on behalf of the Healthcare Supply Chain Association
(HSCA) to request that this correspondence be included in the record
for the hearing held before your Committee on July 25, 2012. We applaud
you for holding this important hearing and examining these so-called
``gray market'' drug companies that drive up the cost of short-supply
prescription drugs. The hearing and corresponding staff report
entitled, ``Shining Light on the ``Gray Market'': An Examination of Why
Hospitals Are Forced To Pay Exorbitant Prices for Prescription Drugs
Facing Critical Shortages'' provided valuable insight into why
hospitals and other health care providers sometimes struggle to obtain
short-supply prescription drugs they need to treat patients suffering
from cancer and other life-threatening conditions.
We want to clear up any misstatements made by the witnesses for the
National Coalition for Pharmaceutical Distributors attempting to blame
Group Purchasing Organizations (GPOs). We also want to address any
questions or misconceptions the reports mention of group purchasing
organizations and the role they play in the supply chain may raise.
Specifically, the report cites information from ``some observers'' that
have linked ``the broader business dynamics of the generic sterile
injectable market to explain the recent shortages.'' These observers
argue that the bargaining power of the GPOs and Medicare Part B
reimbursements tied to the ``Average Sales Price'' cause manufacturers
to operate with only very small profit margins.'' The facts are that
GPOs have worked vigorously with hospitals, providers, manufacturers,
distributors, the FDA, and Congress to bring critical issues related to
drug shortages to light, to help find market-based solutions to
managing and preventing shortages, and to help ensure that hospitals
and patients have uninterrupted access to lifesaving drugs.
GPOs negotiate vigorously on behalf of our hospital members and
clients. These negotiations are between extremely sophisticated
parties, and while GPOs have continually demonstrated our success in
lowering prices to bring savings to our members, clients and taxpayers,
we do not have the ability--nor would it be in our interest--to force
manufacturers into contracts that undermine their ability to deliver
product. Drug companies regularly and quickly adjust pricing of GPO
contracts when they experience shocks to production, and GPOs manage
thousands of price changes annually, both increases and decreases. Drug
shortages are a complex problem and one without an easy or overnight
fix. GPOs are clearly part of the solution, and we support recent
regulatory and legislative activities aimed at solving the drug
shortage problems. As an industry, we are committed to mitigating this
public health crisis.
In addition, we are concerned that the materials submitted by the
witness for the National Coalition for Pharmaceutical Distributors to
the Committee contain inaccuracies and statements that should not go
unchallenged. We would like to clear up the record on a few key points.
For example, it was stated that GPOs limit access for ``small
distributors or only contract with the ``Big 3.'' In fact, GPOs
contract with a range of distribution providers, including national,
regional and family-owned businesses. Most GPOs have dozens of
distributors on contract to provide members with maximum choice and
flexibility. Also, any hospital can purchase off contract any time they
choose--they often do so, especially in times of shortage. It is
standard practice to include provisions in GPO contracts allowing any
member to seek alternatives sources of supply in the instance of a
product shortage.
GPOs have been at the forefront of advancing private sector
solutions to drug shortages and seeking common-sense policy solutions.
The market realities are that some drugs, particularly older, generally
low margin generics, may only have 1 or 2 suppliers. The fact that GPOs
only contract with 1-2 companies is not by choice. It's because that's
all there is to work with. And if one of those companies experiences a
problem, we all can see the results. Drug shortages are caused by a
variety of reasons, but GPOs are not the problem but rather an
important part of the solution.
The Healthcare Supply Chain Association is a broad-based trade
association that represents 15 group purchasing organizations,
including for-profit and not-for-profit corporations, purchasing
groups, associations, multi-hospital systems and healthcare provider
alliances. The GPO industry stands ready to work with you and all
parties to address today's drug shortages. I appreciate the opportunity
to correct the record and to share our role in the healthcare delivery
system. We are proud of the savings we achieve for our customers and
the contribution we make toward containing costs in an unstable
pharmaceutical market.
If you have any questions or would like additional information
about GPOs, please do not hesitate to contact me. Thank you for your
consideration of our comments.
Sincerely,
Curtis Rooney,
President,
Healthcare Supply Chain Association.
______
Prepared Statement of Mark Snyder, Chief Executive Officer,
Superior Medical Supply, Inc.
Chairman Rockefeller, Ranking Member Hutchison, I thank you for the
opportunity to submit written testimony for this hearing entitled:
``Short-Supply Prescription Drugs: Shining a Light on the Gray
Market.'' I commend the Senate Commerce, Science and Transportation
Committee for conducting oversight of the important issues surrounding
our pharmaceutical supply chain. The serious and protracted drug
shortages plaguing this country are undoubtedly a tragedy from the
perspective of the patient who cannot obtain critically necessary
medication, and all healthcare stakeholders and policymakers who will
need to work together to resolve these dangerous shortages in a fashion
that can truly benefit all patients in every healthcare sector. I
strongly support the Committee's effort to help ensure that patients
receive the medication that they need and deserve. I offer this written
testimony today to discuss the business practices of my company,
Superior Medical Supply, Inc. (subsequently referred to as
``Superior'').
Background
Superior was formed in 2004 as a small family-held company to
engage in nationwide wholesale pharmaceutical distribution. Superior
suffered substantial losses in its first several years, due to the
difficulty of establishing a competitive foothold in the heavily-
consolidated distribution industry. Early on, it became readily
apparent that Superior, like most specialty distributors, could not
offer competitive pricing in the large and lucrative hospital sector.
Despite these competitive challenges, Superior has been able to
establish a healthy customer base in its 8+ years as a specialty
surgical distributor catering to the non-hospital sector. Because of
this specialized customer base, Superior's single largest inventory
component is injectable medications, especially sterile injectables
used in the operating room, most of which are produced in a generic,
non-branded form.
Today, Superior plays an important and indispensable role in the
pharmaceutical supply chain primarily serving these smaller surgical
facilities operating outside the hospital sector, including those
facilities in more remote locations that are not well served by the
larger primary distributors, including the Authorized Distributors of
Record or ``ADRs'' for the drug manufacturers. Superior's business
model focuses on providing pharmaceuticals to these smaller medical
facilities that otherwise cannot acquire them in the primary
distribution market. The necessity of the smaller more flexible
wholesaler couldn't be more apparent than it is today, with monthly
minimum purchasing requirements by the major wholesalers often
exceeding $100,000/month for a direct account, thus excluding most
smaller facilities from participation in these accounts.
As a specialty wholesaler, Superior currently serves hundreds of
these small facilities as a primary--if not only--source of necessary
medications, while also servicing thousands of other facilities, both
large and small, as a supplemental or ``secondary'' source of supply.
In many cases, Superior provides a very low volume of medications (such
as one or two vials) to a facility in need, and necessarily incurs
substantial overhead expenses in operating this low-volume, high-cost
specialized service throughout the entire U.S. But, as noted, many of
these smaller facilities necessarily depend upon the services of
Superior and other specialty distributors to obtain their medications.
If these smaller medical facilities and private physicians are to get
the medications that they--and their patients--desperately need,
secondary wholesalers like Superior must meet this demand.
Superior prides itself on offering its customers the most favorable
pricing possible under then-prevailing market conditions. As a smaller
distributor, however, Superior must pay a proportionally higher
``Wholesaler Acquisition Cost'' or ``WAC'' to acquire its
pharmaceutical supplies than the larger wholesalers--and this is
generally true regardless of whether acquired directly from the
manufacturer itself, a large primary wholesaler, or another secondary
wholesaler. Like many specialty distributors, simply Superior lacks the
economy of scale to qualify for more favorable volume-based pricing
from many drug manufacturers and larger wholesale distributors and
ADRs. As a result of this market dynamic, Superior's customer pricing
tends to be significantly higher than the larger wholesalers and ADRs
even under normal market conditions where there are few critical drug
shortages. The concentrated critical drug shortages, however, have made
it more difficult and expensive for everyone to obtain their
medications, including Superior's specialized customer base.
The medical and surgical facility customers of Superior definitely
value the important service that they receive. Superior has a series of
written customer testimonials which illustrate the strong regard that
Superior is held in by its customers (sample testimonials can be viewed
online at www.superiormedicalsupply.com). Some of these customer
testimonials also highlight the difficulties faced by the customers who
rely upon specialty distributors like Superior, including the
escalating drug costs caused by these critical shortages. For example,
as an attachment to this written testimony (Exhibit #1), I provide for
the hearing record a recent testimonial from a surgery center in
Casper, Wyoming, which both thanks Superior for its indispensable
services but also bemoans the lack of better pharmaceutical
availability and pricing to smaller facilities. I am attaching this
exhibit for inclusion in the hearing record.
Drug Shortages
I described above how Superior's business model serves many smaller
surgical facilities as a primary source of their pharmaceuticals,
particularly sterile injectable medications used in virtually every
operating room in this country. This means that Superior's customer
base competes directly with the hospital sector for many of the same
necessary OR drug supplies. To meet the needs of its specialized
customer base, Superior has expended substantial time and resources in
developing an extensive supply network that can offer its customers the
best drug pricing possible under then-prevailing market conditions,
particularly for generic injectables.
As manufacturer backorders and other shortages of pharmaceuticals
have intensified, however, Superior has found it increasingly
difficult, if not impossible, to locate certain medications at
favorable wholesale prices through the customary channel of the larger
primary wholesalers, including ADRs. These large wholesalers operate on
a ``just in time'' inventory system that maintains only about one (1)
week of stock on hand, so that when a drug shortage strikes the market,
their inventory is almost immediately exhausted by the sudden spike in
demand. When this happens, Superior is forced to purchase these
backordered pharmaceuticals at a much higher price on the open market,
or in other words, from other secondary wholesalers who have them in
stock at the time.
Thus, due to the Company's specialized customer base, the shortages
that you are now investigating have placed Superior squarely in the
``hard-to-find'' or backorder drug market as a matter of necessity.
According to a recent Health and Human Services report, ``in 2010,
there were 178 drug shortages. . . . Currently, shortages are
concentrated in the area of sterile injectable drugs, 132 of which are
now in shortage.'' Office of the Assistant Secretary for Planning and
Evaluation, Office of Science and Data Development, U.S. Department of
Health and Human Services, Economic Analysis of the Causes of Drug
Shortages at 2 (October 2011).
Thus, even though Superior's business model is not focused upon
servicing the so-called ``hard-to-find'' drug market, our participation
in this particular market has necessarily increased substantially
because of the concentration of these shortages in sterile injectables.
These critical drug shortages have been so protracted in the generic
injectable market, in fact, that Superior is now forced to acquire most
of its inventory on the open market from other secondary wholesalers,
rather than through its direct accounts with drug manufacturers and ADR
wholesalers at a more favorable wholesale pricing. This market reality
prompted Superior to form its Backorder Management Division to offer
expertise in this ``hard-to-find'' marketplace as a specialized
customer service. This group is specifically tasked with locating and
acquiring backordered pharmaceuticals that our customers need and
cannot otherwise locate. Though important to our customers, this
service has not supplanted our primary model of distribution to our
smaller medical facility customer base.
It is important to note that this service is almost entirely
reactive (not proactive). In response to customer requests, Superior
expends substantial time and significant labor cost to locate the
desired medications on the open market at the best price then
available, but as a practical matter, this price point is always
significantly higher than the price that would be paid under normal
market conditions when Superior is able to obtain medications directly
from the manufacturer or primary ADR wholesalers. Superior typically
purchases these backordered medications only if the customer authorizes
the particular purchase price. Superior typically receives hundreds of
requests per week from both established and prospective customers
desperately seeking these backordered medications.
As the success of this Division grew, so did our customer base.
Through customer referrals, industry word of mouth, and an outreach
program, many hospitals too began to find value in utilizing Superior
to fill in the gaps of medications that they could not acquire though
their primary wholesalers. Over the last several years, and as the
shortages had worsened, the customer base of hospitals that utilized
Superior in this supplemental or secondary capacity had grown to
several hundred customers strong. However, with the widespread
publicity focused on secondary distributors servicing hospitals,
Superior and many other specialty wholesalers have found it necessary
to pull back from servicing hospitals as a matter of business survival.
Many specialty distributors around the country have suffered
substantial lost business from this negative publicity, forcing many to
lay off more than half of their staff members in order to survive.
Superior has now reduced its hospital base to only a handful of
preferred customers, and intends to ultimately cease all distribution
into this sector to minimize further business losses. Superior is not
alone. We now receive numerous calls daily from hospitals around the
country desperately seeking drugs.
Although there are several drivers for drug shortages ranging from
raw material deficiencies to manufacturing plant closures, the most
prominent shortage type in Superior's experience revolves around
regional shortages. As noted above, the large primary ADR wholesalers
operate on ``just in time'' inventory systems that maintain minimal
stock on hand at any given time. In the hospital sector, virtually
every hospital belongs to a Group Purchasing Organization or ``GPO,''
which obtains preferential ``contract'' drug pricing for its hospital
members by leveraging their collective purchasing power and negotiating
extremely favorable direct pricing from the drug manufacturers. The GPO
product management and allocation systems are operated primarily by the
largest wholesale distributors, which function by separate regional
distribution centers (``DCs'') spread across the country; each hospital
member is typically assigned to a single regional DC to obtain their
pharmaceuticals at the favorable GPO contract price This GPO
distribution structure is fundamentally flawed due to the lack of
flexibility caused by the restrictive pricing and distribution
structure that hospitals are held to under their GPO contracts. This
often results in situations where a hospital customer is told that a
particular medication is on ``backorder'' and unavailable, when in fact
the same drug may be in stock in other regional DC's of the same
primary distributor, and is almost always available from other
wholesalers within the region, particularly secondary wholesalers.
In Superior's industry experience, these regional DCs of the
largest distributors actually compete with each other intra-company,
resulting in a real disincentive to cooperate with each other to
alleviate these regional drug shortages. The typical policies of these
largest distributors also tend to discourage and effectively penalize--
through, for example, cost-prohibitive transfer or service ``fees''--
GPO hospital customers from acquiring products from another regional DC
with product in stock. These situations result in a localized shortage
to the hospital that cannot acquire pharmaceuticals through its GPO
distributor, and must then go out on the open market to acquire these
medications for its patients and necessarily pay a substantially higher
price--often hundreds of times more--than the artificially low GPO
contract price. This is where Superior and other secondary distributors
typically enter the picture in servicing the hospital sector,
performing a critical market reallocation function that the
inflexibility of the GPO distribution system simply cannot accommodate.
While hospitals must pay higher prices to acquire necessary medications
from secondary distributors, there are undeniable benefits to the
patients who avoid unnecessary suffering and death due to this critical
role of distributors like Superior.
Congressional Investigation Into the Pricing of Paclitaxel
On October 5, 2011, Superior received letter from the Ranking
Member of the House Oversight and Government Reform Committee, the
Honorable Elijah Cummings (D-MD), requesting documents related to our
purchase and sale of Paclitaxel. This drug is used to treat breast and
ovarian cancer. A subsequent request for this information was made on
December 15, 2011 by the following Members of Congress: Senator John
Rockefeller, the Chairman of the Senate Committee on Commerce, Science,
and Transportation; Senator Tom Harkin, the Chairman of the Senate
Committee on Health, Education, Labor and Pensions; and Representative
Cummings. We met repeatedly and worked cooperatively with the staff of
these three committees, providing them with proprietary and
confidential materials regarding these Paclitaxel transactions and
Superior's standard business practices.
The greatest area of interest to the committees was the difference
in the price Superior had paid to acquire the Paclitaxel and the price
it charged when it subsequently sold the drug to its customers. In
response to this inquiry, Superior provided data to the committees on
its pricing structure and practices. Pursuant to this data, Superior
showed that its average gross margin on all of its sales of Paclitaxel
was less than 40 percent overall. The committees also expressed
particular interest in the higher-priced sales of Paclitaxel. The data
provided to the committees specifically showed that, for the Paclitaxel
sales in the higher $500.00 range, the average gross sales margin in
this price range was less than 25 percent. This data shows,
importantly, that market supply and demand will tolerate only so high
of drug prices, and that Superior actually makes less profit as a drug
shortage worsens and market prices trend upward. In other words,
because Superior's primary inventory component of sterile injectable
medications has been the class of drugs most affected by the current
shortages, these medications have been subject to greater price
escalation caused by market supply and demand, resulting in lower
operating revenues for Superior than during normal market conditions
where few drug shortages exist.
I do not believe that these gross margins are excessive,
unreasonable, unconscionable, or amount to ``price gouging.'' This is
particularly true given that these gross margins do not account for the
substantial overhead costs of running a small business, paying
employees, providing them with benefits like health insurance and
retirement accounts, or even keeping the lights on in the office. As
alluded to above, Superior's overhead costs are higher operating in
this low-volume, high-cost ``hard-to-find'' marketplace, wherein
Superior often provides a very low volume of necessary medication--
sometimes only one or two vials--to a needy facility (as a practical
matter, the high market prices of these ``hard-to-find'' drugs means
that most customers purchase only the minimum amount of medication for
their immediate patient needs). Since many sterile injectable
medications are produced in glass vials, and sometimes must be kept
refrigerated, there are also additional labor and packaging and
shipping costs associated with the delivery of these particular drugs
to customers. In general, Superior and other small specialty
distributors must internalize substantial overhead costs in the form of
labor expenses, pedigree authentication and compliance, packing
materials, dry ice and other refrigerated packing materials and
methods, as well as the high costs of maintaining a common carrier
account (such as UPS or FedEx) to deliver numerous smaller shipments of
critical medications across the U.S.
In fact, as shown to the investigating committees, Superior's costs
are up substantially while annual revenues have decreased by several
million dollars. If given a choice, Superior would strongly prefer not
to have to operate in this difficult secondary market, and would gladly
return to the normal market conditions that provide more stability and
sustainability to its core business model. But Superior still prides
itself on supplying its regular customers with all of the medications
that their patients need, even if it makes for difficult operating
conditions.
When looking at the gross margins on Paclitaxel, several key points
must be considered. First, Paclitaxel represents a specialty drug with
a need to immediately get it to customers, yet comply with the costly
and time-consuming burdens of verifying/creating paper pedigrees, hand
packaging glass vials (including, if applicable, additional
refrigerated packing), delivering product safely and on time, and then
invoicing the customer and subsequently collecting payment. Second,
operating a small business in the pharmaceutical industry includes
significant fixed overhead and operating costs, such as the following:
licensing, insurance, bonds, compliance, pedigree, shipping, payroll,
rent, utilities, and taxes, among other things To illustrate, Superior
currently maintains 112 different licenses for its distribution
operations, and each of these licenses must be annually renewed at
substantial expense to Superior and other similarly situated small
businesses, yet the costs of maintaining this licensure is roughly the
same as expended by the largest wholesalers in this country.\1\
Superior is just not big enough to recognize the ``economies of scale''
that its larger competitors enjoy, resulting in proportionally higher
total operating costs for Superior and other small, specialty
distributors.
---------------------------------------------------------------------------
\1\ Under these licenses, Superior is accountable to the rules of
numerous administrative agencies and bodies, including but not limited
to the various state boards of pharmacy, the U.S. Drug Enforcement
Administration, the U.S. Food and Drug Administration, the Federal
Aviation Administration, the U.S. Department of Transportation, and
others. The costs of complying with these multiple, and sometimes
conflicting, laws and rules are extraordinary, including substantial
employee training and monitoring expenses.
---------------------------------------------------------------------------
Shipping is one of the particular areas where we find ourselves
unable to compete. For example, as shown to the investigating
committees, the annual cost to maintain Superior's UPS shipping account
ranks second only to employee payroll as its largest annual operating
expense. In contrast, the major wholesalers utilize their own internal
carriers to deliver product to their customers. They have the luxury of
placing their products in plastic totes with little to no packing
material as these totes are not being handled through processing
centers by common carriers. Each package that Superior ships to a
customer must be meticulously packed, often times requiring each unit
to be wrapped in bubble wrap, surrounded by paper or Styrofoam
material, possibly packed in a manner to maintain adequate
refrigeration conditions during shipment, and then placed inside a
cardboard box, addressed and shipped. This sort of packaging
``overkill'' is costly but necessary to ensure that shipments of
valuable medications reach the intended patient in time and intact.
Furthermore, even when Superior purchases products under a direct
manufacturer or ADR contract, we pay significantly higher prices than
larger wholesalers and other volume-based organizations like GPOs. To
illustrate, there have been many instances in Superior's existence
where, under normal market conditions, we have been able to acquire
needed product cheaper on the open market from other wholesalers (even
taking into account their additional markup) than we could pursuant to
our direct accounts with drug manufacturers or ADR wholesalers.
Available evidence suggests that while volume-based discounting is a
standard practice in nearly every U.S. industry, drug manufacturers
engage in more pronounced forms of price differentiation based on
customer type, or ``price discrimination,'' \2\ than in other
industries. For example, the Minority staff of the House Committee on
Government Reform in 1999 found that price differentials are far higher
for drugs than they are for other consumer goods. According to their
findings, the average price differential of the specific drugs
evaluated was 134 percent, whereas the price differential for consumer
goods in other industries was only 22 percent. Minority Staff, Special
Investigations Division, Committee on Government Reform, U.S. House of
Representatives at ii (November 9, 1999). Superior and other specialty
distributors, and the small customers who critically depend upon them,
can attest firsthand to the anti-competitive effects of the pronounced
price differentials in the pharmaceutical industry.
---------------------------------------------------------------------------
\2\ Price Discrimination is defined as ``the practice of charging
different prices for the identical product to distinct buyers.'' See
Ernst R. Berndt & Joseph P. Newhouse, Pricing and Reimbursement in U.S.
Pharmaceutical Markets at 29 (Harvard Research Working Paper Series,
September 2010).
---------------------------------------------------------------------------
Response to Release of Exhibits by the Senate Commerce Committee
The Senate Commerce Committee released five exhibits to the public
on July 25, 2012. Exhibit III summarized a specific pedigree involving
Paclitaxel and Superior's involvement in the distribution of this drug.
This exhibit listed Heartland Regional Medical Center in St. Joseph,
Missouri as the end user of Paclitaxel in this transaction. As a
response to this release of information by the Senate Commerce
Committee, I am attaching for inclusion in the hearing record as
Exhibit #2 a customer testimonial from Heartland. Heartland is one of
Superior's preferred hospital customers and we have enjoyed working
closely with Heartland for many years to assist it in locating hard-to
find drugs that it cannot acquire from its primary wholesaler. Attached
to my written testimony is a customer testimonial that Heartland
provided to Superior attesting to the excellent customer service, fair
pricing, and overall professionalism of Superior as a specialty
wholesaler. Heartland closes its testimonial with the following
statement that really sums up the important service that we provide
during times of shortage:
``Superior offers fair pricing that is often better than other
similar companies in this business, and they deliver fast and
overnight if necessary. Superior Medical recently obtained a
very important chemotherapy drug (paclitaxel) that Heartland
could not obtain through any other sources. We would not have
received the paclitaxel if not for Superior. Superior is able
to help us find several different drugs that have been in very
short supply recently. We will continue to use Superior
Medicals services in the future.''
This customer testimonial shows the close working relationship that
many specialty distributors like Superior have with the individual
hospital pharmacy buyers. These buyers are responsible for maintaining
adequate pharmaceuticals to meet the needs of critical patients on a
day-to-day basis. As a result, these buyers often have a unique
perspective on the real value that specialty distributors can bring to
the table in terms of industry knowledge, drug supply trends, inventory
management, and meeting the immediate needs of the underlying patients.
These hospital pharmacy buyers often have a markedly different
perspective on the value of secondary distributors to the hospital
sector, particularly during times of drug shortages, than do the
hospital administrators or compliance officers who are not involved
with the secondary distribution industry on a regular basis and, thus,
often do not truly understand the unique value that specialty
distributors like Superior can bring to the table for hospital
purchasing departments.
Recommendations by Superior to Address Drug Shortages
Superior would like to offer a couple recommendations to address
drug shortages.
1. Encourage the use of smaller distributors by the major
wholesalers to help alleviate national and regional shortages,
as well and to increase the availability of drugs to more
remote or less populous regions of the U.S. Also increase the
supply channels between the primary and secondary distribution
industry so that our customers--and their patients--can readily
obtain the critical drugs they need at more reasonable price
points.
2. Pass new laws and/or administrative policies to lessen the
anticompetitive effects of differential pricing in the
pharmaceutical industry, and to level the playing field for the
hundreds of small distributors like Superior and the small
medical facilities that depend upon them for their critical
drug supplies.
3. Implement a nationalized electronic pedigree system and openly
support any effort to make this happen. As the current pedigree
law was crafted to exempt 90-95 percent of the pharmaceutical
wholesale transactions that occur daily, the unilateral burden
of pedigree on the secondary distribution industry undercuts
our ability to compete with larger wholesalers and offer better
pricing to the customers who depend upon us. Because of the
pedigree burden, specialty distributors like Superior must
process mountains of paperwork each day, raising the cost of
product that each pedigree-compliant company transacts in by
adding hundreds of man-hours each week. Perhaps more
importantly, absent a national pedigree system that applies to
all stakeholders in the supply chain from top to bottom, this
country cannot realize the Prescription Drug Marketing Act's
original promise of a true closed system of drug distribution
that can better ensure drug integrity and resulting patient
safety.
4. Simplify the license structure for small business
pharmaceutical suppliers. Superior maintains over 100 licenses
between two distribution centers at a cost no different than
what a $100 million company is required to pay. Also simplify
the bonds required by the various state boards of pharmacy and
other administrative agencies in order to be licensed in this
industry. Superior would propose a uniform national bond
requirement, with tiered-pricing according to the scale of each
licensee. In this way, tiered licensing and bonding overhead
costs would level the playing field for small distributors and
the customers and their patients who depend upon us.
Conclusion
Thank you for the opportunity to provide written comments for this
important hearing.
I understand the objective of the Committee is to better
understanding the function of the secondary or specialty wholesalers
and Superior does function in this capacity when necessary. However,
Superior is genuinely more interested in operating in a market without
shortages.
We believe that Superior helps represent an indispensable part of
the pharmaceutical supply chain. Our job is to get the drugs to those
medical and surgery facilities that desperately need them for their
patients. Thanks again for this opportunity.
Enclosure of Exhibits
______
Response to Written Question Submitted by Hon. Roger F. Wicker to
Virginia Herold
Question. Can you give us your opinion on what measures could be
taken to tighten the supply chain or to prevent these types of
``questionable'' transactions from taking place?
Answer. Actually, we see two questions in Senator Wicker's comment.
We strongly believe that the questionable transactions involved in the
gray market of prescription drugs in short supply that were highlighted
by the Committee result from opportunists, and not health care
providers, who see an opportunity to make a profit from a supply and
demand inequity involving prescription medication. As such, the
consequences of engaging in such activity should involve substantial
fines or other financial sanctions that cannot be readily discharged.
Additional, deterrent sanctions are needed when the transactions are
committed by unlicensed entities selling and buying prescription drugs.
In 2004, California enacted changes to pharmacy law to stem one
source of drug diversion--to prohibit a pharmacy from acting like a
wholesaler, except in limited circumstances. As a deterrent, the board
was granted the extraordinary ability to issue fines at $5,000 per
invoice, which correlates a higher fine which repeated involvement in
performing prohibited acquisitions or sales. In our experience:
pharmacies should be prohibited from engaging in wholesale transactions
except in limited circumstances, and correspondingly wholesalers should
be barred from buying from pharmacies except in rare circumstances (the
latter provision we do not have in law currently).
The answer to the second question--how to tighten the supply chain
against questionable transactions--we believe requires greater
transparency in the supply chain, and specifically, the tracking of all
sales transactions from the manufacturer to the purchaser (wholesaler,
pharmacy) in a tamperproof manner. A purchaser needs to be able to
review everyone who has owned the product before the sale. Because the
supply chain is more of a network than a true chain, this is virtually
impossible now to know where a drug has been before purchase.
If a purchaser has the information needed to track (in a
tamperproof manner) the product back to the manufacturer, this will aid
detection against the sudden, unauthorized entry into the supply chain
of a product at a specific point. This is because such insertions would
be traceable to a particular owner who did the insertion, and thus
serve as a deterrent to unauthorized insertions of any product into the
supply chain, making the pharmaceutical supply chain more secure. Such
entries are not now readily detected.
In California, such a system is in place via the e-pedigree law,
which will take effect on a staggered basis from 2015 through July
2017. The law will require electronic tracking of every owner of
pharmaceutical product from the manufacturer to the dispenser.
______
Response to Written Questions Submitted by Hon. John Boozman to
Virginia Herold
Question 1. Mr. Coster testified that, depending on state
requirements, pharmacies may be allowed to open with a temporary
license before regulators conduct an on-site inspection. When dealing
with potentially lifesaving drugs that must be handled and stored
properly, how does a state board determine whether a pharmacy can open
without an on-site inspection? How long can a pharmacy operate without
being inspected? If this practice was changed, would it prevent fake
pharmacies from operating?
Answer. We had to change our practices in performing pre-opening
inspection relatively recently, Since 2010 California now does pre-
opening inspections of new non-chain store pharmacies before a pharmacy
license is issued. This is a resumption of a requirement that was in
effect until approximately 1996 for all pharmacies.
From approximately 1996 to 2010, California discontinued pre-
opening inspections of all new pharmacies before a license was issued.
During these years, the board viewed pre-opening inspections as
providing little value where staff resources could be better deployed
after the pharmacy was operating. Specifically, the inspection of a
pharmacy before it operates, before it has been issued a license, and
before it has been authorized to purchase drugs resulted in the board
making visits to sites in pre-1995 inspections where there was little
to inspect. Essential functions and operations could not be reviewed
because the sites had not been operating, staff were not present and
there were no records to review. Instead, the board opted to inspect
the pharmacy after the first 120 days of operation, and where the board
could cancel the license if there was no pharmacy present (pursuant to
California law).
However in 2010, the board reinstituted pre-opening inspections of
non-chain store pharmacies due to a flurry of fake pharmacies that once
licensed, began to defraud MediCal or divert drugs. The resumption of
these inspections has permitted the detection of truly fake pharmacies.
The board will continue to conduct these pre-licensure inspections.
To additionally ensure the safety of the public, we also try to
inspect pharmacies sometime after 120 days of operation to review their
functioning.
Question 2. Does California have any compliance cost estimates for
independent pharmacies for the new electronic tracking system?
Answer. No. The few pilots underway between manufacturers and
wholesalers do not currently involve many pharmacies, perhaps because
e-pedigree implementation for pharmacies will not occur for another
five years (July 2017). We expect to see more involvement of community
pharmacies in the future once the current pilots involving the
manufacturer/wholesaler interface mature.
However, one area in which the board is cognizant of decreased
costs is in the area of e-pedigree readers for the serialized product.
In discussions with the supply chain in 2008 and earlier, the supply
chain was projecting readers would be required in a pharmacy in at
least three different forms (RFID high frequency, RFID ultra-high
frequency and 2-D bar code). Some of the readers then in use were bulky
and expensive.
Today, we are aware that readers in cell phones are possible, which
greatly reduces this cost component to pharmacies, as well as the size
of the reader. Moreover, manufacturers are principally using 2-D bar
codes to serialize their products, and RFID high frequency is
disappearing for this purpose. We expect continual evolution in the
technology in this area in the future.
______
Response to Written Question Submitted by Hon. Roger F. Wicker to
Dr. David Mayhaus
Question. Can you give us your opinion on what measures could be
taken to tighten the supply chain or to prevent these types of
``questionable'' transactions from taking place?
Answer.
a. I might recommend a look at the main business market of
secondary distributors. Specifically, if their role is to
provide pharmaceuticals to community pharmacies, then why do
they need to purchase intravenous drugs and chemotherapeutic
agent used exclusively in hospitals? There should be some kind
of accountability from the manufacturer or primary wholesaler
where the initial transaction took place to verify the
legitimacy of the purchase of hospital used pharmaceuticals.
Cincinnati Children's would not use the secondary wholesalers
if the product was available through our primary. Some of our
pedigrees have indicated that the initial distributer listed
was a primary wholesaler. I was not aware that primary
wholesalers sold drugs to secondary wholesalers. If there is a
process to determine if the secondary wholesaler had a
legitimate market for intravenous drugs used exclusively in
hospitals, it may deter this type of transaction.
b. Limiting the number of wholesalers that can handle a
pharmaceutical might be something to consider. As described in
other's testimony, as the number of wholesalers involved with
the drug increased, so did the price. Setting a limit of 2-3
distributors permitted on a pedigree may significantly curtail
this activity.
______
Response to Written Question Submitted by Hon. John Boozman to
Dr. David Mayhaus
Question. How often do you turn down business offers from secondary
distributors because you identify inaccurate, incomplete, or unsettling
information in your procurement process?
Answer. The buyers at Cincinnati Children's decline the offers of
approximately 90 percent of the calls they receive. The reasons are
either they are not licensed as a wholesaler in Ohio, too high of
price, or the secondary wholesaler wants a purchase order given to them
without confirmation of the needed drug in supply. The issuance of a
purchase order prior to providing firm confirmation the secondary
wholesaler has the actual drug in supply is not normal pharmacy
business practice of Cincinnati Children's.
______
Response to Written Questions Submitted by Hon. Roger F. Wicker to
Dr. John Coster
Question 1. Can you give us your opinion on what measures could be
taken to tighten the supply chain or to prevent these types of
``questionable'' transactions from taking place?
Answer. There are a number of actions or measures that could be
taken to tighten the supply chain. These could include making sure that
all pharmacies must have an actual on-site inspection prior to being
allowed to open. This would ensure that the pharmacy is, in fact, an
operational and legitimate pharmacy and not a ``shell'' pharmacy. In
addition, NCPA has gone on record in support of Federal standards for
wholesaler licensure.
A number of years ago, there was a flurry of publicity around the
fact that in many states, the licensure requirements necessary in order
to operate as a drug wholesaler were not terribly consistent or robust.
In response, many states took the necessary steps to tighten up or
increase these requirements in order to provide a greater degree of
assurance that only legitimate entities were operating in this area.
That being said, there are still some states in which the wholesaler
licensure requirements are more rigorous than others. Uniform, Federal
requirements for wholesaler licensure would create a consistently high
standard for these entities across the country.
NCPA has also publicly stated its support for a lot-level form of
tracking for prescription drugs that could be used in the event of a
recall or to investigate suspect product. Such a system would make it
much easier for each participant in the supply chain to keep track of
exactly who products are purchased from and subsequently sold to. In
addition, NCPA feels that there should be a greater emphasis on the
importance of all participants in the supply chain to perform their due
diligence with respect to their business partners.
Question 2. Is there a valid reason why a pharmacy may sell a small
amount of his or her inventory to either another pharmacy or perhaps
even to a wholesaler, and do the states address this issue in a
consistent manner? In light of the types of activities we have heard
about, should these practices be allowed to continue?
Answer. Many state pharmacy practice acts recognize the value of
allowing pharmacies to sell small amount of his or her inventory to
another pharmacy in order to alleviate temporary shortages. In
addition, some states also permit appropriate licensed pharmacy sales
to wholesalers as well to alleviate temporary shortages. In addition, a
pharmacy may sell a product which is close to the expiry date to a
wholesaler who has a client with an immediate need, to ensure that the
product will not go to waste and can actually be used for patient
benefit. This is also critical for small pharmacy owners due to the
significant amount of capital that is tied up in inventory stock.
States do not address these issues in a uniform fashion. There are
some states that specifically allow these types of sales or exempt
these transactions from the state definition of wholesale distribution.
There are other states that allow these types of sales but only in
instances of the existence of an actual patient need or as long as a
pharmacy does not sell over a certain percentage of their inventory.
NCPA feels that greater clarity or consistency from state to state in
how these types of transactions are allowed would certainly be helpful.
No pharmacy, whether fake or legitimate, should be in the business of
acting as a conduit to facilitate the activities of a gray market or
placing specific orders with a primary wholesaler for the sole purpose
of immediately selling to a secondary wholesaler.
NCPA does feel that pharmacies do need to have the option to engage
in these types of sales in certain circumstances in order to address
temporary shortages in the workplace and to respond to patient needs.
We feel that any remedial action taken to prohibit the types of
activities highlighted in the hearing should be narrowly tailored. We
urge Congress to not take any overly broad actions that might limit the
ability of pharmacists to take care of their patients or manage their
inventories.
Question 3. Is there a valid role for secondary distributors in the
market? If so, could you elaborate on ways in which your members
utilize these entities?
Answer. Yes, NCPA feels that there is a valid role for secondary
distributors in the market. Most community pharmacies rely on a primary
wholesaler to meet the majority of their ongoing prescription drug
needs. However, community pharmacies typically need to have at least
one or more backup or secondary wholesalers that they can call upon in
the event that there is a shortage. ``Primary wholesaler'' generally
describes entities that purchase the vast majority of their product
directly from drug manufacturers. This market is highly concentrated--
the ``big three'' wholesalers generate approximately 85 percent of all
revenues from pharmaceutical wholesaling in the United States.
``Secondary'' wholesaler generally describes distributors that do not
purchase the majority of their products directly from a pharmaceutical
manufacturer. Most manufacturers typically limit the number of entities
that they will sell to directly and most do not sell directly to
smaller companies that are not interested in purchasing extremely
large, bulk amounts. Secondary wholesalers play an important role in
the industry by serving as a ``back-up'' source of supply to pharmacies
who may use a primary wholesaler for their usual and expected day-to-
day needs and also provide necessary competition for the primary
wholesalers which helps keep costs down. These entities also frequently
specialize or focus on a subset of the market, such as a geographical
region or specific product categories such as differing types of
specialty drugs such as oncology or HIV.
______
Response to Written Questions Submitted by Hon. John Boozman to
Dr. John Coster
Question 1. Do you think that a national pedigree or track and
trace system would prevent nefarious activities by wholesalers or fake
or real pharmacies with respect to the buying and selling of shortaged
drugs?
Answer. It is important to recognize that no system, whether a
national pedigree or track and trace system would solve all problems or
``loopholes'' that may exist in the pharmaceutical supply chain. NCPA
favors a multi-pronged approach to bolstering the integrity of the
supply chain including uniform, Federal licensure standards for
wholesalers, cracking down on illegal Internet pharmacies as well as a
lot-level form of tracking for prescription drugs that could be used in
the event of a recall or to investigate suspect product. In addition,
there needs to be a greater emphasis on each sector of the supply chain
to thoroughly ``vet'' their trading partners--their suppliers and their
customers.
Question 2. What track-and-trace system do small pharmacies support
and why? How will such a system improve the supply chain?
Answer. NCPA supports a lot-level form of tracking for prescription
drugs that could be used in the event of a recall or to investigate
suspect product. This system, known as RxTEC, is the result of a year-
long effort by a multi-stakeholder workgroup that sought to create a
system that would recognize both tangible safety improvements and
appropriate industry burden.
Implementation of this type of system would make it much easier for
each participant in the supply chain to keep track of exactly who
products are purchased from and subsequently sold to. NCPA does not at
this time support the electronic tracking and tracing of prescription
drugs at the unit level due to the costs of the hardware and software
to small businesses that would be required to set up and maintain such
a system as well as the significant time and labor costs associated
with its implementation.
______
Healthcare Distribution Management Association
Arlington, VA, August 31, 2012
Hon. John D. Rockefeller,
Committee on Commerce, Science, and Transportation,
Washington, DC.
Dear Chairman Rockefeller:
Thank you for the opportunity to testify before the Senate
Committee on Commerce, Science and Transportation on July 25, 2012 at
the hearing entitled ``Short-Supply Prescription Drugs Shining a Light
on the Gray Market.'' I have attached my response to the Questions for
the Record forwarded to us by your staff.
As a result of the Commerce committee hearing and release of the
``Shining Light on the Gray Market'' report, we understand that
responsible pharmacies are more acutely aware of the potential impact
of drug shortages on patient health and may be ending their practices
of reselling product, to the extent they had previously done so. While
this is a very positive development, we are encouraging our members to
remain vigilant for any change in tactics from gray market suppliers.
These gray market entities may pursue other avenues to obtain drugs in
short supply, such as through veterinary and dental providers.
In fact, the Federal Trade Commission is convening a workshop to
examine certain veterinary drug prescribing and distribution practices,
including instances in which ``veterinarians purchase pet medications
from manufacturers or authorized distributors and then resell some
portion of their purchase to secondary suppliers for a profit.'' 77
Fed. Reg. 40,355, 40,356 (July 9, 2012).
Thank you for your leadership and we look forward to continuing to
work with you and your staff on the important issue of drug shortages.
Sincerely,
John M. Gray,
President & CEO.
______
Response to Written Question Submitted by Hon. Roger F. Wicker to
John M. Gray
Question. Can you give us your opinion on what measures could be
taken to tighten the supply chain or to prevent these types of
``questionable'' transactions from taking place?
Answer. HDMA and its members are strong advocates for increased
wholesaler licensure standards and a uniform Federal pedigree system to
enhance the safety and security of the pharmaceutical supply chain. In
addition to fundamentally addressing counterfeit and diverted
medicines, Federal pedigree may be a useful tool in discouraging gray
market activities associated with drug products in short supply.
Further, HDMA supports a prohibition on wholesalers' purchasing
prescription drugs from pharmacies. When HDMA members sell any drugs
(regardless of their shortage status) to pharmacies or providers, it is
with the intention that the product will be dispensed or administered
to a patient in the usual course of pharmacy or medical practice.
______
Response to Written Question Submitted by Hon. John Boozman to
John M. Gray
Question. According to Dr. Coster's testimony, the NCPA encourages
pharmacists to conduct due diligence on potential wholesalers before
engaging in business transactions. Has HDMA developed industry
guidelines to assist primary distributors in vetting their customers?
Answer. In 2008, HDMA published the Industry Compliance Guidelines:
Reporting Suspicious Order and Preventing Diversion of Controlled
Substances (ICGs) (http://www.healthearedistribution.oregov_affairs/
pdf_controlled/20081113_ieg.pdf).
These guidelines emphasize ``Know Your Customer''--that is,
obtaining and reviewing thorough background information about a
distributor's prospective customers prior to doing business with them.
The ICGs support due diligence efforts to provide assurance that
pharmacy customers are appropriately licensed by state and Federal
authorities and that these entities intend to dispense drug products
for legally acceptable purposes.
The ICGs were specifically developed to help evaluate customer
orders for controlled substances and report those that are
``suspicious'' to the Drug Enforcement Administration (DEA) as required
under Federal law'.\1\ These guidelines are also intended to aid
distributors in evaluating and incorporating DEA interpretations of
distributors' responsibilities for responding to ever-evolving changes
in the diversion and illicit use of these much needed medications.
---------------------------------------------------------------------------
\1\ 21 C.F.R. Sec. 1301.74(b).
---------------------------------------------------------------------------
As important as it is for distributors to take responsibility to
prevent diversion of controlled substances, it is equally important for
all members of the supply chain (including manufacturers, dispensers,
and prescribers) to take steps to help prevent drug abuse as well as
preventing the diversion of product into the gray market.
______
Response to Written Questions Submitted by Hon. Roger F. Wicker to
Patricia Earl
Question 1. Can you give us your opinion on what measures could be
taken to tighten the supply chain or to prevent these types of
``questionable'' transactions from taking place?
Answer. Who is NCPD: Founded in 2006, the National Coalition of
Pharmaceutical Distributors (NCPD) has represented and promoted the
interests and priorities of small and independent pharmaceutical
distributors before legislatures, regulatory organizations, industry
partners and the community at large by advocating sound and responsible
public policy. In this manner, NCPD is committed to preserve the well-
being of its members; to ensure distribution system efficiency; and to
strengthen the pharmaceutical supply chain to the greatest degree
possible. Our members are regulated by the FDA, the DEA and every State
Board of Pharmacy in which we operate. Our companies produce pedigrees,
engage in current good manufacturing practices and provide heightened
product quality assurance. NCPD members operate inside ordinary, lawful
channels of distribution referred to as the authorized distribution
networks.
Question 2. How did the ``gray market'' root causes emerge?
Answer. Industry changes have placed medication in short supply.
The FDA website provides frequently asked questions and answers. One
noted question is this: What has caused drugs to be in short supply?''
The FDA answered the question as follows:
``The major reason for these shortages has been quality/
manufacturing issues. However there have been other reasons
such as production delays at the manufacturer and delays
companies have experienced receiving raw materials and
components from suppliers. Discontinuations are another factor
contributing to shortages. FDA can't require a firm to keep
making a drug it wants to discontinue. Sometimes these older
drugs are discontinued by companies in favor of newer, more
profitable drugs. With fewer firms making older sterile
injectable drugs, there are a limited number of production
lines that can make these drugs. The raw material suppliers the
firms use are also limited in the amount they can make due to
capacity issues at their facilities. This small number of
manufacturers and limited production capacity for older sterile
injectables, combined with the long lead times and complexity
of the manufacturing process for injectable drugs, results in
these drugs being vulnerable to shortage. When one company has
a problem or discontinues, it is difficult for the remaining
firms to increase production quickly and a shortage occurs.''
The Staff Report prepared for Chairman John D. Rockefeller, IV,
Chairman Tom Harkin and Representative Elijah E Cummings entitled ``An
Examination of Why Hospitals Are Forced to Pay Exorbitant Prices for
Prescription Drugs Facing Critical Shortages'' confirmed those root
causes from the Committee's extensive examination of the authorized
distribution networks.
Question 3. So what are the repercussions of drug shortages and
what measures are needed to prevent these ``questionable'' gray market
transactions?
Answer. Following shortages, supply and demand allowed for prices
to increase. The healthcare market is not immune to the basic
principles of supply and demand. Supply represents how much the market
can offer. The quantity supplied refers to the amount of a certain good
producers are willing to supply when receiving a certain price. The
correlation between price and how much of a good or service is supplied
to the market is known as the supply relationship. Price, therefore, is
a reflection of supply and demand. When there is a short supply of
drugs, as has been noted by the FDA, there is an opportunity for ``bad
actors'' to take advantage of the system. NCPD members do not engage in
pricing gouging behavior even though market conditions are ripe for it
because they know it is inherently bad business to gouge customers that
you want to come back and buy from you next week. Our members know you
can't stay in business long unless your prices are fair and competitive
and that is how NCPD members have done business with their long-
standing relationships. Further, a typical hospital pharmacy purchaser
has multiple back-up small distributors from which to choose. As such,
a secondary distributor will typically seek to offer the best price
available to ensure that its hospital customer will continue to utilize
its services in the future.
Congress is presently considering various legislative proposals
intended to enhance the Federal government's ability to track and trace
prescription drugs beginning with the manufacturer and continuing with
every subsequent transaction until the product is ultimately provided
to the patient or consumer NCPD supports Federal pedigree legislation
that includes unit level track and trace mandates. Since 2006, its
members are the only companies required to authenticate drugs and pass
pedigrees. We support the serialization of drugs for national track and
trace system both level and with 2D bar codes. Many of our members
serialize drugs today for tracking and billing purposes where
distribution in small unit of use packs. We support stringent Federal
licensure standards and penalties for those who fail to comply with
laws and standards. This concept--commonly referred to as
``pedigree''--is considered critical to ensuring that misbranded,
adulterated or counterfeit prescription products do not enter the
pharmaceutical supply chain. NCPD has actively supported congressional
efforts to reform Federal pedigree laws with more stringent and
effective requirements for supply chain participants.
NCPD does not support the ``shell pharmacies'' or illegal
wholesalers that divert drugs that would have gone directly from
manufacturer to independent distributors and been available for normal
distribution supply chain safety net. Plugging those holes with more
stringent Federal licensure standards and penalties for failure to
comply should be the most important measure to prevent these
questionable transactions.
Rather than focusing on how the ``bad apples'' received the
``leaked'' product, a better solution for all normal trading partners
in the ordinary, lawful channel of distribution would be to get product
to the registered, licensed, compliant, traditional safety-net
secondary distributors that have historically been able to redistribute
short supply product without extraordinary measures of multiple
distributors touching the products. Historically, secondary
distributors have stepped in to fill the gap that the normal trading
partners cannot because of their inability to handle the exceptions
created by the current fragile supply chain. The solution to keeping
the supply chain safe is to have all the ``ordinary, lawful channels of
distribution'' have equal access to their fair share of the available
inventory based on their customer's historical needs and not allow,
such unlawful, fake pharmacies and their unlawful business partners
sneak into the supply chain and siphon off the legitimate inventory to
gain illegal and unlawful profits at the expense of everyone else.
______
Response to Written Question Submitted by Hon. John Boozman to
Patricia Earl
Question. There are a number of price markups of critical,
lifesaving drugs that have been uncovered during the course of this
investigation. What would account for these significant markups? I
understand that small distributors have to pay higher prices than those
negotiated under GPO contracts, but will you explain how your members
price their drugs? Putting shipping costs aside, can you explain why
secondary wholesalers may charge more than $100 to pass along product
to another entity in the distribution chain?
Answer. Analyzing prices of the drugs that were examined in the
Staff Report, the first questions we have to ask is ``Is the comparison
apple to apples?'' On page 10 of the report, it was stated that five
prescription drugs were the focus of the examination. Those five drugs
were all compared using the manufacturer--GPO--wholesaler ``normal
contract pricing'' to establish the baseline for the mark-ups to the
hospitals. As you have requested, we will do our response based on the
industry standard, Wholesale Acquisition Cost, which is what a
distributor will pay for the drug in the ``authorized distribution
network.'' It appears in the report, that these examinations make the
assumption that all stakeholders track their purchases using the unique
identifier, NDC number that is the manufacturer identification code for
only one manufacturer's chemical entity for that drug. That NDC
tracking process must be used to trace a drug transaction from the
manufacturer to the normal trading partner and to the GPO hospital in
order to process the GPO contract, file chargebacks and pay
administration fees. Only the contract transactions must follow that
specific NDC track for that one product and since many of our members
are restricted from the GPO agreements, they are free to interchange
competing manufacturer products under one Generic Sequence Number
(GCN). The manufacturer wholesaler acquisition prices are published in
three national data warehouses, First Data Bank (FDB), RedBook and
MediSpan. These database files are used to set the WAC by NCPD members
and many times are used in lieu of a company's actual acquisition price
for single items.
As defined in FDB, the GCN Sequence number is a unique number
representing a generic formulation. It is specific to the generic
ingredients, route of administration, dosage form and strength.
According to FDB, the GCN Sequence Number is the same across
manufacturers and/or package sizes and therefore can be used to
interchange equivalent products. As a consequence of our distributor
members not being restrained in their inventory management systems to
tracking by specific NDC numbers, they may set up a shelf-keeping-unit
(SKU) system by GCN code in order to run all equivalent GCN products
under one unique item number for the purpose of financial accounting
and inventory valuation. They may create an SKU number that is
proprietary to their company, i.e., Paclitaxel 300mg and track that
item by their SKU number. That SKU record will establish their base
cost for purchasing and selling price algorithms based on the average
costing or FIFO or LIFO cost of the drug. In these situations, they may
have multiple manufacturers that make that same drug and sell in
different package sizes and they all sell at a different manufacturer
wholesaler acquisition price. Since our members do not have to follow
the GPO process of selling only one specific manufacturer's NDC number
at a pre-negotiated contract price, they can use the most recent
published market price established for that item. Here is an example of
that pricing comparison is the Paclitaxel 300mg 50ml Vial and its GCN
equivalent of 5ml Vials that is listed in the First Data Bank and the
Redbook data repositories.
As you can see, there are multiple manufacturer-specific
generically equivalent products that have published Wholesale
Acquisition Costs (WAC). If we look at four of these products to see
the variance in the WAC for the purpose of establishing a market in-
bound cost for a distributor to use as the competitive threshold to
price the product when it is acquired from another trading partner, we
will see that manufacturers have created wide variances in how they set
their company's WAC and that there are wide spreads in the dollars and
the percentage difference by manufacturer.
Drug Name: PACLITAXEL 300 MG/50 ML VIAL
----------------------------------------------------------------------------------------------------------------
Mark-Up %
Pkg Pkg Mark-Up $ over
NDC MFG Desc Size WAC Unit WAC Pkg over Lowest MFG
Lowest WAC WAC
----------------------------------------------------------------------------------------------------------------
61703-0342-50 Hospira Vial 50 $1.45 $72.53 N/A N/A
63323-0763-50 APP Vial 50 $2.59 $129.30 $56.77 78.27%
55390-0314-50 Bedford Vial 50 $7.00 $350.00 $277.47 382.56%
66758-0043-03 Sandoz Vial 50 $9.05 $452.55 $380.02 523.95%
----------------------------------------------------------------------------------------------------------------
Drug Name: PACLITAXEL 300 MG/5 ML VIAL
----------------------------------------------------------------------------------------------------------------
Mark-Up %
Pkg Pkg Mark-Up $ over
NDC MFG Desc Size WAC Unit WAC Pkg over Lowest MFG
Lowest WAC WAC
----------------------------------------------------------------------------------------------------------------
61703-0342-09 Hospira Vial 5 $1.61 $8.03 N/A N/A
63323-0763-05 APP Vial 5 $2.58 $12.93 $4.90 61.02%
55390-0314-05 Bedford Vial 5 $7.00 $35.00 $26.97 335.87%
66758-0043-01 Sandoz Vial 5 $9.05 $45.26 $37.23 463.64%
----------------------------------------------------------------------------------------------------------------
When our members purchase a Paclitaxel 300mg 50ml Vial or a 5ml
Vial, they put in the market price of the product based on what the
First Data Bank, Redbook or MediSpan has published as the WAC and if
they have purchased two of the four above and the SANDOZ product was
one of those two, their base cost for that product would be $452.00 not
the $129.30 that APP had priced their lowest contract negotiated
product. Therefore, when a hospital was quoted their price on the
Paclitaxel 300mg 50ml Vial as a non-primary customer of our member,
they would be priced on the highest WAC, unless they have a pre-
negotiated supply agreement with our member for sell price based on
actual cost.
This is a common practice in the ``secondary distributor'' industry
because a hospital has committed to buy 100 percent of their contract
items from the primary distributor -referred to in the report as
``normal trading partners.'' Since a secondary distributor does not
know what products, if any, or how much dollar volume that a hospital
will purchase from them, they normally sell at a cost plus based on
their market intelligence and that is based on the higher of published
WAC or their Commercial Price File established by their inventory and
pricing guidelines. Our members receive letters from their customers
like this one on a consistent basis:
``This is to say THANK YOU for all the vital service you have
provided to our company. You play a critical role in my daily
routine as I rely on your e-mails that contain drugs that I
currently need and you are quick to act on it. You are a life
saver as I have never been without in spite of the current drug
shortages. You have fair prices and I have referred your
company to many of my colleagues so they too can receive the
vital service you provide. Thank you again for the great
service and I will continue to look forward to doing business
with you as always!'' RN, CNOR Surgery Center Customer
There are additional factors that determine the selling price mark-
ups and they include higher costs of acquisition of these life-saving,
critical short supply drugs. Some of our members have long-standing
relationships with hospitals and clinics (like the one above) to be the
last resort in finding a drug that is critical to saving a patient's
life. In these extreme situations, our members use extraordinary
measures to find those drugs by contacting other trusted suppliers that
have assisted them in the past. These extreme situations can cost
hundreds of dollars in operational, administrative and labor costs.
Many times either experienced sales reps or customer service management
will spend hours in tracking down and locating the available product.
They negotiate the rapid response to expedite the drug to the hospital
or clinic. They incur special handling costs, packaging and labeling
materials for hazardous (oncology), breakables (injectables and
liquids) and sensitive transporting (OMD guidelines) of the product to
a viable shipper. There are incremental costs for all these activities
that must go into the cost of processing the drug.
Lastly, our members are required by PDMA and state statutes to
provide a readable pedigree document in these situations that may
involve tracking transactions from the manufacturer to the dispensing
customer. Pedigree documentation not only involves labor costs but also
our members are required to pay a fee to the ``normal trading
partners'' in order to get access to that pedigree. The cost to get
pedigree documentation from the primary wholesalers is a fixed fee of
$5,000 per month or $60,000 per year and that is for one pedigree or
for many per month. Internal labor costs for pedigree administration
carries an average cost of $60,000 or more to authenticate and pass
pedigree on these items. Many of our members have invested in software
systems that have a license fee that has to be paid for the service. If
our members passed on the actual cost of that pedigree service on these
transactions, it could easily add at least $100 per item just for the
authentication documents. Because this is an arduous, labor intensive
process, in many instances, our members lose money on these emergency,
hard-to-find situations in order to keep a good customer and to save a
patient's life.
As benchmark tools for our industry, we have prepared some
financial analysis to show the economic impact of the small
distributions and how it relates to the normal trading partners.
Prescription drugs move though a very complex distribution model that
has many players. These multiple providers each play an important role
in getting the right drugs, to the right patient, at the right time.
However, because of the sheer volume of over $307 Billion, according to
the Center for Healthcare Supply Chain Research, 2011-2012 HDMA
Factbook, each traditional distributor placed more than 385,000 orders
for healthcare products in 2012 from an average of 1,100 manufacturers
delivering drugs daily to over 200,000 providers across the U.S. While
this provider network is vast, distributors were able to consistently
provide services levels exceeding 95 percent while operating
efficiently and keeping the cost of distributor low. These large,
national distributors are able to offer economies of scale by
aggregating volumes and inventory for both manufacturers and providers.
This systems works for drug distribution in a fast and efficient manner
at least 95 percent of the time, but for the balance of that 5 percent,
a back-up, secondary distributor is called on to provide the same level
of service that these primary companies provide.
Table 1.--Flow of U.S. Prescription Sales ($B) and Contribution by Channel (%) in 2010.
----------------------------------------------------------------------------------------------------------------
Total U.S. Pharmaceutical Market Contribution by Channel ($) Contribution by Channel (%)
----------------------------------------------------------------------------------------------------------------
Manufacturers $307 B 100%
----------------------------------------------------------------------------------------------------------------
Traditional and Specialty Distributors $268 B 87%
----------------------------------------------------------------------------------------------------------------
Direct to Chains, Mass Merchandisers $39 B 13%
and Food Stores
----------------------------------------------------------------------------------------------------------------
Total Generic and Brand Prescription
Drugs Sold through Traditional
Wholesalers to Following Providers:
----------------------------------------------------------------------------------------------------------------
Chain Warehouses purchased from $51 B 21%
Wholesalers
----------------------------------------------------------------------------------------------------------------
Chain Pharmacies $59 B 24%
----------------------------------------------------------------------------------------------------------------
Hospitals, HMO's, Clinics and Nursing $61 B 25%
Homes
----------------------------------------------------------------------------------------------------------------
Independent Community Pharmacies $38 B 16%
----------------------------------------------------------------------------------------------------------------
Mail Order Pharmacies $33 B 13%
----------------------------------------------------------------------------------------------------------------
Others (Distributors) $2 B 1%
----------------------------------------------------------------------------------------------------------------
1. Total value of goods flowing through traditional distributors, as per IMS National Sales Perspectives. 2011-
12 HDMA Factbook (Tables 1 and 3 and 109.)
2. Sources: Center for Healthcare Supply Chain Research, 2012-12 HDMA Factbook, IMS Health, Inc., Booz & Company
Analysis, The Role of Distributors in the U.S. Healthcare Industry
NCPD members, small and independent distributors, have estimated
that this market segment does less than one percent of the total goods
flowing through this supply chain or approximately $2 Billion annually.
It is often hard to understand where secondary distributors fit into
the flow of prescription drugs in this supply chain and the role that
NCPD members play every day in distributing prescription drugs to their
small healthcare customers and as a second-line supplier to the largest
providers listed in Table 1. Much activity has driven these secondary
relationships that have been the realities for the pharmaceutical
supply chain during this period of increasing short-supply of critical
drugs. One of the practical circumstances that have fed the expansion
of these relationships in the secondary distribution industry is the
fact that this industry of small suppliers primarily serves as a
safety-net or back-up supplier to all hospitals, both large and small
in the U.S. Add to that, the fact that this industry is the primary
supplier of all drugs to smaller medical facilities, doctor's offices
and pharmacies. Despite their crucial role in getting life-saving drugs
to critically ill patients, they are also on an individual basis, one
of the smallest customers of the ``traditional'' wholesalers that do
billions of dollars of sales to these large hospitals and are required
to pay the highest acquisition cost offered in the U.S. supply chain.
As a practical matter, every sector of the healthcare industry depends
critically upon secondary distributors due to the fact that they act as
the safety-net in times of national shortages to secure and distribute
scarce drugs in short supply.
Many manufacturers, hospitals, health care centers and pharmacies
in rural locations and those too small to meet the minimums of large
distributors rely on secondary distributors to fill critical needs for
life-saving medicine. What's more, every sector of the health care
industry depends critically upon secondary distributors because they
act as the safety-net in times of national shortages to secure and
distribute scarce drugs in short supply. While they are crucial in
getting life-saving drugs to critically ill patients, small
distributors are on an individual basis, one of the smallest customers
of ``traditional'' wholesalers. These same wholesalers do billions of
dollars of sales to large hospitals, but will not supply smaller
clinics and facilities. In addition, small distributors are required to
pay the highest acquisition cost offered in the U.S. supply chain,
putting them at a competitive disadvantage.
In spite of their proven value, small, secondary distributors have
come under fire recently because few people really understand them or
have taken the time to see where they fit in the supply chain. The
arguments have ranged from accusations of price gouging to shifting
product between multiple companies as a means to increase profits to
working with fake pharmacies. These allegations are not grounded in
reality. What's more, these characterizations fail to reflect one basic
fact of this market: There are thousands of small distributors that
work with hospitals across the Nation. To remain competitive, they must
comply with all laws, follow pedigree and handling requirements to the
letter and still offer an economical price point that allows for only a
modest profit margin. If they do anything else, they run the risk of
permanently losing a customer. That's because hospitals comparison
shop. If they don't like a price offered by one company, they will call
another. This is a reality that every small distributor out there is
well aware of. And they know that if they were to engage in the types
of activities you accuse them of, they would not be in business very
long. As you learn more about this industry you will see that the
activities you are trying to paint as nefarious actually have
legitimate and reasonable explanations:
So-Called ``Price Gouging'' Or Mark-Ups
Drug prices are established on an intricate system that is far more
complex than most free markets. Manufacturers set a number of price
points for a product, including the Wholesale Acquisition Cost--or
WAC--which is the lowest price at which a wholesaler or distributor can
buy the product. As with many markets, hospitals and physicians can
negotiate the price they are willing to pay for a drug. The more
product a hospital or doctor expects to use, the more power they have
in securing to negotiate a lower price. Neither large nor small
distributors have the ability to influence drug price negotiations. To
secure the best prices for patients, most hospitals belong to one of
the major group purchasing organizations--GPO's, which leverage the
strength of the collective buying power of their members when
negotiating contracts with manufacturers. GPOs require hospitals to
adhere to specific rules, such as select a primary wholesaler--and if
their primary does not have a drug, they are prohibited from using
another primary. Instead, they must contact their second-line--or
``secondary--distributor to supply their needs. Secondary distributors
are able to work with all of the primary wholesalers, plus their
network of small distributors to locate and secure drugs, even those
that are in short-supply. Because small distributors are not restricted
by GPO contracts, they are able to use avenues that hospitals cannot,
such as large distributors that compete with the hospital's primary
wholesalers.
Small distributor companies measure key profitability by comparing
income and expenses, which are significantly higher than the large
traditional wholesalers because they do not have the depth, breadth and
economies of scale that the larger companies can spread expenses across
billions of dollars in pharmaceutical revenues. In fact, the small and
independent distributors are very similar in size and scope to the
small, independent, community pharmacies that are members of the
National Community Pharmacy Association. We have used the data from the
HDMA Factbook and the 2011 NCPA Digest to compare and contrast the
revenues, gross profit margins, operating expenses and net operating
incomes of these three industries.
Table 2.--Industry vs. Small Distributor. Percentage of Revenues, Expenses, Gross Margins and Net Margins
----------------------------------------------------------------------------------------------------------------
NCPA Industry NCPD Small
Proforma Categories HDMA industry Avg.-- Avg. % Avg.--Small Avg. % Distributors Avg. %
Wholesalers \1\ Pharmacy \2\ Avg.
----------------------------------------------------------------------------------------------------------------
Revenues
----------------------------------------------------------------------------------------------------------------
Rx Sales Per Location $2,615,865,364 100.00% $3,698,748 100.00% $7,500,000 100.00%
----------------------------------------------------------------------------------------------------------------
Cost of Goods Sold $2,528,757,047 96.67% $2,812,250 76.00% $5,625,000 75.00%
----------------------------------------------------------------------------------------------------------------
Gross Margin $ Sales After $87,108,317 3.33% $886,498 24.00% $1,875,000 25.00%
All Discounts
----------------------------------------------------------------------------------------------------------------
Gross Margin % After All 3.33% 23.97% 25.00%
Discounts
----------------------------------------------------------------------------------------------------------------
Expenses
----------------------------------------------------------------------------------------------------------------
Payroll Expense $15,845,003 18.19% $110,812 12.50% $215,625 11.50%
----------------------------------------------------------------------------------------------------------------
Payroll Taxes, Workers $3,188,164 3.66% $17,730 2.00% $37,500 2.00%
Comp, Empl. Benefits
----------------------------------------------------------------------------------------------------------------
Total Payroll Expenses $19,033,167 21.85% $128,542 14.50% $253,125 13.50%
----------------------------------------------------------------------------------------------------------------
Administrative Expense $409,409 0.47% $0 0.00% $0 0.00%
----------------------------------------------------------------------------------------------------------------
Sales and Marketing Expense $226,482 0.26% $4,432 0.50% $8,438 0.45%
----------------------------------------------------------------------------------------------------------------
Buying Expense $17,422 0.02% $0 0.00% $0 0.00%
----------------------------------------------------------------------------------------------------------------
Insurance $0 0.00% $2,659 0.30% $9,375 0.50%
----------------------------------------------------------------------------------------------------------------
Supplies, Storage and Ship $0 0.00% $4,432 0.50% $12,188 0.65%
Containers, Packing,
Labels
----------------------------------------------------------------------------------------------------------------
Postage $0 0.00% $886 0.10% $3,563 0.19%
----------------------------------------------------------------------------------------------------------------
Shipping and Delivery $261,325 0.30% $3,546 0.40% $12,188 0.65%
----------------------------------------------------------------------------------------------------------------
Information and Technology $182,927 0.21% $3,546 0.40% $5,625 0.30%
----------------------------------------------------------------------------------------------------------------
Rent $130,662 0.15% $10,638 1.20% $71,250 0.95%
----------------------------------------------------------------------------------------------------------------
Utilities amd Telephone $0 0.00% $3,546 0.40% $9,375 0.50%
----------------------------------------------------------------------------------------------------------------
Contract and Chargeback $17,422 0.02% $0 0.00% $0 0.00%
----------------------------------------------------------------------------------------------------------------
Pedigree Authentication $0 0.00% $0 0.00% $42,188 2.25%
----------------------------------------------------------------------------------------------------------------
Licensure, Bonds and $0 0.00% $0 0.00% $15,000 0.80%
Compliance
----------------------------------------------------------------------------------------------------------------
Other Operating Expense $0 0.00% $23,935 2.70% $28,125 1.50%
----------------------------------------------------------------------------------------------------------------
Total Operating Expense $31,247,820 1.19% $776,737 21.00% $1,668,000 22.24%
(includes some lines not
broken out separately
above)
----------------------------------------------------------------------------------------------------------------
Net Operating Income \3\ $55,860,497 2.13% $110,962 3.00% $207,000 2.76%
----------------------------------------------------------------------------------------------------------------
\1\ Center for Healthcare Supply Chain Research 2011-2012 HDMA Factbook (Pg. 19-24, 51).
\2\ National Community Pharmacy Association 2011 NCPA Digest Sponsored by Cardinal Health.
\3\ Center for Healthcare Supply chain Research 2011-2012 HDMA Factbook (Table 20).
Small distributors are very competitive with their pricing for
products and services particularly geographically--close proximity to
their distribution centers. For extreme situations where FedEx Air
overnight deliver is provided, they face the possibility of the
shipping, handling, packaging and related delivery costs to be more
expensive than the actual drug itself. Many members have reported that
the large distributors have discounts of 80 percent or more off
delivery schedules. Patient safety is their first concern when
requested to ship an emergency drug. Consistent temperature, humidity
and quality control is vital for a critical, life-saving drug to be
delivered to provide immediate benefits to a patient. They have
experienced high quality warehouse advocates that provide excellent
quality control when a hospital expects reliable, safe and secure drugs
to be delivered just-in-time to save a patient. This manual processing
from the receipt to the delivery of the emergency drug falls outside
the normal cost of the division.
Small distributors have been inaccurately portrayed when it comes
to the price of products. As I noted before, secondary distributors pay
the highest prices for drugs in the entire U.S. supply chain--sometimes
as much as 91 percent more than one of the traditional wholesalers
would ultimately pay for the same product. What's more, many people
will look at a pedigree and compare the cost a distributor paid for a
drug to the price he sold it for and assume the entire amount was
pocketed as profit. That's the furthest thing from the truth. The
reality is that the pedigree does not show how much was spent on things
like shipping, which can be much more expensive than the drug itself if
the hospital needs it delivered overnight.
Every small distributor knows that the hospitals they work with are
going to comparison shop. If a hospital doesn't like the price that one
secondary distributor quotes to them, they will call another. Or, if
they need it right away and can't risk losing it, they will buy it, but
will find another secondary distributor to work with moving forward.
They are free to move their account elsewhere, so secondary
distributors have to remain competitive and will often sacrifice their
own profit margins to make sure they keep a customer.
Question 1a. How does our pricing work and does it contributes to
the ``questionable'' gray market activities?
Answer. Pharmaceutical pricing is complex and difficult to
understand; because of this the investigative reports and ``gray
market'' reports have unfairly and incorrectly discounted the value of
small pharmaceutical distributors that operate inside of authorized
distribution networks. Let's talk about the layers of this business and
the service each layer provides.
(1) Drug manufacturers discover patent, study, create, market and
sell various drugs. Manufacturers build a service fee into
their product price to recoup their cost.
(2) Authorized Distributors of Record's (ADRs) negotiate with drug
manufacturers in order to buy large quantities of drugs at
extremely low prices. ADRs buy from multiple manufacturers.
When a hospital wants to buy certain drugs and does not want to
be constrained by manufacturer product lines, they buy from
ADRs. The best ADRs have strong negotiating power allowing them
to offer low prices and multiple manufacturer product
portfolios to customers. ADRs build a service fee into their
price to account for their negotiation and marketing work.
(3) Pharmaceutical Distributors such as our NCPD members buy bulk
product from manufacturers and ADRs. Some of us just sell the
product in its original container. Others re-package and/or re-
label product in accordance with current good manufacturing
procedures and are regulated by the FDA and DEA. When product
is repackaged from bulk bottles and placed into individual
count bottles, many FDA quality regulations are mandatory.
These quality regulations are not applicable to pharmacies,
such as those referred to in the report entitled ``Shining
Light on the Gray Market'' prepared and presented July 25, 2012
at the Senate Committee on Commerce, Science, and
Transportation. Also, our companies service locations with
little to no buying power. Many rural area clinics and doctor's
offices, for example, are precluded from buying manufacturer
direct or from an ADR because they do not purchase sufficient
quantities of product. Our companies cater to these clients and
ensure that they receive quality, safe products; we are an
integral part of the supply chain. Pharmaceutical Distributors
build a service fee into their price to account for their
operational, administrative and labor costs for sourcing,
purchasing, regulatory compliance to pedigree, storage,
handling, special packaging, labeling, quality checking,
marketing and distribution services. Higher costs are incurred
for special situations that involve life-saving, critical,
short supply drugs.
(4) The service provided by each layer is necessary and an increased
price is a necessary corollary arising from the layers; each
layer must be compensated for their service.
(5) So why are the reports saying that pharmaceutical distributors
are price gougers? Despite the fact that pharmaceutical
distributors provide quality, necessary services, the media has
skewed the world's view of pharmaceutical distributors. For
instance, Premier Healthcare Alliance report published in 2011
incorrectly calculated the percent markup charged by small
distributors overstating the high-end by 3,804 percentage
points or 521 percent. ``Many people mistakenly believe that
distributors that deal in medicines have greater negotiating
power than they really do. This isn't like a car dealership,
where people generally don't have to pay MSRP because of dealer
incentives and rebates. In health care, small distributors must
pay what's called a Wholesale Acquisition Cost that is many
times greater than what the GPOs have negotiated. When you
compare the cost a small distributor must pay for a medicine to
the final price it charges a hospital, you find that the gross
profit margin is often in a very reasonable range. It is not
the 1,400 percent markup you find when you compare to GPO
numbers--a practice that is misleading and doesn't represent
the complexities of the health care market. GPOs have created a
market that is anticompetitive and exclusionary, which actually
leads to shortages and higher prices on alternative products in
times of market disruptions. The fact that the numbers in the
original report were so drastically miscalculated indicates
that it is another unjustified attack on the business integrity
of small distributors. It was disingenuous for Premier
Purchasing Partners who created and understand the system
better than anyone, to point their fingers at small
distributors, which must pay significantly higher prices for
the same products to serve health care providers.
(6) Stories about a few ``bad actors, fake pharmacies and fake
distributors'' have tainted the gray market debate. During 2005
and 2006, rogue companies in Florida took advantage of a flawed
regulatory system and introduced counterfeits and unsafe
practices into the U.S. pharmaceutical supply chain. NCPD was
founded to represent the wellbeing and interests of reputable
small distributors. We worked to help enact Federal
legislations to revamp the Nation's chain of custody laws for
drugs. A new system was put in place to make sure that our
supply chain was safe from the criminals that could open a
storefront, buy drugs off the street and resell them without
any regard for patient safety or regulations. In order to fix
the system, we need to look at all the links in the system, the
manufacturers who bid for contracts and cannot supply, the
traditional wholesalers who have a fragile supply chain with
just-in-time inventory and no safety stock, and especially the
group purchasing organizations that are protected by anti-
kickback and safe harbor exemptions which create a smokescreen
intended to prevent simple comparisons of GPO vs. non-GPO
prices. As a knee jerk reaction to fix that 2005-2006 crisis
and to make sure that we put some standards into place, we saw
the manufacturers, the traditional wholesalers and the group
purchasing organizations tighten their relationships.
(7) The FDA instituted the pedigree requirements that any
distributor that did not buy from the manufacturer direct would
have to create a pedigree record and authenticate that chain of
custody all the way back to the manufacturer. The manufacturers
then exempted Authorized Distributors of Record from the
pedigree statutes. Manufacturers subjectively terminated all
secondary distributors' direct accounts unless the distributor
was a member of the legacy association, HDMA, representing
large, traditional, full-line distributor and manufacturers.
HDMA, at that time, decided to pare down their membership to
only the top 20-30 distributors that could meet their stringent
financial requirements. The group purchasing organizations
pared down their list of authorized distributors to the ones
with direct contracts with manufacturers. The traditional
wholesaler's, who had done business with the smaller
distributors over the last 20 some years, were given fee for
services and inventory management agreements from the
manufacturers and from their GPO partners. All three of the
large wholesalers then blocked sales to the secondary
distributors because they would lose their rights to purchase
hospitals products and to sell into the large GPO members
hospitals. Small independent distributors were essentially
denied access, restricted, blocked and tackled from every
direction, and the only source of product suppliers that they
could buy from were small manufacturers that could not play in
the GPO contracts, small generic manufacturers that could not
win the large GPO contracts, (note that many of those suppliers
went out of business or picked up new products that did not
compete with the GPO manufacturers) thus leaving no safety net
suppliers for products in the supply chain. The secondary
distributors were on an island and their only source of support
and trading partners were each other. They have seen millions
of dollars evaporate off their shelves and balance sheets.
Secondary distributors, by comparison, are often family-owned
businesses. The companies try to obtain their products from the
manufacturer, where permitted, and use a traditional wholesaler
that is an ADR and from other trusted, well-known distributors,
just like them. Secondary distributors, so called because they
fill a need when a hospital's primary wholesaler cannot fill
it, are a beneficial, integrated and official part of the
authorized distribution network. They are required to pay much
higher prices than traditional distributors, are excluded from
GPO contracts, and restricted from filing for chargeback
differentials with the manufacturer when a hospital has a GPO
contract and buys off-contract with a secondary distributor.
Their customers understand they will not get the GPO pricing,
but know the service may help, or even save a patient. They are
the safety-net in the market, ensuring quality medications
reach a patient in the safest, fastest and most cost-effective
way possible.
Question 2. You state in your written testimony that NCPD members
report fake pharmacies they uncover. How often do you come across these
fake or ``shell'' pharmacies? Is action taken to shut them down when
reported?
Answer. As we stated earlier in this response, NCPD represents and
promotes the interests and priorities of small and independent
pharmaceutical distributors before legislatures, regulatory
organizations, industry partners and the community at large by
advocating sound and responsible public policy. In this manner, NCPD is
committed to preserve the well-being of its members; to ensure
distribution system efficiency; and to strengthen the pharmaceutical
supply chain to the greatest degree possible.
NCPD was founded in 2006 as a voluntary, horizontal, member-
directed association that succeeds in differentiating the participants
by a common set of guiding principals for self-governance. New members
are accepted after being vetted by a membership steering committee. The
criteria for vetting a new member may include, but is not be limited
to:
Do they meet all industry regulatory standards for licensing
and business practices?
Do they adhere to provisions of Prescription Drug Marketing
Act for handling, packaging, storage, and shipping of drugs?
Are they in full compliance with all governing federal,
state and local laws?
Provides pedigree and authenticates its inventory according
to state statutes.
Approved through VAWD certification, when applicable to
business model.
Follows cGMP guidelines from FDA in packaging, mail order
and covered facilities.
Employs mutual-nondisclosure agreements to meet anti-trust
thresholds.
Does business only with other licensed distributors or that
meet their stringent customer inspection and monitoring
policies.
Have Standard Operating Procedures for diversion control and
suspicious ordering reporting.
Have rigorous governance policies in place to ensure
internal and external practices for fair treatment of customers
and employees.
Legal aspects of the association will be carefully monitored
by Board. When pricing and group purchasing are discussed, we
abide by the provisions of Robinson-Patman Act and other anti-
trust regulations pertaining to competitive activities.
Member companies are independent of other member companies
in all other respects--and transactions are strictly
confidential.
All member's business information, volumes, pricing, and
supplier information are kept confidential.
Members must approve release of any information.
NCPD recognizes that most aspects of the supplier/member
relationship remain under the individual member's full control.
In addition to the criteria above that we may use to evaluate and
approve new members, each of our members has their own due diligence
process when they accept new customers. That process follows certain
specific PDMA, DEA and State Board of Pharmacy licensing criteria
whereby the customer:
If a Retail Pharmacy, Physician Office or Healthcare Clinic,
it meets all DEA and state licensing and regulatory practices.
Requires a physical inspection of pharmacy sites.
If a Distributor, adheres to provisions of Prescription Drug
Marketing Act for packaging, storage, and shipping and other
applicable requirements.
Is in full compliance with all governing federal, state and
local laws.
Provides pedigree and authenticates its inventory according
to state statutes.
Approved through VAWD certification, when applicable to
business model.
Follows cGMP guidelines from FDA in packaging, mail order
and covered facilities.
As we said above, NCPD is a voluntary, member-directed association
and is not a regulatory enforcement agency. However, NCPD does provide
our members with the most recent Federal, State and local legislative
and regulatory updates to keep them up-to-date on the best practices of
the industry. We have Annual Meetings to educate members on current
trends and regulatory practices. When we receive notices of a
counterfeit, adulteration, fake pharmacy or any unlawful or illegal
activity that affects our membership, we have an immediate notification
process in place to make sure the information gets to the NCPD members
and, if applicable to the regulatory agencies involved.