[Congressional Record (Bound Edition), Volume 146 (2000), Part 14]
[Extensions of Remarks]
[Pages 20114-20116]
[From the U.S. Government Publishing Office, www.gpo.gov]



 DRUG COMPANY ABUSE OF AVERAGE WHOLESALE PRICE SYSTEM: PUBLIC DESERVES 
                     RETURN OF BILLIONS OF DOLLARS

                                 ______
                                 

                        HON. FORTNEY PETE STARK

                             of california

                    in the house of representatives

                      Thursday, September 28, 2000

  Mr. STARK. Mr. Speaker, I have today sent the following letter to the 
Pharmaceutical Research Manufacturers of America (PhRMA), the chief 
trade association representing U.S. pharmaceutical companies.
  The letter details what I believe to be the bilking of the Medicare 
system by a number of large, powerful drug companies. The evidence I 
have been provided shows that certain drug companies are making 
enormous profits available to many doctors on the ``spread'' between 
what Medicare and other payers reimburse for a drug (the average 
wholesale price), and what that drug is really available for.
  These companies have increased their sales by abusing the public 
trust and exploiting America's seniors and disabled. It is my firm 
belief that these practices must stop and that these companies must 
return the money to the public that is owed because of their abusive 
practices.
  The letter follows:

                                      Committee on Ways and Means,


                                       Subcommittee on Health,

                               Washington, DC, September 28, 2000.
     Alan F. Holmer,
     President, Pharmaceutical Research and Manufacturers of 
         America, Washington, DC.
       Dear Mr. Holmer. I am writing to share with you evidence 
     and concerns I have, that certain PhRMA members, are 
     employing false and fraudulent marketing schemes and other 
     deceptive business practices in order to manipulate and 
     inflate the prices of their drugs. Drug company deception 
     costs federal and state governments, private insurers and 
     others billions of dollars per year in excessive drug costs. 
     This corruptive scheme is perverting the financial integrity 
     of the Medicare program and harming beneficiaries who are 
     required to pay 20% of Medicare's current limited drug 
     benefit. Furthermore, these deceptive, unlawful practices 
     have a devastating financial impact upon the states' Medicaid 
     Program.
       As you may be aware, some state Medicaid administrators 
     have been placed in the unenviable position of having to 
     ration needed health care services to the poor due to a lack 
     of funds. For example, major newspapers such as the 
     Washington Post reported that the Administration abandoned 
     its effort to extend Medicaid coverage for AIDS therapies due 
     to the high cost of drugs needed to treat HIV patients 
     (December 5, 1997).
       The national media continues to report on the staggering 
     cost of prescription drugs in the United States. By way of 
     example, the shared Federal/State cost of providing a 
     California Medicaid prescription drug benefit alone is now 
     approximately $2.4 billion dollars a year and that cost has 
     risen by approximately 100% in the past four years. Through a 
     Congressional subpoena, I have recently obtained internal 
     drug company documents, together with documents from an 
     industry insider, that explicitly expose the deliberate fraud 
     that some of your PhRMA members are perpetrating on our 
     nation's health care delivery system.
       The evidence I have obtained indicates that at least some 
     of your members have knowingly and deliberately falsely 
     inflated their representations of the average wholesale price 
     (``AWP''), wholesaler acquisition cost (``WAC'') and direct 
     price (``DP'') which are utilized by the Medicare and 
     Medicaid programs in establishing drug reimbursements to 
     providers. The evidence clearly establishes and exposes the 
     drug manufacturers themselves that were the direct and 
     sometimes indirect sources of the fraudulent 
     misrepresentation of prices. Moreover, this unscrupulous 
     ``cartel'' of companies has gone to extreme lengths to 
     ``mask'' their drugs' true prices and their fraudulent 
     conduct from federal and state authorities. I have learned 
     that the difference between the falsely inflated 
     representations of AWP and WAC verses the true prices 
     providers are paying is regularly referred to in your 
     industry as ``the spread''. The fraudulently manipulated 
     discrepancies are staggering--for example in 1997 Pharmacia & 
     Upjohn reported an AWP for its chemotherapy drug Vincasar of 
     $741.50, when in truth, its list price was $593.20 (Exhibit 
     #1 PHARMACIA 000867).
       Exhibit #2 is a chart provided by an industry insider that 
     lists a number of Medicare covered drugs where the Medicare 
     beneficiaries' 20% co-payment exceeds the entire costs of the 
     drug. These rogue drug companies then market their drugs to 
     physicians and pharmacies based on this windfall profit which 
     in reality is nothing more than a government funded kick-back 
     to the provider.
       The evidence is overwhelming that this ``spread'' did not 
     occur accidentally but is the product of conscious and fully 
     informed business decisions by certain PhRMA members. The 
     following examples excerpted from the subpoenaed documents 
     clearly indicate the companies' fraudulent efforts to 
     manipulate Medicare and Medicaid reimbursements as contained 
     in Composite Exhibit #3.
       Pharmacia: ``Some of the drugs on the multi-source list 
     offer you savings of over 75% below list price of the drug. 
     For a drug like Adriamycin, the reduced pricing offers AOR a 
     reimbursement of over $8,000,000 profit when reimbursed at 
     AWP. The spread from acquisition cost to reimbursement on the 
     multisource products offered on the contract give AOR a wide 
     margin for profit.'' (000025)
       Bayer: ``Chris, if Baxter has increased their AWP then we 
     must do the same. Many of the Homecare companies are paid 
     based on a discount from AWP. If we are lowed [sic] than 
     Baxter then the return will be lower to the HHC. It is a very 
     simple process to increase our AWP, and can be done 
     overnight''. (BAY003101)
       Alpha: ``Pharmacy billing and management services can bill 
     for product based on the published AWP and thereby net 
     incremental margin with Venoglobulin S usage. Margin for the 
     pharmacy is the difference between AWP and acquisition cost. 
     ($76.15/g-$30.00/g=$46.15/g margin).'' (AA000529)
       Fujisawa: ``Many thanks to Rick and Bruce for adjusting the 
     AWP on the five gram Vanco. This should lead to more business 
     . . . I would have liked to see us match Abbott's AWP for our 
     complete Vanco, and Cefazolin line. I will settle for the 
     five gram at $1 below Abbott but that means that we will 
     still have to compete at the other end of the equation. For 
     example, if Abbott's AWP is $163 and their contract is $30 
     and if our AWP is 162 we will have to be at least $29 to have 
     the same spread. Follow?'' (F13206 & F13207)
       Baxter: ``Increasing AWP's was a large part of our 
     negotiations with the large homecare companies'' (0003153)
       And the implications of the fraudulent manipulation of 
     prices were clearly recognized by your member manufacturers 
     who participated in this false pricing scheme. A series of 
     memos from a pricing committee concerned with Glaxo's 
     antiemetic, Zofran, show the committee's development of an 
     enhanced spread for Zofran through increases in AWP and 
     decreases in net purchase price (Exhibit #4).
       Glaxo: ``If Glaxo chooses to increase the NWP and AWP for 
     Zofran in order to increase the amount of Medicaid 
     reimbursement for clinical oncology practices, we must 
     prepare for the potential of a negative reaction from a 
     number of quarters . . . If we choose to explain the price 
     increase by explaining the pricing strategy, which we have 
     not done before, then we risk further charges that we are 
     cost shifting to government in an attempt to retain market 
     share. Congress has paid a good deal of attention to 
     pharmaceutical industry pricing practices and is likely to 
     continue doing so in the next session. How do we explain to 
     Congress an 8% increase in the NWP between January and 
     November of 1994, if this policy is implemented this year? 
     How do we explain a single 9% increase in the AWP? What 
     arguments can we make to explain to congressional watchdogs 
     that we are cost-shifting at the expense of government? How 
     will this new pricing structure compare with costs in other 
     countries? Is the [pharmaceutical] industry helping to 
     moderate healthcare costs when it implements policies that 
     increase the cost of pharmaceuticals to government?'' (GWIG/
     7:00014 & 00015)
       Internal documents from a contractor of SmithKline, 
     (Glaxo's competitor) likewise reveal its recognition of the 
     inflationary effect on government reimbursement of these 
     pricing practices and the potential for an adverse counter-
     offensive (Exhibit #5):
       ``. . . highlighting the difference between the actual 
     acquisition cost and the published AWP may not only increase 
     attention to Glaxo's pricing practices, but may provide the 
     impetus for HCFA to implement a system that could impact not 
     only reimbursement of anti-emetics, but all pharmaceutical 
     and biological products. The ramifications could extend well 
     past Medicare to include Medicaid programs . . .'' (SB01915)
       Perhaps the most striking example of the manufacturers' 
     recognition of the spread and the companies' fraudulent abuse 
     it represents is found in a revealing exchange of

[[Page 20115]]

     correspondence between corporate counsel from Glaxo and 
     SmithKline Beecham in which each accuse the other's company 
     of Medicaid fraud and abuse (Exhibit #6).
       Glaxo: ``. . . In addition, a significant number of these 
     pieces (see Exhibits F-J) contain direct statements or make 
     references as to how institutions can increase their 
     ``profits'' from Medicare through the use of Kytril. Some 
     even go so far as to recommend that the medical professional 
     use one vial of Kytril for two patients (see Exhibit F) but 
     charge Medicaid for three vials. This raises significant 
     fraud and abuse issues which I am sure you will want to 
     investigate.'' (SB04075)
       And SmithKline's response was (Exhibit #7):
       SmithKline: ``In an apparent effort to increase 
     reimbursement to physicians and clinics, effective 1/10/95, 
     Glaxo increased AWP for Zofran by 8.5%, while simultaneously 
     fully discounting this increase to physicians. The latter was 
     accomplished by a 14% rebate . . . The net effect of these 
     adjustments is to increase the amount of reimbursement 
     available to physicians from Medicare and other third party 
     payors whose reimbursement is based on AWP. Since the net 
     price paid to Glaxo for the non-hospital sales of the Zofran 
     multi-dose vial is actually lower, it does not appear that 
     the increase in AWP was designed to increase revenue per unit 
     to Glaxo. Absent any other tenable explanation, this 
     adjustment appears to reflect an intent to induce physicians 
     to purchase Zofran based on the opportunity to receive 
     increased reimbursement from Medicare and other third party 
     payors.'' (SB044277) (In fact, we have had numerous verbal 
     reports from the field concerning Glaxo representatives who 
     are now selling Zofran based on the opportunity for 
     physicians to receive a higher reimbursement from Medicare 
     and other third-party payors while the cost to the physician 
     of Zofran has not changed.)
       Some drug companies have also utilized a large array of 
     other impermissible inducements to stimulate sales of their 
     drugs. These inducements, including bogus ``educational 
     grants'', volume discounts, rebates or free goods, were 
     designed to result in a lower net cost to the purchaser while 
     concealing the actual cost price beneath a high invoice 
     price. A product invoiced at $100 for ten units of a drug 
     item might really only cost the purchaser half that amount. 
     Given, for instance, a subsequent shipment of an additional 
     ten units at no charge, or a ``grant'', ``rebate'' or 
     ``credit memo'' in the amount of $50, the transaction would 
     truly cost a net of only $5.00 per unit. Through all these 
     ``off-invoice'' means, drug purchasers were provided the 
     substantial discounts that induced their patronage while 
     maintaining the fiction of a higher invoice price--the price 
     that corresponded to reported AWP's and inflated 
     reimbursement from the government composite Exhibit #8.
       Bayer: ``I have been told that our present Kogennate price, 
     $.66, is the highest price that Quantum is paying for 
     recombinant factor VIII. In order to sell the additional 
     12mm/u we will need a lower price. I suggest a price of $.60 
     to $.62 to secure this volume. From Quantum's stand point, a 
     price off invoice, is the most desirable. We could calculate 
     our offer in the form of a marketing grant, a special 
     educational grant, payment for specific data gathering 
     regarding Hemophilia treatment, or anything else that will 
     produce the same dollar benefit to Quantum Health 
     Resources.'' (BAY005241)
       Baxter: ``The attached notice from Quantum Headquarters was 
     sent on April 10th to all their centers regarding the 
     reduction of Recombinate pricing. Please note that they want 
     to continue to be invoiced at the $.81 price. They have 
     requested that we send them free product every quarter 
     calculated by looking at the number of units purchased in 
     that quarter and the $.13 reduction in price . . . free 
     product given to achieve overall price reduction.'' (0003632)
       Gensia: ``Hospital--Concentrate field reps on the top 40 
     AIDS hospitals using a $54.00 price in conjunction with a 10% 
     free goods program to mask the final price. Provides the 
     account with an effective price of $48.60 per vial.'' 
     (G00888)
       Gensia: ``FSS--Establish a price of $52.00/vial for Q1 and 
     Q2.''
       The above document is particularly disturbing as it 
     indicates that at least one purpose of ``masking'' the final 
     price with free goods is so that it falsely appears that the 
     Federal Supply Schedule (``FSS'') is less than that of the 
     Hospital Price.
       This insidious behavior by some PhRMA members has a 
     profound and dangerous additional effect by influencing some 
     medical practitioners' judgements. This is acknowledged by 
     Bristol-Myers Squibb (``BMS'') who developed a second 
     generation etoposide, namely, Etopophos (Composite Exhibit 
     #9).
       BMS. ``The Etopohos product profile is significantly 
     superior to that of etoposide for injection . . .'' (BMS: 3: 
     000013)
       ``Currently, physician practices can take advantage of the 
     growing disparity between VePesid's list price (and, 
     subsequently, the Average Wholesale Price [AWP]) and the 
     actual acquisition cost when obtaining reimbursement for 
     etoposide purchase. If the acquisition price of Etopophos is 
     close to the list price, the physicians' financial incentive 
     for selecting the brand is largely diminished.'' (BMS: 3: 
     000014)
       This influence is further demonstrated by SmithKline 
     Beecham and TAP:
       SmithKline: ``In the clinic setting however, since Medicare 
     reimbursement is based on AWP, product selection is largely 
     based upon the spread between acquisition cost and AWP. . . . 
     Therefore, the spread between the AWP and clinic cost 
     represents a profit to the clinic of $50.27 for the 
     medication alone. . . . From this analysis, there seems to be 
     no other reason, other than profitability, to explain uptake 
     differentials between the hospital and clinic settings, 
     therefore explaining why physicians are willing to use more 
     expensive drug regimens.'' (SB00878)
       TAP: ``As we have also discussed, Northwest Iowa Urology is 
     very upset about the allowable not going up. I personally met 
     with the doctors to discuss the issue 4/17. The physicians 
     have started using Zoladex but would stop if the allowable 
     issue was taken care of. NWI Urology has 180 patients on 
     Lupron''. (TAP-BLI0036469)
       The documents further expose the fact that certain of your 
     members deliberately concealed and misrepresented the source 
     of AWP's:
       In a 1996 Barron's article entitled ``Hooked On Drugs'', 
     the following quote from Immunex appeared (Composite Exhibit 
     #11):
       Immunex: ``But Immunex, with a thriving generic cancer-drug 
     business, says its average wholesale prices aren't its own'' 
     ``The drug manufacturers have no control over the AWPs 
     published . . . '' says spokeswoman, Valerie Dowell. 
     (IMNX003079)
       However, Immunex's own internal documents indisputably 
     establish the knowledge of the origin of their AWPs and their 
     active concealment:
       Letter from Red Book to Immunex:
       ``Kathleen Stamm, Immunex Corporation . . .
       ``Dear Kathleen: This letter is a confirmation letter that 
     we have received and entered your latest AWP price changes in 
     our system. The price changes that were effective January 3, 
     1996 were posted in our system on January 5, 1996. I have 
     enclosed an updated copy of your Red Book listing for your 
     files. If there is anything else I could help you with do not 
     hesitate to call.
       ``Sincerely, Lisa Brandt, Red Book Data Analyst.'' (IMNX 
     002262)
       These examples of deception appear to be ``only the tip of 
     the iceberg'' as demonstrated by the evidence contained in 
     Composite Exhibit #12. Exhibit #12 contains the following:
       1. Copy of advertisement sent to the insider from Oncology 
     Therapeutics Network (``OTN'') representing the true 
     wholesale prices to the industry insider for Anzemet.
       2. A copy of a fax sent to a Florida Medicaid pharmacy 
     official by Hoechst containing Hoechst representations of its 
     prices.
       The following chart represents a comparison of Hoechst's 
     fraudulent price representations for its injectable form of 
     the drug versus the truthful prices paid by the industry 
     insider. It is also compares Hoescht's price representations 
     for the tablet form of Anzemet and the insider's true prices. 
     It is extremely interesting that Hoescht did not create a 
     spread for its tablet form of Anzemet but only the injectable 
     form. This is because Medicare reimburses Doctors for the 
     injectable form of this drug and by giving them a profit, can 
     influence prescribing. The tablet form is dispensed by 
     pharmacists, who accept the Doctor's order. And this 
     underscores the frustration that federal and state regulators 
     have experienced in their attempts to estimate the truthful 
     prices being paid by providers in the marketplace for 
     prescription drugs and underscores the fact that, if we 
     cannot rely upon the drug companies to make honest and 
     truthful representations of their prices, Congress will be 
     left with no alternative other than to legislate price 
     controls.

------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                                     Net price as
                                                                                                    represented to  True wholesale
                                            NDC NO.           Unit size/type           Quantity         Florida          price                                Variance
                                                                                                       Medicaid
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Price Representations for:
    Anzemet injection.................    0088-1206-32  100 mg/5ml injectable....               1          $124.90          $70.00  Represented price 78% higher than true wholesale price.
    Anzemet tablets...................    0088-1203-05  100 mg tablets...........               5           275.00          289.75  Represented price 5% less than true wholesale price.
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------


[[Page 20116]]

       Hoescht thus falsely inflated the reported price of its 
     Anzemet to create an improper financial incentive and thus 
     capture market share. The following excerpt from an internal 
     Glaxo document reveals that Hoescht directly benefitted from 
     this diversion of tax dollars:
       (Exhibit #13) Glaxo: ``There is a decline in Zofran usage 
     at Louisiana Oncology in Baton Rouge, Louisiana. Kevin Turner 
     (H1JCO2) has seen a drastic decline in Zofran usage at this 
     clinic over the last few months. The reason for this decline 
     is strictly a reimbursement issue. This clinic has started 
     using Anzemet because it is more profitable. Kevin has 
     learned that this clinic is buying Anzemet for $58.00 for a 
     100mg vial, which gives them a $84.29 profit from Medicare. 
     They are buying a 40mg vial of Zofran for $145.28. If they 
     use 32 mg of Zofran, which is $3.63 per mg. this will net 
     this clinic $69.60 from Medicare reimbursement. Clearly 
     Anzemet has a reimbursement advantage over Zofran. . . .'' 
     (GWZ 085003)
       The above evidence leads to some shocking conclusions.
       First--Certain drug manufacturers have abused their 
     position of privilege in the United States by reporting 
     falsely inflated drug prices in order to create a de facto 
     improper kick-back for their customers.
       Second--Certain drug manufacturers have routinely acted 
     with impunity in arranging improper financial inducements for 
     their physician and other healthcare provider customers.
       Third--Certain drug manufacturers engage in fraudulent 
     price manipulation for the express purpose of causing 
     federally funded healthcare programs to expend scarce tax 
     dollars in order to arrange de facto kick-backs for the drug 
     manufacturers' customers at a cost of billions of dollars.
       Fourth--Certain drug manufacturers arrange kick-backs to 
     improperly influence physicians' medical decisions and 
     judgments notwithstanding the severely destructive affect 
     upon the physician/patient relationship and the exercise of 
     independent medical judgement.
       Fifth--Certain drug manufacturers engage in illegal price 
     manipulation in order to increase the utilization of their 
     drugs beyond that which is necessary and appropriate based on 
     the exercise of independent medical judgment not affected by 
     improper financial incentives.
       As the principal association representing the 
     pharmaceutical manufacturing industry, I believe you owe it 
     to the citizens of the United States to advise Congress as to 
     whether the above evidence reflects the standards of the 
     pharmaceutical industry in this country. If it does, then 
     explicit price regulation will clearly be necessary to 
     counter your industry's inability to report prices will 
     integrity and its propensity to engage in price manipulation. 
     If, on the other hand, the above evidence does not reflect 
     the standards in the pharmaceutical industry, then your 
     association owes it to the American people to support and 
     assist with the efforts of the federal and state enforcement 
     authorities, including the U.S. Department of Justice, to 
     correct the actions of the drug manufacturers engaging in 
     this conduct and to require them to compensate Medicare, 
     Medicaid and other federally funded programs for the damages 
     they have caused.
           Sincerely,

                                                   Pete Stark,

                                                   Ranking Member,
                                           Subcommittee on Health.

     

                          ____________________