[House Hearing, 107 Congress]
[From the U.S. Government Publishing Office]
LESSON'S LEARNED: THE DEPARTMENT OF VETERANS AFFAIRS PRESCRIPTION DRUG
PURCHASING PROGRAM
=======================================================================
HEARING
before the
SUBCOMMITTEE ON NATIONAL SECURITY,
VETERANS AFFAIRS AND INTERNATIONAL
RELATIONS
of the
COMMITTEE ON
GOVERNMENT REFORM
HOUSE OF REPRESENTATIVES
ONE HUNDRED SEVENTH CONGRESS
SECOND SESSION
__________
JULY 22, 2002
__________
Serial No. 107-214
__________
Printed for the use of the Committee on Government Reform
Available via the World Wide Web: http://www.gpo.gov/congress/house
http://www.house.gov/reform
______
87-140 U.S. GOVERNMENT PRINTING OFFICE
WASHINGTON : 2003
____________________________________________________________________________
For Sale by the Superintendent of Documents, U.S. Government Printing Office
Internet: bookstore.gpr.gov Phone: toll free (866) 512-1800; (202) 512�091800
Fax: (202) 512�092250 Mail: Stop SSOP, Washington, DC 20402�090001
COMMITTEE ON GOVERNMENT REFORM
DAN BURTON, Indiana, Chairman
BENJAMIN A. GILMAN, New York HENRY A. WAXMAN, California
CONSTANCE A. MORELLA, Maryland TOM LANTOS, California
CHRISTOPHER SHAYS, Connecticut MAJOR R. OWENS, New York
ILEANA ROS-LEHTINEN, Florida EDOLPHUS TOWNS, New York
JOHN M. McHUGH, New York PAUL E. KANJORSKI, Pennsylvania
STEPHEN HORN, California PATSY T. MINK, Hawaii
JOHN L. MICA, Florida CAROLYN B. MALONEY, New York
THOMAS M. DAVIS, Virginia ELEANOR HOLMES NORTON, Washington,
MARK E. SOUDER, Indiana DC
STEVEN C. LaTOURETTE, Ohio ELIJAH E. CUMMINGS, Maryland
BOB BARR, Georgia DENNIS J. KUCINICH, Ohio
DAN MILLER, Florida ROD R. BLAGOJEVICH, Illinois
DOUG OSE, California DANNY K. DAVIS, Illinois
RON LEWIS, Kentucky JOHN F. TIERNEY, Massachusetts
JO ANN DAVIS, Virginia JIM TURNER, Texas
TODD RUSSELL PLATTS, Pennsylvania THOMAS H. ALLEN, Maine
DAVE WELDON, Florida JANICE D. SCHAKOWSKY, Illinois
CHRIS CANNON, Utah WM. LACY CLAY, Missouri
ADAM H. PUTNAM, Florida DIANE E. WATSON, California
C.L. ``BUTCH'' OTTER, Idaho STEPHEN F. LYNCH, Massachusetts
EDWARD L. SCHROCK, Virginia ------
JOHN J. DUNCAN, Jr., Tennessee BERNARD SANDERS, Vermont
JOHN SULLIVAN, Oklahoma (Independent)
Kevin Binger, Staff Director
Daniel R. Moll, Deputy Staff Director
James C. Wilson, Chief Counsel
Robert A. Briggs, Chief Clerk
Phil Schiliro, Minority Staff Director
Subcommittee on National Security, Veterans Affairs and International
Relations
CHRISTOPHER SHAYS, Connecticut, Chairman
ADAM H. PUTNAM, Florida DENNIS J. KUCINICH, Ohio
BENJAMIN A. GILMAN, New York BERNARD SANDERS, Vermont
ILEANA ROS-LEHTINEN, Florida THOMAS H. ALLEN, Maine
JOHN M. McHUGH, New York TOM LANTOS, California
STEVEN C. LaTOURETTE, Ohio JOHN F. TIERNEY, Massachusetts
RON LEWIS, Kentucky JANICE D. SCHAKOWSKY, Illinois
TODD RUSSELL PLATTS, Pennsylvania WM. LACY CLAY, Missouri
DAVE WELDON, Florida DIANE E. WATSON, California
C.L. ``BUTCH'' OTTER, Idaho STEPHEN F. LYNCH, Massachusetts
EDWARD L. SCHROCK, Virginia
Ex Officio
DAN BURTON, Indiana HENRY A. WAXMAN, California
Lawrence J. Halloran, Staff Director and Counsel
Kristine McElroy, Professional Staff Member
Jason Chung, Clerk
C O N T E N T S
----------
Page
Hearing held on July 22, 2002.................................... 1
Statement of:
Ogden, John, Chief Consultant, Veterans Health
Administration, Pharmacy Benefits Management, Department of
Veterans Affairs; and William Conte, Director, Department
of Veterans Affairs Medical Center, Bedford, MA............ 78
Waxman, Judy, deputy executive director, Families USA; Dr.
Alan Sager, professor of health services, director, health
reform program, Boston University School of Public Health;
and Cynthia Bascetta, Director, Health Care, Veterans'
Health and Benefits Issues, General Accounting Office...... 19
Letters, statements, etc., submitted for the record by:
Allen, Hon. Thomas H., a Representative in Congress from the
State of Maine, prepared statement of...................... 17
Bascetta, Cynthia, Director, Health Care, Veterans' Health
and Benefits Issues, General Accounting Office, prepared
statement of............................................... 45
Conte, William, Director, Department of Veterans Affairs
Medical Center, Bedford, MA, prepared statement of......... 92
Lynch, Hon. Stephen F., a Representative in Congress from the
State of Massachusetts, prepared statement of.............. 58
Ogden, John, Chief Consultant, Veterans Health
Administration, Pharmacy Benefits Management, Department of
Veterans Affairs, prepared statement of.................... 81
Sager, Dr. Alan, professor of health services, director,
health reform program, Boston University School of Public
Health, prepared statement of.............................. 35
Shays, Hon. Christopher, a Representative in Congress from
the State of Connecticut, prepared statement of............ 3
Tierney, Hon. John F., a Representative in Congress from the
State of Massachusetts, prepared statement of.............. 7
Waxman, Judy, deputy executive director, Families USA,
prepared statement of...................................... 22
LESSON'S LEARNED: THE DEPARTMENT OF VETERANS AFFAIRS PRESCRIPTION DRUG
PURCHASING PROGRAM
----------
MONDAY, JULY 22, 2002
House of Representatives,
Subcommittee on National Security, Veterans Affairs
and International Relations,
Committee on Government Reform,
Boston, MA.
The subcommittee met, pursuant to notice, at 9:30 a.m., in
McCormack Courthouse, 1500 John W. McCormack Post Office and
Courthouse, 90 Devonshire Street, Boston, MA, Hon. Christopher
Shays (chairman of the subcommittee) presiding.
Present: Representatives Shays, Tierney, Allen and Lynch.
Staff present: Lawrence J. Halloran, staff director and
counsel; Kristine McElroy, professional staff member; and Jason
M. Chung, clerk.
Mr. Shays. The quorum being present, the Subcommittee on
National Security, Veterans Affairs and International
Relations, hearing entitled ``Lessons Learned: The Department
of Veterans Affairs Prescription Drug Purchasing Program'' is
called to order.
We welcome our witnesses. We welcome our guests. Good
morning to everyone.
At the invitation of Congressman Tierney, the subcommittee
has come to Boston today to discuss the Department of Veterans
Affairs, VA, prescription drug benefit program and the impact
of Federal pharmaceutical purchases on the national effort to
made medicines more affordable. These are important issues to
veterans, senior citizens and to all of us as health care
consumers.
In the current debate on how best to structure a Medicare
prescription drug benefit, VA and the Department of Defense
programs offer important lessons and cautions about how to
expand and access and control costs.
As the General Accounting Office [GAO] recently concluded,
``Considerable leverage can be exerted when the departments
commit to buy increased volumes of a particular drug when there
are generic drugs or brand name drugs that are interchangeable
in efficacy, safety and outcomes.''
Bringing the benefit of that leverage to patients is a
matter of fiscal discipline and effective medical management.
Savings from national contracts and use of evidence-based
formularies can work to make therapies more affordable in the
context of a complete health care delivery system.
But VA cannot afford to become a mere prescription window.
VA health facilities in many areas are already straining under
the weight of increased demand by veterans who once had access
to affordable care elsewhere.
To save costs, not just shift costs, strategies to reduce
prescription drug expenditures must focus on health outcomes as
well as a healthy bottom line.
In this area, and on other important issues, Mr. Tierney
has been a thoughtful, hard working partner in our partnership
oversight of Federal programs. The subcommittee is grateful for
the opportunity to be here today and we look forward to the
testimony of all of our witnesses.
[The prepared statement of Hon. Christopher Shays follows:]
[GRAPHIC] [TIFF OMITTED] T7140.001
[GRAPHIC] [TIFF OMITTED] T7140.002
Mr. Shays. I would extend that by saving gratitude to Mr.
Allen and I think Mr. Lynch will be joining us. I am fortunate
to chair a committee of just outstanding members, any one of
whom could take this gavel and make sure this committee served
well.
At this time I would recognize Mr. Tierney, and again,
thank you for asking us to be here.
Mr. Tierney. Thank you, Mr. Chairman. I want to extend my
gratitude to you for having this hearing and bringing it up to
the Boston area in Massachusetts. Like everywhere else in this
country, this is a very significant issue in Massachusetts and
in my District, as well as others.
I want to also thank Tom Allen, who has been a leader on
this issue for some time, particularly with regard to the cost
aspects of it. No matter what we do in terms of trying to make
prescription drugs accessible to people, the cost is always
going to be an issue and that's one thing we both are going to
address here today.
The fact of the matter is that we're bankrupting many, many
individuals, many of them seniors right now by the high cost
charged to individuals for prescription drugs and if we were to
put an end to Medicare or any other program, we'd run the risk
of bankrupting that program if we didn't also attend to the
issue of cost.
Once again, last year we saw double digit increases in
prescription drug spending in this country, an increase of 17.1
percent in 2001. Once again, prescription drugs are one of the
facet growing components of health care. Once again, seniors
remain the hardest hit because they were the most in need of
prescription drugs while remaining of the least likely groups
to have prescription drug insurance. And Judy Waxman will
testify to that, that 50 percent of Medicare beneficiaries were
without prescription drug insurance at some point during the
year and nearly 30 percent had no drug coverage at all. And
once again, it remains my hope that this situation will change
and that Congress will demonstrate the political will to
protect its most vulnerable citizens by passing a comprehensive
Medicare prescription drug benefit.
In the past, as a Nation, when we had the political will to
protect and serve the most vulnerable, we have been up to the
task. There are lessons to be learned from these efforts and
today we'll focus on Department of Veteran Affairs' efforts to
manage a pharmacy benefit that is both cost effective and able
to provide a high quality benefit to its patients.
One of our charts paraphrases a GAO study that reported
that the VA national contract prices were up to 70, 72 and 88
percent lower than the recommended retail price for cholesterol
lowering drugs.
It's clear from VA's success at negotiating lower drug
prices that drug manufacturers have the ability to make a
profit without charging their highest prices. We can also see
that there's room for negotiations in drug manufacturers'
profit margins when, even in the most dire circumstances, the
manufacturers can still make a profit.
Last October, when this country suffered from a terrorist
attack in the form of anthrax sent through the mail, we needed
affordable antibiotics. Health and Human Services Secretary
Tommy Thompson convinced Bayer to provide Cipro to the United
States at a discount. Because of the size of the order placed
by our government, Bayer still walked away with millions of
dollars in profit.
We have a chart that shows that in 2001, the pharmaceutical
industry was the most profitable industry in the United States
with 18.5 percent of its revenues going to profits. The next
most-profitable industry, commercial banking, had 13.5 percent
of revenues going to profits. The median for the Fortune 500
companies was profits at 3.3 percent of revenue.
Some of our witnesses today will talk about how drug
companies use that money. The companies claim that their high
prices are necessary to support research and development, but
we'll hear today about where the money really goes. We'll hear
that the companies spend significantly more money on marketing,
advertising, and administration than they do on research and
development. And we will also hear that drug companies make
more in profits than they spend on research and development.
I think it's also important to remember that a large
portion of the dollars for pharmaceutical research and
development comes from taxpayers. Pharmaceutical companies have
benefited from the basic drug research conducted primarily
through the National Institute of Health. Of the 21 most
important drugs introduced between 1965 and 992, 15 were
developed using knowledge and techniques from federally funded
research. That research has contributed to the development of
drugs to treat cancer, HIV, depression and other diseases--
drugs that are now reaping billions of dollars in revenues for
drug manufacturers.
We have to find a way to bring down the costs of drugs,
especially for the elderly. As we'll hear today, we don't need
to reinvent the wheel. Instead, we can learn from the VA's
success at getting lower drug prices and adapt those lessons to
other settings. And we'll see that there is room for
negotiation in the drug manufacturers' profit margins.
I believe the time has come to put patients over profits,
to learn from our successes and to protect our most vulnerable
citizens with a cost effective and high quality drug benefit.
The fact of the matter is that we can do all of that while
providing manufacturers with the resources for research and
development and a decent profit. So I look forward to the
testimony of all the witnesses that are here today. I thank
them for coming and I welcome them to the hearing. And again,
thank you, Mr. Chairman, for being so strong on this issue for
letting us have this hearing here.
[The prepared statement of Hon. John F. Tierney follows:]
[GRAPHIC] [TIFF OMITTED] T7140.003
[GRAPHIC] [TIFF OMITTED] T7140.004
[GRAPHIC] [TIFF OMITTED] T7140.005
[GRAPHIC] [TIFF OMITTED] T7140.006
[GRAPHIC] [TIFF OMITTED] T7140.007
[GRAPHIC] [TIFF OMITTED] T7140.008
[GRAPHIC] [TIFF OMITTED] T7140.009
[GRAPHIC] [TIFF OMITTED] T7140.010
Mr. Shays. I thank the gentleman. At this time I recognize
Mr. Allen from Maine.
Mr. Allen. Thank you, Mr. Chairman. I want to thank you and
Congressman Tierney for organizing this hearing. I came down
from Maine this morning because I knew I would learn something
from our panelists and from the interaction with our--as we go
on through the hearing.
Congressman Tierney has been a tireless advocate,
absolutely tireless advocate for our seniors and others in need
of assistance with the high cost of their prescription drugs.
And Chairman Shays, I have to say is my model chairman. We all
should hope that if we ever do get the gavel, we handle it the
way he does.
Congress has been working on legislation to provide
Medicare beneficiaries with prescription drug coverage.
Although the structure of the various plans we have considered
have varied greatly in administration, benefit structure and
cost sharing, the urgent need for a Medicare prescription drug
benefit is clear. Seniors in Maine cannot wait any longer for
prescription drug price relief.
Prescription drug expenditures have continued to rise
almost 20 percent each year for the last 6 years or so. By
comparison, spending for physician and clinical services grew
by approximately one third and expenditures for hospitals
increased by one fifth between 1995 and the year 2000.
Escalating drug costs contribute to higher insurance premiums
and higher out of pocket spending for everyone with insurance.
According to a recent Families USA study, over one third of the
increase in national prescription drug spending from 2000 to
2001 was directly attributable to increases in drug prices. And
the other one third is basically related to increased use of
prescription drugs and the substitution of newer, high cost
prescription drugs for older, lower cost prescription drugs.
Because of high premiums, fewer and fewer Medicare recipients
in Maine can afford the Medicare supplements that have the
prescription drug coverage.
These trends lead to more and more veterans seeking to
enroll in the VA health care system in order to obtain the
prescription drug benefit. The $7 co-payment for prescription
drug is very enticing for those individuals with little or no
prescription drug coverage. However, the increased number of
veterans coming into the system leads to higher case loads and
longer waiting lists. At Togus, Maine's only VA hospital, for
example, there are over 4,000 veterans awaiting assignment to a
primary care physician.
The average wait for an initial appointment is now back up
to 1 year. It was better a while ago. I know one veteran who
had to wait 9 months to get in to see a doctor. When it finally
came time for his appointment, the veteran was diagnosed with
prostate cancer. His doctor said if he had seen him 6 months
earlier, his life could have been saved.
In Maine, over the last 2 years, the VA medical system has
added over 500 veterans to its practice every month. Under the
current compensation formulary, this should mean a commensurate
increase in funding for those facilities. Unfortunately, the
formula also contains a huge 2 year lead time in recognizing
this increase. So we're getting paid for the number of veterans
that we had 2 years ago.
I would like to this opportunity just to commend the staff
at Togus. They're not here, but they do a terrific job. They're
dedicated, hardworking. They do feel understaffed and
underworked and I am convinced they work hard and do the best
they can and with limited resources. The fundamental problem is
the lack of affordable prescription drugs in the civilian
market is resulting in a deluge of veterans forced to turn to
the VA in order to afford the drugs their doctors prescribe.
If we fail to address the prescription drug pricing issue
and don't add a prescription drug benefit to Medicare, the VA
system will continue to be overwhelmed. The increasing backlog
created by the influx of veterans seeking lower cost
prescription drugs means that more and more patients with
chronic illnesses will not receive timely and appropriate care.
I believe one lesson to be learned is that the VA system
works. It provides affordable prescription drugs through bulk
purchasing using the buying power of more than 90 million
veterans. While the model works, the capacity of the VA health
system is totally inadequate. We should be replicating the
model in one way or another, the model of the VA, for the
entire Medicare population so we can leverage the buying power
of the 40 million Americans who are Medicare beneficiaries.
Thank you, Mr. Chairman, and thank you, Mr. Tierney. I'm
very pleased to be with you today.
[The prepared statement of Hon. Thomas H. Allen follows:]
[GRAPHIC] [TIFF OMITTED] T7140.011
[GRAPHIC] [TIFF OMITTED] T7140.012
Mr. Shays. Thank you. I'd like the record to note that Mr.
Tierney will be chairing this entire hearing.
Mr. Tierney. Thank you, Mr. Shays. We're going to have our
first panel testify today with Judy Waxman who is the deputy
executive director of Families USA; Dr. Alan Sager who is
professor of health services and director of the health reform
program at Boston University School of Public Health; Ms.
Cynthia Bascetta, who is the Director of Health Care for
Veterans' Health and Benefits Issues at the General Accounting
Office and with her is Jim Musselwhite who is the Assistant
Director of the General Accounting Office, who I understand
will not be testifying.
Those people who are going to testify, will you please
rise.
[Witnesses sworn.]
Mr. Shays. Let the record reflect that the witnesses have
testified in the affirmative.
Ms. Waxman, why don't we start with you.
STATEMENTS OF JUDY WAXMAN, DEPUTY EXECUTIVE DIRECTOR, FAMILIES
USA; DR. ALAN SAGER, PROFESSOR OF HEALTH SERVICES, DIRECTOR,
HEALTH REFORM PROGRAM, BOSTON UNIVERSITY SCHOOL OF PUBLIC
HEALTH; AND CYNTHIA BASCETTA, DIRECTOR, HEALTH CARE, VETERANS'
HEALTH AND BENEFITS ISSUES, GENERAL ACCOUNTING OFFICE
Ms. Waxman. Thank you, Congressman. Mr. Chairman and other
Members of Congress, thank you so much for asking me to testify
today. Families USA is a national organization that represents
consumers and I've been asked this morning to give an overview
of what's happening with drug crisis.
Since 1995, national spending on prescription drugs has
grown double the rate of growth of spending in other parts of
the health care system, particularly hospital care, physician
care and clinical services. Three trends have been driving this
rapid sustained growth: the number of prescriptions per person
is increasing, newer, higher cost prescriptions are replacing
older, less costly drugs, and the prices of prescriptions keep
rising. As already has been said this morning, more than a
third of the increase in national prescription drug spending
from 2000 to 2001 was directly attributable to increases in
drug prices.
As you are all aware, older Americans are the population
most likely to need drugs and they are the least likely to have
insurance coverage. For a number of years now, Families USA has
monitored the 50 prescription drugs that seniors are most
likely to take. Last month, we issued a report called ``Bitter
Pill, the Rising Crisis of Prescription Drugs for Older
Americans.'' And we found a number of interesting facts.
The prices of the 50 most-prescribed drugs for seniors
rose, on average, by nearly three times the rate of inflation.
This is not a 1-year phenomenon.
Forty-two of the 50 drugs were on the market for the 50-
year period from 1997 to 2002 and they rose, on average, twice
the rate of inflation during that 5 years.
Twenty of the 50 drugs had been on the market for 10 years.
The prices for nine of those drugs increased at least three
times the rate of inflation and five of those drugs rose at
least four times the rate of inflation.
Now why are the prices rising so much? There's a couple of
reasons I'd like to highlight this morning, two of them being
brand name monopolies and also advertising.
Generic drugs can offer seniors a lower cost alternative to
higher cost brand names. Another fact, we found was that the
yearly average for brand new drug for seniors was $1,106
compared to $375 for generics. Additionally, in the last year,
the price of generic drugs rose only 1.8 percent as compared to
8.1 percent as an increase in brand name drugs. Not
surprisingly, the brand name companies go to great lengths to
prevent generic drugs from entering the market. This is a
serious problem that Congress can address.
Not coincidentally, high price drugs, some of which are
among the most commonly prescribed for seniors are the most
heavily advertised. Direct consumer advertising plays a major
role in increasing the demand for many high priced drugs. I
want to give you one example. In 2000, AstraZeneca, the maker
of Prilosec, spent $107.5 million in direct-to-consumer
advertising for this drug. In 2001, that company had sales of
$5.68 billion for that drug alone. That shows you that direct-
to-consumer advertising works for the manufacturers.
As public concern mounts about the explosion of
prescription drug costs, the pharmaceutical industry argues
that the high drug prices are necessary in order to finance
research and development. We've decided to look at how much
profit the companies are actually making and where the money is
going. So this month, just last week, we issued a report
entitled ``Profiting from Pain: Where Prescription Drug Dollars
Go.''
What we did was we examined the SEC filings of the
companies that offered those 50 drugs I spoke about earlier and
there were nine publicly traded companies we could examine. As
has already been said, the pharmaceutical industry is the most
profitable industry in the United States for each of the past
10 years. In 2001, their profits were 5.5 times as large as the
median return for all Fortune 500 countries. Additionally, the
nine companies we looked at generated $30.6 billion in profits
last year which was more than 60 percent higher than
expenditures on research and development.
Many of the companies report marketing, advertising and
administration together, so what we did is we looked at those
items as compared to their spending on research and development
and we found that in the nine companies, spent a total of $45.4
billion on marketing, advertising and administration and only
$19.1 billion on research and development. Eight of the nine
companies actually spent twice as much on those items as they
did on research and development.
We think it's fair to say that the gap between the cost of
medications Americans and particularly seniors need, and what
they can afford is growing wider and wider. And as also has
been mentioned, there are 50 percent of seniors do not have
drug coverage at some time during the year and 30 percent don't
have it at all. Sixty-five million Americans in total do not
have drug coverage, pardon me, do not have insurance coverage
for prescription drugs. So one obvious solution is to add a
meaningful drug benefit for the Medicare program, but they must
include systems to moderate the prices. One, for the seniors
and two for the Medicare program itself, so the drug--so the
program does not become unaffordable.
But I wouldn't finish my testimony without saying that drug
price moderation is necessary for Medicare, for insurers, for
employers and for all others because we're in a situation now
with consumers, all consumers are in jeopardy of facing the
time when more and more drugs will simply be unaffordable and
out of reach.
Thank you.
[The prepared statement of Ms. Waxman follows:]
[GRAPHIC] [TIFF OMITTED] T7140.013
[GRAPHIC] [TIFF OMITTED] T7140.014
[GRAPHIC] [TIFF OMITTED] T7140.015
[GRAPHIC] [TIFF OMITTED] T7140.016
[GRAPHIC] [TIFF OMITTED] T7140.017
[GRAPHIC] [TIFF OMITTED] T7140.018
[GRAPHIC] [TIFF OMITTED] T7140.019
[GRAPHIC] [TIFF OMITTED] T7140.020
[GRAPHIC] [TIFF OMITTED] T7140.021
[GRAPHIC] [TIFF OMITTED] T7140.022
Mr. Tierney. Thank you for your testimony.
Dr. Sager.
Mr. Sager. Congressman Tierney, Congressman Shays, others.
Good morning. Thank you very much for inviting me to appear
before you. After distilling six lessons from the VA's recent
experiences in paying for prescription drugs and from Congress'
experiences in designing a Medicare medication benefit, I'll
apply these lessons to crafting a new approach to a Medicare
drug benefit.
The six lessons. 1. The VA has become one of the main
lightning rods in the electrical storm caused by the collision
of soaring drug prices and lack of adequate insurance. The
number of 30-day equivalent prescriptions filled by the VA in
fiscal year 2001 was more than 2\1/2\ times as much as 5 years
earlier.
2. Owing to rising volumes and prices, the VA's drug costs
are expected to double from $1.6 billion in fiscal year 1999 to
a conservatively projected $3.3 billion in fiscal year 2003.
3. The VA has shown that winning lower drug prices is a far
more effective way to contain costs than is restricting use of
drugs. But costs are projected to soar despite the VA's
efforts.
4. Unless we find a way to finance affordable drugs for all
elderly, disabled and chronically ill Americans, the VA drug
budget will explode or human suffering will magnify. Indeed,
both are possible.
Most of the VA's future efforts to limit its own
obligations can succeed only by adding to the obligations of
others. There has been too much of this already. Congress has
won lower drug prices for Federal programs while allowing drug
makers to charge higher prices to ordinary citizens.
5. The VA's own problems would be eased by creating a
strong Medicare prescription drug benefit. Building such a
benefit has been stymied by the combination of one, high drug
prices and two, the need to find new Federal dollars both to
protect people who haven't been able to afford drugs in the
past and to replace most of today's private spending by people
who can somehow struggle to afford their medications. This
dilemma appears to create a choice between continued suffering
and much higher spending.
6. Fortunately, there is a third choice which is reform.
We've spent $200 billion on medications a year, this year. That
makes the prescription drug problem literally the easiest one
to solve in the United States of America. There are some unique
opportunities.
It's easy to design an inferior Medicare drug benefit with
high premiums, co-pay and multi-thousand dollar donuts, holes,
and other patient financial exposure. It's also easy to design
a benefit that costs the Federal Government many new dollars.
But low patient cost can and must be combined with low, new
Federal costs and with comprehensive benefits.
What are the costs of a good Medicare prescription drug
program? My colleague, Deborah Socolar and I estimate the gross
cost of a good Medicare prescription drug benefit at $2.2
trillion for the full decade from 2002 to 2011 before factoring
in opportunities for savings. Now this is for a full 10 years
that needs to be compared carefully with other estimates that
might be for 5 or 6 or 7 years.
The costs includes, they start with three quarters of the
spending projected by the CBO for its baseline in the absence
of a new drug program, how much people are expected, Medicare
eligible patients are expected to spend on drugs. An additional
$440 billion, we estimate, would be necessary to buy drugs for
previously uninsured Americans to pick up the higher volume of
medications, if we pay retail price. We also budget $80 billion
for a new center to measure which medications are effective,
which are safe and who needs them and to disseminate that
information to doctors and patients. Other minor costs for
administration, building pharmacy capacity and the like.
How to cover those costs. Through modest patient payments,
substantial cost cuts capturing existing revenue and new
Federal dollars. Patient payments cover one tenth of the
amount. Premiums would be set at between 2.5 and 3 percent on a
sliding scale of Social Security checks, so this could be a
progressive premium that would not impoverish people who are
getting $200 and $300 amount Social Security checks.
Also, modest co-pays between $5 and $10 with substantial
protections for low income patients. So that raises a tenth of
the money.
Reducing costs will cover a third of this money, of the
$2.1 trillion we need, $2.1 trillion we need to raise.
We would propose to cap the rise in total spending after
this year at 8.5 percent a year instead of the 11.5 or 12
percent or 12.5 percent that CBO projects will happen in the
absence of intervention.
This means that drug spending doubles only every 10 years
instead of every 6 years as CBO projects. I think the drug
makers can live with revenue that doubles every 10 years.
Indeed, we would protect drug makers' profits as return on
revenue, return on equity.
Also, to save $400 billion over the 10 years, we would pay
for higher volume of medications that newly covered people
would be able now to afford, not at retail price, but at the
marginal cost of producing the pills, to cover the drug makers'
actual costs. We estimate that at 7.5 percent of retail. Once
the drug makers do the research and bill the factories, the
added cost of making more pills is tiny.
We cover 40 percent of the cost by capturing existing
revenue. $400 billion of that would be drug makers' own
marketing and advertising costs, costs that they would no
longer need to bear as part of a drug peace treaty, whereby
information on which medications are needed would be
disseminated by the new Public Refinance Center. We'd also
capture $60 billion worth of State Medicaid spending, frozen at
today's revenue levels, today's spending levels. $160 billion
in Federal Medicaid spending and about $50 billion in VA
spending. Also, about $175 billion in captured employer
maintenance of effort, frozen at 20 percent of this year's
level. These are obligations that employers take on to retirees
and others.
So we raise--recover, $1.75 trillion in cost, leaving about
$375 billion to be covered by new Federal dollars. That's 18
percent of the bill. And this $375 billion, 90 percent of that
replaces existing private spending by Medicare patients as part
of the new Medicare prescription drug program. Patients'
financial exposure would be measured in the hundreds, not in
the thousands, no donut, no hole. The pie chart included in the
testimony itemizes the revenue sources.
I'd be happy to provide additional supplementary
information, either now or in writing and thank you very much
for the chance to speak today.
[The prepared statement of Mr. Sager follows:]
[GRAPHIC] [TIFF OMITTED] T7140.023
[GRAPHIC] [TIFF OMITTED] T7140.024
[GRAPHIC] [TIFF OMITTED] T7140.025
[GRAPHIC] [TIFF OMITTED] T7140.026
[GRAPHIC] [TIFF OMITTED] T7140.027
[GRAPHIC] [TIFF OMITTED] T7140.028
[GRAPHIC] [TIFF OMITTED] T7140.029
[GRAPHIC] [TIFF OMITTED] T7140.030
Mr. Tierney. Thank you very much, doctor.
Ms. Bascetta.
Ms. Bascetta. Good morning. I'm pleased to be here today.
I've been asked to discuss the factors that have contributed to
pharmacy costs, reductions in pharmacy costs in the VA and DOD
as well as the continuing challenges that they face in
procuring drugs jointly. Reflecting national trends, VA and DOD
pharmacy expenditures have risen significantly, and they
consume an increasing share of the Department's health care
budgets. But pharmacy costs would have been even greater if not
for the efforts taken by VA and DOD.
In my remarks today, I would like to highlight formularies,
purchasing agreements, mail order dispensing and joint
procurement, four ways that VA and DOD have been able to reduce
their spending on drugs. My comments are based on work that we
conducted last year for you, Chairman Shays, and other
requesters.
First, VA and DOD have been able to control spending on
drugs by establishing formularies. Through formularies, health
care systems can control costs by effect physician-prescribing
patterns. VA and DOD, for example, substitute lower or higher
cost drugs on their formularies when they determine them to be
therapeutically interchangeable, that is, essentially
equivalent in terms of efficacy, safety and outcomes.
In these cases, VA and DOD may restrict provider choice in
closed classes or they may encourage the use of lower cost
drugs in preferred classes. The Institute of Medicine studied
VA's formulary and found that it was well-managed and not
overly restrictive. In addition, IOM recommended that VA use
more contracts to carefully limit drug choices in more classes
based on quality and cost considerations.
Second, VA and DO have reduced costs by using different
purchasing arrangements to obtain substantial discounts on
prescription drugs. For example, VA and DOD obtained favorable
prices through the Federal Supply Schedule which accounted for
the bulk more than 80 percent of their combined drug
expenditures. These FSS prices are intended to be no more than
the prices manufacturers charge their most favored, nonFederal
customers under comparable terms and conditions. Also, by
statute, they can purchase brand name drugs at a price at least
24 percent lower than the nonFederal average manufacturer price
which may be lower than the FSS price.
VA and DOD have also been able to obtain even lower prices
than FSS prices. For therapeutically equivalent drugs, they've
used a competitively bidding process which has resulted in
prices that average 33 percent below FSS prices.
Third, VA has been able to cut dispensing costs for
prescription drugs through its consolidated mail outpatient
pharmacy centers. These CMOPs reduce costs through economies of
scale. Mail-in refills by using highly automated CMOP
technology is several times more productive than refilling
prescriptions at VA hospitals and clinic. VA and DOD are
currently working on a pilot demonstration to test the
feasibility of using CMOPs to lower the cost of refilling
military pharmacy prescriptions.
Finally, VA and DOD have secured additional savings through
joint procurement. In 2001, VA and DOD estimated savings of
about $170 million per year from current and planned joint
procurements. The Departments can exert considerable leverage
when they commit to jointly buy increased volumes of particular
generic drugs or therapeutically equivalent brand name drugs.
Nevertheless, joint procurement remains one of their most
important challenges. Significant differences between the VA
and DOD health care systems make the joint purchasing of brand
name drugs more difficult. According to Department officials,
differences in their populations result in dissimilar patterns
of drug use and demand. For example, VA serves mostly older men
while DOD also serves younger men as well as their dependents,
women and children. Also, finding overlap between their
formularies has been complicated because VA's national
formulary lists about 1,100 drugs in more than 250 classes,
compared to DOD's much smaller basic core formulary of 175
drugs in only 70 classes.
Finally, DOD is concerned about its ability to persuade
nonmilitary providers to prescribe drugs contracted for
jointly. In 2000, private providers wrote about half of DOD's
prescriptions. The Departments are continuing to pursue joint
procurement of brand name drugs because they make up a far
higher share of expenditures than generic drugs.
Consequently, jointly procuring them could yield much
greater financial benefits. For example, VA's brand name drug
purchases in fiscal year 2000 were 36 percent of the volume,
but 91 percent of their expenditures.
Mr. Chairman, it would be crucial for VA and DOD initially
and individual and together to stay focused on potential
pharmacy cost savings to maintain control of their overall
health care budgets.
This concludes my statement and we'd be happy to answer any
questions you might have.
[The prepared statement of Ms. Bascetta follows:]
[GRAPHIC] [TIFF OMITTED] T7140.031
[GRAPHIC] [TIFF OMITTED] T7140.032
[GRAPHIC] [TIFF OMITTED] T7140.033
[GRAPHIC] [TIFF OMITTED] T7140.034
[GRAPHIC] [TIFF OMITTED] T7140.035
[GRAPHIC] [TIFF OMITTED] T7140.036
[GRAPHIC] [TIFF OMITTED] T7140.037
[GRAPHIC] [TIFF OMITTED] T7140.038
[GRAPHIC] [TIFF OMITTED] T7140.039
[GRAPHIC] [TIFF OMITTED] T7140.040
[GRAPHIC] [TIFF OMITTED] T7140.041
[GRAPHIC] [TIFF OMITTED] T7140.042
Mr. Tierney. Thank you. I want to thank all of you for your
testimony. We are, in fact, going to have a round or maybe
several rounds of questioning as we go forward.
First, let me do some housekeeping. I ask unanimous consent
that all members of the subcommittee be permitted to place any
opening statement in the record and let the record remain open
for 3 days for that purpose. Without objection, so ordered.
[The prepared statement of Hon. Stephen F. Lynch follows:]
[GRAPHIC] [TIFF OMITTED] T7140.043
[GRAPHIC] [TIFF OMITTED] T7140.044
Mr. Tierney. I ask for further unanimous consent that all
the witnesses be permitted to include their written statements
in the record. Without objection, so ordered.
And what we're going to do is because we're all getting
along so well up here, everybody is deferring to everybody
else, I'm going to start the questioning just to take that
issue off the table and we'll go for 5 minutes and then we'll
allow each of the Members--we'll probably go around for a
number of cycles here until we get satisfied that we've got all
the information that we think we can get this morning. Because
what you're saying is obviously very helpful to us.
Let me begin the question by asking Ms. Waxman, your
testimony talked about a lot of places where the money goes
once the pharmaceutical companies get their money in. We heard
a lot of stock options, CEO pay, lately. I know that Families
USA has done a report with respect to the CEO pay in the
pharmaceutical industry.
What have you learned from that report?
Ms. Waxman. Yes, I actually have the report with me and I
think it might be appropriate to enter it into the record as
well.
Mr. Tierney. So ordered.
Ms. Waxman. I did not put in my testimony the exact
numbers, but I do have it here. For example, what we looked at
in the SEC report was not just the salary, but also the
unexercised stock options as well. And so when you look at and
I'm looking for my chart here, the total compensation for a
number of the top executives, for instance, the total
compensation for the top executive laboratories was over $10
million. This is last year. And others are $12--I'm sorry, that
wasn't the highest one. That was just the A. The highest one
was almost $75 million.
Mr. Tierney. $75 million?
Ms. Waxman. Yes, for 1 year. So the point really of that is
just that--the point we were really trying to make with those
numbers is that while the companies are screaming that they
need high costs to cover R & D, when you look at some of the
ways they spend their money such as many, many millions of
dollars for their top executives' compensation and you look at
all the money spent on advertising, administration and
marketing, then some of their claims about the need for high
prices to cover R & D just don't live up.
Mr. Tierney. Well, staying on that just for a second, one
of the comments in here was that prices for prescription drugs
have risen four times inflation, is that right?
Ms. Waxman. Yes, this past year was almost three times.
Mr. Tierney. Am I wrong in assuming that when a company
gets the prescription drug ready to put on the market in the
first place, no doubt sets the price at a level they think will
give them a return on their investment?
Ms. Waxman. I assume that's true.
Mr. Tierney. And then I would think that the only
adjustment after that would be necessary on that figure would
be something that would account for inflation or increase in
their costs?
Ms. Waxman. I would think so.
Mr. Tierney. Is it at all likely that the cost associated
with marketing these pharmaceutical products are four times
that of the cost of marketing any other product?
Ms. Waxman. I think the reason we looked at the SEC reports
and looked at how much profit there was, was really to make the
connection that those prices are going up so much higher than
inflation, really has more to do with profit for the industry
than it does for research and development.
Mr. Tierney. Thank you.
[Pause.]
Mr. Allen. Thank you all very much for being here. Ms.
Bascetta, I wanted to ask you some questions about--I think you
were saying that for therapeutically equivalent drugs you were
able to enter into contracts and get reduced prices, but most
of those are generic drugs as I recall.
Ms. Bascetta. That's correct.
Mr. Allen. And when you try to deal with brand name drugs
you run into the problem of proving they are therapeutically
equivalent and there are lots of steps. I think I was looking
for the number here, but I remember the number 91 percent,
whether that was in your testimony or in the materials that 91
percent of your purchases are brand name drugs, not generic?
[Microphone interference.]
Ms. Bascetta. Ninety-one percent of the expenditures are
for brand name drugs.
Mr. Allen. OK, so 91 percent of the expenditures are for
brand name drugs. Just by--do you know how much of the
purchases are for brand name drugs, what percentage of the
purchases? If you don't have it----
Ms. Bascetta. We have that. We believe it's around 40
percent.
Mr. Allen. So 40 percent of the purchases are brand name.
We'll correct that later, are brand name, but 91 percent of the
cost.
Ms. Bascetta. Thirty-six percent of the brand name and they
account for 19 percent of the expenditures.
Mr. Allen. Now I've introduced legislation in the Congress
that would allow one of the existing Federal agency to do
studies independent studies of the pharmaceutical industry that
would look at the cost effectiveness and the comparative
effectiveness of different drugs. The reason for doing that,
this is a way of offsetting the impact of direct-to-consumer
advertising, but if we had some sanctioned studies looking at
the comparative effectiveness of drugs, different drugs, let's
assume two brand name drugs, the thought is that then we could
tell what we can't find out from the advertising, then we know
which of the two drugs works the best and that's the kind of
information you can't get now very easily in an independent
way.
Would that help or would you have to do something further
than measuring comparative effectiveness in order to decide
whether drugs were therapeutically equivalent?
Ms. Bascetta. I can only tell you what I know the VA and
DOD goes through and what similar large purchasers go through
in making those decisions. And one of the first steps that they
take is to look at their own populations and determine which
drugs their populations need and then primarily to gain the
support of their clinicians they use their pharmacy and
therapeutics committees to go through these scientific
processes of determining whether, in fact, the drugs are
interchangeable and then as you've pointed, once they make that
determination, they can competitively bid for the--solely on
cost. But as to whether or not a process like that for the
country would work, I don't know. I don't know enough about
what FDA does in determining therapeutic equivalence of
interchangeability, for example. Perhaps the VA witness, John
Ogden, would be able to comment on that.
Mr. Allen. Just to clarify some of your testimony, when
you--you set up--the VA has a formulary. It operates its
formulary. Does that--I just wasn't quite clear. Is that a
formulary that operates with respect to both brand name drugs
and generic drugs or do you run into the same kinds of problems
you do with getting a contracted discount?
Ms. Bascetta. No, they have both generic and brand name
drugs on their formulary.
Mr. Allen. So they basically pick--they're doing enough
studies to figure out which drugs are preferable in which
classes, whether or not they are brand name or generic.
Ms. Bascetta. That's right.
Mr. Allen. Thank you.
Mr. Tierney. Mr. Shays.
Mr. Shays. Thank you, let me--what I'm going to do is just
tell you my attitude and then in the rounds of questions I have
you can respond based on my general conception which may be
true or not.
Theoretically, the system, as I saw the pharmaceutical
program in the United States to work was that you had
incentives to drug companies to spend colossal sums of money in
research. They would have an exclusive ability to sell their
product if they were successful, make a very general profit and
then ultimately that would become a generic drug in which the
price would drop significantly and what you would have is this
constant feeding of new brand breakthroughs plus older drugs
that had proved quite successful.
What I sense has happened is that the drug companies,
particularly before the end of the cycle, if it's 17 years, mas
o menos, they would trump that drug and convince the consuming
public that the drug that they had just had the monopoly on is
no longer the drug of choice. And in some cases that may be
true. In other words, they may have come through with a
significant break through or it may just be the difference
between 98 percent and 100 percent.
There is a challenge though because people always want the
best and then the issue for me is when does the government step
in and say we'll fund the drug that does 85 percent of what
this new drug does at 100 percent.
The other point that I would just bring to the table is I
view the VA as being one of their greatest successes is that
they have managed to buy drugs in large quantities, reduce the
cost of those drugs 30 percent, give or take, and you then
wonder why we don't do that for Medicare, in general, but in
Medicare, we allow individuals to buy drugs as individuals, so
there's no mass buying. So when I'm looking at the Department
of Veterans Affairs, I'm also saying OK, we learn lessons how
we can, under the Medicare program be buying at those, at that
mass volume. So that's kind of my view.
Ms. Waxman, you basically said that drug companies can
extend their monopolies in a number of ways including
marketing, what is essentially a new and improved version of an
existing drug.
Ms. Waxman. Right.
Mr. Shays. That's one point. You say the claim the generic
companies has infringed on patents holding the entry of the
generic drug for up to 30 months. And then the last point was
by entering into deals with generic manufacturers to delay
their marketing of generic, that intrigues me first and that's
the one I want to take up.
Anyone can make a generic drug basically, so how would a
drug company be able to prevent the generics from coming in
under that third scenario, could you respond? I'd like a nice,
loud voice.
Ms. Waxman. What has happened is because the way the
Federal law now is that governs generics, there is a Federal
law now that governs the way generics can come into the market.
There's a whole system. And so what happens is the generic
would, the generic company would file a claim, let's put it
that way, that the patent in existence is not infringed by this
generic coming into the market and as to my third point, that
one generic, if the company is successful gets 180 days
exclusivity in the marketplace.
Mr. Shays. Let me ask you this. Do different generic
companies have to race to see which one gets there first?
Ms. Waxman. Yes, they do have to race under current law, if
they want that extra 180 days exclusivity; the theory being
they did all the paperwork, they had to do other research, they
did some work to be able to offer the generic, so they get this
benefit of 180 days exclusivity. That is the theory.
So what has happened, unfortunately, is as you might
imagine, the generic companies are usually not as profitable,
not as big as the big brand name companies, so on occasion the
brand name has gone to the generic company and say I'll make
you a deal. You're going to make X money in your 180-days
exclusivity. I'll give you this much money. You don't even have
to put the product on the market. I get to keep my patent for a
longer period of time and everybody is happy. Everybody but the
American consumer----
Mr. Shays. Any company can jump into the marketplace?
Ms. Waxman. Well, after that 180 days, then other companies
can----
Mr. Shays. Which company gets that first 180-day crack?
Ms. Waxman. The first generic company that's ready to go to
market. They get 180 days exclusivity on their generic product
and so does that make sense? So what happens is the grand name
says to the generic company, I'll make a deal with you. You
don't even have to go to market. Just don't go to market and
I'll give you this money. I get to keep my patent which I can
charge a lot more, and both companies come out ahead. The
problem is, of course, the American consumer is the loser and
that has happened on a number of occasions. The FTC is actually
looking into that problem and indeed, there are certainly
different bills coming out of Congress that would fix that.
Mr. Shays. Is there anyone else who wants to comment on
this issue, the issue of the different ways the pharmaceuticals
try to prevent the generics from coming in the marketplace,
either adding a slight variation to their exclusive product or
claiming the infringement. Do you basically accept all three of
her points, Ms. Waxman's points, Dr. Sager?
Mr. Sager. We might add pediatric exclusivity, if you test
for pediatric use, you get an extension on your patent.
Mr. Shays. Is that because companies tend not to invest as
much in pediatric drugs because there's not a bigger market?
Mr. Sager. The theory was that it costs additional money to
conduct the additional trials, although it seems that typically
the extra revenue garnered far exceeds the cost of the testing
for pediatric use.
Mr. Shays. I mean there's no question, if you make the
generic, the cost of production can be quite small, so generic
companies still can still make a very nice return.
Mr. Sager. To which, of course, the brand name
manufacturers would claim well, we need the high profits to
finance their research. I think that's why----
Mr. Shays. Let me just tell you, I happen to accept that
part. I mean I was out with a company in California that
invested $1 billion in a drug to retard the deterioration that
would cause Alzheimer's, and so far they're out $1 billion. If
they didn't get some--if they had succeeded, they would have
had a license to print money, but frankly, we all would have
benefited. So I accept some bit of that concept.
Mr. Sager. I think it's a matter of balance.
Mr. Shays. OK.
Mr. Sager. We have some evidence recently that a massive
effort to push generics would save only about 1.3 percent over
a decade. I think we're skirmishing about unfortunately areas
that are peripheral.
Mr. Shays. Do you think the generic issue is peripheral?
Mr. Sager. I think today it's a big focus and it's a way
that many people hope in the short term to save money. For the
long haul, I don't think it takes us very far. If we look at
Western Europe, for example, most nations very little on
generics. That's because they negotiate and set fair prices on
the brand name drugs.
Overall, what I think we need to do is design a package
deal.
Mr. Shays. I'm sorry, who sets a fair price on exclusive
drugs?
Mr. Sager. The government does, Cigna funds do. It's really
a matter of public regulation that set the prices on the brand
name drugs. And the prices are low enough so that there's just
not--they don't rely on the very high prices on the brand name
drugs followed by lower prices.
Mr. Shays. I don't understand who they is. I'm sorry----
Mr. Sager. I'm sorry, Western Europe governments.
Mr. Shays. Yes, but I'm not aware that Western European
governments have seen great breakthroughs in pharmaceuticals.
Mr. Sager. I think that issue is----
Mr. Shays. Canada controls prices. Are they having great
breakthroughs as Western Europe?
Mr. Sager. The new molecular entities, the new medications
that come out of Western Europe pharmaceutical companies seem
to be about proportionate. And their investment in research
seems to be about proportionate to ours. I know Pharma denies
that. But what's interesting is the world pharmaceutical
companies earn a disproportionate share of profits in the
United States because our prices are not regulated, but
British, Swiss, Swedish, French, German and other
pharmaceutical companies are quite innovative. They just don't
make as much of their profit in their own companies.
You might think of this as equal opportunity, pillaging and
plundering of the American patient.
Mr. Shays. I think that.
Mr. Sager. And I don't think we can sustain that. I'm not
saying that other countries need to pay more, but we need to
pay less and I think that's part--a lower price for
medications, but allow the drug companies to develop effective
new breakthrough drugs to garner the higher profits they
deserve through higher volume.
Mr. Shays. Ms. Bascetta, is there any comment you'd like to
make in this area?
Ms. Bascetta. Only to say that GAO hasn't done any work on
research and development and profitability in the drug
industry.
Mr. Shays. OK. Mr. Chairman, I'll do the next round, but I
appreciate we're going to be doing 10-minute rounds?
Mr. Tierney. Yes, I think that helps a lot. Let me just
followup on that. I know that one of the mechanisms that VA
would allow them to get 24 percent lower than the average of
nonFederal price, is that right? Anybody want to step up on
that?
Mr. Sager. A minimum effect.
Mr. Tierney. A minimum effect. And they do that how? Just
by establishing that by Federal law that this is as much as you
can charge? Is that a mandate? How does it come into play?
Mr. Sager. My understanding is that they will get a price
equal to the lowest price prevailing anywhere else, which is
the way the Federal Government buys most things, not just
medications.
Mr. Tierney. So Ms. Bascetta, in the report, you indicated
GAO had some concern that if we were to take the Medicare
population, combine that with the VA and Department of Defense
and all that, that one of the problems would be that other
prices would go for other populations?
Ms. Bascetta. That's correct.
Mr. Tierney. So what we have here instead is that because
other countries manage to find a way to negotiate a better
price, the price in this country goes up. Wouldn't we be all
better off if we also joined the fray and got some better
prices and maybe it would even out a little bit as opposed to
the people who just get whacked with higher prices all the
time?
Ms. Bascetta. It's certainly a vexing problem. The concern
that we and others have raised is that as you pointed out, the
more people have access to the FSS prices, the more that
manufacturers would be inevitably driven to offset any
decreases in revenue by increasing prices for those nonFederal
purchasers.
Mr. Tierney. Or people in other countries?
Ms. Bascetta. Yes, wherever else they would have their----
Mr. Tierney. Right now, every time they cut a deal with
Canada or England or some other country, they just turn to the
United States and say well, that's what we're going to get
back. We'll just jack the prices up over there.
Ms. Bascetta. I'm not familiar with the----
Mr. Tierney. We've done studies in this committee, this
subcommittee, the minority side have done studies to show that
cost shifting actually occurs in a significant way.
Ms. Bascetta. I'm certain that it does. But the tail
chasing that occurs, unfortunately, is that those FSS prices
ultimately go up because----
Mr. Tierney. Well, they may go up, but they go up a little
bit all across a much larger board instead of just going up
over here. I guess I'm saying at some point people take
advantage of the United States because we're the only country
that seems to say these prescription drug companies just go out
and treat us any way they want to treat us no matter no
shabbily, but if we want to say that we're going to get in
there and start negotiating for some better prices, then the
prices everywhere in the world may have to shift a little bit
as opposed to taking a lower price over Europe and decide we're
going to make the profits in the United States and just take it
on to them, right?
Ms. Bascetta. I suppose that would be true.
Mr. Tierney. Dr. Sager, let me go over--I assume my
colleagues and other people hopefully have your charts. You put
a proposal out here as to what you might do and I suspect that
one of the good parts of your proposal is that you deal with
that issue that we always hear about, if you lower our prices,
we're not going to do any research, we're all going to die.
That's essentially the comeback we get from the companies. You
do that by making sure that the companies get a decent profit
and that they get money for research and development?
Mr. Sager. That's right.
Mr. Tierney. Would that keep in place all the tax credits
that they currently get for research and development which, as
I understand it, reduces their taxable rate right now to
something about 17 percent instead of 35 percent?
Mr. Sager. I think it would be necessary top ut together a
package deal, really sit back and negotiate all of the
arrangements by which drug makers garner revenue to first of
all sustain competition by protecting businesses, allow them to
ride out the dry seasons. Competition requires competitors.
Competition will prompt more breakthroughs. Mergers probably
will reduce innovation.
I think that profits should be commensurate with risk and
with the value of the drug they produce. Unfortunately, in
today's market, where we lack a competitive marketplace, drug
makers set prices to maximize revenue and they may be able to
persuade doctors and patients to prescribe and buy drugs out of
proportion to the value of the medications because we don't
have a free market at work.
Mr. Tierney. I'm going to just for the sake of time here,
I'm going to assume that your calculations on the gross
constant elements of the medication prescription drug benefit
are accurate and we have time later, we can go over that, but
you basically come down to the figure $2,153,000,000 for a 10-
year period, 2002 to 2011. That's for everybody being able to
get their prescription drugs, that's the veterans' population,
the seniors' population, being able to get them at a reasonable
program that you've described for very low co-pay and a very
low deductible and then help them from then on in.
Mr. Sager. For all Medicare eligibles.
Mr. Tierney. For all the Medicare eligibles. And whether or
not they're veterans or anybody, right, you include them?
Mr. Sager. Yes sir.
Mr. Tierney. Now I'll cover the gross cost, the way that
you would expect to pay for this and maybe you can explain a
little bit more so even I can understand. The patient payments
you indicate, you would charge a premium of 2.5 to 3.5 percent
of someone's Social Security check and that small amount would
then rise by 2.5 percent a year.
Mr. Sager. Yes.
Mr. Tierney. What do you suspect would be the lowest
premium somebody would pay, what would be the highest somebody
would pay under Social Security?
Mr. Sager. Premiums would range from about $6.50 a month up
into the $40 range.
Mr. Tierney. And that would be pretty much the extent of
it. And you would have co-pays of $5 or $10 with one third that
are given to low income patients?
Mr. Sager. That's right. The one third of the total co-pay
amount would be directed toward lower income people.
Mr. Tierney. And they would pay no co-pay or just a smaller
co-pay?
Mr. Sager. There might be a nominal $1 co-pay.
Mr. Tierney. All right, then you get back a sizable amount
of money, almost $964 million by capping the annual rise in
total spending after 2002 at 8.5 percent annually and you would
just have this--this law would just mandate to the companies to
make 8.5 percent per year increase and that's it.
Mr. Sager. Increase in revenue, yes. And that would also
be--actually, that would garner around, that would save around
$300 billion and we'd save around $400 billion by paying for
new prescriptions that Medicare patients were now able to
afford, by virtue of the Medicare benefit at the cost of
manufacture. So the manufacturers don't earn windfall profits
on the higher volume, but their actual costs of making more
pills are covered.
Mr. Tierney. So if I'm making Medicine A and I'm selling to
one population now, I'll be able to make every year after this
8.5 percent annually, increase on that?
Mr. Sager. In total revenue.
Mr. Tierney. In total revenue. And how do we check that?
How do we police that?
Mr. Sager. We check their financial reports year by year
and if they generated too much money, next year's prices would
be adjusted down. And so this would be reconciled year by year.
Mr. Tierney. And how do we keep track now, the second part
of that, how do we keep track of the additional people coming
on because we've now created this new benefit and separate them
out from the others so that we know that the manufacturers are
going to get their marginal cost on that group? How do we
logistically do that?
Mr. Sager. We could translate this into an overall price
discount on all drugs because that would be--it would make the
record keeping far easier. This translate into a 22 percent
effective price discount.
Mr. Tierney. And then you would capture your existing
revenue in a number of different ways. the largest capture
seems to capture offset marketing and advertising by growing at
12.5 percent annually. Explain to me what you mean by that,
please?
Mr. Sager. Well, the drug makers, if they accepted this
arrangement, would no longer be marketing and advertising their
own medications. Instead, a federally financed, publicly
financed organization, maybe a separate nonprofit organization,
would be evaluating the safety and efficacy of new medications
and indicating which patients the medication would be useful
for and provide that information to patients and to physicians.
One source, objective information. In that case, we would say
to the drug makers, you no longer need to market and advertise.
Provide the dollars that you would have spent on marketing and
advertising to help pay for the cost of this new benefit.
Mr. Tierney. I see some problems with that. One is you're
only going to get people to compete through advertising and
marketing and they say I won't play. I think I do a better job
of effectively advertising than the guy next door and that's
how I want to effectively get the market share, so that's going
to have to be more of a mandate than a voluntary mode, I
suspect.
Mr. Sager. And that's tough because of first amendment
issues. That's why it might be a contractual arrangement. If
you'd like Medicare to pay for your medications, you need to
sign on board.
Unfortunately, I think the prescription drug industry is
thinking short-term bottom line next quarter, higher prices,
profits, making more through marketing, through breakthroughs,
through higher prices on existing medications as Judy Waxman
testified.
Unfortunately, I don't think that's going to work forever.
It's not going to work for them and it's not going to work for
us and unless they're willing to consider alternative
arrangements, we may suffer something like World War I, 4 years
of blood and machine guns and gas and no progress. Better to
have an armistice and a peace treaty in 1914. And I think we
need new ways of thinking about medications and paying for
them.
Mr. Tierney. Well, how do you stop a company from saying
that arrangement, well, I wasn't going to advertise at all this
year, so I'm not going to put any money in the pot.
Mr. Sager. We would look at the historical record and
extrapolate forward.
Mr. Tierney. And marry them for life on that. And what
about new products coming on market? How do we determine how
they would have advertised for that? Again, just use some
extrapolation out of previous products?
Mr. Sager. I think that would be right. Or we could take
the historic average for that company, looking how it marketed
new medications.
Mr. Tierney. And then you would capture the Medicaid
dollars from States, whatever they were paying to Medicaid and
now they're paying through this program?
Mr. Sager. Right, and that would be frozen at today's
levels. So they would have instant relief.
Mr. Tierney. And the same with the Federal dollars with the
projected rise, you'd now apply them to that and the VA dollars
the same way?
Mr. Sager. Yes.
Mr. Tierney. And capture employer maintenance of effort.
Explain to me what you mean by that last item there?
Mr. Sager. Employers provide--employers still finance very
substantial amounts of prescription drug for employees who are
Medicare eligible, over 65 and especially for retirees. The
employers are finding it very difficult to sustain, as you
know, their retiree health benefits owing to the rising costs,
principally of medications.
In many instances, these are contractual obligations or in
other instances, moral obligations and employers suffered
terrible black eyes in the public and in the relations with
existing workers and retirees if they reneg on commitments. So
we would engage employers that now have these obligations and
say we'll buy you out, but you maintain your effort at 20
percent of today's level.
Mr. Tierney. So you're counting the fact that all of them
are substantially would participate as opposed to turning down
your offer?
Mr. Sager. Those that now pay.
Mr. Tierney. Thank you. Mr. Allen.
Mr. Allen. Thank you, Mr. Tierney. Ms. Bascetta, I want to
come back to you for a moment.
Mr. Tierney did a good job of laying out what I have always
taken to be the GAO argument about what happens if you reduce
prices for one group that is on the Federal Supply Schedule and
again, we're getting the benefit of the Federal Supply
Schedule.
Mr. Tierney said and he extended it to other countries, and
this is common currency in the debate in Washington among
Members in Congress too. And the suggestion is that if you give
someone who is not getting a discount now, that the industry
will be forced, this is sometimes a verb, encouraged, whatever,
given an incentive, to raise prices to other groups.
I want to make an argument to you as to why that argument
and it is an estimate about future behavior. It is, in its
nature, it's not so much a matter of fact as a matter of
opinion, but let me give you this argument. I spent some time
talking a few years to someone who used to set prices, who used
to work for a pharmaceutical company setting prices and
basically, what the said they did was they charged what the
market would bear in every market that they were dealing with.
The point I am making is this. I suggest that what they are
doing now is maximizing their return from every group to whom
they sell prescription drugs, whether that group is Aetna or
Cigna or the Veterans Administration or France or Germany or
anybody else. They're always trying to get as much as they can
because their job, the CEO's job is to maximize revenues and
income and keep the stock price up.
If that's the case, it is--they're getting as much out of
Aetna now. If they lose--if there is pressure, if all Medicare
beneficiaries got a discount now, there's still--it doesn't
change the incentive to maximize the revenue from Aetna. This
is not a case of--set of bottles of water where they all have
to even out at the same level. So that's the conceptual
argument. Here's the evidence to back it up. In January I was
down at a conference in Florida with Mr. McConnell, the CEO of
Pfizer. Pfizer has just announced its new discount program.
They just said we will sell to every American senior under 200
percent of the poverty level all of our medication which
averages $61, $62 per month, we will sell them those drugs for
$15 a month. If you move away--that's a 75 percent discount.
You move away from Pfizer and look to the discount cards, every
company that's advertising a discount card is saying we will
give you a discount of 25 to 40 percent. Well, that's the
discount that all of us are talking about.
Now so the industry itself in the last year is really
saying we can discount, provide substantial discounts to the
Medicare population, but we certainly want Medicare to require
that of us. That's one point.
Second point, there are 330 million people in Europe. There
are 25 million in Canada. There are 127 million in Japan. There
are 280 million in this country. The Medicare population that
we're talking about when we get to a Medicare benefit, it's
probably about half. Let's say 19 million Medicare
beneficiaries that cannot--that have either no coverage or
inadequate coverage. It's simply, I would argue, it simply
cannot be true that these 19--charging the highest prices in
the world to these 19 million Americans is what shores up an
international multinational pharmaceutical industry. That's a
long ramp in many ways. But the point I'm trying to get at is
and I'm here asking for your response, let me pose a question.
Why isn't it the case that if you give all Medicare
beneficiaries the same kind of discount or benefit, let's say
discount through the Federal supply schedule, why isn't it the
case that the industry will sell more drugs than they are now?
That's what Mr. McConnell said down in Florida. He said I'm now
going to Wall Street and telling them that this will not reduce
our revenues or our earnings. Even though we're giving a 75
percent discount to a significant number of seniors, it won't
reduce our revenues or earnings. They'll sell more drugs and in
any event, the market is expanding so fast that what's really
going on, this is all about maximizing revenue and has almost
nothing to do with the recovery of their costs. I'm sorry for
doing that to you, but you see the conceptual challenge here
that we face and I would like your reaction.
Ms. Bascetta. I see the point that you're making and I have
a few reactions.
Mr. Allen. Can you talk a little louder, please?
Ms. Bascetta. Yes, certainly. One is that in some of the
work that we've done, we've looked at what would happen, we've
looked at how difficult it would be to predict exactly what
would happen if the Medicare population, for example, were able
to buy the FSS prices and there we're simply comparing the size
of that population compared to essentially VA and DOD. And of
course, it's much bigger. We haven't looked at all the other
markets and drug pricing is segmented by market, so we didn't
look at the Medicare population compared to the world or all
the other populations who would potentially be purchasing drugs
at different prices. So that's one observation.
Another though is that in situations where Medicaid has
obtained rebates, in fact, what did happen is that prices to
HMOs and other purchasers did go up. So I guess the cautionary
note is that much of this very complicated. There's been a
proliferation of these complex relationships and financing
arrangements. Much of the information is proprietary. It's very
difficult to tell, in fact, what is actually going on with
regard to pricing. That's one of the reasons that we didn't--we
were careful to say that you couldn't predict exactly how much
FSS prices might go up, for example. It would depend on the
specific drug, the number of people who would have access, the
competition in that particular market, the price sensitivity of
other purchasers. It's very hard to figure it out and our
concern would be that without much better, much, much better
data, there could be some unintended consequences of picking a
particular way to solve the problem.
Mr. Allen. And just for clarification, you said FSS prices
could go up. And that's because, if I'm correct, and correct me
if I'm wrong, that's because the FSS price is tied to something
called the average manufacturer's price, is that right, in the
statue?
Ms. Bascetta. No. The FSS is based on the most favored
price to a nonFederal customer.
Mr. Allen. Right.
Ms. Bascetta. So what would happen would be as the number
of people having access to the FSS price rises, the supposition
is that the drug companies would face a decline in revenue
which would cause them to raise the price for those nonFederal
customers. And because the FSS is benchmarked for the
nonFederal customer, you come around full circle and end up
raising the FSS prices for everyone.
Mr. Allen. And no nonFederal customers, you're talking
about Aetna or Cigna or Anthem Blue Cross or whomever?
Ms. Bascetta. Right.
Mr. Allen. Kaiser?
Ms. Bascetta. Correct.
Mr. Allen. And the foundation of that theory is that adding
more people to FSS would actually reduce revenues for the
industry. My point is it's a nonstatic world. There's an
explosion in drug expenditures and pharmaceutical use?
Ms. Bascetta. That's exactly right. It would reduce
revenues for that segment of the market that the industry is
dealing with and the belief is that they would--to make that up
they would raise prices elsewhere.
Mr. Allen. All right, thank you.
Mr. Tierney. Mr. Shays.
Mr. Shays. Thank you, Mr. Chairman. One of the reasons we
have this panel is to identify and then we'll have our second
panel, to identify what is it that they do right that we can
learn from and what other things in the process of their doing
what they're doing with pharmaceutical drugs can we learn, in
general, about the industry.
Ms. Bascetta, you identify four important factors that have
contributed to reducing pharmaceutical spending by the VA and
DOD. First, you say the two Departments have used formularies
to encourage the substitution of a lower cost drug that is
determined to be just as effective as a higher cost drug.
Now the challenge we have in Medicare is--first of all,
it's being paid for by the individual. But the challenge we
have there is that you will have customers, patients, who
basically if they're sick and they take one drug does 95
percent of what another drug, they want 100 percent, even if
it's three times as expensive. And they will clearly want that
if someone else is paying for it.
So I happen to believe that particularly if the Federal
Government is going to pay for it, they should have some right
to say what it's willing to pay for it.
And I guess I would ask you, Dr. Sager or Ms. Waxman, will
you be troubled if you were in our shoes and we designed a
Medicare program that basically says we will pay for this drug
at this price and we won't pay for this drug because we think
this drug does almost as much and it's one third of the cost.
Do you think that is the way that ultimately we might design a
Medicare program, that we will pay for some drugs because we
think they're almost as good and we'll pay a lot less and then
let the consumer decide whether they want to pay all on their
own or pay--or have the drug almost free? Comments, real short.
Ms. Waxman. I'll make one comment.
Mr. Shays. Keep your voice a little louder.
Ms. Waxman. Many private companies do that kind of thing.
It's a practice that's used very widely.
What we have always said on behalf of the consumer is there
has to be some way for the consumer to get that other drug if
the doctor thinks it's really necessary.
Mr. Shays. I think you have a breakdown. You're not going
to be able to take advantage of what the VA does. Because the
VA basically decides they're going to get one drug over
another----
Ms. Waxman. That's right.
Mr. Shays. They get it for a lot less. And you're saying we
can't learn anything from that?
Ms. Waxman. I'm saying we can learn something and we can
direct people to that lower cost structure, but I don't think
it's tenable to say if in certain circumstances doctor thinks--
you posed the example of 85 percent is good, just
hypothetically. If the doctor says for this particular patient,
that person really needs the 100 percent drug, there has to be
some kind of mechanism or way to get that.
Mr. Shays. We know that doctors basically, just in terms of
lawsuit, even if they thought one was 98 versus 100, they're
going to go with the 100 because they're not taking any chance.
Ms. Waxman. There does need to be education of physicians.
I think physicians need to be educated on looking at the drugs
that can do just as well as relying on the manufacturers.
Mr. Shays. I get your point. In other words, it's not
obvious here.
Yes.
Mr. Sager. There are several choices. One thing they could
do as physicians, you've got $1 million worth of drugs you can
prescribe this year for your patients or half a million,
whatever the appropriate amount would be. And you spend that
money to do as much clinical good as possible for your patients
because we have to balance it out somehow.
Mr. Shays. Fair enough.
Mr. Sager. That would give the people with the greatest
information the choice.
The other thing we could do is go to the person with the
firm that's manufactured this valuable new medication that's
much more expensive than saying what if we give you all the
business, how far can you lower your price and recognizing that
you will offset the lower price with much higher volume.
Mr. Shays. Would you agree that one of the challenges is
basically you're going to have to decide how much better is one
drug over another? The government would be stepping into that
process and obviously a difference between 185 might be too big
a gap, but I have a feeling that sometimes we're really talking
about almost a horsehair's difference between one and another.
Mr. Sager. There may be a tiny difference in value and
there may actually in real world be a tiny difference in cost,
once you talk with the drug makers about how much does it
really cost to make that pill?
Mr. Shays. Ms. Bascetta, but bottom line, do you think we
can learn a lesson from your Point 1?
Ms. Bascetta. Yes, but I'd like to point out that in the VA
one of the most significant differences is that the physicians
work for the VA and so the VA has a distinct advantage of being
able to influence their prescribing patterns from either
restricting their choice for some of the drugs in the closed
classes or for strongly encouraging and prescribing particular
drugs in the preferred classes or in the formulary, whereas in
the Medicare world----
Mr. Shays. When you say ``preferred classes'' is that the
100 percent versus the 85 percent? What do you mean by
``preferred classes?''
Ms. Bascetta. Preferred class, a closed class is one from
which the VA has a committed use contract. In a preferred
situation they don't have that committed use contract, but the
drug is on their formulary and physicians are strongly
encouraged to----
Mr. Shays. And the formularies, I view, as a laundry list
of drugs that the VA buys?
Ms. Bascetta. That's correct.
Mr. Shays. Let me ask you again, you said DOD had some
difficulty getting private providers to adhere to a limited
formulary, in other words, that's----
Ms. Bascetta. Yes.
Mr. Shays. Explain what you mean by that?
Ms. Bascetta. Thank you for asking me to explain that
because that's where the analogy to Medicare comes in. In the
Medicare situation in the DOD tri-care situation, you have
private providers who are writing in the DOD case, about half
of the prescriptions for the military beneficiaries. In the
Medicare world, all of the providers would be private
physicians and it's much harder in that situation for the DOD
or potentially for CNS to exert influence over its providers to
write for the drugs that are on the formularies. It becomes
much more complicated, particularly if the beneficiaries are
asking for different products than happen to be on the
formulary.
Mr. Shays. So that's an indication of trying to go to
Medicare under this, then dealing with the private folks, that
they seem less receptive to the formularies?
Ms. Bascetta. That's right.
Mr. Shays. Let me get to your point 2. You say VA and DOD
have been able to effect different arrangements to pay for or
purchase prescription drugs at substantial discounts. I don't
really how that's different from 1. How is that different from
1?
And by the way, Mr. Musselwhite, sometimes a person who
says nothing has got more to say because they have been
thinking about how they would answer it. I'm going to allow you
to jump in with Ms. Bascetta's permission any time you want to.
Fair enough?
Mr. Musslewhite. Sure.
Mr. Shays. So feel free to respond. Ms. Bascetta, explain
to me Point 2 how it differs from Point 1?
Your Point 1 is formularies. Your Point 2 is are you saying
are there other things besides formularies that they've been
affecting employment, different arrangements to pay for it,
purchase prescription drugs at substantial discounts. What are
some of the other things you're talking about?
Mr. Musslewhite. They are related, the different contract
arrangements and the formulary, but because VA buys the FSS
schedule, any drug that buys is going to begin--it's going to
be less expensive than what others have purchased. That if in
addition to that VA is able to identify a class, a particular
drug that is either to be used all the time or merely all the
time or is preferred, then it's possible to compete a contract
for that drug and get even better price than FSS.
Mr. Shays. The third one is you basically talk about the
mail order process. And that seems like there would be
significant savings. It would seem to me that would--one of the
problems that we have been told is that the VA buy sin bulk,
whereas Medicare is bought by individuals. But if you had a
mail process, there would obviously be significant savings. The
challenge, I guess, that some would suggest is that you're not
sure who ultimately is using that drug that's mailed. You're
also raising the question of whether the mail discontinues even
when the person doesn't need the drug anymore. So maybe you
could just tell me, do you believe, all four of you, do you
believe that the mail order concept has a parallel to the
Medicare program and does that illustrate a potential benefit
for the Medicare program.
Ms. Waxman.
Ms. Waxman. I have to say quite frankly I don't exactly
understand how the mail order saves money. It sounded to me
like it was cheaper to send it out than have people come in and
deal with a clerk and fill it that way. Is that correct or is
there something else?
Mr. Shays. Dr. Sager, why don't you respond and then we'll
have Ms. Bascetta.
Mr. Sager. I don't think the savings are very substantial.
And also, you reduce the availability of community pharmacies
to provide the medications that you need stat, pain killers,
antibiotics, after hospitalization. They are covering their
fixed costs on a smaller volume so they may have to raise their
dispensing fees.
Mr. Shays. Thank you. Jim.
Mr. Musslewhite. The spending in VA is a dispensing cost
and as we indicated in the testimony, the volume of
prescriptions for pharmacists is much greater through the use
of automation. These are refills for the most part. You get
your first prescription at the clinic or at the hospital so
that's where the efficiency or the cost savings----
Mr. Shays. I would think that would be quite significant
under those terms. You don't have dialog. You don't have--it
almost can be automated, it would strike me.
Mr. Musslewhite. In VA, it is automated. And it would have
an effect on local retail pharmacies.
Mr. Shays. Is there any study that you've done that is
shown and Mr. Chairman, I think I've run over a little bit, is
there any study that you've done that's looked at the negative
and that is drugs being sent out because it was refilled and
the person may have passed away or the families get it and just
chuck in the mail because the person----
Ms. Bascetta. I'm not aware of any studies that we've done
on that issue. I believe that VA will tell you that they have
pretty strict controls over their mail order operation, but
that would be a good question to pose to them.
Mr. Shays. Or to you all. Last point, last, you talk about
the DOD joining forces and you mentioned VA has a much smaller
list, over 1000 versus a much smaller number.
Ms. Bascetta. 175.
Mr. Shays. What is it?
Ms. Bascetta. 175.
Mr. Shays. 175, just basically quite a significant
difference. But I would imagine that the DOD is using more of
that 175, so it's pretty big volume stuff.
Ms. Bascetta. That's correct.
Mr. Shays. And so they are working together to get the
purchasing of that?
Ms. Bascetta. Yes, we believe they're making good progress
in their joint procurements. Also, I might point out that the
Congress directed DOD to expand its national formulary and they
are working on that. They have a draft regulation that was
issued in April to do that.
In addition, with the expanded benefits to the retiree
populations, there's more commonality now between the VA
population and the DOD population.
Mr. Shays. I'm just going to comment on something Mr. Allen
that you said. I'm struck by the fact that when we allow a
monopoly pricing, a monopoly sets it at the highest amount they
get, they look at their marginal costs and they set the highest
price they can get before they reduce sales so significantly
that they get revenue or profit. So when they're looking at the
lowest market, I think they're saying that market isn't buying
anything or very little and they're going to price it in a way
that gets them above their marginal cost and they're going to
get some benefit, but they don't want to do it, they don't want
to price their product in a way that others then start to argue
that the market that is buying at the higher cost starts to say
we want to pay less because there's a disincentive. So they're
looking at both the economics, but they're also looking at the
political issue of whether they start the price at less. Are
they going to say that people can afford who are paying at that
much higher price are going to demand that lower price and so
they look at both the political--now they're beginning to see
people that might want to set price and they're saying well,
how can they take the air out of this movement so they're
willing to take a little bit of a chance and show that they can
sell to a lower income.
But I don't look at it as mercenary--if it's mercenary,
maybe I could. It's very logical to me and we, in government
have said you have this monopolistic price because we're saying
you can go out and spend a lot of money in research which is to
just have shared a view that I don't know where it leads, but I
just would want a response from you.
I thank the chairman for his generosity of my time.
Mr. Tierney. Following along that line, I think part of the
problem we have here is this whole corporate climate right now
where people are recognizing that most people in industry are
by and large fair and honest and know that they're doing a good
job, but that a number of people are greedy and not as
scrupulous as we would like them to be and then we look at an
industry that is particularly important to people right now and
it seems to be price gouging and there's a reason to be
concerned.
Ms. Waxman, in your testimony, your written testimony, you
talk about favorable tax refunds that the industry gets. And
say that it does, in a sense, it encourages them to invest in R
& D, research and development, but there's a question that the
pharmaceutical company research dollars are funding. What are
they funding that they demand high prices. They have a special
tax exceptions for funding of research and development, but
studies show that there are fewer and fewer new drugs that
offer significant clinical improvements over existing therapies
and we have a number of studies that recently show the industry
has focused resources on developing knockoffs, so called ``me
too'' drugs as opposed to significantly clinical improvements
in drugs and instead use the money also to invest in marketing
the existing products.
With that in mind, and the fact that, as I mentioned
earlier, the studies also show that total tax credits, that
these companies are getting are significant. It's lowered their
Federal tax rate from 35.2 percent to 17.1 percent, but we
can't really tell how much of that is for research and
development because they're all lumped in to a general business
tax credit category.
Ms. Waxman. Right.
Mr. Tierney. I think the problem is people think they're
getting away with murder and wondering why they're not being
fair about this and seeing that the plan will obfuscate things
so nobody can sort of catch a bouncing ball.
Is there a way--do you think it would matter if we knew the
exact amount of the tax credits that went to research and
development, can we somehow separate that out on tax returns to
give us an idea of how much of this tax credit is going into
research and development?
Ms. Waxman. Yes, absolutely. I think it would be a good
thing to know how much is going for what and also to look even
deeper into the issue of what are the drugs that are coming
out.
Mr. Tierney. That was my next question was going to be and
would it also make sense to track just which of the drugs
they're researching and developing are significant clinical
improvements versus the knock offs and the so-called ``me
toos.''
Ms. Waxman. Absolutely. Unfortunately, what we're seeing
now, for example, on the case of Prilosec where the patent is
almost up. I mean sure we've all seen those ads for the new
purple pill. The new purple pill is an improvement in that it's
a once a day as compared to Prilosec which you have to take a
few times a day. And I assume for some populations that is a
significant improvement, but it isn't necessarily for all of us
and that's the kind of new research that's being done mostly,
unfortunately.
Mr. Tierney. Mr. Shays raised an important point about
somebody made a determination of which branded name, in this
case, or generic in that case, which one should be prescribed
if it isn't the 100 percent new one or to give the example you
give, if it's the same thing, but it's given less times a day,
who makes a decision that you go for the one that's less
expensive as opposed to the other?
Couldn't we set up an independent group? It doesn't
necessarily have to be a government group, but a quasi-public
group of very qualified people to make those types of
determinations?
Ms. Waxman. I assume that would be possible.
Mr. Tierney. Ms. Bascetta, does that sound beyond reach or
does it?
Ms. Bascetta. No.
Mr. Sager. Our plan calls for that, Congressman Tierney.
And also, I think the pricing of new drugs should be
commensurate with their value and with the risks that drug
makers undertake, incur to develop the drug.
Ms. Waxman. May I add one thing?
Mr. Tierney. Sure.
Ms. Waxman. There is a condition when a drug is--the
research is done with Federal money, there is a condition in
the statute that says the drug must be priced reasonable. No
one has ever interpreted what reasonable means or ever enforced
any particular definition of that term.
Mr. Tierney. And that's in which statute?
Ms. Waxman. In the tax credit statute.
Mr. Tierney. It's my throwaway question for a moment, is
this, suppose we condition a drug manufacturer's eligibility
for reimbursement and the tax credits and their use of National
Institute of Health money for research and development, suppose
we condition all of that on manufacturer offering their product
at the most favorable price that they offer any non-U.S./
Federal entity, including other countries.
Ms. Bascetta. The consumer would certainly benefit from
that.
Mr. Tierney. Anyone else?
Mr. Sager. We then move toward one price for the same
medication in every country, every wealthy country, and that's
pretty close to the way things work for steel and bread and
milk.
If we want to mimic what the free market will achieve, we
will see one price.
Mr. Tierney. It's not a free market. Let's be serious on
this. The NIH money owns 50 percent of what they get for
research; tax credits, they're one of the lowest tax payers in
the country; they get a patent. So I assume that none of us are
laboring under the false notion that this is a free market.
Mr. Sager. Absolutely and that's why I said mimic what the
free market would achieve if we had one. I agree with each of
your points, absolutely.
Mr. Tierney. Ms. Bascetta, Mr. Musslewhite, do you have any
closing remarks you want to make? Comment on that last
question?
Does anyone have any remarks they want to add as we wrap
this up? Mr. Allen, Mr. Shays, any questions?
Mr. Allen. No.
Mr. Shays. No.
Mr. Tierney. Thank you very much. I just always like to
know is there anything that you all, that you stayed up last
night preparing to answer that we never asked you? I mean that
seriously. Is there any question you want to put on the record
that you think has not been put on the record that needs to be?
Thank you. In that case, thanks for coming here and
enlightening us this morning. You've been very helpful. I
recommend we take about 5 minutes and then we'll start with our
second panel.
[Recess.]
Mr. Tierney. I think we'll get started on this second
panel.
First, I do have to swear you in as we do to everybody. If
you would raise your right hands and stand.
[Witnesses sworn.]
Mr. Tierney. Thank you. Let the record that the witnesses
have responded on the affirmative.
Our witnesses on the second panel are Mr. John Ogden who is
Chief Consultant to the Veterans Health Administration,
Pharmacy Benefits Management, Department of Veterans Affairs.
And our friend, Mr William Conte, Director of the Department of
Veterans Affairs Medical Center in Bedford, MA who is a great
friend of our Congressional District and the Commonwealth of
Massachusetts particularly this area. He has worked with us in
opening a number of community-based and outreach clinics and is
a great ally to veterans in the area. We appreciate all that
you do, Mr. Conte.
Mr. Conte. Thank you.
Mr. Tierney. Mr. Ogden, would you care to start? We're
going to give you 5 minutes, but if that's too restrictive,
we'll----
Mr. Ogden. No, I'm going to paraphrase my statement.
STATEMENTS OF JOHN OGDEN, CHIEF CONSULTANT, VETERANS HEALTH
ADMINISTRATION, PHARMACY BENEFITS MANAGEMENT, DEPARTMENT OF
VETERANS AFFAIRS; AND WILLIAM CONTE, DIRECTOR, DEPARTMENT OF
VETERANS AFFAIRS MEDICAL CENTER, BEDFORD, MA
Mr. Ogden. Mr. Chairman, and members of the committee, I am
pleased to have this opportunity to address the significant
accomplishments that the Department of Veterans Affairs has
made since 1988 toward effective and efficient management of
pharmaceuticals and I refer you to the attachment to this
statement that reflects those accomplishments over the past 14
years.
The Department organizational element that has been and
continues to provide leadership for these efforts is the
Veterans Health Administration, Pharmacy Benefits Management
Program. The mission of VHA PBM is to enhance the appropriate
use of pharmaceutical in the veteran population. Easy to say,
difficult to accomplish.
The five major core functions of the PBM are utilization
management, that is, development of pharmacologic guidelines,
portions of clinical practice guides that include
pharmacotherapeutics, a major part of our effort. No. 2,
managing the distribution of drugs and related services. And
Mr. Conte is going to talk about that in a few minutes.
No. 3, managing the cost of pharmaceuticals. No. 4,
developing and conducting outcomes research that we've talked
about and heard about earlier this morning. And No. 5,
education. That's education of patients and education of
providers regarding pharmacotherapy.
The business strategy for managing pharmacy benefits within
VA is a simple one. Leverage national contracts are used
whenever clinically possible in contracting for high volume,
high cost pharmaceuticals. In addition, VA has a longstanding
policy of using generic pharmaceuticals whenever they are the
clinically acceptable choice. The contracting process is
clinically driven with a goal of product standardization. The
process is grass roots in nature, is driven by clinicians in
the field, employs evidence based class reviews including data
in the VA population where it exists and involves evaluating
products and groups of products based on efficacy, outcomes,
safety, compliance, VA patient needs and pharmacy factors.
VA has been very successful in these types of contracts and
other similar contracting strategies.
Now I'd like to talk a little bit about utilization and
expenditures. Our internal analysis inside VA shows that the
increasing number of patients treated is the primary driver for
increasing pharmaceutical expenditures in the veterans health
system. In fact, when we analyze fiscal year 2001, 85 percent
of the increase in outlays was because of new patients coming
to VA and receiving pharmaceutical benefits. The increased
utilization of pharmaceutical per patient or intensity of
therapy and use of newer pharmaceuticals account for
approximately 12 percent of our increase and 3 percent can be
attributed to pharmaceutical or medical inflation, very small
proportion of our increased outlays is caused by increased
prices for existing products.
While our overall outlays for pharmaceuticals has
increased, the cost for a 30-day equivalent outpatient
prescription over the past 43 months remains relatively flat,
essentially a little over $13. This fact demonstrates that a
managed formulary process can serve as the framework for an
affordable robust drug benefit.
Let me make a comment about a lack of a Medicare benefit
and impact on VA expenditures. While it's difficult to quantify
the impact on increased utilization and related expenditure
pharmaceuticals due to the lack of a Medicare drug benefit, VA
staff report anecdotal cases where dual eligible veterans have
chosen to access VA for the drug benefit that is a part of our
overall health care system. Some of these veterans indicate a
desire to have VA serve as a pharmacy only. The Secretary has
testified before the Congress and provided written comment to
the Congress that VA should not be a pharmacy only, nor do we
believe that Congress in enacting provisions of Title 38
contemplated that VA act only as a pharmacy.
We believe that when such veterans become aware of the
positive patient outcome associated with VA's continuum of care
delivery model and to safety and health risk inherent in a
fragmented pharmacy-only benefit, they will want their care
coordinated and managed by VA health providers.
From a financial and clinical perspective, the important
lessons learned from VA's experience concerning pharmaceuticals
is that effectiveness and efficiency can be achieved when
providers who treat patients are actively involved in formulary
decision when best clinical practices are employed, when volume
based and committed use contracting are used when clinically
feasible and when clinical pharmacists are fully integrated
into the medication use process.
In conclusion, VA has many lessons learned to share in the
area of drug contracting, drug utilization management, drug
distribution and achieving positive clinical outcomes from drug
therapy. While significant milestones have been reached in
achieving cost avoidance through contracting activities within
VA and jointly with the Department of Defense, even greater
cost avoidance has been achieved by identifying and encouraging
best practices, developing and promulgating drug treatment
guidelines and through recognizing the value of pharmaceuticals
in the treatment of diseases. It is gratifying to know that our
cost avoidance efforts have been accomplished while improving
the consistency of drug therapy across the VA health care
system. Indeed, as a result of our clinically driven cost
avoidance efforts, VA has been able to partially offset the
cost of providing care to the large number of veterans enrolled
in the veterans health care system.
This completes my statement and I'm prepared to answer
questions.
[The prepared statement of Mr. Ogden follows:]
[GRAPHIC] [TIFF OMITTED] T7140.045
[GRAPHIC] [TIFF OMITTED] T7140.046
[GRAPHIC] [TIFF OMITTED] T7140.047
[GRAPHIC] [TIFF OMITTED] T7140.048
[GRAPHIC] [TIFF OMITTED] T7140.049
[GRAPHIC] [TIFF OMITTED] T7140.050
[GRAPHIC] [TIFF OMITTED] T7140.051
[GRAPHIC] [TIFF OMITTED] T7140.052
[GRAPHIC] [TIFF OMITTED] T7140.053
Mr. Tierney. Mr. Conte.
Mr. Conte. I want to thank you for that nice introduction
and I want to thank the chairman and members of the committee
for the opportunity to testify on ``Lessons Learned by VA'' and
for providing an effective and efficient management of
pharmaceuticals. The key component in providing these services
has been the creation of the Consolidated Mail Outpatient
Pharmacies. This is a service we provide for our veterans, to
provide timely, accurate and cost-effective mail out
prescriptions.
Mr. Ogden highlighted the entire Department's success and
the overall pharmaceutical management program. I'd like to
concentrate on the CMOP production concept and its ability to
deliver these cost-effective services to the veterans we serve.
It's pretty tough to do in a very short period of time, but
first, I'd like to explain the CMOP operations. These systems
are really quite unique and complex. A CMOP is a Federalized
operation utilizing a assembly line techniques, robotics and
software interfaces and automated filling systems to produce an
accurately filled prescription with an acceptable
pharmaceutical practice and packaged for delivery. And along
with that good management practices to include inventory
management, quality assurance and accounting practices and
these are all the core of that operation. Patient specific
information is sent daily from the individual facilities or we
call them host sites to the CMOP via a software interface. The
CMOP processes the request and mails the package containing the
prescription to the veteran. All labels and patient information
reflect the host facility, not the CMOP information, which
makes the entire CMOP process transparent to the patient. It is
as if the prescription were mailed from the host facility. One
could view the operation as a vending service for the host
facility. Information on cost, lot numbers, dates of fill,
everything is electronically returned to the sending station
upon completion of the order and placed in the patient's
electronic medical record.
Next, I'd like to underscore a few of the critical elements
that were addressed by the VA over a long period of time to
make this happen. And we've heard this before: creation of a
national formulary. A strong commitment to provide appropriate
drugs for use by the local medical staff with an emphasis on
best value was historically predominant in all VA hospitals. In
1992, the VA created a national utilization data base of actual
dispensing actions system-wide. This forms the basis for
national contracts for high volume, high cost pharmaceuticals.
I mentioned our current Secretary was the Under Secretary at
the time when we did this and this was really a major
initiative in the VA.. The VA National Formulary system is a
product of centralized coordination of grass roots process,
which reflects evidenced-based medicine at the patient/provider
interface.
Next came along the computerized pharmacy software. The VA
clearly, currently possesses the most sophisticated automated
medical record system I think in the country, in most
countries. Standardized software gave the VA the opportunity to
link these facilities to these CMOPs and we can download these
prescriptions to the CMOPs in minutes. And Bedford currently
downloads data from 50 sites across the Northeast.
Then came the national contracting of pharmaceuticals and
use of generics when efficacious, has been a contributing
factor of holding down overall drug costs. Without this
national approach, we'd not be able to achieve these results.
Use of national contracts and a strong, clinically based
National Formulary allows local medical centers to maximize the
utilization of resources. As John referred to earlier, we can
take those resources and maybe buy staff.
Creation of the CMOP operation was another key milestone in
us being able to provide this as centralized highly automated
prescription operation. The first systems were in Bedford, Los
Angeles and Leavenworth. The new system fills 60,000, 80,000
prescriptions a day. We're currently filling 26,000 to 28,000 a
day.
The national average CMOP dispensing cost, that includes
light, heat, this is truly a business operation within
government. It's about $2.15 a day per prescription. That
includes everything, plus the cost of the drug. So you're
looking at--except for $2.15 a major savings.
Another significant factor the VA looked at was the
creation of a prime vendor concept. This enabled us to order
drugs just in time, reduce our inventory. CMOP currently in
Bedford turns its inventory over 60 times a year which is an
amazing factor. You're looking at a couple million dollars a
day that comes in and out of that place.
So with that kind of coordinated ordering, we've been able
to do a lot of things to drive our costs down.
Mr. Tierney. That was a day you were talking about?
Mr. Conte. Yes, a day. This brief description of CMOP, I'd
like to highlight a few advantages. This coordinated system
decreases error rate. This is a totally bar coded system and
it's got numerous balances and checks in it. CMOP was
accredited by the Joint Commission on Hospitals. It received a
100. There was a maximization of pharmacist expertise at the
facility because we have taken the burden of filling these
prescriptions away from the facilities. This has enabled the
facilities to put pharmacists on the front line and have them
interface with a clinical staff which is a key component to
holding your prices down because they can then interact with
the clinical staff and pick the best drugs with them.
Maximization of production of staff. Right those
pharmacists in that CMOP fill between 1500 and 2000
prescriptions a day. Meeting demands for service, I don't think
without that we could recruit enough pharmacists in the
Northeast to keep the operation going with the workload we've
got, so because we've automated, we've been able to do that.
In summary, there's five things, six things or five things
we really do: an extremely efficient system for the effective
clinical review of pharmaceuticals; a distribution system of
pharmaceuticals of CMOPs; a data system which is your software
interface; a method to procure pharmaceuticals nationally and
the software necessary to effectively enable the coordination
of these efforts.
Thank you for your time.
[The prepared statement of Mr. Conte follows:]
[GRAPHIC] [TIFF OMITTED] T7140.054
[GRAPHIC] [TIFF OMITTED] T7140.055
[GRAPHIC] [TIFF OMITTED] T7140.056
[GRAPHIC] [TIFF OMITTED] T7140.057
Mr. Tierney. Thank you for your testimony.
Mr. Allen, why don't we ask you to go first?
Mr. Allen. Thank you, Mr. Chairman. Thank you both for
being here.
Mr. Ogden, let me begin with you. I've heard so much about
PBMs and how now Medicare benefit program could be designed
with private sector PBMs to be operating the program, that it's
nice to hear about a Veterans Administration PBM, even though
it's a little different, but you're not contracting that work
out to a private entity, I take it?
Mr. Ogden. No sir, we are not.
Mr. Allen. You do it in-house?
Mr. Ogden. Yes.
Mr. Allen. Tell me in connection, you facilitate this
national formulary process. In the private sector, of course,
formularies are a key component holding down costs to the major
buyers of prescription medication in this country, the major
insurance companies, for example. And I was wondering if you
could describe a little bit of the interaction between the
industry and your organization as industry tries to get one of
its drugs on a formulary and you try to evaluate the
comparative effectiveness of drugs, how does that work?
Mr. Ogden. I'll try to be succinct. I'll try to speak a
little louder. This is a long story. Formularies in the VA go
back, at least as far as I can determine, back to the early
1950's. I've seen a copy of the formulary dated 1951, so I can
make that statement.
And I've got to tell you, up until about 10 years or so
ago, I did not believe that we could move to a national
formulary in our organization and the reason I believed that is
because we have these affiliations with the medical schools
across the Nation, that local practice customs would prohibit
us, because of those two factors and ever moving to a national
formulary.
As Mr. Conte indicated, when Mr. Principi, our present
Secretary was the Deputy Secretary back in the early 1990's, he
used to ask me repeatedly, what is happening the VA health care
system? And my comment would be we all have to go to Austin. We
would have to meet an army of people and we could give you a
snapshot after working feverishly for many, many, manhours and
come up with a picture at that point in time and that would be
the best that we could do.
With his support, we established the National Drug
Utilization Data base which captures the actual dispensing
actions across our systems and we collect and collate and
analyze that data in Chicago and in my offices in Chicago. That
step, that program change has helped us change our mindset and
allowed us to move toward the national formulary. When Ken
Kaiser, our former Under Secretary for health came on in 1994,
1995, one of the first questions he asked me was why don't we
have a national formulary? I explained our situation, the
historical issue, the cultural issues, the different medical
school affiliations, etc., and he said I want a national
formulary and I want it next week. I said well, boss, it would
be better if we kind of do it in a timed approach if you will,
a tiered approach as opposed to going right to a national
formulary. So what we did was we went to Network, the 22 VISN,
the Veterans Integrated Service Network first in 1995, 1996. A
year later, we went to the national formulary and the key here
for us again is that data base and that grassroots involvement.
People in Washington don't make decisions about the drugs that
are used to treat veteran patients. The people who make the
decisions are two groups, basically. The first group is what we
call our medical advisory panel and that's a group of 12
physicians who are field-based. They see patients. One of those
12 physicians is a Department of Defense practitioner. The
second group that makes decisions is our VISN, our network and
formulary leaders. These are individuals who are agents, if you
will, of the network director regarding pharmaceutical matters
in the particular VISN and a subset of that group is the number
of clinical pharmacists who work in my office who do most of
the staff work to prepare an issue for debate by the Medical
Advisory Panel and the VISN formulary leaders. So those two
groups make the decisions. So it's grass roots. It reflects the
care that is being provided veterans.
I know the title of this hearing concerned lessons learned
in our drug procurement. It's really not drug procurement. It's
lessons learned in managing a benefit. And as I said in my
statement, yes, we have been very successful in contracting,
but that's not where the return on the investment comes. The
return on the investment comes in being an aggregate of all of
the factors that we would describing including one Mr. Conte
described in how we distribute drugs, but the use and
embracement, if you will, of those clinical practice guidelines
and those pharmacologic treatment guidelines by our providers
has to be one of the foremost factors in why we've been
successful.
So the formulary is important, absolutely important. It's
driven by what's actually happening out there at the front
line.
Mr. Allen. When you say it's driven by what's actually
happening, you're talking about patterns of prescribing by the
VA physicians in the field.
Mr. Ogden. Yes.
Mr. Allen. What is the role of the outcomes research that
you referred to in your testimony? What kind of research is it?
How does it use--does it get to the kind of research I
mentioned before the earlier panel and just by way of
background, let me explain that for one moment. Right now for
drugs to get approval from the FDA it has to be proven that it
is safe and that it is effective, that is, it treats the
condition for which it is being prescribed. The two missing
components are how comparatively how effective it is to other
drugs on the market, No. 1, and No. 2, is it cost-effective?
That is, does it treat the condition for which it's prescribed
in a way that makes financial sense to whomever is paying the
price. So my question to you is with that said, can you talk
about your research, your outcomes and how, if at all, what
your research is connected to the formulary and the decisions
about the formulary?
Mr. Ogden. Our intent is exactly what you just described.
Our efforts inside the PBM regarding outcomes research, those
efforts are in their infancy, but I can tell you that our
colleagues in the research portion of VA are very interested in
this issue as well and we get more and more interest in
conducting these types of studies as time goes on and as the
outlays for pharmaceuticals increase.
After we are absolutely interested in head to head studies
inside therapeutic classes where these kinds of questions are
being asked by our providers and by our managers and in some
cases by our patients, let me just come over here to the chart
that you have over here. On the right hand side of that chart
you show two drugs, Prevacid and Prilosec and a few years ago
when we decided clinically that one of those two drugs would
meet the clinical needs of most veteran patients we
competitively bid them with the idea in mind that marketshare
would go to the formulary listed produced.
I'm going to tell you at the time, the drug on the right,
Prilosec which has the generic name of omeorazike, it had 97
percent of the marketshare in the Department. They lost.
Prevacid received the bid. Because that happens to be a
therapeutic class----
Mr. Allen. Excuse me 1 second, Mr. Ogden, did they win the
bid on a lower price or something else?
Mr. Ogden. Yes, they did. They won the bid on a lower price
because we determined clinically that they were both
efficacious. They delivered similar clinical outcomes, so cost
becomes a greater consideration. You can't say that for every
drug or every class of drugs, but in this case there were only
two drugs at the point in time and we made that clinical
decision. Based on the evidence that was available, not only in
the United States but worldwide at the time.
Well, as I just indicated, Prilosec had 97 percent or 98
percent of the VA business at the time. They lost the bid. This
happens to be a class of drugs where again, clinically, they
produce very similar clinical outcomes. So to convert patients,
you don't have to titrate the patient. You can just make a
conversion which is what we did.
The turnaround in market share from Prilosec to Prevacid,
the generic name is Lansoprazole, was almost overnight, almost
overnight. Again, that doesn't happen in every therapeutic
class that we made that decision, but Prilosec's marketshare
went like this. Lansoprazole's market share went like this. And
obviously, the veterans that we treat benefited because we can
treat more veterans because we're treating veterans who used
this product and it is a highly prescribed product. It allows
us to treat more veterans. So that happens to be a good
example. You can't do that in every class of drugs or with
every drug, but when we can do it, we can make a clinical call,
we will do it and do do it as evidenced by the successes that
we have demonstrated over the years.
Mr. Allen. Thank you very much.
Mr. Tierney. Mr. Shays.
Mr. Shays. Mr. Ogden, just refresh me. You're a consultant
to the VA, not an employee?
Mr. Ogden. In statute, I'm the Director of Pharmacy
Services for the Department, but in the re--reformation, if you
will, the reinvention of the veterans health system in 1995,
they changed the title of people like myself, Director of
Nursing, Director of Optometry, Director of Prosthetics to
Chief Consultants. So I had been the Director of Pharmacy
Services by law, but our title is Chief Consultant.
Mr. Shays. I think that's weird. [Laughter.]
Mr. Ogden. We can talk about that. That would probably take
a couple of hours.
Mr. Shays. OK. See I think of consultants as having less
authority but getting paid more.
Mr. Ogden. I'm a Federal employee.
Mr. Shays. Fair enough. That's why I asked the question. I
want you to help sort out a few things. The Department of
Veterans Administration charges $7 co-pay and that the average
cost per veteran in the 30-day period is $13.50.
Mr. Ogden. Ingredient cost, yes.
Mr. Shays. Pardon me?
Mr. Ogden. That's ingredient cost. I neglected to say that
$13 is a cost of the drug ingredients, not any labor, not any
other--it's just the cost.
Mr. Shays. It's the cost of the drug?
Mr. Ogden. Yes.
Mr. Shays. That surprised me. I thought it was going to be
higher. I think it's going to have to change significantly
because what I've seen in my part of the country, the greater
New York area, it's still part of New England, closer to New
York, I've had some very well to do constituents telling me
almost with some bit of embarrassment that they are joining the
VA system to get prescription drugs because they feel like they
are taking $300 a month and throwing it in the waste paper
basket by not taking advantage of it because they say their
drug costs are hundreds of dollars and for a small co-payment
they can buy into the system. But they have the ability to pay
it on their own. They're fairly--I come from a fairly--overall,
they have the ability to pay for it.
And so is there anything statistically that you had that
tells us that $13.50 cost is going to go significantly--because
frankly they're not pulling in my wealthier constituents are
going to save $7 a month. They're coming in because they can
save hundreds of dollars a month. So is there any projection
that $13.50 goes to $26.50 goes to--over a short period of
time?
Mr. Ogden. I don't think it's going to go in a short period
of time. It's going to increase dramatically. I think we can
all expect that the average price is going to increase for a
lot of reasons.
Mr. Shays. What that says though is that veterans pay half
the cost.
Mr. Ogden. But that $7 co-pay does not include--I think by
statute does not include any amount. The $7 is for the
ingredient cost.
Mr. Shays. So the $7 is basically the--well, how much, if
you looked at costs, how much of the $13.50 represents the full
cost?
Mr. Ogden. You mean labor, depreciation, etc?
Mr. Shays. The full cost of providing the service. Tell me
we know that cost.
Mr. Ogden. Pardon me?
Mr. Shays. Tell me we know that cost.
Mr. Ogden. I'm going to tell you it's probably under $13,
under $20.
Mr. Shays. Do we know how much it costs to provide a
prescription service to our veterans, the total cost? If we
don't know, tell me, but----
Mr. Ogden. I think what I told is pretty representational.
We know that the average ingredient cost for a 30-day supply is
right around $13.
The cost to deliver that product, including this facility,
the CMOP facilities and the up front processing is another $7.
Mr. Shays. How do you know that?
Mr. Ogden. Its cost on average $2.50 to process a
prescription. That includes the mailing costs, all the
overhead, everything to run those facilities.
Mr. Shays. The employees?
Mr. Ogden. Yes. The professionals involved, the
pharmacists, the technicians, the lights, the overhead.
Mr. Shays. So basically you're saying that the entire drug
costs is paid for by the government?
Mr. Ogden. Yes, for the veterans who are accessing our
system for service connected. There is no co-pay as you know.
Mr. Shays. You were generous. I wasn't aware of that. There
is no co-pay for the service connected.
Mr. Ogden. Let me back up for just a second. If, in the
Department, the pharmacy co-pay is not the type of co-pay that
you or I would pay in an outside--those co-pays are generally
based upon generic, brand, formulary, nonformulary. When
Congress that legislation back in the early 1990's, the co-pay
was based on eligibility. So if a veteran was rated 50 percent
or greater service connected, they pay no co-pay, whether it's
drugs or otherwise.
Mr. Shays. Mr. Conte, do you agree that the nonmedical, the
nonprescription sole cost is $7?
Mr. Conte. It's pretty close. I know that $2.15 is right on
the target because the CMOPs have costed it very, very
effectively. As far as the balance of that $7, that would
depend on each facility and what the staff is. So John has a
good handle on that. He's darn close.
Mr. Shays. It's hard for me intuitively and sometimes when
I bring my intuition it gets me into trouble. But intuitively,
based on moccasins that I wear, it strikes me that your costs
have got to go up significantly--well, first off, we're
allowing queuing and if you're in the line, you may not be part
of the system. So let me just parenthetically ask how many
people are waiting to be part of the pharmaceutical program in
Massachusetts?
Mr. Conte. In Massachusetts, I think the last figure we
looked at was around 3,000, but these tend to be categories
that are nonservice connected.
Mr. Shays. Right, and I predict to you that they're the
ones who a good number of them will be the ones who are joining
because they see significant savings. And I don't believe that
they are going to go through the hassle of joining the system
if they're just going to save $75 a month--excuse me, $13, a
net of $7 a month. I think they have to basically see that
there's significant savings by joining.
Mr. Conte. I think what they're doing now is paying to a
large amount their prescriptions through the private sector and
they're coming in and paying $7 also.
Mr. Shays. But the cost to you will not be $13 per average.
That average cost will go up significantly.
Mr. Conte. That's a tough thing for me to answer. If a drug
costs $50 and we pay $50, you're right. They're paying $6.
Mr. Shays. Do you want to say something, Mr. Ogden?
Mr. Ogden. Yes, I was just thinking about your question and
if a nonservice-connected veteran presented with a prescription
written by a private doctor, we would simply fill that
prescription, the cost could go up significantly, if that
prescription was for an item not in a formulary process. It was
for an item in our formulary process, then, in fact, it could
be the--the price wouldn't go up because it would be--that's
the average--those are the problems we use to dispense to all
veterans who currently access our system.
Mr. Shays. But frankly--right, and the formulated would be
they buy this drug. No, but they don't care--does the veteran
care if it's in the formulary or not because they still get the
drug at just a co-pay cost. You care, but the veteran doesn't.
Mr. Conte. Yes, they do. Veterans in our system realize
that the pharmacy benefit is, in fact, an integrated benefit as
far as VA providing health care.
Mr. Shays. Let me just interrupt, just so I can follow the
rest of your--I make an assumption that when a veteran goes, if
he needs the drug that's not in your formulated list, they're
entitled to that drug?
Mr. Conte. If the veterans is enrolled for care and he
presents and the physician orders that drug that doesn't happen
to be on our formulary, we do provide that drug.
Mr. Shays. Sorry to interrupt you.
Mr. Conte. Let's don't discount here the power of direct
consumer advertising. When the patient is sitting home watching
the evening news and they see every commercial has to do with
the purple pill or for arthritis of the knee, etc., what do you
think happens when they present in the exam room? They mention
that commercial to the provider and for those veterans who have
not been in our system very long, it's hard for them to
appreciate that the pharmacy benefit is an in-bred part of our
health care delivery system. We do have a formulary process and
we do analyze products and we do when the evidence suggests and
that's the type of product we use.
Mr. Shays. But that's irrelevant to them.
Mr. Conte. It's irrelevant to them. It's hard for them to
understand.
Mr. Shays. All I'm saying to you is that your point is well
taken. If they get the formulary product, it is going to be a
lot less. They say it's not a big cost to you because you got
it at a lot less, but maybe this should be my last question, I
see my red light, how much of your products end up being
formulated and how much aren't? In other words, when you add up
all what the veterans bought, how much is formulated and how
much----
Mr. Ogden. I don't have the figures of what we bought, but
I can tell you what that is in the context of what we dispense.
Last year, in fiscal year 2001, we dispensed approximately $98
million prescriptions, actual prescriptions. Of those $98
million, approximately 90 percent or 91 percent were for items
listed on the VA National Formulary.
Mr. Shays. Let me ask you one last question. Of that 91
prescriptions, what was the cost? Was it 91--it wouldn't be.
The 9 percent remaining, not part of formulary turned out to be
how much of your expense.
Mr. Ogden. Let me just finish by saying another 6 percent
is listed on our network or VISN level formulary, so when you
have 3 or 4 percent nonformulary, you use--the nonformulary
use, as far as a percent in dollars, of total outlays would be
insignificant.
Mr. Shays. It would be interesting to know--I mean I think
this is great news, but it is surprising to me. My prediction
intuitively would be that 3 percent will start to soar, but I
could be wrong and if it doesn't, then we are truly on to
something quite significant.
Mr. Conte. I will tell you there are challenges and Mr.
Allen asked a while ago about the interface between the
industry and ourselves. It really should be about the interface
between the industry, ourselves and you all just because we're
a public institution. And that interface is constant and when
we make these decisions in some cases we have for lack of a
better way to put it, winners, and you have perceived losers.
They are not happy about that. The ones who don't have the
formulary listing, if you will. So it's a constant--maybe what
I really want to say is a tug of war.
But I think as long as we're patient, we have been
validated by the Institute of Medicine. We have been validated
in our process that Cindy mentioned from the General Accounting
Office. Again, it's a public institution. What we're trying to
do here is to do the best we can----
Mr. Shays. I get that. Let me just say to you, it strikes
me and thanks, Mr. Chairman, for having a long red light, but
it strikes me as a very positive story and it's--I'm grateful
one member of the press is here, but this is a story that more
people need to hear. They're hearing a lot of negative stories.
Thank you.
Mr. Tierney. I think all the Members here share the idea
that what we really want to do is get the information and we
don't really care who asks the questions, as long as we get
answers, the credible answers that you're giving.
Mr. Ogden, can you envision this type of a process that you
have at VA being enlarged to cover a larger population to
include Medicare people?
Mr. Ogden. I have thought about this a lot and I don't
think it has to be a Federal program for Medicare to be
successful and I'm going to digress a minute here, but I've
spoken to Mr. Allen in the past and his staff in the past, for
example, linking Medicare pricing to be a pricing and we have,
as the Department testified, that's not in our interest to do
that and as Cindy mentioned, the GAO has looked at that. The
reason that we feel that way and it's not because we're
parochial, we're trying to just provide a service to veterans
and everybody else who doesn't get that opportunity is because
when you think about the population, the size of the Medicare
population and we're all going gray, that Medicare has the
potential to achieve much greater pricing than we do. The VA
and DOD combined, the Coast Guard and Indian Health Service for
that matter, I think we comprise like 3 percent of the U.S.
market in terms of outlays. Medicare is huge. The current
population in Medicare, I think it's like, the dollars out
there now are like 42 percent. And it's just going to get
greater as the boomers age. But I think that again, Medicare
through emulating the kinds of strategies that we have emulated
that they can get far better pricing than we receive. And I'm
going to go back to this example here. If Medicare can deliver
the marketshare and that's the key, it's what was mentioned
earlier, what will the market bear? If Medicare can deliver the
marketshare, they will, in fact, receive better pricing. But
another key area is the patients, of course, when the patients
buy in, they get total free choice, because they get total free
choice about all drugs and all drug facets that causes--it's a
higher price.
Mr. Tierney. What if they put together a formula in process
much like the one that you've got?
Mr. Ogden. I think it could work and as long as we've got
the providers, the physicians in this part of the country to
make those decisions and drive it, it can work and it can work
very successfully.
Mr. Tierney. But you need a data base?
Mr. Ogden. And that's where the Department comes in and
services the public good and the patients we treat are very
geriatric. They're mostly male at this point in time, but there
are a greater number of female patients that we're treating,
but we have an excellent research and longitudinal, if you
will, research base that can demonstrate people like
yourselves, the types of public policy that will best serve in
this case, the Medicare population and affordable cost. I think
the difficult thing for us and Mr. Shays mentioned our costs
are going to go and everybody's costs are going to go up is
we're sitting here today, and pharmaceutical outlays are going
up. But I don't think anyone will argue that pharmaceuticals
aren't a good value. Because we all know they are a good value.
The problem for all of us is with pharmacogenetics and genomics
and biotechnology is the percent of our health care dollar that
we outlay as a society for pharmaceutical has the real
potential, in a very short period of time to climb
dramatically. This is going to involve all of us to design a
system that integrates pharmaceuticals much more so than we
have up until this point in time.
Mr. Tierney. Excuse me, it seems like an interesting
exercise would be to have somebody who does just that, design a
system that could be laid over the Medicare population using
what we've learned from the VA in setting it up and plainly is
the direction to go. And I would suspect whatever cost that
would be to do that design and get everything ready to go would
be reasonable to consider what the benefits in the long run
would be and maybe that's something we can all think about up
here.
Mr. Conte, I'm curious to know your consolidated outpatient
mail pharmacies, that network, how would you compare your CMOPs
to the distribution systems used by private sector people like
Pharmco, Merck and Expresscrips?
Mr. Conte. Well, you know, they all visited us. I think
we've been the model for that as far back as the early 1990's
and I think we have some significant advantages in that we use
technicians more than they do in the private sector and we've
been able to automate our system using technicians and
maximizing the pharmacy output. I can't give you exact figures,
but I know our pharmacist to technician ratio is very different
than what you see in the private sector. It's still a very
accurate system because of bar coding the way we support those
pharmacists.
The system itself has got a history of being extremely cost
effective versus those companies you mentioned. I have no
figures on their actual cost, but we've seen their operations
and they tend to have a lot more pharmacy staff and a lot more
of staff than we do. I think the VA has demonstrated
unequivocally that it's been able to produce the most cost-
efficient mail out system for pharmacy. It's a service that we
provide. The clinical aspects are sort of linked, the host
facilities. We can't just mail it out. This is linked with
those facilities on the clinical side.
Mr. Tierney. How long did it take the VA to get its
architecture for this pharmaceutical program together from the
concept to actually implementing it where you get to the point
where you're comfortable and you feel that you're getting the
maximum benefit from it?
Mr. Ogden. The architecture has been in development during
the past 12, 13 years or so. It's an evolving architecture.
These facilities that we have are in laboratories and for
example, Bill mentioned what the capacity of the current
Bedford facility is and by the way it was one of the first
generation facilities.
I was just in Chicago Thursday and Friday and they just
added some technology at the Chicago facility and they
anticipate, when it's debugged, that they'll be around 25,000
prescriptions per day. It's evolving not only in VA, but it's
evolving in the private sector as well. Merck has some very
excellent technology. Our people have been into their plant in
New Jersey and have looked at it and it's very good, we all
have very good technology, but it's an evolving situation. I
think that ours is totally different than what you'd see in the
private sector because we're a mail service pharmacy, not a
mail order pharmacy.
Our intent was to have the patient talk to the doctors,
nurses, the pharmacists, etc., when they access the VA system.
What we designed over here far, far away, if you will, is an
economies of scale distribution facility to maximize
productivity dispensing the actual prescription. I have to give
you credit to our IT people, information technology, people.
Think about moving massive amounts of patient data day in and
day out. We hand it off to commercial software processes who
fills the prescription. We hand it back to put it back over the
wires and we print the patient's medical record. It's
absolutely phenomenal what our IT people have done over the
past 12 years. It's evolving. It's a very good success story.
Mr. Tierney. If we supposedly thought about setting up a
parallel system for Medicare patients and we wanted to learn
what you were doing and we decided we're just going to take and
replicate what you've done using what benefits we think we
would learn on that, set it up with the Medicare and move
forward, what cautionary notes would you give us on that?
Mr. Ogden. Well, I think my primary cautionary note was it
has to be gradual. If for some reason we decided to make a
national decision what the formulary was, I don't think it
would be successful.
Mr. Tierney. How do you envision that a grassroots
operation----
Mr. Ogden. I'm a proponent of allowing States to form
consortiums.
Mr. Tierney. To do what?
Mr. Ogden. Allowing States to form consortiums or a State
like Maine that doesn't have a big population, if you will,
with regards to New York, could partner with large other
potential buyers and so that when they did determine what a
formulary was, that they could actually affect better pricing
in the marketplace just because of the numbers. So I think
that's the key. I don't think we're ready for a national
program under--and I'm not saying I'm a proponent--I'm
obviously talking for myself and not for the Department.
Mr. Tierney. Right.
Mr. Ogden. We're not a proponent of that. Again, our whole
process has been in effect since 1995. We've been evolving this
process. The buy-in is superior to the buy-in yesterday,
superior to the buy-in 6 years ago. And we don't bat 1,000, but
we're batting pretty good and it causes me to appreciate that
unless it's grass roots, it won't work.
Mr. Tierney. I have some legislation that basically would
give States, grants to States or regions to devise a system by
which they could deliver health care services and then a second
grant if they did that would let them implement that. Of
course, part of that would be dealing with prescription drugs
and there are some State efforts, particularly here in New
England, where people are looking to have consortiums with
States that do just what you're talking about and so there's
nothing that you see that would stand in the way of doing
what--state consortiums, getting together and deciding that
they're going to establish formularies, maybe model it in a way
that you've done yours and then go about their business in that
respect.
Mr. Ogden. I would certainly like to see that.
Mr. Tierney. Well, maybe we'll hear some of our
gubernatorial candidates talk about it.
Mr. Conte, do you agree with that assessment, that it's
worth it?
Mr. Conte. Absolutely. I'm sitting here as John as talking,
it really comes down to getting your providers on board because
they're the ones who are actually going to do the prescribing
and getting the software up and going, a formulary and an
automated process, and that's what we've done.
Mr. Tierney. Mr. Allen, any more questions?
Mr. Allen. Just a couple, some comments. I'm struck by how
much, at least up here, how much progress we've made during the
course of this hearing. I hear two things that seem to me of
great significance. Aside from the fact that VA has got a
system that is moving along and that really does shed some
light on where we're going. One of the points is and this is
not acknowledged in the debate over a Medicare prescription
drug benefit by either side of the aisle. One is that if you're
going to save money, you need to do it as the private sector
does and as the Veterans Administration does and accept the
formulary. This is something that those who want a Medicare
prescription drug benefit based on the insurance industry and
the private sector say they don't want to go close to that and
on our side of the aisle people say you can get any drug you
want under our plan, any drug you want. Again, a rejection of
the formulary.
The second component is that if you have a formulary in
order to hold that price, you have to have an independent way
of doing the research that will allow you to conclude that
Prevacid and Prilosec are equivalent effectiveness and without
that research capability you're basically sunk and it has to a
research capability that is not tainted by the pharmaceutical
industry itself. And so to me what you've been saying is very
helpful in sort of shaping that conclusion.
I want to give you both a chance to say is there anything
that I've said that concerns you, troubles you or is
incomplete? That was an effort to summarize sort of how, where
my mind has been going as a result of what you've been saying
and I don't want to take away a lesson that you didn't mean to
convey.
Mr. Conte. I think that we could have a formulary process,
but I think we also could have access to any product on the
market. And so they're not oxymorons. And the way to do that is
to decide what clinically reflects the clinical care of most
patients who are going to receive that benefit and then if
patients want above and beyond, then you could just make the
co-pay, make it co-pay, so if they want that particular
product, then they could acquire it just with co-pay. Let's
leave it open to allow any drug to be accessed, but do that
through co-pay.
Mr. Ogden. I hear what you're saying and absolutely, when I
was the Chief of Pharmacy, how drugs came on the formulary,
clinical people in that facility where I worked needed that
drug for a particular reason and we would make a decision on
putting a drug on the formulary based on cost, based on dosing,
like you've heard and many times we made a decision to keep
that drug and make it available for a specific clinical reason,
an individual may be not able to take pills twice a day. Maybe
that person needs--we can make exceptions. Give the purchaser
the option to buy up if they want.
Mr. Allen. Mr. Conte, I have a smaller question and I just
wanted to know and you may have covered it, but I missed it, if
you could just talk about the impact on your facility of more
veterans signing up for--to get the prescription drug category,
veterans signing up for their prescription drug benefits. How
big an influx have you had and how have you dealt with it?
Mr. Conte. As Congressman Tierney knows, we were fortunate
enough to enforce--John was working with us on this--and
because of that our veteran population went from around 9,000
to 16,000 a year, so we've had a tremendous increase in
veterans coming. Service has been good, yet it generates a
large prescription volume. I would say we're probably going to
expend just on volume alone. It doesn't increase costs. We have
$2.5, $3 million in the budget for prescriptions for those
patients that come in. That's really the impact, the volume of
people coming to the VA because we do provide something more
than just prescriptions. I think John's alluded to that. If you
come to the VA system, we're asking you to join that system to
provide continuity of care, not just prescriptions. I as a--my
pharmacy had the honor--a friend of my is a physician--would
not want to be just a writing service and not have any
responsibility, yet legally, he's responsible for the medical
care of that individual by dispensing the prescription and/or
writing that prescription. So when people come in to join our
primary care clinic and then you become part of the VA system,
so that alone also has impacted us because we need more staff
to do that and I think you've talked about, someone on the
committee talked about the funding mechanism where the VA
system gives you a couple years later, so there's a lag in
terms of that. We're constantly stressing the system trying to
deal with those people who are on the waiting list, but it's
had a major impact on the staff and I'm lucky enough that I
have staff who is able to adapt and change.
The other thing is centralized mail out pharmacy. I
mentioned it briefly. We've never been able to recruit
pharmacists for other issues, partly pay. We'll stay out of
that area, but the issue becomes how will you take care of this
large volume to bring in new patients and this mechanism has
helped us to do that.
Mr. Allen. Thank you very much.
Mr. Tierney. With the indulgence of my colleagues here and
panel members, we're going to break protocol a little bit. If
there's anybody out in the audience area that has a question
for members of this panel or a question for members of the
committee, provided that you're willing to share with us your
name, we're willing to open the microphone to give you that
opportunity for a brief period of time. We still have some
time. And if we could get an idea of how many people might be
interested in that opportunity, we'll be able to judge how much
time each person would have. Is there anybody that today has a
question, a comment? That saves us a lot of time.
I want to thank both of you, gentlemen, very much for your
testimony. I'm sure that you'll be hearing from us and we'll
try to work together. I thank Mr. Shays, again for his
generosity, Mr. Allen for his work in the area. I thank all of
you.
Mr. Shays. I thank the chairman, again for your encouraging
us to come up here. I would just take the liberty to thank
Michael McEneamy, State Administrator and Mr. Anthony Lopez,
the Court Officer and Marilyn Franklin, the Court Reporter. I
thank all three for their help and I obviously thank our staff
for their work on both sides of the aisle, and again, thank
you, Mr. Chairman.
Mr. Tierney. Thank you also and we'll look forward to
working with you on this issue.
[Whereupon, at 12:30 p.m., the hearing was concluded.]