[Senate Hearing 111-552]
[From the U.S. Government Publishing Office]
S. Hrg. 111-552
SENIORS FEELING THE SQUEEZE: RISING DRUG PRICES AND THE PART D PROGRAM
=======================================================================
HEARING
before the
SPECIAL COMMITTEE ON AGING
UNITED STATES SENATE
ONE HUNDRED ELEVENTH CONGRESS
SECOND SESSION
__________
WASHINGTON, DC
__________
MARCH 17, 2010
__________
Serial No. 111-15
Printed for the use of the Special Committee on Aging
Available via the World Wide Web: http://www.gpoaccess.gov/congress/
index.html
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SPECIAL COMMITTEE ON AGING
HERB KOHL, Wisconsin, Chairman
RON WYDEN, Oregon BOB CORKER, Tennessee
BLANCHE L. LINCOLN, Arkansas RICHARD SHELBY, Alabama
EVAN BAYH, Indiana SUSAN COLLINS, Maine
BILL NELSON, Florida GEORGE LeMIEUX, FLORIDA
ROBERT P. CASEY, Jr., Pennsylvania ORRIN HATCH, Utah
CLAIRE McCASKILL, Missouri SAM BROWNBACK, Kansas
SHELDON WHITEHOUSE, Rhode Island LINDSEY GRAHAM, South Carolina
MARK UDALL, Colorado SAXBY CHAMBLISS, Georgia
KIRSTEN GILLIBRAND, New York
MICHAEL BENNET, Colorado
ARLEN SPECTER, Pennsylvania
AL FRANKEN, Minnesota
Debra Whitman, Majority Staff Director
Michael Bassett, Ranking Member Staff Director
(ii)
C O N T E N T S
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Page
Opening Statement of Senator Herb Kohl........................... 1
Opening Statement of Senator Bill Nelson......................... 3
Opening Statement of Senator Bob Corker.......................... 9
Panel of Witnesses
Statement of Gerard Anderson, M.D., Director, Center for Hospital
Finance and Management, Johns Hopkins Bloomberg School of
Public Health, Baltimore, MD................................... 12
Statement of John Dicken, Director, Healthcare, Government
Accountability Office, Washington, DC.......................... 41
Statement of Gregory Hamilton, MBA, Consultant, Algonquin, IL.... 61
Statement of Willafay McKenna, Medicare Part D Participant,
Williamsburg, VA............................................... 65
Statement of Jack Calfee, Ph.D., Resident Scholar, The American
Enterprise Institute, Washington, DC........................... 72
APPENDIX
Statement of Senator Al Franken.................................. 97
Mr. Anderson's Responses to Senator McCaskill's Questions........ 100
Mr. Anderson's Responses to Senator Franken's Questions.......... 100
Mr. Dicken's Responses to Senator McCaskill's Questions.......... 101
Mr. Dicken's Responses to Senator Franken's Questions............ 102
Mr. Hamilton's Responses to Senator McCaskill's Questions........ 104
Mr. Hamilton's Responses to Senator Franken's Questions.......... 104
Mr. Calfee's Responses to Senator McCaskill's Questions.......... 105
Mr. Calfee's Responses to Senator Franken's Questions............ 106
Statement submitted by Medicare Rights Center President Joe Baker 108
Statement submitted by Medicare Access for Patients Rx (MAPRx)... 111
Statement submitted by Curt D. Gurberg, MD, PhD, Advance, NC..... 115
(iii)
SENIORS FEELING THE SQUEEZE: RISING DRUG PRICES AND THE PART D PROGRAM
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WEDNESDAY, MARCH 17, 2010
U.S. Senate,
Special Committee on Aging,
Washington, DC.
The Committee met, pursuant to notice, at 2:49 p.m. in room
SD-562, Dirksen Senate Office Building, Hon. Herb Kohl
(chairman of the committee) presiding.
Present: Senators Kohl, Nelson, McCaskill, Corker, and
LeMieux.
OPENING STATEMENT OF SENATOR HERB KOHL, CHAIRMAN
The Chairman. Good afternoon to one and all, and we thank
the witnesses who are with us today.
We are pleased to have Senator Bill Nelson chair today's
hearing on the effect of high drug prices on America's seniors
and the Medicare Part D program.
Senator Nelson is a most valuable member of this committee,
who hails from a State that understands very well the unique
challenges and opportunities posed by an aging population. He
has been a leader on this issue, and we are very happy to have
him leading the charge for the Aging Committee.
Before I turn over the gavel to Senator Nelson, I want to
make sure we all understand that prices for brand-name drugs
are higher in this country than anywhere else in the world.
This affects seniors severely, both because they tend to need
more medications and because of the doughnut hole in Medicare
Part D, which can cost individuals up to $4,400 out-of-pocket
every year.
But ultimately, the high price of drugs does affect each
and every one of us. Americans pay as much as two to three
times as much for the same medications as people in other
industrialized countries. This is one of the reasons healthcare
costs so much more in this country.
I have written letters to the top six drug makers to find
out why. Why must American consumers pay so much more, when the
bulk of drug research and innovation happens right here in the
United States, and much of it is subsidized by our Federal
Government? The Aging Committee looks forward to taking a look
at the answers to these questions later on this spring.
In the meantime, today's hearing is getting at an ongoing
issue that is crucial to our seniors. I would like again to
thank Senator Nelson for all his work on closing the doughnut
hole and will now turn over the gavel and the remainder of the
hearing to Senator Bill Nelson from Florida.
[The prepared statement of Senator Kohl]
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
OPENING STATEMENT OF SENATOR BILL NELSON
Senator Nelson. Thank you, Mr. Chairman.
Late last year, the AARP released a report that showed that
while the Nation was in a recession and the overall inflation
rate was negative, brand-name drugs were seeing some of their
highest price increases in years. According to the report, the
price of brand-name drugs most commonly used by Medicare
beneficiaries increased 9.3 percent in 2009, a much higher
increase than any of the previous 7 years.
For some drugs, their price increase was markedly higher.
Aricept, a drug that treats dementia, saw a 17 percent
increase. Ambien, a sleep aid, 19 percent increase. The price
of Flomax, a drug used by men with enlarged prostates,
increased 20 percent.
Just yesterday, the Kaiser Family Foundation released a
report confirming these trends. According to their report, 9 of
the top 10 drugs in Medicare Part D saw an increase between
2009 and 2010, and for half of those drugs, the increase was 5
percent or more.
Kaiser also highlights some particularly egregious cases.
Between 2006 and 2010, for Medicare Part D beneficiaries in the
so-called doughnut hole, they paid 20 percent to 25 percent
more for Lipitor, Plavix, Nexium, Lexapro, and paid 39 percent
or more for Actonel, and paid 41 percent more for Aricept.
In comparison, the Consumer Price Index, which is the
general price increase of consumer goods, increased by 9
percent between 2006 and 2010. Even the price of most medical
care, which we call the health inflation--and of course, we
know that that is increasing rapidly--well, that grew by 16
percent. So you can see the comparisons.
Now these reports show us that a time when people's
pocketbooks are getting squeezed, seniors are being asked to
pay more and more for their prescription drugs. So, in this
hearing, which you have given me, Mr. Chairman, the
graciousness of planning the hearing and chairing it--and I
thank you. In this hearing, I hope that our witnesses are going
to be able to help us look at these drug price increases, try
to understand what is happening, and consider how they affect
seniors in Medicare prescription drug Part D plans, and then
discuss policy options for addressing these high and increasing
costs.
In order to understand how increasing drug prices affect
seniors, it is important to understand the standard Part D
prescription drug plan and how it works. Now a standard Part D
plan in 2010--can you hold that up a little higher--starts with
a $310 deductible, which the senior pays right at the outset.
This then is followed up to an amount of total cost of drugs of
$2,830 in total spending, where the senior pays an average of
25 percent, and the prescription drug Part D plan pays 75
percent up to that level.
All right. Then this is known as the doughnut hole. Because
under what was passed back in 2003 in order to establish a new
prescription drug plan and for it not to cost the Federal
Government more than a certain amount, someone devised this
crazy plan that then has the doughnut hole all the way up to
$6,440 in total drug costs that the senior citizen is paying
100 percent of that hole, known as the doughnut.
I suppose they call it a doughnut, although it is not
closed on all sides, because you have got some coverage down
here on this side of the doughnut and then up there on the
doughnut. That is what is basically the catastrophic coverage,
of which the senior citizen pays 5 percent, the prescription
drug Part D plan pays 15 percent, and Medicare pays 80 percent.
Now that is the doughnut, and that is the hole.
So, you can see on out-of-pocket costs, the senior is
paying $310 right off the bat on the bottom. By the time they
get to where they are paying 100 percent of the drug cost in
the doughnut hole, they have expended $940 out-of-pocket costs.
By the time they got through the doughnut hole, they are now
out of pocket $4,550 out-of-pocket costs.
Over in the House, Congressman Pete Stark requested a
report from the Government Accountability Office on the
prescription drug program drug price increases, and we are
going to discuss that today. This report gives us an example of
a cancer drug called Gleevec, and the price was increased by 46
percent between 2006 and 2009, from about $31,200 per year to
about $45,500 per year.
Average out-of-pocket cost for this drug per year increased
for a senior citizen of $4,900 back in 2006 to more than $6,300
in 2009. That, over 3 years, is not a trivial amount of
increase.
If drug prices were increasing for some underlying
necessary reason, such as scarcity of resources or excessive
increase in demand, then we would be able to understand the
increases a lot better. But these very same drugs are sold all
over the world, and they are sold for far less than they cost
here in the United States.
The 30 most commonly prescribed drugs cost 27 percent less
in Canada and 66 percent less in New Zealand, the 30 most
commonly prescribed drugs. The drugs are approximately 50
percent less in the United Kingdom, the Netherlands, and
France.
So, while pharmaceutical companies are giving other
countries deep discounts, they are still able to maintain a
tidy profit due to their high prices in the U.S. Let us go to
Chart 3. Between 2006 and 2009, the profits of the top drug
makers grew by up to 201 percent. Between 2006 and 2009, the
top drug makers, and there they are listed, and here their
profits grew over that period of time, starting at 96 percent
here up to 201 percent.
Now health reform legislation provided unprecedented
opportunity to control prescription drug prices, and the House
of Representatives is going to get a chance to vote on what we
provided in the Senate. What came out in the Senate-passed bill
was something that was agreed to early on between the White
House and some of the leadership in the Congress and the drug
companies. In the Senate-passed bill, the doughnut hole is not
eliminated.
Let us go back to that chart with the doughnut hole.
Instead, the brand-name drug manufacturers are mandated to give
seniors a 50 percent discount on drugs when they are in the
doughnut hole. Remember, the senior pays 100 percent here. In
the Senate-passed bill, if you thought the doughnut hole was
closed, it wasn't.
The drug companies will give a 50 percent discount for the
brand-name drugs to seniors. It doesn't say what the price is.
It says that they will give a 50 percent discount to the
seniors.
Now there is talk, and it is supposed to be published on
the Internet tonight, this additional proposal, and we will see
once it gets up on the Internet, for a bill that would come to
the Senate from the House next week, after the Senate bill is
signed into law. That is that the Federal Government kicks in
an additional 25 percent to expand the discount to 75 percent
for brand-name drugs, as well as a 75 percent discount on
generics. It is not the drug companies that are kicking in the
additional 25 percent for the doughnut hole. It is the Federal
Government.
Proponents of the plan argue that this achieves full
coverage since seniors are paying 25 percent co-insurance, but
when the drug manufacturers are required to give a discount,
what happens? Do they raise their prices? By basing this
doughnut hole policy on a discount, beneficiaries and the
Federal Government are still going to be subject to working off
the base price of whatever the pharmaceutical company has
established as the price of the brand-name drug.
So, is this policy going to prevent manufacturers from
raising their prices? Well, I certainly would encourage them to
do so, but there is no guarantee.
Now, since this whole thing was created back in 2003, and
the prescription drug benefit, been a lot of folks talking
about eliminating the doughnut hole. While this proposal that
is coming back to the Senate next week is not going to stop
manufacturers from raising their prices, it will provide
additional protection to seniors that would otherwise
experience having to pay the whole freight in the doughnut
hole.
Why do I get exercised about this? Because back in the
Finance Committee, I offered an amendment that was not accepted
on a 10 to 13 vote, 13 votes against and 10 for, that would
have caused there to be a rebate for only dual eligibles, those
people who were eligible for Medicaid because either they were
poor or disabled, and they were eligible also dually because
they were of Medicare age.
Back in the old days before the prescription drug benefit,
the dual eligibles got the same rebate that is in law from drug
manufacturers for Medicaid recipients because they qualified
for Medicaid, even though they were of retirement age for
Medicare. Uh-uh, not after the 2003 prescription drug benefit.
If you went and got your drugs through Medicare in the new
plan, prescription drug benefit D, you didn't get a rebate to
the Federal Government. You had to go through this scheme.
So, today, taxpayers pay higher cost for the same drugs for
the same seniors that they used not to do before the
prescription drug benefit. So, we want our panel to discuss all
of this. We want you to tell us your personal experiences.
I am sorry to have taken as long as I have, but we needed
to get into the technicalities on this to set the table for
this discussion. We have a distinguished panel.
Dr. Gerard Anderson is an expert on healthcare payment
policy. He is currently a Professor of Johns Hopkins. Dr.
Anderson also directs Johns Hopkins Center for Hospital Finance
and Management. He co-directs the Program for Medical
Technology and Practice Assessment, and previously, he was the
National Program Director for the Robert Wood Foundation-
sponsored program Partnership for Solutions. I could go on and
on.
I will finish introducing the panel, and then I am going to
turn to you, Senator Corker, as the ranking member? Let me
finish introducing the panel.
John Dicken is the Director for healthcare issues at the
U.S. Government Accountability Office, where he directs
evaluations of private health insurance, long-term care quality
and financing, and prescription drug pricing issues. Prior to
working at the GAO, Mr. Dicken was a Senior Analyst for the
Presidential Advisory Commission on Consumer Protection and
Quality in the Healthcare Industry. I could go on and on with
his lengthy resume.
Greg Hamilton has worked in the pharmaceutical industry for
31 years. Mr. Hamilton's areas of expertise include product
reimbursement, as well as pharmaceutical issues in Medicaid and
Medicare. Mr. Hamilton worked for major drug manufacturers as a
pharmaceutical, nutritional, and biological account executive
for 20 years. He has experience in marketing, sales, business
development, and Government contracting. He was a Senior
Product Manager for Bayer, and I could go on and on with his
resume.
Ms. Willafay McKenna is a Medicare beneficiary all too
familiar with the challenges of what we have been talking
about. Ms. McKenna has diabetes, and she controls that with
insulin. Every year, her insulin costs push her into the
Medicare Part D doughnut hole that we described where she has
to pay 100 percent of those medications out of her pocket. She
is from Williamsburg, VA.
Finally, John Calfee, listed here as Jack Calfee. He is a
resident scholar and Economist at American Enterprise
Institute, where he studies the pharmaceutical industry and the
Food and Drug Administration, along with the economics of
tobacco tort liability and patents. He was previously a
visiting senior fellow at Brookings, previously worked at the
Federal Trade Commission's Bureau of Economics. He has taught
marketing and consumer business behavior at a number of schools
and has a very lengthy resume.
So, Mr. Chairman, with those introductions, if you want me
to chair the meeting or throw it back to you, I would like to
call on Senator Corker for his opening comments.
[The prepared statement of Senator Nelson follows:]
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
OPENING STATEMENT OF SENATOR BOB CORKER
Senator Corker. Thank you, Mr. Chairman.
I typically don't give opening comments. However, our staff
had written such an outstanding one, I was going to give one
today. I am not going to do that because of the time. I respect
the witnesses too much and want to hear from them.
I know we have a vote at 3:30 p.m. So let me just say,
though, I, too, have been concerned about the cost of brand
drugs. We met with the Obama administration's trade
representative just recently to see if there are ways of
getting at the fact that Americans pay so much more for brand
name drugs than other folks. With that, I will stop.
I look forward to hearing the testimony, Mr. Chairman.
Thank you for calling this.
[The prepared statement of Senator Corker follows:]
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Senator Nelson. OK. All of the witnesses have been briefed
ahead of time. We want to really dig into some questions. So we
have asked each of you to keep your comments to 5 minutes. That
will take some time, and I would encourage you to talk to us
instead of reading a statement.
Of course, your full statement will be entered as a part of
the record, and we will start just in the order that I
introduced you.
So, Dr. Anderson?
STATEMENT OF GERARD ANDERSON, M.D., DIRECTOR, CENTER FOR
HOSPITAL FINANCE AND MANAGEMENT, JOHNS HOPKINS BLOOMBERG SCHOOL
OF PUBLIC HEALTH, BALTIMORE, MD
Dr. Anderson. Thank you, Mr. Chairman and members of the
committee----
Senator Nelson. Make sure your microphone is on.
Dr. Anderson. OK. The rising prices of prescription drugs,
especially brand-name drugs, is an important issue for
America's seniors and for the Medicare program. Let me begin by
following up with Senator Kohl and Senator Nelson on the price,
the international perspective.
In 2007, the prices for brand-name drugs in the United
States were about double the prices in other industrialized
countries. For example, the average price of one dose of
Lipitor in the United States was $2.82. The U.S. was paying 54
percent more than Canada, more than twice as much as most other
industrialized countries, and four times the price for Lipitor
in New Zealand.
The story, however, is quite different for generic drugs.
Most other countries pay two to three times what we pay for
generic drugs. Countries have devised a whole variety of
different ways to try to control drug prices, and some of them
seem to be much more effective price negotiators than other
countries. The U.S. seems to be not very good at brand-name
drugs and very good on generic drugs.
These price differentials have very important public policy
implications. In 2006, I coauthored an article, which said if
the United States was paying the same prices as these other
countries, we could completely eliminate the doughnut hole.
Ms. McKenna, who you are going to hear from in a moment, is
typical of the about 4 million Medicare beneficiaries that
enter the doughnut hole each and every year. The Kaiser Family
Foundation, looking at this data, found that once people
entered the doughnut hole, about 10 percent of the diabetics
stopped taking their medications and about 18 percent of people
with osteoporosis stopped taking their medications.
In 2008, I coauthored an article in JAMA discussing how
Medicare beneficiaries could respond to the financial
incentives created by the doughnut hole. We did not recommend
that they stop taking their medications. Changing medications
or eliminating medications for financial reasons can lead to
very severe adverse outcomes, higher emergency rooms, more
preventable hospitalizations, a whole series of things.
Between 2007 and 2017, the size of the doughnut hole is
projected to double, exposing more beneficiaries to even higher
out-of-pocket expenditures and increasing the costs of cost-
related noncompliance. It is now virtually impossible to get
insurance coverage that fills in the doughnut hole.
There is basically two categories of drugs, brands and
generics. On average, brand-name drugs are about four times as
expensive as generic drugs. Brand-name drugs are the ones that
are most likely to push people into the doughnut hole.
Beneficiaries who enter the doughnut hole are the ones who are
most likely to be using these brand-name drugs.
According to the--and it was already talked about,
according to a report by AARP, overall drug prices increased
about 9 percent in 2008 and 2009. What this means is that about
300,000 Medicare beneficiaries are added to the doughnut hole
each time drug prices go up by about 9 percent.
According to the GAO, the prices for the most expensive
brand-name drugs increased an average of 12 percent between
2006 and 2009. MedPAC has found that Part D plans were unable
to negotiate significant drug prices with drug companies for
brand-name drugs. GAO found pretty much the same thing for
specialty drugs.
One reason the drug companies argue that they need more
money is to do more research and development. But what you have
got to recognize is they only spend about 15 percent of their
resources on research and development. They spend 30 percent on
marketing.
The 50 percent deal, or now maybe 75 percent deal, is to
get the prices down. If beneficiaries enter the doughnut hole
and they can leave, they will have a benefit. They will
probably save about $522 under this. Over the course of the 10
years, that is a savings of about $17 billion, but not the $80
billion promised.
If, however, you enter the doughnut hole, it is very
important that you get full credit for all the expenditures,
not the 25 percent that you pay. Otherwise, you are going to
remain in the doughnut hole forever.
So what are the implications of rising drug prices for
Medicare beneficiaries? Between 2006 and 2010, their premiums
increased 10 percent per year. The beneficiaries that used
brand-name drugs are the ones most likely to enter the doughnut
hole quickly and to stay in the doughnut hole.
What are the implications for the Medicare program? Between
2006 and 2009, the cost of reinsurance--that is what happens
when you enter the doughnut hole and where the Medicare program
pays 80 percent of the bill--increased an average of 22 percent
per year. For low-income beneficiaries, the Medicare program
pays almost all of the bill, and therefore, all of the costs
for brand-name drugs basically is paid for by the Medicare
program.
Thank you for your time.
[The prepared statement of Dr. Anderson follows:]
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Senator Nelson. Thank you, Dr. Anderson.
Mr. Dicken.
STATEMENT OF JOHN DICKEN, DIRECTOR, HEALTHCARE, GOVERNMENT
ACCOUNTABILITY OFFICE, WASHINGTON, DC
Mr. Dicken. Mr. Chairman and members of the committee, I am
pleased to be here today to provide highlights from GAO's
recent report entitled, ``Medicare Part D: Spending,
Beneficiary Cost-Sharing, and Cost Containment Efforts for
High-Cost Drugs Eligible for a Specialty Tier.''
This report focuses on drugs covered by Medicare Part D
that have particularly high costs, sometimes exceeding tens of
thousands of dollars per year, and how beneficiaries who take
these drugs often face high out-of-pocket costs.
Part D plans can assign covered drugs to special distinct
tiers with different levels of cost-sharing, such as separate
tiers for generic and brand-name drugs. CMS also allows Part D
plans to establish a specialty tier when the total cost for a
drug exceeds a certain threshold, set at $600 per month for
2010.
Drugs eligible to be placed on specialty tiers are among
the most expensive drugs on the market and are used by a small
proportion of Medicare beneficiaries. Examples include
immunosuppressant drugs, such as CellCept for transplant
recipients; those used to treat cancer, such as Gleevec for
leukemia; and antiviral drugs, such as Truvada for HIV. We
found that specialty tier eligible drugs account for $5.6
billion, or about 10 percent of Medicare Part D spending in
2007.
Medicare beneficiaries who received a low-income subsidy
account for about 70 percent of this total spending. This is
noteworthy because the cost-sharing for these beneficiaries is
largely paid by Medicare.
While most of the spending for these drugs was for
beneficiaries who received a low-income subsidy, most Medicare
beneficiaries are responsible for paying the full cost-sharing
amounts required by their plans. Given the high costs, most
Medicare beneficiaries taking a specialty tier eligible drug
are likely to reach the catastrophic coverage threshold by
spending at least $4,550 in out-of-pocket costs in 2010.
Over half of all beneficiaries who used at least one
specialty tier eligible drug reached the catastrophic coverage
threshold in 2007, compared to only 8 percent of Part D
beneficiaries who filed claims but did not use any specialty
tier eligible drugs.
Let me walk through an example of a beneficiary's expected
out-of-pocket cost for a specialty tier eligible drug costing
$1,100 per month, the median cost in 2007 for these drugs.
Initially, out-of-pocket costs are likely to vary because some
Part D plans may place the drug on a tier with a flat copayment
while other plans may require co-insurance.
In this example, excluding any deductibles, out-of-pocket
costs during this initial coverage period could range from a
flat $25 monthly copayment to $363 per month for a plan with a
33 percent co-insurance. Under either cost-sharing approach,
within 3 months, the beneficiary will typically reach the 2010
coverage gap threshold of $2,830 in total drug costs and be
responsible for paying 100 percent of the drug's costs. This is
commonly referred to as the doughnut hole.
Once out-of-pocket costs reach $4,550 in 2010, in about 6
months for this example, most beneficiaries will pay 5 percent
of the drug's negotiated price for the remainder of the
calendar year. At this point, beneficiaries' out-of-pocket
costs will be similar, regardless of the plan's initial
requirement for a flat copayment or for co-insurance.
Variations in negotiated prices between drugs across plans
for the same drug and from year-to-year can also affect out-of-
pocket costs for beneficiaries. As Senator Nelson noted, for
example, for seven plans we reviewed, the average negotiated
price for the cancer drug Gleevec increased by 46 percent from
about $31,000 in 2006 to more than $45,000 in 2009.
Correspondingly, the average out-of-pocket cost for a
beneficiary taking Gleevec for the entire year will have risen
from about $4,900 in 2006 to more than $6,300 in 2009.
Finally, let me close by noting that Part D plan sponsors
report having little leverage to negotiate price concessions,
such as rebates from manufacturers, for most specialty tier
eligible drugs. All 7 of the plan sponsors we surveyed reported
they were unable to obtain price concessions from manufacturers
on 8 of the 20 drugs in our sample.
For most of the other 12 drugs, plan sponsors report that
they were able to obtain price concessions that averaged 10
percent or less. Reasons plan officials cited for limited
leverage include the lack of market competitors, CMS formulary
requirements, and very low utilization.
Mr. Chairman, this concludes my statement. I would be happy
to answer any questions that you or other members may have.
[The prepared statement of Mr. Dicken follows:]
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Senator Nelson. Thank you, Mr. Dicken.
Mr. Hamilton.
STATEMENT OF GREGORY HAMILTON, MBA, CONSULTANT, ALGONQUIN, IL
Mr. Hamilton. I remembered to turn my mike on.
Mr. Chairman and members of the Aging Committee, thank you
for inviting me here this afternoon. My name is Greg Hamilton,
and I am a consultant in the healthcare industry in which I
have been working for over 35 years.
Most of my clients are Qui Tam attorneys working with
whistleblowers, the DOJ, and States to recover monies lost
through fraud. I have been asked here today to discuss with you
the effect on seniors of the 2008 and 2009 drug price
increases, which you have described quite well.
A couple quick points, the Wall Street Journal article on
April 15 quoted one of my former employers, Express Scripts,
saying it saw prices rise more than 10 to 15 percent over the
past 12 months. The New York Times reported that wholesale
prices for brand-name drugs rose about 9 percent last year, and
this was all in the face of, as you noted, the Consumer Price
Index decrease by 1.3 percent.
Analysts in these articles believe these unusual increases
were preemptive attacks on anticipated cost containment under
healthcare reform, coupled with a drive to maintain profits as
patents on many popular brand drugs are set to expire soon.
These price increases will harm seniors--seniors in Part D,
seniors in retirement plans, seniors paying cash. Pretty much
anybody that goes to buy a prescription is going to be affected
by these price increases. Here is why. It all has to do with
the system in which they get paid.
Pharmacies are not paid by the insurance companies. Almost
all pharmacy claims are paid by a middleman called a pharmacy
benefit manager, or PBM, as in one of my former employers.
Insurance companies, unions, and other payers hire PBMs to
maintain networks of retail pharmacies, create formularies,
configure copay tiers, collect rebates, and adjudicate claims.
PBMs begin this process by contracting with retail
pharmacies. They negotiate reimbursement rates for prescription
drugs at some discount off of average wholesale price,
otherwise known as AWP, also commonly called ``ain't right
price.'' Many of you here might be familiar with all the
Federal and State lawsuits revolving around AWP. There have
been many multimillion dollar settlements.
The problem is that our industry continues to use that
system, and it is that system that will continue to pass these
price increases along to the consumer. We should also note that
all the Medicaid programs predominantly use AWP for their own
reimbursement also. The typical reimbursement, by the way, just
for on average for State Medicaids and for what the PBMs
negotiate, is about 14 percent as a discount off of AWP that
they actually pay the pharmacy.
AWP is directly related to wholesale price. It is typically
20 percent or 25 percent above wholesale price. So when
wholesale price increase, so does AWP, which, in turn, drives
up the reimbursement to the pharmacy and, consequently, the
patients' copay.
Price increases to both patients and payers, can,
theoretically, be offset through rebates. PBMs combine AWPs
with rebates to determine the total cost of a drug to the
payer. Lower-cost drugs are sometimes placed in a lower copay
category to encourage patient selection and thus reduce their
cost and the cost to the payer.
The New York Times article cites analysts and a 2007
congressional study as saying these rebates often accrue to the
middlemen and not to consumer. My experience in the industry
supports this claim.
Although PhRMA Senior Vice President Ken Johnson has
claimed that the pricing studies were incomplete because they
did not consider the rebates, he is wrong. He forgets the basic
nature of rebates. These rebates are not paid out of generosity
or altruism. They are negotiated vigorously on relative prices
for drugs within specific therapeutic categories.
The eight largest pharmaceutical companies all had
comparable increases. So if all the prices went up at about the
same rate in the same time period, there would be no rationale
for new or additional rebates as the relative prices would
remain constant. Payers would have no leverage with which to
pit one company against another in order to derive new rebates.
Under this regime and with the system that we use, the
payers and the patients will just have to pay more for the
drugs, seniors included.
Thank you.
[The prepared statement of Mr. Hamilton follows:]
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Senator Nelson. Thank you, Mr. Hamilton.
Ms. McKenna.
STATEMENT OF WILLAFAY MCKENNA, MEDICARE PART D PARTICIPANT,
WILLIAMSBURG, VA
Ms. McKenna. I want to thank each of you for allowing me to
speak this afternoon very briefly on what my experience with
Medicare Part D has been.
I anticipated this program with a great deal of hope as it
was debated in Congress in the months before it passed. I was
pretty horrified at the thought of the doughnut hole, but one
thing that saved me in the first year was that I found or I
misunderstood the bill and thought that the out-of-pocket
expenses that would take me to the doughnut hole were my own
expenses.
But of course, they include the insurance company payments.
So when I went into it, it was a big shock. That was my first
year.
Just before I went into the Part D program, I purchased one
of my prescriptions for insulin, and I paid a total of $77.
That was $44 for the drug and a modest copay under the plan
that I had at the time. As you will see from the information I
submitted, at this time, the drug that I paid $44 and a copay
for in 2005 is now selling for $239.99.
I have also experienced the doughnut hole in each year that
I have been with the program. Each year, as the doughnut hole
has changed in its breadth and its range, even though the drug
prices may have stayed the same or if they go up a little, they
never quite match what the doughnut hole has done. So it has
been a constant problem.
I have insulin-dependent diabetes. I am on two different
insulins, which I take several times a day. In addition, I am
on three other medications that are used generally with
diabetics for the maintenance or prevention of the typical
kinds of side effects and other complications that you can have
with the disease.
There is no generic insulin, and that is a definite
criticism. Surely the copyrights or the patents or whatever
controls the drug manufacturers has run out now. Here we are in
2010 with what is basically a simple drug that is made up of
some kind of RNA or DNA, but there is no protocol to allow a
drug company to come in and know how to get approval through
the FDA. That is part of the problem.
Also I would say that the transparency that has not been
available to seniors in examining the plans each year, that is
being addressed now. The first year that they were included on
the Medicare website, they were quite inaccurate. This year,
they were much better, and I think that Medicare has done a
marvelous job with its Plan Finder. It is very, very helpful,
and I do have some suggestions about that later.
The one last thing I would like to address with you is that
this year because something happened with one of my drug
manufacturers, I am now purchasing one of my drugs from Canada.
The manufacturer of one of the cartridges that I use for
insulin discontinued those as of December 31st. They are sold
all over the country, but they are no longer available in the
United States.
I was switched to a different insulin by my
endocrinologist, and as with a series of insulins before that,
I developed an injection site reaction that was a horrible
thing, and I was taken off that drug. I contacted the drug
manufacturer, the FDA, Medicare, everybody else, and I kept
sending letters. Finally, in late December, I received a letter
from the FDA, which did not guide me and direct me but let me
discover for myself that it would be legal for me to purchase
this drug in Canada.
Even though I went through the process with fear that it
would never arrive because it would be confiscated and within a
very, very uneasy feeling when I had to go to the post office
to pick it up, absolutely certain that out of the door with the
package would come a bunch of Federal agents and spirit me
away. I got through that, and I am now using it. The packaging
is exactly the same. The only difference is that it is printed
in English on one side and French on the other.
The information contained within the package, it is the
same writing. It says the same thing. It is all the same, but
the price--$65 is the full price for the Canadian prescription.
Then I paid $10 for insulated packaging to get it here, and
that is remarkable to me. That expense that I will bear myself
will probably keep me out of the doughnut hole this year.
I very quickly want to go through, as somebody who deals
with the program but is not professionally involved in it, some
suggestions that I have. I really think this is a laudable
thing to do. Medicare people being the senior citizens of this
country, many of them on a limited income, particularly with
the people who are now experiencing it because they grew up in
a time when Social Security was offered as the way to retire.
Remember the old ad? Retire on $300 a month in Florida?
Well, anyway, the first thing is I think that allowing
Medicare to negotiate with the pharmaceutical companies for the
drug costs is just about the only way that may give some relief
in this thing, in this whole program. Permitting Medicare, and
if you want to keep the private drug companies involved or the
insurance companies involved, let Medicare contract with them
to process the claims, but not to run the program.
I would also note that Medicare pays faster on its medical
bills and provides more information to the Medicare
participants than any of the insurance companies do. We may get
a statement once a quarter from the private insurance company,
but we get them constantly from Medicare.
Encourage the FDA to issue rules for development of generic
biologics like insulin. It is absolutely ridiculous that a
simple drug, a basic, simple, biologic drug could undoubtedly
be put on the market here for a very minimal price. It was a
low price even 10 years ago, and it has gone sky high and it
hasn't changed.
Consider a modest increase in the withholding tax for
Medicare. Obviously, when Medicare was made available decades
ago, the anticipated costs could never--didn't anticipate
pharmaceuticals. It didn't anticipate the higher cost. But like
for my secretary, I think I deduct like $6.08 out of a pay
period. I would go to $7 at least without--I wouldn't think
twice about that.
Finally, consider a grading part for Part D programs, a
grading similar to what Medicare used to do when it did the A
to F groupings for the Medigap insurance that was sold some
time ago. But that way, if the participant could identify the
specific health problems they are having and get those programs
that are graded for them, that might be helpful.
I would just say one more thing, and that is Mr. Dicken, I
think, mentioned the big tier of the drugs. One of the years,
my insulin was in that tier, and I certainly can't understand
that. It never costs $600 a month. It is not a rare drug. It is
not a controlled substance. But it was in Tier 4. Of course,
that upped the price.
Senator Nelson. Yes.
Ms. McKenna. Thank you very much, and I appreciate the
opportunity again.
[The prepared statement of Ms. McKenna follows:]
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Senator Nelson. Thank you, Ms. McKenna.
Before you go, Senator, what we will do, we have got about
6\1/2\ minutes to get over to the floor to vote. We will recess
right now. We will pick up with Mr. Calfee, and then I am going
to flip it to you for questions first, Senator Corker.
Thank you. We will stand in recess.
[Recessed.]
Senator Nelson. Good afternoon. The committee will resume,
and sorry for the interruption. But when it is time to vote, it
is time to vote.
Mr. Calfee, you are recognized.
STATEMENT OF JACK CALFEE, PH.D., RESIDENT SCHOLAR, THE AMERICAN
ENTERPRISE INSTITUTE, WASHINGTON, DC
Dr. Calfee. Thank you, Mr. Chairman.
I would like to thank you and the committee for inviting me
to testify. The views I present are my own, not those of the
American Enterprise Institute, which does not take
institutional positions on specific legislation, litigation, or
regulatory proceedings.
My testimony focuses on three topics--price trends for the
most-used drugs among the elderly, the influence of the
Medicaid drug price rebate program, and international patterns
in drug pricing.
A series of reports from AARP on price changes for the
most-used drugs for the elderly has attracted considerable
attention, including in these hearings. These reports find that
branded drugs typically have annual price increases
substantially greater than increases in the Consumer Price
Index.
For example, the April 2009 report said that during years
2002 through 2008, price increases for branded drugs ranged
from 5.3 percent to 8.7 percent. These results are very
misleading. The AARP reports failed to describe the impact of
the ongoing wave of patent expirations and generic entry for
many blockbuster drugs. These reports disguise the dramatic
price declines that have occurred for such widely prescribed
molecules as Ambien, Aricept, Flomax, Fosamax, Neurontin,
Norvasc, Pravachol, Prevacid, Protonix, and Zocor.
Instead, the AARP tables track prices for the branded
versions of these drugs, even though the market has shifted
dramatically to generic versions. Notwithstanding the AARP
reports, which seem to show steadily increasing drug costs for
seniors, actual events demonstrate a central characteristic of
the pharmaceutical market, which is that a period of profitable
prices for drugs under patent is followed by dramatic price
reductions that permit patients to obtain some of the best
drugs we have at very low prices for years to come.
So-called specialty drugs are also important. These are
usually, although not always, biologics rather than chemical
compounds. Created through biotechnology methods, they are
often very expensive. Although they are presently not subject
to generic competition, through application of the Hatch-Waxman
Act, a regulatory pathway for post-patent competition may well
be created soon by new legislation.
The price effects would come relatively slowly, however,
because of the complex nature of these products. On the other
hand, specialty drugs typically address longstanding unmet
therapeutic needs. They have revolutionized the treatment of,
to cite a few examples, MS, rheumatoid arthritis, some forms of
cancer, and the leading cause of blindness in the elderly.
Despite their costs, specialty drugs remain an example of how
the competitive marketplace creates previously unobtainable
medical solutions despite the tremendous costs and
uncertainties of the R&D process.
A very different set of economic issues is raised by a
proposal introduced in the Medicaid drug rebate, which pertains
the dual eligibles who qualify for both Medicaid and Medicare
Part D. Research has demonstrated that the Medicaid rebate has
tended to increase prices in the private sector. An expansion
of the scope of the Medicaid rebate seems likely to reinforce a
tendency to bring higher drug prices in the private sector even
as the Medicaid system gets lower prices.
Finally, there is the matter of international disparities
in patented drug prices. Research has consistently found large
differences, sometimes more than twofold, although this is
usually not true for specialty drugs. These disparities arise
from three factors--the tendency to charge higher prices in
wealthier nations, and the United States is the wealthiest
nation; the fact that some drugs save money in healthcare
services, which cost more in the U.S., making these drugs more
valuable here than elsewhere; and most important, Government
price controls that have been implemented in all rich nations
other than the United States.
The result is that the U.S. market provides a
disproportionate share of worldwide pharmaceutical profits.
This means that other wealthy nations are, to a significant
extent, free riding on U.S. R&D investment that is motivated by
the search for profits and which remains a dominant source of
valuable new treatments. Unfortunately, there is no easy
solution to this problem, although there are some measures that
could provide some help.
Mr. Chairman, that concludes my oral testimony. Additional
details are provided in my written testimony.
[The prepared statement of Dr. Calfee follows:]
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Senator Nelson. Thank you, Mr. Calfee.
Senator Corker?
Senator Corker. Thank you. I want to thank each of you for
your testimony, and I have a--like we always do, I have got a
conflict. I am going to leave very briefly, but I think your
testimony has been outstanding.
Senator Nelson, I appreciate you calling this hearing and
for the explanation you gave on the front end.
Let me say, generally speaking, I have concerns, as I
mentioned on the front end, about the high cost of brand name
drugs here. We have talked to trade representatives from both
administrations, explored things like ``most favored nations''
clauses and those kind of things to deal with it.
But I am going to ask some questions to sort of look at the
other side of this, not that I am in any way debunking what is
before us today. But when I was in Tennessee as commissioner of
finance, we had a program called TennCare, and in that program,
we did not have things like the doughnut hole or appropriate
copays. What we found was that drug utilization just went
through the roof, OK?
While I have--my heart goes out to Ms. McKenna and the
issues that she is dealing with, sometimes we have unintended
consequences with policies like this. I wondered if you might
comment as to the effect, if you will, of not having some of
the financial constraints that exist, which are very difficult
for some people, but what the unintended consequences might be
as it relates to actual drug utilization?
Mr. Anderson.
Dr. Anderson. Sure. Thank you.
What I am really concerned about is that I think you
definitely need to have co-insurance, and at the beginning of
the doughnut hole, you have 25 percent co-insurance, which I
think is quite high compared to what we have from other goods
and services. But essentially, that is the co-insurance.
The problem is, obviously, the doughnut hole, and what
happens when you enter the doughnut hole is that your
incentives change dramatically. As I said, 10 percent of the
diabetics stop taking their medications when they entered the
doughnut hole. Eighteen percent of the people with osteoporosis
stop taking their thing, and that leads to further expenditures
in the Medicare program because now they are going to be
hospitalized. They are going to need emergency room care. They
are going to need a whole set of things.
So it is really penny wise and pound foolish in a number of
instances to have this doughnut hole and have these people
paying so much, and they can't afford it. I mean, $5,000 for a
Medicare beneficiary making $20,000 a year is a quarter of
their income. That is an awful lot of money to pay just on
prescription drugs.
Senator Corker. You know, we hear a lot about the fact that
the reason drug prices are so high here is that we do so much
research and development in this country of new drugs, and we
get them to the markets quicker here. Our seniors actually take
advantage of them more quickly.
At the same time, you look around the world in other places
where prices are negotiated and set, and there is a lot of
research and development that is taking place in those other
places. Is that because they are able to still sell into the
U.S. market, or is the whole issue that we talk about as far as
research and development one that is a myth?
I guess I will ask whoever is most qualified to answer
that.
Dr. Anderson. Well, let me try again. Basically, what we
are spending is 15 percent of our drug budgets in most
pharmaceutical companies on research and development. We are
spending 30 percent of our budgets on marketing.
So I am all for more research, and I think we really need
to change the incentives for pharmaceutical industries to spend
more than 15 percent. If we had higher drug prices and they
were spending 50 percent of their things on new research and
development, I think that would be great. But at 15 percent on
research and development, I just don't think we are getting
value. The other countries are just getting all that.
So if we had unlimited money, if we didn't have a deficit
in the Federal Government, a trade deficit with the rest of the
world, I think that would be fine. But we do.
Senator Corker. Mr. Dicken, I read a report, CBO report, I
guess, talking about the fact that if we had actually
negotiated--if we negotiated prices for our brand drugs, that
at the end of the day, which seemed like it was
counterintuitive to what much has been said about the actual
negotiation for brand drug prices. But I read a report that
said there would actually be very little saved if we did that,
and I wondered if you might respond to that?
Mr. Dicken. Well, I think part of what CBO's analysis was,
was that one of the things that will drive how much plans or in
this case the Government, could negotiate in savings, is
dependent on the formularies and to what extent they can steer
particular utilization to particular manufacturers. I think
CBO's estimate was based on an assumption that it would not be
within the Medicare program's ability for the Government to
negotiate with having restrictive limited formularies.
Senator Corker. Mr. Chairman, I have a number of questions
I want to submit for the record. I have got to go on. I know
that these witnesses have been waiting a long time, but I thank
you for the hearing and look forward to the results.
Senator Nelson. Thank you, Senator Corker.
Mr. Chairman Kohl?
The Chairman. Thank you very much, Mr. Chairman.
I would like to ask each and every one, or one or two on
the panel, is there any justification in your mind, in terms of
the people of our country, for Americans to be paying twice as
much for the same product as is sold in other countries when
particularly we manufacture the product here? In many cases,
the costs of a product's development is paid for by tax dollars
through the NIH? Is there any justification for that?
How we get to an answer might be another question, but is
there any way that you can justify that in terms of the
American consumer? Anybody think that there is a justification
for it? We should pay twice or three times as much?
Yes, Mr. Calfee?
Dr. Calfee. Well, I guess it depends partly upon what you
mean by ``a justification.'' I mean, the reason those prices
are so low is because of price controls that are implemented by
those nations. In most cases, the manufacturers would like very
much to charge higher prices in some developed nations but are
prohibited from doing so.
I think it is worth bearing in mind that in a normal world
in which you didn't have any kind of price controls at al,
prices in the U.S. would be higher than they are in those
countries for a couple of different reasons, which I mentioned
earlier. Some of these drugs are just worth a lot more in the
U.S. than they are in France or Switzerland or Germany because
when they save days of healthcare here, which they often do,
the cost of the healthcare services they save is much higher
here than it is over there. So, the drugs are more valuable
here than they are there.
The Nation is wealthier, wealthier people tend to pay more
for products generally. There would be a disparity, but it
wouldn't be as big as it is now. There are some elements of
unfairness, just as you suggest.
I think one thing is worth paying attention to, and Gerry
Anderson mentioned this in his remarks, and that is that the
U.S. market for generics is extremely competitive and extremely
efficient. It is that way because we have a very open market.
There are a number of European nations which make it rather
difficult for generic manufacturers to enter into the market.
They tend to favor their domestic generic manufacturers, and in
fact, several years ago, Mark McClellan, who was then the
Commissioner of the FDA, gave a speech in which he pointed out
that for many European nations, if they were to open up their
generic market to competition instead of favoring their
domestic manufacturers, generic prices would drop so much that
they could go a long ways in raising branded prices toward U.S.
prices without actually paying anything more.
So, there is an element of trade restrictions there, that I
think is probably worth pursuing at some level.
The Chairman. Anybody want to make a--is there any
justification in your minds for we who represent the American
people defending two and three times as much being charged for
those brand-name drugs here as they are anywhere else.
Mr. Anderson.
Dr. Anderson. I can't think of one. I mean, I think,
basically, the problem is that we have many people that are
paying lots of money, $5,000, to get through the doughnut hole.
That is a huge amount of money. It really affects their access,
and most of the reason why they are in that doughnut hole is
the price and the utilization of brand-name drugs.
So it really affects the American senior substantially to
pay these high prices, and I think--I wouldn't mind paying it
if we didn't have a trade deficit and if all the seniors were
getting drugs free of charge. But they are not.
The Chairman. OK. I wanted to get that clear. I assume you,
Ms. McKenna, believe there is no real justification other than
it is just happening, not that you believe it is right. Is that
true?
Ms. McKenna. I have heard a lot of the comments about the
research and development, and I understand that. But when I
think about the last 5 to 10 years when we were bombarded with
advertisements on television, ``Ask your doctor about this,
that, and the other thing,'' that is so offensive when as just
one person in Part D out of, what is it, 40 million people who
are using Part D, one of us has a concern about that and is
confronted with it every day, why isn't that spent on providing
the drugs at less cost to the large group of people who are
elderly?
The Chairman. Yes, Mr. Calfee?
Dr. Calfee. If I could say something about marketing and
R&D? A couple of things: First, is the 30 percent figure
mentioned by Gerry Anderson. That number is inflated because it
includes the samples that are provided, the free samples that
are provided to doctors. Those are valued at wholesale prices,
and that is a pretty big chunk. On the order of half of all
marketing consists of giving away samples, which doesn't really
cost the manufacturers very much at all.
If you correct for those numbers, they probably spend more
in R&D than they do on marketing. But you have to remember that
they do marketing in order to make money. They do it in order
to increase their profits. Those profits are the source of
their R&D.
Large manufacturers, don't go out and sell bonds in order
to fund their R&D. They fund their R&D out of the cash that
they bring in from selling their drugs. If you eliminate their
marketing, you probably reduce sales. You reduce their profits,
and you reduce the money that is available for R&D. It is not a
tradeoff between the two.
Now 15 percent doesn't sound like very much for research
out of total revenues, but in fact, it is extraordinarily high.
I don't think there is any other industry that comes close to
that level. Now we can sit here and we can try to figure out
what that percentage ought to be, but I don't think anyone
knows what that percentage ought to be. It is really a matter
of how manufacturers want to spend their money in order to try
to figure out what they can do to find a new cure.
It is a very, very difficult business, and there are a lot
of drugs that we need that manufacturers are not working on,
like new antibiotics, malaria drugs, and so on. No one else is
coming up with these drugs. So, I think we have to remember it
is a chase for profits that is the source of the drugs that we
are getting, and it makes sense that we should at least pay
attention to whether or not we are going to be getting a lot
more new drugs in the future because there are a lot of
unsolved problems, such as the illness that Ms. McKenna is
dealing with.
The Chairman. Yes, sir, Mr. Hamilton?
Mr. Hamilton. First of all, I am not going to try and
justify those prices. But I can offer a couple of explanations.
One is that in the pharmaceutical industry, absent of
generics--I am talking the brand-name world--cost to
manufacturer to bring a product to market is only considered
when you first look to launch a drug. Pharmaceutical companies
will scope the market. How big is the market? How many patients
could take this? How many pills or tablets or injections can I
sell?
It may be some idea of what kind of price, and that will
help them decide whether to pursue that drug or not. But once
the drug is on the market, the cost of the drug has nothing to
do with its price. As Jack said, talked about the cost of
samples, samples cost a lot more than yet the drug does going
to the pharmacy, and that is because of basically the packaging
and storage and shipment to reps.
So cost, unlike many other situations, you know, if you are
going to make something, you think, ``What is it going to cost
me, and therefore, how much am I going to sell it for?'' It
doesn't exist in the pharmaceutical industry. You sell a
product for whatever the market will bear.
Another factor that comes into play in domestic marketing
is several other nations, I see many other nations benchmark
their U.S. pricing. They will pay a percentage for a drug based
off of the average selling price, calculated quarterly on
domestic products. So the higher you can keep your price here
in the United States, the more money you are going to make
abroad.
The Chairman. Thank you.
Thank you, Mr. Chairman.
Senator Nelson. Thank you, Senator Kohl.
Senator LeMieux.
Senator LeMieux. Thank you, Mr. Chairman.
Thank you to my colleague Senator Nelson for having this
hearing today.
Thank you all for being here to testify, especially you,
Ms. McKenna. I appreciate your good words, and it is important
for us to put a face on these problems.
Senator Nelson and I represent Florida, and this issue
comes home loud and clear in our State, with the highest per
capita population of seniors, more than 3 million folks on
Medicare.
Now the issue that I want to focus on with you is just the
cost and why it is so expensive and why it continues to be more
expensive, and there has already been some good testimony on
this today.
Mr. Hamilton, in a prior life, I was the deputy attorney
general in Florida, and we dealt with AWP cases, and I guess
they are AMP now, and I have been through those cases that we
have tried to figure out in the Medicaid program in Florida why
we weren't getting the best price. Really is average wholesale
price truly the best price, or is there some discount, as you
say in your testimony, 25 percent perhaps, below that?
So I am familiar with the work that you have done and know
that the struggles that both the Federal Government and the
State governments deal with in trying to make sure that we are
getting the best price.
I think, Mr. Dicken, I want to ask you the first question,
and that is, you know, the Federal Government representing, in
a way, so many consumers of pharmaceuticals should be able to
negotiate better prices on these drugs for Medicare and
Medicaid and veterans recipients.
I understand the analysis you did, and I understand on a
drug-by-drug basis those discounts don't seem so appealing.
They might be 10 percent or so. But why can't the Government,
when representing so many consumers, be able to go to a
particular drug company and say we are not going to just
negotiate on Lipitor, we are going to negotiate on all of the
drugs?
Based upon the volume of the people that we represent in
our consumer pool, we are going to get the best prices. Are we
doing as much as we can to negotiate?
Mr. Dicken. As you know, there are a variety of different
approaches that different Federal programs use to attempt to
negotiate or set prices for drugs. So, certainly, the Part D
program in Medicare is relying on private plans to do those
negotiations. Many of them will establish formularies within
guidelines that are established by CMS that limit the ability
to restrict drugs in certain classes, and so the Medicare
program is relying on the private plans to do those
negotiations.
Senator LeMieux. Is that through their PBMs?
Mr. Dicken. Often contracting with a PBM that would do the
negotiations with the manufacturers.
Senator LeMieux. How do we know that they are getting the
best price? If we are segmenting the market, are we not getting
the best price when they have a smaller volume of people that
they are negotiating on behalf of than the entire Federal
Government would be able to have that ability to negotiate?
Mr. Dicken. Well, it is a very different approach for Part
D that does rely on multiple different Part D plans to be
negotiating. They may have differences in their formularies and
the price that consumers may find on Plan Finder for different
plans. So, it is relying on both those plans to negotiate and
for consumers to choose the plan that would best meet their
needs.
That may be different from, say, a VA program which does
have a formulary and set prices that may look different from
what may be existing in Medicare. So the Federal Government,
through a number of different programs, has a number of
different prices for the same drugs.
Senator LeMieux. Let me go to Mr. Hamilton and then to Dr.
Anderson.
Mr. Hamilton. A couple of things. First of all, the Federal
Government, through two different programs--one is the Federal
supply schedule, which is the VA, DoD, and Indian health, and
the 340B program--through both of those programs, they
negotiate on a national level, and they do a very good job of
it. If that was applied to Part D, you would see discounts far
better than anybody is getting right now.
But they also have an advantage in that they have a formula
for the Federal supply schedule and the 340B runs off of the
Medicaid rebate program. So they start off with a certain
discount off of every drug, regardless of the number of
competitors or what leverage a particular plan might have based
on utilization or anything. They start off with a basic
discount no matter what. Then they negotiate from there. That
is called the ceiling price.
So we already have in place two systems that work very,
very well to drive down the cost of drugs for patients. The
DoD, for example, has a mail-order facility. As a matter of
fact, they hired my former employer, Express Scripts runs it in
Arizona, where they have literally massive machineries and
canisters and gazillions of pills. They fill the scripts and
send them out to DoD recipients at a fraction of what you would
pay anywhere else. They do that because they buy off the
Federal supply schedule, which starts with a discount and then
negotiates after that.
So, certainly, regionalization of plans reduces their
ability to negotiate. Remember, they don't start with a given
discount. They start at retail.
Senator LeMieux. Dr. Anderson.
Dr. Anderson. Thank you.
If you look at the 2003 Medicare law that created Part D,
there is something called ``noninterference.'' Basically, that
says that the Medicare program can't negotiate directly with
the drug companies. So that is essentially the answer to your
question why Medicare doesn't do it.
If you look across the Federal programs, what you will see
is that they are paying a two-to-one difference. The DoD and
the VA typically pay the least. The Medicare program typically
pays the most for most things, and there is the two-to-one
difference.
So if you are talking market power, the Federal Government
is the largest purchaser of drugs in the world, and it should
be getting a very good deal. But it is totally splintered in
that it is buying all sorts of things in all sorts of different
ways, which means that it is not using its market power or its
regulatory power to its fullest. The seniors and everybody else
is paying very different amounts.
Senator LeMieux. Mr. Calfee.
Dr. Calfee. Yes, I think it is worth remembering that the
ability to negotiate lower prices has almost nothing to do with
the size of the entity that is doing the negotiating. Gerry
Anderson mentioned that some of the lowest prices in the world
are from New Zealand. New Zealand is a very small country. The
entire population of New Zealand is probably less than the
Medicare population of Florida alone.
What gives them the ability to negotiate these things is to
look at several different competing drugs in a therapeutic
category and to play off one manufacturer against another. The
VA does very well in its negotiations, because it tends to have
very narrow formularies.
In Medicare Part D, for many therapeutic categories, the
formularies cannot be very narrow. It is against the law. You
have to include every drug in a particular category. So that is
what really drives the ability to negotiate lower prices.
I think it is also worth remembering that if you start out
with a policy of having just a percentage discount, where does
the price come from, the original price that you are
discounting from? At some point, if all the drugs sold to the
Federal Government are going to be 30 or 50 percent less than
the prices in the private sector, those prices in the private
sector are going to adjust, because manufacturers know that
whenever they set those prices, they are setting a much lower
price for the Federal Government.
So it is very hard to solve these things through just
simple formulas, I think.
Senator LeMieux. Well, I appreciate the testimony, and I
agree that these formulas, it is hard to set them, and they
certainly can be gamed once you do set them. But the comments
that were made, I think, from Dr. Anderson and Mr. Hamilton is
that we are losing our ability, based upon the size of the
Government. I don't mean the size of our entity. I mean the
size and the number of people that we represent, which is
volume, and certainly that has something to do with the ability
to negotiate.
Maybe not the only factor, Mr. Calfee, but certainly a
factor, that this noninterference clause makes no sense to me.
That we would give up our right to have that ability to
negotiate doesn't make sense to me.
I mean, it occurs to me, Mr. Chairman, that we want to hit
the sweet spot of allowing these companies to develop the best
drugs in the world. We don't want to stifle that. We don't want
to put this in a situation--we can't be Canada, where the
research is not happening and just take, cap these prices and
say, well, we will buy them at this price, and we won't buy
them at any other. We can't do that because we are doing the
innovation.
You have to applaud these companies for doing the
innovation. It is saving lives around the world. But at the
same time, we want to get the very best price. It is appalling
to me that these other countries are freeloading off of our
R&D. I wonder, Mr. Chairman, that our U.S. Trade Representative
shouldn't be talking about these issues when he is dealing with
folks from other countries.
I want to talk about what has been called the doughnut
hole, and I know that my colleague from Florida will recognize
doughnuts are--everybody likes doughnuts. I think we have named
it the wrong thing. We should call it the black hole or the
sink hole because a senior who falls into it has a tough time
of getting out of it, and words matter.
What can we do under the existing law--I mean, maybe we can
change the law. But what can we do under the existing law, if
anything, to help seniors who are in this hole? They are
struggling. They are certainly struggling in our State. Ms.
McKenna has given us great testimony about that. Is there
anything we can currently do, or do we just have to change the
law?
Who wants to take a stab at that?
Dr. Anderson. Well, I think price transparency is an
important thing and a Republican thing as well. I mean, we just
don't know the prices for these drugs, and we should. I mean,
it is important for the Medicaid program, as you know, in the
past. It is important for the Medicare program.
We also don't know the level of cost-sharing. So I looked
at Part D drugs, and sometimes the Medicare beneficiary is only
paying 5 percent of the cost because the drug company is paying
95--I am sorry. The Part D plan is paying 95 percent of it. In
other drugs, they are paying 60 percent of the cost.
So, it is sort of the Part D plan is making a judgment of
what the beneficiary should pay for different drugs, and I
can't understand a rhyme nor reason for it. But if I am a
person that is going to sign up for one of these Part D plans,
I want to know what the plan is going to pay, and we don't know
that.
Senator LeMieux. Mr. Dicken.
Mr. Dicken. I think certainly Dr. Anderson mentions a good
point with price transparency. Just a couple of other things to
think about. Some of the drugs that have high costs that lead
individuals into the doughnut hole may be ones with a lack of
therapeutic alternatives, and so, if there were options to have
more competition there.
The other thing is one of the ways that plans that we have
just talked about will attempt to reduce costs is through
negotiating rebates. Those rebates may reduce the costs overall
and are passed onto the programs through lower premiums but
aren't affecting the costs that the individuals pay at the
drugstore. Those will be reduced by discounts that are
negotiated with the pharmacy.
But the rebates don't necessarily go to that individual who
is showing up at the drugstore other than reducing the overall
program cost.
Senator LeMieux. Can I just ask you one question about
that? Does the pharmacy have any incentive under that rebate
program to pass those savings along to the customer?
Mr. Dicken. Well, there are different types of price
concessions here. So I was speaking about rebates from the
manufacturers that would go back directly to the plan or the
PBMs. Certainly, the plans are also negotiating discounts with
the pharmacies and competitive and trying to encourage, in some
cases, networks of pharmacies where they will negotiate lower
prices. That would be the incentive for the pharmacies to
participate in those discounts.
Senator LeMieux. Mr. Hamilton.
Mr. Hamilton. Those discounts you are talking about, the
rebates. The rebates are typically negotiated by a PBM. Some
insurance companies have their own PBM internally. So they
would do it. But the PBM function negotiates the rebate,
collects the rebate, sometimes passes those rebates on to the
plan. Sometimes they keep them. It depends on what their
contract with the plan is.
But those rebates don't go back to the pharmacy, to answer
your question. No, the pharmacy doesn't get those rebates.
Those rebates are kept by either the PBM or the plan. The PBMs
negotiate network contracts with the pharmacies at some
discount, again, off of AWP. There we go back to the problem of
AWP.
Senator LeMieux. I remember a line of cases about
pharmacies and AWP. That is why I remembered to ask that
question.
Mr. Hamilton. That is what happens. The PBM goes out,
develops a network, and they pay, let us say, 14.5 percent is
what they negotiate with the CVS or Walgreen's to pay them.
Then they go back to their plans, and they say, all right, I
will reimburse your claims, but I am going to charge you 14.6
percent. So, the plan pays one thing, the pharmacy gets
another. But the rebates don't go back to the pharmacy. That
amount is calculated based on AWP, and there again, we go back
to the problem with the system.
Senator LeMieux. Anything on the first question that you
think we can do without changing the law to help with this
problem of people who are in this hole?
Mr. Hamilton. I think--like John said, I think the best
thing without changing the law is to negotiate more rebates and
negotiate them in a way that guarantees they go back to
patients.
Senator LeMieux. Thank you. Anyone else want to comment on
that?
Ms. McKenna. I would just say a couple of things about
that. I feel that the basic amount that is paid for the
participation in Part D could be adjusted. Maybe increase that
a tiny bit, but then have just a standard drug plan. Get rid of
the tiers and the formulas and everything else. These are
impossible for most seniors to understand.
I have a lot of seniors who come to me in my practice, and
continually, it is more and more questions each year that I get
from them. Even from a neighbor who came, and I spent almost 2
hours with a person who is a college professor and couldn't
understand the choices because it is foreign. It is not like
any other insurance.
But that way, yes, there are going to be very expensive
drugs. But probably on the low end of the scale, everybody is
going to pay a little too much for the very inexpensive drugs.
But those payments for those at a reasonable rate are going to
accrue to the benefit of all the others who are participating
and who are on higher drugs.
The formularies have a great deal of difference in how your
copay is calculated. The higher your drug is on the formulary,
the more you are going to pay. But I think that would be
helpful.
Senator LeMieux. Thank you, ma'am.
Mr. Calfee.
Dr. Calfee. Yes, just very briefly, I think it is worth
remembering that when Part D was first created in the 2003 law
and was implemented in 2006, there were a lot of estimates
coming out of CBO and elsewhere about how much that program
would cost. It ended up costing a lot less than was expected,
and that undershooting of cost continued for several years.
It was because of the extraordinary level of competition
amongst the Medicare Part D plans, partly because of the
activities of the PBMs. That competition has resulted in pretty
good deals. Premiums have been down. Drug costs have been down.
Medicare costs have been down below what they would have been.
So I would just exercise some caution when contemplating
doing away with a lot of that competition. You might end up
with something that would be very, very much simpler and easier
to deal with, but it might be more expensive, too.
Senator LeMieux. Mr. Chairman, I want to give you an
opportunity. I know you have questions to ask, and I thank you
again for having this hearing.
I would like to just take a moment of State privilege,
which I know you will appreciate, is that I was reading the
Lakeland Ledger the other day, and our friends at the company
of Publix are now offering some diabetic drugs for free. So
there are good folks out there trying to do the right thing.
Thank you, Mr. Chairman.
Senator Nelson. You recall one of the major retailers in
the country a few years ago turned the pharmaceutical world
upside down, when Wal-Mart came out with a group of about five
commonly used drugs, and they were offering them for something
like 10 bucks. So, Mr. Calfee, what we are trying to do,
regardless of what happened with the prescription drug bill
back in 2003, we are trying to figure out how we can make it
more affordable for folks that are on fixed incomes.
Dr. Calfee. I certainly appreciate that, and as you know,
the Part D program is, to some extent, means tested. I mean, if
you are below a certain income, then drugs cost quite a bit
less. In some cases, a lot less. Of course, if you are eligible
for Medicaid, that is a different story, and we get into all
these squirrelly problems of dual eligibles.
I think there is a strong case for means-tested subsidies
generally. Maybe there is a case--it has been a while since I
have looked at all the parameters of Medicare Part D, but maybe
there is a case for extending those means-tested subsidies. So,
there are fewer people who face the difficulties that have been
described by Gerry Anderson and by Willafay McKenna. That, to
me, strikes me as a reasonable way for addressing the Part D
doughnut hole.
The reason it was there to begin with, I believe, was to
have something that was structured in such a way that it would
not exceed certain cost levels, but would also be attractive to
almost every Medicare beneficiary because you wanted to have
wide participation in this plan because that was going to keep
down costs. That part of it actually worked pretty well, but it
has generated all these other problems.
I don't think there is a simple solution without spending
an awful lot more money, but there may be some middle ground in
which there could be more in the way of means-tested subsidies
without an extraordinary increase in costs.
Senator Nelson. Well, in your written testimony, you cited
an article that argues that Medicaid rebate increases, that the
Medicaid rebate that I offered in the committee, in the Finance
Committee that was defeated for dual eligibles, that that
increases the price of drugs in the private sector. I want you
to please follow up on that.
Do you think that the private sector doesn't have the
ability to keep prices low if the Government is obtaining a
lower price?
Dr. Calfee. The private sector negotiates prices with PBMs
and other people, and they do that in competition with other
manufacturers of similar drugs. When they are doing that, they
take into account all of the pricing that is affected by their
decisions.
For example if Pfizer is negotiating Lipitor price with
Express Scripts on behalf of some large client, say, General
Electric or something like that, they know that if they are
going to give an extra discount for that particular buyer and
that discount becomes their lowest price, they are going to
have to go back and reduce all their prices in Medicaid.
While the dual eligible situation is a rather strange
situation. Under your proposal, there would be more people who
would be getting the Medicaid rebates. So, Pfizer and any other
manufacturer when they are negotiating prices, would think
about that, and they would know that when they are giving
someone an exceptional discount, that exceptional discount is
going to be very costly to them because of the Medicaid rebate.
Consequently, they are not going to go as far in discounting
prices, and that is more or less the logic that has been
documented.
Now the paper that I cited did not look explicitly at your
proposal. It simply looked at what has been happening in the
past.
Senator Nelson. Well, let me give you the other side of
that.
Dr. Calfee. Sure.
Senator Nelson. Had my amendment, and this is an academic
discussion because it didn't pass. Had it passed, dual
eligibles would get the same rebate when they got their drugs
in Medicare that they were eligible to get those same prices
under Medicaid. In fact, CBO scored it, and it would produce
over $100 billion over 10 years. What we could have done with
that is we could have filled the doughnut hole for seniors and
had money left over to apply to the Federal deficit.
Now here is what would have happened, Mr. Calfee. When you
fill the doughnut hole, that means more people are going to get
up into the catastrophic coverage up here. More people get up
into catastrophic coverage, the pharmaceutical industry is
going to sell more drugs, and as a result of that, the
pharmaceutical companies are going to make more money as a
result of saving the American taxpayer over $100 billion of
paying less by Medicaid folks that are getting their drugs
through this Medicare program.
So, there are a lot of arguments that are common sense. We
will have to see what comes out on the Internet tonight on the
way that they are talking about filling this doughnut hole. But
surely, one of the results is going to be more people will get
that coverage like Ms. McKenna, or as Dr. Anderson had
testified, they get into that doughnut hole. They can't afford
it. They stop taking.
You fill that doughnut hole that the Government is going to
pay for it. It gets them on up into the catastrophic coverage,
and at the end of the day, more pharmaceutical products are
going to be available to more people.
Now that is not a bad thing because these drug companies
are doing wonderful things with some of the miracle drugs that
they are coming out with. But at the end of the day, the drug
companies are not going to be hurting. They are going to be
making a lot more money.
Mr. Hamilton.
Mr. Hamilton. I don't know if you know this or not, but
there is a precedent. What you are suggesting in a way has
already been done. The Veterans Healthcare Act of 1992 has a
program called 340B, and the 340B program provides drugs at
basically the Medicaid discount to certain clinics and
disproportionate share hospitals, and it is all outpatient drug
stuff.
But what that bill did, what that legislation did was
basically take all the patients that were being treated at the
outpatient facilities of disproportionate share hospitals--
there are about 105 of those in the country, plus all the
clinics. They did all the inner-city clinics and such and
county health facilities--and turn them all into Medicaid
patients.
So, consequently, when you are in a drug company--and Mr.
Calfee is right--you do have to calculate if I give somebody a
discount or a rebate, which amounts to a discount, then my
Medicaid rebate is the amount of rebate per unit is going to go
up. At the same time, your price to the 340B entities is going
to go down.
But we have already seen all those 340B entities added to
basically what is the Medicaid population, starting back in
1992, and that program actually is administered by the Office
of Pharmacy Affairs that, in addition to taking the Medicaid
rebate discount, they also negotiate prices so that it is
another entity that has done basically what you are talking
about with a different set of people.
Senator Nelson. I want to ask Ms. McKenna, you had
testified that when the drug that you were taking for diabetes
was not available in the United States, your doctor first put
you on another one. It didn't work out for you, and you
realized that you needed to go back on the original drug. You
then got approval so that you could get that drug from Canada,
and you said it cost you $65, plus $10 shipping?
Ms. McKenna. That is right.
Senator Nelson. Now what was that compared to the price
that you were buying it when it was available in the U.S.?
Ms. McKenna. Two hundred thirty-nine dollars and ninety-
nine cents.
Senator Nelson. Two thirty-nine, ninety-nine to 65. What
was the name of that drug?
Ms. McKenna. Novolin N. N-O-V-O-L-I-N N.
Senator Nelson. Let me ask all of you, anyone, do you
believe--hold up this chart. Since there is no limitation on
what can be charged for the brand-name drugs for seniors, if
tonight we find on the Internet that the President's proposal
is that 75 percent of this is going to be covered for seniors,
do you think the price of those drugs in the doughnut hole that
are going to be more available to seniors because of the
payment of 75 percent, with a senior paying 25 percent, do you
think the price of those drugs are going to go up?
Dr. Calfee. If you maintain the competitive Part D
mechanism that you have right now, so that each individual PDP
is competing with every other one in trying to gain sales from
seniors, they will still have an incentive to negotiate lower
prices. I think on the whole, all else being equal, if you
increase Federal subsidies to that extent, which is a pretty
big increase, it certainly isn't going to push prices down. It
might push them up somewhat.
I think that the existence of competition would tend to
moderate whatever price increase there might be. If you
eliminate that competition, then, yes, you are asking for big
price increases.
Dr. Anderson. Medicare beneficiaries are not buying some of
these drugs because they can't afford them, and that may be
that the pharmaceutical industry is saying we have got to keep
our prices down in order to allow people in the doughnut hole
to afford these drugs. If you make--if you reduce the price
effectively to them, of course, the pharmaceutical industry is
going to raise their prices, and they are going to raise it so
that the beneficiary pays about the same amount as they are
doing now. That would just be good economic sense on their
part.
Senator Nelson. Any other comments on anything that we have
covered here?
Mr. Dicken, are certain types of drugs more vulnerable to
steep price increases for Part D beneficiaries?
Mr. Dicken. Well, certainly, in the group of drugs that we
looked at that were very high-cost drugs to begin with, we did
see price increases that could be--I think the example that you
cited was 46 percent over a 3- or 4-year period, and an average
over 36 percent.
We had also done a separate report looking at drugs that
faced truly extraordinary drug price increases. These are drugs
that went up 100 percent, literally doubling in price
overnight, not a cumulative increase, but a one-time increase.
The types of issues that we saw that led to those dramatic
price increases were things like lack of therapeutic
alternatives, and so that there was not enough competition in
that market. There could be consolidation and mergers, and so
the pricing strategies that manufacturers were using changed.
In a few cases--this was not the typical--there were some
unusual manufacturing issues such as disruptions in raw
materials, or handling of hazardous materials that led to some
of those very high increases. So those are the types of drugs
that have had the most dramatic increases.
Senator Nelson. Mr. Hamilton?
Mr. Hamilton. When you are looking at controlling price
increases, you could look at the Medicaid rebate program. The
Medicaid rebate program calculates every quarter what is called
the AMP, which starts when the drug is first marketed, and they
add the CPI-U to that every quarter. Any increase above the
CPI-U is added to the Medicaid rebate.
So within the Medicaid rebate program, price increases are
restricted to the CPI-U. Whether or not something like that
could be done with Part D, I don't know. But it certainly works
in the Medicaid rebate program.
Senator Nelson. In the Senate-passed healthcare bill, the
amount of the rebate for brand-name drugs is being increased
for Medicaid from 15 percent to 23 percent, in addition to what
you just stated about the increase of the differential between
the health inflation cost and the Consumer Price Index cost.
Now my question to you is what happened if we just changed
the total Part D prescription drug, and we made it a rebate
program like Medicaid drugs? What would happen to prices?
Dr. Calfee. Well, my own view is that what would happen
would be the same thing that happened with the Medicaid rebate.
Manufacturers will take this discount into account when they
are negotiating their own prices in the private sector, and
those prices will tend to go up because every time they think
about providing a discount, they will have to remember that
there are several million Medicare patients whose prices will
automatically go down along with whatever discount they are
offering.
So I think that it would tend to disrupt prices in the
private market significantly.
Senator Nelson. Even though the price of the drugs would be
cheaper for Medicare beneficiaries, and therefore, there would
be a lot more drugs sold?
Dr. Calfee. Well, that is part of the mix, too. One of the
more difficult things to predict is how much more you sell when
that happens to prices. Gerry Anderson has a good point. There
are some customers who right now don't buy drugs that would be
bought if there were some subsidies.
Estimating the magnitude of that can be pretty tricky. In
general, if everyone is in Medicare, their drugs are being paid
for by the Government, yes, that is going to increase demand.
If there is a mandatory discount from private sector prices,
then I think it would tend to push those private sector prices
up.
That is a little bit different from the last question you
asked me which is what would happen to total sales and profits?
That is a little bit trickier to answer.
Senator Nelson. Dr. Anderson.
Dr. Anderson. I think the problem here is that the private
sector really can't negotiate drug prices very well. The CBO
says this. The GAO essentially says this. MedPAC has said this.
Basically, they are not able to get good discounts.
So, Jack Calfee is correct. I mean, they may have to pay a
little higher prices, but it is because they are not very
effective negotiators with the drug companies in getting
prices. They can get some more rebates, but they don't get
lower prices. I think it is uniform that they just can't get
lower prices for brand-name drugs. They do very well for
generics. They cannot do it for brands.
Senator Nelson. I thought in Economics 101, the free
marketplace, competition, supply and demand, I thought we
learned that the more that you bought in bulk, huge purchases,
the more negotiating power that you had. Therefore, you could
bring the price down by purchasing a lot of things instead of a
few things.
With regard to the purchase of drugs for ultimately a
population of some 44 million seniors through the Medicare drug
program, although that is not how many are in it now, that is a
lot of negotiating power, and the private sector marketplace
could function. But that is not the way it is, and that is not
the way it was designed in the prescription drug law of 2003.
So, we are where we are.
You all have illuminated this complicated issue enormously.
I am very grateful to you.
Thank you all for being public servants and especially
sharing your expertise with us today.
The hearing is adjourned.
[Whereupon, at 4:46 p.m., the hearing was adjourned.]
A P P E N D I X
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Mr. Anderson's Responses to Senator McCaskill's Questions
Question. Importation: According to a Congressional Budget
Office (CBO) cost estimate from 2007 importation of
prescription drugs would have saved the government itself more
than $5 billion from 2009 to 2017 by allowing it to purchase
cheaper drugs for Medicare and Medicaid recipients. In
addition, the legislation would have increased federal revenues
by about $5 billion by reducing the cost of private health
insurance, which would end up increasing the share of
employees' salary that can be taxed. Should we not be pursuing
this as an option? Can we afford not to do this? Are any of the
pharmaceutical industry concerns related to safe reimportation
legitmate? How do we do it safely and effectively?
Answer. Drugs are made all over the world not just in the
United States. The FDA already has a process to make sure that
drugs made overseas are safe and effective. We should make sure
that the drugs that are imported from places like Canada are
the same drugs that are dispensed in the US already.
We do not have any evidence that the drugs dispensed in
Canada, the European Union or Australia and New Zealand have
undergone any less rigorous testing or are any less safe than
the drugs dispensed in the US. The only difference is that they
are much less expensive. I discuss this in my written
testimony.
There are legitimate concerns that internet dispensing of
drugs could be dangerous. This would apply to both internet
dispensing in the US and in other countries. It is critical for
the internet companies to demonstrate that they have
appropriate safeguards in place to make sure that the correct
drug in the correct dose is dispensed and that it is the drug
is legitimate. Some of the recent robberies in the US of
warehouses full of pharmaceuticals suggest that tighter
surveillance in the US is also needed.
Question. Role of Direct Marketing? (Only two countries--
New Zealand and the U.S. allow direct to consumer drug
marketing) Drug company spending on direct to consumer (DTC)
advertising has increased twice as fast as spending on
promotion to physicians or on the research and development of
new drugs. Advertising is known to cause many consumers to go
to their doctor and ask for the advertised brand name
medication. One study of physicians found that in 5% of the
cases when patients requested specific medications after seeing
an advertisement, physicians prescribed the medication to
accommodate the patients request despite thinking that another
drug or treatment option would be more effective. Clearly, that
is wasteful. I am trying to get a handle on how much this
practice represents in unnecessary spending by the federal
government. Is there a credible estimate that you know of
regarding the cost to the taxpayer because of Direct To
Consumer advertising? What measures would you suggest we take
to try to crack down on this waste?
Answer. A study published in the New England Journal of
Medicine in 2007 entitled ``A Decade of Direct-to-Consumer
Advertising of Prescription Drugs'' by Julie M. Donohue, Ph.D.,
Marisa Cevasco, B.A., and Meredith B. Rosenthal, Ph.D. found
that real spending on direct-to-consumer advertising increased
by 330% from 1996 to 2005.
I do not have an estimate of the cost to the taxpayer of
direct to consumer advertising. From a research perspective
this would be a very difficult number to develop since it would
require estimating what would happen if direct to consumer
advertising was not permitted--something where there is no
data.
Currently direct to consumer advertising for drugs is no
different from direct to consumer advertising for hamburgers--
both attempt to make you feel good about the product and do not
attempt to convey any factual information about the product. A
simple suggestion would be for them to be required to
demonstrate the efficacy of their product instead of
demonstrating that the person taking the drug is able to walk
with their husband or to play with their grandchild. Insist
that the information that is being conveyed be factual not
inferential.
------
Mr. Anderson's Responses to Senator Franken's Questions
Question. Dr. Anderson, like most Minnesotans, I'm baffled
by the wide variation in drug prices between countries. It's
profoundly unfair that we continue to pay so much more for the
same drugs. We invest billions of dollars in federal research
and drug companies are making record profits. So it just
doesn't make sense that all of the excess costs are going to
research and development of new drugs. Can you please discuss
the key factors that result in such wide price variation
between countries?
Answer. Direct Negotiation. Most other countries have
direct negotiation with the drug companies and they pay \1/3\
to \1/2\ what the US pays for the same drugs. It is also well
known that only 15-18 percent of the revenues that drug
companies receive go for research and development.
I have testified in the Senate Finance Committee and in the
House Government Oversight Committee that we should have direct
negotiation with the drug companies. There is no reason why the
seniors in the US should be paying higher prices than other
people in the US or in other countries.
I would go a step further. I would have the federal
government negotiate one price for all drug purchases.
Currently the Medicare program has many different prices under
Part D, the states have 50 different prices, the Public Health
Service has a different price, the VA and DOD have different
prices, and the prisons have their own prices. There is no
reason why each government entity should be paying different
prices when the funds all come from the taxpayers.
Wide Variations in prices. We pay 2-3 times more for brand
name drugs than other countries. The reason is quite clear.
Other countries have direct negotiation with the drug companies
and the US does not. The drug companies are able to negotiate
better deals with multiple payors than with a single payor.
We are the richest country in the world and as a result we
may want to pay a higher amount than other countries. The
amount should reflect our higher income and not our inability
to negotiate a fair rate. If we as the richest country in the
world can afford to pay more it would allow the drug companies
to provide drugs to the poorest countries (e.g. Africa) at the
marginal cost of producing the drugs.
Question. Dr. Anderson recommends that Medicare increase
transparency and begin to report to beneficiaries the amount
the Part D plans actually paid. Can you please discuss changes
we can make at the federal level to ensure that rebates accrue
to consumers and not to middlemen?
Answer. Middlemen. If the price transparency provisions
that I recommended to the Senate Finance Committee were enacted
it would be possible for the Secretary to protect the prices
that individual drug companies negotiate with pharmacies and
PBMs. What the Secretary would know is when a drug is much more
expensive in Part D than it is in Canada or the VA. It would
then ask the CEO of the company to explain the reasons for the
price differential. If you had a top ten list (think David
Letterman) of the most over priced drugs in Part D then it
would be possible to put pressure on just these drugs. Since no
drug company would want their drug on the top 10 list, the
prices would drop in Part D.
In that way you would not need to have middlemen getting
the rebates instead of the consumers'.
------
Mr. Dicken's Responses to Senator McCaskill's Questions
Question. Importation: According to a Congressional Budget
Office (CBO) cost estimate from 2007 importation of
prescription drugs would have saved the government itself more
than $5 billion from 2009 to 2017 by allowing it to purchase
cheaper drugs for Medicare and Medicaid recipients. In
addition, the legislation would have increased federal revenues
by about $5 billion by reducing the cost of private health
insurance, which would end up increasing the share of
employees' salary that can be taxed. Should we not be pursuing
this as an option? Can we afford not to do this? Are any of the
pharmaceutical industry concerns related to safe reimportation
legitimate? How do we do it safely and effectively?
Answer. We have not conducted work directly on the issue of
cost savings and safety issues related to importation of
prescription drugs. However, in a 2004 report we identified
several safety concerns with prescription drugs obtained
through Internet pharmacies located outside the United
States.\1\ Specifically, GAO identified problems associated
with the handling, Food and Drug Administration approval
status, and authenticity of samples received from such
pharmacies.
---------------------------------------------------------------------------
\1\ GAO, Internet Pharmacies: Some Pose Safety Risks for Consumers,
GAO-04-820 (Washington, D.C.: June 17, 2004).
---------------------------------------------------------------------------
Question. Help in choosing the right plan: There are over
1,000 different plans nationwide. In Missouri, there are just
under 50 Part D plans to choose from. We know that there are
widespread differences in benefits offered, copayments,
formularies, donut hole coverage and so on. This makes it
nearly impossible for seniors to choose the plan that is most
cost-effective for them and in turn, most cost-effective for
the government. In addition to frustration for seniors, these
inefficiencies lead to significant wasteful spending. If
seniors are not in the right plan, they enter into the donut
hole faster, come out faster, and the taxpayers end up footing
a higher bill. Ms. McKenna, I know that you suggest a grading
system for plans, though I am not sure that such a system is
detailed enough for individual seniors.
Question a. Are there other suggestions for what can be
done to get beneficiaries in the best plan?
Answer. We have not conducted work that focuses on what can
be done to get beneficiaries in the best Medicare Part D plans.
As you may know, Medicare offers a Prescription Drug Plan
Finder (http://www.medicare.gov/mpdpf) as a tool to help
beneficiaries determine which plan best suits their needs based
on their unique circumstances. Among other features, the Plan
Finder allows beneficiaries to input lists of specific drugs
that they take, and provides information about plan options
based on these specific lists of drugs.
While this tool provides specific information on
beneficiaries' plan options, our work suggests that for certain
beneficiaries--those taking high-cost drugs eligible for a
specialty-tier--plan choice has only limited effects on out-of-
pocket costs. Across plans with different cost-sharing
structures, out-of-pocket costs for these beneficiaries vary
initially but then become similar if beneficiaries' out-of-
pocket costs reach the catastrophic coverage threshold, which
was $4,350 in 2009.\2\
---------------------------------------------------------------------------
\2\ The catastrophic coverage threshold is $4,550 in 2010.
---------------------------------------------------------------------------
Question b. Also, it is my understanding that low income
beneficiaries are automatically enrolled in a plan by CMS. By
law, the assignment of a plan is random. Do any of you have a
handle on how much the government could be saving simply by
placing those beneficiaries into a more cost-effective plan,
particularly since these are the highest cost enrollees?
Answer. We have not conducted work on the potential savings
from placing low-income subsidy beneficiaries into certain
plans. However, in 2007, contractors produced a report for the
Medicare Payment Advisory Commission that considers the
potential impact on beneficiaries and the federal government of
using random assignment for Part D plans compared to other
options.\3\
---------------------------------------------------------------------------
\3\ J. Hoadley, L. Summer, J. Thompson, E. Hargrave, and K.
Merrill, ``The Role of Beneficiary-Centered Assignment for Medicare
Part D,'' (special report prepared at the request of the Medicare
Payment Advisory Commission), June 2007.
---------------------------------------------------------------------------
Question. We have heard that the U.S. pays more than
Canada, Europe and the rest of the world in general.
a. What policies enable this and what policies could we
enact to discourage this disparity?
b. Have other countries seen the same increase in prices or
is part of the rise in U.S. prices caused by cost shifting from
other countries to the U.S.?
Answer. A wide range of approaches is used by other
countries, such as those affiliated with the Organization for
Economic Co-operation and Development (OECD),\4\ to negotiate
drug prices that include the following:
---------------------------------------------------------------------------
\4\ The OECD includes 30 member countries that ``share a commitment
to democratic government and the market economy,'' and OECD's work
includes developing publications and statistics on economic and social
issues.
---------------------------------------------------------------------------
Ceiling prices restrict market negotiations by setting
maximum prices purchasers can pay for drugs. Ceiling prices
allow purchasers to negotiate lower prices directly with drug
manufacturers.
Reference prices use local or international price
comparisons of drugs classified in a group as therapeutically
similar to determine a single or maximum price for all drugs in
that group.
Profit limits establish controls on drug manufacturers'
profits that require manufacturers to pay rebates or lower
prices if profits exceed certain levels.
Other factors--such as scope of coverage and national
formularies, which are generally lists of preferred drugs--
influence drug price negotiations.\5\ We have not examined the
effects of applying policies used in other countries to
negotiate drug prices to the United States.
---------------------------------------------------------------------------
\5\ GAO, Prescription Drugs: An Overview of Approaches to Negotiate
Drug Prices Used by Other Countries and U.S. Private Payers and Federal
Programs, GAO-07-358T (Washington, D.C.: Jan. 11, 2007).
---------------------------------------------------------------------------
We have not conducted any recent work on drug pricing in
other countries and cannot comment on the extent or causes of
price increases in other countries.
------
Mr. Dicken's Responses to Senator Franken's Questions
Question. Mr. Dicken, GAO did a 2009 study for the late
Senator Kennedy comparing copayments for specialty medicines in
private Part D plans to the Federal Employee Health Benefit
Plan. It's my understanding that federal employees get
specialty drugs for a copayment of $60 per month, while most
Medicare Part D beneficiaries pay a percentage-based share of
the cost. This can add up to hundreds, even a thousand dollars
per month. As a member of Congress, I'm embarrassed that we're
giving ourselves better coverage than our seniors get. Can you
please comment on how this discrepancy occurs?
Answer. We found that some plans participating in each
program--the Federal Employees' Health Benefits Program (FEHBP)
and Medicare Part D--use varying cost-sharing requirements for
specialty-tier eligible drugs, with some using a fixed
copayment and others using a percentage-based coinsurance. Both
programs provide consumers with information on the plans cost-
sharing requirements to consider as they decide which plan to
select during open enrollment. Also, while enrollees in
Medicare Part D and FEHBP plans can be responsible for paying
hundreds of dollars a month out-of-pocket, Part D plans have a
catastrophic coverage threshold whereby Medicare covers most
additional costs and nearly all FEHBP plans we studied have
maximum out-of-pocket limits. However, for high-cost drugs such
as those eligible for specialty tiers, the total annual out-of-
pocket costs for enrollees in FEHBP depends on the plan chosen,
whereas for Medicare Part D beneficiaries, the total annual
out-of-pocket costs are generally similar regardless of the
Part D plan chosen.
Specifically, GAO's 2009 correspondence to Senator Kennedy
described the cost-sharing requirements and limits for
specialty drugs covered by FEHBP plans.\6\ We found that
enrollees in FEHBP plans were subject to varying cost-sharing
requirements for the 18 specialty drugs we reviewed. Most FEHBP
enrollees--more than 6.6 million of the nearly 7.8 million
enrollees in the plans we reviewed (86 percent)--were generally
subject to copayments that limit enrollee costs to about $55 on
average for a 30-day supply of the drugs. Nearly 900,000
enrollees (11 percent) were subject to coinsurance for more
than 1 of the 18 specialty drugs, which required the enrollees
to pay on average nearly 31 percent of the cost of the drugs.
These FEHBP enrollees' coinsurance costs for specialty drugs
were typically limited by per prescription dollar maximums or
annual out-of-pocket limits, but depending on the plan, these
varying requirements can result in a wide range of costs for
enrollees for the same drug. For example, we estimate that
under 3 different FEHBP plans with different cost-sharing
requirements, an enrollee taking the multiple sclerosis drug
Betaseron could pay $420 per year if subject to a copayment,
$2,400 per year if subject to a coinsurance with a per-
prescription dollar maximum, or $6,000 per year if subject to a
coinsurance with an annual out-of-pocket maximum.
---------------------------------------------------------------------------
\6\ GAO, Federal Employees Health Benefits Program: Enrollee Cost
Sharing for Selected Specialty Prescription Drugs, GAO-09-517R
(Washington, D.C.: Apr. 30, 2009).
---------------------------------------------------------------------------
Similarly, in our recent study on beneficiary out-of-pocket
costs for certain high-cost drugs covered under Medicare Part
D,\7\ we found that plans included in our sample of high-
enrollment plans from various regions offered a variety of
cost-sharing structures for the specialty tier-eligible drugs
in our sample, including flat copayments as well as various
percentage-based coinsurance rates. However, in contrast to the
variation in annual out-of-pocket costs in FEHBP, our analysis
showed that various cost-sharing structures--whether copayments
or percentage-based coinsurance--utilized by Part D plans in
2006 through 2009 made very little difference in annual
beneficiary out-of-pocket costs for beneficiaries using these
drugs over an entire calendar year. Once Medicare beneficiaries
reached the catastrophic coverage threshold of $4,350 in out-
of-pocket costs in 2009 ($4,550 in 2010), they generally paid
only 5 percent of the negotiated drug price for the remainder
of the year regardless of the plan selected.
---------------------------------------------------------------------------
\7\ GAO, Medicare Part D: Spending, Beneficiary Cost Sharing, and
Cost-Containment Efforts for High-Cost Drugs Eligible for a Specialty
Tier, GAO-10-242 (Washington, D.C.: Jan. 29, 2010).
---------------------------------------------------------------------------
Question. Mr. Dicken, in my opinion, a primary purpose of
Medicare--and all insurance--is to protect Americans against
unforeseen costs from an unexpected illness like cancer or
multiple sclerosis.
Do you think when seniors sign up for Medicare Part D that
they truly understand the potential financial exposure they
face if they get sick and end up needing a drug that's in a
specialty tier?
Answer. We have not conducted work on beneficiaries' level
of understanding of specialty tier drug coverage under Medicare
Part D. However, our testimony included information on the out-
of-pocket costs that one group of beneficiaries--those taking
high-cost drugs eligible for a specialty-tier--may be subject
to paying. Across plans with different cost-sharing structures,
out-of-pocket costs for these beneficiaries may vary initially
but then become similar if beneficiaries reach the catastrophic
coverage threshold, which occurred in 2009 when total drug
costs reached $6,153.75, with beneficiary out-of-pocket drug
costs accounting for $4,350 of that total.\8\ After the
threshold is reached, most beneficiaries are responsible for 5
percent of any additional drug costs. For example, in 2009,
beneficiaries responsible for full cost-sharing amounts who
take drugs with a total negotiated price of $1,100 per month,
or $13,200 per year, would face out-of-pocket costs of
approximately $4,700, regardless of their plans' cost-sharing
structures.
---------------------------------------------------------------------------
\8\ In 2010, the catastrophic coverage threshold is reached when
beneficiary out-of-pocket costs total $4,550.
---------------------------------------------------------------------------
------
Mr. Hamilton's Responses to Senator McCaskill's Questions
Question. Importation: According to a Congressional Budget
Office (CBO) cost estimate from 2007 importation of
prescription drugs would have saved the government itself more
than $5 billion from 2009 to 2017 by allowing it to purchase
cheaper drugs for Medicare and Medicaid recipients. In
addition, the legislation would have increased federal revenues
by about $5 billion by reducing the cost of private health
insurance, which would end up increasing the share of
employees' salary that can be taxed. Should we not be pursuing
this as an option? Can we afford not to do this? Are any of the
pharmaceutical industry concerns related to safe reimportation
legitimate? How do we do it safely and effectively?
Answer. The safe importation of prescription drugs is an
option to help lower US drug costs. However, how and/or if it
can be safely accomplished is a science issue and beyond my
scope.
Question. We have heard that the U.S. pays more than
Canada, Europe and the rest of the world in general.
a. What policies enable this and what policies could we
enact to discourage this disparity?
b. Have other countries seen the same increase in prices or
is part of the rise in U.S. prices caused by cost shifting from
other countries to the U.S.?
Answer. 2) I have had only limited experience with foreign
market drug pricing and have no data on their price changes.
Consequently , I do not believe I'm in a position to
appropriately answer this question.
Question. Role of direct marketing? (Only two countries--
New Zealand and the U.S. allow direct to consumer drug
marketing) Drug company spending on direct to consumer (DTC)
advertising has increased twice as fast as spending on
promotion to physicians or on the research and development of
new drugs. Advertising is known to cause many consumers to go
to their doctor and ask for the advertised brand name
medication. One study of physicians found that in 5% of the
cases when patients requested specific medications after seeing
an advertisement, physicians prescribed the medication to
accommodate the patients request despite thinking that another
drug or treatment option would be more effective. Clearly, that
is wasteful. I am trying to get a handle on how much this
practice represents in unnecessary spending by the federal
government. Is there a credible estimate that you know of
regarding the cost to the taxpayer because of Direct To
Consumer advertising? What measures would you suggest we take
to try to crack down on this waste?
Answer. a) I am unaware of any estimate of the cost to the
taxpayer because of Direct To Consumer Advertising. b) In a
free market the cost would not be considered a waste. So, it's
a question of lese fair vs free market politics.
Question. Comparative effectiveness research. Drug
companies have to prove that their drugs are safe and are
better than a sugar pill to get approval, but the drug
companies rarely compare their drugs to other drugs. What role
does comparative effectiveness research have in making sure
that doctors not only are prescribing a drug that works, but
the best drug? Would this type of research just improve
outcomes or would it also cut spending? Should we include price
when comparing drugs against each other?
Answer. a) I'm not sure- it's a science question. b) It
could affect spending if it went beyond the science into
pricing. c) If by ``we'' you mean the government, then we
already do include pricing when comparing drugs against each
other. Examples include Medicaid and the VA. Also, in the
commercial market Pharmacy Benefit Managers (PBM'S ) include
drug price in their formulary decisions.
------
Mr. Hamilton's Responses to Senator Franken's Questions
Question. Mr. Hamilton AARP Minnesota held a series of
teletown halls on health reform during the past year. More than
92,000 Minnesota seniors participated and the single most
common question they brought up was--why doesn't the federal
government negotiate directly with pharmaceutical companies for
Part D drugs? Can you please discuss the potential effects of
direct negotiation on U.S. drug prices and what you think holds
us back from adopting this policy?
Answer. a) Direct negotiation by the government with drug
manufacturers would result in a significant reduction in the
cost of Part D drugs. b) I believe Mr.Calfee addressed the risk
of such negotiations in saying he suspected the drug companies
would respond by raising their commercial prices.
Question. Mr. Hamilton, you mentioned that some price
increases in Part D can be offset by rebates, but we're hearing
that these rebates aren't getting back to consumers. Do we know
if any portion of the rebates is getting back to beneficiaries?
Answer. I do not know if any portion of rebates gets back
to beneficiaries. It may (EG thru flat co pays), but it would
be difficult to determine.
Question. Mr. Hamilton, I'd like to ask you the same
question--do you believe the increases were a response to the
potential of federal health reform? If so, what can we do so
drug companies don't retaliate against federal reform with
runaway drug pricing?
Answer. a) I can't read Pharma's collective mind, but given
the facts and the timing it certainly appears the unusual price
increases were in anticipation of federal health reform. b)
Nothing short of government intervention (regulation).
------
Mr. Calfee's Responses to Senator McCaskill's Questions
Question. You repeatedly warned of the danger posed by
pushing prices down in government plans, arguing that prices
elsewhere, primarily in the private sector, would
correspondingly increase to compensate for lost profits from
the government programs. This assumes an inflexibility for
pharmaceutical industry business model and profits and
secondarily implies that the U.S. government should contribute
the bulk of the pharmaceutical industry's profit as opposed to
other countries or the private sector. Do you have support that
pharma's business model is as inflexible as you imply and if it
is inflexible is there any reason why the U.S. government
should fill the role as the primary profit center for this
industry?
Answer. This question is about how drug prices in the
private sector adjust to prices paid by the federal government.
In my testimony, I had not intended to suggest that
pharmaceutical firms increase private sector prices to
compensate for lower Medicaid prices. Rather, the Medicare drug
price rebate mechanism penalizes manufacturers if they
aggressively discount their prices in the private sector. This
tends to keep private sector prices higher than they would
otherwise be.
Question. We have heard that the U.S. pays more than
Canada, Europe and the rest of the world in general.
a. What policies enable this and what policies could we
enact to discourage this disparity?
b. Have other countries seen the same increase in prices or
is part of the rise in U.S. prices caused by cost shifting from
other countries to the U.S.?
Answer. This question is about international price
disparities between the U.S. and Canada, Europe, and other
nations. I am unaware of policies that the U.S. could pursue to
attack these disparities directly, because those disparities
are largely the result of price controls that are constructed
in each of those nations. U.S. authorities have in the past
pointed out to those nations that their price controls tend to
suppress innovation (such as in speeches by then FDA
Commissioner Mark McClellan and in a 2004 report on
international pharmaceutical prices). Such appeals seem not to
have an effect. The reason seems to be that each nation is
aware that because pharmaceutical revenues in their own nation
comprise only a small percentage of international revenues,
their own price controls have minimal impact on drug R&D (which
is performed in search of worldwide profits rather than profits
in a single nation). I myself would be glad to see new
proposals to address the impact of international price controls
on pharmaceutical R&D.
This question also asks whether foreign prices have
increased apace with U.S. prices or firms have been raising
U.S. prices in order to shift costs. Past research on
international prices has usually found that foreign prices
increase less rapidly than U.S. prices and sometimes decline as
controls become tighter. But U.S. price levels are almost
certainly not the result of cost shifting, but are simply
reflect attempts to maximize prices (which as a general rule do
not involve cost shifting).
Question. Comparative effectiveness research. Drug
companies have to prove that their drugs are safe and are
better than a sugar pill to get approval, but the drug
companies rarely compare their drugs to other drugs. What role
does comparative effectiveness research have in making sure
that doctors not only are prescribing a drug that works, but
the best drug? Would this type of research just improve
outcomes or would it also cut spending? Should we include price
when comparing drugs against each other?
Answer. This question asks about comparative effectiveness
research on pharmaceuticals. First, CER could help assure that
physicians prescribe the best drug for each patient, but there
are limits to the ability of CER to achieve this result. It is
very difficult to perform CER that provides valid results for
current practice, which is continually changing as new drugs
and new information about drugs become available. Also, CER
often focuses on the average effects of competing drugs,
whereas a drug that is equal or worse on average (in terms of
efficacy, side-effects, or both) may still be better for some
patients. Solid, timely CER could in principle both improve
medical treatments and cut spending, but again, it is all too
easy for CER to discourage the best treatments for some
patients or to encourage cost-cutting that could work to the
disadvantage of some patients. Finally, CER does not involve
drug prices as opposed to clinical outcomes. Incorporating
prices into CER would shift the research toward cost-
effectiveness analysis, which again can be very useful but is
fraught with difficulties.
------
Mr. Calfee's Responses to Senator Franken's Questions
Question. Mr. Calfee, in your testimony, you close by
stating that the path forward to lower drug prices is unclear.
I'd like to point out that from 1997 to 2007, retail
prescription prices increased an average of 7 percent annually,
much faster than the average inflation rate of 2.6%. During
this same time, pharmaceutical companies increased their
spending on direct-to-consumer advertising by an average of 65
percent annually, spending $4.7 billion in 2007 alone. Of
course, these companies have the right to advertise, but do you
believe this is excessive?
Answer. This question is about the relationship between
drug prices and direct-to-consumer advertising. So far,
econometric studies have failed to reveal a connection between
DTC advertising and drug prices. This is not surprising. As the
question points out, DTC advertising totaled $4.7 billion in
2007, which is only a few per cent of total drug spending of
perhaps $200 billion. With the possible exception of a few
heavily advertised brands, it is most unlikely that consumer
advertising could have a significant impact on prices. Also, I
do think that DTC advertising is excessive. Not only is it
quite small relative to the size of the market, it usually
focuses on therapeutic classes that are often under-used,
partly because consumers need to be made aware of, or be
reminded of certain medical conditions for which drug therapy
is effective.
Question. Mr. Calfee, last April, the Wall Street Journal
ran a story entitled ``Drug Makers, Hospitals Raise Prices.''
This article describes double digit increases compared to a
year before on a dozen top-selling drugs. Then in November, a
spokesperson from Merck was quoted in the New York Times
stating that ``Price adjustments for our products have no
connection to health care reform.'' Do you believe these
increases were a response to potential federal health reform?
Answer. This question asks whether drug prices were
increased as ``a response to potential federal health reform.''
I have heard nothing from anyone in the industry on this topic.
I would point out, however, that if manufacturers are already
charging prices that are designed to make as much profit from
innovative drugs as possible, there is probably little
incentive to increase prices simply because a sweeping version
of health care reform might be passed. Nonetheless, I have no
way to plumb all the ways in which pharmaceutical firms might
anticipate the highly varied effects that would come from
comprehensive health care reform.
Question. Mr. Calfee, I'm sure you're aware that the
federal government invests significant funds in R&D. National
Institutes of Health received more than $30 billion in 2010
alone. Not every dollar goes for drug development but right
now, Americans don't receive any direct return on these
investments. Instead, the research is used to develop new
products in the private market that make billions of dollars in
profits. Your testimony doesn't mention the significant
investment we make in R&D with taxpayer dollars. If you're
making the argument that programs like Medicaid underpay for
drugs, it's important to point out that most of these drugs
wouldn't exist without the initial federal investment. Would
you agree?
Answer. This question is about private vs public returns
from taxpayer investment in medical research by the National
Institutes of Health. Much of that research eventually
undergirds research that leads directly to new drugs. I would
emphasize, however, that almost never does NIH actually develop
a new drug all the way to FDA approval. Hence private industry
is responsible for transforming NIH research into useful
therapies. It is true that the public receives no ``direct
return'' on NIH investments in the sense of manufacturer
payments to the federal government. But research (including a
book by Jena and Philipson published by the American Enterprise
Institute) has demonstrated that the total benefits from
pharmaceutical innovation are huge and that most of those
benefits actually go to patients and payers rather than to the
manufacturers. Nonetheless, I agree that NIH investment has
been very important and valuable, not just to Americans but to
residents of essentially every other nation.
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