[Senate Hearing 112-125] [From the U.S. Government Publishing Office] S. Hrg. 112-125 A PRESCRIPTION FOR SAVINGS: REDUCING DRUG COSTS TO MEDICARE ======================================================================= HEARING BEFORE THE SPECIAL COMMITTEE ON AGING UNITED STATES SENATE ONE HUNDRED TWELFTH CONGRESS FIRST SESSION __________ WASHINGTON, DC __________ JULY 21, 2011 __________ Serial No. 112-7 Printed for the use of the Special Committee on Aging Available via the World Wide Web: http://www.fdsys.gov ---------- U.S. GOVERNMENT PRINTING OFFICE 68-441 PDF WASHINGTON : 2011 For sale by the Superintendent of Documents, U.S. Government Printing Office Internet: bookstore.gpo.gov Phone: toll free (866) 512-1800; DC area (202) 512-1800 Fax: (202) 512-2104 Mail: Stop IDCC, Washington, DC 20402-0001 SPECIAL COMMITTEE ON AGING HERB KOHL, Wisconsin, Chairman RON WYDEN, Oregon BOB CORKER, Tennessee BILL NELSON, Florida SUSAN COLLINS, Maine BOB CASEY, Pennsylvania ORRIN HATCH, Utah CLAIRE McCASKILL, Missouri MARK KIRK III, Illnois SHELDON WHITEHOUSE, Rhode Island DEAN HELLER, Nevada MARK UDALL, Colorado JERRY MORAN, Kansas MICHAEL BENNET, Colorado RONALD H. JOHNSON, Wisconsin KRISTEN GILLIBRAND, New York RICHARD SHELBY, Alabama JOE MANCHIN III, West Virginia LINDSEY GRAHAM, South Carolina RICHARD BLUMENTHAL, Connecticut SAXBY CHAMBLISS, Georgia ---------- Debra Whitman, Majority Staff Director Michael Bassett, Ranking Member Staff Director CONTENTS ---------- Page Opening Statement of Senator Herb Kohl........................... 1 Statement of Senator Bob Corker.................................. 2 PANEL OF WITNESSES Statement of Jonathan Blum, Deputy Administrator and Director, Center for Medicare, Centers for Medicare and Medicaid Services, U.S. Department of Health and Human Services, Washington, DC................................................. 3 Statement of Philip Rosenfeld, M.D., Ph.D., Professor of Opthamology, Bascom Palmer Eye Institute, Miami, FL............ 19 Statement of Anthony Adamis, M.D., Vice President, Global Head of Opthamology, Genentech, Inc., South San Francisco, CA.......... 21 Statement of Sean Tunis, M.D., MSc., Founder and Director, Center for Medical Technology Policy, Baltimore, MD................... 23 Statement of Lisa Swirsky, Senior Policy Analyst, Consumers Union, Washington, DC.......................................... 25 Statement of Scott Gottlieb, M.D., Resident Fellow, American Enterprise Institute, Washington, DC........................... 27 APPENDIX Witness Statements for the Record: Jonathan Blum, Deputy Administrator and Director, Center for Medicare, Centers for Medicare and Medicaid Services, U.S. Department of Health and Human Services, Washington, DC........ 42 Philip Rosenfeld, M.D., Ph.D., Professor of Ophthalmology, Bascom Palmer Eye Institute, Miami, FL................................ 53 Anthony Adamis, M.D., Vice President, Global Head of Ophthalmology, Genentech, Inc., South San Francisco, CA........ 61 Sean Tunis, M.D., MSc, Founder and Director, Center for Medical Technology Policy, Baltimore, MD............................... 69 Lisa Swirsky, Senior Policy Analyst, Consumer Union, Washington, DC............................................................. 79 Scott Gottlieb, M.D., Resident Fellow, American Enterprise Institute, Washington, DC...................................... 83 Additional Committee Documents: ``Prescription Drug Prices: Findings from International Comparisons and a Domestic Story,'' A Report of the Majority Staff of the Special Committee on Aging........................ 97 Additional Statements Submitted for the Record: Senator Robert P. Casey, Jr. (D-PA).............................. 109 Senator Jay Rockefeller (D-WV)................................... 111 Senator Mark Udall (D-CO)........................................ 114 Academy of Managed Care Pharmacy, Alexandria, VA................. 115 Alliance for Aging Research, Washington, DC...................... 118 AMD Alliance International, Woodstock, MD........................ 121 National Community Pharmacists Association, Alexandria, VA....... 124 National Venture Capital Association, Arlington, VA.............. 129 A PRESCRIPTION FOR SAVINGS: REDUCING DRUG COSTS TO MEDICARE ---------- THURSDAY, JULY 21, 2011 U.S. Senate, Special Committee on Aging, Washington, DC. The Committee met, pursuant to notice, at 2:08 p.m. in Room SD-106, Dirksen Senate Office Building, Hon. Herb Kohl, Chairman of the Committee, presiding. Present: Senators Kohl [presiding], Whitehouse, Udall, Manchin, Blumenthal, Corker, and Kirk. Also Present: Senator Brown. OPENING STATEMENT OF SENATOR HERB KOHL, CHAIRMAN The Chairman. Good afternoon. This hearing will come to order, and we thank you all for being here. As we all know, rising health care costs are threatening our economy. While the health care reform bill of last year was a start, it certainly has not done enough to address costs at this point. We need to do more, and we need to look at every option as we seek to provide quality care for all Americans at a cost that we can afford. According to testimony provided by the Special Committee on Aging by the Organization for Economic Cooperation and Development, OECD, in 2009 the average price of pharmaceutical drugs in the U.S. was 30 percent higher than in the other 30 OECD countries. These are the most advanced and developed countries. Another study found, the McKinsey study, that the difference in price may actually be as high as 50 percent between what we charge for pharmaceutical drugs here in this country versus those other 29 countries. As I'm sure we can all agree and understand, rising health care costs are hurting America's global competitiveness and are a drag on family wages as potential increases have been used to pay for the rising costs of health care and prescription drugs instead of augmenting the wages of our working families. In 2010, the American people spent more than $300 billion on prescription drugs, and a third of that was paid for by Medicare and Medicaid. Left unchecked, these costs threaten our country, our economy, and every American family, and we all, I think, would agree that this kind of a condition is not acceptable. Today's hearing will focus on one aspect of health costs, namely prescription drugs, and provide an opportunity to talk about possible solutions. The committee will also release an investigative report that indicates that drug companies charge American consumers more because we lack the negotiating power used by other countries. We already have prescription drug programs in place which do cut costs through negotiation, including the Veteran's Administration and a program in Wisconsin called Senior Care, and we should look, I believe, to emulate those examples. The 91,000 beneficiaries enrolled in Senior Care in my state cost the Federal government a third of what it would cost for them to be enrolled in Medicare Part D with the same benefits. By negotiating prices, Senior Care in Wisconsin did save my constituents $80 million in 2010. The VA demands a minimum discount of 24 percent on wholesale drug prices. If Medicare were able to save 24 percent, taxpayers would then save more than $350 billion over 10 years. We also need to look at giving the government the ability to address sizeable price differences between drugs that are similarly effective. The National Institutes of Health recently sponsored a lengthy comparative clinical trial between two highly effective drugs used to treat macular degeneration, a condition that often causes blindness among seniors. The trial found that both drugs worked equally well in treating this condition. However, one cost $2,000 a dose, while the other cost $50. So we will be hearing testimony today about these two drugs on which Medicare is spending more than a billion dollars a year. Today we'll be releasing a number of additional cost savings policy options suggested by experts to hugely reduce prescription drug costs. Some of these options would save billions, while others would be more modest. These options include ways to increase transparency and expand discount programs and reduce the financial incentives for doctors to prescribe the most unnecessary or expensive drugs. This morning, the Judiciary Committee passed on one of these bipartisan proposals which would limit delays in getting generic prescription drugs to consumers. Several of our witnesses will discuss how these and other policies result in lower costs without sacrificing access, choice, or quality of care. I urge my colleagues to be open to considering all of these ideas, and I hope that together we can put additional solutions on the table. We thank you all again for being here today. And now we turn to the ranking member of this committee, Senator Bob Corker. STATEMENT OF SENATOR BOB CORKER Senator Corker. Mr. Chairman, thank you for having the hearing, and I want to thank all of our witnesses who are here. I know that we have two panels. We had expected actually numbers of Senators on both sides of the aisle, and in order that we not have a lot of long, drawn-out opening comments, I'd rather hear from the witnesses. I'm not going to make an opening statement. I will say that I think all of us are concerned about the cost of prescription drugs. Obviously, we may have differing views as to how to solve those, but I think that's the purpose of our hearing today. I look forward to hearing the witness testimony and thank the chairman for calling the hearing. The Chairman. I thank you very much, Senator Corker. Senator Kirk, do you have a comment or two to make? Senator Kirk. I do not, Mr. Chairman. I'll be brief, and let's go. The Chairman. Thank you very much. So now we turn to Panel 1 and our one witness. He is Jonathan Blum, the Deputy Administrator and Director of Medicare at the Centers for Medicare and Medicaid Services. Mr. Blum previously served at the Office of Management and Budget, and for the Senate Finance Committee. Mr. Blum is also the former vice president of Avalere Health. We welcome you back, and we look forward to your testimony. Go right ahead. STATEMENT OF JONATHAN BLUM, DEPUTY ADMINISTRATOR AND DIRECTOR, CENTER FOR MEDICARE, CENTERS FOR MEDICARE AND MEDICAID SERVICES, U.S. DEPARTMENT OF HEALTH AND HUMAN SERVICES, WASHINGTON, DC Mr. Blum. Chairman Kohl, Ranking Member Corker, Senator Kirk, thank you for the opportunity to talk about Medicare's payments for prescription drugs. All four parts of the Medicare program, Part A, Part B, Part C, and Part D, pay for drugs in some form or fashion. All use different payment systems under different statutory authorities and frameworks. I'd like to focus today on payments for drugs under our Part B and Part D payment systems, the two payment streams that receive the most policy attention. All of our payment systems for drugs are similar in one respect. The Medicare program does not reimburse drug manufacturers directly for drugs provided to Medicare beneficiaries. Instead, Medicare pays physicians, hospitals, dialysis facilities, and insurance plans, who in turn purchase drugs or pay a pharmacist for drugs provided to Medicare beneficiaries. That is, we have no direct payment relationship with drug manufacturers. Under Medicare Part B, the most common payment for drugs is to physicians who provide drugs to their patients. The program also pays outpatient hospital departments for drugs provided during outpatient procedures such as chemotherapy drugs, and dialysis facilities for drugs provided in the context of dialysis care. The Congress has authorized the Part B program to pay for only certain drugs through Part B. These drugs include drugs administered by a physician or under the supervision of a physician; drugs provided through durable medical equipment such as nebulizers or IV pumps; and drugs that are directed by statute. These include certain drugs provided to dialysis patients, oral cancer drugs, and certain vaccines. The Part B program covers about 800 drugs total that fall under these three categories. In 2010, CMS spent $12.5 billion for Part B-covered drugs, and the CMS actuaries project that total spending for these drugs will double over the next 10 years. Today's spending for Part B drugs is highly concentrated in a relatively few number of drugs. Thirteen drugs account for half of the total spending. About $6.25 billion is comprised of 13 drugs, and the top spending drug is Lucentis, that accounted for 16 percent of total Part B drug spending. Congress reformed the payment system for these drugs in 2005, or most of these drugs in 2005. Prior to 2005, Medicare's payments for these drugs were based on the so-called average wholesale price, or the sticker price. There were numerous studies finding that payments to physicians under this pricing system far exceeded physicians' own costs to purchase the drugs. This created a payment spread for physicians. Congress changed the system in 2005. CMS now uses a system based upon the average sales price, or ASP. The ASP is the average of each manufacturer's sales price net of most discounts and rebates and other price concessions. The ASP accounts for most sales from manufacturers to entities in the U.S. who purchase the drug from the manufacturer. CMS, for the Medicare Part B program, pays physicians who administer these drugs a payment of ASP plus 6 percent. The Part D prescription drug program works somewhat differently. Private insurance plans compete to provide outpatient drug coverage to beneficiaries who choose to participate in the Part D drug program. CMS contracts with hundreds of drug plans which must meet program requirements. Virtually all Part D plans build their own drug formularies or lists of preferred and non-preferred drugs. CMS must approve plan formularies, and plans must cover at least two drugs in each therapeutic class, and the formularies must be deemed by CMS not to discriminate. Today, Part D plans cover more than 6,000 drugs, and the average Part D private plan formulary includes about 1,000 drugs on average. CMS pays Part D plans a fixed monthly payment which is based upon the average premium bid of all participating Part D plans. Medicare also provides other payments to these Part D plans to offset the insurance risk that these plans bear, and Part D plans that enroll low-income beneficiaries receive greater subsidies from the Medicare program. According to the CMS actuaries, total Part D costs were about $62 billion in 2010, and the CMS actuaries project that total Part D spending will rise to $156 billion by 2020, an average growth rate of about 10 percent per year. The rising cost of drugs will consume a greater overall share of Medicare spending over the next 10 years. This spending growth will require all of us to work together to ensure that costs remain affordable while maintaining access to necessary treatments. I'd be happy to answer your questions. [The prepared statement of Jonathan Blum appears in the Appendix on page 42.] The Chairman. Thank you, Mr. Blum. I'm sure you are familiar with the general fact that many of these prescription drugs are available in other countries for much less than what they cost here in the United States. Why do you think this is so? Mr. Blum. Well, I think a couple of reasons. One is that the public programs, Medicare and Medicaid, operate our payment systems according to very strict statutory formularies. Different countries use other payment mechanisms. We have a policy within CMS not to require formularies. Private Part D plans are able to implement formularies. So we have different statutory frameworks than I think other countries can operate under. The Chairman. Well, would that suggest that, in a sense, we're shooting ourselves in the foot? Mr. Blum. Pardon me. I don't understand the question. The Chairman. Would that suggest that we are making mistakes in how we operate our programs here in this country if our goal is to provide the product at the least possible cost? Mr. Blum. Well, I think one thing that we observe within both the Part B and the Part D payment systems is that when drugs have competition, meaning they have generic alternatives or they have multiple drugs competing in the same therapeutic class, we see much more pricing pressure. We see less pricing pressure for drugs that don't have competition, that don't have generic substitutes. So I think that's one observation. And I think to CMS' observation, when we have competition for drugs in particular classes, when we have generic alternatives, we see greater pricing pressure through both the Part B payment system and also the Part D payment system. The Chairman. Mr. Blum, as you know, I sent your agency a letter yesterday requesting that Medicare ensure that Avastin is available to all patients who choose to use it as a treatment for macular degeneration. As you note in your testimony, Avastin was recently shown by an NIH trial to be similarly safe and effective to Lucentis. I hope that CMS will bring immediate attention to this matter and make an affirmative national coverage decision for Avastin. Mr. Blum. We currently cover both drugs. Both drugs are covered through the Part B program. We note that the majority of physicians that treat this condition choose to use Avastin. Lucentis is an on-label drug, and the Avastin for the condition that you're concerned about is an off-label marketed drug. CMS currently pays for both drugs, and physicians have the option to use both drugs. But while the majority of physicians use Avastin, a vast majority of the spending is for Lucentis, a higher priced drug through our payment system. The Chairman. Why doesn't CMS obtain discounts on the much more expensive drug, Lucentis? Mr. Blum. We don't have any authority to do so under our current law. The pricing system is based upon the average sales price, which takes into account more or less the private purchasers of these drugs. I think what is true is that for Lucentis, this is a condition that's particularly focused within the Medicare program that I believe about 75 percent or so of the drug is delivered to Medicare beneficiaries through our fee-for-service program. But the statutory construct is such that CMS pays based upon the average sales price, but we also note that the Medicare program is by far the largest part of the spending for this particular drug. The Chairman. Thank you very much, Mr. Blum. And now we turn to Senator Corker. Senator Corker. Thank you, Mr. Blum, for being here and for your testimony. You mentioned that Part D plans negotiate rebates, and there's been some legislation put forth by a couple of Senators looking at that ceiling issue and other kinds of things that introduce Medicaid-style drug rebates into Medicare Part D. Is that something you support or do not support? Mr. Blum. Well, I think what the President has said is that he is open to all ideas in the context of the debt ceiling discussions. In April, the President put out a framework---- Senator Corker. I was asking you specifically, since this is what you do, whether you support Medicaid-style rebates or not. I understand what the President may or may not---- Mr. Blum. Sure. Well, as an official of CMS, I have to support the official position of the administration. Senator Corker. So did the President take a position on Medicaid-style rebates? Mr. Blum. I think what the President said is that he's open to all ideas in the context to reduce overall costs, both in the Medicare---- Senator Corker. Just sort of let me move away from the talking points. Do you, as an official that deals with health care issues on the issue of prescription drugs, which is why we're all here, do you or do you not support Medicaid-style rebates for Medicare Part D? Mr. Blum. I believe that the Medicare program has proven successful in lowering drug costs through competition. I also believe that there are certain drugs that are provided through the Medicare program that don't have as much competition, and there are more opportunities for us to reduce costs. Senator Corker. So I think what you're saying is in the overall Medicare Part D program, you think it's worked pretty well. There may be some isolated cases where you would recommend a different type of approach. Mr. Blum. I believe that the Congressional Budget Office has scored a policy that would require Medicaid-level rebates for certain drugs at about $120 billion savings for the next 10 years. The President has said that he's open to all ideas and offered that as one suggestion to reduce overall Medicare spending. Senator Corker. Would it make any sense in those areas to maybe have the same type of competitive structure that we have in Medicare Part D now? Mr. Blum. In terms of the parts of the program? We know that when we structure competition in parts of the program, like durable medical equipment, that we get lower costs, get better prices for both the beneficiaries and for taxpayers. The Part D program in general has produced much lower Part D premiums than I think our actuaries had predicted when the program was enacted. But at the same time, in order to get competition, you have to pick winners and losers. In cases where there aren't alternatives or there isn't competition for products or suppliers, it's very difficult to get lower prices through competition. Where you have lots of choice and you have lots of suppliers, like in the durable medical equipment context, or in the Part D plan context where we have 25 or 30 stand-alone drug plans competing in the same market, we see that competition produces good results. In the cases where we have a single item for a single product, it's very hard to get lower prices through competition. Senator Corker. Thank you. I think, again, to restate what you're saying is Medicare Part D works really, really well as far as the competition goes in lowering prices for seniors, but there are some isolated cases where when only one type of drug is available, we might look at some other ways of dealing with that. Mr. Blum. The total cost of Part D is certainly lower I think than the actuaries for the Congressional Budget Office estimate. I think part of that is that we have seen much more rapid generic diffusion through the Part D program than I think the actuaries would have said. I can't speak for the actuaries, but I think what they would say is that the main reason we're seeing lower costs than expected is that we have much more generic competition and diffusion than they had predicted back in 2003 when the benefit was enacted. We also see robust premium competition for Part D plans, and we see beneficiaries gravitate to the plans that offer the most competitive premiums. So I think to my observation, the number one reason why Part D costs remain low is that we have more generic use through the Part D program than in other payment systems, but we also see very robust premium competition for Part D plans, and we have a very rich market. Senator Corker. Thank you. That's quite an endorsement. Let me ask you, on the Medicaid programs in general where we have a different type of situation, we've seen tremendous cost increases on the prescription drug side of Medicaid, which has a very different type mechanism. Is that not true? Mr. Blum. My observation is that when you compare Medicaid paid net prices to other purchasers, that oftentimes Medicaid is a lower price. I don't know the reasons why Medicaid drug spending is growing like you say, but I would guess that most of that growth is due to the fact that we have more beneficiaries in the program, not necessarily higher prices for prescription drugs. Senator Corker. I see my time is up, and I thank you again for answering the questions the way you have. I appreciate it. Mr. Blum. Thank you. The Chairman. We turn now to the Senator from Ohio, Sherrod Brown. Senator Brown. Thank you, Mr. Chairman, and Ranking Member Corker. I appreciate especially being here at the request of the chairman because I'm not on this committee, and I appreciate the opportunity to share some information and ask you something. I first appreciate the chairman's work on Avastin/Lucentis. I want to bring another issue to you on a progesterone called P17, marketed by KV Pharmaceuticals out of St. Louis as a drug called Makena. I think you know the story, that for several years women, at the cost of $10 to $20 a dose and 20 doses, 20 weeks once a week of a shot they get typically in a hospital or doctor's office. So the cost overall of $200 or $300 for the whole regimen of this P17 progesterone has dramatically cut the rate of low birth weight babies born in this country. Medicaid pays for about 42 percent of the nation's more than 4 million annual births. Twelve percent of live births involve a preterm baby. So compounding pharmacists were making these drugs. Often one in a community or in a major city hospital or whatever were producing these drugs, and women's lives or babies' lives were saved in many cases. Babies were born full course, full term much more often. KV Pharmaceuticals, a company I'd not heard of before this, went to FDA, got approval for exclusivity for seven years. They raised this $10 to $20 a dose for 20 weeks, $200 to $300, $200 to $400, to $1,500 a dose times 20. Do the math. Under pressure from many of us, they dropped the price to $690. That's still a significant public health problem. Call it greed, call it gaming the system, call it what you want, it's a significant public health problem. It's also a significant insurance company and Medicaid/ taxpayer problem. We have seen a similar kind of gaming the system on a drug called Colcrys, as you know, treating gout. It used to be 4 cents a pill. After URL Pharma went to get FDA approval, the price went from 4 cents a pill to $5 a pill. Gout is a serious problem for a lot of people in this country. My question is--oh, one more thing. The FDA--oh, I'm sorry. Yes, the FDA did something that is highly unusual. FDA, when KV Pharmaceuticals sent a cease and desist order to compounding pharmacists all over America, the FDA stepped in and said we will not enforce that cease and desist order, implicitly saying carry on and keep compounding this drug. Now, there is not a public safety issue here. There's never been any accusation the compounding pharmacies, pharmacists and pharmacies have contaminated this drug, have made it in a way that's not safe for these women, never that I've read any accusation about that. So my question is what do you do about this? On Colcrys, on Makena, it's such a public health issue, it's such a taxpayer issue where even today, after CMS or--I'm sorry, after FDA stepped in, only three states, according to the American College of Obstetricians and Gynecologists, only three states are solely covering 17P. Five are covering only Makena. Twenty are covering both. So if the physician is not on her toes here, and if the ultimate buyer of this drug or the user of this drug or the hospital is not paying enough attention, they're paying more like $690 a dose instead of the $10 to $20 that compounding pharmacists are still making this for. What is your role and what is CMS really going to do to make sure the public health isn't at risk and taxpayers aren't paying billions of dollars more, whether it's Colcrys, whether it's Makena, whether it's the next drug that some opportunistic--I won't use the word ``greedy'' but opportunistic drug company decides to move forward on? Mr. Blum. A couple of observations on the examples that you raised. I think it shows that when a drug or a product that doesn't face competition from other products or generics, that they can exercise monopoly pricing power, and that's the incentive to do so. So I think one thing that CMS and every other part of the public health infrastructure needs to do is to ensure that we create consistent and quick pathways consistent with the law to generics to ensure that we have competition. But outside of---- Senator Brown. That's not--sorry to interrupt. That's not good enough here because they have seven years of exclusivity. So that's an answer in some cases. I don't think it's an answer to the chairman's issue, and it's certainly not an answer to these two drugs. Mr. Blum. I think, in complete frankness, Senator, the authorities that you're suggesting aren't authorities that CMS has today. If Congress would like CMS to exercise those authorities, the law would have to be changed in order for us to do so. Senator Brown. You have no role in negotiating drug prices in that narrow window? Mr. Blum. No part of my testimony said that our payment systems don't tie to drug manufacturers directly. CMS pays physicians. CMS pays drug plans. CMS pays hospitals, who in turn purchase drugs, and our payment systems are set based upon very tight statutory constructs. So, today, CMS does not have any negotiating authority directly with drug manufacturers. Senator Brown. Thank you, Mr. Chairman, for your time. Thank you. The Chairman. Thank you very much, Senator Brown. Now we turn to Senator Kirk. Senator Kirk. Thank you, Mr. Chairman. Thank you for having me on this committee. I'd like to raise--I've got a chart here. I'd like to raise an issue with regard to IPAB, the Independent Payment Advisory Board, and the British equivalent, the National Health Service. Their equivalent of IPAB is called the National Institute for Health and Clinical Excellence, called NICE. And what I'm worried about is NICE is not so nice, generating clinical outcomes significantly worse for patients who are unfortunately under its jurisdiction rather than American seniors, who are under Medicare. When you look at several of the indicated medicines that are available, you see, for example, in postmenopausal women, Herceptin is indicated and is available under Medicare for treatment. But NICE denies this, and that would total about 46,000 women in the United Kingdom that are not allowed Herceptin because a British bureaucrat has said to all British doctors, under every circumstance, no matter what your clinical judgment regarding this patient is, you may not provide this. Luckily, we still give this freedom to U.S. physicians. For liver cancer, the indicated treatment may be Nexavar. And in England, the NICE bureaucrats have now denied authority for all British physicians to provide this. This may be one of the reasons why the United Kingdom now ranks 16th out of 18 EU states in cancer survival in this area. They simply are dying, and part of the reason might be that what is indicated and especially could be provided by a physician under Medicare is not allowed. In colorectal cancer, we all understand Avastin, and Avastin has been shown as being clinically indicated to cut off the blood supply of a tumor. For Americans suffering from kidney cancer, they may be prescribed with Affinitor. Affinitor is indicated if the other drugs are not working, and it has also been helpful when you have a transplant. It helps the body accept this. In the case of British patients, they are denied Affinitor and its benefits. Probably a bigger disease, leukemia, the cancer of white blood cells, for Spyrocel, this is used if Gleevec is not seen as effective. American physicians under Medicare are allowed to do this. NICE under the NHS then denies all care for this. And then for lung cancer, Tarceva, which is used for small cell cancer if other chemotherapy fails, and also in pancreatic cancer, denied. Here's my question. What is going to prevent IPAB from metastasizing--and I use that word directly--into NICE? Because I think for many Americans, we go to England, especially on holidays, and normally an American will not get on a plane and leave the United States for a holiday unless they're in a good health status. And so Americans' personal experience with the NHS is minimal to none. I lived and worked in Britain for three years, and I can tell you my first experience inside a British hospital was shocking as to its level of physical infrastructure, some hospitals being not improved or expanded since the blitz, and then the denial of care and lack of technical expertise, as opposed to what I saw at Evanston Hospital near my own town. What actions are you taking to make sure that IPAB can never metastasize into NICE? Mr. Blum. I think a couple of things. One is that as the Affordable Care Act structured the IPAB, that it was structured as an independent body from CMS. And I think that the goal, as I understand it, of the legislation was to create mechanisms to ensure that overall costs of the Medicare program and other parts of the health care system remain affordable. And I think we can all agree that the ultimate goal is to ensure that per capita cost growth remains affordable to ensure that the Medicare program remains strong, and for current beneficiaries---- Senator Kirk. Wait, wait. When you lay out that mission, NICE's view is NICE is connected to a bankrupt government. The British government has almost as many debt loads as we do. And so the bureaucrats then use comparative effectiveness research to then support the kind of decisions that I just laid out that then deny care, driving cancer survival rates in Britain to the lowest in the EU. Mr. Blum. Sure. Well, my understanding of the legislation is that the IPAB provides recommendations to the Congress. Congress has the right to choose to accept those recommendations or not. The Congress can overrule those recommendations. Senator Kirk. And then this is regardless of what a physician thinks is indicated for their patient. What if the physician disagrees with what IPAB recommends? Mr. Blum. Well, I think a couple of things. One is that the IPAB legislation, consistent with the Medicare framework today, I believe prohibits coverage decisions or any coverage decision from factoring costs to those coverage decisions. So I think the chart that you're suggesting suggests that NIHCE takes into account cost considerations for particular drugs. The current coverage authority that CMS operates under in the Medicare program does not allow us to consider cost in making coverage decisions, and I believe the IPAB legislation doesn't change that framework that we currently operate under today. Senator Kirk. Mr. Chairman, I would just say I'm highly worried that before the legislation we didn't even have an IPAB. Now we have an IPAB, and I think its goal inevitably will be to metastasize into what the British have. Thank you, Mr. Chairman. The Chairman. Thank you, Senator Kirk. Now we turn to Senator Udall. Senator Udall. Thank you, Mr. Chairman. I listened to my colleague from Illinois with interest. I do understand, Mr. Blum, that if the IPAB recommendations are not acceptable to the Congress, we can simply override them with our own ideas and our own proposals about how to contain costs. Is that correct? Mr. Blum. That's my understanding, Senator, yes. Senator Udall. That's your understanding? And I also understand that we have had a similar advisory committee attached to CMS, MedPac some have called it, which has made a series of insightful recommendations in retrospect about ways in which to contain costs but also maintain quality of treatment. Mr. Blum. Right. Senator Udall. Would you agree? Mr. Blum. MedPac serves the Congress. They don't serve CMS. So they're an independent agency that provides the Congress recommendations about how to improve Medicare/Medicaid payment policy. They provide recommendations to the Congress each year that the Congress can choose to accept or not. I think what is different about the IPAB is that, if the Congress does not act upon the recommendations, the Secretary of Health and Human Services would have the authority to implement those recommendations. But you're absolutely correct that the recommendations go to Congress. Congress can choose to accept or to suggest other ways. And so I see it as a body that serves the Congress to provide recommendations to contain overall per capita spending. Senator Udall. And that's the point of the hearing today, and I want to thank Senator Kohl and Senator Corker for convening this. If I might, Mr. Chairman, I'd like to ask unanimous consent that my initial statement be included in the---- The Chairman. Without objection. Senator Udall [continuing]. In the record. And if I could, I'd just like to turn to the earlier comments you made about generic drugs. They're obviously a focus of the Medicare Part D, and I know there's some good news on that front. Would you talk about your sense of how branded drug costs have affected costs at CMS, as opposed to generics? [The prepared statement of Senator Mark Udall appears in the Appendix on page 114.] Mr. Blum. Sure. Well, I think we operate under different statutory frameworks and different competition within different therapeutic frameworks in the Part B program and the Part D program. What is driving Part B drug spending? These are drugs largely provided through physician offices. The spending is concentrated on a handful of drugs. They're often new drugs coming on the market that I think are in the brand category. In the Part D program, we continue to see robust generic competition for many of the most commonly prescribed drugs for conditions like diabetes, heart care, et cetera. In the Part D context we see very strong generic competition, less so in the Part B drug context. Many of the drugs that we pay for in Part B are drugs used to treat cancer that are new treatments that still are in their market exclusivity. But on the Part B side, we have a concentration of spending in a handful of drugs due to the newness of the treatments, and due to the popularity of the treatment. Senator Udall. On balance, do you see a flattening out of the costs on whatever metric is the most useful on the branded side? Mr. Blum. Well, I think---- Senator Udall. Again, the point of the hearing is how do we maintain quality, how do we encourage the pharmaceutical sector to innovate and take some risks, but how do we get a handle on the enormous cost of providing drugs to Americans. Mr. Blum. And I think one observation is that while we need to have strong incentives for manufacturers to bring new markets to market, we see that when drugs do face competition from generics or other treatments, that the prices that are fed through our payment system reflect that competition. So I think the question is how do you always find the right balance between creating strong incentives to ensure that new markets come to market, and also that competition can happen when it's appropriate for it to happen. Senator Udall. Let me turn to outcomes. The Affordable Care Act was focused in part on outcomes. What are you doing to pay for services based on health care outcomes, and how does evidence on health care outcomes affect CMS determinations on what drugs they cover? Mr. Blum. Well, a couple of things. One is the Affordable Care Act clearly gives CMS a very strong direction for us to develop the next generation of payment systems for hospitals or for physicians to really focus on the overall value of care rather than the volume of care. We have different authorities that we're implementing, or different programs that we're implementing with this direction. One is accountable care organizations to ensure that physicians working with all parts of the health care system really focus on the long-term outcomes of the patient rather than a single episode of the payment. We are starting to receive stronger evidence that, when beneficiaries continue to follow drug regimens, when beneficiaries have access to drug benefits, that it saves the program long term. I think these are initial studies. I'm not sure that our actuaries have given them kind of absolute certainty, but there is stronger evidence that, when we focus on the overall preventive care, that we save long-term costs. And so, hopefully with our direction, and I think the health care system's direction of focusing payment on the outcome of the patient, the value of the care rather than the volume of the care, that physicians will make the best possible choices with their patients to ensure that care is better coordinated, better managed for the long term. Senator Udall. Thank you, Mr. Blum. Mr. Blum. Thank you. The Chairman. Thank you very much, Senator Udall. Now we turn to Senator Manchin. Senator Manchin. Thank you, Mr. Chairman, appreciate it. Thank you, Mr. Blum. Basically, with rising costs, especially of Medicaid or Medicare Part D costs, they're estimated to rise about 9.7 percent, I think, for the next nine years. And with the waste, fraud and abuse that we see an awful lot throughout government and throughout basically the programs that we're responsible for, what are you all's intentions and what do you think can be done within your confines in order to remove or eliminate or reduce significantly the waste that's in as far as the billing, overbilling, or wrong prescription? And rebates, I think, as I had done a little bit of investigation, the Inspector General's findings suggest that the underreporting of drug rebates has led to excess rebate payments of approximately $1.9 billion per year. And do you all, are you looking at that? Do you have a group or a task force to eliminate that? Mr. Blum. Sure. I think the Part D program is administered through private Part D plans, private insurance plans, who then pay pharmacists and then sign up beneficiaries and operate the benefit through pharmacy benefit managers. Part of our strategy to address the concern that you're raising is to ensure that we set very strong requirements for our Part D plans, to have compliance programs in place to share data. So when we see a fraud issue on the fee-for-service side, we share that information with private insurance companies so they can act accordingly. We're doing a lot more with sophisticated data, data analysis, to highlight and kind of bring to bear when spending is concentrated within a particular physician or a particular pharmacy. So our strategy I think is twofold. One is to ensure that we incent and require our Part D plans that are providing the benefit on behalf of our beneficiaries to have the strongest compliance programs in place. When we see plans have weak compliance programs, we take action very quickly. But also our strategy is to share information, to share data so it's not just the fee-for-service Medicare program that's responding to a fraud hot spot. We're sharing that information with all of our partners to ensure they can respond as well. But if we know that folks that are trying to commit fraud, if one spigot gets cut off, they move to another spigot, so our strategy is to make sure we're working in unison to ensure that all the spigots get cut off, to the extent possible. Senator Manchin. With the cost of drugs, prescription versus generics, do you all play a role in your rulemaking as far as what we are to prescribe first, or go to low cost? Mr. Blum. We allow Part D plans, consistent with the statutory framework, to establish formularies, to set differential cost-sharing policies, to encourage beneficiaries to use generic drugs or lower-cost drugs relative to higher- cost brands. So those formularies have to run through our checks and balances to ensure that they're fair for our patients, but we provide the incentives, and also we provide the framework for private Part D plans to set those cost- sharing policies to encourage the---- Senator Manchin. So you're telling me that basically our prescription prices for our drugs are anywhere from 30 to 50 percent higher than most other nations. Mr. Blum [continuing]. We operate within current statutory frameworks, and our payments are consistent with those statutory frameworks. Senator Manchin. Do you have any opinions on that? Do we have the right statutory provisions in place, or do we need to make some adjustments? Mr. Blum. I think what---- Senator Manchin. To reduce the costs, just to lower the costs so we're able to provide to more people in need. Mr. Blum. What I can say, Senator, is that the President has made it very clear that lowering Medicare costs and all costs in the health care system is one of our highest health care challenges, and he has said that all ideas and options are on the table in the context of the overall debt ceiling discussions. Senator Manchin. Would you agree basically that if you would use prescriptions, that you would have a reduced cost if they were available for the same type of treatment where a higher-cost drug is available? Mr. Blum. I'm sorry. I don't understand the question. Senator Manchin. Well, basically if you all had a policy or if you want us to change the law that would require you all to use the lowest-cost provider or the lowest-cost drugs for their treatment, then there would be tremendous cost savings. Mr. Blum. I think the overall framework that CMS operates under is that the physician and the patient should make those choices together. Senator Manchin. We're paying for it, though. Mr. Blum. Absolutely. And so our payment policy should support the physician and the patient to make those best possible choices. We also know that, due to our cost-sharing policies, higher-priced drugs generally have higher-priced copayments attached to them. And so we have to be very sensitive that it's not just the taxpayers who are paying higher prices, but it's out-of-pocket costs that are also impacted as well. And so our payment framework pays for drugs indirectly, but we also have coverage policies that support physicians and patients making the best possible choices, and hopefully part of that discussion is taking into account the out-of-pocket costs that are being borne by our beneficiaries. Senator Manchin. I'd like to go into it in more depth with you, because I think in these budgetary-constrained times that we have, we should be looking at trying to get the best bang for our buck, and right now it doesn't seem that we're doing that. Mr. Blum. I'd be happy to follow up with that, Senator. Senator Manchin. Thank you. The Chairman. Thanks a lot, Senator Manchin. Now we turn to Senator Blumenthal. Senator Blumenthal. Thank you, Senator Kohl, and thank you for again having a very, very informative and useful hearing. And thank you, Mr. Blum for your testimony here today. Would you agree with me that the Veterans' Administration has greater leeway or authority to negotiate lower drug prices? Mr. Blum. The VA operates I think relative to the Medicare program but with a much tighter what I would call formulary or drug list, and that provides them more negotiating leverage than I think what we operate within the Medicare program. And so the way that the statutory construct for the VA payment system has been constructed is giving the VA the freedom to kind of manage a much tighter formulary, which gives them more negotiating leverage to extract overall lower prices than what the Medicare program would pay. Senator Blumenthal. And in effect, just cutting through what you just said and putting it in layman's terms, the VA can negotiate lower drug prices by using the Federal Government's bargaining power on its formulary. Is that not correct? Mr. Blum. Sure, and I think---- Senator Blumenthal. And under Medicare, that practice, that use of the Federal Government's bargaining power is essentially barred; correct? Mr. Blum. Correct. Senator Blumenthal. And don't we have an obligation to enable taxpayers and seniors to have lower drug prices by using the Federal Government's bargaining power to lower those drug prices? Mr. Blum. I think it's fair that we have an obligation at CMS in the Medicare program to ensure that we are managing costs throughout the program to the best of our ability, and we pay for drugs today within the confines of the statute that's been given to us. Senator Blumenthal. And it really is, in fairness to you, Mr. Blum, the confines of the statute that, in effect, straightjacket you. There's really no other word for it, in my view, straightjacket you from serving the public interest by saving taxpayers and seniors money by using the Federal Government's bargaining power to lower drug prices. Mr. Blum. Sure. My observation is that the payment system that we use for Part B drugs is set very clearly by statutory formulas. CMS operates those payment systems, but we cannot influence those payment systems. Senator Blumenthal. And there's no other way to view it than as a kind of loophole, giveaway, sweetheart deal that raises the cost of drugs at a time when the cost of drugs is already spiraling upward; correct? Mr. Blum. I'm sorry. I don't understand the question. Senator Blumenthal. Well, let me put it a different way. Wouldn't you recommend that the confines of the statute, as you have adroitly put it, be changed so that the public interest could be better served to lower drug prices? Mr. Blum. I can't speak to a specific policy recommendation, but what I can say is that if we--the Congress believes that the pricing mechanisms or the pricing outcomes should be different, then I believe that the statutory construct would have to be changed. Senator Blumenthal. Just to put it in very practical terms, my understanding is that, in FY 2010, the VA in fact spent $3.9 billion in drugs and realized cost savings from negotiations of $700 million. If you were to extrapolate from the current expenditures on Medicare and prescription drugs, there would literally be billions of dollars in savings; correct? Mr. Blum. Well, I think you'd also have to extrapolate the coverage that the VA programs provide relative to the Medicare program. And it's my understanding that the VA operates a tighter formulary, if you will, which gives them more leverage. In order to have leverage, you have to say yes to one product and no to another product to create that negotiating clout. Senator Blumenthal. But even with--and I apologize for interrupting, but my time is about to expire. Let me just make the point, whether the formulary is tight or expansive, negotiations enable lower prices; correct? Mr. Blum. When there's competition, yes. Senator Blumenthal. And the Federal Government, it seems to me, has an obligation to taxpayers and seniors to take advantage of competition where it exists, or enhance it where it should be more robust in order to achieve those savings. I recognize you operate within the confines of the statute, so I am not asking these questions in a way that is meant to be hostile to you personally, but I thank you very much for your testimony today. Mr. Blum. Thank you, Senator. The Chairman. Just one point before we turn to Senator Whitehouse. Senator Blumenthal, of course, you were on legislation that would authorize Medicare to negotiate directly with the pharmaceuticals. Is that right? Senator Blumenthal. I am indeed, and thank you for your leadership on that legislation, Mr. Chairman. The Chairman. Thank you. Senator Whitehouse. Senator Whitehouse. Thank you, Chairman, and thank you for holding this important committee hearing. Why is it, Mr. Blum, that you aren't prepared to make a policy recommendation to this committee? Is that a restriction related to your position at CMS? Mr. Blum. Well, I think I can speak for the administration's position, and what the President has said is that he is open to all ideas. He has suggested some possible ways in April for us to reduce Medicare and Medicaid costs. One suggestion was to think about requiring that the Medicare program receive deeper discounts for certain drugs that are provided through the Medicare program. But that is a statement that I'm prepared to say here today. Senator Whitehouse. We're often told that government should try to run more like a business. Can you think of any business that doesn't exercise its buying power to achieve price advantages? Mr. Blum. I would assume the answer is yes, that businesses have a clear incentive to maximize revenue and lower costs, and part of that would be through negotiations. Senator Whitehouse. And you can't think of an example to the contrary. I mean, that is the way business behaves; correct? Mr. Blum. That is my understanding. Senator Whitehouse. So it is unusual for government to be, at least with respect to the business model, it is a departure from government operating more like a business to have government be constrained by the statutory confines you talked about and forbidden as it was in the Part D act from exercising its negotiating leverage. Mr. Blum. Well, the Part D legislation that was enacted in 2003 provides CMS the leverage to negotiate with Part D plans. That authority was expanded through the Affordable Care Act. The leverage that we have is through our contracting with Part D private plans. But you're correct, we have no authority to negotiate with manufacturers to receive better prices paid or provided to our private Part D plans. Senator Whitehouse. And does that relate back to the Medicare Modernization Act of 2003 and its so-called noninterference provision? Mr. Blum. The noninterference provision prohibits Medicare CMS from interfering with private negotiations, with private health plans, with pharmaceutical companies, hospitals, any other service that is being purchased by the private plan. Our authority is to contract with the plan, but by and large we cannot interfere with the negotiations with the plan and their other providers or suppliers. We have authority to make sure that the benefits are consistent with the program's requirements, but the prices that are contracted with the plan and the manufacturer are outside of CMS' purview. Senator Whitehouse. Setting aside the merits or the policy recommendations just for a moment, the National Committee to Preserve Social Security and Medicare has estimated that nearly $240 billion could be saved in the Medicare program over 10 years if the Secretary were authorized to negotiate drug prices. As an estimate, do you have any comment on its accuracy? Mr. Blum. I've seen different estimates on such authority, but I had not personally seen that estimate that you cite. Senator Whitehouse. What estimate do you have or do you credit that is out there that would reflect the potential savings from such a change in law? Mr. Blum. I believe the Congressional Budget Office may have scored a similar policy. I don't recall the results, but I believe it was lower than the numbers that you have cited. Senator Whitehouse. One of the things that I hear from Rhode Island seniors pretty often is that they have signed on to a Part D plan, and once they were signed on, the formulary then changed and the drug or drugs that they're using and dependent on, or the reason they signed on to that Part D plan, are suddenly either no longer available or require a different and higher copay. In any event, they signed up for one thing, and in midterm they got dealt another set of conditions that they had never agreed to. Can you tell me what role CMS can play to ensure that Part D plans have to--can't make these midterm changes and that they can only become effective after a period has expired that would allow the senior to make a different set of choices, and that you basically get what you signed up for and you're guaranteed to get what you signed up for until you can find something different? Mr. Blum. Sure. What CMS requires, I believe, and this may not be 100 percent accurate, that when that drug plan changes a drug that's provided on the formulary midyear, the plan is required to notify the patient, to provide a transition fill to ensure that the beneficiary can go back to their physician to get a new prescription. But I--but drug prices change throughout the year, and some manufacturers have the freedom to raise and lower prices throughout the year. So I would be hesitant, in the interest of ensuring that prices remain low and affordable, both for the program and for the taxpayers, to take away Part D plans' ability to change formularies for different circumstances, whether the drug is deemed not effective, whether the price goes up and the Part D plan needs to respond to keep premiums affordable. So our policies require that the plans provide notice and transition, but at the same time I would be hesitant, personally, given that we want to make sure that Part D plans have the freedom to respond to different circumstances. Senator Whitehouse. Thank you, Chairman. The Chairman. Thank you very much, Senator Whitehouse. Mr. Blum, we thank you for being here. You've been very helpful, very informative. We're looking forward to continuing our work with you. Mr. Blum. Thank you very much, Senator. Senator Corker. Mr. Chairman, could I make one comment? The Chairman. Go ahead. Senator Corker. I want to thank you for coming, too. And I think in spite of the push by many of my colleagues on the other side of the aisle to push you into direct negotiations on Medicare Part D, I think what you said is that it has been very, very successful at keeping prices low because of the tremendous amount of competition that exists, and that there may be a need in some isolated cases where only one type of drug is available to look at a different type of arrangement. But in Medicare Part D, generally speaking, the costs are far lower than ever imagined, seniors have far more choices than they ever would have, including the VA I think as you mentioned, and from your perspective this competitive nature of Medicare Part D has been very, very successful, and messing with it in any way would likely lead to some unintended negative consequences. So I thank you very much for being here and appreciate your testimony. The Chairman. Thank you. We'll turn now to our second panel, if you would approach the witness stand. First we'll be hearing from Dr. Philip Rosenfeld, Professor of Ophthalmology at the University of Miami. Dr. Rosenfeld has worked on many clinical trials involving innovative treatments for eye diseases. Next we'll be hearing from Dr. Anthony Adamis, who serves as a Global Head of Ophthalmology at Genentech. Dr. Adamis was formerly a professor at Harvard Medical School and is cofounder of Eyetech Pharmaceuticals. Next we'll be hearing from Dr. Sean Tunis, who is founder and director of the Center for Medical Technology Policy. After that we'll be hearing from Lisa Swirsky. She is a senior policy analyst for Consumers Union Health. Finally, we'll be hearing from Dr. Scott Gottlieb. Dr. Gottlieb is a resident fellow at the American Enterprise Institute. We welcome you all. We're looking forward to what you have to say, and we'll now start with you, Dr. Rosenfeld. STATEMENT OF PHILIP ROSENFELD, M.D., Ph.D., PROFESSOR OF OPHTHALMOLOGY, BASCOM PALMER EYE INSTITUTE, MIAMI, FL Dr. Rosenfeld. Chairman Kohl, Ranking Member Corker and other distinguished members of the committee, thank you for inviting me today to testify on this important topic. I'm Dr. Philip Rosenfeld, Professor of Ophthalmology at the Bascom Palmer Eye Institute of the University of Miami Miller School of Medicine. This statement represents my own opinion and not those of the University of Miami or the Bascom Palmer Eye Institute. I bring to the discussion today a real-world perspective of the forces influencing the choice between two commonly used drugs for the treatment of wet macular degeneration. By studying this example, I believe we can better understand how the current incentives in our health care system promote the use of the most costly alternatives. These drugs are being used to treat wet macular degeneration, a leading cause of irreversible blindness among the elderly worldwide. When I say wet macular degeneration, I'm talking about the abnormal growth of blood vessels in the back of the eye. These blood vessels leak, they bleed, and they accelerate vision loss. Genentech performed groundbreaking scientific research that led to the discovery of two fabulous drugs, Avastin and Lucentis. Both drugs block the factor that causes the blood vessels to grow. Both drugs are derived from the same mouse monoclonal antibody. Avastin is a full-length antibody; Lucentis is a fragment of that antibody. Avastin is infused through an arm vein every two weeks in cancer patients; Lucentis is injected into the eye as often as every month. Avastin was FDA approved for colon cancer therapy in February of 2004; Lucentis for eye injections for wet macular degeneration in June of 2006. I don't have time to go into the background of why I first injected Avastin into an eye, but it was clinically and scientifically justified. This off-label injection was successful and led to the international use of Avastin for a wide range of eye diseases. The rapid spread in 2005 was fueled by the availability of Avastin, its apparent efficacy and safety, its low cost, and the fact that Lucentis was not yet available, though everyone was seeking Lucentis. Even after Lucentis was approved, though, Avastin continued to be used as the low-cost alternative to Lucentis. When a pharmacy follows strict USP--that's United States Pharmacopeia--guidelines, Avastin can be prepared for $20 to $40. Lucentis costs $2,000 a dose. Since 2005, 1,500 scientific papers have appeared in peer-reviewed journals exploring the safety and efficacy of Avastin. However, definitive data was not available until the CATT trial results were published in the New England Journal of Medicine in May of this year. Dr. Dan Martin, chairman of the Cole Eye Institute of the Cleveland Clinic and chairman of this National Eye Institute-sponsored multicenter clinical trial, is here in the audience today. In this two-year study, injections of Avastin and Lucentis were compared in 1,200 wet AMD patients. After one year, the Lucentis injections given monthly were comparable to the Avastin injections given monthly. When Lucentis was given as needed, it was comparable to Avastin given as needed. Overall, the two treatments seemed equivalent. There were no apparent expected adverse event differences between the two drugs. However, Avastin was associated with an increase in unexpected adverse events that are not thought to be drug-related. However, these adverse events are closely being studied in the second year of the trial. To understand how these drugs are used in the United States, I collaborated with Ross Brechner at Medicare, and we found that 60 percent of physicians in 2008 used Avastin, 40 percent used Lucentis. This is looking at 100 percent database from Part B Medicare. We saved Medicare approximately $800 million in 2008 alone by the use of Avastin. So what determines why clinicians use one drug or the other? We have found there are several incentives in the system that promote Lucentis use. First, Medicare promotes the use by the 6 percent average sales price reimbursement to physicians. Not only does Medicare cover the cost of the drug, but they also add 6 percent of the average sales price. That's $115 every month for a $2,000 investment. That investment is returned every month. So overall, the physician makes a 70 percent return on that initial $2,000 on Lucentis. In addition, CMS decreased the reimbursement for Avastin from $50 to $7 in a hospital-based setting. This was part of a bigger reduction that was blocked by a number of my colleagues, specialty societies, and government officials. However, the $7 reimbursement in a hospital-based setting is still in effect. In addition, in what's called a disproportionate share hospital, the 340B discount program allows Lucentis to be purchased at $1,600 and get reimbursed at $2,000. That makes a $400 profit for each injection of Lucentis. This profit or this rebate should go to Medicare. Finally, Genentech has two incentive programs. One is a rebate program reported by Andy Pollack of the New York Times, November 2010. It's very lucrative to clinical practices. It's based on volume use and increase in usage of Lucentis. This rebate should not go to the clinician. It should be going to Medicare. And Genentech also allows the direct purchase using a credit card, allows cash back up to 2 percent to the physician. This rebate should go to Medicare and not the clinician. A transaction fee should be charged by Genentech. So while these historical details surrounding the use of Avastin and Lucentis are unique in the annals of medicine, the financial incentives driving the use of expensive drugs and procedures are not. These incentives and disincentives should be eliminated. And finally, I inject over 4,000 eyes per year. I use about half Lucentis, half Avastin, and as a clinician I don't want Medicare telling me which drug to use, but I don't want my patients worrying that my decision to inject their eyes is being influenced by these incentives. The choice between drugs should be based between the physician and the patient based on efficacy, safety, and cost. It is noteworthy that, despite all of these financial incentives, most ophthalmologists use Avastin. This suggests that most ophthalmologists really do care about the cost of health care. Thank you again for this invitation, and for your attention. Thank you. [The prepared statement of Dr. Philip Rosenfeld appears in the Appendix on page 53.] The Chairman. Yes. We'll turn now to Dr. Adamis. Before I do, did I hear you say you inject half of your patients with one and half of your patients with the other? Dr. Rosenfeld. When I look at my 4,000 eyes that are injected, I use on average half Avastin in those eyes and half Lucentis, and the decision is based between discussions with my patient and their decision after all the options are presented whether they want one or the other drug. The Chairman. You let your patient make that decision? Dr. Rosenfeld. Once they're given all that information. I strongly believe that full disclosure is required for a patient to understand the reasons why a needle is going to be stuck into their eye. The Chairman. I understand. You seem to be indicating your independent opinion is that the drugs are similar. Dr. Rosenfeld. That's my clinical opinion. The Chairman. Okay. Thank you very much. Dr. Adamis. STATEMENT OF ANTHONY ADAMIS, M.D., VICE PRESIDENT, GLOBAL HEAD OF OPHTHALMOLOGY, GENENTECH, INC., SOUTH SAN FRANCISCO, CA Dr. Adamis. Chairman Kohl, Ranking Member Corker, honorable members of the committee, thank you for inviting me here today. I ask my full written testimony be submitted for the record. My name is Tony Adamis. I'm the Vice President, Global Head of Ophthalmology at Genentech. I'm an ophthalmologist and vascular biologist by training. Prior to joining Genentech in 2009, I served in other positions in the biotech industry, as well as 11 years at the Harvard Medical School where I treated patients and conducted research. Genentech is based in South San Francisco and as part of the Roche group currently employs over 30,000 people in the United States. Our commitment to innovation is unparalleled within the industry, with more than 100 projects in clinical development. In 2009 alone, Genentech Roche spent $9.1 billion on R&D, an amount greater than any other company in the world. Genentech's mission is to develop innovative medicines to treat serious diseases. One of the most impactful medicines we've ever developed is Lucentis. Before Lucentis was available, wet AMD was the leading cause of blindness in older Americans. The average patient lost central vision until the ability to read, recognize faces and drive was lost. In addition to the personal suffering and loss of independence, the total annual cost to the U.S. GDP was estimated to be $5.4 billion. Everything changed with the development of Lucentis. For the first time, the average patient with wet AMD recovered vision. When the results were first presented at a major medical meeting, Lucentis was publicly compared to the discovery of penicillin. Since then, Lucentis has reduced the rate of legal blindness by 72 percent. As a result, wet AMD may no longer be the leading cause of blindness in older Americans. Subsequent investments in Lucentis trials by Genentech have demonstrated sustained gains in vision in two additional serious diseases, retinal vein occlusion and diabetic macular edema. So to date, Lucentis has exhibited heretofore unseen efficacy in three of the major causes of blindness in the United States. Drug development is lengthy, expensive, and risky. Drugs entering clinical development have a 92 percent failure rate. Lucentis was one of the 8 percent that succeeded. The price of Lucentis therefore funds not only its own development but also the 92 percent that fail and our future successes. Eleven years and almost $1.4 billion have been spent on the development of Lucentis, involving over 18 clinical trials and 7,100 patients in the United States, and over 10,000 around the world. In 1989, Napoleone Ferrara discovered vascular endothelial growth factor, or VEGF, at Genentech. His research showed that blocking VEGF might prove useful in the treatment of cancer, a line of research that eventually resulted in Avastin. Around the same time, my colleagues and I working with Dr. Ferrara determined that VEGF was also a potential target for eye disease. Dr. Ferrara, however, was concerned that Avastin may not be ideal for the eye, so his team set out to create something better. That drug became Lucentis. For his work on Lucentis, Dr. Ferrara was awarded the Lasker Prize in 2010. Seventy-six Lasker laureates have gone on to win a Nobel Prize in medicine. There are four scientific reasons why Lucentis was created. Today I will focus on one of them, systemic safety. When drugs are administered to the eye, they often find their way into the bloodstream. When that happens, side effects are more likely. Avastin was designed to last a long time in the bloodstream so that it can have sustained activity against tumors. Lucentis, however, was designed to exit the bloodstream very quickly. VEGF-blocking drugs can result in rare but serious side effects. When an interim safety analysis in 2007 revealed a potential stroke risk with the use of Lucentis, Genentech sent a letter to doctors, notified the FDA, updated the package insert, and presented the data to the medical community. Today, there's a growing body of data that suggests off- label Avastin may pose a greater risk than Lucentis. Two large Medicare claim studies, one from Duke and a second from Johns Hopkins, both identified a potentially greater risk of stroke and death when using Avastin in wet AMD. The CATT trial also showed a safety difference. A 29 percent increased risk of serious side effects was seen with Avastin, with over 80 percent requiring hospitalization. Genentech's internal analysis indicates that part of the increased risk is consistent with VEGF blockade in the blood stream. These data are not yet conclusive. However, it is notable that the three largest studies to date have shown statistically significant safety risks with the use of Avastin in wet AMD. As the data emerge, we agree with the American Academy of Ophthalmology and the written testimony of the American Society of Retinal Specialists that a treatment plan must be selected by an ophthalmologist and a patient, considering important benefit/risk information that empowers them to make evidence- based decisions. Genentech is also committed to ensuring that no patient goes without treatment due to financial barriers. Since 1985, we have donated $2.3 billion in free medicine to uninsured patients and more than $550 million to various independent nonprofit organizations for copay assistance. We're committed to working with the Congress, public health agencies, CMS and the FDA to ensure the safety and effectiveness of our products. Today, innovation continues at Genentech as we seek to improve Lucentis and develop additional breakthrough medicines. This work depends in part on the success of Lucentis. Thank you for the opportunity to provide my views today, and I look forward to your questions. [The prepared statement of Dr. Anthony Adamis appears in the Appendix on page 61.] The Chairman. Thank you very much, Dr. Adamis. Now we'll hear from Dr. Tunis. STATEMENT OF SEAN TUNIS, M.D., MSC, FOUNDER AND DIRECTOR, CENTER FOR MEDICAL TECHNOLOGY POLICY, BALTIMORE, MD Dr. Tunis. Mr. Chairman, Senator Corker, thanks for the invitation to appear before the committee today. My name is Sean Tunis. I'm the founder and CEO of the Center for Medical Technology Policy, which is an independent nonprofit that works to improve the quality and relevance of clinical research. I was previously chief medical officer at the Centers for Medicare and Medicaid Services, and I was there at the time when some of the predecessor treatments to Avastin and Lucentis for macular degeneration were introduced. I just wanted to mention what hasn't been mentioned today, that prior to Avastin or Lucentis, the treatments that were available for macular degeneration only slowed the rate of degradation of vision. None of them actually reversed it, and yet Medicare was paying $2,000 to $3,000 a dose for those drugs. So Genentech deserves some credit for having developed the first two effective treatments for macular degeneration that actually improve vision. The Medicare program can almost certainly spend less on drugs without any negative impact on health outcomes for Medicare beneficiaries. In my view, there are at least three important strategies that can be pursued to achieve that, at least one of which has been discussed today. First, Medicare should have the authority to link drug prices more directly to health outcomes. Secondly, Medicare should implement additional policies to promote high-priority clinical research such as the CATT trial, which has provided invaluable information that would support any sort of additional clinically sensitive policies that Medicare might introduce. And third, Medicare should develop a systematic policy approach to promoting drug innovation. The agency is certainly tremendously impactful on biomedical innovation, and there's a number of potential tools that the agency could use to promote innovation. Drug pricing is only one potential tool and probably not the most efficient tool for promoting innovation. I recognize that the approaches to reducing drug spending that we're going to talk about today are not going to save the Medicare program from bankruptcy. These are going to require more fundamental payment reforms and systems innovations. However, I think it's still worth pursuing policy interventions that can save $100 million a year or $500 million a year, et cetera, even though by themselves, obviously, much more significant cost savings are going to need to be pursued. So one relatively straightforward approach to reducing Medicare spending on drugs without negatively affecting patient outcomes would be to restore the agency's authority to pay the same price for drugs that produce similar benefits and harms. Medicare's regional contractors have been adjusting prices based on clinical effectiveness evidence for more than 15 years through their authority called least costly alternative. The policy rationale is that Medicare, beneficiaries, and taxpayers should not pay more for a service or a drug when a similar drug can be used to treat the same condition and produce the same outcome at lower cost. There is no statutory provision giving specific authority or prohibiting the application of least costly alternative. CMS has considered its reasonable and necessary statutory authority to provide the needed legislative basis for this approach. However, a recent court decision has constrained Medicare's ability to use LCA determinations, and therefore restoring that authority legislatively would restore Medicare's ability to adjust the prices of drugs to reflect their clinical outcomes. And as John Blum said earlier today, Medicare is moving towards a policy approach that links payment to outcomes, and there's no reason that that should not also apply to the outcomes for specific technologies, not just the outcomes that providers, hospitals, and others achieve. The CATT trial underscores the importance for Medicare of having the capacity to rapidly identify, design, and implement trials on questions of substantial importance to the Medicare program. Senator Kohl was actually instrumental in addressing the challenges with handling copays for patients enrolled in the CATT trial and helped to craft language addressing this problem in the Medicare Improvements for Patients and Providers Act of 2008. It is my understanding that that statutory language has not been the basis for developing implementing instructions for Medicare, and therefore it remains as difficult as it was before to address those problems. So one step that Medicare could take would be to develop implementing instructions for the language that you develop, Senator Kohl, in order to facilitate future trials like the CATT trial, which are still quite difficult to do. Medicare could also promote critical research by making more systematic use of coverage with evidence development. Coverage with evidence development is a policy tool that links coverage of a drug or device or procedure with a requirement that patients receiving the service are enrolled in prospective clinical studies that would inform future decisions. Medicare has the authority to implement coverage with evidence development, but because it's a vague statutory authority, the agency is reluctant to use that approach, and therefore their ability to support the costs of new clinical interventions in the context of clinical trials is extremely limited, and giving them explicit statutory authority to do so would substantially improve their ability to generate the kind of evidence that would give not only the Medicare program but patients and clinicians more of the kind of information they need to make good judgments based on clinical effectiveness. And last, I see my time has expired, but I just wanted to make the point that Medicare does have an important influence on biomedical innovation just by the virtue of the huge role that it plays on the use of devices and other biomedical services globally. So it's impossible for them to avoid having an impact on innovation, and I think it would be extremely valuable for the Medicare program to take a comprehensive approach to looking at the relationship between various medical policies and biomedical intervention, think about the range of policy mechanisms through which innovation could be promoted, including potentially differential drug prices. But again, it seems that it would be useful to systematically look at ways that this could be done rather than defaulting to a singular approach of drug pricing. So again, I thank you for the opportunity to share some ideas with the committee today. [The prepared statement of Dr. Sean Tunis appears in the Appendix on page 69.] The Chairman. Thank you very much, Dr. Tunis. Ms. Swirsky. STATEMENT OF LISA SWIRSKY, SENIOR POLICY ANALYST, CONSUMERS UNION, WASHINGTON, DC Ms. Swirsky. Good afternoon. Consumers Union is the nonprofit publisher of Consumer Reports magazine. It has a long history of advocating for improving health care and lowering costs of drugs for consumers. So I very much appreciate the opportunity to testify in front of the committee today. Our popular Best Buy Drugs report reaches 100,000 readers per month and provides rigorous evidence-based comparative effectiveness information on a range of commonly used drugs through our website. It's available through our website at www.consumerreportshealth.org. We're proud to say that we make that available free and that we do not accept any advertising. Best Buy Drugs reports rely on credible systematic reviews of available clinical evidence conducted by expert researchers. We use price information from a leading health care data and analytics company. The value added that we think we bring to the table is that our editors and writers then translate this very complicated clinical evidence for our readers into consumer-friendly language and format, which is the hallmark of our publications. To earn a Best Buy Drug designation, a drug must generally be at least as effective and safe as other medications in its class and less expensive. If the data show that the brand name drug is notably safer or works better than a lower cost medicine, that drug gets the Best Buy designation, and I think that's important to stress. We have done a lot of work in the area of statins. Consumer Reports has found that for cholesterol lowering drugs, one of the most common medications, lower cost generics are just as effective and safe as more expensive brands. If you are taking this type of medicine for preventive reasons and you have not yet had a heart attack, the generic lovastatin is as effective, just as safe, and considerably less expensive than the brand Lipitor. A daily dose of Lipitor will cost an individual without insurance about $112 a month, compared to $4 a month for lovastatin. Diabetes medication is another area where our organization has found low-cost alternatives to be effective and safe, and actually in this instance even safer. An older diabetes drug, generic metformin, is our Best Buy recommendation. It clocks in at about $4 a month and is a bargain compared to the pricey drug Actos, which would cost consumers $280 a month. Metformin is also the safest. Newer medications Actos and Avandia both carry a higher risk of increased heart failure. It's worth noting that FDA restricted Avandia's use, proving that you don't always get what you pay for when it comes to drugs. We have found similar findings when it comes to pain medications, which you can read more about in our prepared testimony. These real-life examples show how effective and safe generic drugs are and how they can save consumers precious dollars, and purchasers by the way. Our organization strongly believes that Congress should pursue policies that improve access to generic drugs, including passing Senator Kohl's and Senator Grassley's bill to end collusion between brand and generic companies to delay generic competition. CBO and the FTC have found that these paid-for delay agreements cost Americans billions of dollars. In addition to promoting generics, Congress should do more about the safety and efficacy of drugs, including reforming Medicare and Medicaid payment processes to make use of available evidence that lower-cost drugs are as effective as more expensive drugs. We agree with Dr. Tunis that Congress should consider legislation to authorize CMS to reinstate the least costly alternative policy. Congress may also create incentives to ensure that Part D formularies and state Medicaid formularies carry the generic as a preferred drug when there's strong evidence of comparability. Of course, it goes without saying that doctors must always have the ability to specify a brand alternative if that's in the best interest of the patient. Finally, Congress should act to improve the way pharmaceutical companies convey safety and efficacy information to consumers so that they can better understand and use available clinical evidence to make better choices about their treatments. Consumers Union looks forward to working with Congress to improve the way patient safety and efficacy information is presented to consumers so that they can make better informed decisions about their choices. We believe in a lot of instances when consumers are provided and armed with good information, they will often choose the lower-cost option. A lot of times, that's just not what they're getting from the marketing. In conclusion, I wanted to thank the committee for hearing me out, and we look forward to working with the committee. [The prepared statement of Ms. Lisa Swirsky appears in the Appendix on page 79.] The Chairman. Thank you very much, Ms. Swirsky. Now Dr. Gottlieb. STATEMENT OF SCOTT GOTTLIEB, M.D., RESIDENT FELLOW, AMERICAN ENTERPRISE INSTITUTE, WASHINGTON, DC Dr. Gottlieb. Thank you, Chairman Kohl, Ranking Member Corker. Thank you for the opportunity to testify before this committee. Over the past decade, the drug space stands apart from other segments of the healthcare industry in terms of how much the underlying business model has changed. The life sciences sector has undergone a fundamental transformation to focus on delivering more value and more basic innovation to consumers. Industry pipelines have also had more new compounds in late-stage development than at any time before. More of these new drugs are aimed at fundamentally new targets, and more address unmet needs in medicine, including many orphan diseases. But despite recent progress, challenges remain. There are still consumers priced out of health care. The cost of developing drugs is rising sharply, and new biotech company formation has fallen off. Too many diseases remain poorly treated. So we must craft policies that provide proper incentives for new technology while making sure we are getting more value for programs like Medicare. Any discussion of policies that have worked to bring more price competition to the prescription drug market and lower overall spending has to begin with Medicare's Part D prescription drug program. Competition between more than 1,000 drug plans has resulted in costs that are substantially less than what was first envisioned, wider use of generic medicines and deep discounts on branded drugs. Now, I know there is discussion around imposing mandatory rebates in the Part D program. These are a form of price controls that distort commercial forces. Mandatory rebates create a strong incentive for companies to launch drugs at higher prices in anticipation of the payments that they will have to provide. These rebates also discourage additional discounting. Moreover, as more beneficiaries come under these kinds of tacit price control regimes, it will erode the ability of health plans to use competitive negotiations to move their market share and improve profit margins. This in turn will reduce their incentive to try and drive hard bargains with drug companies. I know members of this committee have also considered proposals to give the staff of Medicare least costly alternative authority. There is nothing inherently wrong with a payer carefully judging the clinical data supporting the use of a particular medical product or service to determine what it will reimburse, but Medicare is no ordinary payer. Its decisions are widely followed. As such, Medicare has an outsized impact on what the U.S. patients will have access to. If Medicare were to make clinical judgments about new technology at the time of their launch, it would also undermine the way innovation unfolds in the life sciences. In many cases, much of the innovation takes place post-market as new technology is introduced and demonstrate additional benefits from real-world use. Demanding early life cycle demonstrations of value, however measured, skews heavily against this sort of postmarket innovation. We should also consider how past treatments we now view as profound advances would have fared under an LCA policy, and we should also consider how such a construct would affect future investment decisions. Policies that encourage more price competition and more clinical competition between similar drugs can help drive more value for beneficiaries while encouraging more opportunities for new innovation. This gets me to the idea of merging Medicare's drug and medical benefits, folding Part B into Part D. There is good clinical and economic rationale for providing drugs under a single unified program. Many private plans have already merged their drug and medical benefits. Folding Part B into Part D could provide substantial savings to Medicare. The savings would be a result of greater therapeutic substitution between oral and injectable drugs, and more price competition between similar agents. Now, moving Part B into Part D is enormously complex and full of potential damaging unintended consequences. It would need to be considered carefully. It is also worth noting that if doing it only invites more temptation to import price controls into the resultant drug program, that will erode competitive forces that ultimately drive value. Moreover, not all the savings would actually accrue to Medicare. Some of it would need to be used to help offset the rise in premiums and out-of-pocket costs incurred by beneficiaries. Medicare would also have to create new codes to compensate doctors directly at a fair and sustainable rate for the cost of infusing drugs in their offices. In conclusion, the drugs that are in late-stage development and have recently been launched are more promising than at any time in recent memory. Yet the model that has made life science successes possible is fragile. The decisions that we make about how we regulate these products and pay for their cost have direct effects on whether these endeavors get undertaken in the first place. Thank you. [The prepared statement of Dr. Scott Gottlieb appears in the Appendix on page 83.] The Chairman. Thank you very much, Dr. Gottlieb. We'll start now by asking everybody on the panel to respond to the question of where do we have the greatest opportunities, in your opinion, in Medicare to help lower the costs? We'll start with you, Dr. Rosenfeld. Dr. Rosenfeld. Well, I think in my testimony today I've outlined some important measures that Medicare can take. Medicare can address the 6 percent average sales price payment to physicians. It's really preposterous, if we think about it, that we should be paid a percentage of the cost of the drug. It develops a codependency between the clinician and the pharmaceutical industry. Moreover, we should look at this disproportionate share hospital discount and ask why that isn't passed through to Medicare. And we should look at these unusual decreases in reimbursement that are still in place that incentivize the use of Lucentis in hospital-based settings. Moreover, if drug companies offer rebates for increased use and the rate of increased use to physicians, it implies that physicians are not injecting the patients they should be and they have to be incentivized to do that. I doubt that's the case. Those rebates are really focusing on increased utilization by the physician, and if there is a rebate, it should be passed on to Medicare, and there should be a limit on how physicians purchase drugs with credit cards, and there should be an added transaction fee or that cost should be rebated directly to Medicare. The Chairman. Thank you so much. Dr. Adamis. Dr. Adamis. It's beyond my area of expertise to make recommendations how we could lower costs for Medicare, but whatever is chosen by the committee and by Congress, we should make sure that it preserves a physician's ability to choose which medication they feel is most appropriate for a patient. I think that's very important. And then the second piece of it, because this is my job, is to make sure that the incentives are still there to develop new therapies. We're working on drugs that have to be dosed just twice a year as opposed to injections every month, and we're working on drugs that work better than Lucentis, hopefully. I want to make sure those incentives stay in place so that we can consider those programs. The Chairman. Thank you. Dr. Tunis. Dr. Tunis. Yes, I think the several ideas offered in my testimony were some of the notions that I had in terms of what might, both in the short term and long term, lead to reductions in prices, and that included least costly alternative, giving the CMS, taking a more proactive role in promoting the kinds of studies like the CATT trial, and also looking at ways in which they could specifically incentivize high-value innovation. The only thing I would add is you heard numerous times from John Blum how constrained they are with their existing statutory authority to do anything around negotiating drug prices or responding to or setting drug prices in any way to reflect the clinical benefits of a drug. I suspect if John was sitting here in a few years, no longer working for the administration, he would have told you more explicitly what kind of authorities that they would like, but I imagine they would be things like least costly alternative authority and perhaps something like the ability to vary patient cost-sharing according to the value of a drug. So a drug that's highly cost effective would have a very low copay so that patients would be inclined to prefer that for economic reasons, and drugs that are extremely expensive and produce very small incremental benefits would have higher copays so that the patients would have to take on more of the incremental costs, and that way the patients and clinicians are still free to make choices. It's just not all of the financial responsibility for the difference falls on the taxpayer; some of it falls on the patients as well. Currently they have no ability to vary cost-sharing based on some judgment about the clinical effectiveness and costs of a drug. The Chairman. Thank you very much, Dr. Tunis. Ms. Swirsky. Ms. Swirsky. I just would kind of highlight some of the same things that Dr. Tunis said about least costly alternative policy as being a ripe avenue. I also would agree with earlier comments about changing incentives in the Medicare program so that physicians aren't incentivized to promote or prescribe a higher-cost drug. I'd also kind of reiterate or maybe go back to some of the examples we weren't able to use in my testimony because of time. But I think a lot of our examples of statins, proton pump inhibitors, which are basically heartburn medications which we can use very inexpensive generics as opposed to the expensive version of Nexium and so forth, all of these things are used by seniors, many seniors on a daily basis and I think are all really ripe for policies that promote their use. The Chairman. Thank you, Ms. Swirsky. Dr. Gottlieb. Dr. Gottlieb. Thank you. I think the problems with Medicare are long-term problems, and they need long-term solutions with respect to changes in the structure of how Medicare pays for services. I think a lot of what we've done in recent years in terms of just across-the-board cuts or targeting individual products or freezing market basket rate increases doesn't tackle the long-term underlying problems in the Medicare program. In some cases, I think it makes true, fundamental reform more difficult. I think Medicare looking for ways to try to tie what it pays for and how it reimburses to notions of value and looking at outcomes are the kinds of payment reforms we need to pursue. I think most of the spending, if you look at it, and most of the waste is probably on the services side and not on the technology side. I think it becomes much more, much easier to target the technologies and the introduction of technologies because you typically have one product and one sponsor, as opposed to trying to tackle reimbursement that affects hundreds, if not thousands of providers across the country. So that becomes politically much more difficult, even though that I think is what we need to ultimately address. On the drug side, ultimately I think we need to concede the Part D plan is working. The competitive structures in Part D are bringing down the rate of inflation on small molecule spending and driving higher generic drug utilization. If we accept that, then most of the growth, if there is growth, is on the Part B side, and Mr. Blum testified that most of that is confined to just a handful of drugs. And quite frankly, those are oncology products. I think as a political matter it's going to be hard to really address some of the utilization in oncology. I think it will be hard to tackle that. If I put forward one competitive market-based reform that I think could work to try to drive some higher-value utilization of drugs, it would be moving B to D. It would address the injectable drugs, but this would be a very hard reform, frankly, to implement. The Chairman. Dr. Rosenfeld, as you know now in his prepared testimony, Dr. Adamis made reference to a study funded by his company, Genentech, which shows safety concerns for Avastin. I think you're in some disagreement with that, but do you want to talk a little bit about that? Dr. Rosenfeld. At our annual research meeting, which is called ARVO, held in Ft. Lauderdale at the end of April, beginning of May, Dr. Gower presented data which had been much publicized before the presentation which has not been submitted for publication as far as I know, and it certainly isn't peer reviewed yet as far as I know, that there was increased risk of hemorrhagic stroke with Avastin. When I attended that presentation, that's not what I heard. What I heard, and it's a common problem with Medicare databases--and I want to thank Dr. Ross Brechner from Medicare because he's taught me a lot about looking at Medicare databases and all the confounding variables that one needs to be concerned with, because the Medicare databases show you what doctors claim happened to their patient, but you know nothing about the patient. So what Dr. Gower presented was that the overall stroke rate in the United States for Medicare beneficiaries was 0.4 percent. The stroke rate among patients getting Avastin was 0.4 percent, the same, but it was lower for the Lucentis patients, which was 0.26 percent, a difference of .15 percent. Now, for those of us working with the Medicare databases, and in particular knowing the distribution of how Avastin is used and how Lucentis is used, those patients with Medicare and full secondary insurance are more likely to get Lucentis than Avastin. If you don't have secondary insurance and you have to pay out of pocket, you get Avastin. These are less wealthy patients and generally less healthy patients. So looking at Dr. Gower's data, the Lucentis rate was lower than the average Medicare patient, while the Avastin rate was the same, suggesting either Lucentis protects against stroke, which seems unlikely, or it's a different population. And that, in fact, is what we're finding in our analysis of the Medicare database. There are so many confounding variables. You have to adjust particularly for wealth and concomitant diseases. Now, the other report that was talked about was a report out of Duke, and contrary to what we heard today--in fact, I brought the paper along. And when these confounding variables are addressed, the concluding paragraph is as follows: ``In conclusion, we found no evidence of increased risks of mortality, myocardial infarction, bleeding or stroke among Medicare beneficiaries who received intravitreous Lucentis or Avastin for wet AMD.'' So when authorities who deal with Medicare databases analyze the data, they understand that you have to do this analysis, this adjustment for confounding variables. It's an ongoing problem and something that we're acutely aware of in our ongoing analysis of the Medicare database. So to answer your question, I do not believe there's any data at this point in time to suggest an increased risk with Avastin, though it needs to be monitored and studied further. The Chairman. Dr. Adamis, your company has paid for a research study that purports to show safety concerns with the use of Avastin for macular degeneration. But the National Institutes of Health has provided the committee with a written statement that indicates they may not agree with these findings. Other experts consulted by the committee also believe that there are shortcomings in the methodology of the study that you all conducted. Is Genentech willing to address these criticisms? Dr. Adamis. Of course. These were Medicare claims database studies. The first was the one that was sponsored by us at Johns Hopkins. It was an unrestricted grant, which means that Dr. Gower had full control over the data and the conclusions that she made. We had that study done because, to date, prior to CATT, there was zero data on the safety of Avastin versus Lucentis in large populations. So if, for instance, the drug increases the risk of stroke by 1 percent, you can't learn that unless you study tens of thousands of patients. You don't have the power in the small number of patients studied in some other trials to detect that difference. And so the only way you can do that is with a Medicare claims database study. And Medicare claims database studies are not conclusive. I agree with that. However, it was the best way to look to see if there is a safety signal. What was surprising to us was, when Dr. Gower completed her analysis, she in fact found the same signal that was found in the Duke study, and that was an increased risk of both stroke and death. So when two studies that are very large--the Duke study looked at the 2006 patient Medicare claims database, and the Gower study looked at 2008 and 2009--show you the exact same signal, although not conclusive, you don't ignore it. And then it was surprising when the CATT data came out; and although CATT was a 1,200 patient trial, it wasn't powered to detect those 1 percent differences. Nonetheless it showed this 29 percent increased risk of serious side effects, with 80 percent of them landing the patient in the hospital. So now you have three large studies showing this, none of them definitive, but I don't think we can ignore them. The Chairman. Okay. All right, Dr. Tunis, many people believe that more needs to be done to give the government the tools to address rising drug costs. In your time at CMS as chief medical officer, Dr. Tunis, what did you find were the biggest policy barriers to lowering drug costs and preserving high quality? Dr. Tunis. Again, I think this comes back to the statutory formulas that determine what Medicare, what price Medicare has to pay for a new drug that are completely insensitive to how much incremental clinical benefit it provides. And one example that's fairly well known was the example of the drug Aranesp for anemia that was caused by cancer chemotherapy, which was a new version of a previous and very closely related to another drug called Procrit, which treated the same problem, anemia from cancer chemotherapy. Because of the pricing systems in place at the time, Procrit would have been a substantially cheaper approach and achieve the same clinical outcomes as patients treated with Aranesp. But because Medicare was forced by statutory formula to pay 95 percent of average wholesale price for Aranesp, the Medicare program would end up spending $150 to $200 million more per year with no additional clinical benefit, no better treatment of anemia than if the program used only Procrit. The agency, CMS, had no statutory authority to do anything about that, other than pay 95 percent of average wholesale price. What happened at the time was they used an authority in the outpatient payment system called the equitable adjustment authority to try to come up with a price for Aranesp that was what was appropriate based on getting the same clinical results. That was actually put in place. But then because of that approach and the Medicare Modernization Act, there was language put in that actually prohibited Medicare from ever doing that again. And so it seems to me that whether it's the least costly alternative or some other version of statutory flexibility to set prices of drugs in some way sensitive to how much additional benefit, if any, is provided, would be a very important way for Medicare to be able to spend less on drugs and not harm Medicare beneficiaries in any way at all. It wouldn't be rationing. It would just be paying the least that the program could pay for a given level of clinical benefit. The Chairman. All right. Before I turn it over to Senator Corker, Ms. Swirsky, Consumers Union recently advocated to instill a fiduciary responsibility on the pharmacy benefit managers, the PBMs. It would require them to work for employers and insurers rather than drug companies. So why did you take that position, and how important do you think it is? Ms. Swirsky. I'm not sure where that information came from. We have not done anything on PBM since I've been there. It may be that that was something done prior to my coming on board. I've been at the organization for about a year. But I will be happy to find out and to make that---- The Chairman. Are you familiar with the issue? Ms. Swirsky. A little bit, but I don't--we have not done anything on that recently. The Chairman. All right. Senator Corker. Senator Corker. Thank you, Mr. Chairman. It's interesting sitting up here and listening to testimony, and Dr. Rosenfeld and Dr. Adamis seem like very good folks who have a very strong disagreement, yet the testimony from both of you is very credible. The issue that Dr. Rosenfeld brought up regarding the rebates and the fact that physicians shouldn't be paid those rebates on some of the drugs he was mentioning that you make as a company, what is your response to that? Dr. Adamis. When I was practicing medicine, you would prescribe a medicine based on what you thought was best for your patient, and you never thought about what it meant for your practice or your hospital, and I think that's the way it should be done around the country. There are these rebates, and this can't be looked at in a vacuum because I have colleagues in South Carolina who don't prescribe Lucentis because there's a $140 tax on it when you use it, so it's a money loser every time you give it. So as I said at the outset, if we could set the system up so we're not incenting or disincenting people one way or the other, and that really you approach the issue with equipoise and a doctor can just be free to choose based on the evidence, the scientific evidence, I think that would be the best of all worlds. Senator Corker. And so this is really--what you're leading to is that this is something that the Federal Government has set up regarding the rebates, not something your specific company is doing relative to trying to drive this product. Dr. Adamis. No. I didn't mean to convey that. So there are rebates that the company provides, but they're---- Senator Corker. But let me just say, if it's not to--if physicians should make decisions based on what's good for their patient, and you say the physicians really don't make decisions based on their own economic benefit, then why do you guys do that? Dr. Adamis. So the rebates actually lower the cost of the drug to Medicare, because what happens is you're required to report that to Federal authorities, and that goes into a formula--and this is getting beyond my area of expertise--that calculates that average sales price. So the average sales price actually moves down, and the amount that Medicare reimburses moves down. So the rebates actually lead to a lower cost of the drug. Senator Corker. But this is not something that you're required to do; is that correct? By the Federal Government. Dr. Adamis. No, but it's something that is pretty routine in the industry. But we're not required to do it. Senator Corker. Wouldn't it also lower the price to Medicare if you just charged a lower price without the rebate to the physician? Dr. Adamis. Correct, it would. Senator Corker. I mean, again, you sounded pretty credible on the front end, but what you're telling me right now is not particularly credible. Dr. Adamis. In what sense, sir? Senator Corker. Well, if the purpose in doing this is to lower the cost of the drug to the end user or the end payer, and you could get there the same way by just charging 6 percent less or giving a rebate to the physician who, I guess, keeps that, it seems to me that you are, in fact, paying that rebate to drive physicians to use your drug. Dr. Adamis. I can't say that that is the purpose behind it. The way it's structured--and I'm getting out of my area of expertise because I don't set these programs up, and I don't work in the commercial area of the organization. But it's for high-volume users of the drug. They're the ones who are eligible for the rebate. Senator Corker. So they make even more money by prescribing your drug, and yet your testimony was that their compensation isn't what drives them to use your drug. Dr. Adamis. I think the rebate, in a vacuum, if you looked at it that way, could be viewed as an incentive. But as I said, there are some jurisdictions, South Carolina being one of them, where actually even with the rebate it's a money loser. So in a perfect world it would be great if docs had an opportunity to prescribe what they want without any incentives. Senator Corker. But in a perfect world, you could do that yourself, right? I mean, in the world we live in today, which is not perfect---- Dr. Adamis. I can't control, our company can't control South Carolina's taxes. Senator Corker. But let's say in Tennessee, where I live-- -- Dr. Adamis. I don't know, sir. Senator Corker. I mean, am I missing something here? Am I-- -- Dr. Adamis. I'm just getting into an area that is not my area of expertise. I'm the scientist in the company. I work in development, and I came primarily to discuss CATT and the differences between Lucentis and Avastin. Senator Corker. And I really didn't come to chase the rebate issue. I just heard you mention it. So am I missing something, Dr. Rosenfeld? Dr. Rosenfeld. Well, Dr. Adamis is correct. In South Carolina, it's a unique situation where there's a state tax on drug revenues, even Medicare Part B drug revenues. But in the rest of the country, the rebate is focused on high-volume users with the intent to increase their use even more. Senator Corker. So that a physician like you would prescribe that drug more than another drug because you'd make more money? Dr. Rosenfeld. Well, I'm not in the rebate program, but I know several large-volume practices that make a lucrative sum every month from the rebate program. Senator Corker. I wasn't really planning to chase that, but it was a comment made, and I appreciate the discussion. So, Mr. Gottlieb, on the idea of combining Parts B and D in Medicare and some of the difficulties you mentioned that might come with that, you threw it out there. It's a pretty big idea. What are some of the immediate issues you think that might be problematic with that type of a combination? Dr. Gottlieb. I think the discussion around rebates gets us some of both the attraction of doing it and the complexities of doing it. I mean, part of why the rebates exist in the market at all, or even the spread on ASP, is to help compensate physicians for the cost of delivering drugs. And I think the existence of these rebates in the market, it's hard to look at them in isolation around a particular product because the existence of rebates market-wide, and they exist marketwide, creates terrible distortions in the market. If you look at what's going on in the 340B program, which was mentioned here, that has resulted in terrible gaming where the 340B hospitals are buying up local oncology practices for the purposes of capturing the spread on the drugs that they're able to acquire at a lower price and then reselling them at a higher price. And so they're capturing that revenue. So you're seeing oncology practices consolidating around 340B hospitals, which is probably the last thing we want to see as a public health matter. So I think the existence of these things in the market across the board is creating bad distortions. In terms of just moving Part B into Part D, I think it would be enormously complex but doable, and we've talked about it in the past. I worked at Medicare and Medicaid in the 2004- 2005 timeframe, and it was something that was talked about, and talked about even in the context of MMA. Premiums would go up, out-of-pocket costs would go up for beneficiaries, so you'd have to offset that. You'd have to figure out a way to pay physicians directly for the true costs of the administration of the drugs. Somehow you'd have to, if you still do it under a buy and build model, where the physicians acquire the drug, somehow you'd have to offset the cost of that acquisition for the physician. There are probably financial arrangements that could do that, but you'd have to also pay for the infrastructure for the physician to be able to do that. Those are just some of the complexities that would ensue. You'd also have the reality that for certain products that are truly breakthrough products for which there is no competition, under the Part D scheme you'd probably potentially see prices go up. I don't think that's necessarily a bad thing because I think it would reflect the fact that they're able to take price increases because they represent true innovation in the marketplace. But in other cases where there might be oral drugs that compete with injectable drugs, you might see more utilization of the oral agents, which would invariably provide cost savings to Medicare because it would be cheaper to deliver. The last thing to keep in mind is that we're also entering an era right now where there's going to be multiple drugs on the market to attack a particular target. So if you have a target like VEGF or other kinds, CD20, CD30, there might be multiple agents that all attack the same target. You want the decision about using a particular agent to be driven by the clinical circumstances and what's best for the patient, not which scheme it's in. And right now you have examples where a decision might be driven by what scheme it's in, Part B versus Part D. Senator Corker. So those are a lot of complications. They seem like vague ones. As to the idea of combining B and D, it's a real idea, or is that just a throw-out idea? Dr. Gottlieb. I think it's a real idea, and it's an idea we've talked about in the past. The reason I caveat it with all the complications is---- Senator Corker. Sounds like one of these advertisements for drugs on television. Dr. Gottlieb. What concerns me is that once it gets into a political context, some of these things that need to be addressed might not be adequately addressed. So, for example, where is going to be the assurance that physicians are compensated for the cost of truly delivering the drugs in their office? We've seen under the physician payment scheme that physician costs have increased and payments have stayed stagnant, so their effective income has been eroded. So those are the kinds of things that worry me, that once this kind of idea gets in the political context, the things that will truly make it successful and competitive won't be adequately addressed. What's the assurance that a future Congress two years from now isn't going to want to impose price controls in the Part D scheme to address the previously Part B drugs? There is no assurance there. And so you would want to see those things addressed in the legislation. Senator Corker. Dr. Tunis, you mentioned--you may have adequately discussed the notion of prescribing drugs based on outcomes, or paying for them based on outcomes, and we hear that a lot. You know, there was a lot of debate about that during the discussions regarding health care reform, and those of us who do what we do up here never were able to grasp a real way of making that happen with other providers. I know that CMS is working towards that end now, but do you want to expand any more on that notion? It's hard for me as a layman to understand how you really make that happen, especially as it relates to prescribing drugs. Dr. Tunis. So there's complicated versions of it, I guess, but in some ways the simplest---- Senator Corker. And those probably won't work on us. Dr. Tunis. Right. I won't give you that one. But the simplest version again I think comes back to some notion of reference pricing, least costly alternative, or what we did back in Medicare with the anemia drugs, which was called functional equivalence at the time, which is--but I'll give the example of what led to the court case that took away Medicare's ability to use this least costly alternative approach. It was for two drugs to treat asthma in children and adults. But basically there was one drug that was a generic drug that was 10 cents to inhale it, and then there was another drug that was developed which was very closely chemically related that was $1.10, so 10 times the price. And when you actually looked at the clinical studies to see how much they opened up the lung airways, how much they freed up people's ability to breathe, it was close to identical. There was no clear information to suggest that there was a clinical reason for either a patient or a physician to want to use the more expensive one. And so under those circumstances, after very careful review, the Medicare contractors tried to apply the least costly alternative approach, and basically to pay essentially 10 cents and you pick your drug. We'll pay 10 cents whether you use the really expensive one or the cheap one based on the fact that there's no clinical difference, and that was taken to court. And the reason, as I understand it, that the court decided that Medicare could not do that was because the Medicare Modernization Act told Medicare you have to pay ASP plus 6 percent, and ASP plus 6 percent for the more expensive drug was 10 times the price. So, you know, that's why in my testimony it seems that at a minimum, in situations where there's a pretty good level of confidence that you get the same clinical benefits for 10 cents or for $1.10 per treatment, there's no reason that the Medicare program should pay $1.10. The only argument that I've ever heard about why they should is that that extra money can then be circulated back to support innovation, or it creates an incentive for pharmaceutical companies to invest in new treatments, and that's why I added the last part of my testimony, which was, well, that certainly does encourage innovation. If you spend more money for things, people are going to want to invest more money to create them. But if it's not creating any more value for the Medicare beneficiaries, that doesn't seem like the best way to incentivize innovation necessarily. I don't know if that cleared it up at all, but that's the-- -- Senator Corker. It seems like that a competitive market and keeping things competitive, much as has been alluded to in earlier testimony regarding Medicare Part D, would actually drive towards that end anyway, would it not? Dr. Tunis. I think because in Medicare Part D the prescription drug plans have a lot more freedom to use pricing tools to manage their benefits. That's exactly how they get the costs down. When you have drugs that are paid for under Part B and under the statutory constraints or lack of statutory flexibility is where you get these what seem like unjustifiable price differences, I don't think that would happen if those were products---- Senator Corker. In Medicare Part D. Dr. Tunis. Yes, exactly. Senator Corker. So we had another Senator talk about some of his concerns about IPAB and just decisions that can be made by groups of unelected folks, if you will. But using the same line of thinking, if you were a patient who needed chemotherapy of some type and, to use the same analogy, there was only a 20 percent chance that it was going to be effective for you but it was the only thing left, the only chance left, if you will, for some type of treatment that might work on that type of disease, how would you employ the kind of thing you're talking about? Dr. Tunis. What I'm talking about wouldn't really come into play there just because we're talking about two choices that are clearly equivalent. In the case where you're talking about something that's better, a drug that's better by some measure and lots more expensive, so it comes up questions about is it actually worth the money, for example, the recent Medicare decision to pay for Provenge to treat prostate cancer is a good example, where it's $90,000 or $100,000 for a treatment that maybe on average extends life for three to four months, and that's the kind of situation where really nobody wants to touch it. And the fact that the National Institute of Clinical Excellence in the U.K. might well decide that that's not a cost-effective use of collective resources doesn't seem to me like a place that you all want to venture into or I would really want to venture into. When you really look at it in terms of all of the downward pressure that there's going to be on finding some way to constrain spending in the Medicare program over the next 10 years, it's hard to believe we're going to be able to do all of that without getting into some sensitive areas of not being able to provide everything that doctors and patients might decide is what's in their best interests. But I'm not able to provide a lot of solutions today. On that kind of example, the one thing I will say is, to some degree, all of the different options that are out there for trying to constrain spending are just a matter of who you decide is going to take on their shoulders the weighing of costs against benefits. And when the government does it, it's government bureaucrats interfering with clinicians and patients. When you put financial incentives on doctors to be cost conscious, then essentially--there's no polite way of saying it--doctors don't want to ration care for their patients. And if you put more cost sharing on patients by higher deductible plans or adjusting benefit designs, you're just asking patients to ration their own care. So it's not a matter of whether or not you ration. It's just who you decide is going to be the rationer. Senator Corker. Mr. Chairman, I want to thank you for the hearing. It's amazing to me. I know that most of these witnesses were chosen by the majority, which is the way things work around here. But it's amazing to me that in every case, it seems like they believe that competitive market forces like we have in Medicare Part D are what drive choice and drive better decisions, and that rebates or things that are distortive like government getting involved in setting rebate levels and making choices really foul the process up tremendously. So I thank you for this very clear signal that everything we need to do, from these witnesses anyway, that everything we need to do needs to move us towards much, much greater competition and innovation, and I couldn't agree with that more, and I thank you for providing these outstanding witnesses. The Chairman. Well, I too think, Senator Corker, that we've had a great hearing and shed much light on the question of prescription drugs, their costs, and what we might do to alleviate those costs on behalf of consumers. I think that my conclusions might be somewhat different than Senator Corker's, but that's why we're here and that's why we debate and hopefully move the ball forward. But you've all done a great job of shedding light on the issue, and we thank you for coming. [Whereupon, at 4:14 p.m., the hearing was adjourned.] APPENDIX [GRAPHIC(S) NOT AVAIALBLE IN TIFF FORMAT]