[House Hearing, 108 Congress]
[From the U.S. Government Publishing Office]
MEDICAID PRESCRIPTION DRUG REIMBURSEMENT: WHY THE GOVERNMENT PAYS TOO
MUCH
=======================================================================
HEARING
before the
SUBCOMMITTEE ON
OVERSIGHT AND INVESTIGATIONS
of the
COMMITTEE ON ENERGY AND COMMERCE
HOUSE OF REPRESENTATIVES
ONE HUNDRED EIGHTH CONGRESS
SECOND SESSION
----------
DECEMBER 7, 2004
----------
Serial No. 108-126
----------
Printed for the use of the Committee on Energy and Commerce
Available via the World Wide Web: http://www.access.gpo.gov/congress/
house
MEDICAID PRESCRIPTION DRUG REIMBURSEMENT: WHY THE GOVERNMENT PAYS TOO
MUCH
MEDICAID PRESCRIPTION DRUG REIMBURSEMENT: WHY THE GOVERNMENT PAYS TOO
MUCH
=======================================================================
HEARING
before the
SUBCOMMITTEE ON
OVERSIGHT AND INVESTIGATIONS
of the
COMMITTEE ON ENERGY AND COMMERCE
HOUSE OF REPRESENTATIVES
ONE HUNDRED EIGHTH CONGRESS
SECOND SESSION
__________
DECEMBER 7, 2004
__________
Serial No. 108-126
__________
Printed for the use of the Committee on Energy and Commerce
Available via the World Wide Web: http://www.access.gpo.gov/congress/
house
__________
U.S. GOVERNMENT PRINTING OFFICE
97-275 WASHINGTON : 2005
_____________________________________________________________________________
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COMMITTEE ON ENERGY AND COMMERCE
JOE BARTON, Texas, Chairman
W.J. ``BILLY'' TAUZIN, Louisiana JOHN D. DINGELL, Michigan
RALPH M. HALL, Texas Ranking Member
MICHAEL BILIRAKIS, Florida HENRY A. WAXMAN, California
FRED UPTON, Michigan EDWARD J. MARKEY, Massachusetts
CLIFF STEARNS, Florida RICK BOUCHER, Virginia
PAUL E. GILLMOR, Ohio EDOLPHUS TOWNS, New York
JAMES C. GREENWOOD, Pennsylvania FRANK PALLONE, Jr., New Jersey
CHRISTOPHER COX, California SHERROD BROWN, Ohio
NATHAN DEAL, Georgia BART GORDON, Tennessee
RICHARD BURR, North Carolina PETER DEUTSCH, Florida
ED WHITFIELD, Kentucky BOBBY L. RUSH, Illinois
CHARLIE NORWOOD, Georgia ANNA G. ESHOO, California
BARBARA CUBIN, Wyoming BART STUPAK, Michigan
JOHN SHIMKUS, Illinois ELIOT L. ENGEL, New York
HEATHER WILSON, New Mexico ALBERT R. WYNN, Maryland
JOHN B. SHADEGG, Arizona GENE GREEN, Texas
CHARLES W. ``CHIP'' PICKERING, KAREN McCARTHY, Missouri
Mississippi, Vice Chairman TED STRICKLAND, Ohio
VITO FOSSELLA, New York DIANA DeGETTE, Colorado
STEVE BUYER, Indiana LOIS CAPPS, California
GEORGE RADANOVICH, California MICHAEL F. DOYLE, Pennsylvania
CHARLES F. BASS, New Hampshire CHRISTOPHER JOHN, Louisiana
JOSEPH R. PITTS, Pennsylvania TOM ALLEN, Maine
MARY BONO, California JIM DAVIS, Florida
GREG WALDEN, Oregon JANICE D. SCHAKOWSKY, Illinois
LEE TERRY, Nebraska HILDA L. SOLIS, California
MIKE FERGUSON, New Jersey CHARLES A. GONZALEZ, Texas
MIKE ROGERS, Michigan
DARRELL E. ISSA, California
C.L. ``BUTCH'' OTTER, Idaho
JOHN SULLIVAN, Oklahoma
Bud Albright, Staff Director
James D. Barnette, General Counsel
Reid P.F. Stuntz, Minority Staff Director and Chief Counsel
______
Subcommittee on Oversight and Investigations
JAMES C. GREENWOOD, Pennsylvania, Chairman
MICHAEL BILIRAKIS, Florida PETER DEUTSCH, Florida
CLIFF STEARNS, Florida Ranking Member
RICHARD BURR, North Carolina DIANA DeGETTE, Colorado
CHARLES F. BASS, New Hampshire TOM ALLEN, Maine
GREG WALDEN, Oregon JANICE D. SCHAKOWSKY, Illinois
Vice Chairman HENRY A. WAXMAN, California
MIKE FERGUSON, New Jersey EDWARD J. MARKEY, Massachusetts
MIKE ROGERS, Michigan JOHN D. DINGELL, Michigan,
JOE BARTON, Texas, (Ex Officio)
(Ex Officio)
(ii)
C O N T E N T S
__________
Page
Testimony of:
Balland, David J., Associate Commissioner for Medicaid and
CHIP, Texas Health and Human Services Commission........... 123
Catlett, Timothy P., Senior Vice President of Sales and
Marketing, Barr Laboratories, Incorporated................. 155
Jones, T. Mark, President, Ven-A-Care of the Florida Keys,
Inc.; and John Lockwood, Vice President, Ven-A-Care of the
Florida Keys, Inc.......................................... 75
Marrs, Pamela R., Senior Vice President and CFO, DEY, Inc.... 150
Marshall, David, Director of Category Management for
Generics, CVS Corporation.................................. 159
O'Connell, Patrick J., Texas Attorney General's Office....... 127
Paoletti, Lesli L., Roxane Laboratories, Inc................. 153
Reeb, George M., Assistant Inspector General, Centers for
Medicare and Medicaid Audits, accompanied by Robert Vito,
Regional Inspector General for Evaluation and Inspections,
Philadelphia............................................... 115
Reinhart, Paul, Michigan Medicaid Director................... 94
Seagrave, Frank, Vice President of Pharmacy, Wal-Mart Stores,
Incorporated............................................... 160
Smith, Dennis, Director, Center for Medicaid and State
Operations, Centers for Medicare and Medicaid Services..... 100
Stratemeier, Edward H., former Vice President and General
Counsel, Aventis Pharmaceuticals........................... 147
Ziebell, John, Category Manager for Pharmacy, Health &
Wellness, Walgreen Company................................. 160
Additional material submitted for the record:
Balland, David J., Associate Commissioner for Medicaid and
CHIP, Texas Health and Human Services Commission, letter
dated January 6, 2005, enclosing response for the record... 184
Michigan Department of Community Health, memorandum dated
January 3, 2005, enclosing response for the record......... 183
Paoletti, Lesli L., Roxane Laboratories, Inc., letter dated
January 18, 2005, enclosing response for the record........ 187
(iii)
MEDICAID PRESCRIPTION DRUG REIMBURSEMENT: WHY THE GOVERNMENT PAYS TOO
MUCH
----------
TUESDAY, DECEMBER 7, 2004
House of Representatives,
Committee on Energy and Commerce,
Subcommittee on Oversight and Investigations,
Washington, DC.
The subcommittee met, pursuant to notice, at 10:05 a.m., in
room 2322, Rayburn House Office Building, Hon. Joe Barton
(chairman) presiding.
Members present: Representatives Bilirakis, Walden,
Ferguson, Rogers, Barton (ex officio), Waxman, Markey, and
Dingell (ex officio).
Also present: Representative Stupak.
Staff present: Mark Paoletta, majority counsel; Andrew
Snowdon, majority counsel; Brad Conway, majority counsel; Mike
Abraham, legislative clerk; Edith Holleman, minority counsel;
and Turney Hall, minority clerk.
Chairman Barton. The subcommittee will come to order.
Today we are going to hold a hearing on Medicaid
Prescription Drug Reimbursement: Why the Government Pays Too
Much.
We have got a number of panels and a number of witnesses.
This is a very important hearing. Medicaid is a program for the
poorest and sickest people in our country. We in the Congress
have a responsibility to make sure that every possible dollar
available under the program goes to those who need it the most.
We also have an obligation to make sure that the American
taxpayer gets what he or she is paying for.
Unfortunately, the current system by which we reimburse
health care providers for prescription drugs under Medicaid
flies in the face of both of these principles. The system is
broken, and it needs to be fixed. The Government pays far too
much for many prescription drugs under Medicaid, primarily
because most States continue to use a system that is called
average wholesale price, or AWP, as the basis for their
reimbursement.
For example, during our investigation, the committee has
obtained documents showing that in the summer of 2002 one drug
manufacturer's direct sales price of 2,000 20 milligram
capsules of Fluoxetine, the generic version of the popular
antidepressant Prozac, was $82.62, while the average wholesale
price was more than $5,300. Let me repeat that. The generic
version, $82.62, but the average wholesale price was $5,300.
I would like to commend the former subcommittee chairman,
Mr. Jim Greenwood, and the current vice chairman, Mr. Greg
Walden, who is sitting to my right, for their work on this
issue over the last year. What they have done is very, very
important.
Chairman Greenwood, in particular, was tenacious in the
pursuit of average wholesale price reform, first in Medicare
where we did change the system, and now in Medicaid where, so
far, we have not. In fact, today's hearing is an outgrowth of
the committee's prior work on AWP drug-based drug reimbursement
under Medicare.
During a hearing back in September 2001, Chairman Greenwood
noted that the term AWP could just as easily be an acronym for
``ain't what is paid.'' sadly, this remains true today. As you
will hear shortly, the Federal Government and, ultimately, the
American taxpayer could save hundreds or millions or even
billions of dollars a year if States would bring drug
reimbursements more in line with what they actually cost the
pharmacy and other health care providers to purchase these
drugs.
Today's hearing, which is a culmination of an extensive
investigation by the subcommittee staff on a bipartisan basis,
will focus on systemic problems with the structure and
administration of prescription drug expenditures under
Medicaid, as well as abuses of the system.
The committee's prior AWP work ultimately led to important
changes in last year's landmark Medicare Modernization Act,
MMA, changes that will save the Medicare program $15 billion
over the next 10 years. It is my profound hope that this
hearing, by exposing some of those same problems and abuses,
will set the stage for similar Medicaid reform on a bipartisan
basis in the upcoming Congress.
Medicaid is supposed to reimburse pharmacists the estimated
acquisition cost of the drugs, plus a reasonable dispensing
fee. Over the years, AWP has emerged as a proxy for estimated
acquisition costs. Currently, all but eight States rely on AWP
as the basis of Medicaid reimbursement. Unfortunately, and all
too often, AWP bears little or no resemblance to what these
providers really pay, particularly in the generic marketplace
where multiple manufactures compete to sell identical drugs
that are, for all intents and purposes, a commodity.
During the course of this investigation the committee has
uncovered evidence that several manufacturers either inflate
their AWPs or actively market their products not based on the
lowest price but on the difference between the price and the
reimbursement amount, better known in the industry as the
spread.
Although the manufacturer's practice of marketing the
spread appears to have waned in recent years due in large part
to litigation and the heightened scrutiny generated by the work
of this committee and others, the existence of substantial
spreads remains a fixture of Medicaid prescription drug
reimbursement.
Let me say that again. The existence of substantial spreads
remains a fixture of Medicaid prescription drug reimbursement.
Generic manufacturers initially set the AWP of their
product at 89.9 percent of the brand name's AWP. In the words
of one manufacturer, we ``set it and forget it.'' Meanwhile,
fierce competition drives down the actual sales price of these
generics, therefore increasing the spread, often dramatically.
I want to be clear here that the price competition is a
good thing. Generic drugs have a critical role in play in
containing soaring drug costs. Concern, however, is that
because of AWP the Medicaid program all too often misses out on
these cost savings. Medicaid's use of AWP corrupts the market
and turns what would otherwise be a positive development,
namely price competition, into abuse that deprives Medicaid of
the benefits.
The primary beneficiaries of the current Medicaid
reimbursement structure are the retail pharmacies. Data
obtained by the committee from five of the largest retail
pharmacy chains reveals that during the period of July 1, 2002,
to June 30, 2003 the average acquisition cost for seven widely
prescribed generic drugs was 22 cents, while the average
Medicaid reimbursement just for those drugs alone was 56 cents,
more than double the cost; and you can see that on the chart
that is up on the overheads.
Indeed, evidence gathered by the committee suggests that
Medicaid reimbursement is more generous than that of most
private payors. The pharmacies do not generally deny that they
reap substantial margins on certain prescription drugs under
Medicaid. Their argument is that any overpayments for
prescription drugs are necessary to offset Medicaid dispensing
fees, which they assert do not cover the true cost of the
services that they provide to the Medicaid population.
This situation is analogous to physician-administered drugs
in Medicare. In the new Medicare law, we have attempted to make
significant changes to the way that physician-administered
drugs are reimbursed, scrapping AWP in favor of a new market-
based average sales price and increasing payments for physician
services.
A recent Government Accountability Office study released
just last week shows that, the appropriateness of the new
payments here as is in Medicare.
I believe that we should pay providers fairly for their
services. I have got absolutely no problem with increasing
dispensing fees, if that is what we need to do. But we should
pay them accurately so that we can achieve cost savings while
ensuring that Medicaid beneficiaries will continue to have
access to critically important drugs.
In this context, I am especially pleased to welcome David
Balland from the Texas Health and Human Services Commission and
Patrick O'Connell from the Texas Attorney General's Office.
Texas is one of the States on the forefront of Medicaid
reform; and the approach that the State of Texas Medicaid
program has taken to address these problems, an approach that
should serve as a model to other States, in my opinion, is one
of flexibility, transparency and fairness.
Texas has imposed an aggressive reimbursement formula and
requires manufacturers to provide transaction data as a means
of verifying acquisition costs, while at the same time having
one of the highest dispensing fees of any State. These reforms
have resulted in substantial cost savings for both the State
and to the Federal Government, yet not one pharmacy has left
the program as a result of underpayment.
This is work that was begun under then Attorney General
John Cornyn, who is now one of our Senators from Texas. I want
to commend him for his work in that area.
As the Texas Attorney General in 1999, Senator Cornyn
identified Medicaid fraud as a priority and created a special
section devoted entirely to this issue. Senator Cornyn was
invited to testify here today, but, due to a scheduling
conflict, he is not available.
I want to thank all of our witnesses at today's hearings. I
think that with the amount of money that we are spending on
prescription drugs under our Medicaid program it is very
important that we identify reforms to get the biggest bang for
the buck.
I want to think the committee staff on both sides of the
aisle for the strong work that they have done over the last
year and a half on this issue, and I look forward to this being
one of the landmark hearings of this subcommittee.
[The prepared statement of Hon. Joe Barton follows:]
Prepared Statement of Hon. Joe Barton, Chairman, Committee on Energy
and Commerce
Medicaid is a program for the poorest and sickest people in this
country, and we in Congress have a responsibility to make sure that
every possible dollar available under this program goes to those who
need it the most. We also have an obligation to make sure that the
American taxpayer gets what he or she pays for. Unfortunately, the
current system by which we reimburse health care providers for
prescription drugs under Medicaid flies in the face of both of these
principles. The system is broken, and it needs to be fixed.
The government pays far too much for many prescription drugs under
Medicaid, primarily because most states continue to use Average
Wholesale Price, or AWP, as the basis of reimbursement. For example,
during this investigation, the Committee obtained documents showing
that in the summer of 2002 one drug manufacturer's direct sales price
of 2000 20-milligram capsules of fluoxetine--the generic version of the
popular antidepressant Prozac--was $82.62, while the AWP was more than
$5,300.
I would like to commend former Subcommittee Chairman James
Greenwood and current Vice Chairman Greg Walden for the tremendous work
that they have done on this very important issue. Chairman Greenwood,
in particular, has been tenacious in the pursuit of AWP reform, first
in Medicare and now in Medicaid. In fact, today's hearing is largely an
outgrowth of the Committee's prior work on AWP-based drug reimbursement
under Medicare. During a hearing back in September 2001, Chairman
Greenwood noted that the term AWP could just as easily be an acronym
for ``ain't what's paid.'' Sadly, this remains true today. As you will
hear shortly, the federal government--and ultimately the American
taxpayer--could save hundreds of millions of dollars per year if states
would bring drug reimbursements more in line with what it actually
costs pharmacies and other health care providers to purchase these
drugs.
Today's hearing, which is the culmination of an extensive
investigation by Subcommittee staff, will focus on systemic problems
with the structure and administration of prescription drug expenditures
under Medicaid, as well as abuses of the system. This Committee's prior
AWP work ultimately led to important changes in last year's landmark
Medicare Modernization Act, changes that will save the Medicare program
approximately $15 billion over the next ten years. It is my profound
hope that this hearing, by exposing some of these problems and abuses,
will set the stage for similar Medicaid reforms in the 109th Congress.
Medicaid is supposed to reimburse pharmacists the estimated
acquisition cost of the drugs, plus a reasonable dispensing fee. Over
the years, AWP has emerged as a proxy for estimated acquisition cost:
currently, all but eight (8) states rely upon AWP as the basis of
Medicaid reimbursement. Unfortunately, all too often AWP bears little
or no resemblance to what these providers really pay, particularly in
the generic marketplace, where multiple manufacturers compete to sell
identical drugs that are, for all intents and purposes, a commodity.
During the course of its investigation, the Committee uncovered
evidence that several manufacturers either inflated their AWP's or
actively marketed their products not based on the lowest price, but on
the difference between the price and the reimbursement amount--better
known as the ``spread.''
Although the manufacturers' practice of marketing the spread
appears to have waned in recent years, due in large part to litigation
and the heightened scrutiny generated by the past work of this
Committee and others, the existence of substantial spreads remains a
fixture of Medicaid prescription drug reimbursement. Generic
manufacturers initially set the AWP of their products at 89.9% of the
brand-name drug's AWP, and, in the words of one manufacturer: ``We set
it and forget it.'' Meanwhile, fierce competition drives down the
actual sales prices of these generics, thereby increasing the spread,
often dramatically.
I want to be clear here that price competition is a good thing, and
generic drugs have a critical role to play in containing soaring drug
costs. My concern, however, is that because of AWP, the Medicaid
program all too often misses out on these cost savings. Medicaid's use
of AWP corrupts the market and turns what would otherwise be a positive
development--namely price competition--into an abuse that deprives
Medicaid of the benefits.
The primary beneficiaries of the current Medicaid reimbursement
structure are the retail pharmacies. Data obtained by the Committee
from five of the largest retail pharmacy chains reveals that during the
period July 1, 2002 to June 30, 2003, the average acquisition cost for
seven widely-prescribed generic drugs was $0.22, while the average
Medicaid reimbursement, just for the drugs alone, was $0.56--more than
double the cost. Indeed, evidence gathered by the Committee suggests
that Medicaid reimbursement is more generous than that of most private
payors.
The pharmacies do not generally deny that they reap substantial
margins on certain prescription drugs under Medicaid. Rather, they
argue that any overpayments for prescription drugs are necessary to
offset Medicaid dispensing fees, which they assert do not cover the
true cost of the services that they provide to the Medicaid population.
This situation is analogous to physician-administered drugs in
Medicare. In the new Medicare law, we made significant changes to the
way that physician-administered drugs were reimbursed, scrapping AWP in
favor of a new market-based Average Sales Price and increasing payments
for physician services. A recent Government Accountability Office study
released just last week by this Committee confirmed the appropriateness
of the new payments. Here, as in Medicare, I believe that we should pay
providers fairly, but accurately, so that we can achieve cost savings
while ensuring that Medicaid beneficiaries will continue to have access
to critically important drugs.
In this context, I am especially pleased to welcome David Balland,
from the Texas Health and Human Services Commission and Patrick
O'Connell, from the Texas Attorney General's Office. Texas is one of
the states on the forefront of Medicaid reform, and the approach that
the Texas Medicaid program has taken to address these problems--an
approach that should serve as a model to other states--is one of
flexibility, transparency, and fairness. Specifically, Texas has
imposed an aggressive reimbursement formula and requires manufacturers
to provide transaction data as a means of verifying acquisition costs,
while at the same time having one of the highest dispensing fees of any
state. These reforms have resulted in substantial cost savings for both
the state and the federal government, yet not one pharmacy has left the
program as a result of underpayment.
Much of the good work done by Texas Medicaid and the Attorney
General's Office is due, in no small part, to the foresight and
dedication of Senator John Cornyn, and I would like to pay Senator
Cornyn a special tribute here this morning. As the Texas Attorney
General in 1999, Senator Cornyn identified Medicaid fraud as a priority
and created a special section devoted entirely to this issue. I invited
Senator Cornyn to testify here today, but, due to a scheduling
conflict, he was unfortunately not available. Senator Cornyn did submit
a written statement for the record that I would like to attach to these
remarks.
I want to thank all of the witnesses at today's hearing for taking
the time to attend today's hearing. Given the tremendous amount of
money spent on prescription drugs under the Medicaid program, I think
that this is an issue worthy of the Committee's attention, and I hope
that this hearing will help to reform a system that is plainly in a
state of disrepair.
Chairman Barton. Senator Cornyn has submitted a written
statement for the record, and we will put that into the record.
[The prepared statement of Hon. John Cornyn follows:]
Prepared Statement of Hon. John Cornyn, a United States Senator from
the State of Texas
Thank you, Mr. Chairman, for inviting me to testify today before
the Subcommittee on Oversight and Investigations concerning government
payments for Medicaid prescription drug reimbursement. I was
disappointed my schedule did not permit me to appear in person, but I
am deeply appreciative of the opportunity to submit these written
remarks.
I would also like to thank Patrick O'Connell, Chief of the Civil
Medicaid Fraud Section of the Texas Attorney General's Office, for his
comments. I share Mr. O'Connell's pride that Texas was the first state
to move from AWP based reimbursement to wholesaler cost and that the
Texas Vendor Drug Program is one of the best Medicaid programs in the
country, if not the best. I especially applaud the dedication and
enthusiasm that the current Texas Attorney General Gregg Abbott and
Chief O'Connell have shown in continuing the work we initiated during
my tenure as Texas Attorney General combating Medicaid fraud and abuse.
As you are aware, suspicions of overpayments for prescription drugs
in Medicaid programs across the nation have been alleged since the
programs were first implemented. In 1977, the U.S. Congress enacted the
federal Medicare/Medicaid Anti-Fraud and Abuse Act, which provided
federal funding to states that established Medicaid fraud and abuse
control units. In 1997, Texas' ability to combat Medicaid fraud
improved when the Texas Legislature enacted Senate Bill 30, which
provided for implementing fraud detection technology, additional
monitoring of service providers along with administrative penalties,
civil remedies, and criminal sanctions for fraudulent and abusive
actions.
I was sworn in as Texas Attorney General in 1999 and became
increasingly concerned about overpayments for prescription drugs in the
Texas Medicaid Program and other specific instances of fraud and abuse.
In August of 1999, I created the Civil Medicaid Fraud Section within my
Elder Law Division. Prior to that time, few investigations, and no
lawsuits, regarding civil Medicaid fraud had been pursued. With the
creation of this special Section, we dedicated resources and efforts to
fighting fraud, waste, and abuse in the Medicaid system.
I was deeply troubled by some of our discoveries. While there are
several examples upon which I could draw, there is one that continues
to resonate. In September of 2000, we filed a landmark case against
three drug companies--DEY, Inc., Roxane Laboratories, Inc., and Warrick
Pharmaceuticals Corporation--for civil Medicaid fraud as part of a
complicated scheme to corner the market in respiratory disease
medications.
Typically, when a doctor prescribes medication for a Medicaid
patient, a pharmacy dispenses the medication and then bills Medicaid
for reimbursement. In order for the drug to be eligible for Medicaid
reimbursement, the drug manufacturer must certify the prices at which
it sells the drug in writing with the Texas Department of Health (TDH).
TDH uses that certification to calculate the amount of reimbursement
pharmacies will receive. Texas at the time was the only state that
required drug manufacturers to certify their prices in order to be
eligible for Medicaid reimbursement.
These drug companies falsely reported inflated prices for their
respiratory medications to TDH. Then, they turned around and sold these
drugs to pharmacies at drastically reduced prices while the pharmacies
were reimbursed at the inflated price. This scheme ensured that
pharmacies would dispense the defendants' drugs over other less
profitable medications. All of this was part of a strategy by the drug
companies to increase their market share and ``capture'' the market. To
be blunt, this was tantamount to stealing from taxpayers. Medicaid
funds should be spent only to provide necessary medical care and
prescription medications to those who need it. Instead, elaborate
schemes such as these steal scarce tax dollars to finance corporate
market strategies and to inflate illegally the bottom line. Plain and
simple: it is wrong
Two of the defendants ultimately settled for $45.5 million
collectively, and the third is set for trial. This lawsuit sent a clear
signal to participants in Medicaid programs across the country that
those who try to steal from the Medicaid program may be prosecuted with
a heavy price inflicted.
This is but one example. However, it effectively emphasizes the
importance of remaining vigilant in our efforts for those of us charged
with protecting the public trust. I commend you, Mr. Chairman, and the
members of this Subcommittee, for continuing to examine these important
issues. And, I appreciate the opportunity to share with you some of my
experiences.
Thank you.
Chairman Barton. Now I want to recognize my distinguished
friend from Massachusetts, one of the members who has been a
real watchdog on this subcommittee, Mr. Markey of
Massachusetts, for an opening statement.
Mr. Markey. Thank you, Mr. Chairman, very much and thank
you for having this very important hearing today.
We are going to hear from the Department of Health and
Human Services Inspector General, indicating that the Federal
Government is paying far too much for prescription drugs under
the Medicaid program.
This is not the first time that such concerns have been
raised. We have been getting reports of these overpayments
since the early 1990's. Yet the Centers for Medicare and
Medicaid Services have continually failed to address their
international mismanagement and the systematic problems that
enable drug companies and pharmacies to commit fraud and
inflate the prices of their drugs.
Prescription drugs are one of the fastest growing expenses
for Medicaid. Between 1992 and 2002, expenditures for
prescribed drugs increased by 19 percent per year, and by 2003
the Medicaid program spent over $31 billion on prescription
drugs alone. If we do not address the rising costs of
prescription drugs, it will drain the Medicaid program of the
funds needed to provide health care to our Nation's most
vulnerable populations.
There are three problems with the current system that I
hope to hear more about in today's hearing. The first is that
CMS has been slow to implement simple cost-saving measures
within the agency. The second problem is that the price the
States pay for prescription drugs has nothing to do with the
actual cost of the drug. The third problem is that the Federal
Government is not allowed to use its market power to negotiate
lower prices for consumers.
The Inspector General has identified several simple ways
that CMS could save money if they were more diligent in their
administration of the problem. Putting qualified drugs on the
Federal upper limits list as soon as they are approved, for
example, could save over $100 million.
Unfortunately, not all of Medicaid's problems can be solved
so easily. We also have to address the fact that the current
reimbursement system practically begs to be exploited.
The fact that numerous pharmacies and drug companies have
pled guilty to overcharging Medicaid, lying about their costs,
taking kickbacks and submitting false claims show the
vulnerability of the system. We currently have a system where
companies are asked to simply make up the price that the States
will pay for their drugs. This price, called the average
wholesale price, has no relationship to the actual cost of the
drug, and the companies that set that price do not have to
provide the States any information about the real costs of
manufacturing the drugs.
It is like being asked to pay $50 for a T-shirt without
having access to any information about what others have paid
for the same T-shirt. If the vendor tells you that it is a fair
price but doesn't have to give you any evidence that it is
reasonable, you have no choice but to trust that seller, that
that seller is being honest.
When it comes to spending taxpayer money, we cannot base
our decisions on trust. We need to base them on evidence. In
order to ensure that States are not overpaying for prescription
drugs, they should have access to pricing information and the
actual costs of the drugs.
We will hear today about the new program that has been
successful in actually reducing spending on prescription drugs.
In April, HHS allowed Michigan, Vermont, New Hampshire, Alaska
and Nevada to form a purchasing pool. By combining their
programs, they were able to increase their market power and to
negotiate better drug prices. At a time when drug prices were
rising at a rate of almost 20 percent per year, Michigan's drug
prices actually declined about 1 percent in the first year of
their pooling program. In response to their success,
Administrator Mark McClelland stated that pools are a proven
legal and safe way to lower drug costs.
However, if evidence suggests that pools work, and CMS
acknowledges that they are an effective way to lower costs,
then why is the Federal Government forbidden from creating one
large pool and using its market power to negotiate the best
price for Medicaid and Medicare beneficiaries with the drug
companies across our country?
Today, we are going to hear from Wal-Mart about how they
are reducing costs through the purchasing power of their Sam's
Clubs. But why can't we establish an Uncle Sam's Club that can
link up all of the States to pool their enormous purchasing
power of the Federal and State governments to further drive
down the costs of prescription drugs for every ordinary
American in our country? Why are they forbidden from pooling
their resources in order to help those most dependent upon
prescription drugs who are in fact being tipped upside down and
having money shaken out of their pockets to pay for
prescription drugs that every American knows is overpriced to
those vulnerable consumers of needed prescription drugs?
In order to preserve this critical health care program, we
need to find ways to curb the costs of prescription drugs.
Instead of wasting taxpayers' dollars on overinflated drug
prices, Medicaid funds could be spent on providing better
health care to our country's most vulnerable populations, the
children, the elderly, the poor and the disabled.
I look forward to hearing from the recommendations of the
IG, the States and other witnesses, and I am compliment you on
having this hearing, Mr. Chairman.
Chairman Barton. Thank you, Mr. Markey.
We now ask our distinguished vice-chairman of the
subcommittee, Mr. Walden, for an opening statement.
Mr. Walden. Thank you very much, Mr. Chairman.
Let me begin by saying that I, too, share the concerns that
the States and the Federal Government are paying too much for
drugs dispensed to our Nation's poorest individuals under the
Medicaid program. I look forward to learning more about what we
can do to remedy this situation.
In September 2001, as you have mentioned, this committee
held a hearing that addressed similar problems with the
prescription drug reimbursement under Medicare. The systemic
problems and abuses brought to light during that hearing helped
pave the way for significant reforms under the Medicare
Modernization Act, scrapping Medicare's reliance on the flawed
average whole price, or AWP.
And I note in your committee about Mr. Greenwood saying
``ain't what is paid.'' I think it is maybe always worst price,
at least when it comes to the Government.
We now turn our attention to Medicaid. Despite differences
between the two programs, there is one common denominator, and
that is AWP. We have allowed a system to develop where AWP, a
number not defined by statute or regulation, has become the
reimbursement standard for the vast majority of Medicaid
prescription drug programs.
Because AWP is not, in many cases, reflective of actual
market prices, it opens the door for the abuses that we will
hear about today. At the very least, it serves to deny the
taxpayer the full benefit of price competition in the generic
marketplace. Let me give you an example.
Ipratropium Bromide is a popular inhalation drug used to
treat patients with respiratory problems like bronchitis,
emphysema, and asthma. Data obtained by this committee during
this investigation reveals that between 1998 through 2003 the
AWP for most generic manufacturers in the marketplace for a
particular size and strength of the drug remained constant at
$44, while the sales price dropped from the mid teens to the
low single digits. In mid 2000, however, another competitor
entered the market with an AWP of $56 for that same drug; and
internal drug company documents show that the existing
manufacturers immediately began to lose business because
pharmacies could make more money off of the higher AWP.
Data obtained by the committee from five of the largest
retail pharmacy operations also show how the Medicaid program
failed to capture the cost savings. In fiscal year 2000, the
average cost to these pharmacies for a single unit of this
particular Ipratropium Bromide product was roughly 20 cents,
while their average Medicaid reimbursement was 41 cents for the
same product, not including any dispensing fees. And by 2002
the average cost had dropped to 13 cents, but average Medicaid
reimbursement remained at 41 cents.
We will hear today from the Department of Health and Human
Services Office of Inspector General about the substantial cost
savings, perhaps totaling hundreds of millions of dollars, that
could be achieved by eliminating AWP as a reimbursement
standard, as well as by placing drugs on the Federal upper
limit in a more timely fashion.
I am also pleased that Edward Stratemeier, former Vice
President of Legal, Government Relations and Public Policy at
Aventis Pharmaceuticals, a manufacturer of brand name drugs,
has agreed to appear before the committee to discuss problems
that he and his former employer had identified with the use of
AWP as a reimbursement standard and the need for AWP reform.
Medicaid prescription drug costs are enormous. We all know
that. And they continue to rise. In fiscal year 2002, total
Medicaid expenditures for prescription drugs exceeded $23
billion; and the Office of the Actuary at CMS projects that
Medicaid expenditures will increase at an average of 12.7
percent per year through 2011. A recent report from the
National Association of State Budget Officers predicts that in
2004 States will, for the first time, spend more on Medicaid
than any other program, including education.
In light of these soaring drug costs under Medicaid, it is
imperative that the Federal and State governments do everything
possible to ensure that drug reimbursement is adequate and fair
not only to the taxpayers but also to the pharmacies dispensing
the drugs. To date, the solution adopted by many State Medicaid
programs to the problem of bloated AWPs has been to modify
their reimbursement formulas with larger discounts off of AWP.
This is a band-aid, not a long-term solution.
A discount off of a bad number is still a bad number, and
at what point does it simply become nonsensical? AWP minus 15
percent? AWP minus 50 percent? AWP minus 80 percent? As in the
case of Medicare, I recognize that, as we consider how to
reform prescription drug reimbursement under Medicaid, we must
also consider the impact on the service providers.
So let me say up front that no one expects pharmacies, or
any other health care providers, for that matter, to serve the
Medicaid population at a loss. If the pharmacies are, in fact,
underpaid for their services, then let's examine that issue
more fully, analyze the relevant data and take steps to ensure
they are reimbursed fairly for their services and expenses.
The answer is not to proceed with the status quo, however,
making up shorts in one area through overpayments in another
and hoping at the end of the day everything comes out in the
wash.
I would point out, however, that, according to figures
obtained by the committee, Medicaid dispensing fees are far
more generous than the pharmacies receive from their largest
private payors.
I would also like to thank all of the witnesses for
appearing here today, and I hope this hearing will serve as a
springboard for meaningful Medicaid reform in the near future.
AWP is a convention that has long outlived its usefulness, and
it is time for us to adopt a reimbursement standard for
Medicaid that is more reflective of actual market cost.
AWP, we are told, has been described as the devil we know.
But I guess I would prefer not to dance with this devil at all.
Thank you, Mr. Chairman.
[The prepared statement of Hon. Greg Walden follows:]
Prepared Statement of Hon. Greg Walden, a Representative in Congress
from the State of Oregon
Let me begin by saying that I too share the concern that the States
and the federal government are paying too much for drugs dispensed to
our nation's poorest individuals under the Medicaid program. I look
forward to learning about what we can do to help remedy this situation
while still maintaining the quality of care that Medicaid beneficiaries
deserve.
In September 2001, this Committee held a hearing that addressed
similar problems with prescription drug reimbursement under Medicare.
The systemic problems and abuses brought to light during that hearing
helped pave the way for significant reforms under the Medicare
Modernization Act, scrapping Medicare's reliance on the flawed Average
Wholesale Price, or AWP.
We now turn our attention to Medicaid. Despite differences between
the two programs, there is one common denominator: AWP. We have allowed
a system to develop where AWP--a number not defined by statute or
regulation--has become the reimbursement standard for the vast majority
of Medicaid prescription drug programs. Because AWP is not, in many
cases, reflective of actual market prices, it opens the door for the
abuses that we will hear about today. At the very least, it serves to
deny the taxpayer the full benefit of price competition in the generic
marketplace.
Ipratroprium bromide--a popular inhalation drug used to treat
patients with respiratory problems (bronchitis, emphysema, and
asthma)--serves as an excellent example. Data obtained by the Committee
during this investigation reveals that from 1998 through 2003, the AWP
of most generic manufacturers in the marketplace for a particular size
and strength of the drug remained constant at $44, while the sales
price dropped from the mid-teens to low single digits. In mid-2000,
however, another competitor entered the market with an AWP of $56 for
the same drug, and internal drug company documents show that the
existing manufacturers immediately began to lose business because
pharmacies could make more money off of the higher AWP.
Data obtained by the Committee from five of the largest retail
pharmacy operations also shows how the Medicaid program failed to
capture these cost savings. In Fiscal Year 2000 (7/1/00-6/30/01), the
average cost to these pharmacies for a single unit of this particular
ipratroprium bromide product was roughly $0.20, while their average
Medicaid reimbursement was $0.41 for the same product, not including
any dispensing fees. By FY 2002, the average cost had dropped to $0.13,
but the average Medicaid reimbursement remained at $0.41.
We will hear today from the Department of Health and Human Services
Office of Inspector General about the substantial cost savings--perhaps
totaling hundreds of millions of dollars per year--that could be
achieved by eliminating AWP as a reimbursement standard, as well as by
placing drugs on the Federal Upper Limit in a more timely fashion. I am
also pleased that Edward Stratemeier, former Vice President of Legal,
Government Relations and Public Policy at Aventis Pharmaceuticals, a
manufacturer of brand-name drugs, has agreed to appear before the
Committee to discuss problems that he and his former employer had
identified with the use of AWP as a reimbursement standard and the need
for AWP reform.
Medicaid prescription drug costs are enormous, and they continue to
rise. In Fiscal Year 2002, total Medicaid expenditures for prescription
drugs exceeded $23 billion, and the Office of the Actuary at CMS
projects that Medicaid prescription drug expenditures will increase at
an average of 12.7% per year through 2011. A recent report from the
National Association of State Budget Officers predicts that in 2004,
states will, for the first time, spend more on Medicaid than any other
program, including education.
In light of these soaring drug costs under Medicaid, it is
imperative that the federal and state governments do everything
possible to ensure that drug reimbursement is adequate and fair, not
only to the taxpayers but to the pharmacies dispensing the drugs. To
date, the solution adopted by many state Medicaid programs to the
problem of bloated AWPs has simply been to modify their reimbursement
formulas with larger discounts off of AWP. This is a band-aid, not a
long-term solution. A discount off of a bad number is still a bad
number, and at what point does it simply become nonsensical: AWP minus
15 percent? 50 percent? 80 percent?
As in the case of Medicare, I recognize that as we consider how to
reform prescription drug reimbursement under Medicaid, we must also
consider the impact on the service providers. Let me say up front that
no one expects pharmacies, or any other health-care providers for that
matter, to serve the Medicaid population at a loss. If the pharmacies
are, in fact, underpaid for their services, then let's examine that
issue more fully, analyze the relevant data, and take steps to ensure
that they are reimbursed fairly for their services and expenses. The
answer is not to proceed with the status quo, making up for shortfalls
in one area through overpayments in another and hoping that, at the end
of the day, everything comes out in the wash. I would point out,
however, that according to figures obtained by the Committee, Medicaid
dispensing fees are far more generous than those that the pharmacies
receive from their largest private payors.
I too would like to thank all of the witnesses for appearing here
today, and I hope that this hearing will serve as a springboard for
meaningful Medicaid reform in the near future. AWP is a convention that
has long outlived its usefulness, and it is time for us to adopt a
reimbursement standard for Medicaid that is more reflective of actual
market cost. AWP has been described by some as ``the devil we know,''
but I guess I would prefer not to dance with the devil at all.
Chairman Barton. Thank you, Mr. Walden.
The Chair would note that we have, in order of appearances,
the distinguished Member from California, Mr. Waxman, and the
equally----
Mr. Waxman. The more distinguished gentleman.
Chairman Barton. They are both equally distinguished. One
is the ranking member of the full committee, however. We will
recognize Mr. Dingell for an opening statement.
Mr. Dingell. Thank you, Mr. Chairman; and I thank my
colleague. I think he is overly kind to me. And I want to
express my respect and appreciation to him and also to you, Mr.
Chairman.
This morning, we are having a very interesting hearing in
which we are trying now to figure out what is going to happen
in the future with regard to drug prices under the legislation
enacted during the past Congress with regard to Medicare and
Medicaid and prescription pharmaceuticals. The situation is not
one in which we can look forward with any particular comfort.
This committee has been addressing the use of AWP, or the
average wholesale price, as the basis of reimbursement for
Federal and State prescription drug programs for several years.
As we will learn today, the drug reimbursement system for
Medicaid is built on layers of artificial price structures,
most of which in no way reflect actual costs.
It has also created an environment that puts providers in
situations where they can charge higher drug prices to Federal
and State governments and also to private insurers. There have
been piecemeal efforts to address this flawed system and to
reduce prices. There is a rebate program which covers $7
billion a year of the $30 billion spent for Medicaid
prescriptions.
Since 2001, aggressive U.S. Attorneys and State Attorneys
General, with the assistance of whistle-blowers such as the
ones we will hear from today, have uncovered efforts to game
the system and have recovered over $1 billion in Medicare and
Medicaid overcharges and fines. These lawsuits will continue,
with New York City and the State of Pennsylvania filing the
most recent ones.
The States are taking their own steps to reduce drug
prices. My own State of Michigan has been a leader in pooling
its bargaining power with other States to get lower prices. I
welcome Paul Rinehart, head of Michigan's Medicaid program, to
this hearing; and I look forward to his testimony.
The Texas Vendor Drug program, which obtains actual drug
acquisition prices from vendors, was recently recommended by an
expert panel as one that the Centers for Medicare and Medicaid
Services should consider implementing nationwide. I would ask,
Mr. Chairman, at this time that the report be placed in the
record.
Chairman Barton. Without objection, so ordered.
Mr. Dingell. Thank you, Mr. Chairman.
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Mr. Dingell. We also look forward to learning more about
this program and hearing from our witnesses from Texas.
But these measures alone are not going to solve the health
care problems of our poorest citizens. Nor will taking away
health insurance from the poor to reduce the Medicaid rolls.
Medicaid is now an essential part of the Nation's health
care system. In 2003, there were 40.4 million persons covered
by Medicaid for their health needs, or 13.6 percent of our
population. If this program did not exist, almost one-third of
this Nation's total population would be totally uninsured. We
need to be stepping up our assistance, and billions of dollars
in tax cuts should not come at the expense of the health of our
most vulnerable citizens.
We also need to look at what the Medicare Modernization Act
will do to the States and the elderly poor. Mr. Rinehart will
tell us that Michigan may pay more under MMA for drugs than it
ever did before.
On Sunday, the New York Times ran a disturbing article
about the unworkability of the new Medicare drug plan for the
1.5 million Americans who live in nursing homes, many of them
in different stages of dementia are receiving drugs through
feeding tubes, people obviously unable to come to a judgment
about what plan it is that will serve their interests best.
These people are not on the Internet studying the various
drug cards, nor are they able to. It appears that CMS has no
strategy for serving these people, and I look forward to
inquiring of CMS about these matters at a suitable time. We
must address this critical issue then in the next Congress at
the earliest time.
Mr. Chairman, I commend you and I thank you for continuing
to focus on the Medicaid drug pricing issues; and I look
forward to the testimony from all of our witnesses.
Chairman Barton. We thank the distinguished gentleman from
Michigan.
We would ask our distinguished subcommittee chairman of the
Health Subcommittee, Mr. Bilirakis of Florida, for an opening
statement.
Mr. Bilirakis. Thank you, Mr. Chairman. Good morning to
all.
Today's hearing, obviously by now, focuses on an issue of
great importance, Medicaid prescription drug reimbursement.
Prescription drug payments are one of the fastest growing
health care costs. In 2001 alone, Medicaid spent approximately
$20 billion on drugs; and from 1997 through 2001, Federal
Government Medicaid expenditures, Federal Medicaid
expenditures, I emphasize, grew at more than twice the rate of
total Medicaid spending.
The Medicaid program is the largest payor for prescription
drugs nationally, representing about 14 percent of the market.
The Federal Government contribution ranges from, as we know,
from 50 to 83 percent in matching payments, depending on the
State's per capita income.
Examining the amount of money the Federal Government pays
for drugs is not an issue--is not a new issue for the Energy
and Commerce Committee. In both the Medicare and Medicaid
programs there have been concerns that the Federal Government
is paying too much for drugs. Congress addressed some of those
concerns, hopefully, in the Medicare Modernization Act that was
signed into law last year. But there is still more work to be
done to ensure that prescription drugs are reimbursed at an
accurate rate.
Medicaid reimbursement for prescription drugs is
complicated, as is already obvious to all of us, and as we will
see here today varies greatly from State to State. The Federal
Government sets the maximum drug reimbursement limit.
But within those Federal parameters each State establishes
its own estimated acquisition cost formula. This calculation is
based on data from published drug prices, average wholesale
price info, and wholesale prices. However, States do not
necessary have access to the actual price paid for drugs, as
has already been stated.
According to a recent Department of HHS Inspector General
report, the difference between the highest and lowest State
Medicaid drug payments ranged between 12 to 4,073 percent. At a
glance, this definitely seems odd, doesn't it? However, there
are many complicated factors as to why State reimbursement
policies vary, the most visible being the acquisition price
formula, but there are other factors as well.
This subject is, as I think, again, obvious to all of us,
will be a top priority for this committee in the 109th
Congress. We all look forward to hearing what our witnesses
have to say. I believe and hope that the information they share
with us will help us move forward in the next Congress.
Thank you, Mr. Chairman. I yield back.
Chairman Barton. Mr. Waxman,the distinguished gentleman
from California is recognized for an opening statement.
Mr. Waxman. Thank you very much. I am pleased that the
subcommittee is holding this hearing today on issues involving
Medicaid prescription drug reimbursement.
Medicaid, as you know, is a critical program for over 52
million low-income families and children and aged, blind and
disabled people who rely on it for their health care services.
It is a program that is costly, and it is a program that
strains the budgets of the States who are struggling to meet
the needs of their citizens. It is a program that needs better
tools to control costs and spend dollars efficiently, and it is
a program that, frankly, needs increased fiscal support from
the Federal Government.
While members of this subcommittee might disagree on the
best ways to improve and strengthen Medicaid, what surely all
of us can agree on is that our scarce dollars be spent
effectively. We should not be wasting dollars by overpaying for
prescription drugs.
First, of course, in this program as in Medicare, we should
be taking all of the steps we can to lower the price for
prescription drugs. We should be using the bargaining power of
negotiation in order to get better prices. Medicare represents
millions of people, Medicaid represents millions of people, as
does private insurance. We ought to be using that collective
buying clout to get better prices for the prescription drugs in
both programs.
Interestingly enough, Medicaid in some ways has been a
leader in this effort. In fact, it was in 1990 when we
established that Medicaid would be given the more favorable of
the best price for brand name drugs or a minimum rebate of
dollars off the average manufacturer's price, or AMP.
Years before Medicare took similar action, we broke away
from the concept of accepting the average wholesale price, or
AWP, as the price the program should pay. It was an early
recognition that the AWP was an essentially bogus price that
bore little relationship to the actual acquisition police of
drugs.
Further, we attempted to ensure competition if there were
three or more generics on the market by limiting the price the
program would pay. But we made a critical mistake when these
policies were developed. Even then, the drug industry was
powerful, and they succeeded in securing a provision in the
basic legislation that kept the best price and the AMP
information a secret.
Can you imagine that? The Federal Government knew this
information, but we kept it a secret from the States. This has
proved to be a costly error. Without this crucial piece of
information, States who are, after all, responsible for
establishing the reimbursement rates for prescription drugs
could not set their reimbursement rates appropriately.
As a result, they continued to rely on the average
wholesale price minus some arbitrary amount simply because they
did not have the information they needed to set a more
appropriate reimbursement rate. Well, we at the Federal level
bear responsibility for this, but we can remedy it. We need to
make the information on the AMP and the best price available to
the States.
I would hope this administration would ask for the
authority to do this and that Members of the majority party
would support it, even though the pharmaceutical companies
might well oppose it. It might mean taking on these drug
companies who seem opposed to transparency, but it makes a lot
more sense to save money this way than to slash the Federal
commitment to the people who depend on Medicaid.
As we will learn today, some States have been very
aggressive in attempting to get this information and require
drug companies to provide it. Too often, they have found that
the Federal Government has undercut their ability to do this.
There is a further irony in the fact that the so-called
claw-back provision of the recently passed Medicare
prescription drug bill is designed so that the States that have
spent the last few years in aggressive efforts to control
increases in prescription drug expenditures will be
disadvantaged for their efforts. They will have their fiscal
obligation to the Federal Government grow at a higher rate than
would have been the case if their prescription drug price
control efforts had continued. This is also wrong, and we
should fix it.
I hope this hearing today will shed some light on these
issues and help show us a way to save money in Medicaid that
will, in the end, benefit not hurt the millions of Americans
this program is designed to serve.
Thank you, Mr. Chairman.
Chairman Barton. Thank you, Mr. Waxman.
Not seeing any other members who have not yet made a
statement, the Chair would ask unanimous consent that all
members of the subcommittee not present have the requisite
number of days to put their written statement in the record.
Hearing no objection, so ordered.
We now want to welcome our first panel. We have Mr. Mark
Jones, who is President of Ven-A-Care in Florida, and we have
Dr. John Lockwood, who is Vice President of that same company
also in Florida.
Gentlemen, we welcome you. Your statements are in the
record in their entirety. We will recognize you, Mr. Jones, and
then Dr. Lockwood for 7 minutes to elaborate on your statement.
Welcome to the subcommittee.
TESTIMONY OF T. MARK JONES, PRESIDENT, VEN-A-CARE OF THE
FLORIDA KEYS, INC.; AND JOHN LOCKWOOD, VICE PRESIDENT, VEN-A-
CARE OF THE FLORIDA KEYS, INC.
Mr. Jones. Mr. Chairman, members of the committee, good
morning. My name is Mark Jones. I am President----
Chairman Barton. Excuse me. This is an oversight hearing. I
am not used to doing hearings where I have to swear people in.
It is the tradition of this subcommittee, since it is an
oversight and investigation subcommittee, to take all testimony
under oath. Do either of you gentlemen oppose testifying under
oath?
Mr. Jones. No.
Chairman Barton. You also have the right, under the
Constitution, to be represented by counsel during your
testimony. Do either of you have counsel here that you wish to
advise you during your testimony?
Mr. Jones. No.
Chairman Barton. Would you then each of you stand and raise
your right hand.
[Witnesses sworn.]
Chairman Barton. Now we can start with you, Mr. Jones, for
7 minutes.
Mr. Jones. My name is Mark Jones. I am the President of
Ven-A-Care of the Florida Keys. I wish to thank you for the
opportunity to appear before you today to discuss a matter of
vital importance to the government health care benefit programs
such as Medicaid.
Before I go on, this is Dr. John Lockwood, he is the Vice
President of Ven-A-Care as well.
Today's hearing focuses on excessive reimbursement for
pharmaceutical products by the States' Medicaid programs.
Deceptive price reports by some drug manufacturers are causing
hundreds of millions in damages to our country's joint State
and Federal health care programs for the poor. The inflated
reimbursements resulting from deceptive reports of prices have
a corruptive effect on our health care system.
Ven-a-Care has learned this firsthand when it suffered
economic retaliation for its refusal to enter into a business
arrangement where inflated reimbursements were used to enrich
the physicians in order to induce them to increase orders of
expensive drugs.
Many Federal and State health care programs establish or
ultimately determine reimbursement rates for pharmaceuticals,
either prospectively or retrospectively, using price and sales
data directly or indirectly furnished by pharmaceutical
manufacturers.
The government sets reimbursement with the expectation that
the data provided are complete and accurate. The knowing
submission of false, fraudulent or misleading information is
actionable.
The difference between the amount a provider is reimbursed
for a drug and the provider's cost is known as the spread. In
the context that we are addressing today, it means the
difference between the cost of the drug to the pharmacy or
other provider and the amount Medicaid reimburses for the cost
of the drug. The greater the spread the greater the profit.
When a manufacturer reports a price that exceeds the price
at which its drug is selling for in the marketplace, the
States' Medicaid programs determine a reimbursement amount that
are higher than the government intends. The participating
manufactures then engage in conduct known as marketing the
spread, by means such as the following:
Some manufacturers take action to increase reimbursement by
further inflating their reported prices in order to persuade
customers to buy their drugs. Some manufacturers train their
sales personnel to pitch the higher reimbursement spreads on
their drugs as compared to their competitors' drugs.
Reimbursement spreads on manufacturers' drugs are routinely
marketed through software programs and data provided by
wholesalers and group purchasing organizations that show the
pharmacy the comparative spreads on different manufacturers'
drugs so that pharmacy can choose the drug with the greatest
spread.
Notwithstanding the explicit warnings from the OIG, the
drug manufacturer executives who report inflated drug prices
and direct their subordinates to market the spread often
contend that their deceptive conduct should be blamed on the
government reimbursement programs themselves. They argue that
their reported prices are no more than list prices and need not
be good faith representation of what their drugs actually sell
for in the marketplace. Executives and other representatives
from these companies have actually contended that it is the
industry standard for them to make up any price they choose and
report it for use by government reimbursement programs, even if
the reported prices are more than 10 time the true prices they
know are generally and currently available in the marketplace.
Such assertions have been rejected by the courts. For
example, in a recent case involving the drug Lupron, United
States District Court Judge Stearns spoke directly to such
preposterous assertions by the drug company defendants.
Judge Stearns wrote, ``Defendants repeatedly assert that
they had no duty to disclose what was publicly known to
everyone, that is, that the Lupron AWP was a sticker price and
never intended to reflect the drug's true average wholesale
price. In support of this argument, defendants cite a number of
government reports acknowledging that published AWPs for
prescription drugs often exceed their acquisition cost. The
argument is ultimately unpersuasive. There is a difference
between a sticker price and a sucker price.''
Judge Stearns then addressed an argument often made by drug
manufacturers who are caught reporting inflated prices. They
argue that the U.S. Congress actually condones and even
encourages such deception. Judge Stearns wrote again, ``The
suggestion that Congress would deliberately condone a bribery
scheme using public funds to enrich drug manufacturers and
physicians is, to say the least, unusual.''
It is my hope that my testimony as well as the information
gathered through this committee's investigation will eliminate
certain factors and concerns which I believe are critical to
understanding the Medicaid reimbursement problem. They are:
Drug manufacturers choose to have their drugs covered by
Medicaid; they are not required to do so.
Drug manufacturers know that State Medicaid programs rely
on the prices that the manufacturer reports directly or through
their price reporting compendia. As with any system of
government reimbursement, pharmaceutical reimbursement is based
upon trust, in this case trust that the drug companies will
report their prices in good faith.
The root of the problem of excessive Medicaid reimbursement
for pharmaceuticals lies with those drug manufacturers who
choose to deceive rather than tell the truth about their
prices.
The excuse that a company will lose market share if it
reports prices truthfully should not be accepted from
pharmaceutical manufacturers. Other industries such as banking,
communications, electrical power and defense manufacturers have
been faced with similar integrity issues.
Any legislation directed at improving the Medicaid
reimbursement system should not inadvertently create a
potential defense through which manufactures may argue that
Congress has somehow absolved them from their past
defalcations.
Judge Stearns' decision quoted above illustrates that the
manufacturers who have participated in this scheme seek to
misconstrue the intent of Congress as somehow approving their
deceptive conduct.
In closing, I would ask that this committee consider the
insidious damage which such deceptive practices have on our
free market system. The contention by drug manufacturers that
deception is somehow justified when it becomes widespread in
their industry reveals a serious and fundamental integrity flaw
that, if left unaddressed, threatens the taxpayer, the patient
and the industry itself.
Mr. Chairman and members, thank you for the chance to
appear before your committee. Dr. Lockwood and I are happy to
answer questions.
[The prepared statement of T. Mark Jones follows:]
Prepared Statement of T. Mark Jones, President, Ven-A-Care of the
Florida Keys
Mr. Chairman and Members of the Committee, good morning. I am T.
Mark Jones, President of Ven-A-Care of the Florida Keys. I wish to
thank you for the opportunity to appear before you today to discuss a
matter of vital importance to government health care benefit programs
such as Medicaid: The diversion of hundreds of millions of taxpayer
dollars because some pharmaceutical manufacturers report falsely
inflated prices, knowing that government programs use those reports in
setting reimbursement amounts. Ven-A-Care's past president, Zachary
Bentley, appeared before this Committee on September 21, 2001 and
testified about the impact of the same deceptive practices on the
Medicare Program. Due in large part to the hard work of this Committee,
protections against such drug manufacturer misconduct were included in
the Medicare Modernization Act. I would draw the Committee's attention
to the extensive evidence presented during the September 2001 hearing
that exposes how drug manufacturers' deceptive reports of prices has
damaged the Medicare Program and its elderly and disabled
beneficiaries. Today's hearing focuses on excessive reimbursement for
pharmaceutical products by the States' Medicaid Programs, where the
same kinds of deceptive price reports, by some drug manufacturers, are
causing wide scale financial harm to our country's joint state and
federal healthcare program for our poor.
As the information from this Committee's prior investigations
revealed, Medicare reimburses pharmacies directly for a limited number
of drugs, such as the inhalant drug Ipratopium Bromide when
administered with a nebulizer. However, a very large portion of
Medicare Part B drug expenditures directly reimburse physicians who
administer the drug and may receive a direct financial benefit from
their decision to use a particular drug. State Medicaid Programs, on
the other hand, reimburse all providers for a much larger number of
drugs than does Medicare Part B, and the vast majority of Medicaid drug
expenditures are paid to pharmacies that dispense the drug to the
Medicaid beneficiary. Accordingly, the manufacturers' marketing of the
financial inducements, made possible by their false price reports, is
usually directed at pharmacies when Medicaid reimbursement is at issue.
As the cost of the War On Terror climbs and our national deficit grows,
Congress faces increasing pressure to reduce federal contributions to
State Medicaid Programs. Congressional and Executive Branch scrutiny of
deceptive price reporting practices by drug manufacturers will do much
to insure that the scarce dollars remaining are no longer diverted from
their intended purpose of caring for our poor. Federal and State
Medicaid funds must not be used as financial incentives that support
individual drug companies' marketing efforts.
A brief discussion of Ven-A-Care's history will help put my remarks
in the proper context. Ven-A-Care is a very small specialty pharmacy
that was created in the late 1980s to provide infusion, inhalation and
injectible pharmaceuticals to seriously ill patients, outside of the
hospital setting, in the Florida Keys. We immediately experienced a
high demand for our services due to the large numbers of patients
suffering from HIV related illnesses in Key West. Our early success
attracted the attention of National Medical Care, then the health care
subsidiary of WR Grace Corporation, that organized the referring
physicians in the community into a single venture and attempted to
recruit Ven-A-Care's principals with promises of making us multi-
millionaires within a few short years. Our examination of the NMC
business plan revealed what appeared to be an unlawful arrangement
where excessive reimbursement for pharmaceuticals would be used to
generate exorbitant profits. Our concerns about the propriety of the
venture were elevated by then recent experiences. In one instance, we
received from Medicare a payment for a cancer therapy in an amount many
times our cost as a very small pharmacy. Assuming that a mistake had
been made, we voluntarily returned the money to Medicare. In another
instance, we became concerned that the Florida Medicaid Program was
paying excessive amounts for certain infusion therapies and we informed
the program supervisors. The organizers of the NMC venture made it very
clear to us that ``success'' would result from using funds generated by
inflated pharmaceutical reimbursements to financially induce the
participating physicians to increase their prescriptions, of expensive
pharmaceutical therapies, many fold beyond that which had previously
resulted from their best medical judgment. We did not believe that we
could properly participate and we declined. As a result, the
participating physicians re-directed their referrals to the new venture
in which they had an economic interest and Ven-A-Care soon lost
virtually its entire market. After reporting our concerns to the
appropriate federal authorities and assisting them in their
investigations of NMC's business practices, Ven-A-Care brought its
first action under the Federal False Claims Act which ultimately led to
the United States recovering nearly $500,000,000 and WR Grace divesting
itself of its healthcare businesses.
Our experience with the NMC venture was soon followed by other
opportunities to share in other business arrangements where excessive
government reimbursement for pharmaceuticals was used to fund kick-back
arrangements and increase utilization of expensive drug therapies.
Again we reported these situations to the government, gathered evidence
through our own investigations and took other actions to assist the
United States Department of Justice, the HHS OIG and later the States'
Attorneys General in their efforts to identify and address the causes
of the inflated reimbursement that was fueling the kinds of kick-back
arrangements to which Ven-A-Care had been exposed.
As an industry insider, Ven-A-Care has had access to information
that the federal and state governments needed to understand the root
cause of the inflated Medicaid drug reimbursements. The following
summarizes what we discovered:
a.) The United States government's policy has been that Medicaid
reimbursement for drugs should be based upon the cost of the
drug to the pharmacy, or other health care provider, who
purchases the drug in the free marketplace and must not be
based upon government price controls or government negotiating
power. This is significantly different from the situation where
the government agency buys the drug directly, such as for the
public health service, and gets the benefit of the much lower
Federal Supply Schedule Prices.
b.) Medicaid programs pay pharmacies a dispensing fee over and above
the amount reimbursed for the cost of the drug itself. The drug
manufacturers' deceptive price reports cause the Medicaid
Programs to pay excessive reimbursement for the drugs' cost to
the pharmacy or other provider. All state Medicaid Programs as
required to limit their reimbursement for the cost of the drug
itself to an amount no greater then that based upon the
program's estimate of the acquisition cost (EAC) which in turn
is to be based upon prices ``generally and currently
available'' in the marketplace.
c.) Therefore, ``reimbursement'' in the context of the Medicaid
pharmacy benefit, is the amount that a state Medicaid Program
pays the pharmacy, or other provider, for the cost of the drug
that it dispenses or otherwise provides to a Medicaid
beneficiary.
d.) State Medicaid programs look to prices reported directly to them by
the manufacturer, as in the case of the Texas Program, or
indirectly through prices the manufacturer causes to be
reported by the three recognized drug price compendia; Red
Book, First Data Bank and Medi-Span.
e.) The manufacturers report prices, and cause prices to be reported by
the compendia, in three basic formats: Average Wholesale Price
(AWP)--a representation of the price of the drug from the
wholesaler to the pharmacy or other provider. Wholesaler
Acquisition Cost (Cost)--a representation of the cost of the
drug to the wholesaler from the manufacturer. Direct Price
(DP)--a representation of the price the manufacturer charges
the pharmacy when it buys the drug directly from the
manufacturer.
f.) The term ``spread'' denotes the difference between one price or
cost and another. In the context that we are addressing today,
it means the difference between the cost of the drug to the
pharmacy or other provider and the amount Medicaid reimburses
for the cost of the drug. The greater the spread, the greater
the profit.
g.) When the manufacturer of a drug reports, or causes the reporting
of, an AWP, WAC or DP that is materially and deceptively
greater than the actual prices in the marketplace, it causes
the Medicaid Programs to calculate an estimated acquisition
cost that is higher than the cost at which the drug is
generally and currently available in the marketplace and thus
reimburse at an inflated amount that causes the spread on the
drug to be inflated.
h.) The manufacturers who have chosen to provide deceptive price
reports have actively, albeit surreptitiously, taken steps to
counteract government efforts to better estimate drug
acquisition costs of prudent purchasers in the marketplace.
--Medicaid reimbursement at a discount off of AWP (eg AWP-15%) is
counteracted by companies who report AWPs resulting in spreads of
hundreds and even thousands of a percent.
--Medicaid reimbursement based upon WAC plus a percent, such as
that paid by Florida and Massachusetts, is counteracted by companies
that report, or cause the reporting of, false inflated WACs.
--Medicaid reimbursement based upon DP, such as that paid for some
drugs by California, is counteracted by companies that report, or cause
the reporting of, false inflated DPs.
--Efforts by states that require direct reporting of prices, such
as Texas are counteracted by companies that report false prices
directly to the state program.
--Efforts by CMS to set caps based on the Federal Upper Limit
(FUL), are similarly counteracted because FULs are based upon 150% of
the lowest publicly available price for a generic and FULs are inflated
when the underlying reported prices are false.
i.) The participating manufacturers then engage in conduct known as
``marketing the spread'' by means such as the following.
--Some manufacturers will have direct discussions with large
customers after which they will take action to increase reimbursement
by further inflating their reported prices in order to persuade the
large customers to buy their drugs.
--Some manufacturers will train their sales personnel to pitch the
higher reimbursement spreads on their drugs, as compared to their
competitors', directly to the pharmacies.
--The reimbursement spread on manufacturers' drugs is routinely
marketed through software programs and data provided by wholesalers and
group purchasing organizations that show the pharmacy the comparative
spreads on different manufacturers' drugs so that the pharmacy can
choose the drug with the greatest spread.
Over the last several years, Ven-A-Care has been vigilant in
reporting industry insider information to the United States Department
of Justice, the HHS OIG and the States' Attorneys General that has
enabled them to identify and begin to address pharmaceutical pricing
fraud by drug manufacturers. I am only at liberty to discuss a small
portion of those efforts in this open proceeding; however, they are
instructive:
1.) The United States ex rel. Ven-A-Care v. Bayer: Settled in 2001, the
``Bayer 1'' case resulted in the recovery of $14,000,000 by the
Medicaid program and set the stage for similar actions
throughout the United States, as well as more focused
Congressional interest such as this Committee's September 21,
2001 hearing. The concept of reimbursement based upon Average
Selling Price (``ASP'') was included in the Bayer settlement
agreement and later incorporated into the Medicare
Modernization Act.
2.) Texas ex rel Ven-Care v. DEY Laboratories and Schering-Plough/
Warrick: Ven-A-Care brought the first case under the Texas
False Claims Act against drug manufacturers for reporting
falsely inflated pricing information in order to cause the
Texas Medicaid Program to pay inflated reimbursement which was
in turn used as a marketing tool to induce pharmacies and other
health care providers to select the manufacturers' drug over
their competitors. Then Texas Attorney General, now United
States Senator, John Cornyn, joined with Ven-A-Care and became
the first State Attorney General to pursue action against
pharmaceutical manufacturers for such deceptive price reports
that cause Medicaid to overpay for drugs. To date, DEY
Laboratories has paid $18,500,000 and Schering Plough has paid
$27,000,000 to compensate the Texas Medicaid Program.
3.) Texas ex rel. Ven-Care v. Roxane and Bohringer Ingelheim: In this
case the Texas Attorney General has joined with Ven-A-Care to
pursue recoveries of excessive Medicaid reimbursements
allegedly caused by deceptive pharmaceutical manufacturer price
reports. This case is currently in active litigation.
4.) Texas ex rel. Ven-Care v. Abbott Laboratories, Baxter, B. Braun
McGaw: In this case the Texas Attorney General has joined with
Ven-A-Care to pursue recoveries of excessive Medicaid
reimbursements allegedly caused by deceptive pharmaceutical
manufacturer price reports. This case is currently in active
litigation.
5.) California ex rel. Ven-A-Care v. Abbott Laboratories: In this case
the California Attorney General has joined with Ven-A-Care to
pursue recoveries of excessive Medicaid reimbursements
allegedly caused by deceptive pharmaceutical manufacturer price
reports. This case is currently in active litigation.
6.) Florida ex rel. Ven-A-Care v. DEY, Schering-Plough and Roxane
Laboratories: In this case the Florida Attorney General has
joined with Ven-A-Care to pursue recoveries of excessive
Medicaid reimbursements allegedly caused by deceptive
pharmaceutical manufacturer price reports. This case is
currently in active litigation.
In addition to the above, the following states have brought similar
actions against drug manufacturers for deceptively reporting drug
prices resulting in their Medicaid Programs paying excessive
reimbursement: New York, Massachusetts, Connecticut, Minnesota,
Kentucky, Wisconsin, Arkansas, Ohio, Montana, and Nevada.
Since the settlement of the Bayer 1 case in 2001, approximately
$2,400,000,000 has been recovered from drug manufacturers in cases,
brought under the federal and various states' False Claims Acts,
seeking recovery of excessive reimbursements paid by the Medicare and
Medicaid Programs or recoveries of amounts underpaid to the Medicaid
Rebate Program. (See, ``The Role of the False Claims Act in Reducing
Medicare and Medicaid Fraud by Drug Manufacturers: An Update'',
prepared for Taxpayers Against Fraud Education Fund by Andy Schneider,
Principal Medicaid Policy, LLC, November 2004.) Perhaps more
importantly, the industry insider information provided by Ven-A-Care
has assisted the HHS OIG to better understand how drug manufacturers'
deceptive price reports cause immense damage to the Medicare and
Medicaid Programs. The HHS OIG addressed this in the OIG Compliance
Program Guidelines for Pharmaceutical Manufacturers, 68 Federal
Register No. 89, pages 23731-23743 (May 5, 2003). The OIG has made it
clear that it considers such conduct to be fraudulent and to violate
the False Claims Act and the anti-kickback laws. I have attached a full
copy of the OIG's Guidelines. However, the following excerpts are
directly relevant to today's proceedings:
``Integrity of Data Used To Establish or Determine Government
Reimbursement. Many federal and state health care programs
establish or ultimately determine reimbursement rates for
pharmaceuticals, either prospectively or retrospectively, using
price and sales data directly or indirectly furnished by
pharmaceutical manufacturers. The government sets reimbursement
with the expectation that the data provided are complete and
accurate. The knowing submission of false, fraudulent, or
misleading information is actionable. A pharmaceutical
manufacturer may be liable under the False Claims Act if
government reimbursement (including, but not limited to,
reimbursement by Medicare and Medicaid) for the manufacturer's
product depends, in whole or in part, on information generated
or reported by the manufacturer, directly or indirectly, and
the manufacturer has knowingly (as defined in the False Claims
Act) failed to generate or report such information completely
and accurately. Manufacturers may also be liable for civil
money penalties under various laws, rules and regulations.
Moreover, in some circumstances, inaccurate or incomplete
reporting may be probative of liability under the federal anti-
kickback statute.''
Average Wholesale Price. The ``spread'' is the difference
between the amount a customer pays for a product and the amount
the customer receives upon resale of the product to the patient
or other payer. In many situations under the federal programs,
pharmaceutical manufacturers control not only the amount at
which they sell a product to their customers, but also the
amount those customers who purchase the product for their own
accounts and thereafter bill the federal health care programs
will be reimbursed. To the extent that a manufacturer controls
the ``spread,'' it controls its customer's profit.''
``Average Wholesale Price (AWP) is the benchmark often used
to set reimbursement for prescription drugs under the Medicare
Part B program. For covered drugs and biologicals, Medicare
Part B generally reimburses at ``95 percent of average
wholesale price.'' 42 U.S.C. 1395u (o). Similarly many state
Medicaid programs and other payers base reimbursement for drugs
and biologicals on AWP. Generally, AWP or pricing information
used by commercial price reporting services to determine AWP is
reported by pharmaceutical manufacturers.''
``If a pharmaceutical manufacturer purposefully manipulates
the AWP to increase its customers' profits by increasing the
amount the federal health care programs reimburse its
customers, the anti-kickback statute is implicated. Unlike bona
fide discounts, which transfer remuneration from a seller to a
buyer, manipulation of the AWP transfers remuneration to a
seller's immediate customer from a subsequent purchaser (the
federal or state government). Under the anti-kickback statute,
offering remuneration to a purchaser or referral source is
improper if one purpose is to induce the purchase or referral
of program business. In other words, it is illegal for a
manufacturer knowingly to establish or inappropriately maintain
a particular AWP if one purpose is to manipulate the ``spread''
to induce customers to purchase its product.''
``In the light of this risk, we recommend that manufacturers
review their AWP reporting practices and methodology to confirm
that marketing considerations do not influence the process.
Furthermore, manufacturers should review their marketing
practices. The conjunction of manipulation of the AWP to induce
customers to purchase a product with active marketing of the
spread is strong evidence of the unlawful intent necessary to
trigger the anti-kickback statute. Active marketing of the
spread includes, for example, sales representatives promoting
the spread as a reason to purchase the product or guaranteeing
a certain profit or spread in exchange for the purchase of a
product.''
Notwithstanding such explicit warnings from the OIG, the drug
manufacturer's executives, who report inflated drug prices, often
contend that their deceptive conduct should be blamed on the government
reimbursement programs themselves. They argue that their reported
prices are no more than ``list'' prices and need not be good faith
representations of what their drugs actually sell for in the
marketplace. Executives and other representatives from these companies
have actually gone so far as to represent that it is ``the industry
standard'' for them to make up any price they choose and report it for
use by government reimbursement programs no matter how many hundreds
or, in many cases, thousands of a percent that their represented prices
exceed the true prices that they know are generally and currently
available in the marketplace. Such assertions have been rejected by the
courts. For example, in a recent case, In re Lupron Mktg. & Sales
Practices Litig., 295 F. Supp. 2d 148 ( D. Mass. 2003), brought to
recover such price fraud damages for Medicare beneficiaries whose 20
per cent co-payment had been inflated, United States District Court
Judge Stearns spoke directly to such preposterous assertions by the
drug company defendants:
``But this is not a case of nondisclosure. Defendants did not
stand mute. As alleged in the Amended Complaint, defendants
trumpeted a lie by publishing the inflated AWPs, knowing (and
intending) them to be used as instruments of fraud.'' Id at
647.
``Defendants repeatedly assert that they had no duty to
disclose what was publicly known to everyone, that is, that the
Lupron ' AWP was a ``sticker price'' and never
intended to reflect the drug's true average wholesale price. In
support of this argument, defendants cite a number of
government reports acknowledging that the published AWPs for
prescription drugs often exceed their acquisition cost. The
argument is ultimately unpersuasive. There is a difference
between a sticker price and a sucker price. If one were
confronting a modest markup of the actual AWP for Lupron
' (which 300% is not), intended to make sales of the
drug for the treatment of Medicare patients commercially viable
(given the 95% of AWP reimbursement rate), it is unlikely that
there would have been a government investigation of TAP's
marketing practices. Similarly, if the same inflated AWP had
not been used to set reimbursement rates for private purchasers
and insurers, the Amended Complaint would not have been filed.
The Blues, in their response to defendants' argument, have it
exactly right: ``[I]f everything [about Lupron ']
was known to everybody, why did [d]efendants emphasize
secrecy?'' Blues Memorandum, at 7. Finally, the recognition on
the part of government regulators of inefficiencies in the
administration of Medicare does not, as defendants contend,
amount to condonation of fraudulent conduct. (Emphasis added)
Id at 648.
``. . . As defendants portray the Congressional purpose in
setting the reimbursement rate at 95% of AWP, Congress meant to
turn a blind eye to the inflated AWPs as a means of enticing
physicians to treat Medicare patients. In other words, Congress
deliberately invited the very fraud of which defendants are
accused. As defendants describe it, ``a determination that AWP
must be set at the actual cost to providers would result in
lower Medicare payment levels to physicians, prompting many of
those physicians to stop treating Medicare patients because it
is not cost-effective for them to do so.'' Defendants'
Memorandum, at 32. The suggestion that Congress would
deliberately condone a bribery scheme using public funds to
enrich drug manufacturers and physicians is, to say the least,
unusual.'' Id at 648.
The above excerpts from Judge Stearn's decision illustrate the
following corrupted logic underlying certain drug companies'
rationalization that they have no duty to tell the truth about prices:
government reimbursement systems that trust price representations by
drug companies are easy to cheat; therefore many companies cheat;
therefore cheating is the industry standard; therefore cheating isn't
really cheating. After Judge Stearns rejected the proposition that such
a complete lack of integrity is somehow excused, if it occurs within
the pharmaceutical industry, the drug companies in question agreed to
pay $150,000,000 in damages.
Like the Defendants in the Lupron case, the manufacturers, who
choose to have their drugs covered by Medicaid, know that state
Medicaid Programs are relying on their price reports to estimate the
drug's cost for reimbursement purposes. For a significant portion of
the dollars expended by the states' Medicaid Programs, reimbursement is
based upon reported prices that fairly and reasonably reflect the price
at which the drug is generally and currently available in the
marketplace. It is only where the manufacturers choose to falsely
report their prices that Medicaid pays an inflated amount. This
inflated ``spread'' is what enables the manufacturers participating in
this scheme to use the taxpayers' money to arrange financial
inducements which are then used to persuade customers to purchase their
drug instead of a competitor's. Moreover, in many cases, the government
dollars that are diverted in this manner encourage excessive
utilization of the drug therapy and otherwise have a corruptive
influence on the healthcare delivery system.
Testimony and documents secured from employees of pharmaceutical
companies merely corroborate that the drug manufacturers participating
in this deceptive practice are fully aware that they are misleading the
States' Medicaid Programs. We understand that the Committee has also
been provided with some of this evidence. We hope that it will be
carefully considered, because it reveals scenarios such as:
1.) A drug company executive suggesting further inflation of price
reports, but presented with subordinates' concerns about the
increased government scrutiny of price reporting practices in
2000, articulated his conscious decision to risk government
sanctions in order to maximize sales for as long as he could
get away with it.
2.) A drug company executive presented with a competitor, who had
caused a greater spread on WAC based reimbursement in Florida
and other states reported admittedly false inflated WAC prices
to the compendia in an effort to gain greater market share.
3.) The four most senior executives of a drug company crafted a written
marketing plan directly based upon creating and marketing
financial incentives to their customers arising from the
company's manipulation of Medicare and Medicaid reimbursement
through false price representations.
4.) Drug company executives choose to inflate the reported AWPs for
many of their drugs by several hundred percentage points in
order to create greater financial incentives for their
customers and thus avoid price reductions that would otherwise
occur due to natural market forces.
5.) Competing drug companies each inflate their price reports for
generic versions of the same drug and thus cause the FULs set
by CMS to be themselves inflated because they are based upon
150% of the lowest publicly available price.
6.) After a branded drug comes off patent, competing drug companies
each continually decrease their true price due to competition
while continually increasing the spread through their inflated
reported price reports, while utilization of the drug increases
exponentially.
7.) Drug company executives testify that they never change the AWP for
a drug once it is established. The evidence shows that they
routinely increase AWPs to gain or retain market share.
8.) Some, but not all, manufacturers fail to report declining AWPs even
though they know the market price of the drug, to all
customers, is falling precipitously in the competitive
marketplace and that their deceptive price reports will deprive
the Medicaid Program of the benefits of declining prices.
It is my hope that my testimony, as well as the information
gathered through this Committee's investigation, will illuminate
certain factors which I believe are critical to an understanding the
Medicaid reimbursement problem. They are:
a.) Drug manufacturers choose to have their drugs covered by Medicaid.
They are not required to so.
b.) Drug manufacturers know that Medicaid Programs must estimate the
acquisition costs of drugs in setting reimbursement. Millions
upon millions of claims are paid by Medicaid programs each year
and scarce dollars cannot, and should not, be taken away from
benefits in order to investigate and determine the individual
cost of each prescription.
c.) Drug manufacturers know that the State Medicaid Programs rely on
the prices the manufacture reports directly or through the
price reporting compendia.
d.) As with any system of government reimbursement, pharmaceutical
reimbursement is based upon trust, in this case trust that drug
companies will report their prices in good faith.
e.) The root of the problem of excessive Medicaid reimbursement for
pharmaceuticals lies with those drug manufacturers who choose
to deceive rather than tell the truth about their prices.
f.) Dissembling excuses, such as protestations that a company will lose
market share if it reports prices truthfully, should not be
accepted from pharmaceutical manufacturers. Other industries,
such as banking, communications, electrical power, and defense
manufacturers have all been faced with similar integrity
issues.
g.) Congress addressed the evil of drug manufacturers' false price
representations in the Medicare Modernization Act by requiring
manufacturers to report the Average Selling Price for their
drugs. These prices are in turn published by CMS.
Unfortunately, similar tools have not been provided to the
Medicaid Program as evidenced by a comparison of Medicaid FULs
with Medicare ASPs for certain drugs, such as Ipratopium
Bromide which are reimbursed by both programs. The drug's
Medicaid FUL, which is still based on inflated price reports by
manufacturers, is several times greater than the ASPs now
reported to Medicare.
h.) Any legislation directed at improving the Medicaid reimbursement
system, should not inadvertently create a potential defense
through which manufacturers may argue that Congress has somehow
absolved them from their past defalcations. Judge Stearns'
decision quoted above illustrates that the manufacturers who
have participated in this scheme seek to misconstrue the intent
of Congress as somehow approving their deceptive conduct.
i.) Insuring now that drug manufacturers, that have reported inflated
prices in the past, face the full consequences of their actions
under the law, will provide the best assurance that drug
manufacturers will not misrepresent ASP or other price
information vital to reimbursement decisions in the future.
In closing, I would ask that this Committee consider the insidious
damage that such deceptive practices have on our free market system.
The contention by drug manufacturers, that deception is somehow
justified when it becomes widespread in their industry, reveals a
serious and fundamental integrity flaw that, if left unaddressed,
threatens the taxpayer, the consumer and the industry itself. The noble
effort to generate profits must never be permitted to subjugate the
higher duty to tell the truth.
Mr. Chairman and Members, thank you for the chance to appear before
your Committee. I am happy to answer any questions that you may have.
Chairman Barton. Dr. Lockwood, you don't have a statement
that you----
Mr. Lockwood. No, I don't.
Chairman Barton. Okay. The Chair would recognize himself
for 10 minutes.
Dr. Lockwood or Mr. Jones, explain in layman's terms what
average wholesale price should be. What should it mean?
Mr. Lockwood. Average wholesale price has been a benchmark
for the industry for over 30 years, and for brand drugs AWP is
a fairly reliable benchmark. About 80 percent--at least based
on our studies and government studies and talking to Medicaid
program directors, about 80 percent of the Medicaid dollars are
paid on brand drugs and are fairly accurately reimbursed.
Chairman Barton. But I want to--I don't want to know what
the tradition is. I want, in layman's terms, average
wholesale--I am trying to think, if I go out and I grow cotton,
I know what it costs me for the seed. I know what it costs me
for the tractor. I know what it costs me to own the land, if I
am paying on it, or to rent the land if I don't own it.
And when I--when that cotton crop is ready to go to market,
I have got a pretty good idea what my costs are. And I add some
profit margin, which is a little bit based on the market and
demand and supply, and that is my average wholesale price, I
think.
So, in drugs, all of these different manufacturers who tend
to be running around like we didn't know what average wholesale
price is, it is some number that we can stick out there, and
the higher the better, because it increases the spread that we
can then discount to encourage the pharmacies to use our drug,
because they get a bigger markup on it.
What should it be? I mean, how--if we wanted to set some
sort of a Federal standard in law for average wholesale price,
what should it be? That is my question.
Mr. Lockwood. We believe that average wholesale price
should be a number that is reflective of the underlying
marketplace that the drug manufacturer sees when they look at
their own books.
Chairman Barton. It is----
Mr. Lockwood. Some people interpret it--because AWP is not
defined--but they have sometimes interpreted average to mean
usual, meaning the average or usual wholesale price.
Traditionally, it has been 20 percent higher than the
invoice price that the wholesaler gets. So that when a drug
manufacturer sells to a wholesaler, there is an invoice price.
Chairman Barton. It is not a cost-based price? It is not
based on the cost of the manufacturer of the drug to actually
produce and market that drug? It is not a cost-based price? It
is a market-based demand price?
Mr. Lockwood. It is a marked-based price. In this country,
we have never instituted price controls. And my partner and I
are certainly capitalists, and we don't believe in price
controls. We believe drug companies should be able to set their
own prices. But we think those prices should be reflective of
their underlying marketplace.
We don't want to get into the business of manufacturers. If
they can produce something for $1 and sell it in the market for
$10, that is their business. But they shouldn't report to the
government that when they are selling--actually selling it for
$10 that they are selling it for $100. And that is what is
happening with AWP, is that they are saying that this drug
costs a hundred dollars, while everyone in the market is buying
it for $10.
Chairman Barton. So we ought to do away--I mean, if it is
okay for the manufacturers to set the price wherever they want,
what we should do from the Federal Government perspective is
whatever you actually sell it for is what you report it for?
You sell it for $1,000, you report it. If you sell it for 10
cents, you report it. But don't say I am going to sell it for
$1,000, and I am really selling it for $10.
Mr. Lockwood. Correct. We believe in capitalism. We think
that drug companies should be able to set their prices. They
just need to report them in an accurate, fair and responsible
way, much like the OIG has recommended in their compliance
guidelines.
Chairman Barton. Are the people that are setting this
average wholesale price, is that the manufacturer or is that a
middleman that sets that price?
Mr. Lockwood. Well, there has been argument about that. But
I don't think anyone argues that compendia certainly use prices
they get directly from manufacturers to calculate AWP.
In some circumstances, manufacturers send the AWP directly
to the compendia and tell them that is their price. In other
circumstances, they send a price that they know the compendia
are going to mark up 20 percent, for instance, which has been a
common industry amount. So they know that when they send a
price of $100 that the compendia are going to make an AWP of
$120. There is no confusion there.
What is more, our investigations have shown that all of the
compendia send a report to the drug manufacturers every year
and ask them to verify that the prices they are reporting are,
in fact, correct, accurate, appropriate, and if they are not
right, they need to be changed.
Chairman Barton. Well, if we have some manufacturers
testify later and I ask them what is wrong with reporting what
you really--what your true selling price is, what is wrong with
that? What is it that is so scary or so negative toward their
continued existence as a for-profit entity that they can't
report what the real selling price is?
Mr. Lockwood. Transparency seems to scare them
dramatically. Exactly why, you may need to ask them. I can
speculate, but----
Chairman Barton. Well, speculate.
Mr. Lockwood. We believe that the real market prices may
actually become lower as a result of transparency. My point
being that if you have a drug that you are selling at a high
AWP, you may actually be able to sell that drug for more money
than your competitor because you have a better spread.
Look, I don't want to confuse you, but if you are selling a
drug for $10 and your spread, your AWP is $100, you might be
able to get $10; whereas another company might be selling the
drug for $5, but because their AWP is $50, nobody is buying
their drug, so that high AWPs help drag up, in some
circumstances, the transaction prices.
Chairman Barton. But if we switch to a system where they
actually report real selling price and document and verify it,
not price controls, but some sort of--like we have in the
natural gas market or the oil market or any other market where
there is buy and sell and some sort of a commodity function,
over time, everybody is going to know what the true prices are,
at least at the selling price, not the proprietary cost, but
the actual selling price, and the best win. Right?
Mr. Lockwood. Absolutely. We believe that is fair and
appropriate. We think they have that obligation now. There is
some disagreement on that. But we believe that the government
should be benefiting from transparency in price transactions.
That will lead to a true marketplace. Currently, Medicaid,
Medicare--until your recent bill--and consumers are price-
shielded from true competition that's occurring in the
marketplace. We are seeing these AWPs but not seeing the real
marketplace.
Chairman Barton. But if we did that, if we went to a
requirement for true price reporting, gave some flexibility on
the dispensing fee for pharmacies so that, if their cost of
dispensing the prescription for Medicaid is truly high or
something, they get reimbursed for that; implement that, have a
transition period, a year, 2 years, to go from the old system
to the new system, is there any reason that that wouldn't work
and result in significant savings to both State and Federal
coffers for Medicaid and to the consumers from the copayment
side if they have a Medicaid co-payment?
Mr. Lockwood. We believe it would work, and we believe it's
ideal. It preserves capitalism in the marketplace, and it
fosters competition, and it's what should be happening in this
market.
Chairman Barton. Is there anything I haven't asked you that
I should in the next 10 seconds before my time expires?
Mr. Lockwood. We need more than 10 seconds probably.
Chairman Barton. Okay. My time has expired.
I recognize the gentleman from Massachusetts, Mr. Markey,
for 10 minutes.
Mr. Markey. Thank you, Mr. Chairman, very much.
So what you have got here is a situation where a drug
company makes a drug, they are selling 100 pills for $100
wholesale to a company, and so it looks like the price is $100
for 100 pills. But, actually, there's a 10 percent discount to
the wholesaler, so it's really only $90 for 100 pills to the
wholesaler, and then the wholesaler can further try to make a
profit as a wholesaler on their sale down the chain.
Meanwhile, the report to Medicaid is that it actually costs
$125 for the 100 pills, which is then the price which the
Federal Government and the taxpayer has to pay, although we
know that the actual price is $90 for 100 pills, because that
is the real world. The made-up number, the average wholesale
price, is the price that we have to pay, Americans have to pay
for these pills.
Now, how do they make up this average wholesale price,
which is perhaps 35 percent higher than the actual cost to an
actual wholesaler to purchase these drugs? How do they make up
that number?
Mr. Jones. I think more importantly than how they make it
up is what they are doing with it. Basically, in the generic
marketplace right now, manufacturers are--they are always in
control of their prices. They own every price that is ever
published; it's theirs. They are taking those published prices,
using the difference between what they are selling them for and
what the end buyer that is going to build a program gets
reimbursed for as their marketing tool to sell their drugs. So
that is called the spread. A manufacturer reports price; $125
is the AWP. Medicaid uses that $125 to reimburse whomever is
billing it, yet they sell it for $90. Well, the difference
between $90 and $125 is the spread. That is the financial
incentive that these companies use to sell their drugs, because
you are talking about a generic market. You are talking about a
marketplace in general where this is 7 or 8 different
manufacturers of the same drug.
Mr. Markey. Okay. Well, we held our first hearing on
average wholesale price in 2001. The drug companies have paid
over $2 billion in fines, penalties, reimbursements to the
Federal and State governments. Now, that's a lot of money. But
has anything really changed in the marketing of prescription
drugs to the retailer since 2001?
Mr. Jones. Well, I think, for those manufacturers that have
participated in paying that money, it has changed.
Mr. Markey. Okay. How about for the marketplace in general?
Mr. Jones. I think the marketplace obviously has an
awareness of what they are doing. I mean, maybe a little
anecdotal evidence here: Over the time period that we have been
investigating this, we have heard drug manufacturers first
claim that they didn't know where AWP came from; it wasn't
their number. And then that evolved into, yes, we set the AWPs.
And then we heard drug manufacturers say, we don't know
anything about marketing the spread. We are not interested in
marketing the spread; we are only interested in the price that
we charge our customer. But we finally evolved into, yes, there
is a spread out there, and, yes, we do market it. And, now, we
are at the point with this industry where they are saying,
look, it is so messed up, everybody wants to buy drugs based
solely on the spread value, and we can't stop it even if we
want to.
Mr. Markey. So has the spread between the average wholesale
price paid by the retailers been reduced, or is the average
wholesale price as false as it always was?
Mr. Jones. Well, obviously, depending on the drugs, because
different drugs have different methods of being--you know,
pricing. But I think----
Mr. Markey. Which drugs still have a false price?
Mr. Jones. The generic industry drugs. Basically, your
generic drugs. That's how they are marketing them in this
country right now.
Mr. Markey. So the industry argues that they still need a
very high average wholesale price whether it is openly marketed
or not. Is that correct?
Mr. Jones. Yes.
Mr. Markey. That's their argument. Now, is it a justified
argument?
Mr. Jones. Absolutely not.
Mr. Markey. Why not?
Mr. Jones. Because they are using precious government funds
as the incentive for selling their drugs, to market their drugs
with.
Mr. Markey. So one of the witnesses on the third panel will
testify that the real acquisition costs for wholesalers is the
reported wholesale acquisition cost plus 5 percent. Is that a
good base price to use for reimbursements?
Mr. Lockwood. Well, for some brand drugs, that is an
accurate number. But for a whole host of other drugs, the
wholesale acquisition cost has been altered over time and is no
longer an accurate number. We discovered that in Texas
certainly. Texas has paid off of a price to the wholesaler, and
we have found essentially that there is fraud in the WAC
marketplace as well.
Mr. Markey. So what is your view of the Federal upper
limits set on drugs by CMS, by the Federal Government? Do they
reflect the real cost of the drug?
Mr. Lockwood. The Federal upper limit has been an attempt
by the government to ensure prudent purchasing in generic
drugs, and they essentially are saying, this is a ceiling
price, we are not going to pay anything more than this. The
problem with the FUL is that it is based on reported prices and
that, if a manufacturer or a whole host of manufactures are
reporting inflated prices, whether it be WAC, direct price or
average wholesale price, if those are inflated, the resulting
FUL is inflated.
Mr. Markey. FUL means?
Mr. Lockwood. Federal upper limit. It's an upper limit
price that CMS creates to limit reimbursement on generics. So
that the lowest generic price reported, if it's $100, the FUL
basically says, we are not going to ever pay more than $150.
Mr. Markey. Well, a markup of a spread of 25 to 35 percent
seems incredibly high and unreasonable to me for a markup in a
commodity marketplace. Don't you agree?
Mr. Lockwood. We agree with that. We are proponents of
average sales price.
Mr. Markey. So if every wholesaler is able to reap a 25 to
35 percent spread, doesn't that suggest that there isn't real
price competition in the prescription drug market?
Mr. Lockwood. Well, in fact, wholesalers don't receive
those kind of benefits. Generally speaking, wholesalers are
probably making 1 or 2 or 3 percent.
Mr. Markey. How about the pharmacies? The pharmacists are
then taking advantage of their spreads. And, you know, we are
not against paying pharmacists appropriately and fairly. Do the
pharmacies deserve to get a 25 to 35 percent markup in the
price of drugs to grandma who is standing there in front of the
counter? Do they deserve that kind of markup?
Mr. Jones. Medicaid is trying to estimate acquisition cost;
30 percent markups over acquisition costs are not realistic in
the Medicaid program.
Mr. Markey. So what is the fix then? How do you make sure
that grandma isn't digging through her pocketbook standing
there to pay a 25 to 35 percent markup for a drug that we all
know is nowhere near that cost in terms of its manufacture and
delivery right to that counter? Why should she, knowing she
should have to take that pill in a half an hour, have to pay
that money? And how do we fix that problem at that counter?
Mr. Lockwood. In fact, your 25 and 30 percent is very low.
If we could bring up slide number 6, perhaps, this will give
you an idea. And it is in your binder under number 4. If you
will look at it, you can see that there are huge, huge spreads
involved in some of these common generic drugs. In the case of
Fluoxetine, we are talking about an AWP of $259.85, and the
current cost last week is $4.25 for that bottle, for the whole
thing. And even the FUL isn't capturing this.
Mr. Markey. So we have got a situation here where the
pharmacist is saying that, for grandma, she has to pay--that
is, the Federal Government or the States have to pay--25 to 35
percent more for the drugs. But the States could be using that
money to lower the cost for grandma to be in a nursing home, to
lower the cost for more children to be covered by a medical
program that would increase the health of the children in that
State. And yet the pharmacy is saying, we won't give this drug
to grandma unless you give us this 25 to 35 percent markup.
So what we need from you in 30 seconds is, how do you fix
that? What do you recommend to fix that at that counter to make
sure that the drugs are what--are a price that they should be,
so that all the rest of the money could then be used to help
grandma and the children in that community to have a higher
level of health care?
Chairman Barton. And the gentleman's time has expired. We
will let the witnesses answer the question, and then we are
going to have to go to Mr. Walden.
Mr. Lockwood. I think we like average sales price. The GAO
study that just came out I think 6 days ago, I think, has
verified that average sales price is an effective way of
estimating drug costs. And then, by all means, taking care of
the pharmacies, paying them a reasonable dispensing fee for
their services. They have to make a profit. They have to stay
in business. They have to help distribute our drugs.
Mr. Markey. In other words, use the Medicare system to
determine the price, rather than this system that Medicaid is
now using, because the Medicaid system allows for the taxpayer
and grandma to get ripped off in terms of the benefits they
receive. Is that correct?
Mr. Lockwood. We like the ASP system.
Mr. Markey. You like the Medicare system better than the
Medicaid system.
Mr. Lockwood. The new Medicare system, yes, sir. Yes, sir.
Mr. Markey. Thank you.
Chairman Barton. I would like to point out before we
recognize Mr. Walden that we have changed in Medicare to the
average sales price in this MMA, the Medicare Modernization
Act. CBO says that should save about $15 billion over the next,
I think, 10 years. So I am not saying we have got it right in
Medicare, but we are moving in the right direction. And the
purpose of this hearing is to see if we can't do a similar
thing in Medicaid. And we obviously see that there are lots of
areas we can improve in.
With that, we would recognize Mr. Walden for 10 minutes.
Mr. Walden. Thank you, Mr. Chairman. And before I start
asking questions, I would just like to move that the documents
that are contained in the exhibit binder be made a part of the
official record.
Chairman Barton. Without objection, so ordered.
Mr. Walden. Thank you, Mr. Chairman.
You know, gentlemen, it seems to me like this is the
proverbial $500 toilet seat of Medicaid, the AWP is. And I am
wondering what the FUL is, because if you look at your chart
there, the Federal upper limit doesn't seem to be a standard
that works either, compared to the price that is being paid. Is
that correct?
Mr. Jones. Unfortunately, it's a price that is determined
off of the manufacturer's reported prices. So it is as
vulnerable to price manipulation as any other.
Mr. Lockwood. Could we bring up slide 8?
Mr. Walden. I was just going to go to slide 8. Indeed.
There you are. All right. Go ahead.
Mr. Lockwood. This slide is based on current prices, and
the ASP plus 6 from the second quarter of 2004. So I don't--we
are mixing apples and oranges a little bit here. The current
cost price is listed in the column that is highlighted.
Mr. Walden. Okay. So let us take Ipatropium; $3.50 is the
current price?
Mr. Lockwood. Yes, sir.
Mr. Walden. As of when?
Mr. Lockwood. About 3 days ago.
Mr. Walden. And the Federal upper limit is as of a year
ago?
Mr. Lockwood. Yes.
Mr. Walden. And why is that price from November 2, 2003?
Mr. Lockwood. Well, that was the date the FUL was changed.
Mr. Walden. And isn't that another issue that we face, is
updating the FUL list?
Mr. Lockwood. Yes, we do. But I don't know if the reported
prices have changed or not. In fact, they may not have changed
in the past year. If the manufacturers are continuing to report
the same prices they did at that time, the FUL won't change.
Mr. Walden. Well, I think there is also an issue in the
IG's report about how often these prices get adjusted, once it
is determined there are generics on the market, that there is a
continuing problem there that may date back a decade it seems
like or at least a half a decade if not more. Well, how current
is the AWP? Is that the same issue?
Mr. Lockwood. The AWPs are current now.
Mr. Walden. So the $44.10 AWP for Ipatropium is a current
price?
Mr. Lockwood. Yes, sir.
Mr. Walden. So you are looking at more than 10 times the
price. The spread is more than 10 times the actual price.
Mr. Lockwood. Yes, sir.
Mr. Walden. And who is pocketing that difference?
Mr. Lockwood. In general, the pharmacies, the providers.
Mr. Jones. And manufacturers are also benefiting by market
share.
Mr. Walden. Getting market share. So there is a marketplace
working here. Isn't there?
Mr. Lockwood. Absolutely.
Mr. Walden. It's just not to the benefit of the person
paying the bill. And generally, in America, marketplaces we
like are the ones that benefit the buyer. Isn't that how you
foster competition?
Mr. Jones. The consumer is not benefiting here.
Mr. Walden. The consumers are losing. The States are
losing. The Federal Government is losing, and the people in
between are making at least what would appear to be a tidy
profit.
Now, we also have to recognize that this AWP isn't
necessarily the price being paid. Right?
Mr. Lockwood. That's correct.
Mr. Walden. Because they will discount off of that.
Mr. Lockwood. And it would default to the FUL for most
State Medicaid programs.
Mr. Walden. And are these FUL current cost AWP prices, are
they fairly representative of all the drugs, or are these the
worst-case examples?
Mr. Lockwood. These are not the worst cases. In fact, I
have--I've included a couple of charts over a wide range of
drugs.
Mr. Walden. Do you want to reference those?
Mr. Lockwood. It's in your binder under number 4. And these
represent drugs that are antidepressants, inhalant drugs,
antibiotics, cancer drugs, such as tamoxifen used in breast
cancer, and high blood pressure drugs. So this is over
virtually the entire drug marketplace; it's not just one little
niche where this is occurring.
Mr. Walden. Now, you are seeing some--I will probably not
pronounce this correctly, but Ranididine.
Mr. Lockwood. Ranididine.
Mr. Walden. I got that wrong.
Mr. Lockwood. It's a drug used to control stomach acid that
is now actually over-the-counter.
Mr. Walden. And we're paying $44.90; well, the current cost
is $44.92 over-the-counter?
Mr. Lockwood. That's for a bottle of 1,000 pills, the
current cost is $44.92.
Mr. Walden. And the AWP is $1,480?
Mr. Lockwood. Yes, sir.
Mr. Walden. And that is a current AWP?
Mr. Lockwood. Yes, sir.
Mr. Walden. All right. Have you done any analysis of how
good a job these Federal upper limits do in capturing cost
savings?
Mr. Lockwood. Well, they certainly reduce, as you can see
in that drug. If the government is paying $341 instead of
$1,480, that's a significant cost savings. But when you compare
the FUL, if you look at the FUL spread on that column, you can
still see that there is a huge, huge profit involved there. And
it is because the FUL is based on reported prices that
manufacturers do what--seem to do what they want with.
Mr. Walden. What I have struggled with is why this isn't
considered some sort of fraudulent billing practice.
Mr. Lockwood. I believe we consider it fraud.
Mr. Walden. Why?
Mr. Lockwood. Because of--actually, the OIG probably did a
much better job of explaining it than I could. I am not an
attorney. But the OIG really set down the guidance to
manufacturers in 2003, and they point out that these type
behaviors may be actionable under the False Claims Act and
under the Anti-kickback Statute. And I am no attorney, but I am
relying on them.
Mr. Walden. Can you--well, several drug manufacturers have
asserted in their written statements that the current Medicaid
reimbursement system effectively puts them between a rock and a
hard place. They can't lower their AWP to make it more
reflective of actual market prices without losing all of their
business. How do you respond to that argument? And I have got
some e-mail traffic from one agency that indicates very clearly
there is enormous market pressure to raise the AWP or you lose
market share.
Mr. Jones. Certainly they use the reported prices to gain
market share in the generic marketplace. Off the top of my
head, when I think about that statement, they corrupted the
system. They are the ones that are responsible for reporting
the prices. Those prices come from them, and the selling prices
come from them. So, now, they find themselves in that untenable
position of not being able to adjust or correct a system that
they have already corrupted.
Mr. Lockwood. They can't stop the fraud.
Mr. Jones. They did too good of a job educating the
consumers who are going to build the programs, the pharmacists
or the doctors or whomever is receiving the benefit of selling
that drug. They have educated them so well, they have----
Mr. Walden. They are marketing the spread.
Mr. Jones. Absolutely.
Mr. Walden. And the idea is that the bigger spread, the
more the take.
Mr. Jones. The higher the utilization in certain
circumstances.
Mr. Lockwood. Manufacturers will tell you they can't quit
doing this unless everyone stops at once.
Mr. Walden. Which is why it is up to us to make that
change. Isn't it?
Mr. Lockwood. Because if there is a half a dozen companies
in the market and one of them stops----
Mr. Walden. They are out of business.
Mr. Lockwood. They are out of business. Now, Abbott
Laboratories did some significant price changes in 2001 that
significantly lowered their prices in the marketplace, and I
think they should be commended for it.
Mr. Walden. And what was the impact of that? How are they
doing?
Mr. Lockwood. Well, they lowered AWPs on a whole host of
drugs enormously. Now, I don't have that information in front
of me, but they made a substantial change in their price
reporting on a whole host of drugs.
Mr. Walden. Can you turn to tab 5 in your binder there,
please, sir, in the final minute and a half I have here. This
exhibit is information on pricing from a company called
Innovatix--is that right? Innovatix, your home infusion
specialists. And I am intrigued, because this would seem to be
a document available--how? Through prescription service or
something?
Mr. Lockwood. To members, it's available over the Internet.
Mr. Walden. Members of?
Mr. Lockwood. Innovatix.
Mr. Walden. Okay. And it lists the AWP spread, the AWP.
It's pretty hard to read on this graph. And then the contract
price, right?
Mr. Lockwood. Yes, sir.
Mr. Walden. Doesn't this give us the data where we could
make more informed decisions about actual costs of drugs being
sold out on the market?
Mr. Jones. These reflect prices in the marketplace.
Mr. Walden. And isn't that what Medicaid and Medicare and
other consumers should be paying based on that?
Mr. Jones. Absolutely.
Mr. Lockwood. We believe that.
Mr. Walden. Now, there are some who would make an argument
that, if you just add a percentage to this price, say contract
price plus 6 percent for overhead, you are going to distort the
market as well and just continue to try and drive up price to
get the higher percentage. How do we wrestle with that?
Mr. Lockwood. Those are difficult issues. It's hard unless
you have a prospective payment program like Medicare has for
hospitals to control every cost. I think our effort has been to
try to get to real market prices and then deal with that.
Mr. Walden. Because what we don't want to do here is create
another AWP, another system that functions in an inverted way,
if you will. So, appreciate your testimony today. Thank you,
Mr. Chairman.
Chairman Barton. Before we go to the next panel, the key
though is the government reimbursement rate has got to be based
on an actual price that somebody pays, not on some artificial
posted price.
Mr. Lockwood. Yes, sir.
Chairman Barton. We have got to change like we have in
Medicare from some sort of a, I won't say a made-up price, but
a--just a sticker price to what somebody who is actually going
to use the drug is paying.
Mr. Jones. Something that has a basis in reality in the
marketplace.
Chairman Barton. And that has to be transparent. It has got
to be verifiable, and there has to be some ability for willing
buyers and willing sellers to have some degree of certainty
that that is a real price that is available to anybody that
meets the terms and conditions of quantity and deliverability
and things like that.
We want to thank you for your testimony. There may be some
written questions for the record, and we would ask that you
reply as quickly as possible because we are going to attempt to
legislate in this area in the next Congress.
Mr. Walden. Trust but verify, Mr. Chairman.
Chairman Barton. Trust but verify. I have heard that
somewhere. But thank you, gentlemen. You are excused.
We would now like to have our second panel come forward. We
have Mr. George Reeb, who is the assistant inspector general,
Centers for Medicare & Medicaid Audits. He is accompanied by
Mr. Robert Vito, regional inspector general for evaluations and
inspections, from the Philadelphia region.
We also have Mr. Dennis Smith, who is the director of the
Center for Medicaid & State Operations, Center for Medicare and
Medicaid Services here in Washington.
We have Mr. Patrick O'Connell, who is the assistant
attorney general for civil Medicaid fraud in the Texas Attorney
General's Office in Austin, Texas.
Mr. David Balland, who is the associate commissioner for
Medicaid and CHIP, the Texas Health and Human Services
Commission in Austin.
And Mr. Paul Reinhart, who is the Medicaid director for the
State of Michigan in Lansing, Michigan.
Welcome, gentlemen. It is the tradition of this
subcommittee to take all testimony under oath. Do any of you
object to testifying under oath?
You also have the right to be advised by counsel during
your testimony. Do any of you have counsel with you that you
wish to also swear in?
Will you all please rise and raise your right hand.
[Witnesses sworn.]
Chairman Barton. Your testimony is in the record in its
entirety. We are going to start with you, Mr. Reinhart, and we
are just going to go right down the row and give each of you
gentlemen that wish to elaborate on your testimony 7 minutes to
do so. So welcome to the subcommittee, Mr. Reinhart.
TESTIMONY OF PAUL REINHART, MICHIGAN MEDICAID DIRECTOR; DENNIS
SMITH, DIRECTOR, CENTER FOR MEDICAID AND STATE OPERATIONS,
CENTERS FOR MEDICARE AND MEDICAID SERVICES; GEORGE M. REEB,
ASSISTANT INSPECTOR GENERAL, CENTERS FOR MEDICARE AND MEDICAID
AUDITS, ACCOMPANIED BY ROBERT VITO, REGIONAL INSPECTOR GENERAL
FOR EVALUATION AND INSPECTIONS, PHILADELPHIA; DAVID J. BALLAND,
ASSOCIATE COMMISSIONER FOR MEDICAID AND CHIP, TEXAS HEALTH AND
HUMAN SERVICES COMMISSION; AND PATRICK J. O'CONNELL, TEXAS
ATTORNEY GENERAL'S OFFICE
Mr. Reinhart. Thank you. Good morning, Mr. Chairman, and
members of the subcommittee.
Chairman Barton. Pull that microphone directly toward you,
sir, please. Thanks.
Mr. Reinhart. Good morning, Mr. Chairman, and members of
the subcommittee. Thank you for this opportunity to discuss
Medicaid prescription drug policies. My name is Paul Reinhart,
and I am the director of the Michigan Medicaid program.
While we work very hard to constrain cost increases in all
areas of the Medicaid program, Michigan's pharmacy cost
containment efforts have been particularly effective.
Unfortunately, one aspect of the Medicare Modernization Act
will increase Medicaid pharmacy costs, at least in the short
term.
The Michigan Medicaid program utilizes many strategies to
hold down the cost of the pharmacy benefit. The three major
initiatives we have used in Michigan are: Preferred drug lists;
the multi-State prescription drug purchasing pool; and limiting
reimbursements to pharmacists to their actual acquisition drug
costs. These strategies have been quite successful and have
produced savings not only for Michigan but also for the Federal
Government. In fiscal year 2003, the first year of our
preferred drug list program, per script cost increases declined
to 4 percent from the 11 percent increases that routinely
occurred in prior years.
Similarly, in fiscal year 2004, the first year of our
multi-State purchasing initiative, per beneficiary costs for
prescription drugs actually declined by about 1 percent. We
believe our aggressive cost containment programs saved us $130
million in fiscal year 2004.
The Michigan Medicaid program, like a growing number of
States, uses a preferred drug list or PDL to discourage
physicians from prescribing high-cost drugs when lower-cost but
equally effective drugs are available. Here is how the PDL
works.
A committee of physicians and pharmacists and Medicaid
staff use evidence-based information and cost to decide which
drugs will be included on the preferred list. Drugs not on the
list are available, but the prescribing physician must secure
prior authorization from our pharmacy benefit manager. This
program has substantially increased the use of low-cost generic
drugs.
The ability of the preferred drug list to generate savings
is greatly enhanced by our multi-State pharmacy purchasing
program. When Governor Granholm began her term in January 2003,
she directed the Medicaid agency to develop a multi-State
pharmaceutical purchasing program. She believed that
manufacturers would be willing to give State Medicaid programs
a better price for their products in exchange for access to a
larger market. And she was right. In mid 2003, Michigan and
Vermont began a joint purchasing program for Medicaid
prescription drugs and asked the Centers for Medicare and
Medicaid Services for permission to add additional States to
the program.
After a series of delays, in April 2004, CMS finally
authorized Michigan, Vermont, Nevada, Alaska and New Hampshire
to create an even larger pool and jointly negotiate better
prices from pharmaceutical manufacturers. This larger pool will
save Michigan an additional $13 million this year. CMS has also
recently authorized Minnesota and Hawaii to join the pool,
which should increase savings even more.
We have also generated substantial savings in Michigan by
limiting Medicaid payments to pharmacists to their actual
acquisition costs. We do this by significantly discounting
payments for brand-name drugs and through daily adjustments of
our payments for generic drugs to the best price available that
day from pharmaceutical distributors.
Finally, while the Medicare Modernization Act certainly has
many positive aspects, one component of that act is likely to
increase costs for States that have effectively managed the
drug benefit for dual eligibles. Michigan has been able to hold
down the rate of growth in pharmacy spending to well below 5
percent, but the MMA's mandatory State contribution will be
determined using much higher inflation factors. Even after
adjusting for the declining contribution percentage, we
estimate that the clawback will increase Michigan's costs by
about $20 million in fiscal year 2006 and $30 million in fiscal
year 2007.
Conclusion: I hope my remarks today demonstrate that, at
least in Michigan, we are not paying too much for the
pharmaceutical products used by Medicare beneficiaries.
[The prepared statement of Paul Reinhart follows:]
Prepared Statement of Paul Reinhart, Representing the State of Michigan
Good morning Mr. Chairman and distinguished members of the
Subcommittee. I want to thank you for this opportunity to discuss the
Michigan Medicaid pharmacy program. My name is Paul Reinhart and I am
the director of the Michigan Medicaid program. Prior to working in this
capacity in Governor Granholm's Administration, I served as the
Director of the Office of Health and Human Services in Governor
Engler's Department of Management and Budget.
While we work very hard to constrain cost increases in all areas of
the Medicaid program, our pharmacy cost containment efforts have been
particularly effective and I appreciate the opportunity to tell you
about them. I would also like to discuss the effect the Medicare
Modernization Act will have on our ability to constrain Medicaid costs.
Pharmacy Cost Containment Programs
As you know, each state chooses a reimbursement methodology for its
Medicaid program. The Michigan Medicaid program utilizes many
strategies to hold down the costs of the pharmacy benefit, but the
three major initiatives we have used in Michigan are:
A preferred drug list;
The multi-state prescription drug purchasing pool; and
Limiting reimbursements to pharmacists to their actual drug
acquisition costs
These initiatives have been extremely successful in constraining
our prescription drug costs, producing savings not only for Michigan,
but also for the federal government..
In fiscal year 2003, the first year of our preferred drug list
program, our per-script cost increase declined from 11% to only 4%. In
fiscal year 2004, the first year of the multi-state purchasing
initiative, per-beneficiary costs for prescription drugs actually
declined about 1%. We believe our aggressive cost containment programs
reduced pharmacy spending in fiscal year 2004 from $770 million to $640
million, a savings of $130 million.
I have attached some charts at the back of this presentation that
detail these trends.
Preferred Drug List
The Michigan Medicaid program, like a growing list of states, uses
a preferred drug list (PDL) to discourage physicians from prescribing
high cost drugs when lower cost, but equally effective, drugs are
available. Michigan instituted the PDL in the last quarter of fiscal
year 2002. A ``Pharmacy and Therapeutics Committee'' of physicians and
pharmacists appointed by the Governor uses evidence-based information
to decide which drugs will be included on the preferred list. Drugs not
on the list are, of course available, but the prescribing physician
must secure prior authorization from our pharmacy benefit manager or
from one of the physicians employed by the Medicaid agency. This
program has substantially increased the use of generic drugs. Generic
drugs now account for well over 50% of the drugs paid for by the
Michigan Medicaid program.
Multi-State Prescription Drug Purchasing Pool
The ability of the preferred drug list to generate savings is
greatly enhanced by our multi-state pharmaceutical purchasing program.
When Governor Jennifer Granholm began her term in January of 2003, she
directed the Michigan Medicaid agency to develop a multi-state
pharmaceutical purchasing program. She felt that manufacturers would be
willing to give state Medicaid programs a better price for their
products in exchange for access to a larger market. And she was right.
In mid-2003, Michigan and Vermont began a joint purchasing program
for Medicaid prescription drugs and asked the Centers for Medicare and
Medicaid Services (CMS) for permission to add additional states to the
program. After a frustrating series of delays, in April of 2004, CMS
finally authorized Michigan, Vermont, Nevada, Alaska and New Hampshire
to create an even larger pool and jointly negotiate better prices from
pharmaceutical manufacturers. This new larger pool generated price
discount proposals from over 40 manufacturers (when only two states
were involved in FY03, 26 pharmaceutical manufacturers submitted
discounted price proposals). These new prices are estimated to save
Michigan an additional $13 million per year on prescription drugs. CMS
has also recently authorized Minnesota and Hawaii to join the pool,
which should produce further savings when prices are renegotiated with
pharmaceutical manufacturers next year.
We strongly encourage CMS to expedite approvals of additional
states that want to enter the pool. This will allow additional cost
savings to both state and federal governments.
Limiting Product Reimbursements to Pharmacists
In addition to the efforts just discussed, we have generated
substantial savings in Michigan by limiting product reimbursements paid
to pharmacists to the pharmacist's actual product acquisition cost.
We accomplish this in two ways. First, our payment for brand name
drugs is set at the AWP, or ``average wholesale price'' less 13.5%-
15.5% depending on the size of the pharmacy. Any pharmacist who is
willing to accept this level of reimbursement is able to participate in
the Medicaid program. This practice has been in place since fiscal year
2000.
Second, we use a contractor to adjust payments for generic drugs on
a daily basis to the actual acquisition costs for that day. This is a
practice also known as ``maximum allowable cost, or ``MAC'' pricing.
Michigan began aggressive daily MAC pricing in October 2004.
Michigan's successful program was recognized by the 2004 Department
of Health and Human Services' Office of Inspector General report that
concluded Michigan had the lowest product reimbursement costs in the
country.
Medicare Modernization Act
I would now like to briefly discuss how the Medicare Modernization
Act (MMA) will impact state Medicaid programs' ability to constrain
prescription drug cost increases. Not surprisingly, we had hoped that a
Medicare pharmacy benefit would relieve states of the responsibility of
paying for the drugs used by Medicaid-Medicare dual eligibles--or at
the very least that the benefit would not increase our pharmacy costs
for these dual eligibles. While the MMA certainly contains many
positive aspects, we have concluded that it, unfortunately, will
increase our costs in Michigan.
The MMA requires states to continue subsidizing the pharmacy
benefit for dual eligibles. While prescription drug costs for dual
eligibles will be covered by Medicare Part D, states will be
responsible for making monthly payments back to the Department of
Health and Human Services for a large portion of the drug expenditures
for these individuals. This financing mechanism is also known as the
``clawback,'' or what some call a ``reverse block grant.'' States will
be required to pay the federal government for 90 percent of the state
portion of dual elgibles' pharmacy costs in 2006, 88.333 percent in
2007, and this amount continues to gradually decline to 75% in 2014.
The Department of Health and Human Services (HHS) will determine the
state payment amount and base part of the formula on double digit
growth factors (National Health Expenditures and then average per-
capita expenditures for Part D drugs) which will be considerably higher
than the low, single digit growth rates we have been able to achieve in
Michigan for prescription drugs. We estimate that the clawback will
increase state costs by $20 million in fiscal year 2006 and $30 million
in fiscal year 2007 (see attached chart). In Michigan, this is quite a
blow because we have been so effective managing these costs.
Additionally, since Medicare will manage the pharmacy benefit for
dual eligibles, the size of our multi-state purchasing pool will be
significantly reduced, which means our ability to leverage better
Medicaid pharmaceutical prices from manufacturers will be reduced. The
other states in our pool will find that their Medicaid savings will be
greatly affected too.
I hope my remarks today demonstrate that, at least in Michigan, we
are not paying too much for the pharmaceutical products used by our
beneficiaries, but rather, we have been very proactive, aggressive, and
successful in our cost containment initiatives. Thank you for the
opportunity to share our experiences. I would be happy to answer any
questions.
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Mr. Walden [presiding]. Thank you.
Mr. Smith.
TESTIMONY OF DENNIS SMITH
Mr. Smith. Thank you, Mr. Chairman. I appreciate the
opportunity to appear before the subcommittee today.
I will have a full statement for the record. I did also
want to provide for the subcommittee a broader picture of
Medicaid drug purchasing as a whole. We are providing to the
subcommittee a number of charts that show that, indeed, there
is variation State by State within drug classes, et cetera. We
hope this information will be helpful to the subcommittee as it
is looking at the issues of Medicaid prescription drugs.
There are a number of underlying assumptions that we all
are faced with in terms of looking at the cost of prescription
drugs in the Medicaid program.
First, that the States themselves operate within a Federal
reimbursement framework. But just as States set reimbursement
for hospitals, nursing homes, and physicians, they also are the
ones at the front line to set reimbursement levels for
prescription drugs. We have a large number of pharmacies that
participate in the Medicaid program. States are looking at
guaranteeing access to coverage for low-income individuals,
many of them with special needs. We have great participation
rates among the Nation's pharmacies in the Medicaid program. So
the States and the Federal Government are looking at balancing
different interests between access for the Medicaid beneficiary
and being prudent purchasers of the services themselves.
So, first, we start off with the fact that Medicaid is a
matching program, a shared cost between the States and the
Federal Government. And as the first line of that program the
States, when they have their dollars at risk, indeed have a
basic incentive to be prudent purchasers for the Medicaid
program. The framework sort of broadens from there in terms of
the different options that the Medicaid program has to set
prices for prescription drugs, including the Federal upper
limit, which we have focused on a lot here this morning
already, and that I know is something the subcommittee is very
much interested in.
But States also have an option to adopt what is called the
``maximum allowable costs'' or a MAC. And a number of States do
that. Those MACs are generally more stringent than the Federal
upper limits. So, again, we are looking at a Federal framework
that says a State cannot pay more than this amount, but the
States have great flexibility underneath those amounts as I
mentioned, again, in relationship to other types of payers as
well.
The Federal statute that was adopted, I believe was alluded
to earlier, back in 1990. The statute requires manufacturers
who want coverage of their products to enter into an agreement
with CMS to provide rebates for the prescription drugs paid for
through the rebate plan. So we have a different way of looking
at getting the best price and the lowest price, and best value
for the taxpayers for the Medicaid program. The acquisition of
the drug itself is part of it, but the rebate is another part
of it as well.
Obviously, in the Medicaid program, there are a number of
different types of purchasers and providers involved in the
decisionmaking itself when you are looking at the overall cost
of the Medicaid program. Pharmacies, physicians, and the
consumers themselves all have a role in ultimately determining
what the price that Medicaid will pay for a prescription.
Approximately 550 pharmaceutical companies participate in the
rebate program and in fiscal year 2003, the manufacturers paid
rebates of about $6.4 billion for outpatient drugs.
In terms of the focus over the last few years of how CMS is
helping States to find ways to be more prudent purchasers of
prescription drugs, our focus has been through the various
State plan amendments which Mr. Reinhart alluded to. States
have adopted a variety of different approaches with the help of
CMS. We have more States than ever before negotiating
supplemental rebates with the manufacturers. There is the
national rebate, and States are negotiating further rebates on
top of that. More States than ever before are doing those
supplemental rebates. Other tools, such as prior authorization,
are an important key at the point of access with the physician
to help educate physicians about being price-sensitive in the
Medicaid program. A number of States have adopted prior
authorization in recent years as well. So the focus has been on
several different areas, not just one particular area, to help
States negotiate lower prices for the Medicaid program.
Mr. Reinhart referred to the purchasing pool that had never
existed before this administration approved it and expanded it
to help States pool the lives that are involved in order to get
deeper discounts for the programs. I think that a lot of the
discussion this morning is about information, and I think we
are taking further steps, steps that had not been taken ever
before, about making that information available to the general
public as a whole.
With the prescription discount card under Medicare, the
administration took the unprecedented step of actually putting
on the Web site price comparisons to give the general public
access to information. We believe that information is indeed an
important component. In the marketplace, people having access
to that information is obviously a very important part of
making marketplace work successfully.
I see my time is ready to expire. I appreciate the
opportunity to appear before this subcommittee and ask that my
entire statement be included in the record.
[The prepared statement of Dennis Smith follows:]
Prepared Statement of Dennis Smith, Director, Center for Medicaid and
State Operations Centers for Medicare and Medicaid Services
Mr. Chairman, members of the subcommittee, thank you for your
invitation to appear this morning to discuss Medicaid prescription drug
reimbursement. Coverage of outpatient prescription drugs is an optional
benefit for Medicaid programs. All states currently provide
prescription drug coverage, which is critically important to Medicaid
beneficiaries. However, this benefit is one of the greatest costs for
the states. In fiscal year 2002, Medicaid drug expenditures were $29.3
billion out of $258.2 billion in total Medicaid spending or 11.3
percent. In addition, Medicaid drug spending increased at an annual
average rate of 19 percent from fiscal years 2000 to 2002, while
Medicaid spending as a whole grew 12 percent annually during that
period. In 2003, Medicaid spent more than $34 billion on prescription
drugs (See Chart 1). Of this amount, 23 percent was spent on drugs
commonly prescribed to treat mental health conditions (See Chart 2).
Furthermore, spending varies based on the specific medication
prescribed. For example, under analgesics and anesthetics, the mean
reimbursement for Celebrex is $112 per prescription, compared to $12
for ibuprofen (See Chart 3). In addition, the 29 most commonly
prescribed drugs account for 25% of Medicaid spending on prescription
drugs (Chart 4). Spending on prescription drugs claims varies by state.
The average claim ranges from approximately $40 to more than $60 (See
Chart 5). Therefore, it is important that both the Federal government
and the states ensure that Medicaid programs pay for prescription drugs
appropriately.
States Determine Payment to Providers
Medicaid operates as a provider payment program. States may pay
health care providers directly on a fee-for-service basis, or states
may pay for Medicaid services through various prepayment arrangements,
including payments to managed care plans. Within Federally imposed
upper limits and specific restrictions, each State has broad discretion
in determining the payment methodology and payment rate for
prescription drugs, and what to pay pharmacists in dispensing fees.
Generally, payment rates must be sufficient to enlist enough providers
to ensure covered services are available at least to the extent that
comparable care and services are available to the general population
within a geographic area. Providers participating in Medicaid must
accept Medicaid payment rates as payment in full. It also is important
to note that prices have increased between 5 percent and 7 percent in
recent years. An increase in utilization, as well as an increase in the
Medicaid population has helped to increase the mean reimbursement per
prescription (See Chart 6).
CMS Involvement with Medicaid Drug Pricing
While the States are largely responsible for managing their
prescription drug benefit, Federal law authorizes CMS to ensure the
Federal government receives a good price for prescription drugs. For
example, the Medicaid Drug Rebate Program affords Medicaid programs the
opportunity to pay for drugs at discounted prices, which are similar to
those offered by pharmaceutical manufacturers to other large
purchasers. In addition, Medicaid programs have a number of options to
set prices for prescription drugs, including the Federal Upper Limit
(FUL), maximum allowable cost (MAC), and wholesale acquisition cost
(WAC) programs.
Medicaid Drug Rebate Program Controls Costs
Federal statute requires manufacturers to enter into an agreement
with the Secretary of Health and Human Services, on behalf of the
states, to provide rebates for covered outpatient prescription drug
products paid for by Medicaid through the Medicaid Drug Rebate Program.
Manufacturers that do not sign an agreement are not eligible for
Federal Medicaid coverage of their product(s). Except for some
statutory limitations, if a Medicaid program opts to cover prescription
drugs for their beneficiaries, it must provide coverage and
reimbursement for all covered outpatient drug products manufactured by
companies that have entered into a rebate agreement with CMS, as
Congress has guaranteed access to the Medicaid market for those drug
manufacturers that provide rebates. Approximately 550 pharmaceutical
companies participate in this program. Currently, 49 states and the
District of Columbia participate in the Medicaid Drug Rebate Program
(Arizona has an 1115 waiver that exempts it from participating in the
Medicaid Drug Rebate Program).
Manufacturers submit their Average Manufacturer Price (AMP) and
Best Price (BP) to CMS. Using the AMP and BP, CMS calculates the rebate
amount and informs the states. The rebate is calculated differently
depending on the type of drug. For generic drugs, the rebate is 11
percent of AMP. For brand-name prescription drugs, the rebate is
calculated in two ways. Basic rebates for brand-name drugs are the
greater of 15.1 percent of the AMP or AMP minus BP. In addition, if the
price of a drug increases at a rate faster than the consumer price
index from a base year, the manufacturer would owe the state the
difference dollar for dollar. States receive rebates from manufacturers
based on states' quarterly data on the utilization of the
manufacturers' drugs. The Drug Rebate Program was enacted out of
concern for the costs the Medicaid program was paying for outpatient
drugs. In FY 2003, manufacturers paid rebates to states of about $6.4
billion for covered outpatient drugs. The program gives Medicaid
programs the opportunity to obtain discounted prices similar to those
offered by pharmaceutical manufacturers to other large purchasers.
States that wish to pursue Medicaid supplemental rebates in
addition to rebates already received under the National Drug Rebate
Agreement have the option to negotiate such rebates with drug
manufacturers as specified in Federal law. In recent years, CMS has
approved plan amendments that allow states to negotiate additional
state-specific supplemental rebates for their Medicaid population or
participate in a multi-state pooling supplemental rebate agreement.
Rebates received under state supplemental agreements are shared with
the Federal government at the same rate as the national rebates.
Currently, 33 states have Medicaid supplemental rebates, including
those states in multistate pooling arrangements. Twenty-six states have
negotiated rebates on their own. For example, Florida began collecting
state-only supplemental rebates in 2001 in conjunction with the
establishment of its Preferred Drug List (PDL). Currently, the state
receives supplemental rebates on brand name drugs, but not on generics.
The state received rebates of $51 million in FY 2003 and does not
expect to lose participation from any of the approximately 80
manufacturers that currently pay supplemental rebates.
Medicaid Federal Upper Limit Cuts Costs
One proven method to reduce drug costs for States and to ensure the
government is a prudent purchaser of prescription medications is the
use of generic medications instead of more expensive brand name
pharmaceuticals. As you know, Mr. Chairman, generic drugs are typically
significantly less expensive than their brand-name counterparts (See
Chart 7). This is achieved through the use of the Federal Upper Limit
(FUL), a program that caps Medicaid payments for brand name drugs that
have therapeutically equivalent generic medications available. As a
result, the FUL program, which achieves savings by taking advantage of
current market prices, helps to significantly reduce pharmacy costs for
both the states and the Federal government.
Through the FUL program, CMS sets an upper limit reimbursement
amount for drugs that meet certain criteria. However, not all drugs are
subject to the FUL pricing. To establish the FUL for a drug, CMS
examines the FDA's Orange Book data to determine whether all the
formulations of a drug product approved by the FDA are therapeutically
equivalent. When all of the versions of that drug are not
therapeutically equivalent, there must be at least three
therapeutically equivalent drug products. Once a product has met the
FDA criteria, CMS verifies that it meets the necessary compendium
criteria by consulting the national drug-pricing compendium (Red Book,
First Data Bank, and Medi-Span) to verify that there are at least three
suppliers of the drug listed. If there are three suppliers, CMS sets
the FUL at 150 percent of the lowest price (Average Wholesale Price,
Wholesale Acquisition Cost, or Direct Price). A state's aggregate
payment for all Medicaid prescription drugs with a FUL must not exceed,
in the aggregate, the payment levels established by the FUL program.
The aggregate cap allows states to increase or decrease the cost of
individual prescription drugs in accordance with state or local markets
while maintaining the overall savings created by the FUL program.
States may exceed the FUL price for individual prescription drugs as
long as their aggregate expenditures do not exceed the amounts that
would have otherwise been spent by applying the FUL limit plus a
reasonable dispensing fee.
CMS uses a 150 percent mark-up so that FUL prices are high enough
to ensure that pharmacists can stock an equivalent product without a
loss on acquisition costs. The mark-up also assures that FUL prices are
low enough so that Medicaid will not pay too much for a prescription
drug that is included on the list. The 150 percent mark-up is intended
to balance the interests of both pharmacists and the government in
achieving efficiency, economy, and quality of care. In addition, to
ensure the most accurate prescription drug pricing data, CMS has
actively worked with the publishers of the compendium to resolve FUL
pricing issues and to encourage the collection of accurate data.
Because of the complexity and volatility of the drug marketplace, it is
impossible to be certain that pricing or the inclusion of a drug on the
FUL list is 100 percent accurate. CMS has an on-going process in place
to ensure that any necessary revisions to the list can be identified
and completed. As new information becomes available, CMS compiles a
list of changes that is released periodically to the agency's regional
offices. The regions provide the information to the states, which
notify providers. CMS also posts the changes on its website at
www.cms.hhs.gov/medicaid/drugs/drug10.asp.
We greatly appreciate the various reports of the Office of
Inspector General on its review of prescription drug prices and the FUL
program. While we value their work, in regards to the FUL program, it
must be examined in its entirety. Specifically CMS must establish a
drug product's eligibility for the FUL list that includes verification
with the suppliers of the drugs that are necessary to assure
availability.
Utilizing Maximum and Wholesale Costs
Maximum Allowable Cost (MAC) programs are designed to ensure
Medicaid programs pay appropriate prices for generic and multi-source
brand drugs. Typically, States administering the MAC programs will
publish lists of selected multi-source and generic drugs with the
maximum price at which Medicaid will reimburse for those medications.
Pharmacies generally will not receive payments that are higher than the
MAC price. These programs differ from the FUL list, as states have more
discretion in determining what drugs to include on the MAC list.
Instead of the MAC, some states use wholesale acquisition costs (WAC),
which is the listed price supposedly paid by a wholesaler for drugs
purchased from the wholesaler's supplier, typically the manufacturer of
the drug.
Additional Tools Are Available to States to Address High Prescription
Drug Costs
In addition to the rebate program, and as a result of increasing
prescription drug costs, State Medicaid programs have implemented a
variety of cost-containment mechanisms in their drug programs over the
past few years. These mechanisms have allowed States to reduce their
pharmacy expenditures and maintain beneficiary access to a vital part
of their overall health care. While some of the pharmacy techniques
employed by the States represent prudent management of program costs,
the Medicaid drug benefit remains a State option with benefits and
limitations that vary from State to State. CMS can provide consultation
and support to assist states in using these and other methods to lower
their drug costs without compromising quality of care. However, aside
from federal regulations, most Medicaid cost containment decisions
ultimately are made at the state level. States use a variety of methods
to pay for prescription drugs. In addition, they use a variety of cost
control measures. For example, the use of copayments, generic
substitution, and disease management programs are handled at the state
level (See Chart 8).
Copayments Contribute to Cost Containment
At their discretion, states may impose nominal deductibles,
coinsurance, or copayments on some Medicaid beneficiaries for certain
services. Nominal copayments are a tool available to states as a cost
containment measure. The use of copayments for prescription drugs
varies from state to state. Nineteen states have no copayment, and the
vast majority of the remaining states require a copayment ranging from
50 cents for generic drugs to $3.00 for brand-name prescriptions. Cost
sharing limits are set by Federal regulation and have not changed in
many years. In addition, some groups are totally exempt from cost-
sharing by law. Pregnant women, children under age 18, and hospital or
nursing home patients who are expected to contribute most of their
income to institutional care are exempt from cost-sharing.
States' Aggressive Generic Substitution Saves Money
Generic drugs account for more than half of all prescriptions in
the United States. Many private health plans have generic drug use
rates of more than 90 percent, but generics are not as widely used in
some Medicaid programs. The low prices of generic drugs in the United
States are an important potential source of savings for states. The
potential cost-savings by the use of generic drugs has prompted 39
states to require that the generic version of a drug be dispensed to
Medicaid beneficiaries when available. Under these mandatory generic
substitution policies, the brand name drug remains available to
beneficiaries through prior authorization. Examples of ``best
practices'' involving generic drugs include Minnesota and Idaho. For
example, Minnesota has had a mandatory generic substitution policy in
place for nearly a decade. This saves the State $10 million annually.
Idaho also has a mandatory generic substitution policy, which increased
the percentage of generic drugs dispensed from 46.7 percent in fiscal
year 2002 to 53 percent in fiscal year 2003. Idaho's policy saved $11.7
million in State and Federal funds.
Drug Utilization Review Protects Patients and Reduces Costs
Congress created the Medicaid Drug Utilization Review (DUR) Program
through the Omnibus Budget Reconciliation Act of 1990. The program
promotes patient safety by an increased review and awareness of
outpatient prescribed drugs. Under the law, states are required to
complete annual reports, which provide an excellent measurement tool to
assess how well states have implemented the DUR program and the effect
DUR has had on patient safety, provider prescribing habits and dollars
saved. In addition to promoting patient safety and positive health
outcomes, the DUR program serves as a cost savings strategy by avoiding
problems such as adverse drug interactions, drug-disease interactions,
therapeutic duplication and over-prescribing by providers.
State Medicaid Disease Management Programs Reduce Expenses
Disease management programs are an emerging strategy for states to
improve care and are designed to reduce overall expenditures, including
drug expenditures, through more appropriate medication use for Medicaid
beneficiaries with chronic illnesses. Both North Carolina and
Washington have instituted successful disease management programs. For
instance, North Carolina's Pharmacy Management Initiative has lowered
drug costs of participants by 22 percent through use of a preferred
drug list and is expected to save $9 million in 2004 through its
pharmacy program that reviews the drug regime of nursing home residents
and recommends changes consistent with appropriate prescribing
practices.
States' Additional Techniques to Control Costs
States use a number of additional techniques to control Medicaid
prescription drug costs.
Approximately 9 states have strict limits on the number of brand name
prescriptions that can be filled.
About 37 states employ refill and/or monthly or annual prescription
limits.
Virtually all states (50 with the exception of Tennessee but
including DC) report using day supply limits ranging from about
a 30 to 100 day supply.
About 32 states have fail-first or step therapy programs in place.
Fail-First policies require that the patient fail on at least
one other medication as a prerequisite for authorization of a
specific, often non-formulary, medication. Step Therapy is a
prescription pattern based on the state of illness that
involves using the drug believed to be the most cost-effective
first, followed by more expensive therapies.
Approaches for Cost Containment in Medicaid and the Private Sector
Differ
The private sector utilizes a number of techniques to control their
prescription drug costs, including significant consumer cost sharing,
which would not be appropriate in the Medicaid setting. For example,
private health plans use tiered copayments, which vary depending on
whether the drug is generic, preferred, brand-name, or not included on
a plan's formulary. Utilizing a range of copayments encourages patients
to select lower-cost options. State Medicaid programs, however, may
institute only a nominal copayment or coinsurance for prescription
drugs, as Federal regulation sets a mandated $3 limit or a 5 percent
coinsurance limit. Furthermore, as mentioned above, by law states
cannot require prescription drug copayments for pregnant women,
children under age 18, and hospital or nursing home patients who are
expected to contribute most of their income to institutional care.
Some private insurers also require their members to obtain their
prescriptions solely through mail-order pharmacies to control costs. In
Medicaid, there is freedom of choice of provider and any willing
provider. While Medicaid programs could apply for a waiver to use mail-
order pharmacies to dispense medications to those with chronic
conditions, states do not have the authority to restrict people with
Medicaid to mail-order pharmacies for all their prescriptions.
Private insurers use formularies with tiered cost sharing and
exclusion of certain drugs as a cost saving strategy. However, Medicaid
must cover all FDA-approved drugs for every manufacturer that has a
national rebate agreement, with some exceptions. States may utilize a
preferred drug list, which would exclude certain drugs, but Federal law
requires these excluded drugs be made available through prior
authorization. In addition, private insurers may not cover particular
drugs, such as oral contraceptives and antihistamines, topical nasal
products, and cough/cold products. These drugs account for 4 percent of
Medicaid spending on prescription drugs (See Chart 9).
Conclusion
Mr. Chairman, members, thank you again for the opportunity to
testify. CMS will continue to assist all states in adopting safe,
proven approaches to lowering drug costs while providing access to
prescription drugs and quality care. In addition, CMS will fulfill its
role as a partner through the Federal Upper Limit and Medicaid Drug
Rebate programs to ensure the government is a prudent purchaser of
prescription medications. Thank you again for hearing my testimony, and
I am happy to answer any questions you might have.
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Mr. Walden. It will be. Thank you, Mr. Smith.
Mr. Reeb, thank you for being with us.
TESTIMONY OF GEORGE M. REEB
Mr. Reeb. Good morning, Mr. Chairman. I am George Reeb; I
am assistant inspector general for the Centers of Medicare and
Medicaid Audits within the HHS Office of Inspector General.
Robert Vito, regional inspector general for evaluations and
inspections in Philadelphia, accompanies me. We appreciate the
opportunity to appear before you today.
In short, the Medicaid program continues to pay too much
for prescription drugs. My written statement describes the
OIG's work, showing that the Medicaid drug program could save
money if it is improved on four particular fronts.
First, States need better methods for estimating pharmacy
acquisition costs. Second, CMS must ensure that qualified drugs
are placed on the Federal upper limit lists in a timely manner.
Third, States must do a better job of accounting for their
billing and collections of the rebates from the rebate
collection process. And, fourth, CMS, we believe, should seek
legislation to correct the inconsistencies which exist between
the rebate and the reimbursement calculations.
Most States have used and continue to use the average
wholesale price to estimate pharmacies' acquisition costs of
drugs. The published AWPs that States use to establish their
Medicaid drug reimbursements generally bear little resemblance
to the prices incurred by retail pharmacies to purchase drugs.
In prior audit reports that we issued in 2001 and 2002, we
estimated that pharmacies' actual acquisition costs for brand-
name drugs in 1999 was an average of 21 percent below AWP and
for generic drugs was an average of 65 percent below AWP. The
effect of the difference between the pharmacy invoice costs and
the amount Medicaid would have paid for those drugs was about
$1.5 billion, a spread from which the States could have derived
savings through better reimbursement methods.
After additional analyses based on both State and industry
interests, we recommend that, if States continue to use a
reimbursement system based on AWP, they should consider
adopting a four-tiered payment system that is described in my
written statement.
Next, I would like to mention our findings with regard to
the Federal upper limit program. For multiple-source drugs,
Medicaid limits reimbursement to Federal upper limit amounts if
at least three generic equivalents are available and certain
other requirements are met. Medicaid misses savings
opportunities when qualified drugs are not placed on the
Federal upper limit list in a timely manner. In a report we
issued in February of this year, we estimated that Medicaid
could have saved $123 million in 2001 if CMS had added just 55
more products to the Federal upper payment list.
As a follow-up to that report, your committee requested
that OIG conduct additional work on this subject. Today, we are
releasing the results of that work. Again, we found that
qualified drugs needed to be added more timely to the Federal
upper limit list. Delays in adding the drugs we reviewed cost
the Medicaid program an estimated $167 million between 2001 and
2003.
Another area we reviewed is the extent to which States vary
in their Medicaid reimbursements for the same drugs. We
estimated that, overall, Medicaid could have saved as much as
$86 million in fiscal year 2001 if the 42 States that we
reviewed had reimbursed at the same price as the lowest paying
price--lowest paying State for each of the selected drugs.
Overall, we believe that States could reduce their spending on
prescription drugs by adopting various strategies that other
States have successfully used to contain costs.
States also spend too much on prescription drugs because
they do not adequately manage their Medicaid rebate billings
and collections process. We recently completed audits at the
rebate programs in 48 States and the District of Columbia. We
found that rebate accounting systems were inadequate, and
information submitted to CMS was unreliable, thereby
undermining CMS' ability to oversee the drug reimbursement
rebate process.
My written statement also describes concerns we have about
the negative effect of inconsistencies between the key values
that are used for calculating rebates and reimbursements. We
estimate that, if rebates and reimbursements had been
calculated using the same value, Medicaid would have achieved a
substantial increase in added rebates. Audit work in progress
confirms that Medicaid continues to overspend because of this
inconsistency in the rebate and the reimbursement processes.
Medicaid reimbursement should reliably reflect the actual cost
of the drugs to the pharmacy. We do not believe that occurs
now, and States need assistance in strengthening their ability
to make reasonable payments for the drugs they do cover.
Mr. Chairman, this concludes my testimony, and we welcome
any questions you may have.
[The prepared statement of George M. Reeb follows:]
Prepared Statement of George M. Reeb, Assistant Inspector General for
the Centers for Medicare and Medicaid Audits, Office of Inspector
General, U.S. Department of Health and Human Services
Good morning, Mr. Chairman. I am George M. Reeb, Assistant
Inspector General for the Centers for Medicare and Medicaid Audits at
the U.S. Department of Health and Human Services' Office of Inspector
General (OIG). Robert Vito, Regional Inspector General for Evaluation
and Inspections in Philadelphia, accompanies me. We appreciate the
opportunity to appear before you today to present information regarding
Medicaid's payments to pharmacies for prescription drugs.
In short, the Medicaid program continues to pay too much for
prescription drugs. My testimony provides a brief overview of OIG's
body of work over the last several years related to Medicaid-covered
drugs that provides the basis for our belief that Medicaid is paying
too much for prescription drugs and offers suggestions for controlling
Medicaid spending.
The testimony describes OIG's findings regarding (1) pharmacy
acquisition costs and average wholesale price, (2) the Federal upper
limit program, (3) State variations in reimbursements for the same
drugs, and (4) the Medicaid drug rebate program. I am also providing
additional analytical information on pharmacy acquisition costs,
highlights of Medicaid-related settlements with pharmaceutical
manufacturers and chain drug stores, and a list of selected OIG reports
and other guidance that are available on our Web site at http://
www.oig.hhs.gov.
The Centers for Medicare & Medicaid Services estimated that
calendar year 2003 Medicaid expenditures for prescription drugs totaled
more than $31 billion, triple the $9.4 billion spent in 1994. Both the
States and the Federal Government share these expenditures. Under
Federal law, States have wide latitude in setting their reimbursement
rates for prescription drugs. Federal regulations require that each
State's reimbursement for a drug not exceed, in the aggregate, the
lower of estimated acquisition cost plus a reasonable dispensing fee or
the providers' usual and customary charge to the public for the drug.
For certain multiple-source (generic) drugs, Medicaid regulations set
Federal upper limits that are contained on a list published by CMS.
Within this general framework, the States use a variety of different
pricing mechanisms when setting reimbursement amounts.
States must reasonably reimburse pharmacies for prescription drugs
provided to Medicaid beneficiaries; yet, they lack access to
pharmacies' actual acquisition costs. Due to this lack of data, they
rely on estimates to determine Medicaid reimbursement. These estimates
include formulas for estimating pharmacy acquisition cost, pharmacies'
``usual and customary'' charges, Federal upper limits, and State
maximum allowable costs.
pharmacy acquisition costs and average wholesale price
Most States have used and continue to use the average wholesale
price (AWP) to estimate pharmacies' acquisition costs of drugs. For the
most part, AWP's (which are not clearly defined by law or regulation)
are compiled in drug compendia such as Medical Economics' Red Book. As
our audit findings have demonstrated, the published AWPs that States
use to establish their Medicaid drug reimbursements generally bear
little resemblance to the prices incurred by retail pharmacies to
purchase drugs.
Until the passage of the Medicare Prescription Drug, Improvement,
and Modernization Act of 2003, Medicare also used AWP as the basis for
most drug reimbursements. Although the Congress recently took action to
help lower excessive payment levels for Medicare, Medicaid's
reimbursement methodology continues to be based largely on the same
inflated AWPs that had plagued Medicare.
To compare actual pharmacy acquisition costs to AWP, for calendar
year 1999 we obtained from 217 pharmacies in 8 States pricing
information that included thousands of invoice prices for both brand
and generic drug products. We compared each invoice drug price to the
AWP for that drug and calculated the percentage, if any, by which the
invoice price was discounted below AWP. We estimated that pharmacy
acquisition costs for brand name drugs in 1999 were an average of 21.8
percent below AWP and for generic drugs were an average of 65.9 percent
below AWP. Both estimates were higher than our previous studies of 1994
data that showed 18.3 percent below AWP for brands and 42.4 percent
below AWP for generics.
Our comparisons of pharmacy acquisition costs to AWP for 1999 did
not adjust the invoice prices for the net effect of discounts available
to most pharmacies, such as volume discounts, prompt pay discounts, and
related rebates provided to pharmacies by manufacturers and/or
wholesalers that would further lower the total pharmacy acquisition
costs. For that one year, 1999, we estimated that the combined pharmacy
invoice costs alone for brand name and generic drugs may have been as
much as $1.5 billion lower than Medicaid would have paid for those
drugs using the States' national average discount from AWP of 10.3
percent. This $1.5 billion constitutes a spread from which States could
have derived savings through better reimbursement methods. We used a
single average discount in the calculation because, in 1999, most
States used the same discount for brand name drugs as they did for the
generics that did not have an upper limit.
In the audit of 1999 data, we did not attempt to assess the
adequacy of dispensing fees paid by the States to pharmacies. Based on
information available from CMS, it appears that States have
significantly varying amounts of dispensing fees.
In 2002, in response to requests by the industry and the States'
interest in having more information on pharmacy purchase prices for
additional categories of drugs, the OIG conducted an additional
analysis of the 1999 data. That analysis provided a more comprehensive
breakdown of percentages for a variety of drug categories. The analysis
demonstrated a wide range of discounts from AWP for pharmacy purchases,
depending on the category of drug that was being purchased. We
concluded that the common method of reimbursing for brand name drugs
and certain generic drugs using a single percentage discount does not
adequately consider the large fluctuations in actual discounts between
brands and generics. We recommended that, if States continue to use a
reimbursement system based on AWP, they should consider adopting a
four-tiered payment system. More information about the additional
analysis and the recommended four-tiered payment system is provided in
Appendix A.
States continue to use a discounted AWP for estimating pharmacy
acquisition costs. However, many have established separate discounts
for brand name and generic drugs. CMS estimated that for the year 2003,
for brand drugs, the States' discounts from AWP ranged from 5 percent
to 16 percent. For generic drugs, CMS estimated that the States'
discounts from AWP ranged from 5 percent to 50 percent. A small number
of States use wholesale acquisition cost rather than AWP when
estimating the acquisition cost.
One reason States continue to rely on AWP, despite its widely
recognized deficiencies, is that States lack access to alternative,
more accurate price information. One option that could be studied is
the feasibility of developing a base payment methodology that uses
actual pharmacy invoice prices adjusted, if necessary, for a
profitability factor after netting post-invoice discounts and other
considerations.
FEDERAL UPPER LIMITS
For multiple-source (generic) drugs, Medicaid limits reimbursement
to Federal upper limit amounts if at least three generic equivalents
are available and certain other requirements are met. The Federal upper
limits restrict the amount that Medicaid can reimburse for drugs that
have available generic equivalents (42 CFR 447.332). Medicaid misses
savings opportunities when qualified drugs are not placed on the
Federal upper limit list in a timely manner.
To quantify the missed savings opportunities, we obtained a list of
the top 200 multiple-source drugs based on retail sales for the year
2001 and determined whether the drugs were on CMS's November 2001
Federal upper limit list. In a report issued in February 2004, we
reported that 90 drugs were not included on the list despite meeting
the established criteria. We estimated that Medicaid could have saved
$123 million in 2001 if CMS had added just 55 of these 90 products to
the Federal upper limit list. Four products alone accounted for 71
percent of the $123 million in potential savings. Subsequently, CMS
added 9 of the 90 products to the Federal upper limit list. Seven of
the nine products accounted for $94 million of the $123 million in
savings we calculated for 2001.
As a follow-up to this report, your Committee requested that OIG
conduct additional work to answer the following questions:
Since 2001, how many generic drugs have met the criteria for
inclusion on the Federal upper limit list?
How many of these drugs have been included on the Federal upper limit
list?
How long, on average, did it take CMS to add newly qualified drugs to
the list?
How much does lag time between when a drug meets the criteria and its
inclusion on the Federal upper limit list cost the Medicaid
program?
Today, we are releasing the results of our work related to the
Committee's request. Again, we found that CMS does not consistently add
qualified drugs to the Federal upper limit list in a timely manner. Of
the 252 first-time generic drugs approved between 2001 and 2003, 109
products met the statutory and regulatory criteria for inclusion on the
list. CMS had added only 25 of the 109 drugs to the list as of July 15,
2004 (date of analysis), and very few of these were included in a
timely manner. It took CMS an average of 36 weeks to place these
products on the list once they met the statutory and regulatory
criteria for inclusion. Only 3 of the 25 drugs were included on the
list when they first became qualified. The longest delay was for two
versions of Metformin Hydrochloride, which were qualified for 102 weeks
before being added in March 2004.
An additional 84 of the 109 drugs we reviewed had still not been
added to the Federal upper limit list as of July 15, 2004. The delay in
adding these 84 drugs averaged 55 weeks as of that date.
Delays in adding the reviewed drugs cost the Medicaid program an
estimated $167 million between 2001 and 2003. A majority of the losses
were attributable to delays in adding just eight drugs, which accounted
for 85 percent ($143 million) of the estimated losses. The product with
the highest losses for Medicaid, Fluoxetine 20 mg capsules (brand name
Prozac), illustrates the potential effect of not adding drugs to the
Federal upper limit list in a timely manner. Fluoxetine met all
criteria for inclusion on the Federal upper limit list by April 1,
2002. However, CMS did not place Fluoxetine on the list until December
1, 2002. We estimate that this delay in adding the 20 mg dosage size of
Fluoxetine capsules cost Medicaid an estimated $57 million dollars. The
Federal share of the loss on Fluoxetine was approximately $32.6
million. The Federal share of the $167 million loss on all the drugs we
reviewed was approximately $95.5 million.
Based on the findings of this report, we recommended that CMS
establish an administrative procedure and schedule to govern the
determination and publication of Federal upper limits. We also
suggested that CMS focus its resources on ensuring that high-volume
drugs that have recently come off patent are added to the list
expeditiously. The report is available on OIG's Web site today under
``What's New,'' and I have provided the report to the Committee.
STATE VARIATIONS IN REIMBURSEMENTS FOR THE SAME DRUGS
As previously mentioned, States have wide latitude in setting their
reimbursement amounts for prescription drugs. In September 2004, we
issued a report of a study in which we assessed the extent to which
States vary in their Medicaid reimbursement for the same drugs. We
analyzed fiscal year 2001 State Medicaid prescription drug
reimbursement data for a sample of 28 national drug codes. A national
drug code is a numeric identifier issued by the Food and Drug
Administration (FDA) for each drug. The code indicates the manufacturer
of the drug, the product dosage amount, and the package size. Forty-two
States agreed to participate in our review and provided us with their
total ingredient reimbursement amount (excluding dispensing fees) and
the total units reimbursed for each of the 28 national drug codes.
Using the data supplied by States, we calculated an average unit price
per drug and found substantial variations in States' payments for the
same drugs. These variations translate into overspending by Medicaid.
Based on State data, we estimated that, overall, Medicaid could
have saved as much as $86.7 million in fiscal year 2001 if all 42
States had reimbursed at the same price as the lowest paying State for
each of the drugs reviewed. In fact, Medicaid could have cut its
spending by more than half if all States had paid the same price as the
lowest paying State for just 9 of the 28 drugs. These savings estimates
derive from only 28 national drug codes that were randomly selected
from 600 national drug codes for which there were substantial Medicaid
outlays. Medicaid covers over 50,000 national drug codes, implying a
potential for even greater program savings.
We believe savings could be achieved if CMS would: (1) share with
the States the various types of price data it collects to help States
develop better estimates of pharmacy acquisition costs, (2) conduct
further research on the factors that affect States' drug prices to be
able to advise States more effectively on ways to set their
reimbursement levels, and (3) annually review the States' drug prices
in order to share comparative State prices and methods to reduce costs.
MEDICAID DRUG REBATE PROGRAM
State Accounting for Rebate Billings and Collections
In addition to paying too much up front for Medicaid prescription
drugs, States exacerbate their overspending of State and Federal funds
by poor management of their rebate billings and collections. Pursuant
to the Medicaid Drug Rebate Statute, States collect rebates from drug
manufacturers for drug purchases made under the Medicaid program. The
drug rebate program allows Medicaid to receive pricing benefits
commensurate with its position as a high-volume purchaser of
prescription drugs.
The statutory drug rebate program became effective in January 1991.
After a start-up period, we audited the effectiveness of the new
program in eight States. In June 1993, we reported that CMS had not
ensured that States had established proper accountability and controls
over the billing and collection of drug rebates. In addition, CMS could
not develop a nationwide total of the uncollected portion of Medicaid
drug rebates because States were only required to report the rebates
that were collected. We replicated our review recently on a national
scale, using 2002 information, and found that, while accountability had
improved since our 1993 report, improvements are needed in most States.
Weaknesses included the following:
Rebate accounting systems were inadequate.
Information submitted to CMS was unreliable, undermining CMS's
ability to oversee the program.
Accounting for interest on late rebate payments was improper.
The dispute resolution and collection processes were inadequate.
We are in the process of developing a national roll-up report. The
individual final reports for each State and the District of Columbia
are currently available on our Web site.
Drug Rebate Calculations
Additional Medicaid overspending occurs because of an inconsistency
between the key values used for calculating rebates and reimbursements.
Currently, Medicaid requires that rebates be based on a specifically
designated value, average manufacturer price (AMP), while, at the same
time, allowing reimbursements to be calculated using other values
(usually a discounted AWP). This creates a situation whereby
fluctuations in reimbursements do not result in a corresponding
adjustment in the associated rebates. When a State increases its
payments for a drug, it would not receive a correspondingly higher
rebate on that drug purchase because there is currently no connection
between the reimbursement and rebate calculations. Legislation is
needed to establish a connection.
In a 1998 audit report, we recommended that CMS seek legislation
requiring drug manufacturers to pay Medicaid drug rebates on the same
basis that States determine reimbursements. The recommendation was
supported by our review of data for calendar years 1994 through 1996
for 100 brand name drugs that had the greatest amount of Medicaid
reimbursement in that period. We estimated that if rebates had been
based on AWP (instead of on the statutorily required AMP) for that
period, Medicaid would have achieved over $1 billion in added rebates.
We used AWP to calculate the rebates for the period because most States
were basing drug reimbursements on AWP minus a percentage discount.
According to information States have reported to CMS, most States
continue to use AWP in their reimbursement methodologies. Audit work in
progress confirms that Medicaid continues to overspend because of the
inconsistent bases used for reimbursement and rebates.
Manufacturers' Calculation of AMP
AMP is supposed to represent the price at which the manufacturers
sell their drugs to wholesalers for use in the retail class of trade.
In addition to the situation described above, our work at selected
manufacturers has shown they are making inconsistent interpretations as
to what components are included in AMP. The inconsistencies have
included how to treat Medicaid sales and accounting for sales and price
concessions that flow through organizations that represent both retail
and non-retail customers. It is important that all manufacturers report
consistent and accurate information in order for the rebate process to
work as intended. We therefore suggest that additional clarification of
the definition of AMP be provided by CMS. This would both improve the
rebate process and assist States that may consider the use of AMP data
in estimating pharmacy acquisition costs for reimbursement purposes.
CONCLUSION
All States could reduce their spending on prescription drugs by
adopting various strategies that other States have successfully used to
contain costs. The savings could be even greater if states had better
access to accurate pricing information. Reimbursement should reliably
reflect the actual costs of the drug to the pharmacy and be grounded in
information that can be validated. There is an urgent need for the
Medicaid policymaking community to assist States in strengthening their
ability to make reasonable payments for the drugs they cover. This
concludes my testimony, and I welcome your questions.
Appendix A
ADDITIONAL ANALYSIS OF PHARMACY ACQUISITION COSTS AND AVERAGE WHOLESALE
PRICE
OIG collected brand name and generic drug acquisition costs for
calendar year 1999 and compared those costs to the average wholesale
price (AWP) for each drug. After issuing separate reports on brand name
and generic drugs, we conducted an additional analysis that provided a
more comprehensive breakdown of percentages for a variety of drug
categories. We found that:
For single source innovator drugs, pharmacies purchased the drugs at
an estimated discount of 17.2 percent below AWP.
For all drugs without Federal upper limits (single source innovator,
multiple source innovator, and multiple source non-innovator),
pharmacies purchased the drugs at an estimated discount of 27.2
percent below AWP.
For multiple source drugs without Federal upper limits, pharmacies
purchased the drugs at an estimated discount of 44.2 percent
below AWP. A further breakdown of these drugs showed the
estimated discount for innovator multiple source drugs to be
24.4 percent and 54.2 percent for non-innovator multiple source
drugs.
For multiple source drugs with Federal upper limits, pharmacies
purchased the drugs at an estimated discount of 72.1 percent
below AWP.
These percentages do not consider discounts available to most
pharmacies, such as volume discounts, prompt pay discounts, and related
rebates that would further reduce acquisition costs.
The analysis shows that there is a wide range of discounts from AWP
for pharmacy purchases depending on the category of drug that is being
purchased. We concluded that, if States continue to use a reimbursement
system based on AWP, CMS should encourage States to consider adopting a
four-tiered payment system consisting of a percentage discount off AWP
for:
(1) single source brand name drugs;
(2) innovator multiple-source drugs without a Federal upper limit; and
(3) non-innovator multiple-source drugs without a Federal upper limit.
(4) The fourth tier would be to pay the Federal upper limit price for
qualified multiple source drugs.
As in the audits on which this additional analysis was based, we
focused our efforts on evaluating the pharmacy's acquisition costs for
the drugs and offer no opinion on the adequacy of the dispensing fees
being paid.
Appendix B
MEDICAID-RELATED PRESCRIPTION DRUG SETTLEMENTS
Settlements with Pharmaceutical Manufacturers
Recent Federal investigations of pharmaceutical manufacturers that
led to settlements involving Medicaid prescription drug cases serve to
illustrate weaknesses and vulnerabilities in the Medicaid drug
reimbursement arena. Following are descriptions of some, but not all,
relevant cases. Both the United States and individual States have
negotiated other settlements that are not mentioned here.
The OIG's ``Compliance Program Guidance for Pharmaceutical
Manufacturers'' is available on the OIG Web site at http://
www.oig.hhs.gov/fraud/complianceguidance.html.
Schering-Plough Corporation. Recently, ScheringPlough Corporation
agreed to pay $345.5 million as part of a global settlement with the
Government and entered a 5year corporate integrity agreement (CIA) with
the OIG. As part of the settlement, Schering-Plough agreed to pay $293
million to resolve its civil and administrative liabilities in
connection with illegal and fraudulent pricing of its allergy drug
Claritin under the Medicaid drug rebate program. The civil portion of
the case focused on ScheringPlough's alleged failure to include the
value of certain incentives offered to two managed care organizations
in Schering-Plough's determination of the best price reported for
purposes of the Medicaid drug rebate program. By failing to include the
value of the incentives in its determination of best price,
ScheringPlough allegedly underpaid rebates due to the States and
overcharged entities (such as community health centers) that purchased
drugs at ceiling prices that are based on Medicaid drug rebate prices.
With regard to the criminal portion of the case, a subsidiary of
ScheringPlough, the Schering Sales Corporation, pled guilty to a
kickback charge and was sentenced to pay a $52.5 million criminal fine.
Schering Sales Corporation was charged with paying a kickback of almost
$2 million in order to keep Claritin on the formulary of a managed care
organization.
Pfizer Inc. As part of a fiscal year 2004 global settlement of $430
million plus interest, Pfizer Inc. (Pfizer), Warner-Lambert Company LLC
(Warner-Lambert), and the Parke-Davis Division agreed to pay $190
million in a civil False Claims Act settlement relating to Warner-
Lambert's promotion of the drug Neurontin. Pfizer acquired Warner-
Lambert and its Parke-Davis Division in June 2000. Between July 1995
and June 2001, Neurontin was approved by FDA only for use in treating
epilepsy, but Warner-Lambert allegedly engaged in a wide-ranging
program to promote Neurontin for other uses. The Government alleges
that these activities caused the submission of false and/or fraudulent
claims to Medicaid. To resolve its criminal liability, Warner-Lambert
pled guilty to violating the Federal Food, Drug and Cosmetic Act and
agreed to pay a $240 million criminal fine. Pfizer entered a
comprehensive 5-year corporate integrity agreement with OIG.
AstraZeneca Pharmaceuticals, LP and Zeneca Inc. In June 2003, the
United States announced a global settlement with AstraZeneca. The
company agreed to pay a total of almost $355 million and enter a 5-year
CIA with OIG to resolve its criminal and civil liabilities relating to
the marketing and pricing of its prostate cancer drug, Zoladex.
AstraZeneca pled guilty to conspiracy to violate the Prescription Drug
Marketing Act by causing the submission of reimbursement claims for
Zoladex that had been provided free of charge as samples. The
Government also alleged that AstraZeneca paid illegal remuneration (in
various forms including grants, travel, and entertainment) to induce
the purchase of Zoladex; that AstraZeneca created and marketed an
average wholesale price (AWP) spread between the Medicare reimbursement
for Zoladex and its cost; and that AstraZeneca misreported and
underpaid Medicaid rebates for Zoladex. AstraZeneca also agreed to
enter separate settlements with the States.
Bayer Corporation. In April 2003, Bayer Corporation agreed to pay
$257.2 million in criminal fines and civil assessments to settle a
False Claims Act case relating to the Medicaid drug rebate program.
Bayer agreed to plead guilty to charges that it violated Federal law by
failing to report certain information to FDA. The case focused on
Bayer's failure to include certain sales to Kaiser Permanente Medical
Care (an HMO) in its calculation of Best Price reported for purposes of
the Medicaid drug rebate program. The Medicaid drug rebate program
requires drug manufacturers to report their Best Prices to CMS and to
pay rebates to the State Medicaid programs based on those reported
prices.
GlaxoSmithKline. Also in April 2003, GlaxoSmithKline settled a
Medicaid drug rebate case for almost $88 million, based on facts
similar to the Bayer matter discussed above. In connection with the
settlement, GlaxoSmithKline entered a 5-year CIA with OIG.
GlaxoSmithKline also agreed to enter into separate settlement
agreements with the States.
Pfizer, Inc. In October 2002, the United States settled a Medicaid
drug rebate case with Pfizer, Inc., Warner-Lambert Company and the
Parke-Davis Division. The Government alleged that Warner-Lambert failed
to include the value of certain unrestricted educational grants in the
best price reported for purposes of the Medicaid drug rebate program
and, as a result, underpaid rebates due. The government alleged that
Warner-Lambert paid the grants to a managed care organization in order
to obtain unrestricted formulary status for the cholesterol-lowering
drug, Lipitor. As part of the settlement, Pfizer paid $49 million and
entered a five-year CIA with OIG.
TAP Pharmaceutical Products, Inc. In October 2001, the United
States announced a major global health care fraud settlement with TAP
Pharmaceutical Products Inc. TAP agreed to pay a total of $875 million
to resolve its Medicare and Medicaid liability. TAP agreed to plead
guilty to violating Federal law governing the use of drug samples. In
addition, TAP allegedly set and reported AWPs for its prostate cancer
drug, Lupron, at levels far higher than the actual acquisition cost of
the majority of its customers (such as physicians) and caused those
customers to receive excess reimbursement from Medicare and Medicaid.
TAP also allegedly underpaid rebate amounts due to the States under the
Medicaid drug rebate statute.
Bayer Corporation. In February 2001, the United States entered a
$14 million settlement with Bayer Corporation in connection with
Bayer's AWP pricing and Medicaid drug rebate practices relating to six
drugs. The Government alleged that Bayer set and reported AWPs for the
drugs at levels far higher than the actual acquisition costs of the
products; that Bayer made misrepresentations to the Medicaid programs
of certain States; and knowingly misreported and underpaid Medicaid
rebates for the drugs. As part of the settlement, Bayer entered a five-
year CIA with OIG.
Settlements with Chain Drug Stores
Rite Aid Corporation. In 2004, Rite Aid Corporation agreed to pay
$7 million and enter a 4year CIA to resolve its civil and
administrative liability relating to the submission of claims to
Medicaid and other Government health care programs for partially-filled
prescriptions for drugs that were not delivered to the beneficiaries
and, in some instances, were ultimately returned to stock. In addition
to the settlement with the Federal Government, Rite Aid entered
settlements with 28 States and the District of Columbia to resolve
alleged liability to the States for the Medicaid damages.
Wal-Mart Stores, Inc. In 2004, Wal-Mart Stores, Inc., agreed to pay
almost $2.87 million and enter a 4-year CIA to resolve alleged civil
and administrative liabilities relating to the submission of claims for
partially filled prescriptions between 1990 and 2000. The settlement
resolved a False Claims Act qui tam suit alleging that Wal-Mart
submitted false claims each time it dispensed only a portion of a
prescription to a customer yet billed Medicaid, TRICARE, or the Federal
Employee Health Benefits Program for the full amount of the
prescription.
Eckerd Corporation. In May 2002, Eckerd Corporation entered a
settlement with the United States and a group of States for $9 million.
Eckerd also entered into a 5-year CIA with OIG. The Government alleged
that Eckerd submitted false claims each time it dispensed only a
portion of a prescription to the customers but billed for the full
amount of the prescription. The claims at issue were submitted to
Medicaid, TRICARE, and the Federal Employee Health Benefits Program
between 1986 and 2000. Previously, ECK M.D., Inc., an affiliate of
Eckerd, pled guilty to submitting false claims to Medicaid and to
violating certain record-keeping requirements of the Controlled
Substances Act.
CVS Corporation. In July 2001, the U.S. Department of Justice and
the OIG, working jointly with representatives of the States, reached
settlement in a qui tam action against CVS Corporation, involving
allegations that the company submitted claims for partially filled
prescriptions to Medicaid, TRICARE, and the Federal Employee Health
Benefits Program. In addition to paying $4 million to the Government,
CVS also agreed to a 4-year CIA.
Walgreen Co. In 1999, the Federal and State governments (through
the Medicaid Fraud Control Units) entered the first settlement with a
major retail pharmacy chain for conduct involving partially filled
prescriptions billed to Medicaid and other Federal health care
programs. Walgreen Co. paid $7.6 million and entered a 4-year CIA to
resolve its liability.
Appendix C
SELECTED MEDICAID DRUG REPORTS AVAILABLE ON THE OIG WEB SITE (HTTP://
WWW.OIG.HHS.GOV)
A-06-91-00092: HCFA Needs to Provide Additional Guidance to Drug
Manufacturers To Better Implement the Medicaid Drug Rebate
Program. 1992. (Inconsistencies in manufacturers methods used
to determine AMP.)
A-06-91-00102: Improvements Needed in HCFA's Procedures To Implement
the Medicaid Drug Rebate Program. 1992. (Errors in AMP and best
price.)
A-06-92-00029: Management Controls Over the Medicaid Drug Rebate
Program. 1993. (Inadequate State controls and accountability
over billing and collection of rebates.)
A-06-96-00030: Medicaid Pharmacy: Actual Acquisition Cost of
Prescription Drug Products for Brand Name Drugs. 1997. (Based
on invoices, in 1994 pharmacy acquisition costs for brand name
drugs averaged 18.3 percent below AWP.)
A-06-97-00011: Medicaid Pharmacy--Actual Acquisition Cost of Generic
Prescription Drug Products. 1997. (Based on invoices, in 1994
pharmacy acquisition costs for generic drugs averaged 42.5
percent below AWP.)
A-06-97-00052: Need to Establish Connection Between the Calculation of
Medicaid Drug Rebates and Reimbursement for Medicaid Drugs.
1998. (Increases in reimbursement do not trigger corresponding
increases in rebates.)
A-06-00-00023: Actual Acquisition Cost of Brand Name Prescription Drug
Products. 2001. (Based on invoices, in 1999 pharmacy
acquisition costs for brand name drugs averaged 21.84 percent
below AWP.)
A-06-01-00053: Medicaid Pharmacy--Actual Acquisition Cost of Generic
Prescription Drug Products. 2002. (Based on invoices, in 1999
pharmacy acquisition costs for generic drugs averaged 65.93
percent below AWP.)
A-06-02-00041: Medicaid Pharmacy--Additional Analyses of the Actual
Acquisition Cost of Prescription Drug Products. 2002. (A 4-tier
discounting methodology would bring reimbursement more in line
with acquisition costs.)
OEI-05-99-00611: Containment of Medicaid HIV/AIDS Drug Expenditures.
2001. (Comparison of Medicaid payments to other pricing
methods.)
OEI-03-01-00010: Medicaid's Use of Revised Average Wholesale Prices.
2001. (States' use of price revisions by First Databank.)
OEI-05-02-00080: Medicaid's Mental Health Drug Expenditures. 2003.
(Comparison of Medicaid payments to 4 other Federal payers.)
OEI-05-02-00680: State Strategies to Contain Medicaid Drug Costs. 2003.
(Review of States' methods to control spending on drugs.)
OEI-03-02-00670: Omission of Drugs from the Federal Upper Limit List in
2001. 2004. (CMS did not ensure timely placement of drugs on
the FUL list.)
OEI-03-02-00660: Medicaid Rebates for Physician-Administered Drugs.
2004. (Some States' systems are inadequate to ensure rebate
collections.)
OEI-05-02-00681: Variation in State Medicaid Drug Prices. 2004.
(States' reimbursements vary widely for the same drugs.)
OEI-03-04-00320: Addition of Qualified Drugs to the Medicaid Federal
Upper Limit List. 2004. (CMS did not ensure timely placement of
drugs on the FUL list.)
Mr. Walden. Thank you, Mr. Reeb.
Mr. Vito, do you have any comments? No.
Mr. O'Connell, or Mr. Balland.
TESTIMONY OF DAVID J. BALLAND
Mr. Balland. Good morning, Mr. Chairman. Mr. O'Connell has
agreed to allow me to go first as his statement will follow
logically after mine.
Good morning, Mr. Chairman. Thank you for having Texas
attend this very important hearing. I am David Balland, the
associate commissioner for the Medicaid and Children's Health
Insurance Program for the State of Texas, and I appreciate this
opportunity to be with you today.
Mr. Walden. Thank you for being here.
Mr. Balland. Our main goal in setting reimbursement for the
Texas Medicaid Prescription Drug Program, referred to as the
Vendor Drug Program, is to make the reimbursement formula as
fair as possible to all parties involved by reimbursing as
close as possible to the pharmacy's actual cost and the
pharmacies--allowing the pharmacies to set an adequate fee to
cover their costs to dispense that product and working with the
pharmacies. We do this in a proactive and transparent manner.
In Texas, we spend approximately $2 billion a year on
prescription drugs for Medicaid clients. Most States currently
use private companies to access prescription drug pricing
information by drug in order to set reimbursement levels for
their pharmacies for prescription drugs dispensed in their
Medicaid programs. These companies request pricing information
from manufacturers by drug, and then make this unregulated
pricing information available to their clients for a fee.
Unlike most other States, Texas does not solely rely on the
pricing information provided by these private companies to set
our reimbursement for prescription drug products. We take the
proactive approach and do this due to the potential inaccuracy
of the reported information and the actual cost of the product
to the pharmacies.
Texas Medicaid used similar pricing services as most States
until the early 1980's when the Texas Vendor Drug Program
studied ways to more accurately pay for drug products paid to
pharmacy providers since we were having problems obtaining
accurate pricing information. Once we recognized that the
average wholesale price was greater than the amount that Texas
pharmacies paid the wholesaler for a drug product, we decided
to do this. In other words, Texas Medicaid was reimbursing our
pharmacies at a higher amount than the pharmacies' actual price
to purchase the drug product.
Texas started requiring drug manufacturers to fill out an
application and questionnaire in the early 1980's for their
products to be considered for the Texas Medicaid list of
covered prescription drugs. We required drug manufacturers to
provide pricing information on a number of different kinds of
actual prices for each prescription drug product in order to
determine the appropriate reimbursement level for those
products purchased from different sources, including the
average wholesale price, the wholesale acquisition cost, the
chain warehouse price, the direct price to the pharmacy, and
similar pricing information. Our Vendor Drug Program took
specific steps to further refine the reimbursement amount paid
to our pharmacies, including putting into place targeted
prescription drug audits and pharmacy invoice audits and
requesting additional pricing information directly from drug
manufacturers.
Based on information from some out-of-State pharmacies and
our Texas Medicaid regional pharmacists, Texas Medicaid Vendor
Drug Program initiated two targeted audits--drug invoice, one
in early 2000 and one in early 2001. We selected drug products
with the greatest estimated discrepancy in pricing from drug
manufacturers to review during these audits, including over 300
brand-name and generic prescription drug products. The audits
found significant discrepancies between Texas Medicaid vendor
drug reimbursement to our pharmacies and the amount the
pharmacies were actually paying for most of the 300-plus
products reviewed.
As a result of these two targeted audits, we updated the
base reimbursement amount for most of these specific drug
products. The reimbursement updates to pharmacies for most of
the products reviewed saves Texas Medicaid an estimated annual
$20 million in all funds.
Additionally, we completed an invoice audit of more than
674 pharmacies in 2001 through 2002. This audit also indicated
that Texas was reimbursing the pharmacies at a significantly
higher amount than the pharmacies' costs. We proposed to change
the prescription drug reimbursement formula after this audit.
Unfortunately, the program was unable to proceed with the
proposed changes due to legal challenges by the pharmacy
association. This proposed rule was estimated to save Texas
Medicaid millions of dollars annually due to setting more
accurate reimbursement levels for prescription drugs.
In addition to moving toward a more accurate reimbursement
for product cost, we are working to determine the most accurate
dispensing fee that our program should pay the pharmacy. An
August 2002 study completed by Myers and Stauffer L.C.
Indicated that the actual statewide median cost of dispensing a
drug in Texas Medicaid is estimated at about 90 cents higher
than the current dispensing expense.
Texas will continue to develop tools and request additional
pricing information that will assist us in setting the most
accurate reimbursement fee for our pharmacies. We will proceed
with the following activities: One, continue developing
aggressive State maximum allowable costs; two, require drug
manufacturers to also report average manufacturer price; three,
further define the accuracy of the price the wholesaler pays
the manufacturer; and, four, analyze the feasibility of
implementing a more accurate dispensing fee.
These additional price points will allow Texas to cross-
check all the reported pricing information to reach the most
accurate product cost and dispensing fee for a product.
In conclusion, Mr. Chairman, again, thank you, members of
the committee, for giving Texas Medicaid an opportunity to be a
part of this important panel. Texas Medicaid works very closely
with our partners, drug manufacturers and pharmacies in a
transparent manner, in a proactive way, and has tried to
establish a fair process that works for all parties involved.
[The prepared statement of David J. Balland follows:]
Prepared Statement of David J. Balland, Associate Commissioner for
Medicaid and the Children's Health Insurance Program, Texas Health and
Human Services Commission
My name is David J. Balland, Associate Commissioner for Medicaid
and the Children's Health Insurance Program (CHIP) at the Texas Health
and Human Services Commission.
Before I begin my testimony, I would like to thank you, Mr.
Chairman, and the members of the Committee for inviting Texas to speak
on such an important topic. We look forward to sharing our prescription
drug reimbursement best practices with our federal and state partners.
Our main goal in setting reimbursement for the Texas Medicaid
prescription drug program, referred to as the Vendor Drug Program, is
to make the reimbursement formula as fair as possible to all parties
involved by reimbursing as close as possible to the pharmacies' actual
cost of buying prescription drugs. Texas then works with the pharmacies
to set an adequate fee to cover their costs to dispense that product to
Medicaid recipients. In Texas, we spend about two billion dollars a
year on prescription drugs for Medicaid clients (in state and federal
dollars).
Current Pricing System: Most states currently use private companies
to access prescription drug pricing information by drug in order to set
reimbursement levels for their pharmacies for prescription drugs
dispensed in their Medicaid programs. These companies request pricing
information from drug manufacturers by drug and then make this
unregulated pricing information available to their clients for a fee.
Unlike most other states, Texas does not solely rely on the pricing
information provided by these private companies to set our
reimbursement for prescription drug products due to the potential
inaccuracy of the reported information and the actual cost of the
product to the pharmacies.
Problems with Earlier Pricing Systems: Texas Medicaid used similar
pricing services as most states until the early 1980's when the Texas
Vendor Drug Program studied ways to more accurately pay for drug
products paid to pharmacy providers. The Texas Vendor Drug Program had
long recognized that the average wholesale price in the commercial
price database was greater than the amount that Texas pharmacies
actually paid the wholesaler for a drug product. In other words, Texas
Medicaid was reimbursing our pharmacies at a higher amount than the
pharmacies actual price to purchase the drug product.
In the early 1980's, Texas started requiring drug manufacturers to
fill out an application (later referred to as a questionnaire) for
their products to be considered for the Texas Medicaid list of covered
prescription drugs (otherwise known as a formulary). In the
questionnaire, drug manufacturers are asked to provide pricing
information on a number of different kinds of actual prices for each
prescription drug product in order to determine the appropriate
reimbursement level for products purchased from different sources
including:
Average price pharmacies paid for product from a wholesaler, known as
Average Wholesale Price;
Price paid for product by the wholesaler and/or prescription drug
distributor, known as Wholesaler Acquisition Cost;
Chain warehouse price;
Direct price to the pharmacy; and
Similar pricing information.
Steps Taken to Further Refine Pricing: The Texas Vendor Drug
Program took specific steps to further refine the reimbursement amount
paid to our pharmacies including:
1. We put into place targeted prescription drug audits and pharmacy
invoice audits; and
2. We requested additional pricing information directly from drug
manufacturers.
Based on information from some out of state pharmacies and our
Texas Medicaid regional pharmacists, who gather acquisition cost
information in the public sector out-patient pharmacy market, Texas
Medicaid Vendor Drug Program initiated two targeted drug invoice
audits, one in early 2000 and the other in early 2001. Texas selected
drug products with the greatest estimated discrepancy in pricing from
drug manufacturers to review during the audits, including over 300
brand name and generic prescription drug products.
The audits found significant discrepancies between Texas Medicaid
Vendor Drug Program reimbursement to our pharmacies and the amount the
pharmacy was actually paying for most of the 300-plus products
reviewed.
Texas Medicaid Vendor Drug Program Targeted Audit Savings: As a
result of these two targeted audits, the Texas Medicaid Vendor Drug
Program updated the base reimbursement amount for most of these
specific drug products. The reimbursement updates to pharmacies for
most of the products reviewed saved Texas Medicaid an estimated annual
savings of over $20 million in state and federal funds.
In addition to the targeted specific product audits, Texas Medicaid
Vendor Drug Program also completed an invoice audit of more than 670
pharmacies in 2001-2002. This audit also indicated that Texas was
reimbursing the pharmacies at a significantly higher amount than the
pharmacies' cost to purchase their products from drug manufacturers or
prescription drug wholesalers. Even though Texas Medicaid Vendor Drug
Program proposed to change the prescription drug reimbursement formula
after this audit, the program was unable to proceed with proposed
changes due to legal challenges by the pharmacy association. This
proposed rule was estimated to save Texas Medicaid millions of dollars
annually due to setting more accurate reimbursement levels for
prescription drugs.
Dispensing Fee: In addition to moving towards a more accurate
reimbursement for product cost, the Texas Medicaid Vendor Drug Program
is also working to determine the most accurate dispensing fee that our
program should pay the pharmacy.
An August 2002 study completed by Myers and Stauffer L.C. indicated
that the actual statewide median cost of dispensing a drug in Texas
Medicaid is estimated at about 90 cents higher than the current
dispensing expense. The dispensing costs were especially higher with
specialty and urban pharmacies.
Next Steps: Texas will continue to develop tools and request
additional pricing information that will assist us in setting the most
accurate reimbursement for our pharmacies. Texas Medicaid Vendor Drug
Program will proceed with the following activities:
Continue with developing aggressive state maximum allowable cost
(MAC) on certain products;
Require drug manufacturers to also report average manufacturer price
(AMP) for products in the Texas questionnaire;
Further define the accuracy of the price the wholesaler pays the
manufacturer, known as Wholesaler Acquisition Cost, and
Analyze the feasibility of implementing a dispensing fee that
reflects actual cost to pharmacies in Texas.
These additional price points will allow the Texas Medicaid Vendor
Drug Program to cross check all the reported pricing information to
reach the most accurate product cost and dispensing fee for a product.
Conclusion: Thank you, Mr. Chairman and members of the Committee,
for giving Texas Medicaid and opportunity to be part of this important
panel. Texas Medicaid works very closely with our partners, drug
manufacturers and pharmacies, and has tried to establish a fair process
that works for all parties involved.
In addition, we will proceed to be as flexible as possible while
maintaining the best prescription drug prices for the state and federal
government in the Texas Medicaid program. We must continue to seek the
best value in order to be able to sustain this program that is so
essential to the health of our vulnerable clients.
Mr. Walden. Thank you. And I always try and do whatever I
can to help Texas. It is important. My chairman appreciates
that, too.
Mr. O'Connell, thanks for being here.
TESTIMONY OF PATRICK J. O'CONNELL
Mr. O'Connell. Thank you, Mr. Chairman. My name is Patrick
O'Connell; I am an assistant attorney general and chief of the
civil and Medicaid fraud section of the Texas Attorney
General's Office. We thank you very much for giving us the
opportunity to testify today.
In 1999, then Texas Attorney General, now United States
Senator John Cornyn, became concerned about fraud against the
Texas Medicaid program and created a special Civil Medicaid
Fraud Section within our Attorney General's Office. Our section
utilizes the Texas Medicaid Fraud Prevention Act to initiate
civil litigation to recover funds wrongfully taken from Texas
Medicaid.
One of the first cases we received was filed by a small
Florida pharmacy, Ven-A-Care of the Florida Keys, whom you
heard from today. Ven-A-Care brought information to us showing
that certain drug manufacturers--not all--but certain drug
manufacturers violated Texas law by intentionally reporting
prices to the Medicaid program that did not remotely equal the
prices they really charged for their products. As Mr. Balland
has indicated, unlike most other States which derive their
pricing information from third parties, Texas requires the
manufacturers who want their products to be eligible for
Medicaid reimbursement in Texas to fill out this questionnaire
for each drug they wish placed on the formulary. When Texas
relies upon an inflated price report in calculating a
provider's estimated acquisition cost, the resulting
reimbursement to providers is well above the provider's actual
acquisition cost, thus providing pharmacies with unintended
windfall profits.
Based on the information that we received from Ven-A-Care
as well as information we discovered in our own preliminary
investigations, General Cornyn authorized us to intervene
against three defendants in September 2000. This Texas lawsuit
was the first ever State intervention in a qui tam case
involving pharmaceutical manufacturer pricing fraud.
The evidence we discovered in our lawsuits and
investigation shows that some manufacturers make conscious
deliberate business decisions to create enhanced spreads and to
market the sale of their products based on those spreads. For
example, we found that some manufacturers have engaged in the
following activities: Purposefully reporting false and inflated
wholesale prices to the Medicaid program in Texas; deliberately
failing to report prices to certain classes of trade in
violation of Texas law; instructing their sales personnel to
market spreads to customers; creating spread sheets showing
pharmacies how much more profit they can make off of Medicaid
when purchasing one manufacturer's product over another; and
tying sales personnel compensation to success in marketing the
spread.
We also found that some manufacturers actually kept two
sets of computer records with prices, one with the inflated
prices that were reported to their price reporting services and
to Texas Medicaid, and another with their real contract prices
that are used in their everyday business transactions with the
manufacturers' customers.
As of May 2004, we have settled with two defendants in our
lawsuit for a recovery for the State and the Federal Government
of $45.5 million. In both cases, Texas recovered more than two
times the actual damages to the Medicaid program plus our
costs, our attorneys' fees, and the attorneys' fees of the
relater. It's important for the committee to remember that
these were Texas State settlements only. Texas is approximately
8 percent of the national Medicaid budget. So if you multiply
it by 10 or 12, I think you can see the numbers involved.
Our office continues to provide assistance to those
authorities in other jurisdictions who are pursuing these
defendants and other companies. We have developed close and
cooperative working relationships with the United States
Department of Justice and with the other State attorneys
general who have initiated similar litigation. So far, 13 other
States have followed Texas' lead and have sued various drug
companies for false price reporting.
The litigation in Texas is still pending against one of the
three defendants we sued in 2000, and we are scheduled to go to
trial against that manufacturer in the fall of next year. We
have also intervened against three new additional defendants.
The cases against those three defendants is in the discovery
phase, and we anticipate trial in those cases to be reached in
the spring of 2006.
Despite our efforts, some unscrupulous manufacturers
continue to devise ways to defraud our Texas Medicaid program,
and we are doing everything in our power to bring those
companies to justice. Our current Texas Attorney General Greg
Abbott has committed the resources of the agency to these
efforts.
I would like to make clear that while Texas is pleased to
have recovered these significant sums of money in the qui tam
cases, litigation is clearly not the most efficient way to run
this system. Our Texas Medicaid program has been required to
spend thousands of man hours responding to discovery requests
and preparing for hearings and preparing for and attending
depositions in our litigation. The program could have used
those hard earned tax dollars to provide more and better
services if the Vendor Drug Program personnel were not tied up
in the litigation caused by the very manufacturers who have
been gaming our system. Thank you for your attention, and I
will be available for questions.
[The prepared statement of Patrick J. O'Connell follows:]
Prepared Statement of Patrick J. O'Connell, Chief, Civil Medicaid Fraud
Section, Office of the Attorney General of Texas
Mr. Chairman and members of the Subcommittee: Good morning. My name
is Patrick O'Connell. I am an Assistant Attorney General and Chief of
the Civil Medicaid Fraud Section of the Texas Attorney General's
Office. Thank you for inviting us to testify this morning. In my
remarks, I will describe for you the efforts undertaken by the Texas
Attorney General to identify and vigorously litigate against those
persons and companies that defraud the Medicaid system in Texas.
As you are aware, the federal False Claims Act has been in place
since the Civil War. Texas adopted our version of the FCA in 1995. Our
statute, the Texas Medicaid Fraud Prevention Act, is specific to fraud
against the Medicaid Program. In 1999, then Texas Attorney General, now
United States Senator, John Cornyn became concerned about fraud against
the Texas Medicaid Program and created a special Civil Medicaid Fraud
Section within the AG's office. Our Civil Medicaid Fraud Section
utilizes the Texas statute to initiate civil litigation to recover
funds defrauded from Texas Medicaid. One of the first cases we received
was filed by a small Florida pharmacy, Ven-A-Care of the Florida Keys,
Inc., who you heard from earlier today.
Ven-A-Care brought information to us showing that certain drug
manufacturers violated Texas law by intentionally reporting prices to
the Texas Medicaid Program that did not bear a reasonable relationship
to the prices for their products that were generally and currently
available in the market place. Unlike most other states which derive
pricing information from third party price reporting services like
First Data Bank, Texas requires manufacturers who want their products
to be eligible for Medicaid reimbursement to fill out a questionnaire
for each drug they wish placed on the Texas Medicaid formulary. For
each drug, the manufacturer must report its prices to various classes
of trade: e.g., its AWP; its price to wholesaler and/or distributor;
its direct price; special price to chain warehouse, etc. A drug company
representative is required to sign the form and certify that the
information included in it is accurate. Texas law also requires drug
companies to update the Medicaid Program with any changes in reported
pricing within 15 days of the change.
When Texas relies upon an inflated price report in calculating a
provider's estimated acquisition cost (``EAC''), the resulting
reimbursement to providers is well above the providers' actual
acquisition cost, thus providing pharmacies with windfall profits. The
information brought to us by Ven-a-Care indicated that certain drug
companies may have knowingly and purposefully misrepresented their
reported prices to Texas in order to enhance or drive up the
reimbursement to their provider customers.
Under the Texas statute, we have broad powers to compel document
production and testimony of potential witnesses. In 1999 and 2000, we
used these civil investigative demand powers to require several
manufacturers to produce documents. We also took examinations under
oath of several industry representatives. Based on the information that
we received from Ven-a-Care, as well as the information we received
pursuant to the CID process, General Cornyn authorized us to intervene
against threeVAC defendants in September 2000. The Texas lawsuit was
the first state intervention in a qui tam case involving pharmaceutical
manufacturer pricing fraud.
The evidence we have discovered in our investigations shows that
some manufacturers make conscious, deliberate business decisions to
create enhanced spreads and to market the sale of their products based
on the spreads. For example, we found that some manufacturers engaged
in the following activities:
purposefully reported false and inflated prices to Texas Medicaid--as
well as to third party price reporting services--in order to
create enhanced spreads;
deliberately failed to report prices to certain classes of trade in
violation of Texas law;
instructed their sales personnel to market spreads to customers;
created spread sheets showing pharmacies how much more profit they
can make off Medicaid when purchasing one product over another;
tied sales personnel compensation to success in marketing the spread.
We also found that some manufacturers actually kept two sets of
computer records with prices: one, with inflated prices that are
reported to the price reporting services like First Data Bank, or in
Texas' case, directly to the Medicaid Program; and another with real
contract prices that are used in every day business transactions with
the manufacturer's customers.
In June 2003, we settled our case with one defendant drug company
for $18.5 Million, and in May 2004, we settled with another for $27
Million. The total recovery in both settlements was $45.5 Million. In
both cases, Texas recovered more than two times the actual damages to
the Medicaid Program, plus our costs and attorneys' fees. Since the
federal government supplies approximately 62 cents of every dollar
spent on Medicaid in Texas, so approximately 62% of the net settlements
went to the United States Treasury.
It is important to remember that these were Texas State settlements
only. My office continues to provide assistance to those authorities in
other jurisdictions who are pursuing these and other companies. We have
developed close and cooperative working relationships with the United
States Department of Justice and with other state attorneys general who
have instituted similar litigation. So far, California, Kentucky,
Florida, Minnesota, Connecticut, New York, Ohio, Arkansas, Wisconsin,
West Virginia, Massachusetts, and Nevada have sued drug companies for
false price reporting.
Litigation in Texas is still pending against one of the defendants
we sued in September 2000, and we are scheduled to go to trial against
that manufacturer in the fall of next year. We have also intervened
against three additional defendants. The case against these three
defendants is in the discovery phase where we are taking depositions
and exchanging documents. That trial is scheduled to begin in the
Spring of 2006.
I would like to briefly follow-up on the remarks from the Texas
Medicaid Program. We have consistently found over the last five years
of litigation that our Vendor Drug Program in Texas is one of the best,
if not the best, program in the country. Texas is the only state thus
far to require drug companies to report and certify their prices
directly to our Medicaid administrators. This distinguishes Texas from
all other Medicaid programs, which derive their pricing information
from third party publishing services like First Data Bank. In addition,
as you heard, Texas was the first state to move from AWP based
reimbursement to wholesaler cost and the first to differentiate
payments to chain pharmacies. In addition to these efforts, our Texas
Program continues to search for new ways to improve. They have passed a
law requiring drug companies to report their AMP to Texas Medicaid, and
they intend to use the AMP as another benchmark for comparison with the
prices reported by manufacturers. Unfortunately, to date, only 16% of
manufacturers are reporting their AMPs.
Despite our efforts, some unscrupulous manufacturers continue to
devise ways to defraud Texas Medicaid, and we are doing everything in
our power to bring those companies to justice. Our current Texas
Attorney General, Greg Abbott, has committed the resources of the
agency to these efforts. Through his leadership and vision, we have
obtained the funding to increase our staffing to 8 lawyers plus support
staff. With this additional staffing, we will be pursuing every
manufacturer that we find has engaged in this type of activity.
I would like to make clear that, while Texas is pleased to have
recovered significant sums of money in these qui tam cases, litigation
is not the most efficient way to run this system. The Texas VDP has
been required to spend thousands of man hours responding to discovery
requests and preparing for and attending depositions in our litigation.
The program could have used our hard earned tax dollars to provide more
and better services if VDP personnel were not tied up in litigation
caused by manufacturers who game the system. In addition, without the
help of relators like Ven-A-Care, who took great personal and financial
risks to present their allegations, we would not have been able to
obtain the significant recoveries in the DEY and Schering. We hope that
you will ensure that, in whatever system implemented in the future by
Congress, the States and the Department of Justice continue to have
laws with strong penalties to force compliance.
My time is about up. Thank you for your attention. I am happy to
answer any questions.
Mr. Walden. Thank you very much, Mr. O'Connell. I want to
thank all of the panelists. Your testimony has been very
helpful in our process here.
Mr. Reinhart, I want to start with you with a question,
because I think I heard you say in your testimony that Michigan
updates its list of prices on a daily basis?
Mr. Reinhart. For generic drugs, we do.
Mr. Walden. And how do you do that?
Mr. Reinhart. Well, our agency has significant staff
constraints, so we have hired an outside entity that also is a
pharmacist, and they monitor the market, they--each of the
distributors, and they will adjust prices accordingly. If a
pharmacist--and we do this all over the Internet. So if a
pharmacist indicates that they couldn't find the drug for that
price, our consultant will send them back and tell them two
places where they can get it.
Mr. Walden. And is this a nationwide service that you
subscribe to, or is this a Michigan-only creation?
Mr. Reinhart. This is a Michigan firm.
Mr. Walden. Do you know if they work in other States?
Mr. Reinhart. Not to my knowledge.
Mr. Walden. All right. But you are able to update your
pricing, then, on a daily basis?
Mr. Reinhart. Well, we do that for generic drugs.
Mr. Walden. Right.
Mr. Reinhart. We still have the more traditional--for
brand-name drugs, we do use the average wholesale price.
Mr. Walden. And do you know what cost that is to the State
to have that service, to utilize that service?
Mr. Reinhart. It is minor. I think that component of--you
know, I mentioned a $130 million savings. That component
contributes about $40 million, and this service is less than a
half a million.
Mr. Walden. Per year?
Mr. Reinhart. It's very modest. Right.
Mr. Walden. Mr. Smith, why does it take CMS so long in some
cases, as identified by Mr. Reeb and his colleague Mr. Vito, to
update these lists when these generics come out? And how many
people do you have dedicated and at what cost?
Mr. Smith. Right now, there are about 700 drugs on the
Federal upper limit. The last full update, I believe, was in
2001. We have updated on a specific basis when drugs come on.
And it is not just one drug, but we have to assure that there
are three.
Mr. Walden. Right.
Mr. Smith. That is part of it. We have done 13 updates
since 2001 to advise that these drugs would be put on the FUL.
I think part of the delay is waiting for three. Part of the
intensity is that we actually have to go back and do a
verification ourselves to make sure that those prices are
indeed available at that price.
Mr. Walden. Would you admit that the system that's being
used today or has been in use up until today simply isn't
functioning as well as it should for the taxpayers?
Mr. Smith. I would agree that we have done it on a
historical basis, and it's time to update what we are doing and
how we are doing it. And, as I said in my opening statement, a
lot of our activity has been involved with providing other
tools to the States. Obviously, this is an operational one. But
we appreciate----
Mr. Walden. I know. But I go back to--I've read through the
IG's draft report and the testimony today, and it just seems
that the problem remains, despite repeated suggestions. And I
am not picking on you, but it is just something we all need to
get involved in and figure out from our end what we need to
fix, and I think from CMS's end, specifically Fluoxetine--there
were 8 or 9 generics in the market the day that the exclusivity
period ended, and yet it took a considerable length of time to
update the list. Right?
Mr. Smith. Again, that update was our own verification that
those prices----
Mr. Walden. And how long did it take to update?
Mr. Smith. It took approximately a year to do that
verification.
Mr. Walden. And do you know how much loss to the taxpayer
occurred during that period?
Mr. Smith. I have not calculated it.
Mr. Walden. Compared to if an update had been done quicker?
Mr. Smith. I think this has shown us that we need to update
our internal procedures.
Mr. Walden. One of the findings in the OIGs report--or
recommendations--is that there is a new group of generics about
to come onto the market that could have--there are substantial
costs associated with them. And so it seems clear to me as a
business owner that it is going to be important from a business
standpoint that your agency be ready to go to put those on the
upgraded list. What assurance can you give our committee that
that will happen short of a year or 10 months?
Mr. Smith. We are looking at that in itself and understand
windows will be coming into the market, and we will move
quickly. But again, it is incumbent on us to do that
verification that they are available as well. But we will do
that.
Mr. Walden. Do you need better notification from FDA when
generics are going to come on the market? Do you get that
today?
Mr. Smith. I think we use the same resources that all
purchasers have available to them. This information is
available. We look at three different commercial products that
are available just as other purchasers and insurers do as well.
Mr. Walden. I want to go to that. Mr. Reeb, Mr. Vito, maybe
you can tell me. I am told that some of the big purchasers on
the private side, on the insurance side, move pretty rapidly
when generics come to market in terms of adjusting their price
structures. Are you familiar with that?
Mr. Vito. We are not, sir.
Mr. Walden. Do you agree with what Mr. Smith says in terms
of the problems associated with trying to update? I mean, I
have read your recommendations. It seems like there is a real
issue here in terms of being able to move swifter than we are;
is that correct?
Mr. Vito. We believe there is a problem. We believe that it
can be resolved by having a dedicated effort on CMS's part. We
understand the amount of significant work that is involved in
maintaining the list, adding the products to the list and
deleting them. But it is certainly manageable if the FTEs are
applied to it, the resources are applied to it that are
necessary. It is our estimation that if you put these resources
to that goal, the savings to the program, both the Medicaid and
the Federal Government, will far exceed the cost that you
would----
Mr. Walden. That is what seems obvious to me is, wow, you
are talking about literally hundreds of millions, if not
billions of dollars, and we have got a big hole in the bucket
draining out all those savings quickly. How difficult would it
be to update this on a more timely basis? How many people do
you think it would take?
Mr. Vito. In our estimation, I think that would be better
answered by CMS. However we can say that if it is 1, 2, 3 FTEs,
whatever those numbers are, the cost of those FTEs will be
certainly outweighed by the savings that can be achieved to the
program.
Mr. Walden. I want to make sure I am not mixing the
proverbial apples and oranges here. Is the price updating
information that Michigan is doing using this outside service
comparable to what we are talking about for updating these
lists?
Mr. Vito. I am not familiar with what Michigan is using. I
could tell you, though, that it appears that they are doing
more than just looking at the red book and the blue book and
the MediSpan, the drug compendiums; is that correct?
So it would be different.
Mr. Walden. It would be different in terms of their
resources to identify the prices?
Mr. Vito. I believe that the Medicaid program, they are
required to use the drug compendiums to identify the lowest-
priced product and then add 150 percent to that. I believe that
is what CMS does.
Mr. Walden. Is that correct, Mr. Smith?
Mr. Smith. That is correct. The rebate provision of the
Medicaid law itself, established the parameters that we work
with.
Mr. Walden. So that is where we need to come into focus
here to fix that if that is indeed the problem.
Let me ask about the rebates AWP versus AMP because it
looks like we are paying at one schedule and reimbursing based
on a different price. Is that correct, Mr. Reeb and Mr. Vito?
Mr. Reeb. We issued a report a couple of years ago exactly
saying that. We estimated that about a billion dollars could
have been saved over a 3-year period had the rebates been paid
using AWP. We don't like AWP, but if you are going to reimburse
under AWP, then it doesn't seem to make sense to us to have a
rebate process that uses average manufacturers price. You are
using two different sets of numbers to basically try to bring a
little bit more----
Mr. Walden. So how much are we losing as a result of this
mismatched pricing?
Mr. Reeb. We estimated about a billion dollars for a 3-year
period ending around 1997 or so, but we are updating the data
presently, and it is at least that much in present day----
Mr. Walden. I would think with the growth in the percentage
of Medicaid that is prescription drugs, it would be at least
that, if not significantly more, when you look at the rapid
escalation in costs in the last few years.
Mr. Reeb. We believe--and again, we are not supporting AWP
as necessarily being a good basis, but if you are going--most
States use that in some form in their reimbursement process.
Then, if in the rebate process you use that, it would at least
bring another pressure point on the system, the industry, as
to--if you are going to raise AWP, then you run the risk of
making the spread greater to the best price which is how the
rebate calculation uses those two sets of numbers.
Mr. Walden. And just quickly, in your report from a couple
of years ago, you also looked at Oregon's Medicaid system and
found that it wasn't operating appropriately and some $20
million in problems there. Do you know if they have responded
in a positive way to your recommendations?
Mr. Reeb. I don't know specifically, sir.
Mr. Walden. Okay. I will get back to you on that.
Mr. Stupak, I would like to turn to you now for 10 minutes.
Mr. Stupak. Thank you, Mr. Chairman. I am sorry, most of
this hearing I was in another hearing. But it is good to be
here and to welcome Mr. Rinehart from Michigan. I did read your
testimony.
A couple of questions, Mr. Rinehart, if I may. How much do
you estimate that Michigan saves each year under the preferred
drug list that you have been using?
Mr. Rinehart. It's difficult to precisely partition--the
preferred drug list and the multi-State work hand in hand. I
said it earlier that our pricing strategies save about $40
million. So this other component will be about $90 million.
Mr. Stupak. Has anyone lost their prescription drug benefit
as you saved this money?
Mr. Rinehart. No. No one has lost money.
Mr. Stupak. Michigan has been very aggressive in cutting
their Medicaid prescription drug costs, particularly in the
generic area. Do you think that your maximum allowable cost or
MAC is more aggressive than most States?
Mr. Rinehart. I think it is. I think the daily component
and the use of technology to convey those prices to pharmacists
is a little more aggressive.
Mr. Stupak. The daily component, you said you MAC change
your prices every day?
Mr. Rinehart. We do.
Mr. Stupak. In your testimony you outlined how Michigan has
benefited from prescription drug pooling purchase. The
purchasing pool plan was approved in April; correct?
Mr. Rinehart. April 22.
Mr. Stupak. Okay. And I know you have explained the
clawback in your testimony as part of your Medicare
prescription drug bill. Can you please briefly explain it
again? Specifically what does it mean to Michigan, the clawback
prevision in the Medicare bill?
Mr. Rinehart. Sure. States are required to help finance the
drug benefit for dual eligibles. And our contribution will be
calculated using our 2003 per person expenditures, per capita
expenditures, inflated through 2006, and the index that most
people cite, it's an 11 or 12 percent annual increase. And as I
tried to argue earlier, our annual increases are below 5
percent currently because we have been so aggressive in
managing the benefit. So even though in 2006, when the
declining percentage will pay 90 percent of that per capita
amount, it is still more than we think we could have managed
the benefit to because of our lower growth rates.
Mr. Stupak. Sure. Because you are below that 11 percent,
and making an assumption on 11, you are doing it at 4;
therefore, you are going to have to pick up that 6, if you
will?
Mr. Rinehart. Yes.
Mr. Stupak. How does this compare to other items in
Michigan's Medicaid budget?
Mr. Rinehart. The pharmacy expenditure line grew at a much
lower rate than the balance of the program. I included a chart
in my written testimony that shows the caseload. The caseload
has dramatically increased in Michigan. So everything is
growing, but this particular line grew at a rate somewhat below
the balance of the program.
Mr. Stupak. Is it fair to see that the clawback provision
is going to cost Michigan about $30 million in 2007?
Mr. Rinehart. On a full-year basis, in 2007, $30 million
State resources, yes.
Mr. Stupak. What about other States? Do you have any idea
what will happen there?
Mr. Rinehart. In talking to my colleagues, States that have
been aggressive in constraining the growth in pharmacy
spending, if they started in 2002, 2003, and I think it is
likely they will also increase, my colleague from Ohio was
talking about an $80 million figure.
Mr. Stupak. So the States that have been aggressive in
trying to provide prescription drug coverage underneath the
Medicaid plan, but still trying to save taxpayers money
underneath the so-called Medicare reform bill that was passed
are actually going to be punished now with the clawback
provision?
Mr. Rinehart. At least initially. The State percentage
declines to 75 percent. So at some point, perhaps we will reach
a break-even point, but certainly initially, we feel costs will
exceed what we would have spent.
Mr. Stupak. Mr. Balland, you are a much bigger State than
Michigan. Do you agree with that that the clawback provision
will cost States money, and if so, how much in your State?
Mr. Balland. Yes, sir. I do agree it will cost--the
estimate in Texas, I am not certain what that figure is.
Mr. Stupak. Mr. Rinehart, Michigan's annual increases in
prescription drug expenditures are below the national average
than the other States. So when you get to this clawback, the
only thing we can do to relieve you of that is to repeal that
part of the bill?
Mr. Rinehart. You could--I would have----
Mr. Stupak. Are there any other ways you can think of----
Mr. Rinehart. You could accelerate immediately to the 75
percent.
Mr. Stupak. As opposed to the 90?
Mr. Rinehart. As opposed to the 90. That would be very
helpful. Or 100 percent.
Mr. Stupak. 100 percent, I am sure, would be better. Let me
ask you in a different area, Sunday there was an article in The
New York Times that CMS has no plan for moving elderly nursing
home patients on Medicaid to the new Medicare drug benefit
program, and that it is possible for these patients to select a
drug card. How is Michigan going to do that, because that is
that dual eligible again?
Mr. Rinehart. Sure. That is very important and we are very
concerned about that. We are working hard. Michigan was one of
the States that did receive a grant from CMS for education and
outreach. Recently, I know Mr. Smith has indicated, that there
will be an open enrollment period prior to December. But in
December, States will be allowed for those that haven't
selected--I think this is true--States would be allowed to
automatically enroll beneficiaries into a card. So that at
least should avoid an interval with no coverage, but it will be
a fair amount of work.
Mr. Stupak. Mr. Balland, do you care to comment on that
aspect of it about selecting the card there?
Mr. Balland. I am sorry. Say that again, sir.
Mr. Stupak. Sure. The article--I don't know if you saw it--
in The New York Times this past Sunday. It was about that CMS
has no plan for moving the elderly nursing home patients on
Medicaid to the new Medicare drug benefit program, and that it
is impossible for these patients to select drug cards. So how
would Texas approach this? You have no longer dual eligibility
underneath the Medicare reform bill that has passed.
Mr. Balland. No. And we would have to analyze that further
to see exactly what the impact would be on Texas.
Mr. Stupak. Mr. Reeb, if I can ask you a question. In a
2001 report on Medicaid's use of the average wholesale price,
the OIG concluded that the reliance on the reported average
wholesale price as a basis for drug reimbursement was
fundamentally flawed and CMS said it would look for solutions.
In its October 2003, report, the OIG recommended that CMS--and
I am quoting now--``review the current reimbursement
methodology, work with States to find a method that more
accurately estimates pharmacies' acquisition costs and initiate
a review of Federal Medicaid rebates.'' Did CMS ever do this?
Mr. Reeb. I don't think any action, as such, directly has
been taken, but I believe CMS has brought the issue up to the
States as a part of normal operations. I don't believe, as
such, a fundamental change in the process has a occurred yet,
but perhaps, Mr. Smith----
Mr. Stupak. I was going was going to say, Mr. Smith, could
you comment on that? Can you tell us why CMS has not worked to
develop a more accurate acquisition cost for the States to work
with?
Mr. Smith. I think we have provided updates to the full
list. I think much of our attention has been on helping States
find other ways, such as the purchasing pools and prior
authorization, et cetera. So I think we have had a great deal
of activity with the States in helping them to find ways to
save money in the Medicaid program.
Mr. Stupak. But the report which said it was fundamentally
flawed really looked at CMS and the way the drug reimbursement
was done, and they said it was fundamentally flawed, and you
said you would look for solutions. Other than working with
States have you come up with any solutions?
Mr. Smith. Wgain, we have to work within a framework of
making certain that there are at least three alternatives and
to validate that they are available at those prices. That is an
intensive process. And as I stated earlier, we are looking
internally at how we can improve the way we do update the FUL
on a quicker basis.
Mr. Stupak. Yes. But the way you base it upon they said was
fundamentally flawed. So even if you are doing all of this,
unless you take care of the fundamental basis of it--I mean, is
there any logic to States reimbursing on the average wholesale
price while the rebates are actually based on the average
manufacturing price, and that is not really shared with the
States? So, I mean, where is the logic here?
Mr. Smith. Mr. Stupak, in terms of that basis, that comes
from Title XIX itself. That comes from the law wherein Congress
established how we do it back in 1990, in terms of having those
two different standards.
Mr. Stupak. So wouldn't CMS recommend to the Congress
having to change the law so you would have a real good basis,
not an average wholesale price, but the average manufacturing
price which would save everyone a lot of money?
Mr. Smith. I believe we have twice put in the President's
budget recommendations to address the pricing. On the pricing
itself also I would like to----
Mr. Stupak. But in the President's budget that won't change
it unless we change the law.
Mr. Smith. That is correct.
Mr. Stupak. So shouldn't you really come to Capitol Hill
and ask us to change the law on that so you could use the
average price?
Mr. Smith. Certainly Congress has to take that action
itself.
Mr. Stupak. Did CMS recommend that----
Mr. Smith. We did not submit legislation, no.
Mr. Stupak. Did you recommend that they do it in the
Medicare reform bill last August?
Mr. Smith. In Medicare, I believe it went to the average
sales price instead. In terms of the consideration of changing
Medicaid at the same time, I don't know to what extent that----
Mr. Stupak. And we should do it for Medicare and Medicaid;
right? We shouldn't have two different systems?
Mr. Smith. We do have two different systems. We do have
different systems on acquisition and in the rebate programs. I
don't think that Medicare has the rebate program that Medicaid
does. I know we have focussed a lot on the manufacture side,
but I do want to at least bring to the subcommittee's
attention, when you talk about AWP, it has an impact on the
pharmacy as well. The pharmacy is being paid not only for its
acquisition, but also storage and counseling the Medicaid
patient as well. Most States price their purchase on an AWP
minus 10 percent to AWP minus 15 percent but they also add on a
dispensing fee. That dispensing fee has large variation among
the States. So when you look at the price that a State says in
its State plan, ``This is what I want to reimburse our
pharmacies for,'' they are looking not just at the cost of
acquisition, but also counseling that Medicaid patient. Many
argue that the Medicaid recipient needs additional time at the
pharmacy, and you are compensating the pharmacy for that as
well. And in addition, again, how Medicaid differs----
Mr. Walden. I understand the gentleman has one more
question.
Mr. Stupak. Yes, one more question if I can. While I have
you here, the CHIPS program, as you know, back on September 30,
2004, more than a billion dollars of funding under the CHIPS
program was reverted back to Treasury. This money is money that
States could have used for coverage. A number of States have
insufficient funding this year, and over the next 3 years, more
than 17 States are projected to have inadequate funds to cover
their current children population. There is bipartisan
legislation in the House and Senate to address this matter, but
the way I understand it, the administration objected, publicly
stating he wanted to spend the money to do more outreach
instead. My question is if the State doesn't have enough money
to cover the kids they currently cover, what good does it do to
do more outreach to bring more people in a program when you
don't have enough money to cover the kids to start with?
Mr. Smith. Sure. First, the money that expired, that money
expired when Congress created S-CHIP. We created it on the
basis that States would have 3 years to spend their allotments.
The authority to spend the money dated back to 1998, 1999, and
2000. That money was unspent because the States themselves
didn't have enough kids covered so that they needed those
resources.
In terms of 2005, Congress gave the Secretary the authority
to redistribute unspent allotments. You are taking from one
State that didn't use the money to give it to another State.
That, in itself, we project and the States project, will be
sufficient funding through the end of 2005, because you are
adding that money plus 3 years of allotments including the new
2005 allotments.
In terms of the legislation that was introduced that was
based on a formula, that formula, in itself, would have left
States with shortfalls in the long term. It did not solve all
the problems.
Mr. Stupak. We are not saying it is going to solve all the
problems. We are saying States that don't have enough money to
cover the kids, we wanted the money--a bipartisan group wanted
the money to go back to the States to cover kids. Instead, the
administration said no, we are going to use it for outreach to
bring more kids in the program. We don't have enough money to
cover the kids in the program. Why bring more kids in? A lot of
us saw it as sort of the way of administration saying we will
give it to you next year but only if we can block grant the
Medicaid program back to the States, which would leave the
States even further underfunded.
Mr. Smith. Well, I think what the President announced was
that we should use money that the States themselves said ``We
aren't going to use this money based on coverage.'' The first
step to increasing insurance is to actually enroll kids for
programs they are already eligible for. And the second part of
that was that Congress should come back and reauthorize the S-
CHIP program. It has done great things. We are at record levels
in coverage for kids and we want to do more.
Mr. Walden. Thank you, Mr. Stupak.
Mr. Stupak. Thank you, Mr. Chairman.
Mr. Walden. I am going to turn now to the chairman of the
full committee, Mr. Barton, for questions.
Chairman Barton. Thank you, Mr. Chairman. Before I go into
questions, I have got a point of personal privilege. I would
like to introduce my wife, Terry Barton, who is right behind
me; my district director, Ron Wright from Arlington, Texas; and
his wife, Susan Wright. I introduce them to the committee. Just
a little bit of a personal break.
I am going to direct most of my questions to our two
friends from Texas who have testified. And I am going to start
by reading part of the statement that Mr. O'Connell has already
put into the record. On Page 3 of his statement he talks about
some of the things that the State of Texas did in their
investigation, and I am going to read a part of it and then ask
Mr. O'Connell a question.
``the evidence that we discovered in our investigation
shows that some manufacturers made conscious, deliberate
business decisions to create enhanced spreads and to market the
sale of their products based on these spreads.
For example, we found that some manufacturer engaged in the
following practices: One, purposefully reported false and
inflated prices to Texas Medicaid as well as to third-party
price reporting services in order to create enhanced spreads;
two, deliberately failed to report prices to certain classes of
trade in violation of Texas law; three, instructed their sales
personnel to market spreads to customers; four, created
spreadsheets showing pharmacies how much more profit they can
make off Medicaid when purchasing one product over another;
five, tied sales personnel compensation to success in marketing
the spread.
We also found that some manufacturers actually kept two
sets of computer records with prices. One with inflated prices
that are reported to the price reporting services like First
DataBank or, in Texas's case, directly to the Medicaid program
and another with real contract prices that are used in everyday
business transactions with the manufacturers' customers.'' Mr.
O'Connell, because of these results of the investigations that
Texas attorney general's office found, what was the result of
the lawsuits that were brought by the Texas Attorney General?
Mr. O'Connell. As I indicated earlier Mr. Chairman, so far
we have collected $45.5 million, and that is more than twice
the amount of what we believe were the damages incurred by the
Texas Medicaid program. And in addition, we recovered the
attorneys' fees and costs of the Attorney General as well as
related----
Chairman Barton. Are there any lawsuits that are still
pending?
Mr. O'Connell. Yes. We have one still pending against
Roxane Pharmaceuticals, which will be taking place in fall of
2005, and then we have also sued three other manufacturers:
Abbott Laboratories, Braun/McGaw Pharmaceuticals, as well as
Baxter.
Chairman Barton. So the only lawsuits that have been
concluded that the State of Texas has won, and you've got four
other pending lawsuits?
Mr. O'Connell. And we have settled two. One with DEY
Laboratories; one with Warwick, a division of Schering. And we
have four others. And then Senator Cornyn, when he was Attorney
General, made clear that there were other investigations going
on, and we are proceeding as quickly as we can with the
staffing that we have.
MChairman Barton. Is it reasonable to expect that the
lawsuits that haven't been settled that are still pending, the
outcome is going to be similar to what has already occurred?
Mr. O'Connell. We certainly expect so, yes, sir.
Chairman Barton. That would be obvious--that is what I
would think. What has Texas done to change its Medicaid system
as a result of these same investigations? Have there been
changes in the way Texas administers its part of Medicaid that
deals with prescription drug reimbursement?
Mr. O'Connell. Absolutely. And Mr. Balland may be able to
speak to it more than I. But I do know that because of the
prices that we have found in our investigations, they have
conducted audits, spent significant sums of money to conduct
these audits, which I don't believe they should have had to do,
in order to get the real pricing that the pharmacies and
wholesalers are paying for these products. They then lowered
the reimbursement rates in Texas for those particular prices.
And in addition, and more importantly, the maximum allowable
cost that was referred to earlier that Texas maintains in those
MACs were lowered significantly as well. And in most cases, my
understanding is the Texas MAC is significantly lower than the
Federal upper limit that is currently in place.
Chairman Barton. Mr. Balland, do you want to elaborate on
the changes that Texas has made in its system?
Mr. Balland. Yes, sir. Thank you, Mr. Chairman. That is
correct. We--75 percent of the time, Texas pays lower than the
Federal upper limit. Also, we have refined the pricing
methodology in the State to make it much more accurate. We also
have three points that we feel makes the vendor drug program in
Texas unique, and that is, No. 1, we have a pricing system that
is proactive and transparent in determining the most accurate
prices; No. 2, we have within our vendor drug program a
formulary unit which is dedicated and focused to determining
the most accurate of prices; and then No. 3, we are the only
State that has a questionnaire that we require the
manufacturers to answer with specific pricing points that help
us refine those true prices.
Chairman Barton. Is there any manufacturer or distributor
that because of the changes that Texas has made or because of
these lawsuits has chosen to not serve Texas? Has somebody
backed out and said we don't want to play in that market
anymore?
Mr. Balland. No.
Mr. O'Connell. Not only that, Mr. Chairman, the number of
pharmacies that are participating in the Medicaid program have
gone up over the last number of years instead of gone down.
There was one thing that the Medicaid program did that I
think was particularly important, I think, and that is that a
rule was passed requiring manufacturers to report their AMPs
directly to Texas. The rule required that the AMPs maintain
confidential--as you know, CMS gets those AMPs but they are not
provided to the States. So far, only 16 percent of the
manufacturers have complied with that rule and we have a
problem when----
Chairman Barton. The AMP is the average manufacturing
product----
Mr. O'Connell. The actual manufacture price for the
previous quarter, which would be akin to the average sale price
that you have instituted in Medicare. Only 16 percent of the
manufacturers have cooperated with us so far in that regard.
Chairman Barton. I just want to recapitulate because I am
about to run out of time. The Texas Attorney General, who is
now the United States Senator from Texas, decided that there
was reason to believe that fraud or corruption was occurring in
the Medicaid program in terms of prescription drug payments in
Texas; so he instigated an investigation that has so far
resulted in several lawsuits being successfully concluded and
the State and the Federal Government have recouped over $45
million. We have got 3 or 4 lawsuits that are currently
pending. In addition, the State of Texas has changed the way it
administers the Medicaid program. Because of those changes,
there are significant cost savings. No provider has chosen not
to provide so that so far it is a win-win for everybody in
terms of honesty and good government.
My last question is, is there any reason to believe that
some system similar to what the State of Texas has instigated
would not work at the Federal level if we did something
similar?
Mr. O'Connell. In my opinion, no. Obviously the concern
that we have is Texas has spent a tremendous amount of money to
institute this system, and I think most States, certainly the
smaller States, probably don't have the funds to do that. And
the more money you spend trying to get the number right, the
less money you have to spend on your beneficiaries.
Chairman Barton. But the two representatives from Texas
think that what Texas is doing in a similar way, obviously
would have to be massaged to some extent, could be used in
other States?
Mr. Balland. Absolutely.
Chairman Barton. All right. I want to ask Mr. Rinehart, who
I think is from Michigan, do you agree with that? Do you think
that what Texas is doing might be useful in Michigan?
Mr. Rinehart. Yes, I do.
Chairman Barton. Mr. Smith, Mr. Reeb, Mr. Vito, do you all
see any reason to believe that something similar to what we're
doing in Texas couldn't be used at the Federal level and other
State levels? Anybody?
Mr. Smith. I think, Mr. Chairman, it goes back to part of
the fundamentals of Medicaid. The Federal Government is working
with upper limits and frameworks. You've heard two good
examples today, of how the States themselves are involved in
getting prices lower than what the Federal upper limits would
have allowed. So that's the way Medicaid works.
Chairman Barton. But I mean does anybody on this panel,
before we turn it back because I have got about a minute left,
fundamentally think we ought to just maintain the status quo?
Is everybody in agreement that we ought to change the status
quo and if it is necessary to do that by Federal statute that
we ought to do that, we ought to actually change the Federal
law? And I'm not saying we go to exactly what Texas is doing,
but to go to some system that really is based on actual sales
prices with auditing and backup so that we have a transparency
in the system so that anybody that has an interest can find out
what's really going on? Is there anybody that disagrees with
that? Let the record show that all the heads are saying they--
--
Mr. Smith. I think everybody wants better than what we
have.
Chairman Barton. All right. With that, Mr. Chairman, I
yield back the balance of my time.
Mr. Walden. The gentleman yields back the balance of his
time.
The Chair now recognizes the gentleman from Michigan, Mr.
Rogers.
Mr. Rogers. Thank you, Mr. Chairman. I want to commend
Chairman Barton for holding the hearing. One thing I have found
through this whole process is when you look at the monumental
occasion that happened here not so long ago, the first time
ever under Medicaid trying to provide a prescription drug
benefit, and hopefully apply some common sense, it was so big,
we have some problems. And I know my good friend, Mr. Stupak
from Michigan, was talking about why don't we fix the Medicaid
portion of it. We're still trying to figure out if we exactly
got reimbursement right for oncology, and we're really talking
about pharmacies in the Medicaid and trying to figure that out.
We still have issues that we have to work out. It is a
complicated, complicated--too complicated obviously. I think we
have decided that. Better transparency, better availability for
information.
Mr. Rinehart, I want to congratulate you in the State of
Michigan. You have been aggressive and you have certainly given
credence to the old saying that no good deed goes unpunished,
at least in the first couple of years. But I want to make sure
we are comparing apples and apples. I think you have
acknowledged that when it gets down to that 75 percent mark,
that is going to be a true savings for Michigan that is in this
bill.
And as I understand your numbers, you didn't add in that 28
percent subsidy that is being paid to a State like Michigan to
its retiree benefits. So there is a big chunk of money that is
being able to be applied to Medicaid or any other issue the
State decides.
Mr. Rinehart. That is true. No, I did not. I just focussed
on Medicaid----
Mr. Rogers. So it's not really a true loss. What is really
deceptive here is we have got the two best, I think, in the
State. I think you are No. 1 and No. 2 for keeping your costs
down. I have imagined if we put all the States in a hat and
drew two out, we'd have a whole different story here about cost
containment on Medicaid prescription drugs. This has kind of
given us a bit of a distorted view on why we're at and I think
why that formula was there.
I will offer you this commitment, that I will work with
Chairman Barton to make sure that we institute at least a
little fairness and not punish the States that have been
aggressive about keeping their costs down. But I would caution
that next year's an estimate for you. You've done a great job.
You've come down. The numbers over the last few years were very
impressive. That is wonderful. We just want to make sure that
number continues, because it is a guess right now, and you are
making a best guess, and we want to make sure we're accurate.
We don't want to punish you for doing great things, but we
don't want to give you extra money for having a little bit of
progress and falling back either.
So as you can imagine, with 48 States in the mix, it is
pretty complicated for us to get to the right conclusion. These
hearings are incredibly important for us to understand how we
tweak this thing and make it better and more service-oriented,
especially in cases exactly like this.
And just to CMS, I'll throw you under the bus. I am
hoping--you've really enjoyed that today. I can tell by that
expression and the sweat on your brow that you love that. I
mean I hope that we are going to allow--and my understanding
and reading of this and through staff consultations is that
there is a little wiggle room that is not hard, fast, and
certain, that CMS will have some ability to make some judgments
to look at how their costs--how they're charging back on that
clawback provision; is that correct?
Mr. Smith. Offhand, I'm not certain what wiggle room you
might be referring to. But I think overall, the way the State
contribution, as we call it, is calculated, is off of a base
year. Congress enacted this a year ago. They had to establish
something as a base so 2003 was the calendar year that they
used because that way the expenditures were what they were. It
was set, instead of basing it on estimates. And then it was
indexed by national health expenditures.
That, in itself, historically, is of benefit to States
because the growth in prescription drugs in the Medicaid
program is generally higher and historically higher than
national health expenditures. So right off the bat, Congress
provided a way for the States to save money by doing a lower
rate of growth.
When you get States like Michigan and Texas that then have
become more aggressive than what the national health
expenditures have been, that is to the good on both sides
because then they are saving that much money for the rest of
the Medicaid program as well. So I don't see----
Mr. Rogers. You mean projected growth sayings is what you
are saying over time?
Mr. Smith. Correct. Because they are saving that for the
entire population, not just----
Mr. Rogers. So even States like Michigan and Texas, and I
heard Ohio mentioned, at the end of the day at the 10-year--
they are all reaping rewards from this bill.
Mr. Smith. Yes. They all, compared to the baseline, will be
spending less than what they would be doing.
Mr. Rogers. Which is a benefit. And, Mr. Rinehart, again, I
congratulate what you are doing. I know in November you went to
this outside contractor. I think that's a great way to do it.
As I looked at it, and I would just be interested in your
thoughts on it, but one of the immediate issues I guess that I
looked at that raised my eyebrow was that you are only dealing
with distributors. So there may be even a better way to do it.
And I'm not condemning what you did. I think it's a great
thing. But have you look at other ways to try to do that?
Because you are contracting with a firm who is taking
distributor prices. As you sat through the net and through
other places, can you tell me cost savings, can you tell me a
better way to do it?
Mr. Rinehart. The savings on this firm we estimate that
about $40 million in 2004. I have learned a lot today about--we
are dealing with a distributor, and there's a step before that
that I think could be done. I don't know how Michigan could do
it by itself, but get better pricing information at that level.
We still use the average wholesale price for brand name drugs,
and that's half of our spending. So any attempts to--any
efforts to improve the accuracy of that, that would be very
helpful as well.
Mr. Rogers. I appreciate it. Mr. Smith, I just want to go
back to this New York Times article, and I didn't get a chance
to read the whole thing, but my understanding is they are not
ineligible, they are just worried about their capacity in order
to have access; is that correct?
Mr. Smith. That's correct. Most definitely they are
eligible, and most definitely they will be enrolled. The issue
is really trying to take the overarching concept of competition
among plans and applying it to a specialty market in long-term
care. So, this is something that we believe we are making great
progress on, and when the final rule is developed, I think
people will see that the concern has been alleviated. But most
definitely we are going to be auto-enrolling all these
individuals who are dual-eligibles so they will become eligible
and matching them up with a plan that will do what they do
today for low-income seniors. It's kind of a specialty market
with the long term-care pharmacy providers themselves and
helping them to work with the plan sponsors, developing the
product that will meet the needs of low-income citizens.
Mr. Rogers. And as I understand it, please correct me if
I'm wrong, but there was kind of a loose framework there under
Medicaid that they hope will have a better management structure
under Medicare, just getting an understanding of the cost. It
doesn't mean it is going to diminish the services, doesn't mean
it's going to diminish what they are certainly eligible for.
But it is forcing us to go through an understanding of exactly
how we implement it, which means we will have a better idea of
what cost and what it truly and accurately costs us to take
care of those patients.
Mr. Smith. I think you are correct, yes, sir.
Mr. Rogers. Is that correct?
Mr. Smith. Yes.
Mr. Rogers. So this isn't--we're not pulling a rabbit out
of a hat. There is already a system under Medicaid. Now we have
some transfer, some mechanism to Medicare; is that correct?
Mr. Smith. That's correct.
Mr. Rogers. So this isn't an insurmountable the sky is
falling----
Mr. Smith. We do not believe it is insurmountable at all.
And we believe that we will come up with models that guarantee
access and provide quality of treatment that people in nursing
homes need at a competitive price. It's a specialty market and
I think that when the final rule comes up people will be very
pleased with what we come out with.
Mr. Rogers. Thank you. I don't have too much further other
than I just want to thank you so much. If we can be of any
assistance as we move forward on this, again, I'd like to see
States like Texas and Michigan get rewarded. Being that you are
from Michigan, it is easy to say I think all those other 48
ought to pay for the difference. I'm sure I have a lot of help
here from that.
Mr. Walden. The gentleman's time has expired.
Mr. Rogers. But we do appreciate--especially Oregon. We do
appreciate your efforts. I think we need to be cautious
sometimes about some of what we have heard from the State
administration. At the end of the day, this will save Michigan
money in a very large way. And I think it is counterproductive
for this sparring, I think even with the administration, about
the cost of this. There are some things that we can fix and
make it better. Absolutely no doubt. And this is a good thing
for Michigan and they will save significant amounts of money,
and I look forward to working with you. Thank you, and I yield
back.
Mr. Walden. I thank the gentleman from Michigan.
Mr. Stupak. Mr. Chairman, in response to Mr. Rogers'
questions, Mr. Smith said they have a plan that they have ready
to fix this nursing home thing. Could he submit that to the
committee for the record so we would have it so we can look at
it.
Mr. Walden. I'm sure we can ask him for that.
Mr. Stupak. This plan that you have in response to Mr.
Rogers' questions?
Mr. Smith. The final rule on how the long-term care
pharmacies and the plan sponsors themselves will be working
together to deliver the benefit.
Mr. Stupak. But when you have that plan ready, could you
submit it to the committee before the final rule?
Mr. Smith. Before the final rule?
Mr. Stupak. Yes.
Mr. Smith. The proposed regs are already out. We are going
through all the comments, et cetera, and expect to publish the
final regs in early January.
Mr. Stupak. Send those proposed rules up, would you please?
Mr. Smith. The proposed, absolutely. Absolutely.
[The material referred to appears in the Federal Register
of Tuesday, August 3, 2004, Parts II and III.]
Mr. Stupak. Thank you.
Mr. Walden. Thank you. I'm going to dismiss this panel now.
Thank you very much for your testimony and for your good work.
It is most helpful in our committee's deliberations. We
appreciate your sticking with us today. I know other committee
members may have questions they may want to submit to you for a
response along the way.
Now I would like to call forward our final panel of
witnesses today. Mr. Edward H. Stratemeier, former Vice
President and General Counsel of Aventis Pharmaceuticals; Ms.
Pamela R. Marrs, Senior Vice President and CFO of DEY, Inc.;
Ms. Lesli Paoletti, Roxane Laboratories, Inc.; Mr. Timothy
Catlett, Senior Vice President of Sales and Marketing, Barr
Laboratories, Incorporated; David Marshall, R.Ph., director of
Category Management for Generics, CVS Corporation; John
Ziebell, R.Ph., Category Manager for Pharmacy, Health &
Wellness, Walgreen Company; and Frank Seagrave, Vice President
of Pharmacy, Wal-Mart Stores, Incorporated.
You are all aware the committee is holding an investigative
hearing and when doing so, has had the practice of taking
testimony under oath. Do any of you have an objection to
providing your testimony under oath? Let's start with Mr.
Seagrave. Do you have any objection to----
Mr. Seagrave. No.
Mr. Walden. Mr. Ziebell?
Mr. Ziebell. No.
Mr. Walden. Mr. Marshall?
Mr. Marshall. No.
Mr. Walden. Mr. Catlett?
Mr. Catlett. We need one more chair.
Mr. Walden. If we can get you a chair, that would be
helpful. We need one more chair at the witness table.
Ms. Paoletti, do you object?
Ms. Paoletti. I have no objections.
Mr. Walden. Ms. Marrs?
Ms. Marrs. No objection.
Mr. Walden. Mr. Stratemeier?
Mr. Stratemeier. No objection.
Mr. Walden. Okay. The Chair then advises you that under the
rules of the House Rules Committee, you're entitled to be
advised by counsel. Do any of you desire to be advised by
counsel?
Mr. Seagrave? Counsel? Do you want to be advised by
counsel?
Mr. Ziebell. Yes, I do.
Mr. Walden. You do? Could you identify your counsel,
please?
Mr. Ziebell. Mr. Frederick Robinson. Mr. Walden. Mr.
Frederick Robinson, right there. Okay. Mr. Marshall?
Mr. Marshall. No counsel.
Mr. Walden. Mr. Catlett?
Mr. Catlett. Mr. Mark Young.
Mr. Walden. Mr. Mark Young. Okay, thank you.
Ms. Paoletti?
Ms. Paoletti. Yes. Ed Miller.
Mr. Walden. Ed Miller is your counsel.
Ms. Marrs?
Ms. Marrs. Yes. Paul Doyle.
Mr. Walden. Paul Doyle. And Mr. Stratemeier?
Mr. Stratemeier. No, your honor.
Mr. Walden. ``Chairman'' is okay, as opposed to ``your
honor.''
[Witnesses sworn].
Mr. Walden. You're now under oath and you may give a 5-
minute summary of your written statement.
I'm going to have Mr. Rogers take over the Chair for just a
moment, but please proceed, and Mr. Stratemeier, we will begin
with you. Thank you again for being here.
TESTIMONY OF EDWARD H. STRATEMEIER, FORMER VICE PRESIDENT AND
GENERAL COUNSEL OF AVENTIS PHARMACEUTICALS; PAMELA R. MARRS,
SENIOR VICE PRESIDENT AND CFO, DEY, INC.; LESLI L. PAOLETTI,
ROXANE LABORATORIES, INC.; TIMOTHY P. CATLETT, SENIOR VICE
PRESIDENT OF SALES AND MARKETING, BARR LABORATORIES,
INCORPORATED; DAVID MARSHALL, DIRECTOR OF CATEGORY MANAGEMENT
FOR GENERICS, CVS CORPORATION; JOHN ZIEBELL, CATEGORY MANAGER
FOR PHARMACY, HEALTH & WELLNESS, WALGREEN COMPANY; AND FRANK
SEAGRAVE, VICE PRESIDENT OF PHARMACY, WAL-MART STORES,
INCORPORATED
Mr. Stratemeier. Thank you, Mr. Chairman, Members of
Congress. My name is Edward Stratemeier. Until recently, I was
senior Vice President of Aventis Pharmaceuticals. My
responsibilities included legal matters, government relations,
and public policy in North America.
Aventis is a global pharmaceutical company that has just
been acquired by Sanofi-Synthelabo to form Sanofi-Aventis. As a
result of that merger, I left the company. I'm here today at
the committee's request as a private citizen. I understand that
the purpose of today's hearing is to address issues relating to
AWP-based reimbursement of prescription drugs under Medicaid.
I have been asked to discuss with the committee the policy
positions developed by Aventis during my tenure with respect to
AWP reimbursement for prescription drugs. And as much as I am
no longer employed by Sanofi-Aventis, I cannot say whether the
company still supports the policy positions taken during my
tenure, nor can I speak to what the company will do in the
future with respect to these matters. I joined Marion
Laboratories, one of the predecessor companies of Aventis, in
1982. Over the past 20 years, I've been actively engaged in the
prescription pharmaceutical industry as an attorney and a
senior executive. It was in my capacity as head of government
relations and public policy that I oversaw the development of
Aventis's position on reimbursement for pharmaceuticals under
Medicare and Medicaid.
The pharmaceutical industry has seen many changes since I
joined Marion. The complexity, potency, and value of the
products the industry develops have changed as had the entire
distribution system for those products. One thing, however, has
not changed: the reliance on AWP as a reimbursement benchmark
by both government and private payors. To understand this
reliance, one has to look back nearly 40 years. In the late
1960's, about the only people who did not pay for prescription
drugs out of their own pockets were employees of the
pharmaceutical companies and people who qualified for Medicaid.
Therefore, it fell to Medicaid to try to build systems to
meet the task of paying for these drugs. I think it is
important to remember that in the 1960's, a computer with as
much computing power today as today's notebooks had not been
built and would have filled an entire building. Medicaid needed
simple manual systems. As a result, the concept of average
wholesale price, or AWP, was created by the director of
Medical, the California Medicaid Agency. The idea was that
rather than having a pharmacist report what he had paid to
purchase a product and then going through some type of audit
procedure to make sure that that was in fact the case, it would
be administratively simpler to always pay the same amount for a
given drug. At the time it was established, AWP was not
intended to be what was actually paid by the pharmacist to the
wholesaler, but it was a good surrogate for administrative
efficiency.
Beginning in 1969, Medical reimbursed pharmacies for
Medicaid patients' prescriptions by paying AWP plus a
dispensing fee. As third-party coverage of prescription drug
costs became more widespread by both government and private
payers, the reliance on AWP became more invasive.
Let me fast forward through two of the major trends in the
pharmaceutical industry that have made AWP a problematic
reimbursement benchmark. These trends are consolidation in the
wholesale drug industry and the rise of managed care, including
pharmacy benefit managers. For branded prescription drugs, AWP
typically reflects a 20 to 25 percent markup over the wholesale
acquisition cost, the manufacturer's list price to wholesalers,
also known as WAC. This markup roughly corresponded to the
wholesalers' markup in early days of AWP. However, drug
wholesalers have seen technological change that has
dramatically increased the efficiency of scale in that
industry. The change fostered incredible competition and led to
consolidation of the industry. Three companies now account for
over 90 percent of the wholesale drug business and they do it
on gross margins of less than 5 percent. That means that an AWP
that remains static at a 20 to 25 markup over WAC began to
overstate the price paid by the retail pharmacist.
The 1980's saw the rise of managed care and PBMs. Whatever
else they may have done, they forced big pharmaceutical
companies to aggressively compete on price. They did this by
limiting the number of drugs a drug plan would pay for and then
negotiating with the manufacturers for rebates to be on the
preferred known as a formulary. They also forced pharmacies to
compete on price by requiring pharmacists to sign contracts if
they wanted to serve the population covered by the plan.
I should point out that all of these agreements used AWP as
a benchmark price. While these trends were occurring, there was
tremendous pressure to maintain AWP at a fixed markup from WAC.
AWP had been codified as the benchmark price by statute or
regulation in the public sector and by contract in the private
sector. As the difference between AWP and real prices paid by
pharmacists and providers began to increase, that difference
was used to compensate for lack of payment for services. A
change in the current well-known relationship of AWP to WAC
would have had far-reaching effects on the provision of health
care services.
In 1990, Congress recognized that private sector payers
were able to negotiate substantial discounts from
pharmaceutical manufacturers. To take advantage of these
negotiations for Medicaid, Congress included provisions in the
Omnibus Budget Reconciliation Act, requiring pharmaceutical
manufacturers to pay a rebate on Medicaid purchases that was
based on the best price negotiated by private sector payers.
The 2002 policy document which was provided by Aventis to
the committee reflects the result of an effort to point out the
problems associated with relying on AWP benchmarking and
government reimbursement of prescription drugs given the
reality of the changed environments in which those products
were used. It was Aventis's view that appropriate methodology
needed to reimburse providers for the drugs they dispensed at
or near their cost to acquire those drugs while also fully and
appropriately paying them for the professional services they
provided in connection with dispensing those products.
I appreciate the opportunity to appear before the committee
today and would be happy to answer your questions regarding the
use of AWP as a basis for reimbursement.
[The prepared statement of Edward H. Stratemeier follows:]
Prepared Statement of Edward H. Stratemeier, Esq.
Mister Chairman, Members of Congress, my name is Edward
Stratemeier. Until recently I was Senior Vice President of Aventis
Pharmaceuticals. My responsibilities included legal matters, government
relations and public policy in North America. Aventis is a global
pharmaceutical company that has just been acquired by Sanofi-Synthelabo
to form Sanofi-Aventis. As a result of the merger I left the company.
I am here today at the Committee's request as a private citizen. I
understand that the purpose of today's hearing is to address issues
relating to AWP-based reimbursement of prescription drugs under
Medicaid. I have been asked to discuss with the Committee the policy
position developed by Aventis during my tenure there with respect to
AWP based reimbursement for prescription drugs.
I joined Marion Laboratories, one of the predecessor companies of
Aventis in 1982. Over the past twenty years I have been actively
engaged in the prescription pharmaceutical industry as an attorney and
a senior executive. It was in my capacity as head of government
relations and public policy that I oversaw the development of Aventis'
position on reimbursement for pharmaceuticals under Medicare and
Medicaid.
The pharmaceutical industry has seen many changes since I joined
Marion. The complexity, potency and value of the products the industry
develops have changed, as has the entire distribution system for those
products. One thing, however, has not changed: the reliance on AWP as a
reimbursement benchmark by both government and private payers. To
understand this reliance, one has to look back nearly 40 years.
In the late 1960's, about the only people who did not pay for
prescription drugs out of their own pockets were employees of
pharmaceutical companies and people who qualified for Medicaid.
Therefore it fell to Medicaid to try to build systems to meet the task.
I think it is important to remember that in the 60's, a computer with
as much computing power as today's notebooks had not been built and
would have filled a large building. Medicaid needed simple manual
systems.
As a result, the concept of Average Wholesale Price or AWP was
created by the director of Medi-Cal, the California Medicaid Agency.
The idea was that rather than having a pharmacist report what he had
paid to purchase a product (and then going through some type of audit
procedure to verify that he had truly paid such a price) it would be
administratively simpler to always pay the same amount for a given
drug. At the time it was established, AWP was not intended to be what
was actually paid by the pharmacist to the wholesaler, but it was a
good surrogate for administrative efficiency. Beginning in 1969, Medi-
Cal reimbursed pharmacies for Medicaid patients' prescriptions by
paying AWP plus a dispensing fee. As third party coverage of
prescription drug costs became more widespread--both by government and
private payers--the reliance on AWP became more pervasive.
Let me fast-forward through two of the major trends in the
pharmaceutical industry that have made AWP a problematic reimbursement
benchmark. These trends are consolidation in the wholesale drug
industry and the rise of managed care including Pharmacy Benefit
Managers (PBM's.)
For branded prescription drugs, AWP typically reflects a 20% to 25%
mark up over the Wholesale Acquisition Cost (the manufacturer's list
price to wholesalers also known as WAC.) This mark up roughly
corresponded to the wholesaler's mark up in the early days of AWP.
However, drug wholesalers have seen technological change that has
dramatically increased the efficiency of scale in that industry. That
change fostered incredible competition and led to consolidation of the
industry. Three companies now account for over ninety percent of the
wholesale drug business and they do it on gross margins of less than
five percent. That means that an AWP that remained static at a twenty
to twenty-five percent markup over WAC began to overstate the price
paid by the retail pharmacist.
The 1980's saw the rise of managed care and PBM's. Whatever else
they may have done, they forced big pharmaceutical companies to
aggressively compete on price. They did this by limiting the number of
drugs that a drug plan would pay for and then negotiating with the
manufacturers for rebates to be on the preferred list (known as a
formulary.) They also forced pharmacies to compete on price by
requiring pharmacists to sign contracts if they wanted to serve the
population covered by the plan. I should point out that all of these
agreements used AWP as the benchmark price.
While these trends were occurring, there was tremendous pressure to
maintain AWP at a fixed markup from WAC. AWP had been codified as the
benchmark price, by statute or regulation in the public sector and by
contract in the private sector. As the difference between AWP and the
real prices paid by pharmacists and providers began to increase, the
difference was used to compensate for lack of payments for services. A
change in the current, well-known relationship of AWP to WAC would have
far reaching effects on the provision of health care services.
In 1990, Congress recognized that private sector payers were able
to negotiate substantial discounts from pharmaceutical manufacturers.
To take advantage of these negotiations for Medicaid, Congress included
provisions in the Omnibus Budget Reconciliation Act requiring
pharmaceutical manufacturers to pay a rebate on Medicaid purchases that
was based on the ``Best Price'' negotiated by private sector payers.
In 2001, the Office of the Inspector General of the Department of
Health and Human Services and the General Accounting Office both issued
reports that found that Medicare providers were paying substantially
less than AWP to obtain the drugs they dispensed to patients and
recommended government reimbursements to providers for drugs be brought
more in line with acquisition costs. As committee staffs were
considering the question, Aventis met with them to recommend adopting
acquisition cost as the amount for reimbursement. This recommendation
was formally adopted by Aventis management in 2002.
The 2002 Aventis policy document, which was provided by Aventis to
the Committee, reflects the result of an effort to point out the
problems associated with relying on AWP benchmarking in government
reimbursement of prescription drugs given the realities of the changed
environment in which those products are used. It was Aventis' view that
an appropriate reimbursement methodology needed to reimburse providers
for the drugs they dispensed at or near their cost to acquire those
drugs, while also fully and appropriately paying them for the
professional services they provided in connection with dispensing those
products.
I appreciate the opportunity to appear before the Committee today,
and will be happy to answer your questions regarding the use of AWP as
a basis for reimbursement.
Mr. Rogers [presiding]. Thank you for your testimony.
Ms. Marrs.
TESTIMONY OF PAMELA R. MARRS
Ms. Marrs. Good morning, Mr. Chairman and distinguished
members of this committee. Thank you for the opportunity to
appear before you today.
For the past 15 years, I have been the Chief Financial
Officer of DEY LP. Founded in 1978 and located in Napa
California, DEY is a specialty pharmaceutical company focused
on the development, manufacturing, and marketing of
prescription drugs for the treatment of respiratory diseases
and respiratory-related allergies. In addition to our facility
in Napa, we also have a distribution center in Allen, Texas.
Last year Congress and the administration took important
steps to reform and improve Medicare reimbursement policy when
it passed the Medicare Modernization Act. As you know, the
system of reimbursement using a percentage of AWP badly needed
to be reformed and many in the pharmaceutical industry
including DEY supported reform. Medicaid reimbursement has
typically had a spread between the cost of the drug paid by the
provider and the reimbursement amendment. That spread goes to
the provider, not to the manufacturer. Until the mid 1990's, my
understanding is that it was not unusual for salespeople when
speaking to customers to compare their spreads with those of
their competitors. Beginning in the late 1990's as a result of
litigation, government investigations, and the OIG compliance
program guidance, my understanding is that the industry has
become sensitive to this practice and has largely stopped. At
DEY we have developed and implemented a major compliance
program over the last few years designed to ensure that our
sales force is compliant with the OIG guidance.
Is the spread still meaningful to providers? Yes. Because
they often depend on the spread to cover their cost of
dispensing which often exceeds the dispensing fees they receive
from Medicaid.
How does DEY set AWP for generics? At DEY, our historical
practice for generic drugs has been to set the generic AWP as a
percentage off of the brand's AWP when the product is launched.
Usually that percentage has been around 10 percent. After that,
our practice has been not to change AWP on generics.
Why doesn't DEY lower its AWP on generic drugs? The simple
answer is that given the system that now exists, our customers
won't buy from us if we lower our AWP. This was confirmed about
a year and a half ago when a reporting service lowered their
published AWP for our drugs without consulting. Our customers
told us they would stop buying from us with the lower AWP. This
could have put many of our employees out of work overnight. So
we went to court and the court issued a temporary restraining
order.
Why do we need AWP at all? At this point the current system
is based on AWP, and customers rely on it and won't buy a
product without it. As evidence of this, about 2 years ago,
because of the litigation, we tried to market a new drug with
no AWP. Our customers said they would not buy it. So we set an
AWP which happened to be lower than those of our competitors.
As a direct result of this lower AWP, we sold almost nothing of
a drug for which we had projected to have sales of $6 million.
These experiences taught us that reimbursement reform has
to come from the government and be applied to the whole
industry. If a generic company, especially a small one like
ours, tries to buck the AWP system on its own, it can being be
forced out of a whole business line.
Do our profits on generic drugs increase as the spread
increases? In DEY's case, the answer is no. First, it is
important to keep in mind that the drugs manufacturers don't
get the money from the spread. The money realized from the
spread goes to providers. Second, in the case of generic drugs,
a larger spread actually means a lower profit for the
manufacturer.
Because generic drugs are a commodity, price competition is
fierce. If the spread for a particular generic drug is getting
larger, it almost always is because AWP is remaining the same
while the actual selling price is getting lower. At the same
time, our costs are increasing and our margins declining. This
situation has shown dramatically in the case of Albuterol,
which has been repeatedly cited in CMS reports as having some
of the largest spreads of any drug. For the last 10 years, the
spread on Albuterol, which is one of DEY's biggest generic
products in terms of volume, has been getting larger and larger
as the price drops because of competition.
Have our profits increased as the spread has grown? No. At
the current time, we are actually close to breaking on
Albuterol due to the continuing erosion of the market price.
As I said at the outset, I am the Chief Financial Officer
of DEY. I have held that position since 1989. Most of the
documents I was asked about and my staff interview or that came
to me afterwards came out of our sales and marketing
department, and with some exceptions where I was copied or was
the addressee, I saw them for the first time during this
litigation. Having said that, I hasten to add that I have
learned a lot about AWP in these documents from the litigation
and I will try to be as helpful as I can when answering
questions. Thank you for your time and I'd be pleased to answer
any questions.
[The prepared statement of Pamela Marrs follows:]
Prepared Statement of Pamela Marrs, Chief Financial Officer, DEY, LP
Good morning, Mr. Chairman and distinguished members of this
Committee. Thank you for the opportunity to appear before you today.
For the past 15 years, I have been the Chief Financial Officer of DEY,
L.P. Founded in 1978 and located in Napa, California, DEY is a
specialty pharmaceutical company focused on the development,
manufacturing and marketing of prescription drug products for the
treatment of respiratory diseases and respiratory-related allergies. In
addition to our facility in Napa, we also have a distribution center in
Allen, Texas.
Last year Congress and the Administration took important steps to
reform and improve Medicare reimbursement policy when it passed the
Medicare Modernization Act.
As you know, the system of reimbursement using a percentage of
average wholesale price, or AWP, badly needed to be reformed and many
in the pharmaceutical industry, including DEY, supported reform.
Medicaid reimbursement has typically had a spread between the cost
of the drug paid by the provider and the reimbursement amount. That
spread goes to the provider, not the manufacturer. Until the mid
1990's, my understanding is that it was not unusual for sales people,
when speaking to customers, to compare their spreads with those of
their competitors. Beginning in the late 1990's, as a result of
litigation, government investigations and the OIG Compliance Program
Guidance for Pharmaceutical Manufacturing issued in 2003, my
understanding is that the industry has become sensitive to this
practice and it has largely stopped. At DEY, we have developed and
implemented a major compliance program over the last few years designed
to ensure that our sales force is compliant with the OIG Guidance.
We have also seen many changes on the government side that are
reducing the emphasis on AWP. Last year's Medicare law will, by 2006,
virtually eliminate AWP as a basis for Medicare reimbursement under
Part B. The new Medicare Part D drug benefit will not use AWP as a
basis for government payment for drugs. So, both by industry practice
and government action, the situation is changing.
Is the spread still meaningful to providers?
Yes, because they often depend on the spread to cover their costs
of dispensing, which often exceed the small dispensing fees they
receive from Medicaid.
How does DEY set AWP for generics?
At DEY, our historical practice for generic drugs has been to set
the generic AWP as a percentage off of the brand's AWP when the product
is launched. Usually that percent has been about 10%. After that, our
practice has been not to change AWP on generics.
Why doesn't DEY lower its AWP on generic drugs?
The simple answer is that, given the system that now exists, our
customers won't buy from us if we lower our AWP. This was confirmed
about a year and a half ago when a reporting service lowered their
published AWP for our drugs without consulting us. Our customers told
us they would stop buying from us with the lower AWP. This could have
put many of our employees out of work overnight. So we went to court
and the court issued a temporary restraining order stopping the
service's action.
Why do we need an AWP at all?
At this point, the current system is based on AWP and customers
rely on it and won't buy a product without it. As evidence of this,
about two years ago, because of the litigation, we tried to market a
new drug with no AWP. Our customers said they wouldn't buy it so we set
an AWP which happened to be lower than those of our competitors. As a
direct result of the lower AWP, we sold almost nothing of a drug for
which we had projected to have sales of $6 million. These experiences
taught us that reimbursement reform has to come from the government and
be applied to the whole industry. If a generic company--especially a
small one like ours--tries to buck the AWP system on its own, it can be
forced out of whole business lines.
Do our profits on generic drugs increase as the spread increases?
In DEY's case, the answer is no.
First, it is important to keep in mind that the drug manufacturers
don't get the money which comes from the spread. Money realized from
the spread goes to the providers.
Second, in the case of generic drugs, a larger spread actually
means a lower profit margin for the manufacturer. Because generic drugs
are a commodity, price competition is fierce. If the spread for a
particular generic DEY drug is getting larger, it is almost always
because the AWP of the drug is remaining the same, while the actual
selling price is getting lower. At the same time, our costs are
increasing and our margins are declining.
This situation is shown dramatically in the case of albuterol,
which has been repeatedly cited in CMS reports as having some of the
largest spreads of any drug.
For the last ten years, the spread on albuterol, which is one of
DEY's biggest generic products in terms of volume sold, has been
getting larger and larger as the price drops because of competition.
Have our profits increased as the spread has grown? No. At the current
time, we are close to breakeven on albuterol due to continuing erosion
of the market price.
Why doesn't the industry get together and agree on a solution to
the AWP problem?
It is not within the purview of the industry to make such a change.
We at DEY are anxious to provide information and assistance so we can
help the government bodies that will effect such changes. We have
provided written comments on multiple occasions to CMS as that body has
worked toward reform of the current AWP-based system in an effort to
assist with this process.
As I said at the outset, I am the Chief Financial Officer of DEY.
I've held that position since 1989. Most of the documents I was asked
about in my staff interview or afterwards came out of the sales and
marketing department and, with some exceptions where I was copied or
was the addressee, I saw them for the first time during the litigation.
Having said that, I hasten to add that I have learned a lot about
AWP and these documents from the litigation and I'll try to be as
helpful as I can in answering your questions about them. q
Thank you for your time. I would be pleased to answer any questions
you may have.
Mr. Walden. Thank you, Ms. Marrs. We appreciate you being
here.
Ms. Paoletti. Thank you.
TESTIMONY OF LESLI L. PAOLETTI
Ms. Paoletti. Mr. Chairman and members of the subcommittee,
my name is Leslie Paoletti. I am appearing today on behalf of
Roxane Laboratories, where I am senior product manager. I am
here today at your request to assist you in your efforts to
examine Medicaid reimbursement.
Roxane is a leader in the development, manufacture and
marketing of generic pharmaceutical products. We are proud to
produce medicines that extend and improve the quality of
patient lives while reducing reliance on more expensive
alternative treatment options, including hospitalization stays,
invasive medical procedures, and more expensive prescription
products. We are committed to continuing to provide lower cost
pharmaceuticals to meet the health care needs of Americans.
As you know, Roxane is one of 26 manufacturers from whom
the subcommittee requested documents in connection with its
investigation into reimbursements and rebates under Medicaid.
Roxane voluntarily produced several thousand pages of documents
and provided witnesses for informal interviews on two separate
occasions.
Roxane understands the importance of the congressional
oversight process in determining the need for, and establishing
a basis for, legislation improving the Medicaid system. We
therefore agreed to the subcommittee's request that we appear
today to answer any questions on which members believe we can
provide useful information.
We have been advised that the Energy and Commerce Committee
may develop legislative recommendations to reform Medicaid
reimbursement policies, which we understand currently are
established on a State-by-State basis under a variety of
complex formulas. As you know, as a manufacturer of multisource
products, our revenues come exclusively from purchases by our
customers who, in turn, sell to parties or patients. We do not
sell prescription pharmaceutical products directly to patients,
nor do we receive any payments from Medicaid. However, we would
support any effort by Congress to bring greater efficiencies
and simplicity to the system, including much-needed guidance
from the government.
We believe any reform should maintain an incentive for
using generic drugs and ensure that an appropriate and viable
economic framework remains in place for health care providers
to serve patients.
I would be pleased to answer any of the questions on issues
you have identified and on the materials we have previously
provided to you. Roxane looks forward to working with you as
you address these issues.
[The prepared statement of Lesli L. Paoletti follows:]
Prepared Statement of Lesli L. Paoletti, Roxane Laboratories, Inc.
Chairman Barton and Members of the Subcommittee, my name is Lesli
Paoletti. I am appearing today on behalf of Roxane Laboratories, Inc.,
where I am Senior Product Manager. I am here today at your request to
assist you in your efforts to examine Medicaid reimbursement.
Roxane is a leader in the development, manufacture and marketing of
generic pharmaceutical products. We are proud to produce medicines that
extend and improve the quality of patient lives while reducing reliance
on more expensive alternative treatment options, including hospital
stays, invasive medical procedures, and more expensive prescription
products. We are committed to continuing to provide lower cost
pharmaceuticals to meet the health care needs of Americans.
As you know, Roxane is one of 26 drug manufacturers from whom the
Subcommittee requested documents in connection with its investigation
into pharmaceutical reimbursements and rebates under Medicaid. Roxane
voluntarily produced several thousand pages of documents and provided
witnesses for informal interviews on two separate occasions. Roxane
understands the importance of the congressional oversight process in
determining the need for, and establishing a basis for, legislation
improving the Medicaid system. We therefore agreed to the
Subcommittee's request that we appear today to answer any questions on
which Members believe we can provide useful information.
We have been advised that the Energy and Commerce Committee may
develop legislative recommendations to reform Medicaid reimbursement
policies, which we understand currently are established on a state-by-
state basis under a variety of complex formulas. As you know, as a
manufacturer of multisource products, our revenues come exclusively
from purchases by our customers who, in turn, sell to other parties or
patients. We do not sell prescription pharmaceutical products directly
to patients, nor do we receive any payments from Medicaid. However, we
would support any effort by Congress to bring greater efficiencies and
simplicity to the system, including much needed guidance from the
government. We believe any reform should maintain an incentive for
using generic drugs and ensure that an appropriate and viable economic
framework remains in place for health care providers to serve patients.
I would be pleased to answer any questions on the issues you have
identified and on the materials we previously have provided to you.
Roxane looks forward to working with you as you address these
issues.
Mr. Walden. Thank you for being here today.
Mr. Catlett, thank you for being here.
TESTIMONY OF TIMOTHY P. CATLETT
Mr. Catlett. Thank you, Mr. Chairman and members of the
subcommittee. I am Tim Catlett, Senior Vice President of Sales
and Marketing of Barr Laboratories. We are a leading
manufacturer of generic pharmaceuticals.
Mr. Chairman, I know that you and others want to reduce the
cost of prescription drugs for Medicaid patients. Your goal and
Barr's business objectives are well aligned. Barr's generic
drug business is designed to offer the same medicines as
branded companies, but at a lower cost.
The products we manufacture and sell are mostly in tablet
and capsule form. They are dispensed to patients by others, not
Barr. Barr does not receive reimbursements under Medicaid.
Like other generic manufacturers, Barr does offer a vehicle
for reducing Medicaid costs. When a pharmacy dispenses a
generic drug to a Medicaid patient, the reimbursement to
Medicaid is usually lower, and often substantially lower, than
it would be for a branded product. In that way, promoting the
use of generic products helps to reduce Medicaid costs. For any
drug reimbursement system, providing incentives to pharmacies
to dispense generic drugs is vital to achieving cost
reductions.
Generic drugs, by definition, are second to market, not
first. Pharmacies must be convinced to stock and dispense our
products as the alternative to a branded product which has been
on their shelves for years. If the drug reimbursement systems,
including Medicaid, do not create incentives to dispense
generic drugs, substantial cost savings will be lost.
I know the subcommittee has questions about AWP, or average
wholesale price. As HHS found years ago, AWP does not represent
an actual wholesale price or an average of actual prices.
Instead, as set out in my written testimony, AWP is simply a
publicly available reference price.
Many drug reimbursement systems, including some State
Medicaid agencies, use AWP in certain instances as a reference
point to calculate reimbursement levels for those who dispense
drugs to patients. Because they recognize that AWP is not an
actual acquisition price, these agencies reimburse at a
percentage off AWP.
If a generic manufacturer lowered its AWP unilaterally in a
multisource generic environment, pharmacists might choose to
dispense a competitor's generic product.
I would be pleased to answer any questions the subcommittee
may have, and thank you for your consideration.
[The prepared statement of Timothy P. Catlett follows:]
Prepared Statement of Timothy P. Catlett, Senior Vice-President of
Sales and Marketing, Barr Laboratories, Inc.
Mr. Chairman, thank you for inviting me to testify today. My name
is Tim Catlett, and I am Senior Vice-President of Sales and Marketing
at Barr Laboratories, Inc. Barr is pleased to have the opportunity to
answer any questions the Subcommittee may have on the company's role as
a manufacturer of generic pharmaceuticals in the context of the
Medicaid program.
I would like to make two key points:
First, Barr is in business to offer its customers the same
medicines as brand name drug manufacturers but at a significantly lower
cost, and we do. As a result, when Medicaid patients receive a generic
prescription product, they receive the same medicine as the counterpart
branded product, but at a cost to the Medicaid system that usually is
substantially lower.
Second, Medicaid and other prescription drug reimbursement programs
should encourage the maximum utilization of lower-cost generic drugs.
Any proposed changes must be carefully examined to ensure that they
include appropriate incentives for pharmacies to stock and dispense
generic products.
AN INTRODUCTION TO BARR LABORATORIES, A GENERIC PHARMACEUTICAL
MANUFACTURER.
Barr is one of America's leading manufacturers of generic
drugs.1 A generic drug is a product determined by the Food
and Drug Administration (``FDA'') to contain the same active
ingredients, and provide the same therapeutic value, as its brand-name
counterpart. The FDA bases its sameness determination on detailed
scientific criteria, including clinical studies. These criteria include
showing that the generic product is pharmaceutically equivalent to the
branded product (i.e., contains the same amount of the same active
ingredient); and that the generic product is bioequivalent to the
branded product (i.e., has the same rate and extent of absorption in
the human body).
---------------------------------------------------------------------------
\1\ More information about Barr and its role in the development of
the generic drug industry can be found at http://www.barrlabs.com.
---------------------------------------------------------------------------
When the FDA determines that a generic product is therapeutically
equivalent to its branded counterpart, the FDA grants the generic what
is called an ``AB'' rating. The rating means that the generic product
is interchangeable with the branded counterpart. Once an AB rating is
granted, the generic product can be substituted for the brand at the
pharmacy level, even in response to a prescription written for the
branded product, unless the physician writes ``dispense as written.''
When a pharmacy dispenses a generic prescription product to a Medicaid
patient, the pharmacy provides the patient with the same medicine as
the branded product, but usually at a significantly lower cost to the
Medicaid system.
Barr's generic pharmaceutical research, development, and marketing
efforts focus on specialty products that are difficult to manufacture
or otherwise require our unique development skills. Often, Barr makes
available the first low-cost generic alternative for a pharmaceutical
product, either by developing generic pharmaceuticals to compete with
branded drugs no longer under patent, or by challenging patents on
branded products under the Hatch-Waxman Act when those patents appear
to be invalid, unenforceable, or not infringed by our
product.2
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\2\ Drug Price Competition and Patent Term Restoration Act of 1984,
21 U.S.C. 355 (1999 & Supp.).
---------------------------------------------------------------------------
Patent challenges brought by generic manufacturers under the Hatch-
Waxman Act have resulted in $27 billion in prescription drug cost
savings.3 Barr brought several of these cost-saving patent
challenges, including the one that resulted in the first marketing of a
lower-cost generic form of Prozac more than two years prior to patent
expiry. When Barr successfully develops a generic substitute, other
manufacturers are thereby encouraged to bring generic products to
market when allowed by law. The resulting vigorous generic
pharmaceutical competition brings even lower prices and greater cost-
savings for consumers and their insurers.
---------------------------------------------------------------------------
\3\ See Kathleen D. Jaeger, Presentation to the HHS Task Force of
Drug Importation, April 5, 2004, available at http://
www.gphaonline.org/policy/pdf/2004-04-05-testimony.pdf.
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Currently, Barr manufactures and distributes more than 70 generic
products in core therapeutic categories, including oncology, female
healthcare (including hormone therapy and oral contraceptives),
cardiovascular, anti-infective, pain management, and
psychotherapeutics. All of Barr's generic products are in tablet,
capsule or oral suspension dosage form. We do not sell our generic
pharmaceutical products directly to physicians or their patients.
Rather, our ``customers'' for these products are pharmaceutical
wholesalers, who in turn sell to pharmacies; large chains with
distribution centers and pharmacy operations; mail-order pharmacies;
federal, state, and local government institutions; and managed care
organizations. Our customers then either dispense our products to
patients or sell our products to pharmacies, which then dispense our
products to patients pursuant to prescriptions written by physicians.
The growth of generic pharmaceutical manufacturers over the last
thirty years has resulted in substantial prescription drug cost savings
for consumers, private insurers, and public insurers. For example,
during the third quarter of 2004, the average prescription cash price
to a consumer of a branded pharmaceutical medication was $97.52, as
compared with an average price of only $26.35 for a generic
prescription.4
---------------------------------------------------------------------------
\4\ IMS Health, National Prescription Audit, November 2004.
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Congress and federal agencies recognize that use of generic
pharmaceuticals should continue to be promoted, given the magnitude of
savings that already have been realized. According to the Centers for
Medicare & Medicaid Services (``CMS''), generic substitution is a
``best practice'' for lowering prescription drug costs.5
When Congress passed the Medicare Prescription Drug, Improvement, and
Modernization Act of 2003, Pub. L. 108-173, Title IX 1101-1104, it
closed loopholes in Hatch-Waxman that delayed the development and
marketing of generic products. According to the Congressional Budget
Office, these statutory reforms ``would accelerate the availability of
generic versions of prescription drugs'' and ``result in lower total
drug spending within the United States by $7 billion over the 2004-2013
period.'' 6
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\5\ Centers for Medicare and Medicaid Services, Safe and Effective
Approaches to Lowering State Prescription Drug Costs: Best Practices
Among State Medicaid Drug Programs, available at http://
www.cms.hhs.gov/medicaid/drugs/strategies.pdf.
\6\ See, Congressional Budget Office, Analysis of Changes to the
Hatch-Waxman Act, August 27, 2003, available at http://www.cbo.gov/
ftpdocs/45xx/doc4513/Hatch-WaxmanLtr.pdf.
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Pharmaceutical Price Data.
Brand and generic manufacturers provide pricing data to independent
publishers, including Red Book, First DataBank, and others, which
compile the data for drug manufacturers, wholesalers, retailers, and
third-party payors, including state governments and the federal
government. These data are used as reference points for numerous
purposes, including calculating reimbursement levels under Medicaid and
other public and private health insurance programs.
Average Wholesale Price. It is generally known in the
pharmaceutical industry and related government agencies that average
wholesale price (``AWP'') is a reference price only, and does not
represent the actual selling price charged by a manufacturer for its
products. The Department of Health and Human Services has repeatedly
recognized that AWP does not reflect an actual wholesale
price.7 A recent General Accounting Office report confirms
that ``AWP is not necessarily the price paid by a purchaser,'' and that
it is ``often described as a `list price' [or] `sticker price.' ''
8 A generic manufacturer typically establishes the AWP for
the generic product at 90% of the corresponding brand AWP.
---------------------------------------------------------------------------
\7\ See Report, Title XIX of the Social Security Act, Limitation on
Payment or Reimbursement for Drugs, Medicaid Transmittal No. 84-12,
reprinted in Medicare & Medicaid Guide (CCH0 34,157, at 10,193 (Sept.
1984); Report, Use of Average Wholesale Prices in Reimbursing
Pharmacies in Medicaid and the Medicare Prescription Drug Program, A-
06-89-0037 (Oct. 1989), reprinted in Medicare & Medicaid Guide (CCH)
38,215 (1990).
\8\ United States General Accounting Office, Report to
Congressional Committees GAO-01-1118, Medicare: Payments for Covered
Outpatient Drugs Exceed Providers' Cost, 9 (September 2001).
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Wholesale Acquisition Cost. Wholesale acquisition cost (``WAC'') is
the price that wholesalers and distributors pay on the invoice for a
given product, although discounts may be provided after invoice, for
prompt-pay or periodic volume purchasing incentives, or as rebates.
Average Manufacturer Price. Average manufacturer price (``AMP'') is
the average per tablet price for a product sold to a CMS-designated
class of purchasers including wholesalers, retail chains, and mail
order pharmacies for resale in the retail pharmacy market after all
discounts and rebates to customers are taken into account.
Manufacturers report AMP to CMS on a quarterly basis. For generic
products, the manufacturer then pays a unit rebate amount of 11% of the
AMP to the state Medicaid programs based on utilization of the product
by each state Medicaid program. States can readily calculate AMP for a
generic product from the unit rebate data they receive from CMS.
Prescription Reimbursements Under Medicaid.
Pharmaceutical manufacturers, including Barr, do not seek or
receive any reimbursements under the Medicaid program. It is pharmacies
that are reimbursed, under the contracts they negotiate with state
Medicaid agencies, for the Medicaid prescriptions they fill.
Because CMS ``note[s] the shortcomings of using AWP as a basis for
reimbursement,'' the agency has agreed to ``strongly encourage states
to reevaluate their reimbursement methodology for drugs' and to
``continue to encourage states to look for an alternate basis for
reimbursement.'' 9 Despite these admonitions, many States,
like many private insurers, choose to use AWP to establish the
reimbursement formula for Medicaid prescriptions that they negotiate
with retailers during each contract period. Notably, these formulae
usually subtract a percentage ``off'' of AWP (different States
negotiate different percentages), reflecting the understanding that AWP
is a reference price.10
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\9\ Letter from Thomas A. Scully, Administrator to Janet Rehnquist,
Inspector General (March 7, 2002) (Commenting on Department of Health
and Human Services Office of Inspector General, Medicaid Pharmacy--
Actual Acquisition Cost of Generic Prescription Drug Products, A-06-01-
00053 (March 2002)).
\10\ Quarterly reports of state reimbursement formulae are
available at http://www.cms.hhs.gov/medicaid/drugs/prescriptions.asp.
---------------------------------------------------------------------------
CMS can and sometimes does cap the reimbursement of Medicaid
prescriptions with a Federal Upper Limit (``FUL''). Because CMS does
not always move to set a FUL when additional competitors enter the
market, thirty-eight states have established maximum allowable cost
(``MAC'') programs to cap reimbursement under Medicaid even absent a
FUL. As soon as a FUL or a MAC is set, other reimbursement methods and
reference price data--including AWP and WAC--diminish in significance.
THE IMPORTANCE OF INCENTIVES FOR GENERIC DRUG USE
In order for Barr and other generic manufacturers to continue
providing these dramatic cost-savings, generic medicines must be
stocked and dispensed by pharmacies. As a practical matter,
wholesalers, drug chains with distribution centers, and pharmacies
stock or maintain access to essentially all branded pharmaceutical
products. If a physician writes a prescription for a branded product
for which no generic exists, or if a physician writes ``brand medically
necessary,'' the pharmacy must be able to dispense the branded product.
Because a full catalogue of brand products already must be stocked
or accessible, pharmacies incur extra costs when they stock any generic
products. Consequently, pharmacies must have an economic incentive to
carry and dispense generic products. Such an incentive exists when the
pharmacy can purchase the generic product for sufficiently less than
the branded product and then dispense the generic product at a lower
price than the branded product and still make a ``profit'' on the
generic product that is greater than the pharmacy could make on the
branded product. If the profit to the pharmacy is greater on the
branded product than on the generic product, the pharmacy is not likely
to stock or sell the generic product. Moreover, because prices on
generic products are almost always lower than prices on the equivalent
branded products, third-party payors (including Medicaid) will almost
always pay a lower reimbursement amount for the generic product even
though the pharmacy makes a larger ``profit'' on that generic product.
As long as Medicaid agencies or other third party reimbursers
continue to use AWP-based reimbursement systems, AWP could be a factor
in a pharmacy's decision as to which generic manufacturer's product to
purchase and dispense. If a generic manufacturer unilaterally reduced
its AWP for a given product relative to the AWPs of other generic
manufacturers for the same product, pharmacies would have an incentive
to purchase another manufacturer's drug that did not reduce its AWP.
If any changes to Medicaid prescription reimbursement are
considered, these changes must maintain Medicaid's practice of
promoting the use of lower cost, therapeutically equivalent, generic
drugs by providing pharmacies with financial incentives to carry and
dispense generic drugs.
Barr's Fluoxetine Product.
Barr incurred millions of dollars in costs and years of patent
infringement litigation in order to bring a low-cost Prozac substitute
to market. When Barr ultimately prevailed in the litigation, we were
entitled to 180 days of exclusivity for our fluoxetine product under
the Hatch-Waxman Act, because we were the first to file an Abbreviated
New Drug Application challenging the patents on Prozac.11
Barr brought this important generic medication to market more then two
years prior to patent expiry.
---------------------------------------------------------------------------
\11\ Press Release, Indiana District Court Clears Way for Barr's
Generic Prozac(R) Launch, available at http://www.barrlabs.com/pages/
nprpr.html.
---------------------------------------------------------------------------
As is customary for generic products, Barr's fluoxetine was a
lower-cost alternative to the brand, Prozac. This provided pharmacies
with an incentive to purchase and dispense generic fluoxetine. The
incentive Barr provided was effective: by the end of the exclusivity
period, generic fluoxetine products had gained more then 80% of the
prescription market for 20 mg Prozac. The early introduction of a
generic fluoxetine, and the incentives provided to pharmacies through a
lower purchase price for the generic medication, encouraged
substitution of the generic for the brand.
The day that Barr's fluoxetine exclusivity period ended, nine other
generic manufacturers entered the market, each establishing virtually
the same AWP for fluoxetine as Barr's. Prices for generic fluoxetine
dropped quickly and dramatically. Of course, the establishment of a FUL
or a MAC for fluoxetine immediately following the launch of multiple
generics (January 29, 2002) would have effectively eliminated the use
of AWP as a reference point for reimbursement. Notably, this is exactly
what did happen with private third party payors (which account for
approximately 87% of the market), almost all of which placed a MAC on
generic fluoxetine either before or immediately after January 29, 2002.
CMS did set a FUL for Prozac on December 1, 2002.12
---------------------------------------------------------------------------
\12\ Centers for Medicare and Medicaid Services, Federal Upper
Limit (FUL) Changes to Transmittal No. 37 at 17. (showing that CMS
added fluoxetine hydrochloride to the FUL product list for
implementation on December 1, 2002). See also Department of Health and
Human Services Office of Inspector General, Ommission Of Drugs From The
Federal Upper Limit List in 2001, OEI-03-02-00670 (discussing delays in
establishing FULs in a timely manner.)
---------------------------------------------------------------------------
Conclusion.
Barr is proud to be part of a highly competitive industry that
offers generic products at a lower cost than the brands. In 2003,
through the enactment of Hatch-Waxman reforms, Congress recognized the
importance of generic drugs and their role in easing the financial
strain that prescription drug costs often impose on the budgets of many
in our society, including federal and state budgets under Medicaid. For
the very same reasons, Congress should ensure that any potential
changes to Medicaid reimbursement will encourage, rather than
discourage, the continued substitution of generic drugs.
Mr. Walden. Thank you, Mr. Catlett. We appreciate your
being here.
Mr. Marshall.
TESTIMONY OF DAVID MARSHALL
Mr. Marshall. Mr. Chairman and distinguished
Representatives, on behalf of CVS Corporation I would like to
thank the committee for inviting CVS to appear today to
participate in this important hearing.
CVS shares the committee's goal of reducing the cost of
prescription drugs for all of our customers. The single most
effective action that can be taken to achieve that goal is to
promote the use of generic drugs wherever possible. It is my
responsibility at CVS to purchase generic drugs at the lowest
possible cost.
I am pleased to have the opportunity to answer your
questions to the best of my ability today. Thank you.
Mr. Walden. Thank you, Mr. Marshall.
Mr. Ziebell, your comments.
TESTIMONY OF JOHN ZIEBELL
Mr. Ziebell. I have no comment, but I am ready to answer
any questions you may have.
Mr. Walden. Thank you for being here.
Mr. Seagrave.
TESTIMONY OF FRANK SEAGRAVE
Mr. Seagrave. Thank you, Mr. Chairman.
My name is Frank Seagrave. I am a registered pharmacist in
Louisiana, Colorado, and Mississippi. I am currently the Vice
President of Pharmacy for Wal-Mart Stores, Incorporated.
I am familiar with the struggle that many States are
currently having with their Medicaid expenditures. The Medicaid
business at Wal-Mart represents about 11 percent of our
prescription business. I believe that Wal-Mart and our 11,500
pharmacists are part of the solution.
Currently, retail pharmacy Medicaid reimbursement is based
on a formula consisting of two parts, estimated acquisition
costs, plus a dispensing fee. Everyday low price, or EDLP as we
call it, is a core belief of our company. It greatly benefits
the Medicaid program in many States because our EDLP is often
below the Medicaid allowable price. When this happens, the
State gets charged the lower price. Wal-Mart's EDLP, therefore,
is a value to the Medicaid program.
I believe that generic drugs are the best opportunity for
savings in the Medicaid program. The average price of a
Medicaid prescription that was filled with a brand name drug at
Wal-Mart in 2002 was $88.53. When a Medicaid prescription was
filled with a generic drug, the average price was $20.25, a
savings of $68.28. Therefore, the average Medicaid price of a
prescription filed with a brand name drug was 439 percent
higher.
Generics are deemed to be bioequivalent and therapeutically
equivalent and should be mandatory when they are available. At
Wal-Mart, we dispense generic drugs over 94 percent of the time
when one is available. Wal-Mart is able to effectively
negotiate good costs on generic drugs because generics are
available from multiple manufacturers and are therefore
commodities.
This is not the case with brand name drugs. Wal-Mart has no
greater leverage for branded drug products than any other
retail class of trade pharmacy provider. There is great
disparity between what brand name drug manufacturers charge
retail pharmacies and the lower prices they charge other
classes of trades, such as hospitals, mail order pharmacies and
HMOs. Thus, an average sales price, or ASP, model for drugs
dispensed to Medicaid recipients would be inequitable for
retail pharmacies.
Wal-Mart currently accepts all endorsed Medicare discount
cards. We have been aggressive in providing educational
literature regarding the discount cards to our customers. The
program has been a success at Wal-Mart. We look forward to the
opportunity to serve the needs of our Medicare customers when
the Medicare drug benefit starts.
Wal-Mart pharmacists and all retail pharmacists are a
valuable part of the health care system and the communities
that we serve. Pharmacists routinely consult with customers and
answer questions about prescription and over-the-counter drugs
as well as general health care issues. Pharmacists are
consistently regarded as the one of the Nation's most trusted
professionals.
In summary, Wal-Mart is committed to continue to provide
the best service to our Medicaid customers in any reimbursement
system as long as it provides fair payment for the service and
product delivered, protects the customer's safety, and allows
the Nation's retail pharmacies to fairly participate. Thank
you.
[The prepared statement of Frank Seagrave follows:]
Prepared Statement of Frank Segrave, Wal-Mart Stores, Inc.
INTRODUCTION
Mr. Chairman and members of the Committee, your efforts to gain
more information about pharmaceutical reimbursements under Medicaid are
well advised.
I am a registered pharmacist. I joined Wal-Mart Stores, Inc. (Wal-
Mart) in 1986, and after various roles in operations and merchandising,
became Vice President of Wal-Mart's Pharmacy Division based in
Bentonville, Arkansas. Part of my role includes ensuring that
``Everyday Low Price'' (EDLP) is practiced within the Pharmacy
Division. In its purest form EDLP is as it sounds: the same low price
every time you visit the store. EDLP begins with ``Everyday Low Cost''
(EDLC). Purchasing at the best cost along with being a low cost
operator and using technology to be efficient allows us to sell at
EDLP.
As a Medicaid pharmacy provider in 49 states, our job is to get the
right medications to the patients who need them. As a retail pharmacy
provider, we must stock and dispense the majority of medications that
are commonly prescribed. It is noteworthy that ``pharmacies'' do not
practice pharmacy; it is the face-to-face interaction with the 11,500
Wal-Mart pharmacists that benefit Medicaid recipients.
Our pharmacies operate in large urban locations and small rural
towns across America. Of our nearly 3,500 pharmacies, over 1,200
operate in rural areas with a population of less than 50,000. Medicaid
patients in both rural and urban areas value their relationship with
their Wal-Mart or Sam's Club pharmacist. Wal-Mart's focus is on our
retail pharmacy patients and their healthcare outcomes. To this end,
our pharmacists are advocates for the Medicaid patients they serve.
This advocacy includes: working with prescribers to select less
expensive alternative medications; immediate conversion of brand
medications to lower cost generics when they become available; and
treatment with less expensive OTC medications. Wal-Mart pharmacists
seek to limit ``preventable'' events by maximizing patient adherence to
prescribed treatments. ``Pharmacy is about relationships'' has become
the unofficial mantra of the Pharmacy Division's Associates.
Wal-Mart purchases most drugs centrally through its own pharmacy
distribution centers. We are described as a ``self-warehousing'' chain.
Whenever possible, Wal-Mart buyers order directly from manufacturers,
who ship products directly to Wal-Mart pharmacy distribution centers.
Wal-Mart's purchasing decisions for generic products are
straightforward. If ``AB rated'' generic products--which mean products
determined by the FDA to be identical to the brand drug--are available
from multiple manufacturers, Wal-Mart will purchase the drug product
with the lowest acquisition cost. Product availability is also a
factor, because a reliable supply of product is essential to satisfy
our patients.
Wal-Mart does not take into account the amount of Medicaid
reimbursement, known or anticipated, in determining whether to stock or
sell any particular branded or generic drug product. We first and
foremost follow our core tenet--``ALWAYS LOW PRICES.'' Lower drug
product prices to patients are made possible through lower acquisition
costs and operational efficiencies.
State Medicaid program beneficiaries represent an important patient
population to Wal-Mart. These patients represent 11% of our pharmacy
business revenue. Wal-Mart values its role as a Medicaid provider and
has never withdrawn from participation in any program, in the Medicaid
system, or threatened to do so. Wal-Mart competes for Medicaid patients
based on service. While we never provide a blanket waiver of Medicaid
co-payments for our patients, we do not collect the nominal co-payment
when a Medicaid patient is unable to pay it.
We do not sponsor a Medicare Discount Card Program, but accept all
Medicare-endorsed drug discount cards. Wal-Mart has been aggressive in
providing educational literature regarding these discount cards and
these approved discount cards have been a success at Wal-Mart. The
Pharmacy Division also strongly supports and participates significantly
in manufacturer-sponsored patient assistance programs, such as
TogetherRx.
My testimony today addresses two issues. First, the importance of
ensuring access to Wal-Mart's retail pharmacies by America's most
needy, the elderly and the poor. Second, how can Wal-Mart partner with
the states to have an effective Medicaid drug program?
The importance of ensuring access to Wal-Mart's retail pharmacies.
On a daily basis, our 11,500 pharmacists take care of patients in
the Medicaid program, fill their prescriptions that are subject to
complex rules and regulations, and provide the best patient-focused
care.
When prescription-only products move to the over-the-counter (OTC)
market, their prices drop sharply. Wal-Mart pharmacists routinely
consult with patients who have OTC medication questions. This includes
options such as our cost-effective private label Equate '
brand OTC products, for patients when therapeutically appropriate. Wal-
Mart's private label diabetic testing and treatment products sold under
the ReliOn ' diabetes brand are considered the best value
brand in the United States. All state Medicaid programs should include
these products on their formularies and provide reimbursement for them.
Many states do this today.
Usual and Customary Charges (U&C)
Revenue from Wal-Mart's ``cash'' pharmacy business for drug
products is significantly larger than its revenue from Medicaid. Retail
cash price or ``U&C'' is defined as the usual and customary charge for
a drug product offered to cash paying patients. Because this U&C is
often lower than the reimbursement formula for Medicaid, this benefits
both cash-paying patients and the Medicaid programs. Individual Wal-
Mart pharmacies have the ability to lower, but not increase, drug
product prices (U&C) within their marketplace as they see fit. Thus,
Wal-Mart's U&C (EDLP) is often lower than the formula driven payment
set by the state Medicaid programs. Our estimates indicate that many
times Medicaid prescriptions were reimbursed at Wal-Mart's lower U&C.
The impact of our aggressive lowering of U&C is represented on the
attached graphs and Fact Sheet.
Generic Utilization at Wal-Mart
When a generic is available for a prescribed branded product, Wal-
Mart pharmacies dispense that generic over 94% of the time. This is
true for all payers. Consumers need to know when generic options are
available and that they are as safe and effective as brand name drugs,
but at a fraction of the cost. Wal-Mart pharmacists play an important
role in educating patients about their drug treatment. Our pharmacists
help patients understand generic options and whether more affordable
generics might be right for them.
In summary, Wal-Mart has low prescription and OTC drug prices
everyday for cash-paying patients and Medicaid benefits directly from
this. Our pharmacists also recommend generic drugs and shift patients
to more cost-effective drug therapies.
How can the Wal-Mart partner with the states to have an effective
Medicaid drug program?
One of the main reasons for the continuing rise in Medicaid drug
expenditures and the failure of cost-containment measures, is the
introduction of new, more expensive brand name drugs. Drugs within a
therapeutic class may be similar, but their prices often vary
substantially. Several state Medicaid programs took a major step in
passing legislation mandating a permanent commission to research and
report on the comparative effectiveness of medications and prices. Wal-
Mart encourages other states to implement similar tools.
Reimbursement mechanisms for generics should aim for price
competition as the main priority. To Wal-Mart, multi-source generics
represent a commodity. Generics save everyone money. The following
charts demonstrate Wal-Mart's experience in Medicaid reimbursement for
2002.
[GRAPHIC] [TIFF OMITTED] T7275.071
While almost half of the prescriptions are written for generic
drugs, they account for less than 20% of total Medicaid expenditures.
Switching from expensive brand drugs to lower cost generics can help
alleviate this problem. Wal-Mart is strongly committed to encouraging
the use of AB rated generics--the exact same drugs at a much lower
cost. Generic substitution provides tremendous savings at the same
time. Generic drugs mean competition, and competition means lower
prices, both to the pharmacy and to the patient. Focusing on generics
to reduce Medicaid prescription drug costs is not the answer, because
the largest expense lies in the over-utilization and high cost of
single source brand drugs. The chart below provides the average total
reimbursement received by Wal-Mart from Medicaid programs for each type
of drug.
[GRAPHIC] [TIFF OMITTED] T7275.072
Wal-Mart endorses the continued adoption maximum allowable cost
(MAC), with frequent audits/updates, for multi-source generic drugs
under Medicaid.
For branded drug products, Wal-Mart has little or no ability to
negotiate discounts below the published wholesale acquisition cost
(WAC). Wal-Mart has no greater leverage for branded drug products than
any other retail class of trade pharmacy provider.
There is a great disparity between what drug manufacturers charge
retail pharmacies and the significantly lower prices they charge other
classes of trade such as hospitals, mail order pharmacies, and health
maintenance organizations. Thus, an average sales price (ASP, as
defined in the Prescription Drug Improvement and Modernization Act
(PDIM)) reimbursement model for drugs dispensed to Medicaid
beneficiaries would be inequitable for retail pharmacies. ASP is
intended to represent volume-weighted, average selling price to all
purchasers, excluding certain federal purchasers.
Conclusion
Wal-Mart supports any reimbursement system that provides fair
payment for the service and product delivered, protects the patient's
safety, and permits the nation's retail pharmacies to fairly
participate. Wal-Mart's motto--Always low prices--is carried out in its
pharmacy operations. Actual substantial savings come from market shifts
to more cost-effective therapies. Wal-Mart and its pharmacists, as a
low cost pharmacy provider, are on the front line to effectuate such
shifts.
Thank you for the opportunity to appear today. As always, Wal-Mart
is willing to work with state Medicaid programs to be part of the
solution.
Mr. Walden. Thank you. I appreciate your comments, Mr.
Seagrave.
I just want to say at the outset that we don't want to do
anything here that would create a disincentive to generic use.
I think we all agree that that is an important component of
holding down costs and giving consumers choice. But we do need
to make sure that the taxpayer benefits from the savings, and I
think--so we can take care of those who need help that today
are, frankly, robbed of that help because, in some cases, of
lack of funds. So I want to start by getting at this issue of
the AWP with this panel. Do each of you believe that the AWP
reflects the actual selling price that you charge for your
products?
If we can get kind of a yes-or-no answer. Mr. Stratemeier.
Mr. Stratemeier. No, it does not.
Ms. Marrs. No.
Ms. Paoletti. No.
Mr. Catlett. No.
Mr. Marshall. No.
Mr. Ziebell. No.
Mr. Seagrave. No.
Mr. Walden. So all of you agree that it is not a legitimate
selling price, reflection of your selling price.
Do you adjust the AWPs of your products after you have set
them; and, if so, under what circumstances? Mr. Stratemeier.
Mr. Stratemeier. Well, in the brand industry, AWP generally
reflects a 20 to 25 percent markup over wholesale acquisition
cost, WAC. So as WAC is increased, AWP goes up accordingly.
Mr. Walden. You do adjust your AWP then on a regular basis?
Mr. Stratemeier. I can't say that companies adjust the AWP.
The reported AWP by the reporting services, put out the AWP.
Most companies, including Aventis do not set an--most brand
companies do not set an AWP.
Mr. Walden. Okay. Ms. Marrs.
Ms. Marrs. In our case, in the case of generics, we
historically have not had a practice of raising AWP. For the
brand products, we have increased AWP as the WAC has increased.
Mr. Walden. Okay.
Ms. Paoletti. Generally, we do not change our AWPs once
they are established. We have changed some AWPs for one reason
or another.
Mr. Walden. Why wouldn't you adjust them to reflect the
market?
Ms. Paoletti. Why wouldn't we?
Mr. Walden. Yes.
Ms. Paoletti. It is generally a standard in the generic
industry that you set your price for AWP and you don't adjust
it.
Mr. Walden. All right. Mr. Catlett.
Mr. Catlett. An instance where I can think that AWPs are
increased in our business would be in a sole-source generic
situation. We are the only generic on the market. If there was
a brand price increase and we felt there might be an
opportunity and we would make a decision to raise our generic
price, we would raise both our AWP and our price to maintain.
I think we heard earlier today that generally there is a 90
percent difference between the brand and the generic price.
That is the incident I can think where AWP might increase, sir.
Mr. Walden. Let me go to your testimony. I am going quote
it here, Mr. Catlett. You said, ``It is generally known in the
pharmaceutical industry and related government agencies that
average wholesale price, AWP, is a reference price only and
does not represent the actual selling price charged by the
manufacturer for its products.''
I would like you to--they don't have the notebook, do
they--to turn to Tab 1. Do we have--we don't have that. They
can't turn to Tab 1. There you go.
In our exhibit binder there, you will see OIG compliance
program guidelines for pharmaceutical manufacturers. And on the
bottom of page 23,733, it says, ``The government sets
reimbursement with the expectation that the data provided are
complete and accurate, and, where appropriate, manufacturer's
reported prices should accurately take into account price
reductions, cash discounts and free goods,'' et cetera.
In light of these ongoing--these OIG guidelines, if you
report an AWP, aren't you required to make sure that it is up
to date and accurate?
Mr. Catlett. Are you directing that question to me?
Mr. Walden. To you and Ms. Paoletti and Ms. Marrs.
Mr. Catlett. I will take the question first, sir.
The practice in the industry is to report AWP as a
reference price. I believe what is reported that is updated is
we do provide our AMP, which is our average manufacturer's
price, which does take into account all of those.
Mr. Walden. But given that AWP is also used as a
reimbursement mechanism, shouldn't it be accurate to the
market? I mean, to--shouldn't it represent something?
Mr. Catlett. It has been industry practice and the practice
at Barr that it is strictly a reference price and it is in
relation to the branded price.
Mr. Walden. Ms. Paoletti.
Ms. Paoletti. I would agree with that. And there really is
no clear guidance for us to follow that tells us how to
calculate that number.
Mr. Walden. Ms. Marrs.
Ms. Marrs. I would agree with my colleagues.
I think we have heard many times here today the system is
broken. There is no statutory definition of AWP. To the extent
that there is clear guidance, as the gentleman from Barr said,
we have been reporting AMP. But the industry practice as it is
and the lack of statutory guidance, industry practice has
prevailed.
Mr. Walden. All right. I want to go--turn to Tab 37, if you
would, Ms. Paoletti. This is document number 01999-02002. The
second page of the document, 02000, states that Roxane's bids
for Furosomide business were rejected not because the sales
price was too high but solely because the AWP was too low. Our
AWP and reimbursement factors in negotiations with retail
customers.
Do you want to talk about that, that document?
Ms. Paoletti. Furosomide was a very unique situation for us
in that there were some changes in the market that allowed
opportunities for us to potentially gain new business.
When we tried to gain the new business, we were repeatedly
told that our AWPs were out of line with our competitors and,
upon looking at that, discovered that they were significantly
below our competitors such that, regardless of how low our
contract price was, no one would buy the product.
Mr. Walden. So AWP--I mean, okay. I guess what I see here
is that AWP is how you get market share. The higher it is, the
better chance you have to get market share. Because somebody is
making money on the spread, and the people making the money are
the purchasers. Right?
Ms. Paoletti. I would disagree with that. I think it is
in--in our experience, it has been a rare occasion that
customers have discussed any of that with us; and, in this
occasion, it is my impression that the only reason it was
discussed was because we were out of line. They weren't asking
us to increase the spread over where the current market was.
They were just asking us to be on a level playing field.
Mr. Walden. Okay. We will try and tell you what tab this
one is.
But there is--Tab 39, if you will go to that. And it says
here--this is to Judy Waterer from Anthony Tavolero. It says,
Judy, as you know, Caremark had shown interest with our
Furosomide back in April. After review of our AWPs on the
product, the opportunity was dead. Our AWPs are 78 percent
below the rest of the industry. I am not aware of any
competitor where the AWP is below $100 for bottles of 40
milligram thousands. Miline and Zenith are approximately $120,
ours is $29. Caremark has commented that they could not
possibly award the product to us unless we increased our AWPs.
Janet Miller also added that Roxane has a history of having
AWPs out of sync with the rest of the industry.
I don't know why we have to wait until our customers
complain before we adjust an AWP. Major customers--Walgreen,
Wal-Mart, CVS, MEDCO, Caremart--expect their leading suppliers
to maintain their AWPs. Not executing this core competency
reflects negatively on Roxane and promotes a perception of
Roxane not understanding industry dynamics. I hope this helps.
This would appear to me to reference more than just
Furosomide. Does it appear that way to you?
Ms. Paoletti. Well, he does say that we have a history. I
am not sure what he is basing that on. Typically, we set our
pricing and we don't monitor it. We don't monitor AWPs once
they are set.
Mr. Walden. Then why would he say, I don't know why we have
to wait until our customers complain until we adjust an AWP?
Ms. Paoletti. In this case, he is referencing Furosomide.
And we aren't able to get business. Actually, we were on the
verge of discontinuing the product because we couldn't gain
customers, and it was based on the fact that our AWP was so far
out of line with where the rest of the market was.
Mr. Walden. Okay. And then if you would turn to Tab 38 in
the binder. This document also notes that when AWP is out of
line with the rest of the market it a bigger issue than a
straight price. But this e-mail goes on to mention concerns
associated with the decision to raise AWP, including scrutiny
and consumer backlash. Can you discuss those concerns?
Ms. Paoletti. Any time pharmaceutical companies do a price
increase, it is scrutinized, AWP in particular, because that is
one of the prices that is publicly available for every one to
see.
Mr. Walden. But it appears, in this case at least, in order
to get market share--am I missing it? In order to get market
share, you are having to increase your AWP?
Ms. Paoletti. We were having to bring it in line with our
competitors, yes. They weren't asking us to raise it above our
competitors. That was not my impression.
Mr. Walden. What effect does raising the AWP have on the
price that they pay for that product?
Ms. Paoletti. That the customers pay? It would not have an
impact on the price that they paid.
Mr. Walden. What is the benefit to them of a higher AWP set
by you, which I assume would be an arbitrarily set AWP?
Ms. Paoletti. Well, in this case, they weren't buying our
product. They were buying another competitor's product, who was
much higher. So, in that case, there would not have been an
impact on what they were currently buying versus what----
Mr. Walden. No, my point is, your incentive to raise the
AWP is to get market share, is it not?
Ms. Paoletti. In this case, it was to bring ourselves in
line so that we could actually compete on a contract price
basis.
Mr. Walden. Right. To get more market share.
Ms. Paoletti. Sure.
Mr. Walden. It doesn't cost the purchaser any more and it
doesn't cost you anything to have a higher AWP?
Ms. Paoletti. True.
Mr. Walden. So the loser in this is the government, right,
the taxpayers?
Ms. Paoletti. Well, I wouldn't agree with that.
Mr. Walden. Why?
Ms. Paoletti. Because at the time they were already buying
one of our competitor's products that was already at that--at
that level. My changing that price didn't advantage----
Mr. Walden. Right. Okay. But your company would benefit by
changing if it allowed you to get market share.
I guess the point is not to pick on Roxane specifically. I
don't mean to do that necessarily, other than as an example of
the pressures within the marketplace that drive a higher AWP in
order to get market share. The actual price paid by the
purchaser is no more. You have indicated that. The AWP, you
just all are competing up here to see who has got the highest,
because that creates the biggest spread?
Ms. Paoletti. I am not sure that is the way that it is
really done.
Mr. Walden. How is it done?
Ms. Paoletti. In our case, we set the AWP and we don't
monitor AWPs of our competitors. We typically don't change our
AWPs.
Mr. Walden. In this case, you were monitoring and had all
of the data. It is in the e-mail.
Ms. Paoletti. Well, in this case, we weren't monitoring it.
It was so far out of line that our competitors were bringing it
to our attention that, hey, even if you have the best supply
and the lowest contract price, I can't pay your product because
you are not in line on this other reference price.
Mr. Walden. The other reference price does what for them?
Ms. Paoletti. It would have put us in line with----
Mr. Walden. No, it creates the spread, right? The AWP
creates the spread with the actual purchase price. Correct?
Ms. Paoletti. It would be one of the factors that their
reimbursement is based on, yes.
Mr. Walden. All right. My time has expired. Thanks for the
patience of the committee.
Mr. Stupak.
Mr. Stupak. Thanks, Mr. Chairman.
Well, going along that line, Exhibits 37, 38, 39, Mr.
Catlett, your testimony on page 8 says, if a generic
manufacturer unilaterally reduces its AWP for a given product
relative to the AWPs of other generic manufacturers for the
same product, pharmacies would have an incentive to purchase
another manufacturer's drug that did not reduce its AWP.
So basically what is going on here, if you keep the AWP
high, then the pharmacies make more money off it, right?
Mr. Catlett. I believe what I tried to say in my written
testimony is that the AWPs are set as a reference price. If a--
in a multi-source situation, if there are multiple competitors,
I believe that if a company such as Barr was to unilaterally
reduce its AWP and if we are still in a situation where it is
not an FUL or not a MAC in place and we are dealing with AWP
reimbursement formulas, while I have no example or any
experience and could you give you an example of it, my fear
might be that it would put a situation in place where we may
have that type of decision.
Mr. Stupak. Well, Ms. Marrs, you testified that you had a
product and you lowered your AWP and you couldn't get any
customers to buy it, right?
Ms. Marrs. We have had a couple of situations. We tried to
launch a product without AWP.
Mr. Stupak. You established an AWP. It was lower than the
rest, and your customers wouldn't buy it?
Ms. Marrs. That is correct.
In the other situation, we did not lower our AWP, but one
of the reporting services chose to do so without our knowledge.
And, as a result of that, we got many calls from pharmacists
basically saying that they wouldn't be able to buy our products
in the future if that situation was not changed.
Mr. Stupak. So if we lower the AWP, why won't the
pharmacies buy the drugs? If there is a lower AWP, you are
paying a lower price, you could pass that savings on to your
customers, as you claim you like to do. So why wouldn't you buy
a drug at a lower AWP? Mr. Marshall? Mr. Ziebell? Mr. Seagrave?
Mr. Marshall. As I stated earlier, my responsibility to CVS
is to purchase the lowest-possible-cost generic product. I do
not focus on the AWP value in negotiations. The market is very
fluid and dynamic and a highly competitive marketplace.
Mr. Stupak. That is not what these people are saying. They
are all saying you keep your AWP at the market standard. It is
not fluctuating. If you would bring it lower, you don't get
customers. You are the customers. You are the pharmacists.
Isn't it true the reason why you don't want to lower AWP is if
you have a lower AWP your reimbursement from the government and
from the insurance companies is discounted off of that AWP? So,
therefore, if the AWP is lower, your profit is lower on that
drug. Isn't that true?
Mr. Marshall. Again, I don't focus on the AWP. My
initiative or my----
Mr. Stupak. How about just a yes or no? I don't care if you
focus on it or not. Doesn't it stand to logic if you have a
lower AWP and you are reimbursed--and that AWP is discounted by
Medicaid and by the big insurance companies, the lower the AWP,
the lower the profit for the pharmacy? Yes or no?
Mr. Marshall. Yes, if the reimbursement were based on AWP.
Correct.
Mr. Stupak. Are you telling me it is not?
Mr. Marshall. No, I am agreeing with you, that that would
be the case.
Mr. Stupak. Sure.
How about Mr. Ziebell? Would you agree with that? Lower AWP
means lower profit to--who do you represent? CVS or Walgreens?
Mr. Ziebell. It would depend on whether or not the product
is reimbursed based on AWP. If it were, than the profit would--
--
Mr. Stupak. Well, Medicaid is reimbursed based on AWP?
Mr. Ziebell. In some situations, yes. There are Federal
upper limit and MAC situations put on by the Federal Government
and the individual States. But if it was based strictly on AWP,
if you lower AWP, the reimbursement would be lower.
Mr. Stupak. Well, we are looking at the list right here.
Medicaid prescription reimbursement information by State. It is
all based upon an AWP, plus a little bit more. So the lower the
AWP, the lower the profit to you. So if you are really
concerned about the price the customer pays, wouldn't you want
to buy your drugs from these manufacturers here who have a
lower AWP to pass that savings on to your customers?
Mr. Ziebell. I haven't had a situation presented to me
where the AWP has been lower.
Mr. Stupak. Well, not you personally. But I mean to your
company.
Mr. Ziebell. Well, I am the purchaser of generic
pharmaceuticals. And that is the case, that no one has been----
Mr. Stupak. You represent what company?
Mr. Ziebell. Walgreens.
Mr. Stupak. So this e-mail then that they referred to, I
believe Exhibit 38: I don't know why we have to wait until our
customers complain before we adjust an AWP. Major customers--
Walgreens, Wal-Mart, CVS, MEDCO, Caremart--expect their leading
suppliers to maintain their AWPs.
I guess you are mentioned in this one.
Mr. Ziebell. Well, from the manufacturer's standpoint. I
have never indicated that direction to any manufacturer.
Mr. Stupak. Okay. Mr. Seagrave, do you care to comment? If
you lower your AWP, you could lower the price for the customer,
right?
Mr. Seagrave. I would agree with the other two gentlemen.
If reimbursement is based upon the AWP only, then our
reimbursement would be less if it was based on AWP.
I would comment, though, that we heard testimony on the
previous panel from some gentlemen from Michigan and in Texas
where they indicated that they do have maximum allowable costs
in place, and they base their reimbursement off of that and not
off of AWP.
Mr. Stupak. Well, how can this side of the table over
here--Mr. Stratemeier, Ms. Marrs, Ms. Paoletti, Mr. Catlett--be
saying they can't sell any unless it is based on a stable AWP,
which is higher price? You are saying that is not the only
reason? I mean, what side of the table is right here, left or
right?
Ms. Marrs. I think the issue is there needs to be a level
playing field. I don't think the manufacturer is as concerned
with exactly what the reimbursement rate is. The issue is it
has to be the same for all manufacturers competing with that
specific product.
Mr. Stupak. Well, a manufacturer wouldn't be concerned,
because you are trying to get part of market share. It makes
sense, you would lower your AWP to get a bigger market share.
But if the customers, the pharmacies won't buy it unless you
maintain a higher AWP, because that is what their profit is
based upon--so the system really is broken.
Ms. Marrs. The system is broken. There really needs to be a
reimbursement rate set by somebody outside of manufacturing so
it is a level playing field for all of the manufacturers.
Mr. Stupak. Let me ask you this question, and go right down
the line. We have known for years and we have heard again today
that the average wholesale price, or AWP, and the WAC, or
wholesale acquisition cost, on which most States base their
Medicaid drug reimbursement formulas are fictitious numbers.
You know it, Congress knows it, CMS knows it, and the States
know it. As the $2 billion in fines and settlement indicate,
the manufacturers have benefited from an AWP system, but so
have the providers. The big losers been the taxpayers and the
poor who are most vulnerable to losing their health care when
there are budget crunches. Sicker, uninsured, and untreated
people don't benefit any of us. The systems need to be changed.
But any changes, any change needs to be fair, transparent,
efficient and effective.
The CMS expert panel recommends that reimbursement be based
on actual acquisition costs to the pharmacies. Aventis made
this recommendation in 2002. So I would like to hear from each
of you how would you change the system. Mr. Stratemeier.
Mr. Stratemeier. Well, as we said in our policy statement,
that we think that actual acquisition cost is the best way to
start your structure, your reimbursement system.
Mr. Stupak. Then you can still put in a dispensing fee and
a copay?
Mr. Stratemeier. If a pharmacist dispenses drugs, there
would be a dispensing fee. For physician office drugs, there
would be a physician services fee. That needs to be adequately
dealt with in its own right. But the key is the actual
acquisition.
Mr. Stupak. The key is for the pharmaceuticals to use the
actual acquisition cost.
Ms. Marrs.
Ms. Marrs. I agree that it should be cost based, and a
reasonable service fee should be provided.
In the case of getting the cost from the manufacturer, I
just would caution the committee that, in our case, most of our
sales are to wholesalers and distributors. So when we report an
average selling price that may not be reflective of what the
pharmacy is actually paying. That needs to be considered in
developing the methodology.
Ms. Paoletti. I would agree that any system that is put in
place needs to encourage the use of generic, lower cost
generics, and it needs to take into account all of the issues
that impact all of the parties--the manufacturers, the
pharmacies, the patients, and the government.
I am not sure that we can sit here today and put forth a
proposal.
Mr. Catlett. I think the important issue here and what you
are getting at is, in a situation where we have many
competitors entering the market and we are seeing a dramatic
decrease in acquisition price by our customers, that an AWP-
based reimbursement system may not be the best solution.
I think that is the really the key issue here there needs
to be reliance upon.
Mr. Marshall. We would, at CVS, be open to dialog to
discuss a program that would provide coverage for Medicaid
patients, would offer a program that covered the cost and
adequately covered the dispensing fees associated with filling
a prescription; and, again, just to reiterate, that would
promote the lower cost generics.
Mr. Ziebell. I think that is the most important part, is
you don't want to take away the incentive to dispense the
generic over the brand. The focus here has really been on the
markups on generic pharmaceuticals, but not much attention has
been paid to the small markup that results from the
calculations based on brand-name pharmaceuticals. So I think
you have to keep that in mind, also.
Mr. Stupak. Mr. Seagrave.
Mr. Seagrave. Well, I think there are a lot of
possibilities and a lot of things that we can talk about and
ways to fix the system.
I think primarily what we would want to do is focus on the
increased use of generic drugs, and then I think we need to
come up with a fair and equitable formula where we address the
adequate dispensing fee, the adequate cost of goods and
services, and we will offer our support into finding that
solution.
Mr. Walden. Thank you.
The gentleman from Michigan, Mr. Rogers.
Mr. Rogers. Thank you, Mr. Chairman.
Wow, was it a great day when I got the health care
committee in Energy and Commerce. You know, I went to a
reference point to make sure we were taking about the same rule
of law. I went to page 23,733. I don't know how you all do it.
And when I look at the fact that there is really no
guidance in this AWP, if we have found an enemy in this whole
thing, it is us, the U.S. Congress. To create a system that has
a perverse incentive in it for the customers of these
manufacturers to try to establish a price point that says,
look, I know they are not going to cover my proper dispensing
costs so I have got to build that in, and I am going to make
sure that obviously we make a little bit on the drug itself and
the dispensing costs. So I have got to try to figure out how to
bump up this AWP to make sure, of which they are not giving me
credit for, I get credit for when I am building in my profit
margin on running a pharmacy. Holy mackerel.
I don't know how we got here. But this is broke. I
appreciate you all being here. Where there is profit, there is
normally confusion--or where there is confusion, there is
normally profit.
I would venture to guess that most of you have been subject
to lawsuits on pricing. Has any of you experienced a lawsuit on
pricing?
Let the record reflect that I think everybody on the panel
has been shaking their head. The only people smiling are your
counselors on the other side of you.
I mean, this thing is absolutely amazing. And, Ms.
Paoletti, can you explain to me--I mean, what--when this
lawsuit happens to your company, based on confusion of which I
think the Federal Government is a big part of this problem,
what does that do? What does that cost structure do to the cost
of your product, to your time and talents dedicated to trying
to run a business and getting low-cost drugs to the market?
Ms. Paoletti. It takes a tremendous amount of our
resources, both time and money, that, frankly, would be much
better spent reducing our prices and our costs.
Mr. Rogers. Do you have any idea--probably not a fair
question, but do you have any idea--I mean, what percentage
cost--is there any way I can get anywhere close to a figure of
what--the lawsuit problem of your cost structure? You build it
in every year, I imagine.
Ms. Paoletti. I am sure that we can provide it for you.
Mr. Rogers. That would be helpful.
Anyone else? Obviously, some of even the bigger pharmacies,
have you been subject to these suits as well?
Mr. Ziebell. I am not personally aware of that. I am in the
purchasing department, and I try to keep the costs as low as
possible. I am not aware of pricing lawsuits.
Mr. Rogers. I think we all know the answer to the question.
This is a significant cost. It is a confusion that we have
created for you to try to have to deal with. And I agree. I
appreciate you all being here. We are going to have to do
something about this. This is absolutely nuts.
Let me ask you this. Could you go to a Medicare pricing
system, ASP plus 6, fill in the blank? I mean, this--is this
something that is a structure that seems to be a little bit
closer to taking into account your costs of distribution and
the costs of the drug and the ability for you to keep your
doors and lights on and pay people? Any thoughts?
Nobody wants to commit to a pricing structure. That is very
smart. I can see your lawyers tugging on the back of you. If
you do, don't do that. That means no bonus this year.
Quite obviously, this pricing structure thing is a problem.
Let me ask you this other question. You can sense my
frustration. I certainly sense yours, and trying to go through
this and understand it.
By the way, that first 22,000 pages was riveting. Loved it.
Would it be--what problem would it cause for you--and I
will address this to Ms. Paoletti--to provide your pricing
structure to the States? Is that a problem?
Ms. Paoletti. We would provide whatever information was
required by the States, as we currently do.
Mr. Rogers. For DEY as well?
Ms. Marrs. We would be fine with providing pricing
information to the States. We would hope that it would be kept
confidential from our customers.
Mr. Rogers. Obviously. I am not sure that is the right
answer. But if I have learned nothing today, that we have got,
A, a transparency problem, availability of information problem,
and this god-awful system of which we have created to build in
these perverse incentives for people to start dealing against
each other, not for lowering prices in a free market
competition but to try to jack them up a little bit to cover
costs that we haven't recognized at the Federal Government, is
a real issue for you and your operations.
That is an issue that I hope, if nothing else, that we walk
away from this hearing today and try to deal with that very,
very serious issue. And I, again, I appreciate you all being
here and your forthrightness, and trying to get us to this
answer.
Again, I have found this out in this oncology issue that we
have created a really bad system, and then we blamed people for
trying to participate in applying any business sense that they
could possibly muster in this god-awful system that we created,
and then we come back a few years later and said, how could do
you that? That is awful. It is a system that we created.
Thanks for having the patience to hang in there and trying
to offer low-cost drugs to your customers. Hopefully, we will
have some relief on this lawsuit side of it as well. I know
that is just an absolute waste of money in our healthcare
system. We have got to fix it.
And hopefully, Mr. Chairman, we can work to eliminate what
is obviously a very confusing, large, ugly system, trying to
develop and implement rules and regulations so you all know
what you doing.
With that, I yield back, Mr. Chairman.
Mr. Walden. The Chair now recognizes the gentleman from New
Jersey, Mr. Ferguson, for questions.
Mr. Ferguson. Thank you, Mr. Chairman. I appreciate you
holding this hearing. I don't have any questions at this time,
but I share many of my colleagues' concerns about AWP.
Clearly, this is an issue that is going to continue to draw
a lot of attention from folks on this panel, folks on our
committee. And I really look forward to engaging in that
debate, because clearly there are many problems which need to
be addressed, and I thank the chairman and the committee for
holding this hearing.
Mr. Walden. Appreciate your participation.
Mr. Marshall, I want to come back on some questions. I
would like to turn your attention to Tab 37. In the exhibit
binder, pages 2001, 2002, purportedly quote a voice mail left
by a CVS buyer, Matt Leonard. Do you know who Mr. Leonard is,
Mr. Marshall?
Mr. Marshall. Yes.
Mr. Walden. Who is he?
Mr. Marshall. I replaced Matt Leonard. He was the person in
my position prior to me taking the current role.
Mr. Walden. Is he still with the company?
Mr. Marshall. Yes, he is.
Mr. Walden. And what role does he have now?
Mr. Marshall. He is the Vice President of Pharmacy
Merchandising.
Mr. Walden. So where is he in the hierarchy with you?
Mr. Marshall. I report to Matt.
Mr. Walden. So you report to Mr. Leonard.
This is a voice mail supposedly left by him in June, July
2000, concerning Furosomide. And it says, and I quote, CVS
would award Roxane the product if we, Roxane, would adjust our
AWPs to reflect where the other generic companies are.
Otherwise, CVS would award to Zenith Gold Line.
Does CVS emphasize AWP or reimbursement when negotiating
with these folks?
Mr. Marshall. Okay. I have not seen this document prior to
this time, and it was my understanding that counsel had spoken
with counsel for the committee, that documents that had not
been reviewed previously would not be reviewed today. I would
just like to verify that.
Mr. Walden. Who did your counsel speak to on the committee
about that?
Mr. Marshall. I believe it was Mr. Stone.
Mr. Walden. My understanding is there was not an agreement
like that. They tried to show you all of the documents that we
got.
Mr. Marshall. I would be more than willing to review this
document and come back to you with a response.
Mr. Walden. Why don't you take your time right now to take
a look at it, if you don't mind.
Because it says: CVS is looking for a Furosomide vendor.
Apparently, the HICFA MACs are changing shortly, and they are
not happy with the margins. And their current supplier--they
did not have the new MACs available to share with me, but,
being public record, I am sure that we should have them
somewhere. In fact, I think Bob has them on his desk.
In the past, CVS has asked for AWP less 55 percent to be
competitive on generics. I am not sure how the MAC impacts
this. I would like to discuss this with Bob or Anthony before
we bid. For now, I have listed the requested bid price, AWP
less 50.
And then it says: ML, CVS would award Roxane the product if
we would adjust our AWPs to reflect where other generic
companies are. Otherwise, would award it to Zenith Gold Line.
If you look at Tab 38----
Mr. Marshall. Okay.
Mr. Walden. [continuing] Tab 38, you will see that the
document there, which I am told you have been made aware of
prior to this hearing, is almost identical in its language or
reference points to this issue.
Have you seen that document before, Tab 38? It is a set of
e-mails. My counsel indicates that you were made aware of this
document.
Mr. Marshall. I have seen the lower portion of that page.
Yes.
Mr. Walden. And for the record, this is an e-mail from
Steve Snyder to Judy Waterer at Roxane, right? It says: Gang,
CVS is looking for a Furosomide vendor. Apparently, the HICFA
MACs are changing shortly. And I just read most of this. That
goes on to say, can I request that we discuss this Thursday or
Friday, et cetera, et cetera, which is very similar to the
document on page Tab 36.
So I guess the issue is, do you know if Mr. Leonard or
you--do you ever look at AWPs?
Mr. Marshall. As I mentioned earlier, regarding negotiation
of lowest cost, to the extent that a manufacturer provides me
with a published AWP or their AWP and references that AWP in a
conversation or in a proposal, very often I will use that AWP
value as a point of negotiation, not to instruct or ask that
the value be changed in any way, shape or form, but, to the
extent that I am offered a discount off of AWP, for example,
that a manufacturer indicates they would sell it to CVS for AWP
less 40 percent, I may say, well, gee, I would like to have it
at AWP minus 60 percent as a good negotiating tool, all within
the context of that value having been provided to me but for no
other purpose other than to derive a lower cost of goods.
Mr. Walden. I thought earlier you testified that you didn't
look at AWP as a negotiating point?
Mr. Marshall. I believe I testified that I do not consider
AWP as far as requesting any changes to that value. But to the
extent that it is presented to me by a manufacturer, I will use
that as a point of leverage to try to get a lower----
Mr. Walden. Do you ever inquire about AWP, what it is and
what--how much off you are being offered?
Mr. Marshall. As a standard, the AWP is provided when a
proposal is provided to me for a new product.
Mr. Walden. So it is something that you look at then?
Mr. Marshall. I am aware of it.
Mr. Walden. Do you require it to be provided to you when
you are looking at purchasing a product?
Mr. Marshall. We require it to put in into our systems.
Mr. Walden. Okay. So you are asking for AWP, the pricing on
AWP, right?
Mr. Marshall. Yes, I am asking for the value.
Mr. Walden. Why do you ask for that?
Mr. Marshall. We need it to set up an item in our current
systems at CVS.
Mr. Walden. What purpose does it serve in your current
system then? It is to determine the spread?
Mr. Marshall. No. I am not certain, But it may have some
role in third-party processing downstream. But I am not sure as
to the purpose we need it.
Mr. Walden. You don't know what use it has in your company?
Mr. Marshall. I need to have that value to set up a new
item. Correct.
Mr. Walden. I guess I am--but you don't know why you need
it? You just know you need it?
Mr. Marshall. It is a value that I need to populate in our
purchasing system.
Mr. Walden. But you don't know what role it plays in the
purchasing system?
Mr. Marshall. I believe that downstream it may be used in
our third-party processing systems.
Mr. Walden. And that third-party processing system does
what? Is that the billing system to the government?
Mr. Marshall. The third-party system would be responsible
for managing our third-party claims.
Mr. Walden. And who are third-party claims?
Mr. Marshall. Private as well as Medicaid.
Mr. Walden. So this does play a relationship then in the
billing to Medicaid?
Mr. Marshall. Yes, as far as me populating that value, and
ultimately downstream it may be used for that purpose.
Mr. Walden. But you are telling me you don't negotiate that
AWP value----
Mr. Marshall. That is correct.
Mr. Walden. [continuing] when you are making a purchase.
Mr. Marshall. That is correct. I may negotiate a discounted
purchase price.
Mr. Walden. Let me be clear. I realize that you don't
necessarily set the AWP. But you negotiate a percentage off of
that AWP, is that right?
Mr. Marshall. In some instances when I am presented with a
price by a manufacturer and it is referenced as a discount off
of an AWP. For example, the price we are willing to sell this
to CVS is at 40 percent off of our established AWP. As a good
negotiator, I may ask for 50 percent of AWP in that
circumstance.
Mr. Walden. But you have never asked them to raise an AWP
or said it is hard to buy your product because your AWP is so
low?
Mr. Walden. That is correct.
Mr. Walden. Ms. Paoletti, I am curious then--hold on just a
minute. I am sorry.
Mr. Marshall, can you go to Tab 42? You should have seen
this, I am told by counsel.
This is an e-mail--is that correct? I will let you get
there.
Mr. Marshall. Yes.
Mr. Walden. This is e an e-mail to Matthew J. Leonard,
subject Roxane, cyclofosfamide.
It says, Matt, I thought an e-mail might be a little
quicker and easier than trying to exchange voice mails on this.
We spoke about cyclofosfamide a week or so ago. You indicated
that our spread was not significant enough to pique your
interest.
I would like to approach by company about what it might
take to get CVS on board. Can you provide me with CVS's annual
volume of the 25 milligram and 50 milligram product? Also, pass
me the volume that you believe CVS would sway to the generic if
I can bring you a 50 to 60 percent spread via a contract price.
Thanks, Steve Snyder, National Account Manager, Eastern
Midwest.
Does this not also reference the spread being important,
AWP versus what you pay?
Mr. Marshall. Yes. In this case, just to clarify, my
interpretation is the spread here is the established AWP of the
manufacturer and a requested price to CVS.
Again, I can't comment on something that was written by
another individual. But my interpretation would be it would be
similar to what I had described earlier as far as a lever in
negotiating a lower purchase price when you are presented with
an AWP value.
Mr. Walden. All right. Ms. Paoletti, if you could turn to
Tab 36. This is an e-mail to Judy Waterer from Robert Socora, I
believe. And it lists the AWPs for, I assume, your competitors.
Is that correct?
Ms. Paoletti. That is correct.
Mr. Walden. They are like 151.90, 141, 151, 140. And then
Roxane is at 45.
Ms. Paoletti. Correct.
Mr. Walden. How did your AWP get so out of line with the
others?
Ms. Paoletti. Again, we set our pricing, typically, when we
launch the product, and then we don't revisit the AWP. It is
typically set as a standard off of the brand in the generic
industry, and we wouldn't typically readdress it. In this case,
I can't say why the other competitors were higher.
Mr. Walden. Sure. Did you readdress it in this case,
Furosomide?
Ms. Paoletti. We had to.
Mr. Walden. Why?
Ms. Paoletti. Because our AWP was so far out of line, as
you can see with our competitors, that they wouldn't want the
product.
Mr. Walden. I am confused between you and Mr. Marshall
here. Because he says AWP--he doesn't set it. He is going to
negotiate off of it for your purchase price, right? And you are
saying it is not high enough. We are talking about CVS here in
the middle.
Ms. Paoletti. I think we are talking about a very rare
occasion. You know, we might talk about----
Mr. Walden. But I think it is indicative of a practice in
the industry.
Ms. Paoletti. I am not sure that it is. This is a situation
where it was so far out of line with our competitors that----
Mr. Walden. What would be the purpose being of raising it?
Ms. Paoletti. Our purpose was to just put us on a level
playing field.
Mr. Walden. And for what purpose did you need to be on a
level playing field?
Ms. Paoletti. Because the----
Mr. Walden. To get market share?
Ms. Paoletti. Absolutely.
Mr. Walden. For market share you needed to raise your AWP,
which you said you didn't normally do once it is set?
Ms. Paoletti. That is true. Again, this is a very unique
situation. We were faced with discontinuing the product because
nobody would buy it, because no matter--even if our contract
price was on a level playing field with our competitors and our
service level and we were a-graded, the AWP, which is one
additional factor, was so far out of line, again, that----
Mr. Walden. Right. It was out of line because the spread
matters to those buying the product.
Ms. Paoletti. In some cases, I would assume that is true.
Mr. Walden. I would assume in every case, although it may
not be as dramatic as this. If spread plays into it here, tell
me why it wouldn't play into it everywhere else?
Ms. Paoletti. I think as long as you are relatively in the
same ballpark, it hasn't been our experience that it is
something that is dwelled on. AWP is generally a reference
price that is sometimes, primarily in new launch products, used
as a--just as a reference point in contract negotiations.
Mr. Walden. But it is a reference point that is used?
Ms. Paoletti. Yes.
Mr. Walden. So, I mean--I am having trouble believing that
it is not an important part of this discussion.
Ms. Paoletti. I am sure it is an important factor in some
decisions. I don't know that it is something that is dwelled on
in every case.
Mr. Walden. So you don't think it is a big deal, AWP?
Ms. Paoletti. Absolutely. I think AWP and the issues need
to be addressed. Is it something--is reimbursement something
that we discuss in normal discussions with our customers? No.
Mr. Walden. All right. This will be a question to the
representatives from the various pharmacies. Medicaid
dispensing fees vary fairly widely from State to State. I think
we have heard the national average for Medicaid dispensing fees
appears to be somewhere in the neighborhood of $4 per
prescription.
By way of comparison, the committee obtained data showing
what the pharmacies receive in the way of dispensing fees from
some of their larger third-party payors. One pharmacy chain
also submitted data showing the average dispensing fees for all
of its retail customers. These data showed an average of
approximately $2.25 per prescription on the private side.
Why should Medicaid being paying more in the way of
dispensing fees than private payors? Mr. Marshall, shall we
start with you?
Mr. Marshall. Sure. I understand the data that you have
presented to me. My understanding, there are two components to
reimbursement. There is a negotiated formula component, which
may involve the AWP or Federal upper limit or a MAC price.
There is also the dispensing fee.
So I take your information at face value, but I really
couldn't come to a conclusion as to, you know, whether we would
be paying for Medicaid versus the private plans, other than on
that absolute value of the dispensing fee.
Mr. Walden. Are the numbers correct, from your perspective,
on the dispensing fee?
Mr. Marshall. I believe. I am not as closely tied to this
in my current role. I knew that it was, you know, that Medicaid
was a little higher than $3 and on the private a little higher
than $2.
Mr. Walden. So we are in the ballpark here, from your
historical background?
Mr. Marshall. Yes.
Mr. Walden. You can't comment as to why Medicaid should be
paying more as a dispensing fee than other third-party payors?
Mr. Marshall. No. Again, I think you need to consider the
entire equation as far as the overall reimbursement.
Mr. Walden. Mr. Ziebell.
Mr. Ziebell. I am not really familiar with the figures
presented or how they apply to Walgreens, but I would agree you
have to--you can't look just at the dispensing fee. You have to
figure the cost component and how that figures in the
calculation also.
Mr. Walden. All right. Mr. Seagrave.
Mr. Seagrave. I think your numbers are fairly accurate. But
I will tell you that when we look at reimbursement, we don't
look at one segment of the formula. We look at the ingredient
costs as well as the dispensing fee. We look at the total
reimbursement. We don't look at one component or the other.
I will mention that, with respect to our Medicaid and
Medicare business, it is not a business that we would negotiate
as we do with the commercial payors such as the PBMs and the
HMOs. So when we are looking at the business we look at it in
total. We look at total reimbursement.
Mr. Walden. I appreciate that.
In fact, based upon the data provided by the pharmacies,
Medicaid actually pays slightly more for ingredient costs, I am
told.
And I guess--what I want to make sure of is that, as we
move forward on the policy side here, is that we do the best we
can to get it right, that we don't have a situation where we
are paying more for drugs than we should and more than private
payors are paying or others. We ought to pay what is fair. I
don't believe AWP is fair. Then we are just guessing off of a
percentage off AWP. There is all of these different systems.
I also want to make sure, though, that pharmacists are
properly compensated so that if we change how you are being
paid or how this system functions that we don't shortchange it
and pharmacists suddenly write to all our constituents and say
we are not going to dispense any more because those miserly
turkeys in Congress changed the formula.
But I don't think it's right, either, to have a formula
that ends up overcompensating on the drug side and
undercompensating on dispensing or overcompensating on both. We
need to try and figure out how to get it right, because the
costs are exploding around us, and I would like to see a
marketplace work, work honestly, work ethically.
I think Aventis got at this issue a bit when they realized
AWP was going to become a tar baby for the industry. And I
commend you for noticing that and for taking action, because I
am amazed that AWP prior to this hasn't been blown out of the
water and, after seeing what we went through on Medicare, that
something didn't change for Medicaid prior to this.
Turn to the gentleman from Michigan, Mr. Stupak.
Mr. Stupak. Thank you, Mr. Chairman.
Mr. Catlett, if I can go back to you. The statement you
made in your testimony states that, again, if a generic
manufacturer unilaterally reduced its AWP for a given product
relative to the AWPs of other generic manufacturers for the
same product, pharmacies would have an incentive to purchase
another manufacturer's drug that did not reduce its AWP. Why
did you say in your testimony?
Mr. Catlett. I believe that potentially could happen. I
mean, I could not think of an instance where it has happened. I
think I mentioned that earlier. But my fear, if there was a
great disparity, that--between AWPs of generic products, that
potentially the company that had the lowest AWP may not be in a
position to sell their product in a system where there is AWP-
based reimbursement in terms of how that's how the system's
being based.
Mr. Stupak. Has your company ever had the lowest AWP and
had it purchased by the pharmacies? Have you lowered your AWP
to be lowest and had that happen, where they had purchased your
AWP?
Mr. Catlett. No, I have no recollection of that.
Mr. Stupak. Ms. Marrs, if the pharmacies would purchase at
a lower AWP, could you lower your AWPs on your products and
stay in business?
Ms. Marrs. As I mentioned before, I think key to this, and
similar to what Ms. Paoletti said, there has to be a level
playing field. The manufacturer has no incentive to keep their
AWPs high. We are just trying to compete in a fair market. So
whatever the government chooses as their reimbursement system,
we want there to be a level playing field for all manufacturers
of the same product.
Mr. Stupak. Sure. But the point is, you could lower all
your AWPs and still stay in business, couldn't you?
Ms. Marrs. Probably not. As I've testified, we had a
similar experience to Ms. Paoletti.
Mr. Stupak. And the reason why you couldn't, because they
wouldn't purchase it, right?
Ms. Marrs. I don't believe they would.
Mr. Stupak. Okay.
Ms. Marrs. In fact, the product I mentioned when we had a
lower AWP, we did not raise our AWP. We no longer sell the
product because we could not compete.
Mr. Stupak. And only because no one would purchase it.
Ms. Marrs. Correct.
Mr. Stupak. But if they would purchase at a lower AWP, you
could probably lower all your AWPs of the products you sell and
still stay in business as long someone would purchase your
product. Right?
Ms. Marrs. Correct.
Mr. Stupak. And in your testimony--and why wouldn't they
purchase your product?
Ms. Marrs. Well, because they are being reimbursed at a
much lower rate for our product than somebody else's in this
particular case.
Mr. Stupak. Correct. So the company wouldn't make as much
money; and, again, the taxpayer/customers wouldn't have to pay,
right?
Ms. Marrs. Correct.
Mr. Stupak. Thank you.
I have nothing further, Mr. Chairman.
Mr. Walden. Thank you, Mr. Stupak.
We don't have anything else at this time for the committee.
We greatly appreciate your insights and your patience, and we
will look forward to staying in communication with all of you.
With this, the third panel is dismissed. The record will
remain open for ample opportunity for members to submit other
questions or testimony; and, with that, the subcommittee is
adjourned.
[Whereupon, at 2:02 p.m., the subcommittee was adjourned.]
[Additional material submitted for the record follows:]
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