Statement of John D. Jones, Vice President, Legal and Regulatory Affairs,
Prescription Solutions, Costa Mesa, California, on behalf of PacifiCare Health Systems, Inc.

Testimony Before the Subcommittee on Health
of the House Committee on Ways and Means

Hearing on Medicare Payments for Currently Covered Prescription Drugs

October 3, 2002

Introduction

Madam Chairman, Representative Stark, and Members of the Subcommittee, thank you very much for the opportunity to testify at the hearing on the payment of prescription drugs currently covered by Medicare.  I am John Jones, Vice President of Legal and Regulatory Affairs for Prescription Solutions, which is based in Costa Mesa, California.

Background

Prescription Solutions, a pharmacy benefits management (PBM) company, was founded in 1993 as a subsidiary of PacifiCare Health Systems, Inc. (PHS). Prescription Solutions serves approximately six million individuals, including members of managed care organizations, and union trusts, retirees, third-party administrators, and employer groups.  Our goal is to provide the highest quality drug coverage in a cost-effective manner.  Access and affordability are the cornerstones of everything we do.  Our company manages approximately $2 billion of prescription drugs annually.   We handle approximately 200,000 prescription claims per day of which nearly 15,000 are filled through our mail-service facility in Carlsbad, California.

Our parent company, PHS, is one of the nation’s largest health care services companies. Primary operations include managed care and indemnity products for employer groups and Medicare beneficiaries in eight states and Guam serving 4 million members. Approximately 800,000 of these members are in our Medicare+Choice health plan, Secure Horizons.  PHS and Prescription Solutions strive to provide a high quality, cost-effective pharmacy benefit for both our commercial members and Medicare beneficiaries.

Our testimony today focuses on three points: We support efforts that promote competition in the market for Medicare-covered pharmaceuticals and to describe for the Subcommittee how PacifiCare, as a private payer, uses several processes to cover prescription drugs that are currently covered by Medicare in a cost-effective manner.  Second, we believe that bringing appropriate purchasing and quality management techniques into the program can result in better clinical outcomes.  And third, how price-setting mechanisms create barriers to cost effective drug pricing and contracting for care.

Competition and Prescription Solutions Processes

The key to Prescription Solutions’ ability to operate efficiently is that it is a PBM, which was founded to support the drug coverage provided to the enrollees of health plan products provided by PHS.  As such the ability to integrate managed care concepts with effective purchasing is worth review as Congress considers improving payment for Medicare-covered services.  Since we believe that competition is key to our success, our testimony will describe some of the techniques we employ. 

As outlined in greater detail below, we utilize a variety of dynamic methods to manage our business in order to achieve efficiencies that permit us to provide a broader overall prescription benefit than the company might otherwise offer  in the absence of those efforts.  Nonetheless, over the past two or three years, these efficiencies have been more challenging to achieve for drugs that Medicare does not cover.  In response to these market pressures, Prescription Solutions continues to strive to improve quality, safety, and cost management techniques.  As referenced in various studies by the GAO and other public policy experts, the effect of various price setting mechanisms (i.e. Medicaid Best Price) on the market have not achieved the expected goal of reducing overall program costs. 

Recent cost increases and breakthrough biotechnology therapies have spurred new efforts to develop and implement coordinated processes to manage costs and improve health outcomes.  Until recently, PHS risk or financial responsibility for these products had been delegated to medical groups and hospitals through capitated arrangements.  Those entities in turn shifted accountability to home health, durable medical equipment, infusion centers and other providers.  The result was a lack of a cohesive infrastructure that can effectively monitor utilization, ensure appropriate use and maximize efficiencies, thereby minimizing costs and encouraging providers to accept risk for the provision of those services.

Recently, the utilization of Part B covered drugs has soared due to both technological advances in oncology and biotechnology.  At the same time, the costs of these agents also have soared;  supplying providers and patients in a convenient and cost effective manner has become difficult.  More seriously, the delivery system for medications has become fragmented.  Since many firms focus on providing a specific category of agents or a limited range of products and services, providers have had to work with many different entities creating further inefficiencies and less focus on quality of care. 

In response to this situation, Prescription Solutions strives for comprehensive solutions that create preferred product choices and clinical management.  Prescription Solutions does not rely on any one technique to purchase and provide Medicare-covered drugs, but rather on a combination of tools.  Dependent on the type of pharmaceutical or treatment, our programs can integrate some or all of the following processes:

• Mail Service Pharmacy. Prescription Solutions operates a highly automated pharmacy that ships prescriptions and over-the-counter drugs by mail.  Mail service is most routinely used to supply maintenance medication to patients on long-term therapies.  For complex treatment protocols, our PBM will coordinate with the clinician, product and DME vendor, and medical management to mail overnight the drugs and equipment necessary to provide the drug.  This eliminates the need for the physician to coordinate with several vendors.
• Specialty Pharmacies. The PBM will coordinate with pharmacies that provide niche therapy products by mail.  Examples of such therapies would be drugs for the treatment of AIDS, transplants or infertility. 
• Home Infusion. The PBM will assure that companies which provide injectable medication that will be administered in the patient’s home is delivered with the proper equipment by mail or a local delivery service.
• Infusion Centers. Prescription Solutions will work with the organizations that provide injectable medications in a clinical setting.  Typically, patients go to such centers for cancer treatments.
• Wholesaler/GPO.  In this instance, the PBM obtains the drug through large purchasing groups at discounted rates. This purchasing price helps determine the reimbursement rates.
• Reimbursement Methods. There are three basic models.  In the first, provider groups assume the risk for all in-office furnished pharmaceuticals.  Dependent on the market, this model applies to less than 50 percent of the providers.  In a second model, the health plan assumes the risk and the physicians send claims for covered pharmacy services to the health plan; claims are paid on a schedule of billed charges or on a discount off AWP.  Finally, the PBM may supply the drugs on order or supplements inventory, and Prescription Solutions bills the health plan or insurer.  In this instance, the provider does not have to negotiate pricing with multiple vendors.  Between 30 to 40 percent of our PBM business falls into this model.

Because Prescription Solutions is able to compete by leveraging the numbers of subscribers, contracted networks, and pharmacy arrangements, we can achieve efficiencies that, when integrated with the rest of the PHS health care and disease management services, have allowed us to pass many of those savings on to our members in the form of more comprehensive benefits.  However, as is well known, this is becoming more challenging in the Medicare+Choice program.

Improved Clinical Outcomes

One important outcome of Prescription Solutions ability to compete efficiently for cost-effective drugs is that we integrate the need to manage the purchasing and cost of Part B covered drugs with the need to produce the best overall health outcomes while managing total health costs.  For this reason, many physicians from our contracted groups have stated that they can deliver better quality of care in a managed environment than in fee-for-service.  

I would like to illustrate the point with a couple of examples. We offer an integrated approach to management of specific diseases that involve physicians, pharmacists, and patients.  We improve quality of care and quality of life.  These programs often encourage the use of medication and can sometimes increase the cost of pharmaceutical care, but these costs often are offset by a decrease in the cost of overall health care.  For example, the use of beta-blockers after a first heart attack is strongly supported by the research and national guidelines to help avoid future adverse cardiovascular events.  The national average for the use of beta-blockers is only about 70 percent; our program has demonstrated 85 to 95 percent compliance with the guidelines.  Prescription Solutions actively supports other disease management programs, such as those for diabetes and congestive heart failure. We work closely with patients and their physicians on the use of the most efficacious drugs.

A second example illustrates our use of formularies as quality enhancement tools.  By our definition, a drug formulary or preferred drug list is a compilation of drugs that have been reviewed for safety and efficacy.  Contrary to the conventional belief that formularies exist to simply control the costs of drug therapy, there are many aspects to the proper administration of a formulary that have more to do with quality and clinical effectiveness.  In one of our cases, a request for a non-formulary antibiotic medication, Vancomycin oral, was received in the prior authorization department.  The treating physician had prescribed this drug for a serious knee infection.  Due to the way this oral medication works, it could not get into the blood stream in a high enough concentration to effectively treat the infection.  We contacted the physician to change the medication to an intravenous form.  Notwithstanding the fact that the intravenous drug was significantly more costly than the oral medication, the latter would have had no benefit and potentially could have led to a more serious problem, including the need for surgery.

Concerns With Current Pricing Mechanisms

Finally, Prescription Solutions agrees with Members of Congress that the current AWP system for determining payment for covered drugs is flawed in that average prices and prices charged by wholesalers do not reflect the prices paid by suppliers and physicians.  In fact, the tension that the AWP system has created led to changes in how health plans, like PHS, contract with certain specialists for Medicare-covered drugs, as we described earlier.  To us, the AWP is simply a benchmark price that is independently established and maintained.    We use it as a value used to negotiate purchasing, discounts and rebates of drugs.    Increasingly, contracts with pharmaceutical manufacturers, pharmacy providers, and clients using our services are based upon negotiated discounts from AWP for the prescriptions being dispensed. 

But AWP concerns are not the whole story, and we would encourage the Subcommittee to understand the impact of a rule on drug costs to the Medicaid program, and which has broad impact in the pharmaceutical market as a whole, i.e., the Medicaid “best price” rule.  In the simplest terms, the best price rule requires that whenever a drug company gives a deeper discount to an insurance plan, PBM, or other purchasing entity than the current discount offered to the states’ Medicaid programs, the deeper discount must be offered to the states as well. 

While on the surface this may seem to be a logical requirement, in practice, the rule has created a floor price for many branded drugs, thus inhibiting competition on price among the pharmaceutical manufacturers with similar products.    Because the Medicaid best price and Federal Supply Schedule (FSS) pricing structures require the most favorable pricing available to any entity, manufacturers use the requirement as a shield against aggressive negotiations by private sector companies such as ours.   The net effect is to artificially buoy-up the price to all purchasers since a pricing concession that would discount a product below the Medicaid or FSS price would result in substantial losses for the public book of the manufacturer’s business.

The reason is simple.  The rule limits the effect that competition from multiple private purchasers—health plan PBMs, insurers, hospitals, clinics and pharmacies—can have on price because the drug companies would be required to give that same price to all 50 state Medicaid programs as well.  It is not a bargain for the manufacturers and results in the states paying a higher price or floor for the drugs provided under the program. 

A further complication is that PBMs do not know the “Best Prices” for drugs and have no realistic way of learning this information.  Thus, if a pharmaceutical company states in negotiations that it can not give a bigger discount because of “Best Price” considerations, the PBM has no way to verify or rebut this claim.  In effect, while the best price rule was intended to reduce costs, it has become a good example of price controls failing to achieve the original purpose and raising drug prices for all consumers.

Conclusion

In closing, we would commend the Subcommittee for seeking solutions to the payment issues created under the AWP reimbursement system.  We would like to emphasize two key points: first, we support a system that allows for competition; and second, we believe it is critical that the ability of Prescription Solutions and similar entities to continue to achieve their quality management goals through integrated purchasing and management systems is not compromised.  We believe that Prescription Solutions’ PBM model --- a closely integrated component of a health plan delivery system --- is a template for how drug coverage and quality management can provide value to beneficiaries and decrease the overall cost of healthcare.  Thank you for the opportunity to testify.

Prescription Solutions PBM Structure