C O N T E N T S

Advisory of September 26, 2002, announcing the hearing

WITNESSES

Centers for Medicare & Medicaid Services, Hon. Thomas A. Scully, Administrator

U.S. Department of Health and Human Services, Office of Inspector General, Centers for Medicare and Medicaid Audits, George Reeb, Assistant Inspector General; accompanied by Robert Vito, Regional Inspector General, Evaluation and Inspections, Philadelphia, PA

American Association for Homecare, statement

MEDICARE PAYMENTS FOR CURRENTLY COVERED PRESCRIPTION DRUGS

Thursday, October 3, 2002

House of Representatives,
Committee on Ways and Means,
Subcommittee on Health,
Washington, DC.

The Subcommittee met, pursuant to notice, at 10:38 a.m., in room 1100 Longworth House Office Building, Hon. Nancy L. Johnson (Chairman of the Subcommittee) presiding.

[The advisory announcing the hearing follows:]

Chairman JOHNSON. Good morning. This morning's hearing is very important in our effort to strengthen our Medicare program. The evidence is overwhelming that Medicare is paying way too much for some items of durable medical equipment (DME) and prescription drugs. It is imperative that we adopt a system that more accurately aligns costs and payments.

While this would not normally be a difficult task, it is a very difficult problem at this time because most cancer care is paid for through drug reimbursements. This means that as we change the way we pay for drugs, we must also realistically and accurately reimburse for the practice expenses associated with the delivery of, for example, chemotherapy. These practice expenses are significant--personnel, special equipment, costly drug inventories and insurance to cover them, and so forth.

So assuring reimbursement for practice expense is no easy task, yet it has been only a minor part of the average wholesale price (AWP) discussion. The U.S. General Accounting Office (GAO) tried identifying practice expenses, but neglected to focus its work appropriately on oncologists who deliver such care in an office setting. The oncology community was slow, as well, to rise to this quite daunting task.

However, now we are developing the needed information. Today we are unified in our quest to change the way we pay for Medicare-covered drugs and the way we pay for the costs of administering those drugs.

While I am keenly disappointed in the GAO study, I am pleased that the oncologists have taken advantage of a provision I wrote in the Benefit Improvement and Protection Act. The provision permits groups to submit practice expense data and requires the Centers for Medicare & Medicaid Services (CMS) to evaluate that data and use it if it meets certain standards. The most recent data is very important and particularly significant because of our earlier failure to collect appropriate information.

Overpaying for drugs burdens seniors with co-payments that in some instances exceed the cost paid for the drug by the physician, pharmacist, or provider of durable medical equipment. On the other hand, underpayment will, without question, deny seniors access to life-saving care.

Medicare spending on Part B drugs is very concentrated. Just 35 drugs account for 82 percent of Medicare spending, and 95 percent of the claims volume. Furthermore, Medicare payments for covered drugs have skyrocketed, increasing beneficiary and taxpayer costs. In 1992, Medicaid paid about $700 million for prescription drugs. In 2000, it paid $5 billion, a 700-percent increase over 8 years.

Medicare's payment for these drugs is prescribed in law. The Balanced Budget Act of 1997 specifies that Medicare pay 95 percent of the AWP, for the drug. The AWPs, however, are not defined by law or regulation. They are reported by drug manufacturers to organizations that publish the data in compendia, like the Red Book. Medicare carriers use the published data to calculate payment.

The problem is that AWPs do not reflect the actual price paid by purchasers. Nor do they accurately account for the costs associated with administering the drugs, for which no other Medicare payment is made. The AWPs are often far greater because they do not reflect the discounts, rebates, or so-called charge backs that manufacturers and wholesalers customarily offer to providers. On the other hand, for cancer drugs, they have the costs of inventory, insurance, special equipment, nursing, and other personnel that are not captured in any other payment.

Examples of overpayment abound, forcing seniors to bear higher co-payments and premiums. Beneficiaries pay a co-payment equal to 20 percent of Medicare's payment for the drug. For some drugs, beneficiaries are, indeed, paying more in co-payments than physicians or suppliers are paying to purchase the drug.

Consider Vancomycin, with an AWP of $382. The beneficiary would pay 20 percent, or $73. The provider would pay $5, on average. That is a $73 payment by the beneficiary for a drug that cost the provider $5.

Here are just a few examples comparing one company's 2001 AWP, as reported in the Red Book, and the actual wholesale prices determined by the U.S. Department of Justice. Vancomycin, the Red Book reported AWP was $382 compared to the U.S. Department of Justice actual price of $5, an injectable drug. The other two are also injectable. In the interests of time, I am going to skip over the details.

A second and equally serious problem are reports that some manufacturers use inflated AWPs as a strategy to increase market share. If Medicare reimburses physicians and suppliers based on the inflated AWP, providers have a greater incentive to use the products with the larger spread. Providers may base prescribing decisions on economic incentives rather than clinical appropriateness. This practice may harm patient care and drive over-utilization of services.

Of all countries, America has the greatest access to cancer care. In recent years, there has been a revolution in cancer care, enabling physicians to deliver the latest in quality care in many small centers across America. Medicare does not reimburse oncologists for the practice expenses associated with providing treatment to cancer patients in outpatient settings. Consequently, they have come to rely on the overpayment for drugs to cover these costs.

Before we eliminate overpayments, we must assure appropriate reimbursement for practice expenses. While all agree on this, I am determined it be done accurately and fairly. I am disappointed with the relatively small amount of attention that has been focused on this issue and will pursue it in questioning.

We are very pleased to welcome the Honorable Thomas A. Scully from the Centers for Medicare & Medicaid Services again before us, and on our second panel, George Reeb, Michael J. O'Grady, Ph.D., Paul A. Bunn, Jr., M.D., John D. Jones, and Kim Glaun, whom I will introduce a little bit more at a later time. Mr. Stark?

[The opening statement of Chairman Johnson follows:]

Mr. STARK. Thank you, Chairman Johnson, for holding this hearing today. I could not agree with you more. It is clear that the pharmaceutical industry, and its partners are bilking Medicare beneficiaries and the program, perhaps out of billions of dollars.

I will not repeat many of your observations because they hold. This illegal behavior, I think, harms each and every one of us. Medicare pays more for the services it covers, and the taxpayers pay more, in many cases, or beneficiaries pay more.

The drug companies will argue in their defense that they are operating within the letter of the law. They will not change their behavior unless and until the law changes. Well, I disagree with their interpretation of the law. I certainly will agree with them that they are right. We should change the law, and that will take care of that.

I have introduced a bill which would end the outrage. It is a market-based solution which would require Medicare to pay the true average market price for the drugs currently covered. That means we pay for what the doctors or the hospitals actually pay. It is consistent with the GAO recommendations. It is achievable in a short time frame. It is enforceable, very stiff penalties, and it also recognizes that we must address the inadequacies of the current reimbursement to the doctors.

One of the reasons this is so prevalent is that the doctors feel they are underpaid for the Administration. They make it up through marking up the drugs. I do not think that is the way to do it. I think if they are underpaid, we should address that, as well. Then we will have a solution.

I would like to put some human terms on this. There is an enterprising person in Florida. I know this sounds like a little advertising, but that is okay. He looked up on the web--he was mad about this problem and found my bill. He wrote to one of our staff members on the Committee on Ways and Means. He says, "Terry, I would like to thank you for your time and effort in helping track down the price of cancer drug Leucovorin, $14.88. The fascinating 20 percent that I have to pay is $51.08. It does not take a rocket scientist to figure out that the numbers are questionable, not only the price of Leucovorin, but every item on the page would raise eyebrows."

"My problem is, of course, that our HMO, health maintenance organization, dropped out of our county and now we only have Medicare. The facts will show that what I have to pay for my wife's chemo are out of line. Paying a 20-percent copay is okay as long as the doctor's numbers were fair. The page I will fax to you will show that there is a problem. Please thank Congressman Stark for his effort in trying to right the wrong. Please give my regards to Congresswoman Karen Thurman, as she helped me with the U.S. Department of Veterans Affairs (VA) health program, parentheses, this is only a personal opinion, but she is the jewel of Citrus County."

[Laughter.]

Mr. STARK. "Thank Terry and you. If you would send me your fax number, I will send you the document I have from the doctor."

I would like to ask that the Harper's personal address be redacted but that the letter be made part of the record, Madam Chair, and I submit it.

Chairman JOHNSON. So ordered.

[The letter from Mr. and Mrs. Harper follows:]

Terri Shaw
Washington, DC

Terry,

I would like to thank you for your time & effort that you gave in helping track down the price of the cancer drug (leucovorin). ($14.88), & the fascinating 20% that I have to pay, is $51.08. It does not take a rocket scientist to figure out that the numbers are questionable ????.

Not only the price of leucovorin, but every item on the page would raise eyebrows. I will fax the document from the doctor as I am having trouble with my scanner. My problem is of course is that our HMO dropped out of our county & now we only have Medicare.

The fax will show that what I have to pay for my wife's chemo are out of line. Paying a 20% co-pay is o-k as long as the doctor's numbers were fair !!!!!!!. The page that I will fax to you will certainly show that there is a problem.

Please thank Congressman Stark for his effort in trying to right a large wrong in our Medicare Program.

Please give my regards to Congress Women Karen Thurman, as she helped me with the VA health program. ( This is only a personal opinion but, she is the jewel of Citrus County).

Thank you Terry & if you would send me your fax number I will send the document I have from the doctor. Once again, we thank you.

Bob & Florence Harper 

Mr. STARK. I look forward to hearing what our witnesses have to say.

[The opening statement of Mr. Ramstad follows:]

Chairman JOHNSON. Mr. Scully?

Mr. SCULLY. Madam Chairwoman, Congressman Stark, and Members of the Subcommittee, thank you for having me here today. I am always happy to be here on an issue I think we have so much agreement on.

Obviously, as I think we all know, we all wanted to be talking about larger Medicare prescription drug issues this year. We still hope to get a Medicare drug benefit out of Congress this year. That seems increasingly unlikely. From the Administration's point of view, we would like to congratulate you for getting a Medicare prescription drug bill out of the Committee and out of the House. We certainly are committed to getting that legislation passed as soon as we can.

Back to AWP, this is a longstanding problem. Medicare pays about $5 billion a year for about 450 outpatient drugs. We pay far more than any of the purchasers of these drugs, and the agency has been determined for many years to try to find a way to fix it.

This is the third time I have testified on AWP this year. Having testified on a lot of issues, I can tell you that rarely have I seen the kind of bipartisan support for fixing a problem that this issue has. Senator Baucus and Senator Grassley in the Senate Committee on Finance  were both very supportive of fixing this problem. Chairman Tauzin and Congressman Dingell were literally jumping up and down in their hearing to fix this problem. The Administration is very anxious to work with all of Congress, including this Committee, to fix this problem.

I think this is clearly one place where Congress has a very huge problem that needs to be fixed. There are a number of ways to fix AWP. We support a lot of what the Committee has been talking about in your proposal on competitive bidding. We think that is one approach that could easily work. Mr. Stark's approach is another. The House Committee on Commerce , as you probably know, proposed using the average sales price (ASP), which is similar to Mr. Stark's bill. I think we have been saying all year long, we may have opinions. We would work with any one of them. The one thing that is clear is we are overpaying for all these drugs.

Just to give you one example on the competitive bidding front, which we think in the long range--in the short range, an ASP approach or picking a new and better AWP may be the short-term fix. We believe, however, that even those numbers potentially could be gamed in the long run, as AWP has been. In the longer term, we think a more market-oriented approach may work.

Just to point out one example, in San Antonio last year in our DME competitive bidding proposal, we put out a bid for Albuterol, a widely used drug for asthmatics, and we received 30 bids. Eleven companies out of the 30 were accepted. We saw a 25-percent reduction in the price that we paid. It worked out to about average wholesale price minus 30, not average wholesale price minus 5. Not every drug is that easy to compete with. San Antonio is a big town. We understand competitive bidding may have other issues in smaller markets. It is very clear that we are overpaying and not paying market prices for drugs.

We are also very concerned, as you are. We have said to the oncologists and others, that there are a number of areas--particularly, oncology, hematology, and dialysis facilities--where providers rely on the cross-subsidy from high average wholesale prices for drugs to make up for what they perceive, in some cases probably correctly, to be an underpayment for their basic services. We think on any proposal to fix AWP needs to address that.

The GAO report, that came out earlier said that they believe that the oncology practice expense payments were underpaid by about $49 million. An earlier CMS report suggested that number was $52 million. We have been spending a lot of time with the oncologists, and it is part of our ongoing rulemaking. I cannot get into the details they submitted, but it is significantly higher, which probably is not surprising given the number. We do think that we need to find the right amount for practice expenses. As we reduce the overpayments for AWP, that we need to make adjustments probably, at the very least, for oncologists, hematologists, and for dialysis facilities.

There are problems here. This fits into a broader payment concern. We believe the easiest way to fix this is for Congress to fix it, because if you fix it and we get the savings through average wholesale price, you can redistribute the appropriate money back into the base to pay oncology fees. It is very unclear at this point whether the agency has the ability to do that administratively.

Our concern is we could save, we could discuss any number, say $100 million a year to $1 billion a year on overpayment for AWP. We have looked at legally whether we could actually save the money administratively and put it back in the payment rates. It is not clear. It is not clear that we cannot, but it is also not clear that we can. It would clearly be much cleaner to take the savings and for Congress to put the money back in the program.

If we cannot put it back in administratively, you can see the potential problem we have. If we were to add, let us say hypothetically, $100 million a year back for the oncologists, we are in a context, at least right now, which we also hope to fix, where we are looking at a physician update of negative 4.4 percent on the base conversion factor next year--an outcome I think all of us are hoping to avoid in the next few weeks for which the Administration strongly supports technical fixes.

In the context of fixing payments to oncologists, if in the current setting we had to put $100 million back into the base for oncology fees as we fix the AWP, that update would not be negative 4.4 percent, it would be negative 4.6 percent. So, the idea in a budget neutral sense of fixing the oncology practice expenses as you save money in AWP is probably not particularly appetizing for anyone, including the oncologists. So it may be an option, but it is not clear that we can do that legally. That is one of the major reasons all year long we supported the idea of Congress making this fix and telling us, at least directing us, even if it is in somewhat vague terms, to make the market-base fix and to put some of the money back into the appropriate practice areas.

There are a number of impacts of AWP that I do not think a lot of people understand. We clearly way overpay for drugs, but I want to go through one example because I think while we overpay for drugs. It is obviously a huge problem for taxpayers if we are overpaying $1 billion a year on drugs, which some folks claimed, but it also has an impact all through the rest of the health care system. So, I brought some charts today to illustrate that.

About 80 percent of these drugs are paid for in physicians' offices, but about 20 percent are paid for in hospital outpatient settings. As you know, right now we are going through a rewrite of our hospital outpatient rule, which is incredibly complicated. I am spending a great amount of time on. Last year, we paid most of what are called pass-through drugs at 95 percent of AWP, and when we pay that, we significantly overpaid for a lot of drugs.

This year, in our draft rule, we used about 60 million claims to figure out the real rate that hospitals paid for drugs. Those rates came down significantly, and they will come down. In the final rule, they came down a lot, and I used the draft rule data. In the final rule, we are actually using even better data and better claims. I think some of the drug prices will go down and others will go up, so there will be some significant changes.

Last year, the reason I put this chart up is this does not just cost the taxpayers $1 billion. If you look at what we paid on that chart--and you probably cannot read it too well from that distance and I apologize--what you will see is that for some drugs, we will overpay a lot. I will just give you an example: Retuxin last year. When we paid at 95 percent of AWP, we paid $372. This year, when we are using actual hospital claims to pay it, the price is dropping by 20 percent.

Each of the first four drugs on the chart are cancer drugs. As you go down the line, you will find that when you switch from 95 percent of AWP, which we paid in the outpatient setting, to real prices that hospitals pay, you frequently end up with 75 or 80 percent of the AWP. So obviously for taxpayers, paying that lower rate is the right thing to do.

What a lot of people do not realize is the hospital outpatient pot is a finite, roughly $17-billion pot. If you switch to the next chart, I think what you will find is that in addition to paying too much, when we have to put more money into overpaying for drugs, and it is somewhat similar but different for devices, you also have to take money out of basic services. So last year, for instance, the payment in an outpatient setting for colorectal colonoscopies dropped 16.3 percent. For mammographies, it went down 13.2 percent. For emergency room (ER) level visits, the mid-level ER visits, it went down 3.7 percent. When you take out overpayments for drugs you free up money to go back into the base services because it is a finite pot. If we are paying too much for drugs, we are not necessarily just paying too much from taxpayers. We are also taking resources out of other areas for critical services, like colonoscopies, mammographies, and ER visits.

So this year, we found that we took a lot of money out of the payments, and we had overpaid for AWP. We now have 60 million claims, in the final outpatient rule. We are going to take down a lot of payments for a lot of drugs to what we think are far more market oriented, far more appropriate levels. What you find is, and these will change in the final rule, but you will find double-digit increases over last year for payments of colonoscopy, double-digit increases for mammographies, and probably close to double-digit increases for the basic emergency room visit. There is also a direct trade-off between overpaying for drugs and underpaying for basic hospital services that a lot of people do not understand.

So it is not just bad policy for taxpayers to overpay for outpatient drugs, and it does not just have the impact of spending too much taxpayer money. It also has the impact of negatively affecting hospitals on their basic services for critical preventive services and critical things like emergency room visits. I do not think the connection is often made in that regard.

So we are determined for a variety of reasons, mainly so that we do not overpay for drugs, but also to make sure that we have the accurate payment for base physician and hospital services, to fix this policy. I think it is clear on a bipartisan basis that this is bad payment policy. We have an enormous level of bipartisan support to fix it. It is very clear.

We would very, very much like to have Congress fix AWP this year if you can do it before you go. If you cannot, the Administration is committed to fixing it on our own. I will tell you that, just in brief, if Congress does not fix it this year, our plan is to pick one of our 23 contractors--right now, we have 23 contractors that pay--they, each one of them measures AWP on their own, and they decide what AWP is locally. When you do a poll of those contractors, which we have done, you will find that the payments vary massively and their interpretation of the AWP varies massively.

So administratively, our plan immediately would be later this year to pick one contractor--we have a couple that we believe are better than others. We will pick our best of the 23 carriers and tell them that they are going to be essentially the common price determiner for what is real AWP. We think that would immediately save $100 million a year.

Then our plan would be to go out and do a much more detailed market survey. Most of our carriers are Blue Cross plans. They know what they are paying for people for the same drugs who are under 65. We believe that if we did nothing but identify appropriate market prices, we could probably save as much as $500 million a year.

We think Congress can probably do more if you direct us to do any one of the hybrid approaches that you have, but our view is the number one thing that we should not do is let this go on any longer. It needs to be fixed as soon as it possibly can.

We would be very anxious to work with the Committee and Congress to try to fix this in the next 2 weeks by any one of the approaches that have been suggested. If not, I think the Administration is committed to fixing it on our own administratively during the course of the next 6 months. Thank you, Madam Chair.

[The prepared statement of Mr. Scully follows:]

Chairman JOHNSON. Thank you for your testimony, Mr. Scully.

Unfortunately, last night, I only had your Senate Committee on Finance statement of March. While I reviewed that, that was the most we had and my morning did not allow me to look at the statement that we just received. I am delighted to hear of the more detailed information that you have. It is absolutely true that you need to be able to respond to drops in drug prices as volume rises, as well as other changes in the market. So, I hope that we will be able to work together to get this job done.

The new Gallup survey results developed by the American Society of Clinical Oncology (ASCO), as they will testify later, do give us some very concrete information. Will you be willing to work with them on that data and its implications for reimbursement of practice expenses? The Gallup survey does use the same methodology that the American Medical Association and CMS uses for other payment costs.

Mr. SCULLY. Absolutely. I believe we have been working with them a lot on their data, and we will probably end up incorporating it in whatever policy we use, to the extent we can.

Chairman JOHNSON. The biggest and most dramatic difference is the issue of payment for non-physician work, that so many other types of personnel are necessary to deliver this care, that it does not come out in the way we generally calculate payments. So, we do have to look differently at practice expenses in the delivery of cancer care than we do in some other areas. Would you agree on that?

Mr. SCULLY. Absolutely, and I think we have acknowledged that we need to make some changes in the practice expense payment for oncologists. As you probably remember, we went through one of your oncology clinics in your district earlier this year. I think it is clear that in a number of these settings, the base practice payments are underpaid, but they also are relying on a transfer subsidy, basically, of excessive margins on AWP. We believe we should pay people correctly in both situations.

Chairman JOHNSON. Thank you. In preparing for this hearing, I looked at the list of the 32 drugs that are 82 percent of the cost for the government. While Albuterol was on that list, none of the other couple of pages of examples of gross spreads were on that list. I want to know whether or not your agency is going to be able to, of the 450 drugs, give us a better understanding of which of those drugs are oral, which are injectable, and which we have a practice expense component, because you cannot treat them sort of all the same.

If some are just an injection in an office that is in addition to a whole other office procedure or visit for which a physician is reimbursed, that is different than if it is part of a day-long process of treatment. So, it is interesting to me that some of the largest abuses, some of the biggest spreads are in oral and injectable drugs, with which there is not, to my knowledge, a significant practice expense issue.

So, it would be very helpful if you could provide for the Committee a list of those that you think there is a practice expense issue associated with. Then, the other critical piece of information to doing this right, is which of those drugs are sole-source, which are dual-source, and which are multi-sourced. You can compete where there is multi-source. You cannot compete where there is sole source, and in some of the cancer areas, that is a very big issue. So, do you think you will be able to provide us with that kind of information in the near term as we move forward trying to resolve this?

Mr. SCULLY. Absolutely. We would be happy to.

[The information follows:]

Centers for Medicare & Medicaid Services
Washington, DC 20201
1/6/03

Hon. Nancy L. Johnson
Subcommittee on Health
Committee on Ways and Means
U.S. House of Representatives
2113 Rayburn House Office Building
Washington, DC 20515

Dear Chairman Johnson:

The attached table shows information for the top 35 drugs that account for 86.5 percent of Medicare spending for currently covered drugs paid for by Part B carriers.  Drugs paid by intermediaries (e.g., to ESRD facilities for epoetin, vitamin D and iron preparations, and to hospital outpatient departments for separate drug APCs or for pass-through drugs) are not shown on this table.  The table shows both the technical and common names for the drug as well as the clinical indications for which the drug is used. 

Medicare Spending: In 2001, allowed charges were $6.4 billion for all carrier paid drugs.  The 35 drugs shown on the table account for $5.6 billion.  Seven drugs account for 50.5 percent of spending for carrier-paid drugs ($3.2 billion).  The top drug, Procrit, accounts for 12.1 percent of spending.  Two interchangeable prostate cancer drugs, Lupron and Zoladex, combined account for 17.2 percent of carrier paid drugs.  Two drugs furnished via a covered item of durable medical equipment, Albuterol and Ipratropium Bromide, account for 12.8 percent of carrier drug spending.

Competition:  The table also shows the type of competition for the drug, i.e., whether the drug is sole source, multi-source or generic.  This information is primarily from the hospital outpatient department prospective payment system classification for the 30 of these drugs covered under that system and from the FDA Orange Book for four drugs.  Other than unclassified injections:

• Twenty of the 35 drugs, representing 44.0 percent of Medicare carrier drug spending are sole-source. 
• Nine of the 35 drugs, representing 25.2 percent of Medicare carrier drug spending are multi-source. 
• Five of the 35 drugs, representing 16.4 percent of Medicare carrier drug spending are generic.

Form of Administration:  The table also shows the form of administration for the drug.   Other than unclassified injections, which account for 1.0 percent of drug spending and have multiple forms of administration:

• Twenty-two of the 35 drugs, accounting for 38.0 percent of carrier spending, are administered by intravenous infusion.
• Two of the 35 drugs, accounting for 12.8 percent of carrier spending, are administered through an inhaled solution, i.e., through an item of Medicare-covered durable medical equipment.  Specifically, albuterol and ipratropium bromide are inhaled as an aerosolized solution through a nebulizer.
• Two of the 35 drugs are oral immunosuppressive drugs taken to prevent rejection of an organ transplant.  They account for 1.5 percent of carrier spending.
• Eight of the 35 drugs, accounting for 33.3 percent of carrier spending, are administered through injections.  Of these, two are subcutaneous injections, two are injected into a joint, three are administered through intramuscular injections and one can be administered by subcutaneous or intramuscular injection.  Medicare pays a separate fee for administration of these injections.

Payment for Drug Administration/Dispensing:  Medicare pays a separate fee for injections.  Each of the subcutaneous and intramuscular injections and injections into a joint would receive such separate payment. 

Medicare pays a separate fee for administration of chemotherapy drugs (and other drugs administered through intravenous infusion such as Remicade for rheumatoid arthritis).

Oncologists and rheumatologists have raised issues regarding the adequacy of payment for the administration of drugs.  These concerns generally involve the administration of intravenous infusion drugs and other drugs that are not taken orally.  Oncologists argue that Medicare payment for chemotherapy administration is too low and drug overpayments are necessary to subsidize a practice expense underpayment.  Rheumatologists make a similar argument with respect to infusing Remicade. 

Medicare does not make a separate payment for administration of clotting factor to treat hemophilia.  A draft GAO report recommends that Medicare lower payment for clotting factor and establish a separate payment for clotting factor administration. 

It has been suggested that ESRD facilities use their Medicare drug mark-ups to compensate for what they believe to be inadequate composite rates.  It has also been suggested that there may be issues about administration or dispensing of infusion drugs (other than chemotherapy drugs) furnished via an item of Medicare-covered durable medical equipment.  Suppliers of durable medical equipment have argued that there is an administration or dispensing issue regarding inhalation drugs furnished through durable medical equipment, such as nebulizers.

CMS clinical staff have reviewed the remaining carrier paid drugs that Medicare currently covers.  For drugs not on the list of top 35 drugs, the same types of issues would arise for chemotherapy, clotting factor, ESRD facility separately billable drugs and infusion and inhalation drugs furnished via durable medical equipment.  Our clinical staff review does not suggest different types of administration issues for the remaining drugs.

There are two types of issues regarding using some of the savings from a revised method of paying for drugs currently covered in Medicare to pay for administration or dispensing of these drugs.  First, for drugs where the administration is paid under the physician fee schedule, increases in administration payments would need to be done in a manner that is not budget-neutral under the physician fee schedule.  Second, for drugs where the administration is not paid under the physician fee schedule, there an administration or dispensing fee would need to be established.  We would be glad to work with the Committee staff to provide technical assistance to address both of these issues.

Sincerely,

Hon. Thomas A. Scully
Administrator

ALLOWED CHANGES FOR TOP 25 DRUGS PAID BY CARRIERS
CY 2001 Through November 2002

* Does not include Epoetin for ESRD or any other drugs paid for by intermediaries.
** Type of competition based on the 202 OPPS pass-through drug classification.
*** Allowed Charges are what Medicare allows before application of deductible and coinsurance.

Source:   Facts and Comparisons, 2001
                USPDI, 2002
                FDA Orange Book

Chairman JOHNSON. There are two other issues I wanted to bring up. One is that I do not believe you have the authority, and you indicated that it is not at all clear to you whether you have the authority. I think you have the authority to compete prices. I think at least that may be less difficult. I would worry about your competing prices and changing prices without the authority to take the money saved and use whatever portion the data indicates to reimburse for practice expenses without putting that money into the big pool of practice expense dollars where it would be averaged across every other physician and increase practice expenses for every physician in every discipline and not adequately increase oncologists.

So as you approach this problem, are you looking at defining in the law clearly that the practice expense money used to reimburse for the drugs whose price we are going to cut will stay with the physicians who have those practice expenses, and not allow that money to sink into the general pool from which practice expenses for every other practicing physician affected by Medicare are reimbursed? Do you think that you have the authority, and are you committed to achieving that goal?

Mr. SCULLY. Well, we are certainly committed to achieving the goal. We would certainly like to make the fix in a context where we do not have a negative 4.4-percent pot, first of all. I think it is clearly appropriate to put the practice expense funds back where they are needed, and there may be other categories, but as I said, oncology is probably number one. Other areas we have identified that rely on AWP for margins are hematologists and dialysis facilities. We clearly think that you should put the money back in where there is a problem. I think we are committed to doing that.

It is unclear, and I have spent a lot of time on it, legally whether we--how we can do that. It would be a lot cleaner and a lot better if Congress directed us to do it that way.

Chairman JOHNSON. We will need to direct you to do it that way, but we will also need help on the clarity of the law. We have spent hours and hours on this. It is hard to define those dollars, keep them in the pool that will reimburse the people appropriately, then have our clean savings, and then maintain that after year one.

So this is an issue that if we do not address correctly, it will, without question, close cancer treatment centers across the country. Our hospital-based cancer treatment facilities are not capable of absorbing the number of patients that need attention, nor would they provide access to elderly people who often are not able to drive themselves. So, the access issue is critical. We are blessed to have developed this system that provides greater access to cancer care than any other Nation provides its elderly, or its citizens. So, we want to be sure to do this right. It does need to be done, but it must be done correctly.

Lastly, in your experience with bidding drug prices, what standards are you finding you will need to include to prevent things like the following? This is an example that comes to me from California, where they have had some experience in this.

The health plan changes the drug that it is going to offer for a patient, a cancer patient, monthly depending on where they get the lowest price. Now, that can be very difficult for the continuity of care. That is one problem. The second problem is that sometimes they take the powder form, because it is the cheapest, but that takes 20 minutes in a shaker machine in order to dissolve the powder form into an injectable component. It does come in a liquid form. So, if you just look at price, you are going to shift some very significant personnel costs on providers. That is not fair. We have to be able to deal with that.

Secondly, mail order alone does not work. Mail order can be delivered to your doorstep and sit in the sun and have no effect afterward or be badly affected. Some of these are very toxic agents, and how they are delivered, when they are delivered, and the physician having ample lead time so that if a drug needs to be complemented by another drug to address white cell problems, that drug is also there, is important.

So, these problems are real. They have been experienced by physicians who are dealing with plans that competitively bid cancer drugs. We cannot go nationwide with a program that does not set some standards in regard to what kinds of costs could be forced on a physician, what kinds of disruption in continuity of care can be tolerated, and what the standards must be for certain kinds of drugs in terms of mail order delivery and handling, because if some of these drugs are not managed by the wholesaler in an appropriate fashion, they will not do the job. They will be compromised in their effectiveness. Some oncologists actually go and check the wholesaler. They make unannounced visits to see that the drugs are well managed.

So far, we do not have an example of a competitive bidding system in which there are such quality controls. Has your agency gotten into this? Will you be able to work with us on this issue of quality controls?

Mr. SCULLY. Sure. I think whether it is the DME competitive bidding where you are doing it or whether it is drug competitive bidding, it is going to take a number of years to phase it in rationally. I do think there are some benefits to it.

Clearly, we are not trying to just get low prices. The drug that I mentioned, Albuterol, we had 30 bidders, and we took 11. I think in the past, we had very little oversight of who was selling it, and in the competitive bidding process, we have a site inspection and probably more oversight of the people who won the bids. So, in some ways, we are more involved in the process of overseeing the people that are actually selling the drugs. Clearly, by having a third of the bidders win, quality is every bit as big a factor as price, which I think we need to be clearly focused on.

In the case, I believe, of the San Antonio demo, we actually hired an ombudsman, a third-party ombudsman, to accept complaints and do independent review of what is going on. So there are clearly ways--I think there are ways that, potentially, you could have better oversight and better quality, and at the same time create at least some pressure to get better prices.

Chairman JOHNSON. Thank you. I look forward to working with you. It certainly is disturbing that things like Leucovorin, and the calcium have a spread of 6,581 percent. So, I do not differ with you that this is a problem that we need to address, both out of fairness to the taxpayers--

Mr. SCULLY. If I can just give you one more example, and I do not want to pick on them, because I actually had good results, but I had, I think, a fairly important cancer drug that came in with an AWP a couple months ago of $28,000, because I am sure that is what they thought was a neat price. I found out that the VA was paying about, depending on how you calculate it, $12,000 to $14,000. This happened to be the in outpatient setting. We came to a very good resolution which will not be final until the rule comes out, but I think we actually ended up determining pretty close to a reasonable price.

The bottom line is, in most cases, had this drug not been $28,000, and the vast bulk of them are not, they are usually $300, and I had not happened to notice it because it was so huge, which is almost by accident, people make up AWPs. Whatever they just happen to think is a great price goes in the Red Book as an AWP, and we pay it. That is a crazy process.

In this case, because it was such a high-priced drug and it happens to be, I think, a pretty good cancer drug, I think we talked to the company and came up with a very rational result that will pay an appropriate price and give great access to patients. What scares me is how many of the other ones that are not that big that we do not notice that just come through and get paid for automatically. It is a crazy process.

Chairman JOHNSON. I absolutely agree with you. We are very careful in what we pay for every other purchase in Medicare, and we should be careful about what we pay for drugs.

The VA example that you give is very important, though, for people to remember. We appropriate dollars to the VA to deliver the drug to the patient, and that is the practice expense issue that we also have to give equal time to.

Mr. SCULLY. I had the VA's budget for 4 years in the last Administration. I do not mean to compare the VA price. It is one of many indicators. It was a flag for me that--

Chairman JOHNSON. Absolutely.

Mr. SCULLY. The VA has a totally different delivery mechanism.

Chairman JOHNSON. Mr. Stark?

Mr. STARK. Thank you, Madam Chair.

I gather that you have outlined what you could do if we do not act, but you do not think it would be as effective because of reserving the savings to adjust the payments to the providers. I also gathered in your testimony, I think you said or indicated that you thought it would be best to go currently with actual cost and build the payment constraints on that, looking forward to moving to a competitive bidding system, is that a summary of--

Mr. SCULLY. I think I tried to say, Congressman Stark, all year to the three committees involved is that we just want to get something done, and we are interested--

Mr. STARK. I think I heard you say that you could get into using the actual price more quickly and then move on, perhaps, it would take some time to work on a bidding--

Mr. SCULLY. I think in the short term, you could clearly make an argument that going to an average manufacturer's price (AMP) or ASP-type price clearly delivers the quickest change and probably the quickest savings. My only concern there is if, and obviously there are a lot of interested parties in this, if they get locked into a new price, like an ASP or AMP, for years, they will come back and say, we do not need to do it anymore. You have got whatever your number is. I believe in the long run, a more competitive market-based approach is probably going to work better.

Mr. STARK. They are both market based, I mean. It is a question--I am curious. The GAO is going to tell us that the Albuterol, you said you could save 25 percent in your experiment, and GAO tells us that 85 percent discounts are generally available. What is wrong with using the generally available discounts? Is there something wrong with the people who are buying it that way and saving 85 percent instead of 25 percent?

Mr. SCULLY. My view is we should find the best price we can pay and try to save as much money as we can.

Mr. STARK. Consistent with getting quality drugs.

Mr. SCULLY. Yes.

Mr. STARK. Let me confess, and this is a very difficult confession to make, but I am unaware, probably because I do not pay enough attention, but I am unaware of the proposal that our Committee is now considering for competitive bidding, mostly because they have not shared it with the minority. I am aware of the bills that would take various average pricing. Could you summarize for us what you see as the current difference in these programs, and what are the problems we would have to solve if we go to bidding? As I say, this is something we have never discussed, and I would be interested in getting your read on it.

Mr. SCULLY. I am not sure the competitive bidding approach has been sketched out in detail with the Administration, either. We have talked about it because we have been asked by various committees, because I have a lot of staff who have spent years on this, to think about different approaches. I do not think it has gotten much more than conceptual, certainly nothing written I have seen.

I think the basic concept is similar to the DME-type thing: in major metropolitan areas in particular, over the next few years, that we would--essentially, we did an Albuterol for large-volume drugs, go out and have competitive pricing opportunities. I think the problems you have there are similar to what we have in other competitive bidding. In rural areas and smaller towns, it is going to be more difficult, and you probably have to have some kind of--what I believe our alternative would be is kind of have a market-based pricing mechanism.

Mr. STARK. That is what I was going to ask you. Where Kaiser, say, in my district has got half the people, they can get probably a lower bid than the pharmacist in Susanville, where they have got a 10-bed hospital. Whereas we could average the price that Kaiser gets, with the Susanville price, we would get somewhat lower. Whether it would be lower for more or fewer people, I do not know. That is a problem, I gather, unless you have a winner-take-all, which I gather the industry would object to.

Mr. SCULLY. I am not sure that is--our approach, I think, is generally to--in a place like San Antonio, you can have 30 bidders and pick 11, I think you are probably going to get a result. In a rural area, I am not sure it is--we are going to be concerned about having one bidder.

I do think, however, that most of our carriers are Blue Cross plans. If you talk to Palmeto or River Bend, which is South Carolina or Tennessee, they have millions of people who buy the same drugs under 65 years old. It is not that difficult to figure out what the market for under-65-year-olds are. In many cases, our contractors are not allowed to do that.

I think it is certainly possible to measure what the prices are for people in commercial plans, and frequently these are the same contractors we use, and pay what the commercial rates are instead of a made-up rate.

Mr. STARK. Do you envision picking one contractor in an area?

Mr. SCULLY. No. The only thing we envision, as an administrative situation in the short run, if Congress did not act, is we would probably pick--we have 23 Part B carriers that do this now. They do it independently. We have been trying to get all 23 of them, for a variety of reasons, to communicate better. What we would probably do is pick whoever we thought was the best one, had the best staff and the best information, and say for the other 23--AWP is different in all 23 right now. We could at least pick one and say, "This is the reference price. If you want to pay differently, explain to us why."

Mr. STARK. Thank you. Thank you, Madam Chair.

Chairman JOHNSON. Mr. McCrery?

Mr. MCCRERY. Thank you, Mr. Scully, for joining us this morning. Frankly, between your testimony, which was excellent, and your responses to the questions from Mrs. Johnson and Mr. Stark, I do not have a whole lot of questions left to ask. However, let me explore a couple of things.

First of all, Mrs. Johnson was adamant that CMS research the extent to which the practice expenses should be bolstered to make up for the drop in the AWP or in the price for the drugs, and I am wondering how much research CMS has done or how much research you have access to that would allow you to accurately make up that difference?

Mr. SCULLY. I think the whole system--arguably, the physician fee schedule, relative value units (RVU), which I have been involved in, as have many on the Committee, for 15 years, is never perfect. As I said, the GAO report, I think, said $49 million. We said $52 million earlier in the year. We spent a lot of time with the oncologists since. We have a lot more data. The number is probably a little higher than that. I am sure it will never be perfect, but I am pretty confident we have a lot of different reference points to figure out the right amount, and--

Mr. MCCRERY. For every specialty?

Mr. SCULLY. Probably--certainly for oncology, we spent a lot of time on it. I think we have a fairly good idea for hematology, which is smaller, and probably not as good for dialysis facilities, but I think we have a pretty good idea. There may be others that I have not mentioned, but those are the three that I have had flagged by the staff as the biggest problem areas.

Mr. MCCRERY. Does CMS plan to do a continual review of the practice expenses, the changes in technology, the changes in office set-up and all the things that one has to look at?

Mr. SCULLY. It is pretty controversial every year with the physician community as it is, so I think we are constantly reviewing, especially in the practice expense guidelines, which the Secretary withdrew earlier this year. We work with all the specialty groups through the Relative Value Update Committee (RUC), which is done on the guidance that we convene all--the Resource Utilization Committee, which makes all the recommendations for all the RVUs and practice expenses every year. I think we continually discuss this all year long in committees with all the specialty groups. So, we are very focused on it.

I think because of the cross-subsidy in oncology for AWP, even the RUC has acknowledged that over the years--I think everybody acknowledges it--there has been an underpayment for practice expenses and for AWP.

Mr. MCCRERY. Speaking of subsidies, you mentioned that you could easily look at the under-65 population and get an accurate reflection of the price of a drug. Is it not true that that drug, that under-65 population could be subsidized by the reimbursement from Medicare, which is vastly overblown?

Mr. SCULLY. Yes, but I think, and we had this discussion on the prescription drug issue--it may sound unrelated, but I am not sure it is--on our drug card. Seniors pay the highest cost for drugs right now, and I think if they were organized, they would pay--we think they would pay 15 percent less. Do we expect prices to go up as a result for people under 65? Yes. Right now, seniors are cross-subsidizing non-seniors, and I think, arguably, if we squeeze the price of AWP down, do we expect there might be some increases in the commercial market? There probably would be. Clearly, we are vastly overpaying right now.

Mr. MCCRERY. Yes, we clearly are, but my point is that the under-65 price does not necessarily reflect the true market price because it is being subsidized by the artificially high price that they get from Medicare.

Mr. SCULLY. Yes.

Mr. MCCRERY. What I am really getting at here is that this whole thing is a mess.

[Laughter.]

Mr. MCCRERY. I was down in Shreveport visiting the pathologists, and they are concerned about the technical component of their reimbursement being considered to be in the Diagnosis Related Group (DRG). There are scores of examples of that type of judgment that CMS has to make, that we have to make, and in my view, the market should be making. Would it not help a lot if we were to adopt the recommendations of the National Bipartisan Commission on Medicare and go to a premium support system that the market then would make these decisions rather than a bunch of people sitting up here that have not a whole lot of knowledge of all the intricacies of those market decisions?

Mr. SCULLY. Well, Congressman, as I think you probably know, philosophically, I completely agree with you, and I think that, as I mentioned, Blue Cross of South Carolina, Blue Cross of Tennessee, all these companies make these judgments every day in the under-65 market. In the over-65 market, CMS fixes prices. I think that will probably continue for a while. With the system we have, I will be the best price fixer I can be.

We clearly think that, obviously, in the long run, that the under-65 market, the Blue Cross plans and other insurers make these judgments, and we think they probably make them more accurately than we do. We are stuck with a not particularly good system, and we are trying to make the best of it. I totally agree with you.

Mr. MCCRERY. [Presiding.] You have my sympathy. Mrs. Thurman?

Mrs. THURMAN. Thank you. Thank you for being here. Until the last question, it sounded like everything was going along just pretty good here.

[Laughter.]

Mrs. THURMAN. I would say it is heartening to hear that we are all kind of on the same page here. I happen to have had an opportunity just a couple of weeks ago to visit a cancer center, and many of the issues that we are talking about here certainly were a part of our discussion and their concerns. Certainly, the nursing staff at the center was, I mean, by far the best, along with the doctors, but they are just saying they cannot continue to do what they are doing because of the cost of the practice and doing the service.

So, I do think we need to get to the bottom of this and figure out, and I think we should be honest about it. I think we should say, you do this work and this is what you get paid for. This is what the drugs cost, and we cannot hide this stuff anymore. So I would say that.

I am curious within some of the staff that you have talked about, if they have looked at all, if we were to fix this, because of the 25 percent of Medicare beneficiaries that have Medigap? Would there be a reduction in cost for them, as well, or could our premiums go down in that area? Has anybody looked at that?

Mr. SCULLY. I am not sure we have calculated the details of that, but clearly in the physician office, it is usually at least 20-percent co-insurance.

Mrs. THURMAN. Right.

Mr. SCULLY. So if we had a significant reduction in prices, let us say it is just 15 percent, then seniors save 20 percent of that. In the outpatient setting, as you know, the co-payments are all over the board, but we have a long-term policy to fix it, which Congress passed. I think we are still looking at probably 45-percent average co-payments. So, in the outpatient setting, seniors are paying frequently 45 percent of the drug prices. Clearly, there would be some savings to seniors.

Mrs. THURMAN. So, we could suggest in the Medigap that they need to be looking at some cost reduction if this were fixed in that way.

Mr. SCULLY. Yes.

Mrs. THURMAN. Secondly, I want to thank you for meeting with some of our constituents, I guess, with the University of Florida and others on the protein bead issue. Can we fix this at all? This also is an issue of payments on cancer therapy.

Mr. SCULLY. This has to do with our extremely popular pending outpatient rule. My tongue is in my cheek.

Mrs. THURMAN. I believe it does have something to do with your extremely popular--

[Laughter.]

Mr. SCULLY. The outpatient rule, as I think a lot of the Committee know, I was involved in, when I was not in the government, is incredibly complicated. It has got a lot of problems. We are getting better at the pricing every year.

When we did our draft rule that came out on August 8, essentially, we took 60 million claims and we pushed the button, and the computer spit out the right rates. There were many price changes, and I think many of them legitimate, for drugs and devices that went down. As I mentioned, the benefit is colonoscopies, emergency room visits went up.

For the final rule, we have culled through the data, met with, I think, lots and lots of people from the industry, including a number of people from Florida and a number of other medical centers about proton beam devices. I have tried to be very open to everybody in the world that wanted to come and meet with us. We are using a lot narrower chunk of the data that we think is more accurate, about 45 to 50 million claims. I think you will see a lot of device-related and drug-related ambulatory payment classifications (APC) go up in the final rule, and I think the calculations will be far more accurate. I probably spent 2 or 3 hours a day on this every day.

I do not think everybody in the world will be happy. I think the final results of that rule will be probably more accurate. On a relative basis, people will be happier with the final rule than they were with the draft rule. My guess would be that particular payment is probably one of them.

Mrs. THURMAN. Then just lastly, as you can imagine, we are starting to hear from our nursing homes. I know this not the subject of this hearing, but we need to give some idea back to folks at home on the nursing home issue, because I believe they took their 10-percent cut in payments. I just wondered if we are supportive of efforts in Congress to eliminate or postpone these 10 percent cuts.

Mr. SCULLY. Well, in fairness, I do not think it is fair to portray it as a cut. I have a lot of friends in the nursing home industry, and I have had this friendly debate with them. In fact, I would note that I have hired--this is a little bit off-track, but I hired a number of Wall Street analysts who work for CMS who look at the relative health of the industries from public information. We put out a very detailed 45-page report on the health of the nursing home industry and these add-ons--and what would happen if they went--and they are on our website. I think it is very accurate, and I will be happy to send it up.

We have done the reports on hospitals. We are putting out one tomorrow or Monday on devices. We have done them on nursing homes, on home health, and my view is that we have responsibilities regularly just to figure out how people are actually doing--if they are making a reasonable margin or if they are losing money. We are trying to figure out accurately from publicly-available information how they are doing, if it is the right thing.

In the nursing home field, largely based on that report that we did earlier this year, Congress spent $12 billion a year on Medicare nursing homes, and we added $3 billion in temporarily. The Administration had the discretion to continue $1 billion, and we did that earlier this year. Congress is talking about adding back what are add-ons and the House bill added on about another $1 billion. The Senate did about the same. I think that we are up in the air about that, whether that should be done or not.

Chairman JOHNSON. [Presiding.] Mr. English of Pennsylvania.

Mr. ENGLISH. Thank you, Mr. Scully. At the risk of missing a procedural vote, I do have a question that I wanted to pose to you.

A lot of the discussion about AWP reform is focused on cancer treatments and oncologists, which is one of my areas of interest. Is it not true that there are also some other types of non-cancer therapies that should be included in discussions to ensure that all patients continue to have access to medically necessary therapies? Can you tell me the other types of health care providers, disease states, and drug therapies we should be keeping in mind as we design policies to ensure patient access, and what other types should we be taking into account?

Mr. SCULLY. I think there are a lot of different provider areas that may have small impacts from AWP, and we are certainly willing to work with the Committee to identify those. I think the big dollars are largely in oncology, probably the second biggest is in dialysis facilities who also rely on margins from AWP, and hematologists, the third. I think almost every physician, to some degree, that administers drugs probably has some beneficial cost-shifting benefit from AWP. I think those are the three big areas.

Mr. ENGLISH. My impression is that there are some others that would also be impacted by AWP, including osteoarthritis, rheumatoid arthritis, multiple sclerosis (MS), acquired immune deficiency syndrome (AIDS), and anemia. Have you solicited input from any non-cancer physician provider groups about these issues?

Mr. SCULLY. We have, and I think some of the ones you mentioned, clotting factors is one very large one. I mean, we are more than happy to meet with any of them and discuss any appropriate data they have.

Mr. ENGLISH. Very good. Thank you, and I appreciate your participation today. I also want to thank you again for coming to Northwestern Pennsylvania to help us with some of the reimbursement reform issues and hope to be able to host you there again.

Mr. SCULLY. I am happy to do it. Thanks.

Chairman JOHNSON. Thank you, Mr. Scully. I would hope that as you look at some of these other areas, that you also give some attention to the issue of respiratory therapists. The role that respiratory therapists play in home care is something we need to better understand in making these reimbursement decisions.

Also, I would like to comment for the record that I am concerned about your references to the GAO study and their $49 million. Having spoken with them at great length about their study, they also would acknowledge that their sample of oncologists was very small and that it under-represented the office practice delivery of chemotherapy. Eighty percent of all patients receive their care there. They included in their study not only surgeons, who just do cancer surgery, but also hospital-based cancer treatment facilities whose reimbursement structure is different.

So I think, in spite of the fact that I put the provisions in that asked for the study, not only are these results we can't use, but they acknowledge themselves that they did not do what you did in my district. You went into an office practice and see what the expense of the temperature-controlled containers are, what you have to keep on hand, the Occupational Safety and Health Administration, OSHA, prescribed hoods under which you have to manage the dosages, the waste, because once you open something, you have to throw the rest away.

So, there are a lot of costs associated with delivery that they explicitly did not look at. Whereas, the Gallup survey results that the oncologists have finally completed and have gone to Lewin, who I think is your contractor, do go to those issues.

So, I hope that since it is the same methodology as is normally used and so on and so forth, that we take that data extremely seriously so that we do not make a mistake, because this is an area in which we really cannot afford to do it wrong. As important as it is for the government to start paying for drugs properly, it is every bit as important for us to try to pay accurately in an area where we have never paid. So, this is new territory, and because it is new territory, it must be an add-on to the practice expense pool and not a part of that practice expense pool.

So, I hope you will have your legal staff begin helping us define the legal structure that we need to keep that money available for the purposes for which we need it. If we free it from the drug payment structure, we will be able then to both pay fairly for drugs and pay fairly for delivery.

Congresswoman Dunn, I am glad you got back.

Ms. DUNN. Thanks.

Chairman JOHNSON. We expect to have an hour after this vote, so we wanted to keep going.

Ms. DUNN. Thank you very much, Madam Chairman. Thank you, Mr. Scully, for coming today.

I want to take an opportunity today to ask you a couple of questions that have to do with reimbursements. In the State of Washington, we continue to be concerned about the inequitable payments for managed care plans and physicians, and find that we increased funding for both of these groups in the Medicare prescription drug bill that the House did pass earlier this year, but we are particularly concerned in my State about the inequities that are due to geography.

I am hopeful that as we look at this issue--this is a continuing long-term issue--that we will be able to work together and find legislative and administrative answers to solving our problem dealing with the parity in payments. I would like today to get your commitment to work with me and other Members of the Congress who are eager to get this situation squared away in order to address these inequities.

Mr. SCULLY. Absolutely. As I said when I was in Seattle earlier in the year, when we spent a day hearing from a lot of people about this, I think the Medicare+Choice rates, which were significantly improved in the House bill. The Administration has a strong interest in getting those rates more effectively targeted this year, I think there is a fairly significant increase in the House bill. I think we had continued erosion in Medicare+Choice nationally, but I know in Seattle, you have got a major problem for the plans in the State, and I have tried to keep them in. They have been raising premiums, and it is all due to the rate repayment. We are very concerned about that.

We are also concerned about how the area rates are set and why they are significantly higher in some regions and lower in the others. We are committed to working with you. Equally on the hospital wage index and the physician geographic practice cost indexes or GPCIs, it is called, that are regionally varied, there are a lot of different components that go into that and most of them are legislative. We are very happy to work with you to make them more accurate.

Ms. DUNN. That is good. That is really important. As we see plans raising their premiums, which is my great worry in our State, where we have lost too many plans already, the willingness of the Administration to work with us on remedies is very much appreciated. I will look forward to that.

Also, when you were in Seattle, we worked on another issue, which is the reimbursement for certain drugs. Of course, that is what we are talking about today. Right now, the Medicare program is paying 95 percent for certain drugs that are biologics. Some of these drugs that are biologics are very expensive. Self-injected versions already exist in the market that may be cheaper and allow more choice to patients. For example, we have self-injected biologics that can treat multiple sclerosis or rheumatoid arthritis, but these are not currently covered by Medicare.

I have introduced legislation to allow Medicare coverage of self-injected biologics as a substitute for covered drugs or biologics. One way to reduce costs of drugs, of course, is to encourage competition by allowing replacements of a self-injected biologic in the place of a covered drug. Even with a comprehensive prescription drug bill, we still need to address AWP as we try to find a solution for that much larger problem.

I hope that we can do something to reduce costs by encouraging competition. I would like to just probe your thoughts today on allowing coverage for self-injected biologics, which do cut costs in the long run because they take the burden off the clinics, off the hospitals, off the physicians, yet are not currently covered.

Mr. SCULLY. Well, this is another complicated problem. As you know, we went through a very detailed program guidance earlier this year on self-injectables. The current law says that we pay for outpatient drugs that are not usually self-injected, which after great mounds of legal advice, we determined meant they had to be done in an office more than 50 percent of the time. That brings up some very strange results.

For example, with MS, we determined--the good news is, for a drug like Avonex, which is only covered in about half the country, it is now covered everywhere, which is a very prevalent MS drug. That was because we determined in a national survey that more than half the time, it was done in a physician's office.

A number of other very successful MS drugs, some of which are taken by friends of mine, were not covered because they are generally not self-injected, so they were not covered. Similarly with rheumatoid arthritis. Remicade and Enbrel are two great drugs. After our survey, we covered Remicade, I believe, and did not cover Enbrel for the same reasons.

You can certainly make a good argument that that, policy-wise, does not make a lot of sense, and we are more than happy to talk about it. We made the determination that we think we followed the law as clearly as we possibly could and clarified coverage as much as we could to, I think, the benefit of a lot of patients. Clearly, we do not believe under current law we can pay for drugs that are not usually--that are usually self-injected.

Ms. DUNN. Thank you very much, Mr. Scully. I do want to just give you one example of where we could be saving some money by covering both those drugs for rheumatoid arthritis. The covered drug is $17,000. The self-injected version is $15,000. It would be a savings of about $2,700. So, we will continue to make our case, and I appreciate your willingness to listen to us and possibly at the proper time act to include these drugs as choices for others that are currently included.

Mr. SCULLY. I try to be sensitive to all these things, but as you know, I have rheumatoid arthritis, so that one I know a lot about. There is a very good policy argument for that.

Ms. DUNN. Thank you. Thank you, Madam Chairman.

Chairman JOHNSON. Mr. Ramstad?

Mr. RAMSTAD. Thank you, Madam Chair, and thank you, Tom, for being here today and for spending as much time discussing with me the outpatient rule, particularly as it relates to procedures using technology. You know my concerns. I am very concerned that the proposed outpatient rule will cut reimbursements for medical devices, which means that these reductions will negatively impact Medicare beneficiaries' access to new medical procedures. I believe seniors should have the same access to medical devices, to procedures using medical technologies that other health care patients enjoy.

I guess my concerns can be boiled down to two principal concerns. First of all--and they both relate to the methodology used to determine 2003 rates. As we have discussed, the inaccuracy of hospital data, I think, is obvious, the problems there. Secondly, the underlying methodology using the cost-to-charge ratio.

Now, I know we have talked about the third-party data that CMS has been presented. Are you willing to use third-party data where appropriate? That is my first major question.

Mr. SCULLY. I think this is--as I said, I am spending probably 2 or 3 hours a day on this and have for the last month. I am confident that the final rule will have accurate payment. We really cannot use third-party data except to figure out where we are just wrong and need to go back and scrub our own data more. We have 60 million claims, as I mentioned. We are only using a little under 50 million claims. We used 60 in the draft rule.

The reason we use third-party data, and we have used a lot from the drug companies and device companies, is to figure out where our calculations from our data are just way off, and in many cases, they have been. In addition, I also called up the three very large buyer groups, and we cannot use their data, either, but I called them up and I identified personally about 35 drugs and devices that seemed to be way off. I called up independent buying groups and confidentially they gave me the prices they pay in the market. We have used that to further target places where our data might have been off.

The bottom line is that we are using lots of independent data, more than anything else, to figure out outliers where we may have made a mistake. It is clear to me we have way overpaid for a lot of things last year. I am confident when the final rule comes out that we will have appropriate prices for virtually every procedure that includes a device.

Mr. RAMSTAD. When I look at the 2001 data, which shows the pass-through pool is about half the size that CMS projected for 2002, even assuming the billings would increase by 50 percent from 2001 to 2002, the pro rata reduction was at least a third larger than it needed to be. As far as the underpayments are concerned, would you use the authority that we gave you to compensate underpayments in a previous year to increase this year's conversion factor? Is that--

Mr. SCULLY. This system is so complicated. I have been working on Medicare for over 20 years, and there has never been any law passed more complicated than this one. I am not sure--we still do not know for 2001, because I went through this--this morning with the staff. We are not certain exactly how much we spent in 2001, much less 2002. So, I am not sure we could make an accurate calculation.

The good news is, I do not believe at this point, and the regulation comment period does not close until October 8, and we do not want the rule out until November 1, but my guess is right now that for this year, we will not have to have any pro rata reduction and that we will be able to live with it in the pass-through pool. I think as every year goes on and we get a little better at calculating both the rates and what we are likely to spend, we will be more accurate. At this point, I am not sure we could, even if we wanted to, say we actually did not spend as much as we should have in previous years. We do not actually know exactly right now.

Mr. RAMSTAD. In the regulations, CMS acknowledges that the deep cuts from 2002 to 2003 that I initially broached would likely impact access to new technology in the outpatient setting, as I said before, and that is my concern. How many of these APCs do you think you will be able to fix by the final rule, Tom? Are you willing to use your authority to keep some APCs within about 10 to 15 percent of their current year rates until more accurate data can be secured?

Mr. SCULLY. I think we will have some mechanisms in the final rule to make sure that if there were any things that were real outliers, that they do not take too big a decrease. I literally have gone through personally every one of these devices of any significance in great detail, looked at the rates from past years, looked at commercial rates, and I am pretty confident.

What we did last year, just to clarify, is--because we did not have any other data--we frequently called up companies and got their manufacturers' list price and put them in the rule. I think in some cases, I understand people in some places looked like they got a big cut. I also think that we clearly way overpaid for some devices in past years.

The initial rule that came out this summer, which caused a lot of panic, probably, in many cases, came out with rates that were a lot lower than the final rule will be. As I said, that came purely out of essentially pushing the button and coming up with the computer data on 60 million claims that may not have been as accurate as we would like. We spent enormous amounts of time going through this device by device, drug by drug, and I am confident that when I sit down with you on November 2 when the rule comes out, that I can go through device by device and discuss every one, where we went with which price and that they will be fair.

Mr. RAMSTAD. Let me just conclude, Madam Chairman, by saying I am very, very hopeful that you are willing to use your authority to keep some APCs within about 10 to 15 percent of their current year rates until the data are accurate. I think that, for the integrity of the system and the spirit of fairness, is very, very important, and I hope you will so agree.

Mr. SCULLY. I would be happy to--I think when you--I am very confident--I spent a lot of time on this rule. I do not expect everybody in the country to be happy with it, but I do think trying to keep the balance, as I mentioned, because we clearly overpaid for a lot of things in previous years that hurt base hospital services like colonoscopies and emergency room visits. I try to keep that balance in mind, that we need to find the right amount to pay for it. We do not actually pay for devices. We pay hospitals a capitated rate for the services that include devices.

I expect many of the ones that, you know, some of the bigger outliers, like defibrilators and others, I spent an enormous amount of time looking at various other sources, including our own data. I am confident we will come out with a fair payment.

Mr. RAMSTAD. Thank you.

Chairman JOHNSON. Thank you very much, Mr. Scully. I would appreciate it if you would get back to the Committee as soon as you can in terms of the lists of drugs that you think are going to be most impacted and the ones that are going to be least impacted, and also with language that you would suggest as to how to keep the practice expense money that we save from better competing the prices of drugs separate from other practice expense money so that we can allocate it to the purposes for which we need it.

Thank you very much. I appreciate your being here today on this important subject.

Mr. SCULLY. Thank you very much.

Chairman JOHNSON. On our second panel, George Reeb from the Office of Inspector General (OIG), in the U.S. Department of Health and Human Services, will update us on his findings comparing AWP to actual acquisition costs.

Dr. Michael J. O'Grady from Project HOPE, Health Opportunities for People Everywhere, will discuss a competitive bidding approach to establish Medicare reimbursements for outpatient drugs.

John D. Jones from Prescription Solutions will discuss how drug reimbursements are handled in the private market.

Dr. Paul A. Bunn, Jr., from the American Society of Clinical Oncology will tell us about the new information on practice expenses that the Society has collected and submitted for consideration.

Kim Glaun from the Medicare Rights Center will present concerns from the beneficiaries' perspective.

Thank you all for being here. I regret that we got a little late start, but we will try to keep going through any votes that might be called in respect for your individual schedules. Mr. Reeb?

STATEMENT OF GEORGE REEB, ASSISTANT INSPECTOR GENERAL, CENTERS FOR MEDICARE AND MEDICAID AUDITS, OFFICE OF INSPECTOR GENERAL, U.S. DEPARTMENT OF HEALTH AND HUMAN SERVICES; ACCOMPANIED BY ROBERT VITO, REGIONAL INSPECTOR GENERAL, EVALUATION AND INSPECTIONS, PHILADELPHIA, PENNSYLVANIA

Mr. REEB. Thank you and good morning, Madam Chairman. I am George Reeb, Assistant Inspector General for the Centers for Medicare and Medicaid Audits within the U.S. Department of Health and Human Services. I am accompanied today by Robert Vito, who is our Regional Inspector General for Evaluations and Inspections. We appreciate the opportunity to be here before you today regarding the important issue of Medicare payments for prescription drugs.

My written testimony describes several Office of Inspector General reports that found Medicare and Medicaid paid too much for prescription drugs. I would like to briefly summarize that information for you.

Medicare's current payment methodology adversely affects both the Medicare trust fund and Medicare's beneficiaries, who are responsible for a 20-percent coinsurance payment. This occurs largely because Medicare and Medicaid base reimbursement to physicians and suppliers on inflated average wholesale prices.

Our work has consistently shown that published AWPs bear little or no resemblance to actual wholesale prices available to physicians, suppliers, and large government purchasers. In general, Medicare reimburses physicians and suppliers at 95 percent of AWP. Similarly, most State Medicaid agencies reimburse pharmacies at AWP minus an average of about 10.3 percent.

Medicare's total payments for prescription drugs have risen steadily over the past decade. In 2001, Medicare paid $6.5 billion for drugs, an increase of $1.5 billion from the previous year. Unlike Medicare, which currently covers a narrow range of drugs, Medicaid, as you know, covers most outpatient prescription drugs and total Medicaid payments were almost $24 billion in fiscal year 2001.

Over the past 5 years, the Office of Inspector General has issued a number of reports on Medicare reimbursement for prescription drugs. Medicare's coverage of outpatient drugs is limited primarily to drugs used in dialysis or in transplantation and cancer treatment. Physicians and suppliers purchase these drugs, administer or provide them to Medicare beneficiaries, and then submit the bill to Medicare for reimbursement.

In our reports, we have compared Medicare reimbursement for drugs to prices available to the VA, to Medicaid, and to wholesale prices available to physicians and suppliers. For just 24 drugs that we studied, we found Medicare could have saved between $425 million to $1.9 billion a year by basing reimbursement on prices available to other sources.

Although this hearing pertains to Medicare, I would also like to mention our work on Medicaid primarily because it confirms that AWP is not a realistic basis for drug reimbursement. Both our Medicaid and Medicare work serve as a red flag that if the Medicare prescription drug benefit is expanded, the current payment methodology could lead to billions of dollars in excess payments.

In Medicaid, we found that there was a significant difference between the pharmacy acquisition costs for drugs and their published AWPs. In our latest report, we found that pharmacy acquisition costs ranged from 17 to 72 percent below published AWPs. These percentages are not considered discounts available to most pharmacies, such as volume discounts. We believe that if States would reimburse pharmacies for Medicaid patient prescriptions more in line with the actual acquisition costs of the drugs, substantial savings could be realized by the Medicaid program.

Publishing artificially high AWPs can be used as a marketing device to increase the drug companies' market share. For instance, because physicians and suppliers get to keep the difference between their actual acquisition cost and the inflated reimbursement amount, this spread can serve as an inducement for suppliers or physicians to use one brand of drug over another. While inflating the AWP does not increase the amount the manufacturer receives for each unit of the drug, it can increase their market share by creating an incentive for physicians to prescribe the manufacturer's drug instead of a competitors. This occurs, obviously, at the expense of the Medicare program and its beneficiaries.

We have had some recent legal cases which illustrate some of the problems associated with Medicare's current reimbursement. Because the price spread is so large and Medicare reimbursement is so lucrative for the drug Albuterol, some mail-order pharmacies have made illegal kick-back payments to durable medical equipment suppliers for patient referrals and a $10 million civil settlement was had from one pharmacy group.

In another legal case, Bayer Corporation agreed to pay $14 million last year to resolve its liability in the Medicaid program. Although Bayer did not admit liability, the United States alleged that Bayer had knowingly set and reported the AWPs for these drugs at levels far higher than the actual acquisition costs for the majority of its customers and caused these customers to receive excess Medicaid reimbursement. They made misrepresentations to the Medicaid program for certain information that is used in the rebate programs and knowingly reported and underpaid the Medicaid rebates.

In October of last year, the United States announced an $875 million settlement with TAP Pharmaceutical Products, Incorporated. The TAP allegedly reported AWPs for Lupron at levels that were far higher than the actual cost. They encouraged customers to bill for free samples they provided, and they paid kickbacks to physicians and were underpaying rebates to the Medicaid program.

A drug reimbursement system should be based on real prices available in the marketplaces. Physicians and suppliers, including pharmacies, should be fairly reimbursed at levels that ensure beneficiaries have access to the drugs they need. We recognize that some physician groups say that overpayments for prescription drugs simply make up for inadequate payments for their practice costs. We agree that the physicians need to be properly reimbursed for the patient care. However, we do not believe that the payment for artificially inflated AWP prices is the appropriate mechanism because it just exacerbates the problem.

We would be happy to answer any questions you may have.

[The prepared statement of Mr. Reeb follows:]

Chairman JOHNSON. Thank you very much. Dr. Bunn?

Dr. BUNN. Chairman Johnson and distinguished Members of the Subcommittee, thank you for the chance to discuss with you the views of the American Society of Clinical Oncology, or ASCO, concerning payment for chemotherapy in physicians' offices. We also appreciate Mr. Stark's efforts to move the debate forward and that he has recognized the need to reform both the drug payments and the practice expense at the same time.

With more than 19,000 members, ASCO is the world's leading organization representing cancer physicians and researchers. I am the elected President of ASCO and serve as Director of the University of Colorado Cancer Center in Denver. My specialty as a medical oncologist is the care of patients with lung cancer.

I would like to begin by summarizing several facts regarding cancer care in the United States. First, scientific evidence indicates that cancer mortality rates are declining in the United States. This decline can be attributed to advances in screening, early detection, prevention, and therapy. These advances have been realized largely through the Nation's investment in cancer research and Congressional support for the national cancer program.

Second, the U.S. cancer care system is the best in the world. In this system, care is provided primarily in the outpatient office setting because it is preferred by patients who benefit from its convenience, its efficiency, and its quality. Academic cancer centers play a major role in scientific discovery and education, but are not equipped to provide chemotherapy services to the majority of cancer patients.

Third, most cancer chemotherapies and supportive care agents are delivered most effectively in the office setting. This is possible because of improvements in chemotherapeutic drugs with fewer side effects, improved chemotherapy delivery systems, better medications for system management, and highly qualified support staff, including specially trained nurses, pharmacists, and other health professionals.

Fourth, the reduction in cancer mortality and improved quality of care come with associated increases in cost. Most of these cost increases are due to increases in non-physician services, such as chemotherapy administration and other essential patient services.

Fifth, Medicare more than adequately reimburses for the costs of drugs but under-reimburses for practice expenses. The ASCO has long believed that the current system of reimbursement is fundamentally flawed, but can only be fixed by reform in all parts of the system. The net result of such simultaneous changes would be to preserve the quality and integrity of cancer care in the country today.

The ASCO is concerned that sudden changes in drug reimbursement without correction in practice expense payments could have a ripple effect that would adversely impact the quality of care for our patients. Academic centers such as my own could not absorb a significant influx of new patients from physician offices that might be unable to continue to provide chemotherapy services.

With that background, I want to make it clear that both I personally and ASCO favor reform of the current system. Let me briefly set forth what is necessary.

On the practice expense side, ASCO has advocated making direct estimates of the cost involved in furnishing cancer therapy. If Congress wants to use a system based on surveys of practice expenses per hour, we believe the following are required.

First, CMS should take into account the new data derived from the recently completed Gallup survey to determine practice expenses per hour of physician work. The data indicate significant underpayment for these expenses.

Second, CMS must eliminate from its payment methodology bias against services that do not involve physician work, these services being critical to oncology care.

Third, Medicare must commit to pay in full for all actual costs incurred.

On the issue of payment for drugs themselves, we have no strong preference among the methodologies under consideration. Competitive bidding sounds promising, but we have no idea of how it might play out in a practical manner, given the necessity to maintain inventories of drugs for both Medicare and non-Medicare patients. The overarching point with respect to payment for drugs, it is necessary to cover all the costs of making the drugs available to Medicare beneficiaries with cancer. This means we must account for the variability in the capacity of individual physicians to acquire drugs at the lowest possible price. Moreover, we have to accept, regardless of the underlying payment mechanism, that maintenance of an inventory of expensive, toxic, and sometimes unstable drugs bears its own costs and these should be reimbursed by Medicare.

The ASCO is very eager to work with Congress and with CMS to reach a solution that will assure Medicare beneficiaries continue to receive the best possible cancer care.

Thank you again for inviting me here today, and I am happy to answer your questions.

[The prepared statement of Dr. Bunn follows:]

Chairman JOHNSON. Thank you very much, Dr. Bunn. Dr. O'Grady?

STATEMENT OF MICHAEL J. O'GRADY, PH.D., SENIOR RESEARCH DIRECTOR, PROJECT HOPE, BETHESDA, MARYLAND

Dr. O'GRADY. Madam Chairwoman, Members of the Subcommittee, my name is Michael O'Grady, and I am a Senior Research Director at Project HOPE. I appreciate the opportunity to comment today on how Medicare's payments for currently covered drugs might be improved.

I would like to start with three key points. One has been pointed out before. The current system is overpaying for the drugs Medicare covers.

Two, the evidence is in from the CMS competitive bidding demonstrations and other public and private insurers that competitive purchasing of drugs can yield significant savings without hurting quality or beneficiary access.

Third, a reformed payment system based on competition between drug manufacturers for access to the Medicare market and competition between pharmaceutical benefits managers (PBM) or other group purchasers to have the opportunity to be Medicare's purchasing agent has the opportunity to provide the highest quality drugs at the most competitive price.

Some background on the problem. Certainly, basing payments on average wholesale price has long been a problem and it is well demonstrated by both the OIG reports and the GAO reports on this issue. As a general rule, any payment formula that relies on data that cannot be effectively verified, either through audits or other means, always will leave itself vulnerable to that sort of manipulation.

The AWP-based formula is a prime example of how hard it is to get an administered price done correctly. Every year, CMS tries to accurately estimate thousands of different prices across thousands of different counties across America using, at best, 2-year-old data. This almost Herculean task is almost impossible to do accurately.

Now, how to correct the problem. Unlike most problems in Medicare payment policy, there is an example of how this might be solved. The evidence from the CMS competitive bidding demonstrations is quite encouraging. In the example brought up before by Mr. Scully, in San Antonio competitive bidding saved Medicare 25 percent over what it would have paid for the drug Albuterol. There were no discernable effects on beneficiary access found by the evaluation team that came in afterwards. Outside of Medicare, both public and private insurers have made heavy use of pharmaceutical benefit managers, PBMs, to help negotiate discounts and managed benefits.

Some considerations in thinking about how to design a new system. An essential design consideration is getting the incentives right. Use the competitive natures of the industries involved to maximize Medicare's goals, design a payment system so drug manufacturers, suppliers, and providers will be most successful in the new system by providing the highest quality products at the most competitive prices.

There are two areas where competition can be used to encourage more prudent purchasing. First would be competition among drug manufacturers for access to the Medicare market. The second would be competition among group purchasers, for example, PBMs, to supply drugs to Medicare's providers.

Now, this type of competition for access to the market. The largest example that is currently out there is used by the State of California for CalPERS, the California Public Employees Health Plan. The CalPERS takes bids from a number of different health plans every year with the understanding that not all health plans will necessarily be allowed to offer coverage to the approximately 1 million State and municipal employees and retirees. The result has been an active competition between California health plans to offer the most coverage at the lowest price.

Medicare could apply the same method by designing a payment system that has drug manufacturers compete for access to the Medicare market. Medicare could use PBMs or other group purchasing organizations the same way employers do, to negotiate with the drug manufacturers for group discounts.

Now, the other type of competition that might work has to do with competition to supply Medicare's providers. A familiar example of this type of competition is found with the Federal Employees' Health Benefits Plan, or FEHBP, where insurers compete with one another to enroll workers and retirees in their particular plan. The government sets its contribution based on an average premium bid by the insurers. Then the workers and retirees shop between plans for the best plan at the most affordable price.

A similar design could be used where PBMs and other group purchasers compete to offer Medicare-covered drugs to Medicare's providers. This could be done by having PBMs bid to participate in a program based on discounts they already have or believe they can get from the manufacturers. The government payment to providers could be set at an average price for a particular drug. Providers would have the ability to shop between different suppliers and choose one they were happiest with in terms of price and service.

Now, to conclude, the best chance of maximizing quality and access while minimizing Medicare's expenditures lies in designing a purchasing system that builds on competition between both manufacturers and PBMs. By structuring the competition at two levels and having group purchasers act as the intermediaries, the link between the drug manufacturers and the providers that has caused so much trouble in the past has been effectively broken.

How the competition is structured is key to the success of a new program. The incentives of all actors, manufacturers, PBMs, and providers, have to be structured in the same direction. They only gain by providing quality products and service at the best possible price. Thank you very much.

[The prepared statement of Dr. O'Grady follows:]

Chairman JOHNSON. Thank you, Dr. O'Grady. Mr. Jones?

Mr. JONES. Chairman Johnson, Representative Stark, and Members of the Subcommittee, I want to thank you very much for this opportunity to testify. I am John Jones, Vice President of Legal and Regulatory Affairs for Prescription Solutions, which is a subsidiary of PacifiCare Health Systems. I am a pharmacist by training.

Prescription Solutions is a pharmacy benefit management company which manages $2 billion of prescription drugs annually. We handle about 200,000 claims every day. Nearly 15,000 of those claims are filled through our mail service facility.

We support efforts that promote competition in the market for Medicare-covered drugs. We applaud the Subcommittee's work on the House-passed Medicare prescription drug bill which seeks to accomplish this. My goal today is to describe how PacifiCare, as a private payer, uses competition-based tools to provide beneficiaries with prescription drugs in a cost-effective manner. I then will illustrate how using these purchasing and quality management techniques can result in better clinical outcomes. Finally, I will highlight how price setting mechanisms can disrupt this model and create barriers to cost-effective drug pricing.

For years, the drug delivery system was fragmented and lacked a cohesive infrastructure that could effectively monitor utilization, ensure appropriate use, and maximize efficiencies. Spurred by recent increases in utilization and cost of Part B covered drugs, Prescription Solutions developed a better model that uses a series of management tools. These include the following: a highly automated mail service pharmacy, specialty pharmacies dealing with AIDS and transplant, home infusion management, close coordination with infusion centers, and obtaining drugs through wholesalers and manufacturers at discounted prices.

The mix of tools we use can be influenced by the reimbursement model for a particular provider group. Three basic models are used. First, the provider group assumes the risk for outpatient drugs. Second, the health plan assumes the risk and pays the pharmacy claims to the provider. Third, the PBM supplies the drugs and bills the health plan or insurer.

Using these techniques, we are able to achieve efficiencies that have allowed us to pass many of those savings on to our Members in the form of more comprehensive benefits. However, this is becoming more challenging in the Medicare+Choice program.

One important component of Prescription Solutions' model 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. For example, a use of formularies actually serves to improve the quality of care. Contrary to the conventional belief that formularies exist simply to control the cost of drug therapy, there are many aspects as to the proper administration of a formulary that have more to do with quality and clinical effectiveness.

In one instance, we received a request for a non-formulary antibiotic medication, which is Vancomycin oral. The treating physician had prescribed this drug for a serious knee infection. Due to the way this medication works, by being taken orally, it cannot 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 oral form would have had no benefit and potentially would have led to a more serious problem, including a need for surgery.

Prescription Solutions agrees that the current AWP system for determining payment for covered drugs is flawed in that it does not reflect the prices paid by suppliers and physicians. To us, AWP is simply a benchmark price that is independently established and maintained. It is useful as a tool. Increasingly, contracts with pharmaceutical manufacturers and pharmacy providers are based upon negotiated discounts from AWP.

The AWP concerns are not the whole story. We would encourage the Subcommittee to understand the impact of another drug pricing rule which has brought impact in the pharmaceutical market as a whole, and that is the Medicaid best price rule. In simplest terms, the best price rule requires a drug company to give the State Medicaid programs the deepest discounts that it gives to the other purchasers. Manufacturers use the requirement as a shield against aggressive negotiations by private sector companies such as ours. The net effect is to artificially increase the price to all purchasers. Thus, the rule limits the effect that competition can have on price. It results in the States paying a higher price for drugs. 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.

In closing, we would commend the Committee for seeking solutions to the payment issues created under the AWP reimbursement system. We believe that Prescription Solutions' 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 health care. Thank you very much.

[The prepared statement of Mr. Jones follows:]

Chairman JOHNSON. Thank you, Mr. Jones. Ms. Glaun?

Ms. GLAUN. Good morning, Madam Chairman. My name is Kim Glaun, and I am the Washington Counsel at the Medicare Rights Center. The Medicare Rights Center is a national consumer service organization with offices in New York, Washington, and Baltimore, working to ensure that older and disabled Americans get good, affordable health care.

Every year, the Medicare Rights Center hears from more than 60,000 Americans with Medicare who have questions about their Medicare benefits, rights, and options. Thank you for inviting me to share with the Subcommittee the consumer perspective on Medicare's payment scheme for covered drugs.

Every day, the Medicare Rights Center hotline hears from scores of older and disabled Americans who cannot afford their prescriptions. Medicare's current policy of covering only a limited number of drugs and paying for them based on the average wholesale price often forces elderly and disabled persons with cancer and other serious medical conditions to spend more out of pocket than their small fixed incomes allow. This policy should be changed.

Take, for example, Mrs. Thomas. While she is fictional, we have spoken to countless men and women like her who face the same difficulties she does in getting critical care. Mrs. Thomas is 75 years old and lives in Texas, which, like most States, does not have a State pharmaceutical assistance program. Like the majority of people with Medicare, Mrs. Thomas suffers from two chronic conditions, congestive heart failure and cancer. Like the typical person with Medicare, her annual income is about $16,000, too high for her to qualify for Medicaid or other low-income assistance programs.

For someone like Mrs. Thomas, out-of-pocket costs for medications and treatment for her heart condition alone could easily cost $5,000 annually. A Medicare supplemental policy to fill voids in Medicare could cost her $1,500 annually. If Mrs. Thomas cannot afford supplemental insurance, she will need to pay all Medicare gaps herself and is likely to forego critical treatment.

Like most older and disabled Americans, Mrs. Thomas needs Medicare to offer a good, affordable prescription drug benefit. Instead, Medicare only offers her limited coverage for some of her cancer drugs. The current policy of basing Medicare reimbursements on the AWP directly harms Mrs. Thomas and millions of other vulnerable and older disabled men and women.

First, as the U.S. General Accounting Office has documented and my fellow witnesses and Administrator Scully have testified today, the AWP bears little relation to the amount doctors and suppliers actually pay for drugs and is grossly inflated. Because Medicare patients pay 20 percent of the amount Medicare reimburses for drugs and Medicare premises payment rates on the inflated AWP, older adults and persons with disabilities are overpaying for their medications.

Second, Medicare's inflated payments for medications drive up the costs of Medicare supplemental policies. Insurers pass on to policy holders the cost of inflated coinsurance payments through premium increases. Premium hikes have made supplemental policies unaffordable for a growing number of older and disabled Americans with Medicare.

Third, the AWP creates perverse financial incentives that could result in inappropriate prescribing at the expense of people with Medicare's health and quality of care. The difference or spread between the AWP-based price and the price a physician actually pays for the drugs is essentially profit. The greater the difference between the Medicare price and the actual price, the more profit a physician keeps. The government should not be perpetuating a system that induces doctors to prescribe drugs based on their own financial gain rather than clinical efficacy.

In sum, Medicare's current policy of pegging drug reimbursement under Part B to the arbitrary AWP subsidizes physicians, suppliers, and manufacturers at the expense of older and disabled Americans and America's taxpayers. It is due time that Medicare use its market leverage to lower prescription drug prices for people with Medicare rather than accept the pharmaceutical industry's pricing structure as a given. A Medicare policy of paying prices that the pharmaceutical industry charges its most favorite customers comports with Medicare's pricing practices for doctors, hospitals, providers, and suppliers. A more rational payment system will protect people with Medicare, the common good, and the public purse.

Congress must respect the need to pay doctors and hospitals rates that encourage them to continue to serve people with Medicare, but moving toward a system based on acquisition costs would institute much needed, reasonable reforms and success in lowering both people with Medicare's cost sharing and taxpayer expenditures for currently covered drugs.

In conclusion, we urge you to save the Medicare program from wasteful expenditures and to conserve those dollars to help more people with Medicare get good, affordable prescription drugs. Thank you.

[The prepared statement of Ms. Glaun follows:]

Chairman JOHNSON. Thank you very much. I thank the panel for their testimony. Ms. Glaun, I thank you for your eloquent description of the burden that high-priced drugs place on our elderly. I am hopeful that we will pass some prescription drug legislation this year. I am very proud that this Committee did get a bill through the House, that particularly for the low-income seniors would take essentially all the costs off them, so I certainly share with you that concern.

I also am very conscious of the co-payment burden that high-cost drugs place on our seniors and the danger of the spread driving a physician's decision as to what to use. In light of the testimony that indicates that 80 percent of our seniors get chemotherapy in practice-based cancer treatment centers, do you have any concern about access to those centers if we concentrate only on price and not on practice?

Ms. GLAUN. I completely agree with the parties that have testified and you, Madam Chairman, as well, when you have said that at the same time we fix the prices that Medicare is paying, that we need to adequately reimburse providers and physicians for their practice expenses. Our goal is to assure access to quality care for our beneficiaries.

Chairman JOHNSON. Thank you very much.

Dr. O'Grady, and Mr. Jones, you can enter in on responding to this question if you care. Dr. O'Grady, you mentioned that the evidence is in on competitive bidding, and yet CMS has done one competitive bidding in one county in Florida and one competitive bidding in one city in Texas. They competitively bid hospital beds, urological supplies, surgical dressings, wheelchairs and accessories, and general orthotics. The only drugs they competed were nebulizers and oxygen.

Now, to take that evidence and assume that you can crosswalk it over to chemotherapy drugs is, in my mind, risky. I believe competitive bidding has a place here, there is no question about that. The examples that you give of competitive bidding are amongst plans, and you also Mr. Jones, when a plan bids competitively or uses the competitive approach in purchasing, they have underneath them an integrated delivery system and that is our problem. We do not have underneath drug pricing and Medicare an integrated delivery system, and if we do not pay properly for that, as Mr. McCrery said in his questioning, which I had to miss some of, we should not have to be doing this. If we had integrated delivery systems in Medicare, we would not have to be doing this.

We do have to do this. So, in a sense, the Federal Employee Health Benefit Plan analogy and Mr. Jones' Prescription Solutions analogy, while useful and demonstrating the power of competitive bidding, particularly in the setting of integrated care delivery systems, in a sense, it circumvents the hardest part of the nut that we have to crack.

So, I would like your comments on how do we get at the practice expense. Then I just want to go on to Dr. Bunn. I want him to be thinking about it. I mean, we need to understand, what are these drugs we are talking about? When I read about their toxicity, what is it? I go through a clinic, and they show me a drug that if it gets misplaced and does not go through the needle and it gets in the skin, it can cause a chain of erosion.

So, I want us to understand a little more clearly, not only what competitive bidding might do for us, but the terrific challenge we face in managing the delivery of highly toxic drugs that are highly sensitive to temperature and other things. I do not think, Mr. Reeb, that the OIG has done any investigations of these particular kind of drugs. The examples we are getting are from Albuterol and others that are more simple, either orally or nebulizer or injectably taken.

So, this issue of systems of delivery is the hard nut to crack here. We cannot dodge it or seniors will not have access to care. It is that simple. Dr. O'Grady and Mr. Jones, if you would like to comment, and then, Dr. Bunn, if you would like to comment, and finally, Mr. Reeb, if you would like to comment, you are welcome to do so.

Dr. O'GRADY. Sure. To start off in terms of thinking about the competitive bidding demo and also where this sort of negotiation and bidding has been done in the past, and is there enough of a track record to have some confidence to move forward? Certainly, CMS has done a good job on this particular demo. They have also followed up to find out whether there was any problem with access, any problem with the quality of care that the beneficiaries received, and they had outside people come in from the University of Wisconsin, and kind of verify what was going on and do the evaluation. That all came back fairly positively.

Broader than that, you are absolutely right that the experiment was on Albuterol. We know that from other public purchasers, as well as private, including FEHBP, that this notion of negotiating prices has certainly gone on for quite a long time. It certainly works well within an integrated setting where you can have this balance, that Mr. Jones talked about. It is also, as Mr. Scully said, with the pre-65 population, the Blue Cross-Blue Shield plans are doing this sort of stuff all the time.

My point would not be that this is only one part of the things to do. Certainly, you have to look at the other part of the issue and make sure that the overall payment makes sense. If it does not make sense, at some point, you will hit some access problems.

So, it is certainly within Medicare's prime set of responsibilities to make sure that they pay fairly, but mostly that is to be because of their responsibility to beneficiaries to protect them, and if they do not get the price right, that will hurt beneficiaries. It is also balancing that protection that they have to provide to taxpayers.

Chairman JOHNSON. It does not bother you that none of the things that they have had experience in competitive bidding with are complicated to deliver, that their experience, in fact, is extremely limited?

Dr. O'GRADY. I think it would be a better experimental design to use some of those drugs that you are talking about and then find out, how much does the price come down?

The one thing I would also like to be quite clear on this is if you look carefully at that report, there are other things that go on there where, after competitive bidding, the price was higher. Now, part of that is back to the point I made about it is very hard in an administered price system to get the price right, different locations, different things. Things change.

Chairman JOHNSON. I appreciate that.

Dr. O'GRADY. So you are trying to pay kind of an accurate price, and this sort of one-size-fits-all approach sometimes overpays, other times underpays. A better situation in a public policy sense would be something that could adapt to change, adapt to different parts of the country, different markets, and take that into account. That is one of the real positive aspects of competitive bidding.

Chairman JOHNSON. Mr. Jones?

Mr. JONES. Prescription Solutions has a number of clients that it serves as a PBM. PacifiCare is the largest of them. We have other clients that are not integrated, and they look for savings when it comes down to injectable drugs, as well.

Because we purchase large amounts of injectable drugs from the manufacturers, we get good prices for all of our clients. The delivery systems in delivering it to a clinic or to physician offices is no different than the drug company would use. We use the same protections in trying to make sure they are shielded from temperature and humidity and all of those things. So, the physician would get the drug product in the clinic similarly as if they ordered it directly, but they would be able to take advantage of our purchasing power.

So, it is really not much different than that. It is just that we get better pricing because we are--

Chairman JOHNSON. Excuse me. I guess I did not quite understand. So you only deal with the drug component? You do not deal with the reimbursement to the physician and the system?

Mr. JONES. In a non-integrated system, you are exactly right. It is the drug alone.

Chairman JOHNSON. Furthermore, because we do also have reports from users in California about problems, would you be happy to work with us on any problems that you have seen develop?

Mr. JONES. Surely.

Chairman JOHNSON. Dr. Bunn?

Dr. BUNN. Thank you for the opportunity. I agree with you entirely. There are issues of quality as well as cost, and, of course, as a physician, we are concerned with quality.

I guess the example that was incited this morning and, I think, your examples were outstanding, of course, was the pharmacist in St. Louis who decided he could make money by diluting the drugs, and certainly the physicians would not feel that a system that allowed that to happen is one that either the Congress or the physicians should support. So, we are certainly not opposed to some competitive system that would ensure quality and that the physician has some control over the quality.

You are also quite right that these agents are mixed and they are toxic, and the way they are mixed and the way they are stored is extremely important. Many of these will become inactive at improper temperatures, with improper shipping or storage. If they show up in a doctor's office overnight express and sit there outside and they need to be refrigerated, obviously, that is not going to work.

So, basically, I think what you said we would reiterate, and I think you said it very well.

Chairman JOHNSON. Dr. Bunn, if we were motivated, could we be using some of the dosages that are left? For instance, if you open something and you use half of it, could we be using the other half for a patient that is also there at the same time if we were allowed by law? Should we be looking at the sheer waste we impose on the system because something was opened?

Dr. BUNN. That example would not be a great thing to be doing, but things could be packaged potentially differently by pharmaceutical manufacturers to optimize the flexibility so as not to have waste. Using the same vial with multiple needle sticks would not probably be the best way to get at that.

Chairman JOHNSON. What about the personnel that are required? The practice expense formula looks at physician work hours, but we have a hard time taking into account non-physician contributions. You mentioned in your statement the highly qualified support staff that clinics depend on. Could you describe that in a little more detail and also some of the equipment and insurance costs that are also part of the practice expense bundle, that if not taken into account, will not enable people to stay in the practice of delivering cancer care?

Dr. BUNN. Right. We believe there have been two fundamental problems with the practice expense side. First of all, there was inadequate data and an inadequate database for which to estimate the true costs. You brought up today, we agree entirely with you that the GAO data is totally flawed and totally inadequate. We agree that the CMS is has also not developed adequate data. We do believe that the Gallup survey now does provide that data.

We also believe, as you alluded to, that there is a flawed methodology for making the calculations that is biased against non-physician work, and it does happen that oncology practices have the largest amount of that. So, we believe that in addition to using the new data provided, both ASCO and the Congress need to work with CMS to develop an adequate methodology to account for those true expenses, which are the non-physician-related expenses that are largely attributable, like anything, to personnel, largely trained nurses, pharmacists, and other health professionals. Each oncology office has a large number of those.

Chairman JOHNSON. Thank you very much.

Mr. Reeb, would you just clarify for the record, if you know--I am not sure whether you know or not, but has the OIG looked at drugs used in chemotherapy or have the drugs that they have focused on studying been more like Albuterol?

Mr. REEB. We have looked at both oncology drugs and other drugs, but our work has come from the pricing side. We are a problematic looking kind of an agency. The spread that is created with the AWP difference to the acquisition costs, whether it be at a physician's office or whether it be from a Medicaid agency in their program. So, we have not looked--I mean, we have focused on that because the amount of money at stake allows for these kind of situations to develop.

Chairman JOHNSON. You have not done any work on what the cost of the delivery system is and whether it is more or less than the spread?

Mr. REEB. No, ma'am.

Chairman JOHNSON. I mean, it is also conceivable that in some instances, it could be more than the spread, it could be equal to the spread, it could be less than the spread, or it could be a lot less than the spread.

Mr. REEB. Yes, exactly.

Chairman JOHNSON. Okay. Thank you.

Mr. REEB. We have not done work in that area.

Chairman JOHNSON. Mr. Stark?

Mr. STARK. Thank you, Madam Chair. I would like to thank all of our witnesses, in particular Mr. Reeb and Mr. Vito from the OIG, whose work in this area has called our attention to a serious problem that we hopefully can correct and save the government some money. Unfortunately, you do not get a raise. You guys ought to work on commission. You would be better off. We do appreciate and the public will appreciate the work that you do.

Ms. Glaun, the work that you do for beneficiaries also should not go unnoticed, and I am sure that my colleagues in Maryland send their constituents to you frequently and that you are a great deal of assistance. Unfortunately, California is a little long distance for us to refer our constituent service cases to you, but we also appreciate the work that you do in this.

I guess I just have a couple of questions. It seems to me, Dr. Bunn, if you will not mind my putting aside the question of reimbursement for practice expense, I am really not sure that is what this hearing is about. I recognize it as a problem, but aside from yourself, the people here, I think we are dealing more with the cost of the unit of a prescription that your colleagues administer. We do recognize that some of that problem has been exacerbated because of problems with the reimbursement for the professional services that your group renders.

I hope that we can separate that. I hope that we can find an adequate reimbursement, an adequate, fair reimbursement system for the physicians. I hope that we can find an efficient way to get the best price to which we ought to be entitled from the pharmaceutical industry for our beneficiaries.

I am not even sure it is a dispute or a disagreement, but there seems to be at issue whether or not we should bid for a pharmaceutical, the price of a drug, and then in what form. I do not hear any enthusiastic support for a winner-take-all. Somebody mentioned in the testimony, Dr. O'Grady, that you could underpay. Now, I am missing something. If you are talking about underpaying Dr. Bunn's gang, I am with you. How would you underpay AMGEN for Epoetin alfa (EPO) once you set a price for it? It is the same EPO in Wapakoneta, Ohio, as it is in Oakland, California, is it not?

Dr. O'GRADY. One of the things that can happen here, and I guess the best example I can think of right now is--one of the things involved when CMS tries to do this, that is just a very tough nut for them to crack, is that there is always this lag having to do with the data that they collect. So they are always working from about 2 years behind.

Mr. STARK. Okay--

Dr. O'GRADY. No, but--

Mr. STARK. I am with you, but once you set a price for a pharmaceutical that is in a specially compounded potion, and if you are buying basically branded, ethical prescription drugs, you cannot underpay for it. I mean, you are paying the same price across the country. There is nothing wrong with that, is there?

Dr. O'GRADY. No.

Mr. STARK. Okay.

Dr. O'GRADY. It is not so much that. It is more the idea that the price changes, and you have not taken it into account.

Mr. STARK. All right. I just wanted to--because the question comes up, and Mr. Scully was talking about it, that if you have got a lot of clout, a big purchasing base, you can get a better price than some small clinic in a small State that does not have the market clout to demand a lower price based on volume.

To that end, I would ask Mr. Jones to deal with the issue that was brought up where you find that we can get, what, a 25 percent savings in these, as Mr. Scully pointed out, but we can get almost a 65 or 80 percent savings, a lot more, where we took the actual price. So, why should we not do it with the actual price as long as that dichotomy holds?

Mr. JONES. Our company would try to assess on a regular basis what that actual price is. Because we also buy drugs, we have a pretty good indication of--

Mr. STARK. So we pay based on what you pay, right?

Mr. JONES. They take advantage of that, yes.

Mr. STARK. I mean, that is what I would think. Do you know whether PacifiCare uses more than one PBM to service its beneficiaries?

Mr. JONES. No. It is one PBM. It is ours. We are a subsidiary company of PacifiCare.

Mr. STARK. Even if you were not, would it not be to their advantage to use one? Would they not get better prices by concentrating their buying power in one provider?

Mr. JONES. In this case, almost every year, the question is are we giving PacifiCare the very best deal, and they will actually make us compete against competitors. They will invite people in to check, yes.

Mr. STARK. How many of your other clients--you serve other managed care plans.

Mr. JONES. Yes.

Mr. STARK. How many of them have multiple PBMs?

Mr. JONES. There are a few, not many. Most of them will choose one after a competitive process.

Mr. STARK. Although that is a concern that we have heard here if the government went to bidding, and there are some impracticalities, some people may not be able to serve the entire country, but I am just trying to find out, my sense is that if we do go to bidding, which I am less comfortable with, we do not have a system, that the extreme, the most competitive would be winner-takes-all, would it not? That really would be the toughest competition.

Mr. JONES. If that winner can provide all services--

Mr. STARK. Yes. You hit it right on the head. If they could provide the quality and the coverage for the market.

Mr. JONES. Then there is the issue of ongoing competition. A winner with a long contract may not be that--

Mr. STARK. Then the price goes up and you have knocked the other competitors out of the box, so there is nobody to come up and bid the next time.

Mr. JONES. Yes.

Mr. STARK. That is a good observation, and it further is a problem. I think this is between us and the committees here and--I still want to say Health Care Financing Administration, I can never remember what their name is now--between CMS, we are going to have to figure out what is a system. It seems that we could go to the actual price now and phase into something else if that worked.

Dr. Bunn, did you want to add something to the discussion?

Dr. BUNN. I think there are a couple of other facts in the drug cost besides what you just mentioned, which is what you pay for. First of all, these drugs have to be given on a very set schedule and they have to be available when the patient is due. If you delay, it is going to decrease the effectiveness.

So, there are several things here that will adversely affect a rural practitioner. Again, you have to have an inventory and you have to have it available at the time. If, for example, the patient progressed or had some toxicity, then you would be stuck with that drug and that drug might go out of date before it could be used in another patient in a rural area. Also, sometimes the pharmacist or the nurse make a mistake and spill the drug. Obviously, this is not often, but that is an added cost. You cannot bill that to somebody else. So, that is sort of a cost of the drug that has to be taken into consideration, as well.

So, I think there are some issues with inventory and wastage and so on that have to be considered in the cost, as well.

Mr. STARK. Keep going. How does that--so I will stipulate to that. Now, what is better, to use an average price across the Nation so that the Marshfield Clinic pays the same amount as Kaiser in Oakland, or do you suggest a different system that would resolve that problem? Finish that up.

Dr. BUNN. Well, I think we all have the same goal, which is come the closest to the actual cost as possible. I am not sure that having an average cost for the entire United States of America would be best, because, obviously, the cost in a physician practice is going to be different, and then you are going to create some huge winners and some huge losers.

Mr. STARK. Can you generalize, and my time is up, but Dr. Bunn, can you generalize for us, in the non-Medicare payers, Blue Cross, whomever, when they reimburse oncologists, do they pay for spillage, wastage, how do you bill there? Is it different from what we have been discussing here? Is there a general standard procedure that the Blues across the country, say, would reimburse your members for non-Medicare payers that is different from what we are talking about today?

Dr. BUNN. Largely not. As you know, government to a certain extent sets standards. I would say in non-Medicare patients, we have some of the same cross-subsidization going on where actually the insurance companies will a bit overpay for the drugs, knowing that practice expenses and spillage and so on are going to be covered by the overage. Again, we do not think that is probably the best way for either the insurance company or the government to be reimbursing.

Mr. STARK. Do they pay you as a percentage of average wholesale or do they negotiate a rate with you, a price for the drug? How is that done?

Dr. BUNN. It is actually variable, but in many instances, it is the same as the government.

Mr. STARK. Thank you. Thank you, Madam Chair.

Chairman JOHNSON. Thank you very much. Congresswoman Thurman?

Mrs. THURMAN. Madam Chairman, a lot of the questions have been asked today. We have kind of exhausted some of this, but maybe you can just help me reemphasize a little bit of this, because one of these competitive bidding areas is now in a new part of the district, so obviously I am going to be more actively involved in the competitive bidding issue.

I would say to Dr. O'Grady, when you talk in your testimony--and if this has already been answered, it is okay, I am just trying to clarify it--recent findings from Medicare's competitive bidding demonstrations for durable medical equipment in which Medicare saved 25 percent over what it would have otherwise paid for one particular drug, Albuterol, based on these findings, you argue that Medicare should undertake competitive bidding. When GAO reported in September 2001 that the average widely available discount from AWP in 1999 for the unit dose form of Albuterol was 85 percent, why should Medicare just accept the savings of only 25 percent when discounts of 85 percent are widely available to us?

Dr. O'GRADY. I think that the difference between the 85 and the 25 percent figure are a big question mark. This was not done in Polk County. This was done over in San Antonio. So, what they did is have a number of bidders who went out and negotiated.

Now, back to Mr. Stark's point, it was not a winner-take-all. It was so that the providers could, or in this case the beneficiaries were choosing this for their nebulizers, could pick between a number of different suppliers, and so it might be price that they pick on or it might be service or availability, things like that.

Now, when they negotiated this, they got 25 percent off the Medicare rate and the GAO guys found 80. I made a note to call GAO and ask them what was going on there, what they thought. Perhaps the folks from the Inspector General have a feel for what might explain that kind of a gap.

Mrs. THURMAN. Mr. Jones, you wanted to respond?

Mr. JONES. Albuterol is a good example of a drug that changes dramatically. If you bid, the product can fall in price fairly dramatically. So you can bid here and it falls down here, and your bid is still in effect.

These drugs change often, dropping by 80 percent over a 6-month time period once the patent expires and various competitors come onto the scene and produce it generically, and it is not uncommon for drugs to drop that rapidly. It makes us quickly take notice and try to adjust, and it is one of the issues of how you establish your contracts, can you take advantage of those pricing drops.

I empathize in doing a pilot in trying to get a window in time on the costs of things. It is difficult to do.

Mrs. THURMAN. Mr. Reeb, do you have anything to add to that?

Mr. VITO. Yes, ma'am. I believe that the price of Albuterol that we were able to track over time has dropped significantly, yet the AWP has remained the same. That is why the Medicare program has continued to pay that amount of money, because they base their reimbursement on AWPs, not on the acquisition costs that people were able to get the product for.

Mrs. THURMAN. Dr. Bunn, I also am concerned with what happens to some--we have a lot of larger areas, and then, quite frankly, what I am seeing out there is that there actually are larger cancer centers now than there have been in the past. I am curious of how smaller groups or sole practitioners actually purchase their medicines, and how do we give them the opportunity to participate in any of this? It is a real concern when you have a lot of rural areas around. How do they do it? What happens to them? Do we end up losing some folks and not giving them the care because of this?

Mr. JONES. I have experienced both in rural and urban areas. I have lived most of my life in rural areas, and I have lived the last 30 years in urban areas. We have buying groups that are available to small pharmacies and mom-and-pop stores as well as the mega-chains that have their own buying structure. It is not impossible for smaller pharmacies to aggregate and get better pricing.

Mrs. THURMAN. Ms. Glaun, did you want to add to that? You looked like you were--

Ms. GLAUN. No.

Mrs. THURMAN. Okay. My time is up, but we thank you all and, hopefully, we can all sit down and work some of this out together. Always remember, it is about the patient and us on this end who have to worry about the taxpayers.

Chairman JOHNSON. I thank the panel very much. That was very interesting, Mr. Jones, the varied sizes of buying groups within the same structure. Perhaps we will follow up on that later.

Thank you all very much for your testimony. I appreciate it. I do believe that this is a problem that needs to be addressed, that with adequate data and with a good methodology and with a legal structure that guarantees that we will be able to use the savings to reimburse practice costs, we should be able to save the taxpayers really a dramatic number of dollars and make Medicare more efficient and also a better program to serve our seniors. Thank you.

Finally, I would like to include in the record a statement submitted by Laura Thevenot, Executive Director of the American Society for Therapeutic Radiology and Oncology, Incorporated.

[The statement of Ms. Thevenot follows:]

Statement of Laura Thevenot, Executive Director, American Society for Therapeutic Radiology and Oncology, Inc.

Introduction and Summary

The American Society for Therapeutic Radiology and Oncology, Inc. ("ASTRO") is a professional organization of more than 7,000 members, including physicians (radiation oncologists), radiation scientists (radiobiologists, radiological physicists), radiation therapy technologists and radiation oncology nurses.  These specialists comprise the expert medical team that uses radiation to treat patients with cancer.  Radiation therapy is recognized as one of the most effective methods of treating cancer and other diseases.  Between 50 and 60 percent of cancer patients are treated with radiation at some time during the course of their disease.  ASTRO’s membership represents community cancer centers and hospitals as well as major education and research centers from the U.S. and around the world.  ASTRO publishes the leading scientific journal in radiation oncology in the world.

ASTRO commends the Subcommittee on Health for examining issues related to Medicare payments for those prescription drugs that are currently covered by Medicare.  However, ASTRO is concerned that proposals to revise Medicare's payment methodology for drugs, and to more properly reimburse medical oncologists for the practice expenses[1] involved in the administration of cancer drugs, may have an unintended and adverse impact on continued patient access to high-quality radiation oncology services.  While we agree that there are weaknesses in Medicare's system for reimbursing medical oncology services, we are concerned about the potential unintended consequences of correcting these problems.  We request that Congress include appropriate statutory language to ensure that payment for radiation oncology services and other similarly impacted services are not reduced as a result of efforts to ensure appropriate payment for medical oncology services.

Background

Medicare's method for determining payments for practice expenses for physicians' services is extremely complex.  In addition to the specialty-specific payment "pools" that exist under the Medicare payment system, there is a pool reserved for a group of technical component-only services (i.e. services for which there is no physician work component) provided by a number of different specialties.  Many of the medical oncologists' procedures reside in this so-called "zero work pool" ("ZWP"), along with other capital-intensive procedures for specialties such as radiation oncology, diagnostic radiology, cardiology and others.  In 2002, services in the ZWP experienced a 4-6% cut in practice expense payments due to relatively minor shifts in the mix of services shown in the utilization data.  These cuts, combined with the 5.4% cut in the conversion factor for 2002, equaled a 10% or greater loss in reimbursement for those services.  Since publication of the 2002 Physician Fee Schedule, we have worked with other specialties and with the Centers for Medicare & Medicaid Services ("CMS") to determine why these losses occurred, and to ensure that similar cuts do not occur again in the future.

It is our understanding that Congress may consider changing the way that drugs, including chemotherapy drugs, are reimbursed.  In addition, we understand that the practice expense payment methodology for chemotherapy administration is being examined.  Related to this review is a proposal for modifying the practice expense payment methodology for chemotherapy administration.  This proposal, if adopted, would effectively remove chemotherapy administration from the ZWP.  As previously stated, the mix of services in the pool, which changes based on each year's utilization data, significantly affects the amount of money allocated to the entire pool.  Since chemotherapy administration is among the most frequently performed services in the ZWP, the removal of these services would have a significant, negative impact on the remaining specialties in the pool.

Request for Congressional Assistance

For radiation oncology, technical component services are the foundation of our work.  In addition to physician planning and management, the care we provide to cancer patients is heavily dependent on the skilled services of medical physicists, dosimetrists and radiation therapists, whose codes in the ZWP have been hit especially hard.  The decreased Medicare payments—compounded by decreases from many insurers that base their payments on the Medicare Fee Schedule—will adversely affect our ability to maintain critical staff and to provide therapy using the advanced technology that is now available.  In the long term, without sufficient practice expense reimbursement, future research and development will slow as device manufacturers see that their customers are unable to afford their products.  The net effect of all these cutbacks will be reduced access to quality care by cancer patients.  These problems must not be exacerbated by inadvertent reductions that could result from revisions in payment methodology for medical oncology services.

ASTRO requests that if Congress decides to enact legislation that addresses the practice expense payments for chemotherapy administration, that it do so in a manner that protects the practice expense payments for all medical services remaining in the ZWP, including radiation oncology, from further inappropriate reductions.

[1] Practice expenses include the provision of facilities, equipment, supplies and non-physician personnel.  For radiation oncology, these services include radiation therapy delivery, and services with substantial amounts of resource-intensive physicist time.

Chairman JOHNSON. The hearing is adjourned.

[Whereupon, at 12:49 p.m., the hearing was adjourned.]
[Submissions for the record follow:]

American Association for Homecare, statement