COMPETITIVE PROBLEMS IN THE DRUG INDUSTRY (Present Status of Competition in the Pharmaceutical Industry) WEDNESDAY, MARCH 19, 1975 U.S. SENATE, SUBCOMMITTEE ON MONOPOLY OF THE SELECT COMMITTEE ON SMALL BUSINESS, Washington, D.C. The subcommittee met, pursuant to notice, at 10:10 a.m., in room 318, Russell Senate Office Building, Senator Gaylord Nelson (chairman of the full committee) presiding. Present: Senators Nelson, McIntyre, Haskell, Hathaway, Javits, Beall, and Brock. Also present: Benjamin Gordon, staff economist, and Kay Klatt, research assistant. The CHAIRMAN. Our first witness this morning will be Mr. Caspar Weinberger, Secretary of Health, Education, and Welfare, and he is accompanied by Dr. Alexander Schmidt, Commissioner of the Food and Drug Administration; Dr. Theodore Cooper, Acting Assistant Secretary for Health; and Mr. Stephen Kurzman, Assistant Secretary for Legislation. Mr. Secretary, the committee is very pleased to have you here this morning. I appreciate your taking the time from your busy schedule to appear. The Monopoly Subcommittee of the Senate Small Business Committee is today resuming its hearings on Federal expenditures on pharmaceuticals. This subcommittee has for many years been holding hearings on the efficiency, economy, and rationality of the Federal agencies and departments in the procurement of drugs, as well as reimbursement under various Government programs. We are particularly interested in finding ways in which competition can be promoted for the benefit of small business and the public and the cost of drugs under medicare and medicaid to Government can be reduced. On December 19, 1973, the Secretary of HEW announced that reimbursement for drugs under medicare and medicaid, which at present amounts to $2.5 billion, will be limited to the lowest cost at which the drug is generally available unless there is a demonstrable difference in therapeutic effect. It was estimated that this policy could result in savings of 5 to 8 percent to the taxpayer. Since about $2.5 billion is spent annually on these two programs, it appears that annual savings to the taxpayers could amount to as much as $200 (11637) million, although initially the savings will be around $89 million. In addition, this policy would have a beneficial impact on drug pricing throughout the country. In November 1974 the Department of Health, Education, and Welfare published its proposed Maximum Allowable Cost regulations in the Federal Register, which also provided for a 60-day period of comments from the public, a period later extended for 30 days. These comments bring to mind the book written some years ago by Richard Harris which described the efforts of the late Senator Estes Kefauver to bring order and reason into the pharmaceutical field. Mr. Harris' book was entitled "The Real Voice", a reference to a statement of President Woodrow Wilson to the effect that it is not often that the real voice of the people is heard clearly in Washington, D.C. This observation is highly relevant in considering most of the responses which were received by the Department of HEW in response to the publication of the Maximum Allowable Cost regulations in the Federal Register. While such comments are generally expected to reflect the real voice of the people, an analysis of the more than 2.300 responses by our subcommittee staff indicates that, at least in this instance, that expectation was not realized. There is little doubt that most of these resopnses do not represent the real voice of the people but constitute a well orchestrated, highly organized campaign by the drug industry to abort the program before it begins. The most obvious examples were hundreds of form letters, which were prepared by various organizations to support their own position or were inspired by the industries' detail men, and were sent in by individuals, chiefly medical practitioners and pharmacists, as if they were an original contribution. This transparent tactic is, fortunately, easily recognized as not representing the independent judgment of an individual. While there were several such form letters, one in particular is worth mentioning. It seems from an organization known as the American Association of Physicians and Surgeons. This organization was established by a group of doctors who left the American Medical Association, which, they claimed, was too liberal. Hundreds of copies of this form letter were received from all over the United States. Yet when some of the persons who had sent this form letter were contacted to discuss its content, they were unfamiliar with the substance of the letter and in some instances denied any knowledge of it. Some claimed that it was an original letter, written by them, and were crest fallen to find that their "original letter" had been received in identical form, word for word and letter for letter, from hundreds of other persons. Quite clearly, although the submission of such a form letter may significantly, in general, opposition to the proposed rules, it does not represent an independent judgment of the issues on the part of the sender and cannot be given much weight. Many other form letters were received, and are open to the same objections. In some instances when form letters were not used, the results were more interesting, though no less nonobjective. For example, a pediatric surgeon from Fort Worth cautioned: "Your proposed rule to fix drug prices and force substitution of drugs is another example of totalitarian bureaucracy but there will be a day of reckoning" (letter No. 1325). Another surgeon from a small town in Florida noted that "the program is designed to save $88.8 million but informed sources estimate that implementing the program will cost $275 million. So obviously, it is not to save money but to further socialism" (letter No. 1618). Another citizen of uncertain address and occupation made the same point and added: "If you have read the Communist Manifesto, you would know that socialism is just a nice name for communism" (letter No. 1729). These letters far outnumbered those which favored the MAC proposals. Many letters were received stating the positions of various organizations. The positions of the organizations were quite predictable: State and local medical and pharmaceutical organizations were uniformly opposed, while consumer organizations were unformily in favor of, the proposed regulations. The purpose of thes hearings during the next 3 days, therefore, is to present for the benefit of the Congress and the general public an accurate description of HEW's plan to save the taxpayers money as well as the point of view of some interested parties. It is unfortunate that the American Medical Association decided at almost the last moment not to send a representative to present its point of view. In addition, the president of the Ayerst Co., whose detail men labored hard to stimulate and encourage opposition to HEW's plan, has informed us that he has decided to go abroad and will be unable to come. Mr. Secretary, your statement will be entered in full in the record. We are happy to have you present it however you desire. You may elaborate on it, extemporize from it, however you wish. For purposes of the record, please identify your associates so that the comments they make will be in the correct place under the correct identification in the record. Mr. Secretary? STATEMENT OF HON. CASPAR W. WEINBERGER, SECRETARY OF HEALTH, EDUCATION, AND WELFARE, ACCOMPANIED BY STEPHEN KURZMAN, ASSISTANT SECRETARY FOR LEGISLATION; THEODORE COOPER, M.D., ACTING ASSISTANT SECRETARY FOR HEALTH; ALEXANDER M. SCHMIDT, COMMISSIONER, FOOD AND DRUG ADMINISTRATION; DR. KEITH WEIKEL, COMMISSIONER, MEDICAL SERVICES ADMINISTRATION, SOCIAL AND REHABILITATION SERVICE; DR. MARK NOVITCH, DEPUTY ASSOCIATE COMMISSIONER FOR MEDICAL AFFAIRS, FOOD AND DRUG ADMINISTRATION; DR. J. RICHARD CROUT, DIRECTOR, BUREAU OF DRUGS, FOOD AND DRUG ADMINISTRATION; AND VINCENT R. GARDNER, CHIEF, DRUG STUDIES BRANCH, OFFICE OF RESEARCH AND STATISTICS, SOCIAL SECURITY ADMINISTRATION Secretary WEINBERGER. Mr. Chairman and members of the committee, I appreciate very much the opportunity to appear before you and I am delighted to be accompanied by my associates. 1 See prepared statement, page 11936. You have identified Dr. Schmidt, Commissioner of the Food and Drug Administration: Stephen Kurzman, Assistant Secretary for Legislation; and Dr. Cooper, Acting Assistant Secretary for Health. We will be glad to proceed as you suggested. I will present a major portion of the statement, but I will probably make some additions and subtractions, so I appreciate the sugestion that it will be printed in full in the record. This is a very complex issue, as you know, and we have been concerned with drug prices, as indeed this committee has been, since the inception of medicare and medicaid nearly 10 years ago. We have no doubt that the public interest and commonsense dictate that we institute a program based on the substantial economic and scientific information we have in hand which is aimed at reducing the cost of drug reimbursement without sacrificing the quality of health care. The Maximum Allowable Cost program-or MAC-is well along toward its implementation. I would like to mention just a few things as background. In 1970, the Department and the States spent $1.2 billion to pay for drugs under these two programs-medicare and medicaid. In the current fiscal year, as you pointed out Mr. Chairman, $2.5 billion will be spent, an increase of more than 100 percent in the last 5 years. This increase is substantially, though not entirely, the result of increased participation in these health programs. More people are being served; the caseload is going up. There has been some inflation in drug prices, though not nearly as great as in other elements of health care, and this, coupled with the trend toward more costly drugs replacing less expensive items, and increasing quantities being prescribed, has all brought about this enormous increase in cost. Now the rationals for the MAC policy does not rest primarily on the fact that the Federal Government and the States are spending more now than we did in former years. The rationale was just as good then as it is now. The policy rests on the recognition that substantial savings of public funds could be realized through increased use of lower cost drugs that yield the same clinical results as their more costly counterparts. In other words, there is no reason for anyone-public agency or private citizen-to pay more than the lowest cost at which a quality drug product can be bought. We do not have anything to do with what private citizens will be doing, but we do have responsibility for the public programs, and that is behind the recommendation of this policy. The goal is very simple, but it is difficult to reach it equitably, safely, and prudently, and that is one of the things that has taken as much time as it has. A key issue, of course, is quality. If a drug reimbursement program is to limit costs by encouraging the use of drugs at the lower rather than the higher end of the price scale, then we must be certain that the low-cost drugs will have the same clinical results as their more costly counterparts. Despite the increasing availability of low cost equivalent drug products in the American marketplace, and despite the wide variation. in prices of these products, most drugs dispensed tend to be the most costly available, and identical products of equal quality and lower cost seem to be shunned. To the extent that this situation results from a lack of price information available to prescribors, it can be remedied by giving doctors information that will enable them to consider price as well as quality. Second, we find that the present medicaid reimbursement systems. do not accurately reflect the two components that make up the retail price of a drug-the pharmacist's cost of acquiring the drug wholesale and his cost of dispensing the drug. Now this does not mean that the Nation's pharmacists are at fault, and I do not have any intention this morning of trying to fix blame. If any blame is to be fixed on anyone The CHAIRMAN. May I ask a question, Mr. Secretary? The CHAIRMAN. You state at the top of page 4 that: "despite the wide variation in prices of these products, most drugs dispensed tend to be the most costly available and identical products of equal quality and lower cost tend to be shunned." As you know, a recent study of the Council on Economic Priorities showed that the most expensive brands of antibiotics are prescribed most frequently and have the greatest sales volume and are used to fill the majority of generically written prescriptions. In many cases it is common that one firm manufactures an antibiotic for another firm which sells it at widely different prices, both under different brand names and generically. For example and this is just an example to comment on, although there are a large number of them-the Mylan Laboratories manufactures erythromycin for Smith, Kline & French, for Pfizer, ParkeDavis, and Squibb. And the published prices vary from $10.15 to $15.87 for identical packages of 100-, 250-milligram tablets. The same firm also manufactures for Sherry Pharmaceuticals, which sells erythromycin not for $10.15 or $15.87, but for $5.70. Now, how would the MAC regulations meet this kind of situation? Secretary WEINBERGER. Well, the MAC Board, which we will mention in the course of the testimony, would determine the lowest price at which erythromycin was generally available to pharmacists throughout the country. Then we would have a determination as to whether or not the lowest available price had the same bioequivalency, bioavailability; and if there were no problems of that kind, then the price that the MAC Board set would be the lowest price generally available to pharmacists, and that would be the limit on the government reimbursement for orders of that particular drug. The CHAIRMAN. Well, now in this kind of a case, it is the same firm manufacturing and supplying the same drug-erythromycinto half a dozen different companies. When you say the lowest price at which it is generally available, in this kind of a case where it is the same company, the same drug, no matter in what small amount, it might be sold at $5.70-would that be the standard? Secretary WEINBERGER. Yes. It is not the volume of sales; it is the lowest price of the drug that is generally available throughout the country to pharmacists. We have supply problems in line with things of that kind, so that when you establish that, if that turns out to be $5.70-as it very well could in this case-the next question |