clear difference between these two groups of manufacturers, and we find no basis from the Food and Drug Administration's experiences with its product surveillance program to believe that the currently ongoing activities of the Government need any substantial change before this MAC program can be implemented.

Obviously, we will search for improvements. We will make them whenever we can, whenever they seem to be necessary, but we are confident that the basic soundness of our approach to quality assurance is there and there will be fundamental success of its current operation.

The recall list shows that mistakes do occur, and it is important that we have a mechanism for identifying those products rapidly. The Food and Drug Administration in 1970 established a Product Defect Reporting System to accomplish this. It relies on practicing pharmacists and nurses in hospitals, pharmacists in community pharmacies to report such things as deformed tablets, leaky vials, or cloudy solutions to the United States Pharmacopeia and the FDA. We have had over 13,000 such reports and these reports have precipitated recalls and plant inspections. About 75 percent of these reports have concerned products of well-known manufacturers. Since well-known manufacturers hold the major share of the market, that would be an expected percentage. The data does not reveal any clear difference between the various segments of th prscription drug industry.

New regulations relating to bioequivalency have been promised for some time by the Food and Drug Administration. It is a very complex matter. We want to try and be as right as we can, and we have delayed publication to provide for full consideration of all of these products. The regulations will be published in the near future, probably the end of April or May as a proposal, and they will definitely appear before the MAC regulations are published as a final order. Specific procedures will be proposed for the establishment of the bioequivalence requirements for individual drugs whenever there is evidence that products made by the manufacturers are not bioequivalent, or where there is any clear potential for bioinequivalence. The requirement, once established, will require testing of absorption in humans, in vitro testing of the dissolution rate of each batch by the manufacturer, and the approval of an abbreviated New Drug Application as a condition of marketing.

On old drug monographs, we have the "generally recognized as safe and effective," and that is now known, as you know, as generally "old drugs," and that includes most of the over-the-counter preparations and most older prescription drugs.

The law has always permitted any registered manufacturer to market those well-established old drugs without obtaining any preclearance from FDA. FDA has felt for some time it was necessary to develop a monograph system for prescription drugs in the old. drug category, and the major regulations relating to old drug monographs will be published as proposals later this year.

In anticipation of this, we will announce that certain well-established prescription drugs which do not have bioequivalence or special manufacturing problems in the future will be considered as old

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drugs that may be marketed without preclearance provided they meet certain conditions. Some have said this will result in less effective Food and Drug Administration surveillance.

On the contrary, we think it will improve the conditions for the marketing of these drugs. The listing will trigger appropriate plant inspections, and that I think will mean again that we will have more frequent inspections in many of the firms. All such products must comply with the compendial standards and be produced in conformity with current good manufacturing practices and enforcement mechanisms to insure these are already in operation.

Manufacturers of these drugs will-that is with any bioequivalence requirements or special manufacturers problems-be required to obtain marketing preclearance through the submission of the abbreviated New Drug Applications.

Mr. GORDON. May I interrupt at this point? How is it determined that a drug has a bioequivalency problem? Would it be determined on the basis of a scientific study or individual complaints?

Secretary WEINBERGER. No, scientific studies. Dr. Schmidt may want to elaborate on that.

Dr. SCHMIDT. In general, I think that certain principles can be invoked that would allow one to anticipate where equivalency problems may arise. We do have some experience that has resulted from clincal experience that shows that certain classes of compounds, those with solubility problems, for example, may have problems. So I think we know enough to anticipate some problems.

We have clinical experience that would identify some problems. Then also drugs that you have identified before, those with a narrow therapeutic range, those that are terribly important, there is just. one drug to treat a sort of disease that kind of drug we would pay particular attention to.

All in all I think that we would very well be able to establish that list of drugs which should have as a requirement a prior marketing bioavailability study.

Secretary WEINBERGER. We now have over 1,100 employees working in drug quality with a public investment of about $25 million, and our analysis of industry performance in the recent past fails to show any systematic problem with any particular segment of the industry. Drug standards and Good Manufacturing Standards are increasing their specificity and their scientific excellence. Enforcement activitiese are becoming more stringent. Policies of the agency are becomng more demandng to insure single-standard performance, and I am reassured and I want to reassure you that the quality of drugs in this country is consistently high and will continue to remain so under current Departmental practices.

Now, with respect to the MAC proposal specifically, Mr. Chairman- we have three parts to it. The first is multiple source drugs, and it would, as I said, limit the Federal payment or cost-sharing to the lowest cost as which a drug is widely and consistently available to pharmacists throughout the United States. This would be termed the "maximum allowable cost" or the MAC for that drug. That would be established by a five-member Pharmaceutical Reimbursement Board which would be composed of Departmental officials re

sible for administerng our drug benefit program. It would be chaired by our Assistant Secretary for Health. The Board would be assisted by a nine-member advisory committee representing the professions of pharmacy and medicine, the drug industry, and consumers. No MAC would be proposed for any drug for which there is a pending or anticipated regulatory activity, including the establishment of the bioavailability requirement, that would warrant a delay in establishing a MAC for that drug. No MAC would be made final before interested persons had an opportunity to submit written comments and request a hearing, and each, of course, would be reviewed on a regular basis.

I want to emphasize that the MAC would not be set at the absolute lowest cost as which a drug is marketed; it would be the lowest cost at which the drug is generally available; that is the price at which pharmacists throughout the country can be assured of a continuing supply of that drug.

To assure access by physicians to any needed drug, the MAC limit would be waived when a prescriber certified in writing the necessity of a higher price product.

And to assure that the MAC ceiling does not also become its floor, the pharmacist would be entitled to retain 25 percent of any difference between the actual cost of the product dispensed and the MAC limit on that drug.

We estimate that Federal and State savings during the first full year of this program would be about $49 million.

With respect to acquisition costs and the dispensing fees, the second major proposition is to change the way in which acquisition costs and dispensing fees are calculated. This would establish in effect a cost-plus fee basis as the basis of reimbursement to pharmacists, and the majority of States do that now, so it would not be any great fundamental change, but it would define actual acquisition cost as that less discounts and promotional allowances except of course for the usual discount for cash payment.

Most States now pay pharmacists on the basis of a so-called average wholesale price, and we believe that tends to overstate actual costs by about 15 to 18 percent. We do not underestimate the difficulty the States would have or pharmacists in arriving at this actual acquisition cost, and we are exploring various means of trying to estimate it, but we come much closer to the true cost than the so-called current published prices. We estimate additional savings of up to $40 million from this provision, so you would have about $90 million the first year in savings with this proposal.

Finally, the point I was mentioning to Senator Javits a moment ago, the compilation and distribution of comparative price information to physicians and pharmacists and on request to interested consumers while physicians have a great deal of clinical information about drugs, we think they have little or no information about the relative prices of different drugs having the same therapeutic indications. The price information would be presented by therapeutic category and would include both multiple and single source drugs. They have had a somewhat similar program in Canada for some time with results that we understand are good.

Now, you have requested that we characterize the public response to our proposal. During the 90-day comment period that closed on February 15, we had about 2.300 responses to the proposal. Most of them were from individual physicians or pharmacists. Most of them were opposed to the proposal or some part of it.

Surprisingly, few letters were received from consumers who would stand to benefit from the increased prescribing of lower cost alternatives. Interestingly, the majority of favorable consumer letters we did receive came from Dayton, Ohio, an area where the proposal received considerable press attention.

The letters from pharmacists make clear the difficulties that they would have in figuring actual acquisition cost and their concern about downward revisions in their drug product reimbursement base without compensating increases in dispensing fees, and we certainly recognize the need for equity in dispensing fees regardless of whether we have the MAC policy or not.

In reviewing these comments with care, we will certainly take them into consideration in the final version. A number of pharmacists and doctors expressed concern about the quality of lower cost alternatives and the possibility that they could be held legally liable for an adverse result of therapy with a lower cost drug. Well, we have some difficulty in understanding how a doctor could be held liable for prescribing according to official terminology instead of trade names or that a pharmacist could be held liable for dispensing an officially named drug entity in accordance with the prescriber's valid instructions.

The primary responsibility for maintaining quality necessarily lies with the manufacturers. It is our mission to see that the manufacturers are fulfilling that responsibility.

The CHAIRMAN. May I interrupt you, Mr. Secretary?
Secretary WEINBERGER. Certainly.

The CHAIRMAN. I intend to put in the record some copies of letters, form letters that were promoted around the country, but there is one here that we have that is addressed to Mr. William L. Davis,1 the President of the Ayerst Laboratories, New York, and it is signed by a pharmacist. That letter reads as follows:

DEAR PRESIDENT DAVIS: Recently your local representative, Patrick T. Kelley, called on me to enlist my personal support for your company's opposition to the proposal HEW MAC regulations. Mr. Kelley explained that Ayerst had selected 200 of their key representatives, each of whom is to solicit letters of opposition from five pharmacists.

He also explained that you would personally present the 1000 letters to Secretary Weinberger as evidence of the opinion of the nation's pharmacists.

I am aware that yours is not the only company seeking to organize pharmacists' opposition to the MAC regulations. I think this tactic should be effective because obviously sales representatives have within their means the incentives needed to persuade individual pharmacists to support the campaign.

In response to Mr. Kelley's request, I am pleased to provide you with this letter. I am sure you will want to include it with the letters you present to Secretary Weinberger.

As Mr. Kelley will confirm, I spent better than an hour listening to his presentation. Fortunately, I made my own analysis of the HEW MAC policy against which I was able to evaluate the Ayerst arguments. I want you to know that having done my own thinking on the subject, I have no intention of lending my support to the industry's opposition. As far as this practicing pharmacist is concerned, HEW is moving in exactly the right direction.

1 See letter to William L. Davis, page 11834.

Further, I would regard it as a professional tragedy if pharmacists once again bailed out the industry to the detriment of the public and their own profession. I simply read that into the record because it is quite obvious that there was an organized campaign to produce letters to you indicating opposition.

Secretary WEINBERGER. That is all the more welcome because of its rarity. Usually the letters we get are of a different character. Thank you, Mr. Chairman.

A number of physicians have also raised the point that they feel that regulations would interfere in the practice of medicine and would create a second, or lower class of medicine for beneficiaries of public programs, and obviously we disagree very strongly on both points. The proposed regulations make clear that any physician will be able to order a drug priced above the MAC limit simply by certifying ts medical necessity. The present language requires the prescriber to certify that the requested brand "is the only brand which can be tolerated or will be effective" for a given patient. Many physicians have indicated that this is impossible without testing all of the other brands. We believe that this objection has some merit, and we are considering some alternative language. For one thing, we do the testing, and I have the responsibility for it, and if we do run into problems, we would obviously not put those drugs on the list to which this regulation would be applicable.

The argument that lower cost implies second-class care is clearly wrong. It runs directly wrong. It runs directly counter to the welldefined trend toward increased generic prescribing by physicians to the increased participation in the generic drug market by major brand name firms and to the broad substitution authorities granted hospital staffs and hospital pharmacists and I might add, I think also to the repeal of the antisubstitution laws in at least two States recently.

Recent study by the American Journal of Hospital Pharmacy showed that over two-thirds of the brands dispensed in surveyed hospitals were selected by pharmacists, not physicians, in any event. Interestingly, relative few adverse comments about the quality of care and questions of liability came from such States as California, Colorado, and Tennessee where similar programs are currently in effect.

A major concern of industry is that the annual reduction of Federal and State reimbursement for drug costs that we project in the neighborhood of $49 million will result in a lowering of investment in research and new drug development.

This would disturb me very much if I thought it were correct, but we think it is hard to accept when it is applied to an industry that has spent nearly $1 billion in such research and a near equal amount in marketing and promotional efforts, and I very much hope that and believe that dollars spent on research will continue.

Remarkable things have been developed by the private drug industry by this research, and we want it to continue, and we do not believe that the new regulation really should interfere with it.

Some critics of the proposal are saying that the administrative costs might exceed the savings realized. This argument was raised when we first made the plan public some months ago, and it is strongly reiterated in a number of the comments we received among the 2,300.