Two years ago we conducted a manual survey and we found approximately 2 percent of our recipients were going to more than one physician and obtaining the same drug. This was a form of abuse. Overutilization, we found in some cases, recipients receiving three or four tranquilizers, drugs which were contraindicated. The bulk of overutilization and abuse was due to the part of the recipient, not on the part of the physician or the pharmacist.

Our first attempt was to communicate through the pharmacist, and it was not as successful in that the pharmacist would write or call back and explain that the doctor wrote for that quantity and I am not aware they are going to another drugstore and what do you want me to do about it. So we concentrated on the physician and through our committee we obtain all the necessary information and obtain a social summary and the committee fills out a form or dictates what should be done, and we write to the physician. We have received wonderful success. The physician writes back and points out he was not aware of the problem and he indicates corrective action will be taken. In a few cases some of the physicians have resisted cooperation. We have a contract with the Colorado Foundation for Medical Care and we refer such cases for peer review to the Colorado Foundation for Medical Care who will write to the physician and take corrective action.

So I feel the program is very successful.

Mr. GORDON. You have a drug utilization review system?

Mr. MARGREITER. Yes.

Mr. GORDON. Does California have drug utilization review system at all?

Mr. MICHELOTTI. Only a limited basis. There are a few pilot study areas, one conducted by Paid Prescriptions in four counties and another project with the San Joaquin Foundation for Medical Care, which is involved in utilization review.

In addition to that, the State Department has an investigative unit that is charged with investigation of over utilization and one thing and another.

But to be very honest, because there are so many people involved, beneficiaries and providers, it is difficult for the State unit to pursue with any degree of efficiency those cases of overutilization of misutilization of drugs when you compare them to the type of peer review and utilization control that Mr. Margreiter is talking about, and that we experienced on limited basis.

Mr. GORDON. I just have a couple of questions to ask you.
Would you turn to page 10 of your statement.

You give two figures of savings, 1,092,000, and then 461,900 for a half year. What accounts for the difference in these two figures? How much was actually saved by the MAC plan and how much would have been spent on the same drugs had the MAC plan not be in effect?

Mr. MARGREITER. Well, in evaluating our MAC program's cost effectiveness, you can approach it from different angles. What we did in one case since we implemented the MAC plan on July 1, 1972, we took those drug products which were more expensive than our MAC price and compared the expenditures the first 6 months of 1972 with the later 6 months of 1972. We looked at the same generic

products. During the 6 months period evaluated we found that our expenditures were $461,900 less for those products than during the latter 6 months.

Now, you cannot say that have that much savings, because during that period there were some changes in policy. There were other products added, other generic products that would come on the market. The prices would automatically be lowered and in some cases they would be raised.

About that time we were activating our utilization review system, beefing it up so it was more effective and sending more letters to doctors so they would prescribe fewer prescriptions. So we cannot say that we saved that much money entirely due to the MAC policy.

There are other variables, such as possibly a physician would be writing for two drugs when he could not get that one drug, maybe in some instances the more expensive generic product that he could not get, forced him to write for the lesser expensive one, maybe something happened and the patient would come back and he would have to represcribe something else.

It is very difficult to say this is how many dollars and cents you have saved. But we are able to look at the savings from a budget standpoint and determine how much time we had been spending annually per recipient. Prior to July 1, 1972, we were spending approximately $53.72 per recipient. Now, our recipient population has varied from 120,000 to 167,000, but roughly taking 150.000 recipients and looking at what happened after 6 months of experience, the average dollar amount paid on an annual basis for a recipient was $46.44, a difference of $7.28, on a 12-month period. If you assume that your drug costs dropped $7.28 for every recipient and your average population is 150.000 then you have approximately 1 million in cost savings.

Had we not implemented the program you can assume our program would have gone up that much more.

Mr. GORDON. What percentage of savings do you actually achieve? Mr. MARGREITER. Roughly 14 percent.

Mr. GORDON. How much?

Mr. MARGREITER. Fourteen percent.

Mr. GORDON. What is your estimate for the administrative costs, in administering the program which enabled you to save 14 percent? Mr. MARGREITER. The administrative costs were really insignificant because of several factors. Our staff was available, the medical advisory council composed of the pharmacy subcommittee composed of physicians and pharmacists were donating their time free. The Colorado pharmacists and doctors on the drug formulary committee were eager to participate in the program. There were no additional staff added to our program.

There were some charges, naturally. When we closed our formulary there were printing costs involved, postage costs involved, computer costs. But we felt the costs were very minimal at that time.

Mr. GORDON. Thank you very much, gentlemen, on behalf of the chairman.

I want to thank you again, and I appreciate your coming. The hearings are recessed subject to the call of the Chair. [Whereupon at 11:40 a.m., the subcommittee recessed subject to the call of the Chair.]

COMPETITIVE PROBLEMS IN THE DRUG INDUSTRY

(Present Status of Competition in the Pharmaceutical Industry)

THURSDAY, APRIL 24, 1975

U.S. SENATE,

SUBCOMMITTEE ON MONOPOLY OF THE

SELECT COMMITTEE ON SMALL BUSINESS,

Washington, D.C.

The subcommittee met, pursuant to notice, at 10:05 a.m., in room 1318, Dirksen Senate Office Building, Senator Gaylord Nelson [chairman of the full committee] presiding.

Present: Senator Nelson.

Also present: Benjamin Gordon, staff economist, and Kay Klatt, research assistant.

The CHAIRMAN. Today and tomorrow Monopoly Subcommittee of the Senate Small Business Committee will hear testimony on the OMB and GAO reports, and what is being done to fulfill the recommendations with respect to the establishment of a single, unified drug purchase and management quality assurance program.

Our witnesses this morning are Dr. Alexander Schmidt, Commissioner of the Food and Drug Administration, Mr. Hugh Witt, the Administration of the Federal Procurement Policy, Office of Management and Budget, Mr. Ronald Zechman, Associate Administrator for Federal Management Policy, General Services Administration, and Gregory Ahart, Director of Manpower and Welfare Division of the General Accounting Office.

I understand that Mr. Hugh Witt has to appear before the Appropriations Committee later this morning, so we will take his testimony out of the order listed here and hear him first.

Mr. Witt, you may present your statement however, you desire, and it will be printed in full in the record. Please proceed.

STATEMENT OF HUGH E. WITT, ADMINISTRATOR FOR FEDERAL PROCUREMENT POLICY, OFFICE OF MANAGEMENT AND BUDGET, ACCOMPANIED BY LOUIS SORETT, MANAGEMENT ANALYST, GENERAL SERVICES ADMINISTRATION

Mr. WITT. Mr. Chairman and members of the subcommittee, I welcome this opportunity to appear before you today to discuss the steps we are taking to improve the procurement and management of drugs and medical items which are required to support the needs of

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the Federal Government. Within the Office of Management and Budget these problem areas are among my responsibilities as Administrator for Federal Procurement Policy. My office was established in OMB by the Office of Federal Procurement Policy Act, Public Law 93-400, enacted on August 30, 1974.

Over the years there has been a growing awareness of the need for greater coordination, economy, and efficiency in the procedures, processes, and systems employed by the various agencies in the executive branch whose responsibilities include the acquisition and supply of drugs and medical items. In 1971, the Office of Management and Budget established an interagency group to study military and civil agency procurements and distribution of these commodities and to recommend the optimum system or systems for their effective and economical government wide support.

The interagency effort was concluded early in 1974. I understand, Mr. Chairman, that copies of the study group report entitled, "Study of an Optimum Procurement and Distribution System for Medical and Nonperishable Subsistence Items" have been provided for the information of the subcommittee.' The report made four basic recommendations, which I will summarize as follows:

First, that a single system should be established for governmentwide management of drugs, medical devices, and nonperishable subsistence.

Second, that the Department of Defense and the Veterans' Administration should be assigned on a nonduplicative basis, purchasing responsibility for these items and that related purchasing functions performed in the General Services Administration and the Department of Health, Education, and Welfare should be transferred to the Department of Defense and the Veterans' Administration.

Third, that the General Services Administration should assume lead responsibility for developing the system through an interagency implementing committee chaired by the General Services Administration with membership from the Department of Defense, and the Veterans' Administration.

Fourth, that the Food and Drug Administration in the Department of Health. Education, and Welfare should assume responsibility for the quality assurance for all agency procurement of drugs and medical devices.

The full recommendations can be found on pages 18, 19, and 20 of the Office of Management and Budget study.

The report and recommendations were endorsed by the agencies and approved by the Director of the Office of Management and Budget by letter of June 4, 1974, to the heads of the four agencies concerned. In that letter, which also assigned implementing responsibilities, the Director emphasized that effective implementation of the single system recommendation should ultimately assure timely deliveries of required supplies by methods which result in the least total cost to the Federal Government.

Responsibility for implementing the first three recommendations. was assigned to an interagency committee comprised of representatives of the Department of Defense, the Department of Health, Edu

1 See information beginning at page 12098.

cation, and Welfare, and Veterans' Administration, and the General Services Administraton with lead responsibility to be carried forward by the General Services Administration's Office of Federal Management Policy.

Under the leadership of GSA Associate Administrator Ronald Zechman, an Interagency Medical/Nonperishable Subsistence Supply Management Committee was established to implement the study recommendations.

Responsibility for developing an implementation plan for the fourth recommendation, to consolidate under the Food and Drug Administration a quality assurance program for all Federal procurement of drugs and medical items, was assigned to the Secretary of Health, Education, and Welfare. Substantial progress has been made toward achieving the objectives that recommendation, Mr. Chairman, and a full report will be given the Subcommittee by the Food and Drug Administration's Commissioner Schmidt.

At this time, Mr. Chairman, I would like to ask that Mr. Zechman be permitted to describe for the subcommittee the progress being made in the executive branch to carry out the first three recom.mendations of the Office of Management and Budget study. At the conclusion of Mr. Zechman's statement, we will be happy to respond to any questions that members of the subcommittee may have. The CHAIRMAN. Go ahead, Mr. Zechman.

STATEMENT OF RONALD E. ZECHMAN, ASSOCIATE ADMINISTRATOR, OFFICE OF FEDERAL MANAGEMENT POLICY, GENERAL SERVICES ADMINISTRATION

Mr. ZECHMAN. Thank you, Mr. Chairman.

Our appearance here today acknowledges your concern for the problems that exist with the purchase and management of drugs in the government today. We are here to explain to you and members of the subcommittee the system which we are developing to correct the existing inequities.

Thank you for the opportunity to appear before you and describe the organization and operation of the Interagency Medical Nonperishable Subsistence Supply Management Committee. This committee is in the process of implementing the procurement and supply aspects of the issues stated by Mr. Witt.

The committee was established in response to a request by the Director of OMB to the Administrator of General Services. The responsibility to form the committee was then delegated by Administrator Sampson to me. Great care was taken to staff the committee with experienced personnel whose level was high enough to have easy access to the decisionmakers and their agencies, but at the same time close enough to agency operations to know their practical problems.

To chair this committee, I selected a manafiement analyst from my office, Mr. Louis Sorett, who is sitting to my right, with broad experience in the commercial hospital and laboratory supply business. The Department of Defense member of the committee is the staff director of the Supply Management Policy Director, Office of the Assistant Secretary of Defense for Installations and Logistics.