this trading area. Most of these community drugstores are located within 2 miles from the Underwood Hospital Pharmacy. I worked at the Underwood Hospital Pharmacy for 2 months following graduation from pharmacy school.

The Underwood Hospital has built a medical office building on its grounds, which was completed in 1966. Private nonhospitalized patients of these physicians are urged to use the hospital pharmacy, and the Underwood Hospital Pharmacy has sold prescription drugs to other people off the street for a number of years. This pharmacy is located in a wing between the medical building and the main hospital so that people off the street need not even go into the hospital proper to buy from the pharmacy. This practice of selling to people off the street has continued at least until a couple of weeks ago when I understand they may have turned some people away, maybe because of these committee hearings. In any event, the pharmacies in the area are in direct competition with the Underwood Hospital Pharmacy for this class of prescription buyers in Woodbury. Incidentally, I also understand that around 40 percent of the physicians with offices in the city of Woodbury have their offices at the Underwood Hospital, which means we are discussing a substantial volume of prescription drug business in Woodbury.

To the best of my knowledge, the Underwood Hospital generally buys prescription drugs from many different drug manufacturers at better prices than competing community pharmacies in the trading area can buy, without regard to the nature of resale to hospitalized patients versus others. They fill prescriptions for hospitalized and nonhospitalized people from the same stock. From confidential sources I consider reliable, I have gathered the following examples:

1. The best price of Wyeth's Equanil sold directly to retail druggists in Woodbury is $58 per thousand on a direct basis. I understand Underwood Hospital Pharmacy buys direct at $17 per thousand.

2. The generic product ampicillin, sold by Bristol Laboratories, Wyeth, and Ayerst Laboratories is priced to Woodbury drugstores at around $27 or $28 per hundred on a direct basis. Underwood Hospital Pharmacy recently secured a successful bid for ampicillin from Ayerst at $14.25 per hundred on a direct basis.

3. Merck, Sharp & Dohme's Diruil, a fast-moving prescription drug product (like Ciba's Esidrex), sells direct to retail druggists in Woodbury at $48.45 per thousand, and around $55 per thousand from the drug wholesaler. I understand that Underwood Pharmacy buys at around $30 or $35 per thousand.

Turning now to the compartive retail prescription prices, which the consumer pays in Woodbury, I understand the Underwood Hospital prices are generally the lowest in this trading area. Even so, the Underwood Hospital Pharmacy operates at a profit. The Underwood Hospital Pharmacy, of course, has a smaller prescription drug inventory than the average retail drugstore because of its formulary system. This of course keeps costs down.

Mr. DINGELL. Mr. Scully, counsel has a question he would like to ask you at this point.

Mr. POTVIN. First of all, sir, when you say the Underwood Hospital has built a medical office building, I gather that you mean that doctors have their offices there-that these would be their only offices and that they conduct their entire practice from these offices.

Mr. SCULLY. Yes.

These doctors were housed in the old hospital, and they just built a new medical arts building to house them, and more doctors also.

Mr. POTVIN. Presumably the greater portion of their patients at any given time would not be hospitalized.

Mr. SCULLY. True.

Mr. POTVIN. With respect to the formulary system, do you know whether any distinction is made between those patients who are either inpatients or outpatients in the narrower sense of the word and those patients who are simply there to see the doctor as part of his private practice? In other words, if my wife were to drive in to see her physician, who happened to have an office there, and he wrote her a prescription which she took to that hospital pharmacy, would it be subject to the formulary system?

Mr. SCULLY. You see, the formulary system is just mainly for the hospital. They will take one brand of a drug, like tetracycline. They will carry one brand of it. But that is to keep their inventory down on drugs.

Mr. POTVIN. Yes, sir.

Mr. SCULLY. Not their total dollar volume of drugs, but just their own individual

Mr. POTVIN. The number of drugs.

Mr. SCULLY. The number; yes, sir.

Mr. POTVIN. If a doctor wrote, say, Equanil and the formulary committee had decided on Miltown or the generic meprobamate, that is what it would be filled with. Is that correct?

Mr. SCULLY. They would have to check with the doctor first, but usually the doctors in that building would comply with what the pharmacy had. Like if they wrote for Achromycin and they didn't have it, they would call them up and they would OK any brand that they have down there. They would carry Sumycin.

Mr. POTVIN. But it would not be automatic as it would be in the case of an inpatient is what you are saying.

Mr. SCULLY. True; yes.

Mr. POTVIN. But you are further alleging that, as a practical matter, it would be the same result because these doctors would know. Mr. SCULLY. Yes.

Mr. POTVIN. What the formulary committee had decided?

Mr. SCULLY. Usually.

Mr. POTVIN. And would write their prescriptions accordingly?
Mr. SCULLY. Yes; true.

Mr. POTVIN. Now you are employed in a community pharmacy?
Mr. SCULLY. Now; yes, sir.

Mr. POTVIN. And you have filled prescriptions for these same doctors?

Mr. SCULLY. One or two, because we are quite a few miles away from that town. I am in Cherry Hill.

Mr. POTVIN. Do you know whether either in the pharmacy where you are employed, or in other community pharmacies, these doctors write prescriptions for a larger number of drugs?

Mr. SCULLY. Yes.

Mr. POTVIN. Than they do at their own hospital pharmacy?

Mr. SCULLY. I don't believe so, no; because the hospital pharmacy, although they did have a formulary system, they had a very inclusive formulary system. When they didn't carry one brand of each, they might carry more than one brand, but I didn't think they had a limited formulary system.

Mr. POTVIN. So that it would be less restrictive than the formulary systems of some hospitals then?

Mr. SCULLY. Yes.

Mr. POTVIN. Thank you.

Mr. DINGELL. Is this formulary system a rather widespread practice among hospitals?

Mr. SCULLY. Yes; especially now, because you have to have a formulary system to be qualified for medicare. They will only pay for drugs on the formulary now.

Mr. DINGELL. So substituting a particular drug for any of a large number of chemical equivalents is a rather common practice. Am I correct?

Mr. DINGELL. Would you say this is true in every hospital or in almost every hospital or in just a few hospitals?

Mr. SCULLY. Yes; it is true in every hospital.

Mr. DINGELL. In every hospital?

Mr. SCULLY. In most hospitals; yes.

Mr. POTVIN. So the hospital dispensary would substitute generics or another member of the same generic for any of the constituent members of that particular group. Am I correct?

Mr. SCULLY. Yes; but in the outpatient prescriptions they usually check with the doctor before they substitute.

Mr. DINGELL. They check with the doctor before?

Mr. SCULLY. Yes.

Mr. DINGELL. Is that regarded as an ethical practice?

Mr. SCULLY. Yes.

Mr. DINGELL. To check with the doctor before you substitute. Mr. SCULLY. You usually ask for his permission to change it, but in that case, where the doctors were familiar with the formulary system, they didn't often write for drugs that the pharmacy didn't carry, or they wouldn't write for-they would carry two brands of tetracycline, they usually wouldn't write for any other brands except those two, if they would write for tetracycline. Therefore, we didn't have to call the doctors very often for an OK to change.

Mr. POTVIN. In other words, there is a real difference between the hospital pharmacy and the community pharmacy in that the doctors know what the hospital pharmacy stocks under the formulary plan. Mr. SCULLY. Yes.

Mr. POTVIN. And prescribe accordingly.

Mr. SCULLY. True.

Mr. POTVIN. And it is, I take it, much less clear that they are equally considerate of the community pharmacy and would know with the same precision what you stocked. Is that correct?

Mr. SCULLY. Yes.

Mr. POTVIN. And, therefore, even had they wanted to, they could not possibly have shown you the same consideration that they did their in-house pharmacy.

Mr. SCULLY. Yes.

Mr. DINGELL. You may proceed, Mr. Scully.

Mr. WILLIAMS. Mr. Chairman.

Mr. DINGELL. Mr. Williams.

Mr. WILLIAMS. If you are to substitute one prescription for another, Mr. Scully, can a written prescription be altered without written approval?

Mr. SCULLY. Yes.

Mr. WILLIAMS. It can?

Mr. SCULLY. Yes.

Mr. WILLIAMS. When you, as a community pharmacist, get a prescription from a doctor and the particular drug prescribed you don't have, have you called the physician and said, "We are out of this. Can we substitute that?"

Mr. SCULLY. Yes. That is a common occurrence.

Mr. WILLIAMS. It is?

Thank you.

Mr. SCULLY. And if they okay it, you can change it by rewriting. The only prescription you can't take over the phone is a class A narcotic. Any other you can.

Mr. WILLIAMS. Thank you, Mr. Chairman.

Mr. DINGELL. Is this legal under the State laws dealing with the requirement that a doctor's prescription be faithfully followed. Mr. SCULLY. Yes. If you get his permission you can change it. Mr. DINGELL. I see.

Proceed.

Mr. SCULLY. In this connection, it may be interesting to tell how Underwood Hospital pharmacy priced Equanil to people off the street and private patients of physicians on the grounds when I was employed there. If the prescription called for Equanil, the retail drug price would be 72 cents a tablet. If the prescription called for the generic name meprobamate, Underwood would fill it with the same Equanil for 42 cents a tablet, which as I just noted is cheaper than the retail druggists' cost of 5.8 cents per tablet.

Pretty clearly, the retail druggists of Woodbury suffer a tremendous competitive disadvantage because of these huge price concessions granted to the Underwood Hospital pharmacy. I might add that the Underwood Hospital has been aware of the price discrimination problems in reference to their off-the-street prescription business, but they have evidently chosen to disregard this issue.

The public image of retail druggists in Woodbury and elsewhere in the United States where the same practice goes on, must also suffer for reasons beyond their control. The consumer who pays a higher price at the corner drug store simply thinks he is being overcharged. The consumer has no idea why the retail druggist is not competitive in price and is probably not even interested in explanations.

I sincerely hope that this committee and the law enforcers will take whatever action is necessary to correct any unlawful conduct arising from drug selling practices involving the Underwood Hospitals of the United States.

I thank you for this opportunity to be here today.

Mr. DINGELL. Mr. Scully, the committee is grateful to you for your presence and for your very helpful testimony.

Mr. Conte?

Mr. CONTE. Mr. Scully, do you know what the markup was on drugs sold by the hospital?

Mr. SCULLY. It was a straight third over the usual drug wholesale cost, either blue book or red book cost.

Mr. CONTE. Is this about the same charge that the local druggists in Woodbury would charge?

Mr. SCULLY. No. The usual retail store marks up approximately 40 percent on the retail cost, and Underwood marks up a third on the wholesale cost. There is a difference there, so overall they are under the average prescription cost.

Mr. DINGELL. Both in terms of markup and in terms of total cost to the patient?

Mr. SCULLY. Yes.

Mr. CONTE. That 40-percent markup on prescription drugs, is that an average? There are some drugs that are not fast-moving drugs, and I understand that in those cases there may be as much as a 100-percent markup.

Mr. SCULLY. No. I think for the large majority, there is usually a 40-percent markup on the total cost.

Mr. CONTE. You would say that is the average.

Mr. SCULLY. Yes, but may I add this? The inpatients in hospitals are charged 75 percent of wholesale cost, so they pay more than an average person going into a corner drugstore would.

Mr. CONTE. The inpatient in the hospital

Mr. SCULLY. Yes.

Mr. CONTE (Continuing). Is charged a 75-percent markup?

Mr. SCULLY. Yes, because the pharmacy is one of the only moneymaking parts of a hospital.

Mr. CONTE. It will get to the point where you can't afford to get sick any more.

Mr. SCULLY. That is right.
Mr. POTVIN. Mr. Chairman.
Mr. DINGELL. Mr. Potvin.

Mr. POTVIN. Mr. Scully, in this discussion you have had with Congressman Conte on the amount of markup, are you predicating this markup on the paper price, so to speak, to the hospital, or are you taking into consideration the sort of free goods wheeling and dealing that goes on? In other words, if they buy five and get five free, wouldn't it be correct that when you say a 75-percent or a 3313-percent markup, you would be talking about that price per unit on the five paid for? Is that correct, sir?

Mr. SCULLY. Well, you see, they didn't mark up 33 or 75 percent on what they paid for it. They marked it up on what a regular retail store would pay for it from the blue or red book, which is the wholesale cost across the country to any retail store.

Mr. POTVIN. So it would be much higher.

Mr. SCULLY. Yes.

Mr. POTVIN. In terms of what they actually paid for it?

Mr. SCULLY. True, yes.

Mr. POTVIN. Now isn't it a fact, sir, that because of the formulary system, there is a tendency to carry, in the example you use, either all Equanil or all Miltown.

Mr. SCULLY. True.

Mr. POTVIN. So that when the salesman comes in to make this sale, there is a great deal more incentive to wheel and deal, as it were, than in dealing with your pharmacy. Is that correct?

Mr. SCULLY. Yes.