Senator, the problem is that I am just not sure to what extent we would be prejudicing the rights or the reputation of Dr. Neer. Senator WILLIAMS. Where is Dr. Neer?

Secretary RICHARDSON. What is involved basically is the allegation that he, in collaboration with a Nebraska official, created a fictitious consulting firm to which checks were allegedly made out and cashed by him in Nebraska. There have been no charges filed to date of which we are aware, although we do know that there is an investigation underway involving both this particular former HEW employee and the former welfare director of Nebraska. The former HEW employee who has been mentioned resigned before we became aware of this investigation, and our files on him have been made available to the Department of Justice for appropriate Federal investigation.

Senator WILLIAMS. How much money was involved, if you know? Secretary RICHARDSON. My understanding is that it was some $80,000.

Senator CURTIs. Will you yield just briefly?

Senator WILLIAMS. Yes.

Senator CURTIS. This Federal investigation and the calling in of the Department of Justice, that was made near the time that I made a written request of the Department for such an investigation; was it not?

Mr. VENEMAN. That is correct, Senator Curtis. The investigation, I think, was instigated by the Department of Justice because of the U.S. attorney's action in the State of Nebraska. During that time, there was an investigation going on within the Department. As you realize, the funds that were involved were primarily State funds, but a Federal employee was allegedly involved, so we had our own investigation going. Subsequently, we turned all of our investigative records over to the Department of Justice and are cooperating with them in every way possible.

Senator WILLIAMS. Where is Dr. Neer now?

Mr. VENEMAN. We have no knowledge of his whereabouts, Senator Williams, and have not had, apparently, since he resigned from the Department. Justice may know.

Senator WILLIAMS. Justice may know? Do they know?

Mr. VENEMAN. I cannot answer that. I have not been a close party to the investigation.

Senator WILLIAMS. What was the background of Dr. Bradley Neer? Had he been with the Department, a long-time employee?

Mr. NEWMAN. He had been with the Department for several years, Senator. He is a veterinarian by training.

Senator WILLIAMS. A veterinarian?

Mr. NEWMAN. Yes.

Senator WILLIAMS. I do not think I have any more questions. (Laughter.]

Seriously, though, my time is up, but I think some explanation should be coming to the committee. I am a little puzzled that you have a veterinarian setting up a program such as we have here. That is rather interesting. All of this case is rather interesting and I would like to have the full details on it.

Secretary RICHARDSON. We will be glad to make the information. available to the committee under whatever understandings are appropriate in protection of the rights of the individual involved.

Senator WILLIAMS. You might furnish the committee a list of how many more veterinarians you have in this program.

Would you do that at this point in the record?

Secretary RICHARDSON. I will be glad to do that, Senator. I hope the answer is none.

(The Department subsequently informed the committee that there were no veterinarians in the employ of the Medical Services Administration.)

COMMITTEE ON FINANCE STAFF RECOMMENDATIONS IN THE HEALTH CARE FIELD

The CHAIRMAN. I would like at this point to get just one matter straight if I can, and then go into the other matters tomorrow. There are members of this committee who are interested in debating and voting on what's on the floor this afternoon, so we will have to come back tomorrow.

As you know, Mr. Secretary, this bill and the family assistance bill combined involve an increase in spending of about $7.5 billion a year the first year they will be in full operation. That is a great deal of money. This committee feels that we ought to see to it that the Government gets value recieved for every dollar of that money that is possible. We believe that is our duty and we are going to try to make these the best bills we can at the time we report both this one and the other one.

Now, our staff started this Congress by doing a lot of work on the fact that the costs of medicare greatly exceeded all the estimates. Our staff made about a hundred recommendations and suggestions to us on ways that they thought savings could be achieved. Quite a few of those suggestions are in the bill that is now before us, incorporated by the House. I understand that members of that Ways and Means Committee had copies of our staff report and recommendations with them when they were considering that measure. Chairman Mills pointed out in his statement on this measure that the investigation done on this side was very helpful in the modifications and changes that they recommended, hoping to save quite a bit of money.

SENATOR RUSSELL B. LONG'S DRUG AMENDMENT

One matter that this Senator initiated before we even started the investigation was a proposal to try to save at least $40 million a year on what we are paying for drugs. That is a big industry involved here, a multibillion dollar industry. I can understand how they would certainly oppose something that is going to reduce their income and try to demonstrate that it will not work if they can.

One thing that came to my attention as the fact that they apparently persuaded Secretary Finch that the cost of administering that proposal would be about $111 million the first year, declining thereafter. Now, we have done some studying of that industry presen

tation and our conclusion is that it would not cost anything like that. It would cost about $7.7 million to administer in the first year and about $4.6 million annually thereafter, which is a great deal of difference, a difference of administrative costs of, once in full operation, less than $5 million, compared to an industry estimate of $111 million.

I do not know that you have had occasion to study that, Mr. Secretary. Have you looked into that matter?

Secretary RICHARDSON. Not sufficiently, Mr. Chairman. I am aware of it. I am interested in it and I do want to follow it up.

The CHAIRMAN. I am going to ask that some of the staff just present to you a memo that I had prepared, showing why that $111 million figure is completely fallacious, and I will ask that that be made a part of the record.

(The memo referred to follows:)

ADMINISTRATIVE COSTS OF SENATOR LONG'S DRUG AMENDMENT

Secretary Gardner testified in 1967 that H.E.W. estimated initial administrative costs of about $111 million first year and less thereafter for your amendment. That extraordinarily high figure was based upon a misunderstanding by H.E.W. (later corrected) as to where the burden of proof lay for determining whether a particular drug product should be included in the Formulary. The Department assumed that every single product would have to be tested by H.E. W. to assure that it met official standards and that it was "clinically equivalent."

It was subsequently explained to them that under the Long Amendment, the intent was that the burden of proof and expense was on the manufacturer to present satisfactory evidence to the Formularly Committee that his particular drug product had "distinct, demonstrated, therapeutic" advantages over other products of that same drug which met all official standards. Further, that, in the absence of scientific evidence to the contrary products meeting official standards would be assumed equivalent. The point here is that F.D.A. has continuing responsibility to assure that all drug products sold meet_official standards for the drugs involved. That is not a cost attributable to the Long Amendment.

As far as costs of establishing the initial formularly it was anticipated that the Formulary Committee would start with a listing of drugs based upon various formularies presently in use as well as upon their own experience. That listing would be modified and expanded as experience and information indicated.

Where they included a drug about which there were substantive questions concerning relative efficacy of the different products of that drug it was expected, that payment would be authorized for all products of that drug until the differences were satisfactorily resolved. Obviously this situation would occur only in a small number of cases. For the overwhelming majority of drugs no substantive questions have been raised concerning one product of a drug which met official standards being superior to another, which also met official standards.

As far as costs of tests, the testing authority given to the Formulary Committee was intended to be minimal and to be used only in exceptional instances-not as an ongoing product quality and evaluation program.

Section 405 of the Social Security Amendments of 1967 required H.E.W. to study the Long Amendment and report to the Congress. That report (attached) constitutes a virtual blanket endorsement of your proposal. It was completed after some 18 months of work and submitted to Congress on January 14, 1969.

On page 9 of the Report, you will notice their estimated first year cost of a "Long-type" drugs amendment as $7.7 million-not $111 million. They estimated cost in subsequent years at $4.6 million annually.

The CHAIRMAN. I am not going to burden you by listening to you read that at this time, but I would suggest that you study it, because there is one item that, according to department estimates, would save about $40 million initially. We are aware of the drug industry's arguments and we just do not think they are sound. We think they

are completely erroneous. But after your staff and your department told us in February that they approved of what we in the Senate did on this matter previously, the industry apparently convinced your predecessor that they were still sound in their $111 million estimate and he signed a letter dated June 23 this year endorsing that figure. Now, we think that is totally in error.

Was Mr. Finch still Secretary on June 23?
Secretary RICHARDSON. Yes, I think so.

The CHAIRMAN. Well, I will submit this letter for the record, too. It bears his signature. Apparently, he was still convinced of that error when he gave us this letter. I would like to get this matter straightened

out.

(The letter referred to follows:)

THE SECRETARY OF HEALTH, EDUCATION, AND WELFARE,
Washington, D.C., June 23, 1970.

Mr. C. JOSEPH STETLER,

President, Pharmaceutical Manufacturers Association,
Washington, D.C.

DEAR MR. STETLER: This is in response to your letter of March 3, 1970, requesting a clarification of this Department's position on the use of a national pharmaceutical formulary and a reimbursement program based on the assumption of drug equivalency.

We are, of course, anxious to make certain that the beneficiaries of Federal health programs receive the finest available care at the most reasonable cost to the Government, and to that extent we are in agreement with the objectives of the Senate in its 1967 amendment in this regard.

However, we are also aware that the inseparability of quality from price requires that we make certain that all manufacturers' versions of every drug product available to American patients are in fact safe and effective. We are not in such a position today. We would be reluctant to impose constraints on prescribers until such time as the Department has acceptable answers to the question surrounding the equivalency of drug products. The problem is considerably more difficult than we had anticipated and will require substantial time and effort to resolve.

In addition, we are aware that calculations of dollar savings to be expected from such a program must take administrative and other expenses into consideration. The last HEW estimate of such expenses exceeded $111 million for the first year, and somewhat less thereafter. Such an expenditure could and probably would outweigh the "savings" to be expected from the proposed program.

The brief statement submitted to the Senate Finance Committee last February is not the position of this Department. The statements in the paper referred to in your letter were prepared by the staff primarily as points of reference for discussion, rather than as definitive statements of policy.

The present position of the Department on these issues is reflected in the Report of the Review Committee under the Chairmanship of John Dunlop, dated July 23, 1969. As you know, I appointed that Committee on March 24, 1969, asking it to evaluate the findings and recommendations of the Task Force, and thus to assist me in developing Departmental policy.

It is necessary, of course, that we act to contain the rising cost of medical care in our country. I am confident that you will join us in working to achieve that objective while ensuring that conditions conducive to innovation and research in the pharmaceutical field are preserved and enhanced.

Sincerely,

BOB FINCH, Secretary.

The CHAIRMAN. Here is the Wilbur Cohen report with the $7 mil lion cost estimates in it. I will ask the staff to take out any surplusage and simply put in the record the studies made in your Department which indicate that the correct figure would be $7.7 million the first year and $4.6 million the second year, as compared to an industry

propaganda estimate of $111 million that they apparently sold your predecessor.

I am willing to hear their arguments and consider their position. Any time we reduce someone's sales by at least $40 million a year, we certainly should hear what they can say for that side of the argument. But I hope you would study this, Mr. Secretary, and consider Mr. Cohen's study and our staff's study as well as our estimate on this, as well as the industry position, keeping in mind that while we want to save money, we do not wantjto be unfair to them. But it would appear to me that when they undertake to say that to save $40 million on drugs would incur an additional administration cost of $111 million, they just do not have any basis. I hope we can have your full cooperation.

We are not complaining at all, but it just looks like from time to time, if they can catch us separately, they will either convince you or convince us of something we believe to be in error. I would like to have all the facts before us.

Thank you very much, Mr. Secretary.

(The report referred to, follows. Hearing continues on page 115.)