Legislative Transparency and Accountability Act of 2007

LEGISLATIVE TRANSPARENCY AND ACCOUNTABILITY ACT OF 2007 -- (Senate - January 10, 2007)

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Mr. GRASSLEY. Mr. President, I am back here today, as I have been other days this week, to talk about the Medicare drug benefit and the debate about whether the Government would do a better job of negotiating with drug companies than the prescription drug plans that are doing so this very day under law of the last 2 1/2 years. Over the past 2 days, I have talked about the fundamental structure of the drug benefit. I talked about the heart of it, of the drug benefit plan, as competition. Plans, with vast experience in negotiating with drug manufacturers, compete to get the best drug prices for Medicare. That is what is happening today to benefit our senior citizens. Plans that have been doing this for 50 years are negotiating with drug companies in a competitive way to get the best prices for Medicare senior citizens.

To date, the proof is in the pudding. We have lower bids, we have lower beneficiary premiums, lower costs to the Government, and lower costs to our States. Most importantly, we have lower prices on drugs, meaning senior citizens get affordable drugs and low-income people do not have to choose between drugs and food. Remember, that was a goal we had in 2003 we passed this legislation.

I will give some examples of how this competition has worked. A draft PricewaterhouseCoopers study found in 2006 prescription drug plans achieved higher savings, 29 percent compared to unmanaged drug benefit expenditures. That is almost 100 percent greater than the 15-percent savings projected by Centers for Medicare and Medicaid Services and almost 50 percent greater than the savings estimated by the Congressional Budget Office way back when, in 2003, when we all thought if this program worked at all there would be some savings on prescription drugs for seniors. However, it has turned out to be much greater savings than we anticipated when we wrote the bill.

It isn't often that legislation we write comes back with a better benefit to the taxpayers, better benefit to our seniors or any group or population. Most often there are what we call cost overruns.

I believe it is fair to say that competition is working.

Yesterday, I talked about how this whole debate is based on nothing more than a distortion of language in what is called the noninterference clause in the existing legislation. This noninterference language was first included in legislation introduced by many of the same people now opposing it, and these people tend to be led by Members of the Democratic Party.

To be clear, that language, the noninterference language that people now are questioning, that period of time between 1999 and 2003, bills introduced by Members in the other party included this language and now, somehow, they do not like it.

I want to be clear that the impressions left by opponents of this part of the legislation that we do not have competition, we do not have negotiations, this language in the legislation does not prohibit negotiations to get drug prices down. Negotiations occur between private plans and the drug manufacturers regularly. You could not get those percentage decreases in prices I just mentioned--those percentages that are even greater than percentages we thought when we wrote the legislation--you would not get those without negotiation, you would not get those without competition.

I, also, pointed out in earlier speeches, so far, proposals to have the Secretary of HHS negotiate drug prices have not been shown to actually save any money. Our beloved Congressional Budget Office tells us that they cannot project savings by having a Government bureaucrat negotiate instead of plans negotiating. Nevertheless, here we are, in the new Congress, discussing this matter once again.

What I want to do today is put forward a picture of what Government negotiations might look like. Admittedly, doing this will require some speculation. Why is that necessary? It is necessary because Democrats have not provided many details on how they actually envision their requirement that the Secretary negotiate how that will work. This is despite the fact that some opponents of the noninterference clause have demagoged this issue for nearly 3 years. After 3 years, they are still out there saying the noninterference clause ought to go, but there are no details on how their plan will work. They have given us a few clues as to their thinking on how they want it to work.

For the longest time, I heard it said that the Secretary of Health and Human Services should have the power to negotiate drug prices, as the Veterans' Administration does. With the Veterans' Administration as our guide, let's talk about the VA's approach to purchasing drugs and then ask you to consider, after you hear this, do you want to do it that way? This discussion will be somewhat technical, but I urge listeners to bear with me because we need to get beyond the Veteran's Administration sound bite. Everyone needs to have a good understanding of what this would mean for Medicare.

It is a fact that the Veterans' Administration uses different purchasing arrangements to get discounts on prescription drugs. But there is a big distinction between these purchasing arrangements. The Veterans' Administration has access to what we call the Federal supply schedule prices. Under the Federal supply schedule prices, the Government guarantees by law that it must get the best price in the marketplace. This means that the Federal supply schedule prices cannot exceed the lowest price that a manufacturer gives in comparable terms and conditions to a non-Federal customer such as the pharmacy benefit manager. Since that is technical, I will go over that once more. Under the Federal supply schedule, the Government guarantees by law that it must get the best price in the marketplace. But what this means is that the Federal supply schedule prices cannot exceed the lowest price that a manufacturer gives under comparable terms and conditions to a non-Federal customer, and that could include health plans, pharmacy benefit managers, and many others. Under Federal law, manufacturers must list their drug on the supply schedule to qualify for reimbursement under Medicaid.

Next, the VA can purchase drugs at the Federal ceiling price. Again, the Government passed a law to guarantee itself an automatic discount no one else can get. By law, that price is automatically 24 percent less than the average price paid by basically all non-Federal purchasers.

Isn't that a nice negotiating tactic? Pass a law and guarantee yourself a discount. The logical questions are, why not have Medicare access the Federal supply schedule--because people who want to do it such as the VA, that is where it takes you.

Why not give Medicare the Federal ceiling price?

I will refer to a chart because experts have looked at this question, and we have assigned the Government Accountability Office to look into this. They had a year 2000 report on this. They say:

Mandating that federal prices for outpatient prescription drugs be extended to a large group of purchasers, such as Medicare beneficiaries, could lower the prices they pay but raise prices for others.

In other words, raising prices for everybody else in America that is purchasing drugs. You heard that right: Raise prices on everybody else.

Who would face the higher prices under ``everybody else'? Small businesses, their employees, their families, to name a few. Those higher prices would likely force employers to reduce their prescription drug benefit or stop providing health insurance coverage altogether. Of course, that is an outcome I surely hope people want to avoid, but it may be an outcome that the proponents of doing away with the noninterference clause are not aware of. Or the people that are saying we ought to follow the VA practice may not be aware, that to save the taxpayers some money you are going to raise the price of drugs on everybody else in America, according to the Government Accountability Office.

The Government Accountability Office reached its conclusion by examining what happened to drug prices after Congress required drug manufacturers to pay rebates to State Medicaid Programs such as the Federal supply schedule, the Medicaid rebate program guarantees that the Government gets the best price in the marketplace.

What happened after the law was enacted? The best prices went up for everyone else. The practical effect was twofold: First, the size of rebates for State Medicare Programs got smaller. What the Federal Government wanted to accomplish to benefit the States did not happen. Second, other purchasers paid higher prices. One might ask why that might happen. Here is why: Drugmakers had to eliminate their best prices to private purchasers or face bigger rebates. That happens because if they gave 1 purchaser a best price, they then had to give the best price to 50 State Medicaid purchasers. One discount to a private purchaser could mean millions that a manufacturer would be forced to pay in rebates to the Government.

What do you think the drug companies did to counteract a well-intentioned act of Congress which ended with unintended consequences? The drug companies eliminated all the deep discounts so that they did not have to pay as much in mandatory rebates to Medicaid.

A 1996 study by the nonpartisan Congressional Budget Office examined the extent to which the Medicaid laws result in higher drug prices to everyone else. Listen to what our Congressional Budget Office concluded:

Best price discounts have fallen from an average of over 36 percent in 1991 to 19 percent in 1994. Hence, although the Medicaid rebate appears on the surface to be attractive, it may have had unintended consequences for private purchasers.

The Federal Government passes a law to do good, and we find out we end up not doing so good. Almost a 50-percent reduction in best-price discounts; is that good? A nearly 50-percent reduction in the discounts received by purchasers such as health plans that serve employers and their employees; is that good? Of course, it is not. What this means is when those deep discounts went away, the price that everyone else pays for drugs went up. So those mandates, rebates to Medicaid made drug prices for everyone else higher.

Talk about unintended consequences. And we in the Senate who set these things up had the right intentions for doing it, but it has not worked out--unless you want to look at the good it did to the Federal Treasury and not count or not discount the harm it did to everyone else who paid higher prices.

To state it more simply, when discounts to a large purchasing group are based on discounts to another, no one gets a good discount. That is what the Government Accountability Office said in its 2000 report:

Extending the Federal Supply Schedule ..... could also raise the prices paid by private and federal purchasers, as increases in prices, manufacturers charged their best customers would, in turn, increase Federal Supply Schedule prices.

Would opponents of the noninterference clause believe the congressional agencies, such as the CBO and the Government Accountability Office, that striking the noninterference clause would not be good? Ironic, isn't it, when the Government used price controls to mandate discounts to itself, it actually makes prices go up. I will go through that again. When the Government uses price controls to mandate discounts to itself, it actually makes prices go up.

No person in their right mind concerned about the Federal Treasury or concerned about the cost of drugs to people in this country would say that meets the commonsensical test. But that is what happens.

During a 2001 hearing before the Senate Committee on Veterans' Affairs, my colleague, the senior Senator from Pennsylvania, Mr. Arlen Specter, posed a question on this very matter. He asked whether adding Medicare to the VA and Department of Defense purchasing mix would produce greater bulk discounts. The Veterans' Administration chief consultant for its Pharmacy Benefits Management Strategic Health Group answered that adding Medicare to the Federal Supply Schedule umbrella would result in increased drug prices for both the Veterans' Administration and the Department of Defense.

So, now, in addition to the Government Accountability Office and the Congressional Budget Office, the Veterans' Administration weighs in for itself, and the Department of Defense, that doing what repealers of the noninterference clause want to do will actually increase drug prices to the Veterans' Administration and the DOD. And people want to use the Veterans' Administration as a pattern to affect Medicare. So that is saying it for the third time.

If I could say it for another time, straight from the Veterans' Administration's mouth, itself: Extending VA prices to Medicare would make the VA's own drug prices increase.

And for one last time, the basic point they are making is, if you try to mandate discounts to everyone, then--what I have said a few minutes ago--no one gets a discount. Now, I am no economist, but that is basic economics. And not only that but it is common sense.

I think I have pretty much laid out why including Medicare in the Federal Supply Schedule is not as good an idea as its proponents may have made it out to be.

So now I want to go back to how the Veterans' Administration uses competitive bidding to get the discounts they say they want to use as a pattern for the Medicare Program.

Let me start by giving you an important piece of information. The Veterans' Administration has its own pharmacy benefits manager. More than a decade ago, as part of a major initiative to improve the care delivered, the Veterans' Administration formed a pharmacy benefits manager, better known around here as a PBM.

So you will probably wonder why they did that. Because, as stated in the VA news release, they wanted to maximize a strategy used by the private sector. You have people who want to have Medicare do it like the VA does it, but the VA set up a very special program because they wanted to learn something from the private sector.

A primary responsibility of the PBM for the Veterans' Administration was to develop a national formulary. The Government learned that from the private sector, the very same people they are finding complaints about now. They wanted to set up a national formulary.

A formulary is the list of drugs that a plan will cover. Basically, if your drug is not on the list, it is not covered.

A 2005 article in the American Journal of Managed Care, coauthored by the Veterans' Administration's staff and university-based researchers, stated that the Veterans' Administration created the national formulary to achieve two main goals.

First, the Veterans' Administration wanted to reduce the variation in access to drugs across its many facilities throughout the United States. In other words, they wanted to put a VA bureaucrat between the doctor and the patient. Doctors could not subscribe to everything that they thought that patient might need because if it was not on the formulary, they could not prescribe it.

Second, the VA wanted to use the formulary as leverage to get lower prices for drugs. Let me repeat that because it is important. The Veterans' Administration created a national formulary to create the leverage it needed to get lower prices for drugs.

That goes back to the point I made a couple days ago. The ability to get good discounts does not result from the sheer number of people a purchaser buys for. The ability to get good discounts comes from how the purchaser leverages those numbers. That leverage comes from a purchaser threatening to exclude a drug from the formulary. So it eventually comes down to threats.

The Veterans' Administration uses its formulary to say: Give me a better price or else--or else we are not going to buy your drugs at all.

As I said earlier, the Veterans' Administration was intentionally adopting a private sector strategy when it started using a formulary to get lower drug prices. The Medicare prescription drug plans also use formularies to negotiate lower drug prices. The most important thing about the VA formulary is that it is one big national formulary.

The biggest difference between the VA and Medicare is that beneficiaries have choices.

Let me make that clear. The biggest difference between how the VA does it and how the plans do it--the plans that are approved by the Secretary of Health and Human Services for the senior citizens of America and Medicare--the biggest difference is the beneficiaries have choices. They can choose their plans with different formularies. So Medicare bureaucrats are not coming between the patient and the doctor like VA bureaucrats are coming between the patient and the doctor. You can run into this in your town meetings because I had people come up to me and complain about the VA: My doctor says I ought to have this drug because the drug that the VA wants me to take has side effects.

And they come to me and say: How come the VA won't pay for this drug because it is better for me, according to my doctor?

And their answer is: Because the VA wants to save money. So you have a Government bureaucrat deciding what is best for your health instead of your doctor.

But the principle behind the prescription drug bill that Senator Baucus and I wrote was that we were not going to have the bureaucrat getting in the medicine cabinet of a person, of senior citizens. We wanted every therapy available. That is the way it is written, and that is the way it is being carried out. So I wonder if people who say you ought to change this and do it the way the VA does it know how you are negatively affecting the senior citizens of America.

The way senior citizens can do it is they have choice.

They can enroll in a plan that covers their drugs. They can enroll in a plan that allows them to use their neighborhood pharmacy. The VA does not do business with every pharmacist in America. So you are hurting your local pharmacist when you do business that way.

Under the Veterans' Administration programs, veterans do not have a choice. They cannot choose a different plan, and they have to use the VA's own pharmacy, not the pharmacy down the street. Using a limited number of VA-controlled pharmacies and mail-order pharmacies also helps keep VA costs down.

But one of the things we wanted to accomplish in the prescription drug bill, Part D, was to make sure the Government did not use its leverage to hurt local pharmacists. And we put several things in--a requirement you had to have a brick-and-motor pharmacist in every plan. So we have some requirements to help pharmacies that the VA does not even worry about. And I have to confess to the community pharmacists of America, we still have a lot of work to do to help them so they benefit from this program like we intended. There are some unintended consequences to what we did, even considering the fact we took the community pharmacists into consideration.

Under the VA program, then, you do not have a local pharmacist to go to. When they do not use the local pharmacist the way we do, when they use all these mail-order pharmacies, they hurt the local pharmacist, but they are saving some money.

Also, there is limited access to drugs, limited access to retail pharmacies. That is how the VA works. So do you want to force that upon the senior citizens of America?

I would like to go to another chart now. The Los Angeles Times put it best in an article on November 27 of last year. According to the Los Angeles Times:

VA officials can negotiate major price discounts because they restrict the number of drugs on their coverage list. .....In other words, the VA offers lower drug prices but fewer choices.

So do you want to offer fewer choices to our seniors? That is not what we wanted when we wrote the Medicare bill. We wanted to keep CMS bureaucrats out of the Medicare medicine cabinet of every senior citizen.

So what would it mean if the Government negotiated lower drug prices for Medicare in a national system like the Veterans' Administration? It would mean having a more limited formulary. And it would mean having the Veterans' Administration bureaucrat between you and your doctor.

So I would go to a chart that would make this more picturesque and more clear to you. This chart shows what this would mean. It would mean that instead of having 4,300 drugs available to them, beneficiaries would have about 1,200 drugs available. If Medicare used a national formulary like the VA, it would mean that 70 percent of the prescription drugs could not be covered by Medicare. Only 30 percent of the drugs covered today would be covered.

Then let's get into some specific drugs, about major problems we are trying to treat today, such as diabetes or cholesterol. There, too, if the Government negotiated for Medicare like it does for VA, it would mean fewer drugs covered by Medicare.

In the case of treatment for depression: 65 percent covered; 35 percent not covered. In the case of treatment for high cholesterol: 54 percent covered, 46 percent not covered. It seems that by looking at these drugs, if the Government used the VA model, our senior citizens would not be as well served.

Now, maybe you can make an argument we are not treating our veterans right. We appropriate more money every year for veterans health programs. And we have to because the needs are there and we made a promise. We have to keep the promise to the veterans. But I think veterans watching this could say: Well, why not cover these? Why not cover these? Well, I have given the reason. We want to save taxpayers money. But it is completely opposite what we wanted to accomplish under the Medicare bill to serve our senior citizens: everything being available, and to save the taxpayers money through competitive bidding.

This could also mean that beneficiaries could not get their prescriptions filled at the most convenient pharmacy for them. That is not what we wanted when writing the bill. We put seniors first. Those who want to repeal it, it seems to me, they are putting bureaucrats first, or at least they are putting bureaucrats between the doctor and the senior citizen. In many cases, those realities have led Medicare-eligible veterans to enroll in Medicare drug programs so they will have coverage for drugs not covered by the VA.

When I held my town meetings as we were rolling out this new drug program, I had veterans say: Well, does this mean I have to get out of the veterans program?

I said: If you are satisfied with the veterans program, you can stay in it. You do not have to do anything. If you decide later on you want to get into one of these programs, you can do it without penalty.

So they had the best of both worlds. If they were satisfied with the VA, keep it. But we have evidence that some of them are leaving the VA program to join the program of Part D Medicare. Even though many veterans have very good drug coverage, almost 40 percent of the veterans with VA benefits and Medicare coverage are enrolled in Part D. So when you get beyond the easy sound bites, when you get to the facts, applying the VA system to Medicare is neither as easy as it sounds nor will it likely have the effect that the proponents suggest.

It now appears that even they have begun to figure this out because now, when the rubber hits the road, when they have to produce something, they introduce a bill--and I am referring now to a bill of the other body--that explicitly prohibits the Secretary from creating a formulary.

In fact, the Los Angeles Times reported last week that a House Democratic leadership aide said, ``We felt we couldn't go as far as the Veterans Affairs [Department] does.'

Under the House Democrats bill, Medicare can't have a formulary. As I tried to make clear here today, the drug formulary is the key to negotiating lower drug prices. The House Democrats bill prohibits the Government from having a national formulary. No formulary means no negotiations, no leverage over drug companies. In reality, the Democratic proposal on negotiation actually prohibits the Government from negotiating. Under their plan for Government negotiation, the Government won't be able to say no to a drug company. With no formulary to bargain with, the drug companies could say something like this: No, why should I give you that price if you can't exclude me or charge higher cost sharing?

At the same time, the House Democrats bill repeals the prohibition on the Government setting a pricing structure. So if the Government cannot negotiate because it can't have a formulary, if there is no prohibition on Government price structure, where does that leave us? Sounds like price controls to me. Experience shows that when the Government sets prices for itself, when it gives itself mandatory discount, prices go up for everyone, higher prices for everyone else. Why would anyone want that sort of a situation?

Everyone always asks, why not have Medicare work like the VA program to get lower drug prices. I think I have laid out why that idea might not be as good as the proponents have made it sound. Having Medicare work like the VA could mean fewer drugs covered, restricted access to community pharmacies, more use of mail-order pharmacies and higher drug prices for everyone else. I can't imagine that is what people want.

So where does that leave us? The Medicare plans are working today. I say that based upon several polls that show 80 or so percent of the seniors are satisfied. The plans are also delivering the benefits to Medicare beneficiaries. These private sector plans have the experience of negotiating better prices. These Medicare negotiators have proven their ability to get lower prices. The Medicare plans are negotiating with drug companies using drug formularies within the rules set by law, and the formularies are basic for that negotiation.

Last week on the Senate floor, the Senator from Illinois said that the law ``took competition out of the program so that [the drug companies] could charge whatever they want.' That is not true. We have the 50-year experience of the Federal Employees Health Benefit Program negotiating for every Federal employee to keep costs down to the citizen as well as to the taxpayers. We patterned it something like that. And quite frankly, when we patterned it for the senior citizens under Medicare, I wasn't entirely sure we would get all the plans interested, that we would have the competition we ended up having. It has worked beyond our expectation. And thank God it did, because I am not sure we had that kind of expectation out of it. But it sure worked. Thank God something worked a little bit better than we anticipated it would work.

So we had a Senator saying that we took competition out of the program. Competition is what this program is all about, and that competition is working. Costs are lower. Premiums are lower. Let me quantify how premiums are lower, because when we were writing the bill in 2003, we were figuring at what price, somewhere between $35 and $40 a month, could we get seniors to join. Over that, we would have problems. Competition has brought it in at $23 last year and $22 this year on average. So these organizations remain in the best position to get lower prices for Medicare beneficiaries and taxpayers.

I yield the floor.

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