• Medicare Drug Reimburseme is a broken system for patients and taxpayers because some drug companies falsify reports about their prices in order to cause reimbursement to be inflated.

• State Medicaid Programs also face a crisis because spiraling drug expenditures have forced states to curtail other needed public services.

• Medicare and Medicaid patients are harmed because drug companies report inflated prices to induce health care providers to make decisions to prescribe and dispense drugs on the basis of profit to the provider rather than the best interests of the patient.

• Medicare patients are defrauded because their 20% co-payment alone often exceeds 100% of the true cost of the drug.

• Americans are deprived of newer and safer drugs when drug companies inflate price reports of older drugs to encourage physicians to keep prescribing them.

• The fraud scheme encompasses drugs including chemotherapy, inhalants, biologicals, IV fluids, IV antibiotics and oral drugs reimbursed by Medicaid.

• Government programs are deprived of the benefits of price competition when false prices are reported to conceal falling prices set by the free marketplace.

• Expanded Medicare drug coverage is threatened because false drug price reports already cause billions of dollars in excessive reimbursement.

• Oversight and enforcement have begun to save Medicaid programs tens of millions of dollars. CMS Director Scully should be required to support ongoing oversight and enforcement efforts directed at protecting Medicare and its beneficiaries from this exploitation.

TESTIMONY OF ZACHARY T. BENTLEY

Mr. Chairman and Members of the Subcommittees:

Good morning.

I am Zachary T. Bentley.

For the last thirteen years I have been an officer and the business manager of Ven-A-Care of the Florida Keys, a small pharmacy located in Key West, Florida. Early on, I was shocked to receive a payment from Medicare for the infusion cancer drug, Leucovorin, that exceeded our cost by approximately 1000%. The ten-fold profit on this drug, being paid for by Medicare (80%) and the beneficiary (20%), was so excessive that the beneficiary's co-payment actually exceeded the cost of the drug to Ven-A-Care. I thought the Florida Medicare carrier had made a mistake. I attempted to return the payment, only to learn that the Medicare program in fact assumed that the cost of Leucovorin was many times greater than the true price available to even a small company such as Ven-A-Care.

We communicated pricing information about Leucovorin and other drugs which we discovered had similar pricing and reimbursement disparities, to the Health Care Financing Administration and other federal and state agencies, in an effort to alert them to the problem. We learned that the prices used by Medicare, Medicaid, and many private health insurance programs for setting drug reimbursements were the prices reported to those entities by the drug companies. When the manufacturers report falsely inflated prices, providers reap exorbitant windfall profits. Those windfall profits serve the drug manufacturers as government-funded kickbacks to induce the providers to order their drugs.

I must emphasize, however, that not all pharmaceutical manufacturers engage in this nefarious scheme.

In 1991, Ven-A-Care was solicited to enter into a physician joint venture designed to split the proceeds of such excessive reimbursements with doctors in a position to prescribe expensive infusion drugs to AIDS patients. The venture was crafted by one of the country's largest healthcare companies, National Medical Care, then a subsidiary of WR Grace. We were promised by NMC that we would become wealthy if we shared drug revenues with the treating physicians, because they would order large quantities of pharmaceuticals that cost far less than the reported prices. We believed that this proposal was nothing more than a kickback scheme, which ultimately would lead to over-utilization of drugs and possibly to patient harm, and we elected to not participate. National Medical Care then proceeded with the physician venture on its own and effectively ran Ven-A-Care out of business.

Later, when Ven-A-Care attempted to rebuild its business with a focus on oncology drug therapies, we encountered demands that we enter into similar kickback arrangements with oncologists associated with yet another large national healthcare company. Again, we declined to participate. Instead, we redoubled our efforts to shine the light of day on these shadowy schemes.

We learned that almost every third-party payer, including Medicare, Medicaid, the Federal Employees Health Benefits Plan, and most private insurers, relied on the drug companies' representations of drug prices when setting the reimbursement amounts paid to providers. It became apparent to us that many drug manufacturers reported truthful prices, while others falsely inflated their price reports so that their targeted customers - oncologists, urologists, home care companies, ESRD providers, DME companies, and others - would be induced by the resulting windfall profits to order their drugs.

We have worked diligently to educate those who administer the Medicare and Medicaid programs about this serious problem, including personally briefing the previous HCFA Administrator. Ven-A-Care also has taken direct action to stop this major hemorrhage of tax dollars. We have assisted the HHS Office of Inspector General and the Department of Justice and have prosecuted False Claims actions that resulted in the government's nearly $500,000,000 recovery against National Medical Care/Fresenius and the more recent $14,000,000 Medicaid settlement with Bayer Pharmaceutical Corporation.

We also initiated the pending Texas Medicaid false claims action against Schering Plough's Warrick drug division, Boehringer Ingelheim's Roxane drug division, and Dey Laboratories. Each of those companies manufacture inhalation drugs used to treat severe respiratory ailments. Texas Attorney General John Cornyn has adopted our claims, and we are currently assisting him in that litigation. The Texas Medicaid Program has led the Nation in its efforts to secure accurate price reports from drug companies by requiring written certification of a range of prices.

Last year, pursuant to subpoena, we provided to the House Committee on Energy and Commerce our documents and other evidence relating to the inflation of price reports by certain drug companies. In preparing for my testimony today, I have again reviewed the information now in the Committee's possession. The Committee's commendable oversight and investigative efforts have alerted the Congress and the public to the following issues:

1.) The evidence reveals that the fraud scheme encompasses a wide range of drugs including chemotherapy, inhalants, biologicals, IV fluids, and, IV antibiotics. More recent reports reveal that the fraud is also directed at oral drugs reimbursed by Medicaid and which will be the focus of an expanded Medicare drug benefit.

2.) Falsely inflated drug price representations enrich certain health care businesses, including some drug companies, home care pharmacies, oncologists, and inhalation providers, while cheating Medicare beneficiaries of their current drug benefits. This shameful fraud levies a cruel tax on Medicare beneficiaries, whose 20% co-payment alone often exceeds 100% of the true, reasonable cost of the drug to health care providers.

3.) This fraud compromises the health and safety of Medicare and Medicaid patients. The excessive reimbursements are used as inducements to physicians and other health care providers in a position to cause the companies' drugs to be ordered. Oncologists and other providers are thus financially induced by certain drug manufacturers to prescribe such vital drugs as chemotherapies, not on the basis of what is best for the patient, but based on what is most profitable for the medical provider. Such kickback schemes impair independent medical judgment and interfere with the physician/patient relationship. A case in point involves the prostate cancer drug Lupron, manufactured by TAP Pharmaceuticals, a joint venture between Japan's Takeda Pharmaceutical Company and Abbott Labs. Recently announced criminal indictments of several urologists illustrates the seriousness of the problem.

4.) The price fraud costs Medicare and Medicaid billions of dollars each year in the form of excessive reimbursements and over-prescribing of medications.

5.) False, inflated drug price representations effectively deprive Medicare and Medicaid patients of access to medical care because:

a.) Seniors are overcharged in their co-payments and thus have less money available to purchase other needed drugs not covered by Medicare.

b.) Scarce health care program dollars are diverted to fund these overpayments and kickbacks that benefit practice specialties in a position to increase drug company sales. The Wall Street Journal reported last February 7 that "states say the drug-cost component of Medicaid is rising more than 20% annually," forcing states to cut funding for other services. Missouri budget director Brian Long told the Journal that Medicaid costs are responsible in part for his state's inability to fund increased costs for school transportation and special education. An Ohio budget official said "The rest of state government is dramatically impacted" by rising Medicaid drug costs. Similarly, scarce Medicare dollars are diverted and thus not available, therefore, to increase reimbursements to other practice specialties such as cardiology, surgery, and gynecology.

6.) Certain drug manufacturers and health care provider groups have actively misled Congress and the Medicare and Medicaid programs in an effort to conceal and perpetuate this fraud. Examples include

a.) Seeking to deflect scrutiny by contending that Congress and the Executive Branch have created a flawed reimbursement system. This argument is specious, because the system works well as long as drug companies tell government insurance programs the truth about their prices. If a flaw exists, it is the fault of the drug companies who choose to give the government false prices.

b.) Contending that the inflated reimbursements are needed to defray other provider costs not adequately covered. Some health care providers may be justified in requesting higher reimbursements. The recent GAO study, however, will confirm that the drug companies in question (and I reiterate that not all drug companies are guilty of this practice) have generated exorbitant reimbursement schedules for certain drugs. The scheme benefits only the companies and their provider customers, to the detriment of government health insurance programs and patients. These inflated reimbursements are created only when a drug company desires to fend off competition; they are not calculated to cover administration costs, and they far exceed any reasonable level of reimbursement.

c.) Some health care professionals have stooped to extortion tactics by threatening that they cannot continue to care for cancer patients if their gravy train is derailed. The false premise for this threat is revealed by the fact that those same health care professionals were making the drugs available to patients before manufacturers contrived to create such lucrative "spreads" to stave off competition by other manufacturers.

I find it offensive that the drug companies that are engaging in these practices have tried to conceal their actions while at the same time piously holding themselves out as stewards of the public good. In fact, the sub-committees' subpoenaed records reveal that one major drug manufacturer inflated price reports for a broad range of cancer drugs while touting itself as America's "most admired" pharmaceutical company.

7.) The federal government and many states have taken action to improve reimbursement systems by requesting additional price data. For example, California often bases payments on manufacturers' reports of direct prices and submission of manufacturer invoices; Texas requires written certification of different kinds of prices and costs; many States rely on reports of Wholesaler Acquisition Cost rather than AWP; HHS regulations were modified to provide for a federal Medicaid Upper Limit; and Congress enacted the Medicaid rebate law. Each of these efforts, however, has been circumvented and frustrated by certain drug companies that falsely inflate any form of price or cost data the government attempts to use to set reimbursements.

8.) The fraud scheme deprives government programs of the benefits of vigorous price competition that occurs when expensive drugs become subject to competition by generics, other patented drugs, or other kinds of treatments. Prices drop in the marketplace, but prices reported to the government remain at the same level, or rise. As a result, Medicare, Medicaid and the public are misled to believe that the drugs remain highly expensive when in fact they sell for a fraction of their pre-competition prices. The current example of the cancer drug Taxol is illustrative. When Taxol's patent protection expired recently and a competing generic drug entered the market, the prices of both drugs began to fall. Nevertheless, the reported prices remained at the pre-competition level, creating a "spread" that is used to market both drugs, and government health insurance programs have not benefitted from the reduced (but unreported) prices set by the marketplace. It is ironic that there was no "spread" before Taxol had a generic competitor, but now a "spread" exists and is used to market both drugs.

9.) Those drug manufacturers making false price representations have effectively usurped the right and the duty of Congress to determine Medicare drug payments, and the right and duty of state legislatures and Congress to determine Medicaid drug payments. Increased oversight by the Congress and enforcement by the Executive Branch, have resulted in at least two drug manufacturers reporting markedly lower prices to the Medicaid Programs, however, even those companies continue to report inflated prices for Medicare purposes.

After concluding the first stage of its investigation last year, Congress enacted legislation requiring the General Accounting Office to investigate and report on the true costs of the drugs in question and the expenses incurred by health care providers in administering them. The legislation also requires the recently renamed Center for Medicare and Medicaid Services (CMS), formerly known as the Health Care Financing Administration (HCFA), to review the GAO report when issued and take appropriate action with respect to Medicare drug reimbursements. State Medicaid programs already have taken actions based on the results of investigations by the Department of Justice and the National Association of Medicaid Fraud Control Units, and many of those programs have already reported saving tens of millions of dollars as a result. I am hopeful, that after considering the GAO report, CMS Administrator Thomas Scully will take similar action to stop these excessive payments that are costing the Nation's health care systems billions of dollars each year.

In conclusion, the evidence amassed by the sub-committees demonstrates without doubt: No drug reimbursement system will succeed unless drug companies tell the truth about their prices. Our existing Medicare Drug Reimbursement System is broken because certain drug companies lack honesty and integrity. Any expanded drug benefit will be doomed to fail if those same companies continue to lie about their prices.

Thank you for the opportunity to bring to the sub-committees' attention this widespread, institutionalized fleecing of Medicare, Medicaid and other health care programs funded by the American taxpayer.

I will be happy to answer any questions the sub-committees may have.