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[H.A.S.C. No. 106–6]



FOR FISCAL YEAR 2000—H.R. 1401






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MARCH 10, 1999


House of Representatives,
Committee on Armed Services,
Military Personnel Subcommittee,
Washington, DC, Wednesday, March 10, 1999.

    The subcommittee met, pursuant to call, at 1:12 p.m. in Room 2118, Rayburn House Office Building, Hon. Steve E. Buyer (chairman of the subcommittee) presiding.

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    Mr. BUYER. I am going to go ahead and get started, even though Mr. Abercrombie is not here.

    I want to begin with opening remarks. That is, over the last 2 years, the subcommittee has taken major steps toward improving the way the Department of Defense [DOD] provides health care to its Medicare-eligible beneficiaries. As a result, the Medicare Subvention Demonstration Program is under way and the FEHBP (Federal Employees Health Benefits Program) demonstration will be implemented in January of 2000.

    Last year, as part of the Fiscal Year 1999 National Defense Authorization Act, the subcommittee directed another initiative that DOD undertake a top-to-bottom redesign of its pharmacy system. In part, this initiative was intended to assess whether sufficient reform and savings might be generated so as to enable DOD to provide all DOD Medicare eligibles with full pharmacy benefit. More broadly, with an eye towards improving the effectiveness of the DOD pharmacy system and all DOD health care beneficiaries, the subcommittee directed that the best business practices of the civilian health community be made part of the Department's reform.

    I look forward to the testimony of the witnesses on our first panel not only to provide us a sense of how far the DOD has come in designing the pharmacy reform effort, but also to give us their perspectives on the direction that such reform might take. Although I initially intended to devote this hearing only to examining pharmacy redesign, it has become apparent that continuing problems with TRICARE implementation also demand the subcommittee's attention.

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    Recently, the vexing problem of claims processing has emerged as a critical issue, and I use the phrase ''critical issue'' because inefficiencies in the current system seem to be causing at least two major problems. The first is that the credit ratings of military personnel and other beneficiaries have been undermined because the TRICARE claims processing system cannot seem to make consistently timely payments to providers. This is an intolerable situation. It would seem reasonable and doable to me that we could design and implement a medical claims processing system of sufficient rigor and responsiveness so that it does not wreck the financial health of the very people the system is trying to assist.

    The second problem is that because of the late claims payments, no payments, and administrative hassles in getting paid, health care providers are walking away from TRICARE or deciding not to join TRICARE networks at all. Such trends potentially threaten the overall stability of the TRICARE system, and these trends need to be stopped. For these reasons, I look forward to hearing the testimony of our second set of witnesses today.

    Our first panel will explore the issues on pharmacy redesign. The witnesses on the first panel today are Dr. Sue Bailey, the Assistant Secretary of Defense for Health Affairs. Next we will have Stephen P. Backhus, the Director of Veterans' Affairs and Military Health Care Issues, the United States General Accounting Office. Next we will have David J. McIntyre, Jr., President and CEO of TriWest Healthcare Alliance. Next we will have Judith Bello, Executive Vice President for Policy and Strategic Planning, Pharmaceutical Research and Manufacturers of America. And then we will have Virginia Torsch, cochairman of the Health Care Committee, the Military Coalition.

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    Mr. BUYER. Before I ask the first witness to begin, I will note that a number of statements by organizations and individuals relating to this hearing and the Defense health care system have been submitted for inclusion in the record for this hearing. Without objection, I would plan to make these statements part of the record.

    The testimony submitted for the record comes from Lieutenant General Ronald R. Blanck, the Army Surgeon General; Vice Admiral Richard A. Nelson, the Navy Surgeon General; Lieutenant General Charles H. Roadman, II, Air Force Surgeon General; Robert E. Shields, President and CEO of Humana Military Healthcare Services; Joshua W. Krebs, the Air Force Sergeants Association; and S. Lawrence Kocor, Senior Vice President and General Counsel, National Association of Chain Drug Stores.

    Dr. Bailey, if you would please open with testimony.

    Dr. BAILEY. Thank you, Chairman Buyer.

    As you know, the military health care system has two missions, our peacetime health care mission and our wartime mission. I mention that at the outset here so that we realize, as we go forward, that things that we do that affect the military health care system not only affect those that we provide health care for on a day-to-day basis, but our ability to provide for health protection as we go into battle at times. It is our responsibility, therefore, to understand the link between these two systems so that there are not methods that we may undertake that could possibly erode our ability to provide for both of those missions.

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    Specifically, in TRICARE, you mentioned the problems we have had with the business practices, specifically claims, and that includes pharmacy as well. We are in a time of changing demographics. In the 1950s, 7 percent of our beneficiaries were over the age of 65 or retired; today, it is approximately 50 percent. So we have an overwhelming responsibility here to provide for those to whom we have promised care and, at the same time, the need to be responsive to those changing demographics at a time in the post-Cold War era where we have had a downsizing of the military, base closures, and health care costs that are rising at such a rate that it makes it difficult to budget for and provide for the needs all of those who are so deserving.

    Specifically, in pharmacy, we will be discussing today the dedicated process that we have undertaken that has provided for us insight into our pharmacy system, certainly legislatively directed. I would like to apologize, Chairman Buyer, at this time, for the fact that we are going to be a few weeks late in getting our initial report, which was due March 1. We are anticipating on or before May 1. In other words, we need 6 to 8 weeks. And I could explain a little bit about why we feel we need that additional time.

    Mr. BUYER. Please take your time in the opening statement to explain that.

    Dr. BAILEY. I will do so. Thank you.

    We have been working right up until January in a very dedicated process to bring together all the stakeholders and all those that could help us solve this overwhelming problem. And I would state it that way because pharmaceuticals are at this point costing us a billion dollars of our $16 billion budget. That of course, therefore is a huge piece of not only the health affairs budget and the military health care system's budget, but of the Department of Defense budget. So we have to be particularly careful to coordinate within the building lest we impact at those large numbers the budget of the Department of Defense.
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    Furthermore, we are looking at issues that are above and beyond the pharmaceutical issue, specifically that overwhelmingly large pool of beneficiaries that at this point we are continuing to try to provide for, that is, our honored and revered retirees, those that have served their nation, for whom we have made a promise of health care and are looking to deliver it. That over-65 issue again goes way beyond pharmaceuticals, and it also deals with the benefit, which, as you know, we are concerned may be perceived to be eroded in some way. So as we look at all the best business practices and all the things we have undertaken here in trying to understand what is happening in our pharmaceutical delivery system, we have discovered the enormity of the undertaking in regard to those issues, the benefit, the over-65 issue, and the impact on the budget.

    So, again, I would hope that you would indulge us with an additional few weeks so that we can make the very best recommendations to you and be responsive to the legislative directive.

    Specifically, we have undertaken, and I will end here and give you more detail as we go, to look first at our information systems, which I believe is the key to really providing for an updated and cost-efficient and medically efficient pharmaceutical delivery system. We are looking at all the best business practices that are undertaken in the industry and applying those that do not erode the benefit or adversely affect the military health care system to our current pharmaceutical delivery system.

    I would end by saying I look very much forward to working with you and the members of the committee as we look for better ways to serve our troops, their families, and those who have served.
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    Thank you.

    [The prepared statement of Dr. Bailey can be found in the appendix.]

    Mr. BUYER. Before I move to the next witness, I would like for you—before we come back to you in the rounds of questioning, Dr. Bailey, for you to think through your mind what is realistic, because getting it to the committee by 1 May is not realistic because I interpret that as trying to run the clock out on the budget cycle.

    I do not know who made those decisions and that type of thing, and if that is a wrong perception then, please, we will go into that, but I do not want to run the clock out.

    And realistically, I have a political problem because I was able to hold back the mail order pharmacy in order to do the entire redesign, and I cannot hold back that political momentum. So I want to be realistic with you and I want to make sure that we step out together on something that is realistic that can be implemented, that is the best rather than some fractured movement. So I want you to think about that. Okay?

    Let me now turn to Mr. Backhus.

    Mr. BACKHUS. Good afternoon, Mr. Chairman, members of the subcommittee. I am pleased to be here today to discuss the need to redesign DOD's three pharmacy programs: MTF (Military Treatment Facilities) outpatient pharmacies, TRICARE contractor retail pharmacies, and the National Mail Order Pharmacy.
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    You asked that I focus my remarks on the key issues covered in our June 1998 report. Namely, one, the adequacy of information that DOD and its contractors have to manage the pharmacy benefit; and two, the merits and feasibility of DOD and its contractors applying commercial best practices.

    In summary, Mr. Chairman, the problems DOD is experiencing in delivering its $1.3 billion pharmacy benefit stem largely from the way it manages the three programs. DOD needs to take a system-wide view of MTF and contractor operations, because they share patient populations. For example, because of nonintegrated databases, conflicting formularies, and varying eligibility rules, changes made to one program inevitably affect the others and have unintended consequences for DOD in contractor costs, as well as for beneficiaries, to access the pharmacy benefit.

    DOD and its contractors lack integrated pharmacy patient databases and routine information that commercial pharmacy benefit managers use to deliver high-quality pharmacy benefits at the lowest possible cost. Millions of dollars are probably wasted and patient safety jeopardized from uncontrolled prescription drugs stockpiling and adverse drug reactions.

    Significant benefits can be achieved if DOD and its contractors share databases of patient medications obtained through all three programs so they can reliably screen prescriptions before they are dispensed. Other commercial best practices could be more fully applied across DOD's three programs to save hundreds of millions of dollars and improve the quality of the benefit.

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    Let me highlight, for example, our recommendation for a uniform incentive-based formulary. This will allow DOD and its contractors to provide formulary and generic drugs at little or no cost, such as $5, to beneficiaries as well as provide nonformulary drugs at a somewhat higher copayment. Such a change would improve considerably consistency and the dependability of the pharmacy benefit system-wide.

    Right now, DOD's formularies vary and conflict. For example, each MTF, while it has the basic core formulary, has its own unique medications above and beyond that. We have learned of many situations where MTFs have had to restrict the drugs available on their formularies to hold down costs and address budget concerns. As a result, beneficiaries view this as an erosion of their benefit, and they feel they cannot depend on the MTFs to get their medications. DOD's Medicare-eligible retirees who have no prescription drug coverage under Medicare and depend on MTFs to fill their prescriptions find this especially difficult.

    Copayments, a common element of almost all private-sector plans, can be an effective way to hold down rising drug costs without creating restrictive formularies that raise the specter of benefit erosion. Copayments can create the incentives crucial to balancing DOD's financial bottom line with giving beneficiaries the freedom to choose pharmacies and drugs.

    Moreover, DOD could save between $61 million to $107 million with the uniform incentive-based formulary. When combined with other best practices, the savings could more than double and help offset the cost of providing Medicare-eligible beneficiaries a system-wide pharmacy benefit.

    In conclusion, Mr. Chairman, we believe DOD needs to commit itself to managing a fully integrated pharmacy system. As you know, our report makes several recommendations to achieve these objectives. We are encouraged that such a fundamental overhaul is possible, given that legislation first drafted by this subcommittee directs DOD to submit a plan for system-wide redesign of the pharmacy system. Although we have not yet, obviously, seen the specifics of this plan, we look forward to continuing to work with this subcommittee as it oversees DOD's efforts.
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    Mr. Chairman, that concludes my statement. I will be glad to answer any questions you or others may have.

    Mr. BUYER. Thank you, Mr. Backhus.

    [The prepared statement of Mr. Backhus can be found in the appendix.]

    Mr. BUYER. Mr. McIntyre.

    Mr. MCINTYRE. Good afternoon, Mr. Chairman and Mr. Abercrombie and Mr. Thompson. Thank you for inviting me to again appear before the committee, this time on a question of how we might best mature one of the critical areas of the TRICARE program, its pharmacy benefit.

    I believe the goal of the DOD program, which includes the TRICARE benefit, is to maximize the health of our Nation's active duty force, retirees, and military families by ensuring that they have access to optimal pharmacy products to meet their health care needs at the most cost-effective price for the taxpayer.

    While the pharmaceutical manufacturers are doing an excellent job of providing the products needed to maximize health, the current design of the program is not maximizing the benefit for the overall health of our beneficiaries, and it is leaving everyone bleeding financially. To this end, I would like to applaud the committee for its interest and concern, the GAO for their work on the issue, and the Department for its desire and continued intent to mature the DOD pharmacy program and the TRICARE benefit.
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    Let me tell you for a second about the experience in the 16-State central region. When we came into this program, we estimated what we would see in terms of spend increases on the pharmacy side, the actual spend overall. What we found in the first year is that that spend increased our projections by as much as 344 percent in a given area. The average spend increase in our 16-State region is 165 percent; the industry average in the private sector is between 12 and 16 percent.

    We have a problem. The problem boils down, in my view, to three components that need our focus. First, like Mr. Backhus said and Secretary Bailey said, we need an integrated pharmacy data system to give us the information that we collectively need to manage the program system wide.

    Secondly, I believe we need the ability to purchase the right drugs at the right price in the right location in order to maximize the benefit.

    And third, I believe that we need an alignment of the economic realities to ensure that we are making the right decisions for the right reasons. I am not going to spend any time on the Integrated Pharmacy Data System because that has already been covered.

    Mr. BUYER. Would you repeat number 3 for me?

    Mr. MCINTYRE. Yes, sir. And third, I believe that we need an alignment of the economic realities to ensure that we are making the right decisions for the right reasons.
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    Mr. BUYER. Explain that, sir.

    Mr. MCINTYRE. I will, sir, if you will let me or forgive me until I get to the end of my testimony.

    In terms of the right drugs at the right price and the right location, I believe there are seven elements that we need to focus on. First, we need an appropriate—and I stress ''appropriate''—prior authorization tool available to both the system within the active duty site as well as the network. And it ought to focus on making sure the people are getting safe medications, appropriate medications, and cost-effective medications. And rather than prior authorizing everything under the sun, we ought to target those areas where we actually think there is benefit to be gained from the resources that would be expended in that area.

    Particularly, we ought to focus on high-cost injectionable agents, high-cost biotechnology agents, medications with high potential for inappropriate use and/or medications that are deemed to be problematic by our experience. It is something that is done in the private sector, and we believe would be a good and appropriate tool to use internally within the system.

    Secondly, I believe that we should institute a common, therapeutically based formulary across the entire system.

    Today, the scenario that we face is that there is a formulary called a core formulary in the MTF environment. It is the drugs that they actually have to stock for the reasons of supporting the troops that are there and the like. Sometimes they go beyond that formulary. Sometimes they end up simply at that formulary. It differs from MTF to MTF based on budget, based on need and the like.
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    Secondly, the NMOP (National Mail Order Program) has a formulary. But the network does not. So what happens to all of us who seek to support the side of the system that involves the network pharmacies is that as the formularies are constrained internally within the system, the bleeding goes to the outside. I do not believe it is intentional, but it is a pragmatic fact of the current design of the system.

    We believe that there ought to be a therapeutically based formulary that is put in place that is appropriate, that covers appropriate therapies, multiple agents if need be, for those particular illnesses. To go beyond that therapy, it has to be for medically necessary reasons. If you go beyond the therapy for nonmedically necessary reasons, then we would submit that the concept of having people pay extra to exercise that decision makes a lot of sense.

    The third piece in terms of getting the right drug at the right price and the right location is maximizing the NMOP. Obviously, there would have to be changes made to the contracts. But I believe that we are losing an opportunity to maximize the resources, limited as they may be, at hand, to deal with the pharmacy program.

    We have a very good NMOP system put in place. Today, what we do is we encourage people at the 90th day of their benefit on the pharmacy side to actually use the NMOP, and the way we do that is to give them a discounted rate for using the NMOP.

    I would submit that we should flip the equation upside down. If you ask beneficiaries who use the NMOP, they like it. We should tell them that if you need a drug supply beyond 30 days that you should get that drug 31 days not beyond through the NMOP environment and actually provide it mail order rather than providing it in the network.
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    Now, does that mean that you do not provide it in the MTF environment day 31 and beyond? That is an issue that would have to be looked at. But I submit that we ought to be maximizing the mail order drug program that we have in place that is working well, that is cost effective, and in the eyes of the beneficiaries, is working fairly well. If people choose to go beyond that, they too ought to pay an additional price and so there ought to be a piece tied to it that deals with multiple copayments.

    The third piece, as I stated earlier, is aligning the economic realities of the program. Mr. Chairman, you asked me to spend just a minute on that, so I will. I believe that there are two things that we ought to be doing in this area. One is, we ought to be looking really hard, as a system—meaning the direct care system and the contractors—at how we can make sure that we foreclose the possibility that we purchase drugs in one environment at one rate and we squeeze the budget on that side, so in turn we are pressing things out to the network at a much greater cost. We have an obligation, I believe, as a system to maximize the use of resources in this area.

    As you know, this is an appropriated account. It is very different than Medicare, which is an entitlement. So every dollar we spend, if we are not spending it in the most effective way, we are actually leaking dollars outside of the system. One of the things that I believe ought to occur in this area is that we ought to design a consolidated budget that just deals with that billion dollars and separates it out; or we ought to have a proxy for that so that the contractors that support the system, like ourselves and the others, do not have to hold on to the price tag for that leakage.

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    Today every one of the contractors, including the company that I run, are running deficits in the tens of millions of dollars as a result of how the current pharmacy system is designed. That is wrong. That should not continue to occur, I do not believe anyone wants it to occur, but we need to get it fixed.

    In conclusion, Mr. Chairman, I would like to say the following: I believe that the system ought to be reformed. I believe that there are a lot of resources available to the pharmacy benefit. But we are not managing it right now. We are not managing it as effectively as we can, in some cases because tools have come to the marketplace today that were not envisioned several years ago.

    It is not the Department's fault, but at the same time, we have all got to wrap our arms around the issue and follow, in my view, what are some fairly isolated, fairly targeted pieces, to try and wrap our arms around how we collectively resolve the problem.

    I agree with you, the idea of doing an over-65 benefit is a great idea. You might remember the history, though, of Medicare Catastrophic. I was around on the other side when that was enacted; I was in the Senate as a staff person. I actually was the staff person that drove the undoing of Medicare Catastrophic. You may recall that in that particular piece of legislation there was a pharmacy benefit and actually that was one of the major drivers in the eyes of the beneficiary population at that time who supported Medicare Catastrophic.

    But do you know what? We got the formula wrong. And I would suggest that while that is a very admirable goal and it is one that needs to be pursued, the first thing we need to do is to fix the existing system to figure out how much money actually is in the system to be used for an over-65 benefit so that we do not go down the same road we did on Medicare Catastrophic where the drug estimate for the benefit was changing by the week, literally by the week, in the final days of that law's existence.
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    I applaud the committee for its focus in this area. I applaud the Department for its intent to get on with this issue. We look forward to continuing to be constructive contributors to the process. I do believe this issue can be fixed, and we look forward to helping in that effort.

    Thank you, Mr. Chairman.

    Mr. BUYER. Thank you, Mr. McIntyre.

    [The prepared statement of Mr. McIntyre can be found in the appendix.]

    Mr. BUYER. Ms. Torsch.

    Ms. TORSCH. Mr. Chairman and distinguished members of the subcommittee, the (Military) Coalition is very grateful for your efforts, particularly last year, to upgrade the overall TRICARE program, redesign and expand the pharmacy system, and provide a substantially expanded test in enrolling Medicare eligibles in the Federal Employees Health Benefit Program. The subcommittee's accomplishments were a major highlight of the 105th Congress.

    We would like to echo concerns about the impact that MTF cost-cutting, particularly in the pharmacy efforts, have had on uniformed services beneficiaries, particularly on those who are Medicare eligible. Complaints and concerns from our members about the difficulty in obtaining prescribed medications from military pharmacies have increased dramatically over the past few years, as has confusion about where and how to use the various pharmacy programs. Stories abound where retirees receive drug discrimination.
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    For example, some bases refuse to honor prescriptions written by civilian providers. Others seem to limit the availability of more expensive drugs to preferred clients, such as those on active duty. Further, those under age 65 who may use the retail or mail order program have a fallback not available to those who are Medicare eligible. The fact that many of these older retirees are the heroes and heroines of World War II makes this inequity an extremely bitter pill to swallow.

    In order to better document just how important the pharmacy benefit would be to older beneficiaries, particularly those living on fixed incomes such as widows, one of the Coalition's associations, the Retired Officers Association, conducted a survey in December 1998 of its widows, age 65 and older, who live outside the service area of a military hospital. A detailed analysis of the survey results are provided in our written testimony. However, we would like to highlight some of the findings.

    The survey found that 86 percent of the widows reported needing medications on a daily basis and are paying on average over a thousand dollars per year in out-of-pocket costs. Seventy-six percent of these widows do not have any health insurance to cover these drugs. The comments of these widows add perspective on how vital the pharmacy benefit is to their peace of mind.

    For example, one widow stated, ''I would get down on bended knee and be thankful to have my medicines provided. I am 85 and cannot drive anymore. Getting my prescriptions by mail for a nominal fee would be a blessing.''

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    The high cost for prescription drugs is making life miserable for senior citizens would can least afford them. Do you buy food or do you get your prescriptions filled? Another said, ''I get mostly free samples from doctors.'' Another said, ''I sometimes cut down on my medications so they will last longer.'' And finally, ''My doctor wants me to take medications, but I have to refuse. I cannot afford it.''

    Having access to outpatient prescription drugs is one of the most important health care benefits for our retired beneficiaries; and, therefore, we are gratified to see that you mandated that one of the goals of the pharmacy redesign is to extend prescription drug coverage to all Medicare-eligible uniformed services beneficiaries.

    The GAO made a number of recommendations in its report which Congress asked DOD to address in its pharmacy redesign plan. We would like to address at least two of these recommendations because they contain estimates of cost savings that might accrue to DOD if these suggestions were implemented. Cost savings we firmly believe should be applied to expansion of the pharmacy benefit to all Medicare eligibles.

    GAO concluded that because DOD cannot fully apply automated drug utilization review techniques across its different pharmacies, millions of dollars in unneeded pharmacy costs are being incurred and patients are being exposed to unnecessary safety risks. For example, we found it startling that GAO estimated about 55,000 MTF hospitalizations per year may have been caused by inappropriate drug therapy, amounting to about $83 million per year in unnecessary medical expenses.

    Although DOD believes perhaps the planned acquisition of the CHCS2 (Comprehensive Health Care System) system by fiscal year 2003 would eventually create an integrated patient pharmacy database, the Coalition is afraid this proposed system may be too little too late. DOD pharmacy officials have informed GAO that a currently available system, the Universal Pharmacy Patient Profile, UP-3, could be implemented immediately and save an estimated $420 million over 10 years in unnecessary pharmacy costs at a cost of only $43 million over the same period.
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    We wonder why DOD would wait 4 years for what they hope might be a panacea instead of using the proverbial bird-in-the-hand system available now. Therefore, Mr. Chairman, we urge your subcommittee to require DOD to immediately implement an integrated pharmacy patient database, rather than waiting for the completion of the CHCS-2 system in the year 2003.

    Like GAO, we too are greatly concerned about the lack of a uniform formulary among the various pharmacy programs. This lack of uniformity has prevented common pharmacy benefit management practices from being systematically applied in DOD's pharmacy programs. GAO has estimated that PBM (Pharmacy Benefit Management) practices in the establishment of a uniform formulary could help reduce benefit variability, increase cost effectiveness, and save between $61 million to $107 million annually.

    Where we part ways with GAO, however, is this notion that for a uniform formulary to be truly effective, it may require prescription copayments in military hospitals. The Coalition strongly opposes this recommendation. To adopt such copays would reverberate throughout the uniformed services community and cause many to conclude their interests are being traded off for a few pieces of silver.

    Although the Coalition supports the uniform formulary, provided it is not too restrictive, we do not believe that copayments have to be imposed on military hospital pharmacies in order to fund this initiative. Therefore, Mr. Chairman, the Coalition requests your subcommittee prohibit DOD from imposing copayments in military pharmacies.

    The Coalition has worked closely with DOD in the past year on the pharmacy redesign project, and we are thankful we have had the opportunity to provide input into how the pharmacy benefit should be structured, particularly expansion of this benefit to those who are Medicare eligible. We would like to applaud DOD's efforts in this regard. However, a recent development has us concerned.
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    We wonder why DOD is not backing off its estimates of cost savings that could be achieved by implementing some of GAO's recommendations, savings that DOD originally told GAO could amount to as high as $300 million per year just by implementing a uniform formulary and an integrated pharmacy database. These savings could and should be applied to the expansion of the pharmacy benefit to those who are Medicare eligible.

    We believe that if DOD follows GAO recommendations, enough savings should be generated to be able to expand the pharmacy benefit to all Medicare eligible uniformed services beneficiaries. However, we also believe that if additional funds are needed to expand the pharmacy benefit, then in keeping with the lifetime health care commitment, Congress should provide these funds, not the beneficiaries through premiums or copayments to military pharmacies.

    In conclusion, we would like to express our special appreciation for this subcommittee's efforts to require DOD redesign its pharmacy program and expand its benefit to all Medicare eligible uniformed services beneficiaries. In closing, we wish to express our profound appreciation to you and the subcommittee for the opportunity to present our views on this very critically important topic.

    Mr. BUYER. Thank you, Ms. Torsch.

    [The prepared statement of Ms. Torsch can be found in the appendix.]

    Mr. BUYER. Ms. Bello.

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    Ms. BELLO. Thank you, Mr. Chairman and members of the subcommittee, for the opportunity to share with you the views today of PhRMA (Pharmaceutical Research and Manufacturers of America), representing the Nation's leading research-based pharmaceutical and biotechnology companies. Our member companies lead the world in discovering and developing new medicines. The views we share with you today on the Defense Department's pharmacy benefit redesign are preliminary because we have not seen a specific proposal. We look forward to sharing our expertise with the subcommittee and with the Department in ensuring that the redesign efficiently improves patient care. We offer four general overarching recommendations in this regard.

    First, we strongly believe that TRICARE can fulfill its promise to deliver cost-effective, high-quality health care only if the pharmacy benefit is fully integrated into overall health benefits management. When we say ''integrated,'' we mean a system in which patient care and financing decisions are coordinated rather than considered component by component.

    Congress intended that the TRICARE system operate in this way. In any health care system, we oppose focusing on prescription medicines in isolation without considering the offsetting costs and efficiencies relative to other therapeutic options. Studies demonstrate that for some diseases or conditions, spending more on innovative medicines reduces overall health care spending. Even when they do not reduce overall health care spending, innovative medicines are on the most cost-effective therapy, costing less than alternative treatment options. Appropriate pharmaceutical care facilitates military readiness by improving the ability of our service men and women to perform their important jobs.

    Second, physicians, pharmacists and other health care professionals know best which therapies will be most effective to meet an individual patient's medical needs. The Department's basic core formulary lists essential medicines that must be kept on hand to meet immediate patient needs. However, any list of this type must not limit the treatment options of the health care professional who is responsible to determine the appropriate care for each individual patient.
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    In any health care system, we oppose restrictive formularies because they jeopardize health care quality and seldom fulfill their promise to reduce overall health care spending. Studies show that restrictive formularies, either in government programs or in the private sector, may reduce drug spending but they increase overall health care spending. For the same reasons, we also oppose system-wide, single-source contracting.

    Third, we support the implementation of best-business practices by local TRICARE contractors as GAO recommends. The health plan responsible for delivering high-quality, cost-effective care must have the tools to coordinate each patient's care. These best practices may include, for example, prospective drug utilization review, clinical pathways, and flexible formularies that permit caregivers to select medicines they determine best for their individual patients whether or not they are on a preferred drug list.

    Every health care professional in each TRICARE plan can implement these practices without impeding either health care quality or the mobility of military personnel if providers have access to patient records through a common, automated health care information system. As GAO recognizes, such a system facilitates both quality and cost-containment objectives. We commend the Department for its leadership in developing these systems.

    Finally, we strongly oppose extension of prices available to military treatment facilities under distribution and purchasing agreements to TRICARE contractors. These prices are subject to Congressionally mandated price controls which PhRMA opposes. Price controls discourage innovation by reducing the return investors may reasonably expect if investments in drug discovery and development without reducing the risks investors necessarily assume.
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    We recognize that Congress established a ceiling on prices for procurements by government agencies specified in law, including, of course, Defense. We agree with the legal opinion of the Department of Veterans Affairs that the Defense Department lacks authority to extend these ceiling prices to TRICARE contractors.

    We also note that Congress has expressed its view that these prices should not be extended to TRICARE contractors. By using private sector plans to manage health care, the department has made considerable progress to modernize its health care systems, improve quality, and contain spending. A retreat to centralized government-managed components would only undermine this progress.

    Thank you, Mr. Chairman and members of the subcommittee. And like other members of the panel, we look forward to your questions.

    Mr. BUYER. Thank you, Ms. Bello.

    [The prepared statement of Ms. Bello can be found in the appendix.]

    Mr. BUYER. I want to share with you, I was not at all a supporter of Mrs. Clinton's proposed health care plans and these involuntary alliances and this government takeover of the private health systems. It is interesting to know my political philosophy and beliefs, and then I serve as chairing the military health systems, which are government-run systems, and I serve on the Veterans Affairs Committee and I have got the VA health system. So I end up having to manage two government systems, and do it in such a way that I fight my own views and even fight incremental reforms for a government-wide system for the country. So bear with me.
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    Mr. ABERCROMBIE. Mr. Chairman, I want to tell you, it is not necessarily interesting to know that philosophy, but it is very useful.

    Mr. BUYER. Thank you.

    We have two completely different approaches here. We could be moving in a discussion of the private sector, and I can concur with some of the things you said here. But because I now wear this hat, I now have one side that wants more restriction and you want flexibility.

    You always have to fight to get on these formularies, so bear with us here. All right?

    Ms. BELLO. Yes, Mr. Chairman.

    Mr. BUYER. I do have several questions. Let me open with Dr. Bailey.

    I would like for you—if you have any comments on the testimony of Mr. Backhus or Mr. McIntyre, if you had any comments that you would like to make based on their testimony.

    Dr. BAILEY. Not at this time.

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    Mr. BUYER. Not at this time? Does that mean that you would but that you would submit it in writing?

    Dr. BAILEY. I would be happy to do so for specific points that we may be either in agreement that we would like to express or in disagreement. There is nothing that comes to go mind right now.

    Mr. BUYER. That would be useful to the committee. It would be helpful for us to know that with which are you in agreement or where you may disagree.

    Dr. BAILEY. Let me say, first of all, we had four very complex testimonies, so I would have to go back and think through each one.

    I can say I know certainly in terms of Mr. Backhus's testimony there is much that we agree with and in fact have concurred with in terms of their observations about the system. We are completely in agreement that we certainly need to have a computerized data system that lets us do all the things you heard discussed here today.

    In fact, even though you heard on either side of me what sound like opposing opinions, I think we all know we cannot provide reasonable medical-pharmaceutical delivery, efficient, cost-effective or otherwise, without a computer system that allows us to do so.

    Clearly, the thing that I am most concerned about is any drug interactions that may not be caught due to the fact that we have the National Mail Order Pharmacy, we have retail, we have MTF, we have people purchasing and obtaining medications in a variety of ways; and without being able to track that, we cannot do good medicine. So I clearly agree that that is one area that I am in agreement with both Mr. McIntyre and Mr. Backhus on.
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    I would say specifically on that, by the way, that we are not waiting for CHCS-2. I would agree completely with Ms. Torsch that waiting for '03 makes no sense. So to that end, we are clearly working with the prospective drug utilization review process and have, as of January 1999, selected the Pharmacy Data Transaction Service to provide us with a system that will allow us to link the MTF, (the Military Treatment Facility), the National Mail Order Pharmacy, and the retail network so that we know across the board what our beneficiaries are receiving and provide better medical delivery of medications.

    I would add that, interestingly, Ms. Torsch mentioned—I know I am into someone else's testimony.

    Mr. BUYER. That is quite all right. I want to find out where we are in agreement.

    Dr. BAILEY. Where we are in agreement is this computerized data system.

    So let me just say that we are in agreement in this, as well, that we are comparing UP-3 (Universal Pharmacy Patient Profile). In fact, this summer we have asked for a review. One of the things I have looked at and have been concerned about is our informing systems in this near-year now that I have been in this position, and I keep saying compared to what? Are we able to get to where we need to go as effectively and cost efficiently, and can we do it sooner possibly by using some of the systems that may be out there?

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    So we are indeed reviewing and—specifically, the off-the-shelf products and UP-3, and comparing that to PDTS, which is our Pharmacy Data Transaction Service that we have selected at this time. And before we begin the testing of that system, the alpha testing, we are going to compare it in the very near term, in fact this summer. So we are hoping by the end of this year that indeed we will have compared that, have chosen the most effective system, and can implement that system so that we can link our current retail MTF and NMOP system.

    Mr. BUYER. I have a whole list of questions, but I want to yield to the rest of the panel.

    I think that we are going to need to have a conversation here in the next several weeks so you can give us a prebrief perhaps on where you are going and what your sense is and how the subcommittee can be helpful and any recommendations for any legislative fix that we may be able to do over this next year, so we don't get into—so we don't get into a situation where we may be fighting against each other—if we can, focus on where we are in agreement, how I can be helpful to you. We all know where we want to go.

    Dr. BAILEY. Right.

    Mr. BUYER. Okay. So we don't get into this frustration of, I have got to wait, I can't see anything until May. Then, I do get into this waiting out the clock on us; and let us not do that.

    Dr. BAILEY. I would be happy to work with you in that regard.

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    Mr. BUYER. All right. Thank you.

    I yield to Mr. Abercrombie.

    Mr. ABERCROMBIE. Thank you, Mr. Chairman.

    May I put my statement into the record?

    Mr. BUYER. Your entire statement will be entered into the record, Mr. Abercrombie.

    Mr. ABERCROMBIE. Thank you very much. By the way, may I say, Mr. Chairman, how much we appreciate this hearing being held and your focus on the issues at hand and your grasp of it, I think, is going to lead to a good solution for us.

    I want to make sure that—Dr. Bailey, that I understand correctly what might be the implications; and the reason has to do with some of the broader implications of the drug prescription availability. As the chairman has indicated, there is a somewhat broad context in which all of this is being played out; that is to say, the whole question of Medicare eligibility and benefits to be provided and paying for Medicare, right?

    Dr. BAILEY. Correct.

    Mr. ABERCROMBIE. This take place within that—this conversation takes place within that overall context, does it not? Is that a fair point?
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    Dr. BAILEY. It is a fair point.

    Mr. ABERCROMBIE. Yes. I am not trying to trick you by asking you that. What I mean is that if you recall some of Ms. Torsch's testimony, talking about a widow, 85 years old and so on, wanting to have a drug prescription and so on. We have got to be very careful when we start talking about this as if there is going to be a privileged class of people in the United States.

    My mother is 91 years old, and I assure you she is every bit as important to me as the 85-year-old widow. And when we talk about health care and the provision of health care and what is fair, we also have made a promise to Medicare people in Medicare, who are not retirees or spouses or related to people in the military or former military people, correct?

    Dr. BAILEY. Correct.

    Mr. ABERCROMBIE. So when we talk about reforms that are going to take place or changes that are going to take place with respect to provision of benefits, whether they are drug benefits or anything else with respect to the delivery of health care, we are not going to try and create two classes of people I trust. Right?

    Dr. BAILEY. Yes, sir.

    Mr. ABERCROMBIE. Where Medicare is concerned at least, it is one thing to say you are going to have your health care—and I hope, Mr. McIntyre, my comments apply in some respect to your testimony as well. It is one thing to say we are going to keep promises that were made with respect to health care, but that applies to promises that are made, implicit and explicit, in all the legislation that we pass.
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    Okay, having said that, what interests me the most out of all of this is how—what is a practical way of dealing with this? And what appears to me from my conversations and my studying of the issues at hand is the question of what I wrote down to myself, and I guess it kind of reflects the database, an integrated computer delivery capacity.

    Now, I am trying to remember the name of the system here. Is it integrated computer data?

    Dr. BAILEY. The Pharmacy Data Transaction Service, PDTS.

    Mr. ABERCROMBIE. Right. Let me have it, tell me again.

    Dr. BAILEY. Pharmacy Data Transaction Service.


    Dr. BAILEY. Yes.

    Mr. ABERCROMBIE. This is not possible right now, right?

    Dr. BAILEY. We will be testing it in August of this year.

    Mr. ABERCROMBIE. But there is a Pharmacy Data Transaction Service, right?
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    Dr. BAILEY. Your question is, is there one today; you mean an off-the-shelf product?


    Dr. BAILEY. What Ms. Torsch is referring—

    Mr. ABERCROMBIE. The claim there is.

    Dr. BAILEY. There are many products out there that we are looking at in terms of costs and the ability to implement and do what we need to have done, which is very—it is much more complex than most managed care systems.

    Mr. ABERCROMBIE. I understand that. But that is going to be complex for people all over the country. I mean, in order to deal with the provision of drugs for people on Medicare right now, or Medicaid right now, it is complicated for any system to deliver, and it is all going to have to be computerized so that you have transferability of information, so that you know where you are, what you are doing.

    Is that where we need to spend money now if we put—should we put an emphasis on that, on the mechanics, if you will, the logistics of delivery? Will that take care of most of our problem? Because what I am hearing from all of you, it isn't so much a policy problem; there are some questions about who gets what and where it is delivered and so on.

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    But over and over again, what comes across to me is, this is principally a matter of having the ability to be able to access information, coordinate information and make a decision as a result of knowing the correct information.

    Dr. BAILEY. Shall I respond?


    Dr. BAILEY. I used to train at Johns Hopkins. I did a fellowship there in the geriatric unit, and it always amazed me when the older people would come in, and we asked them to bring all the drugs they were on, and they would bring a grocery-sized bag filled with bottles. I mean, it would be more than anybody could keep up, much less if you can't see very well and you were having some trouble with your memory, and you, in fact, are expected to keep track of these drugs. And that is way beyond interactions, just when to take them and what doctors have given you them to you, et cetera, and when you are supposed to stop taking them. So, in fact, I think that our being able to track that is essential.

    I would go on to say when we hear of the 85-year-old widow, our National Mail Order Pharmacy is now instituted system-wide for us; we would like to provide that as well for over 64, those who are over 65. And it has been estimated that that will cost $267 million, just that alone, providing the national mail order.

    But I would like to say—

    Mr. ABERCROMBIE. For how many people?
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    Dr. BAILEY. For people—well, at this point, we have a possible 1.4 million over-65-eligible, Medicare-eligible beneficiaries. But let me just say for the woman who is over 85, it would help her to have that National Mail Order Pharmacy instead of going back and forth having to get out and get the medications for her to be able to spend $8 for the NMOP order for 90 days, so she would have a 3 months' supply and not have to go get that, that is the kind of thing we would like to see provided, but we are going to need to look at the budgetary constraints we are under and find a way to provide that for $300 million.

    Mr. ABERCROMBIE. That would be fine for everybody who is over 65.

    Dr. BAILEY. I would agree.

    Mr. ABERCROMBIE. That is Medicare eligible.

    Dr. BAILEY. Right.

    Mr. ABERCROMBIE. I mean, we are all in this same problem.

    Dr. BAILEY. Let me just add, though, and make my point that it is essential for us to know what medications are in her bag, for all of those she has to take, it is our responsibility to be certain we are not providing medications that may adversely affect her health. And that is why we need to track that, as well as doing it for our own cost efficiencies.

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    Mr. ABERCROMBIE. Okay.

    Mr. McIntyre, you have heard all of this. Do you have any comments with respect to my inquiry about what seems to be information integration and cross-capability of different institutional entities within the provision—the system provision, whether it is the treatment facility or whether it is as crucial here?

    Mr. MCINTYRE. Sir, I think your question is very insightful, because the backbone of how we operate has to provide us with the appropriate information to be able to manage the benefits that we have. And I would agree with Dr. Bailey that the—it is imperative that we have a good system internally in a—what has become a virtually integrated health care system, between the private sector and the military, to be able to manage that system.

    I would submit to you, however, that having the information is only one piece; how you manage it then is the second piece. And the fact of the matter is that if we are, for example, having a beneficiary who may have a sinus infection, a basic sinus infection, and there is a doctor who is trying to prescribe a blockbuster antibiotic to take a hammer to that sinus information, whereas the beneficiary could actually do just as fine with Erythromycin, why aren't we putting the person on Erythromycin? And that happens today in the system, especially when people are on the outside in the network, because there is no formulary that is able to be applied to the network.

    Secondly, in addition to that, because of the way that the system is currently nonintegrated from a decision-making perspective, we have a drug that is called Sinegis, as an example, which is a respiratory agent for young kids. It is a great drug, very, very critical to saving the lives of young kids and keeping them out of the hospital. The cost of that drug in the MTF environment is $3,000; the cost of that drug in the network, to the system and to the taxpayer, is $6,000. Now, I would ask you, where is the best place for the system to be buying and providing that drug?
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    That is an example of some of the kinds of things that we need to get to as we are working on the overall issue of fixing the pharmacy benefit.

    Information is absolutely critical to make sure that we manage this in an integrated way. But we also need to be very smart about how we buy our products and where we provide them.

    Mr. ABERCROMBIE. I understand that; I mean, that is one of the reasons we are doing this. But what is to prevent, what needs to be done in legislation? I don't see anything there, why you can't do that right now—

    Mr. MCINTYRE. Well, I would submit—

    Mr. ABERCROMBIE. —if you had the information. And how you manage is a factor of whether you have the information correctly put together in the first place.

    Mr. MCINTYRE. Of course.

    Mr. ABERCROMBIE. If you do that, if you have that information, it seems to me there is sufficient legislation right now to be able to manage it the way it should be. If it isn't being managed right, we have got the wrong people doing it and we should get rid of them.

    Mr. MCINTYRE. I would offer, sir, that if a common therapeutically based formulary would be implemented across the system and you had, for example, an additional copay that people had to pay if they went beyond that, that it is possible that that would have to be legislated because of the way in which the benefit structure for the copay of this program is drawn.
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    Mr. ABERCROMBIE. This is a different issue. I have taken additional time for now.

    Mr. BUYER. I would say, Mr. Abercrombie, it goes beyond the information management. It also goes into the question—I will follow up after Mr. Thornberry with the integrated budgetary areas. I am going to be fascinated, how you are going to make that work.

    Mr. Thornberry, you are recognized.

    Mr. THORNBERRY. Thank you, Mr. Chairman. I would like to make another run at trying to look at this—these issues in context, because this subcommittee has tried over the past few years to move us, step by step, closer towards the government, doing what the government said it was going to do for military retirees; and just because we are having to move step by small step in that direction doesn't mean that we shouldn't have a goal out there, that it shouldn't be part of a real effort to get us somewhere.

    And so I guess I would really like to hear first from you, Dr. Bailey, and perhaps, Mr. Backhus, and then, Ms. Torsch, how does this fit into the broader scheme of trying to provide health care for military retirees? For example, some people are suggesting that this pharmacy benefit, particularly for Medicare-eligibles, eliminates the need to continue with the FEHBP test and the Medicare subvention test, which are under way.

    How do these things stack up in our priorities? How do they fit together?
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    And, Dr. Bailey, let me—as part of your answer, I am concerned about the tests that are going on, that they are being set up to fail and to be unsuccessful. Let me give you a couple of examples.

    About a month ago I was in the hospital on the base in my district, which is part of the subvention test emanating out of San Antonio. They are trying to do a good job in providing care, but they hadn't seen a single dollar yet of additional funds as a result of Medicare subvention.

    My understanding was that they were going to get reimbursed for doing this extra stuff. They hadn't gotten anything. There were mileage restrictions put on who could sign up, which don't make sense in my part of the world, where it is such great distances people have to travel; and as a result, the number of enrollees was less than it should be.

    Ms. Torsch has more than a page of concerns about the FEHBP test, which includes the number of enrollees versus lives, the amount of money and so forth, and that is lots of questions.

    But I am trying to figure out, number one, are we serious about these tests? If we are, how does the pharmacy benefit, fit in and what should the priorities be?

    Dr. BAILEY. First of all, your FEH—your TRICARE Senior Prime site is—can you remind me?

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    Mr. THORNBERRY. It is in Sheppard.

    Dr. BAILEY. Exactly.

    Mr. THORNBERRY. Out of San Antonio.

    Dr. BAILEY. It is the Sheppard's.

    Mr. THORNBERRY. Yes.

    Dr. BAILEY. Okay, fine. Let's see, there were a lot of questions there.

    Mr. THORNBERRY. I am trying to put this in a broader context. Where should we be going to get the most done for these retirees?

    Dr. BAILEY. First of all, I don't think the pharmacy redesign solves the problem of our responsibility to our retirees. I think where we have done much—in fact, I know we have been at this for several years, but I am very pleased to say that we are now, in this year, we have set up, as you know, six TRICARE/Medicare subvention sites, and I have been to Sheppard and met with the people there.

    And let me just answer that first and say, by the way, we have been tracking, because it has been one of the concerns and one of the things we need to understand from these demonstration projects, are we getting the shift of funds, is HCFA (Health Care Financing Administration) providing for us; and it looks as though, as of the early tracking, that indeed that is occurring.
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    So I will specifically check on Sheppard and see why they have not received their percentage of that at this particular time.

    [The information referred to can be found in the appendix]

    You also had a question in there which alluded to the fact that in some of these areas there are—we are under the enrollment level or over the enrollment level. It really depends, region to region. Some of the regions were completely enrolled, and in other regions where people have, frankly, some concern about whether or not a demo that may only go a couple of years would leave them again uninsured at the end of the 2 years, they have found reasonable ways to insure themselves. So the combination is, they may not be coming forward to sign up, but we have aggressively pursued filling all the roles of our TRICARE Senior program.

    I opened 5 of the 6 of those. Dave and I opened one together. We are really tracking those because I will say, in my opinion, that is where the solution will come. So I am very pleased that all of these programs are going on, including the FEHBP, so we can compare everything, and that this has all occurred during my watch. And I am going to watch it very carefully, because I want us to move ahead. In fact, I would like to see TRICARE Senior more—even more quickly than even demonstrated to do at this time, because I think it will provide a reasonable way for our retirees to get their care where the majority of them would choose to do so, and that is with the military health care system.

    Specifically, I think that if you—that the program that we are looking at in the redesign will require that if we look at all the ways that we look at the over-65 section, there are only so many ways of providing that. We either provide the exact benefit as the under-65s currently receive, and we would need to understand how—from whence those funds would come, or continue to provide space available and the pharmaceuticals as we do now. And I don't think any one of us feels that is the way to go, and so, for me, the third option, which is to provide the Medicare funding that would let us cover pharmaceuticals and the rest of the health care is the way we can provide for those that are over 65.
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    Mr. BACKHUS. Yes, sir. In my view, pharmacy is probably the single biggest issue and potential solution—therefore, effective solution—toward addressing the needs of the older retiree population. It is the significant gap that exists in coverage for folks who are over 65. And they obviously, most of them, almost all of them, have Medicare, and they have had health care coverage. Many of them, upwards of 50 percent, have wraparound coverage to that. Where they do have gaps is in prescription medications.

    How it fits comparatively with FEHBP and the other demonstrations, in my view—a couple of years ago, we analyzed that and wrote a report on that and compared where potentially FEHBP would be in terms of costs and effectiveness compared with Medigap plans that perhaps would be paid for by DOD—compared that to some sort of wrap-up CHAMPUS program that could extend to people when they became age 65, compared it to subvention before the proposal was in place, or legislated, I should say, and then tried to estimate what the costs would be of dealing just with pharmacy for those people—principally through a Mail Order Pharmacy program though—and by a long way, providing pharmaceutical benefits to people over 65 was the most cost effective in our judgment and had the most potential. It was the most bang for the buck, if you will. It would be the thing that would most likely and most effectively close the gap and provide what the people need in terms of the things they don't have right now.

    So that is where I come out in terms of where pharmacy redesign fits into meeting the needs of the retirees. It is the single most important thing, in my judgment, that could be done to fill the gap.

    Mr. THORNBERRY. Ms. Torsch?
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    Ms. TORSCH. Yes, sir. We have testified many times before that we feel that there are a variety of options and solutions that need to be implemented; and pharmacy, expanding the pharmacy benefit is just one of them. We see this as sort of a matrix. In other words, we now have a TRICARE Senior Prime test that some have chosen to participate in.

    We will have an FEHBP 65 test, if we can get that off the ground, and that test will also be in our TRICARE Senior Prime test so that we can have a chance to see who would choose to enroll in that, because that does carry a premium, and not everybody is going to choose to pay a premium to enroll in a Federal Employee Health Benefit Program test.

    Where I see the pharmacy benefit, the expansion of the pharmacy benefit, fitting an option as that may be, that is good enough for some people and that is all they want. There are others out there, though, that already are enrolled in something like the Federal Employee Health Benefit plan already, because they went out and they worked for the civil service, so they already have a prescription benefit.

    So when we start talking about aggregate costs for, like, $267 million to cover all 1.4 million Medicare eligibles, I think that is a tad high, because you already have some people out there that already have a pharmacy benefit.

    So I think it bears—we just don't see one solution being the solution; I think, rather, a matrix and then seeing where people, what they need to fill in those gaps that they perceive they have in their health care.

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    Mr. THORNBERRY. Thank you.

    Mr. BUYER. Ms. Bello, as I understand it, pharmacy supports DOD's idea of the basic core formulary, so long as that core formulary is operated as a minimum necessary to provide high quality health care and, quote, ''A provider may, without penalty, choose to treat a patient with a nonformulary medicine when dictated by patient needs.''

    Given this, how does PhRMA feel about the idea of incentive-based formularies, recommended by GAO, that create incentives for providers to use formularies; and under PhRMA's concept of holding the provider harmless for using a nonformulary drug, should the patient be held harmless financially if a nonformulary drug is prescribed?

    Ms. BELLO. Mr. Chairman, we basically agree with the conferees who in the conference report last year said the conferees intend that the uniform formulary be considered the minimum and not the maximum inventory of drugs that may be available to a military treatment facility. We understand entirely cost containment objectives, as well as quality objectives.

    So a formulary provided, flexibly administered and integrated in overall health benefits management can be a very useful and, indeed, important tool for both objectives—quality and cost containment. We are opposed to restrictive formularies for the reasons I mentioned; basically, studies in both government programs and private health care programs proved that these measures are penny-wise but pound foolish.

    In a New Hampshire Medicaid program, for example, restrictions on spending did indeed reduce drug spending by $57 a patient, but increased overall health care spending for each patient by over $1,500, because denying patients timely access to the medicines that are medically necessary for them results in emergency care, urgent care, hospitalization, and nursing home administration; and in particular for seniors who are admitted to nursing homes, this caused long-term damage because they lost their capability of independent living.
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    Now, you asked specifically what do we think of incentive-based formularies? I have to tell you that we are not really sure what that means, and we are always concerned that sometimes the words get in the way. If an incentive-based formulary is managed in a flexible and integrated way so that timely access to the medicine that is medically needed by a patient, as determined by the patient's doctor, is not denied, then we think that is fine. If the incentive is such that it acts as a barrier to timely access to the medicine that a physician believes his or her patient needs, then we think it is bad for quality and bad for cost containment.

    Mr. BUYER. Well, let us just straighten it out.

    Mr. Backhus, what does GAO mean by that?

    Mr. BACKHUS. The terminology is 90 percent of them—there may be 99 percent in this discussion, I think, because words do get tossed around and sometimes misinterpreted or not understood.

    We are not suggesting—we, GAO, are not suggesting that there be a closed formulary that limits any patient to the drugs that are on that formulary, in other words, deny people medications that doctors prescribe.

    Mr. BUYER. I guess the key question is, what do you mean by incentive-based formulary?

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    Mr. BACKHUS. Incentive-based formulary is a core formulary supplemented by other kinds of medications, I think like Dave McIntyre suggested, that are available to people, if they choose, that probably require some kind of incentive by way of copayment in order to obtain.

    Mr. BUYER. All right. You have got to bubble-size this for me.

    Mr. BACKHUS. Okay.

    Mr. BUYER. I am—I thought about this, too, I am taking Amoxicillin right now, because you know if I had gotten that Ceclor, I would probably have felt better 3 days ago. Instead I went with a broad-spectrum drug instead at a much cheaper price, but I am paying a price for it. But I could have spent $100 on Ceclor and felt better 3 days ago.

    Now, if I had done this in the system, is that what you are referring to where I could have gone to a core formulary, gotten Amoxicillin, but if I wanted Ceclor perhaps you are proposing I do a copay?

    Mr. BACKHUS. That could be the case. The therapeutic committees that design these formularies actually design these things based on their therapeutic value and, theoretically anyway, there should be a prescription drug available on that formulary that is as effective as the drug that you wish you would have had.

    Now, there could be situations where—things change, new medications are developed every day, the formularies have to be updated, always reviewed.
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    There can be situations, I am sure, where from time to time there may not be the most effective, single most effective drug available on the formulary that is considered near the basic—the basic medication that everybody can get. But it will be available, it will be available to the patient.

    Mr. BUYER. Ms. Bello, why would you find that objectionable?

    Ms. BELLO. Well, copays are not necessarily either good or bad. Again, for us, committed to quality care as well as cost containment, the issue is, is a copay requirement or other incentive, does it operate in a way that really reduces timely access to the medicine that a doctor thinks his or her patient medically needs? If your doctor prescribes Ceclor for you because he or she thinks that is what you need, then we think there should not be a disincentive for you to be able to have access to Ceclor.

    We think that we do a very good job of bringing new medicines to market, and we rely upon the diagnosis and prescription of the individual physician to serve and best recognize the needs of an individual patient. We are concerned that any restrictive formulary, which might or might not include an incentive-based formulary—it depends on how it is administered—could prove penny-wise and pound foolish and also jeopardize the quality of health care.

    Mr. BUYER. I guess my problem here is, being a former medical service corps officer, I know just enough to be dangerous. And I am trying to figure this out.

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    When you have got the MTF over here for which, under the old system, there was a larger population in there and the concern wasn't as great as when we had CHAMPUS, now all of a sudden you have a smaller MTF operation, it is all transferred out here to the TRICARE contractors in a huge cost shift, and you would love it. I would understand that, because as the example was given with the MTFs, we are paying $3,000 for a drug, but perhaps now we are having to pay $6,000 for a drug at more of the TRICARE contractors.

    I could understand why PhRMA would love that. That is why we are having the hearing.

    Now I have to figure out and turn to Dr. Bailey. That is why—what I am anxious to see is, how do you really do all of this? How do you integrate the budgets here to figure this one out? You have got your mail order over here, you have got your MTFs over there, and you have got your TRICARE contracts here, and you are paying different prices.

    How do you integrate the budget to control all of this? That is what we are trying to do here is, how are you going to do this?

    Dr. BAILEY. Well, one of the things is that we have DAPA (Distribution and Pricing Agreement) pricing so that we have lower costs at the both the NMOP and MTF, and one of the questions that we were struggling with that took us past March 1, that question is, is this something that we can provide, realizing we are in an environment—pharmaceutically competitive environment, and the impact that that may have; but realizing at the same time that having those price agreements allows us at least a 24 percent reduction and sometimes as high as 40 percent, which allows us to work within our budget for the majority of the medications we provide.
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    Let me just say one other thing, too, about how many people that are out there, not in the MTFs anymore, but in the contracts, I think—not necessarily on your part, but on the part of many—that there is a misconception that we contracted out greatly. In fact, 70 or 75 percent of the care that is given to the military health care system is still given by people in uniform in military hospitals and clinics all around the world. It is only 25 or 30 percent that is contracted out, and that is where we have closed bases or don't have personnel.

    So it was a wonderful agreement between our good partners in the contracting world to provide services where we could not provide them, but I just want everyone to remember that 70 percent, or plus, is still the same system we have had for years for providing treatment and pharmaceuticals.

    Mr. BUYER. But that cost is really going up out there in the TRICARE world?

    Dr. BAILEY. Yes.

    Mr. BUYER. Concur?

    Dr. BAILEY. Yes.

    Mr. MCINTYRE. Mr. Chairman, if I might join the fray for a second—and I apologize for using the sinus infection as the example, since you obviously are suffering from one—but the bottom line from my perspective is, we have a finite amount of resources here, and the question is, how do you maximize the use of those resources? And in some cases that means, I would submit, even though it would be an inconvenience to you, that maybe not being on Ceclor at the full expense of the taxpayer for what you individually are facing is the right decision. And those are the kinds of choices that we have to make, what is medically necessary, and really getting down to the question of what is the appropriate formulary across the entire system?
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    We would all like to pay for everything. My mother has MS, my mother is on Medicare. My mother and I are talking about whether I should buy the drug cocktail therapy that is available for her, which her plan will not fund. That is a terrible, terrible decision that has to be made by people in this country every single day.

    But oftentimes we are not talking about that kind of an issue. We are talking about the situation that you and I face. I am on an Erythromycin; I am not on Ceclor either, because I chose to go that route versus paying more money and taking the other piece; and I will suffer through it for a couple more days like you are doing. But the issue is, how do we stretch those resources? And that is really where I am concerned because I think until we figure out how to pull this all together, we are not going to end up improving the situation that we are in and offering to those that currently are eligible for services under the program the right pharmacy benefit at the right price to the taxpayer. And that is really where we have got a challenge here, in my view.

    Mr. BUYER. Mr. Abercrombie.

    Mr. ABERCROMBIE. Yes, thank you, Mr. Chairman. I realize we have got another panel to get to.

    Mr. BUYER. That is all right. We are going to get through this.

    Mr. ABERCROMBIE. Because this may help with the other one.

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    Dr. Bailey, this may sound naive to you, either naive or unnecessarily provocative, but I am serious about the question—or there are two questions. The first question, that will lead me to what I want to ask you, under the distribution and pricing agreements now, is that some kind of a cover phrase for the fact—is it a fact that the pharmaceutical companies have made some kind of a deal to give you something below wholesale price on an arbitrary basis?

    Dr. BAILEY. Clearly, it is a negotiated price.

    Mr. ABERCROMBIE. Okay. So you are already doing cost shifting. I don't mean you personally, the pharmacy companies are already doing it. Are they going to charge somebody else?

    Dr. BAILEY. I don't know that I would term it that way, but I understand what you are asking.

    Mr. ABERCROMBIE. There is no reason why you can't have the same agreement going all the way across the line to the contractors and all the rest. If you are going to do business, they have got to give you that price; if you don't want to do it, somebody will give it to you if they want to do business with you.

    Dr. BAILEY. Well, in fact, in the report language it indicated that there are two things. Even though we are required to look at better business practices, which we clearly would do and are doing, two of the things that we are asked that we stay away from were copays and, in fact, DAPA pricing that extended into the retail pharmacy industry.
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    Mr. ABERCROMBIE. Stay away from it?

    Dr. BAILEY. Yes.


    Dr. BAILEY. You would have to speak to those who wrote the report language. I honestly don't know.

    Mr. ABERCROMBIE. I think I understand why.

    Dr. BAILEY. I do understand there are concerns about the competitive industry that is the pharmaceutical industry, and perhaps Ms. Bello might want to respond to that. But—

    Mr. ABERCROMBIE. I will get there in good time. Look, you strong-armed them in the first place, because they want to do business with you—you have got a helluva lot of people out there. If they want to be involved in it and sell anything, they make a deal with you, right?

    If you had any sense when you did the negotiating, you strong-armed.

    Dr. BAILEY. I would not say we strong-armed. Clearly, there are negotiated prices that are set at at least 24 percent below. And, yes, it is negotiated.
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    Mr. ABERCROMBIE. And you are the Assistant Secretary for Defense, Health Affairs?

    Dr. BAILEY. Yes, sir.

    Mr. ABERCROMBIE. Remember, my first questions I said, get away from policy, I wanted to talk about the mechanics and the logistics, if you will. Unless you tell me otherwise, then I am going to assume that you are in charge of this.

    Dr. BAILEY. Yes, sir.

    Mr. ABERCROMBIE. Okay. Why can't you order the MTF and the TRICARE, or whoever the hell the contractor is, and the mail order people to have an integrated policy, period, order them, tell them to do it.

    Dr. BAILEY. A policy on pricing?

    Mr. ABERCROMBIE. Not only on the policy, but to integrate the systems so you don't have three separate—you have got MTF, military treatment facilities, operating under one set of protocols and procedures and prices, and all the rest, the contractors out there somewhere, and then the mail order people are out there.

    Dr. BAILEY. Maybe it would help if I explained one piece of that, Mr. Abercrombie.
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    In fact, we are legislated in our formulary through the direct care system, the military health care system, to provide any drug that is FDA approved. So we could not alter that part of the formulary and the provision of those medications without a legislative change.

    Mr. ABERCROMBIE. I am not asking you to do that. I am saying, why can't you order everybody under the same system?

    Dr. BAILEY. Well, that system we are now talking about, the core formulary that is imposed through the MTF, the formulary that is maintained there within each MTF—which, by the way, may have different specialty services depending on the hospital; Sheppard may be different than Fort Sill and, in fact, is.

    So there are different medications required to be held in a contained environment at that particular MTF. But there is also the overlay of this FDA requirement if someone prescribes a medication, that if it is FDA approved, that that may be received.

    Now, as you can see, the complexity is if it is not held in the formulary at the MTF, then that beneficiary may go to the retail network so that we, in fact, can provide for the legislative directive, which is that they receive that medication which is FDA approved and prescribed. And by the way, that is the essence to everything that is being said, that it is therapeutically driven that any medication—

    Mr. ABERCROMBIE. Though we are talking about—Medicare eligibility is the bottom-line phrase that is being used to justify all of this, right?
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    Dr. BAILEY. Only for the over-65.

    Mr. ABERCROMBIE. Okay. Let us stick with that for the moment.

    Dr. BAILEY. Okay.

    Mr. ABERCROMBIE. Then why can't we just, whatever is available there, make it available across the board and order it to be done?

    Dr. BAILEY. Whatever is available to?

    Mr. ABERCROMBIE. Any Medicare-eligible person, period, over 65. Why should it be any different? Whether it is the TRICARE provider or the mail order or for the MTF, make it all the same and order it to be done. Tell me them to integrate their systems.

    If they come back and say, we can't because it takes so much money, or in order to do this computerwise and so on, that is a logistical problem.

    Am I missing something?

    Dr. BAILEY. Well, there are interagency issues there that are beyond the scope of my control.

    Mr. ABERCROMBIE. Like what?
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    Dr. BAILEY. And as far as the rest of this, the redesign and the implementation of information technology systems, that is within my policy control purview.

    Mr. ABERCROMBIE. If you ordered it and somebody didn't like it or there was a difficulty, can't they come and tell you what the difficulties are?

    Dr. BAILEY. And they frequently do, sir.

    Mr. ABERCROMBIE. I am not trying to be facetious with you. I mean, that if you say ''interagency,'' they are supposed to be trying to help you; if somebody wants to interfere, say, take it up with Congress or something.

    I am trying to figure out why this isn't being done, because, you know, you have got two things here. You have got this distribution of pricing agreement; it seems to me if you have got an agreement, then it should be across-the-board, period. Why isn't it across-the-board?

    Mr. BACKHUS. Sir, can I answer that?

    Mr. ABERCROMBIE. Mr. Backhus.

    Mr. BACKHUS. The Veterans Health Care Act of 1992 mandates that manufacturers, pharmaceutical companies, must sell brand name drugs to four Federal agencies—VA, DOD, the Public Health Service and the Coast Guard—at no more than 76 percent of their average wholesale price. They are not permitted—not required—the law does not require the manufacturers to sell to private contractors, even though they may be servicing DOD beneficiaries. The law states the DAPA prices apply only to purchases made by those—directly by those Federal departments.
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    Mr. ABERCROMBIE. Then we need to amend the law to include the rule, whoever is contracting, who are under those—

    Mr. BACKHUS. Something like that would be required, yes.

    Mr. ABERCROMBIE. Okay. Well, then that is helping to clear something up. Was 76 percent picked because that helped fit what we wanted to do?

    Mr. BACKHUS. I don't know the legislative history beyond that number, why it was 76 and not 70 or 80, but I could look into that and—

    Mr. ABERCROMBIE. No, I am sure it was—I think I have an idea how that sausage was made. But the point here is for—that is blood under the bridge, so there is no sense going back to that.

    But for our purposes today, then, in order to help make this thing work better, Dr. Bailey, would that not be a useful thing to do at this point?

    What I am trying to do is get all of this integrated, at least in terms of legislation and policy, and then try and deal with you.

    You are going to have to have the mechanical capability, number one, to be integrated. Right, Mr. McIntyre?

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    Mr. MCINTYRE. Yes, sir.

    Mr. ABERCROMBIE. And that involves computerization and all that is involved in putting that all together so that you are dealing—the apples and apples and apples, whether it is in MTF, the mail order or the TRICARE, you all want to be dealing with apples, right?

    Mr. MCINTYRE. I would submit to you—if you can't go the direction of DAPA pricing, I would submit one has to look really carefully at going down that road, because what it does to the industry itself and the products. If you can't go down that road, the proxy for getting there is to effectively manage what we do now, which is really at the core of the proposal that I was putting on the table that, in large part, is mirrored by what GAO is talking about and what the industry is talking about.

    Mr. ABERCROMBIE. That takes us back to—and I will close with this, Mr. Chairman, that takes us back to the question of getting your information integrated in the first place.

    Mr. MCINTYRE. You need some information to maximally manage the benefit, but you can better manage the benefit that we have today by integrating some of those pieces now while we are waiting on the data system redesign issues.

    Mr. ABERCROMBIE. But that can be done by virtual policy, it doesn't take legislation to do that, right?

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    Mr. MCINTYRE. No, sir, I believe—I may be wrong on this, but I believe that if you change the copay structure of this program, that that is actually something that does have to be legislated.

    Mr. ABERCROMBIE. Okay. I mean, you have got specific recommendations to the Chair on that?

    Mr. MCINTYRE. Yes, sir, they are contained in my testimony.

    Mr. ABERCROMBIE. Okay. I just didn't see it written legislatively.

    Mr. MCINTYRE. Not written in the form of legislation, but some actual concepts that could be worked through.

    Mr. ABERCROMBIE. Okay, thank you.

    Dr. BAILEY. Let me just add one thing, that we have submitted a legislative proposal on the DAPA pricing. And, again, it is not something that I can dictate; it has to be legislatively directed.

    Mr. ABERCROMBIE. Thanks.

    Mr. BUYER. I will share with you, Mr. Abercrombie, there is some history with this issue. Back in 1997, when we asked GAO to look into this issue—and I am also responsible for putting the brakes on the DAPA pricing, extending DAPA pricing to TRICARE; part of that reason is because I want—we want to force the pharmacy redesign effort from the top to the bottom, and I don't want the Pentagon to say, well, if we just extend DAPA pricing, we can just keep everything the way it is and that would help solve the problem.
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    I don't agree with that. And that might be an oversimplification, and I don't mean to say that in any disparaging way. But that is the reason we put it in the report language.

    So she is correct when she said, it is in there; I don't know, we put it in there, that is why we put it in there. But let me ask a couple of questions from that.

    Has DOD completed the comparison of the potential for cost savings from a redesign to the potential of DAPA pricing savings? That was part of the question.

    Dr. BAILEY. Yes, the estimate was that if we could get DAPA pricing, we would save $27 million.

    Mr. BUYER. Yes. And now compare that to the savings of the redesign.

    Dr. BAILEY. Of the redesign, it is much more complicated to figure out the income that we would—or the costs we will not incur from the redesign. I don't have a specific number on that. The redesign, as I said earlier, if it included providing NMOP to over 65, that is $267 million; if it was across the board, all of the pharmaceutical provisions that are provided for those under 65, it could be as much as $600 million.

    So there are costs incurred with the redesign, at the same time there were cost savings. I wish I had the number. I will provide that for the record.
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    [The information referred to can be found in the appendix.]

    Mr. BUYER. Can you comment on that, in terms of cost savings of the redesign?

    Mr. BACKHUS. Yes.

    Mr. BUYER. That is part of the thing, if I extend DAPA pricing, and if we save—let us say, save $27 million there and we don't do the overhaul. But if we do the overhaul, what is our savings?

    Mr. BACKHUS. Well, we estimated and stated in our report that we think the savings are somewhere from redesign savings are somewhere between $200 and $400 million.

    Mr. BUYER. Billion?

    Mr. BACKHUS. Million.

    Mr. BUYER. Millions, billions.

    Mr. BACKHUS. I think what we are saying is, somewhere between 10 and 20 percent.

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    Mr. BUYER. That is a lot.

    Dr. BAILEY. And that includes the over 65?

    Mr. BACKHUS. No, no, no.

    Dr. BAILEY. Just from the beneficiaries.

    Mr. BACKHUS. This is from the best practices in a formulary of the kind we are talking about. And Carolyn (Kirby) reminds me it is based on 1997 data.

    Mr. BUYER. Would it be your intent, Dr. Bailey, when you come with the redesign and we have this discussion here in several weeks that part of your redesign will also be the recommendation for DAPA pricing extension into TRICARE contractors—

    Dr. BAILEY. That is one of the—

    Mr. BUYER. —or do you want to hold that for a later conversation?

    Dr. BAILEY. I will hold that for later. But that is one of the issues on the table.

    Mr. BUYER. Let me ask—

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    Dr. BAILEY. Could I mention, Mr. Chairman, one more thing? These prices that are from 1997, I think everyone in this room understands that not only have prices changed in general from 1997, but in pharmaceuticals they have leaped ahead, and so it is very difficult again to determine what the savings would be, though I think they should be implemented, and we are working hard to do so, and there can be cost savings.

    But I would just let you know there are a couple of estimates, psychiatric medications alone are expected to add $75 million per year to drug costs. The new vaccines that are out there, $7 million a year; new painkillers, $4 million a year. Huge jumps since 1997.

    Mr. BUYER. I am not going to hold anyone to the estimated savings, nor how you calculated those. I only brought that up for the point that if we do a reform and do—actually, we do a redesign of the entire program, we end up with far more savings than keeping the existing program without the integrations and saying, well, let us just extend DAPA pricing.

    Ms. BELLO. Mr. Chairman, could I respond to Dr. Bailey's last comments?

    Mr. BUYER. Sure.

    Ms. BELLO. She said that pharmaceutical prices have leaped ahead. I think it is very, very important for all of us to recognize that drug spending has increased significantly, but drug prices have not. Pharmaceutical expenditures for the Nation as a whole in the last year have increased about 15 percent, but this is driven by increased use of drugs as our society ages, just as this particular population is aging, as we are successful in bringing more effective medicines to market, which are, to boot, more cost effective. So it is the expenditures that are increasing, not led by price increases, but rather led by increasing consumption, because pharmaceutical care increasingly is the cutting edge of health care for many patients.
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    Mr. BUYER. Ma'am, why should I go out and exercise if you can give me a drug that can make me feel better?

    Ms. BELLO. Because we care about the whole person, we want you to exercise and eat right and sleep well, as well as see your doctor and follow the doctor's advice.

    Mr. BUYER. I agree. I was being—I was playing.

    I do have a question though for—a very serious one, and that is a comment on whether there is a process of inclusion—whether you are included or excluded on DOD's effort to examine, evaluate and incorporate the best business practices of the private sector—has provided a full opportunity for pharmaceutical researchers and manufacturers to participate.

    Ms. BELLO. We have had one opportunity to meet the Department staff. As I mentioned, we haven't seen a specific proposal. We will be very pleased to share our expertise which, on pharmaceuticals, is substantial with both the subcommittee and the Department. We are very eager to help the Department promote the Nation's objectives in providing the highest quality care for our military families and service people, cost effectively.

    Mr. BUYER. When did you meet with them?

    Ms. BELLO. In December, Mr. Chairman.
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    Mr. BUYER. Are any other meetings scheduled?

    Dr. BAILEY. Work groups went until January. Again, we went longer with them than we thought, and they included beneficiary groups, industry representatives, our contractors. It was again a very dedicated effort to try to get as much agreement as we can as we worked the redesign.

    Mr. BUYER. You met with military coalitions also?

    Dr. BAILEY. Yes.

    Mr. BUYER. Did you?

    Dr. BAILEY. In fact, I have a list, which I could provide for the record, extensively of the work groups, if you would—

    Mr. BUYER. That would be fine.

    Dr. BAILEY. Okay.

    Mr. BUYER. Thank you.

    [The information referred to can be found in the appendix.]

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    Mr. BUYER. The last question I will have is, part of the thought process I had back in 1997 was that some of the cost savings that we could achieve by redesigning the system, could we utilize those savings from the efficiencies to extend the pharmacy benefit to the 65-and-over population? I mean, that was part of my thinking back in 1997.

    So, Dr. Bailey, is that going to be part of your considerations and recommendations to us?

    Dr. BAILEY. I was aware of that as an initiative and it clearly made sense. And I would say that we were looking for every method to fund what we feel is our responsibility to provide that health care.

    Again, I think the answer is not in the efficiencies that we will find through this redesign, although I think there can be efficiencies there, as I say, that the $200 to $400 million that may be realized—in fact, that would be quickly spent on the over-65-plus. So I think we are going to have to find other efficiencies, as well as other funding, in order to provide for that group.

    Mr. BUYER. Really? You know, here is one of the questions I have had to myself, the Surgeon Generals love to come and, with pride, and rightfully so, talk about the cost savings that have been achieved in the military health delivery systems over the last few years in comparison to where they were with CHAMPUS and all. But they don't get to see those savings.

    They have to file for their budgets, they work hard, create efficiencies, and then have got to fight for their budgets. That is a crazy way to do work.
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    And now we are working hard here to create some efficiencies so we can extend our commitments. I suppose it is when you get in the building and you are in the budgetary decisions and those high-level decisions on resourcing are made, you almost have to knock on the table and say, time out, excuse me, but I want to remind you of the great work we are doing over here, and we need some of it back, because it all gets siphoned off, you know?

    I will get off my soap box.

    Does anyone have any other questions or any comments you want to make before we excuse the first panel?

    Mr. MCINTYRE. Mr. Chairman, I would submit that as you are looking at the cost savings that are potentially achievable, if there indeed are any from efficiencies, it is really important to remember that those of us who have been working the commercial side of this for the last several years actually have fairly large receivables on our books because of the fact that we have been spending more money than we all projected to spend, given the fact that we don't all collectively have the right tools to be able to use. And that is an issue that ultimately, one way or the other, we are going to have to resolve.

    So part of that is what creates, in my view, the burden to move this as quickly as we possibly can, but it also is one of the issues that comes off the top in terms of savings.

    Mr. BUYER. Any other further comment?
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    Thank you very much for your contributions. If you have any follow-up, please be in touch with the committee. Thank you.

    Ms. BELLO. Thank you, Mr. Chairman.

    Mr. BUYER. For our second panel, the witnesses will again be Dr. Sue Bailey, Assistant Secretary of Defense, Health Affairs, of the Department of Defense; Steve Backhus, the Director of Veterans' Affairs and Military Health Care Issues, U.S. General Accounting Office. Next, we will hear from James Woys, the Chief Operating Officer of Foundation Health Services, Incorporated. And then we will hear from William J. Meyer, Senior Vice President, Palmetto Government Benefits Administrators. We will then hear from Dr. Bohn Allen of the Texas Medical Association.

    This panel will cover the TRICARE claims processing issue.

    Mr. BUYER. Dr. Bailey, we will open with your comments.


    Dr. BAILEY. Mr. Chairman, we have been talking about the health care system here today, and the peacetime health care system that we know as TRICARE has, within the last year, finally stood up, each region has come across the country and created a managed care system in response to the era of military downsizing and some base closures.
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    As I indicated, still we were 70 or 75 percent the same system and have our dual missions of peacetime and wartime health care needs. It is essential that we, therefore, have a healthy and robust peacetime health care system and are working, therefore, to correct some of the probes that TRICARE has experienced in the start-up of the managed care system which we have instituted in the last several years.

    Two of the main problems, to be very simplistic, are getting our phones answered, getting appointments made and getting our bills paid, i.e., claims. So those are the business practices, I think, that have been so problematic for us.

    I would add on behalf of all the fine health care providers that work around this world to provide for our forces and their families and our retirees that they provide world-class health care and that our satisfaction surveys indicate that overwhelmingly people who receive the health care are pleased with the health care and, in fact, we have a higher rating by 1 percentage point; 87 percent said they are pleased with the health care they get, and I believe it is 86 percent in the private industry.

    So, again, even adding our partnership with private contractors at the rate of 25 to 30 percent, we still have a system that provides excellent health care, but we have had big business problems, and I want to see those solved.

    One of the biggest is claims. To that end, we have been engaging in a bottom-up review. We recently had, through the TMA (TRICARE Management Activity), a claims summit, brought together all of our partners so that we could look at all the ways in which we can look for solutions to our business problems.
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    Looking for greater ways to incentivize the system so that we are able to pay our claims more quickly. One of those methodologies would be that if claims are not paid within 30 days that there is interest paid on those claims that are not paid.

    We are looking for utilization management and simplification of the system so that it is easier for people to file their claims and to have them paid. We are looking to have a greater number of electronic claims, because we can pay those at almost 95 percent, within 30 days, and sometimes close to 100 percent. There are many methodologies that are under way here as we look for higher standards within our claims division.

    I would end by saying that we have—I have undertaken regional visits with a wonderful team that includes, often, Congressional Members, Congressional staffers. We bring together in each region—by mid-April I will have been to 11 of the 12 regions, and we spend a complete day bringing beneficiary groups in, provider groups. Our contractors are there and, again, Congressional Members or staffers, and we look at the individual problems of each region, develop an action plan and at times put a tiger team on the ground for immediate solutions to some of the claims problems that we have found.

    Fortunately, at this point, our claims by February of this year, everyone was meeting standard, and that standard was that 75 percent of the claims be paid within 21 days and, in fact, we are moving to a Medicare level standard in September that will say we pay 90 percent of those claims within 21 days. Eighty-five percent of those claims are paid out within a short period of time after those claims are processed. I have been saying ''claims paid;'' it is claims processed, but with 85 percent of those, within a few days, they are also paid.
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    So again we are looking at a complete review of our claims process, because it is one of the big problems that is tarnishing the image of an otherwise stellar health care system.

    Mr. BUYER. Thank you.

    [The prepared statement of Dr. Bailey can be found in the appendix.]

    Mr. BUYER. Mr. Backhus.


    Mr. BACKHUS. Mr. Chairman, you asked me to discuss our ongoing evaluation of claims processing, timeliness and accuracy. In conducting this work, we analyzed 20 million claims to determine whether they were processed in a timely manner. We also reviewed the Department's efforts to assess accuracy, but we did not independently audit claims for making that determination.

    Our review focused—is focusing on claims processing performance in TRICARE regions that were operational in July 1998, so that we could get a broad spectrum of claims; and thus far we have not included Regions 1, 2 and 5 in this area.

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    In summary, our work shows that while 86 percent of TRICARE claims are paid on time and, thus, exceed the timeliness standard of 75 percent within 21 days, the overall measure here of performance is masked. It is not as good performance in certain types of claims, such as hospital claims, where only 66 percent are processed on time. Furthermore, it still means there are 3 million claims that were not paid on time during the period July 1997 to July 1998, 3 million, and 80 percent of those claims were submitted by physicians and other professional providers.

    I must say that the Department does not know the exact extent to which contractors are paid accurately because, in our view, the methodology for its payment accuracy audits is statistically unsound and does not provide a true measurement of payment errors. Fewer than half of the claims are even subject to selection or audit.

    In addition, the DOD's method for assessing payment accuracy does not give a complete picture of performance. For example, another useful measure to calculate accuracy might be to calculate the number of claims processed correctly against the total number of claims processed, and when we used DOD data to compute this information, the percentage of claims with payment errors for some quarterly contract periods was as high as 25 percent.

    Contractors and others familiar with TRICARE, as I am sure you are going to hear on this panel, told us that the program's complexity impedes claims processing accuracy. For example, each of TRICARE's three options has a different array of benefits, deductibles, copayments, and as a result, claims require different adjudication procedures depending on which option is involved.

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    Compounding the complexity, our TRICARE frequent program changes usually require some sort of modification to claims processing software or procedures. As of late last fall, DOD has instructed contractors to implement about 650 changes for about 130 per contract. The complexity of the program and its ever-changing nature also makes it difficult for providers and for beneficiaries who submit the claims to stay educated; and that causes a considerable amount of inaccurately filed and processed claims.

    Contractors also have told us that because TRICARE is usually such a small percentage of a provider's practice that they have little incentive to educate themselves on how to file claims. Relatedly, we also believe that DOD's management problems have impeded the effectiveness of its claim editing software called ClaimCheck, which all contractors are required to use. ClaimCheck is a commercial, off-the-shelf software program that analyzes the appropriateness of billing on professional claims.

    We found that inappropriate denials are sometimes made due to DOD's poor communication with contractors and the slowness to make program changes that affect ClaimCheck outcomes. For example, it took the DOD almost 2 years to direct contractors to make system modifications that had been identified in April of 1996, allowing payment to dermatologists for surgical pathology procedures.

    DOD has identified changes, as Dr. Bailey has pointed out, that could improve TRICARE's claims processing activities as well as other aspects of the program, such things as including the adoption of Medicare timeliness standards and the elimination of the current requirement to hold and develop claims with missing information. However, because claims processing is the end result of many other front-end processes, such as enrollment, preauthorization, eligibility, benefit design, program changes, it is important that DOD's initiatives address the source of these problems and not just the symptoms. We are currently in the process of reviewing these initiatives to better determine their potential effectiveness.
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    In conclusion, Mr. Chairman, if not resolved, we believe the kinds the problems that I just highlighted, as well as the volume of claims processed late, despite meeting the overall timeliness standard, could cause problems in attracting the number of civilian providers necessary to ensure that beneficiaries have adequate access to health care.

    Later this year we will be issuing our report with recommendations addressing these and other issues that we are discussing today. This concludes my remarks and, of course, I will be happy to answer your questions.

    Mr. BUYER. Thank you, Mr. Backhus.

    We have a 15-minute vote, followed by a 5-minute vote. So the committee will stand in recess until 3:30.


    Mr. BUYER. If we can bring the committee back to order, we will next hear the testimony from Mr. Woys.


    Mr. WOYS. Thank you, Mr. Chairman. Thank you for the opportunity to discuss the status of the TRICARE program, the CHAMPUS claims processing from the perspective of a managed care support contractor.
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    My company, Foundation Health Federal Services, is the current contractor for five TRICARE regions and the state of Alaska, covering over 1.6 million TRICARE beneficiaries. In my opinion, TRICARE is a success where it has been stabilized and matured, including claims processing. The TRICARE program has lowered costs for the government and the beneficiary, increased beneficiary choice and access to care, and most importantly, increased overall quality of care.

    This success has required a strong partnership with DOD leadership, the Office of Assistant Secretary, lead agents and MTF commands.

    The TRICARE is much bigger than the contractor. It is the vehicle to deliver the health care benefit promised to the beneficiaries. It encompasses both the direct care and civilian delivery systems and provides quality, accessible health care, regardless of location. The job of the civilian contractor is to complement and optimize, not circumvent, the existing military infrastructure.

    A key component of a successful TRICARE program, as we well know, is timely, accurate and consistent claims processing services. Perceptions of TRICARE usually correspond to the contractor's performance or lack of performance in claims processing. It is extremely important for the contractors to perform well in this area.

    Our earlier claims processing difficulties in both Region 6 and Region 11 over 2 years ago tainted beneficiary and provider perceptions of TRICARE. Since these operational problems have been rectified, program acceptance by both beneficiaries and providers has increased substantially.
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    Every aspect of the TRICARE program manifests itself in the processing and payment of beneficiary and provider claims. Eligibility, enrollment, authorizations, referrals, benefit design, provider beneficiary education, provider network development, and other activities contribute directly to the timeliness and accuracy of claims payment. TRICARE claims begin with the delivery of health care services to the beneficiary and end when the payment is received and reconciled by the provider and the beneficiary.

    Each activity in the claims processing stream offers potential for introduction of problems, either perceived or real, if quality control measures are not utilized. Thus, it is imperative that the contractor, one, must educate our beneficiaries on their benefit and how to properly access it.

    We must educate our value providers on the benefit, the referral and authorization procedures and claims submission procedures. We must educate our military medical and administrative staff. We must maintain an adequate network of providers. We must maintain accurate and timely enrollment processing. And we must provider accurate and friendly information to our beneficiaries and providers when they call for information.

    If we err on any of the above, we are destined to further complicate the job of our claims processing subcontractor and substantially increase the likelihood of claims processing difficulties. Then it is incumbent upon the claims processor to complete the continuum with timely and accurate adjudication services with adequately trained staff.

    Foundation and its claim processing subcontractors, Wisconsin Physicians Services for Regions 6 and 11, and Palmetto Government Business Administrators for California/Hawaii, employ quality assurance measures throughout the claims processing activity. The end result should be timely, accurate, consistent and contractually compliant claims processing.
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    Foundation and its subcontractors process more than 35,000 claims every business day. Since September of 1996, Foundation has routinely met or exceeded claims processing contract standards for timeliness and aging. The volume of claims inventory aged more than 30 days and 60 days has steadily declined, which results in more prompt payment to providers and beneficiaries.

    As you know all too well, every contract implementation has experienced claims processing difficulties. Foundation offers the following suggestions with regard to reducing the risk of substandard claims processing performance at the onset of new managed care support contracts.

    One, we believe that we should extend the time allotted for transition from typically 5 to 7 months, to no less than 9 to 12 months;

    Two, we think we should require the contractors to have a full claims processing staff complement in place 60 days prior to the start of health care delivery; and

    Third, we believe that we should embrace DOD's new TRICARE processing enhancement plan. This enhancement plan will allow us to move to the next generation of claims processing.

    The contractors and the TRICARE Management Activity have joined forces to introduce a series of work simplification changes designed to improve claims processing timeliness and accuracy and reduce the associated and administrative expense incurred by the government. Near-term initiatives include: eliminating most controlled development, reducing the frequency of authorizing TRICARE providers, modifying the government's utilization of management claims review requirements, modifying claims processing cycle time requirements to parallel those used in Medicare, simplifying third-party liability procedures, modifying other health insurance reimbursement methodologies, and a review of ClaimsCheck.
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    Foundation supports these efforts and applauds the leadership of Dr. Bailey and Dr. Sears and their commitment to make real and lasting change in the area of claims processing. These efforts and others that are in development will serve to reduce the bureaucracy associated with claims processing and payment.

    But even when we do everything right, we are going to have—certain beneficiaries will be turned over to collection; that is unacceptable, and if we believe all contractors, then the government will allow that to happen. So we must have quality controls in place to make that change.

    Foundation utilizes a separate, dedicated, toll free telephone service that beneficiaries can call when a threat of collections is present. Trained representatives promptly obtain and analyze information from the beneficiary and initiate action to resolve the situation, including direct contact with the provider seeking payment and any involved collection agency; and incidents when beneficiaries have failed to pay their cost share, beneficiaries are educated and encouraged to promptly remit payment to providers.

    Foundation's objective, and I believe the entire Department's objective, is to remove the beneficiary from the collection action.

    In conclusion, TRICARE is well under way to meeting the goals and the expectations of the government and beneficiaries. Maturing of the program must occur so that TRICARE can become a stable and reliable health care program for the beneficiaries we serve. Our experience shows that, with time, operations will stabilize, including claims processing, and beneficiary and provider satisfaction will increase.
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    This program is not without challenges, but with strong leadership in DOD and support from Congress, TRICARE can and will be the model health care program in the United States.

    Thank you again for the opportunity to express my views. I will be happy to answer any questions. Thank you.

    Mr. BUYER. Thank you, Mr. Woys.

    [The prepared statement of Mr. Woys can be found in the appendix.]

    Mr. BUYER. Dr. Allen.


    Dr. ALLEN. Thank you, Mr. Chairman. I am Bohn Allen. I am an actively practicing general and vascular surgeon in Arlington, Texas. And I am here representing the Texas Medical Association and its 35,000 physicians.

    Today, I would like to express the concerns of Texas physicians treating TRICARE patients and the frustrations they often experience with the TRICARE claims processing system. I hope you will find this information helpful in your deliberations.

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    I have three issues I would like to bring before the subcommittee. First is the issue that Mr. Backhus has already alluded to, and that is ClaimCheck, which an off-the-shelf claims editing software product that bundles provider services for claims of payment and appropriateness of payment. In order to effectively communicate in filing and paying claims, we need a common language and rules. CPT, or Current Procedural Terminology, is that language; and when one member of the process doesn't use the language properly or uses it inappropriately, it causes considerable confusion and disruption of the claims payment process.

    Modifiers are a part of CPT that allows for coding of unusual circumstances. TRICARE instituted ClaimCheck without providing edits that recognize modifiers in the CPT system. As a result, the claims were not processed or paid properly, causing considerable confusion among the provider community—a case of not using the same language.

    Bundling, which is a process where more than one service is combined with another service and is paid as only one service, is another problem. ClaimsCheck is a software that bundled services over a broad range of CPT codes. Many of the edits properly bundle codes according to CPT and the correct coding initiative, but many edits improperly bundled services, denying proper payment to the provider.

    One of the problems with ClaimCheck is that the system and its edits are proprietary and can't be released or shared with the providers, creating a black box atmosphere that keeps the providers in the dark. We think that when dealing with a Federal program, such as TRICARE or Medicare, there should be no black box; the process should be open so that everyone understands the rules.

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    Unless the process is open, how will the provider know how to bill TRICARE correctly? How does the provider avoid filing incorrect claims which may open him up to accusations of fraud and abuse? How does he determine which services will be paid for? How will he determine the correct copay or coinsurance? We need an open system where everybody understands the rules.

    Initially, there were no appeals processes for the improper bundling edits in ClaimCheck. There was no way to correct the errors except on an individual medical review basis of the claim, which did not address the generic problem with the claims edit. Some of these problems have been addressed, but it takes sometimes up to 2 years to get these edits properly changed.

    Mr. Backhus referred to some of them with the surgical pathology and another one was the circumcision problem. And so at this point there needs to be a more timely process because the appeals system is cumbersome, bureaucratic and time-consuming.

    Thanks to the efforts of General Paul Carlton, and certainly General Michael Pietrzak at TRICARE Southwest, there has been a system change that now allows CPT modifiers to be recognized, and some edits have been corrected. This process needs to continue. We feel this represents a step in the right direction and shows that we can work together within the system.

    The second issue I would like to bring before the subcommittee is the problem of downcoding. This is a process whereby evaluation and management services are unilaterally coded to a lower level of service, arbitrarily based on a diagnosis submitted by the provider, without a request for further information or documentation. In our minds, this represents an arbitrary devaluation of the physician services, without his input, and violates due process.
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    The problem is that if the physician appeals the downcoding, it costs him time, personnel time and money to review the information and to send records. If his appeal is denied, his service to the patient has been devalued even more, making participation in the plan less likely. If the appeal is upheld and he is paid, his service has still been devalued because of his time costs and the cost associated with making the appeal. We feel this is an unfair process.

    We would recommend that TRICARE and the managed care support contractors use the process Medicare uses called Focused Medical Review. That is a process to look at provider profiles and identify those providers whose billing patterns consistently are outside their peers or norms and are identified as outliers, then concentrate their efforts on these outliers and not penalize those physicians who are doing it correctly.

    The third issue is the problem of access. CHAMPUS since 1993 and TRICARE since 1995 have been moving toward the Medicare payment schedule. TRICARE has now reached the Medicare reimbursement level using the RBRVS (Reserve Based Relative Value Scale) system. As you know, Medicare reimbursement is budget neutral and is a politically driven process and does not represent the market value of the services provided.

    We have now reached a point where the payment does not cover the fixed costs of providing the service. If the managed care support contractor does not offer an adequate contract to providers with at least the CHAMPUS maximum allowable charge payment, timely claims adjudication and payment with few hassles, there is no incentive to participate in this program.

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    The problem that we are seeing is that in smaller communities where military installations are located that do not have fully staffed Military Treatment Facilities, the managed care support contractors are not provided or are not able to provide an adequate panel of physicians and providers to adequately take care of the dependents, retired persons, and in some instances, even active duty personnel.

    Now, let me say that the problems that we are seeing with timely claims payment and hassles are no worse than we see among commercial carriers. If claims are processed without a question, payment is usually prompt. However, if the claim is held for any reason, payment is frequently delayed for months.

    To the payers who are processing millions of claims, it is not a big problem, but for the individual physician, it is 100 percent, it is his claim. In fact, now, working with General Carlton and General Pietrzak at TRICARE Southwest, and with the managed care support contractors, we have been able to address some of these problems, especially ClaimsCheck, the appeals process, recognition of modifiers, some downcoding issues and more timely payment.

    Organized medicine should be at the table when delivery-of-care decisions are made and to review appropriateness of many of the ClaimCheck edits, especially the ones that do not abide by CPT. The reimbursement mechanism must be reviewed and payment to providers and physicians must be at least CHAMPUS maximum allowable charge rates; otherwise provider participation will continue to be scarce.

    We think these problems need to be addressed, and we appreciate the opportunity to present these to you, sir.
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    Mr. BUYER. Thank you, Dr. Allen.

    [The prepared statement of Dr. Allen can be found in the appendix.]

    Mr. BUYER. Mr. Meyer?


    Mr. MEYER. Mr. Chairman, members of the subcommittee, thank you for inviting me here today, and thank you for your interest in the experience of my company, Palmetto Government Benefits Administrators in the implementation of TRICARE.

    We process claims for all but two of the TRICARE regions, so I understand the challenges with the transition from CHAMPUS and for the transition into a new contract by any TRICARE Prime contractor. These are challenges not only for contractors, but also for the DOD, for the GAO, for health care providers and for the beneficiaries we serve.

    I must point out that DOD officials responsible for TRICARE have recently undertaken a major initiative to simplify this complex program. They have asked for and received input from all the contractors and the GAO. This is a much-needed, very positive development that can only help in the future. It fits the pattern that we have seen of the people at DOD going many extra miles to be certain that this program serves the Nation's military personnel in the way that they should be served.
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    It is important to note at the outset that every TRICARE contract has struggled in the first year, regardless of who the contractor is. But without exception, they all do very well in the second and subsequent years.

    There are good reasons for the problematic start each has experienced. All of us need to focus on eliminating those reasons before these contracts are rebid and a new round of first-year problems begins.

    The major factor that has made our job more difficult is the impossibly short time between the contract award and its implementation. It underlies many, if not most, of the frustrations and complaints that are apparent in the first year of a contract.

    A TRICARE contractor has 6 to 7 months to implement a very complex contract. During that same short implementation period, the DOD typically issues 50 to 75 change orders adding to or modifying the scope of the work to be done. These changes ultimately result in a better program, but they require that the contractor divert precious resources from the task of bringing up the contract.

    Contractors must base their administrative costs and staffing for the program on estimates made by the government in the RFP (Request for Proposal). In two of the five contracts we have implemented, the government-estimated claim volumes were low by 40 to 50 percent. That translated into staff shortages in our company alone of 250 or more people.

    There are several other factors that I believe have created the most concern in the transition to a new TRICARE contract, all affected to some degree the initial implementation of each of the 7 TRICARE contracts regardless of the Prime contractor.
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    The first is what I like to call the ''new contractor factor.'' Of the five Prime contractors which TRICARE contracts, four were new to CHAMPUS and TRICARE; as such, they were largely unfamiliar with this program and without benefit of its history. And the next round of procurements, I would expect that certainly some of the current contractors will rewin their contracts. If an incumbent contract should lose, it could be expected that many of their key staff will migrate to the winner. These things will minimize this problem.

    The second factor affecting efficient implementation, I call the ''network development factor.'' All contractors are charged with developing within the 6-month transition period a massive network of health care providers to be used by TRICARE beneficiaries. The time allowed is the same, whether the area involved is relatively small and sparsely populated or extensive and heavily populated.

    Between the necessity to recruit large numbers of network providers and the requirement that they be fully credentialed, not enough time is provided. The process of investigating the credentials of every provider takes weeks and can take months. When networks are delayed in coming on-line, and all of them are, there is a significant impact on claims processing. Errors at one step of the process have a ripple effect causing more errors at subsequent steps.

    A 12-month transition period is badly needed to give the contractor a minimum of 9 months to be able to put a network together. Ninety-nine percent of providers across all contractors eventually get approved, allow the contractor to process these providers as network members, while the credentialing process takes place.
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    The multiple reimbursement factor also affects our ability to process claims accurately and can also create the impression of inaccuracy when the claims are, in fact, correct. Under TRICARE, reimbursement is far more complicated and difficult to understand. Contractors must negotiate the best prices possible with providers; the result is that network providers can be paid in as many ways as the imagination and advanced computer systems allow. Neither the providers nor the beneficiaries can easily figure out what reimbursement should be for a particular service, which results in errors and misunderstandings.

    Finally, what I call the ''enrollment factor'' also affects claims. The government, with the two newest contracts, now requires that three different computer systems be involved with the enrollment process and that these systems interface. It is nearly impossible to keep these systems all in sync. The solution is to simplify and streamline these interfaces.

    And lastly the fifth factor, I like to refer to as ''large numbers.'' Prime and subcontractors must recruit, hire and train up to 2,000 new employees, including management, in a very, very short period of time. More time to get the staff ready for the job would pay off down the line in fewer errors and a better work product. Just when the work is most difficult in the first 6 months of a contract, there are few people or, even the best trained staff, with any significant experience. Also in those months the staff are not likely to be at optimum performance levels. If, in the rebids, a contract does not change hands and the Prime and processing subcontractors remain the same, then obviously this problem will not be repeated.

    The other factor that should greatly help solve this problem is prompt completion of the DOD-sponsored work simplification initiative. We should all focus on the new rounds of contracts soon to be started and see that each—and see that the first year of each of them is more successful than the first years of the current contracts. We should not waste the experience we have gained.
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    Mr. Chairman, I thank you for your attention and I stand ready for questions.

    [The prepared statement of Mr. Meyer can be found in the appendix.]

    Mr. BUYER. We added this panel to this hearing today, Dr. Bailey, because of the growing concerns that the subcommittee has been hearing from other Members of Congress about the claims processing and the number of beneficiaries having adverse effects upon their credit ratings.

    Now, are you aware of that, and do you have any comment in that regard?

    Dr. BAILEY. We had a TRICARE conference recently, and one of the things that I said was that I don't ever want there to be a collection agent at the door of any of our service members or their family. I think we are all in agreement with that. Now how do we prevent that from happening?

    You have heard it referred to here today. As Mr. Woys indicated, he certainly has a system within Foundation.

    I should say that we have special units which have been set up to act as the interface, much as Mr. Woys described, such as—and what we really need to do is make sure that we educate our service members and their family, because I am very concerned about the fact that often our service members are being good soldiers, and they pay bills which are not even bills, things that they are not responsible for. Often they will get statements that, rightfully so, are large and frighten them, and they are not a bill; but they are very concerned. I don't want any of that happening.
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    So that we have got special units which are in place now, so if you receive a bill from a hospital procedure or, in fact, you are contacted by a collection agent, that you have a place to go, a point of contact, so that that special unit can take over, take those bills and work the problem; so that certainly they don't have to deal with the issue and, most of all, no one's credit rating would be affected.

    Mr. BUYER. Thank you.

    Mr. Backhus, you were, the GAO is very critical of DOD's overall oversight of the claims processing system and found that DOD contributes materially to problems in the claims processing system. Your statement also notes that DOD is making an effort to reform the system, as has been testified to by Dr. Bailey.

    Overall, to what extent do you believe DOD reforms will be—will correct the claims processing problems in a timely manner? And what is DOD not doing that GAO believes should be done?

    Mr. BACKHUS. I am fairly confident that there is going to be some substantial progress. The reason I say that is because I know that included in the discussions, in the brainstorming up to this point, are all of the key players. I think that will bring to the table all of the issues. So there will clearly—this is off to a good start, I think, in terms of the right kinds of initiatives.

    What I have heard today are many of those—identification of many of those solutions, potential solutions. So I think there are—there is a core group of issues here that I think are going to be addressed, and they will be effective.
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    However, I do have a word of caution here in that I think some of the issues are not easily dealt with and may wind up resulting in policy kinds of decisions, require policy kinds of decisions; and those get to the benefit design and the structure of the program.

    Things are complicated in this program. It is unlike any other program. There will always be, therefore, mistakes, errors, misunderstandings, complications that are going to cause people to be frustrated and cause a lot of activity that I don't think you would expect to see in other kinds of health insurance programs.

    Whether it could be simplified to the extent that makes it look like other health insurance programs, I don't know. And I think that is where I tend to be a little reserved in terms of how far the restructuring and the improvements will go.

    Mr. BUYER. Mr. Woys, as I understand, Foundation Health—you had initially thought that you could handle the claims processing in house and then decided to contract it out with an intermediary. If you can, explain to me why. What was it that was perhaps so burdensome or insurmountable that you felt that you had to contract, and now we have all contractors moving to an intermediary to do claims?

    Mr. WOYS. Our process is that we went out and initially actually bought a claims processing system from one of our subcontractors, which is Wisconsin Physicians Services, and in fact that we could operate ourselves. We put it in a location in the country in Tucson, Arizona, that we thought had adequate staffing capable of performing, hiring, as Mr. Meyer, said somewhat upwards of 500, 600 people.
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    We certainly quickly realized that it was not our core competency, especially the CHAMPUS claims processing activity, because of the complicated nature of the function, as well as we couldn't hire enough good-quality trained staff. Unfortunately for us, it was a month, 2 months too late into the decision process; and we had 2 months of very poor experience, both for Region 11 and our Region 6 contracts.

    But part of this is that we finally realized, made a decision that we ought to leave the complex claim processing, as it is in TRICARE, up to people who get paid for exactly what they get done, what they do. It is not our core competency; we made that decision.

    You can see, I think, how other contractors have somewhat followed that process, because it is something that needs—you need to live and die every day, and I would rather have a subcontractor that I can beat on, rather than beat on my own staff to make sure this is happening.

    The key is, it is difficult, and we focused very heavily on trying to do the right thing, which was really to go to people who had the most experience in making it happen.

    Mr. BUYER. Thank you, Mr. Woys.

    Mr. Taylor.

    Mr. TAYLOR. Thank you, Mr. Chairman, for recognizing me. You know, I am not a member of your subcommittee.
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    Gentlemen, last week, the chairman had a group of aviators come appear before his panel, giving a variety of reasons why they were leaving the service. One of the most frequent reasons was health care. We heard everything from a very angry resentment, being promised free health care and the fact that—at a time when they and their families are experiencing expensive medical bills, such as having a child born, having to come up with substantial amount of money for copays. That is not free. And I share in their anger.

    The second thing we are hearing is that again while many of these pilots are halfway around the world on deployments, their spouses, many of them, you can kind of understand, away from home for the first time, don't have their folks to recommend a local doctor or maybe speak a little more forcefully with the doctor than some of these young people would, are being told that what a hospital tells them or a doctor tells them is a necessary medical practice, the insurance won't pay for it. And one instance, a young—I believe it was a Marine pilot was telling me of his wife having a troubled pregnancy, and one of the two recommended a second ultrasound to check on the baby, and yet it was not an allowable procedure.

    Who makes those decisions? How do you all determine what is the best medical practice versus what is reimbursable? Somebody has got to make that decision.

    Mr. WOYS. Let me answer that as a TRICARE contractor.

    We follow prescribed rules for what is a—particularly, in the benefit described by TRICARE, we have a very clear process of how to get medical treatment approved and the ability for denials—what we deny is very small up front. Not only that, there is a very clear appeal process for the provider; if they need to get it appealed, the appeal goes to a clinician.
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    It doesn't go to the administrator. It goes to a physician that is in the same practice, who is independent and makes that decision, either concurs with or denies our position, whether that medical practice was medically necessary or not. And we abide by that independent third party with regard to the decision of either agreeing with this or disagreeing with this with regard to that particular denial of a service because of medical necessity.

    Mr. TAYLOR. I would beg to differ. We are talking about pilots' wives. I can understand the 18-year-old kid who joins the Navy and marries his high school sweetheart, they are both 18 years old and haven't seen most of the world.

    Chances are, this pilot married someone about his age, a little bit older and has seen a little bit of the world. If they don't understand the system, how on earth are the 18-year-old kids from the country going to understand your system?

    So please don't tell me it is working, because I just saw last week about $12 million of U.S. government investment and their pilots telling me they are walking with their feet and walking away from the profession, and the biggest concern was health care.

    Yes, sir, please.

    Dr. ALLEN. Congressman, you have hit on a subject which is very dear to physicians. Medical necessity decision-making is something that needs to be between the physician and their patient. When I go into the examining room with a patient, I do a history, a physical examination; I review their lab work, I review any extenuating circumstances, and then I give that patient my very best opinion. Whatever it may be, it is my very best opinion.
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    There is no room in there, there is not a third chair for someone else to be making that medical necessity decision. It is between the patient and me as to what we both feel is in the best interest of that patient. And when a medical necessity decision is made by someone other than the patient and their physician, it disrupts that patient-physician relationship.

    I have already given them my best opinion. If it is denied or not approved, even if it is reviewed by an appeals process, it has destroyed that relationship between the patient and myself. So this is very dear issue for physicians. We think that medical necessity decision-making should be between the patient and their physician. Unless there is some overriding reason not to approve what the doctor recommends, or it would be dangerous to the health of the patient to have whatever the doctor recommends, those kinds of decisions should be left to the patient and the physician, because they are doing what they think is in the best interest of the patient.

    Now cost concerns, we are certainly all aware of cost concerns. We are certainly aware that we have to preserve precious resources and dollars. But I think most physicians understand that today; they know that you have to conserve costs, but they also know that they want to give that patient their very best decision and their very best recommendation.

    Mr. TAYLOR. Doctor, how would you change the system so that that happens?

    Dr. ALLEN. Yes. Well, I would propose that, as I said, unless there is some overriding reason not to do what the doctor recommends or it would be dangerous to the patient's health to do what the doctor recommends, that basically procedures should be approved. This constant mother-may-I wears the patient out, it confuses them, they don't understand what precertification, preauthorization means. And if you look at the overall prospect and the overall picture of what happens in precertification and preauthorization, probably 99 percent of the time it is approved. It is that 1 percent that is not approved that causes the big problems.
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    We waste a lot of time and resources precertifying and preauthorizing procedures that are never denied. It consumes the time of the payer. It consumes the time of the physician. It consumes the time of the patient.

    Again, unless whatever is recommended by the patient's physician is either not medically indicated from the standpoint of its being either dangerous to the patient or the fact that it would not be of any service to them, it should be approved.

    Mr. TAYLOR. Dr. Bailey, how do we resolve this?

    Dr. BAILEY. Well, I would like to say that clearly the military health care system is not a profit-based system to begin with. It is clearly a managed care system. And the way, however, in which we differ from some of the other managed care organizations—there are many ways in which we differ.

    Specifically, I think at this point it is important to state that in our system only physicians are able to deny care. It may not be the same physician, but there is an appeals process, and it is only a physician; it is not an administrator who would deny care.

    Secondly, there is an external national quality monitoring contractor that serves as our final level of appeal. And clearly that board has no financial interest in the contract as well.

    Mr. TAYLOR. What is the typical length of time for an appeal to be resolved?
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    Dr. BAILEY. It is generally within days.

    Do you want to say something?

    Mr. WOYS. Seventy-two hours, we are required to make the decision within 72 hours. Mr. Taylor—

    Mr. TAYLOR. If I may, do you hear what happens a lot in this town? I normally look at a room, including the people sitting on this panel, including myself, that make pretty good money, who can afford to buy a car, usually have a pretty decent house, don't have to go to the laundromat, don't have little kids, et cetera, et cetera, who make decisions that involve people who moved away from their family for the first time in their lives who are 18-, 19-year-olds who have two or three little kids running around the house, have to go to the laundromat just to do their laundry. If they are using TRICARE, they have to bum a ride to a doctor's office, many times 50, 60 miles away, and what you are saying, yeah, you have got to go borrow that car, go find a babysitter again, if you have got to shove off your job for a couple of days to go see a doctor for the second time, for something that probably should have been handled the first time you went to the doctor.

    I don't think you take the quality of these peoples' lives into account, and you are aggravating the hell out of them. And you know what they are doing? They are leaving the service, and we are losing good people.

    I don't think you are thinking this through, and I really think we can do better.
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    Dr. BAILEY. Mr. Taylor, as someone who has been involved with the military health care system for 30 years, I can tell you that in the last several years, things have improved dramatically. There were no standard—

    Mr. TAYLOR. Dr. Bailey, would you like to come read my mail?

    Dr. BAILEY. I wouldn't disagree that there are concerns out there, and I receive the same mail. And I am very concerned about each individual service member and their family member. But I would just point out, there have been standards set that were not there even several years ago for urgent care within 1 day, for routine care within 1 week, for specialty care within a month, the appeals process in 72 hours. These are standards that we have set because we very much care about the health care of our service members and their families and retirees and their families.

    So I would just also add that it does not mean that we are not concerned about the percentage of those who are either dissatisfied, who have not received treatment, that we would all want them to receive at the highest level of quality.

    I stated earlier before you were in the room that our satisfaction surveys in fact are higher in the military health care system than they are in the industry. Only by a slight amount, but that is 87 percent who say that they are pleased with the health care received.

    Now, I am terribly concerned, however, about the percentage that are not pleased with their health care. And I am concerned about recruitment and retention. But above all, I am concerned about the quality of the care that each of our service member and their families receive.
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    Mr. TAYLOR. I open this up to the panel. One of the other complaints was the time it takes for the claims to be processed. And I am just curious, I am told that the normal amount of money for the Medicare system for a claim to be processed runs around 97 cents per claim. I am also told that in the case of military health care, TRICARE, it is averaging about $8 a claim.

    So we not only have a delay that I am told aggravates the dickens out of our service people, but that the people who are processing those claims are making substantially more money than other government health care.

    Would someone like to comment on that? Again, yes, sir.

    Mr. MEYER. Mr. Taylor, if I might, the two are not analogous at all. In the Medicare system—and Mr. Backhus referred to it in his testimony—once again, in the TRICARE system, we, for example, process, of course, all of our contracts, about 85 to 90 percent of the claims in 21 days, Mr. Backhus appropriately pointed out that that means there are some 3 million claims a year that don't get processed in 21 days.

    We get—of the nondrug claims, we get 10 to 15 percent of our claims electronically; and Medicare on the institutional side, they get 99 percent of their claims electronically.

    On the professional side, they get over 75 percent of their claims electronic. We get less than 10 percent of our claims electronic.
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    Mr. TAYLOR. Why?

    Mr. MEYER. Because Medicare is designed to be so much easier for the provider to submit, because the complexities built into this program are not there in the Medicare program.

    Mr. TAYLOR. Is there a good reason for those complexities to be built into the system?

    Mr. MEYER. In many cases there is.

    Mr. TAYLOR. Why?

    Mr. MEYER. Because Medicare is not dovetailing what the military direct care system is doing. The Medicare system stands alone; it doesn't have to have advanced computer systems, such as in this program, such as the CHCS system and the DEERS (Defense Eligibility and Reporting System) system and the PDTS (Pharmacy Data Transaction Service) system, where you have to track a patient back and forth between direct care on the civilian side. None of that is there in the Medicare system.

    You also have a Medicare beneficiary that basically doesn't move; they pretty much stay where they are. A CHAMPUS beneficiary—excuse me, a TRICARE beneficiary moves quite often.

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    A point that should not be lost when we talk about the Medicare standards, Medicare measures their claims on what they call ''clean claims;'' that is, claims that come in and are fully processible the way they are received. The TRICARE program standard is based upon all claims, whether they are clean or just a mess the way you get them. The TRICARE program requires that the contractor, and in our case, the claims processing contract requires that we, take 35 or more days on a very large number of claims.

    So in one respect, we are saying Medicare is processing 95 percent of its stuff in 14 days or 21 days, and this program only processes 82 percent. This program also, by government regulation, requires that you take more than 35 days to process a large number of its claims, because you have to go out and delve for the missing information on the claim and you have to get from the provider or the beneficiary or whoever has got it that is what you need to perfect the claim.

    Mr. TAYLOR. Dr. Bailey, if I may follow up on that. I am told by a number of friends in the medical profession that there are about 85 percent of all the health care costs that any of us—you, me, my children, my parents—are going to—85 percent of the medical costs that will occur in our lifetimes occur in the last 6 weeks of our lives; it is just a statistic.

    Given what this gentleman has said and the question that I have asked, how is it that a basically extremely healthy group of young people has more difficult claims to process than folks in the last 6 weeks of their lives when 85 percent of the bills are being rung up? How do those bills get paid quicker? Because it sure doesn't make much sense.

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    Dr. BAILEY. Well, first of all, a lot of the claims that we are hearing about are the more complex claims. They are the claims that are much more like the chronic illnesses, surgical procedures and complex medical interventions that occur in the last 6 weeks. I know that as a physician.

    But I also know that because I have been out to the majority of our regions and will have completed 11 out of the 12 of them in the next few weeks and met with the beneficiaries; and many of those who are having the kinds of problems we are hearing about here today have children with chronic illnesses, birth defects, very complex medical situations.

    Furthermore, I would reiterate that we have a very complex system that is very different from Medicare. For one thing it is three really unique systems. It is not just the Prime system that we mostly know as the military health care system. We have a system called Extra which is more like a PPO, and Standard which is the old CHAMPUS, and then Prime, which is like the HMO.

    So first of all, we have got to determine what system an individual is in, and within that system, we have different copays, we have different payments that have to be made, depending on whether you are active duty or a family member or whether you are a retiree, a family member of the retiree.

    There are a variety of complications, including rank, that affect the military health care system beneficiary and the claims that are made about their medical care that are not present in the Medicare system.

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    Mr. TAYLOR. Doctor, does it bother anybody, as we are figuring out all of these different levels of copay, that these people were promised free health care?

    Dr. BAILEY. It bothers me tremendously that health care—we are not able to provide health care across-the-board to those to whom we promised, and that is why I am so pleased to see the TRICARE Senior, which is the Medicare subvention demo, in place at this time, and hoping that that will provide an answer for us so that we can provide the health care that was promised.

    Mr. TAYLOR. What about the copay for the active force?

    Dr. BAILEY. There is no copay for an active duty service member.

    Mr. TAYLOR. For the family members?

    Dr. BAILEY. Yes, there can be for family members if they are treated—not if they are treated in a direct care system at an MTF.

    Mr. TAYLOR. Again, that is not what they were promised.

    When does somebody step forward and say, as a nation, we are going to keep our word?

    Dr. BAILEY. Sir, that is one of the things we have worked on here today. We are looking at the pharmacy redesign, and there are those who say, why not provide, why not insist upon a copay for someone for pharmaceuticals that are required. I will say frankly, we are struggling with that, resisting that because we do not want to erode in any way the benefit as it exists today. In fact, we are all looking for ways to provide health care at the lowest possible cost, particularly to service members.
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    Mr. TAYLOR. Did you want to say something, Dr. Allen?

    Dr. ALLEN. No. I would just echo what Mr. Meyer and Dr. Bailey said. The Medicare system is a different system. It is only one system. It is much simpler to deal with and interface with as a physician than the TRICARE system, which has multiple plans, multiple payers; so it is not comparing apples to apples when you talk about the reimbursement system. It is different. Medicare is much simpler.

    Mr. TAYLOR. In your opinion, does it have to be that difficult?

    Dr. ALLEN. Well, as long as the uniformed services, I guess, are going to embrace the concept of TRICARE and managed care and having the options of an HMO, a PPO and Standard CHAMPUS, I think it is going to be complex. It is extremely difficult for physicians to interface with all the plans and to file—the problem is now that the claims payment problem has become so complex that nobody understands the rules. The payers don't understand the rules, the physicians don't understand the rules, and God knows, the beneficiaries don't understand the rules. So that is part of the problem, the payment process.

    And the claims processing and adjudication and filing is so complex now that nobody understands the system completely.

    Mr. TAYLOR. Should it be the physicians' responsibility to figure it out?

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    Dr. ALLEN. I think we certainly have a responsibility to look at ways to help solve the problem, yes.

    Mr. TAYLOR. I am talking about, is it—I thought I was getting the soft pitch there, Doc. Should it be really your job to figure out where the money comes from?

    Dr. ALLEN. I don't know that we would be able to figure out where the money comes from. You have to understand that physicians have a moral obligation to see and care for patients regardless of their ability to pay, and we have subsidized the Medicare and Medicaid and CHAMPUS systems for many years. And now that the reimbursement has reached such a low level for the TRICARE system, many physicians have just simply reached the point where their other reimbursement has been contracted to the point that they can no longer subsidize it, they can no longer meet their fixed costs, so they can no longer subsidize the system anymore.

    Mr. TAYLOR. Do you think the system could be designed to where it is not so complex for the doctor to try to figure out the claims? And do you think that, in turn, would reduce the cost of doing business so that possibly more doctors would participate in the military health care system?

    Dr. ALLEN. Slightly.

    Mr. TAYLOR. Is that one of the reasons why some don't try to sort out the claims?

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    Dr. ALLEN. That is correct. The hassles of trying to file and get paid have become so complex and onerous that many physicians just simply do not have the time and the effort to put into it.

    Mr. TAYLOR. Last question, Mr. Chairman. If you ever poll your members, and I presume you do from time to time, of those who refuse to participate in the military health care system, I would be very interested in knowing how many do so because of the complexities of filing claims.

    We obviously know that the reimbursement rates is a factor. How big a factor is the thing that I asked about, just the complexity of the paperwork of trying to keep processing the claims.

    Dr. ALLEN. I would say that would be about third down on the list. First on the list would be the reimbursement level, which is extremely low. The second would be this problem of constantly having to hassle with precertification, preauthorization, mother-may-I, where do we go; the example of your lady that wanted—needed another sonogram, and you have to say, '''Mother-may-I' get another sonogram?''

    The physician has already made his best shot. He has already made his best decision. He thought she needs another one. That adds time, cost and money to the system.

    And then third down on the system, then I would say would be, yes, the complexity of going through the bureaucracy of filing the claim and getting paid.

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    Mr. BACKHUS. Mr. Taylor.

    Mr. TAYLOR. Yes, sir.

    Mr. BACKHUS. A little over a year ago, I think it was, we in GAO issued a report on sort of the reimbursement issue in TRICARE, trying to determine to what extent the reimbursements might be keeping physicians from participating and to determine how close above or below they were to Medicare rates.

    Surprisingly, what came out of that analysis, though, was from around the country a pretty strong resistance on the part of providers about the claim processing hassles that they described to us. And they put it to us as being—I don't mean to contradict here, but the principal reason why they were unhappy and dissatisfied with TRICARE, they were willing to accept the payment—they didn't like it, but they were willing to accept it—if they could get a claim submitted and paid hassle free in a timely fashion.

    Mr. TAYLOR. Thank you very much.

    Mr. Chairman, you have been very generous. Thank you, sir.

    Mr. BUYER. Thank you, Mr. Taylor, for your contribution. I have one quick question left on this subject matter, then I am going to switch gears.

    Dr. Allen, you testified that the Texas Medical Association has approximately 35,000 doctors. Of that 35,000, how many do you think or do you know utilize TRICARE?
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    Dr. ALLEN. Extremely low number. We have found that in the larger metropolitan areas where there are adequate military treatment facilities, such as El Paso, San Antonio, there is not much problem with TRICARE, because most of the beneficiaries and retirees can go to those military treatment facilities. The problem is in the smaller areas, such as Wichita Falls, Abilene, where you have a relatively small medical community and you have a military treatment facility that is not fully staffed, doesn't have all the specialties covered, et cetera. Where they have to depend on the local medical community for that care, we are seeing very few physicians that are willing to participate in the program because of the reasons we have been discussing here.

    And so I don't know that we have done an exact poll of the number of people who accept TRICARE or see TRICARE or are a part of TRICARE. But in the Dallas/Forth Worth area and so forth, it is extremely small.

    Mr. BUYER. My sense here from this testimony today is that Dr. Bailey welcomes your constructive criticisms and constructive efforts to help solve the problems, so then you can help educate the doctors.

    Dr. ALLEN. Absolutely.

    Mr. BUYER. Am I right, Dr. Bailey, you will be more than receptive?

    I mean, she can't solve this all by herself. You are—God bless you.
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    Dr. ALLEN. No, sir, we have worked diligently with TRICARE Southwest and we have solved a number of these problems, as with Foundation we have met in San Antonio with General Carlton and General Pietrzak and Foundation, and we have addressed these problems. We feel that an open dialogue between the physicians and the payers is the way to go.

    And we are more than willing to sit down and meet them halfway and try and resolve these disputes and come to a helpful and useful conclusion with them.

    Mr. BUYER. Mr. Woys, do you have a comment?

    Mr. WOYS. Yes, if I could, just kind of following up on what Mr. Backhus and Dr. Allen were talking about in, we have found that during the earlier stages when we had claims processing problems, we disenfranchised the provider community, and we had a hard time getting networks to sign up. Since I think we performed better in claims processing, for example, in Abilene, Texas, where we had a very problematic situation, we have a full complement of the network in Abilene.

    In our four regions—State of Texas, Oklahoma, Arkansas and Louisiana—I don't know exactly what numbers apply to Texas, but we have 17,000 providers under contract for that four-State region. So I would imagine probably over 50 percent of them are in Texas, and I am not sure how many members would be part of the Texas Medical Association or what percentage—what penetration the TMA has within the provider community there in Texas.

    But again I think, as we cleaned up the payment process, we found more providers willing to come back, which leads me to believe that the CMAC (CHAMPUS Maximum Allowable Charge) rate issue was probably further down the list than number one—at least what I have seen as far as providers coming back to us in the form of developing networks—and become stronger and become more adequate.
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    Mr. BUYER. Thank you.

    I now want to shift to a totally different subject. And this is for some questions to you, Dr. Bailey, and I know we have got the Surgeons General here. I am going to ask these questions because I don't know. So I am not asking leading questions, I am not trying to set you up; I am just trying to figure this out, and this is in the area that deals with vaccines.

    So I, like a casual observer, am also reading the articles about the anthrax vaccines, pilots refusing to take the anthrax vaccine, Dr. Roadman, and I began to think about the vaccines, because I have gone through this issue with the Gulf War illness issues and the cocktail mix and having met with Gulf veterans in the United Kingdom.

    Now, I combine that with this issue, and this is the basis for my question.

    I met with a constituent this past week; her name is Betty Fluck. Betty Fluck is 39 years old, mother of three boys, something like 12—or 14, 12 and 11, something like that, even was taking karate. She was a nurse, and she goes and takes a hepatitis B shot, and she has an adverse reaction to hepatitis B, and she is now paralyzed in her legs. And it is a very tragic story in talking with her.

    And the problems that she is getting from CDC (Centers for Disease Control), and even the VARS (Vaccine Adverse Reaction System) system, which I understand is a passive reporting system. So my questions are to you, Dr. Bailey; and I am going to turn now to the Surgeons.
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    Do we require a hepatitis B shot in the United States military?

    They are vacating seats. They want the Surgeons General forward. My God. Wow.

    Dr. Allen, you can stay right there. You might give us some insight perspective.

    General ROADMAN. Mr. Chairman, the hep B is only required for people who have high risk, and that is health care workers.

    Hep A is required, and that is because of the endemic public health exposure that we have, folks in unsanitary conditions when we deploy them.

    Mr. BUYER. How about health care providers, are they required, hepatitis B?

    General ROADMAN. Yes, they are.

    Mr. BUYER. And who else would be required?

    General ROADMAN. I think fire fighters, folks that are involved in close contact with people associated with their job. I can get you for the record, everybody who is.
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    [The information referred to can be found in the appendix.]

    Mr. BUYER. How about the Navy?

    Admiral NELSON. I think it is the same across the services.

    Mr. BUYER. Is there a DOD policy then that requires a hepatitis B shot, a requirement?

    Dr. BAILEY. Yes.

    Mr. BUYER. What about adverse reactions to the hepatitis B shot?

    Dr. BAILEY. Let me just first say that the VARS is the Vaccine Adverse Reaction System.

    Mr. BUYER. It is a reporting system?

    Dr. BAILEY. It is a reporting system. And as you indicated, it is not only a physician or a hospital which reports but an individual can report any kind of a reaction. Reactions occur with all kinds of vaccines. I am sure you are aware of something like Guillain-Barre, which was—with the influenza immunizations occasionally occurs, although that particular—which can result in paralysis.
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    I don't know what the particular situation was with the beneficiary you mentioned, but these things can occur. And they—by the way, that particular response is not only in response to vaccines; it could be surgery, it could be at—sometimes you are not even able to determine why it occurs with childbirth and other situations, so it is not always the vaccine, and it is often not related to the vaccine. I don't know in that particular case.

    Mr. BUYER. I know that SmithKline Beecham is the manufacturer. And I saw a box of FOIA (Freedom of Information Act) requests of the adverse reactions that were reported; and for me just to leaf through them, it was rather stunning. And then I looked further and learned that no claims have been paid out of the vaccine compensation fund with regard to hepatitis B, and there is this claim of no causal link.

    And then they take the next step forward and say, well, with a passive reporting system, it is—you know, it is not sufficient data that would warrant—and I get into this tailspin. It just made me feel very uncomfortable.

    So the reason I am asking this question is, if we are requiring a particular protocol of vaccines with the military, and it is ordered, and if they don't take these vaccines, they are subject to military discipline to include, administratively, out. Why wouldn't we—this is my question to you—why wouldn't we consider that to be an active or mandatory reporting system as opposed to passive?

    Dr. BAILEY. We do use it as an active system. Let me—I would be remiss if I were not to mention anthrax, because that is something that is at the moment in the news and of interest to us all, because we are immunizing our entire force, and I just want to make sure it is on the record here that we report, we have given to over 185,000 service members over 500,000 immunizations with anthrax.
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    It is an incredibly safe vaccine for a particularly deadly and easily weaponized weapon of mass destruction. So we are providing that. And at this point we have had less than 40 reactions through an active reporting system, through VARS less than 40, and only several of those were systemic, and all have made full recovery.

    So that we understand, this is a particular vaccine which has fewer reports of any adverse reactions than DPT, say, or polio or immunizations which you may be aware of.

    General ROADMAN. But I think it is really important, just as we talked about contracting in context, that we look at infectious disease in context. And then, as I believe we have cohorts of people who have forgotten polio, who have forgotten the infectious diseases that quite frankly were the great killers of our people; and we are always in a position of having risk versus risk, the risk of having the immunization versus the risk of not taking it—

    Mr. BUYER. It is risk-benefit.

    General ROADMAN. What I am saying is, risk-benefit really only looks at half of the issue. It is risk versus risk, and we can use anthrax as a great example of that. We have 10 countries that we think have weaponized this bacteria. If we have people that are exposed to it, first of all, we can't detect it well; we will first see people coming in with a flu-like syndrome, and 3 days later, 99 percent of them will die. So the risk of not taking that and putting our people into harm's way is high.
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    The risk of the immunization is relatively low, but with everything that we do, there is, in fact, a downside. I think Eli Lilly said if a drug doesn't have a bad side effect, it is not a drug. And so I think that what we have really got to recognize is that we are in a position with almost every treatment—I think Dr. Allen will back that up—with almost every treatment it is risk versus risk. If we don't do this surgery, if we don't do this immunization, this is what will happen. If we do it, this will what will happen.

    So I think it is important to put that in context. And with infectious disease, I believe it is absolutely imperative that we have fear not of the immunization, but fear of the disease itself. And I think that is where we are.

    Whether it is the anthrax issue or whether it is hep B with people who have high risk, whether it is hep A in environments where sanitation is not adequate, I believe that we have to reframe the issue.

    Mr. BUYER. Mr. Woys, as a TRICARE contractor, how do you participate in the reporting systems? Is it passive or active?

    Mr. WOYS. We don't.

    Mr. BUYER. You do not know? Pardon.

    Mr. WOYS. We don't know.

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    Mr. BUYER. You don't know. Obviously, they are done by the doctors down there. You don't know whether the doctors are reporting them or not?

    Mr. WOYS. We don't know—if we paid for the claim—I don't believe a claim has ever been transmitted to DOD to be included in a reporting.

    Mr. BUYER. Would you know that, Dr. Allen?

    Dr. ALLEN. No, sir.

    General PARKER. Mr. Chairman.

    Mr. BUYER. Yes.

    General PARKER. John Parker, the reaction reporting system is dependent on the provider to do the reporting. And so the HMO or the management company that is managing claims and everything is two, three steps away from this. The only person who knows there is a reaction is the individual who gets the reaction and the doctor they talk to about that. Therefore, the onus is on the physician to make the reporting, and there are requirements to report a severe reaction. That is mandatory, and then it trails off as to whether a less severe reaction is reported to the VARS system.

    The mandatory part of the vaccine reporting system is definitely tied with our total program for anthrax vaccination, and that is a separate reporting against every other vaccine. We have set down tight rules and guidelines for reporting of any reaction to the anthrax vaccine.
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    Mr. BUYER. Gentlemen, would you let me know about the adverse reactions on hepatitis B? Could you give me a report on that—

    Dr. BAILEY. Yes, we will provide that for the record—

    [The information referred to can be found in the appendix.]

    Mr. BUYER. —for each of the services?

    Dr. BAILEY. Yes.

    Mr. BUYER. I noted some correspondence from Senator Luger, who had mentioned that the Centers for Disease Control and Prevention, their director indicated that due to public concern in France and elsewhere, because there is little available research, that CDC is planning a study to assess whether any potential connection exists between the hepatitis B vaccine and multiple sclerosis. So I want to alert you to it.

    I am just now scratching the surface of it. I am trying to figure it out. But I am uncomfortable when I then look a little bit further—and I want to be very careful, I don't want to call it excuses, but I just—I don't know what is there. I know that in order for—from a national capacity standpoint, in order for us to conduct research and development we need, obviously, to promote safe vaccines.

    So you are absolutely right; I concur with you, Dr. Roadman. But to strengthen the national capacity to conduct—and I wrote this down—to conduct surveillance of vaccine preventable diseases, we also need to evaluate the potential adverse events and determine causation and vaccine efficacy.
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    And so we had better evaluate—I wrote ''risk-benefit,'' I am going to write ''risk-risk.'' I never thought of it in that capacity, but, boy, it was painful for me to listen to the constituent who is also required as a nurse to take this, and now 11 months later, she has no use of her legs whatsoever. Yet, she is being told that, well, there is no causal connection between the shot. That is hard. That is hard.

    And then when I am looking here a little bit further and finding out that there are many different adverse reactions, I think I am going to put my nose under the tent here. So I would appreciate it if you can be helpful to me. If, in fact, you have a mandatory reporting system, I will know what that is, and I will ship that over to CDC. And we may even—

    General ROADMAN. The mandatory system that we have for reporting—in fact, it is a push through VARS, so it goes through the CDC system. So they have that.

    Mr. BUYER. Yes, but I don't know what the number is.

    General ROADMAN. I understand.

    Mr. BUYER. So what I am saying is, we may have a particular—I don't know what your medical terminology is—a class; I don't know what you want to call it. I mean, there will be a specific number from a specific population that they can begin—

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    Dr. BAILEY. A cohort.

    Mr. BUYER. A cohort? Okay. I don't know what that is. Thanks for indulging me on a side note dealing with vaccines. I appreciate your coming forward.

    Does anyone else have anything?

    Mr. ABERCROMBIE. Yes. I realize a lot of this has been gone over, but just so that we try to get as much clarity, and at least that I have—I wish Mr. McIntyre was still here.

    He is.

    Mr. BUYER. Come up to the table. This is going to be an ad hoc. The Surgeons General may be excused.

    Mr. ABERCROMBIE. They may want to comment on this as well.

    I haven't been here for the whole of the hearing; obviously, we get trapped in other things at the same time. But what I heard and what I know is being asked reiterates for me this question about being able to communicate electronically, to be able to communicate—and even all of this last discussion, Mr. McIntyre, having heard all of this today, would you still contend that if we could integrate, say, the military training facility—treatment facilities and the TRICARE network and the mail—it is late in the day—
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    Dr. BAILEY. Mail order pharmacy.

    Mr. ABERCROMBIE. —the mail order pharmacy, and add it to also to deal with the claims. It is the same process. If we could put all of that together, can't we do the same thing with the claims? Couldn't a lot of this difficulty be cleared up if we had this all integrated?

    Mr. MCINTYRE. Well, I think—in fact, we are in the process of putting together what I would term a ''virtually integrated system,'' and part of that component is the direct care system and part of it is the contractor or the network or the like. And you are right when you ask the question, doesn't that thread through a lot of different areas? Indeed, it does.

    It threads through not only the claims payment behavior and activity—and we certainly have a lot of dialogue that goes on between the Department, the direct care system and the contractors and subcontractors on claims payment—but you also find that certainly in the pharmacy area and the like. And communication is certainly a critical issue.

    I would submit to you, sir, that that is a front-and-center issue for the Department and for the contractors alike. And we are working through those issues collectively at the moment.

    Mr. ABERCROMBIE. Okay. And, Dr. Bailey, is it fair to say that you are at least planning or hoping to put together an integrated computer system in your pharmacy redesign?
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    Dr. BAILEY. Absolutely. We are testing the main part of the system this summer.

    Mr. ABERCROMBIE. Okay. Would that system be compatible then on medical records, personnel information, billing data, et cetera?

    Dr. BAILEY. It should link the entire system. By way of saying that PRODUR (Prospective Drug Utilization Review) and PDTS (Pharmacy Data Transaction Service) is going to be compatible with CHCS 2, which will eventually link the entire military health care system.

    Mr. ABERCROMBIE. That is the plan—that is your hope, that is your plan, that is the order, or what?

    Dr. BAILEY. That is the plan.

    Mr. ABERCROMBIE. So it will be integrated?

    Dr. BAILEY. Yes.

    Mr. ABERCROMBIE. What resources do you need to make that happen, though?

    Dr. BAILEY. Fortunately, we have budgeted $100 million a year for the CHCS 2 effort, and we have at this point funding that allows us to do the PRODUR or the pharmaceutical part of the IMIT (Information Management Information Technology) effort.
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    Mr. ABERCROMBIE. My question was, what resources do you need to make what we just talked about happen?

    Dr. BAILEY. Aside from funding resources?

    Mr. ABERCROMBIE. Well, are the funding resources you just recited to me sufficient?

    Dr. BAILEY. Right. Yes, we are funded.

    Mr. ABERCROMBIE. That is not what I asked. You have got to be real careful what you answer to me, Dr. Bailey, right now, because most of us are ignorant up here. We are not stupid, but we are ignorant; we are dependent upon the information that we get in order to try and make our conclusions.

    What you just said to me, or what I interpreted as what you just said to me is, you have sufficient funding to be able to put together the integrated system that I just asked you about. Do you mean that? Because that makes it a lot easier for me.

    Dr. BAILEY. At this point, we are funded in the year 1999 for the requirements and the resources for the continuation of the development of the IMIT system that will allow us to integrate the entire system.

    Mr. ABERCROMBIE. All right. Then what is your time frame?
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    Dr. BAILEY. The pharmaceutical portion?

    Mr. ABERCROMBIE. No, no, no, for the whole thing, the medical record, the billing.

    Dr. BAILEY. CHCS 2 will be completed and implemented system-wide by 2003, this is currently, right now, at Tripler Army Medical Center in Hawaii under way and will continue to move throughout the system. I am doing everything in my power to move that far more quickly.

    Mr. ABERCROMBIE. Okay. All right.

    I am trying to figure out. I am trying to help you get more money. But if you don't need it, that is okay; we will put it someplace else. That is it. Thank you.

    Mr. BUYER. Thank you very much. With regard to the Surgeon General's question, do you have a sense where I am scratching?

    All right. Thank you very much.

    [Whereupon, at 5:08 p.m., the subcommittee was adjourned.]


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March 10, 1999
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