Extended Interview: Tom Scully on Prescription Drug Discounts

SUSAN DENTZER:

Tell me about the principle behind the Medicare-endorsed card concept. Why did the administration come forward with it?

TOM SCULLY:

It's pretty simple, and it basically came out of the career staff here, when I first came in the job last year. For almost everybody who's under 65 years old, and if you look at your Blue Cross card, or whatever insurance company you have, on the bottom it usually says PCS or ExpressScripts. Almost every insured person in the country … their insurance company subcontracts with a benefits negotiator buying cheaper drugs. It's just a fact a life, if you're under 65 years old.

Over 65, I've got 39 million people in the Medicare program, and they're the only people in the country that walk into a drug store and pay over-the-counter prices. I always use the example, I walk into a drug store with my PCs card for Blue Cross of Virginia, and I take Lipitor. So for my once-a-month Lipitor, the over-the-counter drug cost to a senior might be $100. Blue Cross already buys that price down to, say, $70 for me. I pay a $15 co-payment, but I've already gotten a significant discount. Blue Cross has negotiated because they're buying on behalf a couple million people. A significant discount for Lipitor.

My mom walks in behind me and pays 15, 20 percent more. That's crazy. So my frustration is, as a first step, I've got 39 million people in the Medicare program. It's crazy that we're not out there trying to negotiate bulk discounts for them. Every insurance company in America does it. If you're under 65, the day you hit 66 you're out of luck. So it's a pretty simple concept.

At some point, Congress needs to decide how much it wants to subsidize that, so seniors can pay, at some point, maybe a $15 or $20 co-payment like I do through Blue Cross of Virginia.

But it makes no sense for me not to be out there negotiating on their behalf, because seniors pay, one by one. They go into a drug store and they pay full over-the-counter price, which is crazy. So what we're trying to do is get bulk discount purchases, which is a first step before you get into what the public subsidy should be.

And it's also the core concept, whether you look at the Democratic bills in Congress or the Republican bills in Congress, anywhere from 30 to 60 percent of the savings of all these bills is to get seniors into group purchasing pools to get discounts.

So it's a pretty common-sense approach.

SUSAN DENTZER:

And it's important, though, to note that this is not coverage.

TOM SCULLY:

It's not coverage; it's group purchasing. But why should anybody that's in a federal program, just because we don't cover drugs — I mean, Congress is not giving us a subsidy to subsidize seniors' drug purchases. But it makes sense to us that we should be, at least be going out and trying to get these 39 million people that I represent into purchasing pools to ratchet down the discounts.

I mean, there's a gigantic cross-subsidy against seniors in this country. Every insurance company and the states in Medicaid negotiate discounts for Medicaid beneficiaries for low-income people, for private sector insurance, and the only people that get cost-shifted against are seniors. That's nuts.

SUSAN DENTZER:

How big do you think the discounts would be on Medicare-endorsed cards?

TOM SCULLY:

Well, nobody's done this before. I was on the board of Oxford Health Plans, as you know, which is the biggest managed care plan in New York City, and I have no doubt commercial insurers have a little more leverage. That these things are generally 25 to 40 percent. We may not have that kind of leverage without an insurance program in Medicare, but I believe it can be — we've estimated 10 to 35 percent, depending on the drugs, and I think that's the case.

SUSAN DENTZER:

And that's based on looking at discounts that other insurance pools–

TOM SCULLY:

It's based on kind a splitting the difference between insurers, who have a little more leverage because an insured product, and what we've seen in the voluntary seniors discount cards, which we think are flawed — that's why we got into this. I mean, there are voluntary drug discount cards out there, but the market's not very well organized, and you really don't have any leverage to get discounts.

SUSAN DENTZER:

Just to hit some of the basics, walk us through exactly how these cards would be set up, what the role of CMS would be, what the role of PBMs [pharmacy benefit managers] would be, et cetera.

TOM SCULLY:

Well, the first levels, what's out there now, if you're in Walgreen's, or you're in CVS, or a pharmacy, you can get — or AARP has a discount pharmacy card — you can go around and have five or six pharmacy cards now. If you ask a smart-shopping senior, they may have five of them in their pocket, and with all the new drug cards out there, they have a Pfizer card, and an Aventis card, and an AARP card. The issue is none of those really give you the leverage.

So you walk into a drug store and Walgreen's may want you to have a 10 percent discount cause they want you to come into Walgreen's to buy soap, and laundry detergent and other things, so they'll give you a 10 percent discount.

But that's a voluntary discount that they're willing to give you. What we're trying to do is organize the seniors the way the insurance companies do to say, look, we're going to show up with one group of people buying cards, and we're going to go on to Pfizer and say we'd like a significant discount on Lipitor, and if you don't, we're going to steer your people towards Mevacor, or towards Pravachol, which for instance in the statins, which are the most popular drugs for cholesterol reduction, for most patients are pretty similar, and that's what private insurance companies do every day.

So the real fundamental difference here is that right now the reason these voluntary discount cards don't get any real significant discounts is you can't guarantee volume.

If we walk in now and let's say you're the AARP, and you walk into Merck or Pfizer, and say we'd like to get a significant discount on the drug, they say, well, you can't — and you might have six discount cards. There's no way — you know, he may have yours today but he might have five or six of them. There's no real leverage there in the market.

The real issue we're trying to do is use the power of Medicare, because seniors trust Medicare, and the fact that all these 39 million people are enrolled in the physician and hospital part of Medicare. To say, look, to a senior, enroll through one of these Medicare cards but you're only gonna get one. You can't have six in your wallet.

And for a six-month period, you call 1-800 Medicare, we're going sign you up with one of the companies that we've agreed to be in our cooperative, and if you decide you want to be in the ExpressScripts plan you're in it for six months but nothing else.

Or if you want to be in the PCs plan for, for six months — great. Or you want to be in the Medco plan for six months — great. But you're going to have one drug card, so we can take your market power of maybe a 100,000 people in Seattle, or 200,000 people in Philadelphia and walk into the drug companies and say all these people are one purchasing cooperative and we want to get your best discounts. That's what the private insurance companies do and it works.

What can happen now in the seniors population is they get six cards in their wallet and they're splintered. So the basic idea was to use the power of Medicare's trust with seniors and the power of our 39 million seniors to get the market leverage to get discounts. It makes a lot of sense, I think.

SUSAN DENTZER:

You saw the analysis that Mike Hash's group did for us, suggesting that under the best circumstances now, and other studies as you've said have, have reflected this as well — that under the best of circumstances discounts now max out at around 10 percent.

TOM SCULLY:

The — and the point I make — Mike's an old friend of mine, and I used to use those guys when I was in the private sector, too –very smart consulting firm. But what GAO looked at and what Mike's group looked at is what happens in the voluntary market now, and we agree that when you go through Walgreen's or you go through AARP, because they don't have the leverage, they probably only do max out at 10 percent, because they're not really going back to the manufacturer and getting rebates.

Their discounts are based on volume of people coming in the door. Walgreen's wants more people coming in the door. AARP can produce volume and say give us a discount because we'll get more people coming into Walgreen's or CVs or, or Rite-Aid, because they've got to have the AARP card.

[What] we're trying to do is get people to go back and push back against the manufacturers, which is what the private insurers do, and if you go ask a Blue Cross plan, or you go ask Blue Cross of Virginia, or California, or Oxford, how do they do it, they walk in and say we've got a million people, we want a discount. It's a totally different concept and I don't think anybody's looked at that.

It's certainly great that we get 10 percent discounts and voluntary seniors cards, but if you go back and look at what happens in the under 65 insured market, you get a totally different concept, and that's not what people looked at, and I think we're talking about is a hybrid.

SUSAN DENTZER:

The national chain drug stores of course have sued you to block this, arguing that the department did not have sufficient statutory authority to bring this forward in the first place. What do you think the outcome of their lawsuit and the ongoing litigation is going to be?

TOM SCULLY:

Well, I'm respectful of the U.S. District Court judge here who, who at least initially agreed with them. We've come out with a regulation that we hope will answer the judge's concerns. Before we rolled this out this summer, we had every lawyer in the government tell me it was fine, both at HHS and the Justice Department, where I don't think the president would have rolled it out. Our view was we thought we had the legal authority to do it. We told the president that, so we announced it and said great, let's start saving money for seniors right now.

The judge thinks that our current legal authority's not broad enough. We certainly respect that. We hope that it will win at the U.S. District Court. If we don't, we're going to appeal it to the appeals court. But we don't want to wait any longer, and so I hope we're going to go to Congress, and I've been spending a lot of time on the Hill trying to work with Congress to clarify it.

The pharmacists are concerned this is going to squeeze their margins. We try to convince them it's not. We're trying to get the discounts from the drug companies. But they have a right to be concerned. We try to address those concerns. But our goal is to save seniors money.

We don't want to squeeze the pharmacist but it's outrageous that seniors are the only ones in the country paying full over-the-counter prices and we're determined to get that done. And we're in a hurry to get it done this year, because the reason we did it so quickly last year was, you may have noticed, we spent $30 million on television ads, most of it with Leslie Nielsen telling seniors to call 1-800 Medicare.

And we got 65,000 calls a day to our switchboards at the peak of that campaign with seniors calling up to ask questions about nursing homes and other things, and one of the goals of that campaign last year was when people called up we could say "look, if you're in Seattle, you want a drug discount card, here's the seven we have in our purchasing cooperative, pick one." And we would have steered huge volume into these cards and we missed a year, and we're going to run the same campaign this fall. We don't want to miss another year.

So we're in a big hurry to, when we start running these ads in September, October, November, next year, saying call 1-800 Medicare, we want seniors to be able to call 1-800 Medicare, find out about a nursing home, find out about whatever their other health care issues are, or Medigap or Medicare questions, but also to say "I live in San Diego and here are the six plans that are part of the government's purchasing coop in San Diego. I'm going to sign up with ExpressScripts and give them the ability to start saving money."

That's not the drug coverage they're going to want, which is a full insured drug plan, but Congress has to decide on that. But they're clearly going to save money and we believe at a minimum it's 10 percent. I think it's going to be a lot more than that.

SUSAN DENTZER:

So are you seeking authorizing legislation from, to come out of ways and means, and–

TOM SCULLY:

I think you'll see something come out of the House, for sure, from what Chairman Thomas is telling me. I hope Mr. Stark and others on the Democratic side have spent a lot of time explaining this to them as well.

I think it's a first step. I spent a lot time talking to Senator Graham, who has the primary bill on the Democratic side of the Senate. His entire package is built on PBM's, and this is not a Republican or Democratic issue. All these drug bills are based on getting seniors into purchasing cooperatives and then building a subsidy based on that. So we look at this as a common building block.

The other reason I feel strongly about this is if you have a Medicare drug program, everybody's bill says my agency's going to run it. We have no experience in running a drug program. We know how to pay hospitals, we know how to pay doctors, we know how to pay nursing homes. I mean, I'll be happy, but we have 35 years of experience of paying all those providers. We have no experience at running a system to pay a pharmacist for a senior walking in over the counter.

And this discount card system would basically lay the infrastructure to let us start figuring out how to do it. So if Congress decided to have a drug benefit in Medicare in 2006, we got a lot of work to do to get this up and running, and having a voluntary discount system would do an awful lot to lay the pipeline, so that we know how to run this in a few years.

So I look at this as a common building block for everybody out there. I understand the pharmacists are nervous about this but the fact is the pharmacists deal with Medicaid doing this now, they deal with every private insurance company doing this now, and the only free lunch the system has is the poor senior walking in and paying full price, which is crazy.

The pharmacists' most legitimate concern is that they're worried that when you get people in these purchasing cooperatives they're going to push people to mail order.

I think the evidence that's happening is pretty slim. They have reasons to be concerned. If I ran one of the chain drug stores, was a pharmacist, I would say I don't blame them for raising concerns, but this is inevitable. Seniors shouldn't be the only people in the country paying over-the-counter drug prices and they shouldn't be the only people in the country that aren't organized in purchasing cooperatives, and I think this is a tide that is inevitable.

SUSAN DENTZER:

If this does go to Congress, what's the prospect that others come out of the woodwork in opposition to it?

TOM SCULLY:

Well, the manufacturers generate enormous profits. I mean, I hate to say this, but the manufacturers, get their biggest profits and their biggest margins from Medicare.

Medicare patients are paying over-the-counter prices and that's crazy, and, the bottom line is seniors are the victims of cost shifts. And it may turn out that if we get seniors better prices on drugs that private insurance companies, people under 65 may pay a little more, and maybe Medicaid beneficiaries a little more. But that's fine.

The only place where there's no pressure on the system to get better prices is with seniors, and that just doesn't make any sense.

SUSAN DENTZER:

Many of them as you've noted have already brought out their own cards as sort of a defensive posture, perhaps.

TOM SCULLY:

Which is great and we've been supportive and the secretary's been supportive, and I've been supportive, and anybody that saves a buck for a senior right now is great.

For Pfizer and Novartis, or any of these drug companies to come and try to find a way to give seniors lower prices in the interim, I think that's terrific. But my view is I don't think most seniors would say, "what's the best way for us to get a good deal from the drug companies, call up the drug companies and say "pretty please," tell every senior what you think is a good discount?"

The best way is to organize 500,000 seniors in New York and 200,000 in Philadelphia and a 100,000 in Washington, and to get them in a cooperative and go to the drug company and say we're all here to buy in a group and we want a discount.

That's the way the market works. So I give the drug companies credit for trying to do, you know, what I consider to be short-term band aids on this problem and, and it will help, and, you know, anybody paying less money in the short term is great.

But the answer is to organize people and the market forces to go out and demand discounts, not to say "pretty please," would you give us the best price you feel like it.

SUSAN DENTZER:

And you think they will stand by as Congress puts through authorizing legislation for a Medicare card —

TOM SCULLY:

Well, the drug companies, they are obviously smart people. I was involved in creating Medicaid drug rebates ten years ago and they didn't like it when the states came in and started getting discounts in Medicaid.

But it's worked and the costs have been shifted in other places, including Medicare.

I'm sure they're not going to be happy about some portion of their market that now doesn't have discounting power to come out and demanding discounts. But they're going to have to shift the cost to other places.

The drug companies really don't want price fixing. What they don't want to do is have the federal government go out there and start fixing prices for every drug like we do for hospitals and docs…

And while I think they're worried about market pricing, which is our preferred way to go, and they'd certainly probably rather stick with the existing system, but given the choice of having us organize seniors into purchasing pools and market power, or having the government fix prices, they're going to take the market approach.

So I'm sure that the status quo is probably the preferred approach but that's not an option.

SUSAN DENTZER:

Finally, do you think there will be a set of Medicare-endorsed cards or at least a couple of Medicare-endorsed cards by the end of this year?

TOM SCULLY:

We think we have pretty good legal grounds. I'm very respectful of the U.S. District Court judge who, who has held up the drug card so far, but we think even if we lose there, that on appeal we think we're on pretty solid legal grounds.

I think there's a lot of bipartisan support growing in Congress. I think increasingly both Democrats and Republicans are realizing that this is a building block for a Medicare drug benefit and it's the core, whether it's the Democratic proposals or the Republican proposals, the core of both of them is this kind a concept.

People want a drug benefit and they want discounts as part of that. I feel pretty confident that we'll eventually win in court at the appeals level. I'm being respectful of the U.S. District Court judge's opinion and I also think there's a lot of momentum on the Hill to do something this year.

I hope we can get an overall drug bill done, but as a first step, I think there's a lot more support than there was a year ago for this bipartisan business. But going back to your other issue about the advertising for the drug companies, it's hard to imagine. …

Had we known there was any legal question we probably would have made a much bigger effort. We were in a hurry to get it done because of our fall ad campaign, and so the president just announced it. Had we known there was any legal controversy about it, we probably would have spent more time trying to make sure we had everybody on board first.

But the problem was we didn't announce it. This thing all happened in two or three weeks last summer.

We had to get our ad campaign up and running, we had to get the cooperative running, we had to do the whole thing in six weeks. So we were in a big hurry, and unfortunately now we have to wait a year.

But there's no question seniors will save money… The existing seniors market is flawed and there's no real market leverage or we wouldn't be bothering to do this.