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but because prescribers are writing prescriptions for them. We would also point out that the patient often pays a premium for such products, certainly in terms of the price paid in relation to the cost of the product. There can be no question but that the physicians in this situation were given or sold stock to increase sales of the company's brandname products.
I would like to refer to the last page of the testimony and read part of a letter from the American Medical News, of June 1, 1970:
Another alternative which will be exercised by many physicians is increased dispensing. Since any physician can buy prednisone and tetracycline for $1.30 a hundred, and since these cost the patient a minimum of $10.00 a hundred on prescription, the margin for "doing well by doing good” is fairly wide.
As a practicing pharmacist, and I practice daily, I cannot buy tetracycline or prednisone for $1.30 a hundred, and I do not charge anywhere near $10 for those products.
Secondly, we would point out that ethical considerations were apparently insufficient to keep the physicians involved with this firm from resisting the temptation of financial gain, even to the point of attempting to disquise their ownership interests by having stock issued in the names of their family members.
A second situation which we would bring to your attention is described in articles appended to our statement which appeared in the Des Moines, Iowa Tribune, on October 23, 1969, and F-D-C Reports ("The Pink Sheet") on May 4, 1970. The staff of the Senate Antitrust Subcommittee is intimately familiar with this situation.
It involves Woodland Drug Holding Co., a subsidiary of the Woodland Corp. in which physicians own a very substantial interest. Through Woodland Drug Holding Co., the Woodland Corp. owned three wholesale drug companies in Iowa, a distributor of medical and surgical supplies and equipment, and a pharmacy franchising firm.
Although, the "Pink Sheet" article describes, the financial fortimes of Woodland Drug Holding Co. have fallen upon hard times, this clearly was not intended. What apparently was intended, and achieved in large part, was control of drug distribution at the wholesale level in Iowa, and a substantial interest in drug distribution at the pharmacy level both in Iowa and elsewhere. The Woodland situation makes clear that the physician owners were involved in a substantial conflict of interest in at least the following ways:
(1) Physician owners had the incentive to stimulate moving drug products in the wholesaler's warehouses by prescribing for them.
(2) Physician owners had the incentive to direct patients to Woodland franchised pharmacies paving percentage fees.
(3) Physician owners had the incentive to overprescribe for their patients, thereby increasing sales by the wholesalers and also increasing the percentage fees received from pharmacy
franchises. In addition to these two specific examples involving abuses related to physician ownership, we can also state that percentage leases of the type that would be prohibited by S. 1575 are in force and continue to be demanded of pharmacists who wish to establish pharmacies in physician-owned medical centers, clinics, and even regular commercial buildings.
With you permission, Mr. Roberts would like to present a situation of this type for the record.
Senator Moss. All right. Mr. Roberts.
Mr. ROBERTS. Senator Moss, just a few days ago we received a telephone report from the Iowa Pharmaceutical Association concerning a situation in Ames, Iowa, in which a pharmacist was seeking to establish a pharmacy in a physician-owned medical clinic. The situation in Iowa, the board of pharmacy requires that for any pharmacy which is to be established in a clinic, that the lease must be submitted to the board of pharmacy for review.
At first the physicians and their attorneys were reluctant to submit the lease to the board, but finally acceded to the demand. When reviewed, the lease revealed that it was a percentage lease, that the percentage stated was 14 percent of the total prescription volume up to $400,000, with a 10-percent override on volumes over $400,000.
And the board of pharmacy at that point informed the attorneys for this clinic that it would not approve a lease of this type for, among other reasons, that the AMA Council on Judicial Ethics declares percentage leases of this type to be unethical.
At that point, the attorneys for the clinic brought in a new lease. This lease states a flat rental. Under normal circumstances, a flat rental would be found to be acceptable, and certainly not unethical.
However, in this case, the rental amount stated was $48,000 a year, which figures out on a square foot basis to $40 a square foot for rental for pharmacy space. The highest amount for similar space that we have ever heard of is $10.
At this point, the board was itself placed on the horns of a dilemma, because when it expressed disapproval of this lease, the attorneys indicated that that would be fine with them, they would simply not submit an application in the name of the pharmacist for a pharmacistownership of the pharmacy, but would simply submit an application on behalf of the physicians themselves, so that it would create another physician-owned pharmacy situation.
At this point, apparently the Iowa Board of Pharmacy has concluded that it would rather have a pharmacy-owned and controlled pharmacy at a flat rental of $48,000 or $40 a square foot, rather than create another physician-owned pharmacy. And to the best of our information, the board of pharmacy is being forced in this case, because of the tactics being used by the doctors, to approve the $48,000 lease.
Senator Moss. Thank you, Mr. Roberts.
Mr. Sacks. It is apparent that mere ethical pronouncements by the AMA's Judicial Council are not and will not be sufficient to remedy the problem we are facing. Legislation is needed.
We emphasize that the failure to legislate with regard to the problem in the drug field has unquestionably, in our view, created the "hands-off” climate in which these abuses can flourish in medicare and medicaid generally. This failure to legislate also has made possible one of the most indefensible decisions made by Government officials in connection with the medicaid program.
The Department of Health, Education, and Welfare's Handbook of Public Assistance Administration entitled "Medical Assistance Programs Under Title 19 of the Social Security Act (Supplement-D)" was issued on May 16, 1967. Section D-5150 originally specified that Federal financial participation with regard to prescribed drugs:
*** is available in expenditures for drugs dispensed by licensed pharmacists and, when dispensed by legally authorized practitioners, where not adequate pharmacy services exist or are available when needed, and the practitioner dispenses such drugs on his written prescription, and retains records thereof.
On June 28, 1968, the Administrator of HEW's Social and Rehabilitation Service announced a change in this policy which now permits Federal financial participation with respect to prescribed drugs in all cases involving physician dispensing:
Federal financial participation is available in expenditures for drugs dispensed by licensed pharmacists and licensed, authorized practitioners in accordance with the State Medical Practice Act. When dispensing, the practitioner must do so on his written prescription and maintain records thereof.
Since the earlier HEW policy had permitted Federal financial participation relating to physician dispensing where adequate pharmaceutical services were not available from licensed pharmacists, it insured that medicaid patients always would be able to obtain needed medication.
What could have influenced responsible HEW officials to relax their stand? In our opinion, it was physician-backed pressures relating not to health care, but to money. The change in HEW policy did absolutely nothing to increase the availability of pharmaceutical services to medicaid patients.
We are most pleased to see that section 7 of S. 1575 would reinstate HEW's original policy with regard to Federal financial participation in all federally supported programs. This provisions is urgently needed to control the escalating costs of these programs by eliminating unwarranted duplication of services.
Finally, we wish to relate the need for S. 1575 to another serious health care related problem. Much recent attention has been given the subject of medical malpractice. The Department of Health, Education, and Welfare has appointed a Special Assistant for Malpractice Research and Prevention in the Health Services and Mental Health Administration of the Public Health Service.
The problem has also been studied by the Senate Subcommittee on Government Reorganization chaired by Senator Ribicoff. A National Conference on Medical Malpractice sponsored by the American Osteopathic Association, with support from the Department of HEW, was held this year on February 7-8 in Chicago, Ill. This significant conference brought together representatives of the health care professions (including APHA), the health insurance industry, Government and consumer representatives, as well as both plaintiffs' and defendants' attorneys with broad experience in malpractice litigation.
Several participants in this conference attributed the escalating malpractice claim experience of physicians in large part to public resentment relating to dehumanization of medical care and also to the belief that doctors are getting rich at the public's expense.
These factors are also cited in the Senate subcommittee's report, "Velical Malpractice: The Patient Versus the Physician.”
Financial involvement of physicians in pharmacy and the pharmaceutical industry which has already been brought to light and which will continue to come to the public's attention, can only serve to enflame the malpractice claim and litigation problem. Thus, because of the abuse of a segment of our medical practitioner, the entire medical profession suffers. Congress would go far toward improving the image
of medical practitioners as a group by imposing legislative restrictions on those who are unwilling or unable to keep their own house in order.
Pharmacy is pleading for a fair opportunity to keep its own house in order by preserving control of the practice of pharmacy within our profession. Pharmacists are willing to accept and exercise their responsibility and authority fully. We will accept the benefits when these are fulfilled, and we will accept the penalties when they are not.
We believe firmly that patients should continue to receive the benefit of high quality pharmaceutical services which only a pharmacist provides. We urge that pharmacists be permitted to provide such services as free and independent professionals and not as the servants of the medical profession.
Senator Moss. Thank you very much for that good presentation Mr. Sacks, and the attachments that are on your statement will also be printed in the record so that they will make clear the material you presented to us here today.
I think your statement is very much to the point. Of course, as you indicated, you have appeared previously before the Antitrust Subcommittee. We seem to be still struggling with the same problem we have had for a number of years.
Your reference to the Bonco Co. situation is interesting. I have a recent letter indicating that this company is still engaged in selling its shares to physicians.
The vice of physician ownership of drug packaging companies has long been in evidence. It was brought out in hearings of the Antitrust and Monopoly Subcommittee. What strikes me is that the AMA holds that physician ownership of repackaging companies is unethical. This was brought to the AMA's attention in 1964, 1965, and 1967, and the AMA promised to take action to end physician ownership in them. Yet spot checks by the staff just this last week showed that the same companies are owned by physicians. In 6 years the AMA has done nothing effective to end this blatant form of conflict of interest.
So I think it is clear that we must move on the legislative level, and I hope that we can move promptly in order to overcome this very serious problem.
Mr. ROBERTS. Senator Moss, may I give you another example involving a physician-owned repackaging company? This would involve reading two paragraphs from a letter we received from the State of Washington, State Pharmaceutical Association. It's a copy of a letter addressed to Senator Magnuson, chairman of the Commerce Committee, and I quote:
Not too long ago, the Paramed Company, a drug repackaging concern, sold stock to physicians, particularly in the Pierce County area. Some of those physicians owning stock insisted that the pharmacists thereabouts stock and dispense Paramed products, frequently to the exclusion of better known and better respected products.
When I wrote a letter to the President of the Pierce County Medical Society protesting this situation, I got no answer from him. But I did get a letter from the attorneys for the Paramed Company, threatening suit if I did not stop calling Paramed a repackaging company. Apparently the Pierce County President himself had a financial interest in Paramed.
Senator Moss. Thank you for adding that to the record, as another example of what is going on in various parts of the country.
Yesterday, Dr. Steinfeld, the Surgeon General, testified in qualified support of the bill before us, S. 1575. He agreed with the premise of the bill that physician ownership of repackaging companies or pharmacies and dispensing by physicians creates a conflict of interest that should be avoided. However, he felt that S. 1575 was too broad in its prohibitions and that the Department of Health, Education, and Welfare should be given power to exempt physicians from the bill's prohibitions. He did not think that the exemptions should be written into the bill as they are now but should be done by regulation by HEW.
I wonder what the reaction of you gentlemen is to this statement by Dr. Steinfeld.
Dr. APPLE. Mr. Chairman, I think our reaction is that we feel definitely that the language ought to be included in the bill as provided, that we ought not leave this to regulation by HEW.
As a Member of the Senate who has considerable expertise in packaging, Senator, you have in front of you the kind of misbranded, mislabeled packaging that goes on in violation of the Food and Drug Act. We know physicians' offices are not checked for these things. We know that the regulations that can be implemented can be changed, as the case of the medicaid program, when pressure is applied to the agency involved.
We would prefer to see this spelled out once and for all and we think that the Congress ought to make its mandate known to the country on this particular issue and not leave it to the executive branch to change it as they wish.
Senator Moss. Thank you, Dr. Apple. This is indeed a dramatic example of failure to comply with the Food and Drug and Cosmetic Act on packaging. What is the mechanism for Federal enforcement, if any, and why hasn't it worked?
Dr. APPLE. Well, I don't think the Food and Drug Administration has adequate personnel to undertake this. Further, as a matter of policy, they have never gone into this type of law enforcement.
You might say it's become an unwritten rule in our society with respect to Federal regulations that the physician is always exempt.
We have the same matter pending before us now on the dangerous drug bill in front of the Congress. There is a blanket exemption for physicians. Now we know there are abuses that originate from the offices of physicians—not necessarily always by the physician himselfbut by persons employed in his office. We have the same thing—as we indicated, as Mr. Olson read—it's not atypical in a dispensing physician's office for the physician to be out of the city attending a meeting or on vacation and having the lay person--not even a registered nurse-hand out medication at the request of the individual.
If a pharmacist were to engage in that kind of activity, he would be in direct violation of Federal and State laws, and someone would be on his back pretty hard and pretty fast.
But this can go on constantly in physicians offices, and I think Congress would render the public a great service if Congress moved to pass this legislation and once and for all eliminate the drug inventories that are accumulated all over physicians' offices in this country.
Senator Moss. Are there State laws to deal with this situation that are not being enforced?
Dr. APPLE. Well, California did pass a statute in an effort to ban physician ownership, but it has some loopholes that physicians soon found a way of getting around.