[Senate Hearing 113-859]
[From the U.S. Government Publishing Office]





                                                        S. Hrg. 113-859

           WHY ARE SOME GENERIC DRUGS SKYROCKETING IN PRICE?

=======================================================================

                                HEARING

                               BEFORE THE

                SUBCOMMITTEE ON PRIMARY HEALTH AND AGING

                                 OF THE

                    COMMITTEE ON HEALTH, EDUCATION,
                          LABOR, AND PENSIONS

                          UNITED STATES SENATE

                    ONE HUNDRED THIRTEENTH CONGRESS

                             SECOND SESSION

                                   ON

                 EXAMINING THE PRICING OF GENERIC DRUGS

                               __________

                           NOVEMBER 20, 2014

                               __________

 Printed for the use of the Committee on Health, Education, Labor, and 
                                Pensions



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          COMMITTEE ON HEALTH, EDUCATION, LABOR, AND PENSIONS

                       TOM HARKIN, Iowa, Chairman

BARBARA A. MIKULSKI, Maryland        LAMAR ALEXANDER, Tennessee
PATTY MURRAY, Washington             MICHAEL B. ENZI, Wyoming
BERNARD SANDERS (I), Vermont         RICHARD BURR, North Carolina
ROBERT P. CASEY, JR., Pennsylvania   JOHNNY ISAKSON, Georgia
KAY R. HAGAN, North Carolina         RAND PAUL, Kentucky
AL FRANKEN, Minnesota                ORRIN G. HATCH, Utah
MICHAEL F. BENNET, Colorado          PAT ROBERTS, Kansas
SHELDON WHITEHOUSE, Rhode Island     LISA MURKOWSKI, Alaska
TAMMY BALDWIN, Wisconsin             MARK KIRK, Illinois
CHRISTOPHER S. MURPHY, Connecticut   TIM SCOTT, South Carolina
ELIZABETH WARREN, Massachusetts
               

                      Derek Miller, Staff Director
        Lauren McFerran, Deputy Staff Director and Chief Counsel
               David P. Cleary, Republican Staff Director

                                 ______

                Subcommittee on Primary Health and Aging

                   BERNARD SANDERS, Vermont, Chairman

BARBARA A. MIKULSKI, Maryland        RICHARD BURR, North Carolina
KAY R. HAGAN, North Carolina         PAT ROBERTS, Kansas
SHELDON WHITEHOUSE, Rhode Island     LISA MURKOWSKI, Alaska
TAMMY BALDWIN, Wisconsin             MICHAEL B. ENZI, Wyoming
CHRISTOPHER S. MURPHY, Connecticut   MARK KIRK, Illinois
ELIZABETH WARREN, Massachusetts      LAMAR ALEXANDER, Tennessee (ex 
TOM HARKIN, Iowa (ex officio)        officio)
                                       

                     Sophie Kasimow, Staff Director

                Kristen Chapman, Minority Staff Director

                                  (ii)

  























                            C O N T E N T S

                               __________

                               STATEMENTS

                      THURSDAY, NOVEMBER 20, 2014

                                                                   Page

                           Committee Members

Sanders, Hon. Bernard, Chairman, Subcommittee on Primary Health 
  and Aging, opening statement...................................     1
Burr, Hon. Richard, a U.S. Senator from the State of North 
  Carolina.......................................................     3
Warren, Hon. Elizabeth, a U.S. Senator from the State of 
  Massachusetts..................................................    60

                       Guest Congressman--Panel I

Cummings, Hon. Elijah E., Ranking Member, House Committee on 
  Oversight and Government Reform, Washington, DC................     5
    Prepared statement...........................................     7

                          Witnesses--Panel II

Schondelmeyer, Stephen W., BS Pharm, MA Pub Adm, Pharm.D., Ph.D., 
  FAPhA, Professor and Director, Prime Institute, University of 
  Minnesota College of Pharmacy, Minneapolis, MN.................     9
    Prepared statement...........................................    11
Frankil, Robert, RPh, President, Sellersville Pharmacy, Inc., 
  Sellersville, PA...............................................    36
    Prepared statement...........................................    37
Riha, Carol Ann, West Des Moines, IA.............................    40
    Prepared statement...........................................    41
Gottlieb, Scott, M.D., Resident Fellow, American Enterprise 
  Institute, Washington, DC......................................    43
    Prepared statement...........................................    44
Kesselheim, Aaron S., M.D., J.D., M.P.H., Associate Professor of 
  Medicine, Brigham and Women's Hospital and Harvard Medical 
  School, Boston, MA.............................................    50
    Prepared statement...........................................    52

                          ADDITIONAL MATERIAL

Statements, articles, publications, letters, etc.:
    Senator Burr.................................................    63
    Senator Mikulski.............................................    64

                                 (iii)

  

 
           WHY ARE SOME GENERIC DRUGS SKYROCKETING IN PRICE?

                              ----------                              


                      THURSDAY, NOVEMBER 20, 2014

                                       U.S. Senate,
       Committee on Health, Education, Labor, and Pensions,
                                                    Washington, DC.
    The subcommittee met, pursuant to notice, at 1 p.m., in 
room SD-430, Dirksen Senate Office Building, Hon. Bernard 
Sanders, chairman of the subcommittee, presiding.
    Present: Senators Sanders, Burr, and Warren.

                  Opening Statement of Senator Sanders

    Senator Sanders. Thank you all very much for being with us 
today on a hearing that I consider to be very important.
    And we especially want to thank our panel of expert 
witnesses.
    And a special thanks goes to Congressman Elijah Cummings. 
Congressman Cummings and I have been working on this issue 
together for quite a while now, and I very much appreciate all 
the efforts that he has made in the House. And we're going to 
turn to the Congressman in a few minutes.
    The issue that we are discussing today is of huge 
consequence to the American people. When we talk about 
healthcare, we are talking about the need of the American 
people to be able to afford the medicine that their doctors 
prescribe. That's pretty commonsensical. Unfortunately, 
however, drug prices in this country are, by far, the highest 
in the world. Because the United States lacks a national 
healthcare program which is able to negotiate with the 
pharmaceutical industry, drug companies are able, in many 
cases, to charge any price they want for their product. And 
people see, time and time again--they walk into their pharmacy, 
and the price of their medicine has gone way up--no particular 
explanation for that.
    Today, according to the most recent reports, more than one 
out of four Americans do not fill their prescriptions because 
they cannot afford the cost. Think about that for a second. 
People walk into the doctor's office because they are sick, 
they or their insurance company pays for that visit, doctor 
spends time with them, the doctor diagnoses the illness, the 
doctor writes out a prescription, and one out of four people 
are unable to afford to fill that prescription. What happens to 
those people? They go home, their illness continues, maybe they 
end up in the hospital. Totally absurd situation.
    All of us understand that one of the important 
breakthroughs in medicine in recent years is the advent of 
generic drugs. And what that means is that, while protecting 
the intellectual rights of the company that developed a drug, 
the patent expires at a certain point, and that drug can then 
be manufactured by other companies. And that's what generics 
are about.
    The result of that has been that millions of people are 
purchasing generic drugs at far lower prices than the same drug 
sold under a brand name. And more and more people use generic 
drugs. And that is, to my mind, a good thing. And this has been 
an enormously helpful development in alleviating illness and 
suffering.
    The purpose of this hearing is to take a hard look at the 
generic drug industry and to make certain that generics remain 
affordable to the patients who need them; because if that does 
not happen, if generic drug prices continue to rise, then we 
are going to have people all over this country who are sick, 
who need medicine, and who simply will not be able to afford to 
buy the medicine that they need.
    On October 2d, Representative Cummings and I launched an 
investigation into the price increases of 10 generic drugs. 
Now, as it happens, the manufacturers, the companies who 
manufacture these drugs, have complained that we just cherry-
picked a handful of drugs that have seen the largest price 
increases. And they said, ``It's not really fair. You know, you 
only picked on a few drugs.'' But, in my view, that criticism 
is not valid. While we are focusing on 10 individual drugs that 
have seen extraordinary price increases, what we are also 
seeing in the industry is that many other generic drug prices 
are rising, as well.
    I should mention here that, according to a November 10th 
article in the Wall Street Journal, some of the price increases 
that we are looking at, at this hearing, and the companies 
involved, are being investigated by the U.S. Department of 
Justice for possible violations of antitrust laws.
    According to Medicare and Medicaid data, between July 2013 
and July 2014, half of all generic drugs went up in price. 
During this same time period, over 1,200 generic drugs, nearly 
10 percent of all generic drugs, more than doubled in price. 
More than doubled in price. In fact, these drugs went up in 
price by an average of 448 percent. Dozens of drugs went up by 
500, 600, 1,000 percent. To say that we're just looking at 10 
drugs is not accurate. There appears to be, now, a trend in the 
industry, where a number of drugs are going up at extraordinary 
rates.
    Let me give you a few examples. I am probably going to 
mispronounce half of these drugs. From July 2013 to July 2014, 
the price of Pravastatin Sodium, which is used to treat high 
cholesterol, went up 577 percent. The price of Divalproex 
Sodium, a migraine medication, went up by 797 percent. The 
price of Digoxin, a medication used to treat congestive heart 
failure, went up by 828 percent. Et cetera, et cetera.
    Let us be clear that these huge increases in generic drug 
prices not only drive up healthcare prices throughout America, 
which is a huge issue, but they impact the lives of very real 
people, many of whom are struggling economically. And if you 
don't have a whole lot of money, and you go to the drugstore, 
and the druggist tells you that you're now going to be paying 
10 times more for a medication that you need, this has a huge 
impact on your life. Maybe you don't get the food you need, 
maybe you don't heat your home the way you should, because you 
don't have the money to spread around.
    Several months ago on my website, I asked people in Vermont 
and throughout the country to tell me what this impact--what 
this increase in drug prices meant to them. What did it mean to 
them? And we got some 1,600 responses. Don't worry, I'm not 
going to read all 1,600 of them, but I will mention just a few, 
if I might.
    Barbara Heller, who wrote in through my website and was 
featured last week on a CBS news program, has an autoimmune 
disease, and she recently saw the price of her generic drug, 
Ursodiol, increase from $95 to over $1,200. Although she 
eventually found a lower price, it was still over three times 
what she previously paid.
    North Carolina pharmacist Parks Thomas said, on April 9th, 
2014, ``I have been a pharmacist for 30 years, and I've never 
seen increases like this. Never.'' According to Thomas, 
antifungal creams that used to cost $5 now cost $77. The cost 
for a bottle of Doxycycline went from $3 to $135. The 
antidepressant Clomipramine, that used to cost $35, now costs 
$605.
    The goal of this hearing was pretty simple--it was to have 
some witnesses come forward to give us their understanding of 
why drug prices had gone up, and to hear from the 
manufacturers. Congressman Cummings and I, and others, wanted 
to know why it is that, over the course of a year, the price of 
these drugs have gone up, not 5 percent, in some cases, but 500 
percent--not 10 percent, but 1,000 percent. We wanted to know 
if there was a rational economic reason as to why patients saw 
these huge price increases or whether it was simply a question 
of greed of companies who were able to raise prices to whatever 
level they wanted, and that is, in fact, what they did. And 
those are the questions that we wanted to ask to a number of 
drug companies. Unfortunately, not one of the companies that we 
asked to testify today chose to come to respond to those 
questions. We invited three companies--Lannett, Teva, and 
Marathon--and I am disappointed, but not surprised, by their 
refusal to show up here.
    Let me conclude by saying that Representative Cummings and 
I have introduced legislation that will address one part of the 
problem. The bill we are introducing will require generic drug 
companies to provide a rebate to Medicaid if their drug prices 
rise faster than inflation. Brand-name drugs are required to 
pay this rebate if their drugs go up faster than inflation, but 
generic drug companies are exempt. Congress should fix this 
loophole immediately.
    Senator Burr, the mic is yours.

                   Opening Statement of Senator Burr

    Senator Burr. Thank you, Mr. Chairman.
    Elijah, welcome. Thank you for ``slumming it'' this 
Thursday afternoon by coming to the Senate. It is always good 
to see you.
    While I share the concerns regarding the importance of 
Americans being able to access affordable healthcare, I'm also 
concerned that today's hearing not interfere with the reported 
Federal investigation into generic drug pricing. It's my hope 
that today's hearing will be conducted in a manner befitting 
the Senate and this committee. And I think it's obvious that, 
if there is an investigation, no right legal counsel would ever 
allow a company to come before Congress and testify if they're 
under Federal review.
    Over the past few years, a lot of promises about affordable 
care were made, and a lot of promises were broken. When a 
patient is sick and needs a prescription drug, they are 
understandably most concerned about whether that drug is 
available and if they can afford it. As we examine the reasons 
behind why some generic drugs have experienced price 
fluctuations, I hope that the committee does not lose sight of 
the important role prescription drugs play in delivering 
quality care to patients in need of these therapies. These 
lifesaving products not only help many Americans to meet their 
healthcare needs, but also improve patients' quality of life.
    While we hear about a few specific drugs and circumstances, 
it's important to remember that there are over 13,000 approved 
generic drugs in the United States. Generic drugs play a 
valuable role in helping patients access affordable medicines.
    The IMS Institute of Healthcare Informatics found that 
generics saved U.S. consumers nearly $1.5 trillion over the 
past decade. In recent years, the shares of prescriptions 
filled by generic drugs has increased, lowering healthcare 
costs not just for patients, but for taxpayers, as well. 
According to the Congressional Budget Office, between 2007 and 
2010, the share of prescriptions filled with generic drugs 
increased from 63 percent to 73 percent in Medicare Part D. And 
this has contributed to the program's success story. This is 
further affirmation that, when it comes to healthcare choice 
and competition, they are essential. Consumers know how to 
leverage these forces to make the market respond to their 
healthcare needs.
    Let's take a look at today's generic drug landscape. Since 
2012, the Food and Drug Administration has been implementing 
the first generic drug user-fee agreement. Since this agreement 
was intended to accelerate the delivery of high quality, low 
cost generic drugs, we have to ask ourselves, Is it working, 
and has it accomplished that goal?
    In 2011, the median time for generic approvals was about 31 
months. Two years and hundreds of million dollars later in 
generic user fees, it's now taking longer for generic drugs to 
be approved by the FDA--36 months, and counting. While FDA has 
taken some initial steps to address the significant backlog of 
generic drug applications, the fact remains that thousands of 
generic drug products await review by the agency. In fact, 
there are more generic drug applications awaiting review at the 
FDA today than before the generic drug user-fee agreement was 
put in place. In other words, the regulatory burden has gone up 
without realizing the full potential benefit of new generic 
drugs entering the market to help lower cost through increased 
choice and competition.
    The FDA has also proposed a generic drug labeling rule that 
actually undermines the core tenet of the term, ``sameness'' 
under the Hatch-Waxman Act. This rule will increase the cost of 
generic drugs and lead to increased cost for patients. 
Obamacare's prescription drug tax is being passed on to 
patients, not only raising prescription drug prices, but also 
raising premium pricing.
    Instead of cherry-picking a handful of examples, we need to 
look at what the full picture tells us. Drug shortages remain a 
concern. Taxes, fees, and regulatory burdens are driving up the 
cost of doing business. When the cost of doing business goes 
up, the market responds and adjusts. We have thousands of 
generic drug applications awaiting FDA review. Ultimately, many 
factors, including the policies enacted by the Congress of the 
United States and this Administration's actions, are impacting 
the availability, the access, and the price of these lifesaving 
products.
    The first rule of medicine is ``Do no harm.'' If we're 
going to point a finger at why healthcare costs are increasing, 
we should start by pointing it at ourselves, the Federal 
Government, and ask if the policies that we're implementing are 
helping or hurting. When it comes to healthcare law and FDA 
actions in--or/and inactions, we already know the answer.
    So, Mr. Chairman, by all means, let's hold a hearing on 
drug pricing. But, we're not doing right by the American people 
if that's all we look at and then proceed to ignore the fees 
imposed, the bureaucracies created, the hurdles erected, the 
regulations unleashed, and other roadblocks constructed by this 
Congress and this Federal Government more broadly.
    I look forward to hearing from our witnesses today. And I 
would remind the Chairman, we're going to be challenged, 
because we've got a series of votes at 2 o'clock. So, I will 
shut up.
    Senator Sanders. OK. Senator Burr, thank you very much.
    Now we're really pleased to hear from Congressman Elijah 
Cummings. Since 1996, Congressman Cummings has represented 
Maryland's 7th Congressional District in the U.S. House of 
Representatives, and he currently serves as the Ranking Member 
of the Committee on Oversight and Government Reform.
    Congressman Cummings, thanks so much for being with us.

  STATEMENT OF HON. ELIJAH E. CUMMINGS, RANKING MEMBER, HOUSE 
  COMMITTEE ON OVERSIGHT AND GOVERNMENT REFORM, WASHINGTON, DC

    Representative Cummings. Thank you very much, Chairman, 
Senators and Ranking Member Burr. I consider this a magnificent 
and very important opportunity.
    And let me say, to both of you, as I listened to your 
statements, we, in the Congress of the United States, do not 
have the right to remain silent on this issue.
    I'd like to start off by highlighting two fundamental 
principles that I believe we all share:

    First, generic drugs are critically important to the 
American people. Thirty years ago, Congress passed the Hatch-
Waxman Act to expand a market for low-cost generic drugs. They 
now account for 86 percent of all drugs dispensed in the United 
States. They save the American people billions of dollars every 
year, and they reduce our Nation's healthcare costs, as well. 
The majority of manufacturers are upstanding companies that 
should be commended for delivering lifesaving drugs to patients 
who need them.
    Second, I believe just as strongly that when drug companies 
increases their prices by hundreds or even thousands of percent 
virtually overnight, we, as Members of Congress, have an 
obligation to our constituents to find out why and to determine 
what we can do to help the people we serve, the ones we'll see 
this weekend at the gas station and at the supermarket and in 
church.
    I am sitting before you today not because I have anything 
against generic drug companies. Quite the contrary. But, people 
have been coming out in droves to warn us about the staggering 
price increases they are now facing for drugs they rely on 
every single day. We have heard from patients, doctors, 
pharmacists, hospitals, providers, and groups--group purchasing 
organizations, all raising the alarm. And I am certain that, 
when you travel back home for Thanksgiving next week, you will 
hear the same thing from your constituents.
    Let me give you an example. The retail price of a certain 
dosage of Albuterol Sulfate tablets increased by more than 
3,000 percent from November 2012 to June 2014. Three-thousand 
percent. I personally use the inhaler, myself, a version of the 
drug, so I know how important it is for people with asthma to 
be able to breathe. To breathe.
    Let me give you another example. Doctors use a drug called 
Digoxin to treat heart failure and irregular heartbeats and 
similar conditions. In 2012, this drug cost 11 cents per 
tablet, but, in June of this year, it had risen to $1.10 per 
tablet. Why did this happen? This drug is manufactured by a 
company called Lannett. In 2012, there were three 
manufacturers, but one stopped producing. After this occurred, 
Lannett increased its price by more than 1,000 percent.
    I know Chairman Sanders invited the company's CEO, Arthur 
Bedrosian, but he declined to testify because he's speaking to 
potential investors in London. Hello. London. What is he 
telling them? According to a call he held with investors on 
fourth-quarter earnings for 2014, his company just recorded its 
highest net sales, its highest gross margin, and its highest 
net income in their entire 72-year history. With respect to 
cardiovascular drugs in particular, the company boasted that 
their earnings rose from $4.5 million to $16.9 million in a 
matter of months. The CEO attributed these dramatic profits to 
their decision to raise prices on 75 percent of their products. 
He also said this,

          ``We are an opportunistic company. We see 
        opportunities to raise prices. Competitors drop out of 
        products, there are shortages in the marketplace that 
        sometimes drive it up.''

    This sounds like Gordon Gecko, ``greed is good.'' But, 
instead of the victims being other corporate entities, the 
victims here are real patients, real people suffering from 
heart disease.
    Let me close with one final example, if I may. In 2005, 
Jeff Aronin was the CEO of Ovation Pharmaceuticals. His company 
bought a drug called Indocin, which doctors use to treat life-
threatening heart conditions in babies. This drug used to sell 
for $77, but no other companies manufactured it, so they 
increased the price to $1,500. Let me repeat that. They hiked 
up the price from $77 to $1,500 for a medicine that doctors use 
to treat heart conditions in premature babies.
    We do not have the right to remain silent.
    Today, Mr. Aronin is CEO of a new company called Marathon 
Pharmaceuticals, and they apparently use the same business 
model. I'm almost finished, Mr. Chairman. They purchased a drug 
called Isuprel, which is also used for heart conditions. A box 
of 25 vials used to cost $916 in 2012, but, again, no other 
companies manufacture this drug, so they raised the price to 
$4,489. Corporate executives claim they are reinvesting 100 
percent of these massive profits into production improvements 
and new medicines, but they refuse--refuse--to provide any 
documents to support this dubious claim, and they declined to 
send anyone here today to testify.
    Finally, let me reiterate to every member of this panel, 
your constituents and mine are directly affected by these 
abuses. No doubt there are certainly legitimate reasons to 
increase the price of drugs on occasion, but I believe some 
companies are exploiting monopolies and disruptions in supply 
to implement massive price increases in order to reap 
unconscionable profits.
    Chairman Sanders, Ranking Member Burr, thank you again for 
inviting me here today. And I promise you, I will fight this 
issue until I die, because there are people dying because of 
it.
    Thank you.
    [The prepared statement of Representative Cummings 
follows:]

             Prepared Statement of Hon. Elijah E. Cummings

    Chairman Sanders, Ranking Member Burr, and members of the 
subcommittee, thank you very much for the opportunity to 
testify on this critically important issue. I would like to 
start by highlighting two fundamental principles I believe we 
all share.
    First, generic drugs are critically important to the 
American people. Thirty years ago, Congress passed the Hatch-
Waxman Act to expand the market for low-cost generic drugs. 
They now account for 86 percent of all drugs dispensed in the 
United States. They save the American people billions of 
dollars every year, and they reduce our Nation's healthcare 
costs as well. The majority of manufacturers are upstanding 
companies that should be commended for delivering life-saving 
drugs to patients who need them.
    Second, I believe just as strongly that when drug companies 
increase their prices by hundreds or even thousands of 
percent--virtually overnight--we as Members of Congress have an 
obligation to our constituents to find out why, and to 
determine what we can do to help the people we serve.
    I am sitting before you today not because I have anything 
against generic drug companies-quite the contrary. But people 
have been coming out in droves to warn us about the staggering 
price increases they are now facing for drugs they rely on 
every single day.
    We have heard from patients, doctors, pharmacists, 
hospitals, providers, and group purchasing organizations--all 
raising the alarm. And I am certain that when you travel back 
home for Thanksgiving next week, you will hear the same thing 
from your constituents.
    Let me give you an example. The retail price for a certain 
dosage of albuterol sulfate tablets increased by more than 
3,000 percent from November 2012 to June 2014. I personally use 
the inhaler version of this drug myself, so I know how 
important it is for people with asthma and other lung 
conditions.
    Let me give you another example. Doctors use a drug called 
Digoxin to treat heart failure, irregular heartbeats, and 
similar conditions. In 2012, this drug cost 11 cents per 
tablet, but in June of this year, it had risen to $1.10 per 
tablet.
    Why did this happen? This drug is manufactured by a company 
called Lannett. In 2012, there were three manufacturers, but 
one stopped producing. After this occurred, Lannett increased 
its price by more than 1,000 percent.
    I know Chairman Sanders invited the company's CEO, Arthur 
Bedrosian, but he declined to testify because he is speaking to 
potential investors in London.
    What is he telling them? According to a call he held with 
investors on fourth quarter earnings for 2014, his company just 
recorded its highest net sales, its highest gross margin, and 
its highest net income in their entire 72-year history. With 
respect to cardiovascular drugs in particular, the company 
boasted that their earnings rose from $4.5 million to $16.9 
million in a matter of months. The CEO attributed these 
dramatic profits to their decision to raise prices on 75 
percent of their products. He also said this:

          ``We are an opportunistic company. We see 
        opportunities to raise prices. Competitors drop out of 
        products. There are shortages in the marketplace that 
        sometimes drive it.''

    Let me close with one final example, if I may. In 2005, 
Jeff Aronin was the CEO of Ovation Pharmaceuticals. His company 
bought a drug called Indocin, which doctors use to treat life-
threatening heart conditions in babies. This drug used to sell 
for $77, but no other companies manufactured it, so they 
increased the price to $1,500.
    Today, Mr. Aronin is the CEO of a new company called 
Marathon Pharmaceuticals, and they apparently use the same 
business model. They purchased a drug called Isuprel, which is 
also used for heart conditions. A box of 25 vials used to cost 
$916 in 2012. But again, no other companies manufacture this 
drug, so they raised the price to $4,489.
    Corporate executives claim they are reinvesting 100 percent 
of these massive profits into production improvements and new 
medicines, but they refused to provide any documents to support 
this dubious claim, and they declined to send anyone here to 
testify today.
    Finally, let me reiterate to every member of this panel 
that your constituents and mine are directly affected by these 
abuses. No doubt, there are certainly legitimate reasons to 
increase the price of drugs on occasion. But I believe some 
companies are exploiting monopolies and disruptions in supply 
to implement massive price increases in order to reap 
unconscionable profits.
    Chairman Sanders, thank you again for inviting me here 
today, for agreeing to work with us on this investigation, and 
for your tremendous leadership on this issue.

(Contact: Jennifer Hoffman, Communications Director, (202) 226-
5181.)
    Senator Sanders. Congressman Cummings, thank you very much 
for being here, and thanks for your work on this issue.
    If the second panel could come on up, we'd appreciate that.
    We are very fortunate to have with us some extremely 
knowledgeable people on the pharmaceutical industry, and 
generic drugs in particular. And let us begin with Dr. Stephen 
Schondelmeyer, who is a professor of pharmaceutical economics 
at the University of Minnesota, College of Pharmacy, where he 
holds the Century Mortar Club Endowed Chair in Pharmaceutical 
Management and Economics. We're very pleased that he is here.
    Dr. Schondelmeyer, we'd be delighted to hear your 
testimony.

 STATEMENT OF STEPHEN W. SCHONDELMEYER, BS PHARM, MA PUB ADM, 
     PHARM.D., PH.D., FAPHA, PROFESSOR AND DIRECTOR, PRIME 
    INSTITUTE, UNIVERSITY OF MINNESOTA COLLEGE OF PHARMACY, 
                        MINNEAPOLIS, MN

    Mr. Schondelmeyer. Thank you, sir. I'm pleased to be here.
    I am a professor at the University of Minnesota, but I'm 
here representing my own views and my own experience after 
about 40 years of studying this marketplace and studying the 
pricing behaviors and practices in the marketplace.
    Also, I will say up front, our focus today is on 
skyrocketing generic drug prices, and I will address that, but 
I think it's important for us to realize, Where do we get 
generic drugs? Every generic drug in the market today started 
as a brand-name drug. And the brand-name drug prices are 
equally in the Wild, Wild West today, as far as pricing, as are 
generics. And so, we need to, at some point, consider issues of 
where a drug starts out at its price, what is the value of that 
drug in the market, from a broad market standpoint, not just 
from the stockholders of the drug company, and how do we price 
and change prices of those drugs over time? But, all that said, 
then we end up with generics that come into the marketplace 
today.
    As has been commented, Hatch-Waxman was a major innovation 
for the marketplace and in providing useful, viable drugs to 
the public. Hatch-Waxman really did two basic things with 
respect to generic drugs and generic drug competition. One, it 
put drugs in the marketplace that assured that these generics 
and their competitors, as well as the original brand name, all 
would be identical, or essentially identical. And we have a 
government program that we spend a lot of resources on, and I 
think wisely, to assure and certify, as a government, that 
these products are equal in the marketplace. I can't think of 
any other industry where we've made that type of investment or 
commitment.
    The second thing we've done under Hatch-Waxman was to 
shorten the time and resources required to get a drug on the 
market. And I agree with your colleague that we need to look at 
FDA's timing and what it costs to get that drug on the 
marketplace, but the bottleneck at FDA has been a part of 
constraining the number of competitors in the market. And, when 
you have fewer competitors in a market, what happens to price? 
It goes up. I'm not blaming FDA, totally. FDA is an excellent 
agency, does many good works. But, we need to look at how we 
can loosen that bottleneck of getting generic drugs on the 
marketplace.
    I study, with colleagues at the AARP, drug prices over 
time. And each year, we do an analysis, looking at not only 
brand names and generic drugs, but also specialty drugs. We 
look at each of those. We've already completed our brand-name 
marketplace analysis for 2013. We're in the middle of our 
generic. And I'll give you a few highlights of our generic 
results. But, it's--I think I have to point out, first, that 
the brand names went up 12.9 percent last year, on average, 
across all of the brand names. So, with that as a baseline, 
that's telling us--that's pushing up our future generic prices 
by that much as a baseline.
    Then, we looked at a market basket of 280 generics in the 
2013 time period, and a third of all of those had price 
increases, not price decreases, as we normally expect. I don't 
think you can call that a series of isolated anecdotes or 
cases. A third of all the market is a substantial portion of 
the market, and the trend line is going up, rather than down, 
in terms of the proportion that have these increases. I think 
it's grossly unfair to call that anecdotal or just a few cases. 
I think it is a trend in the marketplace that we're going to 
have to deal with.
    And the percent increases we're seeing for these drugs is 
not 2 percent or 5 percent or 10 percent, even. These drugs are 
going up at, as we've heard, hundreds of percents or thousands 
of percents at a time. Now, imagine if you're a diabetic 
patient and the cost of your diabetic medicine goes up 50 
percent. As a diabetic patient, you don't have any choice. 
Either you don't buy the medicine and you get worse and you 
suffer the consequences or you pay the price. But, even if you 
pay the price, your diabetes doesn't get 50 percent better when 
you pay 50 percent more. It's the same drug. It works the same 
way, and it has the same result for the patient if they have 
access to it and take it.
    We have to realize, these price increases aren't increasing 
the value of what we're delivering to the patient in the 
marketplace. These aren't innovations in the generic drug that 
are being delivered to the patient. It's the same exact generic 
drug. And that could apply to any therapeutic category.
    I noticed among the drugs that have gone up--I didn't see 
on your list--but Levothyroxine is a drug for thyroid. These 
drugs have been around since before the 1950s, and these drugs, 
all of them, went up in price 35 to 50 percent in the last 
year. Just in the last year, a 35-to 50-percent increase in 
price. Again, the patients taking those drugs aren't getting 
35-to-50 percent better.
    You will hear from various witnesses that part of this is 
because the cost structure and the barriers and the burdens 
that we've placed on industry, and regulation, is raising their 
cost structure. There is some element of truth to that. That 
may explain 2-, 5-, 10-percent cost increases, it doesn't 
explain hundreds of percents or thousands of percents. You 
can't show me, in aggregate, all of the regulations and all of 
the behaviors in the market that would justify a 100-percent 
increase in the last year, or a 1,000-percent increase.
    First these are notions thrown out to kind of sidestep what 
the issue is, and second, these are industrywide effects. But 
if they were industrywide, we would see all drugs going up at 
the same rate. No, we've only seen select drugs--32 percent 
being select--go up in price. I don't find those arguments 
largely compelling, that that explains why we're experiencing 
these drug price increases.
    What all of this is leading me to is to tell you--also, we 
hear a lot of talk about a market. And I believe in markets, 
and pharmaceutical markets as well. But, this market is broken. 
This market is failing. And I think it's structurally failing. 
If we would step back and look, consumers don't make a choice 
about what drug they're going to get. Their physician does, 
their PBM influences it, their insurance company, their 
employer. A lot of people have a role in it, but they don't 
make that point.
    The markets are broken, and we need to do something to fix 
it. And I think the government needs to step in and monitor and 
develop solutions.
    [The prepared statement of Mr. Schondelmeyer follows:]
 Prepared Statement of Stephen W. Schondelmeyer, BS Pharm, MA Pub Adm, 
                         Pharm.D., Ph.D., FAPhA
    Thank you Senator Sanders and members of the Senate Committee on 
Health, Education, Labor and Pensions (HELP) for this opportunity to 
provide information and insights on drug price trends related to 
generics and other pharmaceutical products. I am Stephen W. 
Schondelmeyer, Professor of Pharmaceutical Management & Economics at 
the University of Minnesota where I serve as Director of the PRIME 
Institute. The PRIME Institute focuses its research on policy issues 
related to pharmaceutical economics and the management of drug 
expenditures at all levels in society. These remarks are my own views 
based upon my research and experience in studying the pharmaceutical 
marketplace for over 40 years. Previously, I have had the opportunity 
to serve Congress as a member of the Prescription Drug Payment Review 
Commission (established under the Catastrophic Coverage Act of 1988), 
as an author or co-author of several legislatively mandated Reports to 
Congress, and through testimony before congressional committees on 
numerous occasions.
    This hearing is being held to examine ``Why are some generic drugs 
skyrocketing in price?'' Various aspects of this issue are addressed in 
my written remarks which include comments on:

    (1) improved coverage and access to pharmaceuticals;
    (2) the role of generics in the U.S. pharmaceutical market;
    (3) recent price trends for brand and generic prescription drug 
products;
    (4) signals of market failure in the pharmaceutical market; and
    (5) policy options to address skyrocketing drug prices.

    I will briefly address each of these topics and describe their 
relationship to the skyrocketing generic drug prices being observed in 
the market.
            improved coverage and access to pharmaceuticals
    Actions taken by Congress over the past decade have expanded health 
insurance coverage, in general, and more specifically prescription drug 
coverage. Two major pieces of legislation have been enacted and 
implemented in the past decade: (1) The Medicare Prescription Drug, 
Improvement and Modernization Act of 2003 (MMA); and (2) The Patient 
Protection and Affordable Care Act (PPACA)--commonly called the 
Affordable Care Act (ACA) (2010).
    First, the MMA established the Medicare Prescription Drug Program, 
also known as Medicare Part D. The MMA's most prominent feature was the 
introduction of an entitlement benefit for Medicare beneficiaries 
covering prescription drugs through tax breaks, subsidies, premiums, 
and other forms of cost-sharing. The Medicare Part D program was 
implemented on January 1, 2006. The ACA was the second major piece of 
legislation passed by Congress in less than 10 years. The ACA was 
enacted with the goals of increasing the quality and affordability of 
health insurance, lowering the uninsured rate by expanding public and 
private insurance coverage, and reducing the costs of healthcare for 
individuals and the government. While some of the provisions of the ACA 
were implemented as early as 2010, the major provisions went into 
effect on January 1, 2014. Both the MMA and the ACA have expanded the 
number of persons with health insurance including prescription drug 
coverage. Gallup has estimated that the uninsured rate for adults 
(persons 18 years of age and over) was 13.4 percent as of the second 
quarter of 2014, down from 18.0 percent in the third quarter of 2013 
when the health insurance exchanges created under the Patient 
Protection and Affordable Care Act (PPACA or ``Obamacare'') first 
opened.\1\
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    \1\ Levy,Jenna, Well-Being, Gallup Release Date: October 8, 2014, 
found on website at: http://www.gallup.com/poll/178100/uninsured-rate-
holds.aspx.
---------------------------------------------------------------------------
    As a result of the MMA and the ACA, more Americans have public or 
private health insurance which includes coverage of prescription drugs. 
This expansion of health insurance and drug benefit coverage has been 
accomplished using a combination of premiums, subsidies, taxes and 
penalties for lack of coverage. The percent of Americans with 
prescription drug coverage is at an all-time high (about 86 percent of 
the U.S. population).
    Drug therapy is perhaps the most widely used form of therapy in 
health care. Each year in the United States there are more than 4 
billion outpatient prescriptions provided to 310 million Americans.\2\ 
This means that each American gets 12 or more prescriptions per person 
per year on average. In addition to outpatient prescriptions in retail 
settings, patients use drug therapy in virtually all other areas of 
health care such as hospitals, nursing homes, physicians' offices and 
clinics, dentists' offices, government facilities, public health 
clinics, and other settings. Each year there are 20 to 40 new molecular 
entities that are approved by the Food & Drug Administration for 
marketing in the United States.\3\ These new drug (or biological) 
approvals are usually for innovative drug therapies that almost always 
have one or more patents and/or other forms of exclusivity. Often these 
new drug therapies hold the promise of treating a previously untreated 
disease or providing safer or more effective therapy to replace older 
drugs on the market. Also, keep in mind that today's new and innovative 
drug therapies and biologicals are the drug products that will become 
available as generics or biosimilars in the future.
---------------------------------------------------------------------------
    \2\ IMS Institute for Healthcare Informatics. Medicine use and 
shifting costs of healthcare. April 2014., p. 49.
    \3\ U.S. Food & Drug Administration. Novel New Drugs, 2013 Summary. 
January 2014, p. 3.
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           role of generics in the u.s. pharmaceutical market
    In 1984, Congress enacted the Hatch-Waxman Act also known as the 
``Patent Term Restoration and Drug Price Competition Act.'' The Hatch-
Waxman Act (``the Act'' or ``Hatch-Waxman'') simplified the regulatory 
hurdles for prospective generic drug manufacturers by eliminating the 
need for generic companies to file lengthy and costly New Drug 
Applications (NDAs) in order to obtain FDA approval.\4\ The Act also 
eliminated the duplicative clinical trials in patients that had been 
required for a generic drug to obtain approval from the FDA. Instead, 
drug companies are permitted to file Abbreviated New Drug Applications 
(ANDAs) and to rely on the safety and efficacy data already supplied to 
the FDA by the original NDA holder for a given drug. Hatch-Waxman also 
added a number of provisions to the statutory scheme, which extended 
the time during which brand name (and patented) drugs may enjoy patent 
and other forms of market exclusivity.
---------------------------------------------------------------------------
    \4\ How Increased Competition from Generic Drugs Has Affected 
Prices and Returns in the Pharmaceutical Market, Congressional Budget 
Office, July 1998, (``CBO Report''), at xii.
---------------------------------------------------------------------------
    The main purpose of the Hatch-Waxman Act was to balance two 
competing aims: (1) the protection of intellectual property rights of 
those who discover and market new and novel drug therapies, by ``Patent 
Term Restoration,'' in order to account for and to restore part of the 
time a drug product was under review by the FDA; and (2) the benefit to 
the American public that can be provided by ``Drug Price Competition'' 
resulting from prompt market entry of less expensive generic drug 
products that are therapeutically equivalent to the brand name drug 
product.
    Generic drugs are essentially exact substitutes for brand name 
drugs which have met the same exact standards for bioequivalence and 
pharmaceutical equivalence set by the FDA. Generic drug products are 
approved by the FDA through an ANDA and contain the same active 
ingredient(s), in the same dosage form, in the same strength, and are 
bioequivalent to the reference listed drug (RLD) (i.e., the original 
brand name version of the drug approved by FDA through a New Drug 
Application (NDA)).\5\ The FDA through its review process assures the 
same clinical effect and safety profile for brand and generic drug 
products rated as therapeutically equivalent.\6\ According to the FDA, 
``Products classified as therapeutically equivalent can be substituted 
with the full expectation that the substituted product will produce the 
same clinical effect and safety profile as the prescribed product.'' 
\7\
---------------------------------------------------------------------------
    \5\ While a generic drug must have the same active ingredient in 
the same amount as the brand drug, the generic can use different 
inactive ingredients.
    \6\ Orange Book, 27th ed. (12/31/2006) Preface, p. vi.
    \7\ Orange Book, 27th ed. (12/31/2006) Preface, p. x.
---------------------------------------------------------------------------
    Evaluations of therapeutic equivalence for prescription drugs are 
based on scientific and medical evaluations by the FDA. Products 
evaluated as therapeutically equivalent can be expected, in the 
judgment of the FDA, to have equivalent clinical effect and no 
difference in their potential for adverse effects when used under the 
conditions of their labeling.\8\ If the brand and generic products are 
shown to be therapeutically equivalent, and therefore interchangeable, 
they are rated as ``A'' by the FDA. Because there is no difference in 
efficacy and safety between the FDA-approved brand and generic versions 
of a drug product, they are freely substitutable and interchangeable 
from a clinical standpoint.
---------------------------------------------------------------------------
    \8\ range Book, 27th ed. (12/31/2006) Preface, p. x.
---------------------------------------------------------------------------
    Brand-name drugs that are approved for sale by the FDA are 
sometimes protected by one or more patents or other forms of 
exclusivity,\9\ which provide the patent owner (or exclusivity holder) 
with the ability to ask a court to enforce an exclusive right to sell 
that drug in the United States for the duration of the patent, or 
patents, plus any other extension times afforded by law. The Hatch-
Waxman Act requires the brand company to file with the FDA the patent 
number and expiration date of any patent covering the drug in question.
---------------------------------------------------------------------------
    \9\ Drug companies may receive FDA-granted exclusivity periods for 
several reasons including: (1) orphan designation; (2) completing FDA-
requested pediatric studies; (3) conducting new clinical trials that 
result in substantial label changes; and (4) other reasons.
---------------------------------------------------------------------------
    Patent information received by the FDA with respect to approved 
drugs is published in the FDA's ``Orange Book,'' where such information 
can be found and consulted by future FDA applicants. In accepting and 
publishing patent information in the Orange Book, the FDA's role is 
purely ministerial. The FDA does not verify the facts supplied to it by 
the patent holder, but instead relies on the good faith and presumed 
truthfulness of the original NDA holder. An invalid patent that is 
issued will be listed in the FDA Orange Book and may delay generic 
competition.
    The first generic competitor to enter a market typically does so at 
a price substantially lower than the price of the equivalent brand name 
drug, and quickly takes a substantial amount of the share of the market 
for the particular drug ``molecule'' away from the brand name drug 
manufacturer. As additional generic competitors come to market, the 
prices of the generic drug competitors continue to fall compared to the 
brand price, and their combined share of the market for the molecule, 
relative to the brand name equivalent, usually continues to grow.
    The price competition engendered by generic drug manufacturers 
affects all purchasers of the drug, who are able to buy the generically 
equivalent chemical substance (the molecule) at much lower prices. 
Pharmacies and pharmacists--the people and organizations who dispense 
drugs to patients--can and do substitute A-rated generic drugs for 
brand name drugs wherever possible in order to lower their own costs 
and those of their customers. The incentive for pharmacists and 
patients to engage in routine and easy substitution of A-rated generics 
has been enhanced over the years by managed care organizations, who, to 
encourage the use of cost-saving generic drugs, typically place A-rated 
generic drugs on the ``first tier'' of their formularies, which 
corresponds to a lower co-pay level.
    Pharmacy-driven substitution is extremely rapid and robust in 
causing the share of the market for the particular drug molecule to 
shift away from the more expensive brand name drug product and toward 
the less-expensive A-rated generic equivalents. When easy and routine 
pharmacy substitution is possible, i.e., when there is an A-rating, all 
purchasers of the brand name drug--pharmacies of all types (including 
independent, chain, food and drug stores, and mail order pharmacies), 
wholesalers and distributors, managed care organizations, hospitals, 
group purchasing organizations (GPOs) and other ``classes of trade''--
rapidly begin to purchase the generic version in lieu of the brand 
version. In addition to my own research, there are a large number 
(indeed hundreds) of sources--both published and unpublished--
describing the effects of generic competition in pharmaceutical 
markets. These sources include published articles and research papers, 
unpublished analyses and research papers, policy papers, government 
studies and documents, dissertations, data bases, and other sources 
describing the effects of generic competition.\10\ In the course of my 
work, I have reviewed most of this research, as it is available in the 
public domain. I have also conducted studies on the generic pricing and 
generic penetration rates of nearly all new molecular entities (drug 
molecules) that have faced generic competition since 1983.
---------------------------------------------------------------------------
    \10\ Among the principal studies in the scientific and economic 
literature which analyze the effects of generic competition are the 
following:

    a. How Increased Competition from Generic Drugs Has Affected Prices 
and Returns in the Pharmaceutical Market, Congressional Budget Office, 
July 1998 (Ex. 96);
    b. Jae P. Bae, Drug Patent Expirations and the Speed of Generic 
Entry, Health Services Research, Vol. 32, No. 1, pp. 87-101, April 1997 
(Ex. 98);;
    c. Richard G. Frank and David S. Salkever, Generic Entry and the 
Pricing of Pharmaceuticals, Journal of Economics and Management 
Strategy, Vol. 6, Spring 1997, pp. 75-90 (Ex .99);
    d. Henry Grabowski and John Vernon, Longer Patents for Increased 
Generic Competition in the U.S.: The Hatch-Waxman Act After One Decade, 
PharmacoEconomics, 1996 (Ex. 100);
    e. How the Medicaid Rebate on Prescription Drugs Affects Pricing in 
the Pharmaceutical Industry, Congressional Budget Office, 1996 (Ex. 
101);
    f. Pharmaceutical R&D: Costs, Risks, and Rewards, Office of 
Technology Assessment, February 1993 (Ex. 102);
    g. Henry Grabowski and John Vernon, Brand Loyalty, Entry, and Price 
Competition in Pharmaceuticals After the 1984 Drug Act, Journal of Law 
and Economics, October 1992, p. 339 (Ex. 103);
    h. Richard E. Caves, Michael D. Whinston, and Mark A. Hurwitz, 
Patent Expiration, Entry, and Competition in the U.S. Pharmaceutical 
Industry, Brookings Papers on Economic Activity: Microeconomics, 1991, 
pp. 1-66 (Ex. 104);
    i. Alison Masson and Robert L. Steiner, Generic Substitution and 
Prescription Drug Prices: Economic Effects of State Drug Product 
Selection Laws, Federal Trade Commission, 1985 (Ex. 105);
    j. Jerry I. Treppel, Andrew S. Forman, Daniel A. Seto, Geoffrey G. 
O'Brien, Specialty Pharmaceuticals Industry: The Thrifty Fifty (New 
York: Warburg Dillon Read, May 5, 1999) (Ex. 106);
    k. Kirking D.M., Ascione F.J., Gaither C.A., Welage L.S., Economics 
and Structure of the Generic Pharmaceutical Industry, Journal of the 
American Pharmaceutical Association, 41: 578-584, 2001(Ex. 107);
    l. Ascione F.J., Kirking, D.M., Gaither C.A., Welage L.S., 
Historical Overview of Generic Medication Policy, Journal of the 
American Pharmaceutical Association, 41: 567-577, 2001(Ex. 108);
    m. Suh, D.C., Manning W.G., Schondelmeyer, S., Hadsall, R., Effect 
of Multiple-Source Entry on Price Competition after Patent Expiration 
in the Pharmaceutical Industry, Health Services Research, 35: 529-547, 
1993 (Ex. 109);
    n. Reiffen, D. and Ward, M.R. (2002), Generic Drug Industry 
Dynamics FTC Working Paper 248 http://www.ftc.gov/be/workpapers /
industrydynamicsreiffenwp.pdf (Ex. 110);
    o. Rozek, P.R., Berkowitz, R, The Cost to the U.S. Health Care 
System of Extending Marketing Exclusivity for Taxol, Journal of 
Research in Pharmaceutical Economics, 9(4): 21-41, 1999 (Ex. 111);
    p. Hong, S.H., Shepherd, M.D. and Wan, T.T., The Impact of Product 
Line Extensions on Rising Prescription Drug Prices. Manuscript in 
progress (2003) abstract presented at the 130th Annual Meeting of the 
American Public Health Association; Philadelphia, PA (November 9-13, 
2002) (Ex. 112);
    q. Andrew S. Forman and David S. Moskowitz, Specialty 
Pharmaceuticals: Rising to Another Level (New York: Warburg Dillon 
Read, May 5, 2000) (Ex. 113).
---------------------------------------------------------------------------
    Testimony by the FDA's Director of the Office of Generic Drugs 
before the Senate Special Committee on Aging in July 2006 reported that 
``[t]he Hatch-Waxman Amendments have been very successful and have 
provided for the approval of over 8,000 generic drug products. These 
products are lower cost, high quality products that have saved the 
American public and the government billions of dollars.'' \11\ The 
Congressional Budget Office has credited the Hatch-Waxman Act and, 
importantly, the process for easy and routine A-rated generic 
substitution by pharmacists with providing meaningful economic 
competition from generic drugs, and with achieving billions of dollars 
of savings for drug purchasers such as consumers and employers. \12\ 
The rate of generic dispensing has reached an all-time high with 
generic drug products being dispensed for 77 percent to 85 percent of 
all outpatient prescriptions in 2012 and 2013. \13\ \14\

    \11\ Statement of Gary Buehler, R.Ph., Director of the Office of 
Generic Drugs, Center for Drug Evaluation and Research, FDA, before 
Special Committee on Aging, U.S. Senate (July 20, 2006), available at 
http://www.fda.gov/ola/2006/genericdrugs0720.html.
    \12\ Congressional Budget Office, How Increased Competition from 
Generic Drugs Has Affected Prices and Returns in the Pharmaceutical 
Market, July 1998, p. ix (``CBO Report'').
    \13\ Pharmacy Times, November 12, 2013, ``2012 Generic Drug 
Dispensing Surpasses 2011 for New Record,'' found on website at: http:/
/www.pharmacytimes.com/publications/issue/2013/November2013/2012-
Generic-Drug-Dispensing-Surpasses-2011-for-New-Record.
    \14\ The Express Scripts Lab, The 2013 Drug Trend Report, April 
2014, p.67.
---------------------------------------------------------------------------
    In other words, generic drug products play a critical role in the 
U.S. market because they are the only form of direct economic and price 
competition from identical, therapeutically equivalent drug products 
which can be legally substituted for brand name prescription drugs. 
Generics can perform this critical function effectively, however, only 
through the A-rated substitution mechanism. Generic drugs are 
essentially exact substitutes for brand name drugs which have met 
standards for bioequivalence and pharmaceutical equivalence set by the 
FDA. Without the presence of, or ability of, purchasers to choose an A-
rated therapeutically equivalent generic alternative, brand name 
products will face relatively little effective price or economic 
competition. The availability and use of FDA-approved A-rated generics 
provides the key mechanism for assuring that a competitive market for 
drug products exists, allowing patient-users to achieve equivalent 
efficacy and safety with increased access and decreased cost. This 
process of making generic drug products readily available and routinely 
substitutable at the pharmacy level is what brings effective economic 
competition to the generic segment of the prescription drug 
marketplace. Generic drug companies serve a vital role in the 
pharmaceutical marketplace, and as Hatch-Waxman intended, are meant to 
stimulate ``Drug Price Competition.''
           recent price trends for prescription drug products
    What are the recent price trends for prescription drug products in 
the past few years? Research performed by the PRIME Institute at the 
University of Minnesota, in conjunction with the AARP Public Policy 
Institute, has examined the price trends for various segments of the 
pharmaceutical market including brand name, generic, and specialty 
products. Actual transaction prices \15\ at the retail level for 
prescription drugs widely used by older Americans have been examined 
over the time period December 31, 2005 to December 31, 2013.\16\ (See 
the AARP Public Policy Institute Report for details on the study 
methods.) We have completed the brand name drug price trend analysis 
and we are continuing to examine the generic and specialty drug price 
trend analysis. I will report here a summary of the brand name drug 
price trends for 2013 and preliminary findings from the generic drug 
price trends for 2013.
---------------------------------------------------------------------------
    \15\ The retail prices used in this report are drawn from Truven 
Health's MarketScan Commercial Database and MarketScan Medicare 
Supplemental Database (Truven Health MarketScan Research Databases). 
The prices reflect the actual total price for a specific prescription 
that a pharmacy benefit manager (PBM) bills to a specific health plan 
for consumers enrolled in employer-sponsored or government-sponsored 
(i.e., Medicare or Medicaid) health plans and not simply the out-of-
pocket cost (such as the copay) which a consumer would pay at the 
pharmacy. These amounts may or may not reflect what the PBM paid the 
pharmacy or the usual and customary price that a pharmacy would charge 
a cash pay consumer for the same prescription.
    \16\ Schondelmeyer, Stephen W. and Purvis, Leigh, Trends in Retail 
Prices of Brand Name Prescription Drugs Widely Used by Older Americans: 
2006 to 2013, AARP Public Policy Institute, Rx Price Watch Report 
#2014-03, November 2014. 38 pp.
---------------------------------------------------------------------------
    Brand Name Drug Price Trends for 2013. The trends reported here are 
annual price changes based on the 12-month rolling average for the 
period from December 31, 2012 to December 31, 2013. So let's examine 
price changes in the market for brand name drug products in 2013.

     Retail prices for the 227 brand name drug products \17\ 
most widely used by older Americans rose 12.9 percent in 2013 (Figure 
1).\18\
---------------------------------------------------------------------------
    \17\ The market basket for this analysis had 227 brand name 
prescription drug products. Some critics of the Rx Price Watch reports 
have suggested that brand name drug products in our market basket that 
subsequently face generic competition should be excluded from this 
analysis because they may be skewing the results upward. However, when 
only the 169 brand name drug products with no generic competition are 
considered, the average annual price change was 13.2 percent in 2013--
higher than the 12.9 percent price trend shown in this report (for 
additional information and analysis, see Appendix B).
    \18\ When measured as a 12-month rolling average and weighted by 
actual 2011 retail prescription sales to older Americans ages 50 and 
above, including Medicare beneficiaries.
---------------------------------------------------------------------------
     The average annual retail price increase in 2013 for these 
brand name prescription drug products was more than eight times higher 
than the rate of general inflation (12.9 percent vs. 1.5 percent).\19\
---------------------------------------------------------------------------
    \19\ The general inflation rate used in this report is based on the 
average annual rate of change in the Consumer Price Index-All Urban 
Consumers for All Items (seasonally adjusted) (CPI-U), Bureau of Labor 
Statistics series CUSR0000SA0.
---------------------------------------------------------------------------
     The average annual retail price increase for brand name 
prescription drug products in 2013 (12.9 percent) was more than two 
times higher than the average annual brand name drug price increase in 
2006 (5.7 percent).
     The average annual cost for one brand name medication used 
on a chronic basis was nearly $3,000 in 2013.
         For a consumer who takes three brand name prescription 
        drugs on a chronic basis, the annual cost of therapy would have 
        been more than $8,800 during 2013--more than double the cost 
        seen 8 years earlier.
     Between January 2006 and December 2013, retail prices for 
140 chronic use brand name drugs that have been on the market since the 
beginning of the study increased cumulatively over 8 years by an 
average of 113.0 percent.
         The cumulative general inflation rate in the U.S. 
        economy was 18.4 percent during the same 8-year period.
     Retail prices increased in 2013 for 97 percent (219 of 
227) of the widely used brand name prescription drug products in the 
study's market basket. All but two of these retail price increases (217 
of 227) exceeded the rate of general economic inflation in 2013.
     Retail prices for all 32 of the drug manufacturers with at 
least two brand name drug products in the study's market basket 
increased faster than the rate of general inflation (1.5 percent) in 
2013.
         Twenty-two drug manufacturers, including the ``All 
        Other'' category, had average annual price increases for their 
        brand name drugs of 10 percent or more during 2013.
     All but two of the 46 therapeutic categories of brand name 
drug products had average annual retail price increases that exceeded 
the rate of general inflation in 2013, with price increases by 
therapeutic category ranging from 4.2 percent to 41.1 percent.
Figure 1. Average Annual Brand Name Drug Prices Continue to Grow 
Substantially More than General Inflation in 2013


[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]


    Note: Calculations of the average annual brand name drug price 
change include the 227 drug products most widely used by older 
Americans (see Appendix A).
    Prepared by the AARP Public Policy Institute and the PRIME 
Institute, University of Minnesota, based on data from Truven Health 
MarketScan Research Data bases.

    Figure 2 shows the percent change in brand name drug prices for 
each month compared with the same month in the previous year. This 
trend is shown alongside the 12-month rolling average to allow more 
detailed examination of the rate and timing of retail brand name drug 
price changes over the entire study period. This analysis reveals three 
broad trends since implementation of the Medicare Part D program:

     The retail price of brand name drug products has steadily 
increased over time since 2006;
     Brand name drug price increases at the retail level have 
been substantially higher than the rate of general inflation; and
     The gap between the rate of brand name drug price change 
and the rate of change in general inflation has substantially widened 
over the period from 2006 to 2013. This gap has ranged from less than a 
twofold difference in 2006 to nearly a ninefold difference in 2013.
Figure 2. Rolling Average and Point-to-Point Changes in Retail Prices 
for Most Widely Used Brand Name Prescription Drugs Were Well Above 
Inflation from 2006 to 2013



[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

    Note: Calculations of the average annual brand name drug price 
change include the 227 drug products most widely used by older 
Americans (see Appendix A).
    Prepared by the AARP Public Policy Institute and the PRIME 
Institute, University of Minnesota, based on data from Truven Health 
MarketScan Research Data bases.

    Retail prices for 97 percent (219 of 227) of the most widely used 
brand name prescription drug products had price increases in 2013 
(Figure 6). Prices for 96 percent (217 of 227) of the most widely used 
brand name prescription drug products increased faster than the rate of 
general inflation (1.5 percent) in 2013.
    Among the 87 percent (197 of 227) of brand name drug products with 
annual retail price increases of more than 5.0 percent--or more than 
three times the rate of inflation--in 2013:

     Nearly one-half (49.4 percent or 112 drug products) 
increased between 5.0 percent and 14.9 percent--that is, five to ten 
times the rate of general inflation in the economy; and
     More than one-third (37.6 percent or 85 drug products) had 
an annual increase of 15.0 percent or more which is ten or more times 
the rate of general inflation in the economy.
Figure 3. Retail Prices Increased by More than 10 Percent in 2013 for 
Almost Two-Thirds of the Most Widely Used Brand Name Drugs



[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

    Note: Calculations were made using brand name drug price change 
from December 31, 2012 to December 31, 2013, and the analysis included 
the 227 brand name drug products most widely used by older Americans 
(see Appendix A).
    Prepared by the AARP Public Policy Institute and the PRIME 
Institute, University of Minnesota, based on data from Truven Health 
MarketScan Research Data bases.

    Eight of the widely used brand name drug products in this study had 
unusually high 8-year cumulative price increases (i.e., the end of 2005 
to the end of 2013). The brand name drug products with unusual price 
increases were:

     Uroxatal 10 mg tablets are a drug product used to treat 
prostatic hypertrophy. This brand name drug product had a price 
increase of 512.7 percent--more than a sixfold increase--over the 8-
year study period ending in 2013.
     Solaraze Gel 3 percent is a transdermal topical drug 
product used to treat a severe skin condition. This brand name drug 
product had a price increase of 445.9 percent--more than a fivefold 
increase--over the 8-year study period ending in 2013.
     Humulin R U-500--used to treat diabetes--had an 8-year 
price increase of 361.0 percent over the entire 8-year study period 
ending in 2013. This retail price increase shows more than a fourfold 
jump in price over 8 years.
         It is notable that the vast majority of this increase 
        took place over the past 3 years (i.e., 2011 to 2013). Since 
        insulins are biological products they currently do not have 
        generic competition but they are likely to face entry from 
        biosimilar products within the next few years.\20\
---------------------------------------------------------------------------
    \20\ L.S. Rotenstein, N. Ran, J.P. Shivers, M. Yarchoan, and K.L. 
Close, ``Opportunities and Challenges for Biosimilars: What's on the 
Horizon in the Global Insulin Market?'' Clinical Diabetes, Vol. 30(4) 
(2012): 138-150.
---------------------------------------------------------------------------
     Prandin 2 mg tablets--another drug for diabetes--had an 8-
year price increase of 295.3 percent over the entire 8-year study 
period. This retail price increase is nearly a fourfold jump in price 
from 2006 to 2013.
     Atrovent HFA 17 mcg/actuation--a respiratory inhaler and 
bronchodilator--increased in retail price by 252.4 percent over the 8-
year study period. This retail price increase is more than a threefold 
jump in price over 8 years from 2006 to 2013.
     Benicar 40 mg tablets--used to treat hypertension--had a 
price increase of 207.1 percent over the 8-year study period ending in 
2013. This retail price increase is more than a threefold growth in 
price over 8 years.
     Lunesta 3 mg tablets (and Lunesta 2 mg tablets)--drug 
products used for sedation--had an 8-year retail price increase of 
203.7 percent. This retail price increase represents a threefold price 
jump in 8 years.

    Generic Drug Price Trends for 2013. The trends reported here are 
annual price changes based on the 12-month rolling average for the 
period from December 31, 2012 to December 31, 2013. So let's examine 
preliminary findings from the generic drug price trend analysis for 
2013. In the past several years (i.e., 2006 to 2012), the average 
generic price for widely used drugs decreased with the amount ranging 
from 6-7.2 percent to ^14.5 percent. While the final data for 2013 has 
not yet been completed, the generic price effect for 2013 is also 
expected to be a decrease, but not as much of a decrease as seen in the 
previous years of the study (i.e., 2006 to 2012).
    The generic market basket included 280 drug products widely used by 
older Americans. Nearly one-third (32.5 percent) of these generic drug 
products (91 of 280 drug products) had an annual price increase rather 
than a price decrease in 2013 (i.e., December 31, 2013 versus December 
31, 2012). Fifty-four (about 20 percent) generic drug products had an 
increase of 15 percent or more in 2013 and 27 (about 10 percent) 
generic drug products had an increase of 50 percent or more in 2013. 
This market basket was based on outpatient prescription drugs widely 
used by older Americans. A list of the generic drug products with price 
increases in 2013 is attached as Appendix A.
    More than one-half of the widely used generic drug products had an 
average cost per day of therapy of less than $0.50. (See Figure 4). The 
good news is that the number of lower cost generics has increased. And, 
the bad news is, as noted above, that one-third of the widely used 
generic drugs products had price increases.

Figure 4. Percent of Generic Drug Products by Retail Price per Day of 
Therapy: (December 31, 2012 vs. December 31, 2013)



[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

    Expected Generic Drug Price Trends. The importance of A-rated 
generic competition can hardly be overstated. Since the FDA has 
determined that A-rated generics are identical in all material respects 
(``pharmaceutically equivalent'' and ``bioequivalent,'' and thus 
``therapeutically equivalent'') to a particular brand name drug and 
these generics can therefore be substituted for the brand name drug by 
the pharmacist (unless explicitly prohibited) without the intervention 
of the physician. When a consumer presents a brand name prescription to 
a pharmacist, mandatory and permissive State drug substitution laws 
(present in all U.S. States and territories) allow, encourage, and 
often require the pharmacist to substitute an FDA-approved, A-rated 
generic version for the brand name drug prescribed. Effective price 
competition for drug products within a drug molecule market, does not 
typically begin until substitutable, A-rated generic versions of that 
same molecule enter the market. FDA-approved, A-rated generics 
typically are priced substantially below their brand name counterparts. 
Once an A-rated generic enters the market unimpeded, a large share of 
purchases of the brand to which the generic is A-rated switches to the 
generic almost instantaneously, because the generic is identical to the 
brand, substantially less-expensive, and easily and routinely 
substitutable by the pharmacist without the intervention of the 
physician.
    Both the price differential between the brand and its A-rated 
generic equivalents, and the proportion of the market for the 
``molecule'' (typically the brand and its A-rated generic equivalents) 
captured by the A-rated generics, generally increase rapidly over time, 
and follow a predictable pattern. This pattern has been extensively 
studied and is generally accepted as an inherent feature of the 
pharmaceutical industry.\21\
---------------------------------------------------------------------------
    \21\ See footnote 10.
---------------------------------------------------------------------------
    The prices of A-rated generic drugs drop even further as additional 
generic competitors for a given drug molecule enter the market. The 
first A-rated generic competitor generally prices at a level of 
approximately 15 percent to 25 percent below the brand name price. As 
more A-rated generic products enter into the market, the prices of 
generics typically continue to decline both in absolute terms and in 
relation to the brand name price, a trend that typically persists for 5 
years, or more. Generic prices eventually reach as low as 10 percent to 
20 percent, if not lower, of the pre-generic entry brand name price 
when an equilibrium, or market-clearing, price point is finally 
reached.
    When A-rated generic competition is unimpeded, the brand name drug 
rapidly loses sales because the lower-priced, A-rated generic(s) are 
being routinely substituted by pharmacists, often with the 
encouragement of private and public managed care organizations (through 
which more than 85 percent of prescriptions in the United States now 
flow). There are two primary mechanisms by which managed care 
organizations encourage A-rated generic substitution: (1) by 
establishing a lower member copay for A-rated generic drug products; 
and, (2) by setting a maximum allowable cost (MAC) for the drug product 
reimbursement that pharmacies will be paid for A-rated generic drug 
products.
    Observed Generic Drug Price Trends in 2013. The pattern of generic 
drug prices over time for the widely used drug products in the 2013 
market basket was examined at the individual drug product level. First, 
we found that there were a number of generic drug products whose prices 
performed as expected in the market. That is, the generic drug product 
enters the market at a price 10 percent to 25 percent below the brand 
name price and then the generic price rapidly declines over time until 
a market leveling price is reached. For example, Figure 5 show 
Tamsulosin 0.4 mg capsules which entered the market with an actual 
retail transaction price \22\ of about $3.55 per day of therapy (16 
percent below the AWP) and the price rapidly declined to under $0.50 
per day or about 10 percent of the AWP (average wholesale price--a list 
price) and very close to the WAC (wholesale acquisition price--another 
benchmark price). A number of the widely used generic drug products had 
this expected pricing pattern.
---------------------------------------------------------------------------
    \22\ See footnote 15.
---------------------------------------------------------------------------
    A variant on the expected generic pricing pattern was also observed 
for generic drug products that had some form of formal or functional 
exclusivity in the market from one or more of the following: (1) an FDA 
granted exclusivity period; (2) entry of an authorized generic licensed 
from the NDA holder; (3) an FDA granted 180-day generic exclusivity 
period; (4) an at-risk generic launch while a patent challenge is on-
going in the courts; (5) a pay-for-delay generic situation; or (6) 
other reasons for delay of more than one true generics entering the 
market. For example, see Figure 6 (Sertraline HCl 50 mg tablets, 
Greenstone). This generic entered the market and was able to hold near 
its entry level price for about 6 months. In this case, the generic 
sertraline is marketed by Greenstone, which is a generic firm 
affiliated with Pfizer--the original marketer of the brand version of 
sertraline known as Zoloft.
    A second example of delayed generic competition can be seen in 
Figure 7 (Pantoprazole Sodium 40 mg tablet DR, Teva Pharmaceuticals). 
The delay in generic price competition for this drug product was 
secondary to the at-risk launch of several generic versions before the 
patent had expired and during the time in which the patent challenge 
was on-going in the courts. Note that the delay in effective price 
competition was about 3 years (Dec. 2007 to Jan. 2011). Once, the 
challenged patent did expire; then, the typical rapid price decline 
expected from generic drug products was observed.
    There were several generic drug products whose price rose over time 
after generic entry. See Figures 8, 9 and 10. The generic drug products 
presented in these figures include an oral suspension, an ophthalmic 
solution, and a delayed release tablet formulation. In many ways the 
price pattern of these generic drug products exhibits the traits 
commonly seen for a brand name drug product. Often generic drug 
products that are unique dosage forms (e.g., oral liquids; topical 
ointments, creams, and patches; ophthalmic products; injectable 
products; or other unique dosage forms) will have pricing behavior like 
a brand name drug product. Even though a generic drug product market 
for oral solid dosage forms (i.e., tablets or capsules) may be able to 
support entry of several generic firms, the market demand for these 
more unusual dosage forms is often quite limited and may only be able 
to support one firm in the market. Consequently, the one firm in the 
market may be able to function as if it had market exclusivity, even 
though it does not formally have any exclusivity. This functional 
market exclusivity may allow a generic drug product to raise its price 
at one point in time or over time.
    As noted earlier, nearly 20 percent (27 of 280) of the widely used 
generic drug prices saw an annual price increase of 50 percent or more 
in 2013. At the top of the list of generic drug products with 
extraordinary price increases were doxycycline hyclate 100 mg capsules 
(West-Ward) (see Figure 11) and doxycycline 100 mg tablets (West-Ward) 
with annual increases of 2,048 percent and 1,897 percent, respectively 
in 2013. One strategy to thwart generic substitution is to change the 
dosage form (i.e., tablet to capsule, or tablet to tablet extended 
release), since different dosage forms of the same drug molecule cannot 
be substituted without the doctors express written permission.
    Other generic drug products with extremely high annual price hikes 
in 2013 were: digioxin 0.125 mg tablets (Lannett) (Figure 12) with an 
increase of 103 percent and digioxin 0.25 mg tablets (Lannett) with an 
increase of 82 percent; divalproex sodium 500 mg tablets (Mylan) 
(Figure 13) with an increase of 432 percent; prednisolone acetate 
suspension 1 percent suspension (Sandoz) (Figure 14) with an increase 
of 349 percent; levothyroxine sodium at 9 different strengths (Mylan) 
(Figure 15) with annual increases ranging from 44 percent to 63 
percent; and glipizide 5 mg tablets (Mylan) (Figure 16) with an 
increase of 94 percent. Not all of the large price increases among the 
widely used generic drug products occurred in 2013. For example, 
hydralazine HCl 50 mg tablets (Par) (Figure 17) and meclizine HCl 25 mg 
tablets (Par) (Figure 18) each had increases of more than 100 percent 
in 2005 and 2008, respectively.
    While there are a number of generic drug products with very large 
price increases, this is not a new phenomenon. In July 2008, I prepared 
a report for the Joint Economic Committee of Congress that was 
presented by my colleague (Madeline M. Carpinelli). This report titled 
``Extraordinary Price Increases in the Pharmaceutical Market.'' \23\ In 
this report, we identified drug products that had experienced one or 
more ``extraordinary'' price increases.\24\ Our study of 35,143 drug 
products (at the NDC level) found that 13.5 percent of them had 
experienced one or more extraordinary price increases in the period 
1988 to 2008. While a few of these extraordinary price increases 
occurred in the 1990s, the vast majority were found in the 2000s.
---------------------------------------------------------------------------
    \23\ Madeline M. Carpinelli and Stephen W. Schondelmeyer, Statement 
on Extraordinary Price Increases in the Pharmaceutical Market, 
presented to the Joint Economic Committee of the U.S. Congress, by 
Madeline M. Carpinelli, PRIME Institute, University of Minnesota, July 
24, 2008, 11 pp.
    \24\ The term ``extraordinary'' price increase was defined as ``any 
price increase that is equal to, or greater than, 100 percent at a 
single point in time.''
---------------------------------------------------------------------------
    Clearly, the generic drug product price increases shown in these 
figures as a red line (the actual retail drug price per day of therapy) 
were dramatic. These price increases were passed on to the ultimate 
payer (commercial or government programs) and did increase the amount 
of their expenditure for these generic prescriptions.
         signals of market failure in the pharmaceutical market
    The market for drugs does not operate in the same way as most other 
markets in the United States, where the consumer freely chooses a 
product. Various aspects of the market for prescription drugs make it 
unique, including the fact that certain drugs, i.e., prescription drug 
products must be prescribed by one set of market players (physicians), 
dispensed by another market player (pharmacists), paid for by a third-
party or market player (employers or the government via insurers or 
benefit managers, and sometimes partially by the consumer), and then 
ultimately consumed by the end user (the patient). One must understand 
and take into account the differing roles of each of these players, in 
order to understand how competition functions in the market for drugs. 
The pharmaceutical market possesses institutional structural features 
and related behaviors that result in an inefficient economic market as 
evidenced by the unusually large price increases for generic drug 
products and the extremely high initial prices of brand name drug 
products.
    The marketing of patented, single source drug products in the 
United States is a very unique market and has a number of atypical 
structural features. The patent for a drug molecule alone (and other 
related patents and exclusivities) creates a monopoly for a drug 
molecule (and related drug products) and will generate sales 
specifically for that molecule and related drug products, even if there 
are other similar molecules (and their related drug products) in the 
same therapeutic class. This unique market structure for 
pharmaceuticals is due largely to the fact that a prescription must be 
written by the doctor for a specific drug product and the consumer 
(patient) is not free to choose the drug product to be purchased, even 
if there are other drugs in the class that would work as well, or even 
better. The patient (consumer) must have the doctor's permission slip 
(i.e., prescription) and the pharmacist must dispense the exact drug 
product prescribed by the doctor, unless an FDA-approved 
therapeutically equivalent generic version of the drug product is 
available on the market--typically as a lower cost substitute.
    The choice of the prescription drug product is driven by various 
types of ``directed demand'' including physicians who must prescribe 
the drug product; pharmacy benefit managers (PBMs) who establish 
formularies and manage networks of pharmacies to dispense 
prescriptions; pharmacies and pharmacists who must dispense single 
source drugs when prescribed and who chose the manufacturer source from 
among available FDA-approved, therapeutically equivalent generic 
versions of an off-patent drug; insurers and managed care organizations 
who have risk for providing health care for a prepaid premium; and 
employers who bear most of the cost for the prescriptions provided to 
their employees or government programs (e.g., Medicare and Medicaid) 
who bear most of the cost for the prescriptions provided to the 
recipients of these programs.
    In recent years, the high prices for the new drug therapies has 
come under criticism for being excessive, unaffordable and 
unsustainable.\25\ The issue of high drug prices has been raised by 
patients, doctors, health plans, insurers, and by government programs 
such as Medicare and Medicaid.\26\ The various payers for drug therapy 
are not only complaining about the high price of individual drugs, but 
they are also beginning to raise concerns about the long term 
sustainability of the pricing patterns seen for innovative drug 
therapies.
---------------------------------------------------------------------------
    \25\ Lee, Jaimy. Sovaldi fuels triple-digit rises in Gilead revenue 
and profits. Modern Healthcare. October 28, 2014.; see also, Silverman, 
Ed. `Financial Toxicity:' Who's Really to Blame for High Cancer Drug 
Prices? The Wall Street Journal, October 7, 2014.
    \26\ Comments on pricing by patients, doctors, health plans, 
insurers, and by government programs such as Medicare and Medicaid.
---------------------------------------------------------------------------
    There has been an explosion of concern (and articles about) very 
high drug prices for new and, sometimes, innovative drugs introduced in 
the United States. One recent story in the Wall Street Journal detailed 
the reaction of physicians at Memorial Sloan Kettering in New York when 
faced with a new drug whose price was almost double the standard 
therapy, yet was not appreciably safer or more effective.\27\ Not only 
were the physicians upset by the exorbitant pricing of this new cancer 
drug, but also private insurers and the Federal Medicare program have 
expressed concerns.\28\ In October 2014, ``Medicaid chiefs from red and 
blue States are urging Congress to stem the cost of revolutionary new 
drugs for hepatitis C, cancer, and other diseases.'' \29\ A recent New 
York Times editorial argued that ``Medicare should consider withdrawing 
coverage for high-priced cancer drugs that have ``modest'' benefits. 
\30\ Some have argued that the high prices are needed to fuel the fire 
of innovation, but others have suggested that ``the market is telling 
us the opposite: that prices have become the prize.'' \31\
---------------------------------------------------------------------------
    \27\ Silverman, Ed. `Financial Toxicity:' Who's Really to Blame for 
High Cancer Drug Prices? The Wall Street Journal, October 7, 2014.
    \28\ Herper, Matthew. Could High Drug Prices Be Bad for Innovation? 
Forbes, Oct. 23, 2014.
    \29\ Associated Press. States Ask Congress to Intervene on Drug 
Prices. ABC News. Oct. 26, 2014. Found at this website: http://
abcnews.go.com/Health/print?id=26524476 11/.
    \30\ Howard, Paul. High-Priced Cancer Drugs: Are They Worth It? The 
New York Times. July 8, 2011.
    \31\ Herper, Matthew. Could High Drug Prices Be Bad for Innovation? 
Forbes, Oct. 23, 2014.
---------------------------------------------------------------------------
    One of the more recent drugs to enter the market at an astronomical 
price is Sovaldi--used to treat patients with hepatitis C. Solvadi 
costs about $84,000 per course of therapy in the United States, while 
in other countries the price is as low as $900 to $2,000 per course of 
therapy.\32\ Gilead Sciences, the company that markets Sovaldi, had a 
triple digit rise in profits in early 2014 after introduction of its 
new drug.\33\ Another drug therapy for hepatitis C has just been 
approved by FDA (October 2014). This new hepatitis C drug, Harvoni, is 
also marketed by Gilead Sciences and has an even higher price tag--
$94,500 for a 12-week course of treatment.\34\
---------------------------------------------------------------------------
    \32\ Whitman, Debra B., Executive Vice President for Policy, 
Strategy and International Affairs, AARP. Expensive New Hepatitis C 
Drug Raises Alarms. Huffington Post, 05/27/2014.
    \33\ Lee, Jaimy. Sovaldi fuels triple-digit rises in Gilead revenue 
and profits. Modern Healthcare. October 28, 2014.
    \34\ Lee, Jaimy. Sovaldi fuels triple-digit rises in Gilead revenue 
and profits. Modern Healthcare. October 28, 2014.
---------------------------------------------------------------------------
    The high price of Sovaldi has had such a dramatic impact that 
``many payers and pharmacy benefit managers have begun to push back 
against Sovaldi's price, with some threatening to stop using the drug 
once a rival medicine is approved in the United States. State Medicaid 
directors have also raised concerns, saying that taxpayers will have to 
shoulder much of Sovaldi's costs since many hepatitis C patients get 
their health care from the government.'' \35\
---------------------------------------------------------------------------
    \35\ Whitman, Debra B., Executive Vice President for Policy, 
Strategy and International Affairs, AARP. Expensive New Hepatitis C 
Drug Raises Alarms. Huffington Post, 05/27/2014.
---------------------------------------------------------------------------
    The debate surrounding the price of Sovaldi is part of a much 
larger issue related to escalating specialty drug prices that are 
widely viewed as unsustainable. ``Specialty drugs now account for 28 
percent of total drug spending in the United States even though they 
make up less than 1 percent of all prescriptions.'' \36\
---------------------------------------------------------------------------
    \36\ Whitman, Debra B., Executive Vice President for Policy, 
Strategy and International Affairs, AARP. Expensive New Hepatitis C 
Drug Raises Alarms. Huffington Post, 05/27/2014.
---------------------------------------------------------------------------
    In fact, high price is the most frequently cited characteristic 
defining the new class of drugs that we call ``specialty drugs.'' \37\ 
In addition, to being high cost, the specialty drugs also have a high 
rate of patient cost-sharing. Specialty drugs are placed by commercial 
and by Medicare Part D plans in a separate ``Tier 4'' or specialty 
tier. The specialty tier usually uses a percentage co-insurance rather 
than a fixed rate copay. \38\ The percentage of coinsurance as a cost 
share of the total prescription price may range from 20 percent to 50 
percent and it is not unusual for a specialty prescription to cost 
$1,000 to more than $50,000 per prescription.
---------------------------------------------------------------------------
    \37\ EMD Serono Specialty DigestTM, 10th Edition, Managed Care 
Strategies for Specialty Pharmaceuticals, 2014, p. 10.
    \38\ EMD Serono Specialty DigestTM, 10th Edition, Managed Care 
Strategies for Specialty Pharmaceuticals, 2014, p. 10.
---------------------------------------------------------------------------
    Another new drug in the past few years, Alexion Pharmaceutical's 
only drug, Soliris, has proved effective at treating the rare disease, 
atypical Hemolytic Uremic Syndrome (aHUS). This drug therapy has a 
price tag of one-half a million dollars per patient per year. \39\ As 
the Forbes reporter said, ``That's not a typo. By my reckoning Soliris 
is the priciest drug in the world.'' (See: Herper, Matthew. The World's 
Most Expensive Drugs, Forbes, 02-22-10). There are at least nine other 
drugs on the Forbes list that cost more than $200,000 a year for the 
average patient who takes them. Most of these very high cost drugs 
treat rare genetic diseases that afflict fewer than 10,000 patients. 
Since there are no other therapies for these diseases, the ``biotech 
companies can charge pretty much whatever they want.'' \40\
---------------------------------------------------------------------------
    \39\ Herper, Matthew. $500,000-A-Year Drug Is Bright Light for 
Phrma. Forbes. Oct. 21, 2010.
    \40\ Herper, Matthew. $500,000-A-Year Drug Is Bright Light for 
Phrma. Forbes. Oct. 21, 2010.
---------------------------------------------------------------------------
    The battle over high drug prices is pitting large insurers against 
the drug companies. ``The insurance lobby, America's Health Insurance 
Plans, has criticized drugmakers for spiraling medicine prices.'' \41\ 
``Whenever the high price of pharmaceuticals is in the news, drugmakers 
try desperately to change the subject and distract from the issue,'' 
said a spokesman for the insurer lobby. The cost of medication in the 
United States might be higher than in other countries where there's 
negotiated prices and trade agreements.\42\
---------------------------------------------------------------------------
    \41\ Wayne, Alex. Cancer Patients Assail Insurer Policies on Costly 
Drugs. Bloomberg. Jun 11, 2014.
    \42\ Wayne, Alex. Cancer Patients Assail Insurer Policies on Costly 
Drugs. Bloomberg. Jun 11, 2014.
---------------------------------------------------------------------------
    New brand name drugs have much higher prices in the United States 
than in other countries and their prices have been increasing at supra-
competitive prices. Brand name drug prices in 2013 increased last year 
by 21.2 percent, while brand-name drug use dropped by 15.5 percent.\43\ 
Given the growing frustration of payers and concern about overall 
sustainability of drug price levels, at least two major consulting 
groups have released reports suggesting a new payment model for 
pharmaceuticals is needed. One of the consulting groups described that
---------------------------------------------------------------------------
    \43\ Evans, Melanie. Healthcare prices are up, and patients are 
buying less. Modern Healthcare, October 28, 2014.

          ``Makers of brand-name pharmaceuticals are competing over a 
        shrinking piece of the prescription drug pie . . . Several 
        forces are changing the way pharmaceutical companies and other 
        health organizations engage with one another and how they 
        attach value to medications.'' \44\ The second consulting group 
        explained that ``It is well established that large 
        pharmaceutical companies tend not to compete on price, 
        particularly in the largest market, the United States (U.S.).'' 
        \45\ The consulting report went on to say, ``By competing on 
        price publicly, this would lower the cost of treatment for 
        consumers, while arguably generating greater revenue for the 
        company than received currently for these marginalized 
        agents.'' \46\
---------------------------------------------------------------------------
    \44\ Health Research Institute, PWCHealth. Unleashing value. The 
changing payment landscape for the United States pharmaceutical 
industry. May 2012
    \45\ Gorkin, Larry. Time for pharmaceutical companies to compete on 
price regarding Non-Differentiated (``Me-Too'') Drugs. Eye for pharma. 
2012.
    \46\ Gorkin, Larry. Time for pharmaceutical companies to compete on 
price regarding Non-Differentiated (``Me-Too'') Drugs. Eye for pharma. 
2012.

    The market for pharmaceuticals appears to be failing when it comes 
to efficient resource use. The United States is the world's largest 
drug market, yet the United States pays the world's highest prices for 
prescription drugs. The PBMs who manage drug benefit programs for 
employers often make more revenue from drug manufacturer rebates and 
other payments than they make from administrative fees to their clients 
(i.e., employers or health plans). This raises serious issues of 
fiduciary responsibility and conflict of interest. The drug prescribers 
(i.e., physicians) are not necessarily price-conscious or price-
sensitive when it comes to prescribing drugs. Consumers are told to 
engage in consumer-driven choice of health care, yet the price of 
prescription drugs is not readily available when the consumer is ready 
to make a decision about purchasing a prescription. Even if the 
physician and the consumer want to make price-conscious decisions, the 
real net cost of prescription drugs is hidden and is not transparent 
and available.
    In summary, the high price of drugs, whether brand name or generic, 
is a critical issue. Most payers are signaling that they cannot afford 
the level of resources needed, individually and collectively, to pay 
for new and innovative therapies at the prices that are being charged. 
Payers are accustomed to saving money by encouraging patients to 
appropriately use generic prescriptions. Now these payers are nervous 
because they see that generic drug prices are increasing by 100's and 
1,000's of percents a year. Old generic drugs are being re-purposed 
therapeutically and their prices are increasing dramatically. These 
troubling trends in pharmaceutical spending indicate failures in the 
market for pharmaceuticals. A growing number of observers in the 
pharmaceutical market are calling for a new approach to pharmaceutical 
decisionmaking and to the pricing model for drug therapy.
    In other words, the market for pharmaceuticals is out of balance. 
Prices are not transparent. Without actual price data, it is not 
possible to make true value-based decisions. Certainly price is not the 
only issue in a value-based decision, but price is always an issue in 
value-based decisions. In many ways the pharmaceutical market is very 
asymmetric--the seller knows a lot more about the product than does the 
buyer. For example, drug manufacturers know much more about the safety, 
effectiveness, and cost of their drugs than does the physician, the 
PBM, the employer, or the consumer. Three Americans received the Nobel 
prize in economics in 2001 for their work defining the market for 
lemons.\47\ No; their work was not about little yellow fruits, but 
rather about the market for used cars and the effect of the imbalance 
in information between the buyer and the seller.\48\ Their work found 
that markets don't work when there is asymmetry of information--that 
is, when the seller knows a lot more than the buyer, the seller can 
take advantage of that buyer. Since then, Joseph Stiglitz and some of 
his colleagues have developed much further the concepts of asymmetric 
markets, market signals, and their economic impact. If there was ever a 
market that was asymmetric, it is health care and especially 
pharmaceuticals. The lessons we can learn from these Nobel Prize 
winners are that: (1) the imperfect markets are not ``all-knowing and 
self-correcting,'' (2) ``imperfect information corrupts markets,'' (3) 
``markets, when confronted with imperfections, may not be the best way 
to allocate resources,'' and (4) ``government must play a strong role 
in a market system, to prevent damage from imperfect information.'' 
\49\
---------------------------------------------------------------------------
    \47\ Uchitelle, Louis, ``3 Americans Awarded Nobel for Economics,'' 
The New York Times, October 11, 2011.
    \48\ Akerlof, George, ``The Market for `Lemons': Quality 
Uncertainty and the Market Mechanism,'' The Quarterly Journal of 
Economics, Vol. 84, No. 3 (Aug., 1970), pp. 488-500, Oxford University 
Press, URL: http://www.jstor.org/stable/1879431.
    \49\ Louis Uchitelle, ``3 Americans Awarded Nobel for Economics,'' 
The New York Times, October 11, 2001.
---------------------------------------------------------------------------
    Policymakers and legislators continue to call health care a 
market--and in one sense health care is a market; however, health care 
is replete with imperfect information. While health care has some 
structural features that appear to be a market, the information in this 
market is very asymmetric. With so much ``imperfect information'' 
throughout health care, efficient and effective policy decisions will 
not necessarily follow. We must recognize and address the issues of 
imperfect information in health care and assure that accurate, 
transparent, and useful information is available in the market in order 
for more effective market-based decisions to be made.
    The advice of the Nobel Prize winners is that ``government must 
play a strong role in an imperfect market.'' Government doesn't have to 
run or dominate health care, but government has to set the rules for 
the game to correct for the many types of imperfect information. 
Government has to put some boundaries on the health care market so that 
it begins to function like an economically efficient market again. 
Finally, the health care market is very asymmetric for a whole lot of 
reasons, such as the isolating effect of directed demand, and the 
insulating effect of insurance coverage. Insurance is a great thing, 
but in some ways it takes away the market function. Health insurance 
programs give the appearance of having a fairly low cost when one only 
focuses on the amount of copays made at the time of service. The 
consumer only sees the impact of the full cost of their health care a 
year later when the premiums increase, or when the employer does not 
provide a wage increase because health care cost went up.
    There are many forms of imperfect information about prescription 
drugs including, but not limited to, hidden prices, rebates, and 
discounts; undisclosed relationships and transactions; and complex 
technical products. This imperfect information may inhibit, or even 
prevent, value-based decisions at every level of the pharmaceutical 
market.
                              conclusions
    The prices and change in prices of both brand name and generic drug 
products have a direct impact on the costs borne by individual 
consumers and by all other payers. Brand name and generic drug price 
increases often result in higher out-of-pocket costs for beneficiaries 
at the pharmacy, especially for those who pay a percentage of drug 
costs rather than a fixed copayment. Higher brand name and generic drug 
prices are also passed along to consumers, or the end payer, in the 
form of increased premiums, higher deductibles, and other forms of cost 
sharing.\50\
---------------------------------------------------------------------------
    \50\ D.I. Auerbach and A.L. Kellermann, ``A Decade of Health Care 
Cost Growth Has Wiped Out Real Income Gains for an Average U.S. 
Family,'' Health Affairs, Vol. 30(9) (2011): 1630-36.
---------------------------------------------------------------------------
    Prescription drug price increases also affect taxpayer-funded 
programs like Medicare and Medicaid. For example, the Medicare Payment 
Advisory Commission recently attributed the majority of ``excess'' 
growth in Medicare Part D spending to growth in the average price of 
drugs provided to beneficiaries. Higher government spending driven by 
large drug price increases will eventually affect all Americans in the 
form of higher taxes, cuts to public programs, or both. If recent 
trends for brand name and generic drug prices and related price 
increases continue unabated, the cost of drugs will prompt increasing 
numbers of older Americans to stop taking necessary medications. \51\ 
This will lead to poorer health outcomes and higher health care costs 
in the future.\52\
---------------------------------------------------------------------------
    \51\ H. Naci, S.B. Soumerai, D. Ross-Degnan, F. Zhang, B.A. 
Briesacher, J.H. Gurwitz, and J.M. Madden, ``Medication Affordability 
Gains Following Medicare Part D Are Eroding among Elderly with Multiple 
Chronic Conditions,'' Health Affairs, Vol. 33(8) (2014): 1435-43.
    \52\ Z.A. Marcum, M.A. Sevick, and S.M. Handler, ``Medication 
Nonadherence A Diagnosable and Treatable Medical Condition,'' Journal 
of the American Medical Association, Vol. 309(20) (2013): 2105-6.
---------------------------------------------------------------------------
    The expansion of health care and prescription drug coverage has 
provided more Americans with access to important and valuable drug 
therapies. Given the expansion of the number of people with coverage 
for prescription drugs,\53\ without effective measures to evaluate and 
manage the appropriateness, utilization, and price of drug therapies--
Congress has essentially written a blank check to the pharmaceutical 
firms. It is unclear what factors are driving the price levels and the 
continued price increases of brand name and generic prescription drugs. 
Policymakers interested in reducing the impact of brand name and 
generic prescription drug prices should focus on options that balance 
the need for pharmaceutical innovation with the need for improved 
health and the financial security of consumers and taxpayer-funded 
programs like Medicare and Medicaid.
---------------------------------------------------------------------------
    \53\ A.M. Sisko, S.P. Keehan, G.A. Cuckler, A.J. Madison, S.D. 
Smith, C.J. Wolfe, D.A. Stone, J.M. Lizonitz, and J.A. Poisal, 
``National Health Expenditure Projections, 2013-23: Faster Growth 
Expected with Expanded Coverage and Improving Economy,'' Health 
Affairs, Vol. 33(10) (2014): 1-10.
---------------------------------------------------------------------------
                               appendix a
    Actual Transaction Price Changes at the Retail Level for Widely 
Used Generic Drugs in 2013 (December 31, 2012 vs. December 31, 2013)



[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

                         appendix a--continued


[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

                               appendix b
Actual Transaction Prices at the Retail Level for Widely Used Generic 
Drugs (January 1, 2005 to December 31, 2013)Case Studies of Selected 
Drug Products

Figure 5. Tamsulosin HCl 0.4 mg Capsule (Zydus Pharmaceuticals) Price 
per Day of Therapy: (January 1, 2005 to December 31, 2013)


[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]


Figure 6. Sertraline HCl 50 mg Tablet (Greenstone) Price per Day of 
Therapy:
(January 1, 2005 to December 31, 2013)



[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]


Figure 7. Pantoprazole Sodium 40 mg Tablet DR (Teva Pharmaceuticals) 
Price per Day of Therapy: (January 1, 2005 to December 31, 2013)



Figure 8. Budesonide 0.5 mg/2ml Suspension (Teva Pharmaceuticals) Price 
per Day of Therapy: (January 1, 2005 to December 31, 2013)




[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

Figure 9. Brimonidine Tartrate 0.15 percent Ophthalmic Solution 
(Sandoz) Price per Day of Therapy: (January 1, 2005 to December 31, 
2013)


[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]


Figure 10. Potassium Chloride 10 MEQ Capsule ER (Watson Labs) Price per 
Day of Therapy: (January 1, 2005 to December 31, 2013)




[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

Figure 11. Doxycycline Hyclate 100 mg Capsule (West-Ward) Price per Day 
of Therapy: (January 1, 2005 to December 31, 2013)



[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]


Figure 12. Digoxin 0.25 mg Tablet (Lannett) Price per Day of Therapy: 
(January 1, 2005 to December 31, 2013)



[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

Figure 13. Divalproe Sodium 500 mg Tablet ER 24 Hr (Mylan) Price per 
Day of Therapy: (January 1, 2005 to December 31, 2013)

[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMA]


Figure 14. Prednisolone Acetate 1 percent Suspension (Sandoz) Price per 
Day of Therapy: (January 1, 2005 to December 31, 2013)



[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

Figure 15. Levothyroxine Sodium 175 mcg Tablet (Mylan) Price per Day of 
Therapy: (January 1, 2005 to December 31, 2013)



[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]


Figure 16. Glipizide 5 mg Tablet (Mylan) Price per Day of Therapy: 
(January 1, 2005 to December 31, 2013)



[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

Figure 17. Hydralazine HCl 50 mg Tablet (Par) Price per Day of Therapy: 
(January 1, 2005 to December 31, 2013)



[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]


Figure 18. Meclizine HCl 25 mg Tablet (Par) Price per Day of Therapy: 
(January 1, 2005 to December 31, 2013)



[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]


    Senator Sanders. Thank you very much.
    If you could, please, keep your remarks to 5-6 minutes, 
because we want to leave time for questioning.
    Our next panelist is Robert Frankil. Mr. Frankil is a 
pharmacist and owner and president of Sellersville Pharmacy in 
southeastern Pennsylvania. He is a member of the National 
Community Pharmacist Association and past president of the 
Pennsylvania Pharmacist Association.
    Mr. Frankil, thank you so much for being with us.

   STATEMENT OF ROBERT FRANKIL, RPH, PRESIDENT, SELLERSVILLE 
                PHARMACY, INC., SELLERSVILLE, PA

    Mr. Frankil. Thank you, Chairman Sanders and Ranking Member 
Burr, for conducting this hearing and providing me the 
opportunity to share my thoughts and observations regarding the 
puzzling skyrocketing cost of common generic drugs.
    As Chairman Sanders said, my name is Robert Frankil. My 
business is in southeastern Pennsylvania, consists of a 
traditional community pharmacy and a long-term care pharmacy, 
closed door, on the campus of a mental institution. We serve 
the elderly, underserved, and needy. I'm also a member of NCPA, 
which represents nearly 23,000 independent pharmacies that 
provide 40 percent of all the prescription drugs dispensed. I 
also serve on many boards in Pennsylvania as well as the State 
Board of Pharmacy.
    You have my written testimony, so I'll keep it short here 
and only give you a few highlights.
    Just a little background. Approximately 86 percent of all 
prescriptions dispensed are for generic drugs. Historically, 
this represents huge savings for both patients and payers, 
including the Federal Government. Therefore, it was quite 
concerning when, about a year ago, community pharmacists began 
to see a dramatic price increase in generic drugs. NCPA 
conducted a survey and showed that prices spiked as much as 
2,000 percent, or more, on some generic drugs. We've heard 
plenty of that already. These spikes usually happen overnight, 
with little or no notice. All drug classes were affected. And 
I've got a list of examples here that mirrors everyone's 
examples, but I want to stress to you that I am the buyer and 
seller of these prescription drugs. I am seeing it in real 
dollars and cents, in black and white, on my invoices when I 
buy drugs, and I am seeing it on the receipts when I sell 
prescriptions to patients. We're talking about increases of 
2,000, even 8,000, percent. I'm not going to list the drugs 
again. They've been discussed already. But, it's not just 
those, it's many more, as you previously said.
    One of the things this hearing is for is to find out why 
this is happening. It will be debated whether it's due to raw-
material problems, production problems, FDA issues, or a 
reduction in competition among manufacturers. We can speculate 
why. And there should be a full-blown investigation on that. 
And there is. In my opinion, it seems to be more than a 
coincidence that, when manufacturers exit the marketplace for a 
specific drug, leaving fewer competitors, there's often a spike 
in the price of the drug. But, I don't believe in coincidences.
    But, I'm here to tell you what's happening in pharmacies 
across the country. As I mentioned, these spikes happen 
overnight. I can pay $100 for a bottle of drug today and $1,000 
for the same bottle tomorrow, and I have no advance notice.
    Pharmacy benefit managers, or PBMs, are the entities that--
and the middlemen--in the majority of all prescription drug 
claims in the United States, and typically set reimbursements 
to pharmacies. Even though PBMs have immediate, realtime 
knowledge of these drastic price spikes, they continue to 
reimburse pharmacies at the pre-spike price, putting pharmacies 
underwater on these drugs, often for months at a time. That 
puts pharmacy in a position between choosing to lose money, 
turning the patient away, or going back to the prescriber to 
see if there's another medication that can be used. Since 
pharmacists are sworn to take care of patients first and pay 
the bills later, we usually lose money and fill the script. 
This is an unfair position to put pharmacists and pharmacies 
in.
    This problem is not limited to independent pharmacies. It's 
my understanding that national chains that are not connected 
with a PBM, and most grocery-store chains, are also affected.
    Patients also feel it big-time, as we all know. A real 
example. A patient of mine bought his Digoxin while he was in 
his coverage gap or his donut hole in 2013, and paid about $15 
for it. This year, he came in, in his coverage gap, and paid 
over $120 for it. He accused me of price-gouging. I don't set 
the price of the drug, and I don't do anything to set the 
reimbursement terms. This was a pretty bad situation at the 
pharmacy counter, if you can imagine. I had nothing to do with 
the price spike, and I couldn't do anything about it.
    Payers are also affected. The Federal Government, as I 
said, is the largest buyer of prescription drugs in the 
country, and, inevitably, there is eventually a trickle-down to 
the taxpayers, who fund the Medicare and Medicaid plans.
    Thank you for inviting me to this hearing today on a 
critical issue. This is a big problem that must be addressed. 
Unprecedented spike prices on generic medications are now 
commonplace, and it is wreaking havoc on patients, pharmacists, 
and healthcare payers alike. In addition, payment lags are 
jeopardizing the ability of independent pharmacies to remain 
viable and to continue to provide critical medications to 
patients.
    Thank you very much.
    [The prepared statement of Mr. Frankil follows:]
               Prepared Statement of Robert Frankil, RPh
    Chairman Sanders, Ranking Member Burr and members of the 
subcommittee, thank you for conducting this hearing and for providing 
me the opportunity to share my thoughts and observations regarding the 
recent skyrocketing costs of many common generic medications. My name 
is Rob Frankil, pharmacist and owner/president of Sellersville 
Pharmacy, Inc., DBA as two locations: Sellersville Pharmacy, a 
traditional community pharmacy, and Sellersville Pharmacy at Penn 
Foundation, a closed door pharmacy serving a mental health foundation. 
Both locations serve primarily elderly, needy and underserved patients. 
I am also a member of the National Community Pharmacists Association 
(NCPA) that represents the pharmacist owners, managers and employees of 
nearly 23,000 independent community pharmacies across the United States 
that provide approximately 40 percent of all community-based 
prescriptions. I am also the past president of the Pennsylvania 
Pharmacist Association (2012-13), and serve on many boards in 
Pennsylvania including the Philadelphia Association of Retail 
Druggists, Bucks-Mont Pharmacists Association, and the PA State Board 
of Pharmacy.
                  generic price spikes and ncpa survey
    The IMS Institute for Healthcare Informatics recently reported that 
approximately 86 percent of all prescriptions filled in the United 
States are for generic drugs. Historically, generic drugs have provided 
significant cost savings to payers and consumers alike by providing 
safe and effective alternatives to typically more costly brand name 
drugs. Therefore it was extremely concerning when about a year ago; 
pharmacies began noticing a rash of dramatic price increases for many 
common, previously low-cost generic drugs. In response, NCPA conducted 
a member survey on this issue in January of this year to try to gauge 
the prevalence of generic price spikes. NCPA received an overwhelming 
response from more than 1,000 members who reported instances of generic 
drugs that had spiked by as much as 600 percent, 1000 percent or more.
    Seventy-seven percent of pharmacists reported 26 or more instances 
of a large upswing in a generic drug's acquisition price over the past 
6 months. Nearly all (86 percent) said that it took the pharmacy 
benefit manager (PBM) or other third party payer between 2 to 6 months 
to update its reimbursement rate to pharmacies (putting these critical 
health care providers ``underwater'' on these medications). In other 
words, pharmacists are filling prescriptions and are being reimbursed 
significantly less than what it cost them to acquire the drug. In 
addition, 84 percent of pharmacies said that the acquisition price 
spike and associated lagging reimbursement trend was having a ``very 
significant impact on their ability to remain in business to continue 
serving patients.'' In some instances, community pharmacies were faced 
with having to refrain from filling prescriptions that would have 
resulted in losses of $40, $60, $100 or more per prescription filled.
    The generic drugs most frequently cited in the survey included 
drugs from virtually every therapeutic category and included Benazepril 
(high blood pressure); Clomipramine (antidepressant); Digoxin (controls 
heart rate); Divalproex (treats seizures and psychiatric conditions); 
Doxycycline (antibiotic); Budesonide (asthma); Haloperiodol (psychotic 
disorders); Levothyroxine (hypothyroidism); Methyl-
phenidate (ADHD); Morphine (pain); Nystatin/Triamcinolone (fungal skin 
infections); Pravastatin (high cholesterol); and Tizanidine (muscle 
relaxant).
    The prevalence of these generic drug price spikes has not abated 
since the initial survey was completed and NCPA has been unable to 
identify any definitive cause for these price increases. There has been 
speculation that these spikes may be due to manufacturing delays, 
production problems, shortages of raw materials and a dwindling number 
of manufacturers of these products.
impact of generic price spikes on patient cost and access to medication
    These severe disruptions in the market are having a profound effect 
on patients--particularly the elderly and those that are either 
uninsured or are enrolled in a prescription drug plan with a high 
deductible. Medicare beneficiaries enter the coverage gap or ``donut 
hole'' when the accumulated costs of both their co-pays and the charges 
to their drug plan reach a certain threshold. After a Medicare 
beneficiary exhausts the initial coverage of the prescription drug 
plan, the beneficiary is financially responsible for a higher cost of 
prescription drugs until he or she reaches the catastrophic-coverage 
threshold. Precisely because of this dynamic, many pharmacist 
responders to the NCPA survey reported instances in which Part D 
beneficiaries were either refusing to refill their prescriptions or 
were planning to take less than the prescribed dose of their medication 
in an attempt to ``stretch'' their remaining supply and in order to 
avoid having to go into the donut hole.
    Patients without prescription drug coverage are solely responsible 
for the entire cost of the drug and also may ultimately decide not to 
fill needed prescriptions. Patients with a high deductible prescription 
drug plan are in a similar situation as they are solely responsible for 
the cost of medications until such time as they reach a certain 
monetary threshold. Patient non-adherence to prescribed medications for 
any reason can often trigger more serious health conditions that may 
require emergency room visits or hospitalizations--that are ultimately 
more costly to both the patient and health care system as a whole. 
Ultimately, everyone pays for these cost increases, now or later. 
Insurance plans aren't likely to simply just absorb these higher costs, 
so even those with generous insurance plans will pay the price in 
higher future premiums.
    A recent example from my own experience is the price of Digoxin--a 
drug used to treat heart failure. The price of this medication jumped 
from about $15 for 90 days' supply, to about $120 for 90 days' supply. 
That's an increase of 800 percent. One of my patients had to pay for 
this drug when he was in the coverage gap in 2014. Last year, when in 
the coverage gap he paid the old price. This year he paid the new 
price. Needless to say, the patient was astounded, and thought I was 
overcharging him. The patient called all around to try to get the 
medicine at the old, lower price, but to no avail. This caused him lots 
of stress and time, and caused us lots of stress and time in explaining 
the situation, reversing, and rebilling the claim. This example is 
typical of how these price spikes put consumers and pharmacists in a 
bad position, often grasping at straws for explanations. And all the 
while, everyone pays more, including the patient, the pharmacy, and the 
insurer (often the Federal Government).
       impact of generic price spikes on federal government costs
    In addition to the potential negative effects that this situation 
is having on health outcomes for the Nation's seniors, the financial 
impact to the Federal Government itself cannot be ignored. The Federal 
Government pays for more than a third of all prescription drug costs in 
America. In fiscal year 2014, the Centers for Medicare and Medicaid 
(CMS) will serve almost 116 million Medicare, Medicaid and CHIP 
beneficiaries, more than one-in-three Americans. In addition to CMS, 
other Federal prescription drug programs impacted by this situation 
include the Department of Defense TRICARE program, the Veterans Health 
Administration (VHA), the OPM Federal Employees Health Benefit Plan 
(FEHBP) and the Indian Health Service (IHS). These generic drug price 
spikes that we are seeing are perhaps one of the most egregious 
examples of hyperinflation in the United States health care system at 
the present time and must be addressed.
   negative impact of generic price spikes and reimbursement lags on 
                           community pharmacy
    When the price of these common generic medications increase so 
dramatically and insurance middlemen known as pharmacy benefit managers 
(PBMs) do not correspondingly update their reimbursement rates to 
pharmacies--community pharmacies are put in the untenable position of 
having to absorb the difference between the large sums of money that 
they spent to acquire the drugs and the lower amounts that they are 
paid by the PBM (that are still ``stuck'' on the lower (pre-spike) 
prices).
    In this era of instant communication, it is indefensible for PBMs 
to wait weeks or even months before updating their payment benchmarks 
in the wake of these price spikes--without reimbursing pharmacies 
retroactively. Pharmacists' appeals to PBMs are consistently denied or 
ignored, and this situation is untenable particularly for small 
business community pharmacies. This trend also raises a troubling 
fiscal question for employers, government agencies and health plan 
sponsors. Are PBM middlemen taking advantage of these price spikes by 
reimbursing pharmacies low, charging health plans high and pocketing 
the difference? This practice of ``spread pricing'' was examined in a 
recent Fortune magazine article entitled ``Painful Prescription.'' \1\
---------------------------------------------------------------------------
    \1\ http://money.cnn.com/2013/10/10/news/companies/pbm-pharma-
management.pr.fortune/#sthash.osxYRm7O.dpuf.
---------------------------------------------------------------------------
    On a practical level, when we (pharmacists) process a claim and are 
reimbursed at below our cost, the computer flags it and we are 
notified. At this point, the claim must be initialed and processed. 
This happens in about 1 out of every 10 claims. With independent 
pharmacies on average producing over 90 percent of their revenue from 
prescription sales, this really hurts. I have a file about two inches 
thick of unresolved underpaid claims (appeals with PBMs) where we lost 
money. I do not send in appeals where we lose less than $50. If I did, 
I would not have time to take care of patients. Specifically, 
Carbamazepine used for seizure disorders, spiked in price about 6 
months ago. One of the largest PBMs in the country is still reimbursing 
at the old price (new price is $60 per 100 tablets; old price was $4 
per 100 tablets). I appealed this price and got an answer last week. 
The PBM refused to make an adjustment, and offered no explanation.
    In recognition of this problem, earlier this year CMS finalized a 
provision in the Part D Final Rule that will require PBMs to update 
generic pricing benchmarks (otherwise known maximum allowable cost 
(MAC) lists) in the Medicare Part D program beginning in plan year 
2016. However, this rule does not address any of the other Federal 
health care programs or any of the many commercial health plans 
currently in operation in the United States. I feel strongly that 
pharmacists deserve to be fairly compensated for the medications and 
associated patient counseling that they provide. To that end, I urge 
your support for the bipartisan legislation known as The Generic Drug 
Pricing Transparency Act, H.R. 4437, introduced by Reps. Doug Collins 
(R-Georgia) and Dave Loebsack (D-Iowa). The proposal would allow a 
pharmacy to know how its individual maximum allowable cost (MAC) 
reimbursement rates for multisource generic drugs would be determined 
and would also require that payments be updated more frequently to keep 
pace with actual market costs. To date, 16 States have passed similar 
legislation recognizing the value of ensuring that critical pharmacy 
care providers are able to provide needed medications and related 
patient care services to patients.
                               conclusion
    Thank you for inviting me to testify today on this critical issue. 
The current situation in which unprecedented spikes in previously 
inexpensive generic medications are becoming commonplace is one that 
cannot be allowed to continue. These prices are wreaking havoc on 
patients, pharmacists and health care payers alike. In addition, the 
associated payment lags on these medications are jeopardizing the 
ability of small business pharmacies to remain viable and continue to 
provide critical medications and related care to patients. I am pleased 
to answer any questions that you may have.

    Senator Sanders. Thank you very much.
    Our next panelist is Carol Ann Riha, of West Des Moines, 
IA.
    Ms. Riha, thank you so much for being with us.

        STATEMENT OF CAROL ANN RIHA, WEST DES MOINES, IA

    Ms. Riha. Thank you, Senator Sanders, for the honor and 
opportunity to testify before this subcommittee. Thank you, 
distinguished panel members, for taking the time to address 
this important issue which affects millions of Americans.
    My name is Carol Ann Riha. I and my husband, both early 
retirees, live in West Des Moines, IA. I was laid off in 2011 
from the Associated Press, where I was Iowa bureau chief. After 
leaving AP, I worked a couple of years at the Des Moines 
Register, and retired last year after 38 years in journalism. 
My husband left Nationwide Insurance in 2009, at the peak of 
the recession, and was unable to find subsequent employment. We 
live on a monthly limited withdrawal from my 401(k). My husband 
receives a pension of $273 a month.
    Senator Sanders invited consumers to share their stories, 
and I posted on his website my story about a generic medication 
I take, Pravastatin. It's a preventative that addresses 
problems with lipids and cholesterol to prevent heart disease. 
I switched, a few years ago, from a similar medication called 
Simvastatin after having some side effects--confusion and 
short-term memory loss. My doctor prescribed Pravastatin, a 
proven drug developed decades earlier, with lessened risk of 
side effects.
    At the time I made the switch, my tablets, 10 milligrams, 
made by Teva Pharmaceuticals, sold for $4 a month at the Target 
pharmacy. Then earlier this year, my $4-a-month prescription 
suddenly turned into $18.73. That's with health insurance. I 
asked about the increase, and the Target pharmacist had no 
explanation. Target's retail price for the drug is $25.99, so 
insurance saved me $7.26, but the price I pay is now four and a 
half times more. Since it's a simple compound that has been 
produced for decades, I don't understand the increase. I would 
think a drug that's prevalent would eventually become as cheap 
and readily available as aspirin.
    A couple of years ago, my hormone replacement therapy 
pills, then sold under the brand name FemHRT and made by Warner 
Chilcott, suddenly became unavailable, without warning. The 
patent had expired. Teva was making a higher-dose generic, but 
there was a gap until the low-dose version became available. I 
was able to track down this information online, following news 
reports and releases. But, I've been unable to track down any 
information about why my other prices have increased so much 
recently.
    As I explained to Senator Sanders' office, I consider 
myself lucky. I have good credit and have a steady income from 
my 401(k). I absorb the price increase simply by putting it on 
my credit card. Obviously, it has to be paid at some point, but 
I think about the millions of Americans trying to make cuts 
elsewhere because they are tapped out.
    My Pravastatin wasn't the only budget-buster this year. My 
Lansoprazole, an acid-reducer I've taken for years after an 
ulcer, was made an over-the-counter drug. Another $4 generic, 
it's now available on store shelves, and that's great for 
availability. And I'm sure millions more Americans will now 
avail themselves of the drug. That's good, right? However, a 
14-day package of 15-milligram capsules now sells for $7.39, 
and I take two a day. That's an increase, a month, from $4 to 
$29.56. There is no copay, and over-the-counter drugs aren't 
tax-deductibles.
    The cost of my hormone replacement therapy, Jinteli, varies 
month to month. In September, a 28-day supply cost me $40 after 
insurance. The retail cost was $97.49. In November, I paid 
$101.86 after insurance. The retail cost was $116.99.
    How can anyone on a fixed income deal with these vagaries 
in the system? You sure can't budget for costs that change 
month to month. And it's not just a few pennies, as you can 
see. These are significant percentages.
    The bright spot? My daily 40-milligram dose of Citalopram, 
which manages depression and anxiety, has not changed and is 
still just $4 per month. Last year, I spent $849 on 
prescription medications. This year, after going back to do the 
math, I anticipate that my out-of-pocket costs will exceed 
$1,700. Like many Americans, I've just been slapping these 
extra costs on my credit card. I had no debt when I retired, 
and was making plans to move to sunny Sequim, WA, where I have 
a sister living. Now those plans are on hold until we can 
whittle down our debt.
    I thank you again for the opportunity to speak to you 
today. I look forward to hearing what the drug companies have 
to say about generic drug pricing. And I do want them to know 
that their decisions have a significant impact on real people.
    [The prepared statement of Ms. Riha follows:]
                  Prepared Statement of Carol Ann Riha
    Thank you Senator Sanders for the honor and opportunity of inviting 
me to testify before this subcommittee. Thank you distinguished panel 
members for taking the time to address this important issue, which 
affects millions of Americans. I consider it a great privilege to be 
here.
    My name is Carol Ann Riha. I and my husband, both early retirees, 
live in West Des Moines, IA. I was laid off in 2011 from The Associated 
Press, where I was Iowa Bureau Chief. In my 27 years with AP, I also 
worked in Detroit and Portland, OR. After leaving AP, I worked a couple 
of years at The Des Moines Register and retired last year after 38 
years in journalism. My husband left Nationwide Insurance in 2009 at 
the peak of the recession, and was unable to find subsequent 
employment. We live on a limited monthly withdrawal from my 401(k). My 
husband receives a pension of $273 a month.
    Senator Sanders invited consumers to share their stories and I 
posted on his website my story about a generic medication I take--
pravastatin. It is a preventive that addresses problems with lipids and 
cholesterol to prevent heart disease. I switched a few years ago from a 
similar medication called simvastatin after having side effects--
confusion and short-term memory loss. My doctor prescribed pravastatin, 
a proven drug developed decades earlier with a lessened risk of side 
effects.
    It was sold under the brand name Pravachol and was made a generic 
drug in 2006. At that time, the FDA said in a news release: ``This 
approval is another example of our agency's endeavor to counter rising 
health care costs by approving safe and effective generic alternatives 
as soon as the law permits.'' The FDA release also said that in 2005, 
Pravachol was the 22d most widely used drug in the United States, with 
sales of $1.3 billion. Reading that, I figured R&D costs were paid off 
and companies would recoup further expenses through volume. Millions of 
Americans are taking this drug every day.
    At the time I made the switch, my 10 mg tablets, made by Teva 
Pharmaceuticals, sold for $4 a month at the Target pharmacy. Then, 
earlier this year, my $4-a-month prescription suddenly cost me $18.73. 
That's with health insurance. I asked about the increase and the Target 
pharmacist had no explanation. Target's retail price for the drug is 
$25.99, so insurance saved me $7.26, but the price I now pay is more 
than 4.5 times more.
    Since it's a simple compound and has been produced for decades, I 
don't understand the increase. I would think a drug this prevalent 
would eventually become as cheap and readily available as aspirin.
    A couple of years ago, my hormone replacement therapy pills, then 
sold under the brand name FemHrt and made by Warner Chilcott, suddenly 
became unavailable without warning. The patent had expired. Teva was 
making a higher dose generic, but there was a gap until the low-dose 
version became available. I was able to track down this information 
online, following news report and releases. I've been unable to track 
down information about why the price has increased so much recently.
    As I explained to Senator Sanders' office, I consider myself lucky. 
I have good credit and I have a steady income from my 401(k). I 
absorbed the price increase simply by putting it on my credit card. 
Obviously it has to be paid at some point, but I think about the 
millions of Americans trying to make cuts elsewhere because they're 
tapped out.
    My pravastatin wasn't the only budget buster this year. My 
lansoprazole, an acid reducer I've taken for years after an ulcer, was 
made an over-the-counter drug. Another $4 generic, it's now available 
on store shelves. That's great for availability. I'm sure millions more 
Americans will now avail themselves of the drug. That's good, right?
    However, a 14-day package of 15 mg capsules now sells for $7.39 and 
I take 2 a day. That's an increase from $4 a month to $29.56. There's 
no copay and over-the-counter drugs aren't tax deductible.
    The cost of my hormone replacement therapy, Jinteli, varies month 
to month. In September, a 28-day supply cost me $40 after insurance. 
The retail cost was $97.49. In November, I paid $101.86 after 
insurance. The retail cost was $116.99.
    How can anyone on a fixed income deal with these vagaries in the 
system? You sure can't budget for costs that change month-to-month. And 
it's not a few pennies, as you can see. These are significant 
percentages.
    The bright spot? My daily 40 mg dose of citalopram, which manages 
depression and anxiety, has not changed and is still just $4 a month.
    Last year, I spent $849 on prescription medications. This year, 
after going back to do the math, I anticipate that my out-of-pocket 
costs will exceed $1,700.
    Like many Americans, I've just been slapping these extra costs on 
my credit card. I had no debt when I retired and was making plans to 
move to sunny Sequim, WA, where I have a sister living. Now, those 
plans are on hold until we can whittle down our debt.
    I thank you again for the opportunity to speak to you today. I look 
forward to hearing what the drug companies have to say about generic 
drug pricing. I do want them to know that their decisions have a 
significant impact on real people.

    Senator Sanders. Thank you very much, Ms. Riha.
    Senator Burr will introduce Dr. Scott Gottlieb.
    Senator Burr. Thank you, Mr. Chairman.
    I am pleased to introduce to the committee and the panel 
Dr. Scott Gottlieb. Dr. Gottlieb is a practicing physician and 
resident fellow at the American Enterprise Institute. Dr. 
Gottlieb is regarded as an expert on drug policy and FDA 
issues. He served as the Deputy Commissioner for Medical and 
Scientific Affairs at the Food and Drug Administration from 
1905 to 1907. Prior to that, 1903 and 1904, he was a senior 
advisor to the FDA Commissioner and served as FDA's Director of 
Medical Policy Development. In between those two stints at the 
FDA, in 2004 Dr. Gottlieb worked on the implementation of the 
Medicare Drug Benefit as a senior advisor to the administrator 
of the Centers of Medicare and Medicaid Services. Currently, 
Dr. Gottlieb is an editorial board member of the journal Value-
Based Cancer Care, the Food and Drug Law Institutes Policy 
Forum, is a member of the Board of Advisors of Cancer Commons. 
Dr. Gottlieb has published columns in the Wall Street Journal's 
clinical assistant professor at New York University School of 
Medicine. He completed a residency in internal medicine at 
Mount Sinai Hospital in New York and is a graduate of Mount 
Sinai School of Medicine and of Wesleyan University, where 
studied economics.
    Dr. Gottlieb, thank you for your contributions to these 
important issues.

 STATEMENT OF SCOTT GOTTLIEB, M.D., RESIDENT FELLOW, AMERICAN 
              ENTERPRISE INSTITUTE, WASHINGTON, DC

    Dr. Gottlieb. Thanks for having me. Thanks, Mr. Chairman, 
Mr. Ranking Member.
    I want to offer some observations on some of the discussion 
that's gone on here today.
    One of those observations is that the data that looks at 
the price increases on generic drugs isn't corrected for script 
volume. I think we really need to do that. It could just be 
that the low-volume drugs are the ones that are taking the 
price increases. And that would seem to make sense as 
manufacturers enter the market and as script volume declines 
overall. Once you're down to one or two manufacturers, you're 
going to see price increases. Now, that doesn't diminish the 
impact on the patients, but it does suggest that the overall 
cost of generic drugs to the system and to consumers generally 
is probably declining. And the data that I have would seem to 
suggest that. So, even though you've seen some price increases, 
and some exorbitant price increases on some very low-volume 
drugs, drugs that do less than $10 million in total revenue, 
overall generic drug costs to the system are actually still 
declining.
    I think it's going to absolutely be the case that, for low-
volume drugs, as drugs fall out of favor clinically, as 
utilization is diminished, there are going to be fewer 
manufacturers for those drugs, and, as fewer manufacturers 
remain in the market, they're going to take price increases, in 
part to take advantage of their market position, also in part 
because they have to amortize the cost of manufacturing those 
drugs over fewer patients. There's a fixed cost to 
manufacturing a drug. You have to cover your fixed costs, in 
most cases, although generic companies do lose money on a lot 
of drugs.
    I think the question before us is--this should be self-
correcting. So, as the revenue increases that the manufacturers 
are earning off these drugs, it should become an attractive 
market for other manufacturers to enter. And the rule of thumb 
always was that, once a market reached around $10 million in 
revenue, it became attractive to other generic manufacturers. 
That rule of thumb arguably was the rule of thumb we used when 
I was at FDA a number of years ago. I suspect it's a lot more 
right now, that a category needs to generate more revenue than 
that to really become attractive to a number of manufacturers.
    But, I think the problem is that there are higher barriers 
to entry, and it's harder for generic manufacturers to enter a 
space. So, you're seeing these product categories persist with 
one or two manufacturers for longer periods of time, or 
sometimes in perpetuity. And I think that's owed to the fact 
that the barriers to entry are significantly higher these days 
than they used to be. And that's antithetical to the spirit of 
Hatch-Waxman. Filing a generic application, doing the BE/BA 
studies for a generic application, used to cost about a million 
dollars, now it would cost upwards of $5 million even for a 
simple generic. And, as I noted, use of generics as a category, 
used to see vigorous competition at $10-15 million of total 
revenue for a category. Now it's much higher.
    I would observe that a lot of the drugs on the list that--
Senator, that you've collected--are low-revenue products. 
Doxycycline, for example, does $6.9 million in total revenue 
annually, so it's not at the threshold where we would see 
bigger--more brisk competition.
    I think, as big of a problem as we're observing here today, 
and you've rightly called attention to, if not a bigger 
problem, is the overall cost structure in the generic drug 
industry. And it's going up. And, while that's not responsible, 
certainly, for the price increases of these individual drugs 
that the committee has noted, it is going to result in price 
inflation eventually. We have not seen that yet, but we have to 
be concerned that we'll see inflation in the overall generic 
space as a result of the rising cost structure.
    Some of that owes to rising cost of goods. The biggest 
single input in general manufacturing is energy input costs. 
Energy costs have gone up. But, we can't discount the fact that 
there is much higher manufacturing costs. There's many more 
manufacturing hurdles imposed by new regulatory requirements 
that either keep generic manufacturers out of the market or 
make it more expensive for those who have been in the market. 
And, while I'm not debating, and it's beyond the scope of our 
discussion here to debate, the merits of those regulations, I 
do think they have been imposed in a rather abrupt manner, and 
that has caused some dislocations in the market.
    I think, in conclusion, a concern for all of us as we look 
at these individual cases where generic drug prices have gone 
up significantly for select drugs, an as-big concern, if not 
bigger concern, should be looking at the barriers to entry. If 
barriers to entry do continue to increase in this space, it's 
going to affect most--mostly, and initially, the low-volume 
drugs. Those are the ones that are going to be most vulnerable 
to it. And that may be what we're seeing. We may be seeing the 
canary in the coal mine to rising costs of goods overall.
    Thanks a lot, Senator.
    [The prepared statement of Dr. Gottlieb follows:]
               Prepared Statement of Scott Gottlieb, M.D.
    In our economy for medicines, the dual principles of market-based 
rewards that attract entrepreneurship and deep value once patents have 
lapsed are longstanding features of our system. The competition between 
branded and generic drug makers has enabled remarkable advances in 
science, and vibrant competition on price.
    The compromises struck in the Hatch-Waxman legislation decades ago, 
have endured even as the market has changed. Generic drug makers have 
grown more sophisticated at challenging patents and unlocking new value 
for consumers. At the same time branded drug makers--recognizing this 
competition--have moved into new areas of science where resulting 
products are more specialized, unique, and beneficial. The competitive 
interplay between branded and generic firms, and the benefits that it 
affords, grows more relevant as the industries continue to evolve.
    Recently, questions have been raised whether this competitive 
landscape is giving way to new economic features that erode some of the 
original intent of Hatch-Waxman. Market observers have made note of the 
substantial price increases observed with a select number of drugs, 
even though these medicines have been long subject to generic price 
competition. Yet in observing these cases, there is no one discernable 
feature, or policy shortcoming, that explains the events. In each case, 
there are some unique features that led cost of goods to rise, or 
competition to temporarily erode. At the same time, market-wide generic 
drug prices continue to decline when you look across all of the drugs. 
So what is one to conclude?
    America indeed has a challenge when it comes to the original 
compact that gave us a vibrant market for low-priced generic drugs. But 
it is largely not revealed by the anecdotal cases where a select number 
of drugs have undergone exorbitant price increases. These situations 
stem from unique circumstances, many of which will be hard to solve 
through policy alone because the situations are exceptional, and more 
likely than not, temporary, as market dynamics work to correct 
themselves.
    On the contrary, a more pervasive and concerning trend relates to 
market challenges and policies that are slowly raising overall generic 
cost of goods. Some of these policies are borne of appropriate 
compromises. Others are not as well thought out. While focusing on the 
anecdotal cases where some prices have undergone sharp increase, 
Congress should also take note of the broader underlying trends.
    While generic drug prices, on the whole, continue to decline, that 
is by no means a sure thing. If this deflation eventually reverses, it 
won't be as a consequence of the small number of cases where select 
drugs underwent substantial price increases. It will likely be a result 
of more pervasive increases in industry wide COGS.
                overall generic prices continue to fall
    The increasing use of generic medications has helped mitigate 
growth of health care spending in the United States over the last 
decade. According to a recent report by the Government Accountability 
Office, on average, the retail price of a generic drug is 75 percent 
lower than the retail price of a brand-name drug.\1\ \2\ Until the 
early 2000s, drug spending was one of the fastest growing components of 
healthcare spending. However, since that time, the rate of increase has 
declined each year. These reductions are attributable, in part, to the 
greater use of generic drugs and more competition between generic drug 
makers that lowers the cost of generic drugs.
---------------------------------------------------------------------------
    \1\ GAO-12-371R Savings from Generic Drug Use http://www.gao.gov/
assets/590/588064.pdf.
    \2\ CBO, ``Effects of Using Generic Drugs on Medicare's 
Prescription Drug Spending,'' September 2010.
---------------------------------------------------------------------------
    That same GAO report condensed a series of studies conducted for 
Generic Pharmaceutical Association by IMS Health that estimated the 
total savings generic substitution provided to the overall U.S. health 
care system. The studies looked at the 12-year period 1999 through 
2010.\3\ These reports found that during this period, generic 
substitution saved the U.S. health care system more than $1 trillion. 
In 2010 alone, generic substitution generated more than $157 billion in 
savings.\4\
---------------------------------------------------------------------------
    \3\ GPhA, Savings: An Economic Analysis of Generic Drug Usage in 
the U.S. (September 2011); GPhA, Savings Achieved through the Use of 
Generic Pharmaceuticals, 2000-2009 (July 2010); GPhA, Economic 
Analysis: Generic Pharmaceuticals 1999-2008--$734 Billion in Health 
Care Savings (May 2009).
    \4\ GPhA, Savings: An Economic Analysis of Generic Drug Usage in 
the U.S. (September 2011).
---------------------------------------------------------------------------
    These studies, however, don't answer the question before us today: 
What is happening to the prices of individual generic drugs? Here 
again, the news is encouraging. Data reported in the Express Scripts 
Prescription Price Index show that generic drug prices have been halved 
since 2008.\5\ Thompson Reuters reported that generic dose prices in 
certain markets, especially in the United States,
---------------------------------------------------------------------------
    \5\ Express Scripts. ``Express Scripts Prescription Price Index.'' 
Drug Trend Report. (2014).

          ``have gone into a downward spiral, squeezing margins for 
        generic dose companies and often for API manufacturers as well. 
        Contributing to this pricing pressure are an increase in the 
        number of generic dose players, availability of low-cost active 
        ingredient from India and China, incumbents' desire to maintain 
        market share.'' \6\
---------------------------------------------------------------------------
    \6\ Industrial Pharmacy, September 2006, Issue 11 http://
thomsonreuters.com/business-unit/science/pdf/ls/pharma/
challenges_generics.pdf

    This doesn't negate the fact that the price of select number of 
generic drugs has gone up, in some cases substantially. This has put 
pressure on some pharmacies and consumers. There are concerns that it 
could be the start of a broader trend. But it is important to note that 
the prices of generic drugs are constantly fluctuating. When shortages 
of certain drugs or active ingredients exist, or manufacturers exit the 
market (leaving less competition for the sale of specific medicines) 
prices rise. When the maximum allowable cost limits that pharmacies 
agree to in their contracts don't keep pace with rising generic 
acquisition costs, these cost increases can squeeze pharmacies' 
profits. Over time, the MACs will catch up, and pharmacies often 
benefit when this same phenomenon works in reverse. Once prices start 
declining again, pharmacies benefit because higher reimbursement lags 
behind the lower acquisition costs. In the cases of the drugs that 
underwent price increases, the higher prices serve to attract 
additional generic competitors, and costs decline.
    Indeed, some of the articles pertaining to the rising cost of some 
generic drugs seem to prove out this point in trying to make the 
opposite case, that generic prices are going up more sharply and 
unexpectedly than in the past. For example, the Wall Street Journal 
recently noted, in one such article, that pharmacies are paying more 
money for 37 percent of all generics than they did in the previous 
quarter. But that would imply that they paid the same or less for the 
other 63 percent of generic drugs. This would seem to follow a basic 
rule of thumb that, at any time, about a third of generic prices are 
going up, a third are staying the same, and a third are declining. This 
is the dynamic long observed in this highly competitive market.\7\ 
During an August 5th conference call to discuss financial results, CVS 
Health President and CEO Larry Merlo appeared to dismiss the notion 
that a broader generic inflation is underway.
---------------------------------------------------------------------------
    \7\ Ed Silverman. To the moon: will rising prices for some generic 
drugs never end? The Wall Street Journal, November 14, 2014.

          ``While the cost of goods inflation does exist on some 
        generic items, it is not material in the context of our overall 
        purchasing volume and again was generally within our 
        expectations,'' he told investors. ``On balance, the 
        deflationary nature of the generic pharmaceutical market 
        remains intact and overall, our pharmacy margins' increase this 
        quarter for multiple reasons were in line with our 
---------------------------------------------------------------------------
        expectations.''

    But recently, the cost increases appear to be larger and more 
frequent, attracting notice. Yet there is no data to suggest that this 
is part of a broader trend. In fact, as I noted, the aggregate data 
points to the opposite conclusion. Over any time period, there are 
always subsets of drugs that undergo substantial price increases as a 
result of many factors, often related to disruptions in raw materials. 
However, as I will conclude later, there is reason to be concerned that 
the cost of goods for generic drugs, more generally, could rise if we 
are not careful in how we implement some new policies. That's true even 
if, for now at least, it would appear that in the aggregate, brisk 
competition continues to hold down overall generic drug costs.
                  what do the big price hikes tell us?
    Notwithstanding the favorable trends, some lawmakers have noted 
that there are examples where some generic drugs have undergone 
substantial price increases. A key question is whether there are 
common, underlying reasons for these price increases. Whether these 
anecdotes point to a larger failure of policy or markets?
    Consider first, the 10 drugs that have been recently cited by 
lawmakers from both the House and Senate as examples where old generic 
medicines underwent substantial price increases over the last 2 years. 
These 10 drugs include doxycycline hyclate, albuterol sulfate, 
glycopyrrolate, divalproex, pravastatin, neostigmine, benzapril/
hydrochlorothiazide, isuprel, nitropress, and digoxin.
    Yet in looking at the circumstances surrounding the price rises, 
these drugs don't lend to any consistent, shared observations. In many 
cases, the active pharmaceutical ingredient used to manufacture a drug 
was in shortage because of plant closures. This was the case with 
doxycycline and perhaps some of the sterile, parenteral drugs included 
in this list. Some drugs have seen their use decline as a consequence 
of patient preference for other competing generic medicines in the same 
class. As a consequence, manufacturers have not maintained production 
of the less popular alternatives. This has the effect of creating 
temporary shortages. This appears to be the case, for example, with 
pravastatin sodium.
    In some cases, there are temporarily fewer competitors in the 
market for certain generics as companies exited for business or 
regulatory reasons. This appears to be the case with digoxin. In the 
case of digoxin, as of January this year, there were two companies 
actively manufacturing and marketing the drug--Lannett and Impax. In 
January, Covis Pharmaceuticals also entered the market. One of the key 
events was the elimination of one of the manufactures of the API for 
Digoxin as a result of tightened FDA oversight of that manufacturing 
facility. In this case, the company (Westwood) had to curtail its 
supply of both API as well as its own, tableted version of the drug. 
It's worth noting that Digoxin is also difficult to formulate, 
especially at low dosage forms.\8\ Once a category is split between 
just two or three manufactures, it will follow that price will 
temporarily rise as competition declines.
---------------------------------------------------------------------------
    \8\ http://www.ncbi.nlm.nih.gov/pmc/articles/PMC1381504/.
---------------------------------------------------------------------------
    How do we know this? It is well documented that significant generic 
drug price breaks of about 40 percent off the cost of the branded 
alternative are not achieved until there are at least four generic 
companies competing to manufacture the same drug. Prices don't fall to 
a sustainable and low equilibrium of about 20 percent of the cost of 
the branded drug until about seven manufactures enter the market. 
Moreover, the often-cited statistic that a generic drug is priced at 
just 10 percent of the cost of its branded alternative (or less) is not 
achieved until there are about 15 generic manufactures competing to 
market one particular generic medicine.\9\ It should follow suit that, 
if the market is competitive, these same economic principles will work 
in reverse. As generic manufacturers come in and out of the market for 
certain drugs, when competition falls, prices will rise until new firms 
enter the market. This is one of the principles that makes this market 
competitive, and self-correcting.
---------------------------------------------------------------------------
    \9\ U.S. Food and Drug Administration, Generic Competition and Drug 
Prices. http://www.fda.gov/AboutFDA/CentersOffices/
OfficeofMedicalProductsandTobacco/CDER/ucm129385.htm.
---------------------------------------------------------------------------
    A critical question is whether the market for generic drugs is 
still self-correcting, or have other forces impeded the entry of new 
generic competitors into some of these categories. It has been said 
that generic drug mergers have reduced the number of generic 
manufacturers. While it's true that big generic companies have gotten 
larger, the market for generic drug makers is still vibrant. It is 
marked by literally thousands of different generic drug manufactures 
globally. But is the U.S. market still highly accessible to these 
companies? Is it still relatively straightforward, and inexpensive, to 
enter the market with a generic drug? In some cases, policies pursued 
by the U.S. have raised the cost of market entry for new generic 
manufacturers. This could reduce competition, and raise prices in the 
long run.
               concerns for the future of generic pricing
    There are some gathering signs that the underlying cost structure 
in the generic drug industry is indeed rising, in a manner that could 
raise barriers to entry and increase the cost of goods in the long run. 
I believe we should focus more attention on this challenge. One factor 
is rising COGS in the generic drug industry. Some of this is driven by 
input costs. For example, commodities are part of the raw ingredient of 
certain drugs. On a broader scale, in most cases the single costliest 
input into the manufacturing of active pharmaceutical ingredients is 
the energy costs. As the price of energy has gone up in recent years, 
so will the underlying cost of the API.
    Another reason is regulatory costs. In recent years, FDA has 
increased its oversight of generic manufacturing. The merits of FDA's 
oversight are beyond dispute. The balance struck between safety and 
access by FDA's sometimes-abrupt imposition of these new standards is 
beyond the scope of this discussion. But the fact remains that new 
standards were sometimes imposed with little notice or accommodation, 
leading to plant closures while facilities were remediated. Product 
shortages resulted. It's reasonable to ask whether, in cases where 
there was no imminent risk, facilities could have been remediated under 
close FDA supervision while they continued to produce key medicines, 
reducing the likelihood of shortages. This, however, has not been the 
policy. The bottom line is that COGS in this sector have gone up as a 
result. The higher manufacturing costs, and the tighter scrutiny 
applied to new manufacturing facilities, have increased the entry costs 
for new generic drugs and generic drug makers. How much costs have 
risen is difficult to fully quantify.
    Competition is also diminished because FDA continues to be plagued 
by a backlog of generic applications. While generic drug user fees were 
intended to work this backlog off, it has actually increased. Moreover, 
FDA is now issuing refuse to receive letters, basically telling some 
generic sponsors that the agency won't even file their applications 
because of deficiencies. In some cases, these deficiencies are largely 
clerical in nature. By refusing to receive certain generic 
applications, it could have the effect of understating the actual 
functional backlog of generic approvals. A key question is how many of 
the generic drugs being cited for taking large price increases are 
faced with competition that now sits in FDA's backlog?
    Generic manufacturers are also facing higher costs as a result of 
increased product liability risks as a result of ``failure to warn'' 
claims that they are being exposed to for the first time. A new 
regulation FDA crafted, in part with this understanding and purpose in 
mind, will impose on generic manufacturers a requirement to 
unilaterally change their labels without FDA review and approval--which 
they are currently prohibited from doing. By placing this burden on 
generic drug makers, the effect of FDA's new regulation would expose 
generic firms to the same large torts that are targeted to branded drug 
firms. The action may undermine some of the key public health benefits 
that generic drugs provide by substantially raising the industry's 
costs, in the process reducing access to low cost generic 
medicines.\10\
---------------------------------------------------------------------------
    \10\ Scott Gottlieb, Alex Brill, and Robert W. Pollock. Proposed 
FDA generic drug regulation: Higher prices, no public health benefit, 
American Enterprise Institute Health Policy Outlook. March 12, 2014 
http://www.aei.org/publication/proposed-fda-generic-drug-regulation-
higher-prices-no-public-health-benefit/.
---------------------------------------------------------------------------
    The generic drug makers are also subject to user fees for the first 
time. These fees will help underwrite the investments needed to make 
sure the efficiency of FDA's generic drug approval process continues to 
improve. Nonetheless, the direct costs of these fees raise the barriers 
to generic entry, raise the cost of goods, and are ultimately passed on 
to consumers. These fees are not trivial. They include an application 
fee of $58,730 for each ANDA, a $29,370 fee for each new prior approval 
supplement (PAS) to an approved ANDA, a one time $26,720 fee for the 
drug master files, a $41,926 annual fee for domestic API Facilities, a 
$56,926 annual fee for foreign generic drug API Facilities, a $247,717 
Annual fee for domestic finished dosage form facilities, and a $262,717 
annual fee for foreign FDF facilities.\11\
---------------------------------------------------------------------------
    \11\ David Lennarz. FDA Updates Generic Drug User Fee Rates, FDA 
News. August 4, 2014. http://fda-news.registrarcorp.com/2014/08/fda-
generic-drug-user-fee/.
---------------------------------------------------------------------------
    In addition to these user fees, generic manufacturers face some 
other fees. For one thing, many generic applications are not filed 
under the generic ANDA pathway, which falls under 505(j); but under 
another pathway referred to as 505(B)2. When a generic application is 
filed under 505(b) it faces full, branded drug user fees (which are 
much higher than generic drug user fees). Moreover, these drugs are 
also subject to the drug fees created under the Affordable Care Act as 
a way to close the Medicare Part D ``doughnut hole.'' This was the gap 
in drug coverage that seniors experienced as their drug costs fell in 
between the lower and upper boundary of coverage limits. The ACA said 
only that these fees would apply to drugs approved under 505B, which 
ends up including generic applications filed under 505(b)2.
    Other, expenses are getting loaded onto the generic drug supply 
chain. While each may be small, they start to add up. For example, 
under new regulations, generic companies are required to do many more 
validation batches before they file ANDAs. Even shipping costs have 
increased. And a growing number of drugs need to be stored at more 
precise temperatures (an area of increased enforcement by FDA).
    One of the central tenets of the generic drug framework was the 
idea that there would be low barriers to entry. Generic manufacturers 
have long faced substantially lower entry costs when compared with 
branded counterparts. Historically, enrolling a single patient in a BE/
BA study as part of the ANDA required for a generic filing, on average, 
about $1,000. Today, the average cost per subject ranges closer to 
$5,000-$6,000. In most cases, a BE/BA trial would enroll fewer than 50 
patients to satisfy the requirements of the ANDA. Even that number has 
risen.
    In addition, it had long been said that filing a generic 
application would cost about $1 million, and a branded or specialty 
drug would become subject to generic competition once it reached $10 
million in revenue. It goes without saying that this $10 million ``rule 
of thumb'' figure is substantially higher now. Recent data suggests 
that bringing a generic drug to the market can cost up to $5 million 
per filing for a section viii filing, and another $5-$15 million for a 
paragraph IV filing. The amount of revenue or scripts a category must 
generate, before it attracts robust generic competition, has also 
increased beyond that $10 million figure. That is another factor behind 
some of the very large price increases we have seen with a select 
number of older, generic drugs. For example, in 2014 the total sales of 
the generic doxycycline formulations that have been called into 
question were about $6.9 million.\12\ These drugs, while expensive on a 
per pill basis, do not generate sufficient aggregate revenue to offset 
the investment needed to attract many competitors. That is why the 
market has not corrected more quickly in some of these cases.
---------------------------------------------------------------------------
    \12\ Gross Doxycycline Hyclate Sales by Calendar Year per IMS: 
2012, $13,105,912; 2013, $10,975,295; 2014, $6,937,065.
---------------------------------------------------------------------------
    The fact is that generic companies lose money on many of their 
offerings. They try and maintain a broad portfolio because it helps 
them contract and meet customer demand. So they continue to manufacture 
generic drugs even when they break even, or worse, sustain losses. But 
entering a category where they know they will lose money from the 
outset is another matter. These are not public utilities, 
notwithstanding the fact that they provide an important public benefit 
by delivering substantial value to consumers. At the end of the day, 
they need to remain profitable to continue to provide those benefits. 
Firms will take price increases in circumstances where the market will 
enable profits. This helps offset all of the situations where other 
circumstances create losses. The rising cost of entry increases the 
hurdle rate that must be offset for companies to enter new categories.
    Consumers have an expectation in recent years that healthcare costs 
should start to level off or even decline. They have been promised as 
much in recent policy debates. And they have been conditioned to expect 
low prices when it comes to their old, generic medicines. So they are 
rightly concerned when prices on some old drugs undergo substantial 
increases, even if these costs aren't passed directly onto them. They 
don't follow the day-to-day headlines concerning supply shortages, 
manufacturing snafus, or the like. All they see are their bills.
    The underlying cost pressures inside the generic drug industry are 
indeed changing. There is a risk that increased barriers to entry, 
increased cost of goods, and increased cost of regulatory scrutiny and 
manufacturing, can coalesce to lower the competition that this sector 
has long enjoyed, and the savings consumers have long appreciated. The 
anecdotal cases of substantial price increases that plague a subset of 
drug categories are concerning, but don't themselves point to any 
uniform trends. Instead, it is the underlying cost pressure that should 
merit our policy attention.

    Dr. Gottlieb, a physician and Resident Fellow at the American 
Enterprise Institute, was FDA Deputy Commissioner from 2005 and 2007, 
and worked as a senior official at the Centers for Medicare and 
Medicaid Services during implementation of the Medicare Part D drug 
benefit. He consults for and invests in branded life science companies.

    Senator Sanders. Thank you very much.
    Is Senator Warren going to introduce--is she here? Just in 
the nick of time. We're up to Dr. Kesselheim, and I think you 
want to introduce him.
    Senator Warren. Thank you very much, Mr. Chairman.
    I'm very proud to be able to introduce the next witness, 
from Massachusetts. Dr. Aaron Kesselheim is an associate 
professor of medicine at Harvard Medical School and a faculty 
member in the Division of Pharmacoepidemiology and 
Pharmacoeconomics at Brigham and Women's Hospital, where he 
directs the Program on Regulation, Therapeutics, and Law.
    Dr. Kesselheim earned his bachelor's degree from Harvard 
University and his medical and law degrees from the University 
of Pennsylvania. He also earned his master's in public health 
from the Harvard School of Public Health, and he's certified in 
internal medicine and serves as a primary-care physician at the 
Phyllis Gen Center for Primary Care at Brigham and Women's 
Hospital.
    Dr. Kesselheim's research focuses on the intersection of 
law and public health, looking in particular at how 
intellectual property laws and FDA regulatory policies impact 
drug development, the drug approval process, and the cost and 
availability of drugs. He's also investigated how other issues 
at this intersection can impact the healthcare system, 
including healthcare fraud, expert testimony, and malpractice 
cases, and insurance reimbursement practices.
    Just last week, Dr. Kesselheim addressed the issue of 
generic drug price increases with his colleagues at the New 
England Journal of Medicine.
    Welcome, Dr. Kesselheim. We are very pleased to have you 
here today and to share your expertise.

STATEMENT OF AARON S. KESSELHEIM, M.D., J.D., M.P.H., ASSOCIATE 
PROFESSOR OF MEDICINE, BRIGHAM AND WOMEN'S HOSPITAL AND HARVARD 
                   MEDICAL SCHOOL, BOSTON, MA

    Dr. Kesselheim. Thank you. Thank you very much.
    Chairman Sanders, Ranking Member Burr, Senator Warren, 
members of the subcommittee, it's an honor to be here today to 
discuss the rising prices of some generic drugs.
    Generic drugs are central to patient care. They're the main 
way that many patients afford the medications their doctors 
prescribe them. Inexpensive generic drugs translate to improved 
patient adherence and better patient outcomes. But, generic 
drugs are inexpensive because of competition. The cost of a 
generic product is closely related to the number of 
manufacturers producing it. So, today I want to highlight four 
ways that competition fails in the generic market, and six 
things that we can do about it.
    First, limited competition may occur naturally. Take the 
case of Albendazole, a broad-spectrum antiparasitic medication 
approved by the FDA nearly 20 years ago. Perhaps because its 
indications are so few in the United States, it never attracted 
generic competitors. Recently, its rights were sold to a small 
company, which raised its price from about $6 for a daily dose 
to over $119 for a typical daily dose, exploiting this niche 
market and earning a hefty profit, despite investing no money 
in research and development of the drug.
    Second, reduced competition can also occur because of 
market withdrawals. For example, the number of manufacturers 
producing Digoxin, used for heart failure, fell from eight to 
three from 2002 to 2013. During that time, the price rose by 
nearly 650 percent. Such contractions can be related to safety-
related drug withdrawals or manufacturers deciding to pursue 
greater profits elsewhere.
    Third, competition can be interrupted due to inappropriate 
anticompetitive acts, such as generic manufacturers buying out 
potential competitors. This is the sort of behavior policed by 
the Federal Trade Commission.
    Finally, competition can be squeezed out by companies 
winning patents or new market exclusivities issued by the FDA. 
Thalidomide, for example, first synthesized in the 1950s, has 
recently been discovered useful in treating a rare type of 
cancer, multiple myeloma. Despite having no remaining patents 
on the underlying active ingredient, competing generics have 
remained blocked because of patents received on the drug's 
distribution pathway.
    What can be done? I do not support wholesale changes to the 
current system of manufacturing or regulating generic drugs. 
But, when generic drug prices skyrocket, there is something 
wrong with the market, and the root causes need to be 
identified and fixed.
    Now I want to turn to six possible solutions:

    First, the government needs to be aware of spikes in drug 
prices so that it can adequately respond. Therefore, all 
increases in multisource drugs of greater than 100 percent 
should be reported to the Secretary of HHS so that she can 
investigate the rationale for the increase and determine 
whether public intervention is necessary. Publication of price 
hikes should follow so that physicians and patients can be 
warned, as well.
    Second, the FDA, under its current authorities, can fast-
track potential generic drug manufacturers to permit the 
private market to function more efficiently. The high price in 
growing number of prescriptions may now attract additional 
entrants to the Albendazole market, which would help bring the 
price back down. Substantial increases in an unpatented drug's 
price should trigger the FDA to seek new market entrants 
proactively, and those responding should receive expedited 
reviews of their manufacturing processes and bioequivalence 
data. FDA user fees could be waived to further reduce the 
barriers to entry for potential competitors.
    Third, if a vital generic drug comes to be produced by only 
two or three manufacturers or its price rises uncontrollably, 
the Federal Government may need to guarantee volume purchases, 
which would make companies' investments in producing these 
vital products more economically attractive, as it currently 
does in the childhood vaccine field. The government's 
commitment to purchase a fixed amount at a reasonable cost 
would encourage restoration of a competitive market.
    Fourth, the FTC should ensure that price changes do not 
stem from anticompetitive behavior. The FTC needs greater 
resources to help it enforce maintenance of competitive 
markets.
    Fifth, interventions can also come at the government payer 
level. The law creating Medicare Part D, for example, forbids 
interference with a negotiation of drug prices or institution 
of a price structure in this 80-billion-dollar-per-year 
program. If this noninterference provision could be waived for 
generic drugs, then CMS would be in a better position to combat 
exorbitant increases in drug prices.
    Finally, over the long term, reforms to the patent and 
market exclusivity system may be warranted. There is a low bar 
to obtaining new patents on peripheral aspects of old 
unpatented drugs, such as the business method patent at issue 
in the Thalidomide case. Minor changes in an old drug's 
formulation or other limited alterations should not lead to new 
market exclusivity protections.

    In conclusion, I want to thank this subcommittee for its 
attention to this important issue. Failures in this market are 
events we need to take seriously, because they lead to 
disruptions in the supplies of lifesaving drugs to patients, 
affecting countless lives.
    As I was preparing for this hearing, I was chatting with a 
physician colleague of mine, who told me about a market 
research firm who contacted him in the last week with a survey 
from a manufacturer of a decades-old drug that sells for $70 
for an entire course of therapy but faces little competition in 
the market at present. The final question posed to my colleague 
was, Would you still prescribe this drug if the price was 
$10,000? As a healthcare system and as a nation, we need to 
make sure that question is off the table for generic drugs.
    [The prepared statement of Dr. Kesselheim follows:]
     Prepared Statement of Aaron S. Kesselheim, M.D., J.D., M.P.H.
                        summary of major points
     Generic drugs are one of the central components of the 
health care system. The generic drug industry has a long history of 
producing high quality drugs at very reasonable prices, which saves 
patients money, promotes adherence, and improves clinical outcomes.
     Generic drugs are inexpensive because they can be reliably 
synthesized and packaged for pennies per pill and they are made by 
manufacturers that can make a profit charging closer to the unit cost 
of production because their development costs were low. Competition 
among these manufacturers leads prices to approach the unit cost of 
production.
     Competition among generic or multisource drug 
manufacturers can vanish for a number of reasons, including 
manufacturers' business decisions, fluctuations in market supply and 
demand, anticompetitive behavior from sellers or purchasers, and re-
assertion of patent or market exclusivity rights.
     The first solution is greater transparency: all increases 
in multisource drug prices of greater than 100 percent should be 
reported to the Department of Health and Human Services, which can 
investigate the rationale for the increase in price and determine 
whether some sort of public intervention is necessary.
     The FDA Office of Generic Drugs can responsibly fast-track 
potential generic drug entrants into markets where high prices result 
from manufacturers exploiting natural monopolies, waiving the user fees 
to further reduce barriers to entry for potential competitors.
     The Federal Trade Commission requires increased funding to 
be able to intervene in the generic drug market to ensure that price 
changes do not stem from anticompetitive behavior.
     Interventions can also come at the government payor level. 
If the Medicare Part D non-interference provision was waived for 
multisource drugs, then the Centers for Medicare and Medicaid would be 
in a better position to combat exorbitant increases in drug prices.
     Over the long-term, reforms to the patent and drug market 
exclusivity system may be warranted to help prevent more older drugs 
from soaring in price.
                                 ______
                                 
    Chairman Sanders, Ranking Member Burr, and members of the 
subcommittee, my name is Aaron Kesselheim. I am an internal medicine 
physician, lawyer, and health policy researcher in the Division of 
Pharmacoepidemiology and Pharmacoeconomics at Brigham and Women's 
Hospital in Boston and an Associate Professor of Medicine at Harvard 
Medical School. I lead the Program On Regulation, Therapeutics, And Law 
(PORTAL), an interdisciplinary research team studies the intersections 
between laws and regulations and the development, utilization, and 
affordability of drugs. It is an honor to have the opportunity to share 
my thoughts with you about the rising prices of some generic drugs.
    Generic drugs are one of the central components of the health care 
system. Generic drugs become available after the expiration of the 
market exclusivity period for brand-name drugs, and are the main way 
that many patients are able to afford the medications their doctors 
prescribe for them. The FDA reviews them carefully for purity and 
bioequivalence with the brand-name, standards which are almost always 
met before the drug is marketed.\1\ Meta-analyses I have led, including 
one published in the Journal of the American Medical Association in 
2008,\2\ found no evidence of any clinical differences in studies 
comparing brand-name and generic drugs, even among the small number of 
special ``critical dose'' drugs that have their effective and toxic 
ranges separated by relatively small differences.
    Having the same effectiveness and safety as their brand-name 
counterparts, generic drugs can provide reliable clinical outcomes for 
patients. What sets them apart from brand-name drugs is their low cost. 
When generic manufacturers market their versions after the end of the 
brand-name drug's market exclusivity period, prices can over time be 
reduced by as much as 80-90 percent. With low-cost generic drugs 
currently making up about 84 percent of all prescriptions, the cost 
savings related to generic drug prescribing has saved U.S. patients 
over a trillion dollars in the last decade alone.\3\ Inexpensive 
generic drugs translate to improved patient adherence and better 
patient outcomes. A recent study led by Josh Gagne in my Division 
showed that patients initiating a low-cost cholesterol-lowering drug 
had better medication adherence and, as a result, an 8 percent 
reduction in hospitalization for acute heart disease, stroke, and death 
compared to patients initiating a high-cost cholesterol-lowering 
drug.\4\
    Why are generic drugs inexpensive? They are inexpensive because 
most small molecule prescription drugs can be reliably synthesized and 
packaged for pennies per pill. Brand-name drugs sell for much more--
recently, the $1,000 per pill cost of sofosbuvir (Sovaldi) for 
hepatitis C virus has been widely debated--because they are protected 
by government-issued patents and various FDA rules that prevent 
competitors from making their own versions of the drug. The government 
provides limited periods of market exclusivity for brand-name drugs 
because innovative drug development is expensive. These monopoly 
periods permit the brand-name manufacturers to charge far above the 
unit cost of producing the pill to help compensate for the millions of 
dollars in research costs involved in clinical trials and other tests 
leading to the development of a new drug. After the market exclusivity 
period ends, competition is initiated by other manufacturers that do 
not have as high of development costs and can therefore still make a 
profit charging closer to the unit cost of production. Competition 
leads prices to decrease for these multisource drugs and approach the 
unit cost of production.
    We take for granted that older drugs are inexpensive, but 
competition is the reason why they are reliably inexpensive. This 
competition can vanish for a number of reasons, including business 
decisions by manufacturers, fluctuations in the supply and demand of 
the market, anticompetitive behavior, and re-assertion of patent or 
market exclusivity rights. When any of these things happen, prices 
skyrocket.
    First, generic drug prices can rise because of a confluence of 
business decisions and profit-seeking from manufacturers. Take the case 
of albendazole, a broad-spectrum anti-parasitic medication first 
marketed by corporate predecessors to GlaxoSmithKline (GSK) outside the 
United States in 1982 and approved by the FDA in 1996. Albendazole is 
rarely used in the United States, and the parasitic infections it 
treats usually only occur in poorer populations such as immigrants and 
refugees. Though its patents have expired, GSK remained the sole 
producer of the drug until the company sold its U.S. marketing rights 
to Amedra Pharmaceuticals, a small private firm, in October 2010. In 
2011, Teva, the producer of the only potential therapeutically 
interchangeable competitor mebendazole (Vermox), discontinued 
production of its product for non-safety related reasons. In last 
week's New England Journal of Medicine, my co-authors and I reported 
that between late 2010 and 2013, the listed Average Wholesale Price for 
U.S. patients rose from about $6 to over $119 per typical daily dose. 
For a routine 6-month course of therapy, an uninsured patient therefore 
faces tens of thousands of dollars in costs. Insurance payors were also 
strongly affected, particularly Medicaid, the Federal- and State-funded 
health insurance program for the poor. Medicaid spending on albendazole 
rose from less than $100,000 in 2008 ($36.10/prescription) to over $7.5 
million in 2013 ($241.30/prescription).\5\ In this case, Amedra 
exploited an existing monopoly on a niche drug, a tactic that was 
successful in part because of the exit of another manufacturer from the 
market. It is worth pointing out that companies in these circumstances 
can earn high revenues without having made much, if any, investments in 
research and development.
    Second, competition can languish because of changes in the drug 
industry and manufacturing challenges. For example, the number of 
manufacturers producing oral digoxin tablets, used for atrial 
fibrillation and heart failure, fell from 8 to 3 companies from 2002 to 
2013; during that time, the price of digoxin reportedly rose by 637 
percent.\5\ The market contraction was thought to be related in part to 
safety-related drug recalls and manufacturers deciding to leave the 
market. The cost of a generic product is closely related to the number 
of generic manufacturers producing it, with the first generic 
manufacturer pricing its drug only slightly below the brand-name 
manufacturer's price, and the second pricing it at only about half the 
price. By the FDA's estimation, it is not until the number of generic 
manufacturers reaches more than 5 that the price falls to under 25 
percent of the brand-name price.\6\ Shortages from reduced supply or 
increased demand can play a role in these circumstances. For example, 
hospitals like Brigham and Women's Hospital, where I see patients, have 
been struggling with intermittent shortages of normal saline (that's 
salt water) and other vital unpatented, multisource basic healthcare 
products due to unexpected demand and variations in supply from 
manufacturers with production irregularities at their plants. These 
changes can sometimes lead to spikes in the price of the products.
    Third, competition can be interrupted due to horizontal or vertical 
mergers, or inappropriate anticompetitive behavior. These sorts of 
activities fall under the oversight of the Federal Trade Commission 
(FTC). When the FTC has reviewed mergers of generic drug manufacturers, 
it has sometimes ordered the new entity to relinquish control of 
certain drug products if the transaction would lead to anticompetitive 
effects from a decrease in the number of independent competitors in the 
markets at issue.\7\ A more recent case of a potentially anti-
competitive business arrangement supporting high prices for a very old 
drug occurred in the case of the 60-year-old drug ACTH, now marketed as 
H.P. Acthar Gel, a treatment for hard-to-manage seizures in young 
children, as well as severe cases of multiple sclerosis. The medication 
used to sell for as little as $40 per vial until a small company called 
Questcor bought it in 2001. According to reports in the New York Times, 
the manufacturer raised the price immediately to $700 per vial, and 
then increased it to $23,000 per vial in 2007.\8\ When another company 
sought to bring a lower-cost competing drug named Synacthen into the 
market in 2013, Questcor bought the rights to Synacthen.\9\ Synacthen 
remains unapproved, while H.P. Acthar Gel cost Medicare more than $141 
million in 2012 alone \10\ for a drug first FDA-approved in 1952.
    Finally, competition among multisource drug manufacturers can be 
squeezed out by companies winning patents or new market exclusivities 
issued by the FDA. Thalidomide, for example, is famous for its tragic 
role in helping modernize the FDA in the 1960's, and was later 
discovered to be effective in treating a rare type of cancer, multiple 
myeloma. However, despite the fact that there are no remaining patents 
on the underlying active ingredient in thalidomide, competing generic 
versions have remained blocked because of patents that the current 
manufacturer of the drug received on its distribution pathway.\11\ In 
the case of the anti-gout drug colchicine, the FDA sought to bring 
production of generic colchicine under its regulatory umbrella. 
Versions of colchicine had been available in the United States since 
the 19th century and thus it was never formally approved by the FDA as 
an individual pill. It was sold by multiple manufacturers at about 9 
cents per pill until the FDA formally approved one version of it in 
2009 and gave that manufacturer a period of market exclusivity. After 
the FDA's action, this manufacturer raised the price to $4.85 per 
pill.\12\ Another price jump happened under similar circumstances in 
2011 when the FDA approved a synthetic progestin drug called 17 alpha-
hydroxyprogesterone caproate (17OHP), which is used to reduce the risk 
of preterm birth in pregnant women, and was available through many 
different compounding pharmacies at about $300 per dose.\13\ In 2011, 
the FDA approved one manufacturer's version of it. When the 
manufacturer raised the price to $30,000 per dose, the FDA--under 
pressure from legislators--announced that it would continue to permit 
production of the drug from compounded sources.\14\ With competition in 
the market re-established, the company could not sustain its intended 
exorbitant price.
    So what can be done? I do not support wholesale changes to the 
current system of manufacturing or regulating generic drugs. The 
generic drug industry serves an extremely valuable function in the 
health care marketplace, and has a long history of producing high 
quality drugs at very reasonable prices, which saves patients money, 
promotes adherence, and improves clinical outcomes. But when generic 
drugs skyrocket in price, there is something wrong with those markets, 
and the root causes of the problems need to be identified and fixed. 
Failures in the generic drug market are events that legislators and 
policymakers need to take seriously, because they can lead to 
disruptions in supplies of lifesaving drugs to patients. Thus, I first 
suggest investment into research surveying the extent of high generic 
drug prices, as well as a comprehensive examination of their causes. We 
need a systematic approach to understanding the problem so that focused 
solutions can be developed. If the markups are related to other points 
along the drug distribution chain, such as wholesalers or pharmacies, 
this should be clarified.
    However, because high prices for some generic drugs are already 
reaching critical levels, more immediate actions are necessary. It is 
critical for the government to be aware of spikes in drug prices so 
that it can adequately respond. Therefore, all increases in multisource 
drug prices of greater than 100 percent should be reported to the 
Secretary of the Department of Health and Human Services so that she 
can investigate the rationale for the increase in price and determine 
whether some sort of public intervention is necessary. Publication of 
these price hikes should immediately follow so that physicians and 
patients can be warned about the impending changes. Too often, patients 
are not aware of these fluctuations in price until they try to fill a 
drug at their pharmacy, which can lead to patients having to choose 
between filling their medication and other basic necessities and then 
to gaps in medication adherence. Physicians may be able to determine 
alternative inexpensive medication regimens for patients, a process 
that will be aided by advanced notice of these changes.
    In addition to greater price transparency, there are some potential 
short-term options to help mitigate high prices. One option would be 
for the FDA Office of Generic Drugs to take a more proactive posture 
and fast-track potential generic drug entrants into markets where high 
prices result from manufacturers exploiting natural monopolies. While 
albendazole may not be of interest to many manufacturers at a low 
price, its current high price and growing number of prescriptions may 
now attract additional entrants, which would help bring the price back 
down. The FDA should do everything in its current power to facilitate 
these new market entrants as quickly and as safely as possible. 
According to the FDA, the standard processing time for a generic 
manufacturer's application is about 10 months, which does not include 
the time it takes for the generic manufacturer to address any 
deficiencies in its proposal. Legislation in 2012 created new generic 
drug user fees that promise to reduce such wait times by providing 
greater funding for FDA staff. In addition, under its current legal 
authority, the FDA can create special pathways that permit the private 
market to function more efficiently. Substantial increases in an 
unpatented drug's prices should trigger the FDA to issue public 
announcements seeking other generic manufacturers of the product and 
that those responding to such a request should receive expedited 
reviews of their manufacturing processes and bioequivalence data.\5\ 
Generic drug user fees could be waived in these circumstances to 
further reduce barriers to entry for potential competitors.\5\
    Ultimately, policymakers might be forced to apply a lesson from the 
childhood vaccine field, in which production of needed vaccines 
occasionally became threatened in part because manufacturers were not 
assured of enough profit to continue. The Federal Government intervened 
with guaranteed volume purchases,\15\ which made companies' investments 
in producing these vital products more economically attractive. Since 
the government is currently the largest single payor of drug bills in 
the country, we may need to consider a system that would come into play 
if a vital generic drug comes to be produced by only 2 or 3 
manufacturers, or its price begins to rise uncontrollably. At that 
point, the government, perhaps through the Veterans Administration, 
Medicare, or Department of Defense, could issue a commitment to 
purchase a fixed amount of this drug at a more reasonable cost over a 
certain period of time, to encourage restoration of a more competitive 
marketplace for that product.
    The Federal Trade Commission also should play an important role in 
intervening in the generic drug market to ensure that price changes do 
not stem from anticompetitive behavior. The FTC clearly has interest in 
this area, but needs greater resources to help it enforce the 
maintenance of competitive markets in the generic drug industry on 
behalf of both suppliers and purchasers of multisource drugs. The FTC's 
work would be aided by greater transparency that might alert it to the 
possibility of inappropriate behavior.
    Interventions can also come at the government payor level. It is 
worth noting that Medicare currently negotiates or sets prices for 
basically every health care service it pays for--physician time, 
radiology services, laboratory services, hospital stays--but it is 
forbidden from negotiating the prices of prescription drugs. A clause 
in the statute creating the government's $80 billion per year Medicare 
Part D program, for example, explicitly states that the Secretary of 
HHS cannot interfere with the negotiations of drug prices or institute 
a price structure. If this non-interference provision was waived for 
multisource drugs, then the Centers for Medicare and Medicaid would be 
in a better position to combat exorbitant increases in drug prices. 
Such a change would require congressional action.
    Finally, over the long-term, reforms to the patent and drug market 
exclusivity system may be warranted to help prevent older drugs from 
soaring in price. Under current interpretation of basic patentability 
requirements, such as novelty and non-obviousness, there is a 
relatively low bar to obtaining new patents on peripheral aspects of 
old, unpatented drug products, such as the business method patent at 
issue in the thalidomide case. While true research or business 
innovations deserve patents, it may be worth clarifying the legal 
standards for issuing patents in the pharmaceutical market so that 
minor changes in an older drug's formulation or other limited 
alterations do not lead to new market exclusivity protections. 
Similarly, in the future, the FDA should be wary when its actions lead 
to new market exclusivity protection for old and inexpensive products, 
knowing that extremely high prices will inevitably result, so that the 
colchicine case is not repeated.
    In conclusion, I want to thank this subcommittee for its attention 
to the very important issue of high generic drug prices, which are 
affecting more patients with each passing year. Without timely 
intervention from legislators and other government policymakers, this 
issue threatens to grow worse, impacting countless lives. As I was 
preparing for this hearing, I was chatting with a physician colleague 
of mine who told me about a call he received from a market research 
firm asking questions on behalf of a manufacturer of a decades-old drug 
that currently sells for $70 for an entire course of therapy but faces 
little competition in the market at present. After the standard 
questions about his perceptions of the drug's clinical utility and side 
effects, the final question posed to my colleague was: ``Would you 
still prescribe this drug if the price was $10,000?'' As a health care 
system and as a nation, we need to keep that question off the table for 
generic drugs.
                               references
    1. Davit BM, Nwakama PE, Buehler GJ, Conner DP, Haidar SH, Patel 
DT, Yang Y, Yu LX, Woodcock J. Comparing generic and innovator drugs: a 
review of 12 years of bioequivalence data from the United States Food 
and Drug Administration. Ann Pharmacother. 2009;43(10):1583-97.
    2. Kesselheim AS, Misono AS, Lee JL, Stedman MR, Brookhart MA, 
Choudhry NK, Shrank WH. Clinical equivalence of generic and brand-name 
drugs used in cardiovascular disease: a systematic review and meta-
analysis. JAMA 2008;300(21):2514-26.
    3. Government Accountability Office. Drug pricing: research on 
savings from generic drug use. http://www.gao.gov/assets/590/
588064.pdf.
    4. Gagne JJ, Choudhry NK, Kesselheim AS, Polinski JM, Hutchins D, 
Matlin OS, Brennan TA, Avorn J, Shrank WH. Comparative effectiveness of 
generic and brand-name statins on patient outcomes: a cohort study. Ann 
Intern Med. 2014;161(6):400-7.
    5. Alpern JD, Stauffer WB, Kesselheim AS. High-cost generic drugs: 
implications for patients and policymakers. New England Journal of 
Medicine 2014;371(20):1859-62.
    6. Food and Drug Administration. Generic competition and drug 
prices. March 1, 2010. Available at: http://www.fda.gov/AboutFDA/
CentersOffices/OfficeofMedicalProductsandTobacco/CDER/ucm129385.htm.
    7. Federal Trade Commission. Analysis of agreement containing 
consent orders to aid public comment, In the matter of Novartis AG, 
File No. 121-0144. July 2012. Available at: http://www.ftc.gov/sites/
default/files/documents/cases/2012/07/120716
novartisanal.pdf.
    8. Pollack A. Questcor finds profits, at $28,000 per vial. NY 
Times. December 29, 2012.
    9. Pollack A. Questcor pays $135 million to acquire rights to a 
competitor's drug. NY Times. June 14, 2013.
    10. Ornstein C. The obscure drug with a growing Medicare tab. 
ProPublica. Aug 4 2014. Available at: http://www.propublica.org/
article/the-obscure-drug-with-a-growing-Medicare-tab.
    11. Sarpatwari A, Avorn J, Kesselheim AS. Using a drug-safety tool 
to prevent competition. New England Journal of Medicine 2014;370:1476-
78.
    12. Kesselheim AS and Solomon DH. Incentives for drug development: 
the curious case of colchicine. New England Journal of Medicine 
2010;362(22):2045-47
    13. Armstrong J. Unintended consequences--the cost of preventing 
preterm births after FDA approval of a branded version of 17OHP. New 
England Journal of Medicine 2011;364:1689-91.
    14. Food and Drug Administration. FDA statement on Makena. March 
30, 2011. Available at: http://www.fda.gov/NewsEvents/Newsroom/
PressAnnouncements/ucm249025.htm.
    15. Hinman AR, Orenstein WA, Rodewald L. Financing immunizations in 
the United States. Clin Infect Dis 2004;38:1440-47.

    Senator Sanders. Thank you very much, Dr. Kesselheim.
    Let me begin by making this point, then asking a question. 
According to Medicare and Medicaid data, between July 2013 and 
July 2014, half of all generic drugs went up in price. During 
this time period, nearly 10 percent of all generic drugs more 
than doubled in price. And that's some 1,200 drugs, not a 
handful of drugs. And, in fact, some of these drugs went up by 
500-600 percent. So, the concern here is not whatever the 
explanation may be for a small number of drugs--maybe low-
volume drugs usually escalating in price, it is a concern that 
thousands of drugs may go up. Should we be worried about that? 
And what do we do about it?
    Dr. Schondelmeyer, why don't you start.
    Mr. Schondelmeyer. Absolutely we should be worried. That 
data you presented reflects my own experience. I work at the 
University of Minnesota, and help manage our drug benefit. And, 
just on Monday, we were reviewing the top prescribed drugs in 
our plan, and most of those are generics. And, of the generics, 
three-fourths of those generics on our top-prescribed list went 
up in price. They were on the list of drugs that have had 
extraordinary high price increases.
    Senator Sanders. Significant increases in prices?
    Mr. Schondelmeyer. Yes, sir. These aren't just isolated the 
low-volume drug that drug companies think they can slip by and 
it won't affect the market that much, people won't worry about 
them.
    Senator Sanders. You think that consumers all over this 
country should be worrying about this trend.
    Mr. Schondelmeyer. Absolutely. And the data base we looked 
at in the AARP study includes data nationwide for both 
commercial payers and Medicare and Medicaid.
    Senator Sanders. OK.
    Let me go to Mr. Frankil.
    Mr. Frankil. Yes, I agree, we should all be concerned about 
this.
    Initially, consumers don't feel the price right away. 
Oftentimes, there's a copay, and maybe not until you get into 
your coverage gap or your donut hole do you feel the 
difference. There's a delayed reaction by the public. The 
public does feel it eventually. I'm surprised that some of the 
payers haven't stepped up a little sooner--private payers and 
public payers--because they've eventually got to pay the bills.
    I also want to mention, as Dr. Schondelmeyer said, that 
some of these drugs that are dramatically going up in price are 
not low-volume drugs. There's quite a few very high-volume 
drugs. Pravastatin is a top-20 drug. Levothyroxine, which has 
nearly doubled in price in the past 6 to 9 months, is a top-5 
drug. These are high-volume drugs affecting the majority of 
America, and we should be concerned. I don't know what agency 
it is, but there should be an agency in the Federal Government 
that watches over this and has the power to do something about 
it, and also monitors the PBMs and the insurance companies to 
pay pharmacies appropriately. We shouldn't be put in a position 
to lose money.
    Senator Sanders. OK.
    Ms. Riha, you are not a pharmaceutical expert, you're just 
an ordinary human being----
    Ms. Riha. Right.
    Senator Sanders [continuing]. Struggling economically. What 
do these price increases mean to you and, I think, for millions 
of other folks?
    Ms. Riha. As I said, I charge these on my credit card, so 
eventually it will have to be paid off. But, there are millions 
of Americans who don't have the wherewithal to do that, so 
they're having to make the real choices every week. Do I pay my 
prescription or do I let it go? Do I pay for food this week? Do 
I pay for gasoline? I don't have Medicare coverage or Medicaid 
at this point, because I'm too young, but my health insurance--
and it's Obamacare, thank you very much, and I'm very pleased 
with it----
    Senator Sanders. Yell that to Senator Burr.
    Ms. Riha. Senator Burr, I really love my Obamacare.
    [Laughter.]
    Senator Burr. Listen, I'm on it, too. I don't share the 
cost increase quite as much as you do, but the coverage is 
good.
    Senator Sanders. All right, no speeches. I gave you a 
shout-out here, and you gave me a speech.
    [Laughter.]
    Ms. Riha. There is some health insurance coverage of many 
of these medications, but it doesn't cover the whole cost. And, 
as costs go up, people can't pay the additional cost that's not 
covered by insurance.
    Senator Sanders. OK.
    I wanted to ask Dr. Gottlieb--you mentioned low-volume 
drugs, but Mr. Frankil and Dr. Schondelmeyer said that it's not 
just low-volume drugs. Your response to that?
    Dr. Gottlieb. It's a diverse list. A lot of it is low-
volume drugs. And there's examples where there are high-volume 
drugs. If we want to get an accurate picture of what's 
happening in the market overall, you need to adjust the prices 
and the price increases based on script volume.
    The other thing is, the list also includes parenteral 
drugs, and they've faced a whole other set of regulatory 
issues, some very specific issues addressing those. I think to 
really get at the root cause, we need to carve up the list a 
little bit more finely, because there's very discrete issues 
with certain categories of drugs.
    Senator Sanders. OK.
    Dr. Kesselheim.
    Dr. Kesselheim. I think these regulatory issues have been 
around for a really long time, and this is a new issue. I can't 
see how this is a regulatory problem. I think that we all want 
high-quality, safe drugs, and we want the FDA to be monitoring 
the safety of our drug supply. And it's been doing that, and 
it's continuing to do that. I see this as a market failure, and 
a bunch of individual market failures, in some cases. As Dr. 
Gottlieb said, I think that there are a diversity of reasons 
why these kinds of price jumps happen. We need to look into 
quantifying exactly what those are, and then take steps to 
specifically address those failures.
    Senator Sanders. OK, thank you.
    Senator Burr.
    Senator Burr. Thank you, Mr. Chairman.
    Ms. Riha, since you raised the question, and just so you 
know it, my coverage is about the same, from the standpoint of 
what it covers. My premium went up $100 a month, and I have a 
$3,000 deductible, where I had zero before. My experience with 
the coverage has been a fantastic cost increase to me. 
Unfortunately, I don't have a hearing in Congress to hear my 
complaint.
    But, I'm glad you're here. I understand your problem. And, 
as a Member of Congress, I'd love to see the problem fixed. I'm 
just not sure that it's in the power of us, as legislators.
    I want to go to Dr. Kesselheim, because you raised some 
really great ideas. If you have a regulatory system that's 
responsive to it, you'd have an FDA--and I just go to your 
points, and if I missed one of them, let me know--the FDA 
should fast-track applications that create competition. We know 
an application is now 36 months versus 31 months. Before, we 
didn't have user fees. Now we've got user fees, and the 
application process has slowed down. You said, ``Waive the user 
fees.'' If user fees are what is keeping manufacturers from 
putting applications in, and they want to create a generic 
competitor that would help to bring costs down, let's waive the 
user fees for the company. If I missed another one, I'm sorry. 
But, if you were FDA director today, would you be proposing 
those actions by the FDA with what we see, as part of the 
solution?
    Dr. Kesselheim. I think both are reasonable responses to 
try to address individual market failures in particular drugs. 
Currently, there is a queue for review of new generic drug 
applications. If we're seeing prices rise by 500 percent, 1,000 
percent, because the market has contracted and we need more 
entrants into the market, it makes sense to me that there are 
going to be actual patients who are going to be affected by 
this who are going to stop taking their medications and have 
changes in their healthcare because of it. The FDA should be 
nimble enough to respond to that by fast-tracking the 
applications to try to respond to that. And if a barrier to 
entry might be the payment of a user fee, then, in this 
particular field, as we're trying to attract more competitors 
to it, waiving the user fee in that particular instance might 
be worth it. I think that Congress could step in and increase 
the funding to the FDA to make up for any lack of user fees 
that comes out because of it.
    And I think that the third part of that was that government 
payers could also step in to try to establish a more 
predictable market by putting out bids for certain amounts of 
the drug at a certain reasonable price so that when 
manufacturers are coming into the market, they can know that 
they have a guaranteed purchaser that'll be there and it's not 
just going to all disappear in 3 to 6 months.
    Senator Burr. Let me go to Dr. Gottlieb, if I can, for the 
two points that you raised which were FDA-centric.
    With your experience at the FDA, does the FDA have the 
authority to pick and choose what they fast-track and/or choose 
to waive user fees under the agreements with the manufacturers?
    Dr. Gottlieb. Not to waive user fees right now. The FDA has 
limited authority to change the prioritization of how they 
review applications. A lot of the existing regulations were put 
into place following the generic drug scandals in the 1980s, if 
some of us remember that, where FDA pulled back from doing 
anything to prioritize how they reviewed applications, other 
than first-in/first-out. We did, when I was there, promulgate a 
policy to prioritize first-in-class generics. FDA could 
promulgate policies to do more prioritization--they do some 
right now--of generics, where it's a critical need, where 
there's access problems, concerns around limited access because 
there's one manufacturer in the market, and there's no 
therapeutic substitution of a product.
    There are things that the FDA could do along the lines of 
what Aaron suggested. I wouldn't prioritize based on price. I 
think that would be moving the process in the wrong direction.
    Senator Burr. Dr. Gottlieb, would we find agreement between 
the three of us if I said the FDA is not nimble and it's not 
flexible?
    Dr. Gottlieb. I think the FDA would not be as nimble under 
its current regulations to do what he's suggesting. They 
probably have more authority than they're exercising to 
prioritize based on access issues.
    Senator Burr. OK.
    Let me ask one last question, if I can. If the FDA were to 
finalize the generic drug labeling rule, what effect do you 
believe that would have on generic drug pricing? I'm not 
speaking to the specifics that we've used as examples, but the 
overall generic drug pricing.
    Dr. Gottlieb. This is another concern that's raising the 
cost of goods in the industry overall, is that the industry is 
now going to be exposed to the same kind of product liability 
for alleged failure to warn cases that plagued the Brandon 
industry. And we see how much litigation costs are on the 
Brandon side. The generics are ostensibly going to be exposed 
to those same costs. It's going to get baked into the price of 
the drugs.
    Senator Burr. Thank you, Mr. Chairman.
    Senator Sanders. Thank you, Senator Burr.
    Senator Warren.

                      Statement of Senator Warren

    Senator Warren. Thank you, Mr. Chairman.
    And thank you all for being here today.
    Dr. Gottlieb, in your testimony you say, among other 
things, that increasing FDA oversight of generic manufacturers 
is playing a role in increasing the costs of generic drugs. And 
you made a similar argument, back in 2011, when you testified 
before the Senate Finance Committee and cited increases in FDA 
oversight as a factor contributing to drug shortages. So, I'd 
like to examine that claim about the FDA's ``tighter scrutiny'' 
a little bit more closely.
    One way that regulatory opponents often track FDA oversight 
is by looking at the number of warning letters that the agency 
sends out. And these letters basically tell a company to stop 
breaking the law, or face the consequences from that. And there 
has been a significant increase in FDA warning letters in the 
past 2 years, from about 2,000 in 2011 to nearly 7,000 in 2013. 
That's almost a 400-percent increase. And it would certainly be 
noteworthy if those letters went to drug manufacturers. Do you 
know how many of them did, Dr. Gottlieb?
    Dr. Gottlieb. The warning letters went to drug 
manufacturers----
    Senator Warren. Yes.
    Dr. Gottlieb [continuing]. For manufacturing violations?
    Senator Warren. Well, no--went to drug manufacturers.
    Dr. Gottlieb. I would suspect a significant portion of 
those letters went to drug manufacturers.
    Senator Warren. Actually, my staff checked with the FDA 
this week, and it turns out that almost none of those letters 
went to drug manufacturers. Most of them were about tobacco 
regulations. In fact, in 2013 only 11 of the nearly 7,000 FDA 
warning letters were about generic drug manufacturing problems, 
and that was down from a grand total of 20 such letters in 
2011.
    Your testimony states that pharmacies paid about 40 percent 
more for generics last quarter than they did the previous 
quarter. So, I just want to focus on this part of it. Do you 
think it's reasonable to argue that such an increase, a 40-
percent price increase, resulted, even in part, from the FDA 
issuing 11 manufacturing warning letters last year?
    Dr. Gottlieb. It's hard to analyze that in the abstract, 
and I'm not sure that we're talking just about warning letters 
or untitled letters. But, you know, it is the case that, when 
you look at things like the parenteral drugs, which is what the 
2011 testimony was about, I believe, fully 25 percent of the 
manufacturing capacity for 20---for parenteral drugs has been 
taken out of the market. And that's led to, not only price 
increases, because you don't have----
    Senator Warren. OK, but I'm----
    Dr. Gottlieb [continuing]. As many manufacturers, but 
shifting----
    Senator Warren [continuing]. I'm trying to focus----
    Dr. Gottlieb [continuing]. The compounding--OK, sorry.
    Senator Warren. I'm trying to focus on this question about 
the letters, because this is often one of the ways that those 
who oppose the regulations focus in. And I get it that there 
are a lot of other things going on, including other forms of 
regulation. But, I've actually taken a look at those, as well, 
and the FDA, last year, issued a grand total of five 
injunctions against drug companies and one seizure of product. 
That's fewer overall concerns. That's 11 warning letters, five 
injunctions, and one seizure, compared with a 40-percent price 
spike just this year. And so, the question is, Is it reasonable 
to try to tie those specifically together--we're talking about 
enhanced FDA enforcement--or not?
    Dr. Gottlieb. Right. Well, I wouldn't tie warning letters 
to the points I was making. I would look more at the 483 
findings, if you want to look at the FDA's oversight in 
manufacturing, and I would look at what's happened to overall 
manufacturing capacity or of it's a result of FDA inspections. 
I think that would correlate with competitiveness in the market 
if you were trying to find proxies for what was happening----
    Senator Warren. But, as I understand it, the forms you're 
talking about are down, as well, and we're seeing prices go up. 
So, I'm----
    Dr. Gottlieb. When FDA does inspections, 483s are issued. 
You're saying inspections are down? Inspections----
    Senator Warren. Well, I'll tell----
    Dr. Gottlieb [continuing]. Are probably up.
    Senator Warren [continuing]. We'll talk about inspections 
in just a minute. I wanted to stay focused on this part.
    I understand that individual enforcement actions may 
temporarily affect the price or availability of a particular 
drug, but data demonstrating decreasing enforcement over 
manufacturers does not justify a price spike of 40 percent. The 
numbers just don't line up between the prices and regulatory 
enforcement.
    Let's go to the inspections for just a minute, since you've 
raised that. You also suggest that if there is no imminent risk 
from a manufacturing violation, then manufacturing facilities 
should be allowed to continue to produce medications, Dr. 
Gottlieb. I want to think about what that would mean.
    The FDA has noted that roughly 40 percent of the generic 
drugs in the United States are now manufactured in India. In 
2012, Ranbaxy, a major Indian manufacturer, pled guilty to 
seven Federal criminal counts of selling adulterated drugs. And 
that same year, they recalled nearly half a million bottles of 
generic Lipitor that could have contained tiny glass particles. 
In 2013, the FDA imposed an import ban on another Indian 
manufacturer named Wockhardt after inspectors found urine 
spilling over open drains a few feet from sterile manufacturing 
areas and found mold growing in a storage area containing raw 
drug materials.
    Do you expect us to believe that, after 30 years of 
successful cost and quality control in the generic drug market, 
that the American public now has to choose between drugs that 
are much more expensive and drugs that come from dirty 
facilities, possibly contaminated with mold, urine, or glass?
    Dr. Gottlieb. Certainly not. What I actually said was that, 
rather than issue a public 483, which forces manufacturers 
typically to close facilities because of liability risks that 
they would face, what we could do in cases where there's not an 
imminent risk is allow them to remediate those facilities under 
close FDA supervision. And that's exactly what's been done in a 
case, for example, under Team Biologics, with vaccine 
manufacturers. Now, certainly urine on the floor of a plant 
would qualify as something you might want to close the plant 
for if you're under close FDA supervision.
    Senator Warren. All right. I'm sure there are ways that we 
could streamline our oversight of drug manufacturers. But, 
let's be clear, India is producing 40 percent of our generic 
drugs, and the FDA's supposedly burdensome oversight team in 
that entire country consists of 10 full-time employees. That's 
10 people to watch over the production of billions of doses of 
medicine to make sure that they aren't laced with broken glass 
or splashed with urine.
    I'm sure that some generic drug manufacturers would like to 
blame their price increases on the FDA and its 10 full-time 
employees in India, but I think we need a deeper investigation 
into the price hikes. Frankly, I think we need more support for 
those FDA inspectors who are trying to keep our drugs safe.
    Thank you, Mr. Chairman.
    Senator Sanders. With that, there are some votes on the 
floor right now.
    Senator Burr. Mr. Chairman?
    Senator Sanders. Yes.
    Senator Burr. Could I ask unanimous consent that my opening 
statement be included, as prepared?
    Senator Sanders. Of course.
    Senator Burr. Thank you.
    Senator Sanders. Let me thank all of the panelists for 
their participation in this discussion of an enormously 
important issue. Thank you all very much.
    The hearing is ended.
    [Additional material follows.]

                          ADDITIONAL MATERIAL

                   Prepared Statement of Senator Burr

    While I share the concerns regarding the importance of 
Americans being able to access affordable health care, I am 
also concerned that today's hearing not interfere with the 
reported Federal investigation into generic drug prices. It is 
my hope that today's hearing will be conducted in a manner 
befitting of the Senate and this committee.
    Over the past few years, a lot of promises about affordable 
health care were made, and a lot of promises have been broken. 
When a patient is sick and needs a prescription drug, they are 
understandably most concerned about whether that drug is 
available and if they can afford it. As we examine the reasons 
behind why some generic drugs have experienced price 
fluctuations, I hope that the committee does not lose sight of 
the important role prescription drugs play in delivering 
quality care to patients in need of these therapies. These 
life-saving products not only help many Americans to meet their 
health care needs, but also improve patients' quality of life.
    While we may hear about a few specific drugs and 
circumstances, it is important to remember that there are over 
13,000 approved generic drugs in the United States. Generic 
drugs play a valuable role in helping patients' access 
affordable medicines. The IMS Institute for Healthcare 
Informatics found that generics saved U.S. consumers nearly 
$1.5 trillion over the past decade. In recent years the share 
of prescriptions filled with generic drugs has increased, 
lowering health care costs not just for patients, but taxpayers 
as well. According to the Congressional Budget Office, between 
2007 and 2010 the share or prescriptions filled with generic 
drugs increased from 63 percent to 73 percent in Medicare Part 
D, and this has contributed to this program's success story. 
This is further affirmation that when it comes to health care 
choice and competition are essential. Consumers know how to 
leverage these forces to make the market respond to their 
health care needs.
    Let's take a look at today's generic drug landscape. Since 
2012, the Food and Drug Administration has been implementing 
the first Generic Drug User Fee Agreement. Since this agreement 
was intended to accelerate the delivery of high-quality, lower-
cost generic drugs, it's worth asking if it has accomplished 
that goal. In 2011, the median time for generic approvals was 
about 31 months. Two years and hundreds of millions of dollars 
in generic user fees later, it is now taking longer for generic 
drugs to be approved by the FDA--36 months and counting.
    While FDA has taken some initial actions to address the 
significant backlog of generic drug applications, the fact 
remains that thousands of generic drug products await review by 
the Agency. In fact, there are more generic drug applications 
awaiting review by the FDA today than before the generic drug 
user fee agreement was put in place. In other words, the 
regulatory burden has gone up without realizing the full 
potential benefit of new generic drugs entering the market to 
help lower costs through increased choice and competition.
    The FDA has also proposed a generic drug labeling rule that 
undermines the core tenet of ``sameness'' under the Hatch-
Waxman Act. This rule will increase the costs of generic drugs 
and lead to increased costs for patients. Obamacare's 
prescription drug tax is being passed onto patients, not only 
raising prescription drug prices, but also increasing premiums.
    Instead of cherry picking a handful of examples, we need to 
look at what the full picture tells us. Drug shortages remain a 
concern. Taxes, fees and regulatory burden are driving up the 
costs of doing business. When the costs of doing business go 
up, the market responds and adjusts.
    We have thousands of generic drug applications awaiting FDA 
review. Ultimately, many factors, including the policies 
enacted by Congress and this Administration's actions, are 
impacting the availability of, access to, and the price of 
these life-saving products.
    The first rule of medicine is to do no harm. If we are 
going to point a finger at why health care costs are increasing 
we should start by pointing it at ourselves--the Federal 
Government--and asking if the policies that are being 
implemented are helping or hurting. When it comes to the health 
care law and FDA's actions and inactions, we already know the 
answer.
    So, Mr. Chairman, by all means let's hold a hearing on drug 
pricing. But we are not doing right by the American people if 
that's all we look at, and then proceed to ignore the fees 
imposed, bureaucracies created, hurdles erected, regulations 
unleashed, and other roadblocks constructed by this Congress 
and the Federal Government more broadly.
    I look forward to hearing from our witnesses here today and 
engaging in a constructive dialog.

                 Prepared Statement of Senator Mikulski

    Thank you, Senator Sanders for convening this important 
hearing about skyrocketing prices of generic drugs. This is an 
issue hurting patients nationwide. I've already heard from 
Marylanders who are seeing their drug prices increase 
dramatically and unexpectedly. We must do something about it.
    Just last week, I received a letter from my constituent, 
Rosanne, a Medicare beneficiary from Silver Spring, MD. She has 
been taking ursodiol for several years. This is a generic drug 
used to treat an autoimmune disease. In June, a 3-month supply 
cost Roseanne $159 and in September, the same prescription cost 
her $1,659. This drug is her lifeline. She must pay the 1,000 
percent increase to stay healthy and live a normal life, but 
it's not easy on her checkbook. And many others are simply 
unable to afford these price increases.
    Generic drugs are supposed to provide people an affordable 
alternative, but for many Marylanders and for so many patients, 
that is no longer the case. These increases are just one more 
squeeze on middle class families that are already working so 
hard to make ends meet. They are one more squeeze on seniors 
like Roseanne who have fixed incomes. The American people 
cannot afford to lose access to lifesaving medications, but 
they also cannot afford astronomical, unexpected, and sudden 
new costs to their weekly and monthly budgets.
    I've also heard from Maryland hospitals who are struggling. 
Johns Hopkins University faces $3.75 million in unplanned 
generic drug costs this year and the University of Maryland 
Medical Center estimates $1 million in unplanned costs. How can 
we expect our hospitals to budget properly if they are hit over 
and over and over with unexpected and inexplicable new drug 
costs that they have absolutely no way to plan for?
    I want to thank Senator Sanders again for convening this 
hearing on an issue that is negatively impacting Marylanders. I 
also want to thank Representative Cummings for testifying 
before the committee today and for his work to investigate this 
issue on behalf of Maryland patients and Maryland families who 
are already struggling to pay the bills.
    I look forward to working with my colleagues on the HELP 
Committee and with Representative Cummings, so that we can 
better understand why these prices are skyrocketing and so we 
can do something about it to stop these price increases.

    [Whereupon, at 2:15 p.m., the hearing was adjourned.]

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