[Senate Hearing 114-805]
[From the U.S. Government Publishing Office]


                                                        S. Hrg. 114-805

EPIPEN PRICE INCREASES: HOW REGULATORY BARRIERS INHIBIT PHARMACEUTICAL 
                              COMPETITION

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

                             FIELD HEARING

                                 OF THE

                 SUBCOMMITTEE ON CHILDREN AND FAMILIES

                                 OF THE

                    COMMITTEE ON HEALTH, EDUCATION,
                          LABOR, AND PENSIONS

                          UNITED STATES SENATE

                    ONE HUNDRED FOURTEENTH CONGRESS

                             SECOND SESSION

                                   ON

 EXAMINING EPIPEN PRICE INCREASES, FOCUSING ON HOW REGULATORY BARRIERS 
                   INHIBIT PHARMACEUTICAL COMPETITION

                               __________

                    OCTOBER 7, 2016 (Lexington, KY)

                               __________

 Printed for the use of the Committee on Health, Education, Labor, and 
                                Pensions
                                
                                
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          COMMITTEE ON HEALTH, EDUCATION, LABOR, AND PENSIONS

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

                                    

               David P. Cleary, Republican Staff Director

        Lindsey Ward Seidman, Republican Deputy Staff Directory

                  Evan Schatz, Minority Staff Director

              John Righter, Minority Deputy Staff Director

                                 ______

                  Subcommittee on Children & Families

                          RAND PAUL, Chairman

LISA MURKOWSKI, Alaska               ROBERT P. CASEY, JR., Pennsylvania
RICHARD BURR, North Carolina         BARBARA A. MIKULSKI, Maryland
MARK KIRK, Illinois                  BERNARD SANDERS (I), Vermont
ORRIN G. HATCH, Utah                 AL FRANKEN, Minnesota
PAT ROBERTS, Kansas                  MICHAEL F. BENNET, Colorado
BILL CASSIDY, M.D., Louisiana        PATTY MURRAY (ex officio), 
LAMAR ALEXANDER (ex officio),        Washington
Tennessee

                  Larry Smar, Minority Staff Director

                                  (ii)


                            C O N T E N T S

                               __________

                               STATEMENTS

                        FRIDAY, OCTOBER 7, 2016

                                                                   Page

                           Committee Members

Paul, Hon. Rand, Chairman, Subcommittee on Children and Families, 
  opening statement..............................................     1

                               Witnesses

Jackson, Laura, Coordinator, Kentucky Families With Food 
  Allergies Support Group, Lexington, KY.........................     2
    Prepared statement...........................................     4
Spencer, John, PharmD, Independent Pharmacist, Owner, Spencer 
  Drugs, Richmond, KY............................................     5
    Prepared statement...........................................     6
Strow, Brian K., Ph.D., BB&T Professor for The Study of 
  Capitalism, Professor of Economics, Western Kentucky 
  University, Bowling Green, KY..................................     7
    Prepared statement...........................................    10
Gottlieb, Scott, M.D., Resident Fellow, American Enterprise 
  Institute, Washington, DC......................................    13
    Prepared statement...........................................    15
Almeter, Philip J., PharmD, Senior Director, Pharmacy Acute Care 
  Services and 340B Programs, UK Healthcare, University of 
  Kentucky, Lexington, KY........................................    23
    Prepared statement...........................................    25
Waters, Jim, President, Bluegrass Institute for Public Policy 
  Solutions, Lexington, KY.......................................    30
    Prepared statement...........................................    32

                                 (iii)

  

 
EPIPEN PRICE INCREASES: HOW REGULATORY BARRIERS INHIBIT PHARMACEUTICAL 
                              COMPETITION

                              ----------                              


                        FRIDAY, OCTOBER 7, 2016

                                       U.S. Senate,
                     Subcommittee on Children and Families,
       Committee on Health, Education, Labor, and Pensions,
                                                     Lexington, KY.
    The subcommittee met, pursuant to notice, at 2:57 p.m., at 
the University of Kentucky College of Health Sciences, Charles 
T. Wethington, Jr. Building, Commons Room, 900 South Limestone 
Street, Lexington, KY, Hon. Rand Paul, chairman of the 
subcommittee, presiding.
    Present: Senator Paul.

                   Opening Statement of Senator Paul

    Senator Paul. Hello. Welcome. Thank you for coming. The 
Senate Committee on Health, Education, Labor, and Pensions 
Subcommittee on Children and Families will please come to 
order.
    This afternoon, we're having a hearing on EpiPen price 
increases. It's important when you get upset about something or 
when you see a problem that you try to scratch beyond the 
surface and see what the origin of the problem is and try to 
fully understand it before we react and try to fix it.
    I'd like to thank the University of Kentucky, the UK 
College of Pharmacy, and UK Healthcare for hosting this 
subcommittee hearing.
    When I first heard about the EpiPen price increases going 
up 500 percent, I was like anybody else, outraged. I have 
allergic reactions to bees and have had to use epinephrine when 
I was a kid. Many families have that sort of experience, and 
they hate to think of sort of a lifesaving drug having a--they 
just don't understand why it costs 500 percent more, 
particularly when the ingredients are quite inexpensive.
    The ingredients--epinephrine has been around for maybe 100 
years. It's about a dollar's worth of medication in there, and 
people--some have tried to say, ``Well, it's a complicated 
device.'' They haven't really been in a modern hospital if they 
think a spring loaded needle is a complicated device.
    We've been exploring the question. We've had the FDA come 
in. We won't have them represented here today. It's kind of 
hard to get bureaucrats out of Washington. We have interviewed 
them in the office, and we have some serious questions. Some of 
these questions we will discuss here with the panel.
    One, they have a patent, and I'm for patents. That's 
intellectual property. It's one of the reasons why the great 
developers of things that require patents are intellectual 
property, like drugs. We're a leader in creating new drugs, 
innovative drugs. That's great. Patents can't last forever, and 
their patent will run out in 2025. They got it in 1987, a 38-
year patent. My understanding is that an original patent is 
about 20 years. How did it get to be 38 years?
    We want to know why there's no competition. Why is there 
only one person selling these? There is a generic. There's many 
different generics, but there's at least one generic that 
applied 7 years ago. Is it a little too long to have the 
government take 7 years to approve things? Why does it take so 
long, and what can we do to speed up the process?
    We ought to think about how long patents should be. We 
ought to think about how long the process should be. Then we 
ought to think about how other countries do it and whether or 
not some other countries do it more quickly.
    One of the bills that we've introduced says if it's been 
approved in Europe, and it's on the general market, and there 
hasn't been any significant health or safety problems with it, 
then maybe we can dispense with the Phase 1, Phase 2, Phase 3 
trials and go directly to a committee that would still review 
the information, review it for safety and efficacy, but maybe 
not make the company start over, and that we could expedite 
this. Or maybe we should expedite things when there's only one 
person making something and the price goes up at an alarming 
pace.
    There are a lot of good ideas. We have some patients in the 
audience who have allergies and have to buy the EpiPen. We have 
people who are involved with pharmacies selling the medication. 
We have economists and policymakers.
    Without any further ado, we're going to start by going 
around, and you can either make an opening statement or you can 
introduce yourself and make an opening comment, but I'm going 
to give you your choice, and then we'll proceed from there. 
I'll begin by introducing Laura Jackson, who is the coordinator 
of the Kentucky Families With Food Allergies support group.
    Laura.
    Ms. Jackson. Thank you for inviting us today. I hope I can 
give you a good perspective on what parents and families are 
going through.
    Senator Paul. Thank you. If you want to make any more 
comment than that, you can. We'll come back in a question and 
answer, but go ahead if you----
    Ms. Jackson. So I should go ahead?
    Senator Paul. Yes. If you have a statement, go ahead.

STATEMENT OF LAURA JACKSON, COORDINATOR, KENTUCKY FAMILIES WITH 
          FOOD ALLERGIES SUPPORT GROUP, LEXINGTON, KY

    Ms. Jackson. I have been a food allergy parent for over 25 
years, raising two sons with life-threatening food allergies. I 
know all too well the dangers of a severe allergic reaction, 
having witnessed it with my own child, watching my son's 
symptoms progress from mild to severe in a matter of seconds, 
seeing his labored breathing, the panic in his eyes, racing to 
the emergency room and wondering if we could get there in time, 
knowing that a tragedy was possible, living with the fear of it 
happening again, and then worrying at every meal.
    These experiences inspired me to form the Kentucky Families 
With Food Allergies support group here in Lexington 10 years 
ago. There are many parents like me in our State, all facing 
the financial and emotional responsibilities that come from 
raising a child with a life-threatening condition. That is why 
Kentucky's food allergy parents are so concerned about the 
current EpiPen price increases.
    For over 15 years, my family purchased between 8 and 10 
EpiPen two-packs per year for our sons who are now grown. We 
needed that many due to expiration dates and also to ensure 
that the injectors would always be within reach at home, when 
traveling, or at school, because prompt administration can make 
the difference between life and death.
    In 2013, we were thrilled to have a new option when the 
Auvi-Q injector came onto the market. It was compact and much 
more user friendly. We switched to the Auvi-Q when it was first 
introduced. In 2013, it cost my family roughly the same amount 
as the EpiPen injectors. Soon after, the EpiPen manufacturer 
began offering significant discounts so that EpiPens were less 
expensive than Auvi-Q. Then Auvi-Q offered discounts. I saw the 
cause and effect. Now that EpiPen had a competitor, they found 
a way to lower the price.
    Two years later, in July 2015, our insurance changed to a 
nearly unreachable $5,000 deductible. We began paying the cash 
price. At that time, our cost for an EpiPen two-pack or an 
Auvi-Q two-pack was virtually the same, about $390.
    Within a few months, there was a dramatic change in price. 
In October 2015, Auvi-Q was recalled, and 2 months later, our 
cost for an EpiPen two-pack shot up to well over $600. That was 
an increase of over $200. Since our insurance had not changed, 
I believe that the manufacturer was responsible. When I asked 
my pharmacist why the price had increased so dramatically, he 
said, ``They are the only game in town.'' It is my feeling that 
if Mylan had competition, the price would drop.
    Last year, we went looking for an alternative and were 
pleased to find the Adrenaclick generic auto injector that cost 
us $116 for a two-pack. It works a little differently than the 
EpiPen and is not an exact generic, and, therefore, my pharmacy 
and my allergist had never mentioned it.
    I believe the other reason that the Adrenaclick was never 
prescribed for my sons is the product's sporadic availability. 
Adrenaclick is manufactured by the American company, Amedra 
Pharmaceuticals. At various points in time over the last 
several years, Amedra Pharmaceuticals has not been able to keep 
up with the demand. The situation is confusing for all 
involved, pharmacies, physicians, and consumers. Assuming the 
supply catches up soon, how do we make sure that consumers are 
aware of this lower-cost option?
    My local school system is also affected. They tell me that 
fewer parents are sending EpiPens to keep at school due to the 
cost. This creates a dangerous situation. In Fayette County, 
each building has four stock EpiPens for emergency use. They 
are intended to be a safety net for the undiagnosed or for 
students whose own EpiPen is for some reason not available. 
Those EpiPens stay in the building. That means students are 
riding on buses without EpiPens, going on field trips without 
EpiPens, walking home without EpiPens.
    In addition, an average of one in 13 children now have a 
food allergy, which is roughly 2 per classroom. The school's 
four stock EpiPens cannot possibly protect the entire student 
population. Parents need to continue to supply EpiPens for 
children with documented food allergies, but with skyrocketing 
costs, many parents can't. The high cost is putting children at 
risk.
    There are many families in our local support group who are 
struggling with this issue. Some parents are keeping EpiPens 
past the expiration date. Some parents are doing without. Many 
parents have told me that they are frustrated that one company 
has so much control.
    We need this lifesaving medication to be sold at a 
reasonable price so that every child can be safe. Please allow 
more manufacturers to produce epinephrine injectors.
    [The prepared statement of Ms. Jackson follows:]

                  Prepared Statement of Laura Jackson

    My name is Laura Jackson, and I have been a food-allergy parent for 
over 25 years, raising two sons with life-threatening food allergies.
    I know all too well the dangers of a severe allergic reaction, 
having witnessed it with my own child. Watching my son's symptoms 
progress from mild to severe in a matter of seconds--seeing his labored 
breathing--the panic in his eyes--racing to the emergency room and 
wondering if we could get there in time--knowing that a tragedy was 
possible--living with the fear of it happening again--worrying at every 
meal.
    These experiences inspired me to form the Kentucky Families with 
Food Allergies support group here in Lexington 10 years ago. There are 
many parents like me in our State, all facing the financial and 
emotional responsibilities that come from raising a child with a life-
threatening condition. That is why Kentucky's food allergy parents are 
so concerned about the current EpiPen price increases.
    For over 15 years, my family purchased 8 to 10 EpiPen two-packs per 
year for our sons who are now grown. We needed that many due to 
expiration dates, and also to ensure that the injectors would always be 
within reach at home, when traveling, or at school, because prompt 
administration can make the difference between life and death.
    In 2013, we were thrilled to have a new option when the Auvi-Q 
injector came onto the market. It was compact and much more user-
friendly, so we switched to the Auvi-Q when it was first introduced. In 
2013, it cost my family roughly the same amount as the EpiPens 
injectors. Soon after we had already filled our prescription, the 
EpiPen manufacturer began offering significant discounts so that 
EpiPens were less expensive than Auvi-Q. Then, Auvi-Q offered 
discounts. I saw the cause and effect: now that EpiPens had a 
competitor, they found a way to lower the price.
    Two years later in July 2015, our insurance changed to a nearly 
unreachable $5,000 deductible, so we began paying the cash price. At 
that time, our cost for an EpiPen two-pack or an Auvi-Q two pack was 
virtually the same at about $390.
    Within a few months, there were dramatic changes in price. In 
October 2015, Auvi-Q was recalled, and 2 months later our cost for an 
EpiPen two-pack shot up to well over $600. That was an increase of over 
$200. Since our insurance had not changed, I believe that the 
manufacturer was responsible.
    When I asked my pharmacist why the price had increased so 
dramatically, he said, ``They are the only game in town.'' It is my 
feeling that if Mylan had competition, the price would drop.
    We went looking for an alternative. Unfortunately, there is no 
exact alternative. We opted to purchase a generic epinephrine injector, 
called Adrenaclick, that cost us $116 for a two-pack, but it is not an 
exact substitute. That is why the pharmacy won't automatically 
substitute one for another. Some consumers might find the generic 
harder to use. In addition, many parents are not aware that Adrenaclick 
is available. EpiPen is well-known due to their advertising and 
marketing campaigns, but there is no marketing for the generic. That is 
another issue to address: how do we make sure consumers are aware of 
this lower-cost option?
    My local school system is also affected. They tell me that fewer 
parents are sending EpiPens to keep at school, due to the cost. This 
creates a dangerous situation. In Fayette County, each building has 
four stock EpiPens for emergency use, but they are intended to be a 
safety net for the undiagnosed or for students whose own EpiPen is not 
available. Those EpiPens stay in the building. That means students are 
riding on busses without EpiPens, going on field trips without EpiPens, 
walking home without EpiPens, going to sporting events without EpiPens. 
The high cost is putting children at risk.
    There are many families in our local support group who are 
struggling with this issue. Some parents are keeping EpiPens past the 
expiration date. Some parents are doing without. Many parents have told 
me they are frustrated that one company has so much control. We need 
this life-saving medication to be sold at a reasonable price so that 
every child can be safe. Please allow more manufacturers to produce 
epinephrine auto-injectors.

    Senator Paul. Thank you, Ms. Jackson.
    John Spencer is an independent pharmacist and the owner of 
Spencer Drugs.

  STATEMENT OF JOHN SPENCER, PharmD, INDEPENDENT PHARMACIST, 
               OWNER, SPENCER DRUGS, RICHMOND, KY

    Mr. Spencer. Thank you, Senator Paul. As you said, my name 
is John Spencer, and I graduated from the University of 
Kentucky College of Pharmacy in 1992. I have worked in an 
independent pharmacy since 1989, and I currently own four 
independent pharmacies. My staff and I are literally on the 
front lines of patient healthcare and provide education and 
information that is necessary for our patients to take their 
medications correctly in order to maximize their effectiveness 
in their treatment.
    Unfortunately, in the past few years, we find that we have 
become arbitrators between pharmaceutical manufacturers, 
pharmacy benefit managers, insurance companies, and patients. 
Too often, we have to attempt to explain huge price increases 
and formulary changes to a person that is sick and often in 
need of potential lifesaving medication. As you might imagine, 
these excuses are hard to come by. When talk of multimillion-
dollar salaries for drug company executives is all over the 
news, it is really hard for my patients to understand when the 
price of their prescription increases by 500 percent.
    I am a businessman, and I understand the free market. 
However, in the pharmaceutical industry, there are too many 
players with the ability to manipulate the system, and that is 
not at the heart of true capitalism or reasonable business 
ethics. I also understand that the pharmaceutical companies 
with proprietary products need to make a profit and be paid for 
their research. It appears that, in many cases, these companies 
are choosing an increase in their stock price over an increase 
in accessibility to those who need the treatment the most.
    This industry has to be put under a different microscope 
when we evaluate their pricing practices. We're not dealing in 
sporting goods or appliances. We're dealing with products that 
can mean life and death for our patients.
    It is an inconvenient truth for the makers of EpiPen when 
we tell them about a local teacher with severe peanut allergies 
who finds out that her co-pay for her EpiPen is now $250. The 
last time I checked, most school teachers are not highly 
compensated, and the idea of having to replace this product 
year after year is not a pleasant thought.
    Mylan does not want to discuss about a mother from 
Tennessee whose child was starting kindergarten this year. She 
couldn't believe the price she had heard from her local 
pharmacy, so she started calling pharmacies in Kentucky in 
hopes of finding a cheaper price. Heather Bresch might be 
uncomfortable hearing about my colleague's patient with alpha-
gal allergy whose insurance co-pay was $626 because her 
deductible had to be met.
    Currently, you can go online to EpiPen.com and apply for a 
co-pay discount card, which may take up to $300 off your 
prescription in certain instances. In my two decades of work in 
pharmacy, I have no memory of any co-pay card offering such a 
staggering discount. What I know is that if you can afford to 
offer a $300 discount, there's at least a $300 profit in your 
product.
    A 30 cc vile of epinephrine, as the Senator was mentioning, 
which contains enough drug to make several EpiPens--probably in 
the neighborhood of 20--costs me $58.99. Therefore, it's really 
hard to believe that the active ingredient has a significant 
bearing on the cost of the product.
    Lawsuits, citizens' petitions, and back-door payment deals 
between brand manufacturers and generic companies that are 
about to launch their product seem to be the norm. I guess this 
explains why some pharmacy benefit managers still choose to pay 
for products like Nexium and Crestor long after AB-rated 
generics exist, even though they are sometimes less than 5 
percent of the cost of the brand name drug.
    On Mylan's Web site under the heading, Integrity, ``Doing 
what's right is sacred to us. We behave responsibly, even when 
nobody is looking. We set high standards from which we never 
back down.'' My response to that would be everyone is now 
looking, and we expect more responsible behavior.
    Thank you, Senator.
    [The prepared statement of Mr. Spencer follows:]

               Prepared Statement of John Spencer, PharmD

    Senator Paul, my name is John Spencer and I graduated from the 
University of Kentucky College of Pharmacy in 1992. I have worked in 
independent pharmacy since 1989 and I currently own 4 independent 
pharmacies. My staff and I are literally on the front lines of patient 
health care and provide the education and information that is necessary 
for our patients to take their medications correctly in order to 
maximize their effectiveness in their treatment.
    Unfortunately in the past few years, we find that we have become 
arbitrators between pharmaceutical manufacturers, pharmacy benefit 
managers, insurance companies and patients. Too often we have to 
attempt to explain huge increases in prices and formulary changes to a 
person that is sick and often in need of a potential life-saving 
medication. As you might imagine, those excuses are hard to come by. 
When talk of multi-million dollar salaries for drug company executives 
is all over the news, it is really hard for my patients to understand 
when the price of their prescription increases by 500 percent. I am a 
businessman and I understand the free market, however in the 
pharmaceutical industry there are too many players with the ability to 
manipulate the system and that is not at the heart of true capitalism 
or reasonable business ethics. I also understand that pharmaceutical 
companies with proprietary products need to make a profit and be paid 
for their research. But it appears that in many cases these companies 
are choosing an increase in their stock price over an increase in 
accessibility of their product to those who need their treatment the 
most.
    This industry has to be put under a different microscope when we 
evaluate their pricing practices. We are not dealing in sporting goods 
or appliances. We are dealing with products that can mean life or death 
for our patients.
    It is an inconvenient truth for the makers of EpiPen when we tell 
them about a local teacher with severe peanut allergies who finds out 
that the copay for her EpiPen is now $250. The last time I checked most 
schoolteachers are not highly compensated employees and the idea of 
having to replace this product every year is not a pleasant thought.
    Mylan does not want to talk about the patient from Tennessee we 
heard from whose child was starting kindergarten that couldn't believe 
the price that was quoted by her local pharmacy and was calling to see 
if she might find a better price in Kentucky.
    Heather Bresch might be uncomfortable hearing about my colleague's 
patient with Alpha Gal allergy whose insurance copay was $626.16 
because her deductible had to be met.
    Currently you can go online to www.epipen.com and apply for a copay 
discount card which may take up to $300 dollars off your prescription 
in certain instances. In my two decades of work in a pharmacy I have no 
memory of any copay card offering such a staggering discount. What I do 
know is that if you can afford to offer a $300 discount there is at 
least a $300 profit built into your product.
    On Mylan's Web site under the heading ``integrity'' it reads, 
``Doing what's right is sacred to us. We behave responsibly, even when 
nobody is looking. We set high standards from which we never back 
down.'' My response to that would be . . . everyone is now looking and 
we expect more responsible behavior.
    Thank you Senator Paul for your time and for your concern about 
this issue.

    Senator Paul. Our next witness is Professor Brian K. Strow, 
Ph.D., who is a Professor of Economics at Western Kentucky 
University in my hometown of Bowling Green and a BB&T Professor 
for the Study of Capitalism.

  STATEMENT OF BRIAN K. STROW, Ph.D., BB&T PROFESSOR FOR THE 
 STUDY OF CAPITALISM, PROFESSOR OF ECONOMICS, WESTERN KENTUCKY 
                 UNIVERSITY, BOWLING GREEN, KY

    Mr. Strow. Thank you, Senator Paul, for inviting me to 
testify before this committee today. I value any opportunity I 
have to talk about the values of competition, generally, and in 
this case, specifically, as it applies to the pharmaceutical 
industry.
    My comments today will revolve around the value of 
competition, generally, to markets and to consumers, 
specifically, evident--I'll show some evidence of that value in 
the pharmaceutical industry, specifically; explain barriers to 
this competition, generally, and why they might occur in 
general scenarios and also, specifically, why they're occurring 
in these specific drug markets; and then at the end, suggest 
some policy solutions that we might look at addressing the very 
specific barriers to competition.
    To economists, we generally find that competition is good 
and more competition is better. Why is that the case, and why 
do consumers value choice? It's because they gain power in the 
economic transaction. If there's only one producer, a monopoly 
producer can charge a lot more than if there's a competitor out 
there. If I'm willing to pay $10 for a drug, and I'm able to 
pay $10 for a drug, and they charge me $10 for a drug, that 
transaction will occur, but I've got no, in economic terms, 
consumer surplus. I get no extra benefit out of making this 
purchase.
    If the price of drugs fall--and we'll look at how this 
happens through competition--say, to $4, if I'm still willing 
to pay $10 and only have to pay $4, in economic language, I'd 
be gaining $6 of consumer surplus. What we look at as benefits 
to society--we're going to add up, as economists, these 
consumer surpluses, freeing up, as it were, people's incomes to 
spend on meeting other needs and wants.
    The FDA actually comes in very handy here, because in 2005, 
they did a very specific study regarding the benefits of 
competition in the pharmaceutical industry. What they did was 
look between 1999 and 2004 at average drug prices and compared 
it to the number of competitors in each specific drug market, 
so if there were two drug makers, three drug makers, one drug 
maker, five, six--they took it out to double digits.
    What is interesting when you see the study is virtually 
every increase in the number of competitors in the market 
resulted in a decrease in prices. The most notable decrease in 
price came when the second generic entered into the market.
    You say, ``Well, why is this the case?'' Let's say that 
there is, again, just one producer, a monopoly producer, and 
they raise the price. What is the consumer to do? If it's a 
case of--like the EpiPen, where someone has got to have the 
epinephrine--it's a life or death situation--you're left with 
little recourse.
    You introduce one competitor, and all of a sudden, if the 
price goes up for one, that competitor has a choice, and they 
can do one of two things. They can either not raise their price 
and increase their market share and increase their 
profitability, or, given that explicit occlusion is illegal, 
they could still engage in something called price following and 
start raising their price anyway.
    When there are smaller numbers of producers in any market, 
this price following is more common. Again, what the FDA found 
was that it took as little as that third company, the second 
generic, to virtually wipe away this price following effect and 
drive prices down in a market.
    The key question, then, is not whether more competition is 
good or bad. It's a fairly straightforward microeconomic 
principle that more competition will lead to lower prices for 
consumers. The question is where would these barriers to 
competition arise? Why are we finding in some markets an 
absence of competitors?
    We can think about this broadly first. We can think about 
circumstances that cause a reduction in competition. They might 
include things like control over scarce inputs. Think about De 
Beers and control over costume grade diamonds. They've got the 
diamonds. No one else has the diamonds, so they might be able 
to have some extra market power.
    We can think of IBM at the birth of super computers and 
thinking they had some technological superiority. They knew 
something that other people didn't know. That could give you 
some advantage. We could think about really high up front 
costs. There are not a lot of jumbo jet producers in the world. 
There's Boeing, there's Airbus. There's two, and why might that 
be the case? You'd have to have a company larger than most 
countries' GDP to even startup a company.
    The other big one would be if there's economies of scale in 
production. Think of electricity production. Small scale 
production wouldn't be cost efficient.
    Finally, the last major barrier to competition comes from 
government regulations itself. The Senator alluded to some of 
these in his opening statement. They include patents, licensing 
rules, and government prohibition on competition. Think in this 
case of the post office. There's an actual prohibition against 
competing in the delivery of mail.
    When we look at the pharmaceutical industry, generally, and 
the EpiPen situation, specifically, what we don't see are these 
big startup costs. Sure, there are some startup costs. We're 
not talking Boeing-sized startup costs. Epinephrine has been 
around for a long time. There's no big scientific reasons, no 
great technology that's not available to other people.
    We can go one at a time and go through most of the reasons 
why there is this barrier to competition. It turns out the 
barrier does exist, but it's coming specifically from that last 
item, the government regulations.
    First of all, there's the patent situation. Again, there's 
a reason. Society faces a tradeoff. We can offer patents, which 
gain a company monopoly status, and we know that by giving them 
monopoly status, that's going to increase their pricing power. 
We do it on purpose, and the reason society has decided to do 
this on purpose is to encourage innovation. If you can't recoup 
your research and development costs, people will not spend time 
and money to expand the technological frontier and improve 
people's lives.
    The question is not whether we have patents or not. The 
question is the optimal length of patents. One of the big 
issues we're facing now in the pharmaceutical industry are 
patent extensions. Sure, you came up with a great idea at the 
beginning, but now maybe instead of taking the pill once a day, 
you can take it twice a week, and is that worthy of patent 
protection. What we need to do is look at a tradeoff between 
the value of innovating to a twice-a-week pill or a different 
delivery mechanism for the epinephrine versus the extra 
consumer surplus we could generate by extending competition 
more quickly.
    The second area, then, is going to be with licenses. In 
this case, we're thinking FDA approval itself. You have to 
obtain FDA approval to become a competitor. So when we look at 
absence of competition in the market, particularly in the face 
of high prices, you say, ``Well, why aren't there new 
competitors just jumping in?'' Again, if there are not huge 
technical barriers, what's going on? It turns out there is a 
very lengthy, as you noted, process for approval to be a 
competitor.
    If we're thinking shoes, if we're thinking a shoe store, 
and the only shoe store in town jacks up the price of shoes, 
there's a very low barrier to start a new shoe store and 
compete, or you could have online competition. Here, though, if 
you had to ask ``Mother, may I?'' from the government, and the 
government says, ``Three years from now, 4 years from now, 7 
years from now, you might be able to, if you fill out enough 
paperwork, pay enough, between $1 million and $5 million in 
application costs to start a shoe store,'' you could see how 
there could be a lot of shoe stores that have a lot of monopoly 
status. You would artificially be restricting the number of 
competitors to the market.
    If we're doing this on a logical basis, should the FDA have 
licensing? You can make a good argument for that, that they 
want to ensure product safety, and, again, we're going to face 
a tradeoff. Product safety is going to be the biggest issue 
here. The question is not do we have any approval process, but 
is 4 years, 5 years, 7 years the appropriate amount, 
particularly in cases where we already know what the drug does. 
It's not a new drug. There aren't new side effects. It's the 
same drug in a generic form.
    Does there need to be some product testing to make sure 
that the drug is what it says? Sure. Does that need to take 5, 
6, 7 years? Certainly, by increasing these--the FDA increasing 
the cost of getting generics to the market has done a huge 
disservice to consumer surplus. At a minimum, they should do a 
cost-benefit analysis and determine in each case--is this going 
to be the first generic, or is this going to be the 17th 
generic? We know from the evidence that the 17th generic does 
not reduce prices as much in the market as the second or, most 
notably, the third competitor overall with the second generic. 
If the FDA is facing scarce resources, like we all do, we could 
hope that they could prioritize to those areas in terms of 
approving new drugs that will, in fact, lead to the highest 
increase in consumer surplus.
    The last barrier to competition and corresponding policy 
change is when the government itself regulates the use of an 
item. In this case, with EpiPen, there were some States and 
local school districts that mandated specifically that it was 
EpiPen that had to be stored at the school and the competitor 
was not allowed. When that's the case, you restrict entry into 
the market. You're not even allowing the competitor to come in 
and bid down price.
    Restricting government's ability itself to pick winners and 
losers, to say, ``You must choose this drug versus that drug,'' 
will stand to increase competition and consumer surplus.
    Thank you.
    [The prepared statement of Mr. Strow follows:]

              Prepared Statement of Brian K. Strow, Ph.D.

    My name is Brian Strow, Ph.D., WKU BB&T Professor for the Study of 
Capitalism and Professor of Economics at Western Kentucky University. I 
am grateful for the opportunity to come before the U.S. Senate 
Committee on Health, Education, Labor, and Pensions' Subcommittee on 
Children and Families to testify regarding the benefits to consumers of 
increased competition by producers, provide evidence of the value to 
consumers of increased producer competition in the pharmaceutical 
industry, explain how barriers to producer competition arise in markets 
generally and the pharmaceutical industry specifically, and offer 
policy suggestions aimed at reducing said barriers for the benefits of 
consumers.
                the benefit to consumers of competition
    For consumers, choices are ``good.'' More choices are ``better.'' 
Economists measure ``good'' and ``better'' in terms of consumer 
surplus. Consumer surplus is the difference between the amount of money 
that consumers are willing and able to pay for a good or service and 
the price they actually have to pay for the good or service. If one is 
willing and able to pay up to $10 per for one dose of a prescription 
drug and the price is set at $10, there is no consumer surplus. If the 
price of the prescription drug falls to $4, then the consumer gains $6 
of consumer surplus when they purchase the drug.
    Competition among producers in markets for goods or services works 
to lower prices and improve quality in said markets thereby increasing 
consumer surplus. In order to maximize profits, monopolists will tend 
to artificially restrict the quantity of a good or service available on 
the market and increase the price of the good or service. As each new 
subsequent producer enters the market, consumers gain greater 
decisionmaking power over what good or service to purchase. Any given 
producer loses power over the consumer and must compete for said 
consumer's business by offering a better good or service or lowering 
the price they charge. Standard microeconomic theory suggests that as 
the number of competing producers increases, prices fall.
         the benefit to consumers of pharmaceutical competition
    In 2005, the U.S. Food and Drug Administration reported a direct 
relationship between the number of drug producers in a market and the 
average price of the drug for sale that occurred between 1999 and 2004. 
Their chart is included below. While increased producer competition was 
found to generally lower average drug prices, the best news for 
consumers was that the largest percentage benefit from increased 
competition occurred when merely the second generic drug entered the 
market. Reductions in drug prices directly related to increased 
producer competition are the rule, rather than the exception, in the 
pharmaceutical industry.


    Source: FDA analysis of retail sales data from IMS Health, IMS 
National Sales Perspective (TM), 1999-2004, extracted February 2005.
                   why barriers to competition arise
    In general, barriers to producer competition arise from a limited 
set of circumstances. These circumstances include control over scarce 
inputs (De Beers' control over costume grade diamonds), technological 
superiority (IBM at the beginning of super computers), large up-front 
costs (the jumbo jet industry), the presence of economies of scale 
(large scale electricity production may be cheaper than small scale 
production), and government regulations (patents, licensing rules, or 
government prohibition as in the case of the postal monopoly).
    In the absence of these barriers, if a company were to dramatically 
increase the price of their good or service in absence of an increase 
in their production costs, one of two things will occur. Their 
competitors will not respond to the price increase and gain market 
share or they will respond by increasing their own prices (explicit 
price collusion is illegal). The larger the number of competitors, the 
greater the likelihood that one producer will attempt to gain market 
share and not raise prices. As they lose market share, the other 
producers are forced to reduce their prices or get squeezed out of the 
market.
    If there are a small number of competitors and they all increase 
their prices, the increased price acts as a signal to potential 
producers indicating that resources need to be reallocated into the 
increased production of the very good or service whose price has been 
increased. As long as the price of the good or service remains above 
the price that would be derived from perfect competition, the signal 
for new entrants remains. New entrants will enter into the market until 
the price returns to the price suggested by a perfectly competitive 
market. (F.A. Hayek, The Use of Knowledge in Society 1945 and Milton 
Friedman, Capitalism and Freedom, Chapter 8).
    As in the recent case of EpiPen price increases, one must address 
the question of what specific barriers to competition exist in the 
short run and the long run. If no barriers to entry existed for 
producers, they would have instantaneously responded to higher EpiPen 
prices with similar products aimed at the same consumers.
    EpiPen producers don't have access to scarce resources or superior 
technology. Other drug makers also have the ability to engage in large 
scale drug production, so the argument that new production lines take 
time to implement only carries short term explanatory power. That is, a 
drug maker could only increase prices for a specific drug for a short 
period of time. Dramatically increasing their prices risks long term 
damage to the drug maker's public image which risks their relationship 
with consumers in other product markets.
    The chief barrier to competition in the pharmaceutical industry is 
government regulation--in many forms. Patents, issued by the United 
States Patent and Trademark Office offer producers limited term 
monopoly rights to the production of a good. The U.S. government 
purposefully restricts short term producer competition in order to 
incentivize long run innovation. If we were to the point where we had 
invented all there was public benefit to invent, disbanding the patent 
system would increase competition and consumer surplus. We do not yet 
live in such a world, and reducing the economic returns to patents 
risks diminished research and development in the pharmaceutical 
industry.
    The FDA has to approve or license the production and sale of 
pharmaceutical drugs in the United States. The longer time (and 
financial burden) it takes to gain FDA approval for drug production to 
commence, the less competition pharmaceutical producers face in the 
short run which gives them increased pricing power thereby reducing 
consumer surplus.
    Last, government monopolistic regulations themselves can contribute 
to the lack of competition. In the case of EpiPen, many State and local 
governments mandated that schools stock epinephrine. Some of these 
governments entered into agreements with Mylan (the producer of EpiPen) 
that they not buy from EpiPen's competitors.
       policies designed to lower barriers to competition in the 
                        pharmaceutical industry
    As there are three specific factors that reduce long run 
competition in the pharmaceutical industry, reforms proposed to 
successfully increase competition in the pharmaceutical industry must 
specifically address one of these three factors: patent law, the FDA 
regulatory process, and direct government involvement in drug markets.
    Patent reforms could include increasing the innovation bar 
necessary to qualify for patent protection. Is changing a pill from a 
daily pill to a twice a week pill really worthy of a patent extension 
if it decreases consumer surplus? At a minimum, the patent office 
should be required to do a cost benefit analysis before granting patent 
extensions.
    Increase the speed at which generic drugs are approved by the FDA. 
While the approval process for generics is shorter than for new drugs, 
the FDA could be incentivized to use their scarce resources in ways 
that maximize consumer surplus. The FDA could be required to do a cost 
benefit analysis regarding their usage of scarce inputs. This would 
work to expedite the very drugs whose benefit to consumer surplus are 
the greatest.
    Don't allow agents of the public sector to pick which specific 
producer gains monopoly access to a public market. Analysis by Best 
Practices LLC. Indicates that the most effective ways for drug makers 
to increase profits are through patent extension and large volume 
purchaser contracts. By eliminating public officials' ability to engage 
in exclusive drug deals, one can ensure increased competition in the 
pharmaceutical industry.


    To summarize: competition is good more competition is better, the 
chief barrier to increased competition in the pharmaceutical industry 
is government, policies designed to lower drug costs and increase 
consumer surplus need to begin with regulatory reform.

    Senator Paul. Thank you. Our next witness is Dr. Scott 
Gottlieb. He is a Resident Fellow at the American Enterprise 
Institute, a well-known writer, and a practicing physician.
    Scott.

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

    Dr. Gottlieb. A reformed government bureaucrat, having 
worked at FDA for a number of years.
    I want to thank you for having me today, Senator, and for 
the opportunity to testify before the committee.
    I want to pick up on some of the discussion around the 
regulatory failure and around the lack of competition. The lack 
of competition in this market and for the EpiPen product does 
stem from regulatory failure stemming from FDA policy, and I 
think that policy can be fixed.
    The first breakdown, in my view, is just the sort of 
growing cost and complexity of that FDA approval process. To 
give you some statistics on that, for generic drugs that were 
launched in 2015, it took about 4 years for them to be 
approved, to go through the FDA process, largely because less 
than 1 percent of the applications actually get reviewed and 
approved on their first cycles. You have multiple cycling of 
these generic applications, and often it's over minor issues 
that don't get to the overall safety and effectiveness of the 
products.
    At the same time that the complexity has gone up, so has 
the cost. When I was at FDA, we used to, as a rule of thumb, 
say that a generic drug application--to file and get it through 
FDA would cost about a million dollars, and a category of drugs 
would have to reach about $10 million in total revenue to be 
genericized, to have sufficient revenue to make it worth filing 
that million-dollar application.
    Today, it can cost upwards of $20 million to file a generic 
drug application, and the general market rule of thumb is that 
a drug would have to fetch between $25 million to $50 million 
in revenue to justify the investment. So you have a situation 
where you have these low utilization products on the market 
that don't have any competition.
    Of about 1,300 branded drugs on the market, 10 percent have 
lost all patent protection and only have one competitor. These 
are some of the high priced drugs that we have been talking 
about in the news, drugs like clomipramine, which had an 1,800 
percent price hike from 2013 to 2014; fluconazole, a 996 
percent increase over the same year; doxazosin, a 1,169 percent 
increase. You have one competitor on the market. They have to 
amortize the cost of developing that product over a very low 
volume. There's no competitors coming in trying to drive the 
price down, and you end up having these big price increases.
    These problems are compounded when it comes to the class of 
generics that I would call complex generics or complex drugs. 
Typically, a complex drug is a drug that has something unusual 
about its formulation or its mechanism of action that makes it 
hard to determine that it's the same exact drug as the drug 
it's trying to copy based on a traditional test that we require 
as part of the generic drug process.
    The generic drug process requires what are called bio-
equivalents and bio-availability studies, which basically means 
that if you take the drug and you can measure the drug in 
someone's blood at the same level and in the same proportion as 
the drug it's trying to copy, you can get approval just on the 
basis of those tests, just by showing that your drug gets into 
the blood the same way and stays in the blood for the same 
length of time. That was built for a world when drugs were 
fairly simple chemicals. They were all pills. They were small 
molecules.
    In a world where drugs are complex and just merely 
measuring them in the blood isn't a good approximation of what 
their benefit might be, it's a lot harder to put those drugs 
through the traditional generic drug process. Think, for 
example, of a drug that acts locally like a metered dose 
inhaler for asthma. It's acting directly on the lungs, so 
measuring how much of that drug gets into the blood isn't going 
to be a good approximation for how it works in the lungs. In 
fact, it is the case that we don't have generic competition to 
some very expensive metered dose inhalers for asthma that have 
long lost patent protection.
    Or think of a topical agent like a dermatological cream. If 
you want to know why old acyclovir costs so much, it's because 
it's hard to develop a generic formulation of something that 
acts locally and topically.
    In the case of EpiPen, it too would fall into this category 
of complex generics, and the complexity here is the device. 
It's the product for delivering the drug, the auto injector. 
The problem is that if someone wants to copy EpiPen, the law 
says that they have to have the exact same instructions for use 
in their label as EpiPen. In fact, Mylan has patented some of 
the unique attributes of their auto injector that deal with how 
you would instruct a patient to use it. If someone wants to 
copy EpiPen, they basically have to copy EpiPen's instructions 
for use, but the instructions for use deal with patented 
aspects of the auto injector.
    There's a catch-22 here. If someone wants to develop a 
different auto injector, a different form of epinephrine, a 
different device, and wants to get approval as a new drug, 
because they can't go through the generic drug process because 
they can't copy EpiPen's label, FDA might say to them, 
``Actually, we don't think you can be a new drug because you're 
basically the same ingredient as EpiPen so you have to go 
through the generic drug process.'' You can get caught in a 
catch-22 of sorts, and I think that there are companies caught 
in this process if you were to ask FDA.
    What's the up-shot here? The generic drug law is a very old 
law that was written at a time when drugs were very different 
and were basically simple chemicals. Now that we have these 
categories of complex generics, we might think about changing 
the law to allow FDA to have more discretion to ask for 
different complements of information for the purposes of 
developing generic copies of some of these drugs.
    In the case of EpiPen, that might mean allowing a generic 
copy to EpiPen to have slightly different instructions for use, 
as long as it's not going to create a patient safety issue, but 
still be considered a generic formulation of EpiPen and still 
be substitutable at the point of the pharmacy to provide that 
kind of price competition that we seek in the market.
    With that, I'd be happy to answer questions. I appreciate 
being here.
    [The prepared statement of Dr. Gottlieb follows:]

             Prepared Statement of Scott Gottlieb, M.D.\1\
---------------------------------------------------------------------------

    \1\ The American Enterprise Institute for Public Policy Research 
(AEI) is a nonpartisan, nonprofit, 501(c)(3) educational organization 
and does not take institutional positions on any issues. The views 
expressed in this testimony are those of the author.
---------------------------------------------------------------------------
    Mr. Chairman, thank you for the opportunity to testify before the 
committee.
    The rising list price of drugs such as the lifesaving EpiPen 
autoinjector,\2\ coupled to the increasing exposure that consumers have 
to these costs as a consequence of secular change in the design of 
insurance coverage, has appropriately focused increasing scrutiny on 
how drugs are priced. It's often argued that drugs are one of the last 
vestiges of market-based pricing in our highly regulated health care 
industry. By contrast, regulators in Washington set most prices for 
clinical services. It's true that drug makers have more pricing 
discretion than other sectors in health care, whether it's in 
comparison to hospitals, providers, or even medical device makers. The 
market for drug products is hardly a utopia of free market pricing and 
vibrant competition. The drug market is subject to its own peculiar 
price setting and regulation. These rules undermine the competitive 
opportunities that could help inspire more choice and competition, and 
help lower costs.
---------------------------------------------------------------------------
    \2\ EpiPen, ``Prescribing Information,'' August 2012, https://
www.epipen.com/hcp/-/media/files/epipen/
prescribingpercent20information.pdf.
---------------------------------------------------------------------------
    Today I want to talk about three areas where I believe that 
regulation creates barriers to pharmaceutical competition. I will focus 
my remarks on how policymakers could remedy these market failures, 
enable more choice, and stimulate more price competition.
    The first issue deals with the way that the Food and Drug 
Administration (FDA) regulates drugs. Here I focus on what I categorize 
as complex medicines. These are circumstances where the drugs have 
certain intricacy associated with their formulation or delivery. 
Developing cheaper, copy versions of these complex drugs, after 
legitimate patents have lapsed, are made especially difficult by 
shortcomings in regulatory policy.
    The second area relates to existing price controls and mandatory 
rebates in programs such as Medicaid and 340B. These government rebate 
schemes put upward pressure on drug prices, by creating financial 
pressure to raise the list prices on drugs in order to provide fiscal 
room for accommodating the mandatory kickbacks. The problems associated 
with this system are longstanding and manifold. But these burdens are 
made more acute by a recent, sharp, and secular change in the structure 
of drug insurance coverage that has left more consumers exposed to the 
list price of drugs, before the rebates are applied.
    Consumers who increasingly find themselves underinsured for drugs--
even while more medical care shifts toward the use of higher-cost, 
specialty medicines--are not directly benefiting from the rebates that 
end up lowering the real, net price of the medicine. The health plan 
benefits from these rebates. They help offset premium costs. But the 
underinsured consumer can end up paying the full list price, not the 
post-rebate price.
    In the case of EpiPen, a drug product that's used for the emergency 
treatment of certain allergic reactions, the invoice price for a two-
pack EpiPen product in 2016 is currently about $600. But these invoice 
or ``list'' prices do not account for any rebates and other discounts. 
According to recently published data, the net price received by Mylan 
for each EpiPen 2-Pak was $274.\3\ This is the ``net'' or ``real'' 
price.
---------------------------------------------------------------------------
    \3\ Mary Caffrey, ``How Increased Cost Sharing Triggered the EpiPen 
Crisis,'' AJMC.com, August 24, 2016, http://www.ajmc.com/focus-of-the-
week/0816/how-increased-cost-sharing-triggered-the-epipen-crisis.
---------------------------------------------------------------------------
    The remaining 54 percent of the list price was split among Pharmacy 
Benefit Managers (PBMs), insurers, wholesalers, and pharmacy retailers.
    Toward addressing these challenges, our drug market would be more 
competitive if drug makers were able to offer--and purchasers able to 
demand--up-front discounts off the list price of drugs, rather than 
have to settle for back-ended rebates that aren't available to 
consumers when they purchase a drug at the pharmacy counter. But legal 
precedents that Congress could address through legislation largely 
stand in the way of the ability of drug purchasers to demand discounts, 
and the feasibility of drug makers to offer them.
    Third and finally, there are obstacles to the more competitive 
pricing of the sort of ``single source'' breakthrough medicines that 
are providing some of the most meaningful public health advances. These 
include branded drugs that provide substantial benefit and even 
outright cures for some forms of cancer and diseases such as Hepatitis 
C.
    We need to allow innovative drugs that offer meaningful advances in 
medical care to be priced in a market system based on the benefit that 
they offer, and the cost of the capital required to underwrite the long 
and uncertain development path for creating these sorts of 
breakthroughs. We don't want to undermine the model for investment and 
innovation that makes these advances possible and has given us the most 
vibrant market for the research and development of biotech and drug 
products in the world.
    At the same time, those who purchase these drugs should be able to 
demand prices that relate to the benefits that these products deliver 
and the circumstances for which they are prescribed. Right now, 
government rules regrettably prevent this sort of price discrimination 
based on indication and outcomes. Drug makers can't offer prices based 
on measures of benefit or grounded in the purpose for which a drug is 
prescribed. Patients can't demand these sorts of price concessions.
    fda regulation shortcomings obstruct copies of complex generics
    Drugs such as EpiPen fall into a category of products that one 
might classify as complex generic medicines. It's been noted that the 
active ingredient in the EpiPen is epinephrine, a very old drug. What 
makes the EpiPen unique is its delivery vehicle--an autoinjector that's 
packaged in a convenient, pen-like device. The product's key attribute 
is its ability to reliably deliver accurate doses of the essential 
medicine. This meaningful convenience and the product's reliability 
allowed EpiPen to capture a substantial portion of the market for 
injected epinephrine, but it is not the only such product available.
    The current market for these epinephrine products breaks down this 
way: Of the 4.2 million prescriptions for epinephrine products written 
in 2016, about 3.9 million were for combination products (i.e., 
autoinjectable devices containing the medicine, such as the EpiPen). 
According to IMS Health, Mylan represented about 3.8 million of these 
prescriptions. Impact Laboratories comprises the bulk of the remaining 
market share of autoinjectables. A third autoinjectable combination 
product, Auvi-Q marketed by Sanofi, was voluntarily recalled in 2015 
due to malfunctions with the device.\4\
---------------------------------------------------------------------------
    \4\ U.S. Food and Drug Administration, ``Sanofi US Issues Voluntary 
nationwide Recall of All Auvi-Q Due to Potential Inaccurate Dosage 
Delivery,'' October 13, 2015, http://www.fda.gov/Safety/Recalls/
ucm469980.htm.
---------------------------------------------------------------------------
    In addition to these autoinjectable products, a number of generic 
forms of epinephrine are available in ampule and vial form as well as 
packaged in a prefilled syringe. These products constitute a small 
number of prescriptions written for epinephrine in 2016. The top four 
vial manufacturers totaled about 217,000 prescriptions.
    While the EpiPen's manufacturer, Mylan, maintains some important 
intellectual property around its autoinjector that the company believes 
differentiates its device, this should not--and has not--prevented 
other companies from developing their own pen-like devices for 
autoinjecting epinephrine. However, the way that FDA administers its 
generic drug regulatory process has left the agency tied in some policy 
knots when approving similar products as generic substitutes for 
EpiPen. At the same time, other regulations make it hard for 
competitors to EpiPen to get their products approved as new, branded 
alternatives to EpiPen through the new drug approval pathway. Policy 
shortcomings can leave potential competitors in a regulatory Catch-22.
    One issue relates to the existing statute and FDA regulations that 
govern the approval of generic drugs, the Abbreviated New Drug 
Application (ANDA) process. FDA maintains that, if a patient has to be 
retrained to use a generic alternative to a branded product, then the 
alternative product cannot bear the same labeling as the drug it seeks 
to copy, and it cannot meet the burden of the ANDA process and be 
approved as a generic equivalent. The copy drug can't be considered the 
``same'' and serve as a substitutable alternative.
    This means that an alternative to a complex drug or a complex drug 
and device combination such as EpiPen would have to function in the 
exact same manner as EpiPen. To the extent that Mylan maintains some 
intellectual property around some of the functions of the EpiPen that 
correlate to some unique instructions on how to use the device, this 
can impede entry of generic competitors to EpiPen--even if most of the 
fundamental intellectual property (IP) on the drug and the device has 
lapsed.
    At the same time, under FDA's existing rules it could be difficult 
for a competitor to EpiPen to seek approval under the longer and 
costlier new drug approval process as a branded alternative to EpiPen. 
Here is the Catch-22, of sorts, at play. A competitor might not be able 
to go through the ANDA route, but may not qualify as a new drug, 
either.
    This could occur in an instance where a competitor to EpiPen might 
be filing for approval under a regulatory pathway referred to as 
505B(2). The regulatory pathway is named for the section of FDA's 
statute that gives rise to this alternative approval process.
    First, it would be unusual for FDA to approve a drug through the 
505B(2) pathway and allow it to be therapeutically substitutable for 
another product (in this case EpiPen). So any EpiPen alternative 
approved under 505B(2) would not be a true generic alternative to 
EpiPen. Such an approval would, nonetheless, still create market 
competition that could help lower costs. But there is a second 
regulatory obstacle. In situations where a product is likely to be a 
therapeutic equivalent to a drug, FDA encourages (and could in some 
cases require) a drug developer to file as an ANDA. So there could be 
situations where FDA compels drug makers to file under the ANDA route, 
only to hit a policy obstacle in trying to copy the instructions for 
use in the EpiPen label without infringing some of EpiPen's IP around 
its autoinjector and its unique functions.
    Such is the case with another epinephrine product, Adrenaclick.\5\ 
Like EpiPen, it is a formulation of epinephrine delivered through an 
autopen. Pharmacists cannot substitute it for EpiPen, despite the 
similarities. That's because while it's the same drug, Adrenaclick has 
a different autoinjector and, thus, bears a different set of 
instructions for using the device. It cannot be approved as a generic 
product that is substitutable for EpiPen.
---------------------------------------------------------------------------
    \5\ The Adrenaclick sells for a list price of around $140 per unit.
---------------------------------------------------------------------------
    These issues fall broadly into a category of challenges that relate 
to the approval of ``complex generic drugs.'' \6\ While there is no 
official definition of ``complex'' generics, one can broadly define 
complex generics as generic drugs for which it is particularly 
difficult to establish therapeutic equivalence as defined in the Orange 
Book.
---------------------------------------------------------------------------
    \6\ Robert Lionberger. ``Complex Generic Drugs,'' presentation at 
the Generic Pharmaceutical Association Fall Technical Meeting, October 
29, 2013, http://www.fda.gov/downloads/AboutFDA/CentersOffices/
OfficeofMedicalProductsandTobacco/CDER/UCM374191.pdf.
---------------------------------------------------------------------------
    Some complex generics present significant challenges in 
establishing pharmaceutical equivalence due to problems related to 
physiochemical characterization. For some, a simple bioequivalence 
study is not enough to establish that the generic drug will have the 
same clinical and safety profile as the reference-listed drug that it 
seeks to copy.\7\
---------------------------------------------------------------------------
    \7\ Aloka Srinivasan, ``Complex Generics: Maximizing FDA Approval 
Prospects'' Parexel, 2015, https://www.parexel.com/files/6714/3076/
9385/ComplexGenerics_WPApril2015_final.pdf.
---------------------------------------------------------------------------
    In soliciting a study from the Government Accountability Office, 
Congress defined complex generics as drugs that were not fully 
characterized because the active pharmaceutical ingredient has 
molecular diversity, because scientific analytic methodologies are 
unable to fully identify the molecular structures and physiochemical 
properties of the active ingredient, and because the nature of the 
active ingredient is not understood well enough to identify the drug's 
mechanism of action that produces its therapeutic effect.\8\
---------------------------------------------------------------------------
    \8\ Zachary Brennan, ``House Panel Calls on GAO to Study FDA's 
Approval Pathway for Complex Generics,'' Regulatory Affairs 
Professionals Society, December 15, 2015, http://www.raps.org/
Regulatory-Focus/News/2015/12/15/23775/House-Panel-Calls-on-GAO-to-
Study-FDApercentE2percent80percent99s-Approval-Pathway-for-Complex-
Generics/.
---------------------------------------------------------------------------
    Similarly, complex drugs have also been defined by authors as 
nonbiological products ``where the active substance is not a homo-
molecular structure, but consists of different (closely related and 
often nano-particulate) structures that cannot be isolated and fully 
quantitated, characterized and/or described by state-of-the-art 
physicochemical analytical means and where the clinical meaning of the 
differences is not known.'' \9\ In this regard, complex drugs can share 
characteristics with biologicals.
---------------------------------------------------------------------------
    \9\ Huub Schellekens et al., ``How to Regulate Nonbiological 
Complex Drugs (NBCD) and Their Follow-On Versions: Points to 
Consider,'' AAPS Journal 16, no. 1 (January 2014): 15-21, https://
www.ncbi.nlm.nih.gov/pmc/articles/PMC3889532/.
---------------------------------------------------------------------------
    FDA has defined complex generics more broadly to include these 
circumstances, as well as situations such as EpiPen, where the 
complexity is related to the drug's delivery. This could include 
situations like EpiPen, where a drug is delivered through a complex 
device.
    This might involve, for example, a drug that acts locally on tissue 
lining the gut (such as oral vancomycin) or an inhaled drug that acts 
directly on the lungs (like metered dose inhalers (MDIs) for the 
treatment of asthma and other lung diseases). Complex drugs might also 
be one that is delivered through a complicated delivery mechanism such 
as EpiPen or, to take another example, a drug delivered through a 
controlled-release patch.
    FDA has faced perpetual policy challenges, in part of its own 
making, when it has tried to ``genericize'' a growing number of these 
complex drugs through its ANDA pathway. Because of the FDA's policy 
constraints, as well as its own scientific ambiguity when advancing 
regulatory principles for developing copies of complex drugs, sponsors 
often say that they feel like they are ``shooting in the dark'' when 
developing the product, preparing dossier for an effective FDA filing, 
or engaging in the back-and-forth between FDA and the company during 
the review.
    For example, the agency delayed for years the approval of a generic 
alternative to long-acting heparin--long after the legitimate 
intellectual property on that medicine had lapsed.\10\ Similar delays 
challenged the approval of complex generic formulations, such as oral 
vancomycin, liposomal Doxorubicin HCl injection,\11\ and topical 
Acyclovir ointment.
---------------------------------------------------------------------------
    \10\ Alicia Mundy, ``FDA Approves Generic Lovenox,'' Wall Street 
Journal, July 24, 2010, http://www.wsj.com/articles/
SB10001424052748703294904575385133623904548.
    \11\ Rao N.V.S. Mamidi et al., ``Pharmacokinetics, Efficacy and 
Toxicity of Different Pegylated Liposomal Doxorubicin Formulations in 
Preclinical Models: Is a Conventional Bioequivalence Approach 
Sufficient to Ensure Therapeutic Equivalence of Pegylated Liposomal 
Doxorubicin Products?'' Cancer Chemotherapy and Pharmacology 66, no. 6 
(November 2010):1173-84, https://www.ncbi.nlm.nih.gov/pubmed/20661737.
---------------------------------------------------------------------------
    In other cases, FDA made errors in how it approved generic 
alternatives to complex drugs like IV iron, requiring its decisions to 
be revisited. Or FDA established regulatory principles that were widely 
criticized and ultimately rescinded, such as when FDA tried to address 
the generic approval of certain eye drops that act topically on the 
eye. In the latter case, for products that act locally on tissue rather 
than acting systemically after being absorbed into the blood, FDA can 
lack reliable, rigorous principles for demonstrating sameness in how 
two versions of a drug act on the target organ.
    The problem is that the generic drug approval process was crafted 
at a time when most drugs were relatively simple, small molecule pills. 
The process for copying these drugs was relatively straightforward. The 
system for proving sameness largely turned on the ability to show that 
a copy of a drug can get into the blood at the same levels and in the 
same timeframe as the branded drug that it was seeking to emulate. It 
could then be postulated, based on these ``bioequivalence'' and 
``bioavailability'' studies, that the generic drug would have the same 
therapeutic profile as the branded drug that it sought to copy.
    This classical generic pathway was sufficient for many well-
defined, small, low molecular weight drugs where the analytical testing 
fully characterized the product and showed pharmaceutical sameness to 
the reference-listed drug. Together with a proof of bioequivalence to 
the reference product, this information allowed for the submission of 
an abbreviated file (ANDA) with a waiver for efficacy and safety 
studies. FDA would nonetheless be able to declare that the copy was 
fully substitutable for the reference drug.
    With complex generics, the ability to determine sameness based on 
bioequivalence and bioavailability is sometimes not as straightforward. 
That might be because the complex drugs act locally on an organ and 
therefore, the level of drug found in the blood is not an effective 
surrogate for surmising its therapeutic effect. Or the complex drug 
might be an intricate formulation, where the concentration of active 
ingredient found in the blood cannot be accurately measured. Or the 
drug might be like the EpiPen and involve a complex delivery system 
that requires instructions for use that cannot be precisely copied in 
labeling from one version of the product to the next.
    As a consequence, I believe that Congress should consider 
legislation to modernize the generic drug framework to allow FDA 
greater discretion in the kinds of data it relies on for its generic 
approvals in this narrow category of complex drugs. This would require, 
for example, granting FDA the ability to ask for more than just 
bioequivalence and bioavailability data in making judgments around 
sameness. Or it might require Congress to grant FDA more discretion to 
make minor modifications in generic labeling to account for small 
variations between a branded drug and the proposed generic copy, for 
example, when instructions for use might be marginally different.
    It's noteworthy that generic industry stakeholders named the 
creation of a specialized review pathway for complex abbreviated new 
drug applications as a priority during user fee negotiations. The 
agency has also discussed with generic drug manufacturers the need for 
more clarity from FDA in this pre-ANDA space, according to meeting 
minutes.
    These challenges with the complex drugs are compounded by the 
overall slowness and inefficiency of the generic drug approval process. 
As I recently noted in The Wall Street Journal,\12\ the complexity and 
cost of completing even an average (less complex) generic drug 
application has also grown enormously. In 2003, when I began working at 
the FDA, we estimated that it cost less than $1 million for a firm to 
file a generic drug application. A drug would have to earn about $10 
million in annual revenue before it would be subject to generic 
competition. Today, filing a generic application requires an average of 
about $5 million and can cost as much as $15 million. This means that a 
drug may not face brisk generic competition until it exceeds $25 
million in annual revenue.
---------------------------------------------------------------------------
    \12\ Scott Gottlieb, ``How Obama's FDA Keeps Generic Drugs off the 
Market,'' Wall Street Journal, August 19, 2016, http://www.wsj.com/
articles/how-obamas-fda-keeps-generic-drugs-off-the-market-1471645550.
---------------------------------------------------------------------------
    As I previously noted, the key to the generic economic model is to 
keep entry prices low enough to attract multiple competitors. One study 
estimated the cost to consumers of generics to be 90 percent of the 
branded drug's price if there is only one generic entrant. But the 
price falls to 63 percent if there are five competitors and 40 percent 
when there are 10 competitors. Yet of the 1,328 branded drugs on the 
market, about 10 percent have seen patents and exclusivities expire, 
but face no generic competition.\13\
---------------------------------------------------------------------------
    \13\ U.S. Department of Health and Human Services, Office of the 
Assistant Secretary for Planning and Evaluation, ``Understanding Recent 
Trends in Generic Drug Prices,'' January 27, 2016, https://
aspe.hhs.gov/pdf-report/understanding-recent-trends-generic-drug-
prices.
---------------------------------------------------------------------------
    Some of these are the high-cost medicines that are the subject of 
political wrangling, drugs such as clomipramine (which saw a 1,818 
percent price hike from 2013 to 2014); fluconazole (996 percent 
increase); and doxazosin (1,169 percent). Each of these drugs accounts 
for less than $2 million in total Medicaid spending, meaning that very 
few people are using them. Given the high generic entry costs and the 
infrequent use of these drugs, it's often no longer economically viable 
for more than one firm to make them.
    Owing to these economic challenges, infrequently used generics may 
now have only one competitor and cost as much as branded drugs. When 
the price of a drug rises, it becomes profitable and the target of new 
competition. The FDA recently committed to review new generic drug 
applications in a 15-month cycle, an improvement over a median of more 
than 2 years for applications submitted in 2013.\14\ For generics filed 
in 2009, the median review time exceeds 3 years. Yet generics launched 
in 2015 took about 4 years for the FDA to approve, since less than 2 
percent of applications were approved on their first submission.\15\ 
FDA committed to improve first-cycle approvals, but it still rejects 
most applications before demanding resubmissions, delaying 
competition.\16\
---------------------------------------------------------------------------
    \14\ U.S. Food and Drug Administration, ``FDA/GPhA: Quarterly 
Meeting on GDUFA,'' March 23, 2015, http://www.fda.gov/downloads/Drugs/
DevelopmentApprovalProcess/HowDrugsare
DevelopedandApproved/ApprovalApplications/
AbbreviatedNewDrugApplicationANDAGenerics/UCM442070.pdf.
    \15\ Janet Woodcock, ``Implementation of the Generic Drug User Fee 
Amendments of 2012 (GDUFA),'' testimony before the Committee on Health, 
Education, Labor, and Pensions, U.S. Senate, January 28, 2016, http://
www.help.senate.gov/imo/media/doc/Woodcock5.pdf.
    \16\ Gottlieb. ``How Obama's FDA Keeps Generic Drugs off the 
Market.''
---------------------------------------------------------------------------
    Toward addressing these challenges, in addition to defining a new 
path for complex generic drugs, FDA should also prioritize files for 
these sorts of busted generic drug categories, especially where the 
generic targets an uncommon and serious ailment. Companies that pursue 
copies of these ``discarded'' generics could receive a voucher that 
would allow them to get expedited review of another generic drug. The 
value of this voucher would give firms more incentive to market copies 
of low volume generics.
    FDA must also scrap a draft rule it crafted to deliberately expose 
generic companies to rampant product liability suits--the so-called 
generic drug labeling rule.\17\ FDA also needs to tailor its oversight 
of manufacturing to the way that generics operate, usually by 
manufacturing dozens of different drugs on each production line and 
hundreds of different medicines in a single plant. Right now, FDA is 
trying to force generics into the much costlier way that branded firms 
operate their manufacturing plants, by requiring that generic product 
lines be dedicated to just one or two different drug products.
---------------------------------------------------------------------------
    \17\ Ed Silverman, ``Generic Drug-Safety Rules Debated,'' Wall 
Street Journal, February 26, 2015, http://www.wsj.com/articles/generic-
drug-safety-rules-debated-1425009063.
---------------------------------------------------------------------------
    The regulatory delays are even more apparent with the complex 
drugs. Yet these complex medicines comprise a growing and important 
portion of our therapeutic armamentarium. The generic entry of some 
important copies of these medicines, once the legitimate intellectual 
property has lapsed on the branded alternatives, has sometimes been 
needlessly delayed. This saddles consumers with unnecessary costs that 
were never intended when the generic pathway was envisioned. These 
shortcomings largely stem from the absence of scientific tools for 
determining sameness in these settings, and the regulatory framework to 
efficiently approve these copies through FDA's ANDA pathway. Yet the 
agency insists on trying to force these drugs down the traditional 
generic drug approval process. It's time for Congress to define a more 
efficient pathway.
        price controls force rebates at the expense of discounts
    In the cost of medicines, another challenge facing consumers is the 
growing gap between the list price of drugs and the actual, net price 
paid by those who purchase the medicines on their behalf. In many cases 
the average net price is much lower than the list price. In fact, the 
average net price for drugs actually rose at a 5-year low in 2015 and 
is rising in relative concert with overall health care inflation.\18\
---------------------------------------------------------------------------
    \18\ Policy and Medicine, ``IMS Releases 2016 Report on 
Prescription Drug Spending--Net Price Growth 2.8 percent in 2015,'' May 
2, 2016, http://www.policymed.com/2016/05/ims-releases-2016-report-on-
prescription-drug-spending-net-price-growth-28-in-2015.html.
---------------------------------------------------------------------------
    But the list prices of drugs are rising much more sharply. The gap 
between these two prices--the list price and the real, net price 
actually paid by health plans--reflects rebates that drug makers 
eventually pay to health plans as a way to provide money off the 
sticker price of a medicine. This byzantine system is an unintended 
consequence of past policymaking. But its growing impact on consumers 
is unmistakable.
    As more consumers find themselves on health plans that have adopted 
very high deductibles, that also use closed and narrow drug formularies 
that leave a growing number of important medicines completely 
uncovered, and that use fixed coinsurance rather than fixed co-pays as 
a way to distribute costs to consumers, these conditions mean that the 
high list prices on drugs are the prices being paid by a growing number 
of consumers when they buy medicines at the pharmacy counter. Recent 
data from Kaiser that examined drug spending from 2004 to 2014 showed 
just how much these out-of-pocket costs have risen, far outpacing the 
costs paid by the health plans. Average payments toward deductibles 
more than tripled, rising 256 percent, and average payments toward 
coinsurance more than doubled, rising 107 percent. Over this time, 
average payments by health plans themselves increased only 58 
percent.\19\
---------------------------------------------------------------------------
    \19\ Henry J. Kaiser Family Foundation, ``2015 Employer Health 
Benefits Survey,'' September 22, 2015, http://kff.org/health-costs/
report/2015-employer-health-benefits-survey/view/exhibits/.
---------------------------------------------------------------------------
    In the end, insurers may ultimately pay a price for a medicine that 
is half the ``list'' price paid up front by the consumer. The consumer 
never receives the direct benefit of the rebate, which gets paid to the 
insurer. This is precisely the circumstance that occurred for many 
consumers who purchased EpiPen at or near its list price.
    These challenges are not just a function of high deductibles, which 
leave consumers exposed to the list cost of their drugs up to the point 
that they reach their deductibles. They are also a function of the 
growing use of narrow and closed drug formularies. These are schemes 
where insurers agree to cover to a shrinking list of drugs. When the 
drugs don't make it onto these narrow formulary lists, the closed 
structure of the formulary means that a drug is completely uncovered. 
Moreover, what consumers spend out of pocket doesn't count against 
their deductible or out of pocket maximums.
    Now that these insurance features have become a mainstay of plans 
sold in the Affordable Care Act and are being sanctioned--if not 
encouraged--by Federal regulators as a way to accommodate the law's 
other regulatory costs, these same insurance designs are being imported 
into employer-sponsored coverage and coverage sold outside the 
exchanges. The Kaiser Family Foundation says that a quarter of workers 
with employer sponsored insurance (ESI) must pay the full cost of drugs 
before their coverage kicks in, up from 17 percent in 2011.\20\
---------------------------------------------------------------------------
    \20\ Robert Langreth, ``Secret Rebates: Why Patients Pay $600 for 
Drugs That Cost $300,'' Bloomberg News, October 5, 2016, http://
www.bloomberg.com/news/articles/2016-10-05/patients-lose-out-on-big-
pharma-s-secret-rebate-merry-go-round.
---------------------------------------------------------------------------
    The problem is that our current system provides incentives for 
companies to push lists prices higher, only to rebate the money later 
on the back end. Yet the rebates don't benefit consumers equally and 
they don't necessarily help offset the costs paid by those who need a 
particular drug. The rebates eventually make their way back to health 
plans to help offset the collective costs of premiums. But if a patient 
needs a particular drug, they will increasingly find that they are 
paying the full, negotiated price at the pharmacy counter. They never 
see the real ``net'' price, after the rebate is applied much later. The 
rebate is paid to the health plan, not the patient buying the drug.
    Government policies help push the list prices higher, even as the 
net prices grow more slowly and in some cases even decline. For one 
thing, mandatory rebates required by programs such as Medicaid and 340B 
create incentives to launch drugs with high list prices if companies 
know they will be required to provide a fixed rebate off those charges. 
The use of average sales price in Medicare provides similar incentives 
to launch with a high list price, so do market conditions that largely 
prevent companies from offering up-front discounts to health plans and 
instead force them to compete based on providing rebates.
    Because companies can negotiate based only on providing rebates 
rather than discounts, they know that the list price will bear 
increasingly less relation to their real price.\21\
---------------------------------------------------------------------------
    \21\ Scott Gottlieb, ``Why Drug Makers Charge Outrageous Prices,'' 
CNBC, August 29, 2016, http://www.cnbc.com/2016/08/29/why-drug-makers-
charge-outrageous-prices-commentary.
html.
---------------------------------------------------------------------------
    This is another place where Congress can act to provide more market 
competition based on a system where purchasers can demand discounts up 
front, rather than back-ended rebates. Discounts would actually benefit 
consumers more evenly since consumers would have the opportunity to 
acquire drugs at the pharmacy at the discounted price.
    It gets to the issue of why there is this artificial divide between 
the list and net price in the first place. Why, in other words, does 
the discounting in the drug space take the form of rebates paid to 
pharmacy benefit managers through a convoluted system on the back end 
of the transaction, rather than an up-front discount on the drugs?
    It all stems from litigation in the late 1990s, brought by chain 
store pharmacies, that claimed that drug makers were colluding to 
discount to HMOs and not providing the same discounts to pharmacies, in 
violation of Sherman Antitrust Act. Drug makers contended that they did 
nothing wrong, and the discounts they made available to HMOs and 
providers were appropriate because these purchasers could move market 
share, while the pharmacies could not.\22\ The litigation, which 
comprised dozens of separate cases, was ultimately consolidated into a 
single class action. Drug makers eventually settled the suits. They 
agreed to offer the same price to all channel partners. In other words, 
discounts that they made available to HMOs would also be available to 
pharmacies.\23\
---------------------------------------------------------------------------
    \22\ 21 Collin Levey, ``Trial Lawyers Get Their Comeuppance,'' Wall 
Street Journal, July 19, 1999, http://www.wsj.com/articles/
SB932313148898376573.
    \23\ Milt Freudenheim, ``Drug Makers Settle Suit on Price Fixing,'' 
New York Times, February 10, 1996, http://www.nytimes.com/1996/02/10/
business/drug-makers-settle-suit-on-price-fixing
.html.
---------------------------------------------------------------------------
    To get around this outcome, the drug makers moved away from 
offering discounts and toward today's model of rebates. These rebates 
are based on complex formulas tied to some measure of units of a drug 
that are sold. The idea was that these rebates could be offered to 
everyone, including pharmacies. But the pharmacies would never be able 
to satisfy the burden of evidence to qualify for the rebates. Only the 
health plans could make the required representations related to how 
many units of a particular drug that it sold.
    This raises an interesting question: Could Congress legislate to 
make it legal for drug makers to engage in price discrimination based 
on purchaser, offering discounts to one channel and not to another, so 
long as the drug makers were not conspiring to offer similar discounts? 
The answer, probably, is yes. If drug makers could offer discounts, 
purchasers would start demanding them. A discount would potentially be 
far more equitable, transparent, and pro-competitive than a rebate--
especially where the rebate does not flow evenly to all consumers. 
Increasingly, it's consumers who are underinsured or uninsured that are 
stuck paying the full list price at the pharmacy counter.
    If the ``rebate'' came in the form of up-front discounts, rather 
than back-ended givebacks, more consumers who are underinsured would 
benefit from the negotiated ``real'' price.
  we should allow drugs to be priced based on outcomes and indications
    Third and finally, we need to allow drugs to be priced based on how 
they are being prescribed and the outcomes that they deliver. Right 
now, regulation largely prevents the same medicine from being sold at 
different prices when it's being used in different settings. For 
example, a drug must largely be sold at the same price whether it is 
used in a high-value indication or used for which there might be less 
evidence of benefit. The same rules also largely prevent drugs from 
being priced based differently based on measuring the outcomes that 
they deliver to a group of patients. Regulations largely foreclose 
these kinds of arrangements, referred to collectively as value-based 
contracts.
    Among other things, the Office of the Inspector General would 
probably view such indication-based discounts as an illegal inducement 
for doctors to prescribe more of a drug for a certain use. The FDA 
might interpret a contract tied to an indication or outcome that isn't 
precisely specified in the drug's FDA-approved label as a form of 
illegal, off-label promotion. In order to enable these arrangements, 
FDA would need to concede that commercial, contract-related 
communications constitute protected speech under the First Amendment 
and thus are not subject to the agency's active regulation.\24\
---------------------------------------------------------------------------
    \24\ Scott Gottlieb and Kavita Patel, ``A Fair Plan For Fairer Drug 
Prices,'' Health Affairs Blog, July 11, 2016, http://healthaffairs.org/
blog/2016/07/11/a-fair-plan-for-fairer-drug-prices/.
---------------------------------------------------------------------------
    The way that the Medicaid best price and average sales price (ASP) 
are calculated (two price schedules that are maintained by the Centers 
for Medicare and Medicaid Services (CMS) for the purpose of price 
setting) would also present an obstacle to these kinds of value-based 
contracts. Under these price schedules, when drug companies offer 
indication- or outcomes-based discounts, they would be penalized across 
all of the indications for which a drug is prescribed. The discounts 
offered in one indication-based contract would lower the cost paid by 
every plan that ties its price to the ASP and Medicaid best price. It 
would also mean that the benefit of these discounts would be available 
to heath plans--through a lower overall Medicaid best price and ASP--
even when the health plans don't enter into the same value-based 
contracts.
    Congress could act to provide a safe harbor when companies pursue 
these value-based contracts, to make sure that sponsors don't face 
regulatory obstacles from FDA, CMS, or OIG when the contracts meet 
certain public health goals. This could provide another vehicle for 
purchaser to demand more discounts from drug makers, and more ways to 
tie these discounts to circumstances and outcomes that matter most for 
patients.
                               conclusion
    These policies will take on increasing importance as the nature of 
drug coverage changes. These changes in coverage are partly a 
consequence of the Affordable Care Act, which favored narrow provider 
networks and drug formularies as a way to accommodate the cost of other 
regulatory priorities. This has left more consumers underinsured for 
their drug purchases. The exchange-based plans also relied on 
constructs like closed drug formularies. These same insurance 
constructs--having been rendered politically acceptable under the ACA--
are being imported into commercial insurance plans as well. The 
National Business Group on Health, in a 2016 survey, found that 50 
percent of employers reported that they plan to use a closed formulary 
to help control costs.\25\
---------------------------------------------------------------------------
    \25\ Stephen Miller, ``Employers Project Health Premium Hike of 6% 
in 2017,'' Society for Human Resource Management, August 10, 2016, 
https://www.shrm.org/resourcesandtools/hr-topics/benefits/pages/health-
premiums-2017.aspx.
---------------------------------------------------------------------------
    The result is a sharp, secular change in the structure of drug 
coverage. More consumers are paying the list price for drugs, not the 
lower net price eventually paid by health plans, after rebates are 
applied. Congress can act to increase competition by enabling more 
drugs to reach the market, especially low-cost generic medicines. And 
enabling more health plans to negotiate discounts that can directly 
benefit consumers.

    Senator Paul. Thank you. We'll save the questions--we'll go 
around and save the questions.
    Our next witness is Philip Almeter, who is the Senior 
Director of Pharmacy Acute Care Services and the 340B Programs 
at UK HealthCare here at the University of Kentucky.

   STATEMENT OF PHILIP J. ALMETER, PharmD, SENIOR DIRECTOR, 
PHARMACY ACUTE CARE SERVICES AND 340B PROGRAMS, UK HEALTHCARE, 
             UNIVERSITY OF KENTUCKY, LEXINGTON, KY

    Mr. Almeter. Thank you, Senator Paul, for the opportunity 
to provide testimony regarding the rising prices of medications 
in the United States. I am pleased to see that the HELP 
Committee has taken an interest in this issue.
    The University of Kentucky's UK HealthCare operates two 
hospitals, several ambulatory clinics, and six retail 
pharmacies, one of which is a specialty pharmacy. In fiscal 
year 2016, we saw 38,000 discharges, 1.29 million outpatient 
visits, and UK Pharmacy Services dispensed 430,000 outpatient 
prescriptions.
    Many of the medication price increases seen recently have 
affected UK and in my opinion can be classified into two basic 
groups: direct/obvious and indirect/less obvious. The direct/
obvious reasons include increases in innovation, consequences 
of the FDA's Unapproved Marketed Drugs Initiative, changes in 
ownership, and the sole source effect. Indirect/less obvious 
reasons are surrounding the pharmacy benefit management impact.
    The majority of the increases in innovation lies with the 
specialty pharmacy. In the last 5 years, spend with specialty 
medications has doubled, contributing to 70 percent of overall 
medication spend. The primary drivers for this were therapy 
developments for hepatitis, autoimmune diseases, and oncology, 
which accounted for $19.3 billion in the increased spend. I 
believe we will continue to see the cost of many new therapies 
remain expensive, which have a higher price ceiling than what 
is seen with non-specialty items.
    In 2006, the FDA announced its Unapproved Marketed Drugs 
Initiative, with the goal of bringing medications that do not 
currently have FDA approval for marketing into compliance with 
the approval provisions of the Federal Food, Drug, and Cosmetic 
Act, with one of the goals being to not adversely affect public 
health, imposing undue burden on consumers, or unnecessarily 
disrupting the market. My observations are that this new 
initiative incentivizes manufacturers to put forth R&D dollars 
for older agents in order to gain market exclusivity.
    With neostigmine, a medication used to reverse 
neuromuscular blocking agents, used since 1939, UK HealthCare 
has seen the price increase 519 percent in 3 years. This was 
started in December 2013 when eclat-funded studies and gained 
market approval from FDA. The FDA allowed other agents to enter 
the market, and in November 2015, the price increased further 
to 127 percent. In January, Fresenius Kabi also funded studies, 
receiving market approval. The price increased further in 
February 2015 to 519 percent, and it stayed there despite a 
third manufacturer, West-Ward, in December 2015 gaining FDA 
approval.
    With vasopressin, a medication used since the 1950s in the 
treatment of vasodilatory shock, a single manufacturer gained 
FDA approval in 2014. Since then, the other generic 
manufacturers have dropped out, leaving only one manufacturer 
of a critical medication, which puts patients at risk in case 
of a national shortage. The price increased 3,362 percent in 2 
years, and in the same time period, UK HealthCare has spent 
approximately $650,000 more on this medication.
    As a result of this initiative, medication spend has 
increased. However, these are the same medications that we have 
been using in the hospitals for decades.
    The change in ownership effect that has been seen with 
acquisitions of drugs like EpiPen is also impacting medications 
used specifically in the hospital setting. Nitroprusside saw 
price increases of 1,745 percent following Valeant's 
acquisition of this medication. Calcitonin injection saw a 
price increase of 1,258 percent and then again 3,259 percent in 
a period of 2 years following Mylan's acquisition of this 
medication. Unlike the FDA initiative, these manufacturers have 
not invested any dollars in R&D.
    A phenomenon that has been reported in the retail 
environment over the last 2 years is a sole source effect seen 
with many generics. These are typically older generic 
medications that have fallen out of favor due to other novel 
therapies. As manufacturers leave this market and only one or 
two remain, we are seeing skyrocketing price increases. This is 
impacting many patients who use older generic medications based 
on their affordability.
    Potential solutions to these issues include introduced 
legislation such as Senate Bill S. 3335, the Fair Drug Price 
Act of 2016, as well as asking FDA to consider performing an 
analysis on the market impact of the Unapproved Marketed Drugs 
Initiative thus far.
    Regarding the PBM impact, during the full House Committee 
on Oversight and Government Reform hearing on EpiPen, Heather 
Bresch, CEO of Mylan, stated that although the cost of the two-
pen EpiPen is $608, Mylan only receives $274 net revenue on the 
transaction. Questions should be asked as to where the 
remaining $334 go. Lack of transparency will obscure where 
every dollar goes. However, given the rapidly increasing 
profits of the larger PBMs, questions should be directed in 
this direction.
    PBMs have evolved since the 1970s such that we have seen 
unprecedented growth in consolidation, decreasing transparency, 
and conflicts of interest develop with PBM-owned mail order and 
specialty pharmacies. Introduced legislation that could improve 
transparency in this sector of healthcare are House Bill H.R. 
244, the MAC Transparency Act, and Senate Bill S. 3308, 
Improving Transparency and Accuracy in Medicare Part D Spending 
Act.
    Thank you for the opportunity to provide testimony today.
    [The prepared statement of Mr. Almeter follows:]

            Prepared Statement of Philip J. Almeter, PharmD

    Thank you, Senator Paul, and members of the Committee for the 
opportunity to provide testimony today regarding the rising medication 
prices in the United States. The University of Kentucky's UKHealthCare 
(UK) operates two hospitals numbering 945 beds, several ambulatory 
clinics and six retail pharmacies, one of which is a specialty 
pharmacy. In fiscal year 2016 UK saw 38K discharges, 1.29M outpatient 
visits, and UK Pharmacy Services dispensed 430K outpatient 
prescriptions.
    The medication price increases seen recently, that have affected 
UK, can be classified into a variety of categories but for the purposes 
of this testimony will be placed into two basic groups, Direct/Obvious 
and Indirect/Less Obvious. The Direct/Obvious reasons include increase 
innovation, consequences of the Food and Drug Administration (FDA) 
Unapproved Marketed Drugs Initiative, changes in ownership, and the 
sole source effect. The Indirect/Less Obvious reasons are surrounding 
the Pharmacy Benefit Management (PBM) Impact.
                        increases in innovation
    The majority of Increases in Innovation with medications can be 
generalized into the Specialty Pharmacy Phenomenon. Specialty 
medications now make up the majority of the drug development pipeline 
and within the last 5 years spend with specialty medications has 
doubled contributing to 70 percent of the overall medication spend 
between 2010 and 2015. The primary drivers for this growth were therapy 
developments in Hepatitis, autoimmune diseases, and oncology, which 
accounted for $19.3B in increased spend.\1\ For example, in the case of 
Hepatitis C, in 2014 there was an increase of 742 percent in the cost 
of treatment as Sovaldi, Olysio and Harvoni entered the market. In 2015 
the spend with Hepatitis C specialty improved with competition from 
newer agents (Technivie, Zepatier, and others) as well as more 
stringent insurer evaluations on appropriate use.\2\ Another example is 
specialty medication developments in the field of Oncology, which has 
had much innovation and thus spend. This has been demonstrated with 
advances in immunotherapy and approaches with combination regimens such 
that annual costs for therapy approach $295K per a patient. These 
regimens have demonstrated significant increases in survival compared 
to traditional standards of care.\3\ \4\ With the proliferation of this 
specialty medication phenomenon, we will continue to see the cost of 
many new therapies remain expensive, which have a higher price ceiling 
than what is seen with non-specialty items.
                fda unapproved marketed drugs initiative
    In 2006 the FDA announced its Unapproved Marketed Drugs Initiative 
with the goal of bringing medications that do not currently have FDA 
approval for marketing, due to a lack of safety and efficacy data, into 
compliance with the approval provisions of the Federal Food, Drug, and 
Cosmetic Act (the FD&C Act) 'without adversely affecting public health, 
imposing undue burdens on consumers, or unnecessarily disrupting the 
market.'' \5\ To put this into historical context, in 1938 the FD&C Act 
was enacted due to the 107 deaths that resulted from mistaken ingestion 
of diethylene glycol. The purpose of this Act was to ensure that 
medications were proven safe before use. Several drugs that were 
marketed before this Act were grand fathered in (e.g. levothyroxine, 
digoxin, nitroglycerine, and phenobarbital). The 1962 Kefauver-Harris 
Amendment to this Act was passed due to the serious birth defects seen 
with the tranquilizer medication, thalidomide. The purpose of this 
amendment was to ensure that medications also be proven to be effective 
before use. This requirement was also extended to medications that 
received FDA approval between 1938 and 1962. The initiative, which 
includes Prescription and Over the Counter medications, has the 
potential to impact as many as 5,000 agents.
    Although the intent of this initiative was not to disrupt the 
market, this has not been the case for hospitals. Below are two case 
examples with the medications neostigmine and vasopressin:

    Neostigmine: Observed price increase of 519 percent in 3 years.
         Originally patented in 1933 and approved in the United 
        States in 1939.
         Up until December 2013 there were a handful of generic 
        Neostigmine products that never went through formal FDA safety 
        and efficacy evaluations.
         December 2013--Eclat funded studies to evaluate the 
        use of what is already known with neostigmine and received 
        formal FDA approval for reversal of non-depolarizing 
        neuromuscular blocking agents after surgery.
                 FDA allowed time for other agents to enter the 
                market.
         November 2015--Price increased 127 percent.
         January 2015--Fresenius Kabi, following funded 
        studies, received FDA approval to enter the market.
         February 2015--Price increased further to 519 percent.
         December 2015--WestWard, following funded studies, 
        received FDA approval to enter the market.
         End result: a handful of manufacturers making the same 
        product used since the 1930s but there is a new average price 
        that is 519 percent higher.

         Impact:

                 Compared to fiscal year 2014, UK spent $243K 
                more in fiscal year 2015 and $259K more in fiscal year 
                2016.
                 Measures were taken to modify use as much as 
                possible.
                 The need for this agent has not changed; 
                however, in absence of these efforts UK would have 
                spent $700K more in the span of fiscal year 2015 and 
                fiscal year 2016.
     Vasopressin: Observed price increase of 3,362 percent in 2 
years.
         First used as a vasopressor agent in the 1950s.
         Par Pharmaceuticals funded studies to evaluate the use 
        of what is already known with vasopressin and received formal 
        FDA approval for use in increasing blood pressure in adults 
        with vasodilatory shock (e.g., post-cardiotomy or sepsis) who 
        remain hypotensive despite fluids and catecholamines.
         November 2014--Par gains approval and price increases 
        to 1,137 percent.
         April 2015--As other generics begin to drop out of the 
        market price increases 2,321 percent.
         January 2016--Price increases 2,787 percent.
         July 2016--Price increases 3,362 percent.

         Impact:

                 Compared to fiscal year 2014, UK spent $194K 
                more in fiscal year 2015 and $452K more in fiscal year 
                2016.
                 Measures were taken to modify use as much as 
                possible.
                 The need for this agent has not changed; 
                however, in absence of these efforts UK would have 
                spent $800K more in the span of fiscal year 2015 and 
                fiscal year 2016.
                       change in ownership effect
    Over the last few years a shift in the markets with generic 
medication price increases has gained much attention in the press. This 
is largely for the impact it has had on patients in the retail setting 
and the barriers that have come with making much needed medications 
unaffordable. The most notable examples have been seen with Mylan's 
EpiPen and Turing's Daraprim. This change in ownership effect has also 
been observed with medications that are largely used in hospitals, 
however, given that these medications are not dispensed in a fee-for 
service environment, public awareness to the extension of this issue is 
low. Unlike the examples listed above with the FDA initiative, the 
manufacturers of these generic medications have not invested dollars 
into research of the medications' safety and efficacy profiles. Below 
are 2 case examples with nitroprusside injection and calcitonin 
injection to demonstrate the financial impact of this effect on UK. 
Nitroprusside is used for the immediate reduction of blood pressure in 
hypertensive crises, for producing controlled hypotension to reduce 
bleeding during surgery, and for the treatment of acute congestive 
heart failure. Calcitonin is used for the early treatment of 
hypercalcemic emergencies.
     Nitroprusside Injection: Observed price increase of 1,745 
percent in less than 2 years.
         Since 1988 Hospira has owned and produced.
         December 2013--Marathon acquired and the price 
        increased 350 percent.
         February 2015--Valeant acquired and price increased 
        1,250 percent.
         July 2015--Valeant increase price 1,438 percent.
         August 2015--Valeant increased price 1,745 percent.

         Impact:

                 Compared to fiscal year 2014, UK spent $194K 
                more in fiscal year 2015 and $104K more in fiscal year 
                2016.
                 Measures were taken to modify use as much as 
                possible.
                 The need for this agent has not changed; 
                however, in absence of these efforts UK would have 
                spent $100K more in the span of fiscal year 2015 and 
                fiscal year 2016.

     Calcitonin Injection: Observed price increase of 3,259 
percent in a little over 3 years.

         Since 1986 Sebela has produced this product.
         August 2014--Increased price 1,258 percent (from the 
        price in January 2013).
         September 2015--Mylan acquired the product.
         March 2015--Increased price 2,823 percent.
         May 2016--Increased price 3,259 percent.

         Impact:

                 Compared to fiscal year 2014, UK spent $451K 
                more in fiscal year 2015 and $390K more in fiscal year 
                2016.
                 Measures were taken to modify use as much as 
                possible.
                 The need for this agent has not changed; 
                however, in absence of these efforts UK would have 
                spent $1.5M more in the span of fiscal year 2015 and 
                fiscal year 2016.

    It should be noted that in addition to the impact on medication 
spend, this has also led to a need for increased resources to manage. 
Both the FDA initiative and the change in ownership effect led UK to 
create a pharmacist role responsible for overseeing larger medication 
utilization initiatives 2 years ago. This role, filled by Dr. Jeremy 
Flynn, has been key in monitoring for price spikes, identifying current 
use of affected medications, gaining consensus from providers on how we 
can modify use (supported by evidence-based literature), and monitoring 
utilization moving forward. What is not known and has not been measured 
is the clinical outcomes associated with these practice changes. This 
month UK will be sending Dr. Flynn to Chicago for advanced analyst 
training so that outcomes can be measured in conjunction with these 
increasing utilization initiatives.
                           sole source effect
    A phenomenon that has been reported in the retail environment over 
the last 2 years is a sole source effect seen with many generic 
medications. The medications that are being affected by this are 
typically older therapies and have been somewhat replaced by novel 
therapies. With diminishing interest in these generic medications and 
manufacturers looking to invest in innovative new therapies, several 
generic manufactures are leaving this market. The result is that there 
may be one or two remaining manufacturers. When this occurs, price 
increases are not uncommon. Below is a table of medications reported by 
Vizient Inc. that have observed sharp price increases as a result of 
this sole source effect \6\:

 
------------------------------------------------------------------------
                                                               Percent
                                                                price
                     Generic medication                        increase
                                                              2014-2015
------------------------------------------------------------------------
Hydroxychloroquine 200 mg tablet...........................        1,245
Fluoxetine HCl 10 mg tablet................................        1,131
Atenolol 50 mg tablet......................................          803
Propranolol 40 mg tablet...................................          783
Digoxin 125 mcg tablet.....................................          681
------------------------------------------------------------------------

    It should be noted that this is similar to the impact often seen 
with medication shortages as generic injectable medications have seen 
drastic price increases when shortages occur.\7\
    A potential solution to some of the Direct/Obvious reasons listed 
above include S. 3335: Fair Accountability and Innovative Research 
(FAIR) Drug Pricing Act of 2016, introduced on September 15, 2016 by 
Senator Baldwin (WI). This bill contains language that would require 
manufacturers of certain drugs and biological products to report to the 
Department of Health and Human Services that result in a 10 percent or 
more increase in price over a 12-month-period.
    Additionally, consideration should be given by the FDA on analyzing 
the market impact of their Marketed Unapproved Drugs Initiative thus 
far. If the two medication examples listed above increased expenses in 
excess of $1M in a 2-year span of time for a single health system, then 
careful consideration should be given to the approach of this 
initiative as others in the potential denominator of 5,000 are 
considered.
                     pharmacy benefit manger impact
    During the Full House Committee on Oversight and Government Reform 
hearing on EpiPen, Heather Bresch, CEO of Mylan, stated that although 
the cost of the 2-pen EpiPen is $608, Mylan only receives $274 net 
revenue on the transaction.\8\ Questions should be asked as to where 
the remaining $334 goes. It is likely shared between the wholesaler, 
insurer, pharmacy, and PBM. Lack of transparency will obscure where 
every dollar goes, however, given the rapidly increasing profits of the 
larger PBMs, it is not unlikely that they are receiving the majority of 
this.
    PBMs are the middle men of sorts in the prescription drug industry 
coordinating the sale and reimbursement of prescription drugs between 
health insurance plan sponsors or employers, drug manufacturers, and 
local and national pharmacies. PBMs started out in the 1970s as 
entities that mostly performed claims processing. Much has changed over 
the years as PBMs now largely control the flow of medication from 
manufacturers to patients, control the formularies of covered 
medications, control the reimbursement amounts provided to pharmacies 
for dispensing medication and other related therapy management and 
counseling services, and run their own mail order and specialty 
pharmacies, which many patients are often required to use under certain 
plan designs. PBMs do provide valuable services, such as their touted 
ability to gain reductions in medication costs for plans and employers, 
provide national pharmacy access, and facilitate pharmacy benefits for 
a wide variety of clients.\9\ Despite these benefits some of the 
concerns with the evolved state of PBMs as it relates to rising 
medication costs are the considerable consolidation of the PBM market 
coupled with unprecedented growth, the lack of transparency in PBM 
operations and finances, and the PBM ownership of mail order and 
specialty pharmacies.
    The PBM market in the United States has undergone rapid 
consolidation to the point that it resembles an oligopoly. In 2012 the 
Federal Trade Commission (FTC) permitted Express Scripts Inc. (ESI) to 
acquire Medco (the two largest PBMs in the United States at the time), 
thus forming the largest specialty pharmacy, Accredo. Then in March 
2015 the FTC allowed United/Optum's acquisition of Catamaran (the third 
and fourth largest PBMs) to form OptumRx. Finally, in July 2015 the FTC 
allowed CVS Caremark (the largest PBM for Medicare Part D plans) to 
acquire Omnicare (the largest long-term care pharmacy), which is 
heavily reliant on Part D patients. This consolidation has led to three 
large PBMs (ESI, CVS Caremark and OptumRx) controlling approximately 80 
percent of the PBM market. Parallel to the consolidation, the two 
largest of these PBMs (ESI and CVS Caremark) have demonstrated a profit 
increase from approximately $900M to $6B (600 percent increase) in a 
span of 10 years.\10\
    The lack of transparency with what is occurring with rebates (as 
mentioned in the EpiPen hearing) and payments at the transactional 
level (adjudication and beyond) coupled with this consolidation and 
growth of the PBM industry has led many in the retail pharmacy business 
to question the practices of the PBMs. The advent of Direct and 
Indirect Remuneration (DIR) fees (a.k.a. ``Clawbacks'') has extended 
the timeframe for the dispensing transaction to take place long after 
the adjudication (sometimes weeks or months) so that PBMs can charge 
additional fees after the transaction making it difficult for pharmacy 
owners to determine profitable dispenses. Additionally, the pricing 
structure of many pharmacy contracts with PBMs is not transparent with 
regards to the Maximum Allowable Cost or MAC, making the MAC for many 
PBM agreements a moving target. In response, the industry is developing 
tools for pharmacies to monitor transaction payments from PBMs for any 
deviations in the MAC. However, even with the use of such tools, PBMs 
make it difficult for pharmacies to appeal incorrect MAC pricing 
claims.
    Tied into the rising price of medications is the PBM ownership of 
mail order and specialty pharmacies. PBMs are tasked with managing drug 
costs for health plans and employers by maintaining a formulary. 
However, if the PBM owns a pharmacy, will the PBM prefer medication A 
which is effective or medication B which is also effective but could 
have a better rebate and the cost of paying a pharmacy at the 
transaction level for the medication is irrelevant because it is owned 
by the PBM?
    This strong link between the PBMs and their owned pharmacies has 
had a direct impact on UK's specialty pharmacy in day-to-day management 
of patients. UK has had patients who wished to have their specialty 
medications filled with UK Specialty Pharmacy. In the process of 
completing the fill a Prior Authorization (PA) is often required. This 
involves contacting the PBM to make a case for approval of the therapy 
and often involves engaging the medical team, providing labs, and 
sharing information on previously failed therapies. Following the PA 
being issued by the PBM, UK pharmacy staff have learned to act promptly 
as there have been numerous instances where the PBM-owned pharmacy 
contacts the clinic staff via phone and asks for a duplicate 
prescription to be sent. Early on in UK's specialty pharmacy operation 
PBM-owned pharmacies could capture specialty prescription by this 
method; however, after much discussion with clinic staff over the 
frustrated patients who were forced to wait for their medication to be 
dispensed from a pharmacy States away, this PBM strategy has not been 
as successful.
    It is likely that this strategy has been successful in other 
pharmacy settings which simply do not have the resources to combat this 
conduct.
    There are several potential solutions to making this contributing 
sector to the true price of medications more transparent. H.R. 244: MAC 
Transparency Act (only pertains to Medicare), introduced on January 9, 
2015 by Rep. Doug Collins (GA). This bill contains language that would 
prohibit PBMs from transmitting patient information (including claims 
data) to PBM-owned pharmacies unless the plan enrollee voluntarily 
elects to allow this, and require PBMs to define and disclose MAC to 
participating Pharmacies, to identify the source for this calculation, 
to not update any more frequently than 7 days, and to establish a 
dispute resolution process for reimbursed claims that are below the 
acquisition cost. S. 3308: Improving Transparency and Accuracy in 
Medicare Part D Spending Act, introduced on September 12, 2016 by 
Senator Shelley Capito (WV), will allow for greater transparency at the 
claim level between retail pharmacies and PBMs as it will prevent 
Clawbacks from occurring and will require PBMs to be transparent about 
fees at the adjudication.
                               conclusion
    In closing I am pleased to see that legislation has been introduced 
to address the Direct/Obvious and Indirect/Less Obvious reasons for the 
medication price increases we have seen. It is my hope that public 
awareness of this issue in the retail environment will be extended to 
the hospital environment for the reasons listed above.
    Thank you, again, for the opportunity to provide testimony today. I 
am happy to answer any questions you have.
                               references
    1. Medicine Use and Spending in the US. IMS Institute. April 2016.
    2. Express Scripts 2015 Drug Trend Report.
    3. Helwick C. Cost of Immunotherapy Projected to Top $1 Million per 
Patient per Year. ASCO Post. July 10, 2015.
    4. Loftus P. FDA Approves Merck's Keytruda for Most Common Form of 
Lung Cancer. WSJ. October 2, 2015.
    5. Guidance for FDA Staff and Industry. Marketed Unapproved Drugs--
Compliance policy Guide. September 19, 2011.
    6. Lucio S, Birt A. Understanding Escalating Drug Prices and 
Mitigation Strategies. Vizient Webex. September 20, 2016.
    7. Erstad BL. Value-Based Medicine: Dollars and Sense. Crit Care 
Med. 2016 Feb;44(2):375-80.
    8. Testimony of Heather Bresch. Reviewing the rising price of 
EpiPens. Before the House Committee on Oversight and Government Reform. 
September 21, 2016.
    9. Jorgenson J, Zappa A. Is PBM Transparency an Answer to 
Controlling Rising Drug Costs? Am J Pharm Benefits. 2015;7(4):161-164.
    10. Testimony of David A. Balto. The State of Competition in the 
Pharmacy Benefits Manager and Pharmacy Marketplaces. Before the House 
Judiciary Subcommittee on Regulatory Reform, Commercial and Antitrust 
Law. November 17, 2015.

    Senator Paul. Thank you.
    Our final witness--and then we'll have some discussion--is 
Jim Waters, who is the President of the Bluegrass Institute for 
Public Policy Solutions.

  STATEMENT OF JIM WATERS, PRESIDENT, BLUEGRASS INSTITUTE FOR 
             PUBLIC POLICY SOLUTIONS, LEXINGTON, KY

    Mr. Waters. Thank you, Senator. Good afternoon.
    As Senator Paul said, I'm with the Bluegrass Institute for 
Public Policy Solutions. We are now celebrating our 13th year. 
We were founded in 2003 as a State-based free market think 
tank.
    Whether we're talking about manufacturing or education or 
healthcare or the development of new drugs, it's vital that we 
do understand that the free market does work when it's allowed 
to do so. Competition, as we've heard, drives innovation, and 
perhaps nowhere is that innovation more important than in the 
area of research and developing drugs that save lives.
    I'd like to tell a short story that I shared with 1,500 
freedom fighters at the State Policy Network to show that while 
there are risks and while regulators often claim that they're 
looking out for us and that they are being compassionate, the 
consequences of placing unmovable barriers to lifesaving drugs 
is the wrong approach, as it actually does end up costing 
rather than saving lives.
    Once upon a time, an eagle's egg was knocked loose from its 
nest, and it rolled down the mountain into a barnyard full of 
chickens. Intending compassion, these chickens committed to 
protecting that egg until it hatched, after which they raised 
this creature, not as a beautiful eagle, but as just another 
chicken who scratched for grubs and worms and flittered around 
the barnyard.
    One day, a neighbor convinced the farmer who owned these 
chickens to let him take that eagle up the mountain and see if 
he could fly. When that man released him, of course, that 
innate desire to live free and soar took over, and that 
majestic bird stretched his wings and flew into the sky.
    What if he hadn't? What if he had fallen to the ground and 
died? Would anyone dare claim that that neighbor had done evil 
in giving that eagle the opportunity to fly? Should we really 
have kind of a rope-a-dope drug approval system that says no, 
even to seriously ill or terminally ill human beings' right to 
try every option to save their lives, even if in the end it 
doesn't always work?
    What if medical missionary Dr. Kent Brantly had died of 
that humiliating wasting disease of Ebola, even after taking 
ZMapp while in Liberia, where he was 6,000 miles from family 
and utterly alone? Sure, he had a right to know that no human 
had ever been tested and that it hadn't fully passed all of the 
FDA safety protocols, which had been going on for years with 
that drug. Who should have told him that he had no such right 
to try it until some government agency finally got around to 
approving this drug, even as he stood close enough to death's 
door at age 33 to push it open?
    Who had the right to deny Kalamazoo College sophomore Emily 
Stillman the opportunity to try a vaccine against meningitis 
that was available but not yet approved by the drug 
bureaucracy, even after years of testing and trials. Too often, 
bureaucracy has cried in Chicken Little fashion, ``the sky 
might fall,'' while denying the Emily Stillmans of our world 
the right to try and save a life, her life, as if that life 
belonged to some government agency.
    Yet no government agency blocked Dr. Brantly's access to 
the experimental ZMapp and the ensuing miracle which finds him 
today fully healed and still serving the world's poor and 
downtrodden. It's a moving story, don't misunderstand. I'm very 
happy about what happened to him and for his family. What about 
all the others that also had a right to at least try? Who also 
could have lived a miracle?
    Twelve hundred people make it through the FDA's 
Compassionate Use Application each year. The process is so 
complicated. It's very time consuming and extremely expensive. 
Plus the FDA keeps no record of the many, many people who try 
but who are denied that application. The first step in that 
process alone is laborious. It requires a physician to complete 
an application to the FDA that takes around 100 hours just to 
fill out, after which the manufacturer also must submit lengthy 
documentation requirements.
    The FDA then has a month to review the submission and 
either grant or deny the request, and if there are any 
questions at all, that 1-month clock starts completely over 
from the very beginning. After the FDA approves a request, a 
separate committee not affiliated with the FDA, called an 
Institutional Review Board, also must approve the patient's use 
of the drug, and this board can also take up to a month to 
reach a decision. What do you think happens a lot of times 
during that process? Sadly, there are many documented cases of 
patients dying while their application is being considered 
through this process.
    While the FDA claims these regulations are needed to 
protect lives, in the end, they are too often costing lives. It 
seems like our government's experimental drug policy seems to 
have been more about control, about kind of picking and 
choosing, and EpiPen is a great example of this. Here we have a 
wonderful medical invention, and without the heavy-handed 
regulatory process currently enforced by the FDA, I'm convinced 
that other manufacturers would not only create a similar 
product, but an even better one.
    Perhaps most disturbing about the EpiPen situation is that 
the FDA, at least at this point, as we've heard, has limited 
manufacturing of this lifesaving device to pretty much a single 
company, and the reason they do it is important to understand. 
They do it under the guise of ensuring safety. We want to make 
sure this is safe before we allow other manufacturing of these 
types of drugs. Yet this regulatory overreach has not only 
dramatically increased the price of the product because there's 
no competition, but it also discourages other manufacturers 
from developing better products.
    This is cronyism at its worst, favoring a single company 
while shutting out other firms who would participate while also 
discouraging the research and development that would bring new, 
probably even better drugs to market. I would ask the question: 
Where is the compassion in forcing drug manufacturers through 
what amounts to be a 7 to 10-year, up to a $2 billion process 
for some new drugs just to get them to the marketplace while 
people die who were willing to accept the risk of those drugs 
that may not have completely jumped through all the FDA hoops? 
It doesn't seem compassionate, and it certainly doesn't seem 
fair.
    What if Dr. Brantly had taken ZMapp and then died anyhow? 
What if Emily Stillman had died even if she had taken the 
vaccine? Should that risk outweigh the potential of life 
restored? I have to ask: Should some government agency even be 
taking the temperature of such a risk with individuals willing 
to accept that?
    An alternative ending to that parable that's often been 
used tells about how the eagle died in that chicken coop, 
having never been given the opportunity to try, never knowing 
that he could fly. Who knows the miracles that await by giving 
those even at death's crossing the right to know, the right to 
try, the right to see if they just might soar once again as 
well. It has happened, you know.
    Thank you.
    [The prepared statement of Mr. Waters follows:]

                    Prepared Statement of Jim Waters

    Good afternoon. My name is Jim Waters, and I'm privileged to serve 
as president of the Bluegrass Institute for Public Policy Solutions, 
Kentucky's first and only free-market think tank, which was founded in 
2003.
    Whether we're talking about manufacturing, education or health 
care, it's vital that we understand that the free market works--when 
allowed to do so. Competition drives innovation. Perhaps nowhere is 
innovation more important than in the area of researching and 
developing medicines that save lives.
    I'd like to tell a short story to illustrate:

    Once upon a time, an eagle's egg was knocked loose from its nest 
and rolled down the mountain into a barnyard full of chickens. 
Intending compassion, these chickens committed to protecting this egg 
until it hatched, after which they raised this creature--not as a 
beautiful eagle--but as just another chicken who scratched for grub and 
worms and flittered around the barnyard.
    One day, a neighbor convinced the farmer who owned these chickens 
to let him take that eagle up the mountain to see if he could fly. When 
that man released him, that innate desire to live free and soar took 
over. That majestic bird stretched his wings and flew into the sky.
    But what if he hadn't? What if he'd fallen to the ground and died? 
Would anyone dare claim the neighbor had done evil in giving that eagle 
the opportunity to try?
    Should we really have a rope-a-dope drug-approval system that says 
``no'' even to terminally ill human beings' right to try every option 
to save their lives--even if--in the end--some of those lives do cease?
    What if medical missionary Dr. Kent Brantly had died of the 
humiliating, wasting disease of Ebola even after taking Zmapp while in 
Liberia--6,000 miles away from family and utterly alone? Sure, he had a 
right to know that no human had ever been tested and that it hadn't 
fully passed FDA safety review, which have been going on for years. But 
who should have told him that he had no such right to try it until some 
government agency finally got around to approving it, even as he stood 
close enough to death's door at age 33 to push it open?
    Who had the right to deny Kalamazoo College sophomore Emily 
Stillman the opportunity to try a vaccine against meningitis that was 
available but not yet approved by America's drug bureaucracy--even 
after years of testing and trial?
    Too often that bureaucracy has cried in chicken-little fashion: 
``the sky might fall'' while denying the Emily Stillmans of our world 
the right to try and save a life--her life . . . as if that life 
belonged to a government agency.
    Yet no government agency blocked Dr. Brantly's access to the 
experimental Zmapp and the ensuing miracle, which finds him today fully 
healed and still serving the world's poor and downtrodden.
    It's a moving story. Don't misunderstand. I'm very happy for him 
and his family. But what about all the others that also had a right to 
at least try? Who also could have lived a miracle?
    Twelve-hundred people make it through the FDA's ``compassionate 
use'' application each year. But the process is complicated, time-
consuming and expensive. The FDA keeps no record of the many, many 
people who try but are denied such application.
    The process is complicated, time-consuming and expensive. The first 
step in the process requires a doctor to complete an application to the 
FDA that takes around 100 hours to complete, after which the 
manufacturer must also submit lengthy documentation requirements. The 
FDA then has a month to review the submission and either grant or deny 
the request. If there are any questions, that 1-month clock starts 
over.
    After the FDA approves a request, a separate committee not 
affiliated with the FDA--called an Institutional Review Board--also 
must approve the patient's use of the drug. This board can also take up 
to a month to reach a decision.
    Sadly, there are many documented cases of patients dying while 
their application is being considered.
    It seems like our government's experimental drug policy has been 
more about control . . . about picking and choosing. EpiPen, for 
instance, is a wonderful drug. But without the heavy-handed regulatory 
process currently enforced by the FDA, I'm convinced other 
manufacturers could not only create similar--but better--products.
    Perhaps most disturbing about the EpiPen situation is that the FDA 
has limited the manufacturing of the lifesaving anti-allergic reaction 
device to a single company under the guise of ensuring safety. Yet this 
regulatory overreach has not only dramatically increased the price of 
the product, it has discouraged other manufacturers from developing 
even better products.
    This is cronyism at its worst--favoring a single company while 
shutting out other firms who want to participate and discouraging the 
research and development that would bring new and better drugs to 
market.
    Where's the compassion in forcing drug manufacturers through what 
amounts to be a 7-to-10-year, $2 billion process while people die who 
were willing to accept the risk of drugs that may not have completely 
jumped through all FDA hoops? It's not compassionate, and it certainly 
doesn't seem fair.
    What if Dr. Brantley had taken Zmapp and then died anyhow? What if 
Emily Stillman had died even if she had taken the vaccine? Should that 
risk outweigh the potential of life restored? Should some government 
agency even be taking the temperature of such a risk?
    An alternative ending to that parable that's often been used tells 
about how the eagle died in that chicken coop, having never been given 
the opportunity to try . . . never knowing he could fly. Who knows the 
miracles that await by giving those even at death's crossing the right 
to know, the right to try, the right to see if they just might soar 
once again?

    Senator Paul. Thank you, Jim. I may have to steal that 
eagle story sometime. It's pretty good.
    [Laughter.]
    Jim mentions an ancillary issue, which is the right to try 
for people who are terminally ill, and there is a bill 
percolating through--I think 30-some-odd State legislatures now 
passed it--and I'm a co-sponsor of it in the Congress, and we 
are trying to get that through as well.
    We had some moving testimony from some patients with ALS, 
and one of the points that they made was that a lot of 
treatment for a new disease may well be specifically targeted 
to you and to the genetic mutation you have. There's said to be 
over 20 different mutations for ALS. It's not all the same 
disease, and perhaps maybe you're going to go to a lab, and 
some day, they're going to draw your blood, look at your 
chromosomes, look at your genetic defect, and they can't do a 
1,000-person clinical trial on it because the treatment is 
going to be for you.
    It kind of goes to Dr. Gottlieb's point that maybe we have 
to look at our criteria. Maybe what we used to do 20 years ago 
shouldn't be the same.
    One of the most important things is when we're unhappy 
about something, that we look for the root cause and we don't 
blame the wrong person. We're all unhappy, uniformly unhappy, 
at how the price went up by 500 percent, but there's a couple 
of different reactions. We could say, ``Well, we need price 
controls. We just need to tell the companies they can only 
charge $100.'' Price controls were the disaster that brought 
down the Soviet Union and are the disaster that leads to 
poverty under socialism.
    What we have to say--well, was this a free market? Was this 
really capitalism, as Dr. Strow was saying? Are there barriers 
to entry that are government? Are some barriers acceptable? Are 
we going to let the government be involved in some safety and 
efficacy? Probably, yes, but can they go too far?
    The FDA, when we brought them in, they said to us, ``Oh, 
you fixed this a year ago''--we passed some reforms about a 
year ago--and they said, ``We're doing a lot better now,'' and 
I said, ``Well, it's been 7 years. How about the EpiPen 
alternative?''
    There are a lot of technical questions, and when you try to 
dig into this, if you bring the generic manufacturers in about 
these things, they're afraid to talk to us, because if I 
publicly state what any of the generic people are talking 
about--which they're allowed to tell me--they're afraid the FDA 
will punish them and will never approve their process. We ask 
the FDA, and they say it's proprietary--``We can't tell you any 
information about the applications.''
    It takes about four--3.7 times for the application to go to 
the FDA, come back, go to the FDA, come back, and 7 years is 
just, frankly, unacceptable. We do need to fix the system. With 
regard to EpiPen, it's both looking at people finagling or 
manipulating the patent system, and then it's also looking at 
speeding up the entry of new drugs into the marketplace, not 
only new drugs, but generic drugs.
    One of the things that I'd like to ask Dr. Gottlieb would 
be with regard to--we had these reforms, and I know you 
understand the reforms. Do you think the reforms were enough? 
Do you think the FDA is doing a better job? There's some 
indication that the application time may not have gotten 
shorter since the reforms. They tell us one thing, and then we 
look at the statistics and it doesn't necessarily seem to be 
better.
    Dr. Gottlieb. The statistics are getting better, because 
the cycling--they're trying to address the cycling. The overall 
length of time that it takes to review an application hasn't 
really gone down. They're reviewing more applications--they're 
getting more applications done within a certain timeframe, but 
they're still having these multiple cycles, and it's still 
taking a lot of years to get an application through. It's also 
too early to tell what impact the generic drug user fee law had 
on the process. It certainly gave them more resources.
    With respect to this particular issue, though, there hasn't 
been anything that's resolved this issue of these complex 
formulations, and these, frankly, end up being a lot of the new 
and more innovative drugs and a lot of very important drugs. 
There have been other cases where there have been drugs where 
patents have long since lapsed, and FDA has struggled to 
approve generic versions to those drugs.
    A classic example recently was lovenox. The lovenox patents 
were up for two or 3 years, and FDA was fumbling trying to get 
the generic entrants through the generic drug approval process. 
It relates back to, again, trying to fit these complex drugs 
through that old generic drug application, that old generic 
drug process.
    When I was at FDA, we were just starting to think about how 
we were going to approve generic copies of biosimilar drugs, 
and the FDA staff were arguing that they didn't need Congress 
to do anything. They didn't need new legislation. They could 
approve generic copies of biological drugs through a pathway 
called 505(b)(2) that existed. It turns out Congress did 
legislate, and thankfully, because if the FDA was struggling to 
try to approve these biologics through their traditional 
pathway or some nuance in the authorities that they thought 
they had, it wouldn't have gone as smoothly.
    The same thing is operative here. The FDA will argue that 
they don't need new authority to deal with these complex drugs, 
yet they keep making mistakes when it comes to trying to 
introduce competition. They argue that they can put it through 
their traditional process, but, in fact, they haven't been 
successful at doing that.
    This is a ripe opportunity for Congress to look at this 
whole category--to the extent that the category itself can be 
defined, and I think it can--and think of a sort of generic-
plus type of approval process that's a little different than 
the traditional process but allows these drugs to enter the 
market more quickly.
    Senator Paul. Going back to whether or not this is broken 
capitalism or whether this is cronyism or what we should do, 
some will propose that we just need to cap the price and have 
price controls on drugs and that, somehow, that's the answer.
    Dr. Strow, do you think this is a breakdown of capitalism, 
or do you think this is artificial barriers to entry from the 
government? What do you think of price controls?
    Mr. Strow. Price controls generally make me squeamish, but 
I'm going to come back to that. I'm just going to start with 
the simple answer of, yes, it's largely due to barriers to 
entry.
    Senator Paul. Governmental barriers.
    Mr. Strow. Government barriers to entry. Specifically, 
let's imagine a race. The gun is about to go off. We've got 
epinephrine or the EpiPen in one lane and a potential 
competitor in the next. The gun goes off. EpiPen takes off down 
the track, and you physically restrain the competitor and say, 
``You can't go yet. You have to start an FDA approval process, 
and 4 to 7 years down the line, we'll let you start running the 
race.'' You might imagine who's going to win that race, at a 
minimum, not just 4 to 7 years, but for some time after that.
    The thing is with the patent system, we know when that gun 
is supposed to go off. We know when the patent expires--and we 
can go back and argue about whether or not we should extend 
patents--but we do know when the patent expires. If we know 
that's when the race can start between the brand name and the 
generic guys, why don't we let the generic guys go through all 
the product testing before the gun goes off? Why don't we hit 
it so that when the gun goes off, everyone gets to run? That 
would dramatically increase the role of generics in the market 
and bring them to market more quickly.
    The overarching question we have to ask is: Does the FDA 
care about drug prices? We can argue that the reason they're 
set up is solely for drug safety, and if you're only looking at 
one end of the spectrum, then it's always going to be their 
incentive to have the safest possible thing, which is--safety 
is good, but they're not taking account of the tradeoffs.
    The question is: In their charter itself, should they be 
forced to consider safety at what cost? All kinds of levels of 
government have to do cost-benefit analysis, and FDA, I don't 
think, should be immune from that.
    I was going to hit on price controls. Let's take two 
scenarios. In one scenario, you're going to put price controls 
on for something that's patented. You just undid the patent 
protection. In another form, you either have a monopoly right 
to sell a product or you don't. If you come in on the back side 
and say, ``Yes, we'll give you a patent, but''--wink, wink, 
nod, nod--``we're going to tell you what to charge,'' there no 
longer is that incentive to innovate in existence in the first 
place. You'd be effectively getting rid of the patent system.
    The second question is: Do you want price controls for 
things that aren't subject to patents? Then the question 
becomes: Where is, again, the role of competition? Why would 
you need a price ceiling if new entrants could come in? We see 
from evidence in the drug industry itself and from the FDA, the 
evidence that they have collected, that when you allow the 
competition to happen, the competition does materialize and 
drug prices do fall. It would be a solution in search of a 
problem.
    Senator Paul. I like the idea of maybe starting a generic 
application process before it expires. If it's going to take 
you 4 years, if you took your 4 years before it expires, it 
wouldn't be as much of a complaint. All of us essentially 
acknowledge that we are not against patents and that we like 
the innovation that patents allow.
    Particularly if we're going to reform this in ways drug 
companies may not like--but if you reform it such that you 
speed up the process of getting the patent and getting the 
approval, then they have a longer period of time to enjoy their 
patent protection. You could speed it up on the tail end, the 
transition to generics, but you could also speed it up on the 
front end so they can make more money on the front end if they 
can get their FDA approval sooner, which sooner FDA approval, 
if done properly, is what we want--lifesaving drugs more 
quickly on the market.
    Does anybody else have a comment on Dr. Strow's comment on 
letting the generic application process start earlier? It 
doesn't start now, right? You have to wait until the end to 
file any paperwork?
    Mr. Waters. That would have a huge impact since 90 percent 
of all medicines filled in the United States are generic. 
Beginning that process earlier would certainly affect in a 
positive way--a lot of people.
    Senator Paul. I kind of wanted to broaden the debate beyond 
EpiPen, because Philip Almeter mentioned several of the drugs--
so did Dr. Gottlieb--of all the different drugs. This isn't a 
one drug thing. There's a host of these and many of them in the 
generic sphere.
    Sometimes we will ask: Why did everybody go out of 
business? We get these vague things, like voluntary recall or a 
manufacturing problem, and what I'm wondering is--and Scott may 
know this more than anybody else--is are they sometimes being 
told quietly by the FDA ``You're going to get a public 
punishment. You can voluntarily do this, or you can say 
manufacturing problem.'' In reality, it's the FDA that is 
shutting them down by saying ``You didn't pass a certain 
inspection.''
    Our understanding is that in the last couple of years--did 
something change to make it worse? Are there stepped-up 
investigations that are maybe knit-picking that really aren't 
going to the safety issue but are overwhelming some of the drug 
production, and then all of a sudden, we have no competitor 
because of an inspection process?
    Dr. Gottlieb. Right. It is the case that FDA dramatically 
changed its enforcement standard with respect to what we call 
good manufacturing practices or GMPs as they apply to the 
generic drug industry, out of a perception not entirely untrue 
that the generic industry was operating at a different 
standard, in some cases a lower standard, than the branded 
industry, and they wanted to bring everyone up to the same 
standard.
    They did that in a fashion where they went into these 
generic manufacturing plants and issued what we call 483s, 
which are findings of deficiencies, and the 483s become public 
and they create liability for the companies. If a company 
continues to operate a plant after it has received a sanction 
from the FDA saying that the plant is deficient in some 
significant way, that's a hard position to put a company in and 
for the company to continue operating.
    What happened was they did this, and they knocked off the 
market 25 percent of the parenteral drug manufacturing in the 
United States. By parenteral drug--injected drugs, and these 
are a lot of the drugs that have been in shortage and where the 
prices have gone up. Last year, we almost had a shortage of 
normal saline in this country because they knocked the plants--
--
    Senator Paul. That was a reaction to the contaminated 
steroid injections that happened at the company--what, up in 
Massachusetts or something?
    Dr. Gottlieb. I think it's actually the opposite. They did 
this prior to what happened in Massachusetts, and once these 
shortages were created by FDA for the branded drugs, more of 
the market shifted toward the compounded drugs, and that's why 
the utilization of the compounded drugs spiked. The FDA, by 
trying to address a risk in one context, actually increased the 
overall public health risk because more of the market shifted 
to less regulated products, the compounded products in the case 
that you referenced.
    A lot of that manufacturing is not coming back online. The 
FDA has still imposed requirements on the generic manufacturers 
that are much costlier than what they used to be. For example, 
a generic manufacturing plant might produce hundreds of drugs 
in a plant and literally dozens on a single manufacturing line. 
The branded industry might produce a single drug or two on a 
manufacturing line. FDA is increasingly saying, ``We want only 
a few drugs produced on a manufacturing line,'' because it 
makes it easier for them to oversee that manufacturing line. 
That's also very expensive, and it's not the expense at which 
the generic drug industry has traditionally operated. It's 
increasing the cost of the manufacturing.
    When you increase the cost of manufacturing a pill that 
used to cost 2 cents and now it costs 3 cents or 4 cents to 
manufacture, that's a 100 percent or 200 percent price 
increase. There's a cost of goods component here as a result of 
the regulatory increase that's contributing to the price 
increases that we're seeing in the market.
    Senator Paul. I guess what we have to look at is in the 
mission that the FDA is given--are they going in and--have we 
increased inspections that are shutting down plants because of 
a problem, or are we doing it just because of an increased 
zealousness, that we have decided that we want to inspect 
these, and that perhaps it isn't improving safety? They've made 
a unilateral decision without a real problem.
    Dr. Gottlieb. Right. My view has been it's a little bit of 
both, obviously, and there are situations where the FDA is on 
very firm ground in terms of shutting down a manufacturing 
facility. The larger problem is that there's a disconnect 
between the FDA field force that goes in and inspects these 
plants and issues these public findings and the policymakers 
back at FDA, the career staff who are more sensitive to 
considerations of what the real public health risk would be in 
allowing a plant to manufacture in some subpar State versus 
taking the manufacturing offline and creating unintended 
consequences.
    The policymakers in FDA have a very hard time getting 
control over the field force. The field force operates as sort 
of an independent law enforcement unit and doesn't really 
respond to those policy prerogatives. They'll go in and shut a 
plant down, even if the policymakers might say, ``Look, we 
would rather that plant continue to operate under close 
supervision while they remediate themselves because we don't 
want to precipitate a shortage that might force doctors and 
patients to have to use a compounded alternative that we know 
is a lot less safe.''
    That kind of teaming of those two regulatory pieces of FDA 
isn't happening. The only place it is happening is on the 
biologic side, and that's in large measure because after we had 
those shortages of the flu vaccine that you'll remember, you 
saw long lines in Florida because the FDA shut down some flu 
vaccine manufacturers right before flu season. CBER, the Center 
for Biologics, adopted what they call team biologics, where 
they basically forced the field force and the review staff to 
work together on these inspections, and so you had inspections 
happen that were much more sensitive to what some of the 
potential consequences would be of shutting down a facility.
    That's not happening as much on the drug side. You're 
seeing unilateral decisions taken by the field force to shut 
certain facilities or force their shuttering, and then the 
consequences are felt by the career staff at FDA who worry 
about the unintended consequences.
    Senator Paul. I want to go back briefly to what Dr. 
Gottlieb said earlier. Neither side will tell us--the FDA or 
the people making the generics--exactly why it hasn't been 
approved. There are articles out there saying that it's not 
enough the same.
    The question I asked to the FDA was, ``What does that mean? 
Have you defined a sameness standard?'' They said, ``We're 
working on it.'' Companies have gone through 7 years of being 
denied, and there's no written standard of what the same means. 
I say, ``Does it inject .3 milligrams, the same as the 
EpiPen?'' They won't tell you that, either, but I think the 
answer is yes.
    I think it works. It injects the proper dose. It's not 
harming anybody. It may be that the instructions aren't exactly 
the same, and I was like, ``Are you telling me that if the 
spring that launches the needle is a right-handed spring versus 
a left-handed spring, it wouldn't be the same?'' They were 
like--essentially, yes.
    It's a distinction without a difference that's stopping 
things, so they're screwing up a whole marketplace, making us 
wait 7 years for competition based on something that actually 
works. The catch-22 is they're saying it's not enough the same, 
but if it's different, then give them a patent. Give them a 
patent for a brand new device. Then they'll be sued also.
    What happens is every time a generic wants to come on the 
market, they immediately get sued by the patented every time, 
and then there's a 30-month waiting period. We're looking at 
maybe shortening the 30-month waiting period. They're going to 
sue them every time. Why don't we shorten it and make it 12 
months or 15 months?
    I'm of the belief that we need more oversight of the FDA, 
and the last time around--they want to put soft words in for 
the FDA, like they may do something. I want to say that they 
shall do something. They need more oversight from us, because 
left to their own devices, they don't have a good track record. 
I guess you could argue that for safety, we have done a pretty 
good job in our country.
    I wanted to see if anybody else knew anything about the 
tetracycline problem or some of these other drugs. Maybe, 
Philip, you can comment on this. They say there's a shortage of 
the base ingredients going into tetracycline, and I don't see a 
shortage in any other marketplace. I don't understand how when 
you order it--if you go to Walmart and you take a water off 
there and you scan it, they know it's gone and they order more 
water. Unless it's a diamond or something, and there's a 
shortage of--tetracycline used to be for pennies.
    A mother told me the other day it cost her $1,200 for a 1-
month supply for her kid's--I think it's doxycycline or 
minocycline--but a tetracycline--it's been generic for 50 years 
probably. Even the derivatives are generic. Do you have any 
comment on the tetracycline?
    Mr. Almeter. No, the tetracycline shortages really occurred 
in 2011, and that's when we saw the real--the shortages spike 
across--hospitals were opening their totes in the morning and 
not seeing drugs in their totes.
    Senator Paul. Has the price come back down or not?
    Mr. Almeter. It hasn't. In January 2011, it was $6.76 a 
bottle for the 500 milligram capsules. Then in January 2013, it 
was $900, and then in May or June 2015, it's now $1,260 a 
bottle. There's only two manufacturers, Watson and Teva. 
Nothing else has changed. It was short due to raw ingredients 
at the time, but nothing else has really changed.
    Senator Paul. I hear that, and I'm not sure--my warning 
signals of being suspicious about what I am being told. 
Shortage of supply. Why? Does anybody know?
    Mr. Almeter. I was going to say your question earlier to 
Scott regarding what's the message that pharmacies hear when 
all of a sudden something is unavailable--the example I gave 
earlier with the FDA Unapproved--with vasopressin and 
neostigmine, all we saw was messages from our wholesalers 
saying shortage issue, manufacturer's product issue. There were 
none of the details behind the scenes of ``X manufacturer got 
approval, and we're getting pressure to get out of here or 
we're going to have fines put on us.'' You have to do a lot of 
digging. You have to ask representatives. They don't want to 
talk. A lot of it--you have to wait until it comes out in the 
news.
    Senator Paul. It's opaque. There isn't a transparency, and 
some it is this idea of proprietary knowledge. We're not 
hearing it from either side. One side is afraid of the FDA. The 
FDA says--and I understand the proprietary rules--``we can't 
tell you anything about it.''
    Like on the sameness thing, how do we fix that? The FDA is 
feeling some pressure now. They're going to actually define 
sameness. I asked them the same--some of these EpiPens have 
said it was a dosage problem. I want to know how far off it 
was. I want to know what a standard of error is. I want to 
know--was it doing .31? Was it harming anybody? What's the 
range? Can it go from .295 to .305? What is the range? They 
said they kind of have that, but they didn't seem to be very 
easy and forthcoming with it.
    Then I asked them the question, ``Well, did the EpiPen--
what was its standard of error?'' That's not really what you're 
comparing to. You're having to do new studies where you compare 
something to EpiPen, but the EpiPen may not have had--why 
wouldn't you compare it to an original study, that if EpiPen 
does .3, and it has a range of error on its injection, that 
would be the standard you would go by. But that, apparently, is 
not true. You have to go by new studies where you compare 
yourself to EpiPen. Right?
    Dr. Gottlieb. To your point, initially, about the patent 
issue, Mylan was clever in this circumstance. They patented 
aspects of the auto injector that deal with how the auto 
injector itself is used. They created unique instructions for 
use for their auto injector and then patented the aspects of 
their product that deal with those instructions for use.
    Senator Paul. Maybe we should stop that--stop allowing a 
patent for that, because there is some discussion--like I 
remember in ophthalmology, some guy patented the frown 
incision. We used to do the smile, and he turned it upside down 
and it was a frown. Everybody made fun of it somewhat, but I 
think he actually got a patent. Maybe you shouldn't be able to 
get a patent for----
    Dr. Gottlieb. Just change the regulatory standard, because 
the regulatory standard right now is if it requires any 
retraining by the patient, then it can't be a generic 
alternative. I would argue as a clinician, a little bit of 
retraining, if it's self-explanatory to the patient, might be 
permissible and might be perfectly fine and isn't going to 
confuse the end user. Maybe we could provide a little more 
flexibility there.
    Senator Paul. One other thing I'd like to say--and then 
we're also open for a couple more questions and responses 
here--is that I'm a big believer in trying to figure out the 
problem. You don't just get angry and put price controls on. 
You figure out the problem--and this is a complicated issue--
and then we figure out how to fix it.
    All of you have taken the time to come and testify. I know 
many of you had to drive hours or come from other States, and I 
appreciate that. We want to find the solution. If any of you 
are willing to continue to work with our office--several bills 
were mentioned, and we know about some of those, and we will 
continue to look at those.
    Also, we'll be looking at a solution. I'm going to work 
with Chairman Alexander to try to find a solution to this. As 
this comes forward, it may take 6 months, it may take a year, 
but we want to actually try to fix some of this stuff. Maybe we 
don't patent labeling, maybe we define--if they tell us what 
they think sameness is, maybe we tell them, ``No, this is what 
it should be,'' and when they say there are manufacturing 
issues, we would say, ``Have you pushed them out of the 
market?'' Do we make it easier when there's one supplier? If 
someone gobbles up all the suppliers, should we make it easier?
    Apparently, they do have a special route for drugs to come 
in, to be imported, if there is said to be a shortage, but they 
don't have it for single supplier. Maybe we should do it for 
single supplier. Some of this has to do with drugs coming 
across foreign boundaries, which maybe we should enhance. We're 
not the only civilized country in the world. Europe, Asia--
there's a lot of places that do testing. Should we not have a 
more international system of trying to approve drugs?
    Does anybody have another comment on any of the issues or 
want to make any other statement?
    Mr. Waters. I'm concerned that we discourage the 
continuation of research and development with barriers. Part of 
our system is trial and error a lot of times. In the 
development of these drugs, sometimes you don't always get it 
on the first swing. You don't always hit it. The companies have 
to be encouraged to continue to research that, and maybe a lot 
of these regulatory barriers have been detriments to that part 
of the process that we don't see.
    Senator Paul. We're going to conclude, but I talked to 
Courtney earlier.
    Would you mind just standing up and tell us who you are and 
a little bit about your kids and their problems?
    Audience Member. My name is Courtney, and I have two 
children that have food allergies and require an EpiPen. I've 
been with--Laura Jackson's e-mails. There have been many 
meetings, I follow this closely. The main concern is the 
unexplained price increase. We switched over to the Auvi-Q and 
it was great, because I have a teenager and he liked being able 
to carry it. It was perfect for him.
    Then right after the Auvi-Q was inexplicably recalled, the 
prices jumped. Before, it was costing us, with a co-pay, around 
$50. Then we were without insurance, and we were on a bridge 
insurance for the summer, the Kentucky Connect health insurance 
policy, so we started paying about $250 for a set of EpiPens. I 
have two children and that was a cost of $500 that I couldn't 
afford, and my parents, luckily, stepped in and helped me pay 
for that. Then my job started and I got insurance, and my co-
pay was reasonable.
    Without insurance, right now, my EpiPens for one child 
would cost $802, and--as you said, it was lower. I've tried to 
find out why the Auvi-Q has been recalled, and there isn't a 
lot of information about that. I understand what you're saying 
about how the pharmacist is not given any information, because 
when I asked him, he said, ``Well, it just says it was an 
insufficient supply or delivery method.'' I don't think there's 
been any record of anybody finding any injury, any adverse 
effects from using an Auvi-Q.
    Competition is good, and if you could eliminate some of 
these barriers, maybe we would see that it's helping 
competition.
    Senator Paul. Thank you. That reminds me of one more 
question for Philip.
    The one that's out there is Adrenaclick. Is Adrenaclick 
significantly cheaper for you at the hospital than EpiPen?
    Mr. Almeter. The one we use at the hospital costs a few 
dollars, because we use a vial and we're giving it in a code 
situation intravenously.
    Senator Paul. You're not using an auto injector?
    Mr. Almeter. In the retail environment, we are buying the 
generic, as well as the brand. I guess it depends on the plan, 
the payer and what the patient----
    Senator Paul. It's complicated to figure out whether the 
price----
    Dr. Gottlieb. The list for Adrenaclick is $140, the list 
price.
    Mr. Almeter. It's about $400 for us to buy.
    Dr. Gottlieb. The Adrenaclick is $400?
    Mr. Almeter. The Adrenaclick is about $400.
    Senator Paul. Which gets to the whole other question--
there's 10 different prices, and it's so confusing, and then 
there's rebates for big purchasers, et cetera, et cetera. For 
you, you say the price is not that much different?
    Mr. Almeter. No, it's about 8 percent cheaper for the 
generic.
    Senator Paul. I think what's happening is he's a much 
bigger purchaser than you.
    Mr. Almeter. Sure.
    Senator Paul. EpiPen is probably offering a steeper 
discount to try to get you to use it. There's not enough 
differential for you to even--if you have a differential in the 
hospital, will you try to encourage your physicians to order 
cheaper varieties if you think they're equivalent?
    Mr. Almeter. It's really dictated by the plan. That's 
really where it's----
    Senator Paul. By the plan, more than the physician?
    Mr. Almeter. Yes, it really is, and it's a safety net 
provider when they can't afford it. I will say this, that UK 
HealthCare--we're a safety net provider. We have to get the 
drug to the patient, and if they can't afford it, we will use 
our dollars to give it away for free.
    Senator Paul. Right. Some of the published material also 
said that Adrenaclick was not therapeutically equivalent to 
EpiPen. Does anybody know what that means? I know what it 
means, but why are they saying that.
    Mr. Almeter. My understanding is it has to do with AB 
rating. If you look at the rating, it's a BX rating, and they 
won't say that they're perfectly bio-equivalent.
    Dr. Gottlieb. It's not substitutable, but it would have to 
do with the device, not the drug inside the device.
    Senator Paul. Once again, sort of a distinction without a 
difference. It gives the same dose, and it probably works 
equally as well, and you could debate which one works easier or 
better. By saying that, what's happened on some insurance plans 
is some insurance plans have listed it as a second tier, where 
they would rather you get the other one because it's the gold 
standard and this is not therapeutically equivalent.
    Mr. Almeter. Or they get a bigger rebate with that one.
    Senator Paul. Exactly, and that's another problem we're 
going to look into as well. We've gotten a lot of answers 
today, and we're going to keep looking into it. We want to keep 
in contact with you, if you'll keep in contact with us, and we 
would appreciate any of your feedback.
    Thanks, everybody. I'm supposed to adjourn us here.
    I'm sorry. If you have any more comments, you can put them 
in writing, and we'll put them in the record. What you've given 
us as your testimony today will be in, and you have 10 days to 
submit anything else.
    Thank you for being here today, and the committee will 
stand adjourned.
    [Whereupon, at 4:10 p.m., the hearing was adjourned.]

                                   [all]