[Senate Hearing 115-355]
[From the U.S. Government Publishing Office]




.                                                        S. Hrg. 115-355
                THE COST OF PRESCRIPTION DRUGS: HOW THE
             DRUG DELIVERY SYSTEM AFFECTS WHAT PATIENTS PAY

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

                                HEARING

                                 OF THE

                    COMMITTEE ON HEALTH, EDUCATION,
                          LABOR, AND PENSIONS

                          UNITED STATES SENATE

                     ONE HUNDRED FIFTEENTH CONGRESS

                             FIRST SESSION

                                   ON

   THE COST OF PRESCRIPTION DRUGS: FOCUSING ON HOW THE DRUG DELIVERY 
                    SYSTEM AFFECTS WHAT PATIENTS PAY

                               __________

                             JUNE 13, 2017

                               __________

 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           BERNARD SANDERS (I), Vermont
JOHNNY ISAKSON, Georgia                ROBERT P. CASEY, JR., Pennsylvania
RAND PAUL, Kentucky                    AL FRANKEN, Minnesota
SUSAN M. COLLINS, Maine                MICHAEL F. BENNET, Colorado
BILL CASSIDY, M.D., Louisiana          SHELDON WHITEHOUSE, Rhode Island
TODD YOUNG, Indiana                    TAMMY BALDWIN, Wisconsin
ORRIN G. HATCH, Utah                   CHRISTOPHER S. MURPHY, Connecticut
PAT ROBERTS, Kansas                    ELIZABETH WARREN, Massachusetts
LISA MURKOWSKI, Alaska                 TIM KAINE, Virginia
TIM SCOTT, South Carolina              MAGGIE HASSAN, New Hampshire
                                      
                           

               David P. Cleary, Republican Staff Director

         Lindsey Ward Seidman, Republican Deputy Staff Director

                  Evan Schatz, Minority Staff Director

              John Righter, Minority Deputy Staff Director

                                  (ii)

  


                            C O N T E N T S

                              ----------                              

                               STATEMENTS

                         TUESDAY, JUNE 13, 2017

                                                                   Page

                           Committee Members

Alexander, Hon. Lamar, Chairman, Committee on Health, Education, 
  Labor, and Pensions, opening statement.........................     1
Murray, Hon. Patty, a U.S. Senator from the State of Washington, 
  opening statement..............................................     3
Cassidy, Hon. Bill, a U.S. Senator from the State of Louisana....    40
Casey, Hon. Robert P., Jr., a U.S. Senator from the State of 
  Pennsylvania...................................................    43
Young, Hon. Todd, a U.S. Senator from the State of Indiana.......    44
Franken, Hon. Al, a U.S. Senator from the State of Minnesota.....    46
Collins, Hon. Susan M., a U.S. Senator from the State of Maine...    48
Bennet, Hon. Michael F., a U.S. Senator from the State of 
  Colorado.......................................................    50
Murkowski, Hon. Lisa, a U.S. Senator from the State of Alaska....    52
Baldwin, Hon. Tammy, a U.S. Senator from the State of Wisconsin..    55
Warren, Hon. Elizabeth, a U.S. Senator from the State of 
  Massachusetts..................................................    56
Hassan, Hon. Maggie, a U.S. Senator from the State of New 
  Hampshire......................................................    58
Murphy, Hon. Christopher, a U.S. Senator from the State of 
  Connecticut....................................................    60
Sanders, Hon. Bernard, a U.S. Senator from the State of Vermont..    61
Whitehouse, Hon. Sheldon, a U.S. Senator from the State of Rhode 
  Island.........................................................    62

                               Witnesses

Mendelson, Dan, President, Avalere Health, Washington, DC........     6
    Prepared statement...........................................     8
Coukell, Allan, Senior Director, Health Programs, The Pew 
  Charitable Trusts, Washington, DC..............................    16
    Prepared statement...........................................    18
Howard, Paul, Ph.D., Director and Senior Fellow, Health Policy, 
  Manhattan Institute, New York, NY..............................    22
    Prepared statement...........................................    24
Anderson, Gerard, Ph.D., Professor of Medicine, Johns Hopkins 
  University School of Medicine, Baltimore, MD...................    28
    Prepared statement...........................................    29

                          ADDITIONAL MATERIAL

Statements, articles, publications, letters, etc.
    John Rother, Executive Director, The Campaign for Sustainable 
      Rx Pricing (CSRxP).........................................    67
    Lobbying Registration Form Submitted by Senator Franken......    73
    Response to questions of Senator Alexander by:
        Dan Mendelson............................................    76
        Allan Coukell............................................    77
        Paul Howard..............................................    80
        Gerard Anderson..........................................    82

                                 (III)
    Response by Dan Mendelson to questions of Senator Isakson....    83
    Response to questions of Senator Sanders by:
        Dan Mendelson............................................    83
        Paul Howard..............................................    83
        Gerard Anderson..........................................    85

                                     

  


 THE COST OF PRESCRIPTION DRUGS: HOW THE DRUG DELIVERY SYSTEM AFFECTS 
                           WHAT PATIENTS PAY

                              ----------                              


                        TUESDAY, JUNE 13, 2017,

                                       U.S. Senate,
       Committee on Health, Education, Labor, and Pensions,
                                                     Washington, DC
    The committee met, pursuant to notice, at 10:07 a.m. in 
room SD-430, Dirksen Senate Office Building, Hon. Lamar 
Alexander, chairman of the committee, presiding.
    Present: Senators Alexander, Collins, Cassidy, Young, 
Murkowski, Scott, Murray, Sanders, Casey, Franken, Bennet, 
Whitehouse, Baldwin, Murphy, Warren, Kaine, and Hassan.

                 Opening Statement of Senator Alexander

    The Chairman. Good morning.
    The Senate Committee on Health, Education, Labor, and 
Pensions will please come to order.
    Today's hearing is about how Americans pay for prescription 
drugs and where that money goes. This is a bipartisan hearing, 
which means Senator Murray and I have agreed on the topic, and 
we have agreed on the witnesses.
    Senator Murray and I will each have an opening statement, 
and then we will introduce the witnesses. We hope you will 
summarize your remarks in about 5 minutes each, which will 
leave Senators time to engage in a conversation with you. 
Senators will have about 5 minutes of questions as we go 
around.
    The committee is having this hearing in response to a 
bipartisan request from a number of members of the committee. 
That request was led by Senator Cassidy and Senator Franken, 
but it included Senators Collins, Baldwin, Murkowski, 
Whitehouse, Capito, Sanders, Enzi, and Warren. All suggested we 
should have this hearing.
    This will be the first of three hearings we plan to hold on 
prescription drug costs. The purpose of this first hearing is 
to see if we can better understand a complex subject and agree 
on some basic facts. Americans want to know who pays for 
prescription drugs and where that money goes.
    Next month, the committee will hold a second hearing to 
hear about the process, beginning with the manufacturer's 
development of a drug, the different steps through which the 
drug travels before arriving in a patient's hands, how this is 
paid for, and what the costs are at each step along the way.
    In the fall, we will hold a third hearing to hear from Norm 
Augustine and consider a report that he is leading from the 
National Academy of Sciences. The report is the outcome of a 
project called, ``Ensuring Patient Access to Affordable Drug 
Therapies.''
    The United States leads the world in innovative biomedical 
and pharmaceutical research and development, and American 
patients benefit from having access to most lifesaving drugs 
first.
    Our country produces more than 20 percent of the world's 
wealth, and it is well known that we spend a large share of 
that wealth on our health, a much larger share than many other 
advanced countries.
    In 2015, according to the Centers for Medicare and Medicaid 
Services, healthcare spending totaled nearly 18 percent of our 
country's Gross Domestic Product. Prescription drugs were about 
10 percent of that spending and closer to 15 percent when you 
consider prescription drugs administered in hospitals and 
doctors' offices.
    At around the same time in 2014, the World Bank showed the 
United Kingdom was spending 9.8 percent of its domestic product 
on health care, Germany 11.1 percent, and Finland 9.6 percent.
    More than 4 billion prescriptions are written for drugs 
each year for Americans who then receive these drugs at 60,000 
drug stores, from doctors or hospitals, or from online 
pharmacies. The total cost to the overall health system of 
these prescriptions each year is $450 billion to be paid by 
taxpayers, by patients, by hospitals, and insurers, among 
others.
    Many of these are truly miracle drugs. They cure Hepatitis 
C, keep cancer at bay, stop a stroke, and prevent heart 
attacks.
    According to the Centers for Disease Control and 
Prevention, Americans are living on average 10 years longer 
than their life expectancy in the 1950s. Access to innovative 
drugs is a major reason why.
    In 2003, Congress passed the Medicare Part D Prescription 
Drug program, which provides drugs to about 41 million 
Americans over 65 years of age. The Congressional Budget Office 
estimates that prescription drugs from those on Medicare will 
cost taxpayers and patients about $94 billion this year.
    While safe prescription drugs have become an integral part 
of American family lives today, all of this is relativity new.
    In 1906, Congress passed the Federal Food and Drug Act, 
which added regulatory responsibilities to the Food and Drug 
Administration's scientific mission by prohibiting interstate 
commerce in misbranded and adulterated food, drugs, and drinks.
    In 1938, this was updated to require a manufacturer to show 
that each new drug must be safe before it comes to the market, 
starting a new system of drug regulation.
    It was only in 1941 that the Food and Drug Administration, 
in response to the Insulin Amendment, first began to require 
that a drug be tested and certified for purity and potency, the 
first being insulin for the treatment of diabetes. During the 
next decade and beyond came approval of mass produced 
penicillin, other antibiotics, and a broader range of drugs.
    Developing and approving a drug today is a lengthy and 
costly process. According to the Tufts Center, from the 
beginning of the research and development phase through FDA 
approval, developing a new drug takes, on average, 10 to 15 
years and can cost close to $2.6 billion. Let me say that 
again. According to the Tufts Center, from beginning the 
research and development phase through FDA approval, developing 
a new drug takes, on average, 10 to 15 years and can cost close 
to $2.6 billion.
    Success is far from guaranteed. Fewer than 12 percent of 
drugs that make it to Phase I clinical trials are finally 
approved by the FDA.
    According to Research!America, the United States spent $159 
billion on medical health and medical research and development 
in 2015. The National Institutes of Health funded roughly 19 
percent of that; 8 percent was funded by universities and 
independent research institutes; 5 percent came from other 
Federal and State governmental entities; 4 percent from 
foundations and professional societies; 15 percent, or $24 
billion, was funded by the medical device industry and other 
non-biopharma private industry. The largest share of this 
research, 49 percent or $78 billion, was funded by the 
biopharmaceutical industry.
    It is from these investments that we can expect to see the 
medical miracles that NIH Director Francis Collins has 
predicted will occur during the next decade: Artificial 
pancreas for those with diabetes; new cancer cures; a vaccine 
for Zika; a vaccine for HIV/AIDS; and a universal flu vaccine; 
medicines to identify individuals at risk for Alzheimer's 
before symptoms as well as provide effective therapies to slow 
or even prevent the disease.
    Over the years, this committee in a bipartisan way has 
produced important laws to reduce the cost of drugs before they 
are approved by the FDA.
    For example, last year's 21st Century Cures legislation; 
the Hatch-Waxman Act, which created the generic drug industry; 
and multiple FDA User Fee Agreements, which have helped fund 
the FDA and modernize our drug and device approval process.
    Our focus today is different. It is on what happens to the 
cost of the drug after it is approved by the FDA. We will 
examine the path an approved drug takes from the manufacturer 
to patient, and how this affects what the patient pays.
    We hope to agree on some basic facts such as whether 
prescription drug prices are going up or down, and by how much?
    We want to know as prescription drugs move from FDA 
approval through a complex process and into the hands of 
patients, where does the money go?
    What are rebates and what is their impact on consumers?
    Who actually pays the cost of prescription drugs?
    This is a discussion that affects the well-being of every 
American family. It is important that we work together to 
conduct this fact finding in a bipartisan way.
    Senator Murray.

                  Opening Statement of Senator Murray

    Senator Murray. Well, thank you, Chairman Alexander.
    As I have made clear, the burden of prescription drug costs 
is a huge problem. I hear about it from far too many families 
in my home State and across the country.
    I am glad we are having this discussion today. It is 
something Democrats on this committee have wanted to do for a 
very long time, and I am pleased that we are working on some 
additional hearings. I am hopeful this work can lead to some 
real bipartisan progress.
    I want to express my appreciation, in particular, to 
Senator Franken, who has been underscoring the importance of 
hearing from actual patients about the struggle they face in 
affording the medication they need. Our work on this committee 
is strongest when patients' and families' voices are part of 
this process. I agree, we should make sure that that happens as 
our discussion on this continues.
    I also want to note that today's hearing, on a topic 
central to families' experience with our healthcare system, 
takes place in the midst of a pivotal and deeply concerning 
moment for our healthcare system as a whole.
    My colleagues on the other side of the aisle appear to be 
dead set on jamming their version of Trumpcare through the 
Senate in a matter of days. They have held no hearings, engaged 
in no public debate, and provided no information for people 
across the country to understand what this all-male, Republican 
working group has in store for their health and financial 
security.
    For comparison, during the debate on the Affordable Care 
Act, we held 57 bipartisan meetings, hearings, roundtables, and 
walkthroughs on the text in this committee alone, and another 
53 in the Finance Committee. There were 25 consecutive days of 
debate on the Senate floor.
    Mr. Chairman, I just have to say this morning, I cannot say 
how strongly enough, how unacceptable this is, and I will be 
very loud and vocal about this, and continue to push for 
hearings and open debate on the Senate version of the Trumpcare 
bill.
    In fact, given this committee's long track record of 
bipartisan successes, I have to say I am really surprised and 
disappointed that we are allowing this to happen. I know you 
are part of the process that is going on in secret.
    I just have to tell you, people deserve public debate about 
the future of our healthcare system especially since all Senate 
Republicans' promises to the contrary, it unfortunately sounds 
like this legislation is based on the very same principles as 
the disastrous House Trumpcare bill, including higher costs for 
families, especially seniors and people with pre-existing 
conditions.
    Millions of people will be kicked off Medicaid. Insurance 
companies, once again, will be allowed to charge people more 
for basic healthcare like maternity care or mental health 
services, or as we are talking about today, the expensive, but 
essential prescription drugs they need. All to give a massive 
tax break to special interests in the health industry and hand 
President Trump a hollow political win.
    Let us be clear, as many of my democratic colleagues have 
said, this is not a healthcare bill. It is an attack on 
families, and health, and financial security.
    What I really do hope is over the next several weeks as 
Republicans hear from many people across the country who would 
be devastated by this bill that they choose to change course.
    I will say again, Democrats are ready, like we always have 
been, to work together on continuing to fix our healthcare 
system in ways that make our healthcare system more affordable 
while preserving quality of care and getting more people 
covered.
    We cannot begin that conversation until Republicans reverse 
course and stop trying to take our healthcare system backward 
with a reckless repeal effort and politically motivated 
sabotage that is creating damaging uncertainty in our markets 
and driving up our families' costs.
    I sincerely hope that this effort is backed off because 
there are urgent challenges like the one we are talking about 
today that really deserve our attention.
    Today's astronomically high prescription drug prices are an 
unsustainable burden on our healthcare system as a whole and 
especially on the patients and families that we represent. I 
have heard from far too many families who are forced to choose 
between high-priced medication, paying the bills, or putting 
food on the table. That really is no choice at all. So as I 
said before, it is well past time for this conversation and for 
progress on this issue.
    As we discuss the reality of the high prices too many of 
our constituents are paying for prescription drugs, I do think 
it is important to note that President Trump is wrong to point 
the finger at the FDA.
    Over two-thirds of new drugs are now launched in the United 
States, more than triple the rate in the early 1990s, when the 
first user fee programs were enacted. The Agency has reduced 
the backlog of generic applications to help get competitive, 
cheaper drugs to patients.
    I am pleased this committee took steps in the FDA 
Reauthorization Act to increase transparency and foster more 
competition in the generic market, thanks to the work of 
Senators McCaskill, Collins, and Franken.
    We should always look for ways to get more safe, effective 
treatments to patients as quickly as possible. The FDA approval 
process is the wrong place to look if we really want to tackle 
high drug prices.
    I am proud that a number of Democrats on this committee 
have put forward a number of ideas to get at the root of the 
problem, which are the high prices set by drug manufacturers.
    Democrats have introduced legislation, including bipartisan 
legislation, to demand more transparency from pharmaceutical 
companies about what is behind the soaring drug prices, allow 
Medicare to negotiate fair prices for prescription drugs, and 
to prevent manufacturers from engaging in price gouging and 
more.
    I am grateful to all the members of this committee who have 
worked together, and across the aisle, to advance these 
polices, which would make a real difference to the patients and 
families we serve.
    Mr. Chairman, I am glad to hear that today's conversation 
on the burden of prescription drug prices will not be the last 
on this committee, but there is a lot more we can do and should 
do together to tackle this issue.
    Again, it is deeply disappointing that instead of working 
with Democrats to bring down the price of prescription drugs 
for families, and the other challenges that so many people face 
in the healthcare system, my Republican colleagues are very 
focused on a partisan, political, and damaging effort to enact 
Trumpcare within the next few weeks without any public 
scrutiny.
    I really hope that instead of working to jam Trumpcare 
legislation through, according to an independent CBO analysis, 
is a direct threat to the lives, and health, and financial 
security of millions of people. That you all will reconsider, 
reverse course, and work with us on solving problems.
    If you do, if you drop your efforts to sabotage the 
healthcare system and enact Trumpcare, and if you are ready to 
tackle the challenges by bringing down the healthcare costs for 
families, we are at the table. We are ready to work and we want 
to do that.
    Thank you very much, Mr. Chair.
    The Chairman. Thank you, Senator Murray.
    I will repeat. This is a hearing requested by Democrats as 
well as Republicans on drug prices. It is a bipartisan hearing 
and it is one in which Senator Murray and I have agreed on the 
witnesses.
    We welcome the witnesses. I will introduce you now. Each 
witness will have up to 5 minutes to give his testimony. We are 
going to go from left to right, but let me introduce them this 
way.
    Dan Mendelson is the first witness we will hear from. He is 
the president of Avalere Health, a leading healthcare 
consulting firm specializing in strategy, policy, and data 
analysis for life sciences, health plans, and providers. Prior 
to founding Avalere in 2000, he served as Associate Director 
for Health at the White House Office of Management and Budget.
    Next, we will hear from Allan Coukell, senior director of 
health programs at The Pew Charitable Trusts. The Trusts is an 
independent, nongovernmental organization that conducts 
analysis to provide useful data on issues and trends in public 
policy. Mr. Coukell oversees initiatives at The Pew related to 
drug and medical device innovation and safety, the 
pharmaceutical supply chain, FDA, specialty drugs, as well as 
other efforts related to health costs and delivery.
    Third, Dr. Paul Howard is senior fellow and director of 
health policy at the Manhattan Institute. Dr. Howard has 
written on a wide variety of medical policy issues including 
FDA reform, biopharmaceutical innovation, consumer-driven 
healthcare, Medicare and Medicaid reform.
    Last, we will hear from Dr. Gerard Anderson, professor of 
health policy and management at the Johns Hopkins University 
Bloomberg School of Public Health and Medicine. Dr. Anderson is 
also director of the Johns Hopkins Center for Hospital Finance 
and Management. He is currently conducting research on drug 
pricing, chronic conditions, comparative insurance systems in 
developing countries, medical education, and healthcare payment 
reform.
    Mr. Mendelson, let us start with you and go down the line.
    Welcome.

    STATEMENT OF DAN MENDELSON, PRESIDENT, AVALERE HEALTH, 
                         WASHINGTON, DC

    Mr. Mendelson. Thank you very much.
    Chairman Alexander, Ranking Member Murray, members of the 
committee, thank you for the invitation to discuss how the 
healthcare delivery system affects what consumers pay for 
prescription drugs.
    I also want to thank the incredible team at Avalere Health 
whose passion to be the essential voice improving healthcare is 
being realized today. Of course, my comments are my own and do 
not reflect the views of my organization or our parent company, 
Inovalon.
    My full testimony has plenty of detail about the current 
system, including trends in pricing that address a lot of the 
initial questions that you asked, Senator Alexander.
    I have chosen to focus my comments today on three items--
aspects of the delivery system that are within the purview of 
this committee. First, let us focus on benefit design.
    In recent years, payers have been under increasing pressure 
to meet consumer demand for constrained premium growth. 
Deductibles and cost sharing for medications have increased 
substantially across both commercial and Government payment 
systems.
    Growth and exposure to cost by consumers is seen across 
traditional employer plans, Government plans, as well as high 
deductible plans. Cost sharing for drugs is typically higher on 
a percentage basis from that for hospital or other medical 
care. It is not uncommon that you will see a patient paying 
more for a chronic medication than they would for a surgery, 
even though the surgery costs the healthcare system more.
    One other thing to consider is that cost sharing is 
typically calculated on the basis of the full price of the drug 
before accounting for rebates or discounts offered by the 
manufacturer. There are some exceptions to this. For example, 
CVS Health can adjudicate rebates at the point of sale and give 
the consumer a net price.
    There is a question, why should an individual with a 
chronic illness, who needs a high cost medication, not benefit 
from the price concessions given by a pharmaceutical company on 
that particular product in the competitive class?
    We also need to think carefully about the incentives that 
benefit designs give patients. For example, if a patient with 
Multiple Sclerosis, rheumatoid arthritis, or anemia has to use 
a drug in its class and the only drugs available have a 35 
percent co-pay, why should they have to pay that percentage co-
pay even though the only reason that they are doing it is 
because they have this particular condition? Why should a 
patient have to pay more than the cost of a generic drug for a 
generic drug in a design?
    These are all questions that, I think, are important.
    My second area of focus is competition. Speeding the 
approval of second and third branded drugs to market would 
dramatically expedite competition and result in price 
concessions from manufacturers.
    You saw this with the second drug in the Hepatitis C 
category when it was approved. The net prices of these products 
were reduced dramatically.
    A second area, that I know is a strong interest and within 
the purview of this committee, is generic pharmaceuticals where 
approving generics on an expedited basis in various places does 
create dramatic consumer surplus. Then finally, biosimilar 
competition and expediting these drugs to market.
    All of these are really very important and an important 
facet of the delivery system because it is in this competition 
that drug prices actually come down over a period of time.
    My final area of focus is value-based contracting. We are 
in the midst of a very dramatic transformation in healthcare 
from pay for volume to pay for value. This is of direct 
relevance, I believe, to the cost of pharmaceuticals. We see 
this in Medicare Advantage.
    For example, Medicare Advantage plans have to do well on 
their quality metrics in order to have a viable business. A lot 
of these quality metrics are being driven by things like the 
prescription of generic cholesterol lowering medications.
    In fact, we see many plans actually paying substantial 
amounts of money to create programs to get patients to take 
these medications. That is the kind of design that, benefits 
the program and the kind of design that is important in the 
future.
    One other aspect that I would like to mention is data. 
Using the patient's data to identify gaps in care, doing 
analytics on that basis, and then ensuring that the patient 
that actually needs the medication is getting what they need, 
also has tremendous promise to reduce total health system 
costs, and merits the focus of this committee.
    There are many regulations right now that actually prevent 
manufacturers and health plans from entering into the kinds of 
arrangements that can actually reduce cost for consumers, and 
they do merit the focus of the committee.
    I want to close with one comment about process. Underlying 
all of our work is the view that collaboration is absolutely 
critical to fashioning good policy. So in the work that we do, 
we are always looking for solutions that will be embraced by a 
broad array of policies. We are a nonpartisan, nonpolitical 
organization and try to focus in that way as well.
    I am excited to continue supporting this discussion as it 
evolves over the course of the three hearings.
    Thank you very much.
    [The prepared statement of Mr. Mendelson follows:]
                  Prepared Statement of Dan Mendelson
                                summary
    The focus of this testimony is how the healthcare delivery system 
affects what consumers pay for prescription drugs. Consumer exposure to 
drug costs is determined by benefit design, the competitiveness of drug 
classes, and approaches to provider payment, among other factors. 
Health system change, including outcome-based payment and value-based 
contracting, has potential to incent better alignment between consumers 
and providers.
                             benefit design
    In recent years, payers have been under increasing pressure to meet 
consumer demand for constrained premium growth through changes to 
benefit design. Deductibles and cost sharing for medications have 
increased substantially across government and commercial payers, 
leading many consumers to pay more out-of-pocket for drugs.\1\ For 
medications subject to the deductible or coinsurance, consumer cost 
sharing is typically calculated on the full cost of the drug before 
accounting for rebates or discounts offered by the manufacturer to the 
health plan or pharmacy benefit manager. Of course, consumer costs are 
also importantly determined by the pricing decisions made by 
pharmaceutical companies prior to entry of product into the supply 
chain.
---------------------------------------------------------------------------
    \1\ Avalere Health, ``Consumer Costs Continue to Increase in 2017 
Exchanges,'' January 18, 2017, http://avalere.com/expertise/life-
sciences/insights/consumer-costs-continue-to-increase-in-2017-
exchanges.
---------------------------------------------------------------------------
                           market competition
    Increased competition in the pharmaceutical markets holds promise 
for substantially reducing costs. Speeding the approval of the second- 
and third-branded drugs in a therapeutic class would expedite 
competition and lead to more rapid price concessions. Ensuring a 
continued robust market for generic pharmaceutics is vital for 
effective cost management and improvement of population health 
outcomes. Finally, there is much promise for consumers in effective 
biosimilar competition as patents on key biologics expire.\2\
---------------------------------------------------------------------------
    \2\ Avalere Health, ``Five Obstacles to Competition in the United 
States Biologics Market,'' http://avalere.com/expertise/life-sciences/
insights/five-obstacles-to-competition-in-the-united-states-biologics-
market.
---------------------------------------------------------------------------
                        market driven solutions
    As payers strive to link payment to value, healthcare stakeholders 
must agree on how to define and measure the value of any given product 
or service. Importantly, in addition to reflecting patient perspectives 
on what constitutes value, assessments of value should consider not 
only cost of the medication but also total cost of care, including 
pharmacy and medical spending.
    Outcomes-based contracts also represent a significant opportunity 
to shift away from prescription drug list pricing toward value-based 
reimbursement models. Avalere recently found that 70 percent of health 
plans have favorable attitudes toward outcomes-based contracts, and 
one-half of health plans indicate they have outcomes-based contracts 
already in place or are actively negotiating them.\3\ Existing 
regulatory barriers, including standards related to government price 
reporting and the Anti-Kickback Statute, presently hamper further 
development of this trend.\4\
---------------------------------------------------------------------------
    \3\ Avalere Health, ``Health Plans are Actively Exploring Outcomes-
Based Contracts,''
May 30, 2017, http://avalere.com/expertise/life-sciences/insights/
health-plans-are-actively-
exploring-outcomes-based-contracts.
    \4\ Eli Lilly and Company and Anthem, ``Promoting Value-Based 
Contracting Arrangements,''
January 2016. https://lillypad.lilly.com/WP/wp-content/uploads/
LillyAnthemWP2.pdf.
---------------------------------------------------------------------------
    Health system change is increasingly assigning value to 
improvements in population outcomes for common medical conditions, and 
many of these outcomes can be effectively achieved through better use 
of medication. Further alignment of stakeholder interests around the 
use of pharmaceuticals holds promise to benefit consumers as payment 
systems evolve toward value-based designs.
                                 ______
                                 
                              introduction
    The prices that consumers pay for drugs are determined jointly by 
health system design, pharmaceutical company pricing, and decisions by 
health plans, pharmacy benefit management (PBM) practices, and other 
transactions involving distributors and pharmacies along the supply 
chain. As the healthcare system moves from volume- to value-based 
payments, the incentives underlying many of these market-based pricing 
decisions are also changing rapidly. The purpose of this testimony is 
to elucidate how these factors ultimately determine the prices paid by 
the consumer for drugs.
             how net prices to the consumer are determined
    The pharmaceutical supply chain is the means through which 
prescription medicines are delivered to patients (Figure 1).\5\ Drugs 
typically originate in manufacturing sites; are transferred to 
wholesale distributors; stocked at retail, mail-order, and other types 
of pharmacies; subject to price negotiations and processed through 
quality and utilization management screens by PBMs; dispensed by 
pharmacies; and ultimately delivered to and taken by patients. There 
are many variations on this basic structure, as the players in the 
supply chain are constantly evolving, and commercial relationships vary 
considerably by geography, type of medication, and other factors. The 
pharmaceutical supply system is complex and results in price 
variability across different payers and consumers.
---------------------------------------------------------------------------
    \5\ Avalere Health (formerly The Health Strategies Consultancy), 
``Follow the Pill: Understanding the US Commercial Pharmaceutical 
Supply Chain,'' Kaiser Family Foundation, March 2005.

   Figure 1. Retail, Pharmacy Benefit Product and Reimbursement Flow
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]


                          drug spending trends
    Drugs dispensed in the pharmacy and medical benefit account for 
approximately 13 percent of total U.S. healthcare costs.\6\ This 
frequently cited figure uses total national health expenditures as a 
basis for calculating the percentage. Other experts sometimes use a 
subset of national health expenditures or total medical claims as the 
denominator, which accounts for the range of percentages often cited in 
this context. In recent years, new innovations have increased spending 
on specialty medications, which now account for $384 of the $895 per 
person per year spent on drugs.\7\ These trends particularly impact the 
Medicare program, in which the Medicare Trustees project that Part D 
spending will grow at an average annual rate of 9.2 percent from 2016-
25.\8\
---------------------------------------------------------------------------
    \6\ Centers for Medicare & Medicaid Services, National Health 
Expenditure Data. NHE Tables.
December 2016. https://www.cms.gov/Research-Statistics-Data-and-
Systems/Statistics-Trends-and-Reports/NationalHealthExpendData/
NationalHealthAccountsHistorical.html; Altarum Institute Center for 
Sustainable Health Spending, ``A Ten Year Projection of the 
Prescription Drug Share of National Health Expenditures Including Non-
Retail,'' May 2017 (Addendum II).
    \7\ Quintiles IMS Institute. ``Medicines Use and Spending in the 
US,'' May 2017.
http://www.imshealth.com/en/thought-leadership/quintilesims-institute/
reports/medicines-use-and-spending-in-the-us-review-of-2016-outlook-to-
2021#form.
    \8\ Medicare Trustees. ``2016 Annual Report,'' June 2016. https://
www.cms.gov/research-statistics-data-and-systems/statistics-trends-and-
reports/reportstrustfunds/downloads/tr2016.pdf.
---------------------------------------------------------------------------
    Over the past 5 years, list prices for protected pharmacy benefit 
drugs have increased 11.5 percent, while net prices have increased 6.1 
percent (Figure 2).\9\ The difference is the result of rebates and 
other discounts from manufacturers to public and private payers. These 
considerable differences between list and net pricing trends show the 
power that competition and payer negotiation have on drug prices. As 
multiple products for a given indication come to market, plans and PBMs 
may negotiate rebates from manufacturers in exchange for preferred 
formulary placement and improved access. Typically, payers use these 
price concessions to reduce overall premiums, but the rebates are not 
shared directly with patients at the point of sale. As a result, most 
patients who fill a prescription are paying cost-sharing based on list, 
rather than net, price.
---------------------------------------------------------------------------
    \9\ Quintiles IMS Institute. ``Medicines Use and Spending in the 
US,'' April 2016,
http://www.imshealth.com/en/thought-leadership/quintilesims-institute/
reports/medicines-use-and-spending-in-the-us-a-review-of-2015-and-
outlook-to-2020.

Figure 2. List vs. Net Price Growth, Protected Pharmacy Benefit Drugs, 
                               2011-2015
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]


                             benefit design
    Insurance benefit designs increasingly expose consumers to the full 
cost of their medicines through percentage co-payments for drugs. 
Further, consumer exposure to out-of-pocket costs has increased as 
deductibles have grown across benefit programs.
    In recent years, payers have been under increasing pressure to meet 
consumer demand for constrained premium growth through changes to 
benefit design. In particular, the financial crisis accelerated 
adoption of high deductible health plans (HDHPs) among employers.\10\ 
In addition, the patient protections put in place under the Affordable 
Care Act (ACA) required payers to focus on benefit design as a way to 
offer competitive premiums in an environment where price-sensitive 
consumers focus on monthly costs. Consumers are therefore paying more 
out-of-pocket for prescription drugs as deductibles increase and use of 
coinsurance for drugs becomes more common. Of course, other factors 
unrelated to the delivery system effects that are the focus of this 
hearing are also responsible for increased payment by consumers--such 
as the cost of newly launched products and the increases in list prices 
over time referenced in cost sharing.
---------------------------------------------------------------------------
    \10\ Bureau of Labor Statistics. ``Consumer-Driven Health Care: 
What Is It, and What Does It Mean for Employees and Employers?'' 
October 2010. https://www.bls.gov/opub/mlr/cwc/consumer-driven-health-
care-what-is-it-and-what-does-it-mean-for-employees-and-employers.pdf.
---------------------------------------------------------------------------
    Health plan deductibles have grown steadily over time. Among 
individuals with employer coverage, average deductibles increased 49 
percent over the last 5 years, rising to $1,478 in 2016.\11\ For 
individuals enrolled in coverage through exchanges, 2017 unsubsidized 
silver plans had average deductibles of $3,703--a 20 percent increase 
from 2016 and a 49 percent increase from 2014 levels.\12\ Importantly, 
56 percent of exchange consumers receive cost sharing reduction 
subsidies (CSRs), which lower deductibles to between $243 and $3,070 on 
average based on consumer income. The American Health Care Act (AHCA) 
would repeal the CSRs.\13\
---------------------------------------------------------------------------
    \11\ Kaiser-HRET. ``2016 Employer Health Benefits Survey,'' 
September 2016. http://www.kff
.org/health-costs/press-release/average-annual-workplace-family-health-
premiums-rise-modest-3-to-18142-in-2016-more-workers-enroll-in-high-
deductible-plans-with-savings-option-over-past-two-years/.
    \12\ Avalere Health, ``Consumer Costs Continue to Increase in 2017 
Exchanges,''
January 18, 2017, http://avalere.com/expertise/life-sciences/insights/
consumer-costs-continue
-to-increase-in-2017-exchanges.
    \13\ Avalere Health, ``AHCA Will Remove Low-Cost Sharing Guarantees 
for Low-Income
Individuals,'' May 16, 2017. http://avalere.com/expertise/managed-care/
insights/ahca-will-
remove-low-cost-sharing-guarantees-for-low-income-individuals.

    Figure 3. Average Combined Deductibles for Exchange Plans by Metal 
Level in 2017 Compared to Employer Plans in 2016\14\
---------------------------------------------------------------------------
    \14\ Avalere PlanScape, a proprietary analysis of exchange plan 
features, December 2016
and Kaiser-HRET, ``2016 Employer Health Benefits Survey.'' Avalere 
analyzed data from the FFE Individual Landscape File released October 
2016 and the California and New York State exchange websites.

[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]


    For drugs dispensed in the deductible, consumers pay the full cost 
of the drug based on the price negotiated by the pharmacy or provider. 
This price does not reflect rebates or discounts offered by the 
manufacturer to the health plan or PBM.\15\ As a result, patients who 
choose plans with significant deductibles and also use specialty and 
high-cost medications can face large bills for these drugs early in the 
calendar year, which may cause them to forego care or prevent them from 
complying with prescribed drug regimens. Research shows that high out-
of-pocket costs reduce medication adherence and use.\16\ Indeed, only 9 
percent of patients without a deductible abandon prescriptions, while 
patients with a deductible abandon medications at a rate of 23 percent 
and 27 percent for brand and specialty drugs respectively.\17\
---------------------------------------------------------------------------
    \15\ Negotiated price does not reflect rebates or post point-of-
sale price concessions. Discounts knowable at the point of sale are 
included in negotiated price.
    \16\ Goldman DP, Joyce GF, Zheng Y. Prescription drug cost sharing: 
Associations with medication and medical utilization and spending and 
health. Jama. 2007;298(1):61-9. Kirkman MS, Rowan-Martin MT, Levin R, 
et al. Determinants of adherence to diabetes medications: Findings from 
a large pharmacy claims database. Diabetes Care. 2015;38(4):604-9. Li 
P, Schwartz JS, Doshi JA. Impact of Cost Sharing on Therapeutic 
Substitution: The Story of Statins in 2006. Journal of the American 
Heart Association. 2016;5(11).
    \17\ Quintiles IMS Institute. ``Medicines Use and Spending in the 
US,'' May 2017.
http://www.imshealth.com/en/thought-leadership/quintilesims-institute/
reports/medicines-use
-and-spending-in-the-us-review-of-2016-outlook-to-2021#form.
---------------------------------------------------------------------------
    Once consumers spend through the deductible, they continue to pay 
cost-sharing as they access products and services. Increasingly for 
prescription drugs, this cost sharing takes the form of coinsurance, in 
which individuals pay a percentage of the cost of the drug rather than 
a fixed dollar copayment. Coinsurance is calculated based on the 
negotiated, rather than net, price.
    As the number of specialty medications on the market has increased, 
so too has the use of specialty drug tiers. In 2016, 43 percent of 
employer plans had separate tiers for these products. Among those 
plans, 46 percent charge coinsurance averaging 26 percent.\18\ This 
trend is more pronounced in the exchange markets where 84 percent of 
all 2017 silver plans charge coinsurance for specialty drugs with 
average coinsurance amounts of 37 percent of the drug cost (Figure 
4).\19\
---------------------------------------------------------------------------
    \18\ Kaiser-HRET. ``2016 Employer Health Benefits Survey,'' 
September 2016. http://www.kff
.org/health-costs/report/2016-employer-health-benefits-survey/.
    \19\ Avalere PlanScape, a proprietary analysis of exchange plan 
features, December 2016. Avalere analyzed data from the FFE Individual 
Landscape File released October 2016 and the California and New York 
State exchange websites.

[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]


    Notably, the ACA implemented a maximum out-of-pocket limit that 
caps consumer costs across all healthcare services. This limit offers 
important protection for chronically ill individuals against 
catastrophic healthcare costs, but does not extend to Medicare 
beneficiaries. In addition, as benefits expose consumers to increasing 
costs, use of copay assistance has also risen. IMS reports that 19 
percent of commercial brand drug claims in 2016 included the use of a 
copay coupon to reduce out-of-pocket costs, with significant variation 
across therapeutic classes.\20\
---------------------------------------------------------------------------
    \20\ Quintiles IMS Institute. ``Medicines Use and Spending in the 
US,'' May 2017. 
http://www.imshealth.com/en/thought-leadership/quintilesims-institute/
reports/medicines-use
-and-spending-in-the-us-review-of-2016-outlook-to-2021#form.
---------------------------------------------------------------------------
    Across all forms of insurance, consumer out-of-pocket burden is not 
evenly distributed among covered benefits. Outpatient prescription 
drugs are covered at lower percentage rates than some other services. 
One study, using data from 2014, showed that for all drugs covered by 
insurance in the United States, consumers paid 13 percent of every 
dollar compared to 3 percent for hospital stays, 7 percent for 
emergency care, and 14 percent for physician office visits.\21\ These 
data demonstrate the role of benefit design in shaping consumer 
perception of cost.
---------------------------------------------------------------------------
    \21\ Avalere analysis of Medical Expenditure Panel Survey, 2014, 
from the U.S. Department of Health and Human Services, Agency for 
Healthcare Research and Quality. https://meps
.ahrq.gov/mepsweb/. Accessed February 2017. Analysis includes all 
individuals with any source of health care coverage, including public 
and private.
---------------------------------------------------------------------------
                           market competition
    Consumer experience with drug costs is importantly determined by 
the competitiveness of drug classes. Increased competition in a class--
whether through the introduction of a generic or a competitive branded 
product--typically results in substantial net price reductions, 
particularly for legacy products.
    Health plans and PBMs play an important role in negotiating drug 
rebates and discounts on behalf of employees, individual market 
consumers, and government programs. This role is exemplified when a 
second-to-market brand medication enters the market. While underlying 
data is proprietary, recent experience associated with the Hepatitis C 
market suggests competition among brands led to significant reductions 
in net prices for innovative medicines.\22\ In addition, managed care 
entities incent use of lower cost alternatives, including generics. 
Health plans and self-
insured employers expect that their PBMs will effectively manage cost--
and often compensate on that basis.
---------------------------------------------------------------------------
    \22\ Humer, Caroline, ``HCV price war will save an estimated $4 
billion,'' Reuters, January 2015.
http://www.reuters.com/article/us-express-scr-hepatitisc-
idUSKBN0KV26X20150122.
---------------------------------------------------------------------------
    In addition to managed care stakeholders, drug approval and 
exclusivity processes introduce competition into the marketplace. For 
traditional, small-molecule drugs, the generic approval system created 
under the Drug Price Competition and Patent Term Restoration Act of 
1984 (known as the Hatch-Waxman Act) has been effective at maintaining 
commercial incentives for drug development through market exclusivity, 
while creating strong pricing pressure through generic competition 
later in the product lifecycle. Despite concerns during the passage of 
Hatch-Waxman, the number of approved New Drug Applications (NDAs) has 
remained relatively constant in over three decades since its enactment, 
and generic drugs now comprise 89 percent of all drugs dispensed in the 
United States.\23\ On average, drug prices decrease by 51 percent 
within 12 months of generic comptetion and decrease by nearly 80 
percent within 6 years. In the past 10 years, cost savings from 
generics are estimated at $1.68T.\24\
---------------------------------------------------------------------------
    \23\ FDA. ``Summary of NDA Approvals & Receipts, 1938 to the 
present.'' 2011. 
https://www.fda.gov/aboutfda/whatwedo/history/productregulation/
summaryofndaapprovals
receipts1938tothepresent/default.htm. Last accessed 2 May 2017.
    \24\ Ostroff, Stephen. ``Building a Modern Generic Review 
Process.'' Food and Drug
Administration. FDA, 4 Feb 2016. Web. 28 April. 2017. https://
blogs.fda.gov/fdavoice/index
.php/2016/02/building-a-modern-generic-drug-review-process/.
---------------------------------------------------------------------------
    There are a few exceptions where competition does not produce 
dramatic cost savings for patients in today's environment. First, is 
the case of generics with limited or no competition, in which the 
traditional competitive pricing pressures do not always apply.\25\ FDA 
Commissioner Scott Gottlieb has already indicated his support of 
initiatives to focus on speeding entry of second-to-market 
generics.\26\ For products that have not yet reached the end of their 
exclusivity, the FDA may also be able to accelerate approval of the 
second product to market to encourage more rapid competition and price 
concessions from branded drugs.
---------------------------------------------------------------------------
    \25\ Government Accountability Office. ``Generic Drugs under 
Medicare,'' August 2016.
http://www.gao.gov/assets/680/679022.pdf.
    \26\ Edney, Anna, ``Drug Prices Become Target for FDA as Chief 
Expands Purview,''
Bloomberg, June 2017. https://www.bloomberg.com/news/articles/2017-06-
05/drug-prices-
become-target-for-fda-as-chief-expands-agency-s-view.
---------------------------------------------------------------------------
    Biologics are another area of focus for improved competition. 
Biologics have grown to represent 79 percent ($11.5B) of Medicare Part 
B (Figure 5) and 21 percent ($8.7B) of Medicare Part D spending for the 
top 20 drugs in each program.\27\
---------------------------------------------------------------------------
    \27\ Avalere Health, ``Five Obstacles to Competition in the United 
States Biologics Market,''
http://avalere.com/expertise/life-sciences/insights/five-obstacles-to-
competition-in-the-united-
states-biologics-market.

---------------------------------------------------------------------------
            Figure 5: Medicare Top 20 Part B Spending Trends

[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]


    In 2010, a biosimilar approval pathway was created with an 
expectation that a multi-source competitive market could offer 
potential savings for the U.S. health system.\28\ However, obstacles 
remain that may limit the pricing benefits of a truly competitive 
biologics market--including both innovator and biosimilar products:
---------------------------------------------------------------------------
    \28\ The biosimilar pathway was created by the Biologics Price 
Competition and Innovation Act (BPCIA) as Title VII of the Patient 
Protection and Affordable Care Act in 2010. Available at:
http://www.fda.gov/downloads/Drugs/
GuidanceComplianceRegulatoryInformation/UCM21614
6.pdf.

    1. Complexity of Development: While generics typically experience a 
3-5 year development timeline and a cost of $1-5 million, biosimilar 
development requires 8-10 years and potentially costs $200 million or 
more due to the complexity of the molecules involved.\29\ As a result, 
it is unlikely that biosimilars pricing will ever match the level of 
savings in the generic pharmaceutical market.
---------------------------------------------------------------------------
    \29\ DiMasi, Joseph A., Henry G. Grabowski, and Ronald W. Hansen. 
``Innovation in the pharmaceutical industry: New estimates of R&D 
costs.'' Journal of Health Economics 47 (2016): 20-33. Federal Trade 
Commission. Emerging health care issues: Follow-on biologic drug 
competition. June 2009 Report. Available at: http://www.ftc.gov/os/
2009/06/P083901biologicsreport
.pdf.
---------------------------------------------------------------------------
    2. Prescribing Patterns: Patient and provider reticence to switch 
from a reference biologic to a biosimilar may also hamper market 
competition, though this manifests itself differently in different 
therapeutic areas.
    3. Interchangability: As of yet, the FDA has not issued final 
guidance on how products would be designated as interchangeable, which 
limits the potential for automatic substitution and associated cost 
savings.
    4. Physician Reimbursement Model: Within Medicare Fee-For-Service, 
the Average Sales Price (ASP) payment methodology may limit competition 
by paying physicians the same plus 6 percent add-on payment for either 
the innovator or the biosimilar product, which does not encourage 
providers to prescribe the biosimilar.
    5. Consumer Out-of-Pocket Costs: Within Medicare Part D, the 
current benefit structure results in beneficiaries paying substantially 
more out-of-pocket for biosimilars relative to the innovator 
product.\30\
---------------------------------------------------------------------------
    \30\ Avalere Health. ``Patient Out-of-Pocket Costs for Biosimilars 
in Medicare Part D''. Avalere Health, April 2016. Web. 19 May 2017. 
Available at: http://go.avalere.com/acton/attachment/
12909/f-02c0/1/-/-/-/-/
20160412_Patient%20OOP%20for%20Biosimilars%20in%20Part%20D
.pdf.
---------------------------------------------------------------------------
                      market-driven interventions
    As payers strive to link payment to value, healthcare stakeholders 
must agree on how to define and measure the value of any given product 
or service. In 2015, a series of new public-facing value frameworks 
emerged to address this question--attempting to balance clinical 
benefits of a given product against the system-wide costs. Many of 
these frameworks failed to adequately consider patient preferences in 
their assessments.
    In 2017, Avalere and FasterCures launched the Patient-Perspective 
Value Framework that assesses the benefits and costs of different 
healthcare options in the context of patients' personal goals and 
preferences, including things like symptom relief, complexity of 
regimen, and cost to the patient's family. This sort of holistic 
assessment of value that is broader than clinical outcomes and 
customized to reflect individual patient perspectives will be crucial 
for continuing to evolve our drug payment and delivery system to reward 
value.
    Importantly, assessments of value should consider not only cost of 
the medication but total cost of care, including pharmacy and medical 
spending. Unfortunately, in many instances, public program structures, 
contractual relationships, and data limitations prevent effective 
assessments of value based on total cost of care. For instance, the 
Medicare Part D program is inherently structured to encourage lower, 
more competitive premiums for drugs by reducing pharmacy benefit 
spending--even if higher spending on medications could reduce costs in 
Medicare Parts A and B.
    Outcomes-based contracts also represent a significant opportunity 
to shift away from prescription drug list prices toward value-based 
reimbursement models. A recent survey conducted by Avalere found that 
70 percent of health plans have favorable attitudes toward outcomes-
based contracts, and one-half of health plans indicate they have 
outcomes-based contracts already in place or are actively negotiating 
them.\31\ Unfortunately, existing regulatory barriers, including 
standards related to government price reporting and the Anti-Kickback 
Statute, presently hamper further development of this trend.\32\
---------------------------------------------------------------------------
    \31\ Avalere Health, ``Health Plans are Actively Exploring 
Outcomes-Based Contracts,'' May 30, 2017, http://avalere.com/expertise/
life-sciences/insights/health-plans-are-actively-exploring-out
comes-based-contracts.
    \32\ Eli Lilly and Company and Anthem, ``Promoting Value-Based 
Contracting Arrangements,'' January 2016, https://lillypad.lilly.com/
WP/wp-content/uploads/LillyAnthemWP2.pdf.
---------------------------------------------------------------------------
    Effective outcomes-based contracts require next-generation data 
analysis and interventions that enable payers and manufacturers to 
identify patients eligible for treatment, target outreach to ensure 
appropriate adherence and quality improvement, and measure product 
performance against pre-agreed-upon outcomes on an ongoing basis. 
Consumer benefit can be substantially enhanced through data-based 
engagement around pharmaceuticals, including:

    1. Data Aggregation and Management: Facilitating data sharing 
between a health plan and manufacturer to enable real-time contract 
management and ongoing evaluation of results.
    2. Patient Identification: Designing algorithms to proactively 
identify patients most likely to benefit from a given therapy based on 
their demographics, geography, treatment type, and insurance coverage. 
Conducting statistical modeling to predict patient outcomes and 
potential benefit from the product.
    3. Patient and Provider Engagement: Conduct targeted outreach to 
providers and directly to patients with interventions intended to 
improve adherence and achieve desired outcomes.

    As more manufacturers and health plans embark on these data-driven 
partnerships, the market will evolve away from historical pricing 
models and toward new, innovative ways to reward outcomes.
                               conclusion
    The focus of this testimony is how the healthcare delivery system 
affects the pharmaceutical prices faced by consumers. Consumer exposure 
to drug costs is determined by benefit design, the competitiveness of 
drug classes, and approaches to provider payment. As benefit design 
evolves, deductibles and cost sharing for medications have increased 
across government and commercial payers, increasing out-of-pocket 
spending. Of course, consumer costs are also importantly determined by 
the pricing decisions made by pharmaceutical companies prior to entry 
of product into the supply chain, and the level and type of rebates and 
discounts granted.
    Active management of the pharmaceutical benefit is vital to 
establishing a competitive pricing dynamic and achieving optimal 
patient outcomes. However, it is critical to ensure that benefit 
designs are achieving their promise, and not effectively serving as 
barriers to good medical and cost management. The value of 
pharmaceuticals should always be assessed in the context of total 
medical costs, and unfortunately, many government programs and employer 
benefit strategies fail to integrate the pharmaceutical expense line 
into the context of overall medical management.
    Increased competition in the pharmaceutical markets holds promise 
for substantially reducing costs. Speeding the approval of the second- 
and third-branded drugs in a therapeutic class would expedite 
competition and lead to more rapid price concessions. Ensuring a 
continued robust market for generic pharmaceutics is vital for 
effective cost management and improvement of population health 
outcomes. Finally, there is strong potential for consumers in growing 
biosimilar competition.
    Health system change is increasingly assigning value to 
improvements in population outcomes for common medical conditions, and 
many of these outcomes can be effectively achieved through better use 
of medication. A patient-oriented perspective on value is key to 
ensuring that the American healthcare system continues to evolve toward 
the consumer. Further alignment of stakeholder interests around the use 
of pharmaceuticals holds promise to benefit consumers as payment 
systems evolve toward value-based design.

    The Chairman. Thank you, Mr. Mendelson. Mr. Coukell, 
welcome.

 STATEMENT OF ALLAN COUKELL, SENIOR DIRECTOR, HEALTH PROGRAMS, 
           THE PEW CHARITABLE TRUSTS, WASHINGTON, DC

    Mr. Coukell. Thank you, Chairman Alexander, Senator Murray, 
and members of the committee, for holding this important 
hearing.
    Drugs are the fastest growing segment of healthcare 
spending and are projected to remain so. Indeed, net spending 
on pharmaceuticals increased 42 percent over the past decade 
and more than two-thirds of that was in the last 3 years.
    This creates a challenge for individual patients who face 
high out-of-pocket costs and three-quarters of Americans say 
that drug prices are unreasonable. It also represents a 
challenge for any individual or business that pays taxes or 
insurance premiums which cover most of the cost of drugs.
    The best way to establish prices is usually a free and 
competitive market, but the market for drugs is complex and 
deeply influenced by public policy. Effective competition is 
limited in a number of ways.
    For example, new drugs and some older drugs have monopoly 
pricing power or lack competition. There are misaligned 
incentives at many points in the system and historically, we 
have paid for new therapies, whatever the cost and however 
modest the benefit.
    Before I get to policy options, I would like to spend a 
moment on the main drivers of drug spending.
    The upward trend is largely the result of the rising cost 
of new medicines, especially high-cost biologics or specialty 
drugs. These are used by only 1 or 2 percent of the population, 
but account for more than 40 percent of costs.
    Launch prices for new drugs are at unprecedented levels and 
year-on-year increases in brand drug prices fuel further 
growth. In contrast, generic drugs create significant savings 
despite sharp increases in the price of some individual generic 
products.
    Generic competition has long been the main tool used to 
manage drug spending in the United States. When there is no 
competing product, the FDA prioritizes its review of new 
generics, but there are factors that delay generic entry in 
some cases, including the misuse of REMS programs and reverse 
payment or pay-for-delay agreements, both factors that Congress 
could address.
    As I have noted, the main driver of spending growth is 
biologic drugs where Congress has granted 12 years of monopoly 
protection. That is more than double the 5 years of protection 
typical for a small molecule drug.
    Another consideration is the increasing share of high-
priced drugs that come to market with taxpayer subsidies and 
other benefits through the Orphan Drug Act. It is important to 
support the development of products for rare diseases, but 
Congress may wish to ensure that the program does not have 
unintended costs when the drugs are used in larger populations 
than the Act originally considered.
    For drugs that do not have generic competition, but where 
there are multiple competing products that meet a similar 
clinical need, here there are tools that are widely used in 
commercial insurance, but are absent from some public programs, 
especially Medicare Part B.
    For example, Part B lacks a formulary and any process for 
utilization management or prior authorization. Indeed, Part B 
is designed in such a way that physicians and other providers 
receive greater reimbursement when they choose higher priced 
drugs over lower cost alternatives.
    Similarly, in Medicare Part D, there are a number of 
situations where plans are required to cover every drug in a 
class, such as antidepressants, and this reduces the Plan's 
leverage to negotiate prices.
    Most of our national drug spend accrues to drug 
manufacturers. Estimates vary and we do not have great numbers, 
but at least 70 percent. Several other entities including 
pharmacy benefits managers, pharmacies, and wholesalers also 
each retain a share.
    The crucial question for a self-insured employer or a plan 
sponsor is whether they could possibly obtain lower cost if the 
PBM's cut were smaller. This is a matter that largely sits in 
the negotiations between private parties, but it is a question 
that Congress could address as it pertains to public programs 
such as Part D.
    Finally, let me turn to the issue of value. Fundamentally, 
the debate about drug prices is a debate about value. Is the 
cost of the drug justified by the clinical outcomes that it 
produces? Value-based or outcomes-based contracts between 
manufacturers and purchasers are an attempt to formalize this 
understanding and sometimes to tie the level of payment 
directly to the results achieved.
    Such agreements may play an important role for some 
products, though to date, they remain relatively rare and their 
effect on healthcare costs has been limited. They are unlikely 
to become ubiquitous in the future, not least because they are 
costly to negotiate and monitor.
    In the larger sense, however, better alignment around value 
is needed. We should take into account health benefits that do 
not show up in the drug budget, but also recognize that the 
market only works when the potential purchaser has the ability 
to decide not to cover drugs when the cost is not justified.
    We live at a time of exciting biomedical innovation. We owe 
it to patients and taxpayers to ensure that the cost of drugs 
is sustainable into the future.
    Thank you and I welcome your questions.
    [The prepared statement of Mr. Coukell follows:]
                  Prepared Statement of Allan Coukell
                                summary
    Net spending on pharmaceuticals has increased 42 percent since 
2006, with more than two-thirds of that growth occurring since 2013. 
Indeed, prescription drug spending is now the fastest growing share of 
health spending, and projected to remain so. This creates challenges 
for patients, who face high out-of-pocket costs, as well as American 
taxpayers and businesses, which pay the bulk of the cost of drugs 
through taxes and insurance premiums.
    The main driver of increased drug spending is the rising cost of 
new medicines, particularly high-cost specialty products used by a 
small share of the population, but which account for more than 40 
percent of spending. As more and more innovative medicines come to 
market, the growth in launch prices and the growing share of the 
population that could potentially rely on these products looks 
unsustainable.
    Rising drug spending is a challenge for policymakers. While a 
competitive market is generally the best way to establish prices, the 
market for drugs is complex and deeply influenced by public policy, and 
effective competition is limited in a number of ways.
    Potential policy responses to address drug spending include:

     Increasing competition from generic and biosimilar 
products,
     Increasing competition among existing drugs,
     Incorporating the value into coverage and payment 
decisions, and
     Improving transparency in drug benefit contracting.

    As Congress seeks to manage the challenge of rising drug spending, 
it should look at the range of challenges and policy solutions to 
achieve a balance between access to innovative medicines and the 
equally important need to constrain cost-growth in health care.
                                 ______
                                 
    Chairman Alexander, Ranking Member Murray, members of the 
committee, thank you for holding this hearing and for the opportunity 
to present testimony.
    I direct health programs at The Pew Charitable Trusts, a nonprofit, 
nonpartisan research and policy organization. One of our focus areas is 
the challenge of rising drug spending.
    Net spending on pharmaceuticals has increased 42 percent since 
2006, with more than two-thirds of that growth occurring since 2013.\1\ 
Indeed, prescription drug spending is now the fastest growing share of 
health spending, and projected to remain so.\2\ Currently 
pharmaceuticals account for 16.7 percent of total expenditures.\3\ This 
creates challenges for:
---------------------------------------------------------------------------
    \1\ QuintilesIMS Institute, ``Medicines Use and Spending in the 
U.S.: Review of 2016 and Outlook to 2021,'' May 2017, Available at: 
http://www.imshealth.com/en/thought-leadership/quin
tilesims-institute/reports/medicines-use-and-spending-in-the-us-review-
of-2016-outlook-to-2021.
    \2\ The Centers for Medicare & Medicaid Services projects that 
prescription drug spending
growth will continue to outpace overall health care cost increases over 
the next decade. Source: Centers for Medicare & Medicaid Services, 
``National Health Expenditure Projections 2016-2025,'' Available at: 
https://www.cms.gov/Research-Statistics-Data-and-Systems/Statistics-
Trends-and-Reports/NationalHealthExpendData/Downloads/proj2016.pdf.
    \3\ Health and Human Services Assistant Secretary for Planning and 
Evaluation, ``Observations on Trends in Prescription Drug Spending,'' 
March, 2016, Available at: https://aspe.hhs.gov
/system/files/pdf/187586/Drugspending.pdf.

     Individual patients, who face high out-of-pocket costs. 
Surveys show that three-quarters of Americans think drug prices are 
unreasonable.\4\
---------------------------------------------------------------------------
    \4\ Kaiser Family Foundation, ``Kaiser Health Tracking Poll: 
September 2016,'' September 2016,
Available at: http://kff.org/health-costs/report/kaiser-health-
tracking-poll-september-2016/.
---------------------------------------------------------------------------
     American taxpayers and businesses, which pay the bulk of 
the cost of drugs through taxes and insurance premiums.

    Rising drug spending is a challenge for policymakers, too, because 
while a competitive market is generally the best way to establish 
prices, the market for drugs is complex and deeply influenced by public 
policy, and effective competition is limited in a number of ways. These 
include:

     Monopoly pricing for new drugs,
     Lack of competition for some older drugs,
     Misaligned incentives and incomplete information for 
stakeholders, including payers, providers and patients at many points 
in the system, and
     A historical willingness to cover new therapies without 
ensuring that their clinical benefits justify the price.

    In discussing potential policy options, it is important to 
understand the main drivers of increased drug spending. This trend is 
largely the result of the rising cost of new medicines, particularly 
high-cost specialty products (including biologics),\5\ which are only 
used by a small share of the population, but account for more than 40 
percent of drug spending.\6\ Today, fewer than 2 percent of 
prescriptions account for over one-third of retail drug spending.\7\ 
Some of these products are exciting therapeutic advances--true 
breakthroughs--but some are not. And they are reaching market at ever-
higher launch prices. Net prices (i.e., prices after rebates) are also 
increasing. These products will typically not face generic competition 
for years. Increased volume of sales and year-on-year price increases 
for brand drugs that do not face competition are also a driver of 
spending. As more and more innovative medicines come to market, the 
growth in launch prices and the growing share of the population that 
could potentially rely on these products looks unsustainable.
---------------------------------------------------------------------------
    \5\ Examples include medicines for cancer, multiple sclerosis, and 
autoimmune conditions.
    \6\ QuintilesIMS Institute, ``Medicines Use and Spending in the 
U.S.: Review of 2016
and Outlook to 2021,'' May 2017, Available at: http://
www.imshealth.com/en/thought-leadership/quintilesims-institute/reports/
medicines-use-and-spending-in-the-us-review-of-2016-outlook-to-2021.
    \7\ QuintilesIMS Institute, ``Medicines Use and Spending in the 
U.S.: Review of 2016
and Outlook to 2021,'' May 2017, Available at: http://
www.imshealth.com/en/thought-leadership/quintilesims-institute/reports/
medicines-use-and-spending-in-the-us-review-of-2016-outlook-
to-2021.
---------------------------------------------------------------------------
    While new brand drugs drive spending growth, generic drugs create 
significant savings. In 2016, about 90 percent of prescriptions 
dispensed were for generics, but total spending on these medications 
actually fell,\8\ despite sharp increases in the prices of some 
individual products.
---------------------------------------------------------------------------
    \8\ QuintilesIMS Institute, ``Medicines Use and Spending in the 
U.S.: Review of 2016 and Outlook to 2021,'' May 2017, Available at: 
http://www.imshealth.com/en/thought-leadership/quintilesims-institute/
reports/medicines-use-and-spending-in-the-us-review-of-2016-outlook-to-
2021.
---------------------------------------------------------------------------
    Net pharmaceutical manufacturer revenue from U.S. sales reached 
$323 billion in 2016.\9\ This represents the large majority, but not 
the total of U.S. drug spending, because other entities, including 
pharmacy benefit managers, wholesalers and pharmacies, also each retain 
a portion of total spending on drugs.
---------------------------------------------------------------------------
    \9\ QuintilesIMS Institute, ``Medicines Use and Spending in the 
U.S.: Review of 2016 and Outlook to 2021,'' May 2017, Available at: 
http://www.imshealth.com/en/thought-leadership/quintilesims-institute/
reports/medicines-use-and-spending-in-the-us-review-of-2016-outlook-to-
2021.
---------------------------------------------------------------------------
                       potential policy responses
Increased Competition From Generic and Biosimilar Products
    Competition from generic drugs has long been the main tool used to 
manage drug spending in the United States.\10\ Currently, the FDA 
prioritizes the review of first generics, as well as generic 
applications for drugs for which there is only one manufacturer;\11\ 
however, other policy responses could facilitate generic entry, 
including:
---------------------------------------------------------------------------
    \10\ Generics are now nearly 90 percent of all prescriptions 
filled, but less than 30 percent
of drug spending. QuintilesIMS Institute, ``Medicines Use and Spending 
in the U.S.: Review of 2016 and Outlook to 2021,'' May 2017, Available 
at: http://www.imshealth.com/en/thought-leadership/quintilesims-
institute/reports/medicines-use-and-spending-in-the-us-review-of-2016-
outlook-to-2021.
    \11\ FDA Center for Drug Evaluation and Research, Manual of 
Policies and Procedures 5240.3.
Rev 2. Prioritization of the Review of Original ANDAs, Amendments, and 
Supplements, 2016,
http://www.fda.gov/downloads/AboutFDA/CentersOffices/
OfficeofMedicalProductsandTobacco
/CDER/ManualofPoliciesProcedures/UCM407849.pdf.

     Policies to ensure that manufacturers of brand name drugs 
cannot block generic developers' access to sample products required for 
bioequivalence testing,\12\ and
---------------------------------------------------------------------------
    \12\ Barriers to generic entry exist when brand drug manufacturers 
prevent generic companies
from obtaining their products in order to carry out the testing 
necessary to develop a generic version of a drug. In some cases, FDA 
orders a manufacturer to develop a program to ensure safe use of a 
high-risk product, such as a requirement that a drug can only be 
acquired through select providers, or the manufacturer may 
independently opt for a restricted distribution network. However, some 
generic manufacturers allege that these provisions are used to restrict 
generic company access. Litigation to obtain samples for comparative 
testing often takes years to conclude. Source: The Pew Charitable 
Trusts, ``Policy Proposal: Improving Generic and Biosimilar Developer 
Access to Brand Pharmaceutical Samples,'' May 2017, Available at: 
http://www.pewtrusts.org/en/research-and-analysis/fact-sheets/2017/05/
policy-proposal-improving-
generic-and-biosimilar-developer-access-to-brand-pharmaceutical-
samples.
---------------------------------------------------------------------------
     Policies to limit so-called ``reverse payment'' 
settlements that can, in some cases, be anti-competitive by delaying 
generic market entry.\13\
---------------------------------------------------------------------------
    \13\ Brand and generic companies frequently strike ``reverse 
payment'' or ``pay-for-delay''
settlements that involve a brand pharmaceutical manufacturer paying one 
or more potential generic competitors to resolve patent infringement 
lawsuits and agree upon a date by which the generic product can come to 
market. Both the brand and generic company benefit under such 
agreements, while the public pays higher prices than it would if the 
generic is available sooner. In 2015, for example, the Federal Trade 
Commission (FTC) reached a $1.2 billion settlement with Cephalon, Inc. 
for illegally blocking generic competition to its blockbuster sleep-
disorder drug Provigil, driving up costs for consumers, insurers, and 
pharmacies. FTC and the Congressional Budget Office have estimated that 
banning or otherwise limiting these agreements would generate 
significant savings for consumers and taxpayers. However, any policy 
should also consider that some such settlements may be pro-competitive.

    However, the agency alone cannot address the challenge of 
escalating drug costs. In particular, it should be noted that biologic 
drugs are one of the most significant drivers of increased spending and 
they represent 9 of the 10 highest expenditure products in Medicare 
Part B.\14\ Any policy that hastens access to biosimilars and increases 
competition among these products would reduce spending.\15\ This 
includes better aligning biologic and small-molecule exclusivity 
periods. Congress gave new biologics 12 years of monopoly, free of 
competition from biosimilars, which is more than double the 5 years of 
protection typically granted to new small molecule drugs.
---------------------------------------------------------------------------
    \14\ Medicare Payment Advisory Commission, ``Report to the 
Congress, Medicare and the Health
Care Delivery System,'' June 2016, Available at: http://www.medpac.gov/
docs/default-source/reports/june-2016-report-to-the-congress-Medicare-
and-the-health-care-delivery-system.pdf?sfvrsn
=0.
    \15\ There is a substantial difference in the duration of market 
protection provided to makers
of biological drugs, which are derived from living cells, and that 
given traditional pharmaceuticals. Reducing the period of guaranteed 
exclusivity for biologics from the current 12 years to 7 years would 
bring them more in line with traditional drugs. Such a change could 
generate more than $4 billion in savings to Medicare and other Federal 
health care programs over 10 years. Source: Kaiser Family Foundation, 
``Summary of Medicare Provisions in the President's Budget for Fiscal 
Year 2016,'' February 2015, Available at: http://kff.org/Medicare/
issue-brief/summary-of-Medicare-provisions-in-the-presidents-budget-
for-fiscal-year-2016/.
---------------------------------------------------------------------------
    In addition, an increasing share of drugs comes to market with the 
benefit of taxpayer subsidies and other benefits established through 
the Orphan Drug Act (ODA). While important to incentivize the 
development of products for rare diseases, in some circumstances, these 
products are used much more widely than the ODA intended.\16\ Congress 
may wish to evaluate a number of policy options to ensure the 
appropriate balance, including:
---------------------------------------------------------------------------
    \16\ Daniel MG, Pawlik TM, Fader AN, et al. The Orphan Drug Act: 
Restoring the Mission
to Rare Diseases. Am J Clin Oncol. 2016 Apr;39(2):210-3.

     Limiting the 340B carve-out for products with an orphan 
designation, and
     Considering the potential to cap the value of public 
subsidies.
Increased Competition Among Existing Drugs
    In cases where there are multiple competing, but non-identical 
brand drugs on the market, there are a range of tools that payers can 
use to manage spending while protecting patient access. These include 
formulary placement, prior authorization, and step therapy. While these 
approaches are well-established in commercial insurance, they are 
absent or limited in parts of the Medicare program. For example, 
reimbursement policies in Medicare Part B, which pays for the use of 
physician-
administered drugs, creates a financial incentive for clinicians to 
choose high-priced drugs over lower cost alternatives of similar 
effectiveness.\17\ In Medicare Part D, the private plans that 
administer the outpatient prescription drug benefit are required to 
cover all drugs on the market in six protected classes.\18\ This 
mandate limits the ability of Part D plans to negotiate discounts for 
drugs in these classes. To increase competition among existing drugs in 
Medicare, consideration could be given to policies that would:
---------------------------------------------------------------------------
    \17\ Health and Human Services Assistant Secretary for Planning and 
Evaluation, ``Medicare Part B Drugs: Pricing and Incentives,'' March 
2016, Available at: https://aspe.hhs.gov/system/files/pdf/187581/
PartBDrug.pdf.
    \18\ Current law requires Medicare drug plans to cover every 
medication within six broad
classes, including antidepressants and antipsychotics. Giving greater 
flexibility to private Part D plans in how they design their drug 
benefits could improve their ability to negotiate lower drug prices on 
behalf of Medicare beneficiaries and the Federal Government. Source: 
Lee T, Gluck A, Curfman G, ``The Politics of Medicare And Drug-Price 
Negotiation (Updated)'', 
Health Affairs Blog, September 19, 2016, Available at: http://
healthaffairs.org/blog/2016/09/19/the-politics-of-Medicare-and-drug-
price-negotiation/.

     Increase competition within the Medicare Part B 
program,\19\
---------------------------------------------------------------------------
    \19\ The Medicare Part B program spends some $25 billion each year 
for drugs administered
in clinics and physician offices. Policies to manage biosimilar drugs 
similar to the current approach for generics could create greater 
competition. Source: The Pew Charitable Trusts, ``Can Biosimilar Drugs 
Lower Medicare Part B Drug Spending?'' January 2017, Available at: 
http://www.pewtrusts.org/en/research-and-analysis/issue-briefs/2017/01/
can-biosimilar-drugs-lower-Medicare-part-b-drug-spending.
---------------------------------------------------------------------------
     Increase competition within Medicare Part D,\20\ and
---------------------------------------------------------------------------
    \20\ Medicare price negotiation (which is currently prohibited by 
statute) would achieve savings
only if combined with new authority for Medicare to design its own 
formulary or preferred drug list, similar to how private plans 
prioritize certain drugs among equally effective therapies. Source: 
Shih C, Schwartz J, Coukell A, ``How Would Government Negotiation of 
Medicare Part B Drug Prices Work?'', Health Affairs Blog, February 1, 
2016, http://healthaffairs.org/blog/2016/02/01/how-would-government-
negotiation-of-Medicare-part-d-drug-prices-work/.
---------------------------------------------------------------------------
     Shift some drugs from the medical to the pharmacy benefit.
An Increased Focus on Value
    Value-based or outcomes-based contracts (OBCs) between 
manufacturers and purchasers--contracts that tie the price of a drug to 
specified outcomes--may play an important role for some products, 
though their impact on health care costs has been limited to date. A 
recent survey of 45 health plans found that 24 percent of them have an 
outcomes-based contract in place today, and an additional 30 percent 
are in negotiations to enter into one.\21\ However, just one-third of 
plans with an OBC in place reported cost savings. There are numerous 
challenges in setting up these contracts, and their utility may be 
limited by their cost to negotiate and the need for sophisticated data 
systems to monitor success.\22\ However, policymakers could examine to 
what extent Federal law or regulations pose potential barriers for 
establishing OBCs. For example, the Centers for Medicare & Medicaid 
Services could consider whether Medicaid Best Price rules may impede 
these agreements and develop additional guidance, if warranted.
---------------------------------------------------------------------------
    \21\ Avalere, ``Health Plans Are Actively Exploring Outcomes-Based 
Contracts,'' Available at: 
http://avalere.com/expertise/life-sciences/insights/health-plans-are-
actively-exploring-outcomes-based-contracts.
    \22\ Garrison LP, Carlson JJ, Bajaj PS, et al. ``Private Sector 
Risk-Sharing Agreements in the
United States: Trends, Barriers, and Prospects.'' American Journal of 
Managed Care, September 2015, Available at: http://www.ajmc.com/
journals/issue/2015/2015-vol21-n9/Private-Sector-Risk-Sharing-
Agreements-in-the-United-States-Trends-Barriers-and-Prospects.
---------------------------------------------------------------------------
    Nevertheless, policymakers should consider additional strategies to 
incorporate the value of a drug into coverage and payment decisions. 
Factoring value into coverage decisions--including the choice not to 
cover drugs whose cost is not justified--would help reduce overpayment 
for marginal clinical gains. Alternatively, policies to limit the price 
of drugs based on assessments of their value when comparable 
alternative therapies exist are strategies that have the potential to 
lower spending on pharmaceuticals in public programs.
Opportunities To Improve Transparency in Drug Benefit Contracting
    Pharmacy benefits managers--the intermediaries that insurers and 
employers pay to both administer prescription drug benefits and 
negotiate discounts from drug companies--play a crucial role, using 
their large sales volumes and their ability to create formularies to 
spur drug manufacturers to offer price concessions. However, a share of 
the savings accrues to the pharmacy benefit managers themselves, and 
their contracts can be extremely complex, making it difficult even for 
sophisticated benefits administrators to determine whether they have 
achieved optimal savings.
    Congress could consider requiring greater transparency of contract 
terminology and definitions between payers and pharmacy-benefit 
managers,\23\ as well as mandating the ability for payers to audit 
these deals, and ensuring that entities that advise purchasers on PBM 
contracts do not also have financial relationships with the PBMs 
themselves.
---------------------------------------------------------------------------
    \23\ More than two dozen of the largest U.S. corporations, 
including American Express,
Coca-Cola, IBM, Marriott, and Verizon, have proposed greater 
transparency in these contracts. Source: Silverman E, ``The `gouge 
factor': Big companies want transparency in drug price negotiations,'' 
STAT News, August 2, 2016. Available at: https://www.statnews.com/
pharmalot/2016/08/02/drug-price-transparency-pharmacy-benefits-manager/
 
---------------------------------------------------------------------------
                               conclusion
    As Congress seeks to manage the challenge of rising drug spending, 
it should look at the range of challenges and policy solutions to 
achieve a balance between access to innovative medicines and the 
equally important need to constrain cost-growth in health care. I thank 
you for holding this hearing, and welcome your questions.

    The Chairman. Thank you, Mr. Coukell.
    Dr. Howard, welcome.

 STATEMENT OF PAUL HOWARD, Ph.D., DIRECTOR AND SENIOR FELLOW, 
        HEALTH POLICY, MANHATTAN INSTITUTE, NEW YORK, NY

    Mr. Howard. Thank you.
    Chairman Alexander, Ranking Member Murray, members of the 
committee.
    I would like to thank you for the opportunity to testify 
today about, ``The Cost of Prescription Drugs: How the Drug 
Delivery System Affects What Patients Pay.''
    I am truly honored to be speaking to you as part of such a 
distinguished panel.
    My testimony today is derived from my research and 
experience as director of health policy and a member of the 
Manhattan Institute's Project FDA.
    I believe our focus in this area should try to achieve 
three goals. To broadly promote innovation for the American 
patient; to reduce rent-seeking in the drug delivery system, 
and realign provider incentives to match the best treatment to 
the most appropriate patient; and finally, to continue our 
broad shift of reimbursement away from volume and toward value.
    The United States has become the unquestioned global leader 
in medical innovation over the last several decades thanks to a 
virtual cycle of innovation where older generic drugs compete 
very effectively with branded drugs once those patents expire.
    Inexpensive generic competition--accounting for close to 90 
percent of retail drugs sold in the United States--forces 
branded companies to press the frontiers of science and 
innovation, and develop new medicines that can offset other 
components of healthcare spending including unnecessary 
hospitalizations, physician visits, and nursing home use.
    Innovation benefits patients by extending and improving 
health, but it also benefits the economy by creating more jobs 
and attracting more investment to the United States. This is a 
social and economic contract that has worked remarkably well 
for the most part. In fact, it is no exaggeration to say that 
we stand on the precipice of a Golden Age of medicine.
    New treatments could allow us to attack diseases at the 
molecular and genetic roots. We can finally begin to speak of 
lasting remissions, sharply reduced disability, and even true 
cures for once dreaded diseases like cancer. Even more powerful 
approaches, like regenerative medicine and gene therapy will 
undoubtedly be approved by the FDA over the next 5 to 10 years.
    The outlook for innovation has never been brighter even as 
the industry is embroiled in a wave of product pricing 
controversies.
    However, while most prescriptions in the United States are 
broadly affordable--in fact about 30 percent of all 
prescriptions have $0 co-pays--there are real challenges facing 
patients, particularly patients with serious, chronic illnesses 
who are facing too much cost sharing from benefit designs 
through high co-insurance and deductibles, largely for what are 
called specialty medicines.
    This is a serious challenge that must be addressed. High 
out-of-pocket costs can lead to lower patient compliance, 
increased financial stress, worse health outcomes, and even 
higher costs overall.
    Without abandoning the current market-based paradigm, we do 
need to update it to meet the challenges of the 21st century 
and to take full advantage of new technological tools that can 
enable us to more rapidly match the right patient to the right 
medicine at the right time and at an affordable price for both 
patients and society.
    I have three specific recommendations for Congress today.
    First, reduce renting-seeking in the drug delivery system. 
This effort should begin with fixing the 340B Drug Discount 
Program. 340B drug sales have become a major source of hospital 
revenues and account for as much as 50 percent of infused 
oncology products.
    The shift of treatments into the 340B environment has 
increased the cost of cancer medicines, increased the cost of 
treatment for patients with both commercial insurance and 
Medicare Part B co-
insurance, and has changed the mix of treatments toward more 
expensive therapies.
    Congress should reform 340B and return it to its original 
intent to assist hospitals that largely serve indigent and 
uninsured populations, and ensure that its rebates are extended 
to the most vulnerable patients, like the uninsured.
    Second, we should promote value-based arrangements that 
give innovative companies, physicians, and hospitals equal skin 
in the game to match patients to treatments that work. 
Regulators can help accelerate the transition to these 
contracts by removing regulatory barriers that discourage 
companies from testing the full potential of indication and 
outcomes-based contracts to improve patient outcomes and match 
the performance of medicines to their real world outcomes.
    Finally, I would encourage Congress to consider a broader 
menu of reforms that would allow payers to take a longer term 
view of the value and costs of new medicines. Such reforms 
would include encouraging the uptake of value-based designs 
within high deductible health plans; new financing tools for 
State Medicaid programs that would allow them to purchase 
curative technologies like Hepatitis C drugs upfront, but 
spread the costs over longer periods of time; and multiyear 
private insurance contracts that may align payers' incentives 
with patients' long term health.
    In conclusion, for the last 30 years, the United States has 
benefited from arrangements that have put us on the cusp of 
tremendous new medical achievements. The system is under strain 
today because the pace of the innovation is accelerating while 
our healthcare system is still divided into payment silos that 
create the appearance of a zero sum game between stakeholders.
    I am confident that policymakers can work together on a 
bipartisan basis to update and improve America's virtual cycle 
of innovation and affordability for the next 30 years.
    Thank you.
    [The prepared statement of Dr. Howard follows:]

                Prepared Statement of Paul Howard, Ph.D.

                                summary
    An effective balance between strong upfront patent rights and rapid 
generic competition has helped make the United States the unquestioned 
global leader in medical innovation, while also assuring broad 
affordability, for the last several decades. However, there are real 
challenges facing the health care system today, specifically for 
patients with serious chronic illnesses who face high coinsurance or 
deductibles.
    The U.S. health care system is in dire need of competition to 
reduce wasteful and ineffective care. However, addressing drug prices 
directly, in a silo, is inadvisable because we want technology to 
substitute for labor, something that happens only through innovation.
    The Centers for Medicare and Medicaid Services (CMS) expects that 
medicine's share of total health care costs will closely track overall 
health care spending growth over the next decade. However, costs 
attributable to expensive specialty medicines are rising significantly 
faster than for traditional drugs, with the result that a small 
fraction of all prescriptions account for a disproportionate share of 
all out-of-pocket spending on prescription medicines.
    Fortunately, there are promising signs that payers and 
manufacturers are edging toward agreement that patients with serious 
diseases facing coinsurance should have access to PBM-negotiated 
discounts. There is also growing agreement that contracts for high-
cost, high-value medicines should reflect evidence of their real-world 
performance.
    Congress, CMS, and FDA have important roles to play in encouraging 
the market to shift to new arrangements that lower barriers to patient 
access.
    First, Congress should reform the 340B program and return it to its 
original intent to assist hospitals serving largely indigent and 
uninsured populations. The current system instead encourages profit 
skimming and hospital consolidation.
    Second, HHS and FDA should coordinate on creating safe harbors from 
Federal regulations that would allow stakeholders to experiment with 
new contractual arrangements. This allows manufacturers to bear 
financial risk for new medicines, without discouraging innovation.
    Finally, Congress should consider opportunities to encourage using 
value-based insurance designs, new financing tools for State Medicaid 
programs, and longer-term insurance contracts that better align payers' 
incentives with patients' long-term health.
                                 ______
                                 
    Chairman Alexander, Ranking Member Murray, members of the 
committee, I would like to thank you for the opportunity to testify 
today about ``The Cost of Prescription Drugs: How the Delivery System 
Affects What Patients Pay.'' I am truly honored to be speaking to you 
today.
    Bipartisan support for medical innovation, including strong support 
for FDA user fee agreements, an encouraging environment for translating 
basic medical research into promising new treatments, and an effective 
balance between strong upfront patent rights and rapid generic 
competition once those patents expire has made the United States the 
unquestioned global leader in medical innovation for the last several 
decades.\1\
---------------------------------------------------------------------------
    \1\ For a fuller discussion, see Biopharmaceutical Policy for 
American Leadership 52 in the 21st Century, Peter Huber & Paul Howard. 
https://nationalaffairs.com/storage/app/uploads/public
/doclib/20161209_UnleashingOpportunityInnovationPolicyBooklet.pdf.
---------------------------------------------------------------------------
    Broadly speaking, robust generic competition, along with the advent 
of large and sophisticated payers, has kept the relative share of 
health care costs attributable to medicines broadly stable, even as new 
medicines have become a cornerstone of treatment for acute and chronic 
illness.\2\
---------------------------------------------------------------------------
    \2\ Total U.S. health care spending in 2015 was $3.2 trillion. 
Approximately two-thirds of those costs are attributable to hospital 
care (roughly 30 percent) and physician services (around 25 percent). 
Outpatient prescription drug spending has held steady at around 10 
percent of total expenditures for decades. Adding in hospital 
administered drugs raises that share to 14-15 percent. Fein, Adam J., 
The 2017 Economic Report on U.S. Pharmacies and Pharmacy Benefit 
Managers, Drug Channels Institute, 2017.
---------------------------------------------------------------------------
    However, there are real challenges facing the health care system 
today, specifically for patients with serious chronic illnesses who are 
facing high coinsurance or deductibles largely for what are called 
``specialty'' medicines, and that challenge needs to be addressed.
    Ironically, part of that challenge is due to the advent of highly 
effective new treatments for hepatitis C, cystic fibrosis, some 
cancers, and rheumatoid arthritis. A wave of even more powerful 
treatments, including gene therapies, new immune-
oncology therapies, and regenerative medicine approaches are already on 
the horizon and likely to be approved by the FDA over the next 5 to 10 
years. The outlook for innovation has never been brighter, even as the 
industry has become a lightning rod for product pricing 
controversies.\3\
---------------------------------------------------------------------------
    \3\ Many critics point to European drug price controls as the 
solution--ignoring the outsized role
that the U.S. market plays in global innovation generally. See To Lower 
Drug Prices, Innovate, Don't Regulate. https://www.nytimes.com/
roomfordebate/2015/09/23/should-the-government-impose-drug-price-
controls/to-lower-drug-prices-innovate-dont-regulate.
---------------------------------------------------------------------------
    I would remind critics that having too many effective therapies is 
an enviable problem to have, and can largely be addressed by enhancing 
market competition and creating new financing and reimbursement tools 
that allow payments for treatments to be pegged to their real-world 
outcomes--like lowering costs elsewhere in the health care system, 
improving patient survival or quality of life, or simply delivering a 
comparable outcome to existing technologies less expensively.\4\
---------------------------------------------------------------------------
    \4\ For a fuller discussion of the role of analytics, diagnostics, 
and outcomes-based payments see Precision Medicine in the Era of Health 
Care Reform. https://www.manhattan-institute.org/sites/default/files/R-
PH-0416.pdf.
---------------------------------------------------------------------------
    The U.S. health care system is in dire need of competition to 
reduce wasteful and ineffective care, and new technological platforms 
can allow the rapid analysis of large volumes of patient data--enabling 
competition not only between medicines, but among providers and 
different payment platforms. In short, Congress should create 
incentives that reward providers who use medicines (both generic and 
branded) and technology to deliver care as efficiently as possible, 
while also empowering patients with the information they need to 
identify high quality providers.\5\
---------------------------------------------------------------------------
    \5\ As researchers in a Health Affairs blog wrote in 2015:

     Adherence to treatment guidelines and quality remain highly 
variable across providers in a wide variety of oncology domains, 
including end-of-life care, prostate cancer, ovarian cancer, and 
colorectal cancer screening.
     Problems range from underuse of highly effective therapies and 
procedures to overuse of ineffective ones. Thus, while today's typical 
cancer patient is likely better off than her counterpart from earlier 
years, not all patients are receiving the most effective care. . . . 
Rewarding physicians for patient health improvement moves physician 
incentives closer to the values and needs of patients.
---------------------------------------------------------------------------
    Fixing drug prices in a silo is inadvisable because we want 
technology to substitute for labor, including unnecessary 
hospitalizations, doctor's visits, or debilitating stays in a nursing 
home.\6\ Bending the curve of health care cost growth and delivering 
state-of-the-art care can, and must, go hand in hand if we are to meet 
America's most pressing health care challenges.
---------------------------------------------------------------------------
    \6\ See Michael Mandel, Rising Labor Costs Accounted for 47 percent 
of Increased Personal Health Care Spending in 2015. http://
www.progressivepolicy.org/blog/rising-labor-costs-accounted-47-percent-
increased-personal-health-care-spending-2015/.
---------------------------------------------------------------------------
    There is no accounting or discount scheme that will enable us to 
grapple with the scourge of Alzheimer's short of medicines that delay, 
or perhaps even prevent it entirely. Innovation is our best hope for 
lowering costs and improving outcomes.
    With that in mind, I would like to frame my remarks with some 
observations that I hope will guide our discussion today.
    We stand at the precipice of a Golden Age of medicine, with new 
treatments that allow us to treat diseases at their molecular and 
genetic roots, where we can begin to speak of lasting remissions, 
sharply reduced disability, and even true cures--as from gene therapy.
    Nonetheless, broadly speaking, the vast majority of prescriptions 
in the United States today are highly affordable, with roughly 30 
percent having a $0 copay. Most Americans who take prescription drugs 
regularly say they are affordable. In fact, close to 90 percent of all 
retail prescriptions in the United States today are for generics,\7\ 
which have saved payers hundreds of billions of dollars over the last 
decade.
---------------------------------------------------------------------------
    \7\ Fein, Exhibit 2: Unbranded and Branded Generics, Share of U.S. 
Prescriptions, 2005-21.
---------------------------------------------------------------------------
    Apart from a sharp surge in drug spending in 2014, when a new class 
of highly effective medicines for hepatitis C were introduced, drug 
price growth has been moderate, especially when we disaggregate price 
increases from increased utilization. A growing number of Americans are 
taking medicines, which is unsurprising given that age is one of the 
leading risk factors for developing a chronic illness. Payers, however, 
have been able to leverage large purchasing networks to increase 
manufacturer rebates as a share of gross revenues.
    As a result, the Centers for Medicare and Medicaid Services (CMS) 
expects that medicine's cost growth will closely track overall health 
care spending growth over the next decade.\8\
---------------------------------------------------------------------------
    \8\ Howard and Feyman, Drug Price Controls Hurt Patients Most. 
https://www.manhattan
-institute.org/html/issues-2016-drug-price-controls-hurt-patients-most-
7949.html.
---------------------------------------------------------------------------
    When we drill down into the market, however, costs attributable to 
so-called specialty medicines are rising significantly faster than for 
traditional drugs, and today constitute close to 30 percent of all drug 
revenues. Prices for these medicines are rising significantly faster 
than other costs, although they also treat especially serious chronic 
diseases. They also face less generic competition, including, at least 
for now, from biosimilars.
    That overall drug spending has not risen faster is a testament to 
the success of insurers and pharmaceutical benefit managers (PBMs) cost 
containment strategies. They have employed utilization management tools 
like prior authorization, drug tiering and coinsurance, and larger 
deductibles for non-preferred medicines manage the uptake of specialty 
drugs.
    To retain formulary access for specialty medicines, companies often 
offer quite substantial rebates. One PBM, Express Scripts, noted in the 
last year that it held price increases for its members to under 3 
percent.
    How is it possible, then, that payers can complain about a drug 
pricing crisis, while pharmaceutical firms note that drug spending, and 
especially net pricing after accounting for rebates and utilization 
increases, are fairly stable?
    The he-said, she-said debate can be resolved by simply noting that 
there are an increasing number of patients with high deductible plans, 
where medicines are part of a single combined medical and pharmacy 
deductible, and of patients with traditional insurance who are 
prescribed medicines where they pay coinsurance based on the list 
prices of these medicines, and thus do not benefit from PBM-negotiated 
discounts.
    For patients who may need a medicine that is excluded from the PBMs 
formulary entirely, short of manufacturers' patient assistance 
programs, they may have to bear the full costs of these medicines 
themselves. (PBMs respond that they pass along these rebates to 
employers and other payers, helping to keep overall health insurance 
increases lower than they would otherwise be.)
    To summarize: Patients with serious chronic illnesses may find 
themselves caught between the hammer of rising cost control efforts at 
a time of rapid therapeutic innovation.
    There are some promising signs that payers and manufacturers 
recognize that the status quo is unsustainable, and are edging toward 
agreement that patients with serious diseases should have access, at 
the point of purchase, to PBM-negotiated discounts.
    There is also growing agreement that reimbursement contracts for 
high-cost, high-value medicines should reflect evidence of their real-
world performance, which may be very different than outcomes generated 
in clinical trials used for FDA approval--or for an entirely new 
indication, where evidence may be lacking at the time of approval.
    Congress, HHS, and FDA have critical roles to play in encouraging 
the market to shift to new arrangements that lower barriers to patient 
access and encourage greater collaboration in getting the right 
medicine to the right patient at the right time--and at a price that is 
sustainable for patients, payers, and innovators.
    I have three recommendations for Congress today.

     First, fix the 340B drug discount program. 340B was 
originally designed to assist hospitals serving indigent patients, but 
has expanded to cover approximately 50 percent of the market for 
infused oncology medicines.
    While hospitals acquire these drugs at large mandatory discounts, 
several studies suggest that they are billing commercial insurers a 
percentage of allowable charges, which is significantly higher than 
their acquisition price. As a result, such sales have become a major 
source of hospital revenues and an inducement for vertical hospital 
consolidation--i.e., for hospitals to acquire oncology practices and 
then charge far higher prices than standalone oncology practices (who 
charge Medicare ASP+6 percent).
    Commercially insured patients and Medicare Part B patients thus may 
find themselves paying coinsurance on these highly inflated prices. 
Congress should reform 340B, returning it to its original intent to 
assist hospitals that largely serve indigent and uninsured populations, 
and ensure its rebates are extended to vulnerable patients (like the 
uninsured), and commercially insured and Medicare Part B patients who 
may be treated at these hospitals and find themselves paying 
coinsurance. Reducing the financial arbitrage available to hospitals 
would also reduce the incentive for hospitals to acquire oncology 
practices, reduce pricing pressures on oncology payers and patients, 
and reduce pricing distortions in other parts of the market.
     Second, stakeholders also seem to be in broad agreement 
that novel reimbursement contracts should reflect medicines' value, 
both through indication- or outcomes-based designs. Regulators should 
help accelerate the transition to these contracts by removing 
regulatory barriers that discourage companies from testing the waters.
    Specifically, HHS and FDA should coordinate on creating safe 
harbors from Federal regulations that would allow stakeholders to 
experiment with innovative new contractual arrangements. These might 
allow for reimbursement to track a medicine's real-world performance, 
or for pricing to evolve as the weight of evidence evolves.
    For instance, recently Eli Lilly and Anthem petitioned HHS and the 
FDA to grant them safe harbor from regulations, like Medicaid Best 
Price and Stark anti-kickback rules, which prohibit them from 
experimenting with these types of contracts.
    With the FDA at the table, regulators could also create standards 
for the collection of real-world evidence that would allow the agency 
to update a drug's label to reflect new information on safety and 
efficacy, expand to new label indications, and generally support the 
development of a ``health care learning system.'' This system uses 
information on patient outcomes, medication regimens, and even delivery 
system reforms to create a rapid feedback loop that helps ensure that 
the right medicine reaches the right patient at the right time--and all 
in a framework pushing every dollar spent on patient care to be used as 
efficiently as possible.
     And finally, I would encourage Congress to consider a 
broader menu of reforms that would allow payers to take a longer 
perspective on the value and costs of new medicines. Such reforms would 
include encouraging the uptake of value-based insurance designs; new 
financing tools for State Medicaid programs to purchase curative 
technologies rapidly, but spread the costs over longer periods of time; 
and multi-year private insurance contracts that may align payers' 
incentives with patients' long-term health. Congress should also 
continue to empower patients with more information about both provider 
pricing and outcomes for specific indications--helping the market to 
reset on a competitive basis.
    In conclusion, once we start asking questions about how to deliver 
better value to patients, to society, and to future generations, we are 
apt to look far past our current drug pricing debates--and toward the 
future of precision medicine.
    For the last 30 years, the United States has benefited from 
arrangements that have put us on the cusp of tremendous new medical 
achievements. The system is under strain because the pace of innovation 
is accelerating, while our health care system is still divided into 
payment silos, with a short-term framework that undervalues the long-
term impact medicines can play in resolving our most pressing health 
care challenges--including cancer, major depression, diabetes, and 
Alzheimer's.
    Rather than pointing fingers, I hope that Congress can construct 
arrangements that will serve patients better for the next 30 years, 
unleashing the full potential of precision medicine to improve and 
lengthen patients' lives, here and around the globe.
    Thank you, and I would be happy to answer any questions you may 
have.

    The Chairman. Thank you, Dr. Howard.
    Dr. Anderson, welcome.

  STATEMENT OF GERARD ANDERSON, Ph.D., PROFESSOR OF MEDICINE, 
   JOHNS HOPKINS UNIVERSITY SCHOOL OF MEDICINE, BALTIMORE, MD

    Mr. Anderson. Thank you, Chairman Alexander, Senator 
Murray, and members of the HELP committee today.
    This summer, I will have the opportunity to teach 250 of 
our new MPH students and I am fortunate enough to have Barbara 
Mikulski as one of my professors in the class.
    I do not receive any financial support from pharmaceutical 
companies, entities involved in the pharmaceutical supply 
chain, or health insurers.
    My main concern today is that healthcare prices are 
limiting access to essential drugs. Innovation is absolutely 
wonderful, but all Americans need to be able to afford these 
innovative drugs.
    In my written testimony, I focus on four categories of 
people with the most problems accessing drugs. Almost one-
quarter of all Americans have a chronic condition and one-
quarter of them have two or more chronic conditions. In my 
testimony, I talk about a woman with multiple chronic 
conditions with insurance who has monthly bills of $1,700.
    The second category of patients are those who are 
prescribed very expensive prescriptions drugs. One of my 
physician colleagues at Johns Hopkins came to me very upset 
last year. He treats babies with neuromuscular defects and was 
thrilled to learn that the FDA has approved a new drug to help 
these babies. A month later, he learned that the drug company 
had set the price at $750,000 for the first year of treatment 
and $375,000 in subsequent years.
    Who wants to hear that your new baby has a genetic defect 
that will make them incompetent of doing most anything, and 
then to learn the drug that treats them costs $750,000? In 
Baltimore, you can buy a mansion for $750,000.
    A third category is people taking off-patent drugs where 
the price has increased dramatically because there are no 
competitors. This is what Martin Shkreli did. The Senate Aging 
Committee, led by Senator Collins, did a wonderful report on 
this topic recently.
    The fourth category is public programs that cannot afford 
to pay for drugs. We are working with Louisiana to help them 
find ways to fund Hepatitis C drugs for the 35,000 Louisianans 
with Hepatitis C. Hepatitis C is the infectious disease that 
kills more people than any other infectious disease including 
AIDS.
    The drug costs over $20,000 even with several competitors 
and Louisiana simply does not have the $764 million at current 
prices to treat everyone with Hepatitis C.
    The next part of my drug testimony discusses drug pricing. 
Drug pricing is exceedingly complex. I wore my tie with the 
writing of Leonardo da Vinci as a reminder of how complicated 
drug pricing systems have become. I am not even sure Leonardo 
da Vinci could understand drug pricing today.
    It begins, though, with a drug company setting a list price 
for their drug. It is important to recognize that the 
Government gives that branded drug company patent and market 
exclusivity periods. These are government-given monopolies that 
protect the intellectual capital of the drug company and make 
it profitable for the drug company to engage in research and 
development.
    However, as any economist can tell you, when a company has 
a monopoly, it sets the price that maximizes its profits. The 
monopoly price is not the price that allows everyone to get 
access to the drug.
    The Senate Finance Committee did a very nice report on how 
Gilead had set the price for their Hepatitis C drug assuming 
that most people would not get access to the drug.
    Few people have argued that the list price is irrelevant 
because few people actually pay the list price. However, the 
list price is used to determine the amount of cost sharing that 
many patients pay. Thus, patients are harmed when the list 
price increases.
    Other experts in this panel have discussed the 
relationships between the drug companies, the PBM's, the 
wholesalers, and the pharmacies. It is important to recognize, 
however, that the process begins with the drug company setting 
the price.
    The last portion of my testimony discusses several options 
for the committee to discuss, and I only have time for two of 
them right now.
    One is a policy that would keep people like Martin Shkreli 
from putting a drug into something called limited distribution 
chain. Limited distribution chains prevent competitors from 
getting access to the drug, establishing bioequivalence, 
submitting an ANDA to the FDA, and then competing. So it is 
very anti-competitive.
    Most drugs are paid on a fee for service basis. Putting 
drugs, as some of the others have talked about, into value-
based purchasing--like bundled payments and accountable care 
organizations--would allow the physicians to decide which drugs 
are necessary for the patient taking into account the cost of 
the drug and alternative approaches. This would fundamentally 
change the drug purchasing system by putting physicians, not 
PBM's and health insurers, in charge of the process.
    I am happy to answer any questions.
    [The prepared statement of Dr. Anderson follows:]
              Prepared Statement of Gerard Anderson, Ph.D.
                                summary
    High drug prices are causing access problems. Patients in four 
categories are having the greatest difficulty accessing drugs:

    1. Patients with chronic diseases who cannot afford all of their 
medicines.
    2. Patients prescribed very expensive specialty drugs.
    3. Patients prescribed off-patent drugs whose prices have recently 
skyrocketed due to a lack of competition.
    4. Patients on public programs where the public program cannot 
afford to purchase the drug.

    In my written testimony, I provide examples of people in each of 
these situations.
        how drug prices are set and why this matters to patients
    1. It begins with a drug company setting a list price for the drug. 
No regulatory or market forces constrain the list price.
    2. Branded drug companies have government-issued monopolies 
(patents and market exclusivity periods).
    3. The list price matters because it is often used to determine the 
amount of cost sharing that patients pay.
    4. Pharmaceutical benefit managers (PBMs) earn their profits 
primarily by negotiating discounts off of the list price. The greater 
the list price, the greater the spread between the list price and the 
actual transaction price and the greater the profit the PBM earns. As a 
result, there is a financial incentive for the PBMs to try to get the 
drug company to increase the list price. This in turn increases the 
amount of cost-sharing the patient pays.
    5. Wholesalers bring the drug from the manufacturer to the pharmacy 
or hospital and earn a small profit doing so.
    6. Pharmacies and hospitals sell the drug to the patient after they 
negotiate a price with the drug manufacturer and add a dispensing fee.
    7. Most patients pay something out-of-pocket for the drug that is 
based on their insurance.
    8. All of this information is confidential and the patient cannot 
understand how the cost-sharing amounts are set.
    9. Sometimes the patient would pay less if they ignored their 
insurance coverage and paid cash.
                         policy recommendations
    Finally, I briefly present a series of recommendations about how to 
increase the level of competition in the supply chain for 
pharmaceuticals and lower pharmaceutical prices while still providing 
incentives for innovation.
    Two policy recommendations warrant special considerations:

    1. Preventing companies from putting drugs into limited 
distribution chains that keep generic companies from accessing the 
drug, testing for bioequivalence, and submitting applications to the 
FDA.
    2. Placing drugs into value-based purchasing arrangements like 
bundled payments and ACOs. This is a disruptive system putting doctors 
in charge.
                                 ______
                                 
    Chairman Alexander, Ranking Member Murray and members of the HELP 
Committee, my name is Gerard Anderson. I am a professor at Johns 
Hopkins Schools of Public Health and Medicine and director of the Johns 
Hopkins Center for Hospital Finance and Management.
    This summer, I will have the opportunity to teach our 250 entering 
MPH students a course on public health policy, and Senator Barbara 
Mikulski will be giving them a lecture based on her years of experience 
on the HELP committee.
    I do not receive any financial support from pharmaceutical 
companies; entities involved in the pharmaceutical supply chain, or 
health insurers. I am also not testifying on behalf of Johns Hopkins 
University, but in my role as a professor at Johns Hopkins University.
    Today, I will cover three topics.
    First, my main concern about high drug prices is that they are 
limiting access to essential drugs. Innovation is wonderful, but people 
need to be able to afford the innovative drugs. I begin by showing how 
high drug prices are affecting access to care. I will focus on four 
areas where people are having the greatest difficulty accessing drugs.

    1. Patients with chronic diseases who cannot afford all of their 
medicines.
    2. Patients prescribed very expensive specialty drugs.
    3. Patients prescribed off-patent drugs whose prices have recently 
skyrocketed due to a lack of competition.
    4. Patients on public programs where the public program cannot 
afford to purchase the drug.

    Second, I will attempt to summarize how drug prices are set and how 
this process can affect patients' access to these medications.
    And third, I briefly present a series of recommendations for 
increasing the level of price competition, revising regulations and 
legislation, lowering pharmaceutical prices, and improving patients' 
access to essential drugs, while still providing healthy returns and 
incentives for innovation.
              how high drug prices affects access to care
    While many patients have some level of difficulty paying for their 
drugs, patients taking a large number of drugs or very expensive drugs 
face an even greater health challenge.
    Almost half of all Americans have one or more chronic conditions. 
Perhaps less well known is that one-quarter of all Americans have 
multiple chronic conditions, and there are about five million Medicare 
beneficiaries with five or more chronic conditions. Many of these 
chronic conditions require people to take multiple drugs, and having 
access to the drugs to treat these conditions is critical for patients 
to remain healthy.
    The problem is that many people taking these drugs cannot afford to 
fill their prescriptions. As a result, they are forced to make choices 
between paying the rent, purchasing food, caring for their children and 
being able to afford the drugs that will keep their chronic illnesses 
from becoming even worse. A December 2016 Kaiser Family Foundation poll 
found that one in five Americans did not fill a prescription last year 
because of cost and one in six Americans cut pills in half or skip 
doses in the prior year. This is rationing based on price.
    I am working with an organization called Patients for Affordable 
Drugs, an organization that has been collecting stories from over 7,000 
people who are having difficulty paying their prescription drug bills. 
Its founder, David Mitchell, told me that the most challenging stories 
that he gets every day are from people with chronic conditions that 
cannot afford to purchase their drugs or need to split pills or skip 
doses in order to have the prescription last longer. High drug prices 
are impeding their access to essential medicines that directly affects 
their health.
    A woman from Schenectady, NY wrote him:

          ``I am a 53-year-old diabetes patient who was diagnosed with 
        bipolar disorder. I have also suffered 8 strokes in the last 20 
        years. As I have gotten older, controlling my blood sugar has 
        become harder and harder. I had never had a problem paying for 
        my daily medications until a year and a half ago. The diabetes 
        supply that I need are [she lists five drugs] and other 
        supplies such as a blood meter, needles, test strips, etc. 
        Combine that with the costs of the other 10 drugs I take to 
        control my other medical issues, co-payments, [and] hospital 
        tests needed; I am unable to afford these increasing monthly 
        costs. Under my Part D coverage with Medicare and Humana, my 
        monthly supply of these drugs will cost me approximately $1,700 
        monthly.''

    She is one of the millions of patients who are unable to afford 
drugs to treat chronic conditions in spite of having health insurance 
coverage.
    Other patients struggle to afford their treatment because they have 
been prescribed an extremely expensive specialty drug. Recently, a 
number of very effective new drugs have entered the market offering 
complete cures or ways to maintain a high level of functioning. These 
are the kinds of innovations that will improve health status and 
increase life expectancy. The problem is that many of these drugs are 
so expensive that most people cannot afford them.
    One of my colleagues at Johns Hopkins who treats babies with 
genetic neuromuscular defects was thrilled when he learned that the FDA 
had approved the first drug to help these babies. The drug, a new 
molecular entity, essentially repairs the genetic defect and will allow 
the baby to live a normal life. The treatment is only truly effective 
if it is given immediately following birth before the generic defect 
leads to muscular deterioration. A month later, the doctor was 
mortified to learn that the drug company set the price at $750,000 for 
the first year of treatment, and $375,000 per year after that for the 
rest of the child's life. Who wants to hear that your newborn has a 
genetic defect and then learn that your young family will need to raise 
$750,000 in the next 2 weeks in order for your infant to progress 
normally? If the insurance company initially denies the payment, then 
the appeal will almost always require more than 2 weeks. It is hard to 
imagine the stress that young families feel when faced with this 
situation.
    The Senate Finance Committee conducted a study of the pricing of 
one of these specialty drugs. Gilead was the first drug company to 
develop a cure for hepatitis C. This was a major clinical innovation 
offering a cure for an infectious disease. Hepatitis C is the 
infectious disease responsible for the greatest number of deaths in the 
United States every year--even more than HIV/AIDS. However, the drug 
company set a price that few could afford, and Gilead did this knowing 
that not every one with hepatitis C would be able to afford the drug. 
Let me simply quote one line from the executive summary of the Senate 
Finance Committee's report:

          ``Gilead's own documents and correspondence show its pricing 
        strategy was focused on maximizing revenue--even as the 
        company's analysis showed a lower price would allow more 
        patients to be treated.''

    While we do not have exact numbers of the percent of people with 
hepatitis C that have been treated, the best estimate is that less than 
20 percent of people with hepatitis C have been treated for a 
potentially fatal, but curable infectious disease. Even after the drug 
has been on the market for 3 years and two additional competitors have 
entered the market, still less than 20 percent of hepatitis C patients 
have received treatment.
    Apparently, simply having competition for branded drugs is not 
sufficient to bring the price down to a level that most people can 
afford. The United States should have prices that allow everyone to 
have access to these life saving drugs. While we need innovation, we 
also need access and high drug prices set by the drug companies should 
not ration access.
    The Kaiser Family Foundation conducted a study of Medicare 
beneficiary cost sharing for specialty drugs. For Medicare 
beneficiaries with Part D coverage, out-of-pocket costs averaged $7000 
for drugs to treat hepatitis C, $6000 for drugs to treat multiple 
sclerosis, $4000 for drugs to treat rheumatoid arthritis and $8000 for 
drugs to treat certain types of cancer. For a social security recipient 
earning $26,000 per year, these out-of-pocket costs represent 16 
percent to 32 percent of the person's total income for the year and 
clearly are prohibitively expensive. At these prices, it is not 
surprising that many Medicare beneficiaries with Part D insurance 
cannot afford these drugs.
    Even for off-patent drugs, high prices can still create access 
problems. Much of the recent attention has focused on the rapid 
increases in prices of off-
patent drugs that do not have any competitors. The generic drug 
industry works reasonably well when there are three or more competitors 
selling the same drug. Since the drugs are interchangeable, competition 
works to keep prices affordable.
    However, problems occur when there are no competitors (or even just 
one or two). When there is little competition for off-patent drugs, 
companies can raise the prices without fear that consumers will choose 
a lower priced competitor. This is exactly what Martin Shkreli did with 
his drug. He took an off-patent drug that had been on the market for 
many years, raised the price by 3,500 percent, and created mechanisms 
to prevent other competitors from entering the market.
    Analysis by Senator Susan Collins and the Senate Aging Committee 
staff showed how Martin Shkreli and others have been able to keep 
competitors from entering the market.
    First, the company acquired a ``sole-source drug, for which there 
was only one manufacturer, and therefore faces no immediate 
competition, maintaining monopoly power over its pricing.''
    Second,

          ``The company ensured the drug was considered the gold 
        standard--the best drug available for the condition it treats, 
        ensuring that physicians would continue to prescribe the drug, 
        even if the price increased.''

    Third,

          ``The company selected a drug that served a small market, 
        which were not attractive to competitors and which had 
        dependent patient populations that were too small to organize 
        effective opposition, giving the companies more latitude on 
        pricing.''

    Fourth, the company created a closed distribution system to stifle 
competition. As the report notes,

          ``The company controlled access to the drug through a closed 
        distribution system or specialty pharmacy where a drug could 
        not be obtained through normal channels, or the company used 
        another means to make it difficult for competitors to enter the 
        market.''

    Without access to the drug, a competitor cannot conduct 
bioequivalence studies in order to submit a drug application to the 
FDA. Increasingly, drug companies are using these closed distribution 
systems to stifle competition. This is an area that Congress could 
address, as I will discuss later.
    The Senate Aging Committee concluded by stating,

          ``Lastly, the company engaged in price gouging, maximizing 
        profits by jacking up prices as high as possible. All of the 
        drugs investigated had been off-patent for decades, and none of 
        the four companies had invested a penny in research and 
        development to create or to significantly improve the drugs. 
        Further, the committee found that the companies faced no 
        meaningful increases in production or distribution costs.''

    There have been hundreds of stories written about the problems 
created by these rapid price increases in off-patent drugs without 
competition. Let me quote from another email that Patients for 
Affordable Drugs received: My wife ``has seen [her drug's] price 
increase by over 3,600 percent since 2014.'' Again, this is for an off-
patent drug.

          ``Today her medications cost $283,000 per year or about $200 
        per dosage--from the 1980s to 2006 [drug name eliminated for 
        confidentiality reasons] was $1.00 per dose/$1,500 per year.''

    People simply do not have the resources to afford these drugs and 
often the cost sharing is prohibitively expensive.
    Finally, public programs cannot afford these expensive drugs. 
States and the Federal Government have budget constraints and high 
prices are forcing public programs to make very difficult life or death 
decisions.
    For example, the State of Louisiana wants to expand treatment for 
hepatitis C, but cannot afford to offer the care to everyone at current 
prices. According to the Secretary of Health in Louisiana, it would 
cost $764 million at current prices to cover the 35,000 uninsured and 
Medicaid recipients with hepatitis C, in the State. Louisiana simply 
does not have these resources, without dramatically reducing spending 
for things like education or public safety.
    We, at Johns Hopkins, are working with the Secretary of Health in 
Louisiana to help her develop ways so that Louisiana can afford to 
purchase the drugs and prevent the spread of an infectious disease. 
Similar concerns about the affordability of certain drugs have been 
expressed by other States and by Federal agencies such as the Veterans 
Administration and the Indian Health Service.
    A woman from Alabama writes to Patients For Affordable Drugs:

          ``My husband and I are currently doing without needed 
        medication because of the cost. We recently lost our health 
        coverage. With the high cost of medication, we simply cannot 
        afford to fill our prescriptions. My daughter is in the same 
        position, however she is on Medicaid. She has numerous health 
        conditions and without her needed prescriptions, which Medicaid 
        won't cover due to the cost, she ends up being forcibly 
        hospitalized for treatment.''

    States must make difficulty choices. Simply telling them to cover 
everyone that needs a drug ignores the fiscal realities.
        how drug prices are set and why this matters to patients
    The establishment of the initial drug price, how this then gets 
translated into the price that the pharmacy or hospital pays to acquire 
the drug, and how it ultimately impacts the price that the patient pays 
to obtain the drug is extremely complicated. Much of the process is not 
transparent. My summary by necessity is an oversimplification of the 
process. A full description would consume a book.
    It begins with a drug company setting a list price for the drug. 
There are no regulatory or market forces that determine the list price 
that the brand name drug company can set, and the drug company has full 
discretion and market power to set whatever list price it chooses when 
the drug is launched or to change the list price at any point of the 
life cycle of the drug.
    It is important to recognize that the branded drug company has 
patent and market exclusivity periods that prevent other drug companies 
from manufacturing the drug. These are government given monopolies that 
protect the intellectual capital of the drug company and make it 
profitable for the branded drug company to engage in research and 
development.
    However, any economist can tell you the dangers when a company has 
a monopoly; the drug companies are able to set the price that maximizes 
their profit. The monopoly price is not the price that allows everyone 
to get access to the drug. They set a price that is much higher than 
they would set in a competitive environment.
    There are a number of factors that go into the drug company setting 
the list price. One factor is the cost of research and development. 
However, the list price is typically not based on the research and 
development that went into developing that specific drug; instead, the 
company looks at their entire portfolio of drugs to determine the 
profits they will require to create the next generation of drugs. Even 
using the pharmaceutical industry's own data, it is clear that branded 
drug companies typically spend less than 25 percent of their revenues 
on research and development, and far more on advertising and marketing.
    Many people have argued that the list price is irrelevant because 
few entities actually pay the list price. However, the list price is 
often used to determine the amount of cost sharing that many patients 
will pay. Since the list price is the only price that is publicly 
announced, it becomes the basis for many cost-sharing agreements. Thus, 
patients are harmed when the list price goes up.
    Most people with health insurance have their drug benefits 
determined by pharmaceutical benefit managers (PBMs), who negotiate 
prices with drug companies on behalf of health insurers or large 
employers. Only three PBMs control 80 percent of the market, which is 
troubling from a competitive vantage point.
    Increasingly, it is being reported that PBMs are responsible for 
some or even most of the price increases. While they do have a role in 
the price increases, PBMs also serve to negotiate lower prices because 
of their tremendous buying power.
    PBMs earn the majority of their profits by negotiating rebates off 
of the list price. The greater the list price, the greater the 
difference between the list price and the actual transaction price, and 
the greater the profit the PBM can earn. As a result, there is a 
financial incentive for the PBMs to try to get the drug company to 
increase the list price to show the insurance company or the large 
employer that they are getting a larger discount. However, this also 
serves to maximize the PBM's own rebates. For example, if the list 
price is $100 instead of $50, and if the actual transaction price is 
$30, then the discount appears much greater when the list price is 
$100. Also the PBM's rebate might be greater. Neither the size of the 
rebate nor the actual transaction price is transparent. Congress might 
want to use its subpoena power to investigate.
    The fact that a higher list price can result in greater sales for 
the drug company is contrary to all economics principles. In nearly all 
markets, sales decline when prices increase. However, for drug pricing, 
higher list prices and the greater rebates can help drugs get better 
placement on the formulary and hence more sales. The challenge is to 
change the rebate structure for PBMs a topic that I discuss later in 
the testimony.
    Wholesalers bring the drug from the manufacturer to the pharmacy or 
hospital. The profit margins of the large wholesalers add only 1-2 
percent to the price of the drug.
    Pharmacies and hospitals sell the drug to the patient after they 
negotiate a price with the drug manufacturer and add a dispensing fee. 
Doctors, pharmacies and hospitals can get rebates from drug companies 
for using their drug as well. These rebate arrangements are almost 
never disclosed to patients.
    Most patients pay something out-of-pocket for the drug. The exact 
amount is based on their insurance coverage. Insurance companies and 
PBMs determine the price that the patient will pay out-of-pocket by 
placing drugs on different tiers with different levels of cost sharing. 
PBMs and the branded drug companies negotiate aggressively on tier 
placement and this also helps determine the amount of the rebate. 
Again, all of these negotiations are confidential and the patient 
cannot understand how the cost sharing amounts are set. As a result, 
there have been calls for greater transparency in the pharmaceutical 
supply chain.
    What we have recently learned is that some PBMs have instituted gag 
clauses with the pharmacy that prevent the pharmacy from telling their 
patient that if the patient paid cash instead of using their insurance 
card the price would be lower. Placement of the drug on a cost-sharing 
tier where the drug has a very high list price and low transaction 
price could mean that paying the cost sharing based on the list price 
is greater than the cash price. Pharmacies have reported this occurs 
quite often.
    However, it is important to note that it all starts with the drug 
company setting the list price. Brand name drug companies have complete 
discretion on the price that they set and can raise it at any time. The 
government does not determine or limit the price. In fact, the 
government gives the branded drug company a government issued monopoly 
to set the price. Off-patent drugs face market competition if there are 
multiple competitors. The problem in the off-patent market occurs when 
there is only one or two off-patent drug companies making a drug.
  policy options to increase competition, decrease drug spending, and 
          improve patient access while encouraging innovation
    We are examining policy options for the HELP committee to consider. 
We have divided them into two categories:

    1. Policies that increase the level of competition.
    2. Policies designed to increase access to pharmaceuticals.
            initiatives to increase the level of competition
1. Curb Use of Limited Distribution Networks that Restrict Ability of 
        Generic Companies to Copy Drugs and Submit ANDAs to FDA
    Generic drug companies need access to brand and off-patent drugs in 
order to demonstrate bioequivalence to the FDA for abbreviated new drug 
applications (ANDAs). However, some brand and off-patent drug companies 
are putting their drugs in limited distribution networks, making it 
virtually impossible for a generic drug company to access the drug. 
Hearings at the Senate Aging Committee and House Government Oversight 
Committee have shown how Martin Shkreli and others have used this 
tactic to stifle competition for old and off-patent drugs. Requiring 
drug companies to make their drugs easily available to generic firms 
would accelerate the introduction of generic drugs in the market and 
could save $2.8 billion, according to the Congressional Budget Office.
2. Include Drugs in Bundled Payments and ACOs
    This is a potential game changer. Most drugs are still paid under a 
fee-for-service model. Payment reform is moving toward value-based 
purchasing; however, drugs are typically not included in these 
approaches. Including drugs in reforms like bundled payments and 
Accountable Care Organizations (ACOs) would allow the physicians and 
other providers to make allocation decisions that include tradeoffs 
between a drug and other treatment modalities. Including drugs in 
bundled payments and ACOs would fundamentally disrupt the drug 
purchasing process and lead to more transparent pricing and put doctors 
in charge of deciding which drugs the person receives instead of the 
PBM or insurer. The doctor would have the financial incentive to make 
the decision that is in the best interest of the patient. Drugs are 
already included in the Medicare DRG payment that hospitals receive; 
this would simply expand the scope to value-based purchasing 
arrangements.
3. Eliminate Rebates in PBMs and PDPs
    PBMs earn most of their profit by getting rebates from the drug 
companies. The rebate is based on the difference between the list price 
and the transaction price. Increasing the list price therefore results 
in greater rebates, which totally distorts the pricing system. The 
higher list price also means greater cost-sharing for patients because 
cost-sharing is typically based on the list price. Forcing the PBMs and 
indirectly the prescription drug plans (PDPs) to pass on all of the 
rebates to the government, health plan or self-insured company would 
eliminate the market distortions, reduce prices, and should be used to 
reduce premiums or patient cost-sharing. The PBMs would earn a fee for 
their services instead of a portion of the rebate. Giving the rebate to 
the patient--although it sounds good in principle--serves to distort 
the market since the patient would no longer be affected by the price 
and the drug company could increase the price even further. Some ``skin 
in the game'' for patients is needed to keep prices down, as long as it 
does not prevent access.
4. Restrict Pay for Delay Behavior
    Branded drug companies have used a variety of mechanisms to prevent 
generic drug companies from entering the market, including paying them 
to delay the introduction of a competitor generic drug. While the 
courts have continually said this is illegal, some abuses continue. 
Litigation is time-consuming and allows the branded drug company to 
continue to earn substantial profits while the case is still being 
litigated. An alternative is to penalize the generic company that 
applies to be the first entrant into the market after the patent 
expires, but then does not actually manufacture the drug. Congress 
could, for example, give the FDA the authority to keep the generic 
manufacturer from making an ANDA application for a second drug until it 
has actual sales on its first application. Generic drug companies would 
be motivated to get the drug to market as soon as possible and pay for 
delay would be eliminated.
5. Restrict Use of Patient Assistance Programs
    While public programs like Medicare and Medicaid do not permit drug 
coupons, they do permit patient assistance programs that provide 
billions of dollars in financial support to Medicare and Medicaid 
beneficiaries. Some of the largest foundations in the United States are 
now patient assistance programs sponsored by drug companies, with 
several of them giving out almost a billion dollars a year. The problem 
with patient assistance programs is that they allow drug companies to 
raise prices while keeping patients immune from all cost sharing. A 
recent Wall Street Journal analysis suggests for every $1 million 
funneled to patient assistance programs by drug companies resulted in 
$21 million in increased drug sales. This is problematic considering 
the IRS considers patient assistance program donations to be charitable 
deductions. Again, some ``skin in the game'' for patients is necessary, 
as long as it does not harm access.
6. Reduce Abuse of Orphan Drug Designations
    Some branded drugs have multiple orphan drug approvals that extend 
their period of market exclusivity and give them significant tax 
advantages. While the Orphan Drug Act had good intentions, the 
legislation needs revision to prevent companies from applying for 
multiple orphan drug designations and receiving multiple approvals and 
therefore market exclusivity extensions for the same drug. Revision of 
the law would lower prices by moving branded drugs to the generic 
market sooner.
7. Restrict Mergers of Generic Drug Companies
    The Hatch Waxman Act effectively controls drug prices for generic 
drugs when there are three or more generic competitors manufacturing 
the drug. However, the generic industry has undergone a series of 
mergers that have reduced the number of competitors and lessened price 
competition. Recently, the largest and the third largest generic 
manufacturers merged. Because generic drugs are responsible for almost 
90 percent of drug sales in the United States, Congress and the FTC 
need to take a careful look at the level of competition in the generic 
market to make sure there are more than three competitors for all 
generic drugs. The recent mergers have lessened the level of 
competition in the generic market.
      additional initiatives to improve access to pharmaceuticals
1. Revise Medicare Catastrophic Drug Spending Rules
    The main reason for the rapid increase in Medicare Part D spending 
is the advent of the high-priced specialty drugs costing more than 
$7,000, for which the Medicare program pays 80 percent of the cost. In 
spite of paying 80 percent of the cost, Medicare is prohibited from 
negotiating these drug prices. MedPAC has proposed shifting 80 percent 
of the cost to the PDPs and dropping the Medicare proportion to 20 
percent so that the PDPs have a greater incentive to negotiate lower 
drug prices for these specialty drugs. However, this could cause the 
PDPs to discriminate against people with multiple chronic conditions 
(who take lots of drugs). Instead, Medicare should be able to negotiate 
prices directly for these high-priced specialty drugs. If negotiation 
fails, Medicare could use reference pricing, binding arbitration or 
value-based pricing to set prices.
2. Enact Price Gouging Legislation
    This year, the State of Maryland enacted bipartisan legislation to 
empower the Attorney General to take legal actions against drug 
companies enacting ``unconscionable'' price increases for off-patent 
drugs with fewer than three competitors. It is designed to keep people 
like Martin Shkreli from raising prices on an off-patent drug for which 
there is the only one manufacturer. It is the first legislation to 
address the problem of rapid price increases for off-patent drugs. 
Congress could consider similar legislation to stop actions by people 
like Martin Shkreli.
3. Allow One Single Federal Agency To Negotiate Drug Prices
    Currently many different government agencies negotiate drug prices, 
with each Federal agency paying very different rates with different or 
no formularies. Looking at those 30 drugs for which we can directly 
compare prices, the Medicare program pays 30 percent higher prices than 
the DoD. Considering the similarities in the drugs needed by these 
agencies, the Federal Government would have a better procurement 
process if there was only one Federal agency purchasing drugs. Because 
the prices are highest in the Medicare program and Medicare 
beneficiaries pay the highest cost-sharing, Medicare beneficiaries are 
the biggest losers when government agencies pay different prices. While 
some Federal agencies might pay more in one price arrangement, the 
entire Federal Government could pay less. Savings would be dependent on 
where the single Federal entity set the price--at the highest level 
(Medicare), the lowest (DoD), or at the weighted average.
4. Use 1498 Authority To Negotiate Drug Prices
    The Federal Government has the existing authority (28 U.S.C. 1498) 
to take away the patent of a company, such as a pharmaceutical company; 
provide reasonable compensation to the drug company for the use of the 
patent, and allow a generic manufacturer to manufacture the drug. The 
Department of Defense, the National Gallery of Art and many other 
Federal agencies have used this authority to purchase patented 
materials at reasonable prices. Health and Human Services Secretary 
Tommy Thompson threatened to use 1498 authority to purchase Cipro 
following 9/11 and Bayer lowered its price in response. The State of 
Louisiana is currently considering asking Secretary Price to use his 
authority under 1498 so that Louisiana can purchase hepatitis C drugs 
for the uninsured and Medicaid populations.

    The Chairman. Thank you, Dr. Anderson.
    Thanks to all of you; very interesting testimony.
    We will now begin a round of 5-minute questions. At about 
11:20, I am going to ask Senator Cassidy to come over and chair 
the committee so that I can attend another hearing for a few 
minutes.
    One purpose of this hearing is to see if we can establish 
some base facts. Let me ask this question and if you can answer 
it as close to yes or no as possible, I would appreciate it.
    I have heard drug spending accounts for roughly 15 percent 
of health spending. Of that 15 percent, 10 to 11 percent is on 
drugs purchased at the pharmacy or ordered online, and 4 or 5 
percent is spent on drugs given in the hospital and the 
doctor's office.
    Is that correct? Does anyone disagree with that?
    [Panel nods in assent.]
    Thank you.
    Dr. Howard, you said, I believe, that 30 percent of branded 
generic prescriptions had a zero out-of-pocket cost for the 
patient in 2016. In other words, that when the patient picked 
up the prescription at the drugstore, 30 percent of the 
prescriptions cost zero. Dr. Adam Fein has said that as well in 
a meeting that we had here.
    Is that an accurate reflection of what you said?
    Mr. Howard. Yes, it is.
    The Chairman. Does anyone disagree with that of the panel?
    [No audible response.]
    Thirty percent of the prescriptions, brand and generic, 
picked up at the pharmacy or online costs the patient zero.
    Mr. Mendelson, you observed, if I heard your testimony 
correctly, that patients are bearing more of the cost of 
prescription drugs out-of-pocket in an effort to keep monthly 
premiums low.
    Is it accurate to say, and I would ask this of other panel 
members as well, that in some situations or many situations 
consumers are paying more for drugs while insurance companies 
and employers are paying less for drugs.
    Did I say that right or how would you characterize it?
    Mr. Mendelson. I would characterize it as saying that 
changes in benefit design are resulting in consumers paying 
more.
    The Chairman. Changes in benefit design. Now, what does 
that mean to the untutored of us?
    Mr. Mendelson. As the cost sharing associated with a drug 
goes up, you are paying more of the portion of that price.
    The Chairman. Then who is paying less if the patient is 
paying more?
    Mr. Mendelson. It depends on whether the cost--I know you 
do not like the word ``depends,'' no Senator ever does--but it 
depends on whether the cost is going up as a result of a rise 
in the price of the drug or just the change in the benefit 
design.
    What is happening is that patients are being asked to pay a 
larger and larger percentage of the cost of the drugs that they 
take.
    The Chairman. That would mean someone is paying less. Is 
that right?
    Mr. Mendelson. That is right. It could be reducing the 
premium.
    The Chairman. It would be the employer or the insurance 
company. Right?
    Mr. Mendelson. Or it could be reducing the premiums to the 
consumer.
    That is the other thing that is important, which is that if 
a health plan can reduce premiums to the consumer, they want to 
do that, and part of the way they are doing that is by putting 
higher prices for drugs to consumers at the same time.
    The Chairman. To lower the price of the premium.
    Any other comment on that? Dr. Anderson.
    Mr. Anderson. Essentially what we are seeing in the private 
insurance market and the PBM's, is about a 3 percent growth 
rate in drug expenditures. What we have is if the price----
    The Chairman. A 3-percent growth rate.
    Mr. Anderson. The expenditures by the health insurers, by 
the employers, by people. It is not that the prices are going 
down for the employer; they are just not going up as fast.
    What we have is a balloon here. What happens when the price 
increases are people, the insurance companies, squeeze the 
balloon a little bit to keep their price increase by only going 
up by 3 percent. Somebody else has to pay part of that increase 
and that is the consumer.
    When the employers squeeze the balloon, the consumer pays.
    The Chairman. Who else had a comment? Dr. Howard.
    Mr. Howard. Yes, I am sorry. I just wanted to comment.
    What happens when the person goes to the pharmacy to pick 
up their prescription, the pharmacy does not know the rebate. 
They are reimbursed based on what is called, I think, the 
average wholesale cost.
    The coinsurance that a patient is paying is based on the 
price that the pharmacy has. That rebate is given to the PBM. I 
think Dan commented that that rebate is then, at least some 
portion of it, passed along to the employer. The patient is 
experiencing a co-insurance based on a list price and that is a 
problem. That is what we are honing in on now.
    As Express Scripts said last year, it held cost growth for 
its commercial clients to under 3 percent, but more of that 
cost is being shifted to patients buying these specialty 
medicines.
    The Chairman. I am afraid I am out of time, but I am going 
to submit to each of you two or three questions, if I may in 
writing. One of them is going to be if we should not focus on 
the list price, then what should we focus on instead in trying 
to understand pricing?
    Senator Murray.
    Senator Murray. Thank you very much, Mr. Chairman.
    Before I ask the witnesses any questions, I wanted, since 
you are going to be leaving, to ask you a question. I really do 
appreciate you having this hearing, prescription drug prices is 
extremely important. I appreciate this and it is an important 
topic. I will have questions.
    You have not yet scheduled a hearing on the Republican 
Trumpcare bill. I know you are a part of the discussion. You 
know what is in it. We have no idea. We have not seen it. The 
people we represent do not have any idea. Senator McCaskill 
raised this at a hearing, powerfully, last week and I want to 
raise it here too.
    Do you intend to have any hearings before the bill comes to 
the floor?
    The Chairman. I have none planned, Senator Murray, but let 
me respond to that in two ways.
    No. 1 is that bill, if you are referring to the House bill, 
would be referred to the Finance Committee, not this committee. 
So you might take it up with Chairman Hatch.
    No. 2, I had a hearing in late January, early February. We 
had terrific witnesses. My hope was to focus on the individual 
market and changes that we might agree on in a bipartisan way. 
Most Senators came to the meeting and made their Obamacare 
speeches that they have been making for the last 7 years.
    I would summarize it by saying that the witnesses did very 
well at the hearing. The Senators did very poorly.
    If we are not able to focus in a bipartisan way when we 
have a bipartisan hearing, I do not think there is much promise 
for a bipartisan result.
    Which leads me to my third point, which is that this is a 
hearing that you asked for----
    Senator Murray. Right.
    The Chairman [continuing]. That other Democrats asked for, 
and that Senator Cassidy and Republicans asked for. We agreed 
on who the witnesses should be. We have exceptional witnesses 
today. It is a chance to address drug pricing, which is 
important to every American family.
    I would think that this committee is a group of grown-up 
adults who are able to do more than one thing at a time.
    We could discuss Obamacare, if you would like, but today we 
are trying to discuss drug pricing which is up to 15 percent. 
You brought up the issue.
    Senator Murray. I just asked you a question.
    The Chairman. You asked me the question about Obamacare, 
which is not the subject of today's hearing.
    Senator Murray. I agree.
    The Chairman. If that is the way you want to spend your 
time, fine. I do not know why I should call hearings requested 
by the Democrats with bipartisan hearings when you will not 
focus on the hearing.
    Senator Murray. Mr. Chairman, I appreciate that you are 
having this hearing. I also would very much appreciate that we 
have a hearing on a bill that we are going to see that our 
folks have not seen, people across the country have not seen.
    When we passed the ACA, we had 57 bipartisan HELP committee 
hearings, and meetings, and roundtables. I will just say that 
that is disconcerting.
    The Chairman. You passed the ACA in the middle of a 
snowstorm with 60 votes and crammed it down the throats of 
Republicans.
    Senator Murray. Well.
    The Chairman. If you want to talk about that, we can. Today 
we are talking about drug pricing.
    Senator Murray. We are talking about drug pricing. It is an 
important part of the healthcare program, but I think people in 
the country are deeply worried about what is happening to the 
healthcare system.
    Mr. Coukell, let me go to you first.
    Our hearing today is about the supply chain impacts and 
costs, and we have heard that the interactions between drug 
companies, pharmacies, and payers is a complicated one, but let 
me ask you a simple question.
    We all know prescription drug prices are harder and harder 
for our families to bear. Some Republicans have been blaming 
this on the skimpier insurance coverage that forces patients to 
pay more out-of-pocket.
    If that were the case, the total spending on drugs should 
stay constant as just the patient share of the costs would be 
increasing.
    Based on your testimony, my understanding is that total 
spending on drugs is not only increasing, it is increasing 
faster than spending on other types of healthcare services.
    Is that correct?
    Mr. Coukell. That is correct, Senator, and it is projected 
to continue increasing at about the current rate through 2021.
    Senator Murray. Why is that?
    Mr. Coukell. That is based on a combination of high launch 
prices of new drugs, and year-on-year increases in the prices 
of brand drugs that are on the market. Drug spending is also 
being increased, by the increased volume growth as the 
population ages and we use more drugs. Those are the three 
major drivers of drug spending.
    Senator Murray. Dr. Anderson, about 10 to 15 percent of 
U.S. healthcare spending goes to pay for prescription drugs. We 
established that. That is a cost patients feel every day.
    I wanted to ask you in my short amount of time left, how 
can we tell if a high-priced new drug--you mentioned some of 
the bipartisan report were produced--how can we tell if a high-
priced new drug is actually saving money down the road?
    Mr. Anderson. We really cannot in most cases. We have some 
methodologies out there that are trying to do that, but it is 
exceedingly complicated.
    That is why I would rather have the doctor make the 
decision as to which drug you get by giving that doctor the 
financial incentives to make the choice given the fact that 
they have a certain amount of money to spend.
    Senator Murray. Thank you very much.
    The Chairman. Thank you, Senator Murray.
    Senator Cassidy.

                   Statement of Senator Cassidy, M.D.

    Senator Cassidy. Thank you all.
    A couple of things. Let me just make a comment at the 
beginning. I am a little bit betwixt and between the two sides.
    I will say as a physician, when I was a medical student, 
one of the most common surgeries was gastric resection, taking 
out a part of the stomach for peptic ulcer disease. Along comes 
Cimetidine, which is now an over the counter drug, and we just 
stopped doing the surgery.
    Then when I was a resident and fellow, Crohn's disease 
surgery was so common. No one does Crohn's disease surgery any 
more because now we have these new drugs that just eliminate 
it.
    Yet, on the other hand, I will agree. Dr. Anderson, you 
made the point and it was made by others, that there are some 
drugs that are so priced that some people do not achieve the 
benefit.
    I always said we have a social contract with pharmaceutical 
companies in which we reward them for the risk and the social 
benefit they bring. I was on a call the other day and somebody 
said, ``Well, our first loyalty is to our stockholder, our 
shareholder. We should charge whatever we can.''
    It seems like our social contract has now fallen apart. I 
just say that as a physician that understands there are 
lifesaving medicines which some people cannot access.
    Dr. Anderson, you mentioned the Louisiana Hepatitis C. I am 
actually working on that. I am a hepatologist. I did a 
spreadsheet and saw that we could actually save money on long-
term care--cirrhosis, a better share of the cancer, et cetera--
if we upfront the treatment. The question is how do you pay for 
it? I do think that is something that we have to address.
    Let me toss out something which is kind of radical.
    When I look at the rebates, I am not sure that on net the 
rebates are actually bringing benefit to our society. As a 
physician, I look at the person paying cash and she is not 
benefiting from that rebate unless that is one of the rare 
companies, like CVS, I think you mentioned Dr. Howard, that 
does a point of sale rebate.
    One of you mentioned in your testimony that we are pushing 
people more rapidly into the catastrophic portion of their 
Medicare Part D by a higher price. Sure, it is rebated, but the 
person is paying out-of-pocket. So their true out-of-pocket 
cost is inflated. They are moving more rapidly into the 
Medicare Part D.
    Both for that cash person and their deductible, or with 
their health savings account, and the Federal taxpayer who is 
pushed more rapidly into the catastrophic portion. It seems 
like the rebate is kind of not working as well.
    Mr. Mendelson.
    Mr. Mendelson. Yes. I would respectfully challenge that. I 
think that rebates are benefiting American consumers. They are 
benefiting American consumers because they leverage effective 
price competition and they ultimately reduce----
    Senator Cassidy. Let me interrupt. Why not just have a 
price based? When my wife buys jeans, she does not get a rebate 
from Levi's or Lee. She actually just gets a net price.
    Tell me why that does not just translate into a net price?
    Mr. Mendelson. Rebates are a way that pharmaceutical 
companies give price concessions.
    Senator Cassidy. I accept that. I guess what I am just 
stumbling on, why not have a little upfront price which would 
be the ultimate concession?
    Mr. Mendelson. Because when drugs are first launched, there 
is a launch price and then competition comes in. The Hepatitis 
C market is a great example of this.
    Senator Cassidy. Somehow I think we are talking past each 
other.
    Mr. Coukell. Senator, may I?
    Senator Cassidy. Yes.
    Mr. Coukell. If your wife were buying tens of thousands of 
pairs of jeans, she would go to the manufacturer of the jeans 
and say, ``I do not want to pay list price. I am going to buy a 
lot of jeans and let us have a negotiation about what I should 
pay.''
    Senator Cassidy. I get that, but when you look----
    Mr. Coukell. If we do not have that mechanism, then the 
question is how do we set a price for drugs? Some other 
countries, the Government sets that price.
    Senator Cassidy. Mr. Coukell, let me just say, though you 
can either do that with a rebate or you can say, ``Give me a 
better price upfront.'' If I am buying a fleet of automobiles 
from Ford, I say, ``Just knock $1,000 off,'' or I could say, 
``Give me $1,000 later.''
    The reason I say that is because that manufacturer's price 
is factoring in to what the person paying cash is paying and 
therefore that inflates their true out-of-pocket costs, moving 
them more rapidly into the Medicare Part D.
    Mr. Howard.
    Mr. Howard. Senator Cassidy, I think you make a very 
interesting point, which is companies could shift to a flat 
discount, as per CVS has done, make it available at the point 
of purchase.
    They could also turn to providers and say--the reason they 
give the discount is to get on the formulary--but they could go 
to providers under some systems and say,

          ``Here is your mix of patients. These are the 
        medicines they need. Here is the price we will charge 
        you and because you are operating in a value-based 
        contract or a capitation contract as an HMO, you can 
        save money. We will demonstrate and share our savings 
        with you.''

    There is a different way of thinking about this that 
utilizes health technologies and informatics we have at our 
disposal and that are coming online to try and make the value 
proposition clearer to the provider and the patient.
    Senator Cassidy. I get that. It seems like there is a 
complexity there which is so incredible, that it is hard for 
one side of that to actually fully understand if they are 
getting the value that they are promised.
    Mr. Anderson. It is absolutely true that it is totally 
confidential. What you have got to recognize is the consumers, 
if you go to the pharmacy with your insurance card, you might 
be paying more because you have insurance than if you did not 
have that insurance card. That is because of the rebates and 
those activities.
    Senator Cassidy. I will say that Louisiana is one of the 
few States that has said that pharmacists cannot be gagged. 
Meaning that they can inform a patient that she would pay less 
if she paid cash as opposed to paying her deductible, and that 
may be something we wish to look at.
    The Chairman. OK.
    Senator Cassidy. Which is a very pro-consumer, pro-patient 
perspective.
    The Chairman. Thank you, Senator Cassidy.
    It is hard within 5 minutes to really dwell into this for 
each Senator. We might explore, as time goes on, whether we 
want to have a different forum, a roundtable, for example, 
where we can have more of a conversation and discussion 
between, perhaps, the four of you and Senators who are 
especially interested in this issue.
    I am open to any kind of discussion that will help us 
understand what we are talking about. We talk about list 
prices, rebates, et cetera.
    Senator Casey.

                       Statement of Senator Casey

    Senator Casey. Mr. Chairman, thank you.
    I want to thank you and Ranking Member Murray for having 
this hearing, and for those that made it possible. It is a 
critically important issue and I know we are going to have more 
than one.
    I have to say, that stands in contrast to what is not 
happening on an even larger issue. This is a big issue, drug 
prices and affordability.
    The even larger issue of what is going to happen to our 
healthcare system because of what the Senate Republican members 
are doing right now. I would hope that we would have hearings 
on the healthcare proposal just like we are having hearings on 
this issue.
    In my judgment, there are lots of ways to argue against 
what happened in the House and what likely will happen in the 
Senate because there is reporting, just last week, that the 
Senate bill will be 80 percent of the House bill. So it is 
substantially similar.
    In that case, just in terms of the Medicaid proposals, 
which I do not think will change all that much House to Senate, 
it is not repeal and replace. In my judgment it is repeal and 
decimate when it comes to children who get their good 
healthcare through Medicaid. People with disabilities in my 
State over 720,000 people have a disability and receive 
Medicaid, and about a quarter of a million seniors cannot get 
into a nursing home absent Medicaid.
    If we enact what is being proposed in the House bill, if we 
enact what is being, credibly assessed as to where the Senate 
bill is, a lot of those Pennsylvanians will be hurt. I hope we 
have a hearing on that bill as well.
    This issue for people in my State is of paramount concern. 
Other than questions about national security on the domestic 
side of what people are concerned about, and I would say other 
than maybe healthcare itself more broadly, I am asked about no 
issue more than drug prices.
    It is of great concern to people. It is making it very 
difficult for people to get the medications they need. Millions 
of Americans do not get the medication they need because of 
prices.
    Dr. Anderson, I will start with you. You heard what I said 
about Medicaid and what would happen in the event that a bill 
is enacted substantially similar to what has been talked about 
and what has been legislated.
    Can you discuss high drug prices, especially around 
curative treatments like Sovaldi, which can cure someone with 
Hepatitis C, but will impact State Medicaid programs under 
capped funding?
    Mr. Anderson. I would be glad to.
    If you have a drug like Hepatitis C, and people have it at 
the age of 40 or 50, it makes it difficult for them to work. 
Some of them are in prisons, many have been on Medicaid.
    However the benefit, in terms of financial benefit, of them 
getting ill typically does not accrue to the Medicaid program. 
They get ill when they are eligible for Medicare, and so the 
State is putting out all of this money, and the Medicare 
program is the one that is benefiting.
    Figuring out a way for the State to have an incentive to 
invest in a curative disease, an infectious curative disease is 
absolutely important.
    Senator Casey. One of my basic concerns is that one of the 
changes that will take place at the State level is to a large 
extent, maybe not completely, but to a large extent if the 
Medicaid changes that are being proposed were enacted, the 
Federal officials would wash their hands of it. State 
officials, who have to balance their budgets, would have to 
take up and deal with the consequences, I should say, of no 
more guaranteed funding for Medicaid.
    Mr. Anderson. That is exactly why we are working with 
Senator Cassidy in Louisiana to try to do that. We would be 
happy to work with Pennsylvania or any State as well.
    Senator Casey. I am grateful.
    In the remaining time I have, Mr. Mendelson, on Page 5 of 
your written testimony, you cite the higher out-of-pocket costs 
as a key factor in patients' adherence to prescribed 
medications. For Americans with chronic diseases, adherence to 
a prescribed medication regimen can reduce unnecessary health 
spending such as hospital stays, doctor visits, et cetera.
    Can you talk about that part of your testimony?
    Mr. Mendelson. Absolutely. Adherence is a key aspect and 
especially when a patient is using a medication that is of 
critical benefit to them or, frankly, reducing health system 
costs like the cardiovascular generics that we discussed 
before.
    There is tremendous potential in fielding digital 
compliance programs where patients are tracked and the plan, or 
the Pharmacy Benefit Management company, is able to remind the 
patient, make sure that they are adhering to the therapy. Those 
are programs that could very well be supported by this 
committee.
    Senator Casey. My final point and I know I am done. I do 
not know how you--even if the result of these hearings over 
time ended with lower drug prices--I do not know how that is 
benefiting many people when you rip away healthcare to 23 
million people, which is the CBO number based upon the House 
bill. If you do the math on the Senate bill----
    The Chairman. Time is up, Senator Casey.
    Senator Casey [continuing]. You have millions of people 
without Medicaid coverage.
    The Chairman. Senator Young.

                       Statement of Senator Young

    Senator Young. I thank all of our panelists for being here 
today. Each of you indicated in your written testimony that you 
alluded to the piloting of innovative outcomes-based contracts 
by insurers and by biopharma companies. I would like to explore 
this idea of outcomes-based contracts with each of you.
    Can you first explain how these contracts work and perhaps 
what their potential might be to lower drug costs for patients? 
Any of you can respond.
    Mr. Coukell. There is a vast range of potential ways these 
contracts could work.
    Some could be purely financial instruments around a volume 
of sales and so on. Some could tie reimbursement payment for 
the drug to achieving specific outcomes, preventing 
hospitalization, or lowering cholesterol to a certain level. 
There are a lot of ways they can be structured.
    This is still very new territory. There are not that many 
of these arrangements in place. Avalere just did an analysis 
that Mr. Mendelson could talk about.
    There is relatively little in the public domain about how 
they are structured. They are complex to negotiate. They 
require a lot of data to monitor and followup on, and it is as 
yet unclear whether they will reduce spending.
    Senator Young. Yes.
    Mr. Mendelson. Yes, I am sorry, if I could?
    Our analysis actually showed that 70 percent of health 
plans were very enthusiastic about initiating these contracts, 
and that 40 percent had actually initiated these contracts and 
felt they were successful.
    I completely agree with Allan's characterization of the 
programs, but these are critical programs that are in place 
today, and I think really could be facilitated by making a few 
small changes to enable better contracts between health plans 
and pharmaceutical companies.
    Senator Young. To followup on that, are there policy 
barriers to implementation of these contracts?
    Mr. Mendelson. Yes.
    Senator Young. If so, what are they?
    Mr. Mendelson. I would point to three.
    The first is that certain aspects of the Stark Regulations 
prevent the engagement with patients to make sure that some of 
the compliance programs--for example, that Senator Casey 
mentioned--could actually be adopted.
    The second, ironically, is Medicaid best price where 
sometimes a pharmaceutical company does not want to enter into 
an agreement with a health plan if they think that the price 
that they will ultimately grant will go below what they granted 
to Medicaid.
    It is ironic in the sense that it is really preventing the 
healthcare system from moving forward on the basis of the price 
floor that was set under Medicaid. So those are two.
    Then I think there is a third set of policies around 
enabling more digital engagement by plans into the 
pharmaceutical area, and I would be happy to followup with more 
detail on that for the record.
    Senator Young. I will look forward to that.
    Can others identify policy barriers to implementation of 
these contracts? Or, if you have strong opinions about their 
viability and effectiveness as we transition from a fee-for-
service model, I would like to hear your thoughts as well. Yes, 
Doctor.
    Mr. Howard. Dan is absolutely right.
    I just had one thing. From the perspective of the FDA--and 
the engagement of companies, providers, and payers--there can 
be limitations on what companies can provide in terms of what 
is called off-label information on a product's effectiveness or 
safety profile that is not contained on the label. It is 
gathered through other sources, other clinical sources, 
electronic medical records, other studies.
    Being able to transmit that information and incorporate it 
into these contract designs, testing new value and pricing 
arrangements, would be very helpful. The FDA's concern is that 
manufacturers would not have an incentive to go back and get 
new label indications, or expanded label indications.
    The FDA could create safe harbors for these and then 
develop the use cases where they could capture that information 
and more rapidly expand the label and update the label more 
quickly than they do today. That would also allow for drug 
repurposing, drugs competing head to head based on their real 
world performance, which is another way to drive competition.
    Mr. Anderson. What I would be concerned about in this 
formula approach is determining the value of a human life.
    You really need to do that in most of these formulas and I 
do not know how you are going to do that. If you want to try to 
do that, go ahead. Also, every single patient----
    Senator Young. Would we, perhaps, look to some other areas, 
through regulation? We have seen that regulators here at the 
Federal level on a daily basis do determine cost value. Whether 
it is through auto safety rules, or other decisions over at the 
FDA, they do, in fact, determine a cost value, as uncomfortable 
as that notion is to all of us, a cost value----
    Mr. Anderson. Right.
    Senator Young [continuing]. Per life.
    Mr. Anderson. So the first thing you would have to do is 
that.
    Senator Young. Yes.
    Mr. Anderson. The second thing is each patient is unique. 
Talking about a value for a drug for you is different than for 
Senator Collins.
    Senator Young. Dr. Howard and Mr. Mendelson, this cost 
value, they see that as a red herring based on their facial 
expressions.
    Mr. Anderson. Right.
    Senator Young. I want to get that on the record.
    The Chairman. Thank you, Senator Young.
    Senator Franken.

                      Statement of Senator Franken

    Senator Franken. Thank you, Chairman Alexander and Ranking 
Member Murray for holding today's hearing on prescription drug 
costs.
    I also want to thank Senator Cassidy and the eight other 
Members from both sides of the aisle who joined me in 
requesting this hearing. I hope that we can continue this work 
together to tackle prescription drug costs and that is why we 
are here.
    I am also glad that we will have additional hearings on 
prescription drugs. The roundtable is a great idea, Mr. 
Chairman.
    I do agree with the Ranking Member and with Senator Casey 
that we do need to have hearings on the current effort in the 
Senate to repeal the ACA. I think the fact that we are not, 
should show the people of Tennessee, once again, that the 
Chairman is a rabid right-wing partisan.
    Is that helpful for you?
    [Laughter].
    The Chairman. Actually, that might get me through the next 
election.
    Senator Franken. OK.
    The Chairman. Thank you for that.
    [Laughter].
    Senator Franken. Our No. 1 focus today and always needs to 
be on patients.
    Consider Carol from St. Paul, who has M.S. and has been 
denied coverage for her drugs that charge nearly $3,000 for her 
co-payments.
    Or take Clare, who lives in Stillwater, MN. Clare used to 
pay $60 for her Remicade treatment for her rheumatoid 
arthritis. My mother had rheumatoid arthritis. But the price 
shot up to $1,400 for her prescription. Clare had to choose. 
Take her medicine or keep her home. It has been 2 years since 
her last treatment, and now she is having trouble holding a 
knife and fork.
    No one should have to choose between affording their 
medications or their home.
    Clare is angry. Her condition now interferes with her 
ability to do basic tasks and she feels like she is being 
robbed of her ability to age gracefully.
    Frankly, I am angry too. It is our job, all of us here, to 
help people like Clare.
    These stories are not unique to Minnesota. I have given all 
of you these stories from your constituents and your States. I 
hope that you will read them, everyone here, and internalize 
them, and make these stories your test of whether what we are 
doing here is good enough.
    Senator Cassidy has been talking about the ``Jimmy Kimmel 
Test,'' and I am glad he has been. For drug prices, let us use 
the ``Clare Test.'' Will the proposals we support help Clare 
keep her home and get the medicine she needs to hold her knife 
and fork.
    That is why I worked with 15 of my colleagues, many of them 
here today, to introduce comprehensive legislation to bring 
down prescription drug prices. This bill includes more than a 
dozen policies to increase transparency, improve affordability, 
reward high value innovation--I thank the Senator from 
Louisiana for bringing that up--and accelerate competition.
    I do not expect every member on this committee to endorse 
all the provisions in my bill, but I hope we can work across 
party lines to build on them.
    I would like to turn to my questions.
    Skyrocketing drug prices obviously affect Clare, but they 
actually affect all of us.
    Mr. Coukell, can you describe for Americans who are 
listening today who do not take expensive prescription drugs 
all the different ways that high drug prices affect them as 
well?
    Mr. Coukell. Thank you, Senator.
    We all pay the cost of prescription drugs. We pay it 
through insurance premiums that we pay. We pay it indirectly 
through insurance premiums that businesses pay. We pay it 
through taxpayer programs that support Medicare, and Medicaid, 
and the V.A., and DoD, and all of those programs.
    Every prescription that is covered by insurance ultimately 
is covered by the American public.
    Senator Franken. All of you would agree, right?
    [Panel nods in assent.]
    I only have 30 seconds left, Mr. Acting Chairman, can I go 
to my next question?
    Senator Cassidy [presiding]. Yes.
    Senator Franken. Thank you.
    Reuters recently conducted an investigation on price 
increases for the top 10 drugs sold in the United States. 
Between 2011 and 2014, all of these 10 drugs had price 
increases of at least 50 percent.
    Clare's arthritis drug, Remicade, went up 63 percent. 
Humira, another arthritis drug, had 126 percent price increase. 
M.S. drugs, too, have increased from about $8,000 a year to 
upwards of $60,000 a year annually, even though many have been 
in the market for years.
    Mr. Coukell, or anyone who wants to answer this. How do 
drug companies justify these year over year price increases? 
For example, are their products improving in any way from year 
to year to justify the price? Or, are companies conducting 
valuable new research and development on these existing drugs? 
If neither of these, what do you think drives these increases? 
Again, for anyone, but I will go first to Mr. Coukell.
    Mr. Coukell. Thank you, Senator.
    It is always important in this space to recognize when we 
are talking about list prices or net prices. Both are 
important.
    Net prices are projected to rise 2 to 5 percent a year over 
the next 5 years. So compounded, that is 10 to 30 percent.
    List prices are rising much faster and rebates are rising 
with them. For the patient who is paying an out-of-pocket share 
based on a list price, or something like a list price, that has 
huge implications at the pharmacy.
    Obviously, once the products are on the market, there are 
some ongoing costs for the companies, but if the drug comes to 
market at a price that reflects its value, it is unclear why it 
would increase faster than medical CPI.
    Senator Franken. I am sorry. I will be here for a second 
round. Thank you for your indulgence.
    Senator Cassidy. Senator Collins.

                      Statement of Senator Collins

    Senator Collins. Thank you.
    Dr. Anderson, let me start by saying it is great to see you 
here again. You were extremely helpful last year when the 
Senate Aging Committee conducted a year-long investigation into 
the four drug companies that had acquired decades-old, off-
patent drugs, and then dramatically increased the prices, in 
one case by literally 5,000 percent overnight.
    What we found in that investigation is that companies were 
able to ward off competition by putting their drugs in closed 
distribution systems, or specialty pharmacies that made it very 
difficult for generic companies to get sufficient quantities of 
the drugs to do the bio-equivalency studies that are required 
by the FDA.
    We particularly found that there were problems with abuses 
of the Risk Evaluation and Mitigation Strategies program. That 
is what is known as REMS. It is used for drugs with increased 
risk factors. Instead, it was being misused to prevent 
potential competitors from getting the drugs that they needed 
for the bio-equivalency studies. Indeed, Janet Woodcock, from 
the FDA, testified that this was a real problem.
    Could you elaborate on that issue and what we could do to 
ensure that companies do not block access to the quantities of 
drugs that are needed for the bio-equivalency studies?
    Second, since this is going to be the only question I am 
going to get, another idea would be to amend the Medicare Part 
D contracts that outline the participation in the formularies 
that are covered by Medicare Part D to require companies 
participating in Part D to make available sufficient quantities 
of their medications for these bio-equivalency exams conducted 
by potential competitors.
    Could you comment on those two issues?
    Mr. Anderson. I will do my best.
    Senator Collins. Thank you.
    Mr. Anderson. Thank you for those kind words.
    It has been great to work with you and your staff over the 
last year and a half helping to put together your report, and 
then the legislation I know that you have been able to get 
through this committee. It has been a great effort, and I 
appreciate my little part in that activity.
    What is happening right now is you have this REMS program 
which is established by the Congress and it is to make sure 
that the drugs are safe.
    However, what is happening is that companies are using this 
idea to block other companies from actually getting access to 
the drug. People like Martin Shkreli, which your report showed, 
essentially created this entity called a limited distribution 
chain to keep everyone from getting access to his drug who was 
a competitor to him, so no one could actually get access to the 
drug.
    There are a number of ways that you and others could deal 
with this problem. One of which is to essentially say to every 
drug company, ``You have to make that drug available to anybody 
who wants to manufacture it.''
    I was on a panel with Janet Woodcock over in Government 
Oversight a little while ago, and she said,

          ``I cannot do anything about it. I can say that you 
        can make it available if it is on REMS, but I cannot 
        force you to make it available.''

    I think only the Congress can essentially say that.
    There is about a $3 billion savings that the Congressional 
Budget Office has estimated could happen if essentially 
Congress were simply to say to the company, ``You have to make 
that available.'' There are a number of bills, and you have one 
of them, that are about that particular area.
    You could amend the Part D activities. You could do a whole 
variety of different activities, but essentially the idea here 
is to make sure that there is, in fact, competition in the 
marketplace.
    Senator Collins. Thank you so much. Those are clearly areas 
that we need to pursue.
    Thank you, Mr. Chairman.
    Senator Cassidy. Senator Bennet.

                      Statement of Senator Bennet

    Senator Bennet. Thank you, Mr. Chairman.
    I would like to thank the Chairman and the Ranking Member 
for holding this hearing on drug pricing.
    It is a critical issue for people all across Colorado. I 
hear about it regularly and I have heard about it over the last 
several weeks as I have held town halls all over my State in 
republican and democratic parts of Colorado where people are 
expressing their deep concern--I should say to my colleagues on 
the other side of the aisle--over the House-passed healthcare 
bill.
    Based on what we know, 23 million people may stand to lose 
health insurance, and those who are older and sicker may be 
charged more. The effect of this is going to be felt more in 
rural areas than in urban areas.
    In Otero County, where I held one of these town halls, the 
republican part of my State, 43 percent of the people who live 
there depend on Medicaid. I think they have a right to know 
what is in the bill, what is in the Senate plan. A right to 
know what is being currently drafted behind closed doors. Their 
health, the well-being of their families is at stake.
    In 2009, while amending the process the Democrats used to 
pass the Affordable Care Act, Speaker Ryan said, ``I do not 
think we should pass bills that we have not read, that we do 
not know what they cost.''
    He said,

          ``Congress is moving fast to rush through a 
        healthcare overhaul that lacks a key ingredient, the 
        full participation of you, the American people.''

    Speaker Ryan said,

          ``Congress and the White House have focused their 
        public efforts on platitudes and press conferences, 
        while the substance and the details have remained 
        behind closed doors.''

    In 2010, Leader McConnell said,

          ``When it comes to solving problems, Americans want 
        us to listen first and then if necessary, offer 
        targeted step-by-step solutions. Above all, they are 
        tired of a process that shuts them out. They are tired 
        of giant bills negotiated in secret then jammed through 
        on a party line vote in the middle of the night.
          ``It should be clear now, Americans are tired of 
        grand schemes imposed from above.''

    They said this about a process that took years, literally 
years, and provided numerous opportunities to members of both 
parties to provide input. Almost countless bipartisan hearings 
were held, countless bipartisan roundtables were held. Hundreds 
of amendments were considered. Republican amendments were 
adopted in the process.
    When the bill came to the floor, the Senate spent 25 days 
in broad daylight in front of the American people debating the 
health reform bill. We have not had a single hearing about this 
product, which may be on the floor and voted on next week. Not 
a single hearing. What an abusive process. At the very least, 
we should meet the standards that Speaker Ryan and Leader 
McConnell set for the Affordable Care Act.
    I say to my colleagues on both sides of the aisle based on 
the hearings that I held, the town hall meetings that I have 
held in Colorado. There is going to be a lot of grief that is 
going to come to this body if we do not slow down and have the 
kind of public discourse we should be having about 16 percent 
of our economy and something that affects so materially every 
single family in our States.
    I am glad we are having a hearing today on drug pricing 
because it is one of the things I hear about at every single 
one of my town hall meetings. As I mentioned, I think people do 
not understand why people in America seem to pay such a higher 
price than people around the world do.
    I wanted to ask with my remaining time a question of the 
panel. It seems to me, based on your testimony and other work 
that I have seen, that we really need different solutions to 
address different categories of the drugs.
    I would like to ask first whether you think my categories 
are off-base or on-base. Second, what would you say are the 
ways we could most materially affect the price of drugs.
    The categories, I would suggest, are specialty drugs which 
are innovative treatments and cures that do not have a 
competitor, branded drugs that may not have a generic version, 
but may face competition with drugs that treat the same 
disease, and generic drugs.
    I would ask the panel, do you agree? I have 2 minutes left, 
so I am just going to go down the row starting with Mr. 
Mendelson.
    Do you agree with this break down and the need for 
different solutions to address the rising costs of each of 
these categories? What policy would make the biggest 
difference, Mr. Mendelson?
    Mr. Mendelson. I agree that different approaches are 
necessary for products that have limited competition versus 
those that have robust competition.
    My view is that the best opportunity is really in 
fashioning policies that enhance the competition across all of 
these different categories, but it has to be selectively done 
in ways that make sense.
    I do want to kind of point out one thing from the prior 
aspect which is that, as Allan mentioned, drug prices are going 
up between 2 and 5 percent in the past period. Overall, 
healthcare prices are going up by about 6 percent.
    If these different categories are associated with different 
levels of price increase and, in fact, for drugs with generic 
competition, you see substantial reductions in cost.
    I just wanted to kind of address that in the premise of the 
question.
    Mr. Howard. Just the recognition, to followup on Dan's 
point, this is a problem we are going to have about every 10 or 
11 years because that is when patents expire.
    For the first part of this century through about 2012, in 
2012 real drug spending actually fell because about a trillion 
dollars worth of branded medicines went generic.
    Then we just need to focus on keeping the drugs in the 
picture of this is 15 percent of the cost. There is 85 percent 
of the rest of the costs that is a more appropriate use of 
medicines and a more appropriate reimbursement for outcomes 
that includes all of the other pieces of the system can help us 
to bend the curve.
    I would just caution that. Keep them in sight of all the 
other things they do in the system and the ability to promote 
competition among other providers.
    Mr. Anderson. I would just amend your three categories and 
make it four.
    Within the generic space, for most generic drugs where 
there are three or more competitors, the system works 
incredibly well. When there are one or two competitors, the 
system is broken and that is when you get the Martin Shkreli's 
of the world and that is what Senator Collins and I were 
talking about.
    I would just make that slight modification to your 
groupings.
    Mr. Coukell. May I quickly?
    Senator Cassidy. Very quickly.
    Mr. Coukell. I agree with that taxonomy. I just want to 
followup on one point that Dr. Howard made which is this is a 
10-year cycle.
    The concern here is your first category, which are 
specialty drugs. We know now that 1 percent of prescriptions 
are 30 percent of spending. If biomedical innovation continues 
the way it is going, and let us hope that it does, more and 
more diseases will fall into that 1 percent and that is the 
trend that looks unsustainable.
    Senator Bennet. Thank you.
    Senator Cassidy. Senator Murkowski.

                     Statement of Senator Murkowski

    Senator Murkowski. Thank you, Mr. Chairman.
    Thank you to the panel.
    Many of my constituents back in Alaska live in communities 
where there is not a pharmacy in town, or if there is a 
pharmacy, it is a very small pharmacy and they likely do not 
stock a lot of specialty drugs. Much of what Alaskans receive 
by way of pharmaceuticals comes to them through the mail.
    A pretty basic question here, then, is if it is going to 
come through the mail, why not work to expand that available 
market? For many, they look at our closest neighbor, which is 
Canada and say, ``Well, why can we not just get our 
pharmaceuticals through the mail and through licensed providers 
in Canada?''
    Obviously, that has been a subject of discussion here in 
this committee room.
    What is the answer to a situation like Alaska, or many 
parts in rural America where you receive your drugs by mail? 
How do we work to ensure, not only the safety and the quality--
which of course, we want to do and make sure that the FDA is 
regulating appropriately--but really to allow for a level of 
access to people in rural America?
    I will throw it out to any of you. Dr. Anderson.
    Mr. Anderson. We are working and getting a lot of mail 
order activities in the drug system. In most of the places in 
Alaska, if Federal Express gets there, your pharmaceuticals do.
    Senator Murkowski. No Federal Express in a village.
    Mr. Anderson. No, I understand that.
    Senator Murkowski. Yes.
    Mr. Anderson. But in many places.
    Senator Murkowski. They would like it.
    Mr. Anderson. Exactly. But in many places it is, in fact, 
available and they are.
    The delivery system is working very well in the system. 
Maybe not in the villages in Alaska, but in most parts of the 
United States, the distribution system is working as long as if 
it is not a very limited distribution system, as Senator 
Collins and I were talking about earlier. I think that is it.
    The cost increases that are occurring are not occurring in 
the distribution system. It is really in the cost of the BPM's.
    Senator Murkowski. Right.
    Mr. Anderson. It is the cost of the basic pharmaceutical 
company. That is where the cost is. I do not think we are going 
to be talking a lot about distribution systems here.
    Senator Murkowski. Mr. Mendelson.
    Mr. Mendelson. I agree with the comments about home 
delivery that it is a vital aspect, and I do not think that is 
going to change, but we will see more and more of that as more 
benefit managers encourage those programs.
    With respect to the importation issues and this dates back 
to when I was running OBM Health under the Clinton 
administration and that was also being proposed around that 
time. And talking about things that are cyclical, every 3, 4, 
or 5 years there is an example of a drug that comes in from 
outside our borders and really hurts somebody.
    As a result, I know that Congress had essentially put a 
certification in front of the FDA Commissioner and said, ``We 
need the Commissioner to certify.'' And it had Democrats and 
Republicans in those positions and to date, no one has been 
willing to certify to the safety of the importation program.
    That does give me some level of pause in terms of 
essentially abandoning the protections that we have in this 
country that are tightly regulated, not only by the Federal 
Government, but also by States and essentially kind of adopting 
an external regulatory regimen.
    Senator Murkowski. Let me ask about the PBM's because you 
have raised that and it just seems that we have kind of a self-
reinforcing spiral when it comes to certain drug costs.
    First, you have new drugs and they cost more money, and 
that drives up the cost of insurance. Then in an effort to 
reduce the monthly insurance premiums, insurers offer this 
array of plans that expose patients to more out-of-pocket 
costs. Then PBM's can negotiate some sort of a discount from 
the manufacturer in exchange for certain concessions, but those 
savings, then, are not passed on to the patient buying the 
drug. Instead, those savings are already built in to the cost 
of the patient's insurance premium.
    Somebody who has bought only the insurance that they can 
afford, cannot afford the steep price of the drug because the 
insurance has a co-pay or a high deductible. The higher the 
list price of the drug, the more of a discount, then, that the 
PBM can negotiate and the more money then that PBM earns.
    It seems that you are incentivizing the pharmaceutical 
companies to set a list price that is nowhere close to the 
actual cost of the drug, even when the R and D factored in and 
the cycle starts over again.
    What do we do? I understand that Dr. Anderson would either 
eliminate the rebates to PBM's and PDP's, or mandate 
transparency. How do we get out of this cycle that it clearly 
appears that we are in?
    Mr. Anderson. What you want to do is pay the PBM a fee for 
their services. They are performing a very valuable service. 
What you do not want to do is pay them, give them a portion of 
that rebate because that gives them the incentive to raise the 
price.
    Senator Murkowski. Just a flat fee or----
    Mr. Anderson. A flat fee or some kind of incentive payment, 
but not based upon the price of the drug. You take away that 
rebate incentive to do it. If they can negotiate a better 
price, they can get a bigger fee, but they do not get a rebate.
    Senator Murkowski. Got it.
    Dr. Howard.
    Mr. Howard. Some employers do just that. I forget what the 
exact numbers are off the top of my head. About half of large 
employers ask for 100 percent of the rebate to be passed 
through to them, so they capture the full value of that, and 
then the PBM can be paid on a per member, flat fee basis. You 
can ask the other 50 percent of the employers who do not do 
that, why they do not do that.
    I just wanted to draw attention to some innovative 
approaches on the payment end.
    There was a study that United Health is trying to replicate 
where they tried to bundle physician payment services for 
cancer medicines, and for cancer care that physician delivered 
in the hospital.
    In a nutshell, they found that drug costs went up by, I 
think, 136, 139 percent. But total healthcare costs for 
treating those cancers fell by 36 percent because the physician 
had an incentive to use a regimen at their own discretion that 
they felt would prevent other complications, prevent 
hospitalizations. They are trying to duplicate that experiment.
    That is one way of putting the medicine at the center of a 
better outcome that can lower total cost and still force the 
manufacturers to demonstrate how they are impacting that 
outcome.
    Senator Murkowski. Thank you, Mr. Chairman.
    Senator Cassidy. Dr. Howard said they put the patient at 
the center of that, not the drug.
    Mr. Howard. Correct.
    Senator Cassidy. Yes.
    Senator Baldwin.

                      Statement of Senator Baldwin

    Senator Baldwin. Thank you.
    Mr. Chairman, Ranking Member, it is absolutely clear that 
we have a problem with drug prices when price increases 
accounted for 100 percent of the pharmaceutical industry's $8.7 
billion bump in earnings last year.
    I fear that it is about to get even worse with the very 
partisan healthcare bill that is about to be brought to the 
Senate floor, which I believe will make many, many, many 
Americans pay a lot more for less care.
    I am glad this is a bipartisan hearing. We should be 
working on bipartisan solutions to improve costs instead of 
pulling the rug out from under so many of our constituents, 
like my Wisconsin constituents, who are already struggling to 
pay for lifesaving medications.
    Wisconsinites like Diane. Diane is from Webster, WI. She 
recently had to stop taking her Multiple Sclerosis medication 
that costs more $90,000 annually today. She has seen the price 
increase over the last 23 years and she has seen her savings be 
just completely drained.
    It is why I had the opportunity to introduce the Fair Drug 
Pricing Act with my colleague, Senator John McCain, to require 
basic transparency and accountability--like Research and 
Development costs, like marketing and advertising spending--for 
drug companies that choose to increase the price of certain 
drugs by more than 10 percent a year.
    Holding drug companies accountable is a first step to 
addressing these dramatic price hikes that are making 
healthcare more and more unaffordable for too many families in 
Wisconsin.
    I believe that the market is broken when people like Diane 
have to make that sort of decision and we continue to see these 
yearly price increases.
    Pfizer has already raised the price of 90 of its existing 
drugs by about 20 percent this year. While drug companies often 
argue that their price hikes are due to product improvements, 
and new R and D, we have absolutely no way to verify this.
    What could we do to limit these price increases for 
existing drugs? Do we need more information surrounding drug 
company pricing decisions to help improve access?
    I want to start in answering that question with you, Mr. 
Coukell.
    Mr. Coukell. Thank you, Senator.
    You started with Multiple Sclerosis, and it is an 
interesting area where there are a dozen drugs or so, and every 
time a new one comes along, the price of all the old ones go 
up. So that shows us that the market is not working the way 
markets are supposed to be working.
    It is absolutely a difficult area to make policy in because 
there is such a lack of transparency about who is paying what. 
It is very, very complex.
    I think the question of whether R and D costs have a direct 
relationship to price is an important one and clearly it is an 
expensive undertaking to develop a drug. But if two virtually 
identical drugs came to market with really different R and D 
costs, we would not expect them to have a different price.
    Really as the consumer, what I want to buy is a clinical 
outcome, and it does not matter to me that much what the R and 
D cost is.
    Senator Baldwin. Thank you.
    Mr. Anderson. Senator Baldwin.
    Senator Baldwin. I have a separate question for you, Dr. 
Anderson.
    Since 2002, three major drug companies have increased the 
price of insulin by more than 200 percent. I heard from a 
constituent--his name is Greg from Stoddard, WI--who has two 
sons and is struggling to afford the costs of their diabetes 
and insulin treatment that costs more than $1,000 a month.
    I want to know if the drug maker that increases their price 
every year considers Greg's sons or any of the other families 
who depend on their drugs to function?
    Dr. Anderson, can you discuss why companies who make 
lifesaving drugs are incentivized to regularly increase their 
price or launch new drugs at radically high prices? How much 
does the impact of these high prices on real patients factor 
into any of their decisions?
    Mr. Anderson. I had the opportunity to go to meet with the 
investment bankers and the drug companies, and ask pretty much 
that same question.
    The simple answer is because they can.
    Essentially, there is no regulation and because they have a 
monopoly, they can set the price at whatever they want to set 
it. So they essentially have that ability.
    What they have seen from people like Martin Shkreli, who 
have done it and gotten away with it, that they should be able 
to do it. The investment bankers are often telling them, ``You 
should do the same thing as Martin Shkreli did.''
    Senator Cassidy. Senator Warren.

                      Statement of Senator Warren

    Senator Warren. Thank you, Mr. Chairman.
    I am glad we are having a hearing to talk about the 
skyrocketing price of prescription drugs. It is obviously a 
massive problem and there are a lot of different things we 
could do to help.
    Senator Franken and I have a bill with a whole group of 
Senators that has a whole menu of options in it.
    Senator Sanders and I have a bill with a group of Senators 
to allow medicines to be imported, cheaper medicines to be 
imported from Canada. Those are things we should be talking 
about.
    Let us be blunt. It is insane to pretend to have a 
bipartisan hearing on lowering drug prices when right now, 
today, 13 Republicans are writing a secret bill to kick 23 
million people off health insurance and their prescription drug 
benefits, and we cannot even get a look at it.
    Let us start there. Dr. Anderson, you are an expert in 
health policy. Before the Affordable Care Act, if you bought a 
plan on an individual market, did it have to cover prescription 
drugs?
    Mr. Anderson. It did not.
    Senator Warren. It did not. And now the ACA requires that 
plans sold on exchanges cover prescription drugs as essential 
health benefits. Is that right?
    Mr. Anderson. Yes, they are essential health benefits 
written into the law.
    Senator Warren. Yes. All right. Let us talk about a second 
part.
    Before the ACA, insurance plans could also impose annual 
and lifetime limits, meaning that once patients had run up 
prescription drug costs to a certain point, the patient, not 
the insurer, would be on the hook for all the prescription 
costs after that. Is that right?
    Mr. Anderson. Absolutely. People were being thrown into 
bankruptcy court as a result.
    Senator Warren. Let us talk about potentially who gets 
especially hurt.
    How did those out-of-pocket costs hurt someone with a 
disability or a chronic illness?
    Mr. Anderson. Well, they are the people that are taking the 
most drugs. If you have five or more chronic conditions, which 
is about 5 million Medicare beneficiaries, you are filling a 
prescription every week and that is just exceedingly expensive.
    Senator Warren. Before we had the ACA, we lived in a world 
where insurance stopped for those who needed it most and 
stopped whenever anyone needed it most.
    I know the ACA's coverage of prescription drugs is not 
perfect, but if the secret Republican plan is anything close to 
the House bill, then millions of Americans will lose their 
access to prescriptions. The Republican plan will also gut 
Medicaid, which means millions more will not get access to 
their medicine.
    In fact, I want to ask about Medicaid for a just a second.
    While the Federal Government pays for prescriptions through 
a lot of different Federal programs, the best deal is Medicaid. 
A 2014 GAO study found that TRICARE paid 34 percent more than 
Medicaid for brand name drugs. Medicare Part D paid 69 percent 
more.
    There are a lot of ways that we could lower drug prices. We 
could negotiate with Medicare, let Medicare negotiate. We could 
import cheaper medicines. And instead, the Republicans are 
talking about slashing the one Government program that does a 
good job of keeping prescription drug costs low.
    My question goes in the other direction. Mr. Chairman, I 
assume that you have seen the bill, and I am not asking for 
details on this. Can we get some general outlines of the 
Republican plan? Will the secret Republican bill let insurance 
companies go ahead and drop prescription drug coverage or kick 
people off Medicare?
    Senator Cassidy. Senator Warren, I cannot answer that.
    Senator Warren. I appreciate that and you have been someone 
who has really tried to work in a bipartisan way on this issue.
    This is just enormously frustrating. We are in here to talk 
about the importance of access to prescription drugs and the 
need to bring down the costs, at the same time that 13 people 
are negotiating in secret to take away prescription drug 
coverage from millions of Americans.
    There are people who want to be able to work in a 
bipartisan way. We have had our differences on this committee 
with Chairman Alexander and with others, but we try to sit down 
and work in a bipartisan way.
    We cannot work in a bipartisan way if we cannot see the 
bill.
    What is happening right now to deny Democrats and the rest 
of the Republicans access to this bill so that we can see the 
details, so that we can debate them out in public, so that we 
can have experts review them, so the American people can see 
them.
    To deny the opportunity to see any of that is just flat 
wrong. In fact, it is shameful.
    That is it for me, Mr. Chairman.
    Senator Cassidy. Briefly, Senator Baldwin.
    Senator Baldwin. Mr. Chairman, I want to request that 
testimony from the Campaign for Sustainable Prescription Drug 
Pricing be submitted for the record.
    Senator Cassidy. Without objection.
    [The information referred to may be found in Additional 
Material.]
    Senator Cassidy. Senator Hassan.

                      Statement of Senator Hassan

    Senator Hassan. Thank you, Mr. Chair and Ranking Member 
Murray.
    As is true for all of my colleagues, I think the topic of 
today's hearing is incredibly important, and I appreciate the 
chance to discuss it.
    I would venture to guess that just about every Member of 
Congress has heard from their constituents about the rising 
cost of prescription drugs. I hear about it from Granite 
Staters all the time.
    I also right now, am hearing from Granite Staters all the 
time about Trumpcare and what the Senate is doing with 
Trumpcare.
    Mr. Chair, I come from a State with a large citizen 
legislature, 424 volunteer legislators, where every single bill 
is required to get a hearing. You cannot pass legislation in 
New Hampshire if the bill has not had a hearing.
    I am new to DC, but I continue to be amazed that we would 
not talk about a bill that impacts so many people and one-sixth 
of our economy. We hear references to it in the press. We know 
it is being worked on in secret, but we do not have even an 
outline of that bill for us to be able to examine ourselves or 
to get feedback from our constituents about which is what the 
other purpose of having hearings is about, so people can see it 
and they talk to us about it.
    I appreciate this expert panel so much. But we have been 
talking today about the nuances of benefit plan design when, in 
fact, if Trumpcare passes, a whole lot of our constituents may 
not have a plan to begin with.
    I join with my colleagues in being so frustrated that we 
are needing to spend time today when we want to be talking 
about the very important issue of access to lifesaving 
prescription medications for our constituents. But we need to 
be talking about Trumpcare because if Trumpcare passes in 
anything near the form that the House bill is in, and we are 
told that the Senate plan is similar to the House bill, this 
will be kind of an academic discussion for a whole lot of our 
constituents.
    I will join with my colleagues in asking the majority party 
to please share their plan with us, and to please include us, 
and to have a hearing so that our country can collaborate, and 
come together, and find a way forward.
    One of the things that I am also very concerned about is 
that we are hearing that the Trumpcare plan will cut Medicaid. 
I think a lot about the people who are covered by Medicaid in 
my State with long term disabilities, who do not have the 
physical capacity to actually take the medicine themselves. We 
need nurses, and licensed nursing assistants, and homecare 
workers who can actually help. If Medicaid is slashed again, 
access to prescription drug medicine for a lot of our 
constituents is an academic issue if there is not somebody who 
can help them take it.
    That is what I think we should be talking about in a 
companion hearing to this one--the overall Trumpcare bill.
    I do have a couple of questions about some fundamental 
issues that affect drug pricing because, again, I appreciate 
the discussion about benefit plan design, but we are still 
talking about underlying costs that keep rising very quickly.
    As you know, and Dr. Anderson, we began to talk about this 
in one line of questioning. Drug manufacturers often point to 
high research and development costs to justify high drug 
prices.
    In December, Health and Human Services released a report 
that concluded drug manufacturers set prices to maximize 
profits. This finding is obvious, especially for those who 
struggle every day to afford their medications. But I want to 
point out something from this report that I find interesting 
and would ask for you to comment on it.
    The HHS report said that the relationship between research 
and development costs and drug prices is subject to a number of 
misconceptions. In reality, the prices charged for drugs are 
unrelated to the development cost. Drug manufacturers set 
prices to maximize profits. At the time of marketing, R and D 
costs have already occurred and do not affect the calculation 
of a profit-maximizing price.
    Dr. Anderson, your testimony echoes this finding. I really 
am curious to find out from you, as an expert in this field, do 
companies spend more on research and development or on 
marketing, advertising, and then add to it in the profits they 
take?
    Mr. Anderson. Thank you for that question.
    They spend less on research, and more on marketing and 
sales than most of the companies. Essentially, you are correct 
that there is no typical relationship between the amount 
invested in a particular drug and the price of that drug.
    Overall, the companies need the money for R and D, but they 
do not actually price on the basis of how much R and D they put 
in to a particular drug.
    Senator Hassan. Thank you very much for your answer.
    Thank you, Mr. Chair.
    Senator Cassidy. Senator Murphy.

                      Statement of Senator Murphy

    Senator Murphy. Thank you very much, Mr. Chairman.
    My apologies to the panel; I am not going to ask them any 
questions. I am not. I think this is a really interesting 
discussion, but I think it is totally irrelevant to the most 
important discussion that is happening right now, which is not 
in this committee. It is not anywhere that the American public 
can see.
    It is behind closed doors where there are a certain number 
of Republican Senators that are perpetuating a fraud on the 
American public and they are not here. I mean, Democrats have 
been here at this hearing pretty consistently throughout the 
morning. Republicans have been in and out.
    If you want to believe the Republicans are behind closed 
doors writing a healthcare bill that is going to steal 
insurance from 23 million American in order to pass along a tax 
cut to the richest amongst us. Then this visual is evidence, 
potentially, of what is going on right now.
    Senator Hassan has it perfect. We can talk all we want 
about benefit design, but if 23 million Americans lose their 
access to health insurance, then they cannot afford 
prescription drugs. So it does not really matter what we do 
with respect to adjusting the intellectual property laws, or 
trying to differently regulate PBM's.
    If there is a massive fall off of the number of people who 
have insurance, then nobody can afford the drugs that we are 
talking about here today. With all due respect to the chairman, 
not the chairman who is sitting there today, but the Chairman 
who made opening remarks, what does it matter that the bill was 
passed in 2009 in the middle of a snowstorm? What does it 
matter what the weather was outside?
    There were 25 days of debate in the U.S. Senate before that 
bill came up for a vote. The American people had a month to 
watch the Senate debate that piece of legislation and offer 
amendments. And as the Ranking Member said that was on top of 
exhaustive committee processes.
    It is just not true that that bill was rammed through. That 
is not true. The House and the Senate debated that bill for a 
year and a half. It was there for the American public to see.
    The reason that we are watching this process play out in 
secret, the reason why no one in this country will see this 
piece of legislation until it is already passed is because 
Republicans learned a lesson from 2009 and 2010. That it did 
not accrue to Democrats' benefit to have that process play out 
over such a long period of time, so that is why they are going 
to keep this secret.
    They are going to keep it secret because inside that bill 
are massive giveaways for their friends. $145 billion of tax 
breaks for health insurers. $28 billion of tax breaks for 
pharmaceutical companies. $663 billion of tax cuts, almost none 
of which is going to anyone in this country who makes under 
$200,000 a year.
    There is good reason why there are no Republican Senators 
here except for Senator Cassidy. There is good reason why they 
are doing this behind closed doors because it is a fraud.
    It is a fraud to take insurance from middle class folks, 
folks who might be struggling in this country so that you can 
muster up enough money to hand another big tax break to people 
that do not need it.
    I hope eventually we can sit down and have a conversation 
about drug pricing that is meaningful and relevant, but this is 
not. This is just a distraction from what the real story is, 
which is this committee becoming irrelevant as a secret process 
unfolds to radically change one-sixth of the American economy.
    Senator Cassidy. Senator Sanders.

                      Statement of Senator Sanders

    Senator Sanders. Thank you very much, Mr. Chairman.
    I want to talk about prescription drugs, but I want to 
concur with Senator Murphy, and Senator Murray, and I suspect 
others. We are talking about one-sixth of the American economy 
and there will be no public discussion. No committee hearings. 
No witnesses coming forward. This is really outrageous.
    I want to focus on an issue which is also outrageous and 
that is I am hearing from my constituents in Vermont--that I 
suspect every other Senator here is hearing from his or her 
constituents back home--that they are sick and tired of being 
ripped off by the pharmaceutical industry, and they are very 
tired of paying by far the highest prices in the world for 
prescription drugs.
    At a time when drug prices are soaring, millions of 
Americans are unable to afford the medicine they need. This is 
the United States of America, approximately one out of five 
Americans under the age of 64 who gets a prescription from a 
doctor cannot afford to fill that prescription.
    How many of those people die? We do not know.
    How many of those people suffer, become much sicker than 
they should have been? We do not know.
    How much cost occurs when people end up in the hospital 
because they did not take medicine when they should have? We do 
not know, but clearly it is many billions of dollars.
    Mr. Chairman, there is no rational reason why in the United 
States, Gleevec, which is used to treat leukemia, costs over 
$10,000 in our country, but $2,100 in Norway.
    Why does a drug called Lantus, a diabetes drug, cost $186 
in America, but $47 in France?
    Why does Crestor, a popular drug for high cholesterol, cost 
$86 in the United States, and $29 in Japan?
    Why does Advair, used to treat asthma, cost $155 in the 
United States, $38 in Germany? On and on and on it goes. We are 
not just picking these drugs out. That is all across the board. 
Some cases the discrepancy is more, some it is less.
    Without exception, we pay the highest prices in the world 
for prescription drugs. Why is that? That really should be the 
simple question that is debated today, and I apologize. I have 
been to other hearings and I hope it has been discussed, but 
that is the question.
    Why in this country do we pay the highest prices in the 
world compared to every other country on earth? The answer is 
simple. Follow the money.
    Since 1998, the pharmaceutical industry has spent more than 
$3 billion in lobbying. This is not some kind of high 
technical, medical issue. Three billion dollars in lobbying and 
they have spent hundreds of millions of dollars on campaign 
contributions.
    We have a corrupt campaign finance system. We have a 
corrupt lobbying system. The reason we pay the highest prices 
in the world is an example of that for prescription drugs.
    An incredible example, last year--I was involved in this--
people of California wanted lower prescription drug costs. The 
drug companies spent $131 million in one State to prevent the 
people of California from lowering drug prices in their own 
State.
    Meanwhile, while Americans are dying because they cannot 
afford the medications they need, the five largest drug 
companies in the country made over $50 billion in profits in 
2015, while the top 10 pharmaceutical industry CEO's made $327 
million in total compensation.
    This is not a complicated issue. The drug companies are 
enormously powerful. They own much of the U.S. Congress. They 
make outrageous profits. Their CEO's earn outrageous levels of 
compensation, and yet back in Vermont, we have elderly seniors 
cutting their pills in half because they cannot afford the 
price.
    There are a number of solutions to this problem. They are 
fairly obvious. They have been discussed here for a long, long 
time. The real issue is whether the Congress has the guts to 
take on the very powerful pharmaceutical industry. I must say, 
there is not any particular evidence to believe that that will 
occur.
    What we need right now in this country are people from 
coast to coast standing up and fighting back for their own 
health, for the health of their children, for the health of 
their parents. Demand support for legislation like drug re-
importation.
    My colleague, Senator Franken, has issued a very good, 
comprehensive piece of legislation and other people have 
demanded that Medicare, for example, start negotiating prices 
with the pharmaceutical industry.
    There are a lot of things that we can do. We know what the 
answers are. The question is, will the Congress have the guts 
to stand up to one of the most powerful political forces in the 
United States of America? That is the pharmaceutical industry.
    Thank you.
    Senator Cassidy. Senator Whitehouse.

                    Statement of Senator Whitehouse

    Senator Whitehouse. Thank you, Chairman.
    I can remember once when our Republican colleagues were so 
sensitive to regular order in the Senate that they were 
accusing the Affordable Care Act of being a cooked up, closed 
door deal even when that was not even true.
    We had in this committee, in this very committee, 47 
bipartisan hearings, meetings, roundtables, and/or sessions. We 
considered 300 amendments. There were 160 Republican amendments 
adopted. We sat in that big conference room day, after day, 
after day going through huge stacks of amendments.
    It looks like what is going to happen here is that the 
majority leader is going to call up the wretched House bill on 
the floor. If there is an amendment process, it will be a sham 
because all amendments will be stripped out because he will 
offer a complete replacement, which will be the secret Senate 
bill, the first chance anybody will have to see it.
    No amendments will then be in order and they will cram it 
through on a fixed vote with only then the secret CBO score 
being provided. Then they will go off to conference with the 
House, which did the original wretched bill. It will obviously 
get even worse in conference with the House.
    That may be the most disgraceful Senate process in the 
history of this body and it is certainly a closed door deal 
that bears no comparison to the open, robust process by which 
we got to the Affordable Care Act. Let me just make that point.
    Let me ask the panel, where there is, in fact, competition 
among pharmaceuticals, how does the market tend to work?
    Mr. Anderson. There are two answers to your question.
    Senator Whitehouse. Make it quick.
    Mr. Anderson. When there is generic competition with a lot 
of competitors, it works incredibly well.
    Senator Whitehouse. OK. Next. Howard.
    Mr. Howard. When there are close therapeutic substitutes, 
the drugs are very similar, rebates are very large and the 
competition is fierce.
    Senator Whitehouse. Mr. Coukell.
    Mr. Coukell. I agree.
    Mr. Mendelson. Agree.
    Senator Whitehouse. OK. When there is real competition, it 
tends to work.
    Next question, how hard is it to determine when a drug 
pricing monopoly exists for people who have some familiarity 
with this market? Is this, like, a really impossible thing to 
figure out?
    On a scale of 0 to 10, how hard is it to figure out that a 
drug enjoys an effective pricing monopoly?
    Mr. Coukell. All brand drugs enjoy a pricing monopoly. Some 
have competition from other products. It is a little harder to 
tell when a generic has a monopoly, when it is the only product 
in the market, but not impossible.
    Senator Whitehouse. You can tell. There are some drugs that 
clearly do have a monopoly where monopoly rents can be 
extracted. Correct?
    Mr. Coukell. Yes.
    Senator Whitehouse. And that is visible. People can see 
that.
    Mr. Coukell. Yes.
    Senator Whitehouse. Yes? Economists can look at it and say 
yes, that is monopolistic behavior. Correct?
    Mr. Coukell. Correct.
    Senator Whitehouse. Correct. OK.
    What do we do as a country when we see that monopolistic 
behavior? Who steps in at that point and says, ``But wait a 
minute. That is actually an effective monopoly. We are going to 
have to do something about this pricing.''
    Long pause because nobody does.
    That takes me to Senator Sanders' point. As Senator Baldwin 
mentioned, the Credit Suisse just found that price increases 
have added $8.7 billion in net income to the companies that 
they analyzed; $8.7 billion in added net income.
    Also, we have this wretched decision called Citizens 
United, which allows industries to come in and spend unlimited 
amounts of money on influence in Congress.
    If you are making an extra $8.7 billion, how much money 
might it make sense to spend to try to exert influence in 
Congress? The answer is probably around $8.7 billion. Of 
course, they do not need to spend that much because we tend to 
come cheaper than that.
    It is impossible to imagine that we could not solve, in 
good faith, the pharmaceutical pricing problem, or at least 
take a good whack at it in this country, in a week if it were 
not for the special influence operations that control the 
Senate and control the House.
    It is not just the unlimited money that we see spent. Once 
Citizens United let the pharmaceutical industry, and the fossil 
fuel industry, and the other big players here spend unlimited 
amounts of money. That also allowed them to go to the dark 
money channels and blow them out so that they could spend 
unlimited dark money so that you do not even see their hands in 
operation.
    I associate myself with the comments of Senator Murphy, 
Senator Baldwin, Senator Sanders, and Senator Murray. This is a 
solvable problem except for the fact that we are too in tow to 
big special interests.
    Look out for the special interest prizes buried in the 
secret Senate Republican healthcare bill.
    Senator Cassidy. Senator Franken, second set of questions.
    Senator Franken. Thank you, Mr. Chairman.
    Let me speak to what my colleagues have been speaking to, 
which is this Republican process that is going on behind closed 
doors.
    There is a hope here, which is that they need 50 votes. And 
there is the hope that enough of my Republican colleagues do 
not vote for a bill that will hurt the American people. These 
are colleagues. They are colleagues on the other side of the 
aisle, the acting chairman among them, who cares about 
patients, who has run a clinic for patients who are in need.
    There is hope that there are enough colleagues on the other 
side of the aisle that will not allow something to get passed 
that will hurt the American people and that will make this 
discussion completely moot.
    I am here because I go around the State of Minnesota, and 
everyone knows that the prices of pharmaceuticals have shot up 
in the last 3 years, and they are feeling it.
    We have you four here, and I want to use your expertise to 
talk about that, and put aside this process that none of us, on 
this side, anyway, like--and I suspect that many on the other 
side do not like--and use the fact that you are here.
    I hope we do have a roundtable with you and I hope we can 
do it under maybe different circumstances where we are not 
talking just at the margins. We are talking about something 
that is very key to the American people and not just on the 
margins considering something very bad getting passed.
    I want to ask you about this idea of the R and D costs. I 
have heard some testimony from both Mr. Coukell and Dr. 
Anderson about the R and D. Very often it is said, ``Well, you 
have got to let them charge this much because otherwise they 
would not be able to develop drugs.''
    This is what an article recently published in the Journal 
of American Medical Association said,

          ``Although prices are often justified by the high 
        costs of drug development, there is no evidence of an 
        association between research and development costs, and 
        prices. Rather, prescription drugs are priced in the 
        United State primarily on the basis of what the market 
        will bear.''

    Do you think JAMA is correct?
    Mr. Coukell. Senator, one of the areas we work on is 
antibiotics. It is really hard to make money on antibiotics 
because when a new one comes to market, it is competing with 
old ones that are really cheap. And so that goes to show you 
that it is not related directly to the R and D costs. It is 
related to what the market is willing to pay based on the 
outcomes you get.
    Mr. Howard. To put that in a slightly different way, so 
that returns on investment are very sensitive to the prices 
that drugs command. So that when there is an attractive 
environment for investment, more money goes into R and D.
    There has been a great deal of econometric work from RAND 
and other places that shows when those returns decline, money 
going into R and D can decline as well.
    The problem is that investors have alternatives. If they 
can look at getting the next Snapchat or pick your favorite Web 
application that they can make a billion dollars on in a few 
years and not face regulatory approval compared to a product 
that performs at term.
    Senator Franken. Let me ask to that end. What are the 
profit margins of pharmaceutical companies versus, say, other 
sectors in the economy, say steel?
    Mr. Howard. The CBO has found that returns on investment 
for the industry are comparable to other high tech industries.
    Senator Franken. Other high tech. OK. I said steel. You did 
not answer my question.
    Mr. Howard. Should we compare them to donuts? We should 
compare them to other high R and D industries.
    Senator Franken. You should answer my question first.
    Mr. Howard. Right. There are lower returns for commodity-
based industries like steel than there are to other returns 
like software where there are important I.P. protections and 
higher returns as well.
    Senator Franken. At least that was an answer. Thank you. I 
appreciate that.
    I am out of time, but there are so many--can I make a 
couple of points?
    Senator Cassidy. If you can make them quickly, because I 
have to head out.
    Senator Franken. We should be able to import from Canada. 
We should be able to have a safe path and I think we also pay 
with NIH funding; I do not think that is talked about enough. 
We should negotiate within Medicare Part D.
    I would like to get that roundtable, so we can discuss all 
that again.
    Dr. Howard, thank you again for your answer.
    Thank you.
    Senator Cassidy. Senator Murray.
    Senator Murray. Thanks very much, Mr. Chairman.
    I want to thank all of our witnesses. This is an important 
hearing. It is a hearing about a cost to American families that 
is dramatically growing that they are deeply concerned about. 
We do need to figure out a way to proceed forward in a 
bipartisan way.
    Mr. Chairman, thank you for your forbearance and patience. 
I know you want to go crash the secret meeting, so I do not 
want to hold you up too much longer.
    Senator Murray. Can I come with you and crash that meeting? 
Because I will tell you, people across the country want to know 
what is in it because the cost of healthcare is critical to 
every family, every business, every community, everyone.
    The fact that a Republican Trumpcare bill is going to be 
jammed through here in a few weeks without any look at it by 
this committee, to me, is really appalling.
    We have a responsibility to our constituents to ask 
questions, to offer amendments, to be a part of that process 
particularly when millions of Americans are going to lose their 
coverage, pay higher costs, and feel the impact of that.
    I know you want to get to the meeting. I appreciate that. I 
will just say we are really appalled that this is being done in 
secret, and I hope you pass that onto your colleagues.
    Thank you very much.
    Senator Cassidy. I will also thank you and what I kind of 
draw from our meeting today is that there is a tension between 
how do we drive innovative for that antibiotic, for example, 
and how do we keep drugs affordable?
    Dr. Howard, your point at the end--about drug company 
profits are comparable to other high tech R and D--is 
appropriate. We cannot ignore the fact that some people cannot 
access drugs.
    Also my own concern, but I think I heard it here, is that 
we are driving some patients into the catastrophic portion of 
Medicare Part D which is really increasing the bill for the 
Federal taxpayer as well as for that person who is not getting 
that point of sale rebate.
    Two more things we heard. We need to leverage outcomes data 
to identify and reward value. Last, the whole process is 
opaque, so pity the poor patient who is trying to make a sense 
of it. So if we can get transparency, That could help.
    Let me finish by saying the hearing record will remain open 
for 10 days. Members may submit additional information for the 
record within that time should they wish.
    Thanks again for being here.
    The committee stands adjourned.
    [Additional Material follow.]

                          ADDITIONAL MATERIAL

Prepared Statement of John Rother, Executive Director, The Campaign for 
                    Substainable Rx Pricing (CSRxP)

    Chairman Alexander, Ranking Member Murray, and members of the 
Senate HELP Committee, the Campaign for Sustainable Rx Pricing (CSRxP) 
thanks you for the opportunity to submit testimony for the record on 
the critically important issue of unsustainable growth in prescription 
drug prices.
    CSRxP is a project of the National Coalition on Health Care Action 
Fund. We are nonpartisan coalition of organizations committed to 
fostering an informed discussion on sustainable drug pricing and to 
developing bipartisan, market-based solutions that improve 
affordability while maintaining access to prescription drugs for 
American patients and their families. Our members represent 
organizations including consumers, hospitals, physicians, nurses, 
pharmacists, employers, pharmacy benefit managers and health plans.
    We look forward to continuing our work with the committee to 
address the unsustainable growth in prescription drug prices, which can 
threaten the financial security, health and well-being of American 
patients and their families. Below we describe how the current 
marketplace enables the brand pharmaceutical industry to engage in 
anti-competitive practices that drive up prescription drug prices for 
consumers and present market-based, bipartisan solutions that would 
allow U.S. patients to continue to access the medicines they need at 
prices more affordable than currently available to them.
 i. spending growth on prescription drugs far exceeds spending growth 
               in the u.s. healthcare sector more broadly
    U.S. spending on prescription drugs is unsustainable and growing at 
a rate faster than the rest of the healthcare sector. In 2015, for 
example, while overall growth in U.S. healthcare spending increased by 
5.8 percent, growth in spending on prescription drugs increased by 9 
percent and outpaced spending on all other medical services.\1\ 
Medicare has followed a similar trend in recent years, as spending 
growth on drugs has exceeded spending growth in other parts of the 
program. The Medicare Trustees stated in their 2016 report, for 
example, that per capita drug spending in Part D grew faster tha 
historical rates in 2015, driven in large part by continued growth in 
prescription drug prices and a ``surge'' in spending on expensive 
specialty medicines, and they project such accelerated growth will 
continue in the future for similar reasons.\2\ Likewise, Medicare Part 
B spending on prescription drugs increased at a rapid average annual 
rate of 7.7 percent from 2005 to 2014; during that period, specialty 
biologic medicines grew at a particularly fast rate, increasing from 39 
percent to 62 percent of total spending, with a significant share of 
the growth due to price increases rather than number of patients using 
the medications.\3\
---------------------------------------------------------------------------
    \1\ Centers for Medicare and Medicaid Services. ``NHE Fact Sheet.'' 
See link: https://www.cms.gov/Research-Statistics-Data-and-Systems/
Statistics-Trends-and-Reports/National
HealthExpendData/NHE-Fact-Sheet.html.
    \2\ 2016 Annual Report of the Boards of Trustees of the Federal 
Hospital Insurance and Federal
Supplementary Medical Insurance Trust Funds, page 108. See link: 
https://www.cms.gov/
research-statistics-data-and-systems/statistics-trends-and-reports/
reportstrustfunds/downloads/tr2016.pdf.
    \3\ HHS Assistant Secretary for Planning and Evaluation. ``Medicare 
Part B Drugs: Pricing
and Incentives,'' page 6. March 8, 2016. See link: https://
aspe.hhs.gov/system/files/pdf/187581
/PartBDrug.pdf.
---------------------------------------------------------------------------
 ii. the brand pharmaceutical industry is driving excessive drug cost 
  growth by setting needlessly high list prices for its products and 
increasing those prices by amounts that substantially exceed inflation 
                      after they enter the market.
    Despite efforts from the brand name drug industry to suggest 
otherwise, the pharmaceutical industry is the primary driver of the 
unsustainable and needless growth in prescription drug costs that 
American patients and their families face today. The industry sets high 
initial prices for its products and consistently increases those prices 
at rates that typically exceed inflation.
    The brand pharmaceutical industry acknowledges that the list prices 
it sets represent the majority of the cost that U.S. patients pay out-
of-pocket for their prescription drugs. ``More than half of what 
commercially insured patients pay out-of-pocket for brand medicines is 
based on the list price,'' the Pharmaceutical Research & Manufacturers 
of America States.\4\ In other words, the industry alone sets the lists 
price that comprises a majority of the patient's out-of-pocket 
spending, meaning that the brand drug industry has significant control 
over the excessive and unsustainable costs that U.S. patients and their 
families bear in purchasing prescription drugs.
---------------------------------------------------------------------------
    \4\ Pharmaceutical Research & Manufacturers of America. ``More Than 
Half of Patients' Out-
of-Pocket Spending for Brand Medicines Is Based on List Price.'' March 
27, 2017. See link:
http://www.phrma.org/graphic/more-than-half-of-patients-out-of-pocket-
spending-for-brand-med
icines-is-based-on-list-price.
---------------------------------------------------------------------------
    Indeed, the brand industry today is using its ability to set high 
list prices for its products--and add to the already unwarranted costs 
consumers pay out-of-pocket for the prescription medications they need. 
One recent analysis found, for example, that list prices for 
prescription drugs grew 9.8 percent in 2016 after a 10.8 percent 
increase in 2015.\5\ By way of comparison, the CPI increased by 2.1 
percent and 0.7 percent, respectively, in 2016 and 2015.\6\
---------------------------------------------------------------------------
    \5\ Saganowsky, Eric. ``Report: Price Hikes Are Still Driving 
Pharma's Earnings Growth. Who's
Most At Risk?'' Fierce Pharma. April 19, 2017. See link: http://
www.fiercepharma.com/pharma/despite-scrutiny-price-hikes-still-driving-
pharma-s-eps-growth-report.
    \6\ Bureau of Labor Statistics. ``CPI Detailed Report. Data for 
December 2016,'' page 2. See link:
https://www.bls.gov/cpi/cpid1612.pdf.
---------------------------------------------------------------------------
    The industry also acknowledges the important role that pharmacy 
benefit managers, wholesalers, pharmacies and other intermediaries play 
in reducing the list price by negotiating discounts and rebates off 
that list price, thereby lowering overall cost of medicines for U.S. 
consumers. However, brand drug makers find ways to keep costs 
unsustainably high even after these discounts and rebates are 
negotiated for consumers by implementing excessive price increases that 
typically exceed inflation after a product enters the market.
    AARP found, for instance, that retail prices increased in 2015 for 
97 percent of the widely used brand name prescription drugs and all of 
these increases exceeded the rate of general inflation that year.\7\ 
Another study showed that prices for 4 of the 10 top-selling drugs in 
the United States increased by more than 100 percent between 2011 and 
2014 and for 6 of the 10 top-selling drugs in the United States grew by 
more than 50 percent during that same period.\8\ The trend appears to 
be continuing in 2017, as another analysis determined that there were 
40 drug price increases in the first quarter of 2017--up from 33 in 
2016.\9\
---------------------------------------------------------------------------
    \7\ AARP Public Policy Institute. ``Rx Price Watch Report: Trends 
in Retail Prices of Brand
Name Prescription Drugs Widely Used by Older Americans, 2006 to 2015,'' 
page 10.
December 2016. See link: http://www.aarp.org/content/dam/aarp/ppi/2016-
12/trends-in-retail-prices-dec-2016.pdf.
    \8\ Humer, Caroline. ``Exclusive: Makers Took Big Price Increases 
on Widely Used U.S. Drugs.''
Reuters Health News. April 5, 2016. See link: http://www.reuters.com/
article/us-usa-health
care-drugpricing-idUSKCN0X10TH.
    \9\ Tirrell, Meg. ``The Drug Industry Is Addicted to Price 
Increases, Report Shows.'' CNBC.
April 20, 2017. See link: http://www.cnbc.com/2017/04/20/the-drug-
industry-is-addicted-to-price-increases-report-shows.html.
---------------------------------------------------------------------------
    Manufacturers of expensive specialty medications, in particular, 
significantly contribute to this critical problem of unsustainably high 
list prices and price increases in excess of inflation. AARP 
determined, for example, that the average cost of a specialty 
medication in the United States was $53,000 in 2013.\10\ In that year, 
that amount was more than: (1) The average annual U.S. household 
income--$52,250; (2) two times the median income of a Medicare 
beneficiary--$23,500; and (3) three times the average Social Security 
retirement benefit--$15,526.\11\
---------------------------------------------------------------------------
    \10\ AARP Public Policy Institute. ``Trends in Retail Prices of 
Specialty Prescription Drugs
Widely Used by Older Americans, 2006 to 2013,'' page 8. November 2015. 
See link:
http://www.aarp.org/content/dam/aarp/ppi/2016-12/trends-in-retail-
prices-dec-2016.pdf.
    \11\ AARP Public Policy Institute. ``Rx Price Watch Report: Trends 
in Retail Prices of
Prescription Drugs Widely Used by Older Americans, 2006 to 2015,'' page 
1. February 2016.
See link: http://www.aarp.org/content/dam/aarp/ppi/2016-02/RX-Price-
Watch-Trends-in-Retail-Prices-Prescription-Drugs-Widely-Used-by-Older-
Americans.pdf.
---------------------------------------------------------------------------
    Within specialty medicines, one area of particularly significant 
concern is the treatment of patients with cancer. In the United States, 
a novel anti-cancer drug routinely costs more than $100,000 per year or 
course of treatment and the median launch price of a new oncology drug 
has increased in each decade from the 1960s to today from $100 to 
$10,000 per month of treatment.\12\ Similarly, a separate analysis 
demonstrated that the inflation-adjusted price of an anti-cancer 
medicine often increases after launch, by as much as 44 percent over 
the course of the decade.\13\ These rapidly growing and excessive 
oncology drug costs represent potentially significant barriers for 
patients in accessing lifesaving and life-sustaining treatments who 
simply may not be able to afford them.
---------------------------------------------------------------------------
    \12\ Prasad, et. al. ``The High Price of Anticancer Drugs: Origins, 
Implications, Barriers
and Solutions.'' Nature Reviews Clinical Oncology. 2017. Advanced 
Online Publication, page 1.
    \13\ Ibid.
---------------------------------------------------------------------------
    In analyzing this extreme and rapid growth in cancer drug costs, 
researchers emphasized how these costs both hurts patients, who in many 
cases may not be able to afford these expensive medications, and 
society at large, which simply will not be able to financially bear the 
unsustainable burden of excess drug cost growth over the long-term:

          ``Not only are launch prices high and rising, but individual 
        drug prices are often escalated during exclusivity periods. 
        High drug prices harm patients--often directly through 
        increased out-of-pocket expenses, which reduce levels of 
        patient compliance and lead to unfavorable outcomes--and harms 
        society--by imposing cumulative price burdens that are 
        unsustainable.''\14\
---------------------------------------------------------------------------
    \14\ Ibid.

iii. drug manufacturers suggest that research and development justifies 
 high drug prices--but data show that the excessive amounts charged to 
   u.s. patients in aggregate exceed the industry's global r&d budget
    A recent analysis concluded that the drug prices paid by U.S. 
consumers create significantly more revenue for the brand 
pharmaceutical industry than the amount the industry expends globally 
on research and development. Specifically, the analysis found that 15 
drug companies that manufactured the 20 best-selling drugs worldwide in 
2015 made $116 billion in excess revenue from U.S. drug prices.\15\ 
\16\ Meanwhile, brand drug makers only spent $76 billion--or $40 
billion less--on global research and development that same year.\17\ As 
one author of the analysis Dr. Peter Bach, director of Memorial Sloan 
Kettering Cancer Center's Center for Health Policy and Outcomes, 
clearly said: ``the math doesn't work out.''\18\
---------------------------------------------------------------------------
    \15\ Note that this study looked at net prices--not list prices--
that U.S. consumers paid for
prescription drugs. Net prices reflect discounts and rebates that 
pharmacy benefit managers, wholesalers, pharmacies, and other members 
of the supply chain negotiate with drug manufacturers to lower the list 
price initially set.
    \16\ Yu, Nancy et. al. ``R&D Costs for Pharmaceutical Companies Do 
Not Explain Elevated US
Drug Prices.'' Health Affairs Blog. March 7, 2017. See link: http://
healthaffairs.org/blog/2017/03/07/rd-costs-for-pharmaceutical-
companies-do-not-explain-elevated-us-drug-prices/.
    \17\ Ibid.
    \18\ Sagonowsky, Eric. ``High U.S. Drug Prices Cover Pharma's 
Global R&D--And a Whole Lot More, Study Finds.'' Fierce Pharma. March 
10, 2017. See link: http://www.fiercepharma
.com/pharma/high-u-s-drug-costs-pay-for-pharma-s-global-r-d-plus-more-
study-finds.
---------------------------------------------------------------------------
    Moreover, brand drugs with the highest prices sometimes are the 
ones that are the least costly to develop, indicating that a drug 
maker's R&D budget does not necessarily justify the setting of high 
drug prices or excessive price increases. In other words, as one recent 
study found, high prices do not necessarily correlate with the 
innovative R&D that the pharmaceutical industry maintains it is 
supporting in part through excessive drug cost growth.\19\ 
Specifically, the study explains that the
---------------------------------------------------------------------------
    \19\ Roy, Avik. ``The Competition Prescription: A Market-Based Plan 
for Making Innovative
Medicines Affordable,'' page 7. See link: http://www.csrxp.org/wp-
content/uploads/2017
/05/The-Competition-Prescription1.pdf.

        ``costliest drugs to develop are those which require large 
        phase III clinical trials involving tens of thousands of 
        patients, such as drugs for diabetes, high blood pressure, and 
        heart disease. . . . But in fact, new drugs in these areas have 
        little pricing power, because doctors have the ability to 
        prescribe effective and inexpensive generics for these 
        conditions.'' \20\
---------------------------------------------------------------------------
    \20\ Ibid.

---------------------------------------------------------------------------
    By contrast, the

        ``cheapest drugs to develop are those which require small 
        clinical trials involving dozens of patients, such as drugs for 
        ultra-rare, or `ultra-orphan' conditions. . . . Phase III 
        trials for these conditions, which only affect several thousand 
        people in the United States, run in the tens of millions. But 
        manufacturers have generated billions in revenues from them.'' 
        \21\
---------------------------------------------------------------------------
    \21\ Ibid.
---------------------------------------------------------------------------
iv. excessive drug prices paid by american patients and families enable 
 the drug industry to pay for needless advertising and marketing--and 
                contribute to drug makers' bottom lines
    If the drug industry does not spend all of the money it receives 
from U.S. consumers on its products on R&D as shown above, the question 
arises as to where the industry actually spends those excessive 
revenues. It turns out that brand manufacturers are using a significant 
portion of those funds for marketing and advertising--and to increase 
their bottom lines.
    First, many members of the brand drug industry spend more on 
advertising and marketing than R&D one analysis determined that 9 of 
the 10 largest drug companies spent more on marketing than they did on 
research in 2013.\22\ A separate analysis found that drug makers 
specifically are increasing their spending on television advertising in 
the United States, spending $6.4 billion on TV consumer advertising in 
2016--an increase of 5 percent over 2015 and of 62 percent since 
2012.\23\ Along those same lines, in 2016, drug advertising represented 
the sixth largest category of TV advertising, accounting for 8 percent 
of total TV advertising revenue and increasing six places from twelfth 
place in the category in 2012.\24\
---------------------------------------------------------------------------
    \22\ Swanson, Ana. ``Big Pharmaceutical Companies Are Spending Far 
More on Marketing than Research.'' The Washington Post. February 11, 
2015. See link: https://www.washington
post.com/news/wonk/wp/2015/02/11/big-pharmaceutical-companies-are-
spending-far-more-on-marketing-than-research/'utm--term=.916fc28032c9.
    \23\ Appleby, Anne and Horovitz, Bruce. ``Prescription Drug Costs 
Are Up; So Are TV Ads
Promoting Them.'' The USA Today. March 16, 2017. See link: https://
www.usatoday.com/story/money/2017/03/16/prescription-drug-costs-up-tv-
ads/99203878/.
    \24\ Ibid.
---------------------------------------------------------------------------
    Importantly, while drug makers suggest marketing and advertising 
help inform patients and their providers of treatment options, these 
industry tactics also drive up health care costs for all consumers--not 
just those that take prescription drugs. Television advertisements 
often induce unnecessary demand, encouraging patients and their 
families to ask physicians for drugs they may not need.\25\ Similarly, 
drug makers' direct marketing to physicians informs prescribers about 
the availability of specific treatment options--and not necessarily 
those treatments that are the most effective and least costly for the 
patient. Both cases needlessly and unfairly increase healthcare costs 
for all Americans--not just those using prescription medicines--by 
unnecessarily increasing spending on prescription drugs overall, 
thereby driving up overall insurance premiums for all U.S. consumers.
---------------------------------------------------------------------------
    \25\ Ibid.
---------------------------------------------------------------------------
    Second, and very importantly, brand drug manufacturers depend on 
these unsustainable high drug prices to help support their bottom line 
growth; price increases now are replacing a decline in prescription 
volume that the industry is facing for at least certain types of 
medications. To this point, one recent analysis found that between 2011 
and 2014, sales from the top 10 drugs increased 44 percent even though 
prescriptions for the medications decreased by 22 percent.\26\ 
Likewise, another analysis determined that drug price increases 
contributed $8.7 billion to net income for 28 companies analyzed, 
representing 100 percent of earnings growth for those companies in 
2016.\27\ Hence, it seems very unlikely that many brand drug makers 
have much incentive to curb the unsustainable and excessive drug price 
growth absent bipartisan action to change these unfair pricing 
practices that hurt American patients and their families.
---------------------------------------------------------------------------
    \26\ Humer, Caroline. ``Analysis: Drugmakers Take Big Price 
Increases on Popular Meds in 
U.S.'' Scientific American. See link: https://
www.scientificamerican.com/article/analysis-drug
makers-take-big-price-increases-on-popular-meds-in-u-s/.
    \27\ Tirrell, Meg. ``The Drug Industry Is Addicted to Price 
Increases, Report Shows.'' CNBC. April 20, 2017.
---------------------------------------------------------------------------
vi. rules embedded in the u.s. regulatory system permit the brand drug 
industry to engage in anti-competitive practices that block affordable 
generic competition and keep drug prices high, driving up prescription 
      drug costs for patients and families and all u.s. consumers
    The brand drug industry often manipulates the current U.S. 
regulatory system in an anti-competitive manner to limit and restrict 
patient access to the affordable medications they need.
    First, the Orphan Drug Act introduced a range of incentives--most 
importantly 7 years of market exclusivity with no competition--to 
encourage the development of medications to treat rare diseases, or 
those diseases that affect fewer than 200,000 patients. Since passage 
of the Orphan Drug Act, hundreds of orphan drugs have been approved. 
Many of these medications are helping patients who previously had no 
treatment options.
    However, an increasing number of orphan drugs have achieved 
blockbuster status, with billions of dollars in sales annually. 
Oftentimes in these cases, drug manufacturers have secured a single 
``orphan'' indication for a drug's use and then, after FDA approval, 
patients use the drugs off-label far more broadly beyond that single 
indication use. In effect, manufacturers benefit from having the 
special orphan exclusivity period that restricts competition but allows 
their products to be used off-label for treatments of other types of 
disease--and oftentimes at very high prices for patients. To this 
point, a recent analysis found that 7 of the top 10 best-selling drugs 
in the United States in 2014 came on the market with an ``orphan'' 
designation.\28\
---------------------------------------------------------------------------
    \28\ `` `Orphan Drug' Loophole Needs Closing, Johns Hopkins 
Researchers Say.'' November 19, 2015. See link: http://
www.hopkinsmedicine.org/news/media/releases/orphan_drug_loop
hole_needs_closing_johns_hopkins_researchers_say.
---------------------------------------------------------------------------
    Second, brand name drug companies are using FDA regulations to 
engage in anti-competitive behavior that blocks competition of certain 
drugs that require additional safety protections. For specific drugs 
with specific safety risks, FDA requires manufacturers to develop 
detailed Risk Evaluation and Mitigation Strategies (REMS) prior to 
entering the market. While this type of information creates additional 
safety information for patients and offers safeguards for providers, 
brand drug manufacturers have manipulated REMS to block generic 
manufacturers from obtaining samples of brand drugs under the guise of 
addressing patient safety concerns. This practice restricts competition 
in the market and often leaves patients with fewer choices for their 
medications. As a result, patients may be at the mercy of a single drug 
company for the medication they need to stay healthy, and that company 
is free to set the price for that medication indiscriminately. This 
practice stifles the introduction of generic competition, thus 
preventing lower-priced options from being available to patients and 
increasing costs for everyone. Bipartisan legislation has been 
introduced in both the Senate and the House--the CREATES Act and the 
FAST Generics Act--that would stop this anticompetitive practice. We 
therefore encourage the committee to consider bipartisan legislation 
that addresses these abuses by prohibiting companies from restricting 
access to samples.
vii. market-based solutions can help rein in excessive drug cost growth 

                    for u.s. patients and families.
    CSRxP supports adoption of bipartisan, market-based solutions to 
help curb the excessive and unsustainable growth in prescription drug 
spending for U.S. patients and their families. To that end, CSRxP 
strongly urges the committee to support and adopt the following 
policies that promote transparency, foster competition, and incentivize 
value in the marketplace, making drugs more affordable and accessible 
for the patients who need them.
1. Promote Transparency
     Drug manufacturers should release details of a drug's unit 
price, cost of treatment, and projection on Federal spending before FDA 
approval. Given the significant impact pharmaceuticals have on overall 
health care spending, manufacturers should be required to disclose 
information on the estimated unit price for the product, the cost of a 
course of treatment, and a projection of Federal spending on the 
product.
     Drug makers should annually report increases in a drug's 
list price. Similar to requirements already in place for other entities 
like health plan issuers, hospitals and nursing facilities, 
pharmaceutical companies should report increases in drug's list price. 
Furthermore, HHS should provide an annual report to the public that 
includes the top 50 price increases per year by branded or generic 
drugs; the top 50 drugs by annual spending and how much the government 
pays in total for these drugs; and historical price increases for 
common drugs, including those covered by Medicare Part B.
     Manufacturers should disclose drug R&D costs. Drug makers 
should be required to disclose how much drug research was funded by 
public entities like the National Institute of Health (NIH) or other 
academic entities or by other private companies, so that regulators and 
taxpayers can properly weigh return on investment.

    We encourage the committee to consider bipartisan legislation, the 
FAIR Pricing Act, sponsored by Senators Baldwin and McCain that would 
bring great transparency to the pharmaceutical industry.
2. Foster Competition
     Speed FDA approval of generic drug applications--
especially for lifesaving drugs and for drugs with no or limited 
generic competition. The FDA faces a backlog of nearly 4,000 generic 
drug applications, yet approval times can be 3 or more years. The FDA 
should receive the resources necessary to clear this backlog and 
prioritize generic drug approval applications, especially for 
lifesaving drugs and drugs with no or limited generic competition.
     Reduce drug monopolies by incentivizing competition for 
additional market entrants. Several FDA programs are intended to 
expedite review of new drugs that address unmet medical needs for 
serious or life-threatening conditions. Incentives should drive 
competition for expensive treatments where no competitors exist and 
encourage a second or third market entrant.
     Strengthen post-market clinical trials and surveillance. 
Currently, expedited drug approvals often involve small clinical trials 
with a narrow patient population and trials are not regularly reported 
publicly. Once a drug enters the market, research into the long-term 
efficacy and side effects should continue within specific timeframes 
and reporting requirements. Even if a product is not approved, 
manufacturers should be required to report data for all trials that 
summarizes non-identifiable demographics and participant 
characteristics, primary and secondary outcomes results, and adverse 
event information.
     Target exclusivity protections to the most innovative 
products. Currently, pharmaceutical manufacturers can extend market 
exclusivity protections by seeking approval for a ``new'' product that 
is essentially the same as the original. Prohibiting such tactics will 
bring consumers more options and lower prices more quickly. Anti-
competitive pricing schemes should be closely monitored by Federal 
agencies and prosecuted if violations of antitrust law are found.
     Curb misuse of REMS. As we noted above, the FDA uses REMS 
to allow products with potential safety issues to enter the market. 
Drug manufacturers often manipulate REMS to block generic drugs from 
obtaining samples of brand drugs under the guise of addressing patient 
safety concerns, effectively preventing them from pursuing the research 
needed to bring generic drugs to market. Bipartisan legislation has 
been introduced in both the Senate and the House--the CREATES Act and 
the FAST Generics Act--that would stop this anticompetitive practice. 
CSRxP encourages the committee to consider this bipartisan legislation 
that addresses these abuses by prohibiting companies from restricting 
sample access.
     Promote a robust biosimilars market. Regulatory policies 
should encourage market entry and uptake of biosimilars, as they have 
significant potential to expand treatment options and reduce costs by 
increasing competition in the marketplace. For example, one study found 
that 11 biosimilars already approved for sale in Europe and elsewhere 
could generate approximately $250 billion in savings over 10 years if 
they were available in the United States.\29\ We urge the committee to 
consider provisions--such as reducing the market exclusivity period for 
brand name biologics--that would help support the development of a 
robust biosimilar market and help ensure that patients have access to 
lower cost alternatives to existing, expensive biologics.
---------------------------------------------------------------------------
    \29\ Express Scripts. ``The $250 Billion Potential of 
Biosimilars.'' April 23, 2013. See link:
http://lab.express-scripts.com/lab/insights/industry-updates/the-$250-
billion-potential-of-bio
similars
---------------------------------------------------------------------------
3. Incentivize Value
     Increase funding for private and public research efforts 
like the non-profit Institute for Clinical and Economic Review (ICER) 
to test the value of medical tests and treatments. Investment in 
objective information is critical for physicians, patients and payers 
as more and more high-price drugs enter the healthcare system.
     Require drug makers to conduct comparative effectiveness 
research (CER) studies of new versus existing drug products. Through 
CER studies, manufacturers should have to demonstrate that their 
product is better than others, so that physicians and patients can make 
smart decisions about the value of different treatments, particularly 
those with very high costs. Many other countries currently require drug 
manufacturers to provide CER studies; they should be expanded in the 
United States to reduce spending on unnecessary or ineffective 
treatments.
     Expand value-based pricing in public health programs like 
Medicare and Medicaid. Currently Medicare and Medicaid purchase 
prescription drugs for their beneficiaries, but not generally in a 
manner to accommodate value-based payment models. Steps should be taken 
to ensure these programs can best take advantage of recent developments 
in value-based purchasing to ensure all parts of the U.S. healthcare 
system benefit from market-based negotiating efforts to lower drug 
prices.
                            viii. conclusion
    In conclusion, CSRxP appreciates the leadership from the committee 
and again thanks the committee for the opportunity to submit testimony 
for the record to address the unsustainable and excessive growth in 
prescription drug costs in the United States. The Campaign looks 
forward to continued work with the committee in the future in 
developing market-based policies that promote competition, 
transparency, and value to make prescription drugs more affordable for 
all American patients and their families while at the same time 
maintaining access to the treatments that can improve health outcomes 
and save lives.
                                 ______
                                 
        Lobbying Registration Form Submitted by Senator Franken
        
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]



      Response by Dan Mendelson to Questions of Senator Alexander
    Question 1. To confirm feedback received at the hearing, I have 
heard that drug spending accounts for roughly 15 percent of health 
spending. Of that 15 percent, 10 to 11 percent is on drugs purchased at 
the pharmacy or ordered online, and 4 to 5 percent is spent on drugs 
given in a hospital or at the doctor's office.
    Do you agree, that is how much is spent on drugs in the United 
States?
    Answer 1. Those statistics are generally accurate, though estimates 
vary based on source and spending categories analyzed. According to the 
Centers for Medicare and Medicaid Services, National Health Expenditure 
Data, drugs dispensed in the pharmacy and medical benefit account for 
approximately 13 percent of total U.S. healthcare costs. This 
frequently cited figure uses total national health expenditures as a 
basis for calculating the percentage. Other experts sometimes use a 
subset of national health expenditures or total medical claims as the 
denominator, which accounts for the range of percentages often cited in 
this context.

    Question 2. In 2015, 89 percent of all prescriptions picked up at 
pharmacy or online were low-cost generic drugs. According to Adam Fein, 
an expert on drug spending and the delivery system, nearly 30 percent 
of brand and generic prescriptions had a $0 out-of-pocket cost for the 
patient in 2016, up from 11 percent in 2011. So there appears to be a 
growing number of prescriptions available at no cost to a patient when 
you pick up your prescription at the drug store. Do you agree with that 
statement?
    Answer 2. I agree that the majority prescriptions filled at the 
pharmacy or online are generic drugs and that generic drugs typically 
have lower associated cost sharing for patients.

    Question 3. Would it be accurate to say a drug list price does not 
accurately reflect costs to patients? What should we as Congress be 
focusing on, instead of list prices?
    Answer 3. Generally, a drug's list price and actual patient costs 
differ based on a series of negotiations and decisions. Specifically, 
as multiple products for a given indication come to market, plans and 
PBMs may negotiate rebates and other price concessions from 
manufacturers in exchange for preferred formulary placement and 
improved access. Typically, payers use these price concessions to 
reduce overall premiums, but the rebates are not shared directly with 
patients at the point of sale. As a result, most patients who fill a 
prescription are paying cost-sharing based on a price that is generally 
not reflective of rebates negotiated by a health plan or PBM.

    Question 4. Can you comment on whether the costs for drugs have 
gone up, down, or remained steady in the last 5 to 10 years?
    Answer 4. Like spending for all medical services, spending on 
prescription drugs has increased over time as innovation has enhanced 
capabilities. In recent years, new innovations have increased spending 
on specialty medications, which now account for $384 of the $895 per 
person per year spent on drugs. However, list prices (11.5 percent) 
have increased more slowly than net prices (6.1 percent) over the past 
5 years.

    Question 5. We hear quite a bit about a need to have more 
transparency around drug prices and within the drug delivery system. Do 
you think transparency would help, and if so, where?
    Answer 5. The impact of transparency proposals depends on how they 
are constructed. In some areas, price transparency causes consumers to 
make better competitive decisions, which could potentially result in 
lower costs. On the other hand, certain types of transparency 
requirements can present challenges, and have the potential to inhibit 
competition and create market distortions. For example, the 
Congressional Budget Office (CBO) estimates that disclosure of drug 
rebate information ``would facilitate tacit collusion among those 
manufacturers, which would tend to raise drug prices.''

    Question 6. We hear a lot about passing on rebates directly to 
consumers. What is your perspective on this proposal and what would be 
the impact on costs (for drugs or their premium) to patients?
    Answer 6. Rebates have been growing in recent years, and generally 
are not passed on to consumers in the form of lower copays, but rather 
used to reduce premiums in the context of competitive markets. There is 
good potential to find ways to use rebates to reduce patient-cost 
sharing. While this type of proposal may lead to a small increase in 
premiums, the impact of the proposal on patient-cost sharing will 
depend on the structure of the policy and the healthcare needs of a 
particular patient. Undoubtedly, patients with chronic illnesses would 
benefit from this type of change, and point-of-sale adjudication/
estimation of rebates is technically feasible.

    Question 7. Can you comment on what tools are available within the 
delivery system to directly reduce patient costs?
    Answer 7. Increased competition in the pharmaceutical markets holds 
promise for reducing costs. Speeding the approval of the second- and 
third-branded drugs in a therapeutic class would expedite competition 
and lead to more rapid price concessions. Ensuring a continued robust 
market for generic pharmaceutics is vital for effective cost management 
and improvement of population health outcomes.
    In addition, outcomes-based contracts also represent a significant 
opportunity to shift away from prescription drug list prices toward 
value-based reimbursement models. Effective outcomes-based contracts 
require next-generation data analysis and interventions that enable 
payers and manufacturers to identify patients eligible for treatment, 
target outreach to ensure appropriate adherence and quality 
improvement, and measure product performance against pre-agreed-upon 
outcomes on an ongoing basis. Consumer benefit can be substantially 
enhanced through data-based engagement around pharmaceuticals.

    Question 8. What do you think of the suggestion that concerns 
related to drug costs have grown as patients have been forced 
personally to take on more and more of the drug costs?
    Answer 8. Insurance benefit designs increasingly expose consumers 
to the full cost of their medicines through deductibles or percentage 
coinsurance for drugs, as payers have been under pressure to meet 
consumer demand for constrained premium growth. Of course, other 
factors also contribute to increased consumer payments, such as the 
cost of newly launched products and the increases in list prices over 
time.
      Response by Allan Coukell to Questions of Senator Alexander
    Question 1. To confirm feedback received at the hearing, I have 
heard that drug spending accounts for roughly 15 percent of health 
spending. Of that 15 percent, 10 to 11 percent is on drugs purchased at 
the pharmacy or ordered online, and 4 to 5 percent is spent on drugs 
given in a hospital or at the doctor's office. Do you agree, that is 
how much is spent on drugs in the United States?
    Answer 1. The Office of the Assistant Secretary for Planning and 
Evaluation (ASPE) estimates that pharmaceuticals accounted for almost 
17 percent of U.S. personal health care services, or $457 billion, in 
2015--retail and mail order prescription drugs accounted for 12 percent 
of personal health care services, while nearly 5 percent was for 
pharmaceuticals given in the hospital, physician's office and other 
non-retail settings.\1\ The Altarum Institute, a nonprofit health 
organization, estimates that retail and non-retail prescription drug 
spending totaled $450 billion in 2016, or 14 percent of health 
expenditures.\2\ Of total health expenditure, 10.1 percent was for 
retail spending on pharmaceuticals, and 4.3 percent was for non-retail 
spending.\3\ *
---------------------------------------------------------------------------
    * While Altarum and ASPE use similar methodologies, Altarum 
utilizes total health expenditure as a denominator, and ASPE uses 
personal health care expenditure. Personal health expenditure 
represents spending on medical care and excludes government spending on 
administration, public health, and investment into medical research. 
Personal health expenditure in 2015 was $2.72 trillion.
    \1\ Health and Human Services Assistant Secretary for Planning and 
Evaluation, ``Observations on Trends in Prescription Drug Spending,'' 
March 2016, Available at: https://aspe.hhs.gov/system/files/pdf/187586/
Drugspending.pdf.
    \2\ C. Roehrig, ``Center for Sustainable Health Spending Data 
Brief: A Ten Year Projection of the Prescription Drug Share of National 
Health Expenditures Including Non-Retail,'' Altarum (Updated May 2017), 
http://altarum.org/publications/a-10-year-projection-of-the-
prescription-drug-share-of-national-health-expenditures-including.
    \3\ Ibid.

    Question 2. In 2015, 89 percent of all prescriptions picked up at 
pharmacy or online were low-cost generic drugs. According to Adam Fein, 
an expert on drug spending and the delivery system, nearly 30 percent 
of brand and generic prescriptions had a $0 out-of-pocket cost for the 
patient in 2016, up from 11 percent in 2011. So there appears to be a 
growing number of prescriptions available at no cost to a patient when 
you pick up your prescription at the drug store. Do you agree with that 
statement?
    Answer 2. The growth in the share of prescriptions with no out-of-
pocket costs for patients is driven by generics. An IMSQuintiles 
analysis found that last year 26 percent of prescriptions dispensed 
were for generic drugs with no out-of-pocket costs.\4\ An additional 
3.9 percent of prescriptions were for brand drugs with no out-of-pocket 
costs. Insurance plan design determines out-of-pocket costs for any 
individual patient, but other policies also contribute. For example, 
most Medicaid patients have zero dollar or low out-of-pocket costs and 
the Affordable Care Act (ACA) requires generic contraceptives to be 
dispensed with no out-of-pocket costs. In addition, the ACA limits 
annual patient out-of-pocket spending for covered services in a health 
plan, including that of prescription drugs. Prescriptions dispensed for 
patients who have surpassed their annual maximum have no out-of-pocket 
costs.
---------------------------------------------------------------------------
    \4\ QuintilesIMS Institute, ``Medicines Use and Spending in the 
U.S.: Review of 2016 and Outlook to 2021,'' May 2017, Available at: 
http://www.imshealth.com/en/thought-leadership/quintilesims-institute/
reports/medicines-use-and-spending-in-the-us-review-of-2016-outlook-to-
2021.
---------------------------------------------------------------------------
    However, some patients have seen their out-of-pocket costs increase 
significantly in recent years. The number of Medicare Part D enrollees 
reaching the catastrophic coverage phase reached 3.6 million in 2015, a 
53 percent increase since 2010.\5\ Enrollees not eligible for a low-
income subsidy must pay 5 percent of the cost of their prescriptions in 
the catastrophic coverage phase, with no limit on annual out-of-pocket 
spending. In 2015 patients reaching the catastrophic coverage phase 
paid an average of $257 per month for each high cost prescription 
drug--defined as medications with an average price of more than $1,000 
per month.
---------------------------------------------------------------------------
    \5\ Department of Health and Human Services, Office of the 
Inspector General, ``High-Price Drugs Are Increasing Federal Payments 
for Medicare Part D Catastrophic Coverage,'' January 2017, Available 
at: https://oig.hhs.gov/oei/reports/oei-02-16-00270.pdf.

    Question 3. Would it be accurate to say a drug list price does not 
accurately reflect costs to patients? What should we as Congress be 
focusing on, instead of list prices?
    Answer 3. List prices are a critical factor in determining out-of-
pocket costs for many patients. This happens in at least three 
circumstances. (1) Patients without drug coverage are charged something 
close to list price at the pharmacy, even when the price paid by larger 
payers is far lower. (2) Patients enrolled in health plans with 
deductibles must pay the full cost of their medications until they meet 
an annual spending threshold. During this deductible phase, out-of-
pocket payments are typically based on the drug's list price. (3) 
Patients in health plans with co-insurance,\6\ which is usually applied 
to the most expensive prescriptions medications, typically pay a fixed 
percentage (e.g., 30 percent) of the drug's list price.
---------------------------------------------------------------------------
    \6\ This differs from copays, under which patients pay a fixed 
dollar amount for a prescription.
---------------------------------------------------------------------------
    Among commercially insured patients in 2016, over half of patient 
out-of-pocket costs for brand prescriptions was based on list prices, 
and over 90 percent of patient out-of-pocket spending for specialty 
drugs was based on list prices.\7\ While some payers are able to offer 
plans that pass on rebates and discounts off the drug list price to 
patients at the point of sale,\8\ it is unknown to what extent plan 
sponsors are choosing these benefit designs.
---------------------------------------------------------------------------
    \7\ QuintilesIMS Institute, ``Medicines Use and Spending in the 
U.S.: Review of 2016 and Outlook to 2021,'' May 2017, Available at: 
http://www.imshealth.com/en/thought-leadership/quintilesims-institute/
reports/medicines-use-and-spending-in-the-us-review-of-2016-outlook-to-
2021
    \8\ CVSHealth, Consumer Transparency Helping Members with High-Cost 
Drugs at the Point of Sale, https://payorsolutions.cvshealth.com/
insights/consumer-transparency.
---------------------------------------------------------------------------
    Congress should focus primarily on overall drug spending, 
particularly in public programs. However, drug list prices are not an 
accurate measure of total U.S. spending on prescription drugs. Some 
organizations have published estimates for total drug spending, but 
each uses a different approach, some focusing on pharmaceutical 
manufacturer revenue, while others are based on pharmacy claims, which 
often do not take into account rebates and other discounts offered by 
manufacturers. One challenge in understanding drug spending is the 
range of entities involved in the prescription drug supply and payment 
chain, including wholesalers, pharmacy benefit managers, pharmacies, 
and insurers. Each of these entities retains a portion of total drug 
spending and flow of health care payer and consumer dollars throughout 
this complex system is little understood.
    However, list prices are useful in establishing trend lines for 
prescription drug spending, as list and net prices tend to rise in 
tandem (though the average gap between list and net prices has 
increased slightly in recent years as rebates have increased).
    Pew is pursuing additional research that will develop a national 
estimate of total spending on drugs, including contributions toward 
insurance premiums for drug coverage and a breakdown of what share of 
this total each supply chain entity retains.

    Question 4. Can you comment on whether the costs for drugs have 
gone up, down, or remained steady in the last 5 to 10 years?
    Answer 4. The costs for drugs have gone up in recent years. As 
discussed, methodologies vary widely, but there is widespread agreement 
that spending on drugs has increased significantly. A 2016 report by 
the Department of Health and Human Services Assistant Secretary for 
Planning and Evaluation found that ``[e]xpenditures on prescription 
drugs are rising and are projected to continue to rise in the coming 
years as a share of total health care spending.''
    IMSQuintiles estimates that drug manufacturer revenue net of 
rebates and discounts has increased 42 percent since 2006, reaching 
$323 billion in 2016, with more than two-thirds of that growth 
occurring since 2013.\9\ They have found that while both drug list 
prices and rebates and discounts to payers have increased substantially 
year over year, manufacturer net revenue has continued to rise, up 4.8 
percent in 2016 alone.
---------------------------------------------------------------------------
    \9\ QuintilesIMS Institute, ``edicines Use and Spending in the 
U.S.: Review of 2016 and Outlook to 2021,'' May 2017, Available at: 
http://www.imshealth.com/en/thought-leadership/quintiles
ims-institute/reports/medicines-use-and-spending-in-the-us-review-of-
2016-outlook-to-2021.
---------------------------------------------------------------------------
    New brand drugs have driven the majority of this spending growth 
each year since 2014. New drugs are increasingly specialty products, 
including biologics, and typically launch at high prices. Year-on-year 
increases in the prices of brand drugs that do not yet face generic 
competitors also contribute to rising spending. Conversely, spending on 
generic drugs decreased slightly in 2016. Generic drugs represent an 
ever-growing share of prescriptions dispensed, reaching over 89 percent 
in 2016. While there have been some individual generic products with 
extraordinary price increases in recent years, generic drugs as a class 
generate significant savings.

    Question 5. Some have suggested that drug importation could lower 
drug prices. What are your views on that strategy?
    Answer 5. Brand pharmaceuticals are generally more expensive in the 
United States than in other high-income countries, in part because some 
countries have implemented policies to limit prices, so allowing the 
purchase and importation of prescription drugs from other countries has 
the potential to give Americans access to some medicines at lower 
prices.\10\ However, it is difficult to estimate the potential savings, 
which would have to be weighed against the costs to implement such a 
program, the potential safety risks of imported products, and the 
overall impact on the security of the U.S.-drug supply chain.
---------------------------------------------------------------------------
    \10\ The Pew Charitable Trusts, ``Policy Proposal: Importation of 
Prescription Drugs,'' http://www.pewtrusts.org/en/research-and-
analysis/fact-sheets/2017/04/policy-proposal-importation-of-
prescription-drugs.
---------------------------------------------------------------------------
    The importation of drugs from foreign sources would bypass current 
FDA review processes and could increase safety risks. Federal law 
currently provides the Secretary of Health and Human Services the 
authority to permit importation of prescription drugs from Canada, if 
the Secretary certifies to Congress that they would pose no additional 
risk to the public's health and safety, and would result in a 
significant reduction in the cost of the drugs to Americans. However, 
no certification has ever been made.
    To address the potential risks associated with importing unapproved 
drugs, FDA would need significant additional resources and capacity. At 
a 2004 congressional hearing, FDA's then-commissioner speculated that a 
program to ensure the safety of imported drugs could cost hundreds of 
millions of dollars annually,\11\ which could reduce the net savings 
from importation.
---------------------------------------------------------------------------
    \11\ Options for Safe and Effective Prescription Drug Importation: 
Hearing Before the Committee on Commerce, Science, and Transportation, 
U.S. Senate, 108th Cong. (2004) (statement of Mark McClellan, 
commissioner of the U.S. Food and Drug Administration), https://
www.gpo.gov/fdsys/pkg/CHRG-108shrg76522/pdf/CHRG-108shrg76522.pdf.
---------------------------------------------------------------------------
    Furthermore, any importation system would need to conform to the 
requirements of the Drug Supply Chain Security Act (Title II of the 
Drug Quality and Security Act of 2013), which Congress passed to ensure 
that counterfeit and diverted drugs do not enter the pharmaceutical 
supply chain. This legislation requires pharmaceutical manufacturers 
and repackagers to put a unique product identifier on most prescription 
drug packages and outlines steps to build a system for electronically 
identifying and tracing each individual package of prescription drug as 
it is distributed in the United States. Manufacturers must put this 
unique code on products beginning November 2017, and by 2023, all 
participants in the pharmaceutical supply chain must participate. This 
will make it easier to detect when counterfeit or illegal product is 
introduced into the system, and will significantly enhance the speed 
and accuracy of implementing product recalls. However, if imported 
product could be sold into the U.S. system without the product 
identifiers necessary to comply with this drug security system, it 
would make it difficult for supply chain partners who encounter product 
that is not compliant to determine which products are counterfeit or 
otherwise illegal, and which are legally imported. As a consequence, 
the risk of importation is not only that FDA cannot ensure that the 
products being imported are legitimate, but that the introduction of 
products that are not a part of the supply chain security system (even 
if they are legitimate products) will compromise the ability of the 
system to identify counterfeit and diverted products from any source, 
thus significantly undermining the protections that Congress put into 
place in 2013.
    The importation of drugs from abroad could also have unintended 
consequences in other countries. The U.S. population far exceeds that 
of most other OECD countries and therefore meeting even a portion of 
U.S. demand with foreign supplies could strain local markets. To 
mitigate decreased U.S. revenue, manufacturers could seek to increase 
their prices in foreign markets or restrict foreign entities from 
exporting medications to the United States. In addition, the U.S. 
market's large size could strain the supply of pharmaceuticals, 
resulting in drug shortages in other countries if importation were to 
be implemented on a large scale.
       Response by Paul Howard to Questions of Senator Alexander
    Question 1. To confirm feedback received at the hearing, I have 
heard that drug spending accounts for roughly 15 percent of health 
spending. Of that 15 percent, 10 to 11 percent is on drugs purchased at 
the pharmacy or ordered online, and 4 to 5 percent is spent on drugs 
given in a hospital or at the doctor's office. Do you agree, that is 
how much is spent on drugs in the United States?
    Answer 1. Yes, although the exact numbers vary by source. In 2015, 
APSE estimated that prescription drug spending in the United States was 
about $457 billion in 2015. That same year, CMS found that U.S. health 
care spending totaled $3.2 trillion, which would put total prescription 
drug (retail and physician-administered) spending at 14.28 percent for 
2015. ASPE also notes that 70 percent of the increase in spending from 
2010-14 was due to non-price-related factors (i.e., 10 percent 
population growth, 30 percent increase in the number of prescriptions 
per person, 30 percent overall, economy-wide inflation). By way of 
comparison, in 2016, the Kaiser Family Foundation found that retail 
pharmacy sales totaled $379 billion or 11.1 percent of the total health 
care spending ($3.4 trillion) in the United States for that year.\1\ 
\2\
---------------------------------------------------------------------------
    \1\ http://www.drugchannels.net/2016/04/key-insights-on-drug-
prices-and.html.
    \2\ http://www.drugchannels.net/2016/07/latest-cms-forecast-shows-
big-drug.html.
---------------------------------------------------------------------------
    Finally, totally net spending growth has slowed considerably since 
2014, according to a May 2017 report from Quintiles/IMS (slide 1).

    Question 2. In 2015, 89 percent of all prescriptions picked up at 
pharmacy or online were low-cost generic drugs. According to Adam Fein, 
an expert on drug spending and the delivery system, nearly 30 percent 
of brand and generic prescriptions had a $0 out-of-pocket cost for the 
patient in 2016, up from 11 percent in 2011. So there appears to be a 
growing number of prescriptions available at no cost to a patient when 
you pick up your prescription at the drug store. Do you agree with that 
statement?
    Answer 2. I agree. The 2017 Quintiles/IMS report shows this (see 
slide 5). However, the Quintiles report shows that patient out-of-
pocket spending is highly concentrated among patients with certain 
formulary or benefit designs. Quintiles notes that plans with drug 
``deductibles and coinsurance set patient out-of-pocket costs based on 
list prices and 19 percent of commercial brand prescriptions are paid 
in this way, accounting for 52 percent of out-of-pocket costs.''
    Specifically, ``patients with a specialty prescription in the 
deductible accounted for 2 percent of prescriptions but 32 percent of 
out-of-pocket costs.'' It is the concentration of OOP spending in a 
relatively small subset of patients that I find worrisome:

          ``Abandonment rates for brands are 2.5 times higher when the 
        patient is in the deductible phase of their plan and sees the 
        full cost of the medicine they have been prescribed.''

    As I noted in my testimony, Congress' attention should be focused 
on addressing potentially excessive patient-cost sharing that impact 
patients' health outcomes.

    Question 3. Would it be accurate to say a drug list price does not 
accurately reflect costs to patients? What should we as Congress be 
focusing on, instead of list prices?
    Answer 3. That is correct. Data suggests that, net of rebates, drug 
price increases (on average) have been fairly modest. Congress should 
focus on insurance designs that increase patient-cost sharing without 
reflecting the rebates that manufacturers have negotiated with payers 
and PBMS.
    Broadly speaking, we also need to ensure that insurers are not 
using formulary design (what drugs are covered, and what co-insurance 
they face) as a tool for adverse selection. Further, CMS and Congress 
should be carefully monitoring Part D plans, 340B, and exchange plans, 
to monitor insurance designs for potentially discriminatory impact.
    However, this is a problem that will require a multi-stakeholder 
solution to further the bipartisan goal of expanding coverage, 
improving quality, and slowing cost growth across the health care 
system. I believe that Congress and the Administration should consider 
how to better encourage plans, manufacturers, and providers to take a 
longer term view of the role of medicines in keeping patients 
healthier, longer and reducing the use of other health care ``inputs,'' 
including hospitalizations and emergency rooms visits.
    Encouraging the uptake of value-based insurance designs, longer 
term (multi-year) insurance contracts, and safe harbors from Federal 
regulations like Medicaid Best Price and Stark anti-kickback can help 
the market evolve toward competition based on patient outcomes, rather 
than short-term price of a pill.
    Experts on both sides of the aisle agree that there is hundreds of 
billions of dollars in excessive spending that could be cut from the 
U.S. health care system, while also improving patient outcomes. The 
incentives for collaboration and competition based on delivering best-
in-class outcomes more efficiently for every dollar spent, however, 
remain weak.

    Question 4. Can you comment on whether the costs for drugs have 
gone up, down, or remained steady in the last 5 to 10 years?
    Answer 4. Average prescription drug spending steadily decreased 
from 2000-14. The 2014 spike in spending is almost entirely 
attributable to the entry of highly effective, yet expensive, 
treatments for hepatitis C into the marketplace.
    Out-of-pocket prescription drug spending decreased from 2005-10, 
and remained stagnant through 2015. While out-of-pocket spending is 
expected to increase in the coming years, it is also expected to 
represent a continuously smaller share of total health care spending. 
Many new treatments that are expected to come online in the next 
several years, like C-ART for blood cancers, or gene therapies, are 
expected to be highly beneficial for patients--and thus highly valuable 
for society. Building a sustainable framework for rapid adoption of 
curative therapies is both a tremendous challenge, and a tremendous 
opportunity.

    Question 5. We hear quite a bit about a need to have more 
transparency around drug prices and within the drug delivery system. Do 
you think transparency would help, and if so, where?
    Transparency matters when it encourages patients and physicians to 
find the most effective therapy for that patient, given their medical 
needs and treatment preferences.
    Transparency around list prices isn't helpful, since patient-cost 
sharing varies so widely based on plan design, or where the patient is 
within their annual deductible.
    It also doesn't help us understand the role medicines play in the 
wider health care system, where they are a vital tool for managing 
serious chronic illnesses that account for roughly 85 percent of U.S. 
health care costs.
    Given the economics of the industry, we should also expect drug 
discounts to vary across payers--just as physician and hospital prices 
vary. There is no ``one'' right price for a medicine.
    What we should be doing improving patients and physicians' ability 
to compare treatment strategies based on real world costs, benefits, 
and risks. Real world data on patient outcomes would give us much 
greater ability to drive competition across medicines, other treatment 
strategies, and providers. We should have a health care system that 
rewards the delivery of the best patient outcome, as efficiently as 
possible--whether that is through better diet, exercise, medical 
management, or a surgical intervention. Transparency in terms of being 
able to track and share data on patient outcomes and costs (with 
appropriate privacy protections) would save lives and help reduce the 
enormous waste and inefficiency we see today across the U.S. health 
care system.

    Question 6. We hear a lot about passing on rebates directly to 
consumers. What is your perspective on this proposal and what would be 
the impact on costs (for drugs or their premium) to patients?
    To my knowledge, CVS is the only PBM that has embraced this 
approach, but I believe it would be helpful to address current patient-
cost sharing burdens. Depending on the rebate--say 20 percent or 30 
percent--it could help patients substantially who otherwise find 
themselves paying based on the list price.
    Ultimately, we need to shift to a different system of paying for 
medicines that does not depend on formularies based on the ``bubble'' 
between the list and net price. This is a step in that direction, but 
other approaches should be tried as well, including new insurance 
designs and tools for right-sizing patient-cost sharing based on 
outcomes (i.e., value-based insurance designs).

    Question 7. Can you comment on what tools are available within the 
delivery system to directly reduce patient costs?
    Manufacturers often offer co-pay/co-insurance assistance programs, 
and other means-tested programs that cap the out-of-pocket costs that 
patients pay for their medicines. Some PBMs, like Express Scripts, have 
begun to offer discounts for uninsured patients who would otherwise pay 
list price for their medicines. These programs are a relatively new 
phenomenon. Premera Blue Cross/Blue Shield in Washington State has 
offered a value-based formulary for employers where co-pays vary not 
based on price, but on how effective the medicine is--a very 
interesting approach that is, however, data intensive.
    Encouraging providers, payers, and manufacturers to routinely 
generate and collect more real world data on patients could lower the 
cost of implementing these approaches. To do so, however, would require 
regulatory safe harbors from some FDA and CMS regulations.

    Question 8. What do you think of the suggestion that concerns 
related to drug costs have grown as patients have been forced 
personally to take on more and more of the drug costs?
    Answer 8. There have been dramatic shifts in insurance design over 
the last decade, including the rise of high deductible health plans, 
and the passage of the Affordable Care Act. Under the ACA, as insurers 
have been forced to cover more routine costs without any patient-cost 
sharing, and to standardize other benefits (no annual or lifetime cap 
on benefits, covering a broader collection of essential health 
benefits, greater scrutiny of annual premium increases), and the rise 
of maximum caps on annual spending that combine both medical and the 
pharmacy deductibles, more drug costs are being shifted onto patients 
for certain categories of high cost medicines, even though the long-
term trends are toward lower overall OOP for health care in general.
     Response by Gerard Anderson to Questions of Senator Alexander
    Question 1. To confirm feedback received at the hearing, I have 
heard that drug spending accounts for roughly 15 percent of health 
spending. Of that 15 percent, 10 to 11 percent is on drugs purchased at 
the pharmacy or ordered online, and 4 to 5 percent is spent on drugs 
given in a hospital or at the doctor's office. Do you agree, that is 
how much is spent on drugs in the United States?
    Answer 1. Yes, I agree with these numbers on drug spending. I would 
also add that, according to the Office of the Actuary in the Center for 
Medicare and Medicaid Services, prescription drug spending is expected 
to grow faster than overall health spending between 2016 and 2025 (an 
average of 6.3 percent per year compared to an average of 5.6 percent 
per year for overall health spending), which could affect these numbers 
moving forward.
    As I highlighted in my testimony, these prescription drug costs are 
frequently passed onto patients, making it difficult for them to afford 
the medications that they need. For example, a Kaiser Family Foundation 
study found that for Medicare beneficiaries with Part D coverage, out-
of-pocket costs averaged $7,000 for drugs to treat hepatitis C, $6,000 
for drugs to treat multiple sclerosis, $4,000 for drugs to treat 
rheumatoid arthritis and $8,000 for drugs to treat certain types of 
cancer. For a social security recipient earning $26,000 per year, these 
out-of-pocket costs represent 16 percent to 32 percent of the person's 
total income for the year and clearly are prohibitively expensive.
        Response by Dan Mendelson to Question of Senator Isakson
    Question. What would be the anticipated impact of allowing patients 
to appeal for lower cost sharing if the drug they need (as determined 
by their doctor and following any plan imposed utilization management 
procedures) happens to be on a Part D plan's ``specialty tier?'' 
Because the patient would be paying a total lower out-of-pocket cost, 
wouldn't this common-sense policy be good both for the patient (lowered 
OOP cost) and for Medicare (slower progression through the benefit and 
into catastrophic)?
    Answer. There is growing interest in aligning insurance design to 
deliver value to patients. In particular, some patients have responses 
to medications or genetic makeups that require them to take a drug on 
the specialty tier, even if lower cost options are available. While 
this proposal represents an opportunity to align benefit design and the 
patient experience to such considerations, it could also potentially 
have implications for the market. Allowing patients to appeal for lower 
cost sharing for specialty tier drugs in Part D would lower patient 
out-of-pocket costs for some beneficiaries. This policy also has the 
potential to reduce costs to the Medicare program, as patients may take 
longer to reach the catastrophic phase of the benefit, where Medicare 
pays a greater share of costs. However, such policy would also alter 
the costs incurred by health plans, which could impact premiums.
       Response by Dan Mendelson to Questions of Senator Sanders
    Question 1. Since online pharmacies were created about 15 years 
ago, there have been no reported examples of Americans dying by taking 
medication bought online from a legitimate and regulated pharmacy in 
Canada that requires valid prescriptions. And, this is after tens of 
millions of prescriptions have been filled online and internationally.
    During the hearing, however, you raised safety concerns when the 
topic of drug importation was raised by Senator Murkowski. And, you 
stated that there have been cases of Americans being harmed by drugs 
they imported.
    Can you provide specific instances you referenced generally during 
your testimony? Where (both in terms of country and type of 
distributor) did these drugs come from? Were they from legitimate, 
regulated online pharmacies? Did the patients have a prescription from 
a licensed health care provider?
    Answer 1. The safety concerns I raised during my oral comments 
regarding the importation of medication from outside of the United 
States are based on statements from the Congressional Budget Office, 
the Food and Drug Administration, and the Federal Bureau of 
Investigation.
    The Congressional Budget Office stated,

          ``All products distributed in the United States must be 
        produced in facilities registered with the FDA for production 
        of those specific products. Much of existing worldwide sales 
        volume does not satisfy that criterion, even drugs that 
        otherwise meet safety and efficacy standards.''\1\
---------------------------------------------------------------------------
    \1\ The Congressional Budget Office. Would Prescription Drug 
Importation Reduce U.S. Drug Spending? April 2004. https://www.cbo.gov/
sites/default/files/108th-congress-2003-2004/reports/04-29-
prescriptiondrugs.pdf.

    For example in March 2017, 4 former Food and Drug Administration 
commissioners warned Congress that legalizing importation of drugs from 
other countries could endanger consumers by exposing them to fake, 
substandard, or contaminated drugs. The commissioners were concerned 
that there is no reliable way of knowing where imported drugs come 
from, particularly since the vast majority of online pharmacies are 
fake.\2\
---------------------------------------------------------------------------
    \2\ https://assets.documentcloud.org/documents/3519007/FDA-
Commissioners-Drug-Reimporta
tion.pdf.
---------------------------------------------------------------------------
    Recently, the former director of the Federal Bureau of 
Investigation, released a report examining the degree to which current 
drug importation proposals, if implemented, would impact law 
enforcement's ability to protect the public health and ensure the 
safety of our drug supply. That report concluded that ``importation 
proposals would force law enforcement agencies to make tough 
prioritization decisions that leave the safety of the U.S. prescription 
drug supply vulnerable to criminals seeking to harm patients.''\3\
---------------------------------------------------------------------------
    \3\ Freeh, Sporkin and Sullivan LLC, Freeh Group International 
Solutions LLC. Report on the Potential Impact of Drug Importation 
Proposals on U.S. Law Enforcement. March 2017 http://
freepdfhosting.com/84170a76e7.pdf.

    Question 2. In a January 2017 article published in ``Chicago 
Business'' you are credited with predicting that GOP legislators would 
follow President Trump's lead on drug pricing after the President 
commented that prescription drug companies were ``getting away with 
murder.'' You also are credited with pointing out that pre-election 
poll data showed that Republican voters care more about high drug 
prices than they did about repealing Obamacare. In fact, you are quoted 
as saying, ``it's a populist issue'' and one that ``Trump is likely to 
move on.''
    My question is this: What is the best way for this issue to be 
addressed to ensure that drug companies do not continue ``getting away 
with murder'' and that the interests of the Republican voters you 
referenced in your article--lower high drug prices over repealing 
Obamacare--are front and center?
    Answer 2. There are a range of opportunities to shift toward models 
that align drug prices to value, by promoting competition and pursuing 
other market-driven solutions. In particular, speeding the approval of 
the second- and third-branded drugs in a therapeutic class would 
expedite competition and lead to more rapid price concessions. Ensuring 
a continued robust market for generic pharmaceutics is vital for 
effective cost management and improvement of population health 
outcomes.
    In addition, outcomes-based contracts also represent a significant 
opportunity to shift away from prescription drug list prices toward 
value-based reimbursement models. Effective outcomes-based contracts 
require next-generation data analysis and interventions that enable 
payers and manufacturers to identify patients eligible for treatment, 
target outreach to ensure appropriate adherence and quality 
improvement, and measure product performance against pre-agreed-upon 
outcomes on an ongoing basis. Consumer benefit can be substantially 
enhanced through data-based engagement around pharmaceuticals.
        Response by Paul Howard to Questions of Senator Sanders
    Question 1. Dr. Howard, it is my understanding that the Manhattan 
Institute believes very strongly in the value of free trade. As you 
know, the United States safely imports lettuce, strawberries, tomatoes, 
fish and shrimp, and many other foods from Mexico, Singapore and other 
countries in Southeast Asia. For the most part, do you believe these 
fruits and vegetable and seafood are safe?
    We do believe strongly in the value of free trade and free markets, 
and competition as a tool to drive value for consumers and patients.
    However, with all due respect, the complexity of the drug supply 
chain--as demonstrated by recent scandals with fake or adulterated 
medicines originating in China or India--and the risks associated with 
patients receiving such fake or adulterated medicines for serious 
diseases like cancer are simply an order of magnitude higher than for 
foods. The economic incentive for sophisticated counterfeiters to find 
ways to slip fake medicines into higher cost markets like the United 
States are extraordinarily powerful, and growing. Opening the closed 
U.S. drug supply chain would increase these problems dramatically.
    Issues with food safety are more easily detectible then in the case 
of chronically ill patients who may ingest fake or adulterated drug 
products imported from abroad, because they are already in compromised 
health. If a patient with high cholesterol or high blood pressure takes 
a fake medicine, the results may not be detected without regular 
testing--which might not occur for months, leaving the patient at 
increased risk of a serious adverse event. The progression of cancer 
might also go undetected for some time, and death could be attributed 
to the aggressiveness of the disease, rather than the use of 
counterfeit medicines.
    Opening up the U.S. market to the wholesale importation of 
medicines from abroad has never been certified as safe by any FDA 
Commissioner from either a Republican or Democratic administration. 
Given the much smaller populations in Canada, or the UK, and the need 
for those populations to consume medicines for their own market, 
implies that extra quantities for the U.S. market would have to be 
generated by re-sellers from much farther abroad. This opens up 
opportunities for fraud, as has been the case in the EU.
    Finally, I would note that attempting to link drug prices in 
wealthier countries to lower cost drug sales in poorer countries 
(again, as occurs in the EU, under parallel trade, where drugs for the 
UK and Germany are imported from poorer countries like Greece) provides 
an incentive for manufacturers to delay the launch of new medicines in 
poorer countries, or raises the prices lower income nations pay.
    Respectfully, I would suggest that this is the wrong way to address 
pricing challenges facing U.S. patients. Wealthier countries should pay 
higher prices for medicines than poorer countries, and attempting to 
arbitrage away the differences will only reduce the total supply of 
innovations available to future patients in both wealthy and poor 
countries alike. Instead, we should be finding ways to reduce 
unnecessary patient-cost sharing in the United States in ways that 
actually improve long-term patient health, as has been suggested by 
economists at RAND.

    Question 2. If Americans can eat food from what some would call 
``developing nations,'' then shouldn't Americans be able to import safe 
and affordable prescription drugs, from regulated and legitimate 
pharmacies, from a ``developed'' nation like Canada? And, do you 
agree--yes or no--that Americans should have confidence in the safety 
of Canadian drugs much like they have confidence in the safety of 
shrimp from Singapore or lettuce and strawberries from Mexico? Please 
explain your answer.
    Answer 2. Please see my answer to the previous question. I do not 
believe that the prices of poorer countries, like Mexico, should be 
linked to the sales of medicines in wealthier countries like the United 
States.
    Differential pricing of medicines in wealthier and poorer countries 
is not only economically efficient, it raises the global supply medical 
innovations and thus global health.
    To put this another way, wealthy countries subsidize drug 
development for poorer and middle income countries. Linking these 
markets is likely to raise prices for poorer countries beyond their 
ability to pay.
    The economics and regulation of the pharmaceutical industry are 
simply very different than commodities like food. And the different 
size of the United States and Canadian markets makes it impossible for 
Canada to supply any significant part of U.S. market. As noted earlier, 
keeping a closed system would be virtually impossible.
      Response by Gerald Anderson to Questions of Senator Sanders
    Question 1. Dr. Anderson, you make it very clear in your testimony 
that a lack of transparency about drug pricing is a major part of the 
drug pricing crisis in the United States. Drug companies do not have to 
offer any transparency. In fact, they set a list price without being 
regulated or constrained. PBMs also are able to hide behind a zero 
transparency climate. In fact, despite what they claim to do, PBMs have 
a financial incentive to try to get drug companies to increase their 
list prices because they, then, make a greater profit. Wholesalers 
bring pharmaceutical drugs to hospitals and pharmacies, and they earn a 
profit in doing so without disclosing the amount. And, pharmacies and 
hospitals sell drugs to patients, and they make a profit in doing so, 
too. At the end of the day, the person who really pays is the patient 
and they often do so through higher cost sharing.
    Dr. Anderson, as we work to expand transparency and to bring all of 
these varying amounts of money out into the open, do you think that we 
need to implement a drug importation system so that Americans can 
afford the medicines that they need today?
    In regards to importation, my concern is that the pharmaceutical 
industry would likely adapt to any policy change in this area by 
rationing the number of drugs that they send to Canada or other 
countries. As a result, U.S. patients could still struggle to obtain 
needed medications, while creating access and affordability issues for 
patients in these other countries. Additionally, patients could face 
increased safety risks by consuming medications from manufacturers and 
countries outside of the current FDA-approval system.
    However, I do think it is important to allow importation for off-
patent drugs that have three or fewer competitors. I talked about this 
issue in my congressional testimony at the Senate Aging Committee and 
was a coauthor of a JAMA paper on this topic as well (Greene, Jeremy 
A., Gerard Anderson, and Joshua M. Sharfstein. ``Role of the FDA in 
affordability of off-patent pharmaceuticals.'' Jama 315.5 (2016): 461-
62.) It turns out that most of these drugs are being manufactured in 
other highly industrialized countries and it would be very easy to 
import these drugs from other countries without having the drug 
companies be able to penalize the other countries.
    Instead, I would suggest looking at other policy changes that could 
quickly bring down drug prices and increase patients' access to the 
medications that they need, such as enacting price gouging legislation 
that empowers State Attorneys General to take legal actions against 
drug companies, restricting ``pay for delay'' behavior and other 
similar tactics that block generic drug companies from entering the 
marketplace, or using the Federal Government's current authority under 
28 U.S.C. 1498 to provide reasonable compensation to a drug company 
for the use of its patent and allow a generic manufacturer to 
manufacture the drug.

    [Whereupon, at 12:22 p.m., the hearing was adjourned.]

                                   