    [Senate Hearing 115-640]
    [From the U.S. Government Publishing Office]

                                                         S. Hrg. 115-640

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

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

                                    HEARING

                                    OF THE

                        COMMITTEE ON HEALTH, EDUCATION,
                              LABOR, AND PENSIONS

                              UNITED STATES SENATE

                         ONE HUNDRED FIFTEENTH CONGRESS

                                 FIRST SESSION

                                       ON

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

                                   __________

                                OCTOBER 17, 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 WOOD HASSAN, New Hampshire
                   David P. Cleary, Republican Staff Director
             Lindsey Ward Seidman, Republican Deputy Staff Director
                     Evan Schatz, Democratic Staff Director
                 John Righter, Democratic Deputy Staff Director

                               C O N T E N T S

                                  ----------

                                   STATEMENTS

                           TUESDAY, OCTOBER 17, 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
    Collins, Hon. Susan M., a U.S. Senator from the State of Maine...    56
    Kaine, Hon. Tim, a U.S. Senator from the State of Virginia.......    58
    Cassidy, Hon. Bill, a U.S. Senator from the State of Louisiana...    61
    Hassan, Hon. Maggie Wood, a U.S. Senator from the State of New
      Hampshire......................................................    63
    Young, Hon. Todd, a U.S. Senator from the State of Indiana.......    65
    Warren, Hon. Elizabeth, a U.S. Senator from the State of
      Massachusetts..................................................    67
    Murkowski, Hon. Lisa, a U.S. Senator from the State of Alaska....    69
    Murphy, Hon. Christopher S., a U.S. Senator from the State of
      Connecticut....................................................    71
    Baldwin, Hon. Tammy, a U.S. Senator from the State of Wisconsin..    72
    Franken, Hon. Al, a U.S. Senator from the State of Minnesota.....    74
    Whitehouse, Hon. Sheldon, a U.S. Senator from the State of Rhode
      Island.........................................................    77

                                   Witnesses

    Statement of Lori M. Reilly, Executive Vice President, Policy,
      Research & Membership, Pharmaceutical Research and
      Manufacturers of America, Washington, DC.......................     5
        Prepared statement...........................................     7
        Summary statement............................................    19
    Statement of Chester ``Chip'' Davis, Jr., President and Chief
      Executive Officer, Association for Accessible Medicines,
      Washington, DC.................................................    19
        Prepared statement...........................................    21
        Summary statement............................................    30
    Statement of Elizabeth A. Gallenagh, Senior Vice President
      Government Affairs and General Counsel, Healthcare Distribution
      Alliance, Arlington, VA........................................    31
        Prepared statement...........................................    32
        Summary statement............................................    35
    Statement of Mark Merritt, President and Chief Executive Officer,
      Pharmaceutical Care Management Association, Washington, DC.....    36
        Prepared statement...........................................    37
        Summary statement............................................    43
    Statement of Thomas E. Menighan, BSPharm, MBA, ScD(Hon.), FAPhA,
      Executive Director and Chief Executive Officer, American
      Pharmacists Association, Washington, DC........................    44
        Prepared statement...........................................    46
        Summary statement............................................    50

                              ADDITIONAL MATERIAL

    Question and Answers Submitted for the Record:
      Response by Lori M. Reilly to questions of:
        Senator Alexander............................................    80
        Senator Murray...............................................    81
        Senator Baldwin..............................................    85
        Senator Bennet...............................................    88
        Senator Franken..............................................    91
        Senator Roberts..............................................    94
        Senator Whitehouse...........................................    96
      Response by Chester ``Chip'' Davis, Jr. to questions of:
        Senator Alexander............................................    96
        Senator Murray...............................................    97
        Senator Bennet...............................................   100
        Senator Roberts..............................................   100
        Senator Whitehouse...........................................   102
      Response by Mark Merritt to questions of:
        Senator Alexander............................................   103
        Senator Murray...............................................   104
        Senator Bennet...............................................   105
        Senator Cassidy..............................................   106
        Senator Hassan...............................................   107
        Senator Isakson..............................................   108
        Senator Roberts..............................................   109
        Senator Warren...............................................   110
        Senator Whitehouse...........................................   113
      Response by Thomas E. Menighan to questions of:
        Senator Alexander............................................   115
        Senator Murray...............................................   116
        Senator Bennet...............................................   118
        Senator Cassidy..............................................   119
        Senator Whitehouse...........................................   121

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

                                  ----------

                           Tuesday, October 17, 2017

                                   U.S. Senate,
            Committee on Health, Education, Labor, and Pensions
                                                        Washington, DC.
        The Committee met, pursuant to notice, at 10:03 a.m., in
    room SD-430, Dirksen Senate Office Building, Hon. Lamar
    Alexander, Chairman of the Committee, presiding.
        Present: Senators Alexander [presiding], Collins, Cassidy,
    Young, Murkowski, Murray, Casey, Franken, Bennet, Whitehouse,
    Baldwin, Murphy, Warren, Kaine, and Hassan.

                     Opening Statement of Senator Alexander

        The Chairman. The Senate Committee on Health, Education,
    Labor, and Pensions will please come to order.
        Senator Murray and I will each have an opening statement,
    and then we'll introduce the witnesses. After the witnesses'
    testimony, Senators will each have 5 minutes of questions.
    There's a vote scheduled for 10:30. I think what we'll do is
    continue right on through until about 10:45, and then we'll
    alternate going back and forth to vote. I think we'll have time
    for all of us to hear the witnesses' testimony before we have
    to leave for the vote.
        Today, we're holding a hearing which is the second in a
    series on prescription drug costs in response to a bipartisan
    request led by Senator Cassidy, Senator Franken, along with
    Senators Collins, Baldwin, Murkowski, Whitehouse, Capito,
    Sanders, Enzi, and Warren, as well as other Senators who are
    interested in this subject. Not only was the request for these
    hearings bipartisan, but both this hearing and the first
    hearing on drug prices were bipartisan, which means Senator
    Murray and I agreed on the witnesses.
        Despite this, our first hearing in June went so far off
    track that I delayed this hearing because Senators, instead of
    talking about drug prices, wanted to use the opportunity to
    talk about other issues, specifically, the Affordable Care Act.
    I acknowledge their deep feelings and differences of opinions
    on the ACA, but the Senate has been stuck in a partisan
    stalemate for 7 years over what is a relatively small part of
    healthcare, the individual health insurance market, where 6
    percent of Americans purchase health insurance.
        Senator Murray and I have been working for several weeks to
    see if we can find within the Senate a limited consensus
    bipartisan agreement to stabilize the individual market in the
    interim. But there are many other issues that have caused
    healthcare spending in this country to grow from consuming 9
    percent of the gross domestic product in 1980 to nearly 18
    percent in 2015 and a predicted 20 percent in 2025, according
    to the Center for Medicare and Medicaid Services.
        We need to look at all aspects of healthcare spending--the
    15 percent or so we spend on prescription drugs, including
    retail and prescription drugs administered in hospitals, and
    the other 85 percent of healthcare spending, which includes
    doctor visits, surgeries, and medical devices--and ways to get
    these costs under control. We're having a hearing on Thursday
    to discuss wellness and healthy lifestyle changes and how they
    could decrease serious illnesses and bring down healthcare
    costs.
        While, of course, Senators are free to say and do whatever
    they wish to do, I would hope today that we could focus on the
    cost of prescription drugs while we have these excellent
    witnesses before us. Next month, the Committee will hold a
    third hearing to hear from Norm Augustine and consider a report
    he is leading from the National Academy of Sciences. This
    report is the result of a study called ``Ensuring Patient
    Access to Affordable Drug Therapies.''
        We've set a good example of bipartisan success in the Food
    and Drug Administration user fee agreements. For 18 months,
    this Committee worked with our counterparts in the House to
    update and pass user fee agreements, including provisions from
    many Senators on both sides of the aisle, including measures
    that will provide additional staff and resources to the FDA to
    approve more biosimilars and generic drugs which provide more
    competition and lower drug costs. That bill became law this
    summer. Last year, the Committee worked together on 21st
    Century Cures to spur the development of new drugs and
    treatments.
        My goal for these hearings is to continue these in a
    bipartisan way and learn the facts about what goes into the
    price patients pay when picking up their prescriptions and
    what, if any, steps we can agree on to lower those prices.
    We're in the middle of a remarkable time in science that is
    producing amazing discoveries for patients. We have drugs that
    can cure Hepatitis C, keep cancer at bay, and stop a stroke.
        With this innovation comes new challenges. We need to make
    sure all patients can benefit. We've all heard from patients
    that the cost of new drugs is often too much for them to
    afford. We also need to make sure that any action we take
    doesn't jeopardize the innovation and the breakthroughs.
        The prescription drug delivery system--how a drug gets from
    the manufacturer to the patient--is complicated. More than 4.4
    billion prescriptions are written for drugs each year for
    Americans who then pick up these prescriptions at 60,000
    drugstores or receive them from doctors or hospitals or online
    pharmacies, and those 4.4 billion prescriptions, estimated to
    cost $450 billion, are paid for in a similarly complicated way,
    which you're going to hear about today.
        In addition to private insurance, many different government
    programs subsidize or pay for prescription drugs: Medicaid,
    340B, Medicare Part B and Part D, Tricare, VA, and Indian
    Health Service. Patients often pay a set amount, called a
    copay, or a percentage, called coinsurance, when picking up
    their prescription as well, or sometimes patients have to cover
    the whole cost if they haven't met their deductible. What
    amount of the cost of the prescription drug they pay is
    determined by what health insurance they may have.
        I hope our witnesses today will help us understand the drug
    delivery system and how their role in the system affects the
    price patients pay. Our witnesses represent the brand
    manufacturers, who take enormous risks; generic drug
    manufacturers, who over the last 30 years have grown to make up
    89 percent of all prescriptions, lowering cost; drug
    wholesalers, who purchase drugs from manufacturers and deliver
    them all over the country daily; pharmacy benefit managers, who
    use their buying power to leverage lower prices on all drugs
    but also make difficult decisions about drugs to offer patients
    at what cost and with what copays or what insurance; and then,
    of course, pharmacists, who are on the front lines of helping
    patients that find out the cost of their medicine when picking
    it up at the drugstore and having to make that fit within their
    budgets.
        As we look at it and hope to address the fundamental cost
    of healthcare, I hope we can continue to do this in a
    bipartisan way.
        Senator Murray.

                      Opening Statement of Senator Murray

        Senator Murray. Well, thank you, Chairman Alexander, for
    your leadership in holding these hearings, and to all of our
    colleagues on both sides of the aisle for their commitment to
    address this critical challenge before us today, which is the
    increasing burden and soaring prices of prescription drugs.
    Much like our last hearing on the devastation being caused by
    the opioid crisis, this is truly an urgent discussion.
        Like everyone here, I've heard from so many families who
    are forced to choose between some high-priced medication and
    paying their bills, between filling a prescription or putting
    food on the table, and between getting the care that they need
    or paying their mortgage or putting gas in the tank. So this is
    clearly a challenge we need to meet and meet it quickly.
        Fortunately, we have taken some steps in the right
    direction. I'm very pleased this Committee worked to increase
    transparency and foster more competition in the generic drug
    market in the FDA Reauthorization Act. In these agreements,
    taking suggestions from both sides, we were able to accelerate
    the review of generics that can alleviate anti-competitive
    markets, improve the process for bringing a generic to market
    by increasing communication and transparency between the FDA
    and manufacturers, encourage new generics to compete with sole
    source products vulnerable to price hikes and shortages, and
    prevent gaming of the Orphan Drug Act which has brought hope to
    so many patients.
        But as we know, generic competition alone will not address
    the high prices paid by so many patients and families in out-
    of-pocket costs and high premiums. We've got to make more
    progress to get at the root of the problem facing patients,
    which is the high prices set by drug manufacturers. That is why
    I'm glad that Democrats have put forward a number of ideas and
    legislation to demand more transparency from pharmaceutical
    companies about what's behind drug prices, allow Medicare to
    negotiate fair prices for prescription drugs, prevent
    manufacturers from engaging in price gouging, and crack down on
    the various anti-competitive practices that keep prices high.
    These measures would make a real difference when it comes to
    bringing down prices.
        All this requires--and I've said it many times--this
    administration has to be our partner, not a hindrance to our
    efforts. As we all saw last week, President Trump continued to
    take unilateral steps to increase premiums and undermine
    protections for people with preexisting conditions and cause
    chaos in our healthcare system. That pattern of governing by
    sabotage is reckless and appalling and only makes it, I
    believe, more critical that Congress shows patients and
    families we can work together to undo the damage being caused
    and move on to actually doing some good when it comes to
    families' healthcare.
        On drug prices, like so many other issues, President Trump
    talks a big game on Twitter but has not taken any actions to
    actually lower drug prices, and the little we have seen from
    this administration, a leaked Executive Order back in July,
    barely scratches the surface. Instead, many of the plans that
    have come out would do very little to actually target drug
    prices, and, in fact, some have actually targeted vital
    programs, like 340B, that support hospitals and clinics in
    serving the very communities who cannot afford the drugs they
    need to stay healthy.
        I hope the administration chooses a different path, and I
    would just note, by the way, that President Trump could start
    by nominating a Secretary of Health and Human Services who will
    put families first when it comes to prescription drug prices
    and any issues, and I expect a thorough and rigorous nomination
    process when that comes before us. They have a very important
    role to play.
        We have a lot to cover today, and I want to thank all of
    our witnesses for joining us. We are very much looking forward
    to your testimony.
        I just want to again thank Chairman Alexander and all of
    our colleagues for their efforts to tackle this pressing
    challenge to make sure that prescription medication and
    lifesaving treatments are not just available, but accessible
    and affordable. I'm hopeful that our bipartisan work on
    insurance market stabilization and FDARA can lay the groundwork
    for serious action on drug prices, given that we all agree this
    is a priority. Actually, patients and families we serve can't
    wait much longer.
        Thank you, everyone, and I turn it back over to you, Mr.
    Chairman.
        The Chairman. Thank you, Senator Murray, and thank you for
    creating a bipartisan environment where we can work ahead, as
    you indicated, on trying to stabilize the individual health
    insurance market and begin to move away from health insurance
    to the larger issues affecting healthcare, such as drug prices.
        We thank the witnesses for coming. I would ask you each to
    summarize your comments in about 5 minutes, and that will leave
    Senators more time to ask questions.
        The first witness is Lori Reilly, the Executive Vice
    President of Policy, Research, and Membership at PhRMA. She
    leads the Policy and Research Department there, a trade
    association of brand drug manufacturers. Chip Davis is the
    President and Chief Executive of the trade association that
    represents generic drug manufacturers, distributors, and
    suppliers. Elizabeth Gallenagh is Senior Vice President for
    Government Affairs and General Counsel, representing
    prescription drug wholesalers. Welcome to you.
        Mark Merritt is the President and Chief Executive Officer
    of the national group that represents America's pharmacy
    benefit managers, and Thomas Menighan is the Executive Director
    and Chief Executive of the largest association of pharmacists
    in the United States.
        So, Ms. Reilly, let's begin with you, and then we'll hear
    from each witness.

                      STATEMENT OF LORI M. REILLY

        Ms. Reilly. Thank you, Chairman Alexander, Ranking Member
    Murray, and Members of the Committee, for having me here today.
        Over the past 20 years, the Food and Drug Administration
    has approved more than 500 new medicines to market, and those
    have resulted in significant progress against some of our
    Nation's most costly and challenging conditions. Through
    innovation, the HIV/AIDS death rate has dropped 86 percent in
    this country from the mid `1990's, and, more recently, progress
    that it's been making in the space of oncology has been
    heralded as game changers for many patients facing serious
    conditions such as cancer. Today, because of scientific
    advances, many other conditions are now manageable and
    sometimes even curable.
        In the midst of the incredible scientific progress that
    we've seen, drug spending growth is actually declining from its
    peak in 2014. In fact, last year, prescription drug spending
    cost growth was 3 percent to 5 percent, according to public and
    private experts. That was in line with all other forms of
    spending growth. Spending on retail as well as physician-
    administered drugs continues to remain about 14 percent of what
    we spend in terms of total healthcare dollars in this country.
        Oftentimes, when people talk about that 14 percent, there's
    a presumption that all of that comes back to the brand name
    manufacturer. In fact, less than half of that 14 percent--about
    6.8 percent of what we spend on total healthcare in this
    country--comes back to the brand name industry. The rest goes
    to the generic industry and others in the supply chain.
        One important part of the supply chain that isn't with us
    here today is the hospital sector. Just this morning, we
    released a paper that looked at 20 of the most commonly
    prescribed expensive medicines in hospital outpatient settings
    and found that, on average, hospitals increase and are
    reimbursed two and a half times the acquisition cost at which
    they purchase medicines in this country. They're an important
    part of the supply chain, and I hope we talk about that more
    later today.
        Going forward over the next decade, medicines are projected
    to remain a stable share of healthcare spending at around 14
    percent. To many, they question how can that possibly be the
    case? We know what's in the pipeline. We know that over the
    next 10 years, we're likely to have 40 to 45 new medicines
    approved every single year. But the reality is we have, for
    pharmaceuticals, some of the most stringent cost containment
    across the entire healthcare sector.
        Pharmacy benefit managers use the fact that there's a great
    deal of competition within therapeutic areas to limit
    formularies, to place medicines on high cost-sharing tiers, and
    to use a host of utilization management techniques to keep
    costs under control. Over the next 5 years, over $100 billion
    worth of medicines will be coming off patents, and those
    medicines will become generics and cheaper for Americans to be
    able to afford, and, importantly, in the pharmaceutical benefit
    manager's space, about three pharmacy benefit managers today
    buy on behalf of 75 percent of all prescriptions in this
    country because of the leverage they can exert. In 2015, they
    were able to secure over $100 billion in rebates and discounts.
        Unfortunately, what's happening today is those rebates and
    discounts often are not making their way back to patients at
    point of sale. Compounding this problem is, today, an
    increasing number of patients have high cost-sharing for their
    medicines, either because they have a deductible--today, 50
    percent of commercially insured patients have a deductible for
    their medicine. When they have a deductible for their medicine,
    they're asked to pay a list price, in other words, a non-
    negotiated price for their medicine.
        There are solutions that we think could be put forth to
    address some of the cost challenges we face. The first one is
    the fact that $100 billion of discounts and rebates should find
    its way back to patients at the retail pharmacy level. Those
    discounts should be passed back to patients to lower their
    healthcare costs. We also need to do more to reform government
    rules around how companies can contract today. There's a desire
    to move our healthcare system toward contracting toward value.
    But today, because of government rules and regulations, it
    makes it harder to have sensible contracting.
        Third, we need to look at programs like the 340B program,
    which, yes, do provide a very important benefit to many, but,
    as I mentioned before, we know in the hospital sector,
    oftentimes hospitals are increasing the price of their medicine
    two and a half to three and a half times and are getting
    reimbursed oftentimes, again, three times as much as the
    manufacturer is getting reimbursed for the medicine.
        Last, we need to speed the approval of new medicines as
    well as generic medicines to the marketplace. Competition is
    the best medicine to lowering costs over the long term, and we
    need to build on the work that this Committee passed as part of
    PDUFA-6 to continue to modernize the Food and Drug
    Administration to have efficient and safe delivery of new
    medicines and new generic medicines. Future progress is needed,
    and patients are waiting for the kind of innovation our sector
    can deliver.
        Thank you very much.
        [The prepared statement of Ms. Reilly follows:]

                      prepared statement of lori m. reilly

        Chairman Alexander, Ranking Member Murray, and Members of
    the Committee, thank you for inviting me to participate in
    today's hearing. Understanding the role the drug delivery
    system plays in determining what patients pay for medicines is
    a critical part of the discussion about what can be done to
    improve patient access and affordability and I appreciate the
    opportunity to explore this topic with you in depth.
        PhRMA represents the country's leading innovative
    biopharmaceutical research companies, which are devoted to
    discovering and developing medicines that enable patients to
    live longer, healthier, and more productive lives. The
    biopharmaceutical sector is one of the most research-intensive
    industries in the U.S.: since 2000, PhRMA member companies have
    invested more than half a trillion dollars in the search for
    new treatments and cures, including $65.5 billion in 2016
    alone.

      medicines have transformed the treatment of many diseases, helping
                    patients live longer and healthier lives

        We are in a new era of medicine in which breakthrough
    science is transforming patient care and enabling us to more
    effectively treat chronic disease, the biggest cost driver in
    our health care system. Innovative medicines represent
    significant scientific advancements that revolutionize the
    treatment and thus the downstream healthcare costs of complex
    and costly diseases, such as cancer, hepatitis C, HIV/AIDS, and
    cardiovascular disease. In this new era of medicine, many
    diseases previously regarded as deadly are now manageable and
    even curable. Today, more than 7,000 medicines are in
    development worldwide, of which 80 percent have the potential
    to be first in class and 42 percent are personalized
    medicines.\1\ Prescription medicines produce unparalleled value
    and savings for the health care system, preventing or slowing
    the progression of disease, and reducing the need for more
    intensive medical care. Continued advances in biopharmaceutical
    innovation represent the best opportunities to improve health
    outcomes and control future health care costs.
    ---------------------------------------------------------------------------
        \1\ Long G. The Biopharmaceutical Pipeline: Innovative Therapies in
    Clinical Development. Analysis Group. 2017; Tufts Center for the Study
    of Drug Development (CSDD). Personalized Medicine Gains Traction But
    Still Faces Multiple Challenges. Tufts CSDD Impact Report. 2015;17(3).
    ---------------------------------------------------------------------------
        New medicines help contain overall health care spending by
    preventing costly complications and hospitalizations, and
    replacing other medical interventions. A 2013 study by IMS
    Institute for Healthcare Informatics estimated that the U.S.
    health care system could save $213 billion annually by
    improving the use of medicines.\2\ Similarly, research
    published in Health Affairs found that just an extra $1 spent
    on medicines for adherent patients with congestive heart
    failure, high blood pressure, diabetes and high cholesterol can
    generate $3 to $10 in savings on emergency room visits and
    inpatient hospitalizations.\3\
    ---------------------------------------------------------------------------
        \2\  IMS Institute for Healthcare Informatics. Avoidable Costs in
    U.S. Healthcare: The $200 Billion Opportunity from Using Medicines More
    Responsibly. June 2013.
        \3\ 1A Roebuck MC, Lieberman JN, Gemmill-Toyama M, et al.
    Medication Adherence Leads to Lower Care Use And Costs Despite
    Increased Drug Spending. Health Affairs. 2011;30(1):99.
    ---------------------------------------------------------------------------
        Based on the growing body of evidence about medicines'
    benefits, the Congressional Budget Office (CBO) recognizes
    reductions in other medical expenditures associated with
    increased use of prescription medicines in Medicare Part D.\4\
    Research indicates that the savings may be three to six times
    greater than estimated by the CBO for seniors with common
    chronic conditions like diabetes and hypertension,\5\ and less
    prevalent conditions such as Parkinson's disease.\6\ More
    recent research has shown that increased use of medicines among
    patients is associated with reductions in expenditures from
    avoided use of inpatient and outpatient services in Medicaid as
    well. For example, among patients with schizophrenia, improved
    adherence to antipsychotic medicines yielded annual net savings
    of up to $3.3 billion, or $1,580 per patient per year, driven
    by lower hospitalizations, outpatient care, and criminal system
    involvement.\7\ Another study found that if 60 percent of the
    children enrolled in Medicaid achieved high adherence to asthma
    treatment in just 14 states, Medicaid could achieve $57.5
    million in savings annually.\8\
    ---------------------------------------------------------------------------
        \4\  Congressional Budget Office. Offsetting Effects of
    Prescription Drug Use on Medicare's Spending for Medical Services.
    November 29, 2012.
        \5\  Roebuck MC. Medical Cost Offsets from Prescription Drug
    Utilization Among Medicare Beneficiaries. Journal of Managed Care
    Pharmacy. 2014;20(10):994-995.
        \6\  Wei YJ, Palumbo FB, Simoni-Wastila L, et al. Antiparkinson
    Drug Adherence and its Association With Health Care Utilization and
    Economic Outcomes in a Medicare Part D Population. Value in Health.
    2014;17(2):196-204.
        \7\  Predmore ZS, Mattke S, Horvitz-Lennon M. Improving
    Antipsychotic Adherence among Patients With Schizophrenia: Savings for
    States. Psychiatric Services. 2015; 66:343-345.
        \8\  Rust G, Zhang S, McRoy L. Potential Savings From Increasing
    Adherence to Inhaled Corticosteroid Therapy in Medicaid-Enrolled
    Children. American Journal of Managed Care. 2015;21(3):173-180.
    ---------------------------------------------------------------------------

    the competitive market for prescription medicines balances innovation,
                      patient access, and cost containment

        The competitive market is the engine that drives the
    innovative biopharmaceutical research and development
    ecosystem. The dynamics of the private, market-based system in
    the U.S. promote incentives for continued innovation and
    patient access to needed medicines while leveraging competition
    to achieve cost containment. Since 2000, biopharmaceutical
    companies have brought more than 500 new medicines to the U.S.
    market, resulting in significant progress against some of the
    most costly and challenging diseases.\9\ Yet, as a result of
    robust negotiation and competition in the marketplace, spending
    on medicines is growing at the slowest rate in years.\10\
    ---------------------------------------------------------------------------
        \9\ US Food and Drug Administration. Summary of NDA Approvals &
    Receipts, 1938 to the Present.http://www.fda.gov/aboutfda/whatwedo/
    history/productregulation/summaryofndaapprovalsreceipts1938tothepresent
    /default.htm; US Food and Drug Administration. New Drugs at FDA: CDER's
    New Molecular Entities and New Therapeutic Biological Products. 2012-
    2015.https://www.fda.gov/drugs/developmentapprovalprocess/
    druginnovation/default.htm.
        \10\ QuintilesIMS Institute. Medicine Use and Spending in the US: A
    Review of 2016 and Outlook to 2021.April 2017
    ---------------------------------------------------------------------------
        Government, market analyst, and pharmacy benefit manager
    data all point to the same conclusion: that after peaking in
    2014--an anomaly year in which millions of uninsured patients
    gained coverage and a record number of new medicines were
    approved--prescription drug spending growth has fallen
    substantially. Accounting for discounts and rebates, multiple
    sources report that spending on prescription medicines grew by
    just 3 percent to 5 percent in 2016.\11\ As a result of
    negotiation and competition in the marketplace, spending on
    retail and physician-administered medicines continues to
    represent only 14 percent of overall health care spending, even
    though scores of new medicines are approved every year. At the
    state level, Medicaid programs spent just 4.9 percent of their
    budgets on prescription drugs, including new medicines, in
    2016, relative to 26 percent for hospital care and 18.2 percent
    for provider services.\12\
    ---------------------------------------------------------------------------
        \11\ QuintilesIMS Institute. Medicine Use and Spending in the US: A
    Review of 2016 and Outlook to 2021.April 2017; CVS Health. CVS Health
    PBM Clients Achieved Lowest Prescription Drug Trend in Four Years,
    Despite Rising Drug Prices. March 15, 2017.http://www.prnewswire.com/
    news-releases/cvs-health-pbm-clients-achieved-lowest-prescription-drug-
    trend-in-four-years-despite-rising-drug-prices-300423726.html; Express
    Scripts. 2016 Drug Trend Report. February 2017.https://lab.express-
    scripts.com/lab/drug-trend-report; Which PBM Best Managed Drug Spending
    in 2016: How Did OptumRx Compare? Drug Channels. April 25, 2017.http://
    www.drugchannels.net/2017/04/which-pbm-best-managed-drug-spending-
    in.html#more.
        \12\ Prescription drug pre-rebate expenditures tabulated by The
    Menges Group using fiscal year 2016 CMS State Drug Utilization data
    files and CMS brand/generic indicators for each National Drug Code.
    Rebate information obtained from fiscal year 2016 CMS-64 reports. Post-
    rebate expenditures derived through The Menges Group tabulations using
    above information.
    ---------------------------------------------------------------------------
        The U.S. biopharmaceutical marketplace promotes innovation
    and affordability through cost containment that is built into
    the prescription drug lifecycle. While the price of a medicine
    may increase or decrease over its lifetime, prices fall
    dramatically as competition occurs among brand-name medicines,
    and typically fall even further (up to 80 percent) with the
    introduction of generics.\13\ For instance, the price of one
    common statin (atorvastatin, known in the branded form as
    Lipitor) used to lower cholesterol and prevent cardiovascular
    disease, dropped by about 92 percent from 2005 to 2013 when
    generic alternatives came to market.\14\ Meanwhile, the average
    charge for percutaneous transluminal coronary angioplasty
    (PTCA)--a surgical procedure to treat cardiovascular disease--
    increased by almost 66 percent during that same time
    period.\15\
    ---------------------------------------------------------------------------
        \13\ IMS Institute for Healthcare Informatics. Price Declines After
    Branded Medicines Lose Exclusivity in the US January 2016.
        \14\ Atorvastatin, known in the branded form as Lipitor 10mg: IMS
    National Sales Perspective (NSP) Invoice Price in 2005 (Branded
    Lipitor) and in 2013 (Generic Atorvastatin).
        \15\ Data adapted from: HCUP Hospital Charge Data base 2005 to
    2013, Average Hospital Charges.
    ---------------------------------------------------------------------------
        The U.S. market is structured to take maximum advantage of
    savings from brand competition and from generics. Three large,
    sophisticated pharmacy benefit managers (PBMs) manage over 75
    percent of all prescriptions filled.\16\ They use brand
    competition to obtain discounts from manufacturers and take
    full advantage of the presence of generics to drive savings.
    This drives the rapid shift of market share to generics (and,
    looking forward, to biosimilars), a system with few analogues
    in other health care sectors. As one example of the growing
    influence of PBMs, industry leader Express Scripts has publicly
    stated their success in leveraging substantial rebates for
    hepatitis C medicines led to those treatments being less
    expensive in the U.S. than in many other western countries.\17\
    The competitive market will continue to generate savings in the
    years ahead, as more than $140 billion of U.S. brand sales are
    projected to face generic competition between now and 2021.\18\
    Competition from biosimiliars is estimated to account for $38
    billion of the loss in brand spending.
    ---------------------------------------------------------------------------
        \16\ Fein AJ; Pembroke Consulting, Inc., and Drug Channels
    Institute. 2014-15 Economic Report on Retail, Mail, and Specialty
    Pharmacies. January 2015.http://drugchannelsinstitute.com/files/2014-
    15-PharmacyIndustry-Overview.pdf.
        \17\ LaMattina J. For Hepatitis C Drugs, U.S, Prices Are Cheaper
    Than in Europe. Forbes. December 4, 2015.http://www.forbes.com/sites/
    johnlamattina/2015/12/04/for-hepatitis-c-drugs-u-s-prices-are-cheaper-
    than-in-europe/#7ced43f564bb
        \18\ QuintilesIMS Institute. Medicine Use and Spending in the US: A
    Review of 2016 and Outlook to 2021. April 2017.
    ---------------------------------------------------------------------------

       list prices for medicines do not reflect substantial rebates and
          discounts and provide an increasingly inaccurate picture of
                            prescription drug costs

        Much of the public debate about the cost of medicines has
    focused on list prices, which do not account for the rebates
    and discounts that PBMs and health plans commonly negotiate
    with biopharmaceutical companies in exchange for preferred
    formulary placement on lower cost-sharing tiers. For certain
    medicines used to treat chronic conditions like asthma, high
    cholesterol, hepatitis C, and diabetes, these discounts and
    rebates can reduce list prices by as much as 30 percent to 70
    percent.\19\ Biopharmaceutical companies are also required to
    provide sizable statutory rebates, discounts, and fees to
    government programs, which have increased in recent years due
    to an increase in the Medicaid rebate, closing of the Medicare
    Part D ``donut hole'' and expansion of the 340B program. These
    mandatory payments grew by more than 40 percent between 2013
    and 2015, increasing from $29.6 billion to $41.8 billion.\20\
    ---------------------------------------------------------------------------
        \19\ QuintilesIMS Institute. Estimate of Medicare Part D Costs
    After Accounting for Manufacturer Rebates. October 2016; Gronholt-
    Pedersen J, Skydsgaard N, Neely J. Novo Nordisk Defends U.S. Diabetes
    Drug Pricing. Reuters. November 4, 2016. http://www.reuters.com/
    article/us-novo-nordisk-prices-idUSKBN12Z184; Silverman E. What the
    `Shocking' Gilead Discounts on its Hepatitis C Drugs Will Mean. Wall
    Street Journal. February 4, 2015.https://blogs.wsj.com/pharmalot/2015/
    02/04/what-the-shocking-gilead-discounts-on-its-hepatitis-c-drugs-will-
    mean/ Barrett P, Langreth R. The Crazy Math Behind Drug Prices:
    Intermediaries that Negotiate to Lower Prices May Cause Them To
    Increase Too. Bloomberg Businessweek, June 29, 2017.https://
    www.bloomberg.com/news/articles/2017-06-29/the-crazy-math-behind-drug-
    prices.
        \20\ Berkeley Research Group. The Pharmaceutical Supply Chain:
    Gross Drug Expenditures Realized by Stakeholder. January 2017.
    ---------------------------------------------------------------------------
        Excluding rebates and discounts from discussions about the
    cost of prescription medicines provides an increasingly
    inaccurate picture of marketplace trends. According to PBMs and
    industry analysts, list prices for brand medicines have grown
    by an estimated 9 percent to 12 percent annually since 2015,
    while net prices (which take discounts and rebates into
    account) have grown by just 2.5 percent to 3.5 percent.\21\ A
    recent study from the QuintilesIMS Institute demonstrates that
    net prices for medicines that have been on the market for at
    least 2 years declined by an average of 2.5 percent annually
    from 2010 to 2016, driven by patent expirations and increased
    competition from generics.\22\ The QuintilesIMS report also
    notes that over the next 5 years, net prices for existing
    medicines will continue to decline between 1 percent and 4
    percent annually, highlighting the important role rebates and
    discounts will continue to play in containing prescription
    medicine spending growth in the future.
    ---------------------------------------------------------------------------
        \21\  QuintilesIMS Institute. Medicine Use and Spending in the US:
    A Review of 2016 and Outlook to 2021. April 2017; Express Scripts. 2016
    Drug Trend Report. February 2017.https://lab.express-scripts.com/lab/
    drug-trend-report; SSR Health. US Brand Pharmaceutical Net Prices Fell
    0.3 percent in 3Q16. January 18, 2017.http://www.ssrllc.com/
    publication/us-brand-pharmaceutical-net-prices-fell-0-3-in-3q16/
        \22\  QuintilesIMS Institute. Understanding the Drives of Drug
    Expenditure in the US. September 2017.
    ---------------------------------------------------------------------------
        Claims from PBMs, payers, and others about the skyrocketing
    prices of medicines almost always focus solely on list prices,
    which are not reflective of actual spending trends. When new
    hepatitis C medicines offering cure rates exceeding 90 percent
    entered the market, PBMs claimed that these life-saving
    treatments and cures would bankrupt the health system and their
    costs were simply unsustainable. Instead, competition among
    brand manufacturers quickly drove deep discounts averaging 40
    percent to 65 percent off the list price.\23\ Express Scripts
    now states that their aggressive negotiations have saved
    Americans $4 billion, cured more patients with hepatitis C than
    any time in history, and that the discounted price makes it
    affordable to treat all patients with the infection.\24\
    ---------------------------------------------------------------------------
        \23\  What Gilead's Big Hepatitis C Discounts Mean for Biosimilar
    Pricing. Drug Channels. February 5, 2015.http://www.drugchannels.net/
    2015/02/what-gileads-big-hepatitis-c-discounts.html
        \24\  Express Scripts. The $4 Billion Return on a Promise Kept.
    January 27, 2015.http://lab.expressscripts.com/lab/insights/specialty-
    medications/the-4-billion-return-on-a-promise-kept
    ---------------------------------------------------------------------------
        Prior to the launch of PCSK9 inhibitors, a new type of
    cholesterol lowering medicine that represents a significant
    advance in treatment of heart disease, PBMs made alarming
    claims about their cost, projecting up to $150 billion to $200
    billion per year in spending for these medicines.\25\ CMS'
    Office of the Actuary, however, projected a much more modest
    impact, based on expected competition leading to discounts and
    continued widespread use of generic statins.\26\ The Actuary's
    refusal to accept these inflated claims proved to be the right
    approach. In fact, PBMs quickly made deals to cover both of the
    brand competitors on the market and emphasized that the drugs'
    cost is ``far lower than industry forecasts.''\27\ New research
    shows that PBMs have also effectively used strict prior
    authorization and high cost-sharing requirements to suppress
    utilization of these medicines, resulting in less than one-
    third of patients prescribed a PCSK9 inhibitor being able to
    access therapy.\28\
    ---------------------------------------------------------------------------
        \25\  Shrank W, Lotvin A, Singh S, Brennan T. In the Debate About
    Cost and Efficacy, PCSK9 Inhibitors May Be The Biggest Challenge Yet.
    Health Affairs Blog. February 17, 2015.http://healthaffairs.org/blog/
    2015/02/17/in-the-debate-about-cost-and-efficacy-pcsk9-inhibitors-may-
    be-the-biggest-challenge-yet/
        \26\ 26 Kelly C. U.S. Drug Spending Will Increase 7.6 percent in
    2015, Including PCSK9 Costs-CMS. The Pink Sheet, July 2015.
        \27\  Express Scripts. ``Express Scripts Includes Innovative
    Cholesterol-Lowering Drugs on National Preferred Formulary.'' October
    6, 2015.http://www.prnewswire.com/news-releases/express-scripts-
    includes-innovativecholesterol-lowering-drugs-on-national-preferred-
    formulary-300155222.html
        \28\  Navar AM, Taylor B, Mulder H, et al. Association of Prior
    Authorization and Out-of-Pocket Costs With Patient Access to PCSK9
    Inhibitor Therapy. JAMA Cardiology. Published online September 27,
    2017. doi:10.1001/jamacardio.2017.3451.
    ---------------------------------------------------------------------------

     a complex distribution and payment system shapes the prices patients,
               health plans, and the government pay for medicines

        The process by which prescription medicines move from
    biopharmaceutical manufacturers to patients involves multiple
    stakeholders and numerous financial transactions. This process
    has evolved significantly in recent years, as supply chain
    entities have grown to play a larger role in drug distribution
    and payment. Wholesalers, pharmacies, plan sponsors, and
    patients all pay different prices for medicines, and the amount
    that is ultimately paid is determined by confidential
    negotiations between stakeholders. Many discounts provided by
    manufacturers do not flow directly through to the patients
    taking the medicine, and in some cases the full discounts may
    also not flow through to employers or plan sponsors.\29\
    ---------------------------------------------------------------------------
        \29\ Midwestern Business Group on Health. Drawing a Line in the
    Sand: Employers Must Rethink Pharmacy Benefit Strategies. September
    2017.https://higherlogicdownload.s3.amazonaws.com/MBGH/4f7f512a-e946-
    4060-9575-b27c65545cb8/UploadedImages/Specialty-percent20Pharmacy/DMJ--
    MBGH--Line--in--the--Sand--RV12--9617.pdf
    ---------------------------------------------------------------------------
        Some manufacturer rebates and discounts are required by
    law, while others are negotiated between biopharmaceutical
    companies and powerful commercial payers, many of which cover
    tens of millions of patients. In recent years, as payers have
    consolidated and competition between brand medicines has
    increased, negotiated rebates and discounts have also grown.
    Multiple data sources indicate that growth in manufacturer
    rebates and discounts has been substantial and that an
    increasing share of these discounts and rebates are retained by
    middlemen involved in distributing and paying for prescription
    medicines.\30\ According to a recent study by the Berkeley
    Research Group, on average, more than a third of the initial
    list price of a medicine is rebated back to insurance
    companies, PBMs and the government, or retained by other
    stakeholders along the biopharmaceutical supply chain.\31\ The
    gap between list prices and net prices is growing every year as
    more of medicine costs are being retained by middlemen in the
    system.
    ---------------------------------------------------------------------------
        \30\ QuintilesIMS Institute. Medicine Use and Spending in the US: A
    Review of 2016 and Outlook to 2021. April 2017; Berkeley Research
    Group. The Pharmaceutical Supply Chain: Gross Drug Expenditures
    Realized by Stakeholder. January 2017; Dross D. Will Point-of-Sale
    Rebates Disrupt the PBM Business? Mercer. July 31, 2017.https://
    www.mercer.us/our-thinking/healthcare/will-point-of-sale-rebates-
    disrupt-the-pbm-business.html
        \31\ Berkeley Research Group. The Pharmaceutical Supply Chain:
    Gross Drug Expenditures Realized by Stakeholder. January 2017.
    ---------------------------------------------------------------------------
        As shown in Figure 1, accounting for the discounts, rebates
    and fees paid to PBMs, payers, and the government, brand
    biopharmaceutical companies realize less than half of total net
    spending on prescription medicines.\32\ Of the $469 billion
    spent on prescription drugs in the U.S. in 2015, brand
    manufacturers realized $219 billion; the remainder went to
    generic manufacturers or was retained as earnings by entities
    along the supply chain and other stakeholders.\33\ The $219
    billion realized by the brand biopharmaceutical industry
    accounts for just 6.8 percent of the $3.2 trillion spent on
    health care overall in the U.S. in 2015.\34\
    ---------------------------------------------------------------------------
        \32\  Ibid.
        \33\  Ibid.
        \34\  Martin AB, Hartman M, Washington B, et al. National Health
    Spending: Faster Growth in 2015 As Coverage Expands and Utilization
    Increases. Health Affairs. 2017;36(1):166-176.

    Figure 1:

     patients do not directly benefit from significant price negotiations
                         happening in the market today

        Savings generated from price negotiations between
    biopharmaceutical companies and payers do not always make their
    way directly to patients facing high cost-sharing for their
    medicines. Unlike care received at an in-network hospital or
    physician's office, health plans base cost sharing for
    prescriptions filled in the deductible or with coinsurance on
    undiscounted list prices, rather than on prices that reflect
    negotiated rebates and discounts. Enrollment in high deductible
    health plans and use of coinsurance for prescription medicines
    has grown sharply in recent years, increasingly exposing
    patients to high out-of-pocket costs based on undiscounted
    prices, creating scenarios in which medicines appear to be more
    costly than other health care services. High cost-sharing is a
    cause for concern, as a substantial body of research clearly
    demonstrates that increases in out-of-pocket costs are
    associated with both lower medication adherence and increased
    abandonment rates, putting patients' ability to stay on needed
    therapies at risk.\35\
    ---------------------------------------------------------------------------
        \35\  IMS Institute for Healthcare Informatics. Emergency and
    Impact of Pharmacy Deductibles: Implications for Patients in Commercial
    Health Plans. September 2015; Doshi JA, Li P, Huo H, et al. High Cost
    Sharing and Specialty Drug Initiation Under Medicare Part D: A Case
    Study in Patients with Newly Diagnosed Chronic Myeloid Leukemia.
    American Journal of Managed Care. 2016;22(4 Suppl):S78-S86; Brot-
    Goldberg ZC, Chandra A, Handel BR, et al. What Does A Deductible Do?
    The Impact of Cost-Sharing on Health Care Prices, Quantities, and
    Spending Dynamics. NBER Working Paper 21632, October 2015; Eaddy MT,
    Cook CL, O'Day K, et al. How Patient Cost-Sharing Trends Affect
    Adherence and Outcomes. Pharmacy & Therapeutics. 2012;37(1):45-55.
    ---------------------------------------------------------------------------
        Over the past 10 years, patient cost-sharing has risen
    substantially faster than health plan costs. For workers with
    employer-sponsored health insurance, out-of-pocket spending for
    deductible and coinsurance payments increased by 230 percent
    and 89 percent, respectively, compared to a 56 percent increase
    in payments by health plans.\36\ Whereas cost-sharing for
    prescription medicines once consisted almost entirely of
    copays, use of deductibles and coinsurance has increased
    rapidly. For example, the share of patient out-of-pocket drug
    spending represented by coinsurance more than doubled over the
    past 10 years in the commercial market, while the share
    accounted for by deductibles tripled.\37\ The growing use of
    deductibles and coinsurance for prescription medicines creates
    affordability challenges for many patients. Patients enrolled
    in high deductible health plans may be asked to pay thousands
    of dollars out-of-pocket before any of their prescriptions are
    covered, while patients with coinsurance are responsible for as
    much as 30 percent to 40 percent of the total cost of their
    medicines.
    ---------------------------------------------------------------------------
        \36\  Claxton G, Levitt L, Long M, et al. Increases in Cost-Sharing
    Payments Have Far Outpaced Wage Growth. Peterson-Kaiser Health System
    Tracker. October 4, 2017.https://www.healthsystemtracker.org/brief/
    increases-incost-sharing-payments-have-far-outpaced-wage-growth/#item-
    start
        \37\  Claxton G, Levitt L, Long M. Payments for Cost Sharing
    Increasing Rapidly Over Time. Peterson-Kaiser Health System Tracker.
    April 2016.http://www.healthsystemtracker.org/insight/examining-high-
    prescription-drugspending-for-people-with-employer-sponsored-health-
    insurance/
    ---------------------------------------------------------------------------
        Due to the growing gap between list and net prices,
    patients' cost sharing for medicines is increasingly based on
    prices that do not reflect plan sponsors' actual costs. For
    example, market analysts report that negotiated discounts and
    rebates can lower the net price of insulin by up to 50 percent
    to 70 percent, yet health plans require patients with
    deductibles to pay the full undiscounted price. As a result, a
    patient in a high-deductible health plan who pays the list
    price each month for insulin maybe paying hundreds--or even
    thousands--more annually than their insurer. Analysis by
    Amundsen Consulting shows that more than half of patients' out-
    of-pocket spending for brand medicines is based on the list
    price of the medicine, even though their health insurer may be
    receiving a steep discount.\38\
    ---------------------------------------------------------------------------
        \38\  Amundsen Consulting. Commercially Insured Patients Pay
    Undiscounted List Prices for One In Five Brand Prescriptions,
    Accounting for Half of Out-of-Pocket Spending on Brand Medicines. March
    2017.http://www.phrma.org/report/commercially-insured-patients-pay-
    undiscounted-list-prices-for-one-in-five-brand-prescriptions-
    accounting-for-half-of-out-of-pocket-spending-brand-medicines
    ---------------------------------------------------------------------------
        Health plans typically use some portion of negotiated
    rebates to reduce premiums for all enrollees, rather than to
    directly lower costs for patients facing high cost-sharing due
    to deductibles and coinsurance. According to one actuarial
    firm, this results in a system of ``reverse insurance,''
    whereby payers require patients with high drug expenditures to
    pay more out-of-pocket, while rebate savings are spread out
    among all health plan enrollees in the form of lower premiums.
    \39\ Asking sicker patients with high drug costs to subsidize
    premiums for healthier enrollees is the exact opposite of how
    health insurance is supposed to work.
    ---------------------------------------------------------------------------
        \39\  Girod CS, Hart SK, Weltz S. 2017 Milliman Medical Index. May
    2017.http://www.milliman.com/uploadedFiles/insight/Periodicals/mmi/
    2017-milliman-medical-index.pdf
    ---------------------------------------------------------------------------
        Some patients also end up paying more at the pharmacy
    counter when they use their insurance, not knowing that their
    prescriptions would be cheaper if they were paying in cash.
    Many PBM contracts require pharmacies to charge patients the
    exact amount negotiated between the PBM and the pharmacy, even
    if that amount exceeds what the pharmacy would charge to a
    patient without insurance. Gag-clauses in PBM contracts
    prohibit pharmacists from informing insured patients about the
    lower cash price, at the risk of the pharmacy being excluded
    from the PBM's network. In these instances, pharmacies must
    instead overcharge patients, requiring them to pay the full
    amount of their copayment, over and above the actual cost of
    the medication. These overpayments are then ``clawed back''
    from the pharmacy by the PBM.\40\
    ---------------------------------------------------------------------------
        \40\  Hopkins JS. You're Overpaying for Drugs and Your Pharmacist
    Can't Tell You. Bloomberg. February 24, 2017.https://www.bloomberg.com/
    news/articles/2017-02-24/sworn-to-secrecy-drugstores-stay-silent-as-
    customers-overpay
    ---------------------------------------------------------------------------

     pbms negotiate lower medicine prices for health plans and employers,
                 but don't always pass along all of the savings

        PBMs commonly retain a portion of the rebates they
    negotiate on behalf of their health plan and employer clients.
    While the remainder of the rebates are generally passed on to
    plan sponsors, smaller employers and health plans may not
    benefit from all of the price concessions the PBM has
    negotiated with manufacturers, particularly if the PBM decides
    not to define certain fees or other concessions as ``rebates.''
    For example, one benefits consultant has observed that PBMs are
    increasingly changing the contractual definition of rebates to
    exclude certain administrative fees, allowing the PBM to retain
    these payments rather than passing them back to the plan
    sponsor. These administrative fees can be as high as 25 percent
    to 30 percent of the total rebate negotiated with the
    manufacturer and are often not reported to the plan sponsor by
    the PBM.\41\
    ---------------------------------------------------------------------------
        \41\  Dross D. Will Point-of-Sale Rebates Disrupt the PBM Business?
    Mercer. July 31, 2017.https://www.mercer.us/our-thinking/healthcare/
    will-point-of-sale-rebates-disrupt-the-pbm-business.html
    ---------------------------------------------------------------------------
        In addition to the rebates they negotiate with
    biopharmaceutical companies, PBMs are increasingly requiring
    that if a medicine's list price increases by more than a
    certain percentage, the manufacturer must provide an additional
    price protection rebate reimbursing the PBM for all price
    increases above the threshold. Lack of transparency in
    contracts between employers and PBMs has led many plan sponsors
    to question the share of rebate savings being passed through,
    how much the PBM is retaining for administrative fees, and
    whether the PBM is disclosing and passing on other price
    concessions, such as savings from price protection rebates.\42\
    ---------------------------------------------------------------------------
        \42\  Midwestern Business Group on Health. Drawing a Line in the
    Sand: Employers Must Rethink Pharmacy Benefit Strategies. September
    2017.https://higherlogicdownload.s3.amazonaws.com/MBGH/4f7f512a-e946-
    4060-9575-b27c65545cb8/UploadedImages/Specialty percent20Pharmacy/DMJ--
    MBGH--Line--in--the--Sand--RV12--9617.pdf
    ---------------------------------------------------------------------------
        Both the portion of the rebate retained by the PBM and the
    administrative fees they charge their clients are typically
    based off of a percentage of a medicine's list price.
    Accordingly, some PBMs may prefer that their formularies
    include medicines with high list prices and large rebates,
    rather than medicines with a lower list price. In its most
    recent report to Congress, the Medicare Payment Advisory
    Commission discussed incentives that may drive Part D plan
    sponsors to give formulary preference to medicines with large
    rebates, rather than lower cost alternatives.\43\ These
    incentives arise because sizable portions of the Part D benefit
    are not paid for by plan sponsors (e.g., beneficiaries and
    manufacturers pay for the majority of costs in the coverage
    gap). Similarly, the Centers for Medicare & Medicaid (CMS) has
    noted that coverage of medicines with high list prices and
    large rebates ``ease[s] the financial burden borne by Part D
    plans essentially by shifting costs to the catastrophic phase
    of the benefit, where plan liability is limited.''\44\
    ---------------------------------------------------------------------------
        \43\  Medicare Payment Advisory Commission. Status Report on the
    Medicare Prescription Drug Program (Part D). March 2017.http://
    medpac.gov/docs/default-source/reports/mar17--entirereport.pdf
        \44\  Centers for Medicare & Medicaid. Medicare Part D--Direct and
    Indirect Remuneration (DIR). January 19, 2017. https://www.cms.gov/
    Newsroom/MediaReleaseData base/Fact-sheets/2017-Fact-Sheet-items/2017-
    01-19-2.html
    ---------------------------------------------------------------------------

     hospital markups on medicines increase cost-sharing for commercially
                                insured patients

        The pharmaceutical distribution and payment process differs
    for medicines administered in a physician office or health care
    facility vs. those purchased at a pharmacy. Providers typically
    purchase medicines directly, often through a Group Purchasing
    Organization (GPO). After the physician administers the
    medicine to the patient, the patient's insurance reimburses the
    provider for the cost of the medicine as part of the patient's
    coverage for medical care.
        The amount that providers charge for medicines and how much
    insurers pay varies widely based on where the medicine is
    administered to the patient. For example, commercial insurers
    often pay hospital outpatient departments twice as much as
    physician offices for administering the exact same medicines,
    including for diseases such as cancer or autoimmune
    disorders.\45\ This is because large hospitals can demand much
    higher prices from commercial insurers than small physician
    practices. The Senior Vice President of Oncology and Genetics
    at UnitedHealthcare described the effect for chemotherapy
    treatment at high profile cancer centers: ``Put simply, the
    hospitals are saying, `If you want our beds, you have to take
    our prices for oncology treatment.''\46\
    ---------------------------------------------------------------------------
        \45\  Magellan RX Management. Medical Pharmacy Trend Report: 2016
    Seventh Edition. March 2017.
        \46\  Newcomer LN. Those Who Pay Have A Say: A View On Oncology
    Drug Pricing and Reimbursement. The Oncologist. 2016;21(7):779-81.
    ---------------------------------------------------------------------------
        The results of hospital markups are astounding. Recent
    research shows that for 20 medicines administered in hospital
    outpatient departments, hospitals charge prices that are on
    average nearly five times higher than their acquisition costs
    and are reimbursed up to three and a half times their
    acquisition cost by commercial insurers.\47\ For a vast
    majority of the medicines included in the analysis, this means
    that the manufacturer--who made the substantial time and R&D
    investments including clinical trials necessary to develop the
    treatment--was paid less for the medicine than the hospital.
    ---------------------------------------------------------------------------
        \47\  The Moran Company. Hospital Charges and Reimbursement for
    Drugs: Analysis of Markups Relative to Acquisition Cost. October 2017.
    ---------------------------------------------------------------------------
        Hospital markups on prescription medicines have a
    substantial effect not just on overall healthcare costs, but
    also on patient affordability. For patients with commercial
    insurance, coinsurance is the most common form of cost-sharing
    for provider-administered medicines, which means that the
    amount the patient must pay is equal to a percentage of the
    total price the insurer reimburses the provider for the
    medication. So, when a hospital is paid two or three times the
    acquisition cost for a medicine, patients are also paying
    higher coinsurance. As the same United insurance executive
    quoted above noted ``it is immoral to force vulnerable patients
    to pay triple-digit mark-ups because they have cancer.''\48\
    ---------------------------------------------------------------------------
        \48\  Newcomer LN. Those Who Pay Have A Say: A View On Oncology
    Drug Pricing and Reimbursement. The Oncologist. 2016;21(7):779-81.
    ---------------------------------------------------------------------------

     market distortions created by the 340b program lead to higher health
                                   care costs

        The 340B program, a program originally intended to provide
    discounts on medicines for safety-net providers, is
    contributing to higher health care costs and economists suspect
    that it is also leading to higher list prices for medicines.
    This program started in 1992, and its basic structure has not
    been updated since then, despite dramatic changes in the health
    care system over the past 25 years. The current structure of
    the program is causing higher health care costs for three main
    reasons.
        First, the 340B discount, which is structured as a
    percentage discount, creates incentives for hospitals to earn a
    larger spread from the 340B discounts by prescribing more
    medicines and higher cost medicines. Economists have noted this
    may lead prescribing to ``shift toward more expensive drugs
    because profit margins will in general be larger.''\49\ A 2015
    Government Accountability Office study found evidence that 340B
    was leading to the prescribing of more drugs and more expensive
    drugs for Medicare patients.\50\
    ---------------------------------------------------------------------------
        \49\  Conti R, Bach P. Cost Consequences of the 340B Drug Discount
    Program. Journal of the American Medical Association.
    2013;309(19):1995-1996.
        \50\  Government Accountability Office. Medicare Part B Drugs:
    Action Needed to Reduce Financial Incentives to Prescribe 340B Drugs at
    Participating Hospitals. GAO-15-442, June 2015.
    ---------------------------------------------------------------------------
        Second, evidence suggests the 340B program shifts care to
    more expensive and less convenient settings. Government reports
    suggest that hospitals are taking advantage of guidance that
    has not been revisited since 1994 which allows hospitals to
    obtain more 340B discounts by buying community-based physician
    practices, so that prescriptions written by those physicians
    then qualify for 340B discounts.\51\ As a result, patients are
    left with fewer community-based provider options and are pushed
    into higher cost hospital-based settings. Analysis by the IMS
    Institute for Healthcare Informatics found that average costs
    for administering cancer drugs are typically twice as high at
    hospital outpatient departments compared to community-based
    oncologists, which can lead to ``higher patient cost
    responsibility.''\52\ Researchers from Memorial Sloan Kettering
    have noted 340B is helping to drive consolidation of physician
    practices into hospitals, and that in the absence of reforms
    ``the trend toward consolidation will continue to drive up the
    cost of commercial insurance...''\53\
    ---------------------------------------------------------------------------
        \51\  59 Federal Register 47884.
        \52\  IMS Institute for Healthcare Informatics. Global Oncology
    Trend Report: A Review of 2015 and Outlook to 2020,June 2016.
        \53\  Bach P and Jain RH. Physician's Office and Hospital
    Outpatient Setting in Oncology: It's About Prices, Not Use. Journal of
    Oncology Practice 2017; 13(1), 4-5.
    ---------------------------------------------------------------------------
        Third, the scale of the program as well as its rapid growth
    may be affecting market prices for prescription drugs. In 2015,
    roughly 45 percent of all hospitals participated in 340B.\54\
    In an analysis of prescription drug pricing published in the
    New England Journal of Medicine, economists at Harvard
    University and the University of Chicago concluded that
    ``lawmakers could lower the price of prescription drugs by
    reforming the Federal 340B Drug Pricing Program. [...]The scope
    of the 340B program is currently so vast for drugs that are
    commonly infused or injected into patients by physicians that
    their prices are probably driven up for all consumers''
    (emphasis added).\55\ Another study in JAMA noted that list
    prices for drugs are likely higher than they otherwise would be
    ``to offset revenue losses incurred as a larger number of drug
    sales become eligible for 340B discounts (and thus fewer drugs
    are sold at full price).''\56\ Certain drug classes are
    disproportionately impacted by the 340B program. Thus, the
    price distorting impact may be concentrated in certain
    therapeutic areas, such as medicines for cancer. For example,
    sales to 340B hospitals account for 33 percent of all Medicare
    Part B reimbursement for certain types of cancer drugs.\57\
    ---------------------------------------------------------------------------
        \54\  Medicare Payment Advisory Commission. Report to the Congress:
    Overview of the 340B Drug Pricing Program. May 2015.
        \55\  Conti R and Rosenthal M. Pharmaceutical Policy Reform--
    Balancing Affordability with Incentives for Innovation. New England
    Journal of Medicine. 2016; 374:703-706.
        \56\  Conti R, Bach P. Cost Consequences of the 340B Drug Discount
    Program, Journal of the American Medical Association.
    2013;309(19):1995-1996.
        \57\  Drugs sold to 340B hospitals account for 33 percent of all
    Part B reimbursement for breast cancer and multiple myeloma drugs.
    Vandervelde A and Blalock E. Measuring the Relative Size of the 340B
    Program: 2012-2017. Berkeley Research Group, July 2017.
    ---------------------------------------------------------------------------

      market-based approaches are the best solution for addressing health
                    care affordability and controlling costs

        The competitive U.S. health care market provides a sound
    framework for balancing and supporting patient access, cost
    containment, and continued progress for patients. Meaningful
    efforts to address the cost of prescription medicines must
    include all stakeholders in the supply chain, including
    biopharmaceutical companies, PBMs, health plans, wholesalers,
    hospitals, and pharmacies. Policies targeted solely at brand
    manufacturers--which account for just half of total net
    spending on prescription medicines and just 6.8 percent of
    total U.S. health care spending--are insufficient for
    addressing broader health care sustainability challenges and
    risk diminishing the incentives for future innovation.
        Strategies for strengthening and enhancing the competitive
    market include encouraging payers to share negotiated savings
    with patients at the pharmacy; reforming outdated regulations
    hindering the adoption of value-based payment arrangements;
    reforming the 340B drug discount program, which is distorting
    the market, so that it better serves the purpose for which it
    was created; and continuing to modernize the Food and Drug
    Administration (FDA) and assure that there is robust generic
    and biosimilar competition once a brand medicine loses its
    exclusivity.

                    sharing negotiated savings with patients

        Changes in insurance coverage for prescription medicines,
    and the growing use of deductibles and coinsurance in
    particular, have created affordability challenges for many
    patients. Health plans should be encouraged to directly pass on
    more of the savings from negotiated rebates in the form of
    lower patient out-of-pocket costs, just like they do for other
    types of health care services. This should be executed in a way
    that maintains the confidentiality of proprietary pricing
    information that the Federal Trade Commission has identified as
    important to the effective functioning of competitive markets.
    Payers have begun to recognize that using the undiscounted
    price of a medicine to set cost-sharing is problematic for
    patients: recent statements from the two largest PBMs note that
    high deductibles for medicines put patients in a ``very
    difficult position'' and indicate that sharing rebate savings
    directly with patients should be considered as a ``best
    practice.''\58\ Actuarial research indicates that sharing
    negotiated savings could save certain commercially insured
    patients enrolled in plans with high deductibles and
    coinsurance between $145 and $800 annually, while increasing
    premiums by 1 percent or less.\59\
    ---------------------------------------------------------------------------
        \58\  Seeking Alpha. Express Scripts Holding (ESRX) Q4 2016
    Results--Earnings Call Transcript. February 15, 2017.http://
    seekingalpha.com/article/4046365-express-scripts-holding-esrx-q4-2016-
    results-earnings-call-transcript; Seeking Alpha. CVS Health (CVS) Q4
    2016 Results--Earnings Call Transcript. February 9, 2017.http://
    seekingalpha.com/article/4044425-cvs-health-cvs-q4-2016-results-
    earnings-call-transcript?part=single
        \59\  Bunger A, Gomberg J, Petroske J. Sharing Rebates May Lower
    Patient Costs and Likely Has Minimal Impact on Premiums. October 12,
    2017. http://www.phrma.org/report/point-of-sale-rebate-analysis-in-the-
    commercial-market
    ---------------------------------------------------------------------------
        To help patients afford their medicines, biopharmaceutical
    companies have entered into partnerships with third parties,
    such as Blink Health and GoodRx, to offer discounted prices
    directly to patients, outside of their insurance benefit.\60\
    Encouraging health plans to allow the cost of prescriptions
    purchased through these third-party programs to count toward
    patients' deductibles and maximum out-of-pocket spending limits
    would further reduce patient affordability barriers.
    ---------------------------------------------------------------------------
        \60\  Thomas K. New Online Tools Offer Path to Lower Drug Prices.
    New York Times. February 9, 2016.https://www.nytimes.com/2016/02/10/
    business/taming-drug-prices-by-pulling-back-the-curtain-online.html
    ---------------------------------------------------------------------------
        Copay assistance programs offered by biopharmaceutical
    companies provide another valuable source of assistance for
    many commercially insured patients who are struggling to afford
    their out-of-pocket costs, as do manufacturer-sponsored patient
    assistance programs that help underinsured and uninsured
    patients obtain the medicines they need for free or nearly
    free. Recent efforts by health plans to restrict use of copay
    assistance programs, including no longer counting the full
    amount patients are asked to pay out-of-pocket toward their
    deductibles or out-of-pocket maximums, unfairly penalize
    patients and threaten their ability to stay on needed
    medicines.

     reforming outdated regulations hindering the adoption of value-based
                              payment arrangements

        Changes in the science and pressures for cost containment
    in the competitive market are driving rapid evolution of
    payment and care delivery systems, and biopharmaceutical
    companies are playing a role in this transformation. As
    therapies become more personalized, and as the health care
    market moves away from fee-for-service care and toward more
    integrated care systems, biopharmaceutical companies are
    increasingly partnering with payers to develop new types of
    payment arrangements that reward improvements in care and
    better health outcomes for patients.
        Yet while the science and market are moving rapidly,
    efforts to develop new ways to pay for medicines have been
    slowed by regulations designed for an earlier era. Such
    regulations can have the unintended consequence of making it
    more difficult for payers to prioritize results that matter to
    patients, and for biopharmaceutical companies to increase the
    amount of risk they share with payers. For example:

         LAmbiguity in FDA rules governing manufacturer
    communications about their medicines can prevent
    biopharmaceutical companies from entering into contracts based
    on the ability of their medicine to reduce hospitalizations or
    other medical services, since those contracts might be
    perceived as promoting the medicines for an unapproved
    indication.

         LLack of clarity in the anti-kickback statute
    (AKS) can inhibit value-based contracts due to lack of
    certainty as to whether contracts fit within existing safe
    harbors and exceptions. By revising the AKS regulations to add
    a value-based contracting safe harbor, policymakers can
    facilitate private payers and manufacturers to expand the use
    of value-based contracts as a solution to health care
    affordability and controlling drug costs.

         LPrice reporting rules such as Medicaid Best Price
    can limit the amount of risk biopharmaceutical companies share
    with payers within a value based arrangement, because any
    increased discount beyond the statutory minimum must be offered
    not only to that payer, but also to all of Medicaid. Exempting
    value-based arrangements from existing technical and complex
    Best Price, Average Manufacturer Price, and potentially Average
    Sales Price requirements to reflect a modern and flexible
    approach to price reporting would foster expansion of
    innovative contracting arrangements.

                              modernizing the fda

        As the pace of scientific discovery accelerates, it is
    critical to assure that our regulatory infrastructure keeps up
    with the science and that FDA regulations are up-to-date,
    practical, clear and not overly burdensome to foster
    efficiency, predictability, and the ability of
    biopharmaceutical companies to innovate and bring new medicines
    to patients. The Committee's recent action to reauthorize the
    Prescription Drug User Fee Act creates a solid foundation not
    only to accelerate approval of new life-saving treatments, but
    also assure that there is robust generic and biosimilar
    competition. We thank the Committee for its rapid and
    bipartisan action.
        Accelerating the introduction of new medicines allows the
    forces of private market competition to keep costs in check and
    increases the number lifesaving drugs becoming available to
    patients. Importantly, key provisions of the prescription drug,
    biosimilar, and generic drug user fee acts will help to
    eliminate the generic drug application backlog, increase
    resources to prevent future backlogs, and to streamline the
    review process and enhance FDA's expertise related to drug-
    device combination products, an area in which regulatory
    uncertainties and delays have previously deterred brand and
    generic manufacturers from investments. Additional
    opportunities to improve competition include finalizing FDA
    guidances related to biosimilars and enhancing incentives for
    generic manufacturers to enter the marketplace where there are
    no intellectual property or regulatory incentives preventing
    generic entry but, due to small patient population sizes, there
    are no brand or generic competitors. Increased competition from
    generics could be spurred by waiving user fees for eligible
    products, providing a transferable generic drug priority review
    voucher, and expediting review of such products and the
    inspection of their facilities.
        Finally, the FDA can further spur efficiency in the market
    and free up scarce resources through elimination of certain
    outdated regulations. For example, regulations requiring
    biopharmaceutical companies to submit postmarketing reports in
    a format unique to the U.S. are inefficient and burdensome and
    provide no appreciable benefit compared to the format used
    globally. A more logical approach for submission of
    postmarketing reports would be to streamline the formats.
    Similarly, requiring biopharmaceutical companies to submit all
    promotional materials to the FDA at the time of dissemination--
    even if only minor, non-substantive changes have been made to
    previously submitted pieces--results in submission of thousands
    of pieces per company per year with no benefit to public
    health.

                    reforming the 340b drug discount program

        To protect the health care safety net it is critical to
    ensure that the underlying market works. The 340B program needs
    both congressional and administrative updates to help prevent
    it from continuing to raise costs for consumers and the overall
    health care system. Stronger rules for hospitals participating
    in the program will help ensure the program targets the
    patients and true safety-net facilities it was intended to
    help. Specific reforms for hospitals participating in the
    program should include stricter 340B eligibility criteria,
    limits on contract pharmacy arrangements, requirements that
    patients see a benefit from the program, a tighter definition
    of patient eligibility, and limits on which hospital-owned
    physician practices can participate in 340B.

        assuring robust competition and continuing to modernize the fda

        Economists have reinforced the critical role of boosting
    competition to address drug cost and access issues. To increase
    competition:
         LKey provisions of the prescription drug,
    biosimilar, and generic drug user fee acts will spur
    competition, including policies to eliminate the generic drug
    application backlog and increased resources to prevent future
    backlogs, expand FDA's expertise related to drug----device
    combination products, and reduce the regulatory uncertainty and
    streamline review of drug-device combination products.
    Biopharmaceutical companies have stated that current regulatory
    uncertainties and delays have deterred both generic and brand
    manufacturers from investments in these areas.
         LReducing the length and increasing the efficiency
    of drug development will increase competition on both price and
    clinical effects. Given that the cost of innovator drug
    development has doubled over the past decade, in part due to
    increasing FDA requirements, the Prescription Drug User Fee Act
    includes a range of provisions aimed at reducing uncertainty
    and creating efficiencies in the both the development and
    regulatory review of new medicines. Accelerating the
    introduction of new medicines would allow the forces of private
    market competition to keep costs in check and increase the
    number of lifesaving drugs becoming available to patients.
         LEnhancing incentives for generic manufacturers to
    enter the marketplace in areas where there are no intellectual
    property or regulatory incentives preventing generic entry but
    due to small population sizes there are no brand or generic
    competitors. Increased competition from generics could be
    spurred by waiving user fees for eligible products, providing a
    transferable generic drug priority review voucher, and
    expediting review of such products and the inspection of their
    facilities.
         LFinalizing the various FDA guidances related to
    biosimilars is necessary to reduce regulatory uncertainties for
    biosimliar manufacturers and to accelerate the market entry of
    biosimilars. Biosimilar medicines are an important way to spur
    competition that will lead to more choices for patients and
    lower prices for patients and the health care system.

      sustaining incentives for innovation is critical to solving future
                             health care challenges

        Looking ahead, it is clear that medicines offer some of the
    clearest opportunities to address the challenge of growing
    health care costs as our population ages. For example, the
    number of Alzheimer's cases is projected to increase rapidly
    over the next decade as Baby Boomers begin to reach retirement
    age, resulting in an enormous human and economic cost. If we
    can achieve treatment advances that delay Alzheimer's by just 5
    years beginning a decade from now, 2.5 million fewer Americans
    will be afflicted by the disease and we would avoid $367
    billion annually by 2050 in costs for long-term care and
    similar services for persons with Alzheimer's.\61\ Alzheimer's
    remains a major focus of biopharmaceutical research companies
    despite high risks; since 1998 there have been 123 unsuccessful
    attempts to develop a medicine for Alzheimer's, and just four
    approved medicines.\62\ In just the last 2 years, several
    promising new therapies failed in mid-and late-stage trials,
    resulting in the loss of billions of dollars of human,
    political, and monetary capital.\63\
    ---------------------------------------------------------------------------
        \61\  Alzheimer's Association. ``Changing the Trajectory of
    Alzheimer's Disease: How a Treatment by 2025 Saves Lives and Dollars.''
    https://www.alz.org/documents--custom/trajectory.pdf
        \62\  PhRMA. Researching Alzheimer's Medicines: Setbacks and
    Stepping Stones. Summer 2015. Available at: http://phrma.org/sites/
    default/files/pdf/alzheimers-setbacks-and-stepping-stones.pdf
        \63\  Ogg JC. The List of Failed Alzheimer's Drug Treatments Keeps
    Growing. 24/7 Wall Street. September 26, 2017.http://247wallst.com/
    healthcare-business/2017/09/26/the-list-of-failed-alzheimers-drug-
    treatments-keeps-growing/
    ---------------------------------------------------------------------------
        As with Alzheimer's disease, there is a significant unmet
    medical need for patients with rare diseases which collectively
    affect 30 million Americans. But only 5 percent of these
    diseases have available treatment options.\64\ Given the many
    diseases where there is significant unmet need, maintaining
    incentives for the continued development of new medicines will
    be crucial in addressing the most costly and challenging
    diseases of our time.
    ---------------------------------------------------------------------------
        \64\  Pharmaceutical Research and Manufacturers of America (PhRMA).
    Spurring Innovation in Rare Diseases: 2017 update. http://phrma-
    docs.phrma.org/files/dmfile/Rare-Disease-Udpate--FINAL.pdf.
    ---------------------------------------------------------------------------
        Yet there is evidence that rising costs in drug
    development, combined with an increasingly competitive market,
    have resulted in more uncertainty and lower average returns in
    recent years. Analysis by a Massachusetts Institute of
    Technology economist and the IMS Institute finds that
    increasing market competition has eroded much of the economic
    profitability of newly launched brand medicines, such that on
    average financial returns for medicines launched between 2005
    and 2009 were insufficient to recoup average R&D and operating
    costs.\65\
    ---------------------------------------------------------------------------
        \65\  Berndt ER, Nass D, Kleinrock M, Aitken M. Decline in Economic
    Returns from New Drugs Raises Questions About Sustaining Innovations.
    Health Affairs. 2015;34(2):245-252.
    ---------------------------------------------------------------------------
        Even drugs that succeed at launch may quickly be supplanted
    as other new brand competitors enter the market, as occurred
    with first generation HCV medicines. For example, despite
    initial success, two protease inhibitors launched in 2011--seen
    at the time as substantial advances in treatment for HCV--found
    that they were supplanted by more effective treatments
    following the introduction of the next generation of medicines
    in 2013. Thus, despite substantial investment and many years of
    research and development, competition from newer brands led
    these medicines to be withdrawn from the market within 2
    years.\66\ This underscores the extraordinary risk
    biopharmaceutical companies confront to bring new treatments to
    market.
    ---------------------------------------------------------------------------
        \66\  Loftus P. Merck Will No Longer Sell its Victrelis Hepatitis C
    Drug in the US. Wall Street Journal, Jan 21, 2015.http://blogs.wsj.com/
    pharmalot/2015/01/21/merck-will-no-longer-sell-its-victrelis-hepatitis-
    c-drug-in-the-u-s/
    ---------------------------------------------------------------------------

                     [summary statement of lori m. reilly]

        Innovative medicines represent significant scientific
    advancements that transform the treatmentand the downstream
    healthcare costs of complex and costly diseases. Despite the
    unparalleledsavings and value medicines generate for the health
    care system, spending on medicines is ofteninaccurately
    portrayed as growing rapidly and driving increases in overall
    health care spending.Discussions about the cost of medicines
    almost always focus on list prices, which provide amisleading
    view of actual spending trends because they do not factor in
    the substantial rebatesand discounts that PBMs and health plans
    negotiate with biopharmaceutical companies or thestatutory
    rebates, discounts, and fees companies are required to provide
    to government programs.Accounting for these rebates and
    discounts, net spending on medicines is growing at the
    slowestrate in years.
        A complex distribution system shapes the prices that
    patients, plan sponsors, and the governmentpay for medicines.
    This system has evolved significantly in recent years, and an
    increasing shareof the discounts and rebates negotiated between
    biopharmaceutical companies and payers areretained by middlemen
    along the pharmaceutical supply chain. Savings generated from
    pricenegotiations aren't always passed along directly to
    patients, who are increasingly exposed to highout-of-pocket
    costs for medicines because of the growing use of high
    deductibles andcoinsurance rather than fixed dollar copays.
        Unlike for care received at an in-network hospital or
    physician's office, cost-sharing forprescriptions filled in the
    deductible or with coinsurance is based on the list price,
    rather than aprice that is reflective of the rebates and
    discounts negotiated by payers. When a patient's costsharingis
    based on a price that does not reflect their health plan's
    actual costs, that patient canend paying hundreds-or even
    thousands-more annually for a medicine than their insurer.More
    than half of patients' out-of-pocket spending for brand
    medicines is based on the list price,even though their insurers
    may be receiving a steep discount.
        Within the framework of the competitive U.S. health care
    market, there are several steps thatcould improve patients'
    access to medicines, increase affordability for purchasers and
    patients,and support continued progress for patients. These
    include encouraging payers to sharenegotiated savings with
    patients at the pharmacy counter; reforming outdated
    regulationshindering the adoption of value-based payment
    arrangements, reforming the 340B drug discountprogram to better
    serve the purpose for which it was created; and continuing to
    modernize theFDA and ensure robust generic and biosimilar
    competition.
                                    ------

        The Chairman. Thank you, Ms. Reilly.
        Mr. Davis, welcome.

                STATEMENT OF CHESTER ``CHIP'' DAVIS, JR.

        Mr. Davis. Thank you, Chairman Alexander, Ranking Member
    Murray, and Members of the Committee. I very much appreciate
    the invitation to testify here today.
        The Association for Accessible Medicines is the Nation's
    leading trade association for manufacturers of FDA-approved
    generic prescription drugs. Our members actually manufacture
    more than 90 percent of all the generic pharmaceuticals
    dispensed in the United States, providing tens of thousands of
    jobs in over 150 facilities throughout the country, and
    manufacture more than 61 billion doses of medication every year
    here in the United States.
        AAM's core mission is to improve the lives of patients by
    advancing timely access to affordable generic and biosimilar
    medications.
        On behalf of our members, let me begin by thanking the
    Committee for convening today's hearing to examine the critical
    challenge of rising drug prices and for your leadership in
    reauthorizing all the User Fee Programs earlier this year, most
    particularly for our interest, the Generic and Biosimilar User
    Fee Programs.
        Generic medicines currently represent, as the Chairman
    said, almost 90 percent--actually 89 percent--of all
    prescriptions dispensed in the U.S. But, importantly, we
    account for only 26 percent of all expenditures on prescription
    drugs, saving patients and payers nearly $5 billion every week.
    Last year, use of generic medicines saved $253 billion to the
    U.S. healthcare system. That translates into meaningful patient
    access.
        Generics actually operate currently in a deflationary
    market, not an inflationary market, and that is an important
    context. Consider that in the past 12 months, prescriptions of
    brands have gone down by 7 percent while their revenue has
    increased slightly. By contrast, generic prescriptions have
    actually gone up. They're up 2 percent year over year, while
    revenue has declined by 13 percent.
        It is easy to recognize the significant difference between
    generic and brand name prescription drugs when it comes to
    prices that we often see at the pharmacy counter. The dramatic
    difference, however, in how brand and generic drug markets
    operate is not as widely understood.
        When generics enter to provide competition to a brand
    monopoly, payers typically shift away from the rebate model of
    reimbursement that you often hear about and rely on
    distribution channels to effectively lower the price of
    medicine. Generics, therefore, compete for sales, and because
    the products are identical, commonly, the only leverage the
    generic manufacturers have is their ability to lower price and
    guarantee volume. This creates fierce competition in the
    marketplace amongst our members, which, in turn, causes prices
    to decline.
        The reality is that the markets for brands and generics are
    very different, monopolized versus commoditized, and these
    differences create vastly different incentives for all the
    stakeholders in the supply chain. This reality was most
    recently examined and affirmed through a report issued by the
    University of Southern California Center for Health Policy and
    Economics entitled ``The Flow of Money Through the
    Pharmaceutical Distribution System.'' Among the findings was
    that supply chain stakeholders capture significantly more
    revenue spent on generics than they do on brands. In fact, for
    every $100 spent on dispensing a generic medicine in this
    country, approximately $65 goes to the distribution and
    reimbursement of those products by members of the supply chain.
        In today's market, consolidation in the wholesaler and
    distributor market and arrangements between pharmacy chains and
    distributors have left generic manufacturers with a very small
    number of very large-scale purchasers. Essentially, three
    purchasers today account for 90 percent of all sales from all
    generic manufacturers.
        Ultimately, a market that has three large-scale purchasers
    is going to see significant compression and consolidation on
    the supply side, which is our side. Fewer generic manufacturers
    running the risk of marketing smaller portfolios can easily
    translate into less competition, not more, while simultaneously
    increasing the risk of drug shortages, a scenario none of us
    want to see happen.
        As this Committee has identified and reflected in the title
    of this hearing, how do these realities affect what patients
    pay, and what does it mean for them moving forward? So we all
    know 30 years ago, Hatch-Waxman created a remarkably strong
    system designed to balance innovation and access. But that
    system can only function if there is robust competition amongst
    buyers and sellers, and that system can only work if generic
    companies can get the drug samples they need to do the
    pharmacovigilance and start the FDA application and approval
    process, which this Committee has spearheaded efforts to
    accelerate and reform. That system only works when generic
    medicines have the ability to enter the market when patents and
    other IP protections are actually supposed to expire, and,
    ultimately, that system works when public policy doesn't favor
    one side of the access and innovation equation at the expense
    of the other.
        In closing, we all know that something must be done about
    prescription drug prices. Given the fact that the new FDA
    Commissioner, Dr. Scott Gottlieb, has characterized drug cost
    as a public health concern, AAM respectfully submits that
    Congress has the opportunity to consider policies that will
    enhance generic and biosimilar competition. We have provided
    those in our written testimony, and I look forward to answering
    your questions as we move forward.
        Thank you.
        [The prepared statement of Mr. Davis follows:]

               Prepared Statement of Chester ``Chip'' Davis, Jr.

        Chairman Alexander, Ranking Member Murray and Members of
    the Committee:
        Thank you for the invitation to testify today. I am Chip
    Davis, President and CEO of the Association for Accessible
    Medicines (AAM). AAM is the nation's leading trade association
    for manufacturers and distributors of FDA-approved generic and
    biosimilar prescription medicines. Our members provide more
    than 36,700 jobs at nearly 150 facilities, and manufacture more
    than 61 billion doses in the United States every year. AAM's
    core mission is to improve the lives of patients by advancing
    timely access to affordable generic and biosimilar medications.
        I commend you for convening today's hearing to examine the
    critical challenge of high and rising drug prices.
        Generic medicines represent greater than 89 percent of all
    prescriptions dispensed in the U.S., but only 26 percent of
    expenditures on prescription drugs, saving patients and payers
    nearly $5 billion every week.\1\ Our industry is proud to be
    able to deliver these savings to the healthcare system.
    ---------------------------------------------------------------------------
        \1\  $253 billion total savings in 2016, equivalent to
    approximately $5 billion every week. AAM 2017 Generic Drug Access &
    Savings in the U.S., http://accessiblemeds.org/sites/default/files/
    2017-07/2017-AAM-Access-Savings-Report-2017-web2.pdf.
    ---------------------------------------------------------------------------
        It is sobering to consider what America's patients would
    face if there were no FDA-approved generic or biosimilar
    medicines to provide reliable access to affordable treatments.
    Generics don't just deliver the most medicine at the lowest
    cost and greatest savings; generics cushion the significant
    impact dealt to patients and the healthcare system by high
    brand name drug prices every day.
        Put another way, the availability of low-cost generics
    offsets the impact of high brand drug prices. Whereas prices
    for FDA-approved generic medicines are currently declining by
    over 7 percent year-over-year, prices for brand drugs,
    especially biologics and specialty medicines, are increasing at
    an unsustainable rate. From 2007 to 2016, brand specialty
    medicines grew to occupy almost 43 percent of spending. These
    products treat less than 3 percent of the population, and can
    often cost patients thousands of dollars per treatment.
        To illustrate this fact, consider that in the past twelve
    months, prescriptions of brand drugs have decreased by 7
    percent, but their revenue has climbed by 5 percent. This is a
    direct result of price increases. By contrast, generic
    prescriptions increased by 2 percent, but revenue declined by
    13 percent.\2\
    ---------------------------------------------------------------------------
        \2\  Morgan Stanley: Major Pharma Rx Chart / North America,
    September 2017. https://ny.matrix.ms.com/eqr/article/webapp/89cddeb4-
    96d6-11e7-8a10-
    ce4c0a51e87f?t=1506097268%3A3184%3A22035%3Avmias1106666&m=1&ch=autob#
    ---------------------------------------------------------------------------
        Consider the costs that patients would face in the absence
    of these levels of generic competition. Last year, use of
    generic medicines saved $253 billion. It has produced $1.67
    trillion in savings over the last ten years. This has produced
    meaningful and sustained patient access. Without generic
    medicines, spending on cholesterol drugs would be more than 3.5
    times higher, diabetes drugs almost 3 times higher, and
    spending on breast cancer drugs 8 times higher.\3\
    ---------------------------------------------------------------------------
        \3\  AAM 2017 Generic Drug Access & Savings in the U.S., http://
    accessiblemeds.org/sites/default/files/2017-07/2017-AAM-Access-Savings-
    Report-2017-web2.pdf.
    ---------------------------------------------------------------------------
        However, the sustainability of a competitive generic market
    and the availability of generic medicines for patients,
    uninterrupted by shortages, is in jeopardy. In 1984, Congress
    enacted the Hatch-Waxman Act which represents a model of
    successful, bipartisan public policy. Over its more than
    thirty-year history, the Act has produced a thriving and
    constantly-changing marketplace by balancing innovation in drug
    development and accelerating the availability of lower cost
    generic alternatives. This has important effects on the public
    health, allowing patients to live longer, healthier lives.
        This balance is now threatened by three factors:
         Lchanging and increasingly challenging market and
    reimbursement frameworks,
         Lthe abuse of laws and regulations by bad actors,
    and
         La failure of policy to account for the unique
    challenges facing generic and biosimilar medicines.
        In fact, while brand drug innovation has benefited from a
    series of subsequent laws establishing incentives and
    development tools, the generic and biosimilar marketplace and
    patient access has not received an equivalent level of
    attention. That neglect, combined with current market and
    anticompetitive realities, reinforces why this hearing--and the
    FDA's recent public hearing and the FTC's upcoming public
    meeting on the same issue--are so important.
        Congress must act to support generic and biosimilar
    competition and supply to ensure continued access for patients.
    It can do so by:
         L1. Repealing the misguided Medicaid penalty on generic
    drugs,
         L2. Preventing brand abuses designed to block generic and
    biosimilar competition by passing the bipartisan CREATES Act,
    and
         L3. Ensuring that biosimilar medicines have a level and
    competitive playing field in Medicare.

          generic drug markets are fundamentally different than brands

        First, it is important to provide context about the generic
    marketplace. Not only is the FDA approval process different for
    generics and brand name drugs, but their respective markets and
    the path by which they reach patients diverge significantly,
    with important policy implications.
        The 1984 Drug Price Competition and Patent Term Restoration
    Act, commonly referred to as the ``Hatch-Waxman'' Act, created
    an abbreviated pathway for generic drugs. This allows
    manufacturers to rely upon the existing clinical data of the
    brand product and demonstrate to FDA that their product is the
    same as the reference product.
        Hatch-Waxman also provided numerous lucrative incentives
    for brand name drug companies, including extensions of patent
    terms, regulatory exclusivities that guarantee market
    monopolies regardless of the intellectual property status, and
    a clear litigation pathway for asserting intellectual property
    claims against generic manufacturers.

                          differences in supply chain

        The balance created by Hatch-Waxman also created a new and
    different market for generic drugs--separate from brand drugs--
    that has supported growth in generic utilization and its
    attendant savings for patients. Although brand manufacturers
    often criticize pharmacy benefit managers (PBMs) and health
    plan formulary and rebate practices, the supply chain and
    pricing models they criticize do not represent the vast
    majority of prescription drugs distributed in this country. The
    89 percent of prescriptions filled by generic medicines are
    subject to a different set of economic incentives and
    arrangements--the result of multiple manufacturers marketing
    identical products and competing exclusively on price, in a
    commodity-style market.
        When brand manufacturers leverage the pricing power granted
    by their patents and regulatory exclusivities, PBMs,
    distributors, and payors rely on formulary management and
    rebating agreements to control costs.
        However, upon generic entry, payors typically shift away
    from rebate models of reimbursement and rely on distribution
    channels to effectively lower the price of the medicine. Rather
    than providing rebates to lower the cost, generic manufacturers
    must compete for sales to wholesalers. Because the products are
    virtually identical, the primary leverage manufacturers have is
    their ability to lower the price and provide the necessary
    volume. With over 200 generic manufacturers recognized by FDA,
    competition is fierce and prices decline rapidly. The
    wholesalers, often in collaborative purchasing agreements with
    pharmacies across the country, then distribute generic
    medicines to various retail pharmacies. Generic manufacturers
    may have to compete even further by negotiating separate
    payments to pharmacies to stock their product.
        The different business model leads to a different type of
    business planning by generic and biosimilar manufacturers. As
    part of this, the decisions by which generic and biosimilar
    manufacturers select which products to develop can take into
    account multiple variables. Considerations include the
    complexity in reverse engineering the original product, the
    state of the intellectual property claimed by the brand
    manufacturer over the product, the size of the patient
    population served, the number of likely competitors for that
    product, the product development and manufacturing capabilities
    and costs.
        Generic drug reimbursement is also different. Rather than
    relying on per-transaction rebates, PBMs and insurers typically
    establish a ``Maximum Allowable Cost'' (MAC) list that sets a
    specific reimbursement rate for the product, regardless of the
    generic product cost to the pharmacy. These MAC lists create
    additional incentives for pharmacies to maximize their
    dispensing margins by finding the lowest cost source for
    generic products.
        The result is a business model that differs significantly
    from the brand business model. While brand companies typically
    market a small number of high margin products, many generic
    manufacturers market hundreds of products with varying levels
    of profitability or loss.

                       supply chain pressures on generics

        These differences in the generic and brand marketplaces
    create vastly different incentives for the various
    manufacturers, wholesalers, distributors, pharmacy benefit
    managers (PBMs), insurers, and retail pharmacies that make up
    the supply chain. To put it simply, virtually all other actors
    in the supply chain enjoy significant financial benefits from
    the manufacture of generic medicines.
        This phenomenon was most recently examined by a group of
    researchers at the USC Leonard D. Schaeffer Center for Health
    Policy & Economics. That analysis, ``The Flow of Money Through
    the Pharmaceutical Distribution System,'' identified two items
    relevant to today's hearing:
         LFirst, for every sale of a brand name drug to a
    patient, the brand manufacturer captures approximately 76
    percent of that revenue. Comparatively, generic manufacturers
    keep only half of that percentage. Moreover, generic
    manufacturers cannot rely on capturing the total volume within
    the market as the brands do, and therefore individual generic
    manufacturers are forced to rely on much smaller revenue
    streams. To put it simply, brand drugs capture a higher
    percentage of the spend of a higher value market.
         LSecond, the supply chain captures significantly
    more of the revenue spent on generic medicines than on brand
    name drugs. For every $100 spent on dispensing generic
    medicines in this country, approximately $65 goes to the
    distribution and reimbursement of those products by the members
    of the supply chain. PBMs make nearly three times as much on
    generics as they do on brands. Wholesalers make about eight
    times more. Pharmacies make over 10 times more for every $100
    on generics than brands.\4\
    ---------------------------------------------------------------------------
        \4\  Sood, et al., ``The Flow of Money Through the Pharmaceutical
    Distribution System.'' June 2017. http://healthpolicy.usc.edu/
    documents/USC%20Schaeffer--Flow%20of%20Money--2017.pdf
    ---------------------------------------------------------------------------
        While the analysis demonstrates a series of strong
    incentives to drive patients to generic medicines, supply chain
    consolidation may jeopardize that success.
        Compared to the fragmented generic drug market,
    consolidation in the wholesale market and contractual
    arrangements between pharmacy chains and the wholesalers have
    left generic manufacturers with only a small number of
    purchasers. The result is a market where three purchasers
    account for over 90 percent of all wholesale revenue.\5\
    ---------------------------------------------------------------------------
        \5\  Fein, Adam J. Fein. The 2016-2017 Economic Report on
    Pharmaceutical Wholesalers and Specialty Distributors, September 2016.
    ---------------------------------------------------------------------------
        As these purchasers move more and more towards single-
    source contracts for generic drugs, it creates a dynamic where
    it is possible that no more than three generic manufacturers
    may be able to successfully market any given product. This
    dynamic risks future competitive success in the generic market
    as generic drug manufacturers may be forced to maximize
    economies of scale and consolidate themselves.

                          cost pressures for patients

        Patients thrive because of generic medicines, both in terms
    of health outcomes and financial savings. For insured patients,
    over 90 percent of generic prescriptions are filled for $20 or
    less out-of-pocket. That is in comparison to just 39 percent
    for brands at that price.\6\
    ---------------------------------------------------------------------------
        \6\  AAM 2017 Generic Drug Access & Savings in the U.S., http://
    accessiblemeds.org/sites/default/files/2017-07/2017-AAM-Access-Savings-
    Report-2017-web2.pdf.
    ---------------------------------------------------------------------------
        Data shows that patients are far less likely to fill a
    prescription for a high-priced brand drug. In fact, brand name
    drugs make up 20 percent of approved claims but account for 40
    percent of all abandoned claims for new patients. Moreover, new
    patient abandonment rates for generics are three times lower
    than for branded products.\7\ Patient abandonment has a serious
    effect on patient health--leading to hospitalizations, deaths
    and extensive health system costs.
    ---------------------------------------------------------------------------
        \7\  Id.
    ---------------------------------------------------------------------------
        This is not to say that the market functions perfectly in
    providing patients with the lowest cost possible. Many generic
    medicines are subject to significant markups after they leave
    the generic manufacturer. As an example, amoxicillin/potassium
    clavulanate, commonly referred by its branded name Augmentin
    and used for the treatment of infections, is sold by the
    generic manufacturer for pennies per pill. However, by the time
    a patient picks it up at the pharmacy counter, it may have a
    cash price as high as $60 for 20 pills, or $20 for a fill for
    patients with commercial insurance.\8\
    ---------------------------------------------------------------------------
        \8\  Data on manufacturer sales from CMS Average Manufacturer Price
    (AMP) data. Typical pharmacy prices from GoodRx.com.
    ---------------------------------------------------------------------------
        It is clear the significant benefits for patients of
    reliable access to affordable generic medicines are at risk.
    Notwithstanding the economic principle that more suppliers of a
    good or service creates lower prices for consumers, it is
    unclear that the new imbalance between 200 generic competitors
    and a handful of purchasers is sustainable. Some industry
    analysts have already begun to forecast consolidation among
    generic manufacturers.
        An unfortunate yet foreseeable consequence of fewer generic
    manufacturers is a significantly increased risk of drug
    shortages. Evidence suggests that generic drugs are
    particularly susceptible to drug shortages, potentially related
    to existing market incentives as well as low reimbursement.\9\
    Such shortages have a serious effect on patient care.
    Responding to a series of drug shortages in 2011, Dr. Scott
    Gottlieb testified before Congress that many such shortages
    were a direct result of low reimbursement for older, low margin
    products and that ``many hospitals are being forced to ration
    key medicines and patients to sit on waiting lists for vital
    drugs.''\10\
    ---------------------------------------------------------------------------
        \9\  Stromberg, C. (May 2014). Drug Shortages, Pricing, and
    Regulatory Activity. National Bureau of Economics Working Paper.http://
    www.nber.org/chapters/c13102.pdf
        \10\  Gottlieb, Scott. ``Drug Shortages: Why they happen and what
    they mean'' Testimony before the Senate Finance Committee. December
    2011. https://www.finance.senate.gov/imo/media/doc/
    Gottlieb%20Testimony1.pdf
    ---------------------------------------------------------------------------

           the importance of recognizing differences in policymaking

        It is critical that policymakers take steps to ensure the
    continued supply of affordable FDA-approved generic medicines.
    Failure to do so threatens a stable supply of generic
    medicines.
        Congress recently created a new inflation-based penalty in
    the Medicaid program for generics as part of the Bipartisan
    Budget Act of 2015.The legislation inappropriately applied a
    tool crafted for the brand drug market to generic markets,
    essentially conflating what transpires in a monopolized market
    with what occurs in a commoditized market with multiple
    competitors. Under the legislation, generic manufacturers are
    now subject to additional rebates for products even in the
    absence of changes in the actual price of the product. This is
    a direct result of a flawed application of a brand drug scheme
    that fails to recognize the significant volatility in generic
    prices.
        As a result, manufacturers of affordable generic medicines
    are now paying millions of dollars in ``penalties'' on products
    that have not been subject to a price increase. In many
    instances, changes in customer mix from one quarter to another
    have triggered penalties solely due to purchasers getting lower
    discounts on smaller volume orders--a normal occurrence in a
    competitive market. These changes do not necessarily reflect
    any new price being set by the manufacturer, but may merely
    reflect new purchasing patterns.
        These unpredictable, onerous penalties on often low-margin
    medicines creates significant risk for manufacturers that would
    consider entering these markets, and makes it more challenging
    for manufacturers to continue participating in those markets. A
    recent analysis concluded that the penalty would ``increase
    uncertainty, reduce revenues, encourage manufacturers to exit
    the market, and discourage the entry of new manufacturers. The
    predictable effect of discouraging entry into competitive
    markets is that product availability will be hampered:
    shortages will be more likely, and the market forces that lead
    prices to fall will be dampened.''\11\ Ironically, the analysis
    also concluded that the penalty ``will not only have little
    effect on generic prices, but it will also have the
    unanticipated and unintended consequence of increasing the
    likelihood of shortages for generic medicines.''\12\
    ---------------------------------------------------------------------------
        \11\  Manning and Selck, ``Penalizing Generic Drugs with the CPI
    Rebate will Reduce Competition and Increase the Likelihood of Drug
    Shortages,'' September 2017. https://www.accessiblemeds.org/sites/
    default/files/2017-09/Bates-White-White-Paper-Report-CPI-Penalty-09-12-
    2017.pdf
        \12\  Id.
    ---------------------------------------------------------------------------
        Accordingly, we urge Congress to repeal this penalty.

                               barriers to entry

        AAM and its members strongly support innovation. The
    generic and biosimilar marketplaces rely on the existence of a
    vibrant brand medicine industry. Fortunately, innovation
    continues to flourish. FDA has already approved more new
    molecular entities this year than it did in all of 2016. This
    is good news for all of us.
        But the balance between innovation and access requires a
    clear opportunity for FDA-approved generic or biosimilar entry.
    Without that competition, there can be no savings for patients
    or taxpayers. Unfortunately, many brand medicine companies have
    responded to the threat of competition by deploying new and
    controversial ways to extend their high monopoly prices.

                    challenges to intellectual property law

        Recently, one company went so far as to pay a Native
    American tribe to rent its tribal sovereign immunity by taking
    ownership of certain brand name drug patents facing a
    challenge. Allergan, Plc (Allergan), a Dublin, Ireland-based
    drug company, transferred the patent rights to its blockbuster
    drug Restasis to the St. Regis Mohawk tribe in a blatant effort
    to shield those patents from an administrative review process
    established by Congress in 2011 and block generic competition.
        The deal stands to be a profitable one for Allergan.
    Restasis generated $1.4 billion in 2016 sales.\13\ For less
    than 0.1 percent of the drug's annual sales, Allergan's deal
    could delay patient access to affordable generic drugs for six
    more years. This is a supply chain failure that Congress should
    prevent.
    ---------------------------------------------------------------------------
        \13\  Allergan plc, Annual Report (Form 10-K), at 59 (February
    2017) (link)
    ---------------------------------------------------------------------------
        According to press reports, Allergan provided an initial
    payment of $13.75 million to the St. Regis Mohawk Tribe and $15
    million in annual licensing fees. Every day Allergan delays
    competition, the company takes in over $4 million in revenue
    due to the lack of generic competition. Allergan will recoup
    this licensing fee in around four days.
        Allergan's transfer of its patents to the St. Regis Mohawk
    Tribe is an end-run around the legal process established by
    Congress to challenge questionable patents. If Congress wants
    to ensure that Americans have access to affordable prescription
    drugs, it must address schemes like Allergan's to delay generic
    competition by renting sovereign immunity. The action by
    Allergan to ensure that patients and payors do not benefit from
    timely generic competition to Restasis is an alarming example
    of the steps that brand name drug companies will take to put
    profits above the public interest. But it is by no means the
    only such example. Congress should outlaw these practices and
    strengthen the IPR system.

                 barriers to generic and biosimilar development

        As this Committee is aware, many generic and biosimilar
    manufacturers face significant challenges obtaining the samples
    needed for generic or biosimilar development. This is a result
    of the misuse of systems designed to ensure the safety of
    medicines by certain brand drug companies focused on delaying
    or prevent competition. Such delays created by misuse, abuse or
    regulatory failure deserve Congressional attention. In short,
    if generic and biosimilar development is frustrated, they will
    never enter the supply chain.
        FDA Commissioner Gottlieb has highlighted the abuse of FDA-
    mandated restricted distribution systems and restricted
    distribution systems that brand companies create on their own,
    without any mandate from FDA, to delay or completely prevent
    generic competition.
        This occurs when brand companies, using a Risk Evaluation
    and Mitigation System (REMS) or their own voluntary ``safety''
    program as an excuse, refuse to sell samples of their products
    to generic and biosimilar companies so that they can conduct
    the requisite bioequivalence and other testing. AAM members
    that have sought to purchase brand products from wholesalers in
    the supply chain are often informed that the wholesalers'
    contracts prohibit the sale of the brand product for generic
    studies. To date, FDA has received more than 150 complaints of
    specific challenges to obtaining samples.
        These abusive practices are directly counter to
    Congressional intent reflected in both Hatch-Waxman, which
    seeks to create generic competition as soon as brand monopoly
    protection has expired, and the Food and Drug Administration
    Amendments Act, which specifically prohibited the use of REMS
    to delay generic competition.
        FDA has taken steps to limit these kinds of abuses. In
    2014, FDA released a draft guidance that attempted to assist
    prospective generic and biosimilar applicants in their efforts
    to acquire the samples necessary to conduct bioequivalence
    testing. Under the guidance, FDA reviews bioequivalence
    protocols. Following its review and identification of any
    required changes, FDA sends a letter to the brand sponsor
    indicating that the proposed testing contains safety
    protections that provide the same level of patient-protection
    as those in the applicable brand's safety protocol and that FDA
    will not consider it a violation of the law for the brand
    sponsor to provide samples to the designated potential generic
    or biosimilar applicant. Although well-intentioned, the draft
    guidance has failed to solve the problem and patients wait in
    vain for FDA-approved generic and biosimilar versions of these
    medicines.
        Generic applicants are also challenged by brand companies'
    refusal to negotiate in good faith the creation and
    implementation of a single-shared REMS system (SSRS). Under
    current law, if a brand drug is subject to a REMS that contains
    Elements To Assure Safe Use (ETASU), generic versions cannot be
    approved unless they are subject to a SSRS to implement the
    ETASU elements. Moreover, the Federal Food Drug and Cosmetic
    Act provides that a generic drug must utilize a shared system
    along with the brand drug unless FDA waives this requirement
    for one of the reasons set forth in the statute. In other
    words, the brand and generic must agree on how to implement the
    existing safety protocol jointly, unless FDA says otherwise.
        The creation of a shared system should be relatively
    straightforward and simple-generic applicants merely join the
    existing safety system. Fundamentally, this is the business of
    generic manufacturers: taking a sole-source product and making
    it a multi-source product. However, brand companies regularly
    use a variety of tactics to systematically delay and extend the
    brand/generic negotiations. This refusal to engage in good
    faith negotiations can delay the approval of the generic
    product and force consumers to pay more to fill their
    prescriptions.
        This abuse injures competition. Commissioner Gottlieb
    recently testified that:

          Lbrand companies often have an incentive to refuse to
    agree to a single, shared system REMS. By prolonging the
    negotiations over a single, shared system REMS, they further
    delay generic drug approval and competition. We see prolonged
    negotiations and inability to agree on the terms of a single,
    shared system REMS regularly.\14\
    ---------------------------------------------------------------------------
        \14\  Gottlieb, Scott. ``Antitrust Concerns and The FDA Approval
    Process,'' Testimony before the House Committee on the Judiciary,
    Subcommittee on Regulatory Reform, Commercial and Antitrust Law, July
    2017. https://www.fda.gov/NewsEvents/Testimony/ucm568869.htm

        AAM applauds Commissioner Gottlieb's leadership to develop
    a ``Drug Competition Action Plan'' to address regulatory issues
    that are impeding competition, including abuse of restricted
    distribution and REMS systems. However, AAM is concerned that
    FDA's enforcement authorities as provided in FDAAA will not be
    adequate to fully stem the brand abuses that have become so
    widespread in recent years. For instance, the civil monetary
    penalties available under FDA's enforcement authority pale in
    comparison to the revenue available by impeding generic entry.
    Center for Drug Evaluation and Research (CDER) Director Dr.
    Janet Woodcock noted that ``fines and everything might simply
    be considered a cost of doing business because there's so much
    at stake in delaying generic competition.''\15\ Also, FDA's
    authority to address the brand abuses using voluntarily imposed
    restricted distribution system are highly limited.
    ---------------------------------------------------------------------------
        \15\  Testimony of Dr. Janet Woodcock at ``Generic Drug User Fee
    Amendments: Accelerating Patient Access to Generic Drugs.'' Senate
    Committee on Health, Education, Labor, and Pensions, January 2016.
    ---------------------------------------------------------------------------
        Brand manufacturers who have recognized the incentives
    created by REMS-related delays have developed novel
    distribution schemes that mimic these programs even when the
    FDA has not recognized any inherent safety risk with the
    handling or use of the medicine. According to a recent
    study,\16\ 74 drugs are subject to restricted access programs
    (i.e., drugs that are either subject to REMS or self-imposed
    restricted distribution programs) with total sales of $22.7
    billion in 2016. Of these, 41 drugs are restricted by REMS
    programs, with $11.5 billion in sales in 2016. The remaining 33
    drugs are restricted by the brands in a voluntarily imposed
    non-REMS program, with $11.2 billion in sales in 2016. A 2014
    study concluded that REMS abuse costs the U.S. healthcare
    system $5.4 billion annually.\17\ Consumers bear $960 million
    of that cost while Medicare and Medicaid incur $1.8 billion;
    private insurers bear the remaining $2.4 billion.\1\ 18 This
    estimate is conservative ``and should not be construed as the
    entirety of the lost savings from REMS misuse, either currently
    or going forward.''\19\ AAM and its members are committed to
    ensuring that all Americans have access to safe, effective and
    affordable medicines and believe that FDA's REMS programs can
    and do serve a compelling public good--namely, the safe
    distribution and use of certain pharmaceuticals that have a
    higher risk profile. We do not support any policies that would
    jeopardize patient safety. Any suggestion to the contrary is
    simply an effort to distract us from the real issue we need to
    focus on: addressing the use of REMS or non-FDA mandated
    restrictions on drug supply that are designed to block lower
    cost generics and biosimilars from coming to market. By
    refusing to sell their product for research purposes, or
    restricting its sale to a named patient, brand manufacturers
    can distort the supply chain to limit competition.
    ---------------------------------------------------------------------------
        \16\  Alex Brill, REMS and Restricted Distribution Programs: An
    Estimate of the Market (June 2017), available at http://
    www.gphaonline.org/media/cms/Alex--Brill--REMS--Study--June--2017.pdf.
        \17\  Alex Brill, Lost Prescription Drug Savings from Use of REMS
    Programs to Delay Generic Market Entry, at 5 (2014), available at
    http://www.gphaonline.org/media/cms/REMS--Studyfinal--July2014.pdf.
        \18\  Id.
        \19\  Id.
    ---------------------------------------------------------------------------
        To address this problem once and for all, Congress must
    pass the CREATES Act, bipartisan legislation introduced by
    Senators Leahy, Grassley, Klobuchar and Lee, to prevent the
    misuse of REMS and restricted distribution schemes to delay
    generic drug competition.
        The cost of failure is significant, and will only encourage
    anti-competitive practices to grow. In the absence of
    Congressional action, AAM members today must consider the
    difficulty involved in obtaining branded drugs when determining
    which generic development programs to pursue. Where access to
    brand drugs is subject to restricted access programs, some AAM
    members have determined that generic development was not
    feasible and decided against initiating these development
    programs.
        This means that patients and taxpayers lose out on
    opportunities for affordable access to life-saving medicines
    and our nation's health care system leaves savings on the
    table.

              biosimilar medicines are critical to future savings

        Nowhere is the need for lower-priced alternatives, and the
    challenges facing them, more real than among high-priced
    biologic medicines. Biologics, many of which are specialty
    medicines, are the most rapidly growing segment of increasing
    brand-name prescription drug costs in the United States, with
    more than $100 billion in annual spending. The role of biologic
    drugs in the health care system is expanding--while only 2
    percent of America's patients use biologics, they account for
    about 40 percent of prescription drug spending in the United
    States.\20\
    ---------------------------------------------------------------------------
        \20\  Medicine Use and Spending in the U.S.: A Review of 2016 and
    Outlook to 2021, April 2017.
    ---------------------------------------------------------------------------
        These products are often life-saving therapies for serious
    illnesses, but they come at steep expense to patients,
    taxpayers and insurers. Many biologics cost tens of thousands
    of dollars per year per patient--some more than $200,000.
        To help bring down prices for patients, Congress designed
    and approved the Biologics Price Competition and Innovation Act
    (BPCIA) in 2010--creating an abbreviated approval pathway for
    biological products that are demonstrated to be ``highly
    similar'' (biosimilar) to or ``interchangeable'' with an FDA-
    approved biological product. The BPCIA also gave brand biologic
    drug manufacturers a 12-year market exclusivity period for
    their products to ensure a return on investment for new
    medicines. This period is longer than anywhere else in the
    world that has a similar abbreviated pathway for biosimilars.
        Biosimilar medicines represent a key step forward in
    reducing high drug prices. They are safe, effective and
    affordable versions of costly brand biologics. By the year
    2025, over 70 percent of drug approvals are expected to be
    biological products.\21\ Experts estimate that FDA-approved
    biosimilars could save between $44 billion and $250 billion
    over the next 10 years.\22\ In doing so, they will mean greater
    access to lifesaving cures for 1.2 million U.S. patients,
    according to a new analysis. Women, lower income, and elderly
    patients would particularly benefit from access to biosimilar
    medicines.
    ---------------------------------------------------------------------------
        \21\  U.S. Pharmacist, ``Biosimilars: Current Approvals and
    Pipeline Agents,'' October 2016 (link).
        \22\  AAM, ``Generic Drug Access & Savings in the U.S.,'' June 2017
    (link).
    ---------------------------------------------------------------------------
        Today, there are 38 biosimilars approved for use in the
    European Union, but only 7 in the United States. However, more
    than 66 biosimilar programs are under FDA review for
    development of 20 different biologic products. The ability of
    biosimilars to fulfill their potential is threatened by market
    abuses and policy challenges.

               anticompetitive threats to biosimilar availability

        As discussed above, while the abuse of restricted
    distribution programs continues to impede generic development,
    the problem of access to samples is likely to be even more
    acute for biosimilar development. Biosimilars are more complex
    and difficult to develop than traditional generic drugs. Their
    development requires multiple lots of the brand product
    produced over time. If access to the variability that is
    inherent in brand lot development of biologics is denied, the
    development of the biosimilar will be greatly delayed and
    patients will be held hostage to higher prices and fewer
    options. Plus, unlike with small molecule generic drugs, the
    development of biosimilars is more likely to involve clinical
    trials requiring even more samples of the reference product.
    Restricted access to samples at any point during the clinical
    trial could cause a study to fail. This further highlights the
    importance of Congressional action on the CREATES Act.
        It now appears that brand manufacturers of biologic drugs
    are misusing their negotiating leverage to insist on contract
    terms that effectively block use of biosimilar alternatives by
    physicians. In a recent lawsuit, one branded company has
    alleged that another company that manufactures Remicade has
    misused its negotiating power to force PBMs and purchasers to
    block access to a biosimilar product. Such actions could
    threaten the ability of biosimilars to deliver on the promise
    of savings for patients.
        Finally, it is critical to reiterate that biosimilars are
    just as safe and effective as their reference product. While we
    understand that physicians must remain directly involved in
    their patients' treatment, it is also important to recognize
    that some have sought to create uncertainty around the efficacy
    and pharmacovigilance standards of biosimilars in comparison to
    their reference products. These messages are in direct
    contradiction with the standards established in the BPCIA, and
    enforced by the FDA. Differentiation between biosimilars and
    their reference products risks undermining the important
    provider education that is already being done by FDA. It is
    also directly in contradiction to the medical evidence found in
    Europe and other advanced countries that have more experience
    with biosimilars, and have seen no measurable clinical
    differences between biosimilars and their reference products.

                     policy barrier to biosimilar adoption

        Biosimilars present a significant opportunity for patient
    and program savings in the Medicare Part D program. However
    current law creates barriers to biosimilar access for patients
    in Part D, who may be forced onto higher priced biologics.
        Because of the structure of Medicare Part D, the 50 percent
    discount required of brand biologics is counted towards a
    patient's out of pocket costs--but competing biosimilars are
    barred from providing such a discount. This creates a perverse
    incentive for health plans and patients to use a higher-priced
    brand biologic--moving patients through the coverage gap and
    into catastrophic coverage faster and with lower out-of-pocket
    costs compared to a lower-cost biosimilar.
        This approach creates substantial barriers for biosimilar
    manufacturers, as it may be effectively impossible to ever
    offer sufficient discounts to be included on Part D
    formularies. The resulting imbalance severely undermines the
    market potential for biosimilar competition. Ultimately,
    patients, payers, and Medicare all pay more for brand biologics
    than they would if the Coverage Gap Discount program were
    amended to include biosimilars.
        Congress should amend the Part D coverage gap discount
    program to classify biosimilars as ``applicable drugs'' in the
    Coverage Gap Discount Program. This change would allow
    biosimilar manufacturers to pay the 50 percent discounts paid
    by their brand competitors, and participate on a level playing
    field to compete for placement on the Part D plan's formulary.
    It would reduce both patient out-of-pocket costs and save at
    least $1 billion over the next ten years for the Medicare Part
    D program.
        Additionally, in Part B CMS has chosen to create a coding
    and reimbursement structure that deeply disincentivizes
    development of biosimilars. Under current CMS policy, all
    biosimilars are grouped into an average reimbursement rate,
    separate from their reference brand product. This allows the
    brand to maintain control over its reimbursement rate, and
    allows the company to provide physicians with consistent
    reimbursement, free from price competition. Meanwhile, the
    biosimilar products would be forced to compete on price with
    one-another, despite only ever being compared to the reference
    product rather than each other.
        This policy could significantly limit biosimilar adoption
    in outpatient settings, which would create a significant
    barrier to entry for any potential biosimilar competitors. To
    better incentivize competition in settings reimbursed by Part
    B, CMS should change this policy to grant individual codes and
    payment rates to non-interchangeable biosimilars. This would
    create a market much more conducive to price competition.
                                    ------

                                   conclusion

        AAM and its members commend the Committee for holding
    today's hearing addressing the challenge of high drug prices
    through the lens of the pharmaceutical supply chain. Generic
    and biosimilar medicines are a critical part of the solution
    for patients and America's health care system. But they are
    under threat from market imbalances, policies that fail to
    distinguish their business model from brand drugs, and anti-
    competitive behavior by other supply chain actors. AAM stands
    ready to work with you to ensure uninterrupted access to
    affordable therapies for patients and taxpayers.
                                    ------

               [summary statement of chester ``chip'' davis, jr.]

                                  Background:

         LGeneric medicines represent greater than 89
    percent of all prescriptions dispensed in the U.S., but only 26
    percent of expenditures on prescription drugs, saving patients
    and payers nearly $5 billion every week. Our industry is proud
    to be able to deliver these savings to the healthcare system.
         LIn the past twelve months, prescriptions of brand
    drugs have decreased by 7 percent, but their revenue has
    climbed by 5 percent. This is a direct result of price
    increases.
         LBy contrast, generic prescriptions increased by 2
    percent, but revenue declined by 13 percent.
         LWithout generic medicines, spending on
    cholesterol drugs would be more than 3.5 times higher, diabetes
    drugs almost 3 times higher, and spending on breast cancer
    drugs 8 times higher.
         LHowever, the sustainability of a competitive
    generic market and the availability of generic medicines for
    patients, uninterrupted by shortages, is in jeopardy.

        Three factors threaten today's generic and biosimilar industry:

     L1. Changing and increasingly challenging market and
    reimbursement frameworks;
     L2. The abuse of laws and regulations by bad actors; and
     L3. A failure of policy to account for the unique challenges
    facing generic and biosimilar medicines.

      Congress must act to support generic and biosimilar competition and
        supply to ensure continued access for patients. It can do so by:

         L1. Repealing the misguided Medicaid penalty on generic
    drugs;
         L2. Preventing brand abuses designed to block generic and
    biosimilar competition by passing the bipartisan CREATES Act;
    and
         L3. Ensuring that biosimilar medicines have a level and
    competitive playing field in Medicare.

         Generic Drug Markets are Fundamentally Different than Brands:

         LThe 89 percent of prescriptions filled by generic
    medicines are subject to a different set of economic incentives
    and arrangements--the result of multiple manufacturers
    marketing identical products and competing exclusively on
    price, in a commodity-style market.
         LUpon generic entry, payors typically shift away
    from rebate models of reimbursement and rely on distribution
    channels to effectively lower the price of the medicine.
         LThe different business model leads to a different
    type of business planning by generic and biosimilar
    manufacturers.
         LGeneric drug reimbursement is also different.
         LThe result is a business model that differs
    significantly from the brand business model.
         LThese differences in the generic and brand
    marketplaces create vastly different incentives for the various
    manufacturers, wholesalers, distributors, pharmacy benefit
    managers (PBMs), insurers, and retail pharmacies that make up
    the supply chain.
         LTo put it simply, virtually all other actors in
    the supply chain enjoy significant financial benefits from the
    manufacture of generic medicines.
         LThis is not to say that the market functions
    perfectly in providing patients with the lowest cost possible.
    Many generic medicines are subject to significant markups after
    they leave the generic manufacturer.
         LCompared to the fragmented generic drug market,
    consolidation in the wholesale market and contractual
    arrangements between pharmacy chains and the wholesalers have
    left generic manufacturers with only a small number of
    purchasers.
         LThe result is a market where three purchasers
    account for over 90 percent of all wholesale revenue.
         LIt is unclear that the new imbalance between many
    generic competitors and a handful of purchasers is sustainable.
    Some industry analysts have already begun to forecast
    consolidation among generic manufacturers.
         LAn unfortunate yet foreseeable consequence of
    fewer generic manufacturers is a significantly increased risk
    of drug shortages.
         LEvidence suggests that generic drugs are
    particularly susceptible to drug shortages, potentially related
    to existing market incentives as well as low reimbursement.
    Such shortages have a serious effect on patient care.
         LIt is critical that policymakers take steps to
    ensure the continued supply of affordable FDA approved generic
    medicines. Failure to do so threatens a stable supply of
    generic medicines.
                                    ------

        The Chairman. Thank you, Mr. Davis.
        Ms. Gallenagh, welcome.

                  STATEMENT OF ELIZABETH A. GALLENAGH

        Ms. Gallenagh. Good morning, Chairman Alexander, Ranking
    Member Murray, and Members of the Committee. Thank you for the
    opportunity to participate in today's hearing. I'm Liz
    Gallenagh, Senior Vice President and General Counsel for the
    Healthcare Distribution Alliance.
        HDA is the national trade association representing primary
    pharmaceutical wholesale distributors. HDA members include
    national, regional, and specialty companies. Their expertise
    streamlines the supply chain to ensure safety and efficiency,
    serving over 200,000 pharmacy settings across the country while
    achieving cost savings for our Nation's healthcare system,
    about $40 billion annually.
        The U.S. healthcare supply chain is a complex one. Each
    day, our 35 primary distributor members, who purchase directly
    from authorized manufacturers, ship 15 million products daily
    from about 176 warehouses across the country, a relatively
    small but highly efficient and effective network. In fact, most
    pharmaceutical sales in the U.S. flow through our members,
    nearly 94 percent.
        Distributors are unlike any other supply chain
    participants. Their core business is not manufacturing, and
    they do not prescribe medicines or dispense to patients. They
    focus significant resources on the safety and security of the
    supply chain, and these efforts may, in fact, be the most
    important service distributors provide. With this Committee's
    support, several years ago, HDA strongly advocated for the
    enactment of the Drug Supply Chain Security Act, which sets the
    framework for unit level traceability of medicines by 2023.
        On a daily basis, pharmacies and other providers place
    orders with HDA distributors for the medicines they need to
    serve their patients. Without distributors, customers would
    have to carry weeks of inventory and place daily orders with
    each and every manufacturer. By working with full line
    distributors, providers can maintain just-in-time inventories,
    saving them time, expense, and staff necessary to carry
    extensive inventories or have large storage facilities.
        In addition, primary distributors often provide financial
    credit terms, pharmacy management systems, and in-store retail
    support.
        With regard to the upstream supply chain, the work of HDA
    members enables manufacturers to concentrate on developing and
    producing medicines without the added expense and challenge of
    getting those medicines to every single dispensing site across
    the country.
        While HDA members are primarily supply chain logistics and
    operations experts, this is no longer an industry focused
    solely on moving products from Point A to Point B. Today, they
    provide a wide array of supporting services that deliver
    significant value to both ends of the supply chain and
    ultimately to patients. Some examples of these core services to
    manufacturers include receiving and accurately processing
    orders, shipping pharmaceutical products safely, inventory and
    management, providing manufacturers with ordering and
    utilization data, and processing returns and chargebacks.
        In exchange for these services provided to manufacturers,
    distributors charge bona fide service fees. These fees are not
    passed on to the customer and represent a fair market value for
    a bona fide itemized service actually performed on behalf of
    the manufacturer that the manufacturer would have to otherwise
    perform themselves.
        The distribution industry is a very high-volume yet very
    low-profit margin industry with an industry margin just over 1
    percent, on average, for 2016. Moreover, a recent Berkeley
    research group study noted that the distributor profit on
    overall branded drug cost was just under 1 percent.
        Distributors have little impact on overall drug pricing,
    and, generally, traditional pharmaceutical distributors
    purchase from manufacturers based on wholesale acquisition
    cost, or WAC, and charge manufacturers service fees. WAC
    represents the manufacturer's list price, does not include
    rebates, prompt payments, or other adjustments in price
    resulting from proprietary negotiations between the
    manufacturers and distributors, payer groups, or other
    customers. Distributors are not privy to how such WAC pricing
    decisions are made.
        On the other side of the equation, distributors typically
    sell branded drugs to downstream customers based on WACs
    established solely by manufacturers. They also sell generic
    drugs to downstream customers based on either WACs or other
    list prices, or they may also price generic drugs sold to
    customers in response to the market, for example, when there
    are more than one generic drug. As such, wholesale distributors
    do not control the price of prescription drugs, but rather the
    price is dictated by manufacturers, WAC, or other list prices,
    as well as market forces, including generic competition.
        Primary distributors' goal for the supply chain is a simple
    one: add efficiency, security, and timely delivery so that
    providers can concentrate on patient care and ensure that their
    patients have access to the medications they need.
    Historically, HDA distributor members have had a positive
    effect on the supply chain, helping to make the U.S. supply
    chain one of the safest and most efficient in the world, while
    taking cost out of the system and having minimal impact on the
    overall cost of drugs.
        Thank you, and I would be happy to answer any questions you
    may have.
        [The prepared statement of Ms. Gallenagh follows:]

                  Prepared Statement of Elizabeth A. Gallenagh

        Chairman Alexander, Ranking Member Murray and Members of
    the Committee.
        Thank you for the opportunity to participate in today's
    hearing. I am Liz Gallenagh, Senior Vice President, Government
    Affairs and General Counsel for the Healthcare Distribution
    Alliance (HDA). HDA is the national trade association
    representing primary pharmaceutical distributors--the vital
    link between the nation's pharmaceutical manufacturers and more
    than 200,000 pharmacies, hospitals, long-term care facilities,
    clinics and others nationwide.
        Since 1876, HDA has helped members navigate regulations and
    innovations to get the right medicines to the right patients at
    the right time, safely and efficiently. HDA's members include
    35 national, regional and specialty primary distribution
    companies who are not just distributors, but are technology
    innovators, information management experts, security
    specialists and efficiency professionals. Their expertise
    streamlines the supply chain to ensure safety and efficiency,
    while also achieving cost savings for our nation's healthcare
    system.

                            Role in the Supply Chain

        The U.S. healthcare supply chain is a complex one and the
    nation's primary pharmaceutical distributors play a vital role
    within it. Each day hundreds of thousands of healthcare
    provider locations must receive needed medicines and other
    healthcare products from thousands of manufacturers. These
    manufacturers and providers are served predominantly by 35 HDA
    primary distributors who operate out of about 176 warehouses
    and purchase directly from authorized manufacturers--a
    relatively small, but highly efficient and effective network.
    In fact, most pharmaceutical sales in the U.S. flow through
    primary distributors (93.79 percent).\1\
    ---------------------------------------------------------------------------
        \1\  87th Edition HDA Factbook (2016-2017)
    ---------------------------------------------------------------------------
        Every day HDA members work around the clock to safely and
    efficiently ship 15 million healthcare products (medicines,
    medical supplies, durable medical equipment, et al.) to
    pharmacies, hospitals and other healthcare providers in order
    to keep their shelves stocked with the medications and products
    they need to treat and serve their patients.
        Distributors are unlike any other supply chain
    participants--their core business is not manufacturing and they
    do not prescribe medicines or dispense to patients. Their key
    role is to serve as a conduit for medicines to travel from
    manufacturer to patient while making sure the supply chain is
    fully secure and as efficient as possible.
        HDA distributor members focus significant resources on the
    safety and security of the supply chain, and their secure
    supply chain efforts may in fact be the most important service
    distributors provide to the overall pharmaceutical delivery
    system. With this committee's support several years ago, HDA
    strongly advocated for the enactment of the Drug Supply Chain
    Security Act (DSCSA), Title II of the Drug Quality Security
    Act, which sets a framework for unit level traceability of
    medicines by 2023. Today, HDA members are in the midst of Phase
    I implementation efforts and work to collaborate with FDA,
    state regulatory authorities, and trading partners to build the
    systems and processes necessary to achieve unit-level
    traceability of prescription drugs by 2023, as outlined in the
    law.

                      Relationship with Provider Customers

        On a daily basis, pharmacies, hospitals and other
    healthcare providers place orders with HDA distributor members
    for the medicines, supplies and equipment they need to serve
    their patients. Without pharmaceutical distributors, pharmacies
    and providers would have to carry weeks of inventory and
    undertake the time-consuming process of placing individual
    orders with each and every manufacturer for products needed by
    the healthcare provider on a daily basis. By working with full-
    line distributors, providers can maintain just-in-time
    inventories that saves pharmacies and hospitals the expense and
    staff necessary to carry extensive inventories or have large
    storage facilities--both of which would add significantly to
    their cost of operations.
        While distributors provide many services to the pharmacy
    provider community, the core services are supply chain
    related--providing on-time and complete shipment of ordered
    drugs in a safe and efficient manner. In addition, they often
    provide financial credit, pharmacy management systems, and in-
    store retail support, among many other services.
        Traditional distributors serve a broad array of provider
    types; mostly retail and hospital settings, including chain
    pharmacy warehouses, mass merchandisers and food chains, and
    chain pharmacies (39.5 percent); hospitals, HMOs, clinics and
    nursing homes (17.2 percent); independent pharmacies (17.3
    percent); mail order (15.8 percent). Specialty distributors
    (and specialty subsidiaries) serve other provider settings such
    as physician offices, home care, specialty pharmacy, and some
    retail pharmacy.\2\
    ---------------------------------------------------------------------------
        \2\  87th Edition HDA Factbook (2016-2017)
    ---------------------------------------------------------------------------

                    Relationship with Manufacturer Suppliers

        The work of primary distributors also enables manufacturers
    to concentrate on developing and producing needed medicines
    without the added expense and logistical challenges of
    determining how to get those medicines to the providers and
    patients across the U.S. However, pharmaceutical distribution
    has evolved over the last decade from simply managing
    warehouses and shipping goods. While HDA members are primarily
    supply chain logistics and operations experts, this is no
    longer an industry focused solely on moving products from point
    A to point B. Rather, pharmaceutical distributors provide a
    wide array of supporting services that enable the
    pharmaceutical supply chain to function efficiently and safely,
    delivering significant value to manufacturers and healthcare
    providers--and ultimately to patients. Some examples of these
    core services include: receiving orders and
    shippingpharmaceutical products in a safe, efficient manner,
    inventory handling and inventory management, providing
    manufacturers with data about where, and in which settings,
    their products are utilized, verifying downstream customer
    eligibility to purchase products at pricing established under
    various programs or contracts between such customers and given
    manufacturers, and processing relevant chargebacks to
    manufacturers.
        In exchange for the variety of distribution and logistics
    services that primary distributors provide to manufacturers,
    they charge manufacturers what are referred to as ``bona fide
    service fees'' for the provision of these services. These fees,
    which are not passed on to the customer, represent a fair
    market value for a bona fide, itemized service actually
    performed on behalf of the manufacturer that the manufacturer
    would otherwise perform (or contract for) in the absence of the
    service arrangement. This model reduces demand volatility--
    aligning order patterns more closely to actual patient demand
    and, eliminating artificial demand spikes, allowing for a
    supply chain that operates more smoothly and predictably.
        It should also be noted that without HDA members, each
    manufacturer would have to ensure that more than 200,000
    pharmacy and provider settings receive the medications they
    need when they need them, employing substantial financial,
    logistical and staff resources to provide medicines and
    supplies to hundreds of thousands of dispensing sites. Because
    distributors provide these logistical, inventory and other
    service support which manufacturers and pharmacies would
    otherwise have to perform themselves, the pharmaceutical supply
    chain is more efficient, reliable and secure, and patients are
    able to get the medicines they need in a timely fashion, saving
    our healthcare system approximately $42 billion each year.\3\
    ---------------------------------------------------------------------------
        \3\  The Center for Healthcare Supply Chain Research, The Role of
    Distributors in the U.S. Healthcare Industry, 2011.
    ---------------------------------------------------------------------------

            Primary Wholesale Distributors' Role in Drug Pricing\4\
    ---------------------------------------------------------------------------

        \4\  HDA's antitrust policy strictly prohibits any discussions
    which constitute or imply an agreement or understanding between or
    among its members concerning: 1) prices, discounts, or terms or
    conditions of sale; 2) profits, profit margins or cost data; 3) market
    shares, sales territories or markets,; 4) allocation of customers or
    territories; 5) selection, rejection or termination of customers or
    suppliers; 6) restricting the territory or markets in which a company
    may resell products; 7) restricting the customers to whom a company may
    sell; or 8) any matter which is inconsistent with the proposition that
    each members company of HDA must exercise its independent business
    judgment in pricing its services or products, dealing with its
    customers and suppliers and choosing the markets in which it will
    compete.
    ---------------------------------------------------------------------------
        The primary pharmaceutical distribution industry is a very
    high volume, yet very low profit margin industry, with the
    industry margin just over one percent on average in 2016. In
    fact, overall profitability for the primary distribution sector
    shows little notable change over the past several years, even
    during recent market volatility.\5\ Moreover, in a recent 2017
    study, the Berkeley Research Group concluded that the
    pharmaceutical wholesale distributor profit on overall branded
    drug costs was just under one percent.\6\
    ---------------------------------------------------------------------------
        \5\  Data obtained from annual HDMA/HDA industry Factbook
    Publication, compiled and compared across multiple years.
        \6\  The Pharmaceutical Supply Chain: Gross Drug Expenditures
    Realized by Stakeholders; 2017; Table 2 http://www.thinkbrg.com/media/
    publication/863--Vandervelde--PhRMA-January-2017--WEB-FINAL.pdf.
    ---------------------------------------------------------------------------
        Traditional pharmaceutical wholesale distributors purchase
    pharmaceuticals from manufacturers based on the Wholesale
    Acquisition Cost (``WAC''), a publicly available figure
    reported for each pharmaceutical product by the manufacturer to
    various compendia such as Medi-Span and RedBook, which publish
    such prices. WAC represents the manufacturer's list price, and
    does not include rebates, prompt payment, or other adjustments
    in price resulting from proprietary negotiations between the
    manufacturer and wholesaler, downstream payer groups or other
    customers. Manufacturers (pharmaceutical, biologic, generic,
    etc.) set the WAC price for their products. Wholesale
    distributors are not privy to how such WAC pricing decisions
    are made. Wholesale distributors typically purchase
    pharmaceuticals from manufacturers based on WAC and they also
    charge manufacturers distribution fees related to their
    services, as previously discussed.
        Wholesale distributors typically sell branded drugs to
    downstream customers based on WACs established solely by
    pharmaceutical manufacturers. Wholesale distributors might also
    sell generic drugs to downstream customers based on WACs
    established solely by pharmaceutical manufacturers and
    published in the various pricing compendia or they may price
    generic drugs sold to downstream customers in response to the
    market, which includes supply of competing generic drug and
    considers the WACs for such generic drug products and
    competitors to such drug products. As such, wholesale
    distributors do not control the price of pharmaceuticals rather
    the price of pharmaceuticals is dictated by published WAC or
    other list prices determined solely by manufacturers of such
    products and other market forces, including the WACs of generic
    drugs that compete with a given generic drug product.

                                    ------

                                   conclusion

        As I noted earlier, primary pharmaceutical distributors
    have evolved from providing basic inventory management and
    distribution to now offering a suite of services supporting
    many different operations of both manufacturers and healthcare
    providers. Ultimately, these services result in benefits to
    patients and consumers and have made the U.S. pharmaceutical
    supply chain one of the safest and most efficient in the world.
        Traditional pharmaceutical wholesale distributors' goal in
    the pharmaceutical supply chain is a simple one: add
    efficiency, security and timely delivery of products so
    providers can concentrate on patient care and ensure their
    patients have regular access to the medications they need.
    Historically, HDA distributor members have effectively achieved
    this goal and have had a positive effect on the supply chain
    and patients while taking costs out of the pharmaceutical
    supply chain and having minimal impact on the overall cost of
    drugs.
        Thank you. I would be happy to answer any questions you may
    have.
                                    ------

                 [Summary Statement of Elizabeth A. Gallenagh]

        HDA is the national trade association representing primary
    pharmaceutical distributors--the vital link between the
    nation's pharmaceutical manufacturers and more than 200,000
    pharmacies, hospitals, long-term care facilities, clinics and
    others nationwide. Since 1876, HDA has helped members navigate
    regulations and innovations to get the right medicines to the
    right patients at the right time, safely and efficiently.
        Distributors are unlike any other supply chain
    participants--their core business is not manufacturing and they
    do not prescribe medicines or dispense to patients. Their key
    role is to serve as a conduit for medicines to travel from
    manufacturer to patient while making sure the supply chain is
    fully secure and as efficient as possible. HDA distributor
    members focus significant resources on the safety and security
    of the supply chain, and their secure supply chain efforts may
    in fact be the most important service distributors provide to
    the overall pharmaceutical delivery system.
        Primary pharmaceutical distributors have evolved from
    providing basic inventory management and distribution to now
    offering a suite of services supporting many different
    operations of both manufacturers and healthcare providers.
    Ultimately, these services result in benefits to patients and
    consumers and have made the U.S. pharmaceutical supply chain
    one of the safest and most efficient in the world.
        Traditional pharmaceutical wholesale distributors' goal in
    the pharmaceutical supply chain is a simple one: add
    efficiency, security and timely delivery of products so
    providers can concentrate on patient care and ensure their
    patients have regular access to the medications they need.
    Historically, pharmaceutical wholesale distributors have
    effectively achieved this goal and have had a positive effect
    on the supply chain and patients while taking costs out of the
    pharmaceutical supply chain and having minimal impact on the
    overall cost of drugs.
                                    ------

        The Chairman. Thank you, Ms. Gallenagh.
        Mr. Merritt, welcome.

                       STATEMENT OF MARK MERRITT

        Mr. Merritt. Thank you, Mr. Chairman and Members of the
    Committee, for inviting me to discuss drug pricing and the
    delivery system drug makers use to bring their products to
    market.
        I'd like to start by providing a brief top line overview of
    a very complicated subject, an executive summary, if you will,
    on why there's such anger about drug pricing, especially now;
    the role supply chains play; and how PBMs use their skill and
    expertise to reduce overall costs.
        There are several reasons why drug pricing has become such
    a concern in recent years. First is drug makers' recent shift
    from producing blockbuster drugs like Lipitor, which may have
    cost $3 a day, to drugs like Sovaldi, which costs $1,000 a day.
    These are great drugs, but not everybody is prepared to pay
    $1,000 a day for a new drug even if it is a great drug. All
    this came on the heels of a decade that saw very little brand
    inflation, thanks to a wave of competing generics that hit the
    market at that time.
        The second reason for concern were the recent high-profile
    scandals of three drug makers, specifically Mylan's 400 percent
    EpiPen price hike and the discovery that two companies, Turing
    and Valeant, had built entire business models around buying
    rights to low-cost drugs in order to re-sell them at much
    higher prices. There were, of course, many hearings on the
    issues, and I testified at a few of them.
        Third is that many health plans have tried to restrain
    premium increases by raising deductibles in the face of higher
    costs, not just of drugs but of overall major medical costs.
    Higher deductibles meant that some patients who had grown
    accustomed to paying $25 copays, thinking that might actually
    be the price of the drug, came face to face for the first time
    with the actual price of drugs, which can run hundreds or even
    thousands of dollars.
        The rise of high-price specialty drugs, the scandals
    surrounding particular manufacturers, and the emergence of high
    deductible plans have converged all at one time to raise real
    visibility on this issue.
        I'd like to offer just a few brief thoughts on the drug
    supply chain. First, supply chains are a routine part of how
    consumers access not just drugs but almost any product in the
    marketplace. They're a normal part of American business.
    They're not something that's unique to prescription drugs or
    healthcare. They're used all across America.
        It should be noted that supply chains have nothing to do
    with why manufacturers raise prices. Mylan didn't raise EpiPen
    prices by 400 percent because of supply chain costs. The laws
    of supply and demand, not supply chains, determine how drug
    makers and other manufacturers set prices. In its simplest
    terms, the prescription drug marketplace is like any other, a
    market of sellers and buyers. Drug makers are the sellers and,
    like all sellers, set prices according to whatever the market
    will bear.
        Likewise, the buyers want to pay as little as possible.
    These are the employers, unions, health plans, and government
    programs that hire PBMs to negotiate price concessions from
    drug makers. In fact, PBMs do a number of things to reduce
    cost. PBMs design benefits that encourage patients to use
    generics and less expensive brands. The PBMs create networks of
    affordable pharmacies. They reduce cost for consumers. PBMs
    negotiate rebates and other price concessions from drug
    companies.
        It should be noted that rebates are simply discounts paid
    after sales have been made instead of at the point of sale.
    While PBMs have stated publicly that they welcome drug
    companies to offer alternatives to rebates, including simply
    lowering a list price of drugs, rebates remain a key way to
    deliver savings to our clients who determine the amount of
    rebates each PBM passes through to them.
        Ninety percent of rebates are passed through to plan
    sponsors, and almost half of large employers require 100
    percent of rebates to be passed through. Once these are passed
    through, plans can decide what to do with them. Typically,
    they're used to reduce premiums, deductibles, copays, but
    that's up to every plan to do what they want. So the
    marketplace is evolving on the issue.
        It should also be noted that drug makers set and raise
    prices regardless of rebates they negotiate with PBMs. In fact,
    Sovaldi's list price was $84,000 and involved no rebate
    whatsoever until other competitors came to market. Then they
    were able to bring prices and costs way down, in fact, lower
    than a lot of price control countries in Europe.
        All in all, PBMs reduce drug costs by 30 percent, play a
    major role in the success of Medicare Part D, and have helped
    restrain the growth in overall drug spending to 3 percent to 4
    percent a year, despite rising list prices.
        Finally, there are market-based policy solutions that can
    reduce costs. I'd like to thank Senators Collins and Franken
    for their FDA reauthorization amendment to expedite generic
    approvals, promote competition, and guard against sudden price
    hikes of decades old drugs. We also urge Congress to work with
    FDA to accelerate approvals for brand drugs which face limited
    competition and do whatever possible to bring biosimilars to
    market faster. These steps would foster competition, which is
    the key to reducing overall drug prices.
        I look forward to answering any questions you might have.
        [The prepared statement of Mr. Merritt follows:]

                       prepared statement of mark merritt

                                  Introduction

        Good morning. My name is Mark Merritt, President and CEO of
    the Pharmaceutical Care Management Association (PCMA). I
    appreciate this opportunity to appear before the Committee at
    this hearing examining the drug supply chain. PCMA is the
    national association representing America's pharmacy benefit
    managers (PBMs), which administer prescription drug plans for
    more than 266 million 1A\1\ Americans across dozens of PBMs
    with health coverage provided through self-insured employers,
    health insurers, labor unions, Medicare, Medicaid, CHIP, and
    the Federal Employees Health Benefits Program (FEHBP).
    ---------------------------------------------------------------------------
        \1\  PR Newswire, ``PBMs Provide Policy Solutions to Increase
    Competition, Reduce Rx Costs,'' Feb 04, 2016.
    ---------------------------------------------------------------------------
        The cost of prescription drugs has understandably garnered
    a lot of attention, particularly with the recent wave of high
    priced, high profile specialty drugs like Sovaldi. This
    development has imposed unique challenges on patients and the
    employers, unions and government programs that hire PBMs to
    help make coverage more affordable. By negotiating price
    concessions from drug companies and recommending strategies
    that promote generics and more affordable pharmacies, PBMs have
    played a key role in retraining the rise of overall drug costs
    to low single-digit increases over the past few years. It is
    also important to note that prescription drug launch prices and
    price increases are determined by the same supply-and-demand
    dynamics of countless other industries that manufacture
    products and use supply chains to get them to market. Pricing
    decisions are made unilaterally by manufacturers. There's no
    correlation between manufacturer price increases and the
    rebates and discounts they negotiate with PBMs.
        At the outset, I want to thank this Committee for its
    actions to improve generic competition and lower the cost of
    prescription drugs as part of the Food and Drug Administration
    (FDA) Reauthorization Act. In addition, I'd like to recognize
    Senators Collins and Franken for your work on the amendment
    that addresses clearing the FDA's application backlog as well
    as expediting generic drug development and promoting
    competition. Title VIII will help foster a more competitive
    marketplace to improve the affordability and accessibility of
    prescription drugs for patients and guard against sudden,
    astronomical price hikes of decades-old prescription drugs. The
    HELP Committee has played an important role in fostering the
    competition that will both reward innovation and maintain
    affordability.
        This testimony will outline how PBMs reduce prescription
    drug costs to provide patients, employers, and public programs
    with the highest value prescription drug benefits.
    Additionally, it will suggest a set of policy options to
    increase competition in the prescription drug marketplace to
    help reduce costs.

      How PBMs Reduce Drug Costs for Payers and Cost-Sharing for Patients

        The role of PBMs is to help our clients, including the
    employers, unions, and health insurers who provide prescription
    drug benefits, to reduce costs and improve health outcomes for
    consumers. PBMs have a proven track record of delivering high-
    quality, affordable benefits that address the individual needs
    of their clients and patients.
        PBMs play a crucial role in keeping drug costs down for
    payers. PBMs operate outside of the ``pharmacy supply chain''
    that physically moves prescription drugs from manufacturers to
    drug wholesalers to the pharmacy, where they are ultimately
    dispensed to patients. Rather, PBMs represent insurers and
    health plans, on the buy side of the economic transaction. In
    their capacity as benefit managers, PBMs do not take possession
    of pharmaceuticals, but work on behalf of health care payers to
    reduce costs.
        Given current drug pricing trends, the role of PBMs has
    become more important than ever. While few plans can afford to
    offer true ``first-dollar'' prescription drug coverage, all
    want to offer the most affordable benefits for consumers. That
    is why thousands of America's largest, most sophisticated
    health purchasers--Fortune 500 companies, insurers, state
    employee programs, state Medicaid programs, unions, and
    Medicare Part D plans--choose to hire PBMs, even though none
    are required to.
        PBMs typically reduce costs by 30 percent \2\ by, among
    other things, using their substantial scale and expertise to
    promote generics and negotiate aggressive rebates, discounts,
    and other price concessions with manufacturers to reduce
    premiums and cost-sharing.
    ---------------------------------------------------------------------------
        \2\  Visante: Pharmacy Benefit Managers (PBMs): Generating Savings
    for Plan Sponsors and Consumers, February 2016.
    ---------------------------------------------------------------------------

                       The Role and Background of Rebates

        Long before PBMs became prominent in the marketplace, the
    rebate system was created by manufacturers (and in the case of
    programs like Medicaid and 340B, used by public programs) to
    reduce the net cost of brand drugs. Most rebates reported by
    manufacturers are actually paid pursuant to these government
    discount programs, not to plans administered by PBMs.
        As part of manufacturer-PBM negotiations, brand drug
    manufacturers compete for formulary placement for
    therapeutically equivalent products by offering rebates for
    moving market share, which are typically calculated and paid
    weeks or months after a drug is dispensed. As a result of these
    negotiations, PBMs can recommend benefit designs that stretch
    payers' finite dollars and reduce premiums and cost-sharing.
    These designs include cost-sharing incentives for patients to
    use the most affordable drugs, which often are generics. The
    highest cost-sharing is typically reserved for drugs with the
    least competitive discounts, or in the case of many high-
    priced, single-source drugs (e.g., cancer therapies), no
    discount at all. PBMs also support benefit designs that ensure
    patients do not pay more in cost-sharing than the cost of an
    actual drug and innovations like electronic prior authorization
    that reduce physicians' administrative burden.
        Rebate savings are used by payers to reduce premiums and
    out-of-pocket costs for patients. Each payer determines what
    percentage of rebates is passed through to it, and how much (if
    any) it wants the PBM to retain as payment for services. While
    on average payers elect to receive 90 percent of rebates
    negotiated by PBMs, \3\ an increasing number require PBMs to
    pass through all of them. About 46 percent of commercial PBM
    contracts are negotiated with full pass-through of rebates to
    payers, \4\ and 100 percent of rebates in the Medicare Part D
    program are required to be reported to CMS. PBMs are committed
    to providing rebate transparency and audit rights to their
    clients.
    ---------------------------------------------------------------------------
        \3\  Written Testimony of Joanna Shepherd, Ph.D., Emory University
    for the ERISA Advisory Council Hearing on PBM Compensation and Fee
    Disclosure, June 19, 2014, Citing J. P. Morgan, ``Pharmacy Benefit
    Management, Takeaways from Our Proprietary PBM Survey,'' May 21, 2014.
        \4\  See, Pharmacy Benefit Management Institute, ``PBMI Research
    Report: Trends in Drug Benefit Design,'' 2016.
    ---------------------------------------------------------------------------

       there is no connection between the prices drugmakers set and the
                        rebates they negotiate with pbms

        A recent study of the top 200 self-administered, patent-
    protected, brand-name drugs shows no correlation between the
    launch prices or price increases manufacturers set and the
    rebates they pay to PBMs. \5\ There are many cases of high-
    priced drugs that carry low rebates and low-priced drugs that
    carry high rebates. Some high-priced drugs have no rebate at
    all.
    ---------------------------------------------------------------------------
        \5\  Visante, Inc. Increasing Prices Set by Drugmakers; Not
    Correlated With Rebates, June 2017. Analysis prepared for PCMA
    ---------------------------------------------------------------------------
        The figure below \6\ illustrates the lack of correlation of
    price changes to rebates, by drug class.
    ---------------------------------------------------------------------------
        \6\  Ibid.
        [GRAPHIC] [TIFF OMITTED] T7277.002

        .epsLike manufacturers in other industries, drugmakers set
    prices according to supply, demand, and the level of
    competitive alternatives available. Considering the confusion
    surrounding rebates, PBMs encourage manufacturers to offer
    payers other ways to reduce net costs.

          Hepatitis C Drugs: A Classic Case of Leveraging Competition

        The introduction of new therapies for hepatitis C
    demonstrates how competition in the marketplace can drive
    significant savings on expensive drugs. In 2013 the first
    highly effective drug to cure hepatitis C was priced at $84,000
    for a cycle of treatment. However, by 2015, after that drug
    faced competition from additional market entrants, PBMs were
    able to negotiate a 46 percent rebate--saving billions. \7\
    Market competition and the threat of formulary exclusion
    compelled the manufacturer to agree to this steep rebate.
    Indeed, after some PBMs excluded the first drug and opted to
    prefer a competing manufacturer's drug when the competing
    drug's manufacturer was willing to drop the cost, other PBMs
    were able to prefer the first drug in their formulary, when the
    first manufacturer matched the competition. Still other PBMs
    were then able to keep both on their formulary as the market
    evolved.
    ---------------------------------------------------------------------------
        \7\  New York Times, ``Costly Hepatitis C Drugs for Everyone?''
    September 2, 2015.
    ---------------------------------------------------------------------------
        Research on hepatitis C drug costs has subsequently shown
    that by 2015, when competition had emerged, hepatitis C drug
    costs negotiated in the U.S. by PBMs for Medicare Part D were
    usually lower than those in price-controlled European countries
    and Japan. \8\ The case of hepatitis C drugs illustrates
    clearly the effectiveness of the threat of formulary exclusion
    to bring manufacturers to the negotiating table.
    ---------------------------------------------------------------------------
        \8\  IMS Health, ``Comparison of Hepatitis C Treatment Costs
    Estimates of Net Prices and Usage in the U.S. and Other Major
    Markets,'' September 2016.https://www.imshealth.com/files/web/
    IMSH%20Institute/Healthcare%20Briefs/IIHI--Comparison--of--HepatitisC--
    Treatment--Costs.pdf
    ---------------------------------------------------------------------------

    PBMs Help Commercial Clients Explore Trade-Offs to Point-of-Sale (POS)
                                    Rebates

        POS rebates refer to contract arrangements where negotiated
    price concessions are estimated before the transaction and then
    applied immediately at the point of sale. In the commercial
    market, PBMs already help payers implement POS rebates. Since
    moving rebates to POS does not reduce overall costs but only
    redistributes them among different enrollees, payers ask
    themselves the following questions before choosing this
    approach:
         LShould rebate savings be used to reduce premiums
    for all enrollees or out-of-pocket costs for certain ones who
    take certain drugs?
         LDo plans have the administrative and financial
    capacity to reduce costs at POS even though manufacturers do
    not pay rebates until months after a drug has been dispensed?
         LDo plans understand the limitations of POS
    rebates? Some high-priced drugs carry no rebates at all and
    others are so expensive that rebates alone will not guarantee
    access. A $1,500 drug with a 30 percent rebate would still cost
    patients in the deductible $1,050.
         LIf plans are willing to exchange higher premiums
    for lower cost-sharing, would it be simpler to just reduce
    deductibles or co-pays on certain drugs?
        Frustration over high drug prices has led some policymakers
    to explore ways to reduce costs for consumers, including
    forcing health plans to use rebates to reduce POS costs rather
    than premiums. However, such policies do not reduce costs; they
    only shift costs from one group of patients to another.

                   POS Rebates Do Not Work in Medicare Part D

        While plans with POS rebates can be implemented in the
    commercial market, they have proven unworkable in Medicare Part
    D and pose risks that could destabilize the program. In fact,
    POS rebates are already permitted in Part D and have been
    tried--unsuccessfully--in the past. They lead to significant
    adverse selection and expose plans to other risks, such as
    being accused of False Claims Acts violations if they
    incorrectly estimate the size of rebates. Requiring POS rebates
    in Part D would dramatically increase costs to the program and
    taxpayers. According to modeling by the actuarial firm,
    Milliman, this would result in widespread premium increases and
    cost taxpayers an additional $20 billion over the next decade.
    \9\
    ---------------------------------------------------------------------------
        \9\  Milliman, ``Value of Direct and Indirect Remuneration (DIR):
    Impact on Medicare Part D Prescription Drug Plan (PDP) Program
    Stakeholders,'' Commissioned by Pharmaceutical Care Management
    Association, July 2017.https://www.pcmanet.org/wp--content/uploads/
    2017/07/Value-of-PDP-DIR--20170706.pdf
    ---------------------------------------------------------------------------

    PBMs Use Direct and Indirect Remuneration (DIR) to Keep Drug Costs and
                            Beneficiary Premiums Low

        DIR often refers to negotiated price concessions between
    pharmacies and health plans or PBMs. However, as coined, DIR is
    a technical term created by the Centers for Medicare and
    Medicaid Services (CMS) specific to Medicare Part D that
    includes both manufacturer rebates and certain incentive
    payments to pharmacies. These contractual arrangements--even if
    not specifically labeled DIR--also exist in the commercial
    market. The vast majority of DIR payments in Part D are PBM-
    manufacturer negotiated rebates. A much smaller share is made
    up of incentive payment terms that pharmacies (or their
    Pharmacy Service Administrative Organizations on their behalf)
    \1\ contractually negotiate with PBMs. Pharmacy DIR payments
    based on performance metrics hold pharmacies accountable for
    certain activities such as generic dispensing, cost-effective
    dispensing, improving medication adherence, and reducing
    inappropriate drug use.
    ---------------------------------------------------------------------------
        \1\  Parties especially noteworthy in the supply chain and key to
    negotiations between PBMs and pharmacies are large third-party
    organizations known as pharmacy services administrative organizations
    (PSAOs). These organizations allow independent pharmacies to pool their
    collective purchasing power. More than 80 percent of independent
    pharmacies (18,103 of the 21,511 pharmacies identified by National
    Council for Prescription Drug Programs data) use PSAOs or other group
    purchasing organizations to increase their leverage in negotiating
    their payment terms and conditions with PBMs. The largest PSAOs are
    controlled by three multi-billion dollar suppliers to pharmacies,
    providing a further negotiating advantage for independent pharmacies
    due to the size and sophistication of these parent companies.
    ---------------------------------------------------------------------------
        According to a recent study, the price concessions PBMs
    negotiate with drug manufacturers and drugstores and report to
    CMS as DIR are generating significant savings for the federal
    government and are projected to save enrollees in standalone
    Part D plans $48.7 billion on their premiums over the next 10
    years. \10\
    ---------------------------------------------------------------------------
        \10\  Milliman, ``Value of Direct and Indirect Remuneration (DIR):
    Impact on Medicare Part D Prescription Drug Plan (PDP) Program
    Stakeholders,'' Commissioned by Pharmaceutical Care Management
    Association, July 2017.https://www.pcmanet.org/wp-content/uploads/2017/
    07/Value-of-PDP-DIR--20170706.pdf
    ---------------------------------------------------------------------------
        CMS has also found that DIR contributes significantly to
    keeping Part D premiums low. Earlier this year, CMS released a
    report that found negotiated DIR price concessions have grown
    in recent years to moderate beneficiary premiums and reduce
    costs for the government. \11\ The CMS report highlights how
    negotiated price concessions reduce premiums for Medicare Part
    D beneficiaries, which also lead to lower costs for the federal
    government--negotiated price concessions lowered per-
    beneficiary costs in Part D 28 percent on average. \12\ Stable
    and affordable premiums have contributed to a 90 percent
    satisfaction rate among Part D enrollees. \13\
    ---------------------------------------------------------------------------
        \11\  CMS, ``Medicare Part D-Direct and Indirect Remuneration
    (DIR)'' January 19, 2017.https://www.cms.gov/Newsroom/
    MediaReleaseDatabase/Fact-sheets/2017-Fact-Sheet-items/2017-01-19-
    2.html
        \12\  CMS, Op. Cit.
        \13\  Morning Consult for Medicare Today, ``Ten Years After
    Implementation, Nearly Nine in 10 Seniors are Satisfied with Part D,''
    July 2016.http://medicaretoday.org/resources/senior-satisfaction-
    survey/
    ---------------------------------------------------------------------------

         Policy Recommendations to Improve Competition and Reduce Costs

        PCMA supports policies to lower drug costs through
    increased competition. The policy proposals outlined below to
    help increase competition in the marketplace include some under
    HELP Committee jurisdiction and some under Finance or Judiciary
    Committee jurisdiction.
         LStop anticompetitive product adjustments, i.e.,
    ``evergreening.'' Drug manufacturers sometimes use tactics such
    as ``product hopping'' or ``evergreening,'' submitting
    applications to the FDA for approval of a ``new'' product that
    is essentially the same as the original product. These product
    lifecycle management tactics artificially extend drug
    exclusivity periods and delay the take-up of lower-cost
    generics.
         LAllow for FDA accelerated approval of brand drugs
    based on increasing competition. Accelerated review is granted
    to new drug applications that address ``unmet need.'' The
    economic need for competition to lower prices should be a
    criterion of unmet need.
         LRevisit and improve biosimilar labeling and
    naming. Substitutable biosimilars should bear identical names
    and labels to their innovator analogs. Use of different names
    will confuse patients and providers and inhibit prescribing of
    biosimilars.
         LReduce innovator biologic exclusivity to seven
    years. Seven years of data exclusivity would still provide a
    sufficient return to manufacturers, while also speeding more
    affordable biosimilars to market.
         LEliminate use of Risk Evaluation and Mitigation
    Strategies (REMS) to delay competition. Some manufacturers have
    used REMS to prevent generic or biosimilar developers from
    getting sufficient quantities of a drug or biologic to develop
    a competitor to the innovator product. REMS were never intended
    for this purpose; this practice should be prohibited.
        PCMA also supports enhancing tools in Medicare Part D,
    Medicaid, and commercial markets to increase competition and
    affordability. PBMs and health plans can best drive competition
    among drug manufacturers when they can give plan enrollees a
    strong incentive to use a competing, higher-value drug. This
    reduces costs and helps improve adherence among patients. Below
    are some strategies to strengthen these efforts.
         LCreate a safe harbor for value-based drug price
    negotiations from Medicaid Best Price. Today any drug
    manufacturer must offer state Medicaid programs the lowest
    price it offers any other payer. This provision is seen as a
    price floor and is inhibiting creative value-based pricing
    arrangements.
         LExpand drug coverage options for Health Savings
    Account (HSA)-eligible high-deductible health plans (HDHPs).
    HDHPs associated with HSAs should have the option of covering
    prescription drugs with low or no cost-sharing prior to
    reaching the deductible, especially drugs that qualify for a
    preventive drug list. This policy can be achieved by expanding
    the current preventive drug list used by HDHPs.
         LRemove Part D's protected classes. Designating
    ``classes of clinical concern'' where all or substantially all
    drugs in a class must be covered allows drug manufacturers to
    name their price. CMS already applies careful plan formulary
    coverage checks to assure proper coverage.
         LMake biosimilars subject to the 50 percent Part D
    coverage gap discount. The ACA did not apply to biosimilars the
    50 percent Part D coverage gap discount. This could have the
    unintended consequence of encouraging prescribing of more
    expensive innovator biologics when lower cost biosimilars are
    available.
         LEncourage greater use of generics for Medicare
    Part D Low Income Subsidy (LIS) enrollees. MedPAC recommended
    allowing the Secretary of HHS to lower cost-sharing on generics
    and raise it for brands that have generic competition.
    Increasing the differential between brands and generics and
    allowing plans to lower generic cost-sharing would save money
    for enrollees and Medicare.
         LEliminate the tax deduction for direct-to-
    consumer (DTC) drug ads that mention a specific product. While
    DTC drug ads may encourage some people to see a doctor, they
    drive up unnecessary utilization and the cost of health care.
        These are all common-sense ideas that would improve
    affordability for payers, taxpayers, and consumers, and
    increase competition.
                                    ------

                                   Conclusion

        PBMs evolved because they increase the value of
    prescription drug benefits. PCMA's member companies harness
    market forces and competition to corral drugs costs and deliver
    high-quality benefits and services to their payer clients and
    enrollees. In its search for solutions to address high drug
    costs, PCMA encourages the Committee to pursue policies that
    foster and encourage competition to keep prescription drug
    costs and pharmacy benefits more affordable for employers,
    enrollees, taxpayers, and government programs.
        PCMA member companies welcome continuing discussion among
    all stakeholders to create a robust, sustainable market that
    will continue to deliver needed cures and treatments for
    patients who suffer through disease and chronic illness. PCMA
    looks forward to working with this Committee and the rest of
    Congress to find additional ways to promote savings consistent
    with high-quality, high-value prescription drug benefits.
        Thank you for the opportunity to testify. I am happy to
    answer any questions.
                                    ------

                      [summary statement of mark merritt]

        America's pharmacy benefit managers (PBMs) administer
    prescription drug plans for more than 266 million Americans
    across dozens of PBMs with health coverage provided through
    self-insured employers, health insurers, labor unions,
    Medicare, Medicaid, CHIP, and the Federal Employees Health
    Benefits Program (FEHBP).
        The cost of prescription drugs has understandably garnered
    a lot of attention. However, despite the rise of list prices on
    certain brand drugs, PBMs have held the rise of overall drug
    costs to low single-digit increases over the past few years. It
    is also important to note that prescription drug launch prices
    and price increases are determined by the same supply-and-
    demand dynamics of countless other industries that manufacture
    products and use supply chains to get them to market. Pricing
    decisions are made unilaterally by manufacturers. There's no
    correlation between manufacturer price increases and the
    rebates and discounts they negotiate with PBMs.
        The role of PBMs is to help our clients, including the
    employers, unions, and health insurers who provide prescription
    drug benefits, to reduce costs and improve health outcomes for
    consumers. PBMs have a proven track record of delivering high-
    quality, affordable benefits that address the individual needs
    of their clients and patients.
        Given current drug pricing trends, the role of PBMs has
    become more important than ever. While few plans can afford to
    offer true ``first-dollar'' prescription drug coverage, all
    want to offer the most affordable benefits for consumers. That
    is why thousands of America's largest, most sophisticated
    health purchasers--Fortune 500 companies, insurers, state
    employee programs, state Medicaid programs, unions, and
    Medicare Part D plans--choose to hire PBMs, even though none
    are required to.
        PBMs typically reduce costs by 30 percent by, among other
    things, using their substantial scale and expertise to promote
    generics and negotiate aggressive rebates, discounts, and other
    price concessions with manufacturers to reduce premiums and
    cost-sharing.
        PCMA supports policies to lower drug costs through
    increased competition. The policy proposals outlined below to
    help increase competition in the marketplace include some under
    HELP Committee jurisdiction and some under Finance or Judiciary
    Committee jurisdiction.

         LStop anticompetitive product adjustments, i.e.,
    ``evergreening.''
         LAllow for FDA accelerated approval of brand drugs
    based on increasing competition.
         LRevisit and improve biosimilar labeling and
    naming.
         LReduce innovator biologic exclusivity to seven
    years.
         LEliminate use of Risk Evaluation and Mitigation
    Strategies (REMS) to delay competition.
         LCreate a safe harbor for value-based drug price
    negotiations from Medicaid Best Price.
         LExpand drug coverage options for Health Savings
    Account (HSA)-eligible high-deductible health plans (HDHPs).
         LRemove Part D's protected classes.
         LMake biosimilars subject to the 50 percent Part D
    coverage gap discount.
         LEncourage greater use of generics for Medicare
    Part D Low Income Subsidy (LIS) enrollees.
         LEliminate the tax deduction for direct-to-
    consumer (DTC) drug ads that mention a specific product.

        These are all common-sense ideas that would improve
    affordability for payers, taxpayers, and consumers, and
    increase competition.
                                    ------

        The Chairman. Thank you, Mr. Merritt.
        Mr. Menighan.

                    STATEMENT OF THOMAS E. MENIGHAN

        Mr. Menighan. Thank you, Chairman Alexander and Ranking
    Member Murray, for the opportunity to discuss a very important
    topic for our Nation's patients, families, and pharmacists.
    It's an honor to be here.
        I'm Tom Menighan, American Pharmacists Association CEO.
    APhA is America's largest, oldest, and most diverse pharmacist
    organization. We promote patient access and coverage for
    pharmacists' quality patient care services. Our members
    contribute to healthcare in a wide variety of settings,
    including physician offices, specialty and community pharmacies
    both chain and independent, senior care, ambulatory care, and
    health systems.
        For many years as a practicing community pharmacist and
    specialty pharmacy owner, I've shared the challenges with
    patients facing financial choices between food and medicine.
    Today's topic is of concern to America's 300,000 pharmacists,
    the professional on the front line, informing patients about
    medication cost and explaining complex insurance coverage
    policies.
        As the organization representing pharmacists in all
    practice settings, we support policies that increase patients'
    access to affordable and cost-effective medicines.
        Decisions among the entire supply chain impact patient
    medication costs, including arrangements among manufacturers,
    wholesalers, insurers, and PBMs. Pharmacies are where millions
    of Americans are first confronted with complex pharmaceutical
    pricing policies or changes in coverage, formularies, prior
    authorization, deductibles, copayments, many of which they
    don't know or understand.
        Upstream decisions often limit pharmacists' options to
    impact patients' final drug costs. Instead of helping to
    address the nearly $300 billion the U.S. spends annually on
    medication use problems, fixing the problems of medication use,
    community pharmacists spend much of their day on the phone
    pursuing appropriate, covered, affordable treatment.
        To address this challenge, we support a transparent pricing
    framework that would eliminate or identify mechanisms like
    rebates and post point of sale price fees imposed on
    pharmacies. These policies generally result in higher point of
    sale prices to consumers and, consequently, higher beneficiary
    copayments. We also encourage policies that allow any willing
    pharmacy to enter into contracts with insurers or PBMs to
    increase patient access and choice, which can improve adherence
    and health outcomes.
        AphA requests the Committee to look beyond the drug price
    spend in isolation. Policies should consider the relationship
    between effective medication use and lower medical costs rather
    than squaring them in siloes. Full value in healthcare will
    come from integrating these siloes and their related costs and
    outcomes.
        As drugs become more expensive, complex, and personalized,
    the need to optimize their impact and value should increase. To
    get the greatest benefit from medications, patients must
    understand how to use their medications safely and effectively.
    Empowered pharmacists can assist patients in optimizing the
    medication use and decreasing patient cost by providing
    services focused on safe and appropriate use.
        For example, pharmacists provide medication management
    services, especially important for patients who take multiple
    drugs or have chronic conditions, and we address hospital
    readmissions by helping patients transition between care
    settings.
        Unfortunately, Medicare does not cover our services. Many
    of our Nation's seniors are medically underserved, despite 91
    percent of Americans living within five miles of a community
    pharmacy. Pharmacists are a well trained and underutilized
    healthcare resource, which can positively affect beneficiaries'
    care and the entire Medicare program.
        We ask your support today for S. 109, the Pharmacy and
    Medically Underserved Areas Enhancement Act, and urge its swift
    passage to provide access to underserved seniors. Not only will
    access increase, but the Act will help improve beneficiary
    outcomes, particularly those impacted by medications. But we
    have to be on the team.
        Finally, AphA supports a safe and secure supply chain.
    America's pharmacists and patients should not have to worry
    about diversion and counterfeits. We believe proposals to
    legalize importation of non-FDA approved drugs will do more
    harm than good. Importantly, we have great concern regarding
    importations' impact on patient safety and continuity of care.
    We believe it is in direct conflict with recent efforts by
    Congress to secure the U.S. supply chain and secure and improve
    patient safety.
        In summary, thank you for including pharmacists today, the
    medication experts, on the patient's healthcare team in this
    discussion. Ultimately, the most expensive medicine is the one
    not purchased, not taken, abandoned, or not used correctly by
    patients. Pharmacists stand ready to help.
        I look forward to answering any questions on the positive
    role we can play and do play in reducing patients' prescription
    drug costs.
        Thank you.
        [The prepared statement of Mr. Menighan follows:]

                        statement of thomas e. menighan

        Thank you Chairman Alexander and Ranking Member Murray for
    inviting me to testify today on a very important topic for our
    nation's patients, families, and their pharmacists:
    prescription drug prices. \1\ It is an honor to be here.
    ---------------------------------------------------------------------------
        \1\  The cost of prescription drugs increased by 8.77 percent in
    2016, according to data from the Truveris National Drug Index. Over the
    past 3 years, annual price increases have increased by an average of
    9.98 percent. See, Truveris. Prescription Drug Prices Continue to
    Climb, Soaring 8.77 percent in Latest Truveris NDI Report. Press
    Release. May 10, 2017. Available at:https://www.truveris.com/resources/
    press-releases/prescription-drug-prices-continue-to-climb-soaring-8.77-
    in-latest-truveris-ndi-report
    ---------------------------------------------------------------------------
        My name is Tom Menighan and I am the Executive Vice
    President and CEO of the American Pharmacists Association, or
    APhA.
        APhA is America's oldest, largest and most diverse
    pharmacist organization. APhA was founded in 1852, and
    represents pharmacists, pharmaceutical scientists, student
    pharmacists, pharmacy technicians, and other parties invested
    in improving medication use and advancing patient care. APhA
    members practice and contribute to providing care in all
    practice settings, including community pharmacies, hospitals,
    long-term care facilities, community health centers, physician
    offices, ambulatory clinics, managed care organizations,
    hospice settings, and the uniformed services. APhA promotes
    patient access and coverage for pharmacists' quality patient
    care services.
        I was a practicing community pharmacist and specialty
    pharmacy owner for many years. Like many other pharmacists, I
    needed to make careful purchasing decisions to provide patient
    access to needed medications and negotiate with other members
    of the supply chain and payers to stay viable. I've also shared
    the challenges with patients who face financial choices between
    food and medicine for themselves or loved ones. Today's topic
    is of major concern to America's 300,000 pharmacists-the health
    care professional most often at the front lines of informing
    patients about their medication cost or copay amount and
    explaining complicated insurance coverage policies.
        Pharmacies are where millions of Americans are first
    exposed to the impact of complex pharmaceutical pricing
    policies or confronted with changes in coverage, formularies,
    prior authorization, deductibles and co-payments or co-
    insurance, many of which they didn't know existed or
    understand. My comments today will focus on the following
    areas----cost versus value, patients' access to medications,
    and medications' safety and affordability.

                               Cost Versus Value

        As drugs become more and more expensive, complex, and
    personalized, the need to optimize their impact also increases.
    In order to get the greatest benefit from medications, patients
    must understand how to use their medications safely and
    effectively. Pharmacists have more medication-related education
    and training than any other health care professional.
    Pharmacists can and do assist patients in optimizing the impact
    of medications and decreasing patients' costs by providing
    services focused on safe and appropriate medication use. For
    example, pharmacists provide medication management services,
    which are especially important for patients who have complex
    care plans, take multiple drugs or have chronic conditions.
    Additionally, to address hospital readmissions, pharmacists
    help patients transition between care settings.
        Unfortunately, despite the fact that many states and
    Medicaid programs are turning to pharmacists to increase access
    to health care and address medication-related costs, Medicare
    Part B does not cover the services pharmacists can provide.
    Pharmacists are trained to do more than place medication in a
    container and while 91 percent of Americans live within 5 miles
    of a community pharmacy \2\ many of our Nation's seniors are
    medically underserved. Pharmacists are an underutilized health
    care resource which can positively affect beneficiaries' care
    \3\ and the entire Medicare program.
    ---------------------------------------------------------------------------
        \2\  NCPDP Pharmacy File, ArcGIS Census Tract File. NACDS Economics
    Department.
        \3\  CMS. Evidence Supporting Enhanced Medication Therapy
    Management. Center for Medicare and Medicaid Innovation. 2016.
    Available at: https://innovation.cms.gov/Files/x/mtm-evidencebase.pdf
    ---------------------------------------------------------------------------
        APhA strongly believes S.109, the Pharmacy and Medically
    Underserved Areas Enhancement Act, is a bipartisan proposal
    that will improve patient care, health outcomes, impact of
    medications, \4\ and consequently, the viability of the
    Medicare program. Introduced by former Health Subcommittee
    Chair Chuck Grassley (R-IA) and Senators Bob Casey (D-PA),
    Susan Collins (R-ME), and Sherrod Brown (D-OH), S. 109 has 45
    bipartisan cosponsors. Similar legislation obtained 51
    cosponsors in the 114th Congress.
    ---------------------------------------------------------------------------
        \4\  See Avalere Health. Exploring Pharmacists' Role in a Changing
    Healthcare Environment. May 2014. Available at: http://avalere.com/
    expertise/life-sciences/insights/exploring-pharmacists-role-in-a-
    changing-healthcare-environment Also, See Avalere Health. Developing
    Trends in Delivery and Reimbursement of Pharmacist Services. October
    2015. Available at: http://avalere.com/expertise/managed-care/insights/
    new-analysis-identifies-factors-that-can-facilitate-broader-
    reimbursement-o
    ---------------------------------------------------------------------------
        The legislation will enable Medicare patients in medically
    underserved communities to better access health care through
    state-licensed pharmacists practicing according to their own
    state's scope of practice. In medically underserved
    communities, pharmacists are often the closest health care
    professional and accessible outside normal business hours.
    Helping patients receive the care they need, when they need it,
    is a common sense and bipartisan solution that will improve
    outcomes and reduce overall costs.
        The importance of medication-related services cannot be
    overstated, especially in the Medicare program. Medications are
    the primary method of treating chronic disease and are involved
    in 80 percent of all treatment regimens. Moreover, the United
    States spends nearly $300 billion annually on medication-
    related problems, including nonadherence. \5\ Accordingly, not
    only will S.109 increase beneficiaries' access to health care,
    it will help improve their outcomes-particularly those impacted
    by medications. APhA appreciates the support by many Committee
    members for the Pharmacy and Medically Underserved Areas
    Enhancement Act and urges its swift passage to allow
    pharmacists to deliver these vital services as providers in
    medically underserved areas.
    ---------------------------------------------------------------------------
        \5\  New England Healthcare Institute. Thinking Outside the
    Pillbox: A System-Wide Approach to Improving Patient Adherence for
    Chronic Disease. August 2009. Available at:http://www.nehi.net/
    publications/17-thinking-outside-the-pillbox-a-system-wide-approach-to-
    improving-patient-medication-adherence-for-chronic-disease/view
    ---------------------------------------------------------------------------
        We also encourage the Committee, when considering policy
    changes, to look beyond isolated components of health care to
    determine cost and value. Because health coverage is frequently
    analyzed by the benefit type such as inpatient, outpatient, and
    drug coverage, a patient's overall services, costs and outcomes
    may never be reviewed comprehensively. Policies cannot continue
    to consider drug and medical coverage, and their related costs
    and outcomes, separately if we are to achieve true value in
    health care. Current coverage and payment policies related to
    prescription drugs place incentives on the short-term, focusing
    on cost containment for the product rather than weighing the
    overall clinical benefit to the patient and the impact to their
    medical costs. Breaking down the many silos within our health
    care system will help address that $300 billion dollars spent
    on medication-related problems-many of which are preventable.
    \6\
    ---------------------------------------------------------------------------
        \6\  Ibid.
    ---------------------------------------------------------------------------

                        Patients' Access to Medications

        As the organization representing pharmacists in all
    practice settings, APhA has been, and is, a strong supporter of
    policies which increase patients' access to affordable and cost
    effective medicines. Decisions along the entire drug supply
    chain impact patients' medication costs, including arrangements
    between manufacturers, wholesalers, insurers, and pharmacy
    benefit managers, or PBMs. Because of these upstream
    stakeholder policies, for most patients, pharmacists have
    limited options to impact patients' final drug costs. Moreover,
    complex coverage and payment policies hinder the full potential
    of community pharmacists' clinical education and training from
    being realized as much of their day is spent on the phone
    trying to find an appropriate treatment that is not only
    covered, but the patient can afford. Consequently, APhA
    supports a transparent pricing framework which would eliminate
    such mechanisms as hidden discounts, free goods and post point-
    of-sale price fees imposed on pharmacies.
        To address post point-of-sale fees, known as Direct and
    Indirect Remuneration (DIR) fees, APhA supports S. 413, the
    Improving Transparency and Accuracy in Medicare Part D Spending
    Act, that would prohibit Medicare Part D plan sponsors and
    their PBMs from retroactively reducing payment on clean claims
    submitted by pharmacies under Medicare Part D. The Centers for
    Medicare and Medicaid Services (CMS) has acknowledged a notable
    growth in DIR fees, which have more than tripled in recent
    years. \7\ These policies generally result in higher prices at
    point of sale which result in the beneficiary paying more
    because cost-sharing is based on sales prices. S. 413 will
    boost transparency in drug pricing and facilitate better CMS
    oversight.
    ---------------------------------------------------------------------------
        \7\  See, Wakely Consulting Group analysis of S. 413/H.R. 1038.
    2017. Available at: http://www.ncpa.co/pdf/wakely-report.pdf
    ---------------------------------------------------------------------------
        An additional problem facing some pharmacies is the
    inability to enter into contracts with health plans due to the
    growth in narrow networks. APhA reiterates the need for Part D
    plans to be required to contract with any pharmacy willing to
    accept their contractual terms and conditions. Increasing
    patient choice will not only improve patients' access to
    benefits and services, but will likely positively impact
    patient satisfaction and outcomes, such as adherence. A related
    issue is limited distribution of some medications. As more
    costly and complex medications are being developed, some
    manufacturers, clinics, practitioners' offices and pharmacies
    have entered into contracts that effectively limit the
    distribution of certain medications. To address these issues,
    APhA encourages the Committee to examine narrow networks and
    the limited distribution of certain medications and the impact
    these mechanisms have on patients and competition.
        Drug shortages are another factor that can negatively
    affect patients in terms of cost and the availability of their
    treatments. APhA urges the Committee to consider mechanisms to
    both better control the price of medications in shortage and
    also to improve tracking and prediction systems used to
    identify drugs in shortage. APhA also strongly supports the
    appropriate prosecution of entities that engage in price
    gouging and profiteering of medically necessary drug products
    in response to drug shortages.

                     Medications' Safety and Affordability

        APhA supports congressional efforts to increase patients'
    access to appropriate, safe, effective, and affordable
    prescription medications. We are a strong supporter of the user
    fee acts, like the FDA Reauthorization Act of 2017 (FDARA),
    which have helped innovative and cost affordable treatments
    reach patients more quickly. Equally, we have encouraged the
    development and implementation of a framework by the U.S. Food
    and Drug Administration (FDA) for determining biologic product
    interchangeability. APhA opposes practices which circumvent the
    intent of drug product review laws and negatively impact the
    pharmacist's ability to substitute medications to safe,
    effective, lower-cost alternatives. Conversely, APhA supports
    pharmacists collaborating with prescribers and patients to
    design cost-effective treatment regimens, identify formulary or
    generic products as a means to reduce costs, and intervene on
    behalf of the patient to identify alternate therapies. \8\
    ---------------------------------------------------------------------------
        \8\  See Brief for the FTC as Amicus Curiae, Mylan Pharmaceuticals,
    Inc. v. Warner Chilcott plc, et al. U.S. 3d Cir. (2016), describing a
    typical product-hopping scheme, ``A brand-name pharmaceutical company
    expects generic rivals to win FDA approval to compete with the
    company's profitable brand-name drug using automatically substitutable
    AB-rated equivalents. To thwart such substitution, the brand-name
    company introduces minor changes to the drug's formulation, such as
    therapeutically insignificant tweaks to dosage levels or to the form of
    administration (e.g., capsules vs. tablets). Before generic equivalents
    have a change to enter, the brand-name manufacturer then takes various
    steps to extinguish demand for the original version. The shift in
    prescriptions is generally a one-way street: once doctors prescribe a
    medicine and find that it works, they are generally reluctant to switch
    users back to the original formulation even if a cheaper generic
    version of it later becomes available.'' Available at:https://
    www.ftc.gov/system/files/documents/amicus--briefs/mylan-
    pharmaceuticals-inc.v.warner-chilcott-plc-et-al./
    151001mylanamicusbrief.pdf
    ---------------------------------------------------------------------------
        Although APhA supports congressional efforts to address
    patients' medication costs, APhA has significant concerns with
    turning to drug importation achieve lower prices. We believe
    proposals to legalize importation of non-FDA approved drugs is
    not a comprehensive solution to the complex issue of drug
    pricing, threatens patient safety, disrupts care, and directly
    conflicts with efforts by Congress and federal agencies to
    increase the integrity and security of the U.S. drug supply
    pursuant to the Drug Supply Chain Security Act (DSCSA).
    Furthermore, APhA is concerned savings, if any, will be short-
    term and importation will instead result in long-term costs to
    patients and the health care system.
        Because drug importation policies effectively encourage
    patients to buy medications online from foreign sources, APhA
    fears patients will be at an even greater risk of taking
    ineffective or harmful medications, including controlled
    medications in which they weren't prescribed. The lack of a
    strong regulatory framework for internet pharmacies in certain
    foreign countries has led to the large number of illegitimate
    foreign internet pharmacies. APhA's concerns regarding foreign
    internet pharmacies are compounded by the large number of
    illegitimate internet ``pharmacies'' which have increased and
    become more sophisticated in recent years, making them
    difficult to track and permanently stop.
        Importantly, broader importation laws will further fragment
    care and hinder the progress made by Congress to move U.S.
    health care delivery and payment towards value. Because
    Canadian pharmacists may only fill prescriptions written by
    Canadian prescribers, expanded importation policies will
    encourage Americans to seek care from foreign prescribers and
    pharmacists, whose systems and standards are not integrated
    into, or consistent with, U.S. systems or care. Value-based
    care models and other efforts to produce savings and promote
    quality, such as outcomes-based reimbursement, will be more
    difficult to measure and optimize if patients are allowed to
    receive care outside the model's mechanisms to drive results.
        As previously noted, obtaining safe and effective
    medications is only one part of appropriate medication use. It
    also requires a health practitioner's knowledge of the
    patient's complete medication profile and an understanding by
    the patient of how to take the medication, side effects and/or
    potential interactions----all of which could be negatively
    affected by importation proposals. APhA believes importation of
    non-FDA approved drugs could hurt the very patients intended to
    benefit from importation proposals. Consequently, the risks to
    patient safety from harmful or ineffective products or
    avoidable medication errors due to fractured care outweighs any
    increase in access or cost-savings.
        In summary, thank you today for including pharmacists-the
    medication expert on the patient's health care team-in this
    discussion. Ultimately, the most expensive medicine is the one
    not purchased, not taken, or not used correctly by patients.
    Pharmacists stand ready to help.
        I look forward to answering any questions on the positive
    role pharmacists can and do play in reducing patients'
    prescription drug costs.

       Addendum: APhA House of Delegates Policies Related to Drug Pricing

    2004, 1968          Manufacturers' Pricing Policies

        APhA supports pharmaceutical industry adoption of a
    ``transparent pricing'' system which would eliminate hidden
    discounts, free goods, and other subtle economic devices.
    (JAPhA NS8:362 July 1968) (JAPhA NS44(5):551 September/October
    2004) (Reviewed 2006)(Reviewed 2011)(Reviewed 2016)

    1985                      Pharmaceutical Pricing

        APhA supports a system of equal opportunity with the same
    terms, conditions, and prices available for all pharmacies. (Am
    Pharm NS25(5):52 May 1985) (Reviewed 2004) (Reviewed
    2006)(Reviewed 2011)(Reviewed 2016)

    2004, 1977          Prescription Drug Advertising

        APhA does not oppose the dissemination of price information
    to patients, by advertising or by any other means. (JAPhA
    NS17:448 July 1977)(JAPhA NS44(5):551 September/October
    2004)(Reviewed 2006)(Reviewed 2011)(Reviewed 2016)

    2016, 1994      Pharmacy Services Benefits in Health Care
    Reform

        A single set of pricing rules, eliminating class-of-trade
    distinctions, for medications, medication delivery systems, and
    other equipment so that no payer, patient, or provider is
    disadvantaged by cost shifting.
        The right for every American to choose his/her own provider
    of medications and pharmacists' services and for all
    pharmacists to participate in the health plans of their choice
    under equally applied terms and conditions. (Am Pharm
    NS34(6):58 June 1994) (Reviewed 2004) (Reviewed 2010) (Reviewed
    2011)(JAPhA 56(4); 379 July/August 2016

    2016  Biologic, Biosimilar, and Interchangeable Biologic Drug
    Products

        APhA urges the development of programs and policies that
    facilitate patient access to and affordability of biologic
    products. (JAPhA 56(4); 369 July/August 2016)

    2005, 1977          Government-Financed Reimbursement

        APhA supports only those government-operated or -financed,
    third-party prescription programs which ensures that
    participating pharmacists receive individualized, equitable
    compensation for professional services and reimbursement for
    products provided under the program. (JAPhA NS17:452 July 1977)
    (JAPhA NS45(5):558 September/October 2005)(Reviewed
    2009)(Reviewed 2011)(Reviewed 2012)(Reviewed 2017)

    2012                Drug Supply Shortages and Patient Care

        APhA encourages the active investigation and appropriate
    prosecution of entities that engage in price gouging and
    profiteering of medically necessary drug products in response
    to drug shortages. (JAPhA NS52(4) 457 July/August
    2012)(Reviewed 2017)

    2005, 1981          Third-party Reimbursement Legislation

        APhA supports enactment of legislation requiring that
    third-party program reimbursement to pharmacists be at least
    equal to the pharmacists prevailing charges to the self-paying
    public for comparable services and products, plus additional
    documented direct and indirect costs, which are generated by
    participating in the program. (Am Pharm NS21(5):40 May 1981)
    (Reviewed 2005) (Reviewed 2009)(Reviewed 2014)

    1967  Drugs Provided Under Social Security Act: Guidelines for
    Pharmaceutical Service

        Since it is probable or likely that APhA may have to
    consider and act upon some proposals in the area of drug costs
    before the next annual meeting, we recommend that APhA Board of
    Trustees be guided by whether the proposals: (a) Permit
    pharmacists to select and dispense a quality drug product; (b)
    Establish some mechanism to assist pharmacists in selecting
    quality, drug products under the cost and other criteria
    established; (c) Permit the use of any available drug product
    when unique medical circumstances so require; (d) Establish a
    reasonable remuneration base for pharmacists rendering services
    under the program; (e) Guarantee recipients free choice of
    pharmacy; and (f) Limit the reimbursement for pharmacists'
    services to those provided by duly licensed pharmacists. (JAPhA
    NS7:315 June 1967) (Reviewed 2005) (Reviewed 2009)(Reviewed
    2014)

    2017                Pharmacy Performance Networks

        APhA supports performance networks that improve patient
    care and health outcomes, reduce costs, use pharmacists as an
    integral part of the health care team, and include evidence-
    based quality measures. (JAPhA 57(4): 441 July/August 2017)
                                    ------

                   [summary statement of thomas e. menighan]

        Thank you Chairman Alexander and Ranking Member Murray for
    the opportunity to discuss a very important topic for our
    Nation's patients, families, and their pharmacists.
        It is an honor to be here.
        I am Tom Menighan, the American Pharmacists Association's
    (APhA), Executive Vice President and CEO.
        APhA is America's oldest, largest and most diverse
    pharmacist organization. We promote patient access and coverage
    for pharmacists' quality patient care services. Our members
    contribute to health care in a wide variety of settings
    including physician offices, specialty and community
    pharmacies, senior care facilities, academia and health
    systems.
        I was a practicing community pharmacist and specialty
    pharmacy owner for many years. I've shared the challenges with
    patients who face financial choices between food and medicine
    for themselves or loved ones. Today's topic is of major concern
    to America's 300,000 pharmacists--the health care professional
    most often at the front lines of informing patients about their
    medication cost or copay amount and explaining complicated
    insurance coverage policies.
        As the organization representing pharmacists in all
    practice settings, APhA is a strong supporter of policies which
    increase patients' access to affordable and cost effective
    medicines.
        As you know, decisions along the entire drug supply chain
    impact patients' medication costs, including arrangements among
    manufacturers, wholesalers, insurers, and pharmacy benefit
    managers, or PBMs.
        Pharmacies are where millions of Americans are first
    exposed to the impact of complex pharmaceutical pricing
    policies or confronted with changes in coverage, formularies,
    prior authorization, deductibles and co-payments, many of which
    they didn't know or understand. Due to these upstream decisions
    and policies, for most patients, pharmacists have limited
    options to impact patients' final drug costs. Instead of
    helping to address the nearly $300 billion the U.S. spends
    annually on medication-related problems, community pharmacists
    spend much of their day on the phone to find an appropriate
    treatment that is not only covered but the patient can afford.
        We support a transparent pricing framework that would
    eliminate mechanisms like rebates and post point-of-sale price
    fees imposed on pharmacies. These policies generally result in
    higher prices at point of sale and consequently, higher
    beneficiary co-pays. We also encourage policies that allow any
    willing pharmacy to enter into contracts with insurers or PBMs
    to increase patient access and choice, which can improve
    adherence and health outcomes. APhA requests the Committee to
    look beyond isolated components of health care to determine
    cost and value. Policies that consider drug and medical
    coverage, and their related costs and outcomes in separate
    silos cannot achieve true value in health care.
        As drugs become more expensive, complex and personalized,
    the need to optimize their impact and value also increases. To
    get the greatest benefit from medications, patients must
    understand how to use their medications safely and effectively.
    Empowered pharmacists can assist patients in optimizing the
    impact of medications and decreasing patients' costs by
    providing services focused on safe and appropriate medication
    use.
        For example, pharmacists provide medication management
    services, which are especially important for patients who take
    multiple drugs or have chronic conditions, and address hospital
    readmissions by helping patients transition between care
    settings.
        Unfortunately, Medicare Part B does not cover our services.
    Many of our Nation's seniors are medically underserved, despite
    91 percent of Americans living within 5 miles of a community
    pharmacy. Pharmacists are an underutilized health care resource
    which can positively affect beneficiaries' care and the entire
    Medicare program.
        We ask your support today for S. 109, the Pharmacy and
    Medically Underserved Areas Enhancement Act, and urge its swift
    passage to provide access to underserved seniors. Not only will
    access increase, it will help improve beneficiary outcomes,
    particularly those impacted by medications.
        Finally, APhA supports a safe and secure supply chain.
    America's patients and pharmacists should not have to worry
    about diversion and counterfeits. We believe proposals to
    legalize importation of non-FDA approved drugs will do more
    harm than good. Importantly, we have great concern regarding
    importation's impact on patient safety and continuity of care
    and believe it is in direct conflict with recent efforts by
    Congress to secure the U.S. drug supply and improve patient
    safety.
        In summary, thank you today for including pharmacists--the
    medication expert on the patient's health care team--in this
    discussion. Ultimately, the most expensive medicine is the one
    not purchased, not taken, or not used correctly by patients.
    Pharmacists stand ready to help.
        I look forward to answering any questions on the positive
    role pharmacists can and do play in reducing patients'
    prescription drug costs.
                                    ------

        The Chairman. Thank you very much to all the witnesses.
    We'll now begin a 5-minute round of questions. I'll begin, and
    then we'll go to Senator Murray, and then we'll leave and go
    vote and come back. But we'll continue the hearing so that
    Senators can ask questions.
        Ms. Reilly, did I hear you right? I think you said that
    three of the pharmacy benefit managers, which Mr. Merritt
    represents, negotiate rebates for 75 percent of prescriptions
    sold.
        Ms. Reilly. That's correct.
        The Chairman. That's about $100 billion of money?
        Ms. Reilly. In 2015, over $100 billion was negotiated on
    behalf of commercial health plans as well as some government
    mandated----
        The Chairman. The rebate is simply--that $100 billion means
    that the pharmacy benefit managers then--the manufacturers get
    less money.
        Ms. Reilly. Correct.
        The Chairman. The pharmacy benefit managers then decide in
    their negotiations where that $100 billion goes.
        Ms. Reilly. Right. So it lowers the net price to the
    manufacturer. That money either gets sent back to the insurance
    company, some of which is kept--a portion of which is kept by
    the pharmacy benefit manager.
        The Chairman. Mr. Menighan, you said, I believe, that we
    don't need rebates. Is that what you said?
        Mr. Menighan. No. What I said was that we need----
        The Chairman. Do you want to get rid of them?
        Mr. Menighan [continuing]. we need more transparency in the
    system so that we know where they're coming from. At the end of
    the day when the patient walks up to a pharmacy, and the
    pharmacy presents them with the cost of the medicine to them,
    the impact of rebates isn't really felt until after----
        The Chairman. Well, Ms. Reilly was saying that people who
    go into your pharmacies don't really see the direct--or don't
    necessarily see the direct benefit of the rebate negotiated by
    the pharmacy benefit managers.
        Mr. Menighan. Well, that's fair. They don't.
        The Chairman. Senator Murray and I and others of us--we've
    been working on health insurance, which we find to be very
    complicated. Where the money goes in prescription drugs is more
    complicated. I've yet to figure out exactly where it goes.
        Why do we need rebates at all? Wouldn't it increase
    transparency if the drug manufacturers just established a list
    price and then they negotiated with the pharmacy benefit
    managers, or to whomever else they sold to, a reduction in that
    price if they wanted to, and then we wouldn't have some mystery
    about who is getting the benefit of a rebate.
        Mr. Menighan. Without commenting on the need for rebates,
    they're clearly used to drive market share----
        The Chairman. Why wouldn't you comment on it?
        Mr. Menighan. They're used to drive market share.
    Oftentimes, in our view, that's not necessarily to the benefit
    of the patient. When pharmacists are trying to manage
    medication use----
        The Chairman. Well, my question is why do we need rebates.
        Ms. Reilly. Well, I would argue----
        Mr. Menighan. I don't know why we need rebates.
        The Chairman. Mr. Merritt, why do we need rebates? Why
    don't we just get rid of rebates and let you negotiate directly
    with the manufacturers, take that $100 billion a year and just
    reduce the list price? Wouldn't that make it simpler for us to
    understand where the money goes?
        Mr. Merritt. We'd be open to that. I mean, rebates were
    around before PBMs ever came on the scene, and, usually,
    rebates are used not just by manufacturers of drugs but other
    products because they want to keep one high price because their
    lower volume clients will pay that price. But then as they have
    bigger volume clients, instead of lowering the price, they'll
    offer a bigger discount, which is all a rebate is.
        Ms. Reilly. I would argue, though, that high rebates are
    things that both the pharmacy benefit managers and insurance
    companies like, because they get a big check at the end of the
    day for those rebates. They then can use those rebate dollars
    to do what they want to do with them, which is typically to
    lower premiums.
        The Chairman. Right. Well, would you like, Ms. Reilly, to
    eliminate rebates?
        Ms. Reilly. We'd like to see those rebates get passed back
    to the patient at the point of sale.
        The Chairman. Why worry about a big complicated chart that
    shows how they're being passed back? Why not just eliminate
    rebates?
        Ms. Reilly. Well, I think that's one option, obviously, to
    have a lower list price. But I will tell you, today, plans and
    PBMs tend to favor products in terms of the formularies. They
    prefer to have a product with a high list price and a high
    rebate because, again, that money flows back to them for them
    to decide what to do with.
        The Chairman. Ms. Gallenagh, what do you think? Do we need
    rebates at all?
        Ms. Gallenagh. Honestly, to be candid, wholesale
    distributors don't have any role in this rebate.
        The Chairman. But you have a nice view of the prescription
    drug business. Do you think it would be more transparent and
    easier to follow and the consumers might get a more direct
    benefit of lower cost if rebates were eliminated?
        Ms. Gallenagh. I think it's something to be explored.
        The Chairman. That's what we're doing. We're exploring it
    here, trying to get an--Mr. Davis, what about you?
        Mr. Davis. Mr. Chairman, this is a good example of a
    difference between the branded and the generic market.
    Historically, the rebate model isn't applied across the entire
    generic sector. Our work in setting a wholesale acquisition
    cost is generally directed to the wholesalers. We'll have 20 or
    25 generic manufacturers competing for the business of the
    three wholesalers. That usually leads to sort of an upfront
    negotiation with them on price, which is what forces the
    deflationary aspect of the industry.
        We are seeing an increased level of involvement between
    PBMs and brands as branded products come close to patent expiry
    in an effort to maintain market share that will negatively
    inhibit a generic getting to market. But, ultimately, the
    rebate model is not as commonly used on the generic side as it
    is on the brand side.
        The Chairman. Thanks to each of you.
        Senator Murray.
        Senator Murray. Thank you.
        Ms. Reilly, let me start with you. Do you agree that our
    current system of brand and generic drugs is designed to strike
    a careful balance between protecting the market share of
    innovative drugs for a limited period to recoup costs and
    driving competition to bring prices down after that time? Yes
    or no?
        Ms. Reilly. I do believe that's the intent of our system,
    yes.
        Senator Murray. I do, too. But here's what my concern is.
    Your member companies are taking some actions now to
    deliberately disrupt that balance to get the longest market
    monopoly possible in order to benefit their bottom line, and
    I'll give you some examples.
        AbbVie recently settled in court to extend the market
    monopoly for Humira to 20 years. Biogen extended its monopoly
    on the MS drug, Tecfidera, to 15 years by getting additional
    patents that cover only the drug's dosage amount. Allergan sold
    its patent for Restasis to the Mohawk Indian tribe to shield it
    from challenge, protecting a more than 15-year monopoly, and
    recently settled with a generic challenger to keep it off the
    market for 7 years.
        Are those isolated incidents, or are they part of a larger
    trend in which companies use the patent system to actually
    block competition that could actually bring down prices?
        Ms. Reilly. Well, those were a lot of examples. Let me try
    and address each one of them. In the case of patent
    settlements, companies are given patents by the Patent and
    Trademark Office, and they believe they have every right to
    defend those patents in a court of law. In the case of the
    AbbVie and Amgen patent settlement you mentioned, there was no
    exchange of money for that patent settlement. The patents on
    that particular product, according to public records, exceeded
    actually to 2033, so this product will be coming on the market
    10 years prior to when the patents truly expire for that
    product. I understand there are other companies that are also
    trying to get on the market to challenge that particular
    product.
        Yes, we have a system, and that system was in part designed
    by the Hatch-Waxman Act to encourage generic manufacturers to
    get on the market before our patents actually expire. I think
    it's a system that's worked incredibly well. In 1984, there
    were 19 percent of prescriptions that are generic. Today,
    nearly 90 percent of prescriptions are generic. Patent
    settlements is one way oftentimes to get products to market
    well before the patent would actually have expired.
        Oftentimes, there are anecdotes pointed out. I would argue
    that, by and large, patent settlements and the Hatch-Waxman
    system have served and inured to the benefit of patients in
    getting those medicines to market sooner than they would have
    been otherwise.
        Senator Murray. Well, Mr. Davis, I'd like you to comment on
    that, and there also seems--that, as well as I think there's
    other tactics at play to keep drug prices high. When Congress
    actually passed the Biologics Price Competition and Innovation
    Act as part of the ACA, it cleared the path for products to
    compete with pricey biologics. The CBO estimated that increased
    competition could save patients and families $7 billion just
    through 2019. But even though FDA has now approved several of
    those, we aren't seeing any great savings.
        Why is that? Combine it with an answer to the first
    question.
        Mr. Davis. Sure, Senator Murray. Thank you for the
    question.
        I think there are three things that are having an enormous
    impact on the generic side of the pharmaceutical ecosystem
    right now that, quite frankly, are threatening its continued
    viability and sustainability moving forward. One is the market
    imbalance that I talked about, and, quite frankly, that was
    created in the market, and it's going to take some time for the
    market to work that out, where you have essentially three
    buyers that are in control of 90 percent of the generic drug
    supply.
        The two others, though, are directly related to policy and
    your question. The second is that there has been a series, both
    here in Washington and at the state level, of what we would
    call well-intentioned but misguided policy provisions, for
    instance, things that look to actually penalize generic
    manufacturers operating in a deflationary market that are only
    26 percent of the total cost but that are not focusing on the
    increase in cost of branded drugs and specialty drugs year over
    year. The implementation of a Medicaid rebate penalty on
    generics passed as part of the 2015 budget agreement is a great
    example of that, in addition to some bills in places like
    Maryland and California on the state legislative side.
        Directly to your question, the third area is we are
    absolutely, unequivocally seeing an increased effort on the
    part of certain branded manufacturers with respect to the
    amount of anti-competitive behavior designed to keep generics
    and biosimilars off the market. You mentioned a number of them.
    I think the reality is, overall, the reason that we're seeing
    this is because there are companies that are doing the business
    math and the political math and thinking that they can actually
    get away with it.
        To your question on the biosimilars, interestingly enough,
    when BPCIA passed as part of the Affordable Care Act, I believe
    the Federal Government began scoring savings, estimated
    savings, as early as fiscal year 2014. To your point, the first
    biosimilar did not get to market until September 2015. Seven
    have been approved. Only three are on the market. The other
    four are tied up in litigation.
        Senator Murray. Thank you, Mr. Chairman. I just think it's
    really real that in order for competition to bring down costs,
    we have to make sure the market is actually working. So that's
    one of the concerns that I have as we move forward.
        The Chairman. In the absence of other Senators, I'll ask a
    question, and when they come back, I'll defer to them.
        With the exception of drugs compounded in pharmacies, each
    pharmaceutical drug sold in the United States requires a
    careful review by the Food and Drug Administration before that
    drug can be sold in the United States. We call that the FDA
    Gold Standard. There are 4.4 billion prescriptions a year. Most
    of us, when we go into our local pharmacy or the doctor's
    office, don't really worry about the safety of those
    prescriptions because we rely on the FDA Gold Standard.
        Sometimes, when the cost of drugs comes up, there are
    proposals that we should import drugs from other countries and
    sidestep the careful FDA review and approval of each drug sold
    in the United States. I'd like to ask each of you, starting
    with Mr. Menighan and then going across, whether you agree that
    we should allow drugs approved by other countries to be sold in
    the United States without careful review and approval of each
    drug by the Food and Drug Administration.
        Mr. Menighan.
        Mr. Menighan. The short answer is absolutely not. While
    AphA appreciates congressional efforts to address patients'
    medication costs, we don't believe importation is a solution to
    the complex issue of drug pricing. Broadened importation of
    non-FDA approved meds threatens patient safety, directly
    conflicts with congressional efforts to increase the integrity
    and security of the supply chain and the Drug Supply Chain
    Security Act, and disrupts continuity of care and value-based
    payment and delivery. We're concerned that savings, if any,
    will be short-term, and importation will instead result in
    long-term cost to patients.
        The Chairman. Thank you.
        Mr. Merritt.
        Mr. Merritt. I'll give the short answer. We oppose that.
        The Chairman. Thank you, Mr. Merritt.
        Ms. Gallenagh.
        Ms. Gallenagh. We would absolutely oppose importation as it
    would threaten patient safety in this country. We have done a
    lot of work on the Drug Supply Chain Security Act, and we're
    currently in the Implementation Phase 1 of that law. One of the
    things that it requires is serialized product by all
    manufacturers in this country. There is no global standard for
    serialization currently. It also involves data exchange for
    each transaction that happens from the manufacturer to
    distributor to pharmacy by 2023 at the unit level. There is
    also no global standard for that data exchange.
        We've done a lot of work to try and protect the U.S. supply
    chain and make it as safe as possible, and we don't think that
    allowing foreign imports will do anything to keep that level of
    security.
        The Chairman. Senator Collins has returned, and I'm going
    to turn the chair over to her. But I'd like for Mr. Davis and
    Ms. Reilly to answer my question about drug importation.
        Mr. Davis. Yes, Mr. Chairman. Briefly, we share the concern
    that you've heard from the other witnesses here today relative
    to safety. The Secretary of Health and Human Services has the
    opportunity to certify and legalize importation if they
    determine, whether it's a Republican or Democratic health
    official, that it's safe and cost effective. No one has been
    willing to do that.
        I will tell you, also, there's an additional element
    related to generics from a practical perspective, which is far
    and away, as a market basket, generics are less expensive in
    the U.S. market than they are in major developed markets across
    the world. So it would beg the question: Why would you want to
    be importing something that's more expensive to begin with?
        The Chairman. Ms. Reilly.
        Ms. Reilly. I would just add on to what the panelists have
    said previously. But opening our borders to potentially
    counterfeit medicines risks the health and safety of Americans.
    Counterfeiting medicines is a low-penalty, low-risk enterprise,
    and if we open the borders, we are subjecting Americans to
    unsafe medicines. So we adamantly oppose.

                          Statement of Senator Collins

        Senator Collins. [presiding]. Thank you for your response.
        First of all, let me say that I love having the gavel in my
    hand----
        [Laughter.]
        Senator Collins ----even if it's only temporary and because
    of the need of other Members to go vote. I went and voted early
    so that I could relieve Senator Alexander so the Chairman could
    go vote.
        Last year, the Senate Aging Committee did an extensive
    investigation into the spiraling cost increases of certain
    prescription drugs. It's been mentioned this morning. We looked
    at Turing, we looked at Valeant, and what we found was a
    pattern of certain, what I call, hedge fund pharma companies
    buying the rights to a drug and then, overnight, increasing the
    cost by as much as literally 5,000 percent in the case of
    Daraprim.
        These were companies that played absolutely no role in the
    development of the pharmaceutical. So there wasn't any
    investment in R and D that would justify that kind of increase.
        I am particularly pleased that the Chairman is holding this
    hearing today, because I think that we have a lot of work to
    do. One of the issues that really troubles me is the lack of
    transparency in the system. The MAC price is not what most
    people pay. Prices vary, depending on what pharmaceutical
    benefit manager negotiated the cost. Prices vary according to,
    obviously, whether a generic can be substituted.
        But there's just a lack of transparency in the entire
    system, and I'd like to go across the panel and have each of
    you comment on how we can increase transparency into the
    pricing, because until we do that, it is going to be very
    difficult for us to get a handle on whether these cost
    increases are justified.
        Ms. Reilly.
        Ms. Reilly. Thank you for the question, and thank you for
    the work that you've done on issues that you raised, such as
    the ones with Daraprim, Turing, and Valeant pharmaceuticals.
    We, too, share the concerns that you raised about the fact that
    companies can buy and essentially engage in regulatory
    arbitrage, knowing that the approval through the FDA may take
    years.
        There are a number of solutions that we've talked about as
    well that we think merit some consideration, whether the FDA
    can fast-track reviews of medicines to compete with these
    products, whether they can list on their websites suppliers and
    names of companies that may be able to help in producing
    competing product. So we are thankful for your leadership on
    that issue and would welcome working with you on that.
        The issue of transparency, I think, is a very important
    one. Oftentimes, when we hear the word, transparency, it means
    different things to different people. Transparency is
    important, but it's important if it applies holistically.
    Oftentimes, the transparency legislation that we've seen wants
    to focus on one industry, the brand name pharmaceutical
    industry, and leave out the rest of the supply chain.
        As I mentioned in my testimony, brand name pharmaceuticals
    represent about half of what we spend on total drugs in this
    country. The rest is subsumed by generic manufacturers, as Chip
    mentioned, just over 20 percent, but the rest is as a result of
    supply chain, be it wholesalers, distributors, pharmacy benefit
    managers, payers, and hospitals.
        If we're going to have a discussion on transparency, which
    we would welcome, we think it's important to have one that
    holistically involves the entire supply chain, because there
    are costs, as I mentioned before, in the hospital sector alone
    where they are increasing their reimbursement two and a half
    times over what they acquire a pharmaceutical product for. We
    definitely need to have more transparency into areas like that.
        Senator Collins. I see two of my Members of the Committee
    have returned. So rather than going down the line, I'm going to
    switch to another question that I want to make sure I get in,
    and, Mr. Merritt, I'm going to direct it to you and Mr.
    Menighan.
        Last night, NBC Nightly News ran a story about an
    investigation which found that a wide variety of prescription
    drugs on certain insurance plans are actually cheaper when the
    consumer pays out of pocket. That makes no sense to me. We also
    learned that at least in some negotiations, in some contracts,
    there is a gag order that prevents pharmacists from telling
    patients that they would be better off paying out of pocket
    than using their health insurance.
        I would like both of you to answer the question of how
    common is this practice, and how can this occur? How can it
    occur that a prescription benefit manager, whose very job is to
    negotiate prices, is negotiating a price that's actually higher
    than the consumer would pay out of pocket?
        Mr. Merritt.
        Mr. Merritt. Yes, it's a really good question, and the
    answer to your question is it's not something that should be
    going on in the marketplace. It's an outlier behavior. I'm not
    even sure if it's a PBM or an insurer behavior. But it's not
    something that we support. We think the person ought to--who
    goes to the pharmacy ought to pay the lesser amount if it's a
    cost-sharing or the cost of the drug. So if there's a generic
    that costs $5 and there's a $20 copay, they should pay $5. They
    shouldn't pay that. So I agree that it's a practice that we
    don't support. It's an outlier practice and a practice that we
    hope goes away.
        Mr. Menighan.
        Mr. Menighan. Thank you, Senator Collins. First, I should
    say that I didn't handle an earlier question about rebates. We
    oppose rebates in all their forms.
        With regard to the question that you just asked,
    pharmacists are incredibly frustrated with their inability to
    help patients. Providing patient care shouldn't be this
    difficult. My members feel incredibly frustrated with their
    lack of connectivity, their lack of communication with plans.
    Essentially, they have no negotiating power, and they're sort
    of told what they have to do, and they can take it or leave it.
    They can either be in a network or not, typically not, and if
    they're in the network, they're told how to perform. So----
        Senator Collins. So is it an outlier----
        Mr. Menighan. No, it's not an outlier.
        Senator Collins ----or is this a common practice?
        Mr. Menighan. It's common.
        Senator Collins. Thank you.
        Senator Kaine.

                           Statement of Senator Kaine

        Senator Kaine. Thank you, Madam Chair, and thank you to the
    witnesses for their good testimony. I want to ask a couple of
    questions.
        Mr. Menighan, if I can start with you at the front line
    with pharmacies and dealing with patients--commonly, I hear, as
    I travel around Virginia, about how high prices affect
    financial decisions whether--your last line was great. The most
    expensive drug is one that somebody doesn't get, often for a
    financial reason, or if they get, they don't use it correctly.
    One in four Americans who take prescription drugs report that
    they have difficulty affording them, and then these high costs
    lead to lack of access, and that disproportionately affects the
    most vulnerable people in my population.
        Just talk a little about your customers. How do you see
    this high price challenge affecting your customers?
        Mr. Menighan. Well, on the front end, at the first purchase
    of a medication, oftentimes patients do have to make hard
    choices, and pharmacists are in a great position to help with
    those choices if given the latitude to do so. Oftentimes, we
    spend our time chasing administrivia when, in fact, we should
    be spending our time coaching patients on effective use of
    their medicines, which they so desperately need.
        Patients won't make lifestyle choices, won't be better
    nourished, won't increase their activity without long-term
    coaching and support. When they face these major barriers on
    the front end, oftentimes they throw up their hands and say,
    ``I can't do it. It's too hard,'' and they go back to their old
    ways, and they don't manage their chronic disease.
        At its core, these front line decisions that patients have
    to make and the limited resources and the lack of transparency
    that affects pharmacists' ability to understand the reasons
    behind why PBMs may say this drug is available, this one is
    not, and the conflict that occurs there when a physician says,
    ``This is the drug that I want for my patient. I think it's
    best for that patient,'' the pharmacist says, ``I'd like to
    give that to you, but it's going to cost you $500,'' and the
    patient says, ``I can't handle that. I give up,'' pharmacists
    are really challenged with that.
        To the degree that we know the reasons behind those
    formulary choices, we can be better advocates for our patients.
    To the degree that we can insert lower-cost options in
    collaborations with our physician colleagues, we can help our
    patients. But we need the time to do that and we need the
    transparency and better understanding of the information behind
    those decisions that are often made far above us and without
    any transparency.
        Senator Kaine. I would like the record to reflect that Mr.
    Menighan's use of the phrase, administrivia, suggests a new
    word that should be included in the Webster's Collegiate
    Dictionary in the coming year. I've never heard it, and I
    really like it, and I'm going to use it, steal it, and say I
    thought of it.
        [Laughter.]
        Senator Kaine. My next question is for----
        Mr. Menighan. It's yours, Senator.
        Senator Kaine. My next question is for Mr. Davis.
        Mr. Davis, your written testimony has a really nice thing
    that I love, Congress must act to support generic and
    biosimilars, and you give us three things. I want to make sure
    I really get--one, the CREATES Act, I understand. There are two
    I want to make sure I understand, and I wonder if you could
    explain.
        First, repealing the misguided Medicaid penalty on generic
    drugs. Describe what that penalty is and why it's misguided.
        Mr. Davis. Sure, Senator. Thank you for the question. In
    the fall of 2015, as part of the budget agreement that I
    believe was reached in October of that year, a rebate penalty
    that has long been associated with the branded industry--in
    Medicaid, you pay a base level rebate if you're a branded
    product, and then if your price increases exceed medical
    inflation, there's an additional penalty over and above. That
    was instituted in the early 1990's through a process in an
    effort to constrain a monopolist company's ability to take
    price increases above and beyond the rate of inflation.
        Through weekend deliberations around that budget agreement,
    there was a decision made--there had been a bill introduced in
    the House and Senate that, quite frankly, had languished for
    several years, that was ultimately included in an effort
    because it was allegedly scored at saving about a billion
    dollars over 10 years. The net effect of that provision,
    Senator, is that it actually applies in a commoditized market
    and can impact a generic manufacturer when they don't take a
    price increase.
        So that penalty has now gone into effect beginning earlier
    this year, and we have heard from our members that in certain
    instances some 40 percent of their generic portfolio is
    impacted by this additional penalty in instances when they did
    not take a price increase.
        Senator Kaine. It's a penalty that affects generics in a
    different way than branded pharmaceuticals?
        Mr. Davis. Yes, Senator. We have an added additional
    expense back to the government that is not tied to when
    companies actually take a price increase. That's the net
    effect.
        Senator Kaine. Thank you. Then, second, you want to ensure
    that biosimilar medicines have a level and competitive playing
    field in Medicare. Could you describe that, as my last
    question?
        Mr. Davis. Sure. Thank you. There's two components to that.
    One actually is that our members would actually like for
    biosimilars to be included in the 50 percent discount to the
    Medicare Part D coverage gap, so, actually, to make sure that
    there's not sort of an inverse incentive to make sure that a
    patient actually stays on the higher cost biosimilar--or,
    excuse me--biologic if it's appropriate to be on the
    biosimilar, but we actually have to be exposed to the same 50
    percent discount in the coverage gap. So that's something that
    we have supported, and we would urge Congress to consider that
    at the appropriate option.
        Then the last area with respect to that--and, actually,
    CMS, to their credit, is now looking at several of the
    reimbursement policies that originally came out relative to how
    they were going to treat biosimilars. We think there's more
    opportunity to encourage the marketplace, not distinguish the
    originator biologic and then group all biosimilars that have
    never been compared to each other in a separate J code, and
    we're optimistic that perhaps CMS will continue that evaluation
    and come up with a different decision. But that's going to be
    critical to making sure that we have a more conducive
    environment for biosimilars moving forward.
        Senator Kaine. Thank you.
        Senator Collins. Senator Cassidy.

                          Statement of Senator Cassidy

        Senator Cassidy. Thank you. I think a lot about drugs, and
    I have to admit it turns my head. I'm going to focus on
    insulin, and then I may come back to something else in a little
    bit, and I'm going to focus on it in two different areas.
        Ms. Reilly, if we speak about some of our insulin products,
    they're increasing at 20 percent per year. The Wall Street
    Journal had an article in 2016 about 2015, and at that point,
    they actually referred to the role of PBMs. But if I look prior
    to 2015, there were no rebates, appreciably, being given to
    PBMs, but prices were going up anywhere from 10 percent to 23
    percent per year, and this is toward the end of the monopoly.
    So, presumably, they've recouped their expense of new drug
    development, but costs are going up 20 percent per year so
    that, I think, from 2010 to 2015, something goes from $114 to
    $228. As deductibles have grown, patients can't afford this.
        You make a good case that we're investing in development,
    et cetera, but when costs are going up 20 percent per year on
    the tail end of a monopoly--presumably those costs have been
    recouped--Americans with diabetes and all Americans are upset.
    What do you say about that?
        Ms. Reilly. Thank you for asking that question. I think the
    diabetes marketplace, to your point, is often confusing. Today,
    it is, I would argue, one, if not the most, competitive
    marketplaces. On average----
        Senator Cassidy. But can we go back to that specific period
    from, say, 2010 to 2015, or 2011, where people were basically
    price taking. They were getting 20 percent increases per year,
    even though, presumably, they had recouped their cost of
    investment prior to that.
        Ms. Reilly. Well, I would argue, Senator Cassidy, that
    rebates were occurring well before 2010. Today, the average
    rebate in the diabetes market----
        Senator Cassidy. Okay. If I may, in 2014--2013 to 2014,
    quarter four, year to year, the price list for Novo Nordisk was
    22 percent with a rebate of 1.2 percent increase. For Sanofi,
    it was 23 percent with a rebate change of 5.4 percent, net
    price increase 20.8 percent and 26.4 percent. I'm not sure I'm
    seeing that, at least in that period up to 2014.
        Ms. Reilly. Right, and I'm not sure what the data is that
    you're looking at, Senator Cassidy, but what I can tell you is
    that today, the rebates and discounts publicly reported
    averaged between 60 percent and 70 percent.
        Senator Cassidy. Again, I'm not speaking of today. I'm
    speaking of that period in the early part of this decade.
        Ms. Reilly. Right.
        Senator Cassidy. Those drugs have now had a new competitor,
    and, frankly, when there's new competitors, PBMs drive bigger
    rebates, and I'll have a question for Mr. Merritt about that in
    just a second. But if you're an American looking at the insulin
    price--believe me, there's a guy from Lafayette, Louisiana, who
    texts me about three times a week, talking about how his
    daughter cannot afford insulin, and the price increase it's
    had, coupled with her high deductible premium, and he's a
    Republican, pro-business, but he's about his daughter's
    diabetes. So what do we say to her?
        Ms. Reilly. I would say a couple of things that are
    important that have happened. Prior to, I would say, 2012, most
    patients that took medicine did not have a deductible for their
    medicine. When they showed up at the pharmacy counter in
    January, the price that they paid for their medicine was often
    a copay and a pretty modest one--for diabetes medicine, often
    $20. From 2012 to 2015, there's been a dramatic increase in the
    number of patients that today have a deductible----
        Senator Cassidy. So you're addressing--if I may, because I
    have limited time. You're addressing the fact that the
    individual may not have been seeing the price--but there's
    still price--somebody's paying. It's either indirectly through
    the premium or directly through a copay. So somebody is paying.
        Ms. Reilly. Well, I would argue, too, though, Senator
    Cassidy, when companies price their product, they're not just
    looking to get reimbursed for the prices that they spent on
    getting that individual product to market. Companies are
    investing in the next generation of cures and treatments. Those
    costs also have to be recouped. There's been many advancements
    in the space of insulin since they first began many years ago,
    and some of the newer insulins are longer acting. Patients
    can----
        Senator Cassidy. If I may say, though, just to counter that
    a little bit, there's been more of an emphasis on raising
    prices on established drugs than on new innovative drugs, and I
    think that statistic--I don't have that statistic in front of
    me, but I've read that in the past.
        Ms. Reilly. Well, I would say last year, price increases on
    all drugs was at 2.5 percent. So price increases have certainly
    moderated over the past few years. While that may have been the
    case several years ago, we are not seeing the kind of price
    increases that we had years ago.
        Senator Cassidy. Let me go to Mr. Merritt. I'm sorry. I
    don't mean to be rude. I apologize.
        Mr. Merritt, now, I've learned to say what I've been told,
    not what I know. But this Wall Street Journal article to which
    I refer with my questions to Ms. Reilly point out that in 2015,
    actually, insulin prices did moderate. Prior to that, it's kind
    of like, oh, my gosh, I wish my stocks were doing as well. But
    in 2015, it actually flattened, but the price increased
    dramatically because they had to pay high rebates to PBMs. A
    competitor had entered; the PBM could choose; and so to pay the
    rebate, they jacked up their price in order to pay for the
    rebate.
        The CEO of Mylan came in to speak to me. She said actually
    their price was relatively flat, and then a competitor came in.
    PBMs came and said, ``Wait a second. There's now a competitor.
    We'll only carry you if you give us a big rebate.'' They had to
    increase their price in order to pay the rebate. She said it's
    paradoxical in the world of PBMs. When there is no competitor,
    your prices are lower and competition increases the price. I've
    heard that from the CEO of Mylan and from the Wall Street
    Journal. Your thoughts regarding that?
        Mr. Merritt. I would disagree with that. Let's remember
    Mylan raised the price of EpiPen 400 percent just because it
    felt like doing it, and----
        Senator Cassidy. They would counter and say, ``No, we had
    to do it because there's now a competitor, albeit on the market
    only for a short time, and we were told that they would not
    carry my EpiPen, that they would carry the competitor unless we
    paid the rebate. That's when we increased it.''
        Mr. Merritt. I don't think that happened. I think the
    reality is if they'd just lower the price, that would make it
    great, too, because all we want is the lowest net cost.
        Senator Cassidy. So, wait a second. On insulin--again, I'm
    looking at this Wall Street Journal article dated from October
    2016, and they say that at that point, the net price going back
    to the manufacturer remained flat, even though the price
    increased dramatically, and they were paying the PBM for this
    with a delta between their net price and their list price. Are
    you disagreeing with that, too?
        Mr. Merritt. Again, the simplest thing is for them just to
    lower their prices. Typically, a rebate goes up because the
    price goes up. If the price goes up, our clients are going to
    demand that we get more of a discount. That's just how it
    works. What we want is lower net cost. That can be done in a
    number of different ways, and to Chairman Alexander's point,
    rebates are one way things can work, but the simplest thing
    would just be for prices to go down.
        Senator Cassidy. I am way over, but I'll do it for the
    record and ask you to direct the response directly to the
    article in the Wall Street Journal which disagrees with that a
    little bit.
        I'm sorry for being way over. I apologize to my colleagues.
        Senator Collins. Senator Hassan.

                          Statement of Senator Hassan

        Senator Hassan. Thank you, Senator Collins, and I want to
    add my thanks to Chairman Alexander and Ranking Member Murray
    for holding this hearing, and thank you all to the witnesses
    for being here today.
        Ms. Reilly, I hear from granite staters all the time who
    struggle to afford their medications, and they are so
    frustrated. Drug makers are reaping sky-high profits as
    patients choose between having their medicine or, for example,
    heating their homes, choices they have to make too often
    because of the brazenly anti-competitive behavior that bad
    actors in the drug industry engage in, most recently, Allergan,
    who makes the blockbuster dry eye drug, Restasis.
        Restasis brought in sales of $1.5 billion last year alone,
    which is, on average, $4 million per day. Allergan has had a
    market monopoly on this multibillion dollar drug since its
    approval in 2002, and, boy, is it working to keep it that way.
    On September 8th of this year, just 1 week before its patents
    were set to be subject to a hearing at the U.S. Patent and
    Trademark Office, Allergan announced it had cut a deal with a
    Native American tribe in order to shield the Restasis patents
    from review by exploiting the doctrine of tribal sovereign
    immunity.
        In this outrageous first of its kind deal, which just
    yesterday, a Federal district court judge called a ploy,
    Allergan assigned ownership of the Restasis patents over to the
    tribe. Then it basically leases back the patents from the tribe
    and continues to sell the blockbuster drug. So Allergan is
    using tribal sovereign immunity to shield the Restasis patents
    from review, maintaining its market monopoly, preventing
    generic competition, and keeping prices and profits high.
    Meanwhile, patients who need Restasis are struggling to afford
    it.
        Allergan's behavior here is unacceptable, and if other drug
    companies follow its lead, the problem is only going to get
    worse. I'm very concerned about the potentially devastating
    implications of the deal for our entire patent system, for the
    delicate balance struck in the Hatch-Waxman Act, and, most
    importantly, for patients' access to affordable drugs.
        Ms. Reilly, your organization has a role to play here. In
    May 2017, PhRMA approved new membership criteria to--and this
    is a quote--``tackle the biggest challenges facing patients,''
    and PhRMA expelled 22 member companies, which was seen as a
    response to public concern over the rising cost of prescription
    drugs and to remove bad actors.
        Ms. Reilly, you are head of Membership for PhRMA. What I
    want to know, yes or no, is whether you believe Allergan's
    actions are consistent with the mission of your organization.
        Ms. Reilly. First of all, thank you very much for the
    question. I want to make clear a few things. Today, our member
    companies are asked to defend their patents, not----
        Senator Hassan. Ms. Reilly, I have very limited time and
    another question to ask. So yes or no, is it consistent?
        Ms. Reilly. I believe the IPR process, which is in play
    here, is a process that needs significant reform. Our
    companies----
        Senator Hassan. That's fine. But to exploit tribal
    sovereign immunity to avoid competition as opposed to dealing
    with the patent system, in my view, is unacceptable. I'm sorry,
    but because I have limited time, I'd like to move on to my next
    question, which is to Ms. Gallenagh.
        I want to discuss with you my serious concerns about the
    Washington Post 60 Minutes report this weekend on a bill from
    last year that your organization lobbied for aggressively. The
    DEA had the power to immediately stop distributors from
    supplying opioids and other prescription drugs to pill mills
    and other corrupt sources. But according to the DEA Chief
    Administrative Law Judge, last year's law makes it much harder
    for the DEA to use that power. Under the new law, the agency
    must provide substantial evidence that a distributor's actions
    makes death or serious bodily harm considerably more likely,
    and the DEA needs to do so before any witnesses are produced or
    any evidence is admitted at a hearing.
        As a result, the judge writes that the law appears--and
    this is his quote--``completely eliminate the DEA's ability to
    ever impose an immediate suspension.'' Yet, Ms. Gallenagh, your
    organization spokesperson told the Washington Post, quote, ``To
    be clear, this law does not decrease DEA's enforcement against
    distributors.'' That's a direct contradiction from what the
    judge is saying, and it's his job to interpret the law. Doesn't
    that make your organization's statement pretty misleading?
        Ms. Gallenagh. Thank you for the question, Senator. The
    opioid epidemic, in general, is a very serious concern and a
    complex issue that we are also very concerned about as
    distributors, and we work with our supply chain partners daily
    to try and find solutions to that.
        Senator Hassan. Ms. Gallenagh, I understand that. But
    here's the point. The point is that your organization, which
    lobbied aggressively for this law last year claimed that it
    does not decrease the DEA's enforcement against distributors,
    and the DEA Chief Administrative Law Judge says you're wrong,
    that the law completely eliminates the DEA's ability to take
    certain enforcement actions. It's his job to interpret the law.
    So is the judge wrong, or is your organization statement
    misleading?
        Ms. Gallenagh. In that sense, I believe that the judge's
    statement was misleading, and I stand behind our organization's
    defense, and I----
        Senator Hassan. I'd suggest you read the judge's article,
    which has now been published, because what he points out, among
    other things, is that for all this time when there wasn't a
    statutory definition of immediate harm that constrained the DEA
    the way the bill that was passed last year does, over many,
    many years, the industry didn't challenge the DEA's actions,
    because the DEA--very often, there's almost no case law on it.
    So I'd suggest you go read it, because there are a lot of us
    extraordinarily concerned----
        The Chairman [presiding]: We're a minute over.
        Senator Hassan. I thank you for your time, thank you,
    Chairman Alexander.
        The Chairman. Thank you, Senator Hassan.
        Senator Young.

                           Statement of Senator Young

        Senator Young. Thank you, Chairman.
        Ms. Reilly, the congressional Research Service tells us the
    United States spends more for prescription drugs than other
    wealthy countries. In Europe, drug prices are set by
    governments, not by pharmaceutical companies. There's a recent
    study by McKinsey which indicated, on average, the difference
    between the price of one drug in the United States and the same
    drug in France, UK, Germany, Italy, and Spain was 50 percent.
    So U.S. consumers, by my reading, are subsidizing the world's
    research and development. I'm not the first one to divine this
    insight.
        Research and Development magazine tells us the U.S.
    accounted for 46 percent of global life sciences R and D, a
    vast majority of that going to biopharma. So the challenge is
    even if Europeans or wealthy countries were to raise their
    prices and reduce the extent to which they're free riding, that
    wouldn't automatically lead to a decrease in prices here in the
    U.S. for our consumers. Instead, a company would be punished by
    their investors and by their stockholders for lightening the
    burden on rank and file Americans who are trying to obtain
    pharmaceuticals.
        I guess my question is twofold. The first part should be an
    easy sort of yes or no, as I would see it. Am I correct that
    foreign countries' pricing and reimbursement systems actually
    affect our prescription drug costs?
        Ms. Reilly. I would definitely say that the U.S. does bear
    the burden for the world in terms of supporting research and
    development. I think the numbers that you gave are much higher
    than I've seen in terms of the price differential between the
    United States and other countries. Oftentimes, those rely on
    list prices which are not the net price paid.
        Senator Young. So go back and look at the McKinsey study
    and see where you disagree with their premises and their
    findings. Maybe we could engage in a dialog offline about that.
        Ms. Reilly. Absolutely.
        Senator Young. The second part of the question is since
    you've acknowledged there is an impact of these foreign
    reimbursement systems and foreign pricing on the price to U.S.
    consumers, how might we mitigate to extent to which Americans,
    our innovators, our consumers, are shouldering the burden of
    financing the world's medical innovation?
        Ms. Reilly. Well, one thing I think is important to make
    clear is we do have a different system in the United States. We
    reward innovation, companies that bring their products to
    market, and we pay more up front, and we pay significantly less
    on the back end.
        Senator Young. So you're giving me a lot of background. Are
    there strategies we might use as policymakers to change this
    dynamic or mitigate the extent to which we're shouldering the
    burden like through free trade agreements, for example?
        Ms. Reilly. Absolutely. Stronger trade agreements could go
    a long way to ensure that other countries are paying more of
    their fair share. I would note a comment that Mark said, which
    is with regard to the recent Hep C medicines. PBMs here on
    record said that patients here were paying less than what was
    being paid abroad in part because of the considerable market
    consolidation we have in the PBM market, where you have many
    PBMs that are buying on behalf of more people than entire
    foreign countries and the EU.
        Senator Young. Are there other strategies we might employ
    to reduce the price to consumers in the State of Indiana?
        Ms. Reilly. Well, I think again, we have to look at what
    our insurance market system looks like today. I think,
    oftentimes, we treat pharmaceuticals very different than we
    treat other aspects of the healthcare system. Based on an
    individual's biology, if you need a medicine, you're being
    asked to pay significantly more out of pocket as opposed to if
    you needed to go into a hospital setting. So I think we do need
    to examine whether it's fair to say to a patient with
    rheumatoid arthritis, ``You need to pay 40 percent of the price
    of your medicine,'' and if I go in the hospital, I need to pay
    4 percent of the cost.
        Senator Young. So one possibility to lower prices and
    increase value, as I understand it, is the use of outcome-based
    contracts increasingly being piloted by pharmaceutical
    companies and insurers alike. Can you explain how these
    contracts work in summary fashion and their potential to lower
    drug costs for patients, and then perhaps elaborate on any
    policy initiatives we here might engage in that might be
    standing in the way of moving these pilots to scale?
        Ms. Reilly. Sure. Great question. I think there are a
    number of innovative arrangements that are being produced, the
    goal of which is to say instead of purchasing medicines
    historically like we have, which is based on a volume basis,
    we'll pay for whatever we buy, and a movement toward saying we
    will pay for those medicines at differential rates,
    potentially, depending on if they meet the outcome that the
    payer and the pharmaceutical company can mutually agree to.
        There's lots of potential benefits of moving in this
    direction. First of all, our companies are putting our money
    where our mouth is. We may be getting paid less or, in some
    cases, nothing, depending on if our medicine produces, as we
    believe it should, so it's helpful for the healthcare system
    with the ability to lower cost, helpful for patients, too,
    because the goal, again, is also that if patients aren't being
    helped by them, then their cost sharing should also be lowered
    by those medicines. They're in their infancy stage in part
    because there are government rules, like the anti-kickback
    statute, price reporting, and communications with the FDA that
    need to be addressed to make these become much bigger than they
    are today.
        Senator Young. I'll follow-up with you and your
    organization to see if there's specific ways we might be
    helpful to empower our companies to make use of these
    contracts.
        Ms. Reilly. Absolutely.
        Senator Young. Thank you so much.
        Ms. Reilly. Appreciate it.
        The Chairman. Thank you, Senator Young.
        Senator Warren.

                          Statement of Senator Warren

        Senator Warren. Thank you, Mr. Chairman.
        The high cost of prescription drugs is a huge problem.
    Let's talk about the best way to tackle this public health
    crisis.
        Ms. Reilly, your association, which is called PhRMA,
    represents brand name drug companies, and you said in your
    testimony that, quote, ``the competitive market is the engine
    that drives the drug industry.'' So I take it you think that
    market solutions are the most effective way to deal with the
    rising price of drugs.
        Ms. Reilly. I do believe that markets lower cost, yes.
        Senator Warren. Good. I love markets, and I also believe in
    market-based solutions. So let's talk about one of the best
    market-based solutions, and that's competition. If the
    restrictions that prevent purchasers from importing the exact
    same drugs at lower prices from places like Canada were
    removed, we'd see some real competition, and we'd see some
    lower prices.
        Another market solution is negotiation. If the Federal
    Government were allowed to negotiate more competitive drug
    prices for Medicare beneficiaries, then prices would come down.
        Ms. Reilly, you've already said that PhRMA opposes
    importation of drugs from Canada. Let me ask about letting the
    Federal Government negotiate with drug companies over Medicare
    prices--these two market-based solutions.
        Ms. Reilly. Well, I would argue price controls are not a
    market-based solution. When foreign----
        Senator Warren. I'm sorry. I didn't ask about price
    controls. I asked about bringing in drugs that would compete
    with prices here.
        Ms. Reilly. Bringing in drugs from other countries that
    price control their products is not a market-based way to get
    the drug prices----
        Senator Warren. So you would be in favor of drug
    importation from any place that's not doing what you call price
    control?
        Ms. Reilly. I would argue that almost every country outside
    of the U.S. artificially limit prices----
        Senator Warren. Oh, so there's no place that we can import
    from that would satisfy your requirements. How about the
    Federal Government competing and actually having some
    competition and saying, ``We're going to negotiate prices.''
        Ms. Reilly. I think there's often a fallacy that because
    the Federal Government is not setting prices in Medicare that
    there's not negotiation, and that couldn't be further from the
    truth. As we've seen in the Medicare Part D program, there's
    been robust negotiation. Rebates are over 35 percent, on
    average, in Part D. Premiums have been low.
        Senator Warren. Let me just stop you there. I just want to
    make sure I understand the point of the group that you
    represent here and lobby for, and that is--is it that the
    Federal Government ought to be able to negotiate all drug
    prices?
        Ms. Reilly. No, we don't believe the Federal Government is
    in the best position. We have rapid market consolidation in the
    pharmacy benefit manager space that exerts significant pressure
    to the tune of over $100 billion in rebates last year.
        Senator Warren. I understand that you have other concerns.
    But drug competition from Canada, price negotiation, are market
    solutions. They're not government mandates, and I would have
    thought that if you believe in market solutions, you would have
    embraced them.
        Ms. Reilly. Well, I don't believe that price controls are
    market-based solutions, and I also think that you need to look
    at the downsides that happen in those countries, which is
    patients don't get the kind of access that they get to
    therapies here in the United States.
        Senator Warren. I realize that you can call it price
    controls, but this is a real question of whether or not there's
    any place else for consumers to go to purchase drugs, or
    whether or not the Federal Government can negotiate on a drug-
    by-drug basis every time taxpayers are picking up the ticket.
        Ms. Reilly. Well, the Congressional Budget Office has
    looked at this----
        Senator Warren. I looked it up, and the organizations who
    are testifying here today spent a combined total of $30 million
    lobbying Congress last year. PhRMA, your organization, is
    responsible for almost three-quarters of that total, and a lot
    of that money that is spent lobbying Congress is to keep drug
    prices high. That's what improves profitability for your
    industry and the companies you represent.
        Here's what I think is really wrong about this. You talk
    about wanting market solutions, but your industry isn't based
    on competitive markets. It's based on totally artificial
    taxpayer granted monopolies. Companies invent new drugs, and
    then the government hands the companies the exclusive right to
    manufacture and sell those drugs at whatever prices they want
    for decades. So I just have a little bit of time left. But I
    want to ask--do you know the average length of a government
    granted monopoly for top-selling drugs in this country?
        Ms. Reilly. Ten to twelve years.
        Senator Warren. Yes, 10 to 12 years. The law says five, 5
    years of exclusivity, but drug companies game the system.
    According to a 2015 analysis by researchers at Harvard,
    companies end up with a monopoly that lasts a medium length of
    12 and a half years.
        I know that I'm out of time, Mr. Chairman.
        Ms. Reilly. Senator Warren, patents are 20 years long, 20
    years. That is how long a pharmaceutical patent is. We also
    have 5 years of data exclusivity.
        Senator Warren. I'm sorry. The law says 5 years of
    exclusivity on the basic drugs.
        Ms. Reilly. Absolutely.
        Senator Warren. The average--do you think the Harvard
    study--they don't know how to do it there, to study how much
    money you're making off these things or how long you have
    exclusivity?
        Ms. Reilly. Senator Warren, I'm simply saying that
    companies have 5 years of data exclusivity. Immediately after
    that, a generic company can get to market, and let me tell you,
    they try very hard to get to market as soon as they can.
        Senator Warren. You're saying that the drug companies don't
    game the system at all to expand their exclusivity to an
    average of 12 and a half years? It just happens? Please try
    your story on someone else.
        Ms. Reilly. Senator Warren, patents are 20 years long.
    Exclusivity is a completely different----
        Senator Warren. Try this story on someone else who's going
    to be willing to listen to it. Taxpayers watch----
        The Chairman. If you want to----
        Senator Warren. ----thank you, Mr. Chairman.
        The Chairman. ----you can finish your point.
        Senator Warren. No, no. I just wanted to say taxpayers
    watch when we've granted exclusivity to these companies, and
    then they watch as the prices go up, and there's not a darned
    thing for taxpayers to do about it. This is just fundamentally
    wrong.
        The Chairman. Thank you, Senator Warren.
        Senator Murkowski.

                         Statement of Senator Murkowski

        Senator Murkowski. Thank you, Mr. Chairman.
        Ms. Gallenagh, I want to follow-up just very quickly with
    the discussion that you were having with Senator Hassan
    regarding this latest news with the weakening of the DEA
    enforcement authorization--a big expose this weekend through 60
    Minutes, Washington Post. You have a drug czar that is now
    effectively withdrawn from this position. The President himself
    is saying we need to look into this and to investigate it.
        One of our colleagues on the other side of the aisle has
    already introduced legislation that would repeal it. There have
    been some that have suggested it needs to be modified.
        You've indicated to Senator Hassan that you think that the
    judge had misinterpreted--or you disagreed with the judge's
    interpretation, I believe. But do you think that what was
    passed in 2016 is actually good and sound, or do you believe
    that, in fact, given what we know today, it might need to be
    modified or amended in some way?
        Ms. Gallenagh. Thank you, Senator. First, let me say
    Senators Hatch and Whitehouse, who authored that bill in the
    Senate, worked very closely with the DEA to ensure that the
    bill did not inhibit the ability to take action against
    registrants. DEA did not oppose that bill.
        Also, regarding the ALJ's article, which was a draft, I
    understand, ALJ's are not involved in issuing immediate
    suspension orders. They are recommended by DEA staff. They are
    issued by an administrator or a deputy administrator, and----
        Senator Murkowski. But do you think that something needs to
    be done to address what clearly has come out to be limitations
    within DEA's authority that we might need to address through
    legislation?
        Ms. Gallenagh. I think that it should be explored as to
    what DEA's limited actions were and their limited involvement
    with collaborating with industry and talking about defining the
    terms that registrants operate under. We have pages of
    questions that we have submitted to the agency over the years
    that have gone unanswered. This bill, from our understanding,
    is sound, and we supported it. But we are open to talking
    through those issues more closely with you and with other
    offices.
        Senator Murkowski. I do think that it is an issue that has
    really risen to perhaps a higher level, given what we are
    seeing around this country with regards to just the easy
    availability of these opioids that are just ravishing parts of
    our country. So this is something that needs to be continued
    and addressed.
        I've listened to the testimony from each of you and have
    read through your written comments, and I just have to express
    the frustration that I think the general public feels in just
    being so limited in their ability to understand why. All they
    know is that the most expensive part of their healthcare that
    they can see is what is going on with the cost of their
    prescription drugs.
        Then when we talk about, well, all we need is transparency.
    But if you look to try to understand it, you've got a
    manufacturer that sets a list price, but almost nobody pays
    that. You've got the PBMs that negotiate different prices.
    You've got the GPOs who might negotiate different prices.
    You've got one hospital that might charge something different
    than a hospital across the street. There may be rebates. There
    may be discounts. There may be other pricing things. There is
    no way that anyone can follow this.
        For the average consumer, if you all are talking
    transparency, it doesn't mean anything to them. So I look to
    ways that we might be more transparent that actually could
    translate to something. We put on the back of any product what
    the ingredients are and how that's allocated out. When Alaskans
    get a permanent fund dividend, it actually lists on that
    voucher, if you will, where all of the associated costs are
    attributed to.
        Are we crazy to think that we could be doing more with
    actually accounting for the cost so that the consumer could
    better understand and make it legible? Because right now, it's
    impossible to understand, and even those of us who are
    listening to you as supposed experts, it's all Greek, and we're
    not doing anything to help the consumer.
        Maybe it's a rhetorical question here, but I challenge you
    all to translate how the pricing mechanisms--who gets
    discounts, who doesn't, why it's fair for one hospital to
    charge something that the other one doesn't? In no other
    industry that I can think of do you have this latitude for a
    discrepancy in pricing and the ability to just set it and be
    done with it.
        I'm over my time. So perhaps if you can respond to me with
    some concrete examples of the ways that we can be more
    transparent--because I think that, ultimately, that can help us
    push down the cost. But right now, it's impossible to discern.
        Thank you, Mr. Chairman.
        The Chairman. I'd like to ask--the witnesses are welcome to
    respond to the Senator in writing with concrete examples. I
    think that would be helpful to her and to all of us.
        Senator Murphy.

                          Statement of Senator Murphy

        Senator Murphy. Thank you very much, Mr. Chairman.
        Just to Senator Murkowski's point, I got to be the chairman
    of Connecticut General Assembly's Health Committee when I was
    29 years old because I was the only one who took the time to
    try to figure out how a drug was priced, what AWP and AMP
    meant, what the dispensing fee meant. It was the most opaque
    market that existed in our state's healthcare system, and to
    this day, I think there are only a couple of state legislators
    in Connecticut who understand how a drug is priced either in
    the private market or through Medicaid, and it does behoove us
    when we talk about transparency to understand that if you just
    layer transparency on a pricing system today that has a
    thousand different prices, it's really difficult.
        I just have one question, because I know we've got to sneak
    in Senator Baldwin and myself before the bell here, and it's
    for Ms. Reilly, so I'll just prepare you for it.
        The Trump administration recently announced that it wants
    to expand association health plans and something called limited
    duration insurance plans. That was part of last week's
    Executive Order. The risk here is that you're now going to set
    up one system of care for healthy people who can get into those
    plans, which don't require you to price without respect to
    medical acuity, and one system for sick people, who will then
    stay in the marketplaces under the Affordable Care Act where
    insurance plans can't discriminate.
        Your CEO said on television last week that the Executive
    Order was a good idea, because we need to be trying everything
    that can lower costs for patients. But the fact of the matter
    is when you review these short-term limited duration plans, by
    and large, they do not cover prescription drugs. If you look at
    the best-selling plans that are sold on E-Health, they exclude
    preexisting conditions, they exclude mental health, exclude
    substance abuse, they exclude prescription drugs, and maternity
    expenses.
        I looked up the best-selling plan in my home state, which
    is offered by National General Accident and Health, and it
    doesn't cover prescription drugs, either. So why is PhRMA
    taking a position to support the Executive Order when, to the
    extent that these short-term duration plans become available to
    more and more Americans, it'll exclude the very product that
    you sell, in addition to all sorts of other coverages that
    people desperately need?
        Ms. Reilly. Thank you for the question. Let me offer two
    points, the first of which is our CEO was asked that question
    before the Executive Order was actually released, so I would
    note that. The second, I think some of the words that we heard
    coming out prior to the release of it had to do with how do we
    increase competition, how do we address some of the
    consolidation that's happening in the marketplace. I think
    those are principles that many people espouse.
        I think the details in terms of how this ultimately gets
    worked out--the devil is certainly in the details, and we will
    be looking anxiously as the various agencies look to implement
    that, because, again, our goal is to ensure that patients have
    access to care. That is our primary goal.
        Senator Murphy. So let me just ask that more specifically.
    If the result of the--I understand what the rhetoric is when
    the President talks about his executive actions. They are often
    very different than the actual words in the EOs. If the results
    of this Executive Order is to dramatically expand access to
    limited duration plans, is that something that PhRMA would
    support?
        Ms. Reilly. Our goal, as I said before, is to ensure
    patients have access to therapies, including innovative
    medicines, because so many patients rely on them. So we will be
    looking in earnest as the agencies work on this to ensure that
    patients do continue to have access to medicines.
        Senator Murphy. I would argue that now would be the time to
    weigh in and make your feelings known on this.
        Thank you, Mr. Chairman.
        The Chairman. Thank you, Senator Murphy.
        Senator Baldwin.

                          Statement of Senator Baldwin

        Senator Baldwin. Thank you, Mr. Chairman.
        Today, we've heard many competing reasons and even how it's
    very complex to know why drug prices are high and are
    increasing. So I continue to believe that we should start from
    the beginning of the story. I have a bipartisan bill with
    Senator McCain, and it's pretty simple. It would give us more
    information as policymakers by establishing basic transparency
    for drug companies when they increase the price of drugs.
    That's it.
        In fact, California just enacted, with bipartisan support,
    a new law similarly requiring transparency for drug price
    increases.
        While many changing factors contribute to a price that a
    patient pays, one factor has remained constant. We now see drug
    companies systematically increasing list prices of existing
    drugs every year. According to reports in just the first
    quarter of 2017, there were 40 increases of drug prices, which
    is more than the first quarter of 2016.
        If, as we have heard today, the list price provides an
    inaccurate picture, then I'm not sure why we shouldn't just ask
    drug companies for information to help paint an accurate
    picture and to explain why we are seeing these prices increase
    as my bipartisan bill would do.
        Mr. Davis, you noted that in the last year, revenues for
    branded drugs have increased as a direct result of price
    increases. Can you please briefly elaborate on this and
    describe what your industry is seeing when it comes to list
    price increases? I do want to ask another question, so please
    be brief and concise.
        Mr. Davis. Sure. Thank you, Senator, for the question. Just
    to clarify, are you asking the question relative to the brands
    or to the generics?
        Senator Baldwin. Revenues from branded drugs that you noted
    in your testimony.
        Mr. Davis. Yes. So what we've actually seen--and this is an
    example of how different the markets operate--is that while
    we're experiencing a period of unprecedented price deflation in
    the generics, where actually year over year, the prescriptions
    are going up, the revenue is going down in our industry. That's
    the opposite of what we're seeing in the branded side, where
    the prescriptions are actually going down, and the revenue is
    continuing to go up.
        So there can be a whole host of economic reasons for that.
    One of them that we submitted in our testimony is we are seeing
    an increasing level--despite some of the communications about
    supporting generic and biosimilar competition, we are seeing an
    increased level of activity--some of it was referenced earlier
    by Senator Hassan in her comments around outsourcing IP to
    Native American tribes--lately of these types of behaviors that
    are making it more challenging for generics to get to the
    market.
        Senator Baldwin. Ms. Reilly, like my colleagues have
    reflected in their comments and questions, I way too often hear
    concerns, stories from my constituents, about the impact of
    drug price increases on their lives. Often, these are tearful
    discussions, because your health and the ability to treat
    health conditions is deeply personal. I hear about the insulin
    list prices that have continued to increase since 2002, about
    top-selling drugs like Humira that have increased almost every
    year for 10 years, and about the more than 14 drugs for
    multiple sclerosis that have increased since 2004 to an annual
    average of about $83,000.
        A woman named Diane from Webster, Wisconsin, talked about a
    heartbreaking conversation she had with her husband earlier
    this year where they decided that she would stop taking her MS
    medication after 23 years because of it reaching $90,000 a
    year.
        At the same time, reports have indicated that most of the
    big drug companies spend more on marketing than on research and
    development. A recent Health Affairs study of the 20 top-
    selling drugs found that earnings from charging high drug
    prices in the U.S. exceeded global spending in R and D.
        Ms. Reilly, last year, your trade association updated its
    membership criteria to stipulate that branded companies invest
    in certain amounts of global R and D spending per year to be
    eligible to join. Given this renewed commitment to R and D, do
    you support drug companies making their R and D spending and
    investments more transparent for the public, as my bipartisan
    bill would do, including when they increase the list price of
    an existing drug? Yes or no?
        Ms. Reilly. Absolutely. Research and development costs--and
    I think our companies, by and large, make that information
    public. It is an important part of what we do. I would take
    issue--our companies spend significantly more on research and
    development than they do on marketing costs. With regard to
    transparency----
        Senator Baldwin. Do you disagree with the conclusions of
    the Health Affairs study?
        Ms. Reilly. I do, yes. With regard to transparency, again,
    I think a couple of things are important. One, it needs to be
    holistic and applied to the entire supply chain. As we talked
    about here today, we're half or slightly less than half of what
    we spend on brand name drugs. Lots of other folks in the supply
    chain also have a piece of this equation, and I think that
    needs to be explored.
        Senator Baldwin. I understand the arguments you've made.
    However, let's start at the beginning. Let's get transparency
    throughout, but let's start at the beginning, and the Fair Drug
    Pricing Act would be a good start in that direction.
        Ms. Reilly. I would just say list prices, too, as we've
    talked about here today, are not indicative of net prices and
    what are actually paid in the marketplace.
        The Chairman. Thank you, Senator Baldwin.
        I'm going to need to go vote, so I'm going to thank each of
    you for coming today. You've been excellent in helping us put a
    spotlight on drug prices.
        We have two Senators who--one or two--who have questions to
    ask. I'm going to ask Senator Franken to chair in my absence,
    and he'll ask his questions, and then if other Senators come
    back who have not asked their questions, he'll call on them,
    and then he'll adjourn the hearing. So thank you very much for
    coming.
        Senator Franken, thank you for chairing.

                          Statement of Senator Franken

        Senator Franken. [presiding] Thank you, and as you're
    leaving, I'd like to thank you and Senator Murray for calling
    this hearing and also for the important negotiations that
    you're involved in. So thank you.
        I just wanted to do that. Sorry I haven't been here for the
    whole thing. I've had some other stuff to do, and I ran back so
    that I could do this, and so if you'll excuse me--actually, I
    didn't run back. This is just such an exciting hearing.
        [Laughter.]
        Senator Franken. It seems like from your testimony and some
    of--mainly from your testimony that, like, every one of you in
    some way or another is responsible for getting prices down.
    That's what it seemed like from your testimony. I think Senator
    Young touched on this, but I want to try to go over it again
    for myself.
        The U.S. spends more on prescription drugs than any
    industrialized country, in part because drug prices are higher
    in the U.S. than in any other country. The drug industry pushes
    back and says that these price comparisons don't take into
    account the discounts that manufacturers give to insurers and
    other actors in the system. So to cut through that, I'd like to
    ask you some questions. Let's use the drug, Advair, which is an
    asthma inhaler example. It's produced in North Carolina. So
    it's a drug that's produced in the United States.
        Ms. Reilly, what is the list price for Advair in the United
    States, and how does it compare to the cost in Canada, France,
    and Germany?
        Ms. Reilly. I honestly do not know the list price of Advair
    off the top of my head, so I'd have to get back to you on that.
        Senator Franken. Sure, sure. That's very understandable.
    I'm going to ask you the price of every drug and see how you
    do.
        [Laughter.]
        Senator Franken. No. A Bloomberg news report from 2015
    found that the list price, this is the list price, for Advair
    was $309.60 in the United States. Accounting for, say, a 50
    percent discount, then the price would be $154.80, which is
    still higher than the price in Canada, which, in 2015, was
    $74.12. The price in Germany was $37.71, and the price in
    France was just $34.52.
        Ms. Reilly, why are prices so much higher in the United
    States for a drug produced in the United States? This is true
    for drugs that are produced in the United States and not
    produced in the United States. Why are they so much higher? I
    think Americans really want to know this, and I think they want
    to know this because you guys talked about research. Americans
    pay for a lot of the basic research, right?
        Ms. Reilly. Yes.
        Senator Franken. Yes, through NIH.
        Ms. Reilly. Our industry, yes.
        Senator Franken. But much of it the taxpayer pays directly
    to the NIH to do the basic research. Most of the research you
    do is not--in your industry is not basic research.
        Ms. Reilly. We do a fair amount of basic research.
        Senator Franken. You do a fair amount.
        Ms. Reilly. Yes.
        Senator Franken. Most of it is not basic research, and I'll
    give you the figures on that and we'll call that up in a
    second.
        Ms. Reilly. I'm aware.
        Senator Franken. These higher prices in the United States
    support high-level profits and some research and development
    costs, but we also pay these high prices because of the way our
    system is structured, the laws we set, and the clout of the
    drug industry. For example, Congress passed a law that
    prohibits the Federal Government from negotiating with drug
    manufacturers for lower prices for Medicare, which is the
    single largest payer for prescription drugs. In those other
    countries, you have the government able to bargain with the
    pharmaceutical companies.
        All of you presented yourself as part of the piece that
    keeps the prices down. Why are the prices so much higher--in
    this case, assuming a 50 percent discount from the list price--
    and in a number of cases, twice as high, four times as high as
    Canada, France, respectively, and more than four times as high
    as Germany. Why? Americans want to know why.
        Ms. Reilly. I'm happy to start. We do have a different
    system in the U.S. relative to other European countries. We
    actually compensate companies for the innovation and the value
    of the medicines that they bring. I would argue in many
    European countries, the prices are artificially depressed. They
    tend to also pay more when a medicine goes generic, and they
    use fewer generics.
        In total, our systems are spending--if you compared, on
    average, how much we spend, yes, they probably do spend a
    little bit less. I would argue, though, that our country
    incentivizes new therapies and innovation to come to market,
    and then after that period of time, when a patent expires and
    exclusivity is gone, 90 percent of the market--95 percent of
    the market shifts overnight to low-cost generics.
        In that system that we have, we are able to support a
    broader innovation ecosystem. The fact that we have 90 percent
    generics here and in most European countries, it's 50 percent
    to 60 percent, in part, because they don't incentivize their
    entry. They don't incentivize the dropping of price here. We do
    so in a way that those additional resources are able to fuel
    the next generation of therapies for patients.
        Senator Franken. I would suggest it is very small comfort
    for the Minnesotans that I visit around my state who can't pay
    for their pharmaceuticals, and I would suggest to you that this
    is a longer discussion. But Americans have to ask, why do
    Americans pay more, two times as much, four times as much, for
    our pharmaceuticals, many of which we produce, many of which
    we've done the basic research for through the NIH. Why do we
    have to pay--why does the American consumer have to pay more
    than the Canadian consumer for the same drug, more than the
    German consumer, more than the French consumer?
        Ms. Reilly. Senator, I would also argue----
        Senator Franken. Okay, go ahead.
        Ms. Reilly. I was going to say there is a case here for the
    need for stronger trade agreements to ensure that other
    countries, particularly European countries, are paying more of
    their fair share.
        Senator Franken. So the answer is just to make them pay
    more.
        Ms. Reilly. No. I think them paying more would permit
    prices here to potentially fall. It would also permit more
    money to go back into research and development, which over time
    lowers the cost of therapies, both innovative therapies as well
    as generics.
        Senator Franken. Does anybody else on the panel care to
    comment?
        Mr. Davis. Yes, Senator. If I could just add, just to
    reinforce a comment previously made, to say that all drugs are
    more expensive in the United States fails to recognize the
    distinction Ms. Reilly talked about between brands and
    generics. It is a carefully--it historically has been a
    carefully balanced ecosystem created by Hatch-Waxman, where, as
    a country, we made a decision in the 1980's to actually make
    the investment for the ability to bring novel therapeutics to
    market sooner rather than later, and then, ultimately, get a
    utilization rate and lower cost generics than we have in the
    rest of the world.
        So to the question that was asked earlier, why shouldn't we
    consider importing generics from Canada, by example, they're
    more expensive in Canada. So I'm not sure why we would import
    something that's less expensive here to begin with.
        Senator Franken. I'll bet the idea--and I approve of being
    able to import. I'll bet the idea would be to import the drugs
    that are cheaper. That's just my guess about what consumers
    would do, and I almost--I don't know. I used to be in comedy,
    and I almost think that your answer there was a tad absurd,
    which is--of course, we're not saying we need the right to
    import the same drug that's more expensive in the other
    country. Do you understand kind of the absurdity of saying
    that?
        Mr. Davis. Yes. Senator, my intention in saying that was to
    look at policy and understand that the markets operate
    fundamentally differently. The commoditized market in the
    United States is what drives generic prices lower than they are
    in other developed markets. That was my only point.
        Senator Franken. Thank you. But I do want to say that if
    you look at the whole universe of drug prices, we pay more, and
    we pay a lot more, and you're acknowledging that. That's what
    I'm talking about.
        I'll go to Senator Whitehouse.

                        Statement of Senator Whitehouse

        Senator Whitehouse. Let me ask the panel to focus on a very
    specific issue, which is the question of monopoly. Let's set
    aside for a second the licensed monopoly that people get when
    their intellectual property is protected by a patent or a
    trademark. Let's just set that aside. We're not talking about
    that particularly approved monopoly. We're talking about other
    kinds.
        Does everybody agree that we have seen circumstances
    recently in which a drug manufacturer has an effected monopoly
    with respect to one or more of their products? Does anybody
    dispute that phenomenon? Everybody agrees with that phenomenon?
    We've seen it, right? That's not complicated. Yes, everybody
    agrees.
        Let's say that you are a patient, and you have taken a
    particular drug for many, many years, and it's not under any
    kind of trademark or patent protection. But somebody who's not
    even in the pharmaceutical industry, an investor, comes in and
    sees a monopoly, buys it, and jacks the price up by 500
    percent, just because they can. We know that has happened also,
    don't we? Yes from everybody, no dissent with that, Okay.
        So here's the problem that I have, which is that in that
    circumstance, the question then is: Where do you go? How do
    people respond to that particular problem? The thesis that I
    have is that in those circumstances, which we all admit are
    true, there is a clear monopoly, and, further, we see price
    manipulation consistent not with any market, but with monopoly
    power.
        My thesis is that there's no place for anybody to go.
    There's no entity in the U.S. Government that has the authority
    to say, ``Hold it. That's a monopoly. You are extracting
    monopoly rents,'' to use the economic term, ``and you've got to
    knock it off.'' You may be able to get a lawsuit out of the
    Department of Justice for an antitrust or price fixing type
    violation, but we haven't seen a lot of that. The FDA nibbles
    around the edges of this problem. It doesn't have authority to
    step in at that point.
        Shouldn't there be some place in government where it is
    clear that once a monopoly exists, and there's no doubt about
    that, and it's clear that monopoly rent extraction is being
    done, nothing related to market pricing. In that narrow
    circumstance, shouldn't there be somebody able to act? Let's go
    right down the line here, starting with Mr. Menighan.
        Mr. Menighan. Thank you, Senator. We share your
    frustration. We often serve as uncompensated insurance agents
    for those with coverage who have to navigate complex insurance
    regs and coverage issues and copayments and insurance. We want
    desperately to be part of the team that helps people navigate
    the system in a more effective way.
        Senator Whitehouse. You concur that right now, there's no
    place to go? There's no office----
        Mr. Menighan. We have relatively few places, other than
    perhaps compassionate use programs that some companies provide,
    but not all companies provide that.
        Senator Whitehouse. Mr. Merritt.
        Mr. Merritt. Yes, it's frustrating. It is part of the
    marketplace. What we've seen----
        Senator Whitehouse. Not part of a legitimate marketplace,
    though, right? Extracting monopoly rents isn't viewed by any
    economist as being legitimate economic behavior, is it?
        Mr. Merritt. Well, we didn't like it when Mr. Shkreli went
    and bought up Daraprim and sold it for thousands of percent
    more, and I testified in the same panel a year or two ago. It's
    outrageous.
        Senator Whitehouse. But other than scolding him here in
    Congressional Committees, nobody said, ``No, you can't do
    that.''
        Mr. Merritt. I'll tell you that one thing we did--and I'll
    let Lori talk about the legality of it--but just something we
    did in the marketplace. When Daraprim--the price was jacked
    up--he bought the drug for--was it $13.50, or something like
    that, and jacked it up to several hundred dollars. If you look
    at that from a price control perspective, maybe it would be
    great if he just cut that in half to a few hundred dollars. Or
    if you looked at--well, maybe he shouldn't charge more than it
    was originally, $13.00.
        What we did was we found a compound pharmacy out in San
    Diego that would do it for $1, and then we cut his drug off the
    formulary and said, ``Here, everybody can have this drug for
    $1, but you can't have the Daraprim. It's overpriced.'' So
    there are some things we can do in the marketplace, but that's
    not to say or imply that it's not a challenge. It just takes
    time to overcome.
        Senator Whitehouse. My time is already out. So if you have
    quick responses, I'll go to Ms. Gallenagh.
        Ms. Gallenagh. Thank you, Senator. As you know, HDA members
    are unique in the supply chain, but we do support anything that
    supports increased competition in the marketplace.
        Senator Whitehouse. Mr. Davis?
        Mr. Davis. Senator, I think what you've been characterizing
    is the equivalent of a de facto monopoly.
        Senator Whitehouse. Yes.
        Mr. Davis. Not one that government licenses, but de facto,
    and it requires a lot of analysis before individuals like Mr.
    Shkreli decide to go in there. I do think, moving forward,
    there is a need to continue focus here. I do think that some of
    the things that the new FDA commissioner in the announcement of
    his Drug Competition Action Plan and legislation that this
    Committee ensured was part of FDARA, which was a listing of
    Daraprim-like drugs, so there's more visibility and increasing
    the--in an effort to try to minimize the risk associated with
    more of those types of circumstances----
        Senator Whitehouse. But do you agree that nobody presently
    has regulatory authority over exorbitant monopoly prices?
        Mr. Davis. No, correct. To the credit of the FDA
    commissioner, I think he's doing what he can within his remit.
        Senator Whitehouse. Trying to, but there is no----
        Mr. Davis. But does he have all the authority to address
    that in and of himself? No.
        Senator Whitehouse. Ms. Reilly.
        Ms. Reilly. I would say companies, like in the instance of
    Daraprim, took advantage of regulatory arbitrage to
    dramatically increase a price. I do think there is a lot that
    the FDA could do.
        Senator Whitehouse. But there was no direct regulator on
    the beat whose responsibility was to look for a clear de facto
    monopoly and address the excess price extraction.
        Ms. Reilly. Right, and to Chip's point, I think there's
    been a lot more----
        Senator Whitehouse. I'm sorry. Right? I just want to make
    sure I heard you, your answer. You said right?
        Ms. Reilly. I would say in that particular case--and we've
    seen a handful of others that mimic the same pattern--is
    exactly right. I think the FDA is trying to do--but more could
    be done, and we've got lots of ideas on how you could address
    that.
        Senator Whitehouse. Thanks for letting me go over, Chairman
    Franken.
        Senator Franken. Oh, I went way over. I'm even going to ask
    one more question, just to Mr. Merritt, real quick.
        Pay-for-delay, since we're talking about monopolies. Pay-
    for-delay--a drug company has a patent, and then a generic
    comes up, the patent runs out, the generic has it, the company
    has it, and they pay the generic not to bring it to market.
    What do you think of that practice?
        Mr. Merritt. Well, we oppose that practice. It is an
    interesting economic question, because I've heard both sides on
    it, and I think--well, Chip can address this better than me.
    But what generics would say is, ``Well, gosh, it's so hard to
    break through a patent that at least if I can get a settlement,
    we'll try to get a generic to market,'' and there's some
    incentive to do that. But, overall, our industry is on the
    other side of that issue.
        Senator Franken. Thank you.
        The hearing record will remain open for 10 days. Members
    may submit additional information for the record within that
    time, if they would like. The HELP Committee will meet again
    tomorrow, October 18th, at 9:30 a.m. for an executive session.
        Thank you all for being here today. The Committee will
    stand adjourned.

                              ADDITIONAL MATERIAL

     Response by Lori M. Reilly to Questions of Senator Alexander, Senator
       Murray, Senator Baldwin, Senator Bennet, Senator Franken, Senator
                        Roberts, and Senator Whitehouse

                               chairman alexander

        Question 1. What is the role of rebates, and do we need
    them?
        Answer 1. Payers have significant influence over which
    medications are covered on their formularies and how much
    patients have to pay out-of-pocket for their prescriptions. In
    order to increase patients' access to their medicines,
    biopharmaceutical manufacturers commonly negotiate rebates with
    payers and PBMs in exchange for formulary inclusion or
    placement on a lower cost-sharing tier. Rebates allow
    differential levels of discounting to occur, reflecting the
    robust levels of competition in the market, which economists
    believe leads to lower average prices. We believe today's
    system needs to evolve not to eliminate rebates, but to make
    sure that rebates make their way back to patients to help lower
    patient costs.
        Question 2. How do rebates affect your industry? Do your
    members contract and get paid based on the public ``list''
    price, or using a ``net'' price that takes into account
    rebates?
        Answer 2. Rebates are used in private negotiations by
    manufacturers to gain access to payer formularies and determine
    level of formulary tier placement. Manufacturers pay rebates as
    a percentage of the current list price (WAC price) at the time
    the pharmacy dispenses the medicine to the patient. The
    manufacturer sets the ``list'' price of a medicine, but is
    actually paid the ``net'' price, which is the amount after
    rebates and any other discounts and fees have been removed. In
    recent years, net prices have been growing much more slowly
    than list prices. Focusing on list prices alone results in a
    perception that drug prices are growing at unsustainable rates,
    when the prices manufacturers actually receive are in fact
    growing at low single digit rates. According to IMS Institute
    for Healthcare Informatics, brand net prices grew at just 3.5
    percent in 2016, after taking into account discounts and
    rebates.
        Question 3. Would you support a policy that would allow
    supply chain participants to contract for lower prices on the
    front end rather than after the fact with rebates?
        Answer 3. Today's pharmaceutical distribution and payment
    system is complex, and by almost any measure is very
    successful. It delivers over six billion prescriptions to
    patients every year, and generates deep discounts which have
    held growth in prescription drug costs in check; drug costs
    grew more slowly than overall health care costs in five out of
    the last 10 years.
        Rebates, by themselves, are not problematic, so long as
    patients, health plans, and employers are all able to benefit
    from them so that they lower total costs for the health care
    system. A system in which all discounts are applied only at the
    point of sale would likely run the risk of reducing the ability
    of purchasers with significant market leverage to obtain deeper
    discounts. Economists at the Federal Trade Commission and
    Congressional Budget Office (CBO) have argued that such
    differential levels of discounting tend to result in lower
    average prices.
        However, we do need to make sure that the system is working
    for patients, and that savings provided by manufacturers find
    their way to patients and can help reduce patient cost sharing.
    We are encouraged by signs that the Center for Medicare &
    Medicaid Services is considering policies to apply rebates to
    patient cost sharing in Medicare Part D, and believe that will
    help the market work better. Another way to help the market
    work better is to remove barriers to alternative payment
    arrangements (such as when a manufacturer agrees to forgo
    payment if a medicine does not work as intended). These new
    types of arrangements offer potential to reward the best value
    for patients.

                                 senator murray

        Question 1. In the written testimonies submitted to the
    committee, there is a lot of blame shifting when it comes to
    where the fault of high drug prices lays. We can all agree that
    our complex health system is inefficient, but, for that reason,
    the blame is shared, and everyone bears responsibility to fix
    the problem.
        Please provide more than one policy proposal, which does
    not involve any other members of the supply chain, that your
    industry in particular could implement, either with or without
    the help of Congress or the Administration, to bring down costs
    for patients and families, including the reasons why you
    believe it would bring down costs.
        Answer 1. While our current system has worked well in
    driving innovation for patients and holding down costs, many
    patients still struggle to access their medicines. Now is the
    time to have the critical conversation about how to promote and
    sustain medical innovation and ensure access so that patients
    and the health care system benefit from the tremendous
    scientific advancement and progress we are seeing today. In
    order for this to happen, we believe the entire health care
    system, including medicines, should be driven by value and that
    the private marketplace is best equipped to align health
    improvements with costs moving forward.
        America's biopharmaceutical companies are committed to
    working with policymakers and stakeholders to advance solutions
    that further enhance the private marketplace, lower costs and
    drive value for patients, and promote continued medical
    innovation.
        (1) Value-Driven Health Care: The market is already moving
    towards better recognizing and rewarding value and
    biopharmaceutical companies are working with private health
    insurers to implement new payment arrangements that recognize
    improvements in care and better patient outcomes. But outdated
    laws and regulations are making it challenging to move in this
    direction and for manufacturers to share appropriate
    scientifically sound information with payers on the value that
    medicines provide. Removing these barriers will not only help
    drive value and efficiency in the health system, but drive more
    robust competition in the marketplace and reduce costs for
    patients. As we continue the shift towards rewarding value,
    better quality measurement and value assessment tools will be
    critical to holding the health care system accountable and
    ensuring patient-centered, value-based health care in the
    private sector.
        (2) Modernizing Drug Discovery, Development and Approval:
    To get medicines approved faster while ensuring safety, we need
    to modernize the U.S. Food and Drug Administration (FDA) with
    new technologies and expertise to keep up with 21st century
    science. Modernizing the FDA will bring down the time and cost
    of developing new medicines, which will bring medicines to
    patients faster and enhance competition in the market.
        (3) Engaging and Empowering Consumers: Quality and cost
    information should be readily available to patients to drive
    greater market efficiency and better align benefit design with
    patient preference and need. Insurance companies should also
    pass on more of the discounts they receive to patients in the
    form of lower out-of-pocket costs, just like they do for other
    types of health care services.
        (4) Addressing Market Distortions and Fostering
    Competition: Regulations that stand in the way of competition
    should be revised or eliminated. For example, unnecessary and
    overly burdensome regulations create market distortions that
    impede competition by impacting the introduction of new
    medicines and in some cases generics. Policies are needed to
    encourage generic entry in circumstances where incentives are
    lacking, such as in markets with very small population sizes.
    Additionally, the 340B program is widely understood to distort
    the market and is in need of significant reform. Addressing
    market distortions will increase competition, revive the health
    care market and improve affordable access to medicines for
    patients.
        The market-based U.S. health care system has worked well
    over time, but more can be done to help it work even better. As
    we move towards value-driven health care, we can build a
    sustainable, patient-centered, and science-driven health care
    system that stems the growth of chronic disease and harnesses
    today's hopes to discover tomorrow's cures.
        The complete platform of PhRMA's ideas can be viewed in
    more detail here: http://phrma.org/sites/default/files/policy-
    solutions.pdf.
        Question 2. Patients and families are right to expect--and
    deserve--more transparency from the prescription drug supply
    chain. Recently, experts and lawmakers have started asking
    questions about the work of Pharmacy Benefit Managers, or
    ``PBMs,'' that negotiate on behalf of insurers and employers
    for rebates, off the list prices for drugs, in addition to
    other services like developing pharmacy networks and drug
    formularies. The details of that work and who really benefits
    are largely kept confidential.
        Question 2(a). Do patients at the pharmacy counter always
    benefit from the discounts PBMs secure from drug manufacturers?
    If no, what policy solutions do you propose to address that gap
    for your industry? For others in the supply chain?
        Answer 2. Patients typically do not benefit directly from
    discounts and rebates negotiated between biopharmaceutical
    manufacturers and payers. Instead, payers typically use
    manufacturer rebates in part to reduce premiums for all of
    their covered members, rather than to directly reduce the cost
    that an individual patient has to pay at the point of sale.
    This increases patient cost sharing unnecessarily.
        Answer 2(a). Patients should benefit from negotiated
    savings in the form of lower out-of-pocket costs at the
    pharmacy, just as they do for other types of healthcare
    services. It has been reported that for certain medicines--
    including those used to treat diabetes, asthma, high
    cholesterol, and hepatitis C, rebates can reduce list prices by
    as much as 30 percent to 70 percent. If a larger share of these
    rebates were shared with patients at the point of sale it could
    dramatically lower cost sharing for some patients.
        Question 2(b). When PBMs negotiate with drug companies, is
    the goal to secure the largest rebate, or to secure the lowest
    prices for patients? Put another way, if drug company A company
    offered a drug for a list price of $100 with a rebate of $50,
    and drug company B offered the drug for $40 dollars with no
    discount, which drug would get preferred placement on the PBM's
    formulary?
        Answer 2.(b) PBMs market their role as negotiating for the
    lowest possible prices for their clients. Typically decisions
    about placement of medicines on formularies are based on
    multiple factors, including price. Since administrative fees
    and the size of the rebate retained by PBMs are commonly based
    off of a percentage of a medicine's list price, PBMs may have
    financial incentives to include medicines with high list prices
    and large rebates on their formularies. In this example, the
    PBM may earn more on the drug offered by company A, which may
    impact which medicine receives preferred placement on their
    formulary.
        Question 2(c). We've heard that drug companies will
    sometimes make deals with PBMs by offering big rebates on an
    exciting and expensive new product in exchange for favorable
    placement on the formulary for the rest of that company's
    drugs, even if those products aren't the least expensive
    options for patients. Given that PBM contracts are not public,
    and these examples cannot be verified, can you clarify whether
    these ``book of business'' deals exist? Or is every PBM
    contract, price, and rebate negotiated on a product-by-product
    basis only?
        Answer 2(c). Manufacturers may approach rebate negotiations
    in a variety of ways. PhRMA does not have any source of
    information about specific types of deals or negotiations, and
    cannot comment on individual company pricing decisions or offer
    insight into this question.
        Question 2(d). Pharmaceutical companies often say they need
    to raise drug prices in order to compete by offering larger
    rebates to PBMs. If that is true, what explains price increases
    for drugs that don't face direct competition?
        Answer 2(d). Manufacturers base pricing decisions on a
    range of factors including affordability, access, and
    reinvestment needs for R&D to develop tomorrow's innovative
    medicines. PhRMA does not have any source of information about
    specific types of negotiations, and cannot comment on
    individual company pricing decisions or offer insight into this
    question.
        Question 3. The hearing record shows that we both agree
    that the US drug market represents a careful balance between
    protecting innovative products from competition for a limited
    time, and fostering a robust and competitive generics market to
    drive costs down for consumers after that time. If this balance
    works correctly, market forces will help keep costs low.
        Innovative products are protected from competition by both
    exclusivity periods granted by the FDA, and patents. While
    exclusivity periods are fixed terms that run from the date of
    drug approval, twenty-year patent protections begin from the
    date the patent is granted, which could be well before drug
    approval, or well after. I fully support a robust patent system
    that protects innovation, however, as I made clear in the
    hearing, I do not support perpetual market monopolies that
    eliminate proper market forces and keep drug prices high.
        While there are several high profile examples of new
    patents on drugs sought by companies solely to keep competition
    off the market, an analysis conducted by researchers at
    University of California Hastings College of the Law found that
    this is a widespread practice in the pharmaceutical industry.
    Examining patents in the FDA Orange Book, the authors found
    that between 2005-2015, at least 74 percent of the drugs
    associated with new patents each year were existing approved
    drugs.
        Question 3(a). Please explain how new patents on drugs
    already on the market and nearing the end of a previous
    patents' life can improve the innovation and affordability of
    that drug.
        Answer 3. Patents are issued by the U.S. Patent and
    Trademark Office (PTO) under the Patent Act (title 35 of the
    U.S. Code). Under that Act, the PTO is to issue (or grant)
    patents for inventions that are new, useful, and non-obvious,
    and that meet the other requirements relating to disclosures in
    an application. A patent discloses the invention and then
    includes claims for what is actually protected by the patent.
    The PTO grants patents only after a thorough review of a filed
    application and its claims by patent examiners that are
    specialists in the relevant technical area. The examiner raises
    issues about whether the claimed invention is entitled to
    patent protection based on the patentability requirements
    referenced earlier. There is interaction between the inventor
    and the examiner referred to as the patent prosecution process.
    If the applicant demonstrates to the examiner that the
    application meets all of the requirements for a patent, the PTO
    grants the patent.
        Answer 3(a). Once the patent is granted, the owner has the
    exclusive right to make, use, sell, offer for sale, or import
    the patented invention described in the claims during the
    patent term. The basic term of protection is 20 years from
    filing, although the Patent Act provides for limited extensions
    to the term to compensate for PTO or regulatory approval
    process delays.
        In the pharmaceutical industry, patents are available for
    various types of inventions, and include patents that claim the
    active drug substance, the drug product (including
    formulations, dosage forms and combinations), and new methods
    of using a drug, as well as patents that claim manufacturing
    processes.
        Contrary to recent assertions by Feldman and Wang,\1\ IP
    protections do not impede competition in the U.S.; rather, they
    drive companies to innovate by providing a degree of assurance
    that companies may earn a return on an otherwise risky and
    costly investment in R&D. Specifically, IP protections can
    foster the entry of new competitors to market during the term
    of the patent. For example, in less than a year after market
    entry of the first in a new class of hepatitis C treatments,
    there were multiple competitors on the market that competed on
    both price and clinical effects which resulted in robust
    competition in the marketplace. The competition was so fierce
    that Express Scripts, the U.S.' largest PBM, now touts that
    hepatitis C treatment is less expensive here than in other
    western countries thanks to aggressive market negotiation. The
    study doesn't provide any data about generic entry or pricing
    to support the contention that so-called ``evergreening'' is
    inhibiting competition.
    ---------------------------------------------------------------------------
        \1\  Feldman, Robin and Connie Wang. `May Your Drug Price Be Ever
    Green.' Oct 31 2017. SSRN. https://papers.ssrn.com/sol3/papers.cfm/
    abstract-id=3061567
    ---------------------------------------------------------------------------
        In addition, innovation doesn't stop once a product first
    receives approval as there may be additional patented
    innovations that occur post-approval that benefit patients.
    Specific benefits that might come from additional innovation
    include:
         LKnowing the appropriate dosing for using a
    medication in pediatric populations is necessary to ensure the
    safe and effective use of medicines in this vulnerable patient
    population.
         LAdditional R&D, which may include lengthy and
    costly Phase III trials, may result in expanded uses of
    existing medicines and new formulations of such medicines.
    These innovations may include new dosing regimens and reduced
    side effects, both of which may increase patient compliance
    with treatment. In turn, these innovations may result in
    improved health outcomes and a reduction in unnecessary
    hospitalizations.
         LOngoing innovation increases brand-to-brand
    competition, spurs continued innovation, and provides payers
    with increased leverage in negotiating rebates and other
    discounts.
        Question 1(b). Please provide an estimate of the amount of
    money spent by your member companies in 2016 defending patents
    on their products that were granted after the completion of
    such product's phase III trial supporting the first FDA
    approval.
        Answer 1(b). PhRMA does not collect or track this
    particular information, and it is not publicly available.
        Question 1(c). Please provide the total number of patents
    granted to PhRMA member companies in 2016.
        Answer 1(c). PhRMA does not collect or track information on
    patents granted to companies by PTO.
        Question 1(d). Please provide the number of patents granted
    to PhRMA member companies in 2016 that were not for new
    molecular entities or new indications.
        Answer 1(d). PhRMA does not collect or track information on
    patents granted to companies by PTO.

                                senator baldwin

        Ms. Reilly, in your testimony on October 17, you explained
    that higher drug prices in the United States are needed to
    support an ``innovation ecosystem.'' Compared to lower prices
    in Europe and Canada, you argued that higher prices here
    provide companies the financial resources to ``fuel the next
    generation of therapies for patients.'' You said that your
    member companies spend significantly more on research and
    development than marketing and that they do a great deal of
    basic research to develop new therapies. However, as the first
    chart (Table 1) from Professor William Lazonick's paper\2\
    makes clear, PhRMA's members in the S&P 500 are spending
    significantly more buying back their own stock and issuing
    dividends than they are on research and development. To me,
    this suggests that R&D isn't as important to your members as
    boosting the stock price.
    ---------------------------------------------------------------------------
        \2\  Lazonick, William. `US Pharma's Financialized Business Model'.
    Jul 13 2017. Institute for New Economic Thinking.
    ---------------------------------------------------------------------------
        The second chart (Table 4) provides a key piece of the
    puzzle. Pharmaceutical executives receive an inordinate amount
    of their compensation in the form of stock-based based pay.
    This seems to explain the broad trend of price increases that
    squeeze consumers--because the decision makers at your member
    companies are incentivized to do so by boards and shareholders
    who elect to pay executives in stock. I would appreciate
    answers to the following questions:
        Question 1(a). How do buybacks and dividends help the
    pharmaceutical industry develop ``the next generation of drug
    therapies?''
        Answer 1(a). Since 2000, PhRMA members alone have invested
    over three-quarters of a trillion dollars in the search for and
    development of new therapies, $600 billion of that in the
    United States--more R&D than any other sector, including the
    federal government. The incredible complexity of drug discovery
    and development requires a wider R&D ecosystem made up of
    patient organizations, academia, large and small industry
    players and government agencies bringing their expertise
    together. Whatever the business strategies of our members, it
    cannot be justly or fairly denied that our companies provide
    the lion's share--by far--of the resources and conduct the vast
    majority of the research by which new advances in treatment and
    of the therapies yet to come are made within that R&D
    ecosystem.
        Stock buybacks and dividends are well-established business
    strategies often demanded by investors that return capital to
    investors, and make up part of an investor's total return on a
    stock. Investors can use those returns to fund other
    investments. If returns from high-risk biopharmaceutical
    investments are deemed too low, they will invest those returns
    elsewhere. [Meaning less of the investment capital needed to
    fund new biotech start-up companies, engage in high-risk drug
    discovery, and develop the next generation of drug therapies.]
        In an era when many publicly traded companies of all
    sectors offer buybacks and/or dividends to their shareholder
    investors, and given competitive capital markets, buybacks/
    dividends may be a sound strategy to maintain investor interest
    in the biopharmaceutical industry.
        Question 1(b). Do you recognize that pharmaceutical
    companies could spend billions less on buybacks and dividends
    and instead lower their drug prices by the same amount and
    still generate the same operating revenue?
        Answer 1(b). PhRMA is committed to advancing public
    policies in the United States and around the world that support
    innovative medical research, yield progress for patients today,
    and provide hope for the treatments and cures of tomorrow. We
    have no advocacy role related to individual member company
    business strategies.
        Question 1(c). How does spending billions more on buybacks
    and dividends help promote ``value-driven health care'' which
    is part of your organization's mission statement?
        Answer 1(c). PhRMA is committed to advancing public
    policies in the United States and around the world that support
    innovative medical research, yield progress for patients today,
    and provide hope for the treatments and cures of tomorrow. We
    have no advocacy role related to individual member company
    business strategies.
        Question 1(d). Does PhRMA believe its members should
    maximize shareholder value?
        Answer 1(d). PhRMA represents the country's leading
    innovative biopharmaceutical research companies, which are
    devoted to discovering and developing medicines that enable
    patients to live longer, healthier, and more productive lives.
    PhRMA is committed to advancing public policies in the United
    States and around the world that support innovative medical
    research, yield progress for patients today, and provide hope
    for the treatments and cures of tomorrow.
        Question 1(e). Do you believe that a pharmaceutical
    executive who receives over 90 percent of their compensation in
    the form of stock will make increasing the stock price their
    top priority?
        Answer 1(e). PhRMA's mission is to conduct effective
    advocacy for public policies that encourage the discovery of
    important, new medicines for patients by biopharmaceutical
    research companies. We have no involvement in business,
    operational, or human resource decisions of our member
    companies, including those related to employee compensation.
        Question 1(f). Why do you believe we are seeing this trend
    of pharmaceutical corporations providing a higher than average
    percentage of total direct compensation to their executives in
    the form of stock, as illustrated in Table 2?
        Answer 1(f). PhRMA's mission is to conduct effective
    advocacy for public policies that encourage the discovery of
    important, new medicines for patients by biopharmaceutical
    research companies. We have no involvement in business,
    operational, or human resource decisions of our member
    companies, including those related to employee compensation.
        As the table points out, the executive compensation
    practices in question are used throughout the corporate world,
    in keeping with policies in the tax code. It is my
    understanding that current tax reform legislation in the House
    of Representatives contains a provision that would eliminate
    the section of the tax code that encourages stock options as a
    key performance-based compensation tool.
        Question 1(g). Given the connection illustrated here
    between stock-based executive pay, stock prices, and drug price
    increases, do you think that the pharmaceutical industry should
    reconsider how their executives are compensated?
        Answer 1(g). PhRMA represents the country's leading
    innovative biopharmaceutical research companies, which are
    devoted to discovering and developing medicines that enable
    patients to live longer, healthier, and more productive lives.
        We are committed to advancing public policies in the United
    States and around the world that support innovative medical
    research, yield progress for patients today and provide hope
    for the treatments and cures of tomorrow. We have no
    involvement in human resource decisions at our member
    companies, including those related to employee compensation.

                                 senator bennet

        Question 1. In your testimony, each of you indicated that
    there is some role for value-based arrangements that health
    plans can set up with drug manufacturers for outcomes-based
    reimbursement. However, there are still relatively few of these
    arrangements in place.
        I recently sent a letter with Senators Cassidy, Warner, and
    Young to request a GAO study on value-based arrangements. We
    asked GAO to assess the savings potential for consumers and the
    government in outcomes-based arrangements.
        What do you expect we will find in this study?
        Answer 1. As GAO looks at outcomes-based arrangements, I
    would anticipate that they will probably find that outcomes-
    based arrangements have reduced costs for consumers and health
    plans, and that there is some evidence that these arrangements
    have reduced costs for the government. In addition, I expect
    that you will find that there are significant legal and
    regulatory barriers that limit the proliferation of these and
    other value-based contracts, and modernizing key regulations
    would increase the benefits and widespread adoption of value-
    based arrangements.
        Outcomes-based arrangements can reduce costs for patients
    by allowing the payer to give the medicine improved formulary
    placement, and thus reducing coinsurance or utilization
    management for patients.\3\ A recent Commonwealth Fund study
    highlighted two medicines for which outcomes-based contracts
    resulted in better formulary placement and lower cost sharing
    for patients. As stated by the Commonwealth Fund, one medicine
    ``was given preferred formulary status, meaning that patients
    were responsible for lower copayment'' and another medicine
    received preferred formulary status in some cases.\4\ GAO's
    study will likely identify other cases where outcomes-based
    contracts reduced cost sharing or otherwise improved patient
    access to medicines.
    ---------------------------------------------------------------------------
        \3\  Note that utilization management can increase costs for
    patients if they are forced to try multiple medicines before accessing
    a medicine that works for them, or through other costs from not
    managing their disease.
        \4\  Seely E and Kesselheim A. ``Outcomes-Based Pharmaceutical
    Contracts: An Answer to High U.S. Drug Spending?'' Commonwealth Fund.
    Issue Brief. September 2017.
    ---------------------------------------------------------------------------
        Outcomes-based arrangements can also improve outcomes for
    patients and reduce medical costs for private payers and the
    government. These benefits were recognized by a recent survey
    of representatives from 45 health plans representing 183
    million covered lives. Of the payers surveyed that had
    participated in an outcomes-based arrangement, 38 percent had
    experienced and improvement in patient outcomes and 33 percent
    had experienced cost savings as a result of the outcomes-based
    arrangement.\5\
    ---------------------------------------------------------------------------
        \5\  Avalere Health. Payer Perspectives on Outcomes-Based
    Contracting: Avalere Policy 360. May 22, 2017.
    ---------------------------------------------------------------------------
        These benefits are not surprising. The Congressional Budget
    Office has recognized that, improved use of medicines reduces
    spending reduces on medical services such as hospitalizations
    and emergency room visits.\6\ Value-based arrangements can
    support improved use of medicines by allowing payers to provide
    broader access to medicines, as discussed earlier. They can
    also support development of data about which patients benefits
    most from innovative medicines in the real world. Both of these
    changes can support better use of medicines and lead to reduce
    spending on medical services.
    ---------------------------------------------------------------------------
        \6\  Congressional Budget Office (CBO). Offsetting Effects of
    Prescription Drug Use on Medicare's Spending for Medical Services.
    2012. Available at: https://www.cbo.gov/sites/default/files/112th-
    congress-2011-2012/reports/MedicalOffsets-One-col.pdf
    ---------------------------------------------------------------------------
        Outcomes-based arrangements may also reduce the cost of
    prescription medicines, as manufacturers provide additional
    rebates for patients who do not meet the agreed to outcomes
    targets. These arrangements may also encourage payer and
    manufacturer negotiations to focus on the value of medicines
    instead of the difference between list and net prices.
        Outcomes-based contracts in Medicare Advantage or Medicare
    Part D plans can lead to savings for the Federal government.
    Under Part D's competitive, market-based structure, innovator
    companies contract directly with Part D plans and Medicare
    Advantage (or MA-PD) plans. To the extent that outcomes-based
    arrangements improve use of medicines, they can reduce MA plan
    spending, which could reduce MA plan bids. In addition, if
    outcomes-based arrangements reduce plans' cost of providing
    Part D benefits, this could reduce plans' risk and thus permit
    lower plan bids, reducing the government's costs. Outcomes-
    based arrangements could also reduce reinsurance costs by
    increasing rebates paid by innovator companies.
        Outcomes-based arrangements in Medicaid can also reduce
    government costs. Though the operational hurdles to such
    arrangements are substantial, manufacturers can enter into
    outcomes-based arrangements directly with states through
    supplemental rebate agreements. In addition, to the extent that
    manufacturers enter into outcomes-based arrangements with
    Medicaid Managed Care plans, that can also reduce plan costs
    and the premiums that these plans charge to states.
        Question 1. What impediments exist to creating outcomes-
    based reimbursements?
        Answer 1. PhRMA identified the top barriers to outcomes-
    based contracts in a member survey released earlier this year.
    The top barriers identified in our member survey were:
         LConcern or uncertainty about how the contract
    might affect price reporting metrics (e.g., Medicaid Best
    Price, Average Sales Price, Average Manufacturer Price)
         LConcern about potentially implicating the federal
    anti-kickback statute (which generally prohibits providing
    something of value in return for Medicare or Medicaid business)
    or uncertainty about how to structure the arrangement to ensure
    compliance with the anti-kickback statute, and
         LConcern or uncertainty about FDA regulations
    concerning clinical or economic outcomes claims.\7\
    ---------------------------------------------------------------------------
        \7\  Pharmaceutical Research and Manufacturers of America. Barriers
    to Value-Based Contracts for Innovative Medicines: PhRMA Member Survey
    Results. March 2017.
    ---------------------------------------------------------------------------
         LOperational barriers, including inability to
    measure outcomes and payer access to medical and pharmacy data.
        Additional information about each of these barriers is
    provided below.

                            price reporting metrics

        By law, drug manufacturers must calculate and report to the
    federal government various drug pricing metrics that affect the
    drug's payment rate or the manufacturer rebate in certain
    government programs. In reporting these metrics, manufacturers
    must adhere to a complex set of government price-reporting
    rules for calculating Average Sales Price in Medicare Part B
    and Best Price in Medicaid. These highly technical price-
    reporting rules were established long before the introduction
    of new approaches to contracting. While the price-reporting
    rules do permit biopharmaceutical companies to make reasonable
    assumptions, to the extent there is ambiguity about how to
    capture innovative contracting methods, this can create
    uncertainty for biopharmaceutical companies. Value-based
    contracts in the private market necessitate a more modern and
    flexible approach to price reporting.

                             anti-kickback statute

        Concern about potentially implicating the federal anti-
    kickback statute or uncertainty about how to structure the
    arrangement to ensure compliance with the anti-kickback statute
    was also identified as a substantial barrier across contract
    types. The anti-kickback statute is broadly written. While it
    was designed to achieve the important goal of deterring health
    care fraud, it may also inadvertently thwart beneficial
    innovative programs that present low risk of fraud and abuse
    and could lead to better patient outcomes and significant
    savings for our health care system. Legislative exceptions and
    regulatory safe harbors were created to protect beneficial
    arrangements under the anti-kickback statute; however, the key
    safe harbor regulations for manufacturers were developed over
    twenty years ago, and did not anticipate the market's shift to
    value-based payment and contracting. Value-based contracts
    should have clear protection under the anti-kickback statute.

                 fda regulation of manufacturer communications

        In January, the FDA released a series of new draft guidance
    documents, including guidance on communications with payers and
    formulary committees.\8\ This guidance provides helpful clarify
    for the biopharmaceutical industry. While the draft guidance
    makes clear that FDA ``does not regulate the terms of contracts
    between firms and payors,'' it does address many of the
    communications that may take place in the contracting
    negotiations. To that extent, the draft guidance provides come
    clarity to manufacturers and may reduce the level of concern
    around the barrier posed by FDA regulations. However, the
    guidance does not answer all questions or provide sufficient
    latitude for communications about medically accepted unapproved
    uses of approved medications, so further change is needed.
    ---------------------------------------------------------------------------
        \8\  Food and Drug Administration.``Draft Guidance: Drug and Device
    Manufacturer Communications With Payors, Formulary Committees, and
    Similar Entities--Questions and Answers.'' January 2017.
    ---------------------------------------------------------------------------

                             operational challenges

        Prioritization of these challenges by survey respondents
    supports ongoing efforts to improve measurement of health
    outcomes, including development of patient centric and patient
    reported outcomes. It also suggests an ongoing need to improve
    data systems to reduce the burden of outcome measurement. Many
    organizations are working to address these challenges and do
    the important work of building a system that can support
    expansion of value-based contracting for biopharmaceuticals and
    broader development of a value-driven healthcare system.

                                senator franken

        Question 1. The pharmaceutical industry has an opportunity
    to leverage amazing new treatments to improve the health of
    millions of people. Three million people in the United States
    have Hepatitis C, and your industry has developed new
    treatments that could save many of these peoples' lives. For
    example, there are three new Hepatitis C drugs that have a 90
    percent cure rate. But right now, treatment costs an average of
    $84,000 per course of treatment. Even with discounts offered to
    state Medicaid programs, the annual cost to Medicaid for these
    drugs is still between $20,000 and $30,000 annually, which is
    still too high for many states to provide care to all in need.
    The price of treatment is out of reach for many Americans, and
    we have learned that this is largely due to drug companies
    setting prices not based on what it cost the company to develop
    the drug, but more based on ``what the market will bear.'' The
    more drug corporations set prices with the goal of maximizing
    revenue, the more millions of Americans will not be able to
    access urgently needed medicines.
        What measures would you support to ensure that everyone who
    needs a medicine is able to get it--without busting personal
    and state budgets?
        Answer 1. New medicines are transforming care for patients
    fighting debilitating diseases like cancer, hepatitis C, high
    cholesterol and more. Yet, in the midst of all this progress,
    medicine costs in the US are growing at the slowest rate in
    years and spending on retail and physician-administered
    medicines continues to represent only 14 percent of overall
    health care spending, even as scores of new medicines--
    including cures for hepatitis C--reach patients year after
    year.\9\9,\10\ Despite claims that hepatitis C medicines are
    bankrupting state Medicaid programs, spending on the new
    generation of hepatitis C medicines represented less than 3.5
    percent of national Medicaid prescription drug spending net of
    rebates in 2015 and less than 2 percent of total annual
    Medicaid spending.\11\
    ---------------------------------------------------------------------------
        \9\  Medicare & Medicaid Services (CMS), Office of the Actuary,
    National Health Statistics Group, data. The Nation's Health Dollar
    ($3.2 Trillion), Calendar Year 2015, Where it Went.https://www.cms.gov/
    Research-Statistics-Data-and-Systems/Statistics-Trends-and-Reports/
    NationalHealthExpendData/Downloads/PieChartSourcesExpenditures2015.pdf.
    Accessed May 2017.
        \10\  Altarum Institute. A 10-Year Projection of The Prescription
    Drug Share of National Health Expenditures, Including Nonretail. http:/
    /altarum.org/publications/a-10-year-projection-of-the-prescription-
    drug-share-of-national-health-expenditures-including. May 2017.
        \11\  The Menges Group analysis of FY2015 CMS 64 reports and State
    Drug Utilization data files. Rebate information was obtained from CMS-
    64 reports, and post-rebate expenditures derived through Menges Group
    tabulations using above information.
    ---------------------------------------------------------------------------
        One reason our current marketplace for medicines has been
    successful in controlling costs is that health insurers and
    pharmacy benefit managers are powerful, sophisticated
    purchasers who use their leverage to negotiate discounts and
    rebates off the ``list prices'' of medicines on behalf of
    payers. Today, the top 3 PBMs have considerable negotiating
    power, accounting for three-quarters of the market.\12\ As one
    example of the growing influence of PBMs, industry leader
    Express Scripts has publicly stated their success in
    negotiating substantial rebates for hepatitis C medicines has
    made it affordable to treat everyone with the disease.\13\
    Moreover, owing to the success of this competitive market
    dynamic, negotiated prices here in the US are typically lower
    than in most European countries.\14\ In Medicaid, robust
    negotiation of supplemental rebates on top of federally
    mandated rebates for medicines reduced prices of hepatitis C
    medicines by 40 to 65 percent.\15\
    ---------------------------------------------------------------------------
        \12\  AJ Fein; Pembroke Consulting, Inc. Drug Channels Institute.
    The 2017 economic report on U.S. pharmacies and pharmacy benefit
    managers. http://drugchannelsinstitute.com/products/industry-report/
    pharmacy.January 2017.
        \13\  LaMattina J. For Hepatitis C Drugs, U.S, Prices Are Cheaper
    Than in Europe. Forbes. December 4, 2015. http://www.forbes.com/sites/
    johnlamattina/2015/12/04/for-hepatitis-c-drugs-u-s-prices-are-cheaper-
    than-in-europe/7ced43f564bb.
        \14\  IMS Health,``Comparison of Hepatitis C Treatment Costs,''
    September 2016 https://www.imshealth.com/files/web/IMSH20Institute/
    Healthcare20Briefs/IIHI-Comparison-of-HepatitisC-Treatment-Costs.pdf.
        \15\  Drug Channels, What Gilead's Big Hepatitis C Discounts Mean
    for Biosimilar Pricing, February 2015, http://www.drugchannels.net/
    2015/02/what-gileads-big-hepatitis-c-discounts.html/more.
    ---------------------------------------------------------------------------
        But in order for these medicines to be effective, patients
    need access to treatment. Many patients are struggling to
    access the medicine they need. This is due to several factors
    that are unrelated to the ``price'' of a medicine, including
    the growth of high deductible health care plans,\16\ and
    insurance designs that subject patients to four or more cost
    sharing tiers for prescription medicines (often with
    coinsurance).\17\ Both of these growing trends force patients
    to pay cost sharing based on the full list price of a medicine
    through deductibles or with coinsurance, even if their insurer
    receives a significant discount from the manufacturer. In fact
    more than half of commercially insured patients' out-of-pocket
    spending for brand medicines is based on the full list
    price.\18\ We believe insurance companies should pass on more
    of the discounts they receive to patients in the form of lower
    out-of-pocket costs, just like they do for other health care
    services.
    ---------------------------------------------------------------------------
        \16\  Kaiser/HRET 2017 Employer Health Benefits Survey. Available
    here: https://www.kff.org/health-costs/report/2017-employer-health-
    benefits-survey/
        \17\  Kaiser/HRET 2017 Employer Health Benefits Survey. Available
    here: https://www.kff.org/health-costs/report/2017-employer-health-
    benefits-survey/
        \18\  PhRMA,``Commercially-Insured Patients Pay Undiscounted List
    Prices for One in Five Brand Prescriptions, Accounting for Half of Out-
    of-Pocket Spending on Brand Medicines,'' 2017. Analysis by Amundsen
    consulting. Available at: http://www.phrma.org/report/commercially-
    insured-patients-pay-undiscounted-list-prices-for-one-in-five-brand-
    prescriptions-accounting-for-half-of-out-of-pocket-spending-brand-
    medicines
    ---------------------------------------------------------------------------
        Question 1. How do you propose that we curb the profit
    incentives that drove up the price of Hepatitis C drugs and
    left millions without access to treatment so that this pricing
    model is not replicated across all of the new specialty drugs
    that are now in the pipeline?
        Answer 1. The market for hepatitis C medicines provides an
    illustration of how the market-based system in the US drives
    innovation and medical advances while leveraging competition to
    control costs.
        Just six years ago, the only available treatment for
    hepatitis C was associated with debilitating flu-like side
    effects and cured just half of patients. The rapid pace by
    which new medicines emerged to meet this substantial unmet need
    over the past few years was driven by market-based incentives
    which encouraged competing biopharmaceutical companies to make
    the risky and costly investments in research and development
    needed to bring new medicines to market. Within a year of the
    introduction of the first major breakthrough hepatitis C
    treatment, this competitive dynamic resulted in multiple market
    entrants which enabled payers to leverage deep discounts for
    these medicines in exchange for favorable formulary placement.
    In fact, today publicly reported discounts range from 40-65
    percent and payers tout their aggressive negotiating tactics
    have made it affordable to treat everyone with the disease. But
    what is truly remarkable is in the span of just 6 years a cure
    has been developed for a deadly and costly disease, which
    researchers now project will be rare by 2036 with today's more
    effective treatments and current screening guidelines.\19\
    ---------------------------------------------------------------------------
        \19\  Kabiri M, Jazwinski AB, Roberts MS, Schaefer AJ, Chhatwal J.
    The Changing Burden of Hepatitis C Virus Infection in the United
    States: Model Based Predictions. Annals of Internal Medicine.
    2014;161(3): 170.
    ---------------------------------------------------------------------------
        While our current system has worked well in driving
    innovation for patients and holding down costs, many patients
    still struggle to access their medicines. Now is the time to
    have the critical conversation about how to promote and sustain
    medical innovation and ensure access so that patients and the
    health care system benefit from the tremendous scientific
    advancement and progress we are seeing today. In order for this
    to happen, we believe the entire health care system, including
    medicines, should be driven by value and that the private
    marketplace is best equipped to align health improvements with
    costs moving forward.
        America's biopharmaceutical companies are committed to
    working with policymakers and stakeholders to advance solutions
    that further enhance the private marketplace, lower costs and
    drive value for patients, and promote continued medical
    innovation. We support moving in this direction through the
    following core themes, described earlier.
         LValue-Driven Health Care
         LModernizing Drug Discovery, Development and
    Approval
         LEngaging and Empowering Consumers
         LAddressing Market Distortions and Fostering
    Competition
        The market-based U.S. health care system has worked well
    over time, but more can be done to help it work even better. As
    we move towards value-driven health care, we can build a
    sustainable, patient-centered, and science-driven health care
    system that stems the growth of chronic disease and harnesses
    today's hopes to discover tomorrow's cures.

                                senator roberts

        Question 1. When the Biologics Price Competition and
    Innovation Act passed in 2010, the Congressional Budget Office
    projected $7 billion in savings to the federal government from
    2010-2019.
        Do you think we can achieve this projected savings over the
    next two years?
        Answer 1. The inclusion of the provisions related to
    biologics and biosimilars within the Affordable Care Act was
    very important to future of biopharmaceutical innovation. While
    we can't speculate on how CBO previously derived its estimates,
    some of the more recent non-government estimates such as
    QuintilesIMS suggests about $37 billion in biologic sales will
    be subject to biosimilar competition between now and 2021.
        Question 1. What have been the main delays for biosimilars?
        Answer 1. I believe that the earlier estimates were
    potentially overly optimistic given the substantial costs and
    scientific and regulatory uncertainties associated with
    developing biologic medicines. In addition, the earlier CBO
    estimates did not adequately consider the substantial time
    required for the FDA to develop the range of guidances
    necessary to inform the review and approval of biosimilar
    medicines. To date the FDA has not finalized all of the
    necessary guidances. As of October 2017,the agency has approved
    seven biosimilars.
        Question 1. Does Congress need to clarify parts of the
    biosimilars law, and can that be done without causing further
    delay and uncertainty about the pathway for these products,
    pushing savings even further into the future?
        Answer 1. At this time, I do not think there is anything
    that needs to be clarified in the statute. I believe the FDA
    has the appropriate authorities to develop the necessary
    guidance to inform the development, review, and approval of
    these products, as evidenced by the approval of seven
    biosimilars since passage of BPCIA.
        Question 2. In 2015, Express Scripts and Imprimis partnered
    to offer a compounded alternative to Daraprim in an effort to
    provide a lower-cost option since no approved generic was on
    the market. Do you believe compounded drugs should be
    considered a substitutable alternative for FDA approved drugs
    when there is not a patient medical need?
        Answer 2. The FDA has identified a number of approaches to
    fostering competition when there are small patient populations
    and no IP or regulatory exclusivities serving as a barrier to
    entry. The new FDA Commissioner has taken a number of steps, as
    has Congress, in facilitating the entry of additional
    competitors in these circumstances, which I believe will help
    avoid this occurrence in the future.
        As the FDA has identified a number of potential concerns
    with compounded drugs, PhRMA does not view compounding as the
    optimal approach to addressing this type of situation.
    According to the FDA, there can be health risks associated with
    compounded drugs that do not meet federal quality standards.
    Compounded drugs made using poor quality practices may be sub-
    or super-potent, contaminated, or otherwise adulterated.
    Additional health risks include the possibility that patients
    will use ineffective compounded drugs instead of FDA-approved
    drugs that have been shown to be safe and effective.
        Question 3. Would striking the non-interference clause save
    the government, or patients, money? What impact could it have
    on access to new innovative therapies?
        Answer 3. Medicare Part D is a highly successful program,
    providing access to affordable prescription drug coverage for
    seniors and disabled individuals while keeping costs low.
    Despite numerous claims that repealing the non-interference
    provision would save money, CBO has repeatedly said government
    negotiation would have a ``negligible'' impact on federal
    spending unless the government also limited seniors' access to
    needed prescription medications. Furthermore, large, powerful
    Part D plans already negotiate discounts and rebates directly
    with biopharmaceutical companies and many brand-name
    prescription drugs carry substantial rebates,''\20\ often as
    much as 20-30 percent. These negotiations result in significant
    cost savings for seniors and taxpayers. According to CBO, total
    Part D costs are 45 percent, or $349 billion, lower than
    initial ten-year projections.\21\ Therefore, undermining this
    competitive feature of Part D could have real consequences,
    including reduced access, less choice and higher premiums for
    America's seniors and people living with disabilities who rely
    on Medicare Part D coverage to access needed medicines.
    ---------------------------------------------------------------------------
        \20\  2017 Medicare Trustees Report, p. 143, footnote 66.
        \21\  See CBO Medicare Baselines available at www.cbo.gov
    ---------------------------------------------------------------------------
        There are real concerns that if the non-interference clause
    were removed from Medicare law, the only way for the government
    to negotiate lower prices would be by imposing access or
    coverage restrictions on medicines in Medicare. For instance,
    other federal programs that utilize restrictive formularies,
    like the Veterans' Affairs program, limit access to innovative
    medicines. A recent study by Xcenda found that of 25 newly FDA-
    approved first-in-class therapies, Part D plans covered an
    average of 81 percent, compared to just 12 percent under the
    VA.\22\ In addition, recent research shows that imposing VA-
    style pricing in Part D would reduce life expectancy of
    Medicare beneficiaries by nearly 2 years, significantly shrink
    the drug development pipeline by as much as 25 percent, and
    result in the loss of trillions of dollars in consumer
    welfare.\23\
    ---------------------------------------------------------------------------
        \22\  Comparing Drug Coverage: Medicare Part D vs Veterans Affairs
    Program. Xcenda, August 26, 2016. http://www.xcenda.com/Insights-
    Library/Archive/Xcenda-Original-Research-Stark-Contrast-in-Part-D-vs-
    VA-Coverage-of-Newly-Approved-Drugs/.
        \23\  Moreno, G, van Eijndhoven, E, Benner, J, et al. (2017). The
    Long-Term Impact of Price Controls in Medicare Part D. Forum for Health
    Economics and Policy, January 2017, doi:10.1515/fhep-2016-0011.
    ---------------------------------------------------------------------------

                               senator whitehouse

        Question 1. During the hearing, we discussed ``de facto''
    monopolies of prescription drugs, or monopolies that occur
    outside of the patent and exclusivity protections granted to
    new drugs. You all acknowledged that we have seen instances of
    industry outsiders taking advantage of these de facto
    monopolies and dramatically increasing the prices of drugs.
    Addressing this unfair price manipulation in a targeted way
    will require the proper identification of de facto monopolies.
    How can we ensure de facto monopolies are correctly identified?
        Answer 1. The Turing Daraprim situation was caused when a
    small company was able to corner the market in an older, off-
    patent drug that treats a serious condition in a small patient
    population. This situation is an exception not the rule. In
    this case, there is a lack of a market incentive for a generic
    entry.
        The FDA has already taken steps to avoid this type of
    situation by publishing a list of products that meet the
    criteria of a small patient population yet has no competitors
    and no patent or exclusivity barriers to entry of competitors
    be they brand, generic, or biosimilars. In addition, the FDA
    has stated an intent to expedite the review of potential
    competitors and take other steps to foster the entry of
    additional competitors. PhRMA believes the FDA has taken
    sufficient steps to identify situations that could be taken
    advantage of by unscrupulous actors.

     Response by Chester ``Chip'' Davis to Questions of Senator Alexander,
    Senator Murray, Senator Bennet, Senator Roberts, and Senator Whitehouse

                               chairman alexander

        Question 1. What is the role of rebates, and do we need
    them?
        Question 2. How do rebates affect your industry? Do your
    members contract and get paid based on the public ``list price,
    or using a ``net'' price that takes into account rebates?
        Question 3. Would you support a policy that would allow
    supply chain participants to contract for lower prices on the
    front end rather than after the fact with rebates?
        Answer 1. In response to brand manufacturer pricing power
    granted by their patents and regulatory exclusivities, PBMs and
    payors rely on formulary management and rebating agreements to
    control costs.
        Answer 2. However, upon generic entry, payors typically
    shift away from rebate models of reimbursement and rely on
    distribution channels to effectively lower the price of the
    medicine. Rather than providing rebates to lower the cost,
    generic manufacturers must compete for sales to wholesalers.
    Because the products are identical, the primary leverage
    generic manufacturers have is their ability to lower the price
    and provide the necessary volume. Rebates are simply not a
    factor in our industry.
        Generic drugs currently allow supply chain participants to
    contract for lower prices on the front end. With over 200
    generic manufacturers recognized by FDA, competition is fierce
    and prices decline rapidly. The wholesalers, often in
    collaborative purchasing agreements with pharmacies across the
    country, then distribute generic medicines to various retail
    pharmacies. Generic manufacturers may have to compete even
    further by negotiating separate payments to pharmacies to stock
    their product.
        These differences in the generic and brand marketplaces
    create vastly different incentives for the various
    manufacturers, wholesalers, distributors, pharmacy benefit
    managers (PBMs), insurers, and retail pharmacies that make up
    the supply chain. To put it simply, virtually all other actors
    in the supply chain enjoy significant financial benefits from
    the manufacture of generic medicines.\1\ Ultimately, generic
    manufacturers do not pay rebates on individual sales of their
    products like brands do. Wholesalers force generic
    manufacturers to compete with one another on the front-end
    price.
    ---------------------------------------------------------------------------
        \1\  Sood, et al., ``The Flow of Money Through the Pharmaceutical
    Distribution System.'' June 2017. http://healthpolicy.usc.edu/
    documents/USC percent20Schaeffer-Flow percent20of percent20Money-
    2017.pdf
    ---------------------------------------------------------------------------
        However, compared to the fragmented generic drug market,
    consolidation in the wholesale market and contractual
    arrangements between pharmacy chains and the wholesalers have
    left generic manufacturers with only a small number of
    purchasers. The result is a market where three purchasers
    account for over 90 percent of all wholesale revenue.\2\
    ---------------------------------------------------------------------------
        \2\  Fein, Adam J. Fein. The 2016-2017 Economic Report on
    Pharmaceutical Wholesalers and Specialty Distributors, September 2016.
    ---------------------------------------------------------------------------
        Answer 3. The current state of the market puts these
    savings generics offer at risk. As these purchasers move more
    and more toward single-source contracts for generic drugs, it
    creates a dynamic where it is possible that no more than three
    generic manufacturers may be able to successfully market any
    given product. This risks future competitive success in the
    generic market as generic drug manufacturers may be forced to
    maximize economies of scale and consolidate themselves. AAM has
    no position on the viability or utility of rebates or whether
    the supply chain would be better served negotiating savings on
    the front-end rather than relying on this contracting
    agreement. We would however call your Committee's attention to
    supply chain consolidation and its impact on our industry.

                                 senator murray

        Question 1. In the written testimonies submitted to the
    committee, there is a lot of blame shifting when it comes to
    where the fault of high drug prices lays. We can all agree that
    our complex health system is inefficient, but, for that reason,
    the blame is shared, and everyone bears responsibility to fix
    the problem.
        Please provide more than one policy proposal, which does
    not involve any other members of the supply chain, that your
    industry in particular could implement, either with or without
    the help of Congress or the Administration, to bring down costs
    for patients and families, including the reasons why you
    believe it would bring down costs.
        Answer 1. AAM strongly supports regulatory and
    reimbursement environments that allow generic and biosimilar
    medicines to compete in open markets. These have produced
    robust competition with a proven track record of savings for
    the U.S. health care system--$253 billion in 2016, and $1.67
    trillion over the preceding decade. Medicare and Medicaid alone
    saved $77 billion and $37.9 billion, respectively.
        We believe there are a range of opportunities for Congress
    and the Administration to further the development of
    competitive markets, further delivering savings to patients,
    payers and governments.

                              electronic labeling

        In 2014, the FDA released a proposed rule\3\ establishing
    guidelines for the use of electronic labeling for
    pharmaceuticals. Electronic labeling, or e-labeling, would
    replace paper Prescribing Information package inserts for
    prescription drugs received by physicians, pharmacists, and
    other healthcare professionals.
    ---------------------------------------------------------------------------
        \3\  ``Electronic Distribution of Prescribing Information for Human
    Prescription Drugs, Including Biological Products,'' 79 Fed. Reg.
    75,506 (Dec. 18, 2014).
    ---------------------------------------------------------------------------
        Prescription drug labeling, or Prescribing Information,
    contains the information necessary for the safe and effective
    use of a drug product and is intended for use by healthcare
    professionals. The labeling is submitted to FDA as part of a
    manufacturer's drug application and is subject to agency
    approval, updated periodically to include the most current
    information about the product. Manufacturers provide this
    information in the form of paper package inserts for
    prescription drugs received by healthcare professionals.
        Eliminating the paper labeling requirements would reduce
    the cost of manufacturing, while simultaneously providing
    health care professionals with the most up-to-date safety
    information. A final rule would significantly reduce costs for
    manufacturers, allowing them to maintain deflationary trends
    currently seen in the generics market of about 8 percent per
    year. We encourage the Committee to work with FDA to modernize
    pharmaceutical labeling procedures.

                   increasing generic utilization in medicare

        The nonpartisan Medicare Payment Advisory Commission
    (MedPAC) has estimated that ``nearly 70 percent of Medicare's
    total spending for Part D plans was on behalf of the 30 percent
    of Part D enrollees who receive the LIS.'' Despite having
    greater health needs requiring more prescriptions, these high-
    cost beneficiaries routinely miss opportunities to take
    advantage of lower cost generic drugs. However, Part D plans
    have limited ability to modify drug copayments for LIS
    enrollees. Thus, brand-name drug copays for LIS enrollees do
    not differ significantly from generic drug copays--meaning LIS
    enrollees do not have an incentive to choose the generic drug
    when one is available.
        Compared with other Part D beneficiaries, Low-Income
    Subsidy (LIS) not only fill more prescriptions but fill more
    expensive prescriptions. This is why MedPAC has recommended
    changes to Medicare Part D cost-sharing policies for LIS
    enrollees to improve generic utilization--changes that have
    been echoed by a range of nonpartisan experts. The
    Congressional Budget Office (CBO) has estimated that similar
    proposals could save the Federal Government $17.7 billion over
    10 years\4\, while ensuring that these beneficiaries continue
    to have access to high-quality prescription drugs.
    ---------------------------------------------------------------------------
        \4\  Proposals for Health Care Programs--CBO's Estimate of the
    President's Fiscal Year 2016 Budget (March 12, 2015)
    ---------------------------------------------------------------------------
        AAM encourages Congress to consider legislation directing
    the Centers for Medicare and Medicaid Services (CMS) to modify
    the Medicare Part D LIS copayment structure to encourage the
    use of generic medicines by these beneficiaries. This policy
    would build on the cost and access successes that both private
    and public purchasers have achieved as they have moved to more
    aggressively utilize generic drugs, while assuring beneficiary
    access to life-saving medications.

               ensure access to biosimilar medicines in medicare

        Nowhere is the need for lower-priced alternatives, and the
    challenges facing them, more real than among high-priced
    biologic medicines. Biologics, many of which are specialty
    medicines, are the most rapidly growing segment of increasing
    brand-name prescription drug costs in the United States, with
    more than $100 billion in annual spending. The role of biologic
    drugs in the health care system is expanding--while only 2
    percent of America's patients use biologics, they account for
    about 40 percent of prescription drug spending in the United
    States.\5\
    ---------------------------------------------------------------------------
        \5\  Medicine Use and Spending in the U.S.: A Review of 2016 and
    Outlook to 20, April 2017.
    ---------------------------------------------------------------------------
        To help bring down prices for patients, Congress designed
    and approved the Biologics Price Competition and Innovation Act
    (BPCIA) in 2010--creating an abbreviated approval pathway for
    biological products that are demonstrated to be ``highly
    similar'' (biosimilar) to or ``interchangeable'' with an FDA-
    approved biological product.
        Biosimilar medicines represent a key step forward in
    reducing high drug prices. They are safe, effective and
    affordable versions of costly brand biologics. Experts estimate
    that FDA-approved biosimilars could save between $44 billion
    and $250 billion over the next 10 years.\6\ In doing so, they
    will mean greater access to lifesaving cures for 1.2 million
    U.S. patients, according to a new analysis. Women, lower
    income, and elderly patients would particularly benefit from
    access to biosimilar medicines.
    ---------------------------------------------------------------------------
        \6\  AAM, ``Generic Drug Access & Savings in the U.S.,'' June 2017
    (link.)
    ---------------------------------------------------------------------------
        However current law creates barriers to biosimilar access
    for patients in Part D, who may be forced onto higher priced
    biologics. Because of the structure of Medicare Part D, the 50
    percent discount required of brand biologics is counted toward
    a patient's out of pocket costs--but competing biosimilars are
    barred from providing such a discount. This creates a perverse
    incentive for health plans and patients to use a higher-priced
    brand biologic--moving patients through the coverage gap and
    into catastrophic coverage faster and with lower out-of-pocket
    costs compared to a lower-cost biosimilar.
        This approach creates substantial barriers for biosimilar
    manufacturers, as it may be effectively impossible to ever
    offer sufficient discounts to be included on Part D
    formularies. The resulting imbalance severely undermines the
    market potential for biosimilar competition. Ultimately,
    patients, payers, and Medicare all pay more for brand biologics
    than they would if the Coverage Gap Discount program were
    amended to include biosimilars.
        AAM encourages Congress to pass legislation to classify
    biosimilars as ``applicable drugs'' in the Coverage Gap
    Discount Program. This change would require biosimilar
    manufacturers to pay the 50 percent discounts paid by their
    brand competitors, and participate on a level playing field to
    compete for placement on Part D plans' formularies. It would
    reduce both patient out-of-pocket costs and save at least $1
    billion over the next 10 years for the Medicare Part D program.

                                 senator bennet

        Question 1. In your testimony, each of you indicated that
    there is some role for value-based arrangements that health
    plans can set up with drug manufacturers for outcomes-based
    reimbursement. However, there are still relatively few of these
    arrangements in place.
        I recently sent a letter with Senators Cassidy, Warner, and
    Young to request a GAO study on value-based arrangements. We
    asked GAO to assess the savings potential for consumers and the
    government in outcomes-based arrangements.
        What do you expect we will find in this study?
        What impediments exist to creating outcomes-based
    reimbursements?
        Answer 1. AAM strongly supports efforts to ensure value in
    prescription drug purchasing. In fact, generic drugs are the
    best ``value-based'' purchasing model--a proven approach to
    delivering value and savings to patients and payers, including
    Medicare and Medicaid. In the last 10 years, generic
    competition has produced $1.67 trillion in savings for the U.S.
    health care system.
        As policymakers consider new approaches such as ``value-
    based'' or ``outcomes-based'' arrangements, it is important to
    note that the level of price concessions that seem to be part
    of such arrangements do not compare to the savings associated
    with generic medicines--which can drop as low as 20 percent of
    the brand drug price within a year of the loss of brand drug
    market exclusivity. For that reason, greater flexibility in
    brand contracting will not likely significantly alter the
    generics landscape or the central role of generic drugs in
    delivering FDA-approved medicines to patients at lower costs.
        However, policymakers should carefully consider whether
    such arrangements will truly result in lower prices and reduced
    costs. As part of such scrutiny, policymakers should examine
    whether brand drug manufacturers may abuse their market power
    to delay or impede generic entry.

                                senator roberts

        Question 1. When the Biologics Price Competition and
    Innovation Act passed in 2010, the Congressional Budget Office
    projected $7 billion in savings to the Federal Government from
    2010-2019. Do you think we can achieve this projected savings
    over the next 2 years? What have been the main delays for
    biosimilars? Does Congress need to clarify parts of the
    biosimilars law, and can that be done without causing further
    delay and uncertainty about the pathway for these products,
    pushing savings even further into the future?
        Answer 1. Biosimilars can offer more savings to patients,
    payers, and the Federal Government when more products come to
    market.
        FDA-approved biosimilar medicines represent a key step
    forward in reducing high drug prices. They are safe, effective
    and more affordable versions of costly brand biologics. Experts
    estimate that FDA-approved biosimilars could save between $54
    billion and $250 billion over the next 10 years.\7\ In doing
    so, the cost savings will lead to greater access to lifesaving
    cures for 1.2 million U.S. patients. Women, lower income, and
    elderly patients would particularly benefit from access to
    biosimilar medicines.
    ---------------------------------------------------------------------------
        \7\  AAM, ``Generic Drug Access & Savings in the U.S.,'' June 2017
    (link).
    ---------------------------------------------------------------------------
        Currently seven products have been approved by the FDA, but
    only three have been able to come to market due to legal
    roadblocks initiated by the innovator company(s). Additionally,
    the three products that have come to market have faced market
    roadblocks initiated by the innovator company(s).
        AAM believes that we can achieve the projected savings if
    biosimilars are able to overcome barriers created by innovator
    companies, such as unscrupulous marketing tactics to impede
    competition. Education is another important aspect of the
    conversation. Recently, FDA unveiled a new education campaign
    to help educate prescribers and to help dismiss the myths
    perpetuated by the innovator companies.
        However current law also creates barriers to biosimilar
    access for patients in Part D, who may be forced onto higher
    priced biologics. Because of the structure of Medicare Part D,
    the 50 percent discount required of brand biologics is counted
    toward a patient's out of pocket costs--but competing
    biosimilars are barred from providing such a discount. This
    creates a perverse incentive for health plans and patients to
    use a higher-priced brand biologic--moving patients through the
    coverage gap and into catastrophic coverage faster and with
    lower out-of-pocket costs compared to a lower-cost biosimilar.
        This approach creates substantial barriers for biosimilar
    manufacturers, as it may be effectively impossible to ever
    offer sufficient discounts to be included on Part D
    formularies. The resulting imbalance severely undermines the
    market potential for biosimilar competition. Ultimately,
    patients, payers, and Medicare all pay more for brand biologics
    than they would if the Coverage Gap Discount program were
    amended to include biosimilars. AAM encourages Congress to pass
    legislation to classify biosimilars as ``applicable drugs'' in
    the Coverage Gap Discount Program.
        Question 2. In 2015, Express Scripts and Imprimis partnered
    to offer a compounded alternative to Daraprim in an effort to
    provide a lower-cost option since no approved generic was on
    the market. Do you believe compounded drugs should considered a
    substitutable alternative for FDA approved drugs when there is
    not a patient medical need?
        Answer 2. We believe the key distinction between
    outsourcing facilities, which provide stock supplies of
    compounded drugs, and traditional compounders, who tailor
    products to individual patients, is the prescription. This
    point has been repeatedly made by the FDA and Commissioner
    Gottlieb in recent public statements. The prescription
    requirement is critical to ensure product quality, create
    oversight accountability, and maintain incentives for
    outsourcing facilities to invest in quality systems.
    Outsourcing facilities should not be allowed to compound
    approved products and must be held to Good Manufacturing
    Practices (cGMP) as prescribed by DQSA and the FDA. Widespread
    compounding like that envisioned by Imprimis threatens the
    underpinnings of FDA's ``gold standard'' approval.

                               senator whitehouse

        Question 1. During the hearing, we discussed ``de facto''
    monopolies of prescription drugs, or monopolies that occur
    outside of the patent and exclusivity protections granted to
    new drugs. You all acknowledged that we have seen instances of
    industry outsiders taking advantage of these de facto
    monopolies and dramatically increasing the prices of drugs.
    Addressing this unfair price manipulation in a targeted way
    will require the proper identification of de facto monopolies.
    How can we ensure de facto monopolies are correctly identified?
        Answer 1. We understand that many older, off-patent
    products have provided complex problems for policymakers. The
    FDA has also recognized this problem and begun exploring ways
    to help create market-based solutions for instances when brand
    companies abuse their monopolies for these products, including
    recently publishing a list of such products for public
    consumption. AAM supported this legislation and is working
    collaboratively with FDA to implement it.
        A generic company considers a range of factors when
    determining whether to pursue development of a generic version
    of an approved drug. AAM's assessment of FDA's ``List of Off-
    Patent, Off-Exclusivity Drugs without an Approved Generic''
    revealed that the list contains 264 products, and consists of
    83 products that are often deemed inappropriate development
    candidates due to their product type and the capital investment
    required (e.g., radiopharmaceuticals, amino acid/electrolyte
    replacements). Of the remaining 181 potential products, 144
    products have low volume sales, which reduces the
    attractiveness of developing the product. Generic companies
    evaluate potential product candidates with low sales; however,
    the drugs often treat small patient populations or are no
    longer the standard of care.
        Ultimately any manufacturer that abuses one of these ``de
    facto monopolies'' is effectively relying on regulatory
    arbitrage to delay competition from reaching the market.
    However, it is important to remember that any specific
    restrictions on product pricing will likely ultimately
    completely deter generic entry, which has been shown to be the
    most effective method of reducing brand prices.
        Question 2. While we want to make sure people can afford
    their medications, it strikes me that patient assistance
    programs that reduce out-of-pocket costs for patients also
    serve to help companies maintain their market share, even when
    there is a lower-cost drug available that is just as effective.
    What effect do patient assistance programs have on costs to
    patients and to the overall health care system? How could
    Congress help ensure patient assistance programs don't mean
    wasteful spending of our health care dollars, while still
    preserving patient access?
        Answer 2. We agree that copay coupons and patient
    assistance programs designed to protect brand market share may
    skew functioning markets, and push additional cost back onto
    the health system exclusively to the benefit of the brand
    manufacturer.
        However, in instances where manufacturers work with payers
    to ensure that programs are designed in way that lower patient
    out-of-pocket costs without pushing additional cost on the
    system, those programs should be encouraged.

     Response by Mark Merritt to Questions from Senator Alexander, Senator
       Murray, Senator Bennet, Senator Cassidy, Senator Hassan, Senator
        Isakson, Senator Roberts, Senator Warren, and Senator Whitehouse

                               senator alexander

        Question 1. What is the role of rebates, and do we need
    them?
        Answer 1. After settling a 1996 class-action lawsuit by
    retail pharmacies alleging that manufacturers were illegally
    discounting their products more to health insurers, drug
    manufacturers turned to rebates as a way to grant price
    concessions to drug purchasers who demonstrated they could move
    market share. Previously, manufacturers had offered hospitals
    and managed care plans discounted list prices up front, but
    under the settlement, manufacturers abandoned that practice. By
    calculating the market share a given organization had moved to
    a manufacturer's drug and paying rebates after the insurer or
    PBM presented data demonstrating their enrollees' use of a
    given product, manufacturers could recognize PBMs' and health
    plans' abilities to influence patients' choice of drugs and
    still comply with their court settlement.
        As part of today's manufacturer-PBM negotiations, brand
    drug manufacturers compete by offering rebates for market-share
    influencing formulary placement, typically for therapeutically
    equivalent products. As a result of these negotiations, PBMs
    can recommend benefit designs that reduce the net cost of drugs
    and stretch payers' finite dollars to reduce premiums and cost-
    sharing. Without rebates, payers and patients would pay
    considerably more for brand drugs and health coverage costs
    would be higher. Unless manufacturers devise a different legal
    way of bringing down net drug costs (or decide to lower their
    prices significantly), rebates are needed.
        Question 2. How do rebates affect your industry? Do your
    members contract and get paid based on the public ``list''
    price, or using a ``net'' price that takes into account
    rebates?
        Answer 2. PCMA is not privy to contract negotiations of its
    members' business. PBMs typically respond to payer requests for
    proposals, which lay out the payer's terms and conditions. Each
    payer determines what percentage of rebates it wants the PBM to
    pass through to it, and how much (if any) it wants the PBM to
    retain as payment for services. While on average payers elect
    to receive 90 percent of rebates negotiated by PBMs, an
    increasing number require PBMs to pass through all of them.
    About 46 percent of commercial PBM contracts are negotiated
    with full pass-through of rebates to payers, and 100 percent of
    rebates in the Medicare Part D program are required to be
    reinvested for subsequent year benefits. PBMs are committed to
    providing rebate transparency and audit rights to their
    clients.
        Question 3. Would you support a policy that would allow
    supply chain participants to contract for lower prices on the
    front end rather than after the fact with rebates?
        Answer 3. Yes. PBMs work to obtain the lowest net cost from
    manufacturers and are open to other means besides rebates to
    achieve it.

                                 senator murray

        Question 1. In the written testimonies submitted to the
    committee, there is a lot of blame shifting when it comes to
    where the fault of high drug prices lays. We can all agree that
    our complex health system is inefficient, but, for that reason,
    the blame is shared, and everyone bears responsibility to fix
    the problem.
        Please provide more than one policy proposal, which does
    not involve any other members of the supply chain, that your
    industry in particular could implement, either with or without
    the help of Congress or the Administration, to bring down costs
    for patients and families, including the reasons why you
    believe it would bring down costs.
        Answer 1. Because PBMs negotiate with manufacturers and
    with pharmacies to bring down the cost of prescription drugs,
    there is little PBMs could do on their own without involving
    other actors in the drug supply chain. PCMA has a wide range of
    policy proposals to bring down the cost of drugs, which we will
    send along with this document.
        Question 2. Patients and families are right to expec --and
    deserve--more transparency from the prescription drug supply
    chain. Recently, experts and lawmakers have started asking
    questions about the work of Pharmacy Benefit Managers, or
    ``PBMs,'' that negotiate on behalf of insurers and employers
    for rebates, off the list prices for drugs, in addition to
    other services like developing pharmacy networks and drug
    formularies. The details of that work and who really benefits
    are largely kept confidential.
        Question 2(a)1. Do patients at the pharmacy counter always
    benefit from the discounts PBMs secure from drug manufacturers?
    If no, what policy solutions do you propose to address that gap
    for your industry? For others in the supply chain?
        Answer 2,2(a). There is not a simple answer to this
    question. In general, rebate savings are used by payers to
    reduce premiums and out-of-pocket costs for patients. A PBM
    acts as a third-party administrator under contract to the
    payer. The amount of rebates passed back to a payer is
    established by the contract between the payer and the PBM. The
    allocation of rebates the payer receives is up to the payer,
    which establishes the benefit designs in its health plans. As
    we understand it, such contract terms vary widely among PBMs
    and payers.
        Question 2(b). When PBMs negotiate with drug companies, is
    the goal to secure the largest rebate, or to secure the lowest
    prices for patients? Put another way, if drug company A company
    offered a drug for a list price of $100 with a rebate of $50,
    and drug company B offered the drug for $40 dollars with no
    discount, which drug would get preferred placement on the PBM's
    formulary?
        Answer 2(b). PBMs negotiate with drug manufacturers to
    achieve the lowest net cost of drugs for the client payer.
        Question 2(c). We've heard that drug companies will
    sometimes make deals with PBMs by offering big rebates on an
    exciting and expensive new product in exchange for favorable
    placement on the formulary for the rest of that company's
    drugs, even if those products aren't the least expensive
    options for patients. Given that PBM contracts are not public,
    and these examples cannot be verified, can you clarify whether
    these ``book of business'' deals exist? Or is every PBM
    contract, price, and rebate negotiated on a product-by-product
    basis only?
        Answer 2(c). In its role as a trade association, PCMA does
    not and, for antitrust reasons cannot, have access to our
    member companies' proprietary contracts with other entities.
    Therefore, we do not know the answer to the question.
        Question 2(d). Pharmaceutical companies often say they need
    to raise drug prices in order to compete by offering larger
    rebates to PBMs. If that is true, what explains price increases
    for drugs that don't face direct competition?
        Answer 2(d). The premise of the question is untrue.
    Manufacturers alone decide prescription drug launch prices and
    price increases according to the same supply and-demand
    dynamics of countless other industries that manufacture
    products. The launch prices of new drugs and price increases of
    existing drugs bear no correlation to the rebates and discounts
    manufacturers negotiate with PBMs. There are high-priced drugs
    with low rebates and lower-priced drugs with high rebates. It
    all depends on how much direct competition a given drug faces
    in the market. Indeed, research shows that the size of
    negotiated rebates is strongly correlated with the extent to
    which specific drugs face marketplace competition. Please see
    attached analyses for more information.

                                 senator bennet

        Question 1. In your testimony, each of you indicated that
    there is some role for value-based arrangements that health
    plans can set up with drug manufacturers for outcomes-based
    reimbursement. However, there are still relatively few of these
    arrangements in place.
        I recently sent a letter with Senators Cassidy, Warner, and
    Young to request a GAO study on value-based arrangements. We
    asked GAO to assess the savings potential for consumers and the
    government in outcomes-based arrangements.
        What do you expect we will find in this study?
        Answer 1. It is impossible to speculate without knowing the
    exact questions asked of GAO, or the data and assumptions that
    GAO may use to answer the questions. PCMA agrees that outcomes-
    based arrangements are still in their infancy.
        Question 1(a). What impediments exist to creating outcomes-
    based reimbursements?
        Answer 1(a). The Medicaid Best Price Law and elements of
    the Federal Anti-Kickback Statute may inhibit the formation of
    value-based agreements.

                                senator cassidy

        Question 1. In determining Direct & Indirect Remunerations,
    should Part D plan sponsors utilize quality and performance
    measures that are applicable to the services provided by retail
    and specialty pharmacies?
        Answer 1. In its role as a trade association, PCMA is not
    privy to the contracts our members negotiate. In general, PBMs
    try to work with pharmacies to lower costs, improve quality,
    and provide value to patients and payers. PBMs implemented
    value-based payment incentives with pharmacies, reflecting the
    trend in every other part of the health system toward basing
    payment on value, rather than volume, of services.
        Question 2. An analysis commissioned by the Coalition of
    Affordable Prescription Drugs (CAPD) (http://
    www.affordableprescriptiondrugs.org/app/uploads/2017/06/ow-pbm-
    med-d-report-june-2017-final-1.pdf) found that in 2014 PBMs
    saved the Medicare Part D program $31.7 billion due to
    negotiated price reductions. CMS, however, reported that such
    savings only totaled $17.4 billion (https://www.cms.gov/
    Newsroom/MediaReleaseDatabase/Fact-sheets/2017-Fact-Sheet-
    items/201701-19-2.html)--can you please discuss the difference
    in these two reported amounts?
        Answer 2. The respective authors of the studies would be in
    a much better position to answer this question.
        Question 3. In your testimony, you stated PBMs pass through
    90 percent of rebates to your customers. Please provide
    detailed information supporting this statement for those
    members that participate in the Medicare Part D program.
        Answer 3. As a matter of CMS policy, under Part D bidding
    and medical loss ratio regulatory constructs, every Part D Plan
    (PDP) and MA-PD must file detailed information with CMS on Part
    D rebates in its bids. Because that information is proprietary,
    PCMA does not know what portion of rebates is passed along to
    beneficiaries but notes that under rules and guidance, plans
    treat rebates like all other revenue received, so Part D plans
    must allocate at least 85 percent of all funds to clinical--in
    contrast to administrative activities.
        With respect to the figure in PCMA's testimony, Adam Fein
    calculated and reported the 90 percent figure in his blog
    ``Drug Channels'' on January 14, 2016, in a piece entitled,
    ``Solving the Mystery of Employer-PBM Rebate Pass-Through.'' It
    reads, ``we estimate that on average, PBMs pass back to
    employers more than 90 percent of total rebate dollars,
    regardless of form, received from brand-name pharmaceutical
    manufacturers.''
        Additionally, a J. P. Morgan survey of human resources
    executives at 50 large employers across the United States
    illustrates current pricing arrangements in PBM contracts.
    Across all respondents, PBMs on average retained approximately
    10 percent of manufacturer rebates,
        Question 4. What is PCMA position on ``gag clauses'' that
    impose restrictions on pharmacies from informing consumers
    about lower priced pharmaceutical options? Do PCMA members
    impose these clauses?
        Answer 4. PCMA is not privy to member company contracts
    with pharmacies. However, our understanding is that PBMs may
    negotiate terms with pharmacies that prevent pharmacies from
    suggesting drugs that would deviate from the lowest net price.
    However, regardless of any terms of any contract between PBMs
    and pharmacies, PCMA believes that the patient should always
    pay the lowest cost-sharing possible for a given drug.

                                 senator hassan

        Question 1. In general, what portion of the annual revenue
    and profits for PBMs is derived from the sale of
    pharmaceuticals through mail-order and specialty pharmacies
    that they own and operate?
        Answer 1. PBMs typically operate as separate enterprises
    from both mail order and specialty pharmacies, even when under
    common ownership. Given the widely varying ownership and
    organizational structures within the PBM industry, it is not
    possible for PCMA to derive that figure.
        Question 1(a). Do you know of any nationwide mail-order
    only pharmacies that are in an individual PBM network, but not
    owned by that PBM?
        Answer 1(a). In short, no. In its role as a trade
    association, PCMA is not a party to the contracts our member
    companies negotiate with pharmacies or other entities, nor do
    we see those contracts. We cannot answer this question as we
    lack specific information on the extent or make-up of our
    member company pharmacy networks.
        Question 1(b). In your written testimony, you state that
    PBMs operate outside of the pharmacy supply chain. Please
    explain how it is that PBMs do not participate in the
    ``pharmacy supply chain'' when each of the biggest three PBMs
    own their own mail-order pharmacy.
        Answer 1(b). Because PBMs never take physical possession of
    drugs, PCMA considers them to be outside the pharmaceutical
    supply chain. To the extent that an enterprise also owns mail-
    order and specialty pharmacies, then PCMA would consider those
    enterprises to be in the physical supply chain as pharmacies.
    However, we see the PBM as a fiscal intermediary and outside
    the supply chain.
        Question 2. Have there been quantitative studies that show
    that rebates are required to make the pharmaceutical market
    function according to normal laws of economics? Can you provide
    this evidence?
        Answer 2. PCMA believes that rebates per se are not
    necessary to create a competitive market for branded
    prescription drugs. The current rebate system was created by
    drug manufacturers to comply with a decades-old court
    settlement. Because PBMs work to find the lowest net cost of
    drugs for their clients, PCMA would support other market-based
    methods to manage cost.
        Question 2(a). If manufacturers of undifferentiated
    products (e.g. insulin) were required to set a single retail
    price for their product (with no opportunity for rebates) how
    would they set those prices?
        Answer 2(a): Because drug manufacturers set prices, PCMA is
    unable to shed any light on this question.
        Question 2(b). In your view, would it be more or less
    transparent for consumers and regulators if manufacturers were
    required to set a single retail price for their product (with
    no opportunity for rebates)?
        Answer 2(b). PCMA strongly opposes any government action to
    impose a pricing regime or schedule for prescription drugs.
    PCMA notes that manufacturers do not sell drugs directly to
    patients--manufacturers tend to use wholesalers, which supply
    pharmacies, which ultimately dispense (and sell) drugs to
    patients. Thus, prices to patients would still likely vary,
    even if manufacturers set a price for each drug that could not
    be discounted. As stated above, PCMA would be open to market-
    based methods other than rebates to help manage the cost of
    prescription drugs.

                                senator isakson

        Question 1. This past January, the Centers for Medicare and
    Medicaid Services (CMS) released a report showing how PBMs'
    manipulation of rebates, discounts and other Direct and
    Indirect Fees (called DIR fees) caused beneficiaries to pay
    more at the counter and, more importantly, drove claims through
    the Part D structure in a way that caused claims to be paid in
    the ``catastrophic'' coverage level, where Medicare pays more
    and the PBMs pay less. Should Congress require disclosure and
    transparency of the fees, rebates, DIR fees, and other
    remuneration that PBMs collect so that we and America's seniors
    can better understand how their dollars are being handled by
    your members?
        Answer 1. The CBO examined a similar question--the
    disclosure of negotiated drug rebates--and found that public
    disclosure of drug rebates would have increased costs for the
    Medicare program by ``facilitate(ing) tacit collusion'' among
    manufacturers of drugs with very few competitors, which would
    raise costs. PCMA believes the terms of PBM and pharmacy
    contracts should not be disclosed for the same reasons--that
    disclosure results in higher costs from tacit collusion. In
    fact, CMS found earlier this year that under the current
    proprietary DIR system, ``(h)igher DIR leads to lower bids and,
    therefore, puts downward pressure on beneficiary premiums.''\6\
    ---------------------------------------------------------------------------
        \6\  CMS, ``Medicare Part D-Direct and Indirect Remuneration
    (DIR)'' January 19, 2017.https://www.cms.gov/Newsroom/MediaReleaseData
    base/Fact-sheets/2017-Fact-Sheet-items/2017-01-19-2.html
    ---------------------------------------------------------------------------
        Question 2. I have heard that PBMs use a methodology known
    as ``Maximum Allowable Price (MAC)'' pricing to establish the
    amount long-term care pharmacies are paid for the cost of
    acquiring most generic drugs. The concern my constituents
    shared is that MAC pricing allows PBMs to change payment rates
    every day, as long as those changes are based on actual and
    identifiable marketplace changes.
        Answer 2. Because there are typically multiple
    manufacturers of ``MACed'' generic drugs, generic drugs are a
    commoditized market, like soy beans or gasoline. The prices of
    generic drugs can thus fluctuate rapidly. Because MAC pricing
    relies on pricing data in the market, MAC prices may change
    frequently, reflecting a dynamic market.
        Question 3. Claims processing fees of $0.25 to $1.00,
    charged to LTC pharmacies, are a growing concern that I have
    been hearing about from my state. Most of those concerns
    revolve around that fact that most claims are processed on a
    computer-to-computer basis. Can you tell me the reasoning
    behind PBMs charging these fees to pharmacies when the PBMs are
    supposed to be reimbursing those very same pharmacies?
        Answer 3. We are not privy to our companies' negotiated
    contracts, but we understand that pharmacies agree to certain
    fees in their contractual arrangements with PBMs. These fees
    are not unlike those paid by retailers to credit card companies
    in exchange for the risk of consumer fraud and for immediate
    payment for purchases, or the fees that banks charge consumers
    for ready access to cash through ATMs. Specifically, the fees
    help support access to the PBM's IT systems, which allow
    pharmacies to fill prescriptions, determine patient eligibility
    and cost-sharing, and have claims adjudicated at point of sale
    by nearly any benefit plan. This system essentially assists in
    streamlining the process for pharmacies, which would otherwise
    have to contract with individual employers and plans in order
    to provide services to their enrollees. Additionally, these
    fees also support maintaining help lines, benefit manuals, and
    other services provided to the pharmacy by the PBM.

                                senator roberts

        Question 1. Would striking the non-interference clause save
    the government, or patients, money? What impact could it have
    on access to new innovative therapies?
        Answer 1. The CBO has found that striking Part D's
    noninterference clause would not result in any further savings
    beyond those already negotiated by PBMs, unless the government
    also took steps to restrict the availability of drugs in Part
    D. Without excluding many drugs and establishing a restricted
    formulary, the Federal Government would get no greater savings
    than Part D plans currently do. It seems unlikely that Medicare
    beneficiaries would be satisfied with a single, very narrow
    formulary. PCMA cannot speculate on how drug manufacturers
    would respond to the incentives involved in such a policy
    change.
        Question 2. What obstacles exist for small, innovative,
    often single product companies to have their treatment included
    on a formulary? It is my understanding that there are
    significant challenges for small companies when it comes to
    getting insurance companies to adequately cover innovative
    medicines targeting very specific disease states that represent
    a significant advance for the patient's overall health and
    reduce the need for other healthcare services. Can you share
    some instances where small companies and their medicines don't
    receive equal consideration under a coverage policy, and how it
    could have significant impacts for patient access to the most
    appropriate treatment option? When you negotiate, is it on each
    drug individually, or if a company has more than one drug, do
    you negotiate across all their products?
        Answer 2. PBMs rely on Pharmacy and Therapeutics committees
    (P&T committees) to advise them on drugs they must include in
    their formularies. P&T committees, which typically meet
    quarterly, largely comprise independent clinicians who assess
    the most current drug therapies. To the extent that a therapy
    is truly a breakthrough and must be covered, P&T committees
    recommend coverage. The furor over pricing of the breakthrough
    hepatitis C drug Sovaldi illustrates this point--until its
    competition hit the market, PBMs had to recommend coverage and
    include it on their formularies, even at its very high price.
    Beyond that, however, in its role as a trade association, PCMA
    is not a party to the terms of the negotiations of its member
    companies with manufacturers. We therefore cannot more
    specifically answer this set of questions.
        Question 3. In your written testimony, you mention support
    for ``innovations like electronic prior authorization (ePA)''.
    Would you expand on your support for ePA as well as on how PCMA
    sees ePA and these types of innovation positively affecting the
    drug delivery system?
        Answer 3. PCMA believes that the use of ePA can lower
    administrative costs and in general smooth the process for all
    parties involved in a prior authorization transaction,
    especially patients.
        Question 4. We have seen increased adoption of ePA by EHRs,
    payers and pharmacies over the years, specifically in the
    commercial markets. Are there any barriers your members see to
    that trend continuing in the commercial market or in public
    programs such as Medicare and Medicaid?
        Answer 4. As PCMA understands it, not all physicians are
    technologically equipped to handle ePA, and the technology
    currently in the hands of providers may not have 100 percent,
    real-time formulary access.

                                 senator warren

                    Competition among mail-order pharmacies.

        Pharmacy benefit managers (PBMs) manage prescription drug
    benefits on behalf of plan sponsors, including employers and
    insurers. In this role, PBMs negotiate prices for covered drugs
    with drug manufacturers and maintain networks of pharmacies
    where plan beneficiaries can use their insurance coverage to
    fill their prescriptions. PBMs also operate their own mail-
    order pharmacies, and many insurance plans are designed to
    encourage use of mail-order pharmacies for the filling of
    certain prescriptions.
        Some independent and specialty pharmacies have alleged that
    PBMs engage in abusive, anti-competitive practices to deny
    pharmacies access to their networks and instead steer customers
    toward PBM-owned mail-order pharmacies.\1\1 Pharmacies argue
    that PBMs identify minor offenses and use them as a
    justification for canceling contracts in order to direct more
    customers to the PBM-owned mail-order service. For instance,
    several specialty pharmacies suing Express Scripts, one of the
    Nation's largest PBMs, have alleged that Express Scripts looks
    for ``minor issues concerning [ . . . ] compliance with the
    terms of their provider contracts,'' which are then ``trumped
    up into material breaches'' and used to justify termination
    from the pharmacy network.\2\ PillPack, a specialty mail-order
    pharmacy with a presence in Massachusetts, raised similar
    concerns last year when it alleged that Express Scripts had
    accused the pharmacy of contract violations in order to exclude
    a competitor to Express Scripts' own mail-order pharmacy from
    its network.\3\
    ---------------------------------------------------------------------------
        \1\  Katie Thomas, ``Specialty Pharmacies Say Benefit Managers Are
    Squeezing Them Out,''TheNewYorkTimes(October 26, 2017) (online at:
    https://www.nytimes.com/2017/01/09/business/specialty-pharmacies-say-
    benefit-managers-aresqueezing-them-out.html-r=0).
        \2\  Mary Anne Pazanowski, ``Express Scripts, Pharmacies Collide
    over Network Cutes,'' BloombergBNA(March 2, 2017) (online at:https://
    www.bna.com/express-scripts-pharmacies-n57982084674/).
        \3\  Curt Woodward, ``PillPack Ends Spat with Huge Prescription
    Benefits Company,'' TheBostonGlobe (April 29, 2016) (online at: http://
    www.bostonglobe.com/business/2016/04/29/pillpack-patches-contract-spat-
    with-huge-benefitscompanhy/dDS6AKjGmqfnh0lSSfM08H/
    story.html'event=event12).
    ---------------------------------------------------------------------------
        Question 1(a). How many of PCMA's members own or operate
    mail-order pharmacies?
        Answer 1(a). It is our understanding that PCMA members
    generally offer both mail-service and specialty pharmacy
    benefits, which also operate through mail and rapid consumer
    delivery services. Most PCMA members handle major aspects of
    mail-service and specialty pharmacy operations even if they do
    not own the actual facility that fulfills the prescription.
    Additionally, the majority of PCMA members own mail-order
    prescription fulfillment facilities as well as specialty
    pharmacies.
        Question 1(b). What share of PCMA members that own or
    operate mail-order pharmacies maintain pharmacy networks that
    include other, independent mail-order pharmacies?
        Answer 1(b). In its role as a trade association, PCMA is
    not a party to the contracts our member companies negotiate
    with pharmacies or other entities, nor do we see those
    contracts. We cannot answer this question, as we lack specific
    information on the extent or make-up of our member company
    pharmacy networks.
        Question 1(c). Independent pharmacies, including mail-order
    pharmacies, are regulated by state and Federal standards that
    govern licensing, accreditation, and other credentialing
    requirements. Do PCMA members typically impose additional
    licensing and accreditation conditions that go beyond state and
    Federal requirements on pharmacies participating in their
    networks? If so, what purpose do these additional requirements
    serve?
        Answer 1(c). As stated above, PCMA is not a party to the
    contracts our member companies negotiate with pharmacies or
    other entities, nor do we see those contracts. It is our
    understanding that PBMs may require or prefer network
    pharmacies to earn accreditation beyond state licensing.
    Requiring accreditation is common in many other areas of health
    care network formation, such as physician groups or hospitals.
        Accreditation provides greater certainty with respect to
    pharmacy quality and service than state licensing alone would
    indicate. Accreditation assesses capabilities including, for
    example, having plans to rapidly recover business continuity
    from a natural disaster, a program for compliance with health
    records privacy laws, and proper training for all pharmacy
    staff in carrying out their duties, which state licensure alone
    does not require. These are just a few examples of many.
        Question 1(d). Under what circumstances do PCMA members
    typically audit pharmacies participating in their networks?
        Answer 1(d). As stated above, PCMA does not have access to
    its member companies' pharmacy contracts, but it is our
    understanding that such contracts typically include audit
    rights. Medicare Part D plans, by law, are themselves audited
    by CMS every 3 years. To ensure they meet CMS standards, they
    would need consistently to audit pharmacies that serve
    enrollees. PCMA assumes that private payers may have similar
    requirements as Medicare. In addition, to ensure that
    pharmacies are complying with their contracts and not
    defrauding payers, PBMs would have to audit them periodically.

                          PBMs' impact on drug prices

        PBMs argue that their role in the drug supply chain helps
    constrain the growth of prescription drug prices. For instance,
    in your written testimony submitted to the Senate Committee on
    Health, Education, Labor, and Pensions, you stated: ``By
    negotiating price concessions from drug companies and
    recommending strategies that promote generics and more
    affordable pharmacies, PBMs have played a key role in
    restraining the rise of overall drug costs to low single-digit
    increases over the past few years.''
        While PBMs generate revenue from contracts with clients
    that have an interest in reducing the overall cost of
    prescription drugs purchased by plan beneficiaries, PBMs also
    own and operate their own pharmacies. As a consequence, PBMs
    also generate revenue from the sale of prescription drugs. A
    2005 investigation by the Federal Trade Commission examined
    potential conflicts of interest in this dual role and found
    ``strong evidence that in 2002 and 2003, PBM's ownership of
    mail-order pharmacies generally did not disadvantage plan
    sponsors'' and that there was no evidence of PBMs using various
    methods to steer pharmacy customers toward more expensive drugs
    in order to increase profits.\4\ The FTC concluded that
    ``competition in this industry can afford plan sponsors with
    sufficient tools to safeguard their interests.''
    ---------------------------------------------------------------------------
        \4\  Federal Trade Commission,
    PharmacyBenefitManagers:OwnershipofMail-OrderPharmacies(August 2005)
    (online at:https://www.ftc.gov/reports/pharmacy-benefit-managers-
    ownership-mail-order-pharmacies-Federal-trade-commission-report).
    ---------------------------------------------------------------------------
        However, since the FTC's analysis was conducted,
    competitive dynamics in the pharmacy market have continued to
    shift. In particular, the pharmacy benefit manager industry has
    seen substantial consolidation. Some observers have alleged
    that consolidation, as well as mergers between pharmacies and
    PBMs, ``creates a conflict of interest'' and ``could push up
    drug prices.''\5\
    ---------------------------------------------------------------------------
        \5\  Brian S. Feldman, ``Big Pharmacies Are Dismantling the
    Industry that Keeps US Drug Prices Even Sort-Of under Control,''
    Quartz(March 17, 2016) (online at:https://qz.com/636823/big-pharmacies-
    are-dismantling-the-industry-that-keeps-us-drug-costs-even-sort-of-
    under-control/).
    ---------------------------------------------------------------------------
        Question 2(a). In your testimony, you stated that ``PCMA's
    member companies harness market forces and competition to
    corral drug costs and deliver high-quality benefits and
    services to their payer clients and enrollees.'' How has
    consolidation in the PBM industry impacted market competition
    and PBMs' ability to ``corral drug costs''?
        Answer 2(a). There are dozens of PBMs in the U.S. that
    offer a wide range of services and options to payers, allowing
    these payers to meet their unique program needs. While it is
    true that three PBMs together have a large share of the market,
    the market remains dynamic and competitive. PBMs that are
    substantially smaller than those with the majority of the
    market have had success in winning significant employer
    business, including large employer accounts. The smaller PBMs
    compete by trying to differentiate themselves from larger PBMs
    by emphasizing different services, such as individualized
    account management support, and offering customized PBM
    offerings.
        Competition and innovation in the PBM industry are driving
    change. In just the past year we've seen:
         LPublic speculation of a merger of a major PBM/
    pharmacy chain with a large insurer
         LThe creation of a joint venture by Walgreens and
    Prime Therapeutics
         LAnthem announce it is starting a pharmacy benefit
    manager function in 2020 when its current PBM contract expires
         LRite-Aid's acquisition of Envision Rx
         LThe merger of Optum and Catamaran
         LThe acquisition of LDI by Diplomat
        Additionally, the giant consumer retail purchasing and
    delivery service Amazon is taking material steps to possibly
    enter the PBM industry.\7\ This market activity involving PBMs,
    payers, and pharmacies indicates dynamic industries in flux,
    but one constant is competition. As recently as 2012, the FTC
    has maintained that the PBM industry is competitive.\8\
    ---------------------------------------------------------------------------
        \7\  https://www.cnbc.com/2017/05/16/amazon-selling-drugs-
    pharamaceuticals.html
        \8\  Federal Trade Commission, ``Statement of the Federal Trade
    Commission Concerning the Proposed Acquisition of Medco Health
    Solutions by Express Scripts, Inc.'' FTC File No. 111-0210. April 2,
    2012.
    ---------------------------------------------------------------------------
        Question 2(b). What practices do PCMA members employ to
    safeguard against conflicts of interest between their pharmacy
    businesses and their contracts to negotiate drug prices on
    behalf of plan sponsors?
        Answer 2(b). PCMA notes that the FTC in 2005 found no
    conflicts of interest with business entities owning both a PBM
    and a mail-order pharmacy, and we believe that existing market
    conditions make that finding still applicable. Further, it is
    our understanding that standard terms of contracts and
    accreditation typically require disclosure of any conflicts of
    interest.

                               senator whitehouse

        Question 1. During the hearing, we discussed ``de facto''
    monopolies of prescription drugs, or monopolies that occur
    outside of the patent and exclusivity protections granted to
    new drugs. You all acknowledged that we have seen instances of
    industry outsiders taking advantage of these de facto
    monopolies and dramatically increasing the prices of drugs.
    Addressing this unfair price manipulation in a targeted way
    will require the proper identification of de facto monopolies.
    How can we ensure de facto monopolies are correctly identified?
        Answer 1. PCMA supported the work of Senators Collins and
    McCaskill in introducing the ``Making Pharmaceutical Markets
    More Competitive Act'' as an important first step toward
    creating a more competitive generic drug marketplace. PCMA was
    pleased this concept was later offered as an amendment by
    Senators Collins and Franken to the Food and Drug
    Administration Reauthorization Act of 2017. Specifically, the
    FDA will now be required to publish a list of generic drugs
    where there are three or fewer competitors in the market and to
    expedite the review of generic drug applications where
    competition is limited. PCMA believes policies such as these
    can curb the kinds of outrageous actions such as recently seen
    with price spikes of Daraprim.
        Question 2. While we want to make sure people can afford
    their medications, it strikes me that patient assistance
    programs that reduce out-of-pocket costs for patients also
    serve to help companies maintain their market share, even when
    there is a lower-cost drug available that is just as effective.
    What effect do patient assistance programs have on costs to
    patients and to the overall health care system? How could
    Congress help ensure patient assistance programs don't mean
    wasteful spending of our health care dollars, while still
    preserving patient access?
        Answer 2. Some schemes masquerading as patient assistance
    programs are really marketing schemes. Such programs will tend
    to help patients purchase only one drug and may not be means
    tested. Drug copay coupons are the most common form of this
    activity.
        Considered illegal in Federal health programs, copay
    coupons are banned in Medicare and Medicaid, but are still
    allowed in the commercial market in most instances. Drug
    companies rely on financial subsidy programs to increase
    product uptake among insured patients, to encourage patients to
    ignore similarly effective, but more affordable options to
    treat their conditions. By targeting drugs with sub-optimal
    formulary placement, drug manufacturers use these programs to
    rapidly increase product utilization outside the boundaries of
    traditional insurance processes.
        PCMA supports programs that facilitate patient access to
    specialty and high-cost drugs when appropriate. We do not,
    however, support programs that undermine formulary design.
    Payer costs rise unjustifiably when enrollees choose expensive
    drugs over equally effective, more affordable options, and
    since the use of copay coupons reduces the utilization of these
    more affordable options, restrictions on copay coupon use can
    be part of a solution to help slow the rising cost of
    prescription drug coverage.
        PCMA supports applying anti-kickback statute to coupons
    used in coverage purchased through health care exchanges to
    prevent their use in these plans, as is the case in Medicare
    and Medicaid.

       Response by Thomas E. Menighan to Questions of Senator Alexander,
    Senator Murray, Senator Bennet, Senator Cassidy, and Senator Whitehouse

                               chairman alexander

        Question 1. What is the role of rebates, and do we need
    them?
        Answer 1. During the October hearing, rebates were
    discussed in the context of those provided by manufacturers to
    pharmacy benefit managers (PBMs). Generally, APhA opposes
    rebates given from the manufacturer to the PBM because it sets
    up a framework that artificially raises point-of-sale prices,
    which can increase patients' costs and speed up the rate at
    which they reach the Part D coverage gap. In addition, because
    pharmacies do not receive any benefit from these rebates, they
    are unable to pass on savings to patients. With regard to
    manufacturers' pricing policies, APhA supports pharmaceutical
    industry adoption of a ``transparent pricing'' system which
    would eliminate hidden discounts, free goods, and other subtle
    economic devices. The lack of a transparent pricing framework
    negatively impacts the ability of CMS to oversee the Part D
    program.
        Question 2. How do rebates affect your industry? Do your
    members contract and get paid based on the public ``list''
    price, or using a ``net'' price that takes into account
    rebates.
        Answer 2. Savings from rebates given from manufacturers to
    PBMs are not passed on to pharmacies and APhA is not aware of
    such rebates' savings being passed onto patients. Due to a lack
    of transparency, it is difficult to determine the extent to
    which patients benefit from these rebates, if at all. In fact,
    rebates between manufacturers and PBMs can inflate the point-
    of-sale price of prescription medication.
        Pharmacies purchase their drugs from wholesale
    distributors. That purchase price is generally based on the
    volume of purchases the pharmacy or chain or health system can
    achieve. The more volume purchased, the lower the price, just
    as in any supply chain in America. But these differences are
    generally narrow, and totally disconnected from the pricing
    offered by a PBM to a pharmacy to participate in a network.
    Simply, the contract price between a PBM and a pharmacy for
    medications is not based on what that pharmacy actually pays
    for the medications. Consequently, the amount reimbursed to the
    pharmacy by the PBM may be less than the pharmacy's cost to
    acquire the medication. In addition, it is not clear if the
    value PBMs give a drug in their formularies and benefit design
    incorporates the price the pharmacist pays to obtain it. Our
    member pharmacists have indicated they are experiencing more
    and more products with a negative payment, in which the payer's
    reimbursement does not cover the cost of providing the
    medication.
        With regard to contracting and list pricing, there is no
    standard contract between pharmacists and insurers, PBMs and
    other payers. Therefore, there is no one set of ``list'' or
    ``net'' pricing used. Pricing offered by PBMs is reported by
    our members to lag when prices rise and excel when prices fall.
    Many payer contract prices, as well as terms and conditions are
    `take it or leave it', and do not provide an opportunity for
    meaningful negotiation between parties.
        Question 3. Would you support a policy that would allow
    supply chain participants to contract for lower prices on the
    front end rather than after the fact with rebates?
        Answer 3. Currently, pharmacy chains, or pharmacies in
    buying groups, aggregate buying power to negotiate with
    suppliers (typically wholesalers) for small discounts on prices
    charged to wholesalers from manufacturers. Much of the
    wholesale industry trade with brand name manufacturers is pass
    through, with fees paid by manufacturers to wholesalers to
    distribute their products.
        APhA would need to see details regarding the referenced
    policy. APhA would not support a policy that enables more
    members of the supply chain to retroactively clawback money
    from pharmacies. Regulations regarding Direct and Indirect
    Remuneration (DIR) were established to make transparent the
    rebates secured by PBMs from manufacturers. These rebates, as
    noted earlier, are not connected in any way to the prices paid
    by pharmacies to their suppliers for these medications.
    However, PBMs have taken their required reporting of rebates to
    CMS as an opportunity to ``recover'' their disclosed rebates
    from pharmacies, who do not benefit from the rebates in the
    first place.
        APhA strongly opposes fees imposed by Medicare Part D plan
    sponsors and their PBMs that retroactively reduce the payments
    PBMs earlier approved and paid to pharmacies. These pharmacies
    have already paid the prices charged to them by their suppliers
    and have dispensed these medicines to Medicare beneficiaries.
    DIR disclosure was originally designed to capture rebates and
    other mechanisms not included at the point-of-sale. However,
    the DIR disclosure by PBMs to CMS are now being used beyond
    their original purpose to retroactively adjust pharmacies
    payment months after the sale, sometimes below the price paid
    by the pharmacy. Because point-of-sale prices paid by
    beneficiaries is calculated based on the contracted price
    before DIR is extracted, DIR fees charged to pharmacies do not
    positively impact what patients pay but rather, increase the
    point-of-sale price. This can result in the beneficiary paying
    more because the patient's cost-sharing may be based on sales
    prices.

                                 senator murray

        Question 1. In the written testimonies submitted to the
    committee, there is a lot of blame shifting when it comes to
    where the fault of high drug prices lays. We can all agree that
    our complex health system is inefficient, but, for that reason,
    the blame is shared, and everyone bears responsibility to fix
    the problem.
        Please provide more than one policy proposal, which does
    not involve any other members of the supply chain, that your
    industry in particular could implement, either with or without
    the help of Congress or the Administration, to bring down costs
    for patients and families, including the reasons why you
    believe it would bring down costs.
        Answer 2. To efficiently use resources, meaning both
    dollars and clinicians, APhA suggests several reforms that
    enhance patient access and outcomes while improving
    transparency in the pharmacy marketplace:
        (1) Pass the Pharmacy and Medically Underserved Areas
    Enhancement Act (H.R. 592 / S. 109). This bill, with strong
    bipartisan support would enable medically underserved Medicare
    beneficiaries to better access health care through pharmacist-
    provided care services. As the medication expert on the care
    team, pharmacists possess knowledge and expertise to optimize
    the impact of medications, patient care, and health outcomes
    and consequently, the viability of the Medicare program. The
    importance of medication-related services cannot be overstated,
    especially in the Medicare program. Medications are the primary
    method of treating chronic disease and are involved in 80
    percent of all treatment regimens. Moreover, the United States
    spends nearly $300 billion annually on medication-related
    problems, including nonadherence. Accordingly, not only will
    S.109 increase beneficiaries' access to health care, it will
    help improve their outcomes--particularly those impacted by
    medications. APhA appreciates the support by many Committee
    members for the Pharmacy and Medically Underserved Areas
    Enhancement Act and urges its swift passage to allow
    pharmacists to deliver these vital services as providers in
    medically underserved areas. APhA also requests the Committee's
    consideration of policies that include pharmacists as an
    eligible provider or clinician, such as in advanced payment
    models (APMs). These models often refer to Part B's named
    providers, which disincentivizes the optimal use of the entire
    patient care team, including pharmacists, to deliver effective
    and quality care efficiently.
        (2) We also encourage the Committee, when considering drug
    policy changes, to look beyond isolated components of health
    care to determine drug cost and value. Because health coverage
    is frequently analyzed in a silo by the benefit type such as
    inpatient, outpatient, and drug coverage, a patient's overall
    services, costs and outcomes may never be reviewed
    comprehensively. Policies cannot continue to consider drug and
    medical coverage, and their related costs and outcomes,
    separately if we are to achieve true value in health care.
    Current coverage and payment policies related to prescription
    drugs place incentives on the short-term, focusing on cost
    containment for the product rather than weighing the overall
    clinical benefit to the patient and the impact to their medical
    costs. Breaking down the many silos within our health care
    system will help address that $300 billion dollars spent on
    medication-related problems--many of which are preventable.
        (3) Suboptimal health information technology (HIT) systems
    continue to be a barrier to the exchange of pertinent health
    information necessary for optimal coordination of care in
    various practice settings. For example, unless pharmacists are
    part of an integrated system or practice, pharmacists are
    frequently blocked from the electronic exchange of relevant
    clinical and billing information with other health care
    providers, insurers, etc. Such restrictions impede the ability
    of patients, the health care system and payers like Medicare,
    to benefit from coordinated, team-based care. Pharmacists are
    the most accessible health care professional and may be the
    only one in many communities. We encourage the Committee to
    look at mechanisms and incentives to facilitate pharmacists'
    ability to access and exchange information through Electronic
    Health Records (EHRs)--essential to team-based coordinated
    care.

                                 senator bennet

        Question 1. In your testimony, each of you indicated that
    there is some role for value-based arrangements that health
    plans can set up with drug manufacturers for outcomes-based
    reimbursement. However, there are still relatively few of these
    arrangements in place.
        I recently sent a letter with Senators Cassidy, Warner, and
    Young to request a GAO study on value-based arrangements. We
    asked GAO to assess the savings potential for consumers and the
    government in outcomes-based arrangements.
        What do you expect we will find in this study?
        Answer 1. There are a number of publicly disclosed value-
    based purchasing arrangements between pharmaceutical
    manufacturers and payers. While we anticipate the GAO study
    will not focus on pharmacists, if it did, we would expect the
    GAO would find most, if not all, of these arrangements fail to
    reimburse pharmacists for the services they provide to improve
    medication outcomes, thus impeding real value.
        Question 2. What impediments exist to creating outcomes-
    based reimbursements?
        Answer 2. Numerous studies have shown that medication
    management and other pharmacist-provided services improve
    medication outcomes for patients, yet, pharmacists are often
    not reimbursed for these services under Medicare, or from
    private payers. Any value-based arrangements need to include
    and adequately reimburse pharmacists for the value of the
    services they provide.
        As noted above, the health care system cannot continue to
    cover and evaluate the drug and medical benefit separately. New
    Medicare payment and delivery models, such as ACOs, focus on
    coordinated care and value, but do not include drug coverage.
        Question 3. We have seen reports that in some cases,
    patients who fill prescriptions are charged a copay that is
    higher than the cash price of the drug and may not be given the
    chance to choose the less costly option.
        What have you heard from pharmacists on how widespread this
    practice may be?
        Answer 3. We have heard from our members that this is a
    common practice of PBMs. A June 2016 survey of 600 pharmacists
    by the National Community Pharmacists Association confirms this
    position. The findings from the survey stated, ``Sometimes PBM
    corporations impose ``gag clauses'' that prohibit community
    pharmacists from volunteering the fact that a medication may be
    less expensive if purchased at the ``cash price'' rather than
    through the insurance plan. In other words, the patient has to
    affirmatively ask about pricing. Most pharmacists (41 percent)
    said they encountered these restrictions at least 10 times
    during the past month.'' \1\ While it may be difficult to
    measure the prevalence of such restrictions, it is also
    difficult for pharmacists to remember which plan restricts, and
    which one allows these disclosures. Prohibitions of ``gag
    clauses'' would make the system more transparent.
    ---------------------------------------------------------------------------
        \1\  See, http://www.ncpa.co/pdf/dir--fee--pharamcy--survey--june--
    2016.pdf
    ---------------------------------------------------------------------------

                                senator cassidy

        Question 1. In determining Direct & Indirect Remunerations,
    do you believe Part D plan sponsors should utilize quality and
    performance measures that are applicable to the services
    provided by retail and specialty pharmacies?
        Answer 1. It is important to clarify that pharmacists
    services are not covered under Medicare Part B, and Part D does
    not cover most pharmacist-provided services with the exception
    of medication therapy management (MTM) and immunizations.
    However, pharmacists are willing to engage in value-based
    delivery and payment systems and have the outcomes of their
    services be measured. Therefore, APhA encourages Medicare
    statutes and policy be amended to treat pharmacists like other
    health care practitioners which lays needed groundwork to
    improve access and quality. In addition, we reiterate the need
    to measure outcomes, quality and cost comprehensively rather
    than separately in each Medicare program (e.g. Parts A, B, D).
        APhA supports the Improving Transparency and Accuracy in
    Medicare Part D Drug Spending Act, S. 413, which prohibits
    Medicare Part D plan sponsors/PBMs from retroactively reducing
    payment on clean claims submitted by pharmacies under Medicare
    Part D, which would:
         LLower Medicare costs for taxpayers. Virtually all
    catastrophic costs in Part D are borne by the government. These
    costs are fueled by pharmacy DIR fees, which have more than
    tripled in recent years.
         LBoost transparency in drug pricing. Prohibiting
    these pharmacy fees will make Medicare Plan Finder more
    accurate and facilitate better CMS oversight.
         LGive seniors reduced cost-sharing and greater
    budget predictability. Beneficiaries who use their drug plan to
    fill prescriptions are negatively impacted by pharmacy DIR
    fees. This is because retroactive fees lead to inflated drug
    costs that are the basis for beneficiary cost-sharing amounts.
         LPreserve access to independent community
    pharmacies. Locally owned pharmacies provide enhanced patient
    care, and are often located in underserved rural and inner-city
    areas. The number of U.S. independent community pharmacies has
    declined the past five years and a recent study estimated 3
    million rural residents are at risk of losing the only pharmacy
    in their community with the next nearest pharmacy over 10 miles
    away, a trend exacerbated by DIR.
        Question 2. What role do you believe retail and specialty
    pharmacies should play in combating the opioid abuse epidemic?
        Answer 2. Pharmacists Role/ Pharmacists' Care Services. As
    the medication experts on the patient's health care team,
    pharmacists play an important role in preventing prescription
    drug misuse and abuse. Pharmacists are involved in pain
    management programs that include medication tapering services,
    work in medication assisted treatment programs, and furnish
    naloxone where authorized. Depending on state authority,
    pharmacists working under collaborative practice agreements can
    initiate, monitor, modify, and discontinue medication therapy,
    including opioids, and order and interpret laboratory tests in
    collaboration with other members of the health care team.
    Pharmacists see the patient's complete medication profile and
    can help bridge the communication gap between health care
    providers by coordinating and providing medication-related
    services. Pharmacists are part of the team helping patients
    with legitimate pain management needs achieve treatment goals.
    Pharmacies often serve as an access point for patients to
    receive care and to dispose of their medications through take-
    back receptacles.
        In addition, pharmacists are required by DEA regulations to
    ensure that prescriptions for controlled substances are issued
    for a legitimate medical purpose by a practitioner acting in
    the usual course of professional practice (See United States
    Drug Enforcement Administration, Practitioner's Manual, 2006:30
    ``Federal courts have long recognized that it is not possible
    to expand on the phrase `legitimate medical purpose in the
    usual course of professional practice' in a way that will
    provide definitive guidelines to address all the varied
    situations physicians may encounter''). [Pharmacist's
    corresponding responsibility]
        Medication Assisted Treatment (MAT). Pharmacists' roles in
    the provision of medication-assisted treatment continues to
    grow, however, their ability to help patients is stunted
    because they are not eligible to obtain a DATA-waiver.
    Currently, 48 states and the District of Columbia allow
    pharmacists to enter into collaborative practice agreements \2\
    with physicians and other prescribers to provide advanced care
    to patients, which may include components of MAT. APhA is aware
    of at least six states that allow pharmacists to prescribe
    Schedule III, IV and V controlled substances under a
    collaborative practice agreement. The Comprehensive Addiction
    and Recovery Act (CARA) of 2016 expanded the law to allow nurse
    practitioners and physicians assistants to obtain a DATA waiver
    and provided SAMHSA with authority to modify eligibility
    requirements to obtain DATA waiver. Pharmacist involvement in
    MAT for opioid use disorders helps improve access and outcomes,
    while reducing the risk of relapse. \3\, \4\ Pharmacists'
    capabilities are recognized by the Food & Drug Administration
    (FDA) \5\ and in SAMSHA's 2015 Federal Guidelines for Opioid
    Treatment Programs. \6\ The pharmacy community is united and
    has taken a cohesive position regarding the need to allow
    pharmacists to obtain a DATA waiver. \7\ Allowing pharmacists
    to obtain a DATA-waiver will increase access to MAT and address
    treatment gaps that become more apparent as the opioid epidemic
    evolves.
    ---------------------------------------------------------------------------
        \2\  Collaborative practice agreements create a formal practice
    relationship between a pharmacist and another health care provider and
    specify what patient care services--beyond the pharmacist's typical
    scope of practice- can be per
        \3\  DiPaula, B.A. & Menachery, E. (Mar/Apr 2015). Physician-
    pharmacist collaborative care model for buprenorphine-maintained
    opioid-dependent patients, Journal of the American Pharmacists
    Association, 55(2), 187-192.
        \4\  Raisch, W. (2002). Opioid Dependence Treatment, Including
    Buprenorphine/Naloxone, Pharmacology & Pharmacy, 36(2), 312-321.
        \5\  Food & Drug Administration, Information for Pharmacist.
    SUBOXONE (buprenorphine HCl/naloxone HCl dihydrate, sublingual tablet)
    and SUBUTEX (buprenorphine HCl, sublingual tablet), available at:
    http://www.fda.gov/downloads/Drugs/DrugSafety/
    PostmarketDrugSafety%InformationforPatientsandProviders/
    UCM191533.pdf(last accessed November 16, 2015).
        \6\  Substance Abuse and Mental Health Services Administration
    (SAMHSA), U.S. Department of Health and Human Services, (March 2015),
    Federal Guidelines for Opioid Treatment Programs, available at: http://
    store.samhsa.gov/shin/content/PEP15-FEDGUIDEOTP/PEP15-FEDGUIDEOTP.pdf,
    last accessed: May 18, 2016.
        \7\  See Joint Statement for the Record: American Pharmacists
    Association (APhA), Academy of Managed Care Pharmacy (AMCP), American
    Society of Consultant Pharmacists (ASCP), American Society of Health-
    System Pharmacists (ASHP), College of Psychiatric and Neurologic
    Pharmacists (CPNP), National Association of State Pharmacy Associations
    (NASPA) and National Community Pharmacists Association (NCPA),
    available at:http://www.pharmacist.com/sites/default/files/files/
    Joint20Statement20for20the20Record20on2020MAT20to20Energy20and20Commerce
    20Hearing-10-25-2017.pdf
    ---------------------------------------------------------------------------

                               senator whitehouse

        Question 1. During the hearing, we discussed ``de facto''
    monopolies of prescription drugs, or monopolies that occur
    outside of the patent and exclusivity protections granted to
    new drugs. You all acknowledged that we have seen instances of
    industry outsiders taking advantage of these de facto
    monopolies and dramatically increasing the prices of drugs.
    Addressing this unfair price manipulation in a targeted way
    will require the proper identification of de facto monopolies.
    How can we ensure de facto monopolies are correctly identified?
        Answer 1. APhA recognizes the difficulty in identifying
    patterns indicative of a de facto monopoly. We encourage
    Congress to require research regarding factors that can be used
    to better predict when a de facto monopoly may occur. Such
    research should incorporate members of the supply chain,
    including pharmacists, and also include recommendations
    regarding steps that FTC, FDA, and other government agencies
    may take to prevent price increases. In addition, APhA notes
    that stakeholders have indicated manufacturers are using Risk
    Evaluation and Mitigation Strategy (REMS) Programs
    inappropriately to delay generic drug development and
    marketing. APhA recommends research include reviewing REMS
    programs and whether they are serving as barrier to generic
    drug development and supporting de facto monopolies.
        Question 2. While we want to make sure people can afford
    their medications, it strikes me that patient assistance
    programs that reduce out-of-pocket costs for patients also
    serve to help companies maintain their market share, even when
    there is a lower-cost drug available that is just as effective.
    What effect do patient assistance programs have on costs to
    patients and to the overall health care system? How could
    Congress help ensure patient assistance programs don't mean
    wasteful spending of our health care dollars, while still
    preserving patient access?
        Answer 2. Patient assistance programs may be created for a
    variety of purposes, including helping patients to access
    medications. The components and requirements of these programs
    vary. In some circumstances, pharmacists act as an intermediary
    to identify patient assistance programs for patients to help
    maintain their access to needed medications. Because patient
    assistance programs vary substantially and change, APhA and our
    members do not have the resources to perform a review of
    current programs in attempt to determine their value and impact
    on patients and the overall health care system. APhA encourages
    research be conducted to better answer Senator Whitehouse's
    question.
        With regards to transfer incentives which may be provided
    via patient assistance programs, APhA advocates for the
    elimination of coupons, rebates, discounts, and other
    incentives provided to patients that promote the transfer of
    prescriptions between competitors.
        [Whereupon, at 12:10 p.m., the hearing was adjourned.]

                                       [all]