[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

                               __________

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                                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
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                            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.
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    \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
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                           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]