[Senate Hearing 115-869]
[From the U.S. Government Publishing Office]




                                                        S. Hrg. 115-869

                    THE COST OF PRESCRIPTION DRUGS:
                     AN EXAMINATION OF THE NATIONAL
                  ACADEMIES OF SCIENCES, ENGINEERING,
                          AND MEDICINE REPORT
                     ``MAKING MEDICINES AFFORDABLE:
                        A NATIONAL IMPERATIVE''

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

                                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 AN EXAMINATION OF 
  THE NATIONAL ACADEMIES OF SCIENCES, ENGINEERING AND MEDICINE REPORT 
         ``MAKING MEDICINES AFFORDABLE: A NATIONAL IMPERATIVE''

                               __________

                           DECEMBER 12, 2017

                               __________

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



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                 U.S. GOVERNMENT PUBLISHING OFFICE

48-379 PDF                WASHINGTON : 2022














          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

                                  (ii)






                            C O N T E N T S

                              ----------                              

                               STATEMENTS

                       TUESDAY, DECEMBER 12, 2017

                                                                   Page

                           Committee Members

Alexander, Hon. Lamar, Chairman, Committee on Health, Education, 
  Labor, and Pensions, opening statement.........................     1
Murray, Hon. Patty, Ranking Member, Committee on Health, 
  Education, Labor, and Pensions, opening statement..............     4

                               Witnesses

Augustine, Norm, Chair of Committee on Ensuring Patient Access to 
  Affordable Drug Therapies, National Academies of Sciences, 
  Engineering and Medicine, Washington, DC.......................     6
    Prepared Statement...........................................     7
    Summary Statement............................................    10
Mitchell, David, President and Founder, Patients for Affordable 
  Drugs, Bethesda, MD............................................    11
    Prepared Statement...........................................    13
    Summary Statement............................................    17
Holtz-Eakin, Douglas, Ph.D. President, American Action Forum, 
  Washington, DC.................................................    18
    Prepared Statement...........................................    19

                         Questions and Answers

Response by Norm Augustine to questions of:
    Senator Alexander............................................    48
    Senator Casey................................................    50
    Senator Whitehouse...........................................    50
Response by David Mitchell to questions of:
    Senator Alexander............................................    51
    Senator Casey................................................    52
    Senator Whitehouse...........................................    53
Response by Douglas Holtz-Eakin to questions of:
    Senator Alexander............................................    53
    Senator Casey................................................    55
    Senator Whitehouse...........................................    55

 
                    THE COST OF PRESCRIPTION DRUGS:
                     AN EXAMINATION OF THE NATIONAL
                  ACADEMIES OF SCIENCES, ENGINEERING,
                          AND MEDICINE REPORT
                     ``MAKING MEDICINES AFFORDABLE:
                        A NATIONAL IMPERATIVE''

                              ----------                              


                       Tuesday, December 12, 2017

                                       U.S. Senate,
       Committee on Health, Education, Labor, and Pensions,
                                                    Washington, DC.
    The Committee met, pursuant to notice, at 10:02 a.m. in 
room SD-430, Dirksen Senate Office Building, Hon. Lamar 
Alexander, Chairman of the Committee, presiding.
    Present: Senators Alexander [presiding], Isakson, Paul, 
Collins, Cassidy, Young, Murray, Casey, Franken, Bennet, 
Whitehouse, Baldwin, Murphy, Warren, Kaine, and Hassan.

                 Opening Statement of Senator Alexander

    The Chairman. The Committee on Health, Education, Labor, 
and Pensions will please come to order.
    Today, we are holding our third hearing on drug pricing to 
look at the new National Academies Report, ``Making Medicines 
Affordable: A National Imperative.''
    Senator Murray and I will each have an opening statement. 
Then we will introduce the witnesses, and after their 
testimony, Senators will have 5 minutes for questions.
    Recently, I received a letter from Joseph in Cordova, 
Tennessee. We say it Cordova in Tennessee.
    [Laughter.]
    The Chairman. He wrote, ``Senator Alexander, I just got 
back from a trip to my local pharmacy. Unfortunately, I was 
unable to purchase some of the medicine my family needs because 
one of the medications was $150. I want to know how you plan to 
get this problem under control. In the meantime, I guess my 
family will just have to suffer since we cannot afford the 
medications that they need.''
    I know that every Member of this Committee has heard 
similar stories from their constituents.
    Our three hearings on the cost of prescription drugs have 
been based on a bipartisan request, led by Senators Cassidy and 
Franken, along with Senators Collins, Baldwin, Murkowski, 
Whitehouse, Capito, Sanders, Enzi, and Warren; almost all the 
Members of our Committee.
    This is our fourth hearing on drug prices, if you consider 
how many questions on drug prices Alex Azar, the nominee for 
Health and Human Services Secretary, had to answer at his 
confirmation hearing 2 weeks ago.
    At our first two hearings, we heard from prescription drug 
manufacturers, pharmacists, doctors, health policy experts, and 
others to try to understand what goes into the price patients 
pay when picking up their prescriptions.
    The cost Americans pay for their prescription drugs is an 
important topic. More than 4.5 billion prescriptions are 
written for drugs each year for Americans, who then pick up 
those prescriptions at 60,000 pharmacies, or receive them from 
doctors or hospitals, and from online pharmacies.
    While we are living in a time of remarkable biomedical 
research that is leading to new drugs, that can stop a stroke 
and cure hepatitis C, it is critical that patients can afford 
to pay for these miracle drugs.
    According to the Centers for Medicare and Medicaid 
Services, national health expenditures in the United States 
were nearly 18 percent of our Gross Domestic Product in 2016, 
or $3.3 trillion, and are projected to rise to 20 percent in 
2025.
    Our reason for concern is how this compares to other 
industrialized countries. In 2014, the World Bank showed the 
United Kingdom was spending 9.8 percent of its Gross Domestic 
Product on health care, Germany 11.1 percent, and Finland 9.6 
percent.
    To give what we are talking about today some context, the 
Center for Medicare and Medicaid Services says that hospital 
stays and doctor visits account for about half of national 
health expenditures. The other half includes home healthcare, 
nursing care, medical equipment such as wheelchairs and 
eyeglasses, and our subject for today, prescription drugs.
    According to the National Academies Report, about 10 
percent of healthcare expenditures is on prescription drugs; 17 
percent if you include prescription drugs received in hospitals 
and at the doctor's office.
    Like most elements in our healthcare system, spending on 
prescription drugs increases every year, sometimes by as little 
as 1.3 percent as in 2016, and in other years by as much as 
12.4 percent as in 2014. Big increases in spending may be 
driven by the introduction of a new and lifesaving drug, such 
as the hepatitis C treatment introduced in 2014.
    But there can be differences between what the overall 
increase on spending on prescription drugs is in any given year 
and what a patient actually spends on his or her prescription 
when he or she goes to fill it.
    The system is extremely complex. There are many factors 
that could have caused Joseph, who wrote the constituent letter 
I mentioned, to be charged $150 for his prescription.
    For example, what type of insurance plan did his family 
have? Is it a prescription drug where there is only one 
manufacturer? Is it a new drug with no generic substitute 
available? What is the list price of the drug established by 
the manufacturer and what is the actual net price of that drug 
after all of the negotiations and rebates?
    What we learned at our first two hearings is that all of 
these factors affect what patients pay when they pick up a 
prescription from the pharmacy or receive it at the hospital.
    I think we all recognize it is a complex system to get a 
prescription drug from the manufacturer to the patient, and 
that the complexity affects what and how much of his or her own 
money a patient pays for their prescription drugs.
    That is why it is important we have Norm Augustine 
testifying here today, to hear about the National Academies' 
work on prescription drug prices, and to discuss the thoughtful 
recommendations published in their new report, ``Making 
Medicines Affordable: A National Imperative.''
    The Academies noted in their report, ``There is not enough 
accessible information to determine with certainty which 
segments of the biopharmaceutical sector are principally 
accountable for the rising cost of many pharmaceuticals.''
    I think many of us here today would agree that more 
information is needed to find reasonable solutions for people 
like Joseph.
    I believe most ideas in Washington fail for the lack of the 
idea, so it is important for us to hear concrete 
recommendations from independent and knowledgeable experts.
    These are thoughtful recommendations from the Academies. 
They deserve careful analysis. I am sure there will be a 
vigorous debate before Congress comes to any conclusion.
    My understanding is the research for this report was 
concluded in May, so it does not take into account policy 
changes since then. Since May, Congress has taken some 
significant steps to address some of the concerns in the 
report.
    In August, Congress passed, and the President signed, 
updated user fee agreements, which pay for a quarter of the 
Food and Drug Administration's work that, we hope, will take 
steps to help FDA approve more new drugs more quickly.
    For example, the new law includes a provision from Senators 
Collins, McCaskill, Cotton, and Franken to encourage the 
development of new generic drugs to increase competition and 
bring down prices.
    In addition, through a provision in the new law offered by 
Senators Hatch and Menendez, and action taken by Dr. Gottlieb 
at the FDA, two loopholes have been closed to prevent drug 
manufacturers from taking inappropriate advantage of incentives 
for the development of prescription drugs for rare diseases.
    Mr. Augustine, we are looking forward to hearing more about 
these recommendations from you today.
    We will also hear from David Mitchell, a cancer patient, 
who has become an advocate for policies to make drugs more 
affordable.
    We were sorry that our former colleague, Dr. Tom Coburn, 
could not make it today. We wish him a speedy recovery.
    We welcome, instead, Doug Holtz-Eakin, and thank him for 
accommodating our request to join the panel today. He is a 
well-respected economist and a former head of the Congressional 
Budget Office.
    Senator Murray.

                  Opening Statement of Senator Murray

    Senator Murray. Well, thank you very much, Chairman 
Alexander.
    I really do appreciate your continued commitment to hold 
these bipartisan hearings on prescription drug costs.
    This truly is an urgent discussion. It is an issue that 
touches so much of this Committee's other work. In fact, there 
are few concerns I hear more about in my travels across 
Washington State, and the country, than the high cost of 
prescription drugs.
    Today's high prices are an unsustainable burden on our 
healthcare system as a whole, for doctors and hospitals, 
insurers and employers, and most importantly for the patients 
and families we all represent.
    I have heard from far too many people who are forced to 
choose between a high priced medication and paying the bills or 
putting food on the table. Not only is that no choice at all, 
but it is plain wrong and unacceptable.
    It is well past time for this conversation and for more 
progress on this issue.
    Now, as I have noted before in these hearings, we have 
taken some key actions to address this issue. Together, this 
Committee worked to increase transparency and foster more 
competition in the generic drug market in the FDA 
Reauthorization Act of 2017 which, as you heard, passed in 
August.
    In that bill, we accelerated the review of generics that 
can alleviate anticompetitive markets. We improved the process 
for bringing a generic to market by increasing communication 
and transparency between FDA and drug manufacturers.
    We encouraged the development of new generics to compete 
with sole source products vulnerable to price hikes and 
shortages.
    We made sure orphan drug exclusivities are only granted to 
new or superior products and eliminated mechanisms being 
exploited by some companies to delay the entry of generic 
competitors.
    Those are all important steps, but there is more we can, 
and should, be doing to adequately tackle this issue, which 
means making more progress to get at the root of the problem, 
which are the high prices set by drug manufacturers.
    On this, we have seen far too much finger pointing from 
industry and a lot of missed opportunities.
    Generic competition alone will not address the high prices 
paid by so many patients in out-of-pocket costs and high 
premiums, because as long as manufacturers can actively avoid 
competition, we are going to continue to see little impact and 
little change on drug prices.
    We have to do more to rein in drug companies' market 
monopolies, and their abuses, and gaming of our patent 
regulatory system.
    Now, I am proud that Democrats have put forward a number of 
ideas to tackle these, and other, significant challenges. We 
have legislation that would demand more transparency from 
pharmaceutical companies, allow Medicare to negotiate fair drug 
prices for prescription drugs, prevent manufacturers from 
engaging in price gouging, and crack down on the various 
anticompetitive practices that keep prices high.
    Now, that will not solve all of our challenges. It will 
take more and all of us working together. Just as we need the 
industry to play a more active role on this issue in order to 
make progress, what is also required is that this 
Administration has to be a partner, not a hindrance, to our 
efforts.
    As I talked about during our last hearing on drug costs, I 
see this as a persistent, and very serious, problem from when I 
challenged President Trump to nominate a new Secretary for 
Health and Human Services who would actually put patients and 
families first when it comes to prescription drug prices and 
other issues.
    Unfortunately, President Trump's nominee to lead HHS, Alex 
Azar, has not convinced me he would be willing to stand up to 
the Administration's extreme agenda.
    I remain very concerned with many of his responses during 
our nomination hearing on his previous background working in 
the pharmaceutical industry where, as a senior executive, he 
supported raising drug costs and about what new steps he would 
take at HHS to help lower drug prices.
    Another issue I raised at our last hearing was the 340B 
program, which supports hospitals and clinics in serving the 
very communities who cannot afford the care they need to stay 
healthy.
    On this, the Trump administration has also taken us 
backward under the guise of reducing drug prices. CMS is 
cutting the reimbursement for drugs purchased by most 340B 
eligible hospitals by nearly 30 percent staring in January.
    Not only will this do absolutely nothing to combat high 
drug prices, it will result in less funding for safety net 
providers to provide critical services to low income and 
vulnerable patients.
    That action is disappointing, and it represents a continued 
failure, in my belief, by this President to seriously address 
this issue.
    Now, I am glad today we will hear about the report from the 
National Academies of Sciences, Engineering, and Medicine on 
improving patient access to drug treatments. I am very much 
looking forward to our testimony today because the National 
Academies Report does include several recommendations that, I 
believe, would make a real difference in bringing down drug 
prices including many issues I just raised like the Federal 
negotiation of drug prices, refining methods for determining 
the value of drugs to improve payment, and greater transparency 
from drug manufacturers to preventing perpetual market 
monopolies.
    I really want to thank all of our colleagues who are here 
today, and our witnesses, for joining us.
    We have shown here on this Committee that we can make 
bipartisan progress on this issue, and we really need to build 
on that foundation to do more, and make sure prescription 
medications, and lifesaving treatments, are not just available, 
but accessible and affordable for our patients.
    Thank you.
    The Chairman. Thank you, Senator Murray.
    I would ask each of the witnesses to summarize your 
testimony in 5 minutes, please, and that will leave more time 
for back and forth with questions.
    I introduced our witnesses briefly before, and so I will be 
brief again.
    Mr. Augustine, welcome. You have been Chair of the 
Committee on Ensuring Patient Access to Affordable Drug 
Therapies at the National Academies of Sciences, Engineering, 
and Medicine. Over the last 2 years, you have chaired a project 
at the Academies entitled Ensuring Patient Access to Affordable 
Drug Therapies. This is your report that is the focus of 
today's hearing.
    David Mitchell is the President and Founder of Patients for 
Affordable Drugs. A cancer patient with an incurable blood 
cancer, his experience accessing drugs to treat his cancer led 
him to found that organization to help change policy.
    Doug Holtz-Eakin is the President of the American Action 
Forum. He is an economist who is a former Director of the 
Congressional Budget Office, and he also served as Chief 
Economist of the President's Council of Economic Advisors.
    Welcome, again, to all three of you. Thank you for your 
time.
    Let us begin with Mr. Augustine. Welcome.

STATEMENT OF NORMAN R. AUGUSTINE, CHAIR, COMMITTEE ON ENSURING 
PATIENT ACCESS TO AFFORDABLE DRUG THERAPIES, NATIONAL ACADEMIES 
     OF SCIENCES, ENGINEERING, AND MEDICINE, WASHINGTON, DC

    Mr. Augustine. Thank you, Chairman Alexander, and Ranking 
Member Murray, and Members of the Committee for this 
opportunity to share with you the results of the National 
Academies study of the affordability and availability of 
prescription drugs.
    Our report contains 27 findings, recommendations and 32 
specific implementing actions for those recommendations. Our 
committee sought to find common ground where we could agree 
upon a package of recommendations that might be helpful to you 
and others concerned about the issue.
    Our report, the recommendations in it and the implementing 
actions, has the support of a substantial majority of the 
members of the group. In the case of each of those 
recommendations, some of the cases, we have unanimous support 
of the recommendations and the implementing actions.
    This is in spite of the fact that we intentionally created 
the 17 member committee of people with very diverse 
backgrounds, backgrounds that range from service in Federal and 
state government, pharmaceutical manufacturing, the practice of 
medicine, health policy, consumer engagement, R&D, economics, 
law, public health, and business management.
    We are living in what has been described as a Golden Age of 
the science of healthcare. Yet, in spite of that, as you have 
pointed out in your opening remarks, that healthcare is not 
available to many people today for affordability issues, and 
that certainly includes the ability to buy biopharmaceuticals.
    Healthcare represents, as the Chairman pointed out, 18 
percent of the GDP today. The closest nation to us in that 
level of spending, spends 11 percent. To add a sense of context 
here, with the 7 percent difference between what we spend and 
the next highest nation, we could pay for our entire primary 
and secondary education system. We could pay for two defense 
budgets. We could pay for three transportation and highway 
systems with just the difference.
    Biopharmaceuticals do represent 17 percent of the cost of 
healthcare. It is over half a trillion dollars a year and 
increasing rapidly.
    A recent study of adult Americans asked the question, 
``What is the most important thing that the Congress could work 
on to solve by the end of the year?'' The leading answer in 
that survey was to reduce the cost of pharmaceuticals. That 
ranked above raising the minimum wage, lowering the deficit, 
rebuilding the infrastructure, or reducing taxes. This is 
clearly an important issue.
    Effective biopharmaceutical enterprise in this country is 
vital to our well-being. Very likely there are people in this 
room who would not be alive today were it not for the 
accomplishments of the biopharmaceutical industry in years 
past. But drugs that are not affordable are of no value and 
drugs that are not available, or have not been developed, are 
of no value at all.
    A few of the package of recommendations that we have 
offered, I will summarize very quickly. There are many more 
that are in the book.
    The first that I would mention, not in priority order, is 
to prevent manufacturers from paying other producers to remain 
out of the market with regard to generics and biosimilars.
    Another is to identify specific means to reduce 
evergreening of drug exclusivity that takes place via the use 
of peripheral patents or extensions to existing patents.
    Allow Federal negotiation of drug prices.
    Refine methods for determining the value of drugs and apply 
that to formulary design and to pricing policy.
    Expand the flexibility of formulary design to allow 
selected exclusion of drugs, such as when other, less costly 
drugs are available that produce similar clinical outcomes.
    Require biopharmaceutical companies, and insurance plans, 
to disclose net prices received and paid, including discounts 
and rebates.
    Terminate the tax deductibility of direct to consumer 
advertising.
    Remove the cost sharing requirement for patients who exceed 
the current catastrophic limit under Medicare Part D.
    Calculate patient deductibles and co-payments based on net 
prices, not on list prices.
    Increase the oversight of the 340B program to be sure that 
its use is consistent with the original intent, which was to 
assist financially vulnerable patients.
    Ensure that drugs with orphan designation receive program 
benefits under the Act only for the target family of diseases 
intended by the original legislation.
    There are many additional recommendations, findings, and 
specific implementing actions in our report, and we look 
forward to the opportunity to discuss with the Committee today.
    Thank you very much.
    [The prepared statement of Mr. Augustine follows:]

               Prepared Statement of Norman R. Augustine

    Chairman Alexander, Ranking Member Murray and Members of the 
Committee, thank you for this opportunity to share with you the results 
of the National Academies of Science, Engineering and Medicine study on 
the affordability and availability of prescription biopharmaceuticals. 
The National Academies of Sciences, Engineering, and Medicine provide 
independent, objective analysis and advice to the Nation and conduct 
other activities to solve complex problems and inform public policy 
decisions.
    I appear today in my capacity as Chair of the Committee that 
performed the study and I will therefore be presenting materials 
contained in our report. The report is an evidence-based consensus 
document in which all of the eight recommendations and twenty-seven 
implementing actions contained therein enjoy the support of a 
substantial majority of the Committee Members, while some enjoy 
unanimous support. Two of our colleagues, while agreeing with some of 
the recommendations, have prepared a minority dissenting view which 
expresses the concern that the recommendations taken in totality would 
prove excessive and thus damaging to the Nation's health care and 
biopharmaceutical system in particular. Seven other colleagues have 
expressed full support of all of the recommendations and findings but 
believe further actions are warranted, particularly in the areas of 
pricing, transparency and value assessment. The recommendations and 
implementing actions contained in the report thus represent the views 
of a strong consensus of the Committee's Members.
    Our Committee was composed of individuals with highly diverse 
professional backgrounds in such fields as Federal and state 
government, pharmaceutical manufacturing, the practice of medicine, 
health policy, consumer engagement, research and development, 
economics, law, public health and business management. During our year-
long deliberations, the Committee received presentations from 39 
individuals either representing themselves or specific organizations, 
received inputs from members of the public, reviewed several thousand 
pages of documents, and benefited from written submittals provided by 
various individuals and organizations. The Committee's draft report was 
subjected to in-depth review by 16 anonymous reviewers and two 
overseers chosen by the National Academies and the Committee provided 
specific responses as to the disposition of each of the reviewers' 
comments.
    Notwithstanding the broad range of perspectives of our members, we 
sought to find common ground on which to base recommendations that 
would serve today's patients by reducing the cost of biopharmaceuticals 
while enabling a vigorous program to develop new drugs to serve future 
patients. The result of this effort is contained in our report ``Making 
Medicine Affordable--A National Imperative,'' a report we collectively 
hope can assist the Nation in resolving what is currently an 
unacceptable circumstance.
    As our presence here today attests, making medicines affordable has 
emerged as a national priority. The cost of biopharmaceuticals now 
represents 17 percent of the total cost of healthcare in America. 
Further, the rate of growth in the cost of biopharmaceuticals 
significantly exceeds the rate of inflation in the economy, the rate of 
growth of family income and the cost of healthcare as a whole. A recent 
survey of adult Americans' priorities for the U.S. Congress through the 
end of this year placed reducing prescription drug prices as highest 
ranked; above raising the minimum wage, lowering the deficit, 
rebuilding the Nation's infrastructure, and reducing taxes.
    The amount of money Americans spend on health care as a whole now 
equals 18 percent of the Nation's gross domestic product. This number 
has increased steadily for the past 60 years, leading to what today is 
the highest per capita expenditure on health care in the world. 
Further, the trend of increasing spending, including on 
biopharmaceuticals, is projected to continue for the foreseeable future 
as the Baby Boomer generation ages.
    The nation with health care spending that most closely approaches 
that of the United States allocates about 7 percentage points less of 
its gross domestic product to this purpose. For perspective, that 
difference, 7 percent of the United States gross domestic product, 
would fund America's primary and secondary education system or two of 
its defense budgets or three of its public transportation and highway 
budgets.
    While it is clearly in the public interest to devote significant 
resources to health care, such spending is not without its opportunity 
costs.
    Annual expenditures on biopharmaceuticals in the United States now 
exceed a half trillion dollars. As the cost of drugs has escalated in 
recent years, insurance plans have implemented benefit designs that 
attempted to preserve access to care yet keep health insurance premiums 
affordable by adjusting formularies and increasing co-payments and 
deductibles--each of which impacts patient cost. Deductibles themselves 
have, on average, increased by a factor of 2.5 in the past decade.
    Yet, while few argue that the current situation is acceptable, 
virtually each newly proposed potential corrective measure has 
confronted strong opposition from one or more quarters.
    This is in part because an overarching moral issue remains 
unresolved in the United States: is access to health care--including 
prescription drugs--a fundamental human right? If it is not, who is to 
decide, and based on what criteria, which individuals are to be denied 
access to the drugs and the care that they need? But if health care is 
a right, who is to pay its costs? Is this cost affordable not only to 
the individual but also to society as a whole, and does it represent 
the most appropriate allocation of the Nation's resources?
    The burden of high-priced drugs often falls disproportionately on 
vulnerable elements of the population in spite of government, industry 
and charitable efforts to alleviate its impact. For example, the Kaiser 
Family Foundation reports that in 2015, about 20 percent of Americans 
did not fill at least one prescription due to affordability 
considerations, while others rationed the drugs that they did acquire. 
Two-thirds of personal bankruptcies in the United States have been 
attributed in part or entirely to the overall cost of medical care, 
including drugs.
    Public concern regarding the cost of biopharmaceuticals has been 
accentuated in recent years by sudden unexplained increases in the 
price of various existing drugs. For example, media reports cited the 
unanticipated increase in the price of a two-pack of EpiPens (used to 
administer epinephrine, a treatment for potentially fatal allergic 
reactions) from $160 to more than $600. Perhaps the most egregious case 
involved rights to the existing, non-patent-protected drug Daraprim 
(used in the treatment of severe infections) with a relatively small 
market that makes it unattractive to potential competitors. The rights 
to Daraprim were purchased from its developer by Turing 
Pharmaceuticals, which raised the drug's price from $13.50 to $750 per 
tablet.
    An effective biopharmaceutical enterprise, the source of a long 
history of life-enhancing and life-saving accomplishments, is 
critically important to the Nation's well-being. Without past 
contributions of this sector, supported by research funded by various 
agencies of the Federal Government, universities, private philanthropy, 
venture capital, and biopharmaceutical firms themselves, there would 
have been no vaccines for many deadly diseases, no statins, and no cure 
for conditions such as hepatitis C. Almost certainly, some of us in 
this room would not be here today were it not for the past 
accomplishments of America's biopharmaceutical enterprise.
    Yet, rising prices today threaten to make the products of that 
enterprise unaffordable to patients, and potentially even to society as 
a whole.
    In the case of most business sectors in the United States, the 
pressure of competition is the dominant force controlling prices and, 
to the extent that competition is present, the biopharmaceutical 
industry is no exception. Nonetheless, if firms that have invested 
heavily to introduce new products were to be immediately confronted 
with competitors not having made such investments, there would be 
little motivation or justification for conducting research and 
innovating.
    In recognition of the importance of encouraging innovation, the 
U.S. Constitution provided Congress with the authority ``to promote the 
progress of science and useful arts, by securing for limited times to 
authors and inventors the exclusive right to their respective writings 
and discoveries.'' That is, in exchange for undertaking research and 
development to introduce new products, the government can, and does, 
grant patents to firms and individuals, thereby conferring on them for 
a specified period of time what are in effect sole-source positions in 
the market.
    When the period of patent exclusivity for a drug expires, companies 
other than the developer are free to introduce ``copies''--known as 
generics or biosimilars--into the market. These latter products 
represent 89 percent of all prescriptions written and 24 percent of the 
total cost of all prescription drugs. When generics enter the market, 
experience shows that the price of the original patented product 
frequently drops precipitously as the developer seeks to compete with 
the new, lower-cost entrants or else forfeits some or all of the 
market. As but one example, the price of Lipitor, the widely used anti-
cholesterol drug, dropped from $3.29 per unit to 11 cents per unit when 
its patent protection expired.
    Market forces that promote innovation, while also providing price 
controlling pressures, have worked quite effectively in most United 
States industrial settings, raising the question why they appear to be 
far less effective in the prescription biopharmaceutical arena. The 
answer resides in the fact that this particular market has important 
features that distinguish it from most other markets.
    Perhaps most significant among these features is that the products 
of the biopharmaceutical industry can be indispensable, even to life 
itself--thereby leaving the most important element of the 
biopharmaceutical chain, the patient, with little or no negotiating 
strength. Further, the biopharmaceutical sector of the United States 
has a market structure that is more complex than any other sector in 
health care--and perhaps more complex than any other sector in the 
entire economy. It is fraught with discordant viewpoints, divergent 
priorities and potential conflicts of interest that impede the 
provision of affordable biopharmaceuticals, especially to 
socioeconomically disadvantaged populations. The party often possessing 
the least power in this complex, rather opaque structure is, 
ironically, its raison d'etre: the patient.
    The Committee concludes that the current approach to the provision 
of biopharmaceuticals in the United States is not sustainable. If that 
is indeed the case, only two broad options remain: repair the current 
system or replace it with a new system. Having dismissed the option of 
doing nothing, the report offers recommendations based on the 
preponderance of the available evidence and seeks to substantially 
improve the existing system. Should such steps, or others like those 
proposed, prove insufficient, the remaining choice is a system 
involving substantially increased government sponsorship and control, a 
single payer (i.e., government insurance), accompanied by 
governmentally imposed explicit or de facto price regulation.
    Some of the package of actions proposed by the Committee are as 
follows:
    The Federal Government should consolidate and apply its purchasing 
power to directly negotiate prices with the producers and suppliers of 
medicines and strengthen formulary design. The government should also 
improve methods for assessing the value that drugs provide and ensure 
that incentives to develop drugs for rare diseases are not extended to 
widely sold drugs. In addition, increased disclosure of the financial 
flows and profitability among the participants in the biopharmaceutical 
sector should be required.
    Action should be taken to continually foster greater access to off-
patent generic drugs, which are usually much less expensive than 
branded products. One way this can be accomplished is to prevent 
practices that delay entry of generics into the market and thereby 
extend market exclusivity of branded products. Another critical step is 
to accelerate the review processes that are required of manufacturers 
before they can produce generic drugs.
    Actions should be taken to eliminate existing incentives that 
encourage patients and clinicians to seek or prescribe more expensive 
drugs rather than less expensive alternatives of comparable efficacy. 
One such action would be to discourage direct-to-consumer 
advertisements for prescription drugs and to provide substantially more 
balanced information to patients about the potential benefits and costs 
of alternative treatments, thereby reducing unjustified demand for 
higher priced drugs.
    Insurance plans should be modified to reduce the financial burden 
that patients and their families currently experience when they need 
costly prescription drugs, and individual cost-sharing arrangements 
that are based on drug prices should be calculated as a fraction of the 
net purchase price of drugs rather than the list price set by 
manufacturers. The government should also tighten qualifications for 
discount programs that have drifted from their original intent which 
was to help vulnerable populations. Finally, cost-sharing by patients 
enrolled in Medicare Part D should be terminated when the annual 
catastrophic coverage threshold has been reached.
    Other implementing actions are discussed in detail in the report.
    In the end, drugs that are not affordable are of little value; and 
drugs that do not exist, are of no value.
    Thank you for this opportunity to appear before you on behalf of my 
colleagues on the National Academies Committee and myself.
                                 ______
                                 

               [Summary Statement of Norman R. Augustine]

               Synopsis from Making Medicines Affordable
    Over the past several decades the biopharmaceutical sector in the 
United States has been very successful in developing and delivering 
effective drugs for improving health and fighting disease. Indeed, many 
medical conditions that were long deemed untreatable can now be cured 
or managed effectively.
    This success has come at a cost, however. Spending on prescription 
drugs has been rising dramatically, to the point that many individuals 
have difficulty paying for the drugs that they or their family members 
need. Drug costs are a significant part of the Nation's total spending 
on health care.
    This report, Making Medicines Affordable: A National Imperative, 
from the National Academies of Sciences, Engineering, and Medicine 
recommends several strategies to tackle the rising costs of 
prescription drugs without discouraging the development of new and more 
effective drugs for the future.
    This is a difficult challenge. There may be tradeoffs between 
current drug affordability and new drug availability. Controlling drug 
costs too rigidly, for instance, could potentially reduce the expected 
profits of drug companies, and this could alter their decisions 
regarding major investments to develop new drugs.
    Furthermore, the complex nature of the Nation's medical system-
which includes patients, clinicians, hospitals, insurance companies, 
drug companies, pharmacists, pharmacy benefit managers, various 
government agencies, advocacy organizations, and many others-makes it 
very difficult to predict the precise effects of any specific policy 
changes. This is exacerbated by the fact that there is very little 
publicly available information on the costs and profitability for the 
drug companies and various other participants in the system.
    Nonetheless, there are a number of measures that can and should be 
taken to improve the affordability of prescription drugs for patients 
in the United States.
    The Federal Government should consolidate and apply its purchasing 
power to directly negotiate prices with the producers and suppliers of 
medicines, and strengthen formulary design and management. The 
government should also improve methods for assessing the value that 
drugs provide and also ensure that incentives to develop drugs for rare 
diseases are not extended to widely sold drugs. In addition, increased 
disclosure about the financial flows and profitability among the 
participants in the biopharmaceutical sector should be required.
    Actions to continually foster greater access to off-patent generic 
drugs, which are usually much less expensive than branded products, 
should be taken. One way this could be accomplished would be to prevent 
the common industry practices that delay entry of generics into the 
market and extend market exclusivity of branded products. Another 
critical step is to speed up the review processes that are required of 
manufacturers to produce generic drugs, to ensure healthy competition 
and lower costs.
    Also, various actions should be taken to eliminate incentives in 
the system that encourage clinicians and patients to prescribe or use 
more expensive drugs rather than less expensive alternatives that 
provide comparable results. One action would be to discourage direct-
to-consumer advertisements for prescription drugs and to provide more 
useful information to patients about the potential benefits and costs 
of treatments, thereby reducing inappropriate demand for higher priced 
drugs.
    Finally, insurance plans should be modified to reduce the financial 
burden that patients and their families currently experience when they 
need costly prescription drugs, and individual cost-sharing 
arrangements that are based on drug prices should be calculated as a 
fraction of the net purchase prices of drugs rather than the list 
prices from manufacturers. The government should also tighten 
qualifications for discount programs that have drifted from their 
original intent to help vulnerable populations.
    Ongoing monitoring will be needed, but taking these steps should 
bring down the cost of prescription drugs while still enabling the 
continuing development of new drugs.
                                 ______
                                 
    The Chairman. Thank you, Mr. Augustine.
    Mr. Mitchell, welcome.

 STATEMENT OF DAVID MITCHELL, PRESIDENT AND FOUNDER, PATIENTS 
               FOR AFFORDABLE DRUGS, BETHESDA, MD

    Mr. Mitchell. Thank you, Senator.
    Chairman Alexander, Ranking Member Murray, Members of the 
Committee.
    I am very honored to be here today, especially alongside 
such distinguished panelists.
    I am David Mitchell. I am Founder of Patients for 
Affordable Drugs. We are bipartisan. We focus on policies to 
lower drug prices. We do not accept funding from any 
organizations that profit from the development, or 
distribution, of prescription drugs.
    More importantly for today, I have an incurable blood 
cancer, and I am one of those people alive today because of the 
work of the biopharmaceutical industry. Prescription drugs are 
keeping me alive.
    Right now, my treatment is 5 hours of infusions that carry 
a price tag of $450,000 a year. I am very grateful to the 
science and research community for these drugs.
    Because my disease is incurable, it mutates and finds its 
way around drugs. I need new ones if I am going to live as long 
as I hope. This is not theoretical for me. This is literally 
life and death.
    But my experience has taught me one irrefutable fact, and 
that is: drugs do not work if people cannot afford them.
    Since our launch in February, we have built a community of 
almost 20,000 Americans from every state. They tell us 
devastating stories of skipping doses, cutting pills in half, 
going without food, even declaring bankruptcy because of the 
price of their drugs. They are scared, they are angry, and they 
need help.
    The National Academies of Sciences Report includes many 
excellent recommendations that will help them, and we are here 
today to encourage Congress to act on it. Here is a patient 
perspective on a few of those recommendations.
    We agree with the National Academies that Congress has to 
end patent abuses that circumvent Hatch-Waxman. Drug 
corporations get up to 12 years of exclusivity to recoup their 
investment and earn handsome profits. But too many drug 
companies game the system to block generic competition that 
would lower prices. Here is a personal example.
    I took a drug called Revlimid for 5 years. Over the course 
of my treatment, Celgene, the company that makes the drug, 
refused to provide samples to generic companies so that a 
cheaper alternative could come to market.
    At the same time, the price of Revlimid increased by 34 
percent, and my co-payments went up by 600 percent. In fact, 
Revlimid became the most expensive out of pocket drug on 
Medicare Part D with a median out of pocket cost for 
beneficiaries of $11,500 a year. That is one impact of patent 
abuse.
    Patients are foregoing their medications. They are spending 
their retirement funds, emptying their kids' college savings to 
afford drugs when a generic competitor is sitting around the 
corner, if we could get to it. The bipartisan CREATES Act would 
fix this specific problem.
    Two, we should limit out of pocket costs for Medicare Part 
D. We believe beneficiaries should not be charged based on 
retail prices when everyone else in the system pays based on 
rebated prices. The Trump Administration is moving to address 
this and we encourage Congress to support that.
    Three, Medicare should be able to negotiate directly to 
lower prices, to balance Government granted monopoly pricing 
power given to the drug companies so that we can get the 
benefit as purchasers. Every other developed country in the 
world negotiates. We should too.
    Four, Congress should end tax breaks for drug company 
advertising. Willie Gray is a farmer from North Carolina. He 
told us, ``I cannot afford my diabetes medication and the only 
way I stayed afloat was to use our savings account. Then I had 
to start cashing in my annuities and retirement at the Farm 
Bureau.''
    Drug companies spend significantly more on advertising and 
marketing than they do on research and development. We do not 
believe that Willie and his wife should subsidize their TV ads.
    Five, we really need to increase transparency all along the 
supply chain. Three pharmacy benefit managers control almost 80 
percent of the market, and they operate in secret. The National 
Academies recommendations would pull back the curtain and 
require disclosure of discounts and rebates.
    In conclusion, we believe our healthcare system should 
maximize affordability and accessibility of drugs while 
ensuring a robust R&D pipeline and fair profits for companies. 
We believe that balance has been lost and patients are paying 
the price.
    I will close with a story from Oregon. Anne Nielsen's 
doctor prescribed Restasis to treat her chronic dry eye. The 
drug will cost her $1,400 this year and there is no cheaper 
generic for a drug whose active ingredient went off patent in 
2014. She does not use the recommended dose because it is so 
expensive.
    On behalf of Anne, and all the patients across the country, 
I am extremely encouraged that Members on both sides of the 
aisle are focused on helping patients in lowering drug prices. 
In my experience, the most enduring legislative successes in 
our country have come with bipartisan action.
    Thank you.
    [The prepared statement of Mr. Mitchell follows:]
                                ------                                


                  Prepared Statement of David Mitchell

    Chairman Alexander, Ranking Member Murray, Members of the 
Committee: I am honored to be here today.
                 Section I. Background and Introduction
    My name is David Mitchell. I am the Founder of Patients For 
Affordable Drugs. We are a bipartisan, national patient organization 
focused on policies to lower drug prices. We don't accept funding from 
any organizations that profit from the development or distribution of 
prescription drugs.
    More importantly to today's hearing, I have an incurable blood 
cancer, and prescription drugs are keeping me alive. Several days ago, 
I received 5 hours of drug infusions that carry a price tag of more 
than $20,000 every time I get them. I've had them 22 times over the 
course of the year. $450,000 worth of drugs are keeping me upright.
    I am very grateful to the science and research communities in our 
country for these drugs. Because my disease is incurable, I need 
innovation and new drugs if I am going to live as long as I hope to. 
This is not theoretical for me--it is life and death.
    But my experience as a cancer patient has taught me one irrefutable 
fact: Drugs don't work if people can't afford them.
    Since our launch in February, we have built a community of almost 
20,000 Americans across every state.
    Piper Peltz of Clinton, Tennessee wrote, ``I have a pacemaker and 
suffer from other conditions as well. I have to resort to taking my 
expensive heart medicines every other day.''
    Angel Porche of Montegut, Louisiana was diagnosed with Rheumatoid 
Arthritis at age 39. Her doctor prescribed Humira to put it in 
remission, but the drug cost more than she could afford. ``So, needless 
to say, I went without this prescription,'' she writes. ``I was in so 
much pain because I could literally feel my feet crippling.''
    There are thousands more stories like Piper and Angel.
    People are scared and angry, and they need help.
    A September Harvard poll showed that 4 in 10 Americans want 
lowering prescription drug prices to be Congress' top priority.
    Sixty four percent of Americans, including a majority of Democrats, 
Independents, and Republicans, listed lowering drug prices as their top 
health care priority, according to a Kaiser Health poll.
    The message we hear from patients is simple. They understand that 
drug corporations have monopoly pricing power. Patients and taxpayers 
know the prescription drug pricing system in the U.S. is rigged against 
them. They want leaders in Washington to fight to lower the price of 
drugs, and to get something done.
    This is a central health care issue that impacts millions of people 
every day. We agree with President Trump: ``Drug companies frankly are 
getting away with murder.'' Drug companies are not the only ones who 
take advantage of patients' pocketbooks.
    When prices rise, drug manufacturers, PBMs, doctors, and hospitals 
all make more money. The people our system hurts are patients, 
consumers, taxpayers, and employers who foot the bill.
  Section II. Reflections on the 2017 National Academies of Sciences 
                                 Report
    Last week's National Academies of Sciences, Engineering and 
Medicine (NASEM) report included a number of excellent recommendations 
which we support. Here is a patient perspective on some of the most 
promising recommendations and one potential pitfall.
        Recommendations Patients For Affordable Drugs Supports:
      Limit out-of-pocket costs for Medicare Part D. We believe 
beneficiaries should not be charged out-of-pocket costs based on retail 
prices of drugs when everyone else in the system--employers, insurers, 
the government--pay based on rebated prices. The Trump Administration 
requested feedback on implementing this reform, and we encourage 
Congress to support such a change. We should also cap patient exposure 
at the catastrophic level of Part D. When drugs cost $20,000 a month, 
the current system can be crushing for patients.
      End patent abuses that circumvent the bipartisan Hatch-
Waxman framework. Examples of patent abuse include: pay for delay, 
exploitation of restricted distribution systems, product hopping, 
evergreening, and rental of sovereign immunity from an independent 
entity.
    FDA Commissioner Scott Gottlieb recently told drug manufacturers, 
``Stop the shenanigans.'' We agree with him. The Hatch-Waxman Act 
provides five, seven, or 12 years of exclusivity to ensure drug 
corporations recoup their investments and earn handsome returns. But 
too many drug companies game the system to block free-market 
competition far beyond the stated legal time frames.
    Here's one example. I took a drug called Revlimid for 5 years to 
keep my cancer at bay. Over the course of my treatment, Revlimid's 
manufacturer, Celgene, refused to provide samples to generic 
manufacturers looking to create a competitor. At the same time, the 
price of Revlimid increased by 34 percent and my co-payments rose by 
600 percent. In fact, Revlimid became the most expensive drug for 
Medicare Part D beneficiaries with a median annual out-of-pocket cost 
of $11,500.
    Pam Holt of Granger, Indiana is a widowed, retired schoolteacher 
with multiple myeloma. She wants to spend her remaining years spoiling 
her grandchildren. But she can't. Her Revlimid co-pay is $577 per 
month.
    Patients like Pam also forgo their medications altogether or spend 
their retirement funds and empty their kids' college savings to afford 
drugs. This occurs while a generic competitor sits just out of reach.
    Bipartisan legislation has been reintroduced in both the House and 
Senate to fix this particular abuse of our system while maintaining 
safety for patients. The bipartisan CREATES Act (S. 974, H.R. 2212) 
will help speed generics to market, increase competition, and provide 
patients access to more affordable drugs. It is supported by experts 
across the ideological spectrum--from scholars at the Heritage 
Foundation to academic experts at Harvard University.
      Allow Medicare to negotiate lower costs for patients. The 
government grants drug manufacturers a pricing monopoly during a period 
of exclusivity. Medicare negotiations would help balance that monopoly 
pricing power. Below is a chart that demonstrates why we need 
negotiations--especially for brand drugs--the fastest growing sector of 
health spending.


      End tax breaks for drug companies that spend millions of 
dollars advertising. As NASEM noted, drug companies spend significantly 
more on advertising and marketing than on research and development. It 
is generally recognized that the drug industry spends 20-40 percent of 
its overall budget on advertisements and related activities. Only one 
other country in the world permits direct to consumer advertising for 
drugs. We don't need to step on a drug company's First Amendment right 
to advertise, but we don't believe taxpayers should subsidize their TV 
ads.


      Increase transparency throughout the drug supply chain. 
Three pharmacy benefit managers control about 75 percent of the drug 
market. PBMs negotiate deals in secret, leaving consumers and 
policymakers in the dark. Americans can't tell if these corporations 
provide value in the form of rebates for patients or if they keep 
rebates to increase profits. We do know the combined operating profit 
of the three largest PBMs was $10.1 billion in 2015, up 30 percent from 
2013. The NASEM recommendations aim to pull back the curtains so 
consumers and policymakers can better understand drug prices by 
requiring disclosure on all discounts and rebates. The recommendation 
avoids specific disclosures that PBMs claim would inhibit their 
negotiating success by recommending disclosures be made quarterly at 
the national drug code level.
      We urge caution against so-called outcomes-based pricing 
arrangements. First, it is important to distinguish between value-
pricing and outcomes-pricing. Value-pricing is conducted by 
organizations like the Institute for Clinical and Economic Review, the 
American Society of Clinical Oncology, and the National Comprehensive 
Cancer Network. They examine the value of a new drug to patients and 
can serve as one input for negotiations by--for example--the Veterans 
Administration. Value-pricing can be a useful tool.

    On the other hand, outcomes-based pricing is different. It ties 
reimbursement of a drug to its effectiveness. While this sounds 
attractive, it's a disaster for patients. Outcomes-pricing in general 
stipulates that if a drug fails, the drug company will provide a 
refund. But that system contains a major flaw. It does not lower drug 
prices; it allows drug companies to keep prices high. Drug companies 
have the clinical data that tell them exactly how many patients react 
positively to a drug and how many will fail. Rather than lower prices, 
drug companies will simply raise the price of a drug to compensate for 
failures. Furthermore, it is not clear any refunds will make their way 
to patients. It is also not clear how to use such a process for drugs 
like insulin where patients react differently as individuals and drug 
companies may want to claim user error if the patient doesn't do 
everything right to manage their disease.
         Section III: Not Paying Twice For Taxpayer Investment
    On August 30, 2017, America crossed into new territory. The drug 
company, Novartis, chose to price a breakthrough cancer drug called 
CAR-T at $475,000 per treatment. As NIH Director Francis Collins wrote 
at the time, the drug is ``grounded in initial basic research supported 
by NIH.''
    To be specific, taxpayers invested more than $200 million in CAR-
T's discovery. We believe drug corporations should disclose how they 
set prices if a drug is invented using taxpayer funding.
    In October, taxpayers unknowingly entered into a partnership with 
drug corporations to speed new immunotherapies to market. Under this 
scheme, taxpayers will fund 75 percent of the research--a total of $160 
million--and 11 drug corporations will contribute the remaining 25 
percent or $55 million.
    As a cancer patient, the potential of new drugs is exciting. But in 
an era of drugs priced at over half a million dollars per treatment, it 
is no longer appropriate for NIH to conduct basic research and turn 
that science over to commercializers with no strings attached. Frankly, 
NIH is helping invent drugs that will bankrupt families and cause our 
system to buckle under the weight.
    We urge Congress to consider ways to require or incentivize price 
transparency and reasonable pricing when a drug is invented through NIH 
research. If a drug is built on science and innovation financed by 
American taxpayers, we have a right know how a drug company chose to 
price the drug.
      Section IV. Immediate bipartisan steps to lower drug prices.
    We recognize that many of the suggestions contained in this 
testimony may be out of reach in the near future. So, we conclude by 
highlighting five bipartisan ideas we believe could be implemented 
immediately and would meaningfully lower drug prices for patients.
      Pass the CREATES Act. This bipartisan legislation would 
save taxpayers $3.3 billion, according to CBO, and it would address a 
loophole that delays generic drug competition.
      Follow the Trump Administration's lead to allow Part D 
Medicare beneficiaries to pay out-of-pocket costs based on rebated--not 
retail--drug prices.
      Support FDA in its efforts to eliminate the generic 
backlog--especially for off-patent drugs where there is no generic 
competitor. This could mean additional resources or an increased focus 
on the problem.
      Investigate the insulin market. Three insulin 
manufacturers command 80 percent of the market for this lifesaving 
drug. Together, the companies raised prices more than 300 percent in 
the past 10 years--for a drug invented in 1923 and for which the 
patents were sold for $3. The prices move in lockstep and people with 
diabetes suffer at the hands of what can only be called an insulin 
cartel. Democratic and Republican Members in the House are already 
looking into the insulin market. We encourage Congress to conduct an 
investigation into anti-competitive behavior and possible price-fixing 
by Eli Lilly, Novo Nordisk, and Sanofi.
      Outlaw rental of sovereign immunity. Recently, the Irish 
drug company, Allergan, transferred patent rights to its blockbuster 
drug Restasis to the St. Regis Mohawk Tribe. The drug company 
explicitly acknowledged the move was intended to prevent vulnerability 
from inter partes review under the America Invents Act. A Federal judge 
correctly characterized this as a rental of sovereign immunity designed 
to dodge our patent laws. Such rental from any sovereign entity should 
be outlawed.

    In conclusion, we believe our health care system should maximize 
affordability and accessibility of drugs while ensuring a robust R&D 
pipeline and fair profits for companies. We believe that balance has 
been lost. The current system encourages companies to take advantage of 
patent loopholes, thwart competition, and put profits over patients. 
The system encourages high prices that only benefit big players. We 
hope to work with Congress to lower drug prices and let Americans focus 
on living healthy and productive lives rather than struggling with the 
rising cost of medicines they depend on.
    I am extremely encouraged that Members on both sides of the aisle 
are focused on drug prices. In my experience, the most enduring 
legislative successes in our country have come with bipartisan action.
                                 ______
                                 

                 [Summary Statement of David Mitchell]

    David Mitchell is the founder of Patients For Affordable Drugs. He 
has an incurable blood cancer, and innovative drugs are keeping him 
alive. The price tag of those drugs is over $450,000 a year.
    Mitchell is grateful to the science and research communities in our 
country as he's reliant on new drugs to keep him alive. But he notes in 
his testimony, ``Drugs don't work if people can't afford them.''
David and Patients For Affordable Drugs support the National Academies 
                    of Sciences (NAS) proposals to:
      Limit out-of-pocket costs for Medicare Part D. 
Beneficiaries should not be charged out-of-pocket costs based on retail 
prices of drugs when everyone else in the system--employers, insurers, 
the government--pay based on rebated prices.
      End patent abuses that circumvent the Hatch-Waxman 
framework. Examples of patent abuse include pay for delay, exploitation 
of REMS and restricted distribution system, product hopping or 
evergreening, and rental of sovereign immunity.
      End tax breaks for direct-to-consumer advertising. As NAS 
noted, drug companies spend significantly more on advertising and 
marketing than on research and development.
      Increase transparency in the drug supply chain. Three 
pharmacy benefit managers control about 75 percent of the drug market. 
Americans can't tell if these corporations provide value in the form of 
rebates for patients or if they keep rebates to increase profits.
      Allow Medicare to negotiate lower costs for patients. The 
government grants drug manufacturers a pricing monopoly during a period 
of exclusivity. Medicare negotiations would help balance that monopoly 
pricing power.

    The testimony recognizes that some of the suggestions contained in 
NAS report may be out of reach in the current environment, so it 
highlights five bipartisan ideas that would help patients now:

      Pass the CREATES Act. This bipartisan legislation would 
save taxpayers $3.3 billion, according to CBO, and it would address a 
loophole that delays generic drug competition.
      Support the Trump Administration's proposal to allow Part 
D Medicare beneficiaries to pay out-of-pocket costs based on rebated--
not retail--drug prices.
      Support FDA in its efforts to eliminate the generic 
backlog--especially for off-patent drugs where there is no generic 
competitor.
      Investigate the insulin market. Three insulin 
manufacturers command 80 percent of the market. Together, the companies 
raised prices more than 300 percent in the past 10 years.
      Outlaw rental of sovereign immunity. Do not allow drug 
companies to transfer patents to sovereign entities to avoid patent 
challenges under the America Invents Act.

    Patients For Affordable Drugs is encouraged that Members on both 
sides of the aisle are focused on drug prices. We believe the most 
enduring legislative successes in our country come with bipartisan 
action.
                                 ______
                                 
    The Chairman. Thank you, Mr. Mitchell.
    Dr. Holtz-Eakin, welcome.

 STATEMENT OF DOUGLAS HOLTZ-EAKIN, PH.D., PRESIDENT, AMERICAN 
                  ACTION FORUM, WASHINGTON, DC

    Dr. Holtz-Eakin. Thank you, Chairman Alexander, Ranking 
Member Murray, and Members of the Committee.
    It is a privilege to be here today. I want to congratulate 
the National Academies on the outstanding report that they have 
produced, but which I have not read.
    Let me outline how I think about this problem and then I 
would be happy to talk about some of the specifics.
    First, I think it is important to recognize that we do not 
have a single, broad-based problem in the pricing of drugs.
    We have some very specific markets that are not working 
very well, notably sole source generics and some specialty 
drugs, particularly oncology drugs, which are subject to 
problems, but by and large, the markets are working well. It is 
important not to overreach in thinking about solving those 
problems.
    In thinking about high drug prices, there are two separate 
and distinct things that one ought to keep in mind.
    The first is lowering the overall cost of bringing drugs to 
market and the purchase price of those drugs. In that area, the 
single most important thing is to encourage entry and 
competition, eliminate monopoly power, and have markets work 
effectively to lower prices.
    The second is shifting the cost of the drug from one payer 
to another, from an individual, which is the sole purpose of 
insurance, to shift those costs elsewhere. Cost shifting lowers 
a target person's cost, but does not lower the cost of those 
drugs simultaneously for everyone.
    If you really want to solve problems, you need better 
competition and more entry. Shifting costs will not solve that 
problem in general.
    There are lots of examples of cost shifting in the system. 
Medicaid ``best price,'' for example, undercuts the competitive 
pressures in the private market and effectively shifts costs 
from Medicaid onto private payers.
    There is a lot of interest in focusing on net prices, 
direct and indirect remuneration policies, those which shift 
costs from the beneficiaries from the ultimate consumer. The 
question is who is going to pick up that tab? Where will the 
cost get shifted? Do we want those particular outcomes?
    I encourage the Committee to think carefully about that.
    In this regard, let me say a little bit about Government 
negotiation. I was the CBO Director during the passage of the 
Medicare Modernization Act, which created the Part D program. 
In that capacity, I wrote numerous letters to Congress about 
the undesirability of having the Secretary of HHS negotiate on 
behalf of the Medicare program. I have not changed my views 
since that time.
    In doing that negotiation, the Secretary of HHS does not 
have anything that a private, prescription drug program has. I 
mean, they bring large market shares and the capacity to 
deliver profits to manufacturers. That is what you need.
    They also have one more thing that the Secretary does not 
have. They have a formulary. They have the ability to say to a 
manufacturer, ``I can give you preferential treatment of your 
product at the expense of a competitor.'' That is the essence 
of the negotiation.
    In the Academies recommendations, the most important thing 
is not aggregating the power of Medicare or Medicaid, V.A., or 
whatever it might be. The most important thing is saying, ``We 
are going to have the Government pick among manufacturers and 
say yes to one and no to another having a formulary.''
    That is the essence of the negotiating power and that has 
nothing to do with it being the Government. It has to do with 
having a formulary and discriminating among private producers.
    If you were to go down that road, one possibility is that 
the Government would negotiate very effective, good prices for 
its programs for Medicare, for Medicaid. But in the process, it 
would force manufacturers to charge higher prices to private 
payers in order to continue to produce the drugs that we value 
so much. That would amount to a large cost shift from the 
private sector onto the Government and not a real success in 
lowering drug prices.
    In all of these cases, there is the potential for big, 
unintended consequences. This is an important problem. I am 
thrilled that the Committee is looking at it, but I urge them 
to focus their solutions in the way that they did in August.
    I commend the Committee, and the Congress, for the work it 
did in trying to speed the drugs to market through the FDA.
    In, I think, one of the most important recommendations in 
the report is the notion that if you have a program, like the 
orphan drug program or 340B--which has grown in a way that is 
no longer well targeted on the original problem--reforms are 
appropriate. The steps have been taken, I think, you should be 
commended for, and further work can probably be done.
    I thank you for the chance to be here today and I look 
forward to answering your questions.
    [The prepared statement of Dr. Holtz-Eakin follows:]

               Prepared Statement of Douglas Holtz-Eakin

    1. Thank the National Academy of Sciences for their contribution to 
this important policy debate. Let me make a few general remarks and 
then I will be happy to respond to questions about the specifics.
    2. To begin, there is not single drug market and there is not a 
general problem. There are some specific markets that are generating 
the attention at the moment--sole-source generics and specialty drugs 
(especially oncology). The rest are working fine.
    3. In thinking about drug prices, it is important to be very clear 
about two distinct issues:

      Lowering the cost of bringing drugs to market, and the 
prices generated by market competition
      Shifting the overall cost among stakeholders so as to 
make drugs more ``affordable'' to a target group--but not everybody 
simultaneously

    4. Addressing the overall cost issue is inevitably a matter of 
fostering competition and getting more than on drug on the market. The 
NAS report as a number of suggestions in this area; for example I like 
some of the ideas in: ``Accelerate market entry and use of safe and 
effective generics as well as biosimilars; foster competition to ensure 
the continued affordability and availability of these products.''
    5. Cost-shifting is pervasive in pharmaceuticals; indeed, it is 
important to keep in mind that insurance is basically a financial 
product for cost-shifting. The issue is whether the cost-shifting is 
deliberate or unanticipated, and furthers a policy goal.

      For example, Medicaid best price undercuts vigorous 
competition in the private market; effectively shifting costs from 
Medicaid to private payers
      Proposals to focus on net prices (e.g., ``DIR'') would 
shift costs away from beneficiaries. Who would pick up the tab?
      In this regard, let me say a few words about ``government 
negotiations''

          I have been quite vocal about the non-interference 
        clause in Part D and the absence of any real savings from 
        allowing the Secretary to negotiate. This would not change if 
        Part D were aggregated with Medicaid, or the VA or other 
        programs.
          What does matter is allowing the programs to 
        institute a formulary and deny manufacturers access to the 
        beneficiary population. It is precisely this ability to impose 
        tiered pricing that has made private competition in Part D so 
        successful. It has nothing to do with the government per se.
          Doing this on a large scale runs the risk of 
        permitting the government to negotiate ``good prices'', while 
        private sector payer get stuck with higher prices to make up 
        the shortfall. This would be a large cost-shift and not a 
        genuine improvement in drug pricing.

    6. Finally, if one has a public policy problem, first stop making 
it worse. Well-intentioned programs that have grown to be poorly 
targeted and inefficient--340B and the Orphan Drug program come to 
mind--should be reformed.
                                 ______
                                 
    The Chairman. Thanks to all three of you.
    We will now begin a round of 5 minute questions.
    Mr. Augustine, the report says that prescription drug 
prices are about 17 percent of the total national health 
expenditures.
    What should it be? What percent?
    Mr. Augustine. That is probably the most difficult question 
I faced on this topic.
    I think the simplest answer is not to try to quote a 
percent, but to say that it should be a price that is 
affordable to each individual. Clearly, that would be a number 
well below 17 percent.
    The Chairman. But to press the point a little bit.
    If you confiscated all the profits of the drug companies--
which, I do not know what they are, they might be 6, 8, 10, 12 
percent; you are a former businessperson--that would reduce the 
national expenditure on health by 1 percent.
    If you took away all the advertising, that would be another 
few percent.
    I guess, to keep all this in context, the overall prices of 
drugs, as a part of our national health expenditure, it looks 
to me like it would only be a modest reduction in cost as a 
percentage, if we were able to be successful with, say, your 
recommendations that you have made.
    Mr. Augustine. It is our belief that we could see a 
substantial reduction.
    Many of the abuses that we see in the system, for example, 
in the 340B program, half the cancer treatments that are 
provided in hospitals today come under 340B, which was intended 
for a very narrow, select part of the population.
    I think also that as you look at the profitability, the 
profit margins are much higher than you cite in our view.
    Chairman Alexander. I do not know what they are.
    Do you know what they are?
    Mr. Augustine. It is very hard to determine for the reason 
of lack of transparency.
    But I think we have been through a lot of the numbers, and 
a lot of the studies, and I think it seems pretty clear that 
on-brand manufacturers, it is probably in the 25 to 30 percent 
range, generics are probably in the 20 to 25 percent range, and 
you go on down from that. Wholesalers, the PBM's are well below 
that.
    The branded manufacturers, obviously, bear a great risk and 
great capital requirements, so one would expect them to have 
high margins.
    The Chairman. Well, let me move since I only have 5 
minutes, let me move.
    It seems to me, though, that the real thing that we need to 
try to understand is that my constituent--Joseph, who showed up 
and tried to buy a pharmaceutical that would help him or Mr. 
Mitchell trying to buy one that will help him--sees a price 
increase or a price for that product that is much higher than 
the overall increase in prescription drugs.
    For example, if it went up 10 percent 2 years ago, and 12 
percent 1 year ago, and 1.3 percent last year, the overall cost 
of prescription drugs. Those are, in two of those 3 years, 
those are pretty large increases, but they are not massive 
increases.
    But is it not true that the person who pays for a 
prescription at the drugstore, at the pharmacy may be seeing a 
much bigger increase in prices than the overall cost of 
producing drugs? If that is the case, how do we deal with that? 
For example, do we need rebates at all? It seems to me that----
    We had a panel in our last hearing, and I asked each one of 
the witnesses, do you favor having rebates at all from the 
manufacturers to other people in this process?
    Would it not be easier if we just eliminated them?
    Would that not make it more likely that Joseph, or the 
person who buys his prescription drug at the pharmacy, would 
see and understand what the real cost of producing that 
specific prescription is?
    Did you address the question of rebates and whether we need 
them at all or not?
    Mr. Augustine. We did spend a good deal of time on the 
subject of rebates and we did not make a recommendation to 
eliminate them.
    But I think that a recommendation that we made that would 
best answer your question is that if the Federal Government, 
and HHS in particular, could negotiate with the manufacturers, 
they could do that on a package basis.
    The problem here is not the cost of the average drug so 
much, it is the cost of the specialty drugs that are about 30 
percent of the total cost of drugs, prescription drugs.
    If HHS could negotiate with the manufacturers on Drug A and 
get a better price on Drug B--because they paid a little bit 
more on Drug A--they could equalize this burden on a given 
individual.
    I think the idea that the Government could----
    The Chairman. But is that not what the Pharmacy Benefit 
Managers do?
    Mr. Augustine. They do, but as was pointed out, the largest 
PBM has a great deal of power in the market, but nothing like 
the Federal Government would or like HHS would. Of course, the 
PBM's are there to make a profit too.
    It would be our view that giving HHS the power would 
neutralize, or equalize, this imbalance that exists today.
    The Chairman. My time is up and I try to set a reasonable 
example for other Senators.
    Senator Murray.
    Senator Murray. Thank you.
    Mr. Mitchell, thank you for your testimony. You obviously 
know firsthand that the impact that prescription drugs have on 
prices, have on patients and families.
    We focus a lot on people who are uninsured or have high 
deductibles. But high prices actually impact everyone's ability 
to afford their care and insurance, whether they are covered on 
Federal programs, or get coverage through their jobs, or buy 
coverage on their own.
    Can you share how high prices impact each of those types of 
patients?
    Mr. Mitchell. Yes. We hear from people who are on Medicare, 
on private insurance, on Medicaid, or who are without 
insurance. The people without insurance, obviously, are bearing 
the heaviest burden.
    When I was on my employer coverage for very expensive drugs 
like I am taking now, my out of pocket was $6,000 a year.
    Medicare beneficiaries, especially under Part D, have an 
enormous burden because they are paying high prices for some of 
these drugs, like the one I referenced in my testimony. But the 
out of pocket ranges for Medicare Part D beneficiaries for the 
highest priced drugs annually from $4,400 a year to over about 
$12,000 a year. These are for people whose median income is 
about $26,000 a year.
    Across all forms of insurance, patients are bearing a 
bigger burden, and the headwaters of this problem are when the 
price is set by the manufacturer. The pain is worse for 
patients because they pay their out of pockets based on that 
retail price set by the manufacturer, not based on the rebate 
that everyone else is getting.
    Senator Murray. Right.
    Mr. Mitchell. So that the pain extends across all forms of 
coverage or lack of it.
    Senator Murray. The 340B program helps community health 
centers and safety net hospitals care for those who can least 
afford it by providing lower cost drugs.
    For instance, my home State of Washington, St. Joseph 
Medical Center in Tacoma saves $5 million on drugs, and that 
helps them cover the cost of uncompensated care, and supports 
programs like the diabetes assistance program that provides 
underinsured diabetic patients with insulin, something we all 
know has been subject to massive price hikes over the last few 
years.
    As I talked about in my opening statement, the drug 
industry has spent more time finger pointing on who is 
responsible for high prices instead of taking action.
    Their latest claim is that the 340B program is driving up 
drug prices for everyone else. But according to HRSA estimates, 
the discounts manufacturers provided in 2015 only totaled a 
little over 1 percent of the total drug market that year, and 
340B is one of the few mechanisms our system has to keep the 
prices of drugs down.
    I wanted to ask you, Mr. Mitchell, is there any evidence 
that restrictions on the 340B program would actually result in 
lower drug prices?
    Mr. Mitchell. Based on my experience from a patient 
perspective, I do not understand the focus on 340B precisely 
because of what you just referenced. It is 1.3 percent. The 
rebates are not the 1.3 percent of our total drug spend.
    If there are issues in the 340B program, and it needs to be 
tightened up in terms of its execution so it can still deliver 
the result that Congress intended when it enacted it, that 
seems to be, to me, to be the right step forward that protects 
those hospitals that provide for our neediest.
    But it does not try and use 340B as a way to repair our 
drug pricing problems because there is not enough money there 
to do that.
    Senator Murray. Yes.
    There was a recent report that found that 74 percent of the 
drugs associated with new patents listed with the FDA are 
actually drugs already on the market. That means that companies 
are systematically continuing to layer new patents on old ones, 
on old drugs in order to keep competitors off the market.
    The National Academies recommended that in order to foster 
competition for generics and biosimilars, and allow market 
forces to drive those prices down, drug companies have to stop 
gaming the patent and regulatory system to extend these market 
monopolies.
    I really agree with that, and I wanted to ask you, Mr. 
Mitchell, what are some of the policy proposals we should be 
considering to help address that?
    Mr. Mitchell. Well, I would urge Congress to enact the 
CREATES Act right away, this session. It will solve a specific 
problem of REMS abuse where companies hide behind safety 
programs to avoid giving samples of drugs so that generics can 
be developed.
    It is bipartisan. It will save the Government about $3.3 
billion. We can do that right now.
    There are bipartisan bills on paper delay. Paper delay is 
egregious. It is just a way for them to keep the generic from 
coming to market. Paper delay should be addressed and then, 
there are bills to do that right now.
    Then product hopping, evergreening, all of those issues 
need to be dealt with. The most egregious recently is the 
transfer of a patent to a sovereign entity to defeat patent 
review under the America Invents Act, and that is just plain 
offensive.
    It is not a game. Patients are really being hurt by this. 
We hear from them now saying, ``I cannot afford the drug and I 
do not understand why there is not a generic.''
    Senator Murray. Thank you very much. Appreciate that.
    The Chairman. Thank you, Senator Murray.
    Senator Paul.
    Senator Paul. Well, I think the Chairman asked a very 
important question about rebates, and I think it goes exactly 
to the point of the problem.
    We have rising healthcare prices in medical costs. We also 
have rising drug costs. What the common theme between the two 
is that the prices are not transparent.
    The consumer is disconnected from the price and from the 
product. You have an intermediary: insurance, your employer, 
all these other things. Someone else is making the decision.
    Almost no one in our country goes to the doctor and bases 
their decision on price because from Medicare, we all have the 
same price.
    There really is no capitalism or competition in healthcare 
primarily. Ninety-seven percent of healthcare has somebody in 
between you and the price.
    Occasionally, someone has an HSA and pays, and that is the 
only true marketplace that you have is 3 percent of healthcare. 
The same problem exists with drugs.
    When we talk about getting rid of rebates so we could make 
the price transparent to make competition work, we have to go 
back even further and say, ``Why did we get to the rebate 
system?''
    There was, apparently, a court case in 1996 that disallowed 
discounts. Discounts for big purchasers are a part of 
competition and capitalism. If Walmart buys a drug and they buy 
a gazillion of it, they get it at a cheaper price than I do if 
I buy one lot of it.
    The court case apparently made that illegal. Then the drug 
companies came back over time and reinstituted discounting 
through rebating, but it is so complicated, nobody understands 
it. The drug companies are the only people who have the data.
    Then you have three Pharmacy Benefit Managers connected to 
the people selling you the drugs, now wanting to be connected 
to one of the biggest healthcare providers.
    It is a terrible system and it is never going to work. But 
the only way you would ever make it work is people have to know 
the price so we could mandate transparency or mandate getting 
rid of rebates, which is one way of doing it. Or maybe we ought 
to go back to the very beginning and look at these court cases.
    Is there a way we can go back to transparent discounting? 
Because we should allow discounting, but the system is a 
terrible system and nobody makes their decision based on cost.
    Then as Senator Collins pointed out, you are not even 
allowed to tell somebody. They have a gag order on people.
    Mr. Augustine, when we look at all your recommendations, is 
there one that you think, or your members thought, had more 
economic impact if we were to do one thing, one thing that was 
the most important of the recommendations?
    Mr. Augustine. The recommendations that we made were really 
a package that were intended to balance the treatment of 
various problems and the issue.
    But to try to answer your question, I think it would be 
fair to say that the issue you raised, namely, let us get 
competition back in to this market. We have seen the case where 
generics enter the marketplace that typically, within a year, 
the price will drop about in half, and sometimes, of course, 
much more.
    We have also seen that within about 10 years, the price 
will drop by a factor of 5 from what it was when it was a 
branded product.
    Introducing competition to the marketplace would be 
probably the most useful thing we could do.
    Senator Paul. One of the things you mentioned was buying 
out the competition, preventing generics from coming forward.
    If we had a purely free market and capitalism, buying out 
your competition should be legal. However, many of these 
companies make half of their profits off of Government.
    Even I, who believes in an open and free marketplace, if 
you are contracting with Medicare and Medicaid, maybe we could 
have a rule that says, ``If you want to make money off of 
Medicare and Medicaid, you have to agree not to have a gag 
rule. You have to agree not to buyout the generics,'' and we 
could make rules. And, ``If you do not participate in Medicare 
or Medicaid, you can still buyout your competition.''
    But all these people want the Government money and the 
taxpayer money. Maybe we could have some rules on these things.
    I think the evergreening is a big thing, and I think we 
ought to be able to come to a bipartisan agreement where we 
just say, ``Patents end. You tweak your drug.'' Then, if you 
want your monopoly, maybe you should have to provide samples 
because you are getting a Government monopoly for a certain 
period of time. Maybe you should have to provide samples.
    Then maybe when we look at the evergreening problems, we 
simply say, ``Your patent lasts X long. If you want to tweak 
your thing, you can have a new patent, but your old drug 
becomes generic.''
    That is the mistake is we keep the old drug in the patent 
system and we do not allow it to become generic. The EpiPen is 
a great example of this.
    But I think there is a possibility we could get to a 
bipartisan agreement on some of this stuff. Particularly when 
they are using Government money, I think there could be some 
more rules on the people that are consuming a lot of Government 
money.
    But we have to somehow get to a price transparency and you 
can try mandating it or we could try figuring out maybe 
legalizing the ability to have HSA's and things like that would 
expand the market where people actually make a decision on 
their money.
    Thank you.
    The Chairman. Thank you, Senator Paul.
    Senator Casey.
    Senator Casey. Thanks, Mr. Chairman.
    I want to thank the Chairman and the Ranking Member for 
these bipartisan hearings on this issue. I guess this is our 
third bipartisan hearing. We are grateful for that.
    We have seen some new drugs come to the market with 
terribly high, even astronomical prices. We have also seen some 
other, older drugs experience massive price increases. So it is 
important to understand how each actor in the chain contributes 
to the high cost.
    We all believe, I think, that Congress can act to solve 
this problem and to contribute to getting costs down for the 
consumer.
    Mr. Augustine, I wanted to start with you, and I guess most 
of us are at this stage of the hearing.
    You said on page 2 of your testimony that, quote, ``The 
burden of high priced drugs often falls disproportionately on 
vulnerable elements of the population in spite of Government, 
industry, and charitable efforts to alleviate its impact.''
    Then you give examples of that. Twenty percent of Americans 
are not filling a prescription due to affordability and others 
are rationing drugs that they have used.
    I wanted to start with the use of value based payment 
models. As innovative new drugs are coming to the market, often 
with significant price tags, many drug companies and payers are 
exploring this model as a way to manage costs.
    They could also improve an individual's health outcomes and 
the quality of life so significantly that individuals could 
incur significantly lower costs for healthcare and social 
services over time.
    Mr. Augustine, the fist question I have is one of the 
recommended actions in the report is to identify approaches to 
support value based payments.
    Can you talk more about that?
    Mr. Augustine. Well, I would be happy to.
    From a logic standpoint, I think it is easy to argue that 
value based pricing makes a great deal of sense. That is what 
is used in virtually every commodity or article that people 
buy.
    The question is, then, why is it so difficult to use in the 
case of biopharmaceuticals?
    The answer seems to lie in the fact that there is no real 
agreement on how to measure value. That is really a huge 
roadblock and that is the reason we did not make that a 
recommendation, other than to say we ought to try to figure out 
how to make it work.
    The issue one usually runs into is: what is the economic 
value of a year of human life? Certainly, no one knows how to 
answer that question, I believe.
    Our view is that it offers great promise. It is probably 
the right long term answer, but we do not know how to do it 
today.
    Senator Casey. What can you tell us about other countries 
and their approaches to this?
    Mr. Augustine. Other countries do use something akin to 
value based pricing.
    Generally, those are countries where the government, more 
or less unilaterally, sets the value of cost effectiveness, if 
you will, of a drug and they take inputs from all quarters.
    But they set the value and it becomes an effective form of 
not price setting, but they say, ``This is the most we will 
pay.'' And it becomes a de facto price setting.
    Senator Casey. We recently, the Senate Finance Committee 
leaders of both Chairman Hatch and Ranking Member Wyden, came 
together on the CHRONIC Care Act of 2017.
    We know that an increasing number of adults will age into 
the Medicare program over the next two decades, but those same 
individuals, who are currently not eligible for Medicare, will 
live with multiple, chronic conditions. More than two-thirds of 
beneficiaries in the program today have multiple chronic 
conditions. Chronically ill patients account for, obviously, a 
large percentage of Medicare spending.
    I want to ask you about delivery system reform. What have 
you found? What can you tell us about the prospects for that 
and what would you hope we would do on delivery system reform?
    I will start with you and others if you have an opinion on 
it.
    Mr. Augustine. Well, I will just be very brief.
    Within the delivery system, there are many conflicts of 
interest built in due to the structure of the industry, if you 
will.
    If one thinks some of the problems are introduced by direct 
to consumer advertising, and just to cite that as one example, 
that represents around $5 billion a year. That does not include 
digital advertising. It sort of equalizes all companies in the 
business.
    If one were able to control expenditures on direct to 
consumer advertising, I will be brief here, just by saying it 
would clearly save a great deal of money.
    Senator Casey. I know we are out of time.
    The Chairman. I am afraid we need to go on.
    Senator Casey. We can get some other answers in writing.
    The Chairman. Sure.
    Senator Casey. Thank you very much, Mr. Chairman.
    The Chairman. Thank you, Senator Casey.
    Senator Isakson.
    Senator Isakson. Thank you, Mr. Chairman.
    I have enjoyed working with Senator Casey on any number of 
children's-related and drug-related issues. One of them popped 
into mind a minute ago to ask a question.
    Priority review vouchers, I think it came up when I was 
walking. I heard it mentioned by some. But that is a good way 
to incentivize the drug industry to develop drugs that might 
not otherwise be that high on their list because of the 
anticipated profitability.
    Do you all agree that priority review vouchers, and that 
mechanism to incentivize development, is a good idea?
    Mr. Augustine. Is that addressed to me?
    Senator Isakson. To you, yes, sir.
    Mr. Augustine. All right. Thank you, Senator.
    We did not specifically address that approach, if you will. 
But anything that would accelerate the process of providing 
pharmaceuticals would, to us, make a great deal of sense, 
affordable pharmaceuticals.
    Senator Isakson. It is an idea that has worked already on 
some rare childhood cancer drugs, and we think it will work on 
a lot of other things as well.
    It incentivizes the drug company to go to the marketplace, 
go to the development of a drug in anticipation of getting 
something that works, to get it to the market as fast as 
possible, and to help them with the cost of getting it to 
market.
    One way that Novartis has dealt with that issue, I 
understand, Mr. Chairman, Novartis has negotiated. My staff was 
telling me this as I sat down, so I am not going to talk as 
intelligently as I should, but it intrigued me that they are 
doing results-based pricing. Is that right?
    They negotiated the price with CMS for a drug based on the 
outcome of the drug and its use which, I think, is a terrific 
idea because a lot of times, you do not know how well these 
things are going to work or are going to work, except for in 
field trials which, to a limited basis, limits the information.
    I do not know what you think about that idea, but does 
having a pricing based on results make sense to you?
    Mr. Augustine. The proposal Novartis has made is a very 
interesting one. It will be a very useful experiment.
    The notion of payments being proportional to the result is 
something we do in every other part of the world, the business 
world. If we can figure out a way to actually make it work, it 
would seem to be a very good step forward.
    Senator Isakson. I happen to think so, too.
    Let me add one other comment, if I may, on pricing.
    The average constituent in my state, you ask them, ``What 
is your problem with the drug industry?'' All of them talk 
about advertising. Everybody in my state thinks that 
advertising is the basic cost in all pharmaceuticals.
    You mentioned Restasis a minute ago, and I do not want to 
pick on anybody, but when I heard that name pop up, after about 
a month of watching their ads, I figured dry eye was the 
biggest disease in the United States of America.
    [Laughter.]
    Senator Isakson. It was on every ad on every news show 
every morning I was watching TV But that is to develop a market 
for the drug that has been developed, I would assume.
    Is that not correct?
    Mr. Augustine. Well, clearly, that is true. It has a number 
of negative effects.
    First of all, the price of the advertising has to go into 
the price of the product eventually.
    Advertising is also used to encourage patients to buy 
products on a higher tier very many times.
    Advertising puts doctors in somewhat of a controversial 
position of having to defend their judgment against the 
advertising.
    There are just many negative aspects.
    The problem we ran into with advertising is that there is a 
First Amendment issue here, obviously. While it is somewhat 
ambiguous, the court ruling seemed to suggest it is a real 
issue.
    That is why we did not try to ban advertising, but we said 
at least do not allow a tax deduction for it.
    Senator Isakson. Well, I understand the First Amendment 
question as far as banning the advertising, but it seems to me 
like some responsibility in the amount of advertising used, 
there is some way to measure that ought to be judged against 
the pharmaceutical companies that do it because this stuff we 
talked about on the dry eye and Restasis and that type thing.
    That cost is a tremendous component. The cost of those 
drugs that the consumer is paying, they could spare it because 
they think they have the problem because the advertising told 
them, ``You might need it.''
    We might think of some way we can, like the outcomes-based 
results for Novartis, same type thing, outcome-based results in 
terms of the cost of advertising.
    Thank you, Mr. Chairman.
    The Chairman. Thank you, Senator Isakson.
    Senator Franken.
    Senator Franken. First of all, thank you, Mr. Chairman, and 
the Ranking Member, for holding this series of hearings on 
prescription drug prices.
    Earlier this year, Senator Cassidy and I led a bipartisan 
group of Senators in asking for these hearings. I am especially 
proud that many of the recommendations from the Academies track 
closely the changes that my colleagues and I proposed in the 
Improving Access to Affordable Prescription Drugs Act, a 
comprehensive bill I introduced earlier this spring.
    For example the report, like my bill, calls on Congress and 
the Administration to combat practices that hinder generic 
competition, to negotiate lower prices for drugs under Medicare 
and other Federal programs, to discourage direct to consumer 
advertising. I think, Mr. Mitchell, in your testimony, only one 
other country gives a deduction, and that is New Zealand.
    Right?
    Mr. Mitchell. Only one other country permits it.
    Senator Franken. Permits it. Okay.
    Mr. Augustine. New Zealand.
    Senator Franken. New Zealand, yes.
    Shine a light on financial flows, and profit margins within 
this extremely complex market structure in the drug industry.
    My colleagues will have to carry forward this work after I 
am gone and I urge them to do so in an expedient and bipartisan 
manner. Patients, especially those in Minnesota, need relief.
    Mr. Augustine, you just recommended that Congress should do 
what it can to increase competition.
    What additional authorities do FDA, FTC, and other agencies 
need to meaningfully collaborate to tackle drug industry gaming 
and evergreening?
    Mr. Augustine. Yes, there is a long list of things that 
would be helpful.
    Number 1 would be to permit negotiation between producers 
and those who represent the patient.
    Other things that could be done would be to make it much 
more difficult to have renewed patents for very similar 
products.
    Another would be to make it difficult to have renewed 
patents on just related products.
    Other regulations that come to mind would relate to the 
Section 340B and to the Orphan Drug Act, which you have dealt 
with in your proposed legislation.
    There is a long list of things in both the regulatory area 
and the legislative area that would be very helpful.
    Senator Franken. Thank you. I want to move onto Medicare 
negotiation.
    President Trump's nominee to HHS, Mr. Azar, recently 
appeared before this Committee. During that hearing, I asked 
Mr. Azar whether he supported policy reforms that would allow 
Medicare to negotiate lower drug prices just as President Trump 
has recommended.
    Mr. Azar responded by explaining that Medicare Part D, 
working with Pharmacy Benefit Managers, already secures the 
best net pricing available, implying that further authority was 
unwarranted.
    Mr. Augustine, it seems that a very large majority of the 
Members of your Committee disagree with Mr. Azar's assessment 
and instead have recommended that the Federal Government, 
working with Congress, consolidate its purchasing power to 
directly negotiate with producers and suppliers of medicines.
    Why do you think this is a better approach?
    Mr. Augustine. Well, the report itself does say that it 
would be useful for HHS to be able to negotiate on behalf of 
the patient, if you will. The basis for that is that today, 
there is an imbalance in strength between the provider and the 
buyer.
    This negotiating process works in most every other element 
of the U.S. economy. Why does it not work in the 
biopharmaceutical area?
    The reason is that the representative of the patient does 
not have the choice to walk away from the table or to say, ``I 
will only buy half that many drugs.'' All the strength is 
really on the seller's side.
    The buyer, unlike most other industries, finds himself or 
herself in a position where they have something that is 
absolutely essential and they cannot walk away.
    Senator Franken. I would just point out that other 
countries do this and I do not think that the cost of drugs is 
like a balloon, as Dr. Holtz-Eakin seems to be saying, that if 
you lower them here, they are going to increase there.
    For some reason in other countries, they are able to do 
this. They are able to contain this. The difference that we 
spend on healthcare versus what they spend on healthcare, 
including on pharmaceuticals, as you pointed out in your 
testimony, Mr. Augustine, it would pay for primary and 
secondary education. This is an enormous issue going forward.
    Thank you, Mr. Chairman.
    The Chairman. Thank you, Senator Franken.
    Senator Collins.
    Senator Collins. Thank you, Mr. Chairman.
    An issue that I brought up at previous hearings, as my 
colleague Senator Paul has mentioned, is the imposition of gag 
clauses on pharmacists to prevent them from informing patients 
that they may be better off paying out-of-pocket than using 
their health insurance.
    For example, NBC did a piece that showed that a consumer 
who had a co-pay of $43 for a cholesterol drug would have only 
paid $19 if that consumer had paid out of pocket.
    ``The New York Times'' also wrote about this issue and 
found that consumers who do not use their insurance, and pay 
cash in order to save money, find that they are in the 
situation where insurers will not allow them to apply that 
purchase to their deductible or their out-of-pocket spending 
maximum.
    Mr. Augustine, what would you think of having the Federal 
Government ban this practice of gag clauses as a condition of 
participation in the Medicare or Medicaid programs?
    Mr. Augustine. Senator Collins, our Committee addressed the 
broad issues that you raise and it is our belief that the way 
to resolve that is dealing with the larger issue of the lack of 
transparency.
    The fact that people do not know what all is in the 
agreements that are made between, for example, the drug 
companies and those in the supply chain, so most people will 
never even know that a gag clause is there today.
    One thing one certainly could do would be to outlaw such 
clauses or other clauses that come to mind. But there is a 
broader issue that we need to address and that is this whole 
issue of lack of transparency.
    Just a quick personal example, not long ago I got a 
telephone call from the company that provides my drugs. They 
said they were not allowed to make a choice for me and I needed 
to make a decision. They had two drugs. Which one did I want?
    One was $86 and the other was $5. I said, ``Well, what is 
the difference?'' They said, ``They are identical.'' I said, 
``Well, I think I will go with the $5 drug.''
    Well, why could they not make that decision for me? They 
are not allowed to.
    Senator Collins. Thank you.
    Dr. Holtz-Eakin, I know that you firmly believe that what 
we need is more competition in the marketplace. A bill that has 
been signed into law that Senator Claire McCaskill and I 
authored is intended to move more competitors into the market.
    But an obstacle is what is called the ``patent thicket 
strategy'' that too many drug companies pursue. For example, 
Humira, which is the best selling drug in the world with $16 
billion in annual sales, does not have a generic equivalent 
because its manufacturer has obtained more than 100 patents 
with various changes in the bill to block generic companies 
from coming to the market.
    How can we counter the strategy of a manufacturer making 
minor changes in a drug in order to extend the patent, in this 
case, to almost twice what it should have been, and thus, block 
competitors from coming into the marketplace?
    Dr. Holtz-Eakin. I think in the end, the key is to get 
better value-based pricing because you will not increase the 
value with a ``me too'' patent and you are not going to be able 
to charge more money for it.
    One of the things to do is to get the better competition, 
the better pricing in the retail market, then it is clear that, 
in many circumstances, we are seeing abuse of monopoly power.
    It is okay in America to have a monopoly. It is not okay to 
abuse your monopoly power. There are circumstances, that I have 
seen recently, that appear to be just sheer abuse of monopoly 
power.
    That should be referred to the antitrust authorities and 
should be prosecuted.
    Senator Collins. I completely agree with you that this 
monopoly is being used to protect profits rather than patients 
and R&D development of new drugs. I think it is something we 
need to take a look at.
    Thank you, Mr. Chairman.
    The Chairman. Thank you, Senator Collins.
    Senator Bennet.
    Senator Bennet. Great panel, Mr. Chairman. Thank you for 
organizing it.
    As much as I would love to spend my time talking about tax 
cuts with Dr. Holtz-Eakin, I will relent for the moment.
    Dr. Holtz-Eakin. God bless you.
    Senator Bennet. But he is an honest man in Washington, DC, 
maybe one of the last ones.
    I wondered whether you would say, just briefly, why we are 
spending 18 percent of our GDP on healthcare when the rest of 
the industrialized world is spending half that or less than 
half that.
    Dr. Holtz-Eakin. There are multiple reasons, but I think 
the important thing is to focus less on the number than getting 
our money's worth.
    I think the biggest indictment of the overall performance 
of the U.S. health sector is that we are spending an enormous 
amount of money and we are not getting high quality results.
    We need a high value system from stem to stern, quite 
frankly, and pharmaceuticals are part of that. That is why I am 
a big fan of all the innovations in outcome based pricing, 
value based contracting, whatever it might be.
    But more generally, to have a delivery system where people 
are rewarded for high quality outcomes, not merely pay for 
service. There have been important steps taken to move away 
from that.
    If we do that, we might spend 18, 19, 20 percent of GDP, 
but we will feel like we are getting our money's worth.
    I think the problem is, right now, we do not feel we are.
    Senator Bennet. The reason that number is important is 
because of the pressure it is putting on our fiscal situation. 
But I also agree that we are spending twice as much and getting 
worse results in a lot of other places.
    Mr. Augustine, it is wonderful to see you. You are one of 
the great graduates of East High School in Denver, Colorado. I 
am glad we taught you enough to know that you get the $5 and 
not the $86 product.
    [Laughter.]
    Senator Bennet. I wonder if, in your work, whether you saw 
some instances where Medicare Part D is actually working well 
in terms of drug reimbursement or where you think we should 
focus our attention.
    You mentioned, for example, specialty drugs and you talked 
about how it is not necessarily the cost of the average drug.
    Could you talk a little bit more about that as we seek to 
avoid unintended consequences?
    Mr. Augustine. Yes, Senator.
    Unintended consequences are the big issue here because 
almost anything you recommend, the system is so complex that it 
could pop up somewhere else.
    I think one of the places the system is working well is 
with generics. Now, unfortunately, they are difficult to enter 
into the market. They are often delayed. But when we do get 
generics in the market, we get prices that are market based and 
things are much more affordable.
    Our principle problems are with that 30 percent of the cost 
of drugs that goes to specialty drugs, and these are drugs that 
are not widely used, and they are very expensive to make.
    I think one of the things I would like to say, if I might, 
that I think is a very important point that is somewhat 
tangential--and I apologize--to your question.
    But somehow we have the notion in this country that if you 
reduced the revenues of a pharmaceutical company by $1 that 
takes a dollar out of research and development. There is 
nothing that could be further from true. It might take a dollar 
out, if that is the way they chose to take it out.
    But if a company loses a dollar in revenues, they have many 
choices. In the case of the pharmaceutical industry, they could 
do less research and development, but they might also reduce 
lobbying. They might also reduce the mergers and acquisitions. 
They could reduce dividends. They could reduce executive 
compensation. They could reduce stock buybacks. They could 
reduce overhead costs.
    Picking up on your point, I think you lead to something 
very important and that is, there is this disconnect.
    Senator Bennet. They could stop running that ad with the 
two people in the bathtub that I do not understand.
    [Laughter.]
    Senator Bennet. That could be a choice.
    Mr. Augustine. I have never figured that out.
    Senator Bennet. Did you have any recommendations in my last 
minute, Mr. Augustine, for how the Government could reimburse 
for drugs under Medicare Part B?
    Mr. Augustine. Part B.
    Senator Bennet. Part B, so the hospitals and doctors.
    Mr. Augustine. Well, of course, under Medicare, with the 
exception of drugs, prices are basically fixed for hospitals 
for a given procedure.
    In the case of drugs, are you alluding to the 340B program 
in particular?
    Senator Bennet. I am thinking of chemotherapy drugs; drugs 
that are administered.
    Mr. Augustine. Well, one of the things that is at issue 
here is that the payment to the hospital is often proportional 
to the cost of the drug, and so, the higher the cost of the 
drug, the higher the payment. You have this instability in the 
pricing mechanism.
    It would be much better to pay a flat fee that was 
representative of the true cost of administering the drug and a 
reasonable profit, rather than to have it be based on cost plus 
percent of cost.
    Senator Bennet. Thank you, Mr. Chairman.
    The Chairman. Thank you, Senator Bennet.
    Senator Cassidy.
    Senator Cassidy. Mr. Augustine, I read your report and so, 
I am going to disagree now, not because I disagree with you, 
but I find it more profitable to probe, as opposed to merely 
agree.
    Obviously, a challenge facing our society is finding a 
cure-treatment-something for Alzheimer's. If such is developed, 
the Federal Government will be probably the sole purchaser 
thereof. There will be a few in private insurance. But let us 
just assume 95 percent.
    Now the issue, of course, is whether monopsony purchasing 
power on behalf of the Government would give a return less than 
sufficient to incentivize development. We have some examples of 
that.
    In the Medicaid program, just about every Medicaid program 
in the Nation, except maybe Wyoming and Alaska, pays their 
providers below cost because they can. It is a way to give a 
benefit without necessarily the expense of actually paying for.
    If there was a future Government that said, ``Listen. We 
have to take care of all these Alzheimer's patients, but we do 
not want to pay the,'' you pick the number, $100,000 a year 
that the drug company wants. ``We are going to pay you $10,000 
and if you do not like it, lump it, because we are the only 
person that purchases.''
    That would have a chilling effect on the drug company, but 
would it have a chilling effect on the venture capital required 
at the outset in order to develop the new therapy?
    Now I pose this, kind of long winded, I apologize, just to 
get your thoughts on that, and then I will go to you, Dr. 
Holtz-Eakin.
    Mr. Augustine. With regard to Alzheimer's, you point to a 
critical issue. As the population ages, the Baby Boomers become 
eligible for Medicare and the like, the average person over 65 
spends three times what a person under 65 does. So it is a 
critical issue.
    The question you raise about the impact on development, if 
a Government, or any supplier, comes in and says, ``This is all 
we will pay.'' If that charge is not rationally set, it will 
indeed cause firms to not invest in research, and it will cause 
venture capitalists to not support the funding that the firms 
need.
    That is one reason why it is, I think, so much better to 
let market forces operate here to the extent they can rather 
than to have the Government step in and just set prices.
    Senator Cassidy. But if we allowed all the Federal agencies 
to combine to purchase--and if Federal agencies would end up 
paying for it, maybe Medicaid as a portion--95 percent of that 
drug, that truly would give monopsony power. They would really 
be able to dictate a price.
    Mr. Augustine. Well, if I am not mistaken, private insurers 
provide like half of the insurance in the country, so there is 
a private insurance market that will be stabilizing.
    Senator Cassidy. Now, the reason I say that, though, for 
Alzheimer's disproportionately affects those 65 and above.
    Mr. Augustine. It would affect retirees that were in the 
private insurance plans, but without question, the costs have 
to be set at a reasonable level.
    I come from the industrial world where our biggest customer 
was the Government. It was basically a monopsony.
    There is still a stabilizing fact, and that is that the 
Government wants to be able to get treatments for these 
diseases, just as the firm selling the treatments wants to be 
able to sell them.
    I would not be that concerned about the particular issue 
you raised.
    Senator Cassidy. Douglas.
    Dr. Holtz-Eakin. Imagine that it is essentially coming 
through the Part D program.
    What we would like to see happen is the drug gets 
developed. It gets put on the market. It gets provided to 
Alzheimer's patients. It is initially a monopoly, and it costs 
too much, and people scream and yell, and there is not much the 
prescription drug plan can do about that.
    Competitors recognize that there is a lot of money to be 
made here and they enter with a competitor drug.
    Senator Cassidy. Under status quo.
    Dr. Holtz-Eakin. Under status quo.
    If, in fact, we start doing value based purchasing, they 
want to make that drug better. It might keep people in 
remission longer, and might improve the quality of their lives 
better, and that would be a much better product. Now you have a 
beneficial competition, and that first drug would not be able 
to exploit everybody.
    If you have monopsony buying--setting a fixed price based 
on no information about the actual efficacy or market 
conditions--you run the risk of not only not getting the first 
drug, you do not get the second one or any subsequent drugs. 
That is the danger.
    Senator Cassidy. I yield back. Thank you.
    The Chairman. Thank you, Senator Cassidy.
    Senator Warren.
    Senator Warren. Thank you, Mr. Chairman.
    We have to find ways to bring down the cost of prescription 
drugs and the National Academies recommends that the Federal 
Government negotiate prices directly with drug companies. I 
agree.
    But today, I want to focus on another part of your report.
    You explain that drug companies use so-called patient 
assistance programs to rake-in extra profits from branded 
drugs, even when there are cheaper generics available. One of 
these strategies is to offer coupons.
    The data shows that for top selling brand name drugs, the 
use of these coupons has more than tripled in recent years, and 
patients are now using coupons for nearly one out of every 
three brand name drug purchases.
    Mr. Augustine, it would seem on its face like offering 
these coupons would cost the drug companies money, but your 
report finds exactly the opposite.
    Could you just say a word about how coupons drive up drug 
prices?
    Mr. Augustine. I will be happy to do that.
    Coupons are a bit of an enigma. They appear to be helping 
the patient who cannot afford a drug.
    One of the effects they have, though, is that from the 
patient's standpoint, it causes them to prefer a higher priced 
drug because they are not having to pay the full amount. They 
may choose the drug at a higher tier than otherwise would have 
been necessary. It would have had the same clinical effect.
    The insurance company, then, has paid the full amount, and 
so the insurance rates go up. In effect, the patient saves 
money at the transaction. They lose part of the money when 
their insurance rate goes up and society as a whole pays a 
higher insurance rate overall.
    Coupons, in the balance, in our view, have a negative 
effect.
    Senator Warren. Right.
    I noticed the National Academies Report recommends banning 
these coupons unless there is no other competitor drug 
available.
    In fact, these coupons are already illegal in the Medicare 
program because the Federal Government prohibits drug companies 
from offering kickbacks to steer patients to pricier drugs, and 
then sticking taxpayers with the remainder of the cost.
    Drug companies have found another strategy for Medicare 
beneficiaries funneling billions of dollars to organizations 
called patient assisted charities. Here is how this one works.
    The drug company jacks up its price for a drug, donates the 
money to an independent charity, writes off the donation on its 
taxes, and then the charity turns around and gives patients 
help covering the out of pocket costs of the more expensive 
drug. Once again, Medicare has been stuck picking up the 
remainder of the cost of the high priced drug. So let me start.
    Mr. Augustine, is this legal as long as drug companies do 
not have any sway over the nonprofit charity that it parcels 
out to patients?
    Mr. Augustine. Senator, with the condition you applied, to 
the best of my knowledge, it would be legal.
    Senator Warren. Okay. It is legal, but if drug companies 
have influence over which drugs these charities help patients 
buy, then under current law, it would be illegal.
    The drug company has violated the anti-kickback laws in 
that case and the charity would have violated the IRS rules by 
acting like an arm of the drug company instead of like a tax 
exempt nonprofit.
    Mr. Augustine, did the National Academies Report find that 
the rules governing these charities make them disclose enough 
to the IRS on their Form 990 to know when charities and drug 
companies are breaking the law?
    Mr. Augustine. Senator, it was not at all clear that there 
is enough information that they provided and one of our 
recommendations pertains to the IRS Form 990 that you are 
familiar with.
    One of the purposes of Form 990, of course, is to guarantee 
that a charity is operating independently of the sponsors or 
the funders of the charity. The concern here is that is not 
happening.
    We have made recommendations that additional information be 
disclosed on the 990 Form so that you can really control how 
that money was being used, and that it was being used 
independently of the source.
    Senator Warren. Well, I support strengthening those 
disclosure rules. I have written legislative language to do it.
    I have also called for new requirements to force drug 
companies to disclose all types of patient assistance including 
coupons so that we can get the whole picture of what is going 
on.
    It seems to me that patients and taxpayers deserve policies 
that will actually lower drug costs rather than this shell game 
that funnels more profits to drug companies.
    I think these are good recommendations and I hope that we 
will be able to see them soon here in the Committee, write them 
into law, and get them passed through Congress.
    Thank you, Mr. Chairman.
    The Chairman. Thank you, Senator Warren.
    Senator Kaine.
    Senator Kaine. Thank you, Mr. Chair, and thanks to the 
witnesses. This is very important.
    Mr. Augustine, you started off in a provocative way when 
you said in many ways, we are living through the Golden Age of 
research, and I think a lot of our constituents wonder whether 
we are living through a Golden Age or a Gilded Age in terms of 
the prices that they are seeing for pharmaceuticals.
    There is no single issue on which I hear more about than 
pharmaceutical costs within the healthcare space. A common 
answer is, ``It is oh-so complicated.'' It is like what we hear 
when we talk about gun violence because there is no one answer. 
We should not do anything and we often are told, ``There is no 
one answer to pharmaceutical prices being high, so we should 
not do anything.''
    The thing that is very helpful about these 
recommendations--many of which Senator Franken discussed are 
already part of legislation before the Committee--is that you 
give us some really practical things we can do.
    I used to be a Member of Senator Collins' Committee, the 
Aging Committee, and she has done a superb job with her Ranking 
in spotlighting one of the worst abuses I see in society right 
now, and that is the idea of patients as hostages.
    When we have hearings in that committee about some of the 
particular abuses that you describe in your testimony that all 
of you have referenced in your testimony today, this notion 
that there are certain patients who really need something, and 
we can take a pill, and a venture capital company can buy a 
company, and then jack up the prices dramatically.
    It is more than just about profit. It is about just 
outright abuse of people when they are vulnerable. We are 
really called to try to come up with ways to battle that.
    I think your report has many good recommendations and I 
actually do not want to ask about the recommendations. They 
speak for themselves, and I hope we will tackle them, as 
Senator Warren said.
    I want to ask each of you a question about what is in the 
news.
    There has been a recent news story, obviously, that got a 
lot of attention about CVS deciding to buy Aetna. Many of the 
news stories about CVS's proposed purchase of Aetna said that 
they were doing that because of a worry that Amazon is going to 
be jumping into the pharmaceutical market.
    We are here to talk about prescription drug pricing.
    What should we be looking at either with respect to the 
CVS-Aetna deal or Amazon getting into the prescription drug 
business? How are those developments likely to affect the cost 
that our constituents will be paying?
    I would love each of you to tackle that one question.
    Mr. Augustine. Well, I will start, if that is acceptable.
    What we are seeing is consolidation of the industry, 
further consolidation. It is already a highly consolidated 
industry with the exception of the insurers.
    We are seeing PBM's, pharmacies, insurers going together in 
various combinations that will give each more power.
    Our committee did not look at any specific M&A issues, such 
as you describe, but we did provide a recommendation that said 
that the FTC and the Department of Justice should be very 
deliberative in permitting or should, frankly, not permit 
consolidations within the industry where there is not clear 
competition, ample competition after the merger or the 
acquisition.
    I would have to say, acquisitions perform a useful role 
when there is lots of competition. They eliminate duplicative 
costs. They reduce overhead.
    When you are lacking competition, as we are in this 
industry, I think our committee would say, as our 
recommendation did, that one should be very cautious.
    Senator Kaine. Mr. Mitchell.
    Mr. Mitchell. Thank you, Senator.
    I heard from a patient just over this last weekend who 
wrote to me and said, ``The price for my subcutaneous cancer 
injection increased by $1,400 the last time I went to get it. I 
cannot find out why. I cannot figure out if it is the insurer, 
or the doctor, or the drug company, or the Pharmacy Benefit 
Manager. I am asking, but I cannot figure out why.''
    If Amazon were to come into the system and introduce some 
of its customer friendly approaches in terms of transparency, 
being able to compare prices, being able to shop, getting 
information about what things cost and why, I think it would be 
a useful addition.
    Further concentration in the market, I just want to 
associate myself with Mr. Augustine's remarks. It scares me.
    Senator Kaine. Dr. Holtz-Eakin.
    Dr. Holtz-Eakin. I think this is fascinating and very 
complicated.
    Amazon is a pure entry. It is not consolidation and it is 
entering in what is, essentially, a commodity space, 
pharmaceuticals, the easiest place to enter and compete.
    CVS and Aetna do not compete. It is part of this trend 
toward creating entities that do not carry financial risk, the 
traditional insurance function, and managed delivery systems. 
They have chosen a weird delivery system, a pharmaceutical 
chain, but we need that.
    Senator Kaine. Where they are already offering allied 
health.
    Dr. Holtz-Eakin. May be able to do a lot more especially at 
a low cost, and so, there are some potential benefits there 
that I have always argued for.
    My thinking on these is always to be humble about what we 
know in advance of the way these entities will operate. 
Businesses can organize themselves in a lot of ways, and how 
they choose to do so is their business.
    How they conduct themselves is the issue of public policy. 
I would urge to okay the merger, but monitor conduct and market 
performance very carefully. If there is misconduct, apply a 
remedy.
    Senator Kaine. Thank you, Mr. Chair.
    The Chairman. Thank you, Senator Kaine.
    Senator Young.
    Senator Young. Well, thank you, Chairman.
    I thank our panelists for being here today.
    Mr. Augustine, this report recommends allowing the 
Government to exclude drugs from its formulary based on cost.
    How does the Academies support its claim that it is not 
discouraging patients in the development of innovative 
products, when the report proposes adoption of this 
exclusionary practice?
    Mr. Augustine. Senator Young, thank you for that question, 
because the condition we applied to that recommendation is 
extremely important.
    We said that there should be the possibility of excluding 
drugs under circumstances where alternative drugs of comparable 
clinical benefit are available. It is that last piece that is 
extremely important.
    Senator Young. It is an issue of value, not strictly cost.
    Is that your point?
    Mr. Augustine. Well, that would have the same medical 
benefit. So it would have greater value, the alternative would.
    Senator Young. Okay. Well, we want to make sure, I would 
hope you would agree and go on record, we want to make sure we 
are not restricting access to new medicines for the country's 
most vulnerable patients, right, where they can receive the 
same sort of value.
    Mr. Augustine. As I say, thank you for making that clear.
    Senator Young. Yes.
    Mr. Augustine. Because it is very important we do agree.
    Senator Young. Okay.
    Perhaps you could speak to the dissenting views. I will 
give you an opportunity to respond to those in the report.
    Dr. Rosenblatt and Dr. Termeer, who were two members of the 
committee, they indicated that some of the potential 
consequences in the recommended actions were things that they 
just could not contemplate.
    Could you give a quick overview of their dissenting views 
in the report?
    Mr. Augustine. I would be happy to do that.
    The committee, as I had mentioned, was set up to have 
people from all viewpoints on this issue. We did not try to 
have just a neutral party.
    Dr. Termeer and Dr. Rosenblatt stated that they thought 
many of the recommendations were of value. They included those 
that pertained to competition and to transparency.
    What they did say that they thought, taken as a body, that 
many recommendations and implementing actions that we offered 
would be too stressful to the process of producing 
pharmaceuticals in this country, particularly to the industry. 
And that it would impact the industry such that it would have 
difficulty providing new drugs for further patients. That they 
did take exception to the overall combined impact. That was 2 
of our 17 members.
    Senator Young. That seems it is a very serious concern.
    Could you elaborate on how they arrived at that conclusion?
    Mr. Augustine. Well, I think it is a judgment call. Fifteen 
of our 17 members did not take that position, and we tried very 
hard to find common ground, and where did, we included that in 
the recommendations; when we could not, we did not.
    I also need to say that seven other members did not write a 
dissent, but they asked to provide an expansion on their views. 
And their views were that they agreed with all the 
recommendations and all implementing actions, but felt that the 
recommendations did not go far enough. And that if we are to 
solve a problem of this magnitude, we needed to do additional 
things in the areas, particularly of competitiveness, 
negotiation, and transparency.
    Senator Young. The dissenters indicate on page 161 of your 
report that the U.S. bears a disproportionate burden for the 
cost of drugs and support of medical innovation, something I 
have lamented time and again that we are subsidizing wealthy 
countries.
    They are allies. They are partners. They are friends, but 
frankly, we ought not be subsidizing to the extent we are this 
innovation, to my mind. This was highlight by the dissenters on 
page 161.
    How do foreign countries' pricing and reimbursement systems 
affect our prescription drug costs?
    Mr. Augustine. It is a complicated issue.
    Senator Young. In 30 seconds or less.
    Mr. Augustine. Okay. Thank you.
    Foreign countries, by and large, either set prices or do so 
in a de facto manner by saying, ``That is all we will pay.'' In 
this country, of course, we have not chosen to do that.
    Foreign countries clearly are not investing in R&D to the 
extent we are and they benefit from the R&D we do which, from a 
morality standpoint, is probably a good thing. But it would 
seem that we are bearing more than a fair share of the burden 
and the U.S. patient is paying for it.
    What could you do about that?
    The answer is not a great deal.
    Senator Young. Trade agreements are one possibility, are 
they not?
    Mr. Augustine. That is it exactly, and that is probably the 
only thing you can do.
    There are agreements that both parties have to agree to, 
and there seems to be very little that we can do unilaterally 
to assure that others pay a greater share of the burden. 
Certainly, nothing we would want to do from a morality 
standpoint.
    But it requires sitting down with other governments and 
trying to get a fairer relationship, but it is a negotiation.
    Senator Young. Thank you.
    The Chairman. Thank you, Senator Young.
    Senator Hassan.
    Senator Hassan. Thank you very much, Mr. Chair.
    Thank you to our panelists so much for your testimony today 
and for your work in this area.
    Before I get to my questions, I just wanted to start by 
echoing something Senator Young just said which, when he talked 
about our most vulnerable populations, because I think one of 
the things that makes this topic so challenging is that we are 
dealing with a market that is not like every other market 
because we have people whose lives depend on it. They do not 
have bargaining power when there is only one lifesaving drug 
for them.
    I happen to have two family members who fit into that 
category, who suffer from seizure disorders. Even when there is 
something called a comparable drug with a comparable clinical 
value available to them as a generic, it does not do for them 
what it does for the majority of patients, and the brand name 
does.
    One of my concerns, as we talked about, to Mr. Augustine's 
point, the economic value of a year of human life is for us to 
always focus on the issue of healthcare, understanding it is a 
unique market and has a unique value in our democracy.
    With that in mind, I do have a couple of questions. I do 
not necessarily mean to pick on Allergan and Restasis either, 
but both Senator Isakson's question and mine deal with issues 
that have come up with that drug.
    To Mr. Mitchell, one of the recommendations in the National 
Academies Report is related to accelerating the entry of 
generic drugs, and we have talked a lot about that.
    Then we have the topic of, or the example of Allergan 
essentially, which makes Restasis, with behavior that runs 
counter to what we heard from the National Academies 
recommendations because in September, it announced it had paid 
a Native American tribe to take ownership of its patents for 
Restasis. Then, Allergan licensed the patents back from the 
tribe continuing to sell the drug as usual.
    It is exploiting the doctrine of tribal sovereign immunity 
to protect its profits, and it is essentially renting the 
tribe's sovereign immunity to prevent generic products from 
entering the market, and denying consumers more affordable 
alternatives. It has been called a ploy recently by a court.
    Can you talk to us a little bit about this deal? Mr. 
Mitchell, describe what it may mean for patients.
    Mr. Mitchell. One of the most offensive things about this, 
as another strategy to create the patent thicket, avoid 
allowing generics to come to market is that the company 
involved called it, ``novel, brilliant,'' when they announced 
that they were going to do it.
    The fact is, it hurts people like Joe Landy from Boca 
Raton, Florida. He is a retired police officer. He is going to 
spend at least $1,000 this year for Restasis and he has had to 
stop taking other drugs in order to afford this one.
    The company is treating it like it is a game and, ``How can 
we figure out a way around the laws of the United States? How 
can we defeat the Hatch-Waxman framework?'' that tries to 
compensate companies who take the risk to make a good return, 
but then lets competition come into play and gets the lower 
prices through the introduction of generics.
    Allergan's behavior is offensive and it hurts people. It is 
not a game.
    Senator Hassan. Well, thank you.
    Following up with the example that Senator Isakson gave to 
Mr. Augustine about advertising because we see ads for Restasis 
and there are patients like the one Mr. Mitchell just mentioned 
who definitely need the drug Restasis. I will say with 
firsthand knowledge, dry eye can be extremely painful and 
debilitating when it gets bad enough. It also can be treated 
without Restasis. I would urge people to talk to their doctors 
before they take it.
    But let us talk about advertising and the fact that we 
still allow, Mr. Augustine, companies to get tax breaks for 
advertising. The Academies recommend that we try to address 
that.
    Can you talk to us about why it might be appropriate to end 
tax breaks for direct to consumer advertising by pharmaceutical 
companies?
    Mr. Augustine. Yes. In the committee's view, there are 
several negative aspects of this form of advertising.
    One is that the patient goes to their doctor and tells the 
doctor, ``I saw this on TV and this is what I need,'' and it 
may be a very expensive drug. In fact, most of the drugs that 
are advertised tend to be the more expensive in their class.
    The doctor is then under the pressure of telling a patient 
that you could get another drug that is equally good and costs 
less. It causes a conflict that is not easily dealt with.
    The other aspect, of course, is that advertising costs a 
lot of money and it shows up in the end price of the product of 
the advertiser.
    Also, much of this advertising just neutralizes itself and 
I would think the drug companies, it probably would be an 
antitrust violation, but if they all would say, ``We will quit 
advertising and stand on the merits of our products,'' they 
would probably all be better off. But that is not going to 
happen.
    Our first reaction was to say, ``Let us ban advertising in 
this arena.'' That, we think, runs into a First Amendment 
issue.
    Our second reaction was, ``Well, let us at least not let 
people take that as an exemption, as a cost of doing 
business.''
    The Chairman. We are running out of time.
    Mr. Augustine. That is our recommendation.
    Senator Hassan. Thank you, very much.
    Thank you, Mr. Chair, for your indulgence.
    The Chairman. Thank you, Senator Hassan.
    Senator Baldwin.
    Senator Baldwin. Thank you. Appreciate the Chairman and the 
Ranking Member for this series of hearings on high drug prices.
    Mr. Mitchell, I wanted to thank you for sharing your 
personal story and the organizing you have done to elevate the 
voices of others who have similar experiences.
    Throughout this hearing series, I have been sharing stories 
of Wisconsinites who have shared their experiences with me, 
including Diane, who was diagnosed with multiple sclerosis at 
28 years of age, and has been on a medication for 23 years. But 
she and her husband sadly decided this past January that she 
would stop taking it when it reached $90,000 a year.
    Greg, who has two young adult sons with Type 1 diabetes, 
and has seen the insulin and test strips required go up, and 
up, and up, and now it is about $1,000 a month in his family.
    This seems to be absolutely rampant and you were just 
mentioning an individual who tried to get an explanation for 
why there was a sudden increase in the price of a medication he 
relied on.
    Patients and taxpayers and, frankly, policymakers get far 
too little information.
    You have shared a number of the stories that you have 
collected with us. I want to have you share with us why it is 
critical to require transparency, particularly for drug list 
prices, retail prices, especially surrounding the company's, 
say, R&D costs, advertising costs, expenditures on stock 
buybacks, or executive pay.
    Why is this vital? What information do you think needs to 
be out there that currently is not?
    Mr. Mitchell. Thank you, Senator, for the question.
    I would start by saying we are not dealing with flat screen 
televisions here. I have nothing against flat screen 
televisions, but these are lifesaving drugs, and when we are 
consuming 20 percent of our Medicare budget on drugs and we are 
spending 18 percent of our GDP on healthcare.
    I do no know how individuals, employers, or you all who 
make the laws to take care of these matters can make 
intelligent decisions without transparency at any level. In 
markets, markets function with transparency. In the absence of 
transparency, bad things happen.
    It is one of the reasons we feel it is so important to get 
transparency inside PBM's. We do not know what is going on 
there. We do not know how much of the rebates they are putting 
in their pocket or how much is going to the insurer, if any of 
it is making its way to patients.
    We believe that transparency up and down, starting with the 
setting of the retail price and the justification for it, is so 
important. Especially if the drug is invented using taxpayer 
money and 50 percent of all major new breakthrough drugs are 
invented with money from the NIH or paid by the Federal 
Government to academic medical centers.
    Senator Baldwin. Thank you.
    Mr. Augustine, I was sharing with the committee in the last 
hearing we had of, I think, our first in this series where we 
had people in different parts of the system, and it seemed like 
there was just a ton of finger pointing. ``Oh, it is their 
fault that the price is going up.'' ``No, it is theirs.''
    When asked directly about the starting point, the drug list 
price, we could not even get straight answers. It was still 
pointing to the other players in a very complex system. You 
have already answered questions by saying, ``Well, it is 
complex.'' Or, ``It is hard to figure out without the data.''
    Your report also states, and I quote, ``List price matters 
because it is the starting point for all negotiations in the 
supply chain.'' I could not agree more.
    Can you elaborate on how the lack of transparency 
perpetuates the blame game, the finger pointing, and why your 
report specifically recommends that Congress require 
pharmaceutical companies to publicly disclose list prices, 
price increases, and other details like profits?
    The Chairman. If you could do that succinctly, that would 
be helpful because she is out of time.
    Mr. Augustine. Okay, Mr. Chairman.
    Clearly the issue of blaming each other, which takes place 
a good deal in this arena, is made possible by the lack of 
transparency. If we are to fix the problems, we have to 
understand what the problems are.
    There is some insight to be gained by outsiders making 
assumptions, but the fact is that we do not know with great 
confidence where the money is going. There are reasons why some 
parts of the enterprise should make more money than others, but 
frankly, we just do not know adequately.
    We have made our recommendations on the best data we can 
find.
    The Chairman. Thank you, Senator Baldwin.
    Senator Whitehouse.
    Senator Whitehouse. Thank you, Chairman.
    Thank you to the panel for being here and thank you for the 
work that you have done to help us address this challenging 
problem.
    Thank you, particularly, for making recommendations about 
these direct to consumer ads and what a poor effect they have 
on our system of healthcare delivery, and on the gaming of the 
patent system by evergreening. I think those are very important 
recommendations that we should pay attention to.
    I am not a technical expert, but it strikes me that with 
these pharmaceuticals, they tend to fall into three general 
categories when they are sold.
    One is that they are not a monopoly. There are a bunch of 
alternatives. There is competition and you can let market 
pricing work itself out.
    The second is it is an approved monopoly. You have invented 
something. You have patented it. To reward yourself for your 
investment, you get an approved monopoly for a period of time.
    It seems to me, though, that there is a third category as 
well, which is monopolies that are not approved that are just 
monopolies. Very often, we see very strong signals of 
monopolistic pricing behavior happening in that space.
    One signal of it seems to me is when people--who are not 
even in the pharmaceutical business, but are simply in the 
maximizing return on their investment business--come in, buy a 
company that makes a particular drug, add no value, jack its 
price up 10, 15, or 20 times. Then take advantage of a pure 
monopoly over that product to extract maximum rents despite 
what, I think, every economist thinks is appropriate with 
monopolies. Or a little bit more complicatedly, kind of game 
the system and dare anybody else to come in and invest in a 
facility that could compete with them, and if they try to, 
boom. They drop the price and make the case for their 
competitor noneconomic so they can go back to charging monopoly 
rents.
    I do not see any economic justification for that kind of a 
monopoly, and I am concerned that your recommendations, do not 
use the word ``monopoly''. And seem to pay no attention to this 
problem of when a predatory actor moves into this space, often 
from outside the pharmaceutical industry, and just grabs a 
monopoly in order to extract improper rents from the public.
    How do you address that? First, have I correctly 
articulated a real problem that is actually happening in the 
real world? And if I have, what is your recommendation for that 
problem?
    Mr. Augustine. I assume you are addressing that to me.
    Senator Whitehouse. I will go right down the line and you 
each have about 30 seconds because the Chairman is wielding his 
gavel with great force today.
    Mr. Augustine. Okay.
    We chose not to use the word ``monopoly,'' but we use the 
word ``exclusive rights,'' which are basically the same thing.
    Senator Whitehouse. Well, although the implication from the 
use of the term ``exclusive rights,'' is that it is an approved 
monopoly under a patent.
    Mr. Augustine. But it is.
    Senator Whitehouse. I am not talking about that. I am 
talking about something that is off patent where somebody has 
just moved in to take advantage of the fact that they are the 
only manufacturer of something.
    Mr. Augustine. In those cases, we have tried to point out 
that I think the pharmaceutical industry does a disservice to 
itself when these things take place.
    This industry is unusual in many ways.
    One is that the managements not only have to compete for 
capital and talent with every other company in America, and the 
fact that they are in the pharmaceutical industry does not give 
them a break on Wall Street.
    But they also have this other, very deep responsibility 
that they are dealing with human lives that most other 
industries are not, certainly not to that extent. It places 
them in a very difficult position.
    When you find people making judgments, such as we found 
with the EpiPen, Daraprim, the Mohawk Tribe. It damages the 
industry as a whole. Those things cannot be allowed just as 
monopolies are not allowed in the marketplace as a whole. Even 
in the free enterprise system, we do not allow monopolies.
    We have got to do the same thing in this industry.
    Senator Whitehouse. Except we do here and it strikes me 
that the problem of unapproved monopolies in this space is 
something that you all signal we need to address when we talk 
about your recommendations. That there are some areas in which 
there simply is not a Government agency that has the authority 
to address the problem. The public is just left naked out 
there.
    Mr. Augustine. Well, I will be----
    Senator Whitehouse. My time has expired. I am going to turn 
this into a question for the record, so that I can get your 
answers in writing.
    Mr. Augustine. We will be happy to do that.
    Senator Whitehouse. I do think that this space, Mr. 
Chairman, of non-approved monopolies that are being taken 
advantage of by, frankly, non-pharmaceutical interests is an 
area where we have long, long known how to deal with it.
    We did it with railroad rates, grain silo rates, electric 
utility rates, telephone rates when there was Ma Bell. This is 
not necessarily that complicated and so I will follow-up with a 
question for the record.
    The Chairman. Thank you, Senator Whitehouse.
    I think we would all be interested in your responses to 
Senator Whitehouse's questions about non-approved monopolies.
    [The following information can be found in Additional 
Materials.]
    The Chairman. Both Senator Murray and I have to leave for 
other appointments, and so, I have asked Senator Murphy if he 
will ask his round of questions and then conclude the hearing.
    Before that, I want to thank each of you for coming and 
thank you, Dr. Holtz-Eakin for being fast on your feet and 
coming when Senator Coburn could not.
    Mr. Mitchell, thank you.
    Mr. Augustine, thank you for the work of your commission. 
We will look forward to considering the recommendations and 
discussing with you the follow-up.
    Senator Murphy.
    Senator Murphy [presiding]. Thank you, very much, Mr. 
Chairman.
    Thank you all.
    Mr. Augustine, I was hoping you might say a word about 
pharmaceutical detailing. The pharmaceutical companies spend 
billions of dollars annually in a practice that is referred to 
as pharmaceutical detailing.
    What it is, essentially, is direct visits with clinicians, 
providing presentations, booths at professional medical 
meetings, trying to get them to prescribe their particular 
drug.
    There is a study in the ``Journal of the American Medical 
Association,'' that suggests that academic medical centers that 
restricted pharmaceutical detailing saw a modest, but 
significant reductions in the prescribing of detail drugs 
across six of eight major drug classes.
    Can you talk about whether you have or whether the group 
has recommendations on any restrictions that should be placed 
on pharmaceutical detailing?
    Mr. Augustine. Yes, we did make some recommendations in 
that regard.
    As your question suggests, detailing is a more costly part 
of marketing as a whole than is direct to the consumer 
advertising on which we have spent so much time.
    Detailing performs some useful purposes of conveying 
information to prescribers. At the same time, detailing adds to 
cost and, in many cases, distorts the marketplace.
    The AMA, as you point out, has made a number of statements 
on the subject. Much of it comes down to ethical issues of 
conflicts of interest.
    Our recommendation has to do mostly with the latter that 
one should put limitations on cases of what bluntly might be 
called quid pro quo, not intentionally so, but turn out to be 
that way.
    Senator Murphy. Then the second question is to, I will 
direct it to Mr. Mitchell. Dr. Holtz-Eakin, glad to have you 
join in.
    I was not here for the discussion on value based pricing, 
but I would love for you both to chime in on that subject.
    We made great strides in moving toward value based 
purchasing when it comes to services that we are procuring from 
doctors and hospitals. Obviously, we have not made as much 
progress, but it is there for the taking.
    There is this example where Harvard Pilgrim and Amgen did a 
deal by which if patients on a particular cholesterol 
medication had a heart attack, the drug company would reimburse 
the insurance company a portion of the cost. It seems like a 
pretty commonsense way to hold drug companies accountable for 
the claims that they are making in all of these detailing.
    Just asking the question through the prism of Medicare, 
Medicare obviously is the driving force behind payment reform. 
It is hard to ask a private insurance company to do it when 
they only hold a small percentage of lives that walk into a 
particular hospital or a small percentage of sales to a 
particular pharmaceutical company.
    What more can Medicare be doing specifically to try to 
promote more of this value based pricing?
    Mr. Mitchell. Thank you, Senator.
    I would start by saying that there are two different 
versions of value based pricing.
    One is the kind that is practiced by the Institute for 
Clinical and Economic Review that looks at the value of a drug 
to patients, and it is an input that can be used in setting an 
appropriate price for the system. It can be an input for 
negotiations by Medicare.
    It is, in fact, being used as an input for negotiations 
right now by the V.A. We think value pricing has potential to 
inform rational negotiations about the price of a drug. It is 
also being used in the private sector.
    As a patient, I am very concerned about the other kind of 
value pricing that is really outcomes pricing. The FDA decides 
what is safe and effective and I only want drugs that are safe 
and effective.
    If, under the Repatha Agreement that you talked about at 
Harvard Pilgrim, I land in a hospital with a heart attack, I am 
not so keen on the idea of my insurer getting a refund. I just 
do not want to be given the drug anymore.
    The other big flaw with outcomes based pricing, which is 
being pushed by the drug companies, is it does not lower drug 
prices. The drug company keeps control of the price, but then 
gives a refund to an insurer and I do not know if any of that 
money would ever make it to someone like me.
    We think value based pricing has real potential to 
contribute to rational pricing by the Government and private 
sector purchasers, and outcomes based pricing is a trap.
    Senator Murphy. Here is the way I would sort of frame the 
response to you, Dr. Holtz-Eakin.
    We have instances where drugs are being prescribed that are 
not adding value to patients.
    Dr. Holtz-Eakin. Yes.
    Senator Murphy. The question is how do you change that 
behavior?
    I understand the danger that you suggest, Mr. Mitchell, but 
without holding the prescriber accountable from a reimbursement 
standpoint, I worry that there are not other effective ways to 
stop drugs from being prescribed that are not adding value or 
are, in fact, hurting patients.
    Dr. Holtz-Eakin. The trouble is we are paying for the drug.
    If we are paying the provider for the outcome and that sort 
of care, they would have zero interest----
    Senator Murphy. Right.
    Dr. Holtz-Eakin ----in having an expensive, poor value drug 
as part of a regimen.
    A lot of the problems that were alluded to today--the 
direct to consumer advertising, all of those things--would just 
disappear if we were paying physicians for the right thing, and 
that is high quality outcomes.
    Senator Murphy. Yes, I think it is all tied together, and 
that the detailing often makes providers believe that a drug 
can maybe be of greater help than it is.
    I think there is a combined responsibility in these 
situations, but I understand the limitations.
    I will not abuse my privilege here and go beyond my time. I 
will hold myself to the same standard that Senator Alexander 
held others and thank you all for being here.
    The hearing record will remain open for 10 days. Members 
may submit additional information for the record within that 
time, if they would like.
    Senator Murphy. The HELP Committee will meet again, 
December 13 at 10 a.m., for a hearing on the ``Implementation 
of the 21st Century Cures Act,'' and its response to mental 
health needs.
    Thank you for being here today.
    This Committee now stands adjourned.
                                ------                                


 Response by Norman R. Augustine to Questions from Senator Alexander, 
                 Senator Casey, and Senator Whitehouse

                           Chairman Alexander
    Question 1. Dr. Collins reaffirmed some of his breathtaking 
predictions in front of this Committee last week when testifying about 
the potential of 21st Century Cures. Those predictions include that: 
Scientists will find ways to identify Alzheimer's before symptoms 
appear as well as how to slow or even prevent the disease. Alzheimer's 
causes untold family grief and costs $259 billion a year. Doctors could 
rebuild a patient's heart using his or her own cells. This personalized 
heart would make transplant waiting lists and anti-rejection drugs 
obsolete. Drug companies will research, develop, get approved by FDA, 
and sell a Zika vaccine, a universal flu vaccine and an HIV/AIDS 
vaccine within the decade. Also, that companies will research, develop, 
get approved by FDA, and sell non-addictive pain medicines to help 
patients as we continue to battle the opioid crisis that kills 91 
Americans every day. The National Academies report concludes that 
``There is little value in new drugs that patients cannot afford--and 
there is no value in drugs that do not exist.'' If the amount Americans 
spent on drugs last year went up 1.3 percent, I'd like to ask all of 
the witnesses how we can reduce that further and still get the 
biomedical miracles Dr. Collins has predicted?
    Answer 1. Dr. Collins' projections are indeed encouraging and he is 
well-qualified to make such projections. But if drug costs continue to 
rise as they have in the past, drugs will in many instances be 
unaffordable. The 1.3 percent increase in the past year should probably 
be viewed in the context of the large increases the two prior years.
    The amount of money the United States spends on biopharmaceuticals 
now exceeds half-a-trillion dollars per year and the costs will 
continue to rise if nothing is done. The fundamental conclusion of the 
National Academies' report is that the biopharmaceutical sector of the 
United States is on an unsustainable trajectory and failing to 
adequately serve the health care needs of patients. Actions proposed to 
help reduce the cost of drugs include:

          Accelerating market entry and use of safe and 
        effective generics as well as biosimilars, and fostering 
        competition to ensure the continued affordability and 
        availability of these products.
          Consolidating and applying governmental purchasing 
        power; strengthening formulary design; and improving drug 
        valuation methods.
          Assuring greater transparency of financial flows and 
        profit margins in the biopharmaceutical supply chain.
          Promoting the adoption of industry codes of conduct, 
        and discouraging direct-to-consumer advertising of prescription 
        drugs as well as direct financial incentives for patients
          Modifying insurance benefits designs to mitigate 
        prescription drug cost burdens for patients.
          Eliminating misapplication of funds and 
        inefficiencies in Federal discount programs that are intended 
        to aid vulnerable populations.
          Ensuring that financial incentives for the prevention 
        and treatment of rare diseases are not extended to widely sold 
        drugs.
          Increasing available information and implementing 
        reimbursement incentives to more closely align prescribing 
        practices of clinicians with treatment value.

    Question 2. What policies have already been enacted that you think 
need to be allowed to work, improved upon or revisited to address the 
broader policy questions or the discreet issues you think should be our 
focus?
    Answer 2. The prohibition on governmental agencies negotiating 
prices directly with manufacturers should be removed. In addition, the 
current effort of the FDA to streamline administrative aspects of the 
drug approval process should be supported and extended.
    The Federal Government should tighten qualifications for discount 
programs that have drifted from their original intent to help 
vulnerable populations. The 340B program requires certain drug 
manufacturers to provide outpatient drugs to qualified medical care 
providers that serve the Nation's most vulnerable patient populations. 
However, it is questionable whether the benefits of the program are 
flowing to the intended vulnerable populations. Our report recommends 
that actions be taken to revert the 340B program back to its original 
intent.
    Further, current insurance benefit designs for prescription drugs 
often expose consumers to considerable financial risk and can 
unfavorably affect patients' adherence to treatment regimens. Insurance 
plans should be modified to reduce the financial burden that patients 
and their families currently experience when they need costly 
prescription drugs. Limits should be placed on the total annual out-of-
pocket costs paid by enrollees in Medicare plans that cover 
prescription drugs by removing the cost-sharing requirement for 
patients who reach the catastrophic coverage limit. Also, Congress 
should revise the Orphan Drug Act to achieve its original intent, by 
ensuring that drugs with orphan designation receive benefits only for 
the target rare disease (and not other indications), and getting rid of 
unnecessary sub-categories that can create artificial eligibility for 
orphan drug status.
    Question 3. Do you believe that all companies who manufacture, 
distribute, provide drugs to patients, and pay for drugs should report 
more information about how their policies affect what patients pay for 
drugs? If so, what data would be most useful? How can we get the data 
necessary to understand the system without increasing costs? Are there 
unintended consequences that we should consider when looking at 
proposals to improve transparency? For example, if we were to add 
transparency around price increases, could that lead to higher drug 
prices, especially when a drug is first available?
    Answer 3. The opaqueness of financial transactions among the 
participants in the biopharmaceutical supply chain makes it difficult 
to understand a system that is already complex. One way to improve 
transparency would be to require manufacturers to disclose detailed 
information on a drug-by-drug basis reflecting discounts given within 
the supply chain and discounts given directly to patients. Information 
about the prices paid at the end-stage of distribution in retail 
pharmacies or their mail-order counterparts and by hospitals, clinics, 
nursing homes, and other relevant organizations that purchase and 
directly administer drugs to patients would also need to be gathered. 
Logically, the difference between what the manufacturers report and 
what the final distributors (e.g., retail pharmacies, hospitals, doctor 
offices) report would indicate what has been retained in the 
intermediary system either as costs or profits. These data may provide 
clarity about the interactions--specifically the flow of funds and 
products--among the intermediaries of the biopharmaceutical supply 
chain, or they may point toward necessary regulation and additional 
data gathering from each participant in the biopharmaceutical supply 
chain. This proposed action would involve a sequential process of first 
gathering information at the two ends of the supply chain--
manufacturers at one end and consumers at the other--with the 
understanding that more refined data may be needed later to completely 
understand how the biopharmaceutical supply chain operates.
    With regard to transparency potentially increasing prices, the 
relevant data needed to conclusively answer this question of 
fundamental interest do not currently exist. This lack of clarity has 
led to numerous situations in which different participants in the 
supply chain point to other participants as the source of high and 
increasing prices. It is for this reason that the report recommends 
that the U.S. Congress should require disclosure of information on a 
quarterly basis at the National Drug Code level from:

          Insurance plans that cover prescription drugs about 
        the average net prices paid for drugs, including patient cost 
        sharing.
          Biopharmaceutical companies about average net volume 
        of and prices for drugs across each sales channel, including 
        discounts provided to pharmacy benefit managers and insurance 
        plans. The U.S. Department of Health and Human Services should 
        obtain, curate, and publicly report this collected information 
        at the National Drug Code level on a quarterly basis.
    The U.S. Department of Health and Human Services should conduct 
analyses of these data and inform relevant congressional committees. In 
addition, the Federal Trade Commission should examine these data to 
identify and act upon any anti-competitive practices in the market.
    While there are indeed potential unintended consequences to be 
guarded against, these can be ameliorated by limiting access to some 
data to government entities and by seeking aggregated data rather than 
information pertaining to specific transactions.
                             Senator Casey
    Question 1. Approximately two-thirds of Medicare beneficiaries have 
two or more chronic medical conditions and almost half take five or 
more medications for those conditions. Many of these medically complex 
individuals are served by long-term care pharmacies, which provide 
prescription processing, dispensing and medication management. Services 
provided by long-term care pharmacies improve medication adherence and 
help prevent adverse events related to prescription mismanagement. What 
policies would help ensure older Americans and other individuals 
receiving care in long-term facilities continue to have access to the 
important services provided by these long-term care pharmacies?
    Answer 1. While our report did not focus specifically on this 
segment of the population, it is clearly a critical portion of society 
with unique health needs. The Committee did consider affordability of 
medicines for various subpopulations (e.g., people who have Medicare, 
private insurance, or no form of health insurance). Ensuring high 
quality care for individuals in long-term facilities was the central 
subject of an influential 1986 Institute of Medicine report, Improving 
the Quality of Care in Nursing Homes, a topic that the National 
Academies could revisit, potentially incorporating the insights gained 
through our report on making medications affordable.
                           Senator Whitehouse
    Question 1. At the hearing, I identified three categories of 
pharmaceutical market: competitive markets, approved monopolies, and 
monopolies that are not approved. In this third category of ``de 
facto'' monopolies, companies, including some that aren't even in the 
pharmaceutical business, can buy a drug, add no value, and increase its 
price substantially. The National Academies report says, ``there are 
situations where there is no agency with the definitive legislative 
authority to carry out certain recommendations.'' I believe this is one 
of those situations.
    Answer 1. This indeed appears to be the case. A recent development, 
reported in the New York Times \1\, about a hospital entering the 
generic drug manufacturing business signifies the truly dynamic nature 
of the biopharmaceutical landscape. In advance of any legislation to 
regulate ``de facto'' monopolies to protect the interests of patients, 
Congress could require relevant agencies to coordinate policy, 
investigation and enforcement activities. The relevant agencies would 
include FTC, DOJ, FDA, GAO and perhaps OMB.
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    \1\  Abelson and Thomas, Fed Up With Drug Companies, Hospitals 
Decide to Start Their Own https://www.nytimes.com/2018/01/18/health/
drug-prices-hospitals.html--r--0
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    Question 2. Are de facto monopolies a problem in the prescription 
drug market? If so, what are your recommendations for dealing with this 
problem? Where is regulatory authority over such monopolistic behavior 
presently located? Is it effective? Please include any specific 
additional authorities you would provide to government agencies to help 
solve this problem.
    Answer 2. De facto monopolies are indeed a problem within the 
prescription drug market. When generics enter the market, the prices of 
the branded products frequently drop precipitously as the developer 
seeks to compete with the new, lower-cost entrants--or forfeit some or 
all of the market.
    But there is a common practice in the biopharmaceutical industry 
that delays entry of generics into the market and thereby extends 
market exclusivity of branded products. This practice is commonly 
referred to as ``pay-for-delay''. Pay-for-delay agreements enable brand 
name drug manufacturers to engage in a contract or other arrangement 
with generic drug manufacturers, in essence, to refrain from 
challenging their patent exclusivity. In such agreements, the generic 
drug manufacturers delay marketing their drug products in exchange for 
some benefit, most often a monetary payment.
    As discussed in Making Medicines Affordable, a 2013 Congressional 
Budget Office analysis found that it may take several competing generic 
companies to enter the market before the price of a competing drug 
significantly declines. Pay-for-delay agreements therefore keep drug 
prices higher than they would otherwise be if generic competitors were 
able to enter the market immediately.
    The actions proposed in the report to address this problem include 
the following:
          The U.S. Department of Justice and the Federal Trade 
        Commission should vigorously deter manufacturers from paying 
        other producers for the delayed entry of generics and 
        biosimilars into the market.
          The U.S. Department of Justice and the Federal Trade 
        Commission should expand the enforcement of policies that 
        preclude mergers and acquisitions among companies possessing 
        significant competing generics and biosimilars in the absence 
        of significant other competitors--either by preventing the 
        mergers or acquisitions or by requiring divestiture of 
        potentially competing drug products to independent entities.
          The U.S. Congress and the U.S. Food and Drug 
        Administration should actively seek to reduce barriers to 
        generic market entry and promote the expeditious entry of 
        additional domestic and international providers of generics and 
        biosimilars, particularly including those not marketed by the 
        original patent holder.

Response by David Mitchell to Questions from Senator Alexander, Senator 
                     Casey, and Senator Whitehouse

                           Chairman Alexander
    Question 1. Dr. Collins reaffirmed some of his breathtaking 
predictions in front of this Committee last week when testifying about 
the potential of 21st Century Cures. Those predictions include that: 
Scientists will find ways to identify Alzheimer's before symptoms 
appear as well as how to slow or even prevent the disease. Alzheimer's 
causes untold family grief and costs $259 billion a year. Doctors could 
rebuild a patient's heart using his or her own cells. This personalized 
heart would make transplant waiting lists and anti-rejection drugs 
obsolete. Drug companies will research, develop, get approved by FDA, 
and sell a Zika vaccine, a universal flu vaccine and an HIV/AIDS 
vaccine within the decade. Also, that companies will research, develop, 
get approved by FDA, and sell non-addictive pain medicines to help 
patients as we continue to battle the opioid crisis that kills 91 
Americans every day. The National Academies report concludes that 
``There is little value in new drugs that patients cannot afford--and 
there is no value in drugs that do not exist.'' If the amount Americans 
spent on drugs last year went up 1.3 percent, I'd like to ask all of 
the witnesses how can we reduce that further and still get the 
biomedical miracles Dr. Collins has predicted?
    Answer: First, it is important to clarify the increase in spending 
on drugs. Brand drug prices continue to rise dramatically. According to 
the investment bank Jefferies and Cowen, the biggest drug companies 
increased prices in January by almost 10 percent. For example, the 
world's top selling drug Humira already went up 9.7 percent this year. 
Amgen's drug Enbrel increased 9.7 percent. And after drawing 
condemnation from both sides of the aisle for its sham patent transfer, 
Allergan increased the price of Restasis by 9.5 percent.
    What is constraining drug prices overall is deflation in generic 
drug prices. Here is a chart that makes the point:


    Brand drug prices have increased more than 208 percent in the last 
12 years, while generics have declined in price. Moreover, the 1.3 
percent spending number cited in the Senator's question excludes drugs 
administered in hospitals and physician offices, which are among the 
most expensive specialty drugs.
    To reduce spending further, we urge Congress to:

          End patent abuses which brand companies use to block 
        competition.
          Require transparency from PBMs so we can see how much 
        rebates and other price concessions are being used to defray 
        patient costs vs how much are kept as profit for PBMs;
          Encourage disclosure from drug corporations so 
        patients, taxpayers, and policymakers understand how they set 
        prices. For example: how much are drug companies spending on 
        research and innovation? How much for marketing and 
        advertising? How much for manufacturing and distribution?
          Finally, Congress should give Medicare the power to 
        negotiate with drug companies so it can use its purchasing 
        leverage to negotiate for patients.

    Question 2. What policies have already been enacted that you think 
need to be allowed to work, improved upon or revisited to address the 
broader policy questions or the discreet issues you think should be our 
focus?
    Answer 2. None that I can think of.
                             Senator Casey
    Question 1. Approximately two-thirds of Medicare beneficiaries have 
two or more chronic medical conditions and almost half take five or 
more medications for those conditions. Many of these medically complex 
individuals are served by long-term care pharmacies, which provide 
prescription processing, dispensing and medication management. Services 
provided by long-term care pharmacies improve medication adherence and 
help prevent adverse events related to prescription mismanagement. What 
policies would help ensure older Americans and other individuals 
receiving care in long-term facilities continue to have access to the 
important services provided by these long-term care pharmacies?
    Answer 1. I do not believe that this is a principal driver of 
increased prescription drug costs. The most effective way to lower drug 
prices is to curb the monopoly pricing power given to drug corporations 
and demand transparency from pharmacy benefit managers who run drug 
insurance programs.
    The pharmaceutical industry is one of the most profitable in the 
world--averaging profits more than three times the average of the S&P 
500. Drug corporations are spending 20-40 percent of their budgets on 
marketing. There is plenty of money available to lower prices, pay for 
research, and still deliver a good return for investors.
                           Senator Whitehouse
    Question 1. At the hearing, I identified three categories of 
pharmaceutical market: competitive markets, approved monopolies, and 
monopolies that are not approved. In this third category of ``de 
facto'' monopolies, companies, including some that aren't even in the 
pharmaceutical business, can buy a drug, add no value, and increase its 
price substantially. The National Academies report says, ``there are 
situations where there is no agency with the definitive legislative 
authority to carry out certain recommendations.'' I believe this is one 
of those situations.
    Answer 1. I agree. The FDA is trying to address this issue by 
encouraging development and approval of generics as a way to eliminate 
monopolies that are not approved. But congressional action is needed, 
particularly passage of the CREATES Act which would prevent brand 
manufactures from blocking generic competition.
    Question 2. Are de facto monopolies a problem in the prescription 
drug market? If so, what are your recommendations for dealing with this 
problem? Where is regulatory authority over such monopolistic behavior 
presently located? Is it effective? Please include any specific 
additional authorities you would provide to government agencies to help 
solve this problem.
    Answer 2. In addition to the actions referenced in Question 1, I 
think direct negotiation by Medicare could provide a countervailing 
market force to constrain these de facto monopolies. Congressional 
action is necessary on this front. We were pleased when candidate Trump 
called on Medicare to negotiate with drug companies to lower prices, 
but we are disappointed to see little movement on this issue. We urge 
Congress and the Administration to act expeditiously to fulfill the 
President's campaign pledge.

 Response by Douglas Holtz-Eakin to Questions from Senator Alexander, 
                 Senator Casey, and Senator Whitehouse

                           Chairman Alexander
    Question 1. Dr. Collins reaffirmed some of his breathtaking 
predictions in front of this Committee last week when testifying about 
the potential of 21st Century Cures. Those predictions include that: 
Scientists will find ways to identify Alzheimer's before symptoms 
appear as well as how to slow or even prevent the disease. Alzheimer's 
causes untold family grief and costs $259 billion a year. Doctors could 
rebuild a patient's heart using his or her own cells. This personalized 
heart would make transplant waiting lists and anti-rejection drugs 
obsolete. Drug companies will research, develop, get approved by FDA, 
and sell a Zika vaccine, a universal flu vaccine and an HIV/AIDS 
vaccine within the decade. Also, that companies will research, develop, 
get approved by FDA, and sell non-addictive pain medicines to help 
patients as we continue to battle the opioid crisis that kills 91 
Americans every day. The National Academies report concludes that 
``There is little value in new drugs that patients cannot afford--and 
there is no value in drugs that do not exist.'' If the amount Americans 
spent on drugs last year went up 1.3 percent, I'd like to ask all of 
the witnesses how can we reduce that further and still get the 
biomedical miracles Dr. Collins has predicted?
    Answer 1. In the world of economics, there are tradeoffs. There is 
certainly a very real possibility that reductions in spending on 
pharmaceuticals will result in reduced investments in pharmaceutical 
R&D. Development of new treatments and cures is a risky business and 
companies must continue to be incentivized to take on that risk if we 
(society) want the possibility of reaping the rewards of that 
investment: access to better treatments and new cures. Wringing out all 
or even most of the profits will certainly lead to market exits. 
Conversely, high prices can encourage new entrants into the market 
bringing more choices and new treatments. Without the possibility of 
significant return on investment, companies will not be inclined to 
take on the risk that is more likely to result in failure and financial 
loss than not. Ninety percent of drugs that begin clinical trials do 
not make it to market, and the costs spent on those failed drugs must 
be included when considering the cost of developing a successful drug. 
The best estimate of this cost per successfully developed drug is 
nearly $2.7 billion. \1\
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    \1\ https://www.forbes.com/sites/matthewherper/2017/10/16/the-cost-
of-developing-drugs-is-insane-a-paper-that-argued-otherwise-was-
insanely bad/5ed4760f2d45
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    Further, it is important to consider an individual's treatment 
costs in totality, rather than focusing solely on the cost of a single 
piece of the patient's overall care. Evidence has shown that, in some 
instances, spending more on a prescription drug can actually lead to 
overall cost savings by reducing the need for hospital services by 
preventing the worsening of a condition or the onset of a new chronic 
conditioned. This phenomenon is common enough, in fact, that it can be 
seen in historical national health expenditure data--as spending on 
prescription drugs increased in the 1990's, spending on hospital 
services declined. \2\
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    \2\  https://www.americanactionforum.org/research/understanding-
pharmaceutical-drug-costs/
---------------------------------------------------------------------------
    That said, to think that every penny currently spent on medicines 
in the U.S. is absolutely necessary and that spending any less will 
halt all investment and innovation would be ridiculous. The question is 
``what is the tipping point?'' and ``where/how should those reductions 
be made?'' The first steps should be reforming government programs and 
regulations that distort the market, reduce competition, and prohibit 
or inhibit the implementation of value-based payment models. Ensuring 
patients have access to greater choice, and that payers have the tools 
to incentivize use of high-value medicines is of the utmost importance.
    Disallowing companies from taking advantage of rules to delay 
generic entry into the market is key to increasing access to more 
affordable options. Reforming and/or repealing government programs, 
such as the Medicaid Drug Rebate Program and the 340B Prescription Drug 
Discount Program, that distort the health care market will help to 
reduce costs across the board. Reforming regulations that are currently 
inhibiting more wide-spread use of value-based payments, such as anti-
kickback statutes and prohibitions on communications regarding off-
label uses and pre-market approvals would also help insurers be more 
prepared for new and expensive treatment options which would allow 
patients to access these new treatments sooner. Government programs and 
regulations are typically well-intentioned but often lead to unintended 
consequences or unforeseen roadblocks; Congress and the regulatory 
agencies must periodically review and adapt these regulations to match 
the needs of an ever-changing market.
    Question 2. What policies have already been enacted that you think 
need to be allowed to work, improved upon or revisited to address the 
broader policy questions or the discreet issues you think should be our 
focus?
    Answer 2. In the last year, the FDA has worked hard to improve the 
approval process and timeline, particularly for drugs currently with 
very limited or no competition, whether that be branded or generic 
single-source drugs, and including complex drugs and drug-device 
combinations. The FDA is working to stop abuse of evergreening rules 
that extend patent life and thus block generic drugs from entering the 
market, and the misuse of distribution restrictions in the name of 
safety which prevent generic manufacturers from obtaining drug samples 
necessary to the development of a generic version of a drug. These 
policies should produce positive results but it will take time for 
those results to come to fruition.
    Bringing generic drugs to market more quickly helps reduce the 
price of a given drug dramatically, typically by an average of roughly 
50 percent with just two generics. \3\ Further, disallowing abusive 
uses of the patent and market exclusivity rules by brand-name drugs 
will help ensure that generic drugs are able to hit the market more 
quickly, as well.
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    \3\  https://www.fda.gov/AboutFDA/CentersOffices/
OfficeofMedicalProductsandTobacco/CDER/ucm129385.htm
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    Government regulations that have distorted the market and resulted 
in significant negative consequences in regard to prescription drug 
costs include the Medicaid Drug Rebate Program and the 340B Drug 
Discount Program. These programs have led to significant consolidation 
among health care providers, particularly through hospital acquisition 
of physician practices, providing hospitals with monopolistic power. 
Reforming these programs is important to rebalancing the private market 
forces that drive competition and push prices down.
    Question 3. Do you believe that all companies who manufacture, 
distribute, provide drugs to patients, and pay for drugs should report 
more information about how their policies affect what patients pay for 
drugs? If so, what data would be most useful? How can we get the data 
necessary to understand the system without increasing costs? Are there 
unintended consequences that we should consider when looking at 
proposals to improve transparency? For example, if we were to add 
transparency around price increases, could that lead to higher drug 
prices, especially when a drug is first available?
    Answer 3. Whenever Federal tax dollars are being spent on a good or 
service, it is important to ensure those dollars are being spent 
wisely, efficiently, and as intended. To that end, efforts to provide 
taxpayers and policymakers with information about how Federal dollars 
are being spent and where those dollars are ending up should be viewed 
as worthy of consideration. However, price transparency measures 
require thoughtful consideration in order to be effective without 
undermining the market's ability to function effectively. Striking this 
balance is difficult. Full disclosure of costs, rebates/discounts, etc. 
will almost guarantee all rebates and discounts (final expenditures) 
equalizing; companies will be unable to justify any price differences 
across populations. But to think that will result in all prices falling 
to the current lowest level is incredibly naive. Contracts between two 
private companies must remain exactly that--private. Congress must not 
undermine the sanctity of private contracts. Though, when one of the 
parties involved is taxpayers, the rules begin to change.
    Regarding policies intended to reduce significant price increases, 
such a policy may deter price increases for drugs already on the 
market, but, as your question so mindfully suggests, such a policy 
already exists in the Medicaid Drug Rebate Program and it is known that 
this results in higher launch prices for new drugs. Further, Congress 
must be careful to not cause drug shortages. An exception would need to 
be provided for instances in which there is a supply chain failure that 
necessitates temporary increases in price in order to maintain 
necessary supply.
                             Senator Casey
    Question 1. Approximately two-thirds of Medicare beneficiaries have 
two or more chronic medical conditions and almost half take five or 
more medications for those conditions. Many of these medically complex 
individuals are served by long-term care pharmacies, which provide 
prescription processing, dispensing and medication management. Services 
provided by long-term care pharmacies improve medication adherence and 
help prevent adverse events related to prescription mismanagement. What 
policies would help ensure older Americans and other individuals 
receiving care in long-term facilities continue to have access to the 
important services provided by these long-term care pharmacies?
    Answer 1. Medication management and treatment adherence is 
extremely important, particularly for elderly individuals who are more 
likely to be suffering from multiple chronic conditions. Keeping these 
individuals out of the hospital is vital to keeping them healthy and 
maintaining their medication regimen is often critical in meeting that 
goal. The services provided by long-term care pharmacies include 
ensuring a patients' multiple medicines will not counteract each other, 
educating patients about how and when to take their medicines in order 
to achieve best results, and supplying a long-term supply to reduce 
costs and inconveniences associated with more frequent refill needs. 
Any policies to limit the ability of long-term care facilities to 
provide these services must carefully consider the tradeoffs. In 
particular, the provisions of the recent proposed rule pertaining to 
Medicare Parts C and D for Plan Year 2019 which would reduce the 
required minimum prescription transition fill length in long-term care 
facilities from 90 days to 30--likely intended to reduce costs--may 
inadvertently result in missed dosages, and consequently, worsened 
health.
                           Senator Whitehouse
    Question 1. At the hearing, I identified three categories of 
pharmaceutical market: competitive markets, approved monopolies, and 
monopolies that are not approved. In this third category of ``de 
facto'' monopolies, companies, including some that aren't even in the 
pharmaceutical business, can buy a drug, add no value, and increase its 
price substantially. The National Academies report says, ``there are 
situations where there is no agency with the definitive legislative 
authority to carry out certain recommendations.'' I believe this is one 
of those situations.
    Are de facto monopolies a problem in the prescription drug market? 
If so, what are your recommendations for dealing with this problem? 
Where is regulatory authority over such monopolistic behavior presently 
located? Is it effective? Please include any specific additional 
authorities you would provide to government agencies to help solve this 
problem.
    Answer 1. When a company is allowed to control a de facto monopoly, 
consumers are likely to suffer. Any abuse of this monopoly should be 
dealt with by the Federal Trade Commission (FTC). The FTC has a mandate 
to protect consumers from anti-competitive activity. Specifically, the 
FTC has the authority ``to prevent unfair methods of competition, such 
as illegal anticompetitive agreements among competitors to increase 
prices or restrict supply, and illegal exclusionary or predatory 
practices.'' \4\ In the pharmaceutical market this may include pay-for-
delay deals, evergreening, REMS abuses, and mergers that will create a 
monopoly. The FTC should also have the authority to stop a sole 
provider of a certain drug from exploiting their monopolistic power and 
hiking the price of that drug to an exorbitant rate without any 
justification. If the FTC does not currently have the authority to 
prevent such abuses, Congress should provide it.
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    \4\  https://www.ftc.gov/news-events/blogs/competition-matters/
2015/05/antitrust-mailbag-what-can-ftc-do-about-prescription
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                                 ______
                                 
    [Whereupon, at 12:03 p.m., the hearing was adjourned.]

                               [all]