[House Hearing, 116 Congress]
[From the U.S. Government Publishing Office]
DIAGNOSING THE PROBLEM: EXPLORING THE EF-
FECTS OF CONSOLIDATION AND ANTICOMPETI-
TIVE CONDUCT IN HEALTHCARE MARKETS
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HEARING
BEFORE THE
SUBCOMMITTEE ON ANTITRUST, COMMERCIAL AND
ADMINISTRATIVE LAW
OF THE
COMMITTEE ON THE JUDICIARY
HOUSE OF REPRESENTATIVES
ONE HUNDRED SIXTEENTH CONGRESS
FIRST SESSION
__________
MARCH 7, 2019
__________
Serial No. 116-8
__________
Printed for the use of the Committee on the Judiciary
[GRAPHIC NOT AVAILABLE IN TIFF FORMAT]
Available via: http://judiciary.house.gov
__________
U.S. GOVERNMENT PUBLISHING OFFICE
45-318 PDF WASHINGTON : 2021
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COMMITTEE ON THE JUDICIARY
JERROLD NADLER, New York, Chair
MARY GAY SCANLON, Pennsylvania, Vice-Chair
ZOE LOFGREN, California DOUG COLLINS, Georgia, Ranking
SHEILA JACKSON LEE, Texas Member
STEVE COHEN, Tennessee VERONICA ESCOBAR, Texas
HENRY C. ``HANK'' JOHNSON, Jr., F. JAMES SENSENBRENNER, Jr.,
Georgia Wisconsin
THEODORE E. DEUTCH, Florida STEVE CHABOT, Ohio
KAREN BASS, California LOUIE GOHMERT, Texas
CEDRIC L. RICHMOND, Louisiana JIM JORDAN, Ohio
HAKEEM S. JEFFRIES, New York KEN BUCK, Colorado
DAVID N. CICILLINE, Rhode Island JOHN RATCLIFFE, Texas
ERIC SWALWELL, California MARTHA ROBY, Alabama
TED LIEU, California MATT GAETZ, Florida
JAMIE RASKIN, Maryland MIKE JOHNSON, Louisiana
PRAMILA JAYAPAL, Washington ANDY BIGGS, Arizona
VAL BUTLER DEMINGS, Florida TOM McCLINTOCK, California
J. LUIS CORREA, California DEBBIE LESKO, Arizona
SYLVIA R. GARCIA, Texas GUY RESCHENTHALER, Pennsylvania
JOE NEGUSE, Colorado BEN CLINE, Virginia
LUCY McBATH, Georgia KELLY ARMSTRONG, North Dakota
GREG STANTON, Arizona W. GREGORY STEUBE, Florida
MADELEINE DEAN, Pennsylvania
DEBBIE MUCARSEL-POWELL, Florida
PERRY APELBAUM, Majority Staff Director & Chief Counsel
BRENDAN BELAIR, Minority Staff Director
------
SUBCOMMITTEE ON ANTITRUST, COMMERCIAL AND
ADMINISTRATIVE LAW
DAVID N. CICILLINE, Rhode Island, Chair
JOE NEGUSE, Colorado, Vice-Chair
HENRY C. ``HANK'' JOHNSON, Jr., F. JAMES SENSENBRENNER, Jr.,
Georgia Wisconsin, Ranking Member
JAMIE RASKIN, Maryland KEN BUCK, Colorado
PRAMILA JAYAPAL, Washington MATT GAETZ, Florida
VAL BUTLER DEMINGS, Florida KELLY ARMSTRONG, North Dakota
MARY GAY SCANLON, Pennsylvania W. GREGORY STEUBE, Florida
LUCY McBATH, Georgia
SLADE BOND, Chief Counsel
DANIEL FLORES, Minority Counsel
C O N T E N T S
THURSDAY, MARCH 7, 2019
Page
OPENING STATEMENTS
The Honorable David Cicilline, Chair of the Subcommittee on
Antitrust, Commercial and Administrative Law from the State of
Rhode Island................................................... 1
The Honorable James Sensenbrenner, Ranking Member of the
Subcommittee on Antitrust, Commercial and Administrative Law
from the State of Wisconsin.................................... 3
The Honorable Jerrold Nadler, Chair of the Committee on the
Judiciary from the State of New York........................... 12
The Honorable Doug Collins, Ranking Member of the Committee on
the Judiciary from the State of Georgia........................ 14
WITNESSES
Fiona Scott Morton, Theodore Nierenberg Professor of Economics at
Yale University School of Management
Oral Testimony................................................. 17
Prepared Testimony............................................. 19
Michael Kades, Director, Markets and Competition Policy,
Washington Center for Equitable Growth
Oral Testimony................................................. 26
Prepared Testimony............................................. 28
Martin Gaynor, E.J. Barone University Professor of Economics and
Public Policy Heinz College, Carnegie Mellon University
Oral Testimony................................................. 55
Prepared Testimony............................................. 57
Craig L. Garthwaite, Ph.D., Director of Program on Healthcare at
Kellogg (HCAK), Kellogg School of Management, Northwestern
University
Oral Testimony................................................. 95
Prepared Testimony............................................. 98
LETTERS, STATEMENTS, ETC., SUBMITTED FOR THE HEARING
Statement from the National Community Pharmacists Association,
submitted by the Honorable James Sensenbrenner, Ranking Member
a Member of the Subcommittee on Antitrust, Commercial and
Administrative Law from the State of Wisconsin for the record.. 6
Statement for the record from the American Hospital Association.. 150
Responses to Questions by Martin Gaynor submitted by the
Honorable Ken Buck, a member of the Subcommittee on Antitrust,
Commercial and Administrative Law from the State of Colorado
for the record................................................. 156
Responses to Questions by Martin Gaynor submitted by the
Honorable Doug Collins, Ranking Member of the Committee on the
Judiciary from the State of Georgia for the Record............. 159
Responses to Questions by Martin Gaynor from submitted by the
Honorable Mike Johnson, a member of the Subcommittee on
Antitrust, Commercial and Administrative Law from the State of
Louisiana for the record....................................... 163
Response to Questions by Michael Kades for the record............ 165
Response to Questions by Fiona Scott Morton submitted by the
Honorable Ken Buck, a member of the Subcommittee on Antitrust,
Commercial and Administrative Law from the State of Colorado
for the record................................................. 170
DIAGNOSING THE PROBLEM: EXPLORING THE EFFECTS OF CONSOLIDATION AND
ANTICOMPETITIVE CONDUCT IN HEALTHCARE MARKETS
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THURSDAY, MARCH 7, 2019
House of Representatives
Subcommittee on Antitrust, Commercial and
Administrative Law
Committee on the Judiciary
Washington, DC
The Subcommittee met, pursuant to call, at 2:01 p.m., in
Room 2141, Rayburn Office Building, Hon. David Cicilline
[chairman of the subcommittee] presiding.
Present: Representatives Cicilline, Nadler, H. Johnson,
Jayapal, Demings, Scanlon, Neguse, McBath, Sensenbrenner,
Collins, Gaetz, Buck, and Armstrong.
Staff present: Slade Bond, Chief Counsel; Amanda Lewis,
Counsel on Detail from the FTC; Madeline Strasser, Chief Clerk;
Josephy Van Wye, Professional Staff; Julian Gerson, Staff
Assistant; Susan Jensen, Parliamentarian; Moh Sharma, Member
Services and Outreach Advisor; Daniel Flores, Minority Counsel;
Andrea Woodard, Professional Staff.
Mr. Cicilline. The Subcommittee will come to order. Without
objection, the chair is authorized to declare a recess of the
Committee at any time.
We welcome everyone to today's hearing on Diagnosing the
Problem: Exploring the Effects of Consolidation and
Anticompetitive Conduct in Healthcare Markets.
I thank our witnesses for being here and I also want to say
that it is our first meeting of this Subcommittee and I
particularly want to acknowledge the presence of the Ranking
Member, Jim Sensenbrenner, who I look forward to continuing to
work with who has done a lot of important work in the
jurisdiction of this Subcommittee and will bring great wisdom
to our collective effort.
Mr. Sensenbrenner. If you say so.
Mr. Cicilline. Yes, absolutely. Without objection.
Our healthcare system is in a State of crisis. The costs of
prescription medicine have increased by 200 percent over the
past decade.
Americans spend, roughly $1,200 on average on prescription
drugs every year, which is more than people in any other
country. The average cost of a hospital stay for a child with
cancer is $40,000.
The price for many types of organ transplants and post-
operation treatment is more than a million dollars. Even a
short ambulance ride to the hospital without medical care may
cost patients thousands of dollars.
These outrageous, unsustainable, and immoral costs are
ruining lives. Prices are skyrocketing and people are dying or
bankrupted as a result.
Kaiser Health reports that a quarter of Americans cannot
afford their medicine while many, and I quote, ``cancer
patients are delaying care, cutting their pills in half, or
skipping drug treatment entirely,'' end quote.
Despite decades of rising costs, the United States ranks
dead last in health outcomes among other high-income countries.
For too many Americans it is a dark reality that the life of a
loved one depends on whether they can raise enough money on a
crowdfunding platform to pay for treatment before it is too
late.
Faced with no other options, Americans are left to plead to
strangers for help to keep their loved ones alive. This must
end.
The American people deserve a government that is in their
corner fighting for them to take on drug profiteering and other
barriers to affordable healthcare. Ending this moral crisis is
a top priority of mine as chairman of the Antitrust
Subcommittee and a top priority for House Democrats to keep our
promise to work for the people and to make healthcare
affordable for everyone.
Our competition system is the backbone of promoting open
and fair markets. This competition is absolutely essential in
healthcare markets. For drug prices, the entry of generic drug
competitors can reduce the cost of branded drugs significantly
and hospital and health insurance markets consolidation
threaten the quality and affordability of care.
In too many cases, effective antitrust enforcement takes
far too long to deliver meaningful results to people in need.
For example, some branded drug companies have abused safety
protocols to thwart generics and to preserve their monopoly for
more than a decade.
As Professor Robin Feldman has noted, even months of delay
can be worth hundreds of millions of dollars in additional
monopoly revenues as the generic sits on the sideline.
While this anticompetitive conduct should violate the
antitrust laws, even successful cases are often too time
consuming to provide effective relief, as the Federal Trade
Commission testified before the Subcommittee last Congress.
That is why I have introduced the CREATES Act with Chair
Nadler and Ranking Member Sensenbrenner and Collins to end
these delay tactics. The CREATES Act establishes a tailored
path for generic drug manufacturers to bring low-cost drugs to
market.
The Congressional Budget Office estimates that the bill
would result in nearly $4 billion in federal savings along with
an additional $5.4 billion in savings for consumers, according
to private estimates.
It is also imperative that we examine and address other
anticompetitive tactics that lead to higher drug prices. Last
week, the FTC settled a complaint against a drug company for
paying off its competitor to keep out of the marketplace.
According to a 2010 report by the Commission, this type of
conduct, also called a ``pay for delay'' settlement, costs
about $3.5 billion per year in the form of higher drug prices.
This settlement occurred nearly seven years after the
Supreme Court's landmark decision in Actavis where it held that
these settlements risk significantly anticompetitive effects
and more than 10 years after the FTC originally filed its
complaint.
It is unacceptable that it took a full decade to address
this abuse of our patent system. Moreover, this egregious
behavior is still taking place today.
As Dr. Aaron Kesselheim of Harvard Medical School noted in
his testimony before the Subcommittee last Congress,
corporations continue to engage in ``pay for delay''
settlements in the wake of Actavis decision, driving up the
cost of prescription drugs.
I look forward to working with Chair Nadler and Senators
Klobuchar and Grassley on legislation to confront and reverse
this problem.
In closing, today's hearing is an important opportunity to
examine other competitive threats that raise costs, lower
quality, and reduce choices in healthcare markets.
It is my hope that our discussion today can focus on
continuing our work to diagnose the problems associated with
consolidation and anticompetitive conduct in healthcare markets
as well as finding solutions to provide a better deal for
hardworking Americans on prescription drugs and other
healthcare costs.
I thank our esteemed witnesses today for appearing before
the subcommittee. It is now my great pleasure to recognize the
Ranking Member of the subcommittee, Mr. Sensenbrenner of
Wisconsin.
Mr. Sensenbrenner. Thank you, Mr. Chair, and I thank you
and extend a warm welcome to all my colleagues, our witnesses,
and the audience Members.
It is a pleasure to begin the subcommittee's proceedings
for this term of Congress. I look forward to working with Chair
Cicilline to accomplish as much as we can together to meet the
needs of the American people.
Today's hearing focuses on the issues of vital importance.
According to the Centers for Medicare and Medicaid Services,
American spending on healthcare now accounts for 17.8 percent
of the United States' GDP. That is over $3.6 trillion, or over
$10,000 per person.
These astronomical costs are the result of many factors.
Lurking always is the misguided Obamacare legislation. Sold as
a means to protect patients and make healthcare affordable, it
has produced just the opposite.
Rising costs, loss of doctors and insurance policies, and
increasingly monopolized hospital and insurance markets in
states and counties all across the nation.
Today's hearing offers us a chance to focus on some of the
other important factors in the healthcare cost problems. These
include obstacles to patients' access to low-cost generic
drugs, anticompetitive practices engaged by pharmacy benefit
managers, and rising consolidation in hospital and insurance
markets.
To help tackle the first of these problems, Chair Cicilline
and I have introduced in the first weeks of this Congress the
Creating and Restoring Equal Access to Equivalent Samples Act--
a mouthful--also known as the CREATES Act.
Our bill is strong and bipartisan legislation that will
prefer branded pharmaceutical companies from manipulating test
sample availability to block cheaper generic alternatives from
obtaining FDA approval and entering the marketplace.
The CREATES Act will lead to lower costs for patients by
assuring that they have faster access to safe and effective
FDA-approved generic drugs.
The CBO has estimated that our bill would produce a multi-
billion-dollar decrease in the federal deficit. Savings to
consumers and private insurers will likely be greater than that
amount.
I look forward to hearing the witnesses' testimony on the
CREATES Act and other important issues the Subcommittee will
examine today.
I would like unanimous consent to insert into the record at
this point a statement by the National Community Pharmacists
Association--statement for the record and also pharma's
statement to the House of Representatives on the topic of this
hearing today.
Mr. Cicilline. Without objection.
[The information follows:]
JAMES SENSENBRENNER FOR THE RECORD
=======================================================================
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Mr. Sensenbrenner. I yield back.
Mr. Cicilline. Thank you to the Ranking Member.
Now, it is my pleasure to recognize Chair of the full
committee, the gentleman from New York, Mr. Nadler, for his
opening statement.
Mr. Nadler. Thank you, Mr. Chair.
The Judiciary Committee has a strong tradition of
bipartisan efforts to promote competition in healthcare
markets, particularly with respect to helping to make
prescription drugs and other healthcare services more
affordable through the full benefits of competition.
Over the past several years, the Subcommittee has held
numerous hearings in this area examining the topics of
consolidation in the market for health insurance, competition
in the drug supply chain, and anticompetitive practices by
prescription drug companies.
It is essential that we continue this important work
through today's hearing and throughout this Congress as we seek
to provide meaningful relief to Americans who struggle every
day with the high cost of medicine, insurance premiums, and
hospital bills.
Today, one-quarter of Americans report that it is difficult
to afford their medicines--one-quarter. Exorbitant medical
bills are one of the major causes of why Americans seek
bankruptcy relief.
It is painfully clear that the soaring costs of healthcare
are bad for the health and well being of American families. It
is unacceptable that seniors cannot afford the arthritis
medication they need to perform everyday tasks such as
buttoning their coats or opening a jar without excruciating
pain.
It is unacceptable that hundreds of thousands of cancer
patients are reportedly delaying life-saving care, cutting
their pills in half or skipping drug treatment entirely because
of high drug prices.
It is unacceptable that those suffering from diabetes have
to worry about the life-threatening consequences of not being
able to afford insulin because of its unaffordable costs.
Last week, when confronted with the facts surrounding
skyrocketing prescription drug prices, executives of seven
major drug manufacturers responded by pointing fingers
somewhere else, including insurers and pharmacy benefit
managers.
As many experts have noted, including some of the witnesses
who will testify here today, a lack of competition in
healthcare markets is one of the primary causes of escalating
costs.
In fact, the CEOs of some major drug companies acknowledge
that--acknowledge that competition plays a key role in driving
down prices.
For example, one testified just last week that, quote,
``Competition is a key component to reducing costs,'' end
quote. Frankly, we didn't need him to tell us that. Louis
Brandeis told us that a long time ago.
The significance of competition from lower-priced generic
drugs in particular cannot be overstated. According to the
Federal Trade Commission, the first generic competitor's
product is typically offered at a price 20 to 30 percent below
the branded product's price.
Subsequent generic entry creates greater price competition
with price drops reaching 85 percent or more off the brand
price.
Similarly, the Congressional Budget Office reported in 2010
that the retail price of a generic is 75 percent lower on
average--75 percent lower than the retail price of a brand name
drug.
In response to the threat of generic entry which, of
course, threatens the ability of branded drug companies to
charge monopoly prices, these companies, or some of them, have
engaged in numerous anticompetitive tactics.
This Committee has been and will continue to be active in
stopping drug companies from reaping monopoly profits at the
expense of the health of working American families.
For example, I am proud to be an original co-sponsor of
H.R. 965, the Creating and Restoring Equal Access to Equivalent
Samples Act of 2019, or the CREATES Act.
This bipartisan legislation, introduced last month by
Subcommittee Chair Cicilline and Ranking Member Sensenbrenner,
seeks to remove an obstacle to generic competition by making it
easier for generic drug companies to obtain the samples they
need to enter the marketplace.
Another concern involves so-called ``pay for delay''
settlements which occur when a branded drug firm pays a
potential generic competitor to abandon a patent challenge and
thereby delay entering the market with a lower cost generic
product.
These agreements can be a win for both drug companies. The
brand name drug company gets to keep its monopoly and the
generic gets paid off with a portion of the monopoly profits.
The consumers lose.
According to an FTC study, ``pay for delay'' agreements are
estimated to cost American consumers $3.5 billion per year, $35
billion over the decade from 2010 to 2020.
That is why I plan to introduce bipartisan legislation this
Congress to help end ``pay for delay'' settlements. As we all
know, a lack of competition and anticompetitive conduct is not
just limited to the pharmaceutical marketplace.
These problems show up in hospital markets as well. For
example, it is well documented that hospital mergers can lead
to higher prices and lower quality of care.
Hospital consolidation also results in fewer options for
patients. This is especially harmful for expecting mothers or
women seeking reproductive health services who depend on a full
range of options for care and may be faced by a regional
hospital that doesn't give a full range of options.
I hope that our discussion today will continue our
bipartisan work to diagnose the problems associated with
consolidation and anticompetitive conduct in healthcare markets
as well as break new ground on confronting the harmful effects
of hospital consolidation.
Accordingly, I look forward to hearing from our witnesses
today. I thank them for their participation and yield back the
balance of my time.
Mr. Cicilline. I thank the gentleman.
Now, I am pleased to recognize the Ranking Member of the
full committee, the gentleman from Georgia, Mr. Collins, for
his opening statement.
Mr. Collins. Thank you, Chair Cicilline and Ranking Member
Sensenbrenner, for holding this hearing. I would also like to
thank both of you for the works in the CREATES Act and I
believe this legislation is a good starting point and I look
forward to continuing to work with both of you to ultimately
get this bill signed into law this term.
Over the past decade, consolidation across healthcare and
prescription drug markets have been rapidly increasing. Nowhere
is this more prevalent than in the pharmacy benefit manager
marketplace.
PBMs, in theory, should bring down the cost for consumers.
However, they are not doing that. There are only three major
PBM companies and they control 85 percent of the marketplace,
which yields each company a great deal of power, and these
companies have consolidated horizontally as well as vertically,
as they go forward, and they have merged vertically with major
pharmacies and health insurers.
That means patients' insurers have financial incentives to
push the patients toward their pharmacies. This consolidation
has enabled PBMs to engage in anticompetitive behavior by
targeting competing pharmacies with unfair audits and under
reimbursement.
These audits provide PBMs with the pharmacies' acquisition
cost and patient data. PBMs then use this data to steer
patients to their own pharmacies and reimburse competitive
pharmacies at a much lower rate.
This results in PBMs lining their own wallets. It harms
community pharmacists who have decided--have to decide between
losing money and filling a prescription or losing customers to
big-box pharmacies owned by PBMs.
If you look at Ohio, CVS, and OptumRX charge that State
more than $400,000,000 more than they paid out to pharmacies.
It is just amazing to me that we will continue to turn an eye
and not have the discussion.
If we wanted to lower drug costs in this country right now,
start with the PBMs. Start right where they are at. I have been
talking about this for six years. I just laid it out.
They are going full throttle trying to kill independent
pharmacists and pharmacies in our communities. They offer
little more than anecdotal evidence that will save you money.
In fact, when others have actually--states such as Texas and
companies such as Caterpillar and others have actually gone
away from their PBM system they saved money.
PBMs--it is just amazing having immense control over
patient formularies, allowing them to push patients to a high-
cost medication because these medications give the PBM higher
rebates.
As a result, PBMs increase patient co-pays and incentivize
manufacturers to increase drug costs to pay PBMs higher rebate
demands. So, PBMs are actually costing patients money.
PBMs' role as an intermediary also allows them to extract
rebates and price concessions for competing pharmacies and
manufacturers without passing them on to the patients.
You know what is really amazing about them and talking
about these six years? I have never had a PBM come in and deny
what I say. Never. They just don't like the way I talk about
them. They don't care that their practices are bad.
They just don't like that I call them out for it. It is
amazing. This lack of transparency in the price concessions are
often withheld from patients and payers and increasing PBM
profits while failing to decrease drug costs.
I recently introduced legislation called the Fair Pricing
Act with Representative Gonzalez a Democrat from Texas, and
also Senator John Kennedy from Louisiana.
This legislation will require PBMs to pass pharmacy rebates
and price concessions on to patients at the point of sale. That
will save patients an estimated $9.2 billion over the next 10
years.
Key provisions from my legislation are also included in the
proposed Rule from the Department of Health and Human Services
Secretary Alex Azar.
Additionally, states across the country, including my home
State of Georgia, have realized this lack of transparency in
the marketplace and legislators are passing laws requiring
transparency for PBMs regarding the rebates prices concessions
they are receiving from pharmacies and manufacturers. These
laws aim to ensure that patients are receiving and seeing the
savings PBMs claim to be offering and negotiated on their
behalf.
I do want to talk, Mr. Chair, about another issue that is
dear, especially in Georgia, and that is hospital consolidation
that the full Committee chair also talked about in rural
communities.
These communities often already have few options for
quality care so when hospital consolidation is increased over
the past 10 years rural communities like my own have been hurt
the most.
At times, these mergers and acquisitions can help rural
communities by keeping facilities open. They result in full or
partial closes and shifting patients from nearby facilities to
those hours away.
This doesn't benefit patients. Instead, it hurts them
because they are unable to receive the lifesaving treatment
they need. In some areas of my state, we have seen mergers
limit emergency care, increase patient travel time by hours.
Imagine if a woman has a difficult labor but had to travel
hours to a healthcare facility. These changes can literally
mean the difference in life and death.
I have also seen hospitals acquire other pharmacy and
physician practices in their area to steer patients away from
their competitors. I am concerned that these practices will
result in fewer options for patients, higher cost, and a lower
quality of care.
I want to commend this Subcommittee for reviewing the
consolidation and anticompetitive practice across the
healthcare marketplace and I am looking forward to working with
the Chair and others on this across the aisle to find real
solutions because we must decrease the cost of our healthcare
and prescription drugs while increasing patients' access to the
best care possible and that means taking a look at everything
on the table and it is time the pharmacy benefit managers
realize your time of terrorizing this marketplace is over.
With that, I yield back to Chair.
Mr. Cicilline. Thank you, Mr. Collins.
It is now my pleasure to introduce today's witnesses. Our
first witness on today's panel is Dr. Fiona Scott Morton, the
Theodore Nierenberg Professor of Economics at Yale University
School of Management.
Dr. Scott Morton is nationally recognized as a leading
scholar on issues of competition and has published articles
that range widely across industries and leading economic
journals.
From 2011 to 2012, she served as the deputy assistant
attorney general for economics at the Antitrust Division in the
U.S. Department of Justice where she helped enforce the
nation's antitrust laws.
Dr. Scott Morton received her BA from Yale and her Ph.D.
from the Massachusetts Institute of Technology. Welcome.
Our next witness is Michael Kades, the director of markets
and competition policy at the Washington Center for Equitable
Growth. Prior to joining Equitable Growth, Mr. Kades served as
antitrust counsel for Senator Amy Klobuchar and before that as
an attorney at the Federal Trade Commission for 20 years.
His work on anticompetitive pharmaceutical patent
settlements led to the Commission's victory before the Supreme
Court in FTC v. Actavis. During his time at the Commission, he
was also an attorney advisor to Chair Jon Leibowitz and the
deputy trial counsel.
Prior to working at the Commission, Mr. Kades clerked for
the Honorable John Reynolds at the United States District Court
for the Eastern District of Wisconsin and is a graduate of Yale
University and the University of Wisconsin Law School.
Our third witness is Dr. Martin Gaynor, the E.J. Barone
Professor of Economics and Health Policy at Carnegie Mellon
University. Dr. Gaynor is widely recognized as a leading
scholar on competition and, in particular, the study of
consolidation and market power within hospital markets and
healthcare systems.
Dr. Gaynor previously served as the director of the Federal
Trade Commission's Bureau of Economics and is a research fellow
at the National Bureau of Economic research. He received his BA
from the University of California San Diego and his Ph.D. in
economics for Northwestern University.
Our final witness in today's hearing is Dr. Craig
Garthwaite, the Herman Smith Research Professor in Hospital and
Health Service and the director of the program on healthcare at
the Kellogg School of Management at Northwestern University.
Dr. Garthwaite's research examines the effects of
government policies with a focus on health and
biopharmaceutical sectors. He has appeared as a guest on
various television and radio shows such as NPR Marketplace and
has appeared in journals like the American Economic Review and
Health Affairs. Dr. Garthwaite received his BA and Master's in
public policy from the University of Michigan and his Ph.D. in
economics from the University of Maryland.
So, we welcome all of the distinguished witnesses and thank
them very much for participating in today's hearing.
Now, if you would please rise I will begin our hearing by
administering the oath and swearing you in. Please rise your
right hands.
Do you swear or affirm under penalty of perjury that the
testimony you are about to give is true and correct to the best
of your knowledge, information, and belief, so help you God?
[A chorus of ayes.]
Mr. Cicilline. The record should reflect that the witnesses
answered in the affirmative. You may be seated. Thank you very
much.
Please note that each of your written statements will be
entered into the record in its entirety. Accordingly, I ask
that you summarize your testimony in five minutes.
To help you stay within that time, there is a timing light
on your table. When the light switches from green to yellow you
have about a minute to conclude your testimony. When the light
turns red it signals that your five minutes has expired and I
would ask you to please conclude.
We will begin with Dr. Scott Morton. If you would just hit
the button so we can--
TESTIMONY OF DR. FIONA SCOTT MORTON
Ms. Scott Morton. Thank you, Mr. Chair, and Members of the
Committee for the invitation to testify.
Today in the United States we are choosing to use the
private sector to provide healthcare without establishing
enough rules to ensure competition. The result is that we have
providers who are profit seeking without the restraint imposed
by competition.
My belief is that if we do not fix this that the ever-
increasing costs are going to lead to a different kind of
solution, which is just price regulation by the government.
That is not my preferred solution. I think markets would be
much better, but they have to be working markets. It is not
obvious that price regulation would be worse than unrestrained
private monopolies, which is what we are faced with today.
You will hear from the other Members at my table is that we
have good news. High prices in many areas of pharmaceutical and
medical care are eminently fixable. It is not rocket science
what we are going to tell you.
There is a great deal of evidence about how to bring down
these prices. The bad news is that the providers, whose prices
will come down should they face vigorous competition, are going
to lobby for any--against any changes in the law and,
historically, have been very successful at doing that.
For the conservatives in the room, if you claim to like
markets and you like market solutions over government, this is
what you are going to hear today. I think all of us want
markets, but we want working markets, ones that enable
competition.
I have two main points to discuss from my testimony. The
first is the area of biologics and physician-administered
drugs. This is the area with the most growth currently. These
are very high-priced products. They are growing very quickly
both in terms of price and in terms of quantity.
We procure these drugs primarily through the Part B program
as well as on the commercial side. This is run quite
differently from Part D. Part D, like dog, okay, that is the
one where we outsource to private insurance companies who have
a formulary, and they bargain to get low prices.
Part B, like boy, that is the one where we do nothing. We
allow the manufacturer to announce a price and then the
government pays that. Okay. So, it is not really very
surprising that it is only 18 percent of GDP we spend on
healthcare. Probably should be more.
So, why--what is the restraint? Well, the manufacturer does
have to sell in the commercial marketplace and as prices get
higher that gets difficult. There is no restraint on the
government side.
So, this is something that Congress should fix. We should
be procuring Part B drugs in a way that is competitive. One way
to do that would be to change the system of J-Codes.
Currently, if there is a branded product that is a biologic
and biosimilars enter, each of those manufacturers gets their
own reference price--their own J-Code. So, if the brand costs
$1,000 and the biosimilar costs $600, a doctor that dispenses
the biosimilar gets paid $600 plus a markup and the one that
chooses the brand gets paid $1,000 plus a markup.
If we had one payment for all the drugs that are the same,
all the same molecule, then the branded drug would have to come
down or else the doctors would all pick the biosimilar because
they would be being reimbursed at $600. They would not choose
to buy a $1,000 drug.
That same principle works in other areas. We, for a brief
while, had a low-cost alternative in the area of prostrate
drugs. That caused doctors to go out and actually seek the
lowest cost therapy in that class and the result of that was
such good competition that the brands in question sued the
government and--over the fact that the government--CMS did not
have the authority to procure drugs in that competitive a
manner, and they won.
So, it would be useful if Congress would enable the
government to procure drugs in that cost-effective manner.
My second point is about consumer out-of-pocket costs.
These have gotten very high with the popularity of high
deductible plans. When you have an out-of-pocket cost that is
based on the list price of the drug this generates kind of
negative insurance.
You buy insurance and instead of paying market price for
the drug--let us say, $300, and you pay list price for the
drug, $600. So, you are getting the opposite of what insurance
is supposed to do, which is to smooth these financial shocks
when you get sick.
The HHS solution, which makes consumers' out-of-pocket
costs depend on the net price, I think something like that is a
good idea. It could be the true net price.
It could be some well-defined average to make the net price
continue to be confidential, which is very important for
getting low prices in general, or it could just be below--equal
to or below the net price so that a plan could choose to have a
$50 out-of-pocket cost and we would never know what the net
price was and that would also be fine.
The important thing about this solution that HHS has come
up with is that it is going to restrain competition between
manufacturers. I believe this is why manufacturers are in favor
of this rule, because it is not going to intensify price
competition. It is going to lessen price competition.
Why? Because there won't be able to be performance-based
rebates where a plan says, I will deliver you a high market
share from Drug A to Drug B, and Drug B says, okay, if you
deliver that high market share, I am willing to sell to you at
a low price.
We don't know until the end of the year if the market share
gets delivered and therefore what the price should be. So there
needs to be built into whatever the safe harbor is the ability
for the plan to negotiate that way with the manufacturer,
extract a really low price, and then--sorry, I will stop--and
then--and then deliver that to the patient. So that is key.
[The statement of Ms. Scott Morton follows:]
STATEMENT OF FIONA M. SCOTT MORTON
Framing
Why are U.S. healthcare costs rising so fast? \1\ One
reason is a lack of competition. The narrative that healthcare
costs are high because we use markets, rather than government,
to provide healthcare is not correct in my view. Rather,
healthcare costs are high because we do not have competitive
markets for these services. Private providers that are not
subject to competitive forces create the worst of both worlds.
Because the sector is so regulated there are many ways for
private healthcare providers to successfully lobby for
regulations and practices that shield themselves from
competition. For the last decade or so, Congress has been
explicitly enabling this lack of competition by designing, or
failing to correct, the methods by which the public sector
procures drugs and controls access to markets so as to benefit
providers. The good news, therefore, is that high prices in
many areas of pharmaceutical and medical care are eminently
fixable and there is a great deal of evidence about what
policies will bring down prices. The bad news is that the
providers whose prices will come down--should they have to
vigorously compete for business--will lobby against any changes
in the law, and have historically been very successful at doing
that.
---------------------------------------------------------------------------
\1\ For example, see Professor Martin Gaynor's previous House
testimony: https://docs.house .gov/meetings/IF/IF02/20180214/106855/
HHRG-115-IF02-Wstate-GaynorM-20180214.pdf. For recent work on hospital
prices see Cooper, Zack, Stuart V. Craig, Martin Gaynor, John Van
Reenen (2019). ``The Price Ain't Right? Hospital Prices and Health
Spending on the Privately Insured, The Quarterly Journal of Economics
134(1):51-107.
---------------------------------------------------------------------------
Some of the behaviors detailed below are violations of
existing antitrust law. However, antitrust enforcement has
become weak in the U.S. for a variety of reasons and, in
addition, it is a slow and expensive way to deal with many
healthcare markets that regularly experience new product entry.
Even if the leadership of the antitrust agencies found
increasing competition in healthcare markets to be a priority,
they likely do not have the resources to address all the known
competition problems, much less new problems driven by changing
regulations and new technologies or products.
Congress could significantly lower healthcare costs and
restrain cost increases with some relatively simple statutes
that create more competition in this sector. Congress could
also instruct--and fund--the FTC to pursue particular
enforcement projects in this sector that Congress finds
critical to restraining healthcare costs. Significant increases
in the budgets of the antitrust enforcement agencies are
absolutely necessary if Congress wishes to have more
competition in any market, including in healthcare markets.
Those funds would be leveraged, and therefore more effective,
if combined with some statutory changes recommended below.
The sources of market power in many healthcare markets come
from both intellectual property and the nature of government
programs. My colleague and co-author, Professor Craig
Garthwaite, has provided the background reasons for market
power in his statement. I will not repeat that material here,
but rather move on to particular solutions.
Specific Topics
1. Behavior That Could Be a Violation of Antitrust Laws
When brands try to use FDA regulations concerning provision
of samples or protection of consumers from dangerous drugs as a
means to improperly exclude generic entrants, they may be
violating antitrust laws. The CREATES Act requires brands to
sell generic and biosimilar firms samples under reasonable
terms and prevents abuse of a REMS restricted distribution
system. This new legislation will help keep brands from
hampering and delaying the entry of generics and biosimilars
after the brand's patent has expired. It should be enacted
promptly. The abuse of citizens' petitions should also be
addressed by Congress.
The Supreme Court's Actavis decision \2\ is helpful in
preventing pay-for-delay schemes and therefore promoting new
generic and biosimilar entry that lowers prices. However, firms
continue to enter into these agreements and the FTC continues
to expend resources investigating and litigating against this
abusive behavior. Congress could end this wasteful situation by
passing more specific laws against pay for delay in both small
molecule and biologic markets.
---------------------------------------------------------------------------
\2\ FTC v. Actavis, Inc., 570 U.S. 136 (2013).
---------------------------------------------------------------------------
This would save enforcement resources in the drug markets,
and also control a practice that is spreading to the biologics
markets.\3\ Enforcement is weaker in biologics because
competition among biosimilars and the reference biologic
product are slightly different than the well-studied small
molecule drug case, and therefore there is uncertainty about
how courts will Rule on these cases. In the United States,
biologics grew from just 13% of biopharmaceutical spending in
2006 to 27% in 2016, and growth continues, so timely entry of
biosimilar (clinically equivalent) products at patent
expiration is critical to limiting biopharmaceutical
expenditures.\4\
---------------------------------------------------------------------------
\3\ Feldman, Robin and Misra, Prianka, The Fatal Attraction of Pay-
for-Delay (January 15, 2019). Chicago--Kent Journal of Intellectual
Property, Forthcoming. Available at SSRN: https://ssrn.com/
abstract=3316339.
\4\ https://www.brookings.edu/wp-content/uploads/2017/05/
wp30_scottmorton_competition inpharma1.pdf (pages 5-6, and figure 2).
---------------------------------------------------------------------------
Another industry tactic that insulates a reference biologic
or branded small molecule product with a large and durable
market share from price competition is a loyalty rebate. A
loyalty rebate gives a customer a large ex post rebate on its
drug purchases, but only if the customer has stayed loyal to
the brand (either exclusively or with a high share such as
90%), meaning the buyer has not purchased any significant share
from the generic or biosimilar entrant. A loyalty rebate
successfully excludes the newest entrants when the brand has an
entrenched share of the market (known as non-contestable
share). Non-contestable share is the segment of the market that
the generic or entrant cannot serve (perhaps it is a version
they do not make, an indication they are not approved for, or
the segment of chronic patients that are taking the brand and
are stable and happy on it). The generic or biosimilar entrant
cannot compete for all the business of the buyer because of
this non-contestable share, so it competes for only part--but
at a lower price. The new entrant comes in with a lower price
for the contestable share, but critically, it cannot compete
for 100% of the needs of the buyer. This is where the loyalty
rebate has a harmful effect on competition. A brand with large
and durable market share will create a rebate in exchange for
the buyer making purchases (or adopting formularies) that
exclude entirely a new entrant or reduce the share of the new
entrant.
Buyers (plans or PBMs) that must purchase the brand to
serve their non-contestable share (e.g., the patients
stabilized on the brand) realize they will be buying those
branded units on unfavorable terms--unless they agree to the
loyalty rebate. The buyer faces a choice between staying loyal
(buying 100% from the brand and receiving the rebate on all
those purchases) or buying the contestable share from the
entrant at a low price and the balance of their needs from the
brand at a high price (forfeiting the rebate). An
anticompetitive loyalty rebate scheme causes buyers to avoid
purchasing from the new entrant for no reason related to the
entrant's quality or price, but because of the brand's ability
to withhold a rebate on the share of purchases the new entrant
cannot supply. The entrant therefore earns less share than it
would under competition on the merits. Loyalty rebates can be
designed so that even if the new entrant charges zero for its
product, the buyer still pays more in total by forgoing the
rebates on the noncontestable share. Such rebates generate a
larger share for the brand than it would have secured through
competition on the merits, dose by dose.\5\
---------------------------------------------------------------------------
\5\ Scott Morton, Fiona and Zachary Abrahamson (2017), ``A Unifying
Analytical Framework for Loyalty Rebates,'' Antitrust Law Journal
81(3): 777-836.
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There are now two biosimilar infliximab molecules that
compete with the brand, Remicade. Those biosimilars offer
prices 30% below the branded price and yet, combined, have a 7%
market share.\6\ Why is it that demand does not shift to an
almost identical product with a lower price? On the public side
it is likely due to Medicare reimbursement (explained below)
and on the commercial side it is likely due to anticompetitive
loyalty rebate contracts. By way of contrast, the U.S. Veterans
Administration has a financial incentive to procure drugs at
the lowest possible price and controls physician prescribing.
The U.S. VA has been able to negotiate more than an 80% lower
price for a biosimilar as compared to the reference product.\7\
Data from Europe demonstrate similar levels of savings. Given
the ease of enabling competition in this sector, these are
savings that Congress is choosing to forgo on behalf of U.S.
taxpayers and patients.
---------------------------------------------------------------------------
\6\ Ronny Gal, Sanford Bernstein (Feb. 26, 2019), Global Specialty
Pharma & U.S. Biotech, ``Biosimilars: adoption update in EU & U.S.--Dec
'18 data: Herceptin & Rituxan moving; Remicade U.S. will not adopt in
2019.''
\7\ AB Bernstein report 18 January 2019.
---------------------------------------------------------------------------
A second way that reference biologics exclude biosimilar
entrants is by continually updating their FDA application file.
A biologic medication may have its BLA approved by the FDA and
therefore be selling on the market while its manufacturer
continues to make changes to its file. Those changes then
become part of the reference product. Thus a biosimilar,
instead of attempting to imitate a product that is fixed at the
moment of launch, is chasing a moving target. The reference
product can choose to make changes at any time that make
imitation more difficult or costly. In particular, the
reference biologic can patent the changes it makes and in that
way create a thicket of dozens of patents that take decades to
expire. The migration of the reference product in this way is a
huge barrier to entry for competing products. Biologics already
have 12 years of market exclusivity (granted to them because
they claimed to the government that their patents would be weak
and so the market exclusivity would be a necessary substitute).
Instead we see products on the market with 30 or more years of
patent protection. There are 17 biosimilar products approved by
the FDA that cannot launch because of patent issues. For
example, the biosimilar competitors of Humira, a product that
sells over 13 billion per year in the U.S., have settled with
Abbvie that they will launch in 2023 in the U.S.\8\ In Europe,
these biosimilars are already on the market and Abbvie has
offered discounts of 80% in order to retain its market share.
These are cost savings the United States is foregoing with its
suboptimal regulation.\9\
---------------------------------------------------------------------------
\8\ Abbvie Press Release: AbbVie Reports Full-Year and Fourth-
Quarter 2018 Financial Results (Jan 25, 2019), https://news.abbvie.com/
news/abbvie-reports-full-year-and-fourth-quarter-2018-financial-
results.htm; Peter Loftus, AbbVie, By Adding Patents, Drugmaker Keeps
Cheaper Humira Copies Out of U.S., Wall St. Journal (Oct. 16, 2018),
https://www.wsj.com/articles/biosimilar-humira-goes-on-sale-in-europe-
widening-gap-with-u-s-11539687603.
\9\ A/B Bernstein reports 18 Jan 2019 and 26 Feb 2019.
---------------------------------------------------------------------------
The solution is straightforward. A new regulation
stipulates that at the time of launch the file constituting the
reference product's BLA is fixed; and this product is the one
the biosimilar must match. Any additional improvement the
reference product maker would like to make can become an
improved, different, product as is normally done in small
molecule drugs. Any intellectual property needed to make the
reference product would be notified to the FDA at the time of
the original BLA; any subsequent products could have subsequent
intellectual property attached to them. This would prevent the
migration of the reference product and its role as a barrier to
entry.
2. Pharmaceutical Procurement Is a Problem
Medicare Part B is a growing area of expenditure--due to
biologics and oncology drugs \10\--and yet Medicare procures
these drugs in a way that avoids almost all competitive forces.
Physicians typically purchase the drugs and are reimbursed by
Part B for whatever they choose to give the patient. Because
physicians are paid a markup over the average cost of
purchasing the drug, they have no incentive to consider equally
effective, but lower-priced product.\11\ Indeed, because the
physician earns a percentage margin on the medication, a
physician has a financial incentive to use a higher priced
branded product. Demand from Medicare patients does not decline
appreciably with high prices (many enrollees are insured for
their 20% copay, so their costs are zero), so a manufacturer
wants to set a high list price when it anticipates high
Medicare sales. That high list price must then be paid by
commercial customers. The manufacturer faces a strong incentive
not to give discounts in order to sustain its high price to
Medicare. So the Part B procurement policy is actively harmful
to privately insured patients.
---------------------------------------------------------------------------
\10\ ``61% of Part B drugs approved by the FDA in 2006-2013 were
biologics, and two-thirds of all biologics approved by FDA during this
time were paid for by Part B.'' (p10) ``Expenditures for the 75 new
Part B drugs for which we identified claims in 2013 were concentrated
among a small number of drugs. The 20 highest expenditure drugs
accounted for 92 percent of 2013 expenditures on new Part B drugs and
26 percent of total Part B drug expenditures. Biologics accounted for
13 of the top 20 highest expenditure new Part B drugs and 82 percent of
expenditures for these 20 drugs (see table 2).'' Page 14 of Medicare
Part B, Expenditures for New Drugs Concentrated among a Few Drugs, and
Most Were Costly for Beneficiaries, Report to the Ranking Member,
Committee on the Budget, House of Representatives (Government
Accountability Office, October 2015), https://www.gao.gov/assets/680/
673304.pdf, at 10, 14.
\11\ Medicare Part B, Expenditures for New Drugs Concentrated among
a Few Drugs, and Most Were Costly for Beneficiaries, Report to the
Ranking Member, Committee on the Budget, House of Representatives
(Government Accountability Office, October 2015), https://www.gao.gov/
assets/680/673304.pdf, at 10 and note 27.
---------------------------------------------------------------------------
The situation is particularly bad when a reference biologic
experiences entry and competition from a much cheaper, but
clinically identical, biosimilar. Under current Medicare rules
each manufacturer of a biologic gets its own reimbursement
price from Medicare. Each product is labeled with a different
``J-code'' and associated price. A physician that continues
buying a $1,000 reference product rather than switching to the
$600 biosimilar need not worry about payment because he or she
gets reimbursed the full $1000 for using the brand. The entry
of a cheaper version of the same product has no impact on
Medicare's payment for the brand. In particular, the way
Medicare pays the doctor means she has zero incentive to use a
lower priced product in a case when there is choice. The
solution here is to adopt one reimbursement amount (one ``J-
code'') for Medicare to pay for any of either the reference
biologic or its competing biosimilars.\12\ These are all the
same molecule that deliver the same therapeutic benefit and
should therefore be competition with one another, but current
regulations insulate them from this price competition. This is
a massive waste of Medicare funds. If there were one price
across the group, a physician would be reimbursed that fixed
amount for administering any one of those products, and would
therefore care about seeking out a manufacturer charging a low
price. This in turn would cause manufacturers to compete by
lowering prices.
---------------------------------------------------------------------------
\12\ MEDPAC, Medicare Part B drug payment policy issues, (June
2017) (``Require the Secretary to use a common billing code to pay for
a reference biologic and its biosimilars). Available at http://
www.medpac.gov/docs/default-source/reports/jun17_ch2.pdf?sfvrsn=0.
---------------------------------------------------------------------------
Secondly, Congress should authorize Medicare to use ``least
costly alternative'' models of payment for Medicare Part B
drugs where several equivalent competing therapies (possibly
still under patent protection) are grouped and one payment
amount is set for the group. This causes expensive drugs that
are not superior in efficacy to lose sales--or lower their
price. OIG has studied this way of procuring drugs and found it
delivers large cost savings.\13\
---------------------------------------------------------------------------
\13\ Least Costly Alternative Policies: Impact on Prostate Cancer
Drugs Covered Under Medicare Part B, Department of Health and Human
Services (Office of Inspector General, November 2012), https://
oig.hhs.gov/oei/reports/oei-12-12-00210.pdf, at 12.
---------------------------------------------------------------------------
Part D purchases drugs using the technique of a formulary
run by a private insurer. This allows for much stronger
negotiation of prices for some drugs. However, the protected
classes in Part D most effectively `protect' manufacturers from
competition. Requiring Part D plans to have a robust formulary
that offers covered options for every patient is critical, but
that regulation can be paired with a relaxation of rigid
protected class rules. In addition, the Part D catastrophic
region appears to create incentives that cause higher list
prices and consumer costs, and needs to be reformed as
suggested by Craig Garthwaite.
3. High Consumer Out-of-Pocket Costs are a Problem
High out-of-pocket costs for drugs are inconsistent with
one purpose of insurance, which is to smooth financial shocks
over time by paying a regular premium to cover infrequent
healthcare expenditures. If a person has pharmaceutical
insurance we ideally want it to reduce her out-of-pocket costs
below the market price for the drug, not make them more than
the market price for the drug. For example, if the list price
of a drug is $600 while a plan has negotiated a price of $300,
a consumer with a $1000 deductible will pay the full $600 list
price. Her plan will receive a $300 rebate from the
manufacturer, but will have paid out nothing for the claim. In
this situation, not only is the patient paying more than the
competitive price for the medication, but the employer or plan
has made a profit on the claim. This practice generates a
transfer from the sick to the healthy, which is the opposite of
the purpose of insurance. The solution is a regulation that
requires insurers to design their insurance so that patients'
out of pocket payments in the deductible are equal or less than
the final net price of the medication incurred by the insurer
(or perhaps less than some kind of average of that final net
price).
The recent HHS Rule would effectively require any patient
out-of-pocket payment that depends on the list price of the
drug be calculated based on the net price after rebates. This
Rule will do at least two helpful things: lower patient out-of-
pocket prices and reduce the ability to exclude with a loyalty
rebate contract. However, the Rule is likely to weaken price
competition between branded products, and this may be why
pharmaceutical manufacturers are in favor of the Rule change.
The way in which the Rule change would soften price competition
works as follows (as far as I understand the Rule at present).
First, a patient payment that is a function of the negotiated
price has the potential to reveal negotiated prices, which is
likely to reduce discounts (as described in Craig Garthwaite's
testimony). However, a plan could design out-of-pocket payments
to be fixed amounts (e.g., $25) rather than percentages of a
medication's price. More importantly, the Rule may prevent
performance-based contracts. A PBM that commits to move 50%
share from drug A to drug B in a calendar year in exchange for
a low price may not succeed. The maker of drug B might not want
to offer a very low price because it worries that the PBM will
not deliver its end of the deal. That manufacturer may want to
offer one price in case the PBM does not move 50% share, and a
lower price if it does--a performance-based contract. Consumers
could not be charged that lower price before either side knows
if it is in fact the true net price. If such contracts are
ruled out by the change in the safe harbor definition, then
price competition will become less vigorous. Prices will rise
in equilibrium when PBMs cannot condition low prices on
achieving certain shares. Higher prices will raise manufacturer
profits, which may be the analysis manufacturers have carried
out, and the reason they support the rule. The Rule should be
structured so that the safe harbor still applies if the
patient's out-of-pocket costs are fixed, if the patient's out-
of-pocket costs are a function of a price that is below the
final net price the plan pays, or if they are a function of a
well-defined average price the plan expects to pay. In this way
performance-based contracts and confidential price discounts
will both be permitted and will bring down prices.
The HHS proposed Rule would also encourage intermediaries
in the supply chain to be paid in some way that is not as a
percentage of the list price. A wholesaler that is transporting
drugs could be paid a dollar amount per box, for example, and
would then no longer have an incentive to support higher list
prices.
Recent evidence demonstrates another method by which drug
manufacturers avoid competition; they use various techniques to
make side payments to patients in order to undo the incentives
created by the PBM and thereby shift consumption toward more
expensive branded drugs. These side payments can take the form
of coupons, in-kind benefits provided under the guise of
marketing, or charitable assistance programs. For example, a
brand gives a patient a coupon for $80 that reduces the
patient's co-pay from $90 down to $10. Suppose that in the
consumer's plan the generic equivalent has a copay of $10. Now
the patient is happy to choose the brand (which has a much
higher list price, e.g., $250) because both options cost her
$10.
Meanwhile healthcare costs have risen because the plan is
paying for a $250 brand instead of a $15 generic. In addition,
the plan loses bargaining leverage with manufacturers and must
acquiesce to higher prices. Why? Because when the coupons or
financial aid undo the financial incentives put in place by the
plan, it has lost one of its main tools to move patients to the
cheaper drug. Without being able to ``shift share'' in response
to price, the plan doesn't have bargaining power. With less
plan bargaining power, pharmaceutical prices rise. It is
important to note that these coupons are banned in the Medicare
and Medicaid programs because they are a violation of the anti-
kickback statues and raise costs to the government. However,
they are permitted in commercial insurance where we have no
reason to believe the effects are any different. Indeed, the
research finding that coupons lead to higher drug costs and
less generic competition studied the time when Massachusetts
banned these coupons.\14\
---------------------------------------------------------------------------
\14\ Dafny, Leemore, Christopher Ody, and Matt Schmitt (2017),
``When Discounts Raise Costs: The Effect of Copay Coupons on Generic
Utilization,'' American Economic Journal: Economic Policy, 9(2): 91-
123; Scott Morton, Fiona and Lysle T. Boller (2017), ``Enabling
Competition in Pharmaceutical Markets,'' Brookings Institution,
Hutchins Center Working Paper No. 30, https://www.brookings.edu/wp-
content/uploads/2017/05/wp30_scottmorton_competitionin pharma1.pdf, at
26-27.
---------------------------------------------------------------------------
Such practices are particularly extensive and problematic
in populations with high per-patient expenditure, such as
hemophilia, that are often treated with biologics. Insurance
companies cannot typically see exactly what source of funds is
used for a co-payment and therefore cannot monitor these
kickbacks. In addition, by driving the effective price borne by
patients to zero, manufacturers can encourage over-consumption
of their drug, increasing costs for insurers and driving up
premiums.\15\
---------------------------------------------------------------------------
\15\ Scott Morton, Fiona and Lysle T. Boller (2017), ``Enabling
Competition in Pharmaceutical Markets,'' Brookings Institution,
Hutchins Center Working Paper No. 30, https://www .brookings.edu/wp-
content/uploads/2017/05/wp30_scottmorton_competitioninpharma1.pdf, at
26-27.
---------------------------------------------------------------------------
The solution to this problem is to implement two policies
simultaneously: First, a ban on any kind of manufacturer
payment to patients whether coupons, financial aid, wrap-around
services, etc., paired with a limit on out of pocket
expenditure per prescription (or 30 day supply) at some
reasonable level such as $200. The limit on out of pocket
expenditure protects the patient who has purchased insurance;
the ban on coupons and financial aid to patients empowers the
PBM to create formularies that can shift share and drive down
prices while preventing manufacturers from ``buying'' sales
they cannot achieve on the merits. A plan will be able to shift
share by adjusting the out of pocket payment between zero and
$200 and thus be well positioned to bargain for lower prices
from manufacturers.
A solution to tackle the problem of high out-of-pocket
consumer costs that also promotes competition, such as the
proposal above, is more desirable than one that reduces
competition, such as the HHS rule. The HHS rule, by reducing
competition between drugs, will lead to higher equilibrium
prices.
4. PBM's Dual Role
PBMs can play a good role in today's pharmaceutical
markets, and also, potentially, a bad one. The good role of the
PBM is to create price competition among branded and generic
treatments. In pharmaceutical and device markets, final
consumers are generally both uninformed and insured, so on
their own they cannot respond to a price discount by moving
their purchases, nor are they able to ask for one as
individuals. The institutional innovation that creates
competition in pharmaceuticals is the PBM. The PBM is informed
about available substitute treatments, is sensitive to price,
and controls a large group of final consumers. Of course, the
PBM has far less bargaining power in markets where there is
insufficient competition, for example, a monopoly market
structure or a government requirement to buy a particular
product. In a market with competitive alternatives the PBM has
the ability to negotiate for lower prices in exchange for
market share. Those lower prices take the form of a rebate from
the manufacturer back to the PBM (because the patient has
purchased the drug at a pharmacy that typically serves many
different PBMs). The PBM's role of seeking out discounts from
manufacturers is critical because it is one of the few agents
in our commercial pharmaceutical marketplace that creates price
competition.
It is also key that these rebates stay confidential.
Suppose a small staff-model HMO says it will be able to move
99% of patients to a substitute drug and, with that threat of
walking away, obtains a huge rebate on the drug. If that
discount were to become public, other buyers who cannot move as
much share would nonetheless demand the same discount, and
those bargaining costs would likely stop the manufacturer from
offering it to the small HMO in the first place. We have seen
this dynamic before in the Medicaid MFN rules.\16\ One reason
pharmaceutical manufacturers like restrictions on rebates, such
as those in the proposed HHS rule, is that such restrictions
suppress price competition and less price competition increase
manufacturer profits.
---------------------------------------------------------------------------
\16\ Scott Morton, Fiona (1997), ``The Strategic Response by
Pharmaceutical Firms to the Medicaid Most-Favored-Customer Rules,'' The
RAND Journal of Economics 28(2): 269-290.
---------------------------------------------------------------------------
The side of PBMs that needs policy attention is their
increasing consolidation and market power; however, this is
fixable and may already be weakening. The FTC has allowed many
PBM mergers over the last 20 years while there may not have
been enough competition among PBMs to protect end consumers,
particularly given PBMs' use of MFNs, limited information
disclosures, and other practices detailed in the Garthwaite
testimony. Under these conditions, some PBMs may have stopped
being good agents for final consumers without losing business.
This a phenomenon Craig Garthwaite and I wrote about 18
months ago.\17\ If the rebate process is opaque, the PBM may
find that a good way to raise prices is to keep more of the
rebate dollars. This in turn leads to an incentive for the PBM
to encourage the manufacturer to raise the list price of the
drug (e.g., by $100), increase the rebate (e.g., by $80 so that
the manufacturer gains an extra $20), thereby allowing the PBM
to pass only some of the increased rebate to the customer
(e.g., $50 so that the PBM's profits rise by $30). This tactic
leads to rising list prices, rising net prices, and rising
rebates, the last of which benefits the PBM. There are a number
of possible solutions. Congress could require a PBM to have a
fiduciary duty to its clients.
---------------------------------------------------------------------------
\17\ Garthwaite, Craig and Fiona Scott Morton, ``Perverse Market
Incentives Encourage High Prescription Drug Prices,'' Pro-Market blog
(November 1, 2017), Stigler Center at the University of Chicago Booth
School of Business, https://promarket.org/perverse-market-incentives-
encourage-high-prescription-drug-prices.
---------------------------------------------------------------------------
Alternatively, PBM contracts could require all payments
from the manufacturer, whether labeled as rebates,
administrative fees, consulting fees, marketing fees, or any
other title, flow directly to the end client (the employer).
Indeed, there could be a safe harbor for payments from the
manufacturer to the end client, rather than to the PBM. If the
employer and PBM so choose, they can specify in a contract how
to share them with the PBM. A third point is that competition
in the health insurance market may improve the agency of PBMs.
Due to recent mergers between PBMs and health insurers, all the
large PBMs in the U.S. are now vertically integrated. This
integration may be due to both parties' interest in
internalizing the externalities between pharmaceutical
consumption and medical care. Between the mergers and
significant public exposure, the agency problems outlined above
may be on the wane already.
5. Many Past Mergers Were Anticompetitive
Unlike many other sectors, healthcare providers often have
geographically spaced facilities that limit the extent to which
company activities can be combined and made more efficient in
the event of a merger. This integration is often referred to as
``scrambling the eggs'' because such it is difficult to undo
after a merger. Because there is no time limit on Clayton Act
violations, Congress could instruct the FTC to open a unit to
revisit healthcare mergers that have harmed competition. A
substantial literature concludes that there have been many
anticompetitive hospital mergers over the last 30 years.\18\
---------------------------------------------------------------------------
\18\ See, e.g., Fulton, Brent D. (2017), ``Healthcare Market
Concentration Trends in the United States: Evidence and Policy
Responses,'' Health Affairs 36(9):1530-1538; Cutler, David M. and Fiona
Scott Morton (2013), ``Hospitals, Market Share, and Consolidation,''
JAMA 310(18): 1964-1970; Cooper, Zack, et al. (2019), ``The Price Ain't
Right? Hospital Prices and Health Spending on the Privately Insured,''
Quarterly Journal of Economics 134(1): 51-107; Gaynor, Martin and
Robert Town (2012), The Impact of Hospital Consolidation--Update,
Robert Wood Johnson Foundation Synthesis Project, https://www.rwjf.org/
content/dam/farm/reports/issue_briefs/2012/rwjf73261. See also Cuellar,
Alison Evans and Paul J. Gertler (2003), ``Trends in Hospital
Consolidation: The Formation of Local Systems,'' Health Affairs 22(6):
77-87.
---------------------------------------------------------------------------
A second area of focus for consummated anticompetitive
mergers are transactions that fall below the Hart-Scott-Rodino
Antitrust Improvements Act (``HSR'') threshold. Professors
Thomas Wollmann (University of Chicago) and Paul Eliason
(Brigham Young) have work in the area of dialysis clinics that
shows the harm from mergers.\19\ Wollmann's dialysis paper
shows that when a transaction falls below the HSR threshold,
the FTC essentially requires no divestitures. This is true
regardless of the geographic overlap of the clinics; in
particular it is true when a similar case reported under HSR
would be required to divest in order to merge.\20\ The paper
shows that the bulk of the increase in concentration in the
dialysis industry comes from these small, unreported mergers.
Revisiting those past transactions and requiring appropriate
divestitures of dialysis clinics could increase competition.
---------------------------------------------------------------------------
\19\ Eliason, Paul J., et al. (2018), ``How Acquisitions Affect
Firm Behavior and Performance: Evidence from the Dialysis Industry,''
Manuscript, available at https://www.ftc.gov/system/files/documents/
public_events/1349883/eliasonheebshmcdevittroberts.pdf.
\20\ Wollmann, Thomas (2018), ``Stealth Consolidation: Evidence
from an amendment to the Hart-Scott-Rodino Act,'' Manuscript, http://
faculty.chicagobooth.edu/thomas.wollmann/docs/
stealth_consolidation_2_19.pdf and Wollman, Thomas (2019) ``Getting
away with merger: The case of dialysis clinics in the United States.''
---------------------------------------------------------------------------
Lowering the HSR threshold for merger review going forward
would also allow for more vigorous enforcement. Indeed, if an
automated process were adopted, a very low threshold could also
be cost-effective. For example, Congress could instruct the FTC
to design a form ``EZ-merge'' for mergers between $2 and $20 m,
with a standard HSR process for anything larger.mBusinesses
could choose their type (e.g., auto tire retailer, primary care
physicians, or funeral home) from a drop-down menu and enter
the zipcodes of their customers. An algorithm could determine
if, for example, two small orthopedic groups serve the same
geographic area, or two dialysis clinics are in the same town.
Flagged mergers could be passed on to FTC staff for further
review. We know that simply notifying a merger to federal
authorities creates a deterrent effect; therefore, the simple
adoption of Form EZ-merge might cause dialysis clinics and
other local businesses in the same town to stop proposing
anticompetitive mergers.
6. Nonprofits
U.S. competition laws should apply to nonprofits just as
they do for for-profit companies. In Healthcare, many hospitals
and insurers are nonprofits, but their nonprofit status exempts
them from the Federal Trade Commission Act and its prohibition
on unfair methods of competition and unfair and deceptive acts
or practices. (The FTC has jurisdiction over nonprofits for
section 7 violations.) Congress should eliminate this
exemption.
Mr. Cicilline. Great. Thank you so much, Doctor.
I now recognize Mr. Kades for five minutes.
TESTIMONY OF MICHAEL KADES
Mr. Kades. Thank you, Chair Cicilline and Ranking Member
Sensenbrenner and full committee--Mr. Nadler stepped out.
So, I just want to start with Ranking Member
Sensenbrenner--just would for the record--
Mr. Cicilline. Mr. Kades, would you just pull your
microphone close to you so folks can hear it? Yeah.
Mr. Kades. So, Ranking Member Sensenbrenner, I just want to
State for the record I was born and raised in Beloit,
Wisconsin, fairly close to your 5th District, and when you have
said Wisconsin, you have said it all.
It is an honor to testify before this Subcommittee on
competition in prescription drug prices. This issue is vital to
the healthcare system and affects all Americans.
I am Michael Kades, the director of Market and Competition
Policy at the Washington Center for Equitable Growth. We seek
to advance evidence-based ideas and policies that promote
strong, stable, and broad-based economic growth.
The exploitation of monopoly power is the kind of
inequality that is at the core of the most important challenges
that our economy and Nation face. Prescription drug costs are
and continue to be a burden.
In 2017, the United States spent $333 billion on
prescription drugs. That is over $2,600 per family. Three out
of 10 Americans are not taking prescriptions as directed
because of cost. So, this isn't just about money. It is about
people's health and well being.
No silver bullet exists to ensuring prescription medicine
is affordable. It requires a broad range of policies. Increased
competition should be part of the answer.
Stopping anticompetitive conduct will both lower prices and
promote innovation. For 20 years at the Federal Trade
Commission, I was on the front line of what has been and
continues to be a never-ending struggle to protect competition
in pharmaceutical markets.
I litigated and investigated dozens of pharmaceutical
antitrust matters and I am here to tell you the system is
broken. The incentives for anticompetitive activity in these
markets is substantial.
For example, delaying competition on a blockbuster drug for
just a year can mean hundreds of millions if not billions of
dollars in additional profit.
The antitrust laws should stand as a bulwark against
anticompetitive conduct. Unfortunately, courts have stripped
those laws of their potency, narrowing the scope of the law and
imposing ever-higher burdens of proof.
Easy cases have become hard and hard cases escape
condemnation. Companies have been emboldened to push the limits
of business conduct because the rewards are great and the risks
are minimal. Even if they get caught, the penalties are low.
The result? Consumers pay hundreds if not thousands of
dollars more each month for their prescriptions.
I want to focus on three practical policies that would help
focus competition in the pharmaceutical markets, which this
Committee can work on this year.
First, pass the CREATES Act. Chair and Ranking Member
Cicilline, Sensenbrenner, Nadler, and Collins, this bill--this,
obviously, bipartisan but also a bicameral supported bill would
stop one of the most egregious strategies that limits
competition.
Sometimes it is hard to explain. I like to put it down into
one simple phrase. No samples, no competition. Break that chain
and you will save billions of dollars for the government and
American citizens.
Second, pass legislation to stop branded companies paying
generic companies not to compete in the marketplace--what is
called a ``pay for delay'' patent settlement.
Despite the Supreme Court's clear signal that these deals
can be anticompetitive, the FTC still expends substantial
resources challenging clear antitrust violations.
Chair Cicilline, you referred to the Actavis case which
just got settled. When that case was filed, my daughter was
learning how to read. She is coming home for her spring break
of her first year of college. That is how long it took to get a
resolution of that case. That is too long.
Enacting a law with clear standards such as the Preserve
Access to Affordable Generics Act would deter this practice and
free up limited resources to attack other anticompetitive
conduct.
Third, make bad actors pay a real penalty. The key to
deterring anticompetitive conduct is that when somebody
violates the law, they shouldn't benefit from it. In the world
of antitrust law we call this disgorgement. You make them give
up their profits.
Even in this area, the federal Third Circuit of Appeals
just last week, ignoring 35 years of precedent, clipped the
ability of the FTC to obtain this type of relief.
This Congress should modify the Federal Trade Commission
Act to clarify explicitly that the FTC can obtain this type of
relief. It is critical to deterring highly probable--
profitable, I am sorry--anticompetitive conduct.
Thank you, and I look forward to listen to your questions.
[The statement of Mr. Kades follows:]
[GRAPHICS NOT AVAILABLE IN TIFF FORMAT]
Mr. Cicilline. Thank you, Mr. Kades.
I now recognize Dr. Gaynor for five minutes.
TESTIMONY OF MARTIN GAYNOR
Mr. Gaynor. Thank you. Chair Cicilline, Ranking Member
Sensenbrenner, and Members of the subcommittee, thank you for
holding a hearing on this vitally important topic and for
giving me the opportunity to testify in front of you today.
The focus of my testimony is on healthcare--hospitals,
doctors, insurers--which, collectively, account for almost 60
percent of all of U.S. healthcare spending. Over the next few
minutes, I will briefly summarize for the Committee the basic
facts about healthcare markets, the considerable research on
competition in healthcare, and my views on steps that can be
taken to help make these markets work for the benefit of
consumers.
Healthcare is a very large and important sector of our
economy. Not only is it almost one-fifth of the entire economy,
but it also has a critical impact on our health and well being.
Our healthcare system is based on markets. That system is
only going to work as well as the markets that underpin it.
Unfortunately, these markets do not function as well as they
could or should.
Prices are high and rising. There are egregious pricing
practices. Quality is suboptimal and the sector is sluggish and
unresponsive, in contrast to the innovation and dynamism that
characterize much of the rest of our economy.
Lack of competition has a lot to do with these problems.
There has been a great deal of consolidation in healthcare.
There have been nearly 1,600 hospital mergers in the past 20
years.
The result is the majority of local areas are now dominated
by one large powerful healthcare system such as Pittsburgh, my
home, by University of Pittsburgh Medical Center, Boston by
Partners, and San Francisco Bay Area by Sutter.
The same is true of health insurance markets. The two
largest insurers have 70 percent of the market and over one-
half of all local insurance markets. Physician services markets
have also become increasingly more concentrated. Two-thirds of
specialist physician markets are concentrated and 29 percent
are primary care physicians.
Moreover, there were nearly 31,000 physician practice
acquisitions by hospitals from 2008 to 2012 and about a third--
at least a third--of all doctors are now in hospital-owned
practices. This massive consolidation in healthcare has not
delivered for Americans. It has not given us better care or
enhanced efficiency.
On the contrary, extensive research shows us that
consolidation between close competitors results in higher
prices and patient quality of care suffers from lack of
competition.
Moreover, competition affects the form of payment.
Hospitals with fewer competitors negotiate more favorable forms
of payment and reject those they dislike. This poses a serious
challenge for payment reform.
Hospital mergers can also harm competition in labor
markets. They can depress wages, distort hiring decisions, and
harm incentives for investment in human capital. Recent
evidence shows impacts of hospital mergers is consistent with
these concerns.
There are also concerns about anticompetitive conduct.
Firms who have acquired market power want to keep it. Some
dominant health systems have been using restrictive contracts
with insurers to try and hamper the free flow of patients to
competitors, thereby harming competition and enhancing their
market power.
There are extensive reports of health systems engaging in
data blocking, impeding the flow of patient information to
providers outside the system. This has the potential to harm
competition by making it more difficult for patients to switch
providers.
Now that most hospital markets are dominated by one large
health system, there is considerable potential for this kind of
conduct to seriously harm competition. All of this is causing
serious harm to patients and to the healthcare system as a
whole.
Policies are needed to support and promote competition in
healthcare markets. These include ending policies that
unintentionally incentivize consolidation, ending policies that
impede new competitors and impede competition, focusing and
strengthening antitrust enforcement, in particular, giving the
DOJ and FTC resources so that not only can they do more
enforcement in existing areas but can proactively invest to
address new and developing issues.
Permit the FTC to enforce against anticompetitive conduct
by not-for-profits. Permit the FTC to use its section 6(b)
authority to study the insurance industry. Require simple
reporting of small transactions that fall below the Hart-Scott-
Rodino reporting requirements to the enforcement agencies can
track physician practice mergers--they currently can't--and
hospital acquisitions of physician practices.
Study vertical aspects of hospital physician acquisitions
and develop theory and evidence on competitive impacts. Study
anticompetitive conduct and develop theories and evidence.
Last, consider legislation to alter the antitrust laws,
specifically, changing the standard plaintiffs have to meet and
changing criteria to be met for presumption of harm to
competition.
Thank you very much.
[The statement of Mr. Gaynor follows:]
[GRAPHICS NOT AVAILABLE IN TIFF FORMAT]
Mr. Cicilline. Thank you, Dr. Gaynor.
I now recognize Dr. Garthwaite for five minutes.
TESTIMONY OF CRAIG GARTHWAITE
Mr. Garthwaite. Thank you, Chair Cicilline, Ranking Member
Sensenbrenner, and Members of the Committee for holding a
hearing to examine the role of competition in healthcare.
I am here today to talk about why markets can work in
healthcare with a particular focus on the pharmaceutical
sector. I have prepared a longer written statement outlining
more specific details that I have submitted to the committee.
Unlike most other developed countries, the United States
primarily relies on lightly regulated private markets for the
provision of healthcare services. This choice makes sense
because private firms respond to market incentives and create
products and services that maximize welfare either by lowering
costs or by increasing quality.
In this way, the profit-seeking motives of private firms
benefit society in ways that even the most benevolent
government entities cannot. Optimal healthcare policy then
harnesses these market forces while maintaining no illusions
about the motivations of the firms we employ to efficiently
provide these goods and services.
However, relying on the private market for the provision of
such a vital set of goods and services requires recognizing two
key facts.
First, healthcare markets, like any other markets, can
fail, and second, all markets require vigilant protection of
the structures and institutions that support robust and
vigorous competition.
Complicating matters is the uniquely public-private nature
of the U.S. healthcare system where even government-financed
social insurance and medical services are increasingly the
domain of private firms reacting to these market incentives.
While I think the benefit of the markets is clear, I fear
there are a number of areas where a combination of the market
structure and poorly developed regulations limit the ability of
the market to deliver its most efficient outcome.
There are many areas of healthcare where this is true,
which all the witnesses have already testified to. Today, I
will concentrate my remarks on pharmaceutical markets, a sector
that generates meaningful value but all too often attracts the
ire of policymakers and the general public.
It is not surprising that such negative attention is
focused on the pharmaceutical sector. Certainly, some of this
is the result of bad actors by some industry participants. Poor
behavior is hardly unique to this sector. Far more is about the
simple fact that the products are sold for many multiples at
marginal cost.
However, claims that these prices solely represent
corporate greed ignore the vital societal tradeoff where we
accept limited access to drugs' high prices today in order to
provide incentives for the development of new and innovative
products in the future.
That said, our goal is not to give firms unlimited profits
but instead to provide a time-limited period of increased
market power in order to encourage innovative firms to make the
necessary investments.
During this time period of exclusivity we want to ensure
that firms offering therapeutic substitutes still compete for
patients and, therefore, the greatest profits go to the firms
that have the most uniquely valuable products.
Following exclusivity welfare is then maximized by a robust
and competitive generic market. Today I will briefly highlight
some specific proposals I believe sensibly address these
concerns.
The first set of proposals are for generic markets. First,
as Mr. Kades said, Congress should immediately pass the CREATES
Act in order to facilitate the availability of necessary
product samples for potential generic entrants.
Second, Congress should authorize regulators to investigate
the abuse of citizen petitions, which artificially delay the
entry of generic competitors.
Third, Congress should create a new form of generic
exclusivity targeting molecules with small patient populations.
Markets that are too small to attract multiple competitors
allow incumbent firms to set prices as natural monopolists.
This was most apparent in the case of Martin Shkreli and Turing
Pharmaceuticals. This practice is now widespread across many
firms.
The FDA should create an RFP process where firms can apply
to be the sole supplier of these small markets at a fixed
margin over production costs.
The next proposals are for the branded market where
policies should facilitate robust competition between
therapeutic substitutes. This competition currently takes the
forms of rebates negotiated by pharmacy benefit managers, or
PBMs.
While confidential rebates have become a much maligned part
of the system, they are actually a vital component that results
in large discounts. When rebates are confidential, firms are
more willing to give large discounts in the first place and
less able to tacitly collude on high prices.
That said, there are some improvements that can be made to
the rebate system and I would highlight two particular
suggestions.
First, we must provide a means of passing along the rebates
to consumers at the point of sale--a way that supports
competition and confidentiality while restoring the insurance
benefit to these sick patients.
This can be accomplished by basing cost sharing not on the
list price of the drug but on some other discounted price such
as the average price across payers for the molecule.
Second, we must provide the structure to ensure that PBMs
Act as good agents for their payers. Currently, many
policymakers are worried this is not occurring. In particular,
they are worried that PBMs are capturing an inappropriately
large amount of the discounts that are provided by the
manufacturers.
In order to improve competition, I propose, along with Dr.
Scott Morton, that we increase the amount of information payers
have about the money flowing between PBMs and manufacturers.
For example, Congress could ban payments directly between
PBMs and manufacturers and require all discounts and fees be
paid first to the final payer. Payers and PBMs can then
negotiate about efficient distribution of that surplus.
While I understand the temptation to abandon markets in the
favor of a greater use of government purchasing power and
regulated prices, such policies are shortsighted and they
ultimately through the baby out with the bath water.
Thank you.
[The statement of Mr. Garthwaite follows:]
[GRAPHICS NOT AVAILABLE IN TIFF FORMAT]
Mr. Cicilline. Thank you, Doctor. Thank you to all of our
witnesses for your opening statements. We will now proceed
under the five-minute Rule with questions and I will begin by
recognizing the gentleman from Georgia, Mr. Johnson.
Mr. Johnson of Georgia. Thank you, Mr. Chair, and thank the
witnesses for your appearance today.
Drug prices are rising every day and the burden is being
felt most acutely at the lowest level, the consumer. Yes, this
problem is complex and unwieldy with a variety of competing
interests, and it seems that these competing interests threaten
any incentive to keep costs down.
Lack of competition in the market is driving prices up and
every day Americans are paying a higher and higher amount for
lifesaving medications.
Ms. Morton, do you believe that the American government is
utilizing our antitrust protections in the drug-pricing chain
properly?
Ms. Scott Morton. No.
Mr. Johnson of Georgia. Why do you think antitrust
enforcement has weakened?
Ms. Scott Morton. The answer to that is probably longer
than we have for time today. Mr. Kades' remarks about the
CREATES Act, about defending ``pay for delay,'' citizens
petitions, blocking of biosimilar entry in various ways--all of
these are potentially anticompetitive behavior that the FTC
could go after.
The FTC is limited by the courts' negative views of
antitrust enforcement, the limits of the FTC on nonprofits, and
other areas that are highlighted in his testimony. I think
Congress could fix many of those things.
Mr. Johnson of Georgia. So, more laws and more regulations
would be the fix?
Ms. Scott Morton. I think more laws making it clear what
the antitrust law is supposed to capture and giving the FTC
authority to go after those cases.
Mr. Johnson of Georgia. Now, it wasn't the Affordable Care
Act passage that caused this dilemma, is it?
Ms. Scott Morton. No.
Mr. Johnson of Georgia. In fact, the tens of millions of
people who were brought into the healthcare system upon passage
of the Affordable Care Act, that is not the cause of these--of
consolidation in the insurance and the hospital industries and
in terms of the high cost of prescription drugs. Is that
correct?
Ms. Scott Morton. To the best of my knowledge, that is
correct.
Mr. Johnson of Georgia. Well, let me ask you this question
about prescription drugs. Federal law prohibits itself from
negotiating with drug manufacturers over the cost of
prescription drugs for Medicare Part D enrollees.
Would removing this handcuff result in lower costs for
Medicare Part D employees and the Medicare program?
Ms. Scott Morton. Medicare Part D is run as an outsourced
privatized program where insurance companies negotiate with
drug manufacturers.
Mr. Johnson of Georgia. Instead of--
Ms. Scott Morton. So, they do pretty well. They have a
formulary. They can walk away. I think it is very difficult for
the secretary of Health and Human Services to walk away from a
drug manufacturer and say, I am sorry, Drug A will not be
available to anybody--any of America's seniors.
That is a hard thing to say. It is not very credible.
Whereas, an individual insurance company can say, oh, we are
going to put Drug A low on a high tier with a high co-pay and
Drug B is going to be our preferred drug.
So, I think Part D works pretty well. It is Part B that is
really not good.
Mr. Johnson of Georgia. Do you think the handcuffs on Part
B should be removed?
Ms. Scott Morton. Correct.
Mr. Johnson of Georgia. That would lower costs for the 15
percent of consumers enrolled in that program?
Ms. Scott Morton. Well, we all pay the taxes for it.
Mr. Johnson of Georgia. Well, you are right about that.
Well, let me ask you this question also. With respect to
consolidation in the health insurance industry, would passage
of legislation that allowed for what is known as the public
option--passage of that legislation--would it result in a
competition that would lower prices for consumers?
Ms. Scott Morton. The public option has a lot of different
definitions but, certainly, anything we can do to make the
Affordable Care Act marketplaces more competitive with more
choices for consumers, that would be a great help and it would
lead to lower prices.
Mr. Johnson of Georgia. Thank you. So, the constant
attempts to destroy the Affordable Care Act, which enabled tens
of millions of people to have access to the system don't do
anything to cut the consolidation in the hospital and insurance
industries or the rise in prescription drug prices. Do you all
agree with that?
Yes, yes, yes, and yes?
[A chorus of ayes.]
Ms. Scott Morton. Yes.
Mr. Johnson of Georgia. Okay. Well, let the record show
everybody agrees with that.
With that, I will yield back.
Mr. Cicilline. Thank you, Mr. Johnson.
The chair now recognizes the gentleman from Wisconsin, Mr.
Sensenbrenner, for five minutes.
Mr. Sensenbrenner. Thank you, Mr. Chair.
I have some questions for Dr. Gaynor. First, you note in
your written testimony that Americans who live in rural areas
are vulnerable to harms from hospital consolidations and
anticompetitive behavior.
My home State of Wisconsin has been particularly affected
by rural hospital mergers with 19 mergers taken place between
2005 and 2016.
Why does this happen more in rural areas than in urban
areas?
Mr. Gaynor. Thanks for your question, Member Sensenbrenner.
I don't know that I can answer why it is happening more
frequently in rural than in urban areas at this point in time.
I am happy to consider it further and submit an answer in
written testimony.
Nonetheless, there are quite a few mergers that are
happening across the board, not just in rural areas, and there
are lots of things that are driving those mergers.
As we all know, there is a merger wave in the U.S. economy
happening that is affecting what is happening in healthcare.
There are motives on the part of merging parties to enhance
their negotiating positions by merging and eliminating or
harming competition.
There is sometimes a game of musical chairs that happens
where they see everybody else merging and they don't want to be
the last one left standing when the music stops.
Nonetheless, Americans that live in rural areas are
particularly vulnerable because if there only one provider or
dominant provider it is very difficult for them to go
elsewhere. So they can be particularly harmed by the mergers
that enhance or consolidate market power in the areas that they
live.
Mr. Sensenbrenner. Okay. Second, in your written testimony
you explain that some states have regulations that
unintentionally make it difficult for new care providers to
enter the market and that the negative impacts of these laws
can particularly affect residents of rural areas.
Can you tell me what kind of State regulations or laws make
it difficult for new hospitals or other providers to offer
healthcare services and, again, why does this happen more often
in rural areas than in urban areas?
Mr. Gaynor. Thanks again for your question, Ranking Member
Sensenbrenner.
So, there are a number of examples of this. There are a set
of laws called certificate of need laws. About 26 states in the
Union still have certificate of need laws.
Mr. Sensenbrenner. We had them in Wisconsin and repealed
them.
Mr. Gaynor. Yes. Yes. Pennsylvania, for example, had such a
law. It sunset about '95 or '96. About half of all states still
have them and that requires review and approval by a regulatory
commission to create a new facility or expand a new facility,
whether it is a hospital, an ambulatory surgery center--that
sort of thing.
Another area that is particularly important has to do with
the decisions of State licensing boards about what sorts of
entities are allowed to practice and provide healthcare.
Telehealth is one example where State licensing boards have
discretion over the provision of telehealth. The scope of
practice for nurses is another area--what nurses are allowed to
do and not do, what sort of supervision is required. Last but
not least, independent pharmacists are also subject to these
regulations.
Now, the regulations are statewide but why might they
affect folks in rural areas particularly more? Well, telehealth
is easy to see. If you live in an area where there are not a
lot of providers physically, the ability to obtain care through
telehealth for some kinds of services can greatly expand the
opportunities for care.
If nurses can do more, if pharmacists are allowed to do
more, that expands the supply of healthcare professionals and
so creates more opportunities, more care, and more competition
in those areas.
Mr. Sensenbrenner. Thank you very much. I yield back.
Mr. Cicilline. Thank you, Mr. Sensenbrenner.
The chair now recognizes the distinguished gentlelady from
Washington State, Ms. Jayapal, for five minutes.
Ms. Jayapal. Thank you, Mr. Chair, and thank you so much
for having this hearing. Thank you all for your testimony
today.
I think it is important that we remind people that might be
watching what we are talking about which undergirds everything
you have said, which is that today in the United States we
spend about 18 percent of our GDP on healthcare, which is
double what every other major industrialized country--almost
double what every other major industrialized country in the
world spends on healthcare.
You might think, if you were listening to this, that that
means we have great outcomes. In fact, the United States is
worst of our peer countries on maternal mortality. That is moms
that die in childbirth.
We are worst in terms of infant mortality. That is kids
that die when they are young. We are worst in terms of life
expectancy. We have the lowest life expectancy.
So, this is a marketplace that truly is broken and I think
you all have raised important considerations. I wanted to point
out that this is also a marketplace where the top five private
health insurance companies bring an annual profit of $90
billion a year.
The top pharmaceutical companies bring in $75 billion a
year, and this is as people are dying because they can't afford
insulin or cancer treatments.
So, I have introduced our Medicare for All bill here in the
House and have 106 distinguished original co-sponsors. So, I
wanted to just turn, Professor Gaynor, to you first.i
You are an expert on competition and antitrust policy and
particularly in the healthcare markets, as was evident from
your testimony, and you stated that the U.S. healthcare system
is functioning at a subpar level which has resulted in this
egregious pricing that we see and the poor quality of care.
You attribute that largely to the lack of competition
caused by a highly consolidated healthcare market. So, can you
just explain in the simplest terms why this consolidation is
occurring? Why are all these firms merging and what is driving
that?
Mr. Gaynor. Representative Jayapal, thank you for your
question.
There are multiple reasons. So, one reason that
consolidation occurs is very simple. The consolidating firms
want and can get negotiating power, get higher prices, and have
higher profits, and sometimes the executives of these firms
actually admit that in public.
That is rather rare. Usually, the lawyers are none too
pleased. For example, Toby Cosgrove, a very, very accomplished
CEO--former CEO of the Cleveland Clinic, was interviewed by the
Wall Street Journal in 2012 and said as much--that is exactly
why we do those things.
So, that is one reason, and though there are others, I
think that is important. Another reason has to do with sort of
a--not a virtuous but a vicious cycle in which consolidation
can happen on one side of the market and then the providers or
the insurance on the other side feel that their negotiating
position has been harmed so they consolidate in order to try
and shore that up, and this can go back and forth and back and
forth in a vicious cycle.
Ms. Jayapal. Right.
Mr. Gaynor. As I said previously, there can also be a
musical chairs--
Ms. Jayapal. I am going to--I am so sorry.
Mr. Gaynor. No. That is fine.
Ms. Jayapal. I want to ask you a couple other questions and
I am going to run out of time.
Mr. Gaynor. Of course. Yeah, we could go on for some time.
Ms. Jayapal. Really important, I just want to emphasize.
So, merging is happening because when you merge you have
greater negotiating power, which means you can drive up prices
and profit really simply.
So, do you believe that the goal of the healthcare system
should be to serve patients and improve health and not to
increase profits?
Mr. Gaynor. Absolutely.
Ms. Jayapal. Okay. Great. Is this increasing concentration
in our healthcare markets targeted at improving patient
outcomes at that primary goal of getting better patient
outcomes, better healthcare, and making care more affordable?
Mr. Gaynor. No.
Ms. Jayapal. So, who is paying for the rapidly increasing
prices that we are seeing from these hospital and healthcare
consolidations? Is it just patients? Who is paying for that?
Mr. Gaynor. Ultimately, actually it is all of us. When we
have prices go up in healthcare, we don't see it directly in
the same way if, say, there is a merger of grocery stores or
paper supplier, or that kind of thing.
Nonetheless, it comes back to all of our wallets. For
example, just simple statistics--over the past 20 years worker
contributions to health insurance have risen by 239 percent.
Over that period wages rose by 68 percent.
So, what happens when prices go up, costs go up to health
insurance companies. Health insurance premiums are 80 to 90
percent of greater medical expenses. So, health insurance
premiums go up. What happens?
Well, employers pay higher health insurance premiums. Their
healthcare costs go up. They are not going to alter total
compensation to workers.
I am only worth a certain amount to Carnegie Mellon
University, although you are free to tell my dean I am not
getting paid enough. Yes. Dean Ramayya Krishnan.
[Laughter.]
Ms. Jayapal. So, wages go down because, basically, any
money that is in the system is going to pay for these
increasing healthcare costs.
Mr. Gaynor. Something has got--exactly. Something has to
give. If the employer is faced with higher healthcare costs,
what happens? Wages fall or they don't rise as much as they
otherwise would, workers pay more of health insurance
contributions, or benefits are cut. In some cases, in the past
anyhow, workers lose coverage entirely.
Ms. Jayapal. Thank you so much. I think it is important
that everybody understands that small businesses, employers,
and patients are footing the bill and they are already paying
these enormous costs.
Thank you, Dr. Gaynor. I yield back.
Mr. Cicilline. Thank you.
I now recognize the gentleman from Florida, Mr. Gaetz, for
five minutes.
Mr. Gaetz. Thank you, Mr. Chair.
I want to begin by praising your leadership and thanking
you for this important subcommittee, and while I know the
important work of the full Judiciary Committee has been
flavored a bit partisan at times, as I look at the work you
have done on lowering prescription drug prices, taking on the
excesses of bit tech, I think that this Subcommittee is poised
for some major bipartisan successes and I thank you for your
efforts.
Specifically, as it relates to the subject matter before us
here, I am hopeful that the substance of the CREATES Act will
ultimately be marked up in Committee and I am also hopeful that
some of the PBM transparency issues that we have discussed are
able to be fully exposed.
I also want to praise Florida's governor, Ron DeSantis.
Right now, one of the major challenges we face is Florida is
the rising cost of prescription drugs creates a massive cost
structure on our corrections system and there is currently a
real opportunity for Florida and other states to import drugs
from foreign markets and then to be able to lower costs
substantially.
That is allowed under current law in Florida. We are
currently working toward that with President Trump. So, I would
implore President Trump to look favorably on Governor
DeSantis's request and that other states might be able to
unlock the potential of lower drug prices.
Mr. Chair, as we are gathered here talking about the
anticompetitive practices in medicine, it is really noteworthy
to me that one of the most anticompetitive things that occurs
is the heavy hand of the Federal Government constraining access
to medical cannabis.
As we look at the types of prescription drugs that are
sought to deal with opioids in particular, we continue to see
evidence--substantial evidence, in fact, according to the
National Academy of Sciences--that cannabis is helpful in
dealing with chronic pain, treatment of chemotherapy and
vomiting, and multiple sclerosis symptoms.
So, it is my sincere hope with all the energy and passion
among my Democrat colleagues on the Judiciary Committee that in
looking at prescription drug use, prescription drug abuse, and
prescription drug cost we unlock the potential of medical
cannabis and that we get the government out of the way so that
it is not impairing the relationship between physicians and
patients.
I want to take a moment to ask Mr. Garthwaite, in this
broader discussion we are having about consolidation what role
does the Federal Government have in spurring consolidation
through excessive regulation of the health marketplace?
By that, I mean, as the Federal Government becomes more and
more involved in what qualifies for draw downs to states in the
provision of healthcare does that excessive regulation and the
compliance cost it drives, is that a contributing factor in
your review of maybe a consolidation incentive?
Mr. Garthwaite. I think part of what you are getting at is
there is some fixed cost with dealing with regulations and
compliance. I think at the State of the sort of landscape at
this point, most of these firms are big enough that they are
able to cover that fixed cost and I would agree with Dr. Gaynor
that a lot of this is not about being driven by federal
regulation. It is being driven by either attempts to seek
higher prices or attempts to coordinate care.
Mr. Gaetz. Dr. Gaynor, would you reflect on the role that
PBMs have in the health of the prescription drug marketplace?
Mr. Gaynor. I wasn't asked to prepare testimony on that
topic. I am happy to reflect on it and submit a written
response to your question.
Mr. Gaetz. Great. Thank you.
Those are my questions, Mr. Chair. I will yield back.
Mr. Cicilline. Thank you very much.
I now recognize the gentlelady from Florida, Mrs. Demings,
for five minutes.
Mrs. Demings. Thank you so much, Mr. Chair, and thank you
to our witnesses for being here with us today as we discuss
this very, very important topic.
I am reminded of a quote from Dr. King, who said, ``Of all
of the injustices, and there are many that exist, the lack of
healthcare is the most inhumane.''
So, this is a critical subject to all of our districts and
our communities. My colleague, the Ranking Member, talked about
the merger--the number of mergers that have occurred in rural
areas and I know, Dr. Gaynor, you mentioned that it is not just
occurring in rural areas but across our nation.
I do believe that in rural areas the effects can be much
more devastating because the lack of access, quality of care,
access to services--all of those dynamics.
So, could you just please talk about the extra harm, if you
will, that mergers do or have the effects--the negative impact
that they have on rural communities?
Mr. Gaynor. Representative Demings, thank you for--thanks
for your question. Yes.
Well, because folks in rural communities live much farther
from other healthcare providers--hospitals, doctors, nurses, et
cetera--if there are mergers in rural areas that leave them
with few alternatives, their next best alternative can often be
miles and miles away.
Of course, for some kinds of care it is either very
difficult or impossible for people to travel--emergency care
and obstetric delivery. Even if they are willing to travel it
is a long way.
So, that imposes real costs on them and that means that if
there are providers in the area they have more ability to have
higher prices. They are under much less pressure to do better
and have better quality, provide better service, better access,
and better community benefits.
I think that those of us in America who live in rural areas
are particularly vulnerable to these kinds of harms.
Mrs. Demings. Could you also talk about what type of
positions in terms of employees when hospitals mergers occur
who--what type of employee or hospital worker is really the
most vulnerable in that environment?
Mr. Gaynor. Well, it is the folks who have skills as
workers that are most specific to working in a hospital because
if their best alternative is to working in a given hospital and
now there is a merger and the next hospital over is no longer
available to move to because they are now one firm, then they
don't have such great alternatives.
If their workers who have very general skills--so, if you
are a food service worker in a hospital you might not prefer to
work somewhere else, but you could go and work at another
company and be a food service worker there.
So, when a hospital merger happens, the hospitals can't
squeeze your wages or your working conditions too much. If you
are an OR nurse, where else are you going to go? You may be
able to go elsewhere, but it won't be as good a job.
Mrs. Demings. Finally, Dr. Morton, would you just, again,
please describe for me what is the connection between a lack of
competition and the rising cost of healthcare?
Ms. Scott Morton. Lack of competition means that providers
of various kinds of drugs, devices, hospitals, and doctors
don't have to compete with one another for the business of
patients, and competition generates both lower prices and also
more innovation and more quality, more choice for all the
consumers of healthcare.
When we don't have competition we have higher prices and
lower quality and that just hurts everybody, both the patients
and the taxpayers.
Mrs. Demings. Thank you.
Mr. Chair, I yield back.
Mr. Cicilline. I thank the gentlelady for yielding back.
I now recognize the gentleman from North Dakota, Mr.
Armstrong, for five minutes.
Mr. Armstrong. Thank you, Mr. Chair.
I guess my first question is for Dr. Gaynor. So, we have--
and North Dakota has been a little different since 2010. We
have had an actual boom in our economy. So, prior to that, we
were suffering the same type of problems the rest of rural
America was facing.
We have noticed a lack of workforce shortage. We probably
have--if not the best one of the best rural hospitals in the
country, because it is brand new and it is fantastic, but we
are having trouble staffing it and so when we are talking about
these consolidations in rural areas, we have seen it.
They move into the--yes, we have urban areas in North
Dakota--the more urban areas. These aren't all motivated by
anticompetitive behavior. Factors such as worker shortage,
nurse shortage, provider shortage, resources, and financing are
part of this equation, aren't they?
Mr. Gaynor. So, as I said, there are multiple motives for
mergers and acquisition. I don't know that labor market issues
are a primary driver. I haven't heard that.
There can be--incentives usually happen more in
acquisitions than in mergers where a smaller hospital wants to
be acquired by a larger hospital that has more resources,
particularly if that hospital is struggling.
Then you can certainly see that. I am not aware of labor
market issues as being a motive driving these mergers and
acquisitions.
Mr. Armstrong. Maybe it is just unique to our geography.
Well, part of that we have talked about licensing and State
licensing and states are all very good at putting up their own
White picket fences and ensuring that a nursing degree or a
nursing license in Minnesota doesn't apply in North Dakota and
we work on those at the State level a lot and a lot of
different states are starting to see that the world is becoming
a much smaller place.
So, when these consolidations happen, whether they happen
for--make economic sense, are there any policies here--and I
guess, this question would be for everyone--what can we do at
the federal level that promotes access, whether it is urgent
care centers or things in rural areas?
I know they are starting to do strep tests at pharmacies in
rural areas in our district and before we get into crossing
pharmacists with doctors or nurses but, just to continue to
provide some semblance of access in rural America?
Mr. Gaynor. Well, yeah. There are a number of things. One I
mentioned previously is making sure that licensing is tailored
very specifically to the purpose of protecting the public and
doesn't overstep those bounds so that nurses and pharmacists,
for example, are permitted to do the things that they have been
trained to do and qualified to do and that creates more access
right off the board.
So, that is a principle. Now, that is State level. The
Federal Government can try to work with states, try and provide
information and support to states in this area, and that can
actually make an important difference.
Mr. Armstrong. Does anybody else have any? Yes, ma'am.
Ms. Scott Morton. I would agree. I think occupational
licensing is often used as a barrier by incumbent licensed
people to keep out others and if you have a shortage of a
certain medical worker it is not like human bodies are
different between North Dakota and South Dakota and any other
state.
So, it might be reasonable to imagine that the requirements
for being a nurse or a doctor are the same across states and if
we had fewer differences workers could move more easily.
Mr. Armstrong. Yes, sir?
Mr. Garthwaite. Yeah. I also know that we are seeing
private firms start to address this as well. So, some of the
motivation behind some of the vertical integration we are
seeing in healthcare and this Committee had a nice hearing on
CVS-Aetna as a merger.
Some of the motivation behind that is about finding new
sites of care, maybe finding ways we can treat chronic
conditions at retail settings, be it a CVS. Wal-Mart is
thinking about these things as well.
Those will provide more access for care in places that
aren't the traditional general acute care hospital or a
doctor's office, which can often struggle to be a standalone
business in a rural area, given the lack of demand.
Mr. Armstrong. Thank you, and that is important because the
economies of scale--it is not unique to the medical profession.
We are seeing more and more of this happen in rural areas as we
continue to move on.
Mr. Gaynor. Just one last thought, and this has already
been addressed in part by Congress, and that is what are called
site-neutral payments for Medicare. I think you are familiar
with those.
The payment for the same kind of service delivered by the
same kind of professional can be many multiples if it is dubbed
in a hospital and that creates some distortions that may favor
those things and then actually end up penalizing people in
rural areas.
Mr. Armstrong. Thank you. I yield back my negative 15
seconds.
Mr. Cicilline. I thank you, and I now recognize the
gentlelady from Florida, Ms. Scanlon.
Ms. Scanlon. Pennsylvania.
Mr. Cicilline. Pennsylvania.
Ms. Scanlon. That is a big move. Yes.
Mr. Cicilline. There is a lot of Florida down on that end.
My apologies. Pennsylvania--for five minutes.
Ms. Scanlon. Thank you.
So, there are a few questions that came up or a few topics
that came up more frequently when I was running last fall then
about affordable healthcare and in that sector the biggest
question I kept getting is what can we do about prescription
drugs prices, over and over.
It is a priority for my constituents and therefore a
priority for me. In addition to being very worried about this,
they are also really smart. So, they fed me specific questions.
Professor Scott Morton, the question of evergreening of
patents--as I understand, that is tweaking patents to extend
the amount of time that there is proprietary rights. Can you
speak to that and how that impacts the prices of drugs?
Ms. Scott Morton. Yes. This is a tactic whereby--let us say
there is a drug that is administered twice-a-day and the
manufacturer invents a once-a-day version and patents that, or
maybe even takes 50 milligrams and makes a 60 milligram tablet
and patents that and then releases that new product on the
market and, in some cases, removes the old product that is
about to be generic and therefore much less expensive.
This situation could be really helped with a couple of
policies. So, one is generally strengthening the antitrust laws
and allowing the FTC to go after behavior that it feels is
anticompetitive.
Another one is reforming the incentives of the PBM. The PBM
should want everybody to take that generic drug because it is
cheaper and not steer them to the more expensive one, and when
we have perverse incentives that latter thing can happen.
In general, however, we don't want to get into the business
of saying, is this innovation good or not but, rather, subject
it to the market test. Once-a-day could be a super valuable
innovation and if it has to compete head to head with twice-a-
day we will find out.
If, however, the launch of the once-a-day is accompanied by
the pulling away of the twice-a-day, we don't have head to head
competition anymore. That is a situation where it looks like
the manufacturer didn't think their once-a-day was going to win
and that is why they took away the twice-a-day.
Ms. Scanlon. Okay. Thank you for that.
Mr. Kades, in 2013 the Supreme Court held in FTC v. Actavis
that ``pay for delay'' settlements, which occur when a branded
drug company pays a potential generic competitor to delay
entering the market with a lower cost generic, likely violates
the antitrust laws absent a justification.
Can you comment on whether that decision is sufficient or
insufficient to address the ``pay for delay'' settlements and
is there something we can do about that?
Mr. Kades. Yes. Thank you for the question, Representative
Scanlon.
So, at one level, the Supreme Court decision was good
because until that time courts were taking the position that a
patent holder could pay any amount of money to secure the
agreement of the generic not to manufacture its drug, and
because the brand makes so much more than the generic these
were very common.
Once the court said you can do this, agreements went up.
Supreme Court--in principle, the Rule makes sense. The problem
is that the lines aren't clear and there has been lots of
litigation. I said in my opening statement there was a case
that settled just last year and it was filed back in 2006.
So, what you are having to happen is that the government is
spending lots of resources to prove that paying your potential
competitor not to compete is a problem, and we live in a world
of limited resources.
As other people have talked about other things, whether it
be the rebates and the PBMs or other things, the product
hopping, the government can't even get to those cases because
they are basically left having to prove these basic ideas that
we all should agree are anticompetitive.
Ms. Scanlon. I know one suggestion to address this is to
establish a presumption that these ``pay for delay''
settlements are anticompetitive. Do you think that is a good
idea or are there other legislative fixes that you would
suggest?
Mr. Kades. I think that is an excellent idea. When you look
at both the economic theory behind what happens in a ``pay for
delay'' settlement and we actually have evidence that they--
empirical evidence that these types of agreements delay entry,
then you should start with the proposition that if someone is
paying a potential competitor in a settlement we should presume
it is harmful and make them come forward if it is not.
Instead, we have it the reverse, which makes no sense,
given what we know about theory and the empirics.
Ms. Scanlon. Any other suggestions in that ``pay for
delay'' arena for legislative fixes?
Mr. Kades. So, I think part of this is making sure it is
sort of complementary. These are incredibly enticing deals. So,
in one of the cases I worked on the company paid $60 million
and managed to protect close to a billion dollars.
In another one, after the company paid off four generic
competitors, they boasted, ``We got six years and $4 billion
that nobody expected.''
So, you have to have a really strong penalty provision. If
all the government can do is say, oh, you broke the law--
promise us you won't do it again, that is not going to be
effective and there is going to be no reason for companies to
settle. You have to be able--the government has to be able to
go in and say, no, no, no, you don't get to keep the money
because you earned it by breaking the law.
Ms. Scanlon. Thank you.
Mr. Cicilline. The time of the gentlelady has expired.
I now recognize the gentleman from Colorado, Mr. Neguse,
for five minutes.
Mr. Neguse. Thank you, Mr. Chair.
I want to thank the panel for being here with us today for
your testimony. I also want to thank my colleague from
Wisconsin for raising the important issue regarding rural areas
in particular where this is very pernicious--certainly, in my
district.
I represent a variety of counties--Summit County, Eagle
County, mountain communities more rural in nature where this is
a big problem and the effect is very pronounced.
I want to--so, Dr. Gaynor, I want to call out one
particular finding, which I think is fairly intuitive but your
data certainly supports it. From your written testimony here I
will quote, ``One of our key findings is that hospitals that
have fewer potential competitors nearby have substantially
higher prices.
For example, monopoly hospitals prices are, on average, 12
percent higher than hospitals with three or more potential
competitors nearby.''
That is a very important fact worth repeating and one of
the recommendations you make, and Dr. Morton makes as well,
that I believe is particularly compelling is around nonprofit
hospitals, which is a big part of this discussion that often
gets left out and I think part of it is because there is a
misperception about the nature of nonprofit hospital entities,
in some cases.
I am sure Members of the panel serve on nonprofit boards.
Dr. Gaynor, you have created the Healthcare Cost Institute. I
am curious. I imagine that the CEO of the Healthcare Cost
Institute does not have a private jet. Would I be right in
saying that?
Mr. Gaynor. Well, I am no longer on the board.
Mr. Neguse. Oh, okay.
Mr. Gaynor. I would be extraordinarily chagrined were that
the case.
Mr. Neguse. All right. They are not making tens of millions
of dollars, right?
Mr. Gaynor. No.
Mr. Neguse. Dr. Kades--I hope I pronounced that right,
Kades--is that correct?
Mr. Kades. Kades, yes.
Mr. Neguse. Kades. Yes, sir. You, of course, are the
director of a nonprofit entity, the Washington Center for
Equitable Growth. Is that right?
Mr. Kades. Actually, I am the director of the Competition
Policy. The Washington Center for Equitable Growth is a much
bigger organization.
Mr. Neguse. Okay. Well, I trust that the director of that
entity is probably not flying around on a private jet and
making tens of millions of dollars either.
Mr. Kades. I think that is a fair assumption.
Mr. Neguse. All right. So, here is my point. All right.
Wall Street Journal--this is relatively recent, the last
two years--as of December 13th-December 30th, 2016, tax filings
as of that date prepared kind of a summary and you have a
variety of hospital executives at various large nonprofit
hospital systems.
Ascension in St. Louis, $17 million in annual compensation.
Northwell Health, $10 million. Highmark Health, $9.8 million.
Mercy Health in Wisconsin, $8 million compensation package.
A variety, right? You can encourage folks who are watching
to just Google, nonprofit health CEO and private jet, or
private chef or any variety of other compensation packages that
are attached to folks who are working in those industries.
I think what we have kind of lost sight of there, right, is
the charity aspect and obligation that a nonprofit hospital
has, right, embedded in its purpose as an entity.
The FTC, in 1999--there is a report. Go onto the website. I
was 15 years old in 1999. This is a long time ago. There is a
report titled ``Competitive Effects of Not for Profit Hospital
Mergers,'' and I will quote from it. It says, ``Mergers
involving not-for-profit hospitals are a legitimate focus on
antitrust concerns.'' Yet, here we sit 20 years later and the
FTC has no power to, essentially, engage in this important
area.
So, I would like to give Dr. Gaynor and Dr. Morton perhaps
an opportunity to talk about this, because it is a pretty
simple change in the law that we could make--that Congress
could make--that would really open this up.
Again, a lot of not-for-profit hospitals are doing
incredible work--good work. There is a case to be made for the
FTC to have expanded authority in this regard.
Care to comment?
Mr. Gaynor. Yes. Thank you, Representative. So, I agree 100
percent. Just to be clear, the FTC does have the authority to
pursue mergers under the Clayton Act. What they do not
currently have the authority to do is pursue anticompetitive
conduct by nonprofits under the FTC Act.
So, I agree. I think that needs to be revisited and revised
so that both our antitrust enforcement agencies are using all
the tools in the antitrust arsenal to address the pressing
issues in this sector.
Let me say again, yes, most hospitals in the U.S. are
technically nonprofit but the numbers you gave out are eloquent
testimony to the fact that this is big business.
Once upon a time they were charities but that was a long
time ago. When healthcare is one-fifth of our entire economy,
when UPMC is a $10 billion revenue company, the largest private
employer in the State of Pennsylvania--and that is replicated
over and over and over again--they are no longer charities.
They are big businesses.
Mr. Cicilline. The time of the gentleman has expired. I
thank you.
I now recognize the gentlelady from Georgia, Mrs. McBath,
for five minutes.
Mrs. McBath. Thank you, Mr. Chair, and once again to
reiterate, as many of my colleagues have today, I just want to
thank each of you for coming and sharing your testimony with us
today, and I would just like to thank you for being here
because this is--this is something that is extremely important
to me because it has touched me personally.
I am a two-time breast cancer survivor and I understand
what it is like to have your life completely turned upside down
overnight. Having that diagnosis once was, I can tell you, you
go into a crisis mode.
To have it a second time wreaks even more havoc than it did
the first time and the stress of the financial burdens that
follow are just--weigh so heavily not only on the individual
that has been diagnosed but also the entire family.
Now, I had the benefit of being in a breast cancer study
that allowed me to have discounted treatment as well as
pharmaceuticals. So, I realize that I was very fortunate in
that regard.
Even though I was fortunate to have very good health
insurance--I worked for a major corporation, major company. I
worked for Delta Airlines. I was under a really good group
health insurance program. I still worried about my medical
bills and my needs and how would my family be so adversely
affected by this health crisis.
So, even though I had good benefits, I could not even
imagine what it would be like for a family that didn't have the
ability to have the kind of healthcare that I had the fortune
of having.
Now, I want to say that my story is absolutely not unique.
It is stories like this that we hear every single day from
Americans across the country, and just this week I heard from a
family--a woman within my own district in Georgia--who told me
that she spends $1,500 a month on diabetic supplies for her
daughter, who has type 1 diabetes, and that is more than her
monthly mortgage.
So, Dr. Scott Morton and Mr. Kades, could you speak very
candidly to what should be done to bring down prescription drug
prices, those costs, while also supporting innovation and
research, which is so sorely needed?
Ms. Scott Morton. I would say that, in my written
testimony, I describe a way that you could cap out-of-pocket
prices, which is the most harmful thing that consumers and
patients are experiencing now and combine that with a ban on
kickbacks by the pharmaceutical company in the form of coupons,
financial aid, wraparound services, and so on.
This would leave patients protected and then enable
competition because without being able to incentivize the
patient the manufacturer would have to sell its drug to the PBM
and then it would have to compete with other drugs in order to
sell its drug to the PBM.
So, the key in restraining prices that patients pay out-of-
pocket is to do it in a way that enables as much competition as
possible so that you keep the prices paid by the insurer low
because, of course, we all pay premiums.
So, that is the other way in which this is very expensive,
not just out-of-pocket costs. So, the two sides need to go
together.
Mrs. McBath. Thank you.
Mr. Kades. So, I am going to come at this from my
experience as an antitrust lawyer and what can we do--what is
wrong with this marketplace in terms of anticompetitive
conduct, and the issue here is a branded company makes a pile
of revenue, money, and they are insulated from price
competition generally until there is a generic--just having the
generic totally changes and prices go down, they lose most of
their sales, and so there is a real incentive to do anything
possible to delay that date.
So, that can be you pay your competitor not to compete,
which we were talking about. It can be the product-hopping
stuff conduct that Fiona was talking about. Right now, the
antitrust laws have been so weakened that we can't stop this
conduct.
The good news is if we strengthen those laws or pass things
like the CREATES Act it will make it harder to prevent
competition, but it really shouldn't have any impact on
innovation because these are all types of strategies that are
just about obtaining anticompetitive rents. It is not about
innovation.
So, this is a really--injecting competition into the
marketplace gets you the benefit of lower cost without
undermining incentives to innovate.
Mrs. McBath. Thank you so much.
I yield back the balance of my time.
Mr. Cicilline. I thank the gentlelady. I now recognize
myself for five minutes. Thank you to the witnesses.
I want to begin by broadly talking about competition. I am
very concerned about the rising tide of economic concentration
throughout our economy and the really crippling effects on
economic opportunity, innovation, and equality.
Earlier this week, Professor John Kwoka of Northeastern
University testified before the Senate Antitrust Subcommittee
and said concentration has been steadily rising and competition
declining in a great many sectors of the economy, raising
legitimate concerns about increasing market power in large
swaths of the U.S. economy.
Robert Reisch, the former secretary of labor in the Clinton
Administration, similarly noted, and I quote, ``America has a
monopoly problem. America used to have antitrust laws that
stopped corporations from monopolizing markets and often broke
up the biggest culprits. Antitrust has faded. The results have
been hidden upward redistributions of money and power from the
majority of Americans to corporate executives of and major
investors in huge concentrations of economic power,'' end
quote.
Dr. Scott Morton, I would like to start with you. In your
written testimony you identified a lack of competition as a
reason why U.S. healthcare costs are rising so fast and that
antitrust enforcement has been weakened in the United States
for a variety of reasons.
What are, in your view, the primary reasons that
enforcement has so weakened?
Ms. Scott Morton. The primary long-run reason is that we
were all influenced by the Chicago School in the '70s that
believe things like monopolies are inherently transitory and
oligopolies will price at marginal cost and courts make bad
decisions.
These kinds of presumptions we now know, after 40 years of
studying the economics literature, are false. They weren't true
to begin with and we now are much more sure of that.
In addition, we also see the evidence in front of us, which
is rising markups, lower labor share, higher profit share, all
the different evidence that you pointed to.
So, it is clear that the pendulum has swung past the ideal
point by quite a bit and we need to turn it around. Because
courts now interpret the antitrust laws in this way, it is up
to Congress to instruct the courts that actually Congress would
like it done a different way.
Mr. Cicilline. Thank you, Doctor, and that leads to my next
question to Mr. Kades, who in the end of your testimony just a
moment ago you talked about the weakening of the antitrust
enforcement and wondering whether you have suggestions of the
kind of legislation we should be contemplating that would
really strengthen antitrust enforcement.
Mr. Kades. Thank you, Chair, for the question.
Yes. One of the sort of subtleties about why antitrust is
weak is we have made it just hard and expensive for--to prove
an antitrust case, whether it be a government or private
plaintiff.
So, we know how to fix that. The way to fix that is to
create presumptions where we are confident that the conduct is
likely to be anticompetitive and there is lots of economic
evidence about certain types of mergers that we can be
comfortable are likely to be anticompetitive, certain types of
conduct.
In many ways, the CREATES Act is not an antitrust law, but
it takes that idea that where you have conduct that you are
confident is not justified, you need to make it easy to prove.
So, that is what I would say. More presumptions to address
based on the empirical evidence of where we know things are
likely to be problematic.
Mr. Cicilline. Thank you.
Dr. Gaynor, do we have or do the antitrust agencies have
enough resources to do the work that we expect them to do and,
if not, what would you recommend in terms of additional
resources? Are there other things that you would recommend that
would help improve merger and antimonopoly enforcement?
Mr. Gaynor. Chair Cicilline, thanks for your question.
First, I just want to say I agree with my colleagues, Dr.
Scott Morton and Mr. Kades, and I think those are important
issues to be addressed. You turn to the other side, rightly
so--suppose we do the kinds of things that my colleagues have
suggested, which I agree with 100 percent, the agencies will
need more resources to do more. It is that simple. Over the
past seven to 10 years or so merger filings have risen by about
57 percent and appropriations in inflation-adjusted terms have
fallen by 12 percent.
The number of staff is either constant or declining in the
Bureau of Competition--Bureau of Economics at the Federal Trade
Commission.
As a consequence, what happens is the agencies are faced
with an extraordinarily difficult choice between how much to do
based on what is coming in over the transom, which is coming
out of a power hose, given the rise in merger activity, and
trying to stay abreast of new developments. They desperately
need the resources--additional resources to do that.
Mr. Cicilline. I am just going to squeeze in one last
question.
Over the past several years, Sarah Kliff, a reporter for
Vox, has documented the outrageous practice of surprise billing
in hospitals and she has reported the price of ordinary drugs
that could be cheaply purchased at a local pharmacy such as
generic eye drops or pregnancy tests often cost hundreds of
dollars and, additionally, patients often painstakingly choose
to receive care in hospitals that are covered by their
insurance only to find out that an emergency room doctor who
treated them was not covered by their insurance. As a result,
they receive surprise bills that can cost tens of thousands of
dollars.
Just wondering, starting with you, Dr. Gaynor, obviously,
this is further evidence that our current system is
fundamentally broken. I would also like Dr. Scott Morton to
reflect on that.
Mr. Gaynor. Right. A hundred percent. I mean, this is
unacceptable and can't be allowed to continue and, moreover,
this sort of thing undermines markets.
People think they are making a responsible choice by going
to an in-network hospital and then they get socked with this
astronomical bill they had no way to prevent.
Why should they shop? Why should they buy insurance
policies that ask them to do that? So, it is going to undermine
the market and there are some relatively simple remedies for
that.
Fiona Scott Morton and Zack Cooper have proposed one. So, I
will yield to her because she is the one who can talk about it.
Mr. Cicilline. I am thanking my Ranking Member for
indulgence me one minute. I don't want to abuse my power in my
first hearing.
If it is okay, Dr. Scott Morton, if you could just--
Ms. Scott Morton. Yes. So, this is a really bad problem
and--
Mr. Cicilline. Thank you.
Ms. Scott Morton. --it just comes from the fact that we
have quite a regulated system and sometimes there is a loophole
and then financial players can go in there and say, look, there
is a business model. I insert these doctors into a hospital,
pull them out of network, and double the charges or triple
them.
So, our proposed solution is that hospitals need to sell
the bundle. They need to sell all the care you get in the
emergency department.
The hospital can go out and organize the doctors. They
could employ them. They could contract with a group. Then at
least when you arrive at the in-network hospital everything you
are getting in the ED is in-network.
Mr. Cicilline. Terrific.
Thank you again to our witnesses. This concludes today's
hearing.
Without objection, all Members will have five legislative
days to submit additional written questions for the witnesses
or additional materials for the record.
The hearing is adjourned.
[Whereupon, at 3:38 p.m., the Subcommittee was adjourned.]
APPENDIX
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