EXAMINING THE DRUG SUPPLY CHAIN 

HEARING 

BEFORE THE

SUBCOMMITTEE ON HEALTH 

OF THE

COMMITTEE ON ENERGY AND 

COMMERCE 

HOUSE OF REPRESENTATIVES 

ONE HUNDRED FIFTEENTH CONGRESS 

FIRST SESSION 

DECEMBER 13, 2017 

Serial No. 115–88 

( 

Printed for the use of the Committee on Energy and Commerce 

energycommerce.house.gov 

EXAMINING THE DRUG SUPPLY CHAIN 

U.S. GOVERNMENT PUBLISHING OFFICE

29–424 WASHINGTON : 2018

EXAMINING THE DRUG SUPPLY CHAIN 

HEARING 

BEFORE THE

SUBCOMMITTEE ON HEALTH 

OF THE

COMMITTEE ON ENERGY AND 

COMMERCE 

HOUSE OF REPRESENTATIVES 

ONE HUNDRED FIFTEENTH CONGRESS 

FIRST SESSION 

DECEMBER 13, 2017 

Serial No. 115–88 

( 

Printed for the use of the Committee on Energy and Commerce 

energycommerce.house.gov 

(II) 

COMMITTEE ON ENERGY AND COMMERCE 

GREG WALDEN, Oregon 

Chairman 

JOE BARTON, Texas 

Vice Chairman 

FRED UPTON, Michigan 

JOHN SHIMKUS, Illinois 

MICHAEL C. BURGESS, Texas 

MARSHA BLACKBURN, Tennessee 

STEVE SCALISE, Louisiana 

ROBERT E. LATTA, Ohio 

CATHY MCMORRIS RODGERS, Washington 

GREGG HARPER, Mississippi 

LEONARD LANCE, New Jersey 

BRETT GUTHRIE, Kentucky 

PETE OLSON, Texas 

DAVID B. MCKINLEY, West Virginia 

ADAM KINZINGER, Illinois 

H. MORGAN GRIFFITH, Virginia 

GUS M. BILIRAKIS, Florida 

BILL JOHNSON, Ohio 

BILLY LONG, Missouri 

LARRY BUCSHON, Indiana 

BILL FLORES, Texas 

SUSAN W. BROOKS, Indiana 

MARKWAYNE MULLIN, Oklahoma 

RICHARD HUDSON, North Carolina 

CHRIS COLLINS, New York 

KEVIN CRAMER, North Dakota 

TIM WALBERG, Michigan 

MIMI WALTERS, California 

RYAN A. COSTELLO, Pennsylvania 

EARL L. ‘‘BUDDY’’ CARTER, Georgia 

JEFF DUNCAN, South Carolina 

FRANK PALLONE, JR., New Jersey 

Ranking Member 

BOBBY L. RUSH, Illinois 

ANNA G. ESHOO, California 

ELIOT L. ENGEL, New York 

GENE GREEN, Texas 

DIANA DEGETTE, Colorado 

MICHAEL F. DOYLE, Pennsylvania 

JANICE D. SCHAKOWSKY, Illinois 

G.K. BUTTERFIELD, North Carolina 

DORIS O. MATSUI, California 

KATHY CASTOR, Florida 

JOHN P. SARBANES, Maryland 

JERRY MCNERNEY, California 

PETER WELCH, Vermont 

BEN RAY LUJA ́ N, New Mexico 

PAUL TONKO, New York 

YVETTE D. CLARKE, New York 

DAVID LOEBSACK, Iowa 

KURT SCHRADER, Oregon 

JOSEPH P. KENNEDY, III, Massachusetts 

TONY CA ́ RDENAS, California 

RAUL RUIZ, California 

SCOTT H. PETERS, California 

DEBBIE DINGELL, Michigan 

(III) 

SUBCOMMITTEE ON HEALTH

MICHAEL C. BURGESS, TEXAS

Chairman 

BRETT GUTHRIE, Kentucky 

Vice Chairman 

JOE BARTON, Texas 

FRED UPTON, Michigan 

JOHN SHIMKUS, Illinois 

MARSHA BLACKBURN, Tennessee 

ROBERT E. LATTA, Ohio 

CATHY MCMORRIS RODGERS, Washington 

LEONARD LANCE, New Jersey 

H. MORGAN GRIFFITH, Virginia 

GUS M. BILIRAKIS, Florida 

BILLY LONG, Missouri 

LARRY BUCSHON, Indiana 

SUSAN W. BROOKS, Indiana 

MARKWAYNE MULLIN, Oklahoma 

RICHARD HUDSON, North Carolina 

CHRIS COLLINS, New York 

EARL L. ‘‘BUDDY’’ CARTER, Georgia 

GREG WALDEN, Oregon (ex officio) 

GENE GREEN, Texas 

Ranking Member 

ELIOT L. ENGEL, New York 

JANICE D. SCHAKOWSKY, Illinois 

G.K. BUTTERFIELD, North Carolina 

DORIS O. MATSUI, California 

KATHY CASTOR, Florida 

JOHN P. SARBANES, Maryland 

BEN RAY LUJA ́ N, New Mexico 

KURT SCHRADER, Oregon 

JOSEPH P. KENNEDY, III, Massachusetts 

TONY CA ́ RDENAS, California 

ANNA G. ESHOO, California 

DIANA DEGETTE, Colorado 

FRANK PALLONE, JR., New Jersey (ex 

officio) 

(V) 

C O N T E N T S 

Page 

Hon. Michael C. Burgess, a Representative in Congress from the State of 

Texas, opening statement .................................................................................... 1 

Prepared statement .......................................................................................... 3 

Hon. Gene Green, a Representative in Congress from the State of Texas, 

opening statement ................................................................................................ 7 

Prepared statement .......................................................................................... 6 

Hon. Greg Walden, a Representative in Congress from the State of Oregon, 

opening statement ................................................................................................ 7 

Prepared statement .......................................................................................... 8 

Hon. Frank Pallone, Jr., a Representative in Congress from the State of 

New Jersey, opening statement .......................................................................... 9 

Prepared statement .......................................................................................... 10 

WITNESSES

Lori Reilly, Executive Vice President for Policy, Research, and Membership, 

Pharmaceutical Research and Manufacturers of America ............................... 12 

Prepared statement .......................................................................................... 14 

Answers to submitted questions ...................................................................... 246 

Tom DiLenge, President, Advocacy, Law, and Public Policy, Biotechnology 

Innovation Organization ...................................................................................... 33 

Prepared statement .......................................................................................... 35 

Answers to submitted questions ...................................................................... 254 

Chip Davis, President and CEO, Association for Accessible Medicines .............. 49 

Prepared statement .......................................................................................... 51 

Answers to submitted questions ...................................................................... 262 

Elizabeth Gallenagh, Senior Vice President, Governmental Affairs and General Counsel, Healthcare Distribution Alliance ................................................. 66 

Prepared statement .......................................................................................... 68 

Answers to submitted questions ...................................................................... 271 

Mark Merritt, President and CEO, Pharmaceutical Care Management Association .................................................................................................................... 74 

Prepared statement .......................................................................................... 76 

Answers to submitted questions ...................................................................... 275 

Matt Eyles, Senior Executive Vice President and Chief Operating Officer 

for Policy and Regulatory Affairs, America’s Health Insurance Plans ............ 92 

Prepared statement .......................................................................................... 94 

Answers to submitted questions ...................................................................... 282 

Tom Nickels, Executive Vice President for Government Relations and Public 

Policy, American Hospital Association ............................................................... 108 

Prepared statement .......................................................................................... 110 

Answers to submitted questions ...................................................................... 298 

Gerald Harmon, M.D., Chair, Board of Trustees, American Medical Association ........................................................................................................................ 119 

Prepared statement .......................................................................................... 121 

Answers to submitted questions ...................................................................... 301 

B. Douglas Hoey, CEO, National Community Pharmacists Association ............ 129 

Prepared statement .......................................................................................... 131 

Answers to submitted questions ...................................................................... 307 

David Mitchell, Founder and President, Patients for Affordable Drugs ............. 140 

Prepared statement .......................................................................................... 142 

Answers to submitted questions ...................................................................... 317 

Page

VI 

SUBMITTED MATERIAL

Statement of the AARP, submitted by Mr. Green ................................................ 194 

Statement of Express Scripts, submitted by Mr. Burgess ................................... 197 

Statement of the American Pharmacists Association, submitted by Mr. Burgess ........................................................................................................................ 200 

Statement of the Senior Care Pharmacy Coalition, submitted by Mr. Burgess . 203 

Statement of the Coalition for Affordable Prescription Drugs, submitted by 

Mr. Burgess .......................................................................................................... 217 

Statement of the National Multiple Sclerosis Society, submitted by Mr. Burgess ........................................................................................................................ 220 

Alliance for Transparent & Affordable Prescriptions, submitted by Mr. Burgess ........................................................................................................................ 239 

(1) 

EXAMINING THE DRUG SUPPLY CHAIN 

WEDNESDAY, DECEMBER 13, 2017 

HOUSE OF REPRESENTATIVES, SUBCOMMITTEE ON HEALTH, COMMITTEE ON ENERGY AND COMMERCE, Washington, DC. 

The subcommittee met, pursuant to call, at 10:00 a.m., in room 

2123 Rayburn House Office Building, Hon. Michael Burgess (chairman of the subcommittee) presiding. 

Members present: Representatives Burgess, Guthrie, Barton, 

Shimkus, Blackburn, Latta, Lance, Griffith, Bilirakis, Long, 

Bucshon, Brooks, Mullin, Hudson, Collins, Carter, Walden (ex officio), Green, Schakowsky, Matsui, Castor, Sarbanes, Luja ́n, Schrader, Cardenas, Eshoo, DeGette, Welch, and Pallone (ex officio). 

Staff present: Ray Baum, Staff Director; Mike Bloomquist, Deputy Staff Director; Adam Buckalew, Professional Staff Member, 

Health; Kelly Collins, Staff Assistant; Zack Dareshori, Legislative 

Clerk, Health; Jordan Davis, Director of Policy and External Affairs; Paul Edattel, Chief Counsel, Health; Adam Fromm, Director 

of Outreach and Coalitions; Ali Fulling, Legislative Clerk, Oversight & Investigations, Digital Commerce and Consumer Protection; Jay Gulshen, Legislative Associate, Health; James 

Paluskiewicz, Professional Staff, Health; Jennifer Sherman, Press 

Secretary; Danielle Steele, Counsel, Health; Hamlin Wade, Special 

Advisor, External Affairs; Jeff Carroll, Minority Staff Director; Tiffany Guarascio, Minority Deputy Staff Director and Chief Health 

Advisor; Una Lee, Minority Senior Health Counsel; Rachel Pryor, 

Minority Senior Health Policy Advisor; Samantha Satchell, Minority Policy Analyst; Andrew Souvall, Minority Director of Communications, Outreach and Member Services; Kimberlee Trzeciak, Minority Senior Health Policy Advisor; and C.J. Young, Minority 

Press Secretary. 

OPENING STATEMENT OF HON. MICHAEL C. BURGESS, A 

REPRESENTATIVE IN CONGRESS FROM THE STATE OF TEXAS 

Mr. BURGESS. The subcommittee will come to order. I will recognize myself for 5 minutes for an opening statement. 

I want to thank everyone for being here today. We are going to 

talk about the U.S. drug supply and the complex way it is interwoven with multiple stakeholders involved in each step of the process. Improving access to lifesaving treatments for consumers and 

patients should be a nonpartisan priority for every person in the 

room. Two weeks ago, the Health Subcommittee held a hearing on 

the implementation of the 21st Century Cures Act. We heard testiVerDate Nov 24 2008 10:02 May 30, 2018 Jkt 037690 PO 00000 Frm 00009 Fmt 6633 Sfmt 6633 I:\MY DOCS\HEARINGS 115\HEARINGS\115-88 CHRIS
2 

monies from officials at the helm of the National Institute of 

Health and the Food and Drug Administration about the law’s 

transformative impact on maintaining our nation’s global leadership in biomedical innovation. Built into that very concept is the 

expectation that innovative and breakthrough treatments will get 

developed, approved, and introduced into the therapeutic market to 

cure diseases or effectively manage chronic conditions so people 

lead healthier, fuller lives. 

Today’s hearing will serve as an important educational opportunity to better understand the intricacies of our nation’s drug supply chain. To help us work toward that goal, we will hear from a 

diverse group of representatives—ten to be exact—that represent 

many facets of the supply chain process, and I do want to welcome 

each of you to the subcommittee this morning. It is my hope that 

our discussion today is substantive and will be focused on the patients who are prescribed these medications because, at the end of 

the day, it is the patients who matter most in our conversation. 

Practicing medicine, I cared most about prescribing for my patients a drug that was efficacious and safe, and really not wanting 

to think too much whether or not they would be able to fill their 

prescription at the pharmacy. But now, the conversation has shifted to a complicated back and forth between doctors, patients, insurance companies, pharmacies about drug co-pays, prior authorizations, drug formularies, step therapies, amongst other things. Over 

the last few years, we have also learned about acquisitions and 

mergers within the various drug supply chain as companies seek 

out increased integration of their operations with an eye towards 

more efficiencies. 

Prescription drugs continue to play a vital role in the United 

States health care system. From significantly improving patients’ 

lives to producing health care savings through fewer hospitalizations and medical procedures. A patient’s access to prescription 

drugs is a key health care issue for Americans and within that context now the debate is over affordability. 

I will be frank with you. I expect disagreement this morning. But 

while there are legitimate differences of opinion, I recognize that 

every participant here this morning does aspire to the common goal 

of saving lives and alleviating human suffering. And so out of these 

areas of disagreement, I hope to begin to identify areas of consensus so that we can begin delivering solutions to the problems 

that we do identify this morning. 

These stakeholders here include pharmaceutical manufacturers 

that primarily research, develop, and produce brand name and generic drugs, biologic, and biosimilars. These medicines treat a spectrum of diseases and conditions from allergies, infections, hypertension to cancer, diabetes, and rheumatoid arthritis. 

Next, the pharmaceutical wholesalers purchase these drugs and 

store them in regional distribution centers for delivery points that 

include our pharmacies, our supermarket retailers, hospitals, physician groups, and other health care providers. Wholesalers also 

provide other ancillary services such as repackaging, consulting, inventory management, and patient discount programs. 

Overall, pharmacy benefit managers manage prescription drug 

benefits on behalf of employer-sponsored health plans, health 

3 

maintenance organizations, state and federal health programs including Medicare Part D, and Medicaid-managed care plans. These 

managers impact the lives of 226 million insured Americans with 

most of them enrolled in private health plans. So they have a special role in the drug supply chain that includes determining payments and pricing for drugs, processing pharmacy drug claims, negotiating rebates and discounts from drug manufacturers, designing drug plan formularies, and operating mail order businesses. 

Retail pharmacies have a large neighborhood presence representing large drug store chains, pharmacy departments in local 

supermarkets and big box retailers, and independent community 

pharmacies that occupy a unique and essential role within the drug 

supply chain. Many drug stores contract with payors and pharmacy 

benefit managers to join health plan pharmacy networks. Some 

larger pharmacy chains have also entered into joint ventures with 

PBMs and insurers. 

Finally, private health insurance plans are likely recognized by 

most Americans to have a direct impact on their ability to access 

prescription drugs, largely due to the dictates of federal laws such 

as the Affordable Care Act on benefit requirements and out-ofpocket spending limits. They employ utilization controls to manage 

cost such as multi-tier drug formularies, step therapies, prior authorizations for certain high-cost brand name medicines. 

Again, I want to welcome all of our witnesses here today. As you 

see, we have the entire panoply of the supply chain here before us. 

I look forward to your testimony and we will recognize Mr. Green 

of Texas, the ranking member of the subcommittee, 5 minutes for 

an opening statement. 

[The prepared statement of Mr. Burgess follows: 

PREPARED STATEMENT OF HON. MICHAEL C. BURGESS

The Subcommittee will come to order. 

The Chair will recognize himself for an opening statement. 

The multifaceted nature of the current U.S. drug supply chain system is complex 

and interwoven with multiple stakeholders involved in each step of the process. Improving access to life-saving treatments for consumers should be a non-partisan priority for all of us. Two weeks ago, the Health Subcommittee held a hearing on the 

implementation of the 21st Century Cures Act and heard testimonies from officials 

at the helm of the National Institutes of Health and the Food and Drug Administration about the law’s transformative impact on maintaining our nation’s global leadership in biomedical innovation. Built into that very concept is the expectation that 

innovative and breakthrough treatments will get developed, approved, and introduced into the therapeutic market to cure diseases or effectively manage chronic 

conditions, so people can lead healthier, fuller lives. 

Today’s hearing will serve as an important educational opportunity to better understand the intricacies of our nation’s drug supply chain. To help us work toward 

that goal, we will hear from a diverse group of representatives—ten to be exact— 

that represent the many facets of the supply chain process. I want to welcome each 

of you to the subcommittee this morning. It is my hope our discussion today is substantive and largely focused on the patients who are prescribed these medications 

because, at the end of the day, they are who matter most in this conversation. 

Practicing medicine, I cared most about prescribing my patients a drug that was 

efficacious and safe without thinking too much about whether they would be able 

to fill their prescription at the pharmacy. Now, the conversation has shifted to a 

complicated back-and-forth between doctors, patients, insurance companies, and 

pharmacies about drug copays, prior authorizations, and drug formularies, among 

other things. Over the last few years, we have also learned about acquisitions and 

mergers within and amongst the various drug supply chain as companies seek out 

4 

increased integration of their operations with an eye towards more efficiencies over 

the larger continuum of the system. 

Prescription drugs continue to play a vital role in the United States health care 

system, from significantly improving patients’ lives to producing health care savings 

through fewer hospitalizations and medical procedures. A patient’s access to prescription drugs is a key healthcare issue for Americans, and within that context is 

the debate over affordability. 

Now, I also expect disagreement. But, while there are legitimate differences of 

opinion, I recognize that every participant here this morning does aspire to the common goal of saving lives and alleviating human suffering. And so out of these areas 

of disagreement—I hope to begin to identify areas of consensus so that we can begin 

delivering solutions to the problems identified this morning. 

These stakeholders include pharmaceutical manufacturers that primarily research, develop, and produce brand-name and generic drugs, biologics, and 

biosimilars. These medicines treat a spectrum of diseases and conditions, such as 

allergies, infections, and hypertension to cancer, diabetes, and rheumatoid arthritis. 

Next, pharmaceutical wholesalers purchase these drugs and store them in regional distribution centers for delivery points that include pharmacies, supermarket 

retailers, hospitals, physician groups, and other healthcare providers. Wholesalers 

also provide other ancillary services such as repackaging, consulting, inventory 

management, and patient discount programs. 

Overall, pharmacy benefit managers (PBMs) manage prescription drug benefits on 

behalf of employer-sponsored health plans, health maintenance organizations, state 

and federal health programs, including Medicare Part D and Medicaid managed 

care plans. PBMs impact the lives of 266 million insured Americans, with most 

them enrolled in private health plans. They have a special role in the drug supply 

chain that include determining payments and pricing for drugs, processing pharmacy drug claims, negotiating rebate and discounts from drug manufacturers, designing drug plan formularies, and operating mail-order and specialty pharmacies. 

Retail pharmacies have a large neighborhood presence, representing large drug 

store chains, pharmacy departments in local supermarkets and big-box retailers, 

and independent (community) pharmacies that occupy a unique and essential role 

within the drug supply chain. Many drug stores contract with payers and PBMs to 

join health plan pharmacy networks; some larger pharmacy chains have also entered into joint ventures with PBMs and insurers. 

Finally, private health insurance plans are likely recognized by most Americans 

to have a direct impact on their ability to access prescription drugs, largely due to 

the dictates of federal laws, such as the Affordable Care Act, on benefit requirements and out-of-pocket spending limits. They employ utilization controls to manage 

costs, such as multi-tiered drug formularies, step therapies, and prior authorizations 

for certain high-cost brand-name medicines. 

I again want to welcome our witnesses and thank you for being here. I look forward to your testimony. 

OPENING STATEMENT OF HON. GENE GREEN, A 

REPRESENTATIVE IN CONGRESS FROM THE STATE OF TEXAS 

Mr. GREEN. Thank you, Mr. Chairman, and thank you to our witnesses for being here this morning. 

Too many Americans face real barriers in accessing the medications they need. Annual drug spending in the U.S. is expected to 

reach more than $500 billion by 2018. 

In 2015, the rise in prescription drug spending outpaced all other 

health care services, surpassing hospital care as well as physician 

and clinical services. 

While new life changing and lifesaving therapies continue to 

enter the market each year, patients must be able to afford these 

treatments in order to benefit from these breakthroughs. 

The issue of high drug costs is not a simple challenge with a simple solution. Instances of bad actors buying up off-patent generic 

drugs with only one manufacturer astronomically jacking up the 

price has posed one type of challenge while breakthrough treatVerDate Nov 24 2008 10:02 May 30, 2018 Jkt 037690 PO 00000 Frm 00012 Fmt 6633 Sfmt 6633 I:\MY DOCS\HEARINGS 115\HEARINGS\115-88 CHRIS
5 

ments capable of curing previously incurable disease but will have 

staggering price tags poses a different one. 

These challenges are magnified by the proliferation of the high 

deductible plans which expose more and more consumers to the full 

list of their medications. 

We have a responsibility to explore the full spectrum of the supply chain to protect patients which are distinct for generic and 

brand name drugs and frustratingly complex. 

The United States leads the world in biomedical development, 

but having 21st Century Cures means much less if people cannot 

access because of the high prices. 

It’s important to also recognize that pharmaceutical companies 

sponsor the research that leads to these advances. We must find 

a workable solution that incentivizes competition in the pharmaceutical marketplace, reward value, and encourage the development of these affordable and high quality drugs. 

We must also monitor steep prescription drug price increases 

when they rise, particularly when no additional research or development has occurred. 

There are a number of policy proposals that are represented to 

address the issue of high prescription drug costs. Transparency and 

value-based approaches are some of the keys to market-based reforms that will lead to better prices, continued investment in research and development, and ensure that taxpayers receive a real 

return on their investment. 

I want to note that in pursuit of the lower drug prices, Congress 

must be careful to avoid the policies that will diminish patient 

safety. 

Filling out an application to the FDA is one step in what can be 

a decades-long process to get from the lab table to the bedside. 

Proposals that would lower FDA safety and effective standards 

effectively outsource FDA oversight to other countries, push the 

stage of three trials into the post-approval space are unlikely to 

translate into meaningful savings for customers and are likely to 

put patients at risk. 

Making the FDA approval process as sophisticated and efficient 

as it can be is one thing, but rolling back patient protections in the 

name of lower drug prices is not an acceptable path. 

We should be looking on how we pay for drugs and reward real 

value in the order of safety and meaningful, address the rising 

costs of prescription drugs. 

Following our bipartisan work on the 21st Century Cures Act, 

our recent work to reauthorize the FDA user fee programs, it is my 

hope that we can advance bipartisan policies to address rising drug 

costs. 

This problem demands a bipartisan and thoughtful process that 

includes a full spectrum of stakeholders. The American people expect us to work together to find answers and I believe we can do 

so. 

I want to thank you for being here today and look forward to the 

day’s discussion. And Mr. Chairman, I have one more minute. I’d 

like—anybody would like to have a minute? No? OK. 

I’d like to ask unanimous consent to place into the record, Mr. 

Chairman, a letter from AARP. 

6 

Mr. BURGESS. Without objection, so ordered. 

[The information appears at the conclusion of the hearing.] 

Mr. BURGESS. I believe the chair actually already used your 

minute. 

Does the gentleman yield back? 

Mr. GREEN. I yield back. 

Mr. BURGESS. The chair thanks the gentleman. 

Mr. GREEN. You owe me a minute sometime. 

Mr. BURGESS. Oh, next week. 

The chair now recognizes the gentleman from Oregon, the chairman of the full committee, Mr. Walden, 5 minutes, please. 

[The prepared statement of Mr. Green follows:] 

PREPARED STATEMENT OF HON. GENE GREEN

Thank you Mr. Chairman, and thank you to our witnesses for being here this 

morning. 

Too many Americans face real barriers to accessing the medications they need. 

Annual drug spending in the U.S. is expected to reach more than $500 billion by 

2018. 

In 2015, the rise prescription drug spending outpaced all other health care services, surpassing hospital care as well as physician and clinical services. 

While new life-changing and life-saving therapies continue to enter the market 

each year, patients must be able to afford these treatments in order to benefit from 

these breakthroughs. 

The issue of high drug costs is not a simple challenge with a simple solution. 

Instances of bad actors buying up off-patent generic drugs only made by one manufacturer and astronomically jacking up the price poses one type of challenge, while 

breakthrough treatments capable of curing previously un-curable disease but have 

a staggering price tag poses a different one. 

These challenges are magnified by the proliferation of high-deductible plans, 

which expose more and more consumers to the full list price of their medications. 

We have a responsibility to explore the full spectrum of the supply chain to protect patients, which are distinct for generic and brand-name drugs, and frustratingly complex. 

The United States leads the world in biomedical development, but having 21st 

century cures means much less if people cannot access them because of high prices. 

It is important to also recognize that pharmaceutical companies sponsor the research that leads to these advances. 

We must find workable solutions that incentivize competition in the pharmaceutical marketplace, reward value, and encourage the development of affordable 

and high quality drugs. 

We must also monitor steep prescription drug price increases when they arise, 

particularly when no additional research and development has occurred. 

There are a number of policy proposals that have been presented to address the 

issue of high prescription drug costs. 

Transparency and value-based approaches are some of the keys to market-based 

reforms that will lead to better prices, continued investment in research and development, and ensure that taxpayers receive a real return on their investment. 

I want to note that in the pursuit of lower drug prices, Congress must be careful 

to avoid policies that will diminish patient safety. 

Filing an application with the FDA is the last step in what can be a decade’s long 

process to get from the lab table to the bedside. 

Proposals that would lower FDA safety and effective standards, effectively 

outsource FDA oversight to other countries, or push stagethree trials into the postapproval space are unlikely to translate into meaning savings for consumers and are 

likely put patients at risk. 

Making the FDA approval process as sophisticated and efficient as it can be is 

one thing, but rolling back patient protections in the name of lower drug prices is 

not an acceptable path. 

We should be looking at how we pay for drugs, and reward real value in order 

to safely and meaningfully address the rising costs of prescription drugs. 

Following our bipartisan work on the 21st Century Cures Act and our recent work 

to reauthorize the FDA user fee programs, it is my hope that we can advance bipartisan policies to address rising drug costs. 

7 

This problem demands a bipartisan, thoughtful process that includes the full spectrum of stakeholders. 

The American people expect us to work together to find answers and I believe we 

can do so. 

Thank you all for being here today, and I look forward to today’s discussion. 

OPENING STATEMENT OF HON. GREG WALDEN, A REPRESENTATIVE IN CONGRESS FROM THE STATE OF OREGON 

Mr. WALDEN. Dr. Burgess, thank you for holding this important 

discussion. I appreciate your comments and those of Mr. Green’s 

about the full set of issues before us and the overwhelming desire 

by our constituents that we dive deep into the whole drug chain 

and figure out how we can put consumers first not only in developing new medicines and new innovation and better pricing as 

well. 

As Mr. Green mentioned, this community unanimously reauthorized and the president signed into law the FDA Modernization Act. 

This committee last Congress championed the 21st Century Cures 

Act with Congresswoman DeGette and Congressman Upton at the 

helm of that, celebrating its one-year anniversary. 

But, clearly, there is more to be done, and as chairman of the 

committee, I felt it was really important that we hear from the entire sector from the development of new drugs to the final end 

place where we buy them, we consume them, we use them. 

For more than 4 years, members of this committee have listened 

to patients. We have listened to providers. We have listened to 

payors. The Federal Government is one of the biggest payors in 

this effort and we are all about accelerating the discovery, development, and delivery of innovative drugs and medical devices. That 

was a lot of what was behind passage and implementation of 21st 

Century Cures. 

We have heard from Dr. Gottlieb and we have heard from the 

head of NIH about the progress they are making already with the 

legislation we have enacted. 

Today, though, we want to get a more full appreciation for the 

drug supply chain, and I think you all would have to acknowledge 

its complexity, and we want to ask questions instead of jumping to 

conclusions. 

I encourage members on both sides of the aisle to dismiss, to a 

certain extent, any of your preconceived notions and let’s focus on 

how each stage of the drug supply chain impacts access, delivery, 

and delivery of drugs and, of course, costs. 

We need to listen to the complex journey from molecular discoveries to patient deliveries that one dose of medicine takes along the 

way and we all need to learn about the impact each participant in 

the supply chain has in the ultimate cost to patients. 

And we have no shortage of witnesses today to help us gain a 

better understanding, and we appreciate you all being here. We 

have representatives from the manufacturers, the distributors, the 

payers, the pharmacists, the providers, and the patients. 

And I promise today’s hearing will be an informative discussion 

and, I dare say, not the last as we move forward to better educate 

ourselves and then look at the public policy changes that need to 

be made to move America forward in these areas. 

8 

So I thank you all for your participation. I think you’ll find the 

committee is very interested in every step of this process and with 

that, Mr. Chairman, I would yield the balance of my time to the 

chairwoman of the Telecommunications Subcommittee, the 

gentlelady from Tennessee, Mrs. Blackburn. 

[The prepared statement of Mr. Walden follows:] 

PREPARED STATEMENT OF HON. GREG WALDEN

Thank you, Dr. Burgess, for holding this important discussion. 

As we all know, no one is immune to sickness and disease. This is, in part, why 

our committee—under the bipartisan leadership of former Chairman Fred Upton 

and Congresswoman Diana DeGette—championed the 21st Century Cures initiative. 

For more than 4 years, members of this committee listened to patients, providers, 

and payors. Accelerating the discovery, development, and delivery of innovative 

drugs became a nationwide mantra for the passage of Cures. And I’m proud to say 

that today—thanks to the tireless advocacy of patients across the country and the 

endurance of members of this committee—we celebrate the one-year anniversary of 

this landmark bill being signed into law. 

But our work isn’t done. As Dr. Burgess has said, ‘‘As we continue to build on 

the success of the transformative 21st Century Cures act, our committee must fully 

comprehend how each step of the drug supply chain process impacts consumers.’’ 

He’s right. And it is why we are here today—to learn from patient and industry 

experts and improve our understanding of the drug supply chain. 

In order to fully appreciate the drug supply chain you have to acknowledge its 

complexity and ask questions instead of jumping to conclusions. I encourage members on both sides of the aisle to dismiss any preconceived notions and focus on how 

each stage of the drug supply chain impacts access and delivery of drugs. Listen to 

the complex journey—from molecular discoveries to patient deliveries—that one 

dose of medicine takes. 

Now, I’ll be up front: For me, this isn’t a drug pricing hearing. There’s enough 

rhetoric about the cost of drugs. But having said that I know that I have more to 

learn about the impact each participant in the supply chain has in the ultimate cost 

to patients. And we have no shortage of witnesses to question As you can see, we 

have invited witnesses from each step of the process: manufacturers, distributers, 

payors, pharmacists, providers, and patients. I promise today’s hearing will be an 

informative discussion. 

On that note, I’d like to welcome to each of our expert panelists. I appreciate your 

generosity and willingness to participate today. And I yield to Mrs. Blackburn of 

Tennessee, who would like to offer a few opening remarks. 

Mrs. BLACKBURN. Thank you, Mr. Chairman, and I thank Chairman Burgess for the hearing and to each of you. We know it is the 

busy time of year. We are appreciative that you are here before us 

and, as Chairman Burgess said, we have the entire panoply of the 

system. 

And most of my constituents will tell you they understand how 

their doctor, their insurance plan, and the pharmacy play into the 

prescriptions they receive. They do not have the understanding, as 

Chairman Walden said, of the complex system that goes from research to the time they pick up that prescription, and we are so 

interested in looking at this access, delivery, and cost issue within 

this entire spectrum. 

It does affect health care delivery, and being from middle Tennessee, we have a lot of health care in my congressional district 

and this entire supply chain is an issue that we discuss often. 

And we are excited about some of the new innovations that are 

coming your way with technology. So that will enter into our discussion today. Thank you for your presence and, Mr. Chairman, I 

will yield back to you the balance of the time and if there is another member who would like to claim that time. 

9 

Yield back. 

Mr. BURGESS. Seeing none, the gentlelady yields back. The chair 

thanks the gentlelady. 

The chair recognizes the gentleman from New Jersey, the ranking member of the full committee, Mr. Pallone, 5 minutes for an 

opening statement, please. 

OPENING STATEMENT OF HON. FRANK PALLONE, JR., A REPRESENTATIVE IN CONGRESS FROM THE STATE OF NEW JERSEY 

Mr. PALLONE. Thank you, Mr. Chairman. 

This committee has spent considerable time examining the drug 

supply chain both through the Drug Quality Security Act and, 

more recently, through the 21st Century Cures, and today is actually the 1-year anniversary of when President Obama signed 21st 

Century Cures. Both of these legislative efforts were the result of 

considerable oversight and discussion as to how the drug supply 

chain worked, how it could be better secured and how we could encourage efficiencies to improve drug development. And these bipartisan efforts have helped to address the post-market security of 

products and the regulatory review process. But neither effort focused on how prescription drugs move through the supply chain 

through the financial lens. 

Prescription drug prices are higher than ever, and while the dramatic rise in prescription spending has come down a little, we 

know addressing drug costs continues to be a top priority for many 

American families. The costs of prescriptions have forced so many 

American families to make tough choices. For some, it is a choice 

of filling their prescriptions or filling their tank of gas to get to 

work. For others, they are leaving prescriptions unfulfilled, skipping doses, or cutting pill in half so they don’t have to purchase 

their prescriptions that often, and none of these choices is acceptable. 

Today, prescription drug spending represents about 14 percent of 

overall health care spending. It is no wonder that six in 10 Americans have said that lowering prescription drug costs should be a 

top priority for Congress and this administration and I am pleased 

that there has been such bipartisan interest in this topic both during consideration of the FDA Reauthorization Act and at recent 

member briefings, and I do believe that making prescription drugs 

more affordable for the average consumer is an issue that we all 

care about and can support. 

And that is why today’s hearing is so important. This morning, 

we have the opportunity to better understand the drug supply 

chain and the often-complicated ways that drugs move through the 

supply chain to the patient. As my colleagues have pointed out, we 

will hear from each of our witnesses about the role they play regarding drug delivery, the impact they have on the cost of drugs, 

and the value they bring to patients and consumers, and I hope 

and expect that today’s hearing will serve as a foundation for future hearings on policy solutions that may help reduce prescription 

drug costs in our health care system. 

While understanding how the supply chain works is critically important to this committee, I also would urge Chairman Walden to 

10 

schedule a legislative hearing in the early part of next year to examine specific proposals to address the high prices of prescription 

drugs. 

Our constituents want and expect us to take concrete action to 

address this growing problem. And the problems we are seeing in 

the supply chain cannot be addressed through one policy solution 

and all of our witnesses have a role to play in these solutions. 

It is long past time for Congress to take a serious look at all solutions that will help American families to afford the medications 

they depend on and I look forward to further bipartisan discussion 

on what that broad range of policy solutions may look like. 

And I want to thank each of our witnesses for being here and 

look forward to learning more about your role in the drug supply 

chain and how we can improve access to drugs for patients in the 

future, and I would like to yield the remainder of my time to Congressman Luja ́n from New Mexico. 

[The prepared statement of Mr. Pallone follows:] 

PREPARED STATEMENT OF HON. FRANK PALLONE, JR. 

This Committee has spent considerable time examining the drug supply chain 

both through the Drug Quality Security Act, and more recently through 21st Century Cures. Both of these legislative efforts were the result of considerable oversight 

and discussion as to how the drug supply chain worked, how it could be better secured, and how we could encourage efficiencies to improve drug development. These 

bipartisan efforts have helped address the post market security of products and the 

regulatory review process, but neither effort focused on how prescription drugs move 

through the supply chain through the financial lens. 

Prescription drug prices are higher than ever, and while the dramatic rise in prescription spending has come down some, we know addressing drug costs continues 

to be a top priority for many American families. The costs of prescriptions have 

forced so many American families to make tough choices. For some, it’s a choice of 

filling their prescription or filling their tank of gas to get to work. For others, they 

are leaving prescriptions unfilled, skipping doses, or cutting pills in half so that they 

don’t have to purchase their prescriptions as often. None of these choices are acceptable. 

Today, prescription drug spending represents about 14 percent of overall 

healthcare spending. It’s no wonder that six in ten Americans have said that lowering prescription drug costs should be a top priority for Congress and this Administration. I am pleased that there has been such bipartisan interest in this topic— 

both during consideration of the Food and Drug Administration Reauthorization Act 

and at recent Member briefings. I do believe that making prescription drugs more 

affordable for the average consumer is an issue that we all care about and can support. 

That is why today’s hearing is so important. This morning we have the opportunity to better understand the drug supply chain and the often complicated ways 

that drugs move through the supply chain to the patient. As my colleagues have 

pointed out, we will hear from each of our witnesses about the role they play regarding drug delivery, the impact they have on the cost of a drug, and the value that 

they bring to patients and consumers. 

I hope and expect that today’s hearing will serve as a foundation for future hearings on policy solutions that may help reduce prescription drug costs in our 

healthcare system. While understanding how the supply chain works is critically important to this Committee, I urge Chairman Walden to schedule a legislative hearing in the early part of next year to examine specific proposals to address the high 

prices of prescription drugs. Our constituents want and expect us to take concrete 

action to address this growing problem. 

The problems we are seeing in the supply chain cannot be addressed through one 

policy solution and all of our witnesses have a role to play in these solutions. It is 

long past time for Congress to take a serious look at all solutions that will help 

American families to afford the medications they depend on. I look forward to further bipartisan discussion on what that broad range of policy solutions may look 

like. 

11 

I want to thank each of our witnesses for being here. I look forward to learning 

more about your role in the drug supply chain and how we can improve access to 

drugs for patients in the future. 

Thank you. 

Mr. LUJA ́ N. Thank you, Mr. Pallone, and Mr. Chairman, thank 

you for this important hearing. 

There is so much going on in the health care arena right now— 

CHIP, community health centers, National Health Services Corps, 

special diabetes program, Medicare extenders, Puerto Rico’s Medicaid program—items that all need attention and need it now. 

With all these priorities competing for attention, it would be easy 

to lose sight of which should be our guiding star—finding ways to 

balance innovation and affordability. 

We depend on different approaches to give us more time with the 

ones we love, whether it is a brother who lives with diabetes or a 

mother with a new cancer diagnosis. Our lives have been improved 

by many tools including pharmaceutical therapies. To realize the 

promise of these innovations, we must ensure patients can access 

the cures that manufacturers spend so much energy and effort developing. It doesn’t help to hold out hope for a cure if there is no 

hope that regular people can afford it. 

It is unrealistic to think the answer to making prescription drugs 

affordable for everyone is ending the 340B program or allowing for 

off-label communication. 

We must all look holistically at what affordable accessible health 

care means. I am also real interested, Mr. Chairman—on a bit of 

a sidebar here—because we have everyone in the room to work 

with you and make sure that we are pushing pain management 

treatments that are nonaddictive. 

This is critically important. We have a huge problem facing our 

country and we need to work together to get that done. We also 

need serious treatments from everyone here to make sure that we 

are addressing the cravings that come from opioids and alcohol. 

Simply having medications that make someone sick if they use 

is not going to stop the craving and not going to stop use. 

I am hopeful this is the first of many hearings examining how 

we ensure affordable accessible prescription drugs and I look forward to working with everyone here on real solutions. 

Thank you, Mr. Chairman. 

Mr. BURGESS. Chair thanks the gentleman. Gentleman yields 

back. 

This will conclude member opening statements and the chair 

would remind members that pursuant to committee rules, all members’ opening statements will be made part of the record. 

And once again, we do want to thank our witnesses for being 

here today, taking time to testify before the subcommittee. Each 

witness is going to have an opportunity to give a three-minute 

opening statement and that will be followed by questions from 

members. 

So today, in order, we are going to hear from Lori Reilly, the Executive Vice President for Policy, Research, and Membership at the 

Pharmaceutical Research and Manufacturers Association of America; Tom DiLenge, President, Advocacy, Law, and Public Policy, 

Biotechnology Innovation Organization; Chip Davis, President and 

12 

CEO for the Association for Accessible Medicines; Elizabeth 

Gallenagh, Senior Vice President, Government Affairs and General 

Counsel, Health Care Distribution Alliance; Mark Merritt, President and CEO for the Pharmaceutical Care Management Association; Matt Eyles, the Senior Executive Vice President and Chief 

Operating Officer for Policy and Regulatory Affairs at America’s 

Health Insurance Plans; Tom Nickels, the Executive Vice President 

for Government Relations and Public Policy for the American Hospital Association; Gerald Harmon, M.D., Chairman of the Board of 

Trustees of the American Medical Association; Douglas Hoey, the 

CEO of the National Community Pharmacists Association; and 

David Mitchell, the Founder and President of Patients for Affordable Drugs. 

We do appreciate you all being here this morning. Ms. Reilly, you 

are now recognized for 3 minutes to give a summary of your opening statement. 

STATEMENTS OF LORI REILLY, EXECUTIVE VICE PRESIDENT 

FOR POLICY, RESEARCH, AND MEMBERSHIP, PHARMACEUTICAL RESEARCH AND MANUFACTURERS OF AMERICA; 

TOM DILENGE, PRESIDENT, ADVOCACY, LAW, AND PUBLIC 

POLICY, BIOTECHNOLOGY INNOVATION ORGANIZATION; 

CHIP DAVIS, PRESIDENT AND CEO, ASSOCIATION FOR ACCESSIBLE MEDICINES; ELIZABETH GALLENAGH, SENIOR 

VICE PRESIDENT, GOVERNMENTAL AFFAIRS AND GENERAL 

COUNSEL, HEALTHCARE DISTRIBUTION ALLIANCE; MARK 

MERRITT, PRESIDENT AND CEO, PHARMACEUTICAL CARE 

MANAGEMENT ASSOCIATION; MATT EYLES, SENIOR EXECUTIVE VICE PRESIDENT AND CHIEF OPERATING OFFICER 

FOR POLICY AND REGULATORY AFFAIRS, AMERICA’S 

HEALTH INSURANCE PLANS; TOM NICKELS, EXECUTIVE 

VICE PRESIDENT FOR GOVERNMENT RELATIONS AND PUBLIC POLICY, AMERICAN HOSPITAL ASSOCIATION; GERALD 

HARMON, M.D., CHAIR, BOARD OF TRUSTEES, AMERICAN 

MEDICAL ASSOCIATION; B. DOUGLAS HOEY, CEO, NATIONAL 

COMMUNITY PHARMACISTS ASSOCIATION; DAVID MITCHELL, FOUNDER AND PRESIDENT, PATIENTS FOR AFFORDABLE DRUGS 

STATEMENT OF LORI REILLY 

Ms. REILLY. Thank you, Chairman Burgess, Chairman Walden, 

and Ranking Members Green and Pallone. 

My name is Lori Reilly and I am the Executive Vice President 

for Policy and Research at PhRMA and it is my pleasure to be here 

today. 

Over the past 20 years, more than 500 new medicines have been 

approved to come to market to treat some our nation’s most challenging and costly conditions. In the midst of this progress, prescription drug medicine growth is growing slowly. Just last week, 

CMS released new data to show that prescription drug spending in 

2016 grew at 1.3 percent. That was lower than any other category 

of spending. To put that into context, hospital spending growth 

grew at three and a half times that amount. In the last 7 out of 

10 years, prescription drug spending growth has been below national spending growth. 

13 

Today, medicines consume about 14 percent of the health care 

dollar, and many assume, when they see that number, that all, or 

substantially all, of that flows back to the brand name manufacturers. However, less than half of that, or 47 percent, is attributable 

to brand name drug spending. The remainder, 23 percent, goes to 

generic firms and 31 percent goes to the supply chain. 

Going forward over the next decade, medicines are projected to 

remain 14 percent of the health care dollar, and many question 

how is that possible knowing all of the new innovations that are 

coming to market in the coming years. And there are a few reasons 

for that, the first being that over $100 billion worth of medicines 

will be going off-patent over the next five years and that will put 

cost pressure as new generics and biosimilars enter the marketplace. The second is the fact that there is significant cost constraint 

in the prescription drug market as three large pharmacy benefit 

managers buy on behalf of over 70 percent of all prescriptions in 

this country. 

These PBMs exert significant cost pressure to keep prices and 

spending in check. One of the ways they do that is by extracting 

significant discounts and rebates from pharmaceutical manufacturers. In fact, discounters and rebates increased 40 percent over the 

last 4 years and now total over $100 billion a year. Unfortunately, 

oftentimes those discounts and rebates are captured by intermediaries and don’t make their way back to patients. This problem 

has become more acute over time as we’ve seen a dramatic increase 

in the number of patients that today have a deductible for their 

medicine. 

So take, for example, a patient who takes an insulin product 

with a list price of $400 and that medicine carries a discount of 

about 65 percent. A patient with a deductible today goes to the 

pharmacy counter and will be asked to pay $400 for that medicine 

despite the fact that the insurance company is paying nothing 

while earning $239 on every sale. Given the rapid rise in 

deductibles, this must change. Insurance companies and PBMs 

must be pushing these discounts and rebates back to patients to 

lower their out-of-pocket spending. 

With that, my time is up and I look forward to questions today. 

Thank you. 

[The prepared statement of Ms. Reilly follows:] 

14 


29424.001

TESTIMONY OF LORI M. REILLY 

EXECUTIVE VICE PRESIDENT, POLICY, RESEARCH, AND MEMBERSHIP 

PHARMACEUTICAL RESEARCH AND MANUFACTURERS OF AMERICA 

BEFORE THE U.S. HOUSE COMMITTEE ON ENERGY AND COMMERCE, 

SUBCOMMITTEE ON HEALTH 

December 13,2017 

Full Committee Chairman Walden and Ranking Member Pallone, Health Subcommittee 

Chairman Burgess and Ranking Member Green, and Members ofthe Subcommittee, thank you 

for inviting me to participate in today's hearing. Understanding the role the drug delivery system 

plays in determining what patients pay for medicines is a critical part of the discussion about 

what can be done to improve patient access and affordability and I appreciate the opportunity to 

explore this topic with you in depth. 

PhRMA represents the country's leading innovative biopharmaceutical research companies, 

which arc devoted to discovering and developing medicines that enable patients to live longer, 

healthier, and more productive lives. The biopharmaceutical sector is one of the most researchintensive industries in the U.S.: since 2000, PhRMA member companies have invested more 

than half a trillion dollars in the search for new treatments and cures, including $65.5 billion in 

2016 alone. 

Medicines Have Transformed the Treatment of Many Diseases. Helping Patients Live Longer 

and Healthier Lives 

W c are in a new era of medicine in which breakthrough science is transforming patient care and 

enabling us to more effectively treat chronic disease, the biggest cost driver in our health care 

system. Innovative medicines represent significant scientific advancements that revolutionize the 

treatment and thus the downstream healthcare costs of complex and costly diseases, such as 

cancer, hepatitis C, HJV/AIDS, and cardiovascular disease. In this new era of medicine, many 

diseases previously regarded as deadly arc now manageable and even curable. Today, more than 

7,000 medicines are in development worldwide, of which 80% have the potential to be first in 

class and 42% are personalized medicines. 1 Prescription medicines produce unparalleled value 

and savings for the health care system, preventing or slowing the progression of disease, and 

reducing the need for more intensive medical care. Continued advances in biopharmaceutical 

innovation represent the best opportunities to improve health outcomes and control future health 

care costs. 

1 Long G. The Diopharmaceutical Pipeline: Innovative Therapies in Clinical Development. Analysis Group. 2017; 

Tufts Center for the Study of Drug Development (CSDD). Personalized Medicine Gains Traction But Still Faces 

Multiple Challenges. Tufts CSDD Impact Report. 2015;17(3). 
15 


29424.002

New medicines help contain overall health care spending by preventing costly complications and 

hospitalizations, and replacing other medical interventions. A 2013 study by IMS Institute for 

Healthcare Informatics estimated that the U.S. health care system could save $213 billion 

annually by improving the use of medicines.2 Similarly, research published in Health Affairs 

found that just an extra $1 spent on medicines for adherent patients with congestive heart failure, 

high blood pressure, diabetes and high cholesterol can generate $3 to $10 in savings on 

emergency room visits and inpatient hospitalizations. 3 

Based on the growing body of evidence about medicines' benefits, the Congressional Budget 

Office (CBO) recognizes reductions in other medical expenditures associated with increased use 

of prescription medicines in Medicare Part 0.4 Research indicates that the savings may be three 

to six times greater than estimated by the CBO for seniors with common chronic conditions like 

diabetes and hypertension,5 and less prevalent conditions such as Parkinson's disease. 6 More 

recent research has shown that increased usc of medicines among patients is associated with 

reductions in expenditures from avoided use of inpatient and outpatient services in Medicaid as 

well. For example, among patients with schizophrenia, improved adherence to antipsychotic 

medicines yielded annual net savings of up to $3.3 billion, or $!,580 per patient per year, driven 

by lower hospitalizations, outpatient care, and criminal system involvement. 7 Another study 

found that if 60% of the children enrolled in Medicaid achieved high adherence to asthma 

treatment in just 14 states, Medicaid could achieve $57.5 million in savings annually. 8 

The Competitive Market for Prescription Medicines Balances Innovation. Patient Access and 

Cost Containment 

The competitive market is the engine that drives the innovative biopharmaceutieal research and 

development ecosystem. The dynamics of the private, market-based system in the U.S. promote 

incentives for continued innovation and patient access to needed medicines while leveraging 

competition to achieve cost containment. Since 2000, biopharmaceutical companies have 

brought more than 500 new medicines to the U.S. market, resulting in significant progress 

2 IMS Institute for Healthcare Informatics. Avoidable Costs in U.S. Healtbcare: The $200 Billion Opportunity from 

Using Medicines More Responsibly. June 2013. 3 Roebuck MC, Lieberman JN, Gemmill-Toyama M, et al. Medication Adherence Leads to Lower Care Use And 

Costs Despite Increased Drug Spending. Health Affairs. 2011;30(1):99. 4 Congressional Budget Office. Offsetting Effects of Prescription Drug Use on Medicare's Spending for 

Medical Services. November 29, 2012. 5 Roebuck MC. Medical Cost Offsets from Prescription Drug Utilization Among Medicare Beneficiaries. Journal of 

Managed Care Pharmacy. 2014;20(10):994-995. 6 Wei YJ, Palumbo FB, Simoni-Wastila L, et al. Anti parkinson Drug Adherence and its Association With Health 

Care Utilization and Economic Outcomes in a Medicare Part D Population. Value in Health. 2014;17(2):196-204. 7 Predmore ZS, Mattke S, Horvitz-Lennon M. Improving Antipsychotic Adherence among Patients With 

Schizophrenia: Savings for States. Psychiatric Services. 2015; 66:343-345. 

'Rust G, Zhang S, McRoy L. Potential Savings From Increasing Adherence to Inhaled Corticosteroid Therapy in 

Medicaid-Enrolled Children. American Journal of Managed Care. 2015;21(3):173-180. 

2 
16 


29424.003

against some of the most costly and challenging diseases. 9 Through innovation, the death rate for 

HIV/A!Ds death has dropped 86% and more recently, decades of work are paying off in cancer 

as new therapies launched over the past few years are recognized as game changers that are 

transforming the treatment of many cancers. Today, because of scientific advances, many other 

conditions are now manageable and sometimes even curable. Yet, due to robust negotiation and 

competition in the marketplace, spending on medicines is growing at the slowest rate in years. 10 

Government, market analyst, and pharmacy benefit manager data all point to the same 

conclusion: that after peaking in 2014-an anomaly year in which millions of uninsured patients 

gained coverage and a record number of new medicines were approved-prescription drug 

spending growth has fallen substantially. National health expenditure data just released show 

that retail prescription medicine spending grew more slowly than overall health care cost growth 

in seven of the last ten years, and grew just 1.3% in 2016, less than one-third of the rate of 

overall health care spending growth. 11 Accounting for discounts and rebates, multiple other 

sources report historically low growth rates. 12 As a result of negotiation and competition in the 

marketplace, spending on retail and physician-administered medicines continues to represent 

only 14% of overall health care spending, even though scores of new medicines are approved 

every year. And at the state level, Medicaid programs spent just 4.9% of their budgets on 

prescription drugs, including new medicines, in 2016, relative to 26% for hospital care and 

I 8.2% for provider servicesY 

The U.S. biopharmaceutical marketplace promotes innovation and afford ability through cost 

containment that is built into the prescription drug lifecycle. While the price of a medicine may 

increase or decrease over its lifetime, prices fall dramatically as competition occurs among 

brand-name medicines, and typically fall even further (up to 80%) with the introduction of 

9 US Food and Drug Administration. Summary of~DA Approvals & Receipts, 1938 to the Present. 

http://www. fda.gov/aboutfda/whatwedo/historv /productre gulation/s ummaryofndaapprovalsreceipts 193 Stothepresent 

/default.htm; US Food and Drug Administration. New Drugs at FDA: COER's New Molecular Entities and New 

Therapeutic Biological Products. 2012-2015. 

https://www.fda.gov/drugs/developmentapmovalprocess/druginnovation/default.htm 

10 Quintiles!MS Institute. Medicine Use and Spending in the US: A Review of2016 and Outlook to 202l.April2017 11 Hartman M, Martin AB, Espinosa N, Catlin A, et al. National Health Spending in 2016: Spending and Enrollment 

Growth Slow After Initial Coverage Expansions. Health Affairs. 2018;37(1) Available online ahead of print at 

https://www.healthaffairs.org/doi/abs/l O.l377/hlthaff.20 17.1299. 12 Quintiles!MS Institute. Medicine Use and Spending in the US: A Review of2016 and Outlook to 202l.April 

20 17; CVS Health. CVS Health PBM Clients Achieved Lowest Prescription Drug Trend in Four Years, Despite 

Rising Drug Prices. March 15, 2017. http://www.prnewswire.com/news-releases/cvs-hcalth-pbm-clients-achievedlowest-prescription-drug-trend-in-four-years-despitc-rising-drug-prices-300423726.html: Express Scripts. 2016 

Drug Trend Report. February 2017. https://lab.express-scripts.com/lab/drug-trend-report· Which PBM Best 

Managed Drug Spending in 2016: How Did OptumRx Compare? Drug Channels. April 25, 2017. 

http://www .drugchannel s. net/20 1 7 /04/which-pbm -best-managed-drug -spend in g-in.html#more. 13 Prescription drug pre-rebate expenditures tabulated by The Menges Group using FY20\6 CMS State Drug 

Utilization data files and CMS brand/generic indicators for each National Drug Code. Rebate information obtained 

from FY2016 CMS-64 reports. Post-rebate expenditures derived through The Menges Group tabulations using 

above information. 
17 


29424.004

generics. 14 For instance, the price of one common statin (atorvastatin, known in the branded form 

as Lipitor) used to lower cholesterol and prevent cardiovascular disease, dropped by about 92% 

from 2005 to 2013 when generic alternatives came to market _IS Meanwhile, the average charge 

for percutaneous transluminal coronary angioplasty (PTCA)- a surgical procedure to treat 

cardiovascular disease increased by almost 66% during that same time period. 16 

The U.S. market is structured to take maximum advantage of savings from brand competition 

and from generics. Three large, sophisticated pharmacy benefit managers (PBMs) manage about 

70% of all prescriptions filled. 17 They use brand competition to obtain discounts from 

manufacturers and take full advantage of the presence of generics to drive savings. This drives 

the rapid shift of market share to generics (and, looking forward, to biosimilars), a system with 

few analogues in other health care sectors. As one example of the growing influence ofPBMs, 

industry leader Express Scripts has publicly stated their success in leveraging substantial rebates 

for hepatitis C medicines led to those treatments being less expensive in the U.S. than in many 

other western countries. 18 And the competitive market will continue to generate savings in the 

years ahead, as more than $140 billion of U.S. brand sales are projected to face generic 

competition between now and 2021. 19 Competition from biosimiliars is estimated to account for 

$38 billion of the loss in brand spending. 

List Prices for Medicines Do Not Reflect Substantial Rebates and Discounts and Provide an 

Increasingly Inaccurate Picture of Prescription Drug Costs 

Much of the public debate about the cost of medicines has focused on list prices, which do not 

account for the rebates and discounts that PBMs and health plans commonly negotiate with 

biopharmaceutical companies in exchange for preferred formulary placement on lower costsharing tiers. For certain medicines used to treat chronic conditions like asthma, high 

cholesterol, hepatitis C, and diabetes, these discounts and rebates can reduce list prices by as 

much as 30% to 70%.20 Biopharmaceutical companies are also required to provide sizable 

14 IMS Institute for Healthcare Informatics. Price Declines After Branded Medicines Lose Exclusivity in the US 

January 2016. 15 Atorvastatin, known in the branded form as Lipitor 1 Omg: IMS National Sales Perspective (NSP) Invoice Price in 

2005 (Branded Lipitor) and in 2013 (Generic Atorvastatin). 16 Data adapted from: HCUP Hospital Charge Database 2005 to 2013, Average Hospital Charges. 17 Fein AJ; Drug Channels Institute. The 2017 economic report on U.S. pharmacies and pharmacy benefit managers. 

Exhibit 72. February 2017. 18 LaMattina J. For Hepatitis C Drugs, U.S, Prices Are Cheaper Than in Europe. Forbes. December 4, 20!5. 

http://www. forbes.com/ sites/j ohnlamattina/20 15/ 12/04/for-hepatitis-c-drugs-u-s-prices-are-cheaper-than-ineurope/#7 ced4 3 f5 64bb 19 Quintiles!MS Institute. Medicine Use and Spending in the US: A Review of2016 and Outlook to 2021. April 

2017. 

20 Quintiles!MS Institute. Estimate of Medicare Part D Costs After Accounting for Manufacturer Rebates. October 

2016; Gronholt-Pedersen J, Skydsgaard N, Neely J. Novo Nordisk Defends U.S. Diabetes Drug Pricing. Reuters. 

November 4, 2016. http://www.reuters.com/article/us-novo-nordisk-prices-idUSKBN l2Zl84; Silverman E. What 

4 
18 


29424.005

statutory rebates, discounts, and fees to government programs, which have increased in recent 

years due to an increase in the Medicaid rebate, closing of the Medicare Part 0 "donut hole" and 

expansion ofthe 3408 program. These mandatory payments grew by more than 40% between 

2013 and 2015, increasing from $29.6 billion to $41.8 billion? 1 

Excluding rebates and discounts from discussions about the cost of prescription medicines 

provides an increasingly inaccurate picture of marketplace trends. According to PBMs and 

industry analysts, list prices for brand medicines have grown by an estimated 9% to 12% 

annually since 2015, while net prices (which take discounts and rebates into account) have 

grown by just 2.5% to 3.5%.22 A recent study from the QuintilesiMS Institute demonstrates that 

net prices for medicines that have been on the market for at least two years declined by an 

average of 2.5% annually from 20 I 0 to 2016, driven by patent expirations and increased 

competition from generics. 23 The Quintiles!MS report also notes that over the next five years, net 

prices for existing medicines will continue to decline between l% and 4% annually, highlighting 

the important role rebates and discounts will continue to play in containing prescription medicine 

spending growth in the future. 

Claims from PBMs, payers, and others about the skyrocketing prices of medicines almost always 

focus solely on list prices, which are not reflective of actual spending trends. When new hepatitis 

C medicines offering cure rates exceeding 90% entered the market, PBMs claimed that these 

life-saving treatments and cures would bankrupt the health system and their costs were simply 

unsustainable. Instead, competition among brand manufacturers quickly drove deep discounts 

averaging 40% to 65% off the list price.24 Express Scripts now states that their aggressive 

negotiations have saved Americans $4 billion, cured more patients with hepatitis C than any time 

in history, and that the discounted price makes it affordable to treat all patients with the 

infection.25 

the 'Shocking' Gilead Discounts on its Hepatitis C Drugs Will Mean. Wall Street Journal. February 4, 2015. 

https://blogs.wsj.com/pharmalot/2015/02/04/what-the-shocking-gilead-discounts-on-its-hepatitis-c-drugs-will-mean/ 

Barrett P, Langreth R. The Crazy Math Behind Drug Prices: Intermediaries that Negotiate to Lower Prices May 

Cause Them To Increase Too. Bloomberg BusinesSl.Yeek, June 29, 2017. 

https://www. bloomberg. com/news/articles/20 I 7 -06-29/the-crazy-math-behi nd-drug-prices 21 Berkeley Research Group. The Pharmaceutical Supply Chain: Gross Drug Expenditures Realized by Stakeholder. 

January 2017. 22 Quintiles!MS Institute. Medicine Usc and Spending in the US: A Review of2016 and Outlook to 2021.April 

2017; Express Scripts. 2016 Drug Trend Report. February 2017. https;//lab.express-scripts.com/lab/drug-trendreport; SSR Health. US Brand Pharmaceutical Net Prices Fell 0.3% in 3Q16. January 18, 2017. 

http://www.ssrllc.com/pub I ication/us-bran d-pharmace uti cal-net -prices-fell-0-3 -in-3q 16/ 23 Quintiles!MS Institute. Understanding the Drives of Drug Expenditure in the US. September 2017. 24 What Gilead's Big Hepatitis C Discounts Mean for Biosimilar Pricing. Drug Channels. February 5, 2015. 

http://www.drugchanne Is. net/20 15/02/what -gi leads-hi g-hepatiti s-c-discounts.html 25 Express Scripts. The $4 Billion Return on a Promise Kept. January 27,2015. http:!/lab.expressscripts.com/lab/insightsfspecialty-medications/the-4-billion-return-on-a-promise-kept 
19 


29424.006

Prior to the launch of PCSK9 inhibitors, a new type of cholesterol lowering medicine that 

represents a significant advance in treatment of heart disease, PBMs made alarming claims about 

their cost, projecting up to $150 billion to $200 billion per year in spending for these 

medicines,26 The Centers for Medicare and Medicaid (CMS) Office of the Actuary, however, 

projected a much more modest impact, based on expected competition leading to discounts and 

continued widespread use of generic statins. 27 The Actuary's refusal to accept these inflated 

claims proved to be the right approach. In fact, PBMs quickly made deals to cover both of the 

brand competitors on the market and emphasized that the drugs' cost is "far lower than industry 

forecasts."28 New research shows that PBMs have also effectively used strict prior authorization 

and high cost-sharing requirements to suppress utilization of these medicines, resulting in less 

than one-third of patients prescribed a PCSK9 inhibitor being able to access therapy.29 

A Complex Distribution and Payment System Shapes the Prices Patients, Health Plans, and the 

Government Pay for Medicines 

The process by which prescription medicines move from biopharmaceutical manufacturers to 

patients involves multiple stakeholders and numerous financial transactions. This process has 

evolved significantly in recent years, as supply chain entities have grown to play a larger role in 

drug distribution and payment. Wholesalers, pharmacies, plan sponsors, and patients all pay 

different prices for medicines, and the amount that is ultimately paid is determined by 

confidential negotiations between stakeholders. Many discounts provided by manufacturers do 

not flow directly through to the patients taking the medicine, and in some cases the full discounts 

may also not flow through to employers or plan sponsors. 30 

Some manufacturer rebates and discounts are required by law, while others are negotiated 

between biopharmaceutical companies and powerful commercial payers, many of which cover 

tens of millions of patients. In recent years, as payers have consolidated and competition between 

brand medicines has increased, negotiated rebates and discounts have also grown. Multiple data 

sources indicate that grow1h in manufacturer rebates and discounts has been substantial and that 

an increasing share of these discounts and rebates are retained by middlemen involved in 

26 Shrank W, Lotvin A, Singh S, Brennan T. In the Debate About Cost and Efficacy, PCSK9lnhibitors May Be The 

Biggest Challenge Yet. Health Affairs Blog. February 17,2015. http://healthaffairs.org/blog/20!5/02/!7/in-thedebate-about-cost-and-efficacy-pcsk9-inhibitors-may-be-the-biggcst-challenge-yet/ 

27 Kelly C. U.S. Drug Spending Will Increase 7.6% in 2015, Including PCSK9 Costs- CMS. The Pink Sheet, July 

2015. 

28 Express Scripts. "Express Scripts Includes Innovative Cholesterol-Lowering Drugs on National Preferred 

Formulary." October 6, 2015. http://www.prnewswire.com/news-releascs/express-scripts-inc!udes-innovativecholesterol-lowering-drugs-on-national-preferred-form ulary-3 00 15 5 222. html 29 Navar AM, Taylor B, Mulder 1-l, et al. Association of Prior Authorization and Out-of-Pocket Costs With Patient 

Access to PCSK9 Inhibitor Therapy. JAMA Cardiology. Published online September 27, 2017. 

doi: 10.100 lijamacardio.2017.3451. 30 Midwestern Business Group on Health. Drawing a Line in the Sand: Employers Must Rethink Pharmacy Benefit 

Strategies. September 20 17. https://higherloaicdownload.s3.amazonaws.com/MBGI-l/4f7f512a-e946-4060-95 75-

b27c65545eb8/Uploadcdlmages/Specialty%20Pharmacy/DMJ MBGI-l Line in the Sand RV!2 9617.pdf 

6 
20 


29424.007

distributing and paying for prescription mcdicines. 31 According to a recent study by the Berkeley 

Research Group, on average, more than a third of the initial list price of a medicine is rebated 

back to insurance companies, PBMs and the government, or retained by other stakeholders along 

the biopharmaceutical supply chain.32 And the gap between list prices and net prices is growing 

every year as more of medicine costs arc being retained by middlemen in the system. 

As shown in Figure I, accounting for the discounts, rebates and fees paid to PBMs, payers, and 

the government, brand biopharmaceutical companies realize less than half of total net spending 

on prescription medicines.JJ Of the $469 billion spent on prescription drugs in the U.S. in 2015, 

brand manufacturers realized $219 billion; the remainder went to generic manufacturers or was 

retained as earnings by entities along the supply chain and other stakeholders. 34 The $219 billion 

realized by the brand biopharmaceutical industry accounts for just 6.8% of the $3.2 trillion spent 

on health care overall in the U.S. in 2015.35 

Figure 1: 

Share of 2015 Net Prescription Medicine Spending Realized by 

Manufacturer and Non-Manufacturer Stakeholders 

ill! Brand Manufacturers Generic Manufacturers 

Supply Chain Entities Other Retrospective Rebates and Fees 

"Quintilesl:v!S Institute. Medicine Use and Spending in the US: A Review of2016 and Outlook to 202l.April 

20 17; Berkeley Research Group. The Pharmaceutical Supply Chain: Gross Drug Expenditures Realized by 

Stakeholder. January 20 17; Dross D. Will Point-of-Sale Rebates Disrupt the PBM Business? Mercer. July 31, 

2017. https://www.mercer.us/our-thinking/healthcare/will-point-of-sa1e-rebates-disrupt-the-pbm-business.html 32 Berkeley Research Group. The Pharmaceutical Supply Chain: Gross Drug Expenditures Realized by Stakeholder. 

January 2017. 

JJ Ibid. 34 Ibid. 35 Martin AB, Hartman M, Washington B, ct a!. National Health Spending: Faster Growth in 2015 As Coverage 

Expands and Utilization Increases. Health Affairs. 2017;36( I): 166-176. 

7 
21 


29424.008

Patients Do Not Directly Benefit from Significant Price Negotiations Happening in the Market 

Today 

Savings generated from price negotiations between biopharmaceutical companies and payers do 

not always make their way directly to patients facing high cost-sharing for their medicines. 

Unlike care received at an in-network hospital or physician's office, health plans base costsharing for prescriptions filled in the deductible or with coinsurance on undiscounted list prices, 

rather than on prices that reflect negotiated rebates and discounts. Enrollment in high deductible 

health plans and use of coinsurance for prescription medicines has grown sharply in recent years, 

increasingly exposing patients to high out-of-pocket costs based on undiscounted prices, creating 

scenarios in which medicines appear to be more costly than other health care services. High costsharing is a cause for concern, as a substantial body of research clearly demonstrates that 

increases in out-of-pocket costs are associated with both lower medication adherence and 

increased abandonment rates, putting patients' ability to stay on needed therapies at risk. 36 

Over the past I 0 years, patient cost-sharing has risen substantially faster than health plan costs. 

For workers with employer-sponsored health insurance, out-of-pocket spending for deductible 

and coinsurance payments increased by 230% and 89%, respectively, compared to a 56% 

increase in payments by health plans. 37 Whereas cost-sharing for prescription medicines once 

consisted almost entirely of copays, use of deductibles and coinsurance has increased rapidly 

particularly for new medicines that represent the most innovative therapies and treat the sickest 

patients. The share of patient out-of-pocket drug spending represented by coinsurance more than 

doubled over the past ten years in the commercial market, while the share accounted for by 

deductiblcs tripled. 38 

The growing use of deductibles and coinsurance for prescription medicines creates affordability 

challenges for many patients. Patients enrolled in high deductible health plans may be asked to 

pay thousands of dollars out-of-pocket before any of their prescriptions are covered, while 

patients with coinsurance are responsible for as much as 30% to 40% of the total cost of their 

medicines. 

36 IMS Institute for Healthcare Informatics. Emergency and Impact of Pharmacy Deductibles: Implications for 

Patients in Commercialllealth Plans. September 2015; Doshi JA, LiP, Huo H, et al. High Cost Sharing and 

Specialty Drug Initiation Under Medicare Part D: A Case Study in Patients with Newly Diagnosed Chronic Myeloid 

Leukemia. American Journal of Managed Care. 20 16;22(4 Suppl):S78-S86; Brat-Goldberg ZC, Chandra A, !Iande! 

BR, et al. What Does A Deductible Do? The Impact of Cost-Sharing on Health Care Prices, Quantities, and 

Spending Dynamics. NBER Working Paper 21632, October 2015; Eaddy MT, Cook CL, O'Day K, et al. How 

Patient Cost-Sharing Trends Affect Adherence and Outcomes. Pharmacy & Therapeutics. 2012;37(1):45-55. 37 Claxton G, Levitt L, Long M, et al. Increases in Cost-Sharing Payments Have Far Outpaced Wage Growth. 

Peterson-Kaiser Health System Tracker. October 4, 2017. https://www.healthsystemtracker.org/brief/increascs-incost-sharing-payments-have-far-outpaced-wage-growth/#item-start 

38 Claxton G, Levitt L, Long M. Payments for Cost Sharing Increasing Rapidly Over Time. Peterson-Kaiser Health 

System Tracker. April 20 16. http://www.healthsystemtracker.org/insightlexamining-high-prescription-drugspending-for-people-with-emplover-sponsored-health-insurance/ 
22 


29424.009

Due to the growing gap between list and net prices, patients' cost sharing for medicines is 

increasingly based on prices that do not reflect plan sponsors' actual costs. For example, market 

analysts report that negotiated discounts and rebates can lower the net price of insulin by up to 

50% to 70%, yet health plans require patients with deductibles to pay the full undiscounted price. 

As a result, a patient in a high-deductible health plan who pays the list price each month for 

insulin maybe paying hundreds-or even thousands-more annually than their insurer. 

As a hypothetical example, imagine a patient enrolled in a high-deductible health plan who takes 

an insulin with a list price of $400. The patient's insurer has negotiated a 65% rebate, which 

substantially reduces the cost to the plan. However, because the patient has not yet met his 

deductible, his insurer does not provide any coverage for his prescription, and the patient's bill 

reflects the insulin's full cost of$400. Despite paying nothing for this patient's insulin, the 

insurer still collects the rebate, earning over $200.39 

Unfortunately, as the number of patients with deductibles and coinsurance rises, this situation is 

becoming more common. Analysis by Amundsen Consulting shows that more than half of 

patients' out-of-pocket spending for brand medicines is based on the list price of the medicine, 

even though their health insurer may be receiving a steep discount. 40 

Health plans typically use some portion of negotiated rebates to reduce premiums for all 

enrollees, rather than to directly lower costs for patients facing high cost-sharing due to 

deductibles and coinsurance. According to one actuarial firm, this results in a system of "reverse 

insurance," whereby payers require patients with high drug expenditures to pay more out-ofpocket, while rebate savings are spread out among all health plan enrollees in the form of lower 

premiums.41 Asking sicker patients with high drug costs to subsidize premiums for healthier 

enrollees is the exact opposite of how health insurance is supposed to work. 

Some patients also end up paying more at the pharmacy counter when they use their insurance, 

not knowing that their prescriptions would be cheaper if they were paying in cash. Many PBM 

contracts require pharmacies to charge patients the exact amount negotiated between the PBM 

and the pharmacy, even if that amount exceeds what the pharmacy would charge to a patient 

without insurance. Gag-clauses in PBM contracts prohibit pharmacists from informing insured 

patients about the lower cash price, at the risk of the pharmacy being excluded from the PBM' s 

39 Pharmaceutical Research and Manufacturers of America. Follow the Dollar. November 2017. http://phrmadocs.phrma.org/files/dmfile/Follow-the-Dollar-Report.pdf 

40 Amundsen Consulting. Commercially-Insured Patients Pay Undiscounted List Prices for One In Five Brand 

Prescriptions, Accounting for Half of Out-of-Pocket Spending on Brand Medicines. March 2017. 

http:l/www.phrma.org/reportlcommercially-insurcd-paticnts-pay-undiscounted-list-prices-for-one-in-five-brandprescriptions-accounting-for-half-of-out-of-pocket-spending-brand-medicines 

"Girod CS, Hart SK, Weltz S. 2017 Milliman Medical Index. May 2017. 

http://www.milliman.com/uploadedFiles/insight/Periodicals/mmi/20 17-milliman-medical-index.pdf 

9 
23 


29424.010

network. In these instances, pharmacies must instead overcharge patients, requiring them to pay 

the full amount oftheir copayment, over and above the actual cost of the medication. These 

overpayments are then "clawed back" from the pharmacy by the PBM.42 

PBMs Negotiate Lower Medicine Prices for Health Plans and Employers. But Don't Always 

Pass Along All of the Savings 

PBMs commonly retain a portion of the rebates they negotiate on behalf of their health plan and 

employer clients. While the remainder of the rebates are generally passed on to plan sponsors, 

smaller employers and health plans may not benefit from all of the price concessions the PBM 

has negotiated with manufacturers, particularly if the PBM decides not to define certain fees or 

other concessions as "rebates." For example, one benefits consultant has observed that PBMs are 

increasingly changing the contractual definition of rebates to exclude certain administrative fees, 

allowing the PBM to retain these payments rather than passing them back to the plan sponsor. 

These administrative fees can be as high as 25% to 30% of the total rebate negotiated with the 

manufacturer and are often not reported to the plan sponsor by the PBM.43 

In addition to the rebates they negotiate with biopharmaceutical companies, PBMs arc 

increasingly requiring that if a medicine's list price increases by more than a certain percentage, 

the manufacturer must provide an additional price protection rebate reimbursing the PBM for all 

price increases above the threshold. Lack of transparency in contracts between employers and 

PBMs has led many plan sponsors to question the share of rebate savings being passed through, 

how much the PBM is retaining for administrative fees, and whether the PBM is disclosing and 

passing on other price concessions, such as savings from price protection rebates.44 

Both the portion of the rebate retained by the PBM and the administrative fees they charge their 

clients are typically based on a percentage of a medicine's list price. Accordingly, some PBMs 

may prefer that their formularies include medicines with high list prices and large rebates, rather 

than medicines with a lower list price. Thus, if a manufacturer were to lower the list price of a 

medicine in lieu of a higher rebate, the PBM's revenue would decline. Because PBMs hold the 

key to market access through their decisions about formulary coverage and placement, such a 

manufacturer decision could result in reduced formulary access. 

42 Hopkins JS. You're Overpaying for Drugs and Your Pharmacist Can't Tell You. Bloomberg. February 24, 2017. 

https :I /www .bloomberg. com/news/artieles/20 1 7-02-24/sworn·to-secrecy-drugstores-stay-s ilent-as-eustomersovemay 

' 3 Dross D. Will Point-of-Sale Rebates Disrupt the PBM Business? Mercer. July 31, 20 !7. 

https:llwww.mercer.us/our-thinkinglhealthcarelwill-point-of-sale-rebates-disrupt-the-pbm-business.html 

44 Midwestern Business Group on Health. Drawing a Line in the Sand: Employers Must Rethink Pharmacy Benefit 

Strategies. September 2017. https://higherlogicdownload.s3 .amazonaws.eom/MBGH/4f7f5l2a-e946-4060-9575-

b27c65545cb8/Uploadedlmages/Speeialty%20Pharmaev/DMJ MBGH Line in the Sand RV12 96l7.pdf 

10 
24 


29424.011

In its most recent report to Congress, the Medicare Payment Advisory Commission discussed 

incentives that may drive Part D plan sponsors to give formulary preference to medicines with 

large rebates, rather than lower cost alternativesY These incentives arise because sizable 

portions of the Part D benefit are not paid for by plan sponsors (e.g., beneficiaries and 

manufacturers pay for the majority of costs in the coverage gap). Similarly, CMS has noted that 

coverage of medicines with high list prices and large rebates "ease[ s] the financial burden borne 

by Part D plans essentially by shifting costs to the catastrophic phase of the benefit, where plan 

liability is limited"46 and that plans have "weak incentives, and in some cases even, no incentive, 

to lower prices at the point of sale or to choose lower net cost alternatives to high cost-highly 

rebated drugs when available." 47 Recently, CMS addressed this concern in a Request for 

Information issued as part of a proposed regulation for Medicare Part D. In an effort to better 

align plan incentives with the interests of beneficiaries and the Medicare program, CMS is 

soliciting feedback on a potential future proposal to require Part D plans to share negotiated 

rebate savings directly with beneficiaries at the point of sale. 

Hospital Markups on Medicines Increase Cost-Sharing for Commercially-Insured Patients 

The pharmaceutical distribution and payment process differs for medicines administered in a 

physician office or health care facility vs. those purchased at a pharmacy. Providers typically 

purchase medicines directly, often through a Group Purchasing Organization (GPO). After the 

physician administers the medicine to the patient, the patient's insurance reimburses the provider 

for the cost of the medicine as part of the patient's coverage for medical care. 

The amount that providers charge for medicines and how much insurers pay varies widely based 

on where the medicine is administered to the patient. For example, commercial insurers often 

pay hospital outpatient departments twice as much as physician offices for administering the 

exact same medicines, including for diseases such as cancer or autoimmune disorders.48 This is 

because large hospitals can demand much higher prices from commercial insurers than small 

physician practices. The Senior Vice President of Oncology and Genetics at UnitedHealthcare 

described the effect for chemotherapy treatment at high profile cancer centers, "Put simply, the 

hospitals arc saying, 'If you want our beds, you have to take our prices for oncology 

treatment. "'49 

45 Medicare Payment Advisory Commission. Status Report on the Medicare Prescription Drug Program (Part D). 

March 2017. http://medpac.gov/docs/default-source/reports/mar17 entirereport.pdf 46 Centers for Medicare & Medicaid. Medicare Part D-Dircct and Indirect Remuneration (DIR). January 19,2017. 

https://www.cms.gov/Newsroom/MediaReleaseDatabase/Fact-sheets/20 1 7-Fact-Sheet-items/20 17-0 l-19-2.html 47 82 FR 56419 (November 28, 2017) 48 Magellan RX Management. Medical Pharmacy Trend Report: 2016 Seventh Edition. March 2017. 49 Newcomer LN. Those Who Pay Have A Say: A View On Oncology Drug Pricing and Reimbursement. The 

Oncologist. 20 16;21 (7):779-81. 

ll 
25 


29424.012

The results of hospital markups are astounding. Recent research shows that for twenty medicines 

administered in hospital outpatient departments, hospitals charge prices that are on average 

nearly five times higher than their acquisition costs and are reimbursed up to three and a half 

times their acquisition cost by commercial insurers. 5° For a vast majority ofthe medicines 

included in the analysis, this means that the manufacturer-who made the substantial time and 

R&D investments including clinical trials necessary to develop the treatment-was paid less for 

the medicine than the hospital. 

Hospital markups on prescription medicines have a substantial effect not just on overall 

healthcare costs, but also on patient affordability. For patients with commercial insurance, 

coinsurance is the most common form of cost-sharing for provider-administered medicines, 

which means that the amount the patient must pay is equal to a percentage of the total price the 

insurer reimburses the provider for the medication. So, when a hospital is paid two or three times 

the acquisition cost for a medicine, patients are also paying higher coinsurance. As the same 

United insurance executive quoted above noted "it is immoral to force vulnerable patients to pay 

triple-digit mark-ups because they have cancer."51 

Market Distortions Created by the 3408 Program Lead to Higher Health Care Costs 

The 3408 program, a program originally intended to provide discounts on medicines for safetynet providers, is contributing to higher health care costs and economists suspect that it is also 

leading to higher list prices for medicines. This program started in 1992, and its basic structure 

has not been updated since then, despite dramatic changes in the health care system over the past 

25 years. The current structure of the program is causing higher health care costs for three main 

reasons. 

First, the 3408 discount, which is structured as a percentage discount, creates incentives for 

hospitals to earn a larger spread from the 3408 discounts by prescribing more medicines and 

higher cost medicines. Economists have noted this may lead prescribing to "shift toward more 

expensive drugs because profit margins will in general be largcr."52 A 2015 Government 

Accountability Office study found evidence that 3408 was leading to the prescribing of more 

drugs and more expensive drugs for Medicare patients. 53 

50 The Moran Company. Hospital Charges and Reimbursement for Drugs: Analysis of Markups Relative to 

Acquisition Cost. October 2017. 51 Newcomer LN. Those Who Pay Have A Say: A View On Oncology Drug Pricing and Reimbursement. The 

Oncologist. 20 16;21 (7):779-81. 52 Conti R, Bach P. Cost Consequences of the 340B Drug Discount Program. Journal of the American Medical 

Association. 2013;309(19):1995-1996. 53 Government Accountability Office. Medicare Part B Drugs: Action Needed to Reduce Financial 

Incentives to Prescribe 340B Drugs at Participating Hospitals. GAO- I 5-442, June 2015. 

12 
26 


29424.013

Second, evidence suggests the 34013 program shifts care to more expensive and less convenient 

settings. Government reports suggest that hospitals are taking advantage of guidance that has not 

been revisited since 1994 which allows hospitals to obtain more 34013 discounts by buying 

community-based physician practices, so that prescriptions written by those physicians then 

qualify for 340B discounts. 5

4 As a result, patients are left with fewer community-based provider 

options and are pushed into higher cost hospital-based settings. Analysis by the IMS Institute for 

Healthcare Informatics found that average costs for administering cancer drugs are typically 

twice as high at hospital outpatient departments compared to community-based oncologists, 

which can lead to "higher patient cost responsibility." 55 Researchers from Memorial Sloan 

Kettering have noted 340B is helping to drive consolidation of physician practices into hospitals, 

and that in the absence of reforms "the trend toward consolidation will continue to drive up the 

cost of commercial insurance ... "56 

Third, the scale of the program as well as its rapid growth may be affecting market prices for 

prescription drugs. In 2015, roughly 45 percent of all hospitals participated in 34013.57 In an 

analysis of prescription drug pricing published in the New England Journal of Medicine, 

economists at Harvard University and the University of Chicago concluded that "lawmakers 

could lower the price of prescription drugs by reforming the federal 340B Drug Pricing Program. 

[ ... ]The scope of the 34013 program is currently so vast for drugs that are commonly infused or 

injected into patients by physicians that their prices are probably driven up for all consumers."58 

Another study in JA1'vfA noted that list prices for drugs are likely higher than they otherwise 

would be "to offset revenue losses incurred as a larger number of drug sales become eligible for 

340B discounts (and thus fewer drugs are sold at full price)."59 Certain drug classes are 

disproportionately impacted by the 340B program. Thus, the price distorting impact may be 

concentrated in certain therapeutic areas, such as medicines for cancer. For example, sales to 

34013 hospitals account for 33% of all Medicare Part B reimbursement for certain types of cancer 

drugs.60 

54 59 Federal Register 47884. 55 IMS Institute for Healthcare Informatics. Global Oncology Trend Report: A Review of2015 and Outlook to 2020. 

June 2016. 56 Bach P and Jain RH. Physician's Office and Hospital Outpatient Setting in Oncology: It's About Prices, Not Use. 

Journal of Oncology Practice 2017; 13(1 ), 4-5. 57 Medicare Payment Advisory Commission. Report to the Congress: Overview of the 340B Drug Pricing Program. 

May 2015. 58 Conti Rand Rosenthal M. Pharmaceutical Policy Reform-Balancing Affordability with Incentives for 

Innovation. New England Journal oflv!edicine. 20 16; 374:703-706. 59Conti R, Bach P. Cost Consequences of the 3408 Drug Discount Program, Journal oft he American Medical 

Association. 20 13;309(19): 1995-1996. 60 Drugs sold to 340B hospitals account for 33% of all Part 13 reimbursement for breast cancer and multiple 

myeloma drugs. Vandervelde A and Blalock E. Measuring the Relative Size of the 3408 Program: 2012-2017. 

Berkeley Research Group, July 2017. 

13 
27 


29424.014

Market-Based Approaches Are the Best Solution for Addressing Health Care Affordability and 

Controlling Costs 

The competitive U.S. health care market provides a sound framework for balancing and 

supporting patient access, cost containment, and continued progress for patients. Meaningful 

efforts to address the cost of prescription medicines must include all stakeholders in the supply 

chain, including biopharmaceutical companies, PBMs, health plans, wholesalers, hospitals, and 

pharmacies. Policies targeted solely at brand manufacturers-which account for just half of total 

net spending on prescription medicines and just 6.8% oftotal U.S. health care spending-are 

insufficient for addressing broader health care sustainability challenges and risk diminishing the 

incentives for future innovation. 

Strategies for strengthening and enhancing the competitive market include encouraging payers to 

share negotiated savings with patients at the pharmacy; reforming outdated regulations hindering 

the adoption of value-based payment arrangements; reforming the 340B drug discount program, 

which is distorting the market, so that it better serves the purpose for which it was created; and 

continuing to modernize the Food and Drug Administration (FDA) and assure that there is robust 

generic and biosimilar competition once a brand medicine loses its exclusivity. 

Sharing Negotiated Savings with Patients 

Changes in insurance coverage for prescription medicines, and the growing use of deductibles 

and coinsurance in particular, have created affordability challenges for many patients. Health 

plans should be encouraged to directly pass on more of the savings from negotiated rebates in the 

form of lower patient out-of-pocket costs, just like they do for other types of health care services. 

This should be executed in a way that maintains the confidentiality of proprietary pricing 

information that the Federal Trade Commission has identified as important to the effective 

functioning of competitive markets. Payers have begun to recognize that using the undiscounted 

price of a medicine to set cost-sharing is problematic for patients: recent statements from the 

two largest PBMs note that high deductibles for medicines put patients in a "very difficult 

position" and indicate that sharing rebate savings directly with patients should be considered as a 

"best practice."61 Actuarial research indicates that sharing negotiated savings could save certain 

commercially insured patients enrolled in plans with high deductibles and coinsurance between 

$145 and $800 annually, while increasing premiums by 1% or less. 62 

61 Seeking Alpha. Express Scripts Holding (ESRX) Q4 2016 Results- Earnings Call nan script. February 15, 2017. 

http://seekingalpha.com/article/4046365-exoress-scripts-holding-esrx-g4-20 16-rcsults-earnings-call-transcript; 

Seeking Alpha. CVS Health (CVS) Q4 2016 Results- Earnings Call Transcript. February 9, 2017. 

http://seekingalpha.com/article/4044425-cvs-health-cvs-q4-20 16-results-earnings-call-transcript?part=single 62 Bunger A, Gomberg J, Petroske J. Sharing Rebates May Lower Patient Costs and Likely Has Minimal Impact on 

Premiums. October 12, 20 17. http://www.phrma.org/report/point-of-sale-rebate-analysis-in-the-commcrcial-market 

14 
28 


29424.015

To help patients afford their medicines, biophannaceutical companies have entered into 

partnerships with third parties, such as Blink Health and GoodRx, to offer discounted prices 

directly to patients, outside of their insurance benefit.63 Encouraging health plans to allow the 

cost of prescriptions purchased through these third-party programs to count towards patients' 

deductibles and maximum out-of-pocket spending limits would further reduce patient 

affordability barriers. 

Co pay assistance programs offered by biopharmaceutical companies provide another valuable 

source of assistance for many commercially insured patients who are struggling to afford their 

out-of-pocket costs, as do manufacturer-sponsored patient assistance programs that help 

underinsured and uninsured patients obtain the medicines they need for free or nearly free. 

Recent efforts by health plans to restrict use of capay assistance programs, including no longer 

counting the full amount patients arc asked to pay out-of-pocket towards their deductibles or outof-pocket maximums, unfairly penalize patients and threaten their ability to stay on needed 

medicines. 

Reforming Outdated Regulations Hindering the Adoption of Value-Based Payment 

Arrangements 

Changes in the science and pressures for cost containment in the competitive market arc driving 

rapid evolution of payment and care delivery systems, and biopharmaccutical companies are 

playing a role in this transformation. As therapies become more personalized, and as the health 

care market moves away from fee-for-service care and toward more integrated care systems, 

biophannaccutical companies arc increasingly partnering with payers to develop new payment 

arrangements that reward improvements in care and better health outcomes for patients. These 

arrangements can improve patient access to medicines and lead to savings for the health care 

system. 

Yet while the science and market are moving rapidly, efforts to develop new ways to pay for 

medicines have been slowed by regulations designed for an earlier era. Such regulations can 

have the unintended consequence of making it more difficult for payers to prioritize results that 

matter to patients, and for biophannaceutical companies to increase the amount of risk they share 

with payers. For example: 

Ambiguity in FDA rules governing manufacturer communications about their medicines can 

prevent biophannaceutical companies from entering into contracts on mctrics that matter to 

payers, such as the ability of their medicine to reduce hospitalizations or other medical 

services. This is because of concerns that such contracts might be perceived as promoting the 

medicine for an unapproved indication. 

63 Thomas K. New Online Tools Offer Path to Lower Drug Prices. New York Times. February 9, 2016. 

https ://www .nytimes.com/20 16/02/1 0/business/tam in g -drug-prices-by-pu I I in g-back -the-cu rtain-onl ine.htm I 

15 
29 


29424.016

Lack of clarity in the anti-kickback statute (AKS) can inhibit value-based contracts due to 

lack of certainty as to whether contracts fit within existing safe harbors and exceptions. By 

revising the AKS regulations to add a value-based arrangements safe harbor, policymakers 

can facilitate an expansion of these arrangements between insurers and manufacturers. 

Price reporting rules such as Medicaid Best Price can limit the amount of risk 

biopharrnaceutical companies share with payers within a value based arrangement, because 

any increased discount beyond the statutory minimum must be offered not only to that payer, 

but also to all of Medicaid. These rules should be modernized to create flexibility for new 

innovative contracting arrangements. 

CMS' Center for Medicare and Medicaid Innovation (CMMI) recently released a New Direction 

RFI which expressed interest in testing value based payment arrangements, among other models. 

Unfortunately, CMMI is not the right venue to make the changes needed to allow for new 

contracting approaches between insurers and manufacturers. It does not have waiver authority to 

address challenges posed by Food and Drug Administration (FDA) communication rules or 

Medicaid Best Price. While CMMI can waive the Anti-Kickback Statute, such a waiver could 

discourage beneficial arrangements outside ofCMMI, which would not have the benefit of the 

waiver. Instead of a demonstration, we are seeking permanent regulatory reforms to encourage 

value-based arrangements. 

Modernizing the FDA 

As the pace of scientific discovery accelerates, it is critical to assure that our regulatory 

infrastructure keeps up with the science and that FDA regulations are up-to-date, practical, clear 

and not overly burdensome to foster efficiency, predictability, and the ability of 

biopharmaceutical companies to innovate and bring new medicines to patients. The Committee's 

recent action to reauthorize the Prescription Drug User Fee Act creates a solid foundation not 

only to accelerate approval of new life-saving treatments, but also assure that there is robust 

generic and biosimilar competition. We thank the Committee for its rapid and bipartisan action. 

Accelerating the introduction of new medicines allows the forces of private market competition 

to keep costs in check and increases the number lifesaving drugs becoming available to patients. 

Importantly, key provisions ofthc prescription drug, biosimilar, and generic drug user fee acts 

will help to eliminate the generic drug application backlog, increase resources to prevent future 

backlogs, and to streamline the review process and enhance FDA's expertise related to drugdevice combination products, an area in which regulatory uncertainties and delays have 

previously deterred brand and generic manufacturers from investments. Additional opportunities 

to improve competition include finalizing FDA guidance related to biosimilars and enhancing 

incentives for generic manufacturers to enter the marketplace where there are no intellectual 

property or regulatory incentives preventing generic entry but, due to small patient population 

16 
30 


29424.017

sizes, there are no brand or generic competitors. Increased competition from generics could be 

spurred by waiving user fees for eligible products, providing a transferable generic drug priority 

review voucher, and expediting review of such products and the inspection oftheir facilities. 

Finally, the FDA can further spur efficiency in the market and free up scarce resources through 

elimination of certain outdated regulations. For example, regulations requiring 

biopharmaceutical companies to submit post-marketing reports in a format unique to the U.S. arc 

inefficient and burdensome and provide no appreciable benefit compared to the format used 

globally. A more logical approach for submission of post-marketing reports would be to 

streamline the formats. Similarly, requiring biopharmaceutical companies to submit all 

promotional materials to the FDA at the time of dissemination--even if only minor, nonsubstantive changes have been made to previously submitted pieces-results in submission of 

thousands of pieces per company per year with no benefit to public health. 

Reforming the 340B Drug Discount Program 

To protect the health care safety net, it is critical to ensure that the underlying market works. The 

3408 program needs both Congressional and administrative updates to help prevent it from 

continuing to raise costs for consumers and the overall health care system. Stronger rules for 

hospitals participating in the program will help ensure the program targets the patients and true 

safety-net facilities it was intended to help. Specific reforms for hospitals participating in the 

program should include stricter 3408 eligibility criteria, limits on contract pharmacy 

arrangements, requirements that patients see a benefit from the program, a tighter definition of 

patient eligibility, and limits on which hospital-owned physician practices can participate in 

3408. 

Assuring Robust Competition and Continuing to Modernize the FDA 

Economists have reinforced the critical role of boosting competition to address drug cost and 

access issues. To increase competition: 

Key provisions of the prescription drug, biosimilar, and generic drug user fee acts will spur 

competition, including policies to eliminate the generic drug application backlog and 

increased resources to prevent future backlogs, expand FDA's expertise related to drugdevice combination products, and reduce the regulatory uncertainty and streamline review of 

drug-device combination products. Biopharmaceutical companies have slated that current 

regulatory uncertainties and delays have deterred both generic and brand manufacturers from 

investments in these areas. 

Reducing the length and increasing the efficiency of drug development will increase 

competition on both price and clinical effects. Given that the cost of innovator drug 

17 
31 


29424.018

development has doubled over the past decade, in part due to increasing FDA requirements, 

the Prescription Drug User Fee Act includes a range of provisions aimed at reducing 

uncertainty and creating efficiencies in the both the development and regulatory review of 

new medicines. Accelerating the introduction of new medicines would allow the forces of 

private market competition to keep costs in check and increase the number of lifesaving 

drugs becoming available to patients. 

Enhancing incentives for generic manufacturers to enter the marketplace in areas where there 

are no intellectual property or regulatory incentives preventing generic entry but due to small 

population sizes there are no brand or generic competitors. Increased competition from 

generics could be spurred by waiving user fees for eligible products, providing a transferable 

generic drug priority review voucher, and expediting review of such products and the 

inspection of their facilities. 

Finalizing the various FDA guidances related to biosimilars is necessary to reduce regulatory 

uncertainties for biosimliar manufacturers and to accelerate the market entry of biosimilars. 

Biosimilar medicines are an important way to spur competition that will lead to more choices 

for patients and lower prices for patients and the health care system. 

Sustaining Incentives for Innovation Is Critical to Solving Future Health Care Challenges 

Looking ahead, it is clear that medicines offer some of the clearest opportunities to address the 

challenge of growing health care costs as our population ages. For example, the number of 

Alzheimer's cases is projected to increase rapidly over the next decade as Baby Boomers begin 

to reach retirement age, resulting in an enormous human and economic cost. If we can achieve 

treatment advances that delay Alzheimer's by just five years beginning a decade from now, 2.5 

million fewer Americans will be aff1icted by the disease and we would avoid $367 billion 

annually by 2050 in costs for long-term care and similar services for persons with Alzheimer's.64 

Alzheimer's remains a major focus ofbiopharmaceutical research companies despite high risks; 

since 1998 there have been 123 unsuccessful attempts to develop a medicine for Alzheimer's, 

and just four approved medicines.65 In just the last two years, several promising new therapies 

failed in mid- and late-stage trials, resulting in the loss of billions of dollars of human, political, 

and monetary capital. 66 

64 Alzheimer's Association. "Changing the Trajectory of Alzheimer's Disease: How a Treatment by 2025 Saves 

Lives and Dollars." https:l/www.alz.org/documents custom/trajectory.pdf 65 PhRMA. Researching Alzheimer's Medicines: Setbacks and Stepping Stones. Summer 2015. Available at: 

http://phrma.org/sites/defaultlfiles/pdf/alzheimers-setbacks-and-stepping-stones.pdf 

66 Ogg JC. The List of Failed Alzheimer's Drug Treatments Keeps Growing. 2417 Wall Street. September 26, 2017. 

http://24 7wallst.eom/healthcare-business/20 I 7109/26/the-1 ist -of-failed-alzhe imers-d rug-treatments-keeps-growing/ 

18 
32 


29424.019

As with Alzheimer's disease, there is a significant unmet medical need for patients with rare 

diseases which collectively affect 30 million Americans. But only 5% of these diseases have 

available treatment options.67 Given the many diseases where there is significant unmct need, 

maintaining incentives for the continued development of new medicines will be crucial in 

addressing the most costly and challenging diseases of our time. 

Yet there is evidence that rising costs in drug development, combined with an increasingly 

competitive market, have resulted in more uncertainty and lower average returns in recent years. 

Analysis by a Massachusetts Institute of Technology economist and the IMS Institute finds that 

increasing market competition has eroded much of the economic profitability of newly launched 

brand medicines, such that on average financial returns for medicines launched between 2005 

and 2009 were insufficient to recoup average R&D and operating costs. 68 

Even drugs that succeed at launch may quickly be supplanted as other new brand competitors 

enter the market, as occurred with first generation of hepatitis C medicines. For example, despite 

initial success, two protease inhibitors launched in 20 11-scen at the time as substantial 

advances in treatment of hepatitis C -found that they were supplanted by more effective 

treatments following the introduction of the next generation of medicines in 2013. Thus, despite 

substantial investment and many years of research and development, competition from newer 

brands led these medicines to be withdrawn from the market within two years.69 This 

underscores the extraordinary risk biopharmaceutical companies confront to bring new 

treatments to market. 

*** 

67 Pharmaceutical Research and Manufacturers of America (PhRMA). Spurring Innovation in Rare Diseases: 2017 

update. http://phrma-docs.phrma.org/files/dmfi!e/Rare-Disease-Udpate FINAL.pdf. 

"Berndt ER, Nass D, Kleinrock M, Aitken M. Decline in Economic Returns from New Drugs Raises Questions 

About Sustaining Innovations. lfealth Affairs. 2015;34(2):245-252. 69 Loftus P. Merck Will No Longer Sell its Victrelis Hepatitis C Drug in the US. Wall Street Journal, Jan 21,2015, 

http:/ /blogs. wsj .com/pharmalot/20 15/0 1 /21 /merck-will-no-longer-sell-its-victrel i s-hepatitis-c-drug-i n-the·u-s/ 

19 
33 

Mr. BURGESS. Chair thanks the gentlelady. 

The chair recognizes Mr. DiLenge for 3 minutes for your opening 

statement, please. 

STATEMENT OF TOM DILENGE 

Mr. DILENGE. Thank you, Mr. Chairman, Ranking Member 

Green, Mr. Walden, Ranking Member Pallone. Thank you for the 

opportunity to testify today about how to sustain the biomedical innovation that is bringing home and cures to the patients who need 

them the most. 

I am Tom DiLenge. I am Vice President for Advocacy, Law, and 

Public Policy. While BIO represents the entire biomedical ecosystem—universities, startups, investors, large drug companies— 

the vast majority of our members—about 80 percent—are small 

companies with no marketed products and no profits. They rely 

heavily on outside investors and partners to fund the cutting-edge 

research that they do, and it is these small companies that are 

leading 70 percent of the nearly 6,000 clinical trials that are underway today. 

Another key fact—almost 60 percent of all new medicines are innovated right here in America, more than the rest of the world 

combined. We lead because America has a public policy environment that incentivizes the investment and innovation and this 

committee, on a bipartisan basis, has led the way on that for decades. This is critical because, while NIH funds really important research, it is the private sector that spends $150 billion every year 

in applied R&D to bring products from research to the marketplace. 

This investment provides more than 1.7 million American jobs 

and we are growing jobs at twice the rate of the national average. 

More importantly, we are having an awe-inspiring record of public 

health accomplishment, transforming HIV/AIDS from a death sentence to a manageable condition, increasing cancer survival in children to 83 percent today, and hundreds of other new medicines for 

once-debilitating diseases. 

We are saving millions of lives. We are saving trillions of dollars 

in the process. We are making discoveries that were once unimaginable—immuno-oncology, in which we activate the body’s own immune system to attack cancer—gene therapy, which we can repair 

defective genes or use the patient’s own cells to make a medicine 

tailored for that patient. 

Precision and personalized medicine is here. Thus, to understand 

the pricing dynamics of our market, it is important to consider a 

couple of facts. Ninety percent of clinical programs fail. Ninety-two 

percent of our companies are unprofitable. Ten to 15 years and $2.6 

billion, the average time and cost to bring a medicine through approval, that number has doubled since 2003, and nearly 90 percent 

of prescriptions today in America are for cheap generic copies of 

once-branded drugs. Thus, it is the revenues from the 10 percent 

of successful clinical programs that have to be sufficient to 

incentivize this entire wonderful innovation ecosystem. 

We have repeatedly seen biotech investment jeopardized by the 

spectre of government price setting. The small companies are the 

proverbial canaries in the coal mine when it comes to that. 

34 

We also recognize that patients, even those with insurance, cannot afford many of these lifesaving miracles. We share this commitment to solving the problem. BIO has joined the coalition with a 

lot of people at the table and others—insurers, PBMs, patient 

groups—to come up with market-based ways to lower drug costs. 

We’d love to work with this committee on doing that. 

Reward volume, reward value, not volume, inject more competition, empower patients. So with Congress’ continued support, we 

are going to put more Americans to work, we are going to lower 

health care costs, and we are going to heal the world in the process. 

Thank you, and I am happy to answer any questions you have. 

[The prepared statement of Mr. DiLenge follows:] 

35 


29424.020

Testimony of Tom DiLenge, President, Advocacy, Law & Public Policy 

Biotechnology Innovation Organization 

Before the U.S. House of Representatives Energy and Commerce Committee 

Subcommittee on Health Hearing on "Examining the Drug Supply Chain" 

December 13,2017 

Mr. Chairman, Ranking Member Green, and Members of the Subcommittee: BIO appreciates the 

opportunity to speak with you today about the innovative biopharmaceutical development and delivery 

system and its enormous contributions to patient health and the U.S. economy. 

My name is Tom DiLenge and lam the President for Advocacy, Law and Public Policy at the 

Biotechnology Innovation Organization, or BIO. BIO is the world's largest trade association representing 

biotechnology companies, academic institutions, state biotechnology centers, and related organizations 

across the United States and in more than 30 other nations. 8!0 is a unique association because it 

represents an entire technology, rather than a particular industry or sector. Our members operate at the 

intersection of biology and technology to discover innovative ways to not only heal the world, but also to 

help feed and fuel our planet in more sustainable and environmentally friendly ways. 

BJO also represents the entire biotech innovative ecosystem- from universities and research institutes, to 

start-up biotechnology companies, to the private investors that risk massive amounts of capital to fund 

these companies, to the larger, established companies that play a critical role in bringing these amazing 

innovations through the development and approval process and into the marketplace. 

Of our approximately 1,000 members, the vast majority of them arc small companies engaged in some of 

the most challenging, cutting-edge research in the world. They typically have no marketed products and 

no profits, and thus are heavily reliant on private capital to fund their work. They take enormous risks 

every day to develop the next generation of biomedical breakthroughs for the millions of patients 

suffering from diseases for which there currently arc no effective cures or treatments. 
36 


29424.021

BIO is enormously proud of their entrepreneurial and innovative spirit, and the dedication of all of our 

members to alleviating human suffering. I am honored to testify before you on their behalf today to 

explain what it takes to sustain this dynamic ecosystem and to bring new cures through the incredibly 

risky development and regulatory approval processes to the patients who need them. 

America's Role in Biomedical Innovation 

Let me emphasize at the outset a fundamental fact about biomedical innovation: American 

biopharmaceutical innovation delivers more new dmgs than the rest of the world combined. 

A !most 60 percent of all new medicines that treat patients across the world are innovated right here in the 

United States.l 

This dominant American leadership is made possible by a number of factors: 

Outstanding scientists; 

Savvy entrepreneurs; 

World-class research universities; 

A culture of learning from setbacks; 

And investors willing to take risky bets on life-saving cures. 

Yet other countries have similar capabilities, but don't drive innovation to the degree that America does. 

Why does America stand out and lead the world? Because we have a public policy environment that 

incentivizes investment in innovation. These policies include: 

Strong support for continued advancement and funding of scientific understanding; 

1 DeVol, R., Bedroussian, A, Yeo, B, "The Global Biomedical Industry: Preserving U.S. Leadership," Milken 

Institute, 20 11, at p. 5. 
37 


29424.022

Strong and predictable intellectual property (JP) rights and a reliable system for IP transfer, licensing 

and collaboration; 

An efficient and predictable regulatory environment that strives to keep up with advances in 

biomedical science; and 

Payment systems that reward innovation and encourage free-market competition. 

Yes, the American public has always had a love-hate relationship with drug companies, dating back to the 

late 1800s. But fortunately, even in the face of public pressure, Congress has steadfastly remained 

focused on curing disease and has opted against rash policy actions, including a refusal to impose 

artificial limits on the rewards for successful innovation. 

Congress' strong, bipartisan support for the National Institutes of Health (NIH) biomedical research 

enterprise, which BIO has consistently endorsed, has been a critical component of our nation's success. 

Yet while NIH funds the basic academic research that often leads to breakthrough discoveries about our 

biology and genetics, it is the private sector that drives the applied R&D and approval of actual new 

medicines based on those new scientific understandings. 

In fact, the biophannaceutical industry's collective annual research budget is more than $150 billionroughly five times the entire NIH budget- and our investments are growing much more rapidly than NIH 

funding2 About half of this private sector research- $75 billion a year- is invested right here in the 

United States, far more than any other industry in America.' In any given year, biopharmaceutical 

companies spend five times more on R&D than the aerospace industry- and more than double that of the 

2 See https://report.nih.gov/fundingfacts/fundingfacts.aspx; World Preview 2017, Outlook to 2022, EvaluatePharma, 

2017, at p. 19; Factset, BlO Industry Analysis. 3 Factset, BIO Industry Analysis. 
38 


29424.023

software industry.' Indeed, our industry plows more of our revenues back into research and development 

than any other American industry- period- roughly one out of every five dollars of revenue we 

generate.' 

These investments are paying off in big ways not only for patients living with terrible diseases and 

conditions, but also for American workers and our economy. Today more than 1.7 million Americans 

are employed in the biosciences across the United States. and we are growing jobs at a rate double the 

national average. 6 These are good-paying, highly skilled jobs, and support another seven million 

American jobs throughout the economy.' 

Biotechnology: A Young Industry with Enormous Public Health Contributions 

Modern biotechnology is a young industry. But in just a few decades, the entrepreneurs, scientists, 

researchers and investors working in this field have firmly established themselves at the forefront of 

medical innovation. Indeed, biotechnology's strong track record can be traced directly to the men and 

women working in the field. For them, biotechnology is not just an occupation. It is a mission and a 

calling to solve the greatest challenges of our time: to unlock the essence of life itself and to use what they 

learn to treat and cure disease. These individuals are entrepreneurial. They are risk takers. They are 

driven by science and are stubborn in their refusal to accept human suffering or the status quo. So, let's 

pause to examine the miracles our young industry already has made possible. 

4 Pitts, P. J., Why people don't trust drug makers. Nrnv York Post (September 24, 2015). Retrieved from 

https ://nypost.com/20 15/09/24/why -peop le-dont -trust-drug-makers/ 5 Factsct, BIO Industry Analysis. 6 TEConomy/BIO, The Value of Bioscience Innovation in Growing Jobs and Improving Quality of Life, 2016. 

Retrieved from https://www.bio.org/value-biosciencc-innovation-growing-jobs-and-improving-guality-life-20 16 

7 Ibid. 

4 
39 


29424.024

Thirty years ago, the HIV/AIDS epidemic pushed our country and our healthcare system to the brink. 

Facing more than one million people infected and nearly 100,000 deaths- American biopharmaceutical 

companies went to work, supported by an active patient community who demanded more flexibility from 

federal regulators. 

By 1996, with the development and FDA approval of the first wave of antiretroviral drugs, the HIV 

epidemic abated. Death rates have plummeted by nearly 85% since 1995.' Since then, nearly a million 

premature HIV/AIDS deaths have been prevented, saving our economy $1.4 trillion dollars.' 

What was once thought to be untreatable is now beatable. Today, a 20-year-old diagnosed with HIV can 

expect to live into their early 70s- a life expectancy comparable to that of a person without the disease. 10 

The biotech story doesn't end there. 

Medical breakthroughs are delivering meaningful, measurable results for millions of patients facing a 

wide variety of serious diseases. For example: 

There has been a 22% decrease in the cancer death rate since 1991, resulting in millions of lives 

saved and an estimated $2 trillion in economic savings; 11 

Today, 83% of children with cancer survive, compared to just 58% in the mid-1970s; 12 

8 U.S Department of Health and Services, Centers for Disease Control, "Health, United States, 2013, With Special 

Feature on Prescription Drugs," 2014. 9 Philipson T, Jena AB. "Who Benefits from New Medical Technologies? Estimates of Consumer and Producer 

Surpluses for HIV/AIDS Drugs. Forum for Health Economics and Policy." 2006;9 (2) Biomedical Research and the 

Economy, Article 3. 10 l Samji II, Cescon A, Hogg RS, Modur SP, AlthoffKN, eta!., Closing the Gap: Increases in Life Expectancy 

among Treated HIV-Positive Individuals in the United States and Canada. PLoS ONE 8(12): e81355 (2013). 11 Lakdawala ON, eta!. An economic evaluation of the war on cancer. Journal of Health Economics. May 2010. 

29(3):333-346. 

12 See https://www.bio.org/sites/default/files/BIO Cancer%20Medicine.pdf 
40 


29424.025

Today, 80% of people with Chronic Myeloid Leukemia experience 10-year survival rates, 

compared to only 20% a decade ago; 13 

Heart disease death rates decreased by nearly 30% between 2001 and 2010 alone; 14 

In a single year in America, statins that lower cholesterol save 40,000 lives, prevent 60,000 heart 

attacks, and avert 22,000 strokes; 15 and 

New therapies are delivering more than a 90% cure rate for Hepatitis C, saving our health care 

system billions in reduced hospital costs, liver cancer treatments, and liver transplants. 16 

Innovation truly saves- not just lives, but real dollars as well. In fact, ifbiopharmaceutical researchers 

arc able to develop a new medicine that delays the onset of Alzheimer's disease by just five years, 

America would save $367 billion in healthcare services by 2050. 17 To meaningfully bend the troubling 

healthcare cost curve, increased investment in new medicines is essential. 

The Next Wave of Biomedical Advances Are Here 

This is an extraordinary time for biotechnology. The therapies in development and coming to the market 

are unlike any we've seen in the history of medicine. Our companies are making discoveries that were 

unimaginable a decade ago. We truly are in a new era of medicine, and the science and its promise for 

alleviating human suffering is galloping forward. 

13 Journal of Managed Care, Nov. 2012 14 American Heart Association, Annual Statistical Update Report. December 20 14. Retrieved from 

http://newsroom.heart.org/news/new-statistical-update-looks-at-worldwide-heart-stroke-health 

15 Health Affairs, at content.healthaffairs.org/content/31/1 0/2276.abstract 16 Kabiri M, Jazwinski AB, Roberts MS, Schaefer AJ, Chatwal J. "The changing burden of hepatitis C virus 

infection in the United States: Model-based predictions." Annals oflnternal Medicine. 20 14; 161 (3): 170-180. 17 Alzheimer's Association, Changing the Trajectmy of Alzheimer's Disease: How a Treatment by 2025 Saves Lives 

and Dollars. Retrieved from https://alz.org/documents custom/ ALZ Trajectory Info Sheet 01.26.15 Final. pdf 
41 


29424.026

The days of traditional chemical drugs that treat broad classes of patients in blunt ways are giving way to 

the development of entirely new ways to treat and ultimately cure disease for targeted patient populations 

using living organisms, including a patient's own cells. 

These include advances such as immuno-oncology- in which we attack cancer by activating the body's 

own immune system against it, while leaving healthy cells alone. And cellular and gene therapy- in 

which we use a patient's own cells to develop a medicine tailored for that patient, or use other genetic 

techniques to repair or replace defectives genes causing disease. We've already seen the first wave of 

these advances reach the marketplace, with many more already in the FDA regulatory process, including 

novel medicines that utilize these techniques to treat childhood leukemia and blindness. 

Overall, our industry has nearly 6,000 new medicines in development for a wide range of life-threatening 

or debilitating diseases, with 74% of these clinical projects targeting new mechanisms of action- so 

called "first in class" medicines that work in entirely new ways to treat and cure disease. 18 

This is innovation at its best. The only thing that can stop our march forward is bad public policy. 

The Biopharmaceutical Ecosystem by the Numbers 

As The Economist magazine has noted, "Creating new drugs through biotechnology is at the risky end of 

a business in which superhuman stamina and bottomless pockets are minimum requirements." 19 Thus, to 

18 Emerging Therapeutic Company Investment and Deal Trends 2007-2016, BJO Industry Analysis, 2017, at 

bio.org/iareports; Long, G. The Biopharmaceutical Pipeline: Innovative Therapies in Clinical Development, 

Analysis Group, 20 17; The Analysis Group, The Biopharmaceutica/ Pipeline: Innovative Therapies in Clinical 

Development. July 2017. Retrieved from: http://phrma-docs.phrma.org/files/dmfile/Biopharmaceuticai-PipelineFuii-Report.pdf 

19 Biotechnology: Fever Rising. The Economist (Feb. 14, 2014). Retrieved from: 

https://www.economist.com/news/business/21596557-there-are-reasons-hope-latest-biotech-boom-will-not-befollowed-another 

7 
42 


29424.027

understand the biopharmaccutical innovation ecosystem and its pricing dynamics, you have to understand 

the numbers. Here arc the key ones: 

70%: that's the percentage of innovative clinical programs that are being led by small companies, 

which rely heavily on venture capitalists, angel investors, or partnerships with larger 

pharmaceutical companies to provide the enormous amounts of private capital required to fund 

these challenging and incredibly risky cndcavors. 20 

90%: that's the percentage of clinical programs that ultimately fail to lead to an FDA approval; in 

fact, the success rate of clinical trials can be even less than that, particularly in areas like 

Alzheimer's and cancer. 21 

92%: that's the percentage of biopharmaceutical companies that arc unprofitable at any given 

time. 22 

10-15 Years: that's the time it takes on average to secure FDA approval of a new medicine, from 

initial discovery of a potential new molecule or approach, through pre-clinical and clinical 

programs, and through the FDA regulatory and approval processes. 23 

$2.6 Billion: that's the average cost to develop and secure approval of a new medicine, taking 

into account all the trial and error and research failures along the way, and the cost of capital; this 

figure has skyrocketed in recent years, doubling since just 2003. 24 

36'•: that is where the biophannaceutical industry ranks among domestic industries in tenns of 

return on investment, despite the popular media narrative of excessive drug industry profits. 25 

20 Emerging Therapeutic Company Investment and Deal Trends 2007-2016, B!O Industry Analysis, 2017, at 

hio.orgliareports. 

21 Clinical Development Success Rates 2006-2015, BIO Industry Analysis, 2016, at bio.orgliareports; for example, 

since 1998, 123 medicines in development for Alzheimer's have not made it through clinical trials, while only 4 

have been approved- resulting in a 97% failure rate. See PhRMA, Researching Alzheimer's Medicines: Setbacks 

and Stepping Stones, Summer 2015. Retrieved from http://phrmadocs.phrma.org/sitesldefau ltlfi les/pdf/alzheimersetbacksreportfinal912 .pdf 

22 Factset, B!O Industry Analysis. 23 DiMasi J., Grabowski, H., Hansen, R. Innovation in the Pharmaceutical Industry: New estimates of R&D Costs. 

Journal ofHealth Economies, 2016, at pp. 20-33. 24 lbid. 25 Factset, BIO Industry Analysis. 
43 


29424.028

89%: that's the percentage of all prescriptions in America that are for lower-cost generic copies 

of once-branded pharmaceuticals. 26 

The hundreds of billions of dollars needed to support this private biopharmaceutical ecosystem each year 

come from two basic sources: private and public investors, and sales revenues from existing marketed 

medicines. Thus it is the revenues from the 10% of successful clinical programs and the 11% of 

prescriptions for branded medicines that have to reward investors and support the continuing R&D 

innovation cycle. And they must do that before generics can copy them and enter the market, because 

once generics enter the market, prices and innovator market share fall dramatically. Notably, no other 

component ofhealtheare (e.g., hospital or physician fees) experiences such reductions in price over timea fact that is often ignored during debates regarding drug pricing. 

As noted above, the costs of drug innovation have increased dramatically over the past 15 years. This is 

partly due to increased regulatory and payer demands for more and better data on drug safety and 

effectiveness. But it also has much to do with the new era of genomic and personalized medicine. We 

are tackling the most challenging of problems, and the more we learn about our biology and the basis of 

disease, the more complex our R&D processes become. Furthermore, while these costs go up and up, the 

patient populations to be served are becoming more and more targeted, reducing the ability to spread 

these costs across wide patient populations. 

Thus, this critically important innovation ecosystem can continue to flourish only if it has the confidence 

and financial backing of investors. Biotech investors- like all investors- expect a reasonable return on 

their investments, free from artificial, government-imposed restrictions or erroneous assumptions about 

26 Association for Accessible Medicines. Generic Drug Access & Savings in the US (2016). Retrieved from 

https:l/accessiblemeds.orglsitesldefault/filesl20 17-07120 17 -AAM-Access-Savings-Report-20 17-web2.pdf 

9 
44 


29424.029

investment returns. 

So, let me be absolutely clear here: investment in the biotech sector is directly in!1uenced by the public 

policy debate in Congress and the states, and by the policy positions taken by our leading public officials. 

We have seen that impact over and over again over the decades, with the latest example occurring just last 

year amid all the negative focus on drug prices during the 2016 presidential campaign. While the stock 

index for market-stage drug companies declined slightly during 2016 (only 3%) the index representing 

small research-stage biotech companies plummeted 38% over that same time." Here are some more 

troubling data points from 2016: 

The number of new biotech IPOs dropped in half; 

The dollars spent of acquisitions of small biotech companies dropped by 43%; 

The dollars invested by venture capital in late-stage financing rounds dropped by 33%; and 

The number of biotech licensing deals dropped by 17% and the value ofupfront payments to 

small biotech companies as a result of such deals was cut in half.2' 

Indeed, these smaller companies -the ones that account for 70% of the cutting-edge clinical programs 

underway today- are the proverbial canaries in the coal mine. When the public and policy debates turn 

against innovation, these small companies are the first to feel the negative results- making it harder for 

them to raise the capital needed to advance their R&D programs. And for patients waiting for the next 

modern biotech miracle, that is really bad news. 

27 Based on index performance in 2016 for the LifeSci Biotechnology Clinical Trials Index and the LifeSci 

Biotechnology Products Index. See Life Sci Index Partners, at http://www.bioshares.com; Factset, B!O Industry 

Analysis. 

28 Emerging Therapeutic Company Investment and Deal Trends 2007-2016, B!O Industry Analysis, 2017, at 

bio.org/iareports. 

10 
45 


29424.030

Yes, in the biotech sector, risk is an everyday reality. Indeed, biotech is synonymous with risk. But 

political and policy risk is something different. It can cripple innovation. 

The Right Way to Enhance Patient Access and Affordability of New Drugs 

BIO and our members recognize that too many patients, even those with insurance, cannot afford access 

to the life-saving cures and treatments that biotech companies are developing. We stand with the 

Members of this Committee, the Congress, and the Trump Administration in our shared commitment to 

addressing this serious problem. 

But to accomplish this, we have to harness- not abandon- the free market that has delivered amazing 

innovations for patients and made America first in the world in biomedical innovation. BIO supports 

enhancing drug affordability through competition. If we act smartly to promote market-based reforms 

that spur greater competition and efficiencies in our healthcarc sector, we can improve patient access to 

the innovations of today, while preserving incentives to discover the next generation of innovations for 

the patients of tomorrow. 

That's why BlO has joined with stakeholders across the healthcare spectrum including insurers, PBMs, 

employers, and patient groups- in a coalition that developed and supports consensus, market-based 

reforms to lower drug costs without harming innovation. Through the Council for Affordable Health 

Coverage, 29 BIO and our allies arc working to: 

Increase marketplace competition by speeding regulatory approval of more innovative drugs, and 

promoting greater and faster generic and biosimilar entry once patents and exclusivities for 

innovator drugs have expired; 

29 https://www.cahc.net/prescription-drugs/ 

11 
46 


29424.031

Move towards a drug payment system that is based on value and patient outcomes rather than 

volume, by removing regulatory and legal barriers that hamper value-based arrangements and 

communications between innovators and payers; 

Empower patients and providers with more data on drug costs and value to help them make more 

informed choices; and 

Oppose innovation-killing ideas like price controls, drug importation, or direct government 

"negotiation" of drug prices in Medicare. 

The Council estimates that, if fully adopted and implemented, these reforms could lower national health 

expenditures by $71 billion a year. 30 This approach also is consistent with the landmark 21" Century 

Cures Act shepherded through Congress last year by this Committee on a strongly bipartisan basis, as 

well as this Committee's more recently enacted Food & Drug Administration Reauthorization Act 

(FDARA). BlO was a strong supporter of both of these bills, which we believe will help expedite the 

delivery of new innovations to patients in need, while also speeding competition among branded 

medicines and from more generics and biosimilars. We all want to see FDA approve generic drugs as 

efficiently as possible and for the backlog of generic drug applications to be reduced quickly. More 

choice and competition is good for patients and the healthcare system overall. 

That said, it should be noted that, generally speaking, the United States has a robustly competitive market 

for drugs, where innovators compete vigorously with one another to produce safer and more effective 

medicines within the same class, and then compete on price as part of negotiations with powerful, 

sophisticated, and aggressive commercial middlemen such as insurance companies and pharmacy benefit 

managers who control patient access to these innovative products. While there are pockets of exceptions 

to this competitive environment, the reality is that the average innovator drug has a short period of time 

JO Ibid. 

12 
47 


29424.032

on the market without competition from other similar products (roughly two years 31 ), and nearly nine out 

of every 10 prescriptions filled in America are for cheaper generic copies of once-branded drugs. 32 

Conclusion 

America is one of the only countries left in the world that doesn't treat a vibrant, risk-taking biotech 

industry like a regulated public utility- because we know that doing so will cause investors to !lee this 

critical sector and put their money elsewhere. And this much we also know: lfwe adopt price restrictions 

favored in countries with socialized medicine, we can expect to get the level of innovation found in 

countries with socialized medicine. 33 

!310 recognizes that it's sometimes easy to think of biotech companies as simply manufacturers of 

expensive pills and biologics. But nothing could be further from the truth. Whether we are suffering 

from disease or caring for a loved one who is, the biomedical innovation ecosystem gives every one of us 

the most precious gifts of all hope that tomorrow will be better than today, and more time to share with 

those who mean the most to us. 

We're life savers. 

We're the "cure" to the growing societal cost of disease. 

And we're job creators, investors, and drivers of American economic growth and global technological 

leadership. 

31 Sec "Nearly All Later Entrants to Drug Classes Were in Clinical Testing or Regulatory Review Before First-inClass Approval," Tufts Center for the Study of Drug Development, November 3, 2015, at 

http://csdd.tufis.edu/news/complete story/pr ir november december 2015 32 Association for Accessible Medicines. Generic Drug Access & Savings in the U.S. (20 16). Retrieved from 

https://accessiblemeds.org/sites/default/ftlcs/20 I 7-07/20 I 7 -AAM-Access-Savings-Report-20 17 -web2.pdf 33 Joseph H. Golec and John A. Vernon, "Financial Effects of Pharmaceutical Price Regulation on R&D Spending 

by EU versus US Firms," Pharmacoeconomics 28, no. 8, (2010): 615--{;28. 

13 
48 


29424.033

With Congress' continued support, we will put more people to work, lower health care costs, and heal the 

world. 

Thank you for the opportunity to present our views today. For more information on drug costs and value, 

I would encourage you to visit www.drugcostfacts.org, a comprehensive website that answers many of 

the questions patients and policymakers frequently ask about the drug supply system by reference to 

expert studies and other independent data sources. 

And I stand ready to answer any questions you may have during my testimony as well. 

14 
49 

Mr. BURGESS. The chair thanks the gentleman. 

Mr. Davis, you’re recognized for 3 minutes for an opening statement, please. And your microphone. 

STATEMENT OF CHIP DAVIS 

Mr. DAVIS. Sorry about that. 

Good morning, Chairman Burgess, Ranking Member Green, 

Chairman Walden, and Ranking Member Pallone, members of the 

subcommittee. Thank you for the invitation and opportunity to testify today. 

As stated, my name is Chip Davis. I am the President and CEO 

of the Association for Accessible Medicines. We are the leading 

trade association for manufacturers of FDA-approved generic and 

biosimilar medicines. Our members manufacture more than 61 billion doses of medication at over 150 facilities here in the United 

States on an annual basis. 

As you know, Americans across the political spectrum are calling 

for action to lower the cost of prescription drugs, making it a foremost health priority, which is why we are all here today. Despite 

a lot of well-intentioned rhetoric, over the last year the problem of 

high drug prices by and large continues unabated. 

Last month, the nominee for secretary of health and human services, Alex Azar, said that drug prices are too high and must be lowered. FDA Commissioner Scott Gottlieb recently characterized drug 

costs as a public health concern. 

Congress now has the opportunity to take meaningful action to 

lower the cost of prescription drugs. Over 30 years ago, through 

Hatch-Waxman, Congress sought to strike a careful balance between encouraging innovation in drug development, which we all 

support, and accelerating access to lower cost generic alternatives 

for patients. 

Unfortunately, the patient access side of Hatch-Waxman is absolutely unequivocally in jeopardy as we speak. This is due to a combination of factors, including a failure of policy to keep pace with 

a changing pharmaceutical market, a growing market and balance 

between generic buyers and sellers, and an increase in anti-competitive business practices deployed by certain brand companies 

who have been increasing these activities so much in recent years 

that recently Commissioner Gottlieb counseled the industry last 

month, and I am quoting, ‘‘to end the shenanigans,’’ during his formal remarks at an FTC hearing. 

The generic industry operates in a rapidly changing oftencommoditized marketplace with significant and unique pressures 

that distinguish it from the monopolized brands sector. As a result, 

generics continue to experience accelerated price deflation. In fact, 

it is ironic in many ways that at a time when the overall costs of 

prescription drugs is such a high profile issue that generic medicines are currently experiencing an unprecedented degree of price 

deflation, which impacts the national health estimate figures that 

were mentioned previously. In fact, according to IQVIA, which is 

formerly Quintiles IMS, for 16 consecutive months generic drugs 

prices have declined. 

Our members operate in a consolidated market where three large 

buying consortiums of wholesalers and retail pharmacies now conVerDate Nov 24 2008 10:02 May 30, 2018 Jkt 037690 PO 00000 Frm 00057 Fmt 6633 Sfmt 6633 I:\MY DOCS\HEARINGS 115\HEARINGS\115-88 CHRIS
50 

trol 90 percent of the retail generic market. Portfolio decisions related to what medicines they will continue to manufacture, announcing pending closures of manufacturing facilities, and significant anticipated job layoffs in the generic sector are all things that 

we are currently experiencing. 

Should the market not evolve itself and should Congress fail to 

take action, these trends will continue, threatening uninterrupted 

patient access to the needed generic medicines. When generics and 

biosimilars are available, competition increases and patients benefit from access to safe and affordable treatment options. 

We have provided this committee with recommendations that 

Congress could take today to increase competition and increase patient access. 

I thank you again for the opportunity to testify and look forward 

to your questions today. 

Thank you. 

[The prepared statement of Mr. Davis follows:] 

51 


29424.034

Introduction 

Your Gellerics ami Biosimilan IDdustrg 

Statement of Chester 'Chip' Davis, Jr. 

U.S. House of Representatives Energy and Commerce Health Subcommittee 

Examining the Drug Supply Chain 

December 13,2017 

Chairman Burgess, Ranking Member Green and members of the committee, thank you for the 

invitation to testify today. I am Chip Davis, President and CEO of the Association for Accessible 

Medicines (AAM). AAM is the nation's leading trade association for manufacturers and distributors of 

FDA-approved generic and biosimilar prescription medicines. Our members provide more than 36,700 

jobs at nearly 150 facilities, and manufacture more than 61 billion doses in the United States every 

year. AAM's core mission is to improve the lives of patients by advancing timely access to affordable 

generic and biosimilar medications. 

I commend you for convening today's hearing to examine the critical challenge of high and rising drug 

prices. 

Generic medicines represent greater than 89 percent of all prescriptions dispensed in the U.S., but only 

26 percent of expenditures on prescription drugs, saving patients and payers nearly $5 billion every 

week. 1 Our industry is proud to be able to deliver these savings to the healthcare system. 

It is sobering to consider what America's patients would face if there were no FDA-approved generic or 

biosimilar medicines to provide reliable access to affordable treatments. Generics don't just deliver the 

most medicine at the lowest cost and greatest savings; generics cushion the significant impact dealt 

to patients and the healthcare system by high brand name drug prices every day. 

Put another way, the availability of low-cost generics offsets the impact of high brand drug prices. 

Whereas prices for FDA-approved generic medicines are currently declining by over 7 percent yearover-yea!·, prices for brand drugs, especially biologics and specialty medicines, are increasing at an 

unsustainable rate. From 2007 to 2016, brand specialty medicines grew to occupy almost 43 percent 

AAM 2017 Generic Drug Access & 

601 NEW JERSEY AVE. NW • SUITE 850 WASHINGTON, DC· 20001 • PHONE 2CJ2~249-71GO ·FAX 202·249-7105 
52 


29424.035

Your Geaerics ;md BiosimiJars Industry 

of spending. These products treat less than 3 percent of the population, and can often cost patients 

thousands of dollars per treatment. 

To illustrate this fact, consider that generic drug revenue has declined for 16 consecutive months and 

that 80 percent of the top 20 generic companies had negative dollar growth over the past year. 2 

Contrast this w·rth the expectation published last week by Moody's Investors Service that net prices on 

brand drugs would continue to rise 3 

Consider the costs that patients would face in the absence of these levels of generic competition. Last 

year, use of generic medicines saved $253 billion. It has produced $1.67 trillion in savings over the last 

ten years. This has produced meaningful and sustained patient access. Without generic medicines, 

spending on cholesterol drugs would be more than three-and-a-half times higher, diabetes drugs 

almost three times higher, and spending on breast cancer drugs eight times higher' 

However, the sustainability of a competitive generic market and the availability of generic medicines 

for patients, uninterrupted by shortages, is in jeopardy. In 1984, Congress enacted the Hatch-Waxman 

Act which represents a model of successful, bipartisan public policy. Over its more than 30-year 

history, the Act has produced a thriving and constantly-changing marketplace by balancing innovation 

in drug development and accelerating the availability of lower cost generic alternatives. This has 

important effects on public health, allowing patients to live longer, healthier lives. 

This balance is now threatened by three factors: 

changing and increasingly challenging market and reimbursement frameworks; 

• the abuse of laws and regulations by bad actors; and, 

a failure of policy to account for the unique challenges facing generic and biosimilar medicines. 

In fact, while brand drug innovation has benefited from a series of subsequent laws establishing 

incentives and development tools, the generic and biosimilar marketplace and patient access has not 

received an equivalent level of attention. That neglect, combined with current market and 

'l IVOIA. analysis of National Sales Perspectives and Nationa\ Prescription Audit data through October 2017 < 

3 Moodys· Outlook for global healthcare mdustry in 2018 is stable. Business Standard. (2017, Dec. 8). Retrieved from 

http://www .b1 JS iness-stan dard.com/artic!e /news~cm/moody-s-o utlook-for-gl oba 1-hea It hcare-indlJstry-i n-20 18-js-sta b le117120800572 1 html 4 AAM 2017 Genenc Drug Access & Savings in the U.S., http:/laccessiblemeds.orglsites/default/files/2017-07 /2017-AAMAccess-Savings-Report-2017 -web?.odf 
53 


29424.036

Your Generics and Biosimilars lmlustty 

anticompetitive realities, reinforces why the continued attention to this issue- including the FDA's 

public hearing and the FTC's recent public workshop- are so important 

Congress must act to support generic and biosimilar competition and supply to ensure continued 

access for patients. It can do so by: 

1. Repealing the misguided Medicaid penalty on generic drugs; 

2. Preventing brand abuses designed to block generic and biosimilar competition by passing the 

bipartisan CREATES Act and FAST Generics Act; and, 

3. Ensuring that biosimilar medicines have a level and competitive playing field in Medicare. 

Generic Drug Markets are Fundamentally Different than Brands 

First, it is important to provide context about the generic marketplace. Not only is the FDA approval 

process different for generics and brand-name drugs, but their respective markets and the path by 

which they reach patients diverge significantly, with important policy implications. 

The 1984 Drug Price Competition and Patent Term Restoration Act, commonly referred to as the 

Hatch-Waxman Act, created an abbreviated pathway for generic drugs. This allows manufacturers to 

rely upon the existing clinical data of the brand product and demonstrate to FDA that their product is 

the same as the reference product 

Hatch-Waxman also provided numerous lucrative incentives for brand-name drug companies, 

including extensions of patent terms, regulatory exclusivities that guarantee market monopolies 

regardless of the intellectual property status, and a clear litigation pathway for asserting intellectual 

property claims against generic manufacturers. 

Supply Chain Differences Drive Model Differences 

The balance established by Hatch-Waxman also created a new and different market for generic drugs 

separate from brand drugs that has supported growth in generic utilization and its attendant 

savings for patients. Although brand manufacturers often criticize pharmacy benefit managers (PBMs) 

and health plan formulary and rebate practices, the supply charn and pricing models they criticize do 

not represent the vast majority of prescription drugs distributed in this country. The 89 percent of 

prescriptions filled by generic medicines are subject to a different set of economic incentives and 

3 
54 


29424.037

YDur Generics aad Biosimilars lndustty 

arrangements -the result of multiple manufacturers marketing identical products and competing 

exclusively on price, in a commodity-style market. 

When brand manufacturers leverage the pricing power granted by their patents and regulatory 

exclusivities, PBMs, distributors, and payers rely on formulary management and rebating agreements 

to control costs. 

However, upon generic entry, payers typically shift away from rebate models of reimbursement and 

rely on distribution channels to effectively lower the price of the medicine. Rather than providing 

rebates to lower the cost, generic manufacturers must compete for sales to wholesalers. Because the 

products are virtually identical, the primary leverage manufacturers have is their ability to lower the 

price and provide the necessary volume. With more than 200 generic manufacturers recognized by the 

FDA, competition is fierce and prices decline rapidly. The wholesalers, often in collaborative purchasing 

agreements with pharmacies across the country, then distribute generic medicines to various retail 

pharmacies. Generic manufacturers may have to compete even further by negotiating separate 

payments to pharmacies to stock their product. 

The different business model leads to a different type of business planning by generic and biosimilar 

manufacturers. As part of this, the decisions by which generic and biosimilar manufacturers select 

which products to develop can take into account multiple variables. Considerations include the 

complexity in reverse engineering the original product, the state of the intellectual property claimed by 

the brand manufacturer over the product, the size of the patient population served, the number of likely 

competitors for that product, the product development and manufacturing capabilities and costs. 

Generic drug reimbursement is also different. Rather than relying on per-transaction rebates, PBMs 

and insurers typically establish a "Maximum Allowable Cost" (MAC) list that sets a specific 

reimbursement rate for the product, regardless of the generic product cost to the pharmacy. These 

MAC lists create additional incentives for pharmacies to maximize their dispensing margins by finding 

the lowest-cost source for generic products. 

The result is a business model that differs significantly from the brand business model. While brand 

companies typically market a small number of high-margin products, many generic manufacturers 

market hundreds of products with varying levels of profitability or loss. 

4 
55 


29424.038

Your GeDerics aud Biosimilars Industry 

Generics Face Increasing Supply Chain Pressures 

These differences in the generic and brand marketplaces create vastly different incentives for the 

various manufacturers, wholesalers, distributors, PBMs, insurers, and retail pharmacies that make up 

the supply chain. To put it simply, virtually all other actors in the supply chain enjoy significant financial 

benefits from the manufacture of generic medicines. 

This phenomenon was most recently examined by a group of researchers at the USC Leonard D. 

Schaeffer Center for Health Policy & Economics. That analysis, 'The Flow of Money Through the 

Pharmaceutical Distribution System," identified two items relevant to today's hearing· 

First, for every sale of a brand name drug to a patient, the brand manufacturer captures 

approximately 76 percent of that revenue. Comparatively, generic manufacturers keep only half 

of that percentage. Moreover, generic manufacturers cannot rely on capturing the total volume 

within the market as the brands do, and therefore individual generic manufacturers are forced 

to rely on much smaller revenue streams. To put it simply, brand drugs capture a higher 

percentage of the spend of a higher-value market. 

Second, the supply chain captures significantly more of the revenue spent on generic medicines 

than on brand-name drugs. For every $100 spent on dispensing generic medicines in this 

country, approximately $55 goes to the distribution and reimbursement of those products by 

the members of the supply chain. PBMs make nearly three times as much on generics as they 

do on brands. Wholesalers make about eight times more. Pharmacies make more than 10 

times more for every $1 00 on generics than brands. 5 

While the analysis demonstrates a series of strong incentives to drive patients to generic medicines, 

supply chain consolidation may jeopardize that success. 

Compared to the fragmented generic drug market, consolidation in the wholesale market and 

contractual arrangements between pharmacy chains and the wholesalers have left generic 

5 Sood, et al., 'The Flow of Money Through the Pharmaceutical Distribution System.' June 2017. 

http I /healthpolicy.usc.ed uldocuments/USC%20Schaeffer Flow%2Dof%20ffoney 20 17.odf 

5 
56 


29424.039

Your Generics and Biosimilars lndusay 

manufacturers with only a small number of purchasers. The result is a market where three purchasers 

account for more than 90 percent of all wholesale revenue6 

As these purchasers move more and more toward single-source contracts for generic drugs, it often 

creates a dynamic where it is possible that no more than three generic manufacturers may be able to 

successfully market any given product This risks future competitive success in the generic market as 

generic drug manufacturers may be forced to maximize economies of scale and consolidate 

themselves. 

Patients Face Growing Cost Pressures 

Patients thrive because of generic medicines, both in terms of health outcomes and financial savings. 

For insured patients, more than 90 percent of generic prescriptions are filled for $20 or less out-ofpocket. That is in comparison to just 39 percent for brands at that price. 7 

Data shows patients are far less likely to fill a prescription for a high-priced brand drug. In fact, brandname drugs make up 20 percent of approved claims but account for 40 percent of all abandoned 

claims for new patients. Moreover, new patient abandonment rates for generics are three times lower 

than for branded products8 Patient abandonment has a serious effect on patient health -leading to 

hospitalizations, deaths and extensive health system costs. 

This is not to say that the market functions perfectly in providing patients with the lowest cost 

possible. Many generic medicines are subject to significant markups after they leave the generic 

manufacturer. As an example, amoxicillin/potassium clavulanate, commonly referred by its branded 

name Augmentin and used for the treatment of infections, is sold by the generic manufacturer for 

pennies per pill. However, by the time a patient picks it up at the pharmacy counter, it may have a cash 

price as high as S60 for 20 pills, or $20 for a fill for patients with commercial insurance. 9 

6 Fein, Adam J. Fein. The 2016-2017 Economic Report on Pharmaceutical Wholesalers and Specialty Distributors, 

September 2016. 1 AAM 2017 Generic Drug Access & Savings 1n the U.S., http//accessiblemeds.oro/sites/default!files/2017-07 12017-AAMAccess-Savings-Report-20 17 -web2.pdf. 8 /d 

9 Data on manufacturer sales from CMS Average Manufacturer Price (AMP) data. Typical pharmacy prices from 

GoodRx.com. 

6 
57 


29424.040

Your Generics aDd Biosimilars Industry 

It is clear the significant benefits for patients of reliable access to affordable generic medicines are at 

risk. Notwithstanding the economic principle that more suppliers of a good or service creates lower 

prices for consumers, it is unclear that the new imbalance between 200 generic competitors and a 

handful of purchasers is sustainable. Some industry analysts have already begun to forecast 

consolidation among generic manufacturers. 

An unfortunate yet foreseeable consequence of fewer generic manufacturers is a significantly 

increased risk of drug shortages. Evidence suggests that generic drugs are particularly susceptible to 

drug shortages, potentially related to existing market incentives as well as low reimbursement. 10 Such 

shortages have a serious effect on patient care. Responding to a series of drug shortages in 2011, Dr. 

Scott Gottlieb testified before Congress that many such shortages were a direct result of low 

reimbursement for older, low-margin products and that "many hospitals are being forced to ration key 

medicines and patients to sit on waiting lists for vital drugs."11 

Policymakers Should Recognize Market Differences 

It is critical that policymakers take steps to ensure the continued supply of affordable FDA-approved 

generic medicines. Failure to do so threatens a stable supply of generic medicines. 

Congress recently created a new inflation-based penalty in the Medicaid program for generics as part 

of the Bipartisan Budget Act of 2015.The legislation inappropriately applied a tool crafted for the brand 

drug market to generic markets, essentially conflating what transpires in a monopolized market with 

what occurs in a commoditized market with multiple competitors. Under the legislation, generic 

manufacturers are now subject to additional rebates for products even in the absence of changes in 

the actual price of the product. This is a direct result of a flawed application of a brand drug scheme 

that fails to recognize the significant volatility in generic prices. 

As a result, manufacturers of affordable generic medicines are now paying millions of dollars in 

"penalties" on products that have not been subJect to a price increase. In many instances, changes in 

customer mix from one quarter to another have triggered penalties solely due to purchasers getting 

lower discounts on smaller volume orders -a normal occurrence in a competitive market. These 

10 Stromberg, C. (May 2014). Drug Shortages, Pricing, and Regulatory Activity. National Bureau of Economics Workrng 

Paper. http'llwww.nber.org/chaoters/cl31 O?.odf 

., Gottlieb, Scott. "Drug Shortages Why they happen and what they mean" Testimony before the Senate Finance 

Committee. December 2011. https://www.finance.senate.gov/imo/media/doc/Gottlieb%20Testimonyl .pdf 

7 
58 


29424.041

changes do not necessarily reflect any new price being set by the manufacturer, but may merely 

reflect new purchasing patterns. 

These unpredictable, onerous penalties on often low-margin medicines creates significant risk for 

manufacturers that would consider entering these markets, and makes it more challenging for 

manufacturers to continue participating in those markets. A recent analysis concluded that the penalty 

would "increase uncertainty, reduce revenues, encourage manufacturers to exit the market, and 

discourage the entry of new manufacturers. The predictable effect of discouraging entry into 

competitive markets is that product availability will be hampered: shortages will be more likely, and the 

market forces that lead prices to fall will be dampened."12 1ronically, the analysis also concluded that 

the penalty "will not only have little effect on generic prices, but it will also have the unanticipated and 

unintended consequence of increasing the likelihood of shortages for potentially life-saving generic 

medicines."13 Accordingly, we urge Congress to repeal this penalty. 

AAM and its members strongly support innovation. The generic and biosimilar marketplaces rely on 

the existence of a vibrant brand medicine industry. Fortunately, innovation continues to flourish. FDA 

has already approved more new molecular entities this year than it did in all of 2016. This is good news 

for all of us. But the balance between innovation and access requires a clear opportunity for FDAapproved generic or biosimilar entry. Without that competition, there can be no savings for patients or 

taxpayers. Unfortunately, many brand drug companies have responded to the threat of competition by 

deploying new and controversial ways to extend their high monopoly prices. 

Shenanigans Extend to Intellectual Property 

Recently, one company went so far as to pay a Native American tribe to rent its tribal sovereign 

immunity by taking ownership of certain brand name drug patents facing a challenge. Allergan, Pic 

(AIIergan), a Dublin, Ireland-based drug company, transferred the patent rights to its blockbuster drug 

Restasis® to the St. Regis Mohawk Tribe in a blatant effort to shield those patents from an 

administrative review process established by Congress in 2011 and block generic competition. 

the CPI Rebate will Reduce Competition and Increase the Likelihood 

8 
59 


29424.042

Yo1u Generics aDd Biosimilars IDdustty 

The deal stands to be a profitable one for Allergan. Restasis generated $1.4 billion in 2016 sales. 14 For 

less than 0.1 percent of the drug's annual sales, Allergan's deal could delay patient access to 

affordable generic drugs for six more years. This is a supply chain failure that Congress should 

prevent. 

According to press reports, Allergan provided an initial payment of $13.75 million to the St. Regis 

Mohawk Tribe and $15 million in annual licensing fees. Every day Allergan delays competition, the 

company takes in more than $4 million in revenue due to the lack of generic competition. All erg an will 

recoup this licensing fee in around four days. 

Allergan's transfer of its patents to the St. Regis Mohawk Tribe is an end-run around the legal process 

established by Congress to challenge questionable patents. If Congress wants to ensure that 

Americans have access to affordable prescription drugs, it must address schemes like Allergan's to 

delay generic competition by renting sovereign immunity. The action by All erg an to ensure that 

patients and payors do not benefit from timely generic competition to Restasis is an alarming example 

of the steps that brand name drug companies will take to put profits above the public interest. But it is 

by no means the only such example. Congress should outlaw these practices and strengthen the Inter 

Partes Review(IPR) system. 

Barriers to Generic and Biosimilar Development Threaten Access & Savings 

As this committee is aware, many generic and biosimilar manufacturers face significant challenges 

obtaining the samples needed for generic or biosimilar development. This is a result of the misuse of 

systems designed to ensure the safety of medicines by certain brand drug companies focused on 

delaying or prevent competition. Such delays created by misuse, abuse or regulatory failure deserve 

Congressional attention. In short, if generic and biosimilar development is frustrated, they will never 

enter the supply chain. 

FDA Commissioner Gottlieb has repeatedly highlighted the abuse of FDA-mandated restricted 

distribution systems and restricted distribution systems that brand companies create on their own, 

without any mandate from FDA, to delay or completely prevent generic competition. 

14 Alllergan pic, Annual Report (Form 1 0-K), at 59 (February 2017) (link) 

g 
60 


29424.043

Ycnu Ceaerics and Biosimilars Industry 

This occurs when brand companies, using a Risk Evaluation and Mitigation System (REMS) or their 

own voluntary "safety" program as an excuse, refuse to sell samples of their products to generic and 

biosimilar companies so that they can conduct the requisite bioequivalence and other testing. AAM 

members that have sought to purchase brand products from wholesalers in the supply chain are often 

informed that the wholesalers' contracts prohibit the sale of the brand product for generic studies. To 

date, FDA has received more than 150 complaints of specific challenges to obtaining samples. 

These abusive practices are directly counter to Congressional intent reflected in both Hatch-Waxman, 

which seeks to create generic competition as soon as brand monopoly protection has expired, and the 

Food and Drug Administration Amendments Act, which specifically prohibited the use of REMS to 

delay generic competition. 

The FDA has taken steps to limit these kinds of abuses. In 2014, the FDA released a draft guidance 

that attempted to assist prospective generic and biosimilar applicants in their efforts to acquire the 

samples necessary to conduct bioequivalence testing. Under the guidance, the FDA reviews 

bioequivalence protocols. Following its review and identification of any required changes, the FDA 

sends a letter to the brand sponsor indicating that the proposed testing contains safety protections 

that provide the same level of patient-protection as those in the applicable brand's safety protocol and 

that the FDA will not consider it a violation of the law for the brand sponsor to provide samples to the 

designated potential generic or biosimilar applicant. Although well-intentioned, the draft guidance has 

failed to solve the problem and patients wait in vain for FDA-approved generic and biosimilar versions 

of these medicines. 

Generic applicants are also challenged by brand companies' refusal to negotiate in good faith the 

creation and implementation of a single-shared REMS system (SSRS). Under current law, if a brand 

drug is subject to a R EMS that contains Elements To Assure Safe Use (ETASU), generic versions 

cannot be approved unless they are subject to a SSRS to implement the ETASU elements. Moreover, 

the Federal Food Drug and Cosmetic Act provides that a generic drug must utilize a shared system 

along with the brand drug unless FDA waives this requirement for one of the reasons set forth in the 

statute. In other words, the brand and generic must agree on how to implement the existing safety 

protocol jointly, unless the FDA says otherwise. 

The creation of a shared system should be relatively straightforward and simple-generic applicants 

merely join the existing safety system. Fundamentally, this is the business of generic manufacturers: 

taking a sole-source product and making it a multi-source product. However, brand companies 

regularly use a variety of tactics to systematically delay and extend the brand/generic negotiations. 

70 
61 


29424.044

Your Generics aad Biosimilan lndustrv 

This refusal to engage in good faith negotiations can delay the approval of the generic product and 

force consumers to pay more to fill their prescriptions. 

This abuse injures competition. Commissioner Gottlieb recently testified that: 

brand companies often have an incentive to refuse to agree to a single, shared system 

REMS. By prolonging the negotiations over a single, shared system REMS, they further 

delay generic drug approval and competition. We see prolonged negotiations and 

inability to agree on the terms of a single, shared system REMS regularly. 15 

AAM applauds Commissioner Gottlieb's leadership to develop a "Drug Competition Action Plan" to 

address regulatory issues that are impeding competition, including abuse of restricted distribution and 

REMS systems. However, AAM is concerned that FDA's enforcement authorities as provided in FDAAA 

will not be adequate to fully stem the brand abuses that have become so widespread in recent years. 

For instance, the civil monetary penalties available under FDA's enforcement authority pale in 

comparison to the revenue available by impeding generic entry. Center for Drug Evaluation and 

Research (CDER) Director Dr. Janet Woodcock noted that "fines and everything might simply be 

considered a cost of doing business because there's so much at stake in delaying generic 

competition."16 Also, the FDA's authority to address the brand abuses using voluntarily imposed 

restricted distribution system are highly limited. 

Brand manufacturers who have recognized the incentives created by REMS-related delays have 

developed novel distribution schemes that mimic these programs even when the FDA has not 

recognized any inherent safety risk with the handling or use of the medicine. According to a recent 

study,' 7 74 drugs are subject to restricted access programs (i.e., drugs that are either subject to REMS 

or self-imposed restricted distribution programs) with total sales of $22.7 billion in 2015. Of these, 41 

drugs are restricted by REMS programs, with $11.5 billion in sales in 2016. The remaining 33 drugs are 

restricted by the brands in a voluntarily imposed non-REMS program, with $11.2 billion in sales in 

15 Gottlieb, Scott. "Antitrust Concerns and The FDA Approval Process,~ Testimony before the House Committee on the 

Judiciary, Subcommittee on Regulatory Reform. Commercia! and Antitrust Law, July 2017 

https:/ /www .fda.gov /News Events/T est1mony/ ucm 568869. htm 

16 Testimony of Dr. Janet Woodcock at ''Generic Drug User Fee Amendments: Accelerating Patient Access to Generic 

Drugs." Senate Committee on Health, Education, Labor and Pensions, January 2016 

7 Alex Brill, REMS and Restricted Distribution Programs: An Estimate of the Market (June 2017), available at 

httpllwww.qphao.oline.org/media/cms/Aiex Brill REiviS Study June 2017.pdf 

77 
62 


29424.045

Your Geaerics aad Biosimilars Industry 

2016. And a 2014 study concluded that REMS abuse costs the U.S. healthcare system $5.4 billion 

annually. 18 Consumers pay $960 million of that cost while Medicare and Medicaid incur $1.8 billion; 

private insurers bear the remaining $2.4 billion." This estimate is conservative "and should not be 

construed as the entirety of the lost savings from REMS misuse, either currently or going forward."20 

AAM and its members are committed to ensuring that all Americans have access to safe, effective and 

affordable medicines and believe that the FDA's REMS programs can and do serve a compelling public 

good- namely, the safe distribution and use of certain pharmaceuticals that have a higher risk profile. 

We do not support any policies that would jeopardize patient safety. Any suggestion to the contrary is 

simply an effort to distract us from the real issue we need to focus on: addressing the use of REMS or 

non-FDA mandated restrictions on drug supply that are designed to block lower cost generics and 

biosimilars from coming to market By refusing to sell their product for research purposes, or 

restricting its sale to a named patient, brand manufacturers can distort the supply chain to limit 

competition. 

To address this problem once and for all, Congress must pass the CREATES Act, bipartisan and 

bicameral legislation introduced by Representatives Marino and Cicilline, to prevent the misuse of 

REMS and restricted distribution schemes to delay generic drug competition. AAM also supports Rep. 

David McKinley and Rep. Peter Welch's FAST Generics Act 

The cost of failure is significant, and will only encourage anti-competitive practices to grow. In the 

absence of Congressional action, AAM members today must consider the difficulty involved in 

obtaining branded drugs when determining which generic development programs to pursue. Where 

access to brand drugs is subJect to restricted access programs, some AAM members have determined 

that generic development was not feasible and decided against initiating these development 

programs. This means that patients and taxpayers lose out on opportunities for affordable access to 

life-saving medicines and our nation's health care system leaves savings on the table. 

18 Alex Brill, Lost Prescnption Drug Savings from Use of REMS Programs to Delay Generic Market Entry, at 5 (2014), 

available at http //www.gphaonline.ora/medialcms/REMS Studyf:nal July20l4.odf 

19 /d 

20 /d 

72 
63 


29424.046

Your Generics and Biosimilars lndusb'V 

Biosimilar Medicines are Critical to Future Savings 

Nowhere is the need for lower-priced alternatives, and the challenges facing them, more real than 

among high-priced biologic medicines. Biologics, many of which are specialty medicines, are the most 

rapidly growing segment of increasing brand-name prescription drug costs in the United States, with 

more than $100 billion in annual spending. And the role of biologic drugs in the health care system is 

expanding- while only 2 percent of America's patients use biologics, they account for about 40 

percent of prescription drug spending in the United States. 2- These products are often life-saving 

therapies for serious illnesses, but they come at steep expense to patients, taxpayers and insurers. 

Many biologics cost tens of thousands of dollars per year per patient- some more than $200,000. 

To help bring down prices for patients, Congress designed and approved the Biologics Price 

Competition and Innovation Act (BPCIA) in 2010 creating an abbreviated approval pathway for 

biological products that are demonstrated to be "highly similar" (biosimilar) to or "interchangeable" with 

an FDA-approved biological product. The BPCIA also gave brand biologic drug manufacturers a 12-

year market exclusivity period for their products to ensure a return on investment for new medicines. 

This period is longer than anywhere else in the world that has a similar abbreviated pathway for 

biosimilars. 

Biosimilar medicines represent a key step forward in reducing high drug prices. They are safe, effective 

and affordable versions of costly brand biologics. By the year 2025, over 70% of drug approvals are 

expected to be biological products. 22 Experts estimate that FDA-approved biosimilars could save 

between $44 billion and $250 billion over the next 10 years. 23 1n doing so, they will mean greater 

access to lifesaving cures for 1.2 million U.S. patients, according to a new analysis. Women, lower 

income, and elderly patients would particularly benefit from access to biosimilar medicines. 

Today, there are 38 biosimilars approved for use in the European Union, but only eight in the United 

States and only three are currently marketed. However, more than 66 biosimilar programs are under 

FDA review for development of 20 different biologic products. The ability of biosimilars to fulfill their 

potential is threatened by market abuses and policy challenges. 

21 Medicine Usc and Spending in the U.S.: A Review of 2016 and Outlook to 2021, April 2017. 

U.S. Pharmacist. "Biosimilars: Current Approvals and Ptpeltne Agents," October 2016 (ltnk). 

23 AAM, "Generic Drug Access & Savings in the U.S.," June 2017 (l'nk) 

73 
64 


29424.047

Your Generics and Biosimilars Industry 

Anticompetitive Threats Even Greater to Biosimilars Availability 

As discussed above, while the abuse of restricted distribution programs continues to impede generic 

development, the problem of access to samples is likely to be even more acute for biosimilar 

development. Biosimilars are more complex and difficult to develop than traditional generic drugs. 

Their development requires multiple lots of the brand product produced over time. If access to the 

variability that is inherent in brand lot development of biologics is denied, the development of the 

biosimilar will be greatly delayed and patients will be held hostage to higher prices and fewer options. 

Plus. unlike with small molecule generic drugs, the development of biosimilars is more likely to involve 

clinical trials requiring even more samples ofthe reference product. Restricted access to samples at 

any point during the clinical trial could cause a study to fail. This further highlights the importance of 

Congressional action on the CREATES Act and the FAST Generics Act. 

And it now appears that brand manufacturers of biologic drugs are misusing their negotiating leverage 

to insist on contract terms that effectively block use of biosimilar alternatives by physicians. In a 

recent lawsuit. one branded company has alleged that another company that manufactures Remicade 

has misused its negotiating power to force PBMs and purchasers to block access to a biosimilar 

product. Such actions could threaten the ability of biosimilars to deliver on the promise of savings for 

patients. 

Finally, it is critical to reiterate that biosimilars are just as safe and effective as their reference product. 

While we understand that physicians must remain directly involved in their patients' treatment, it is 

also important to recognize that some have sought to create uncertainty around the efficacy and 

pharmacovigilance standards of biosimilars in comparison to their reference products. These 

messages are in direct contradiction to the standards established in the BPCIA, and enforced by the 

FDA. Differentiation between biosimilars and their reference products risks undermining the important 

provider education that is already being done by FDA. It is also directly in contradiction to the medical 

evidence found in Europe and other advanced countries that have more experience with biosimilars, 

and have seen no measurable clinical differences between biosimllars and their reference products. 

Policy Barriers Impede Biosimilar Adoption 

Biosimilars present a significant opportunity for patient and program savings in the Medicare Part D 

program. However current law creates barriers to biosimilar access for patients in Part D, who may be 

forced onto higher-priced biologics 

74 
65 


29424.048

Your Geaerlc:s and Biosimilars Industry 

Because of the structure of Medicare Part D, the 50 percent discount required of brand biologics is 

counted towards a patient's out of pocket costs -but competing biosimilars are barred from providing 

such a discount. This creates a perverse incentive for health plans and patients to use a higher-priced 

brand biologic- moving patients through the coverage gap and into catastrophic coverage faster and 

with lower out-of-pocket costs compared to a lower-cost biosimilar. 

This approach creates substantial barriers for biosimilar manufacturers, as it may be effectively 

impossible to ever offer sufficient discounts to be included on Part D formularies. The resulting 

imbalance severely undermines the market potential for biosimilar competition. Ultimately, patients, 

payers, and Medicare all pay more for brand biologics than they would if the Coverage Gap Discount 

program were amended to include biosimilars. 

Congress should amend the Part D coverage gap discount program to classify biosimilars as 

"applicable drugs." This change would allow biosimilar manufacturers to pay the 50 percent discounts 

paid by their brand competitors, and participate on a level playing field to compete for placement on 

the Part D plan's formulary. It would reduce both patient out-of-pocket costs and save at least $1 

billion over the next ten years for the Medicare Part D program. 

Conclusion 

AAM and its members commend the committee for holding today's hearing addressing the challenge 

of high drug prices through the lens of the pharmaceutical supply chain. Generic and biosimilar 

medicines are a critical part of the solution for patients and America's health care system. But they are 

under threat from market imbalances, policies that fail to distinguish their business model from brand 

drugs, and anti-competitive behavior by other supply chain actors. AAM stands ready to work with you 

to ensure uninterrupted access to affordable therapies for patients and taxpayers. 

75 
66 

Mr. BURGESS. The chair thanks the gentleman. 

Ms. Gallenagh, you’re recognized for 3 minutes, please, to summarize your opening statement. 

STATEMENT OF ELIZABETH GALLENAGH 

Ms. GALLENAGH. Good morning, Chairman Burgess, Ranking 

Member Green, Chairman Walden, and Ranking Member Pallone 

and members of the subcommittee. 

Thank you for the chance to participate in today’s hearing. 

Health Care Distribution Alliance represents 35 primary pharmaceutical distributors, the vital link between the nation’s pharmaceutical manufacturers and more than 200,000 pharmacies, hospitals, and other providers nationwide. Their expertise streamlines 

the supply chain to ensure safety and efficiency while achieving 

cost savings for our nation’s health care system. 

Without HDA members, pharmacies and providers would have to 

carry weeks of inventory and undertake the time consuming process of placing daily individual orders with every manufacturer. By 

working with full line distributors, pharmacies can maintain justin-time inventories, saving them the expense and staff necessary to 

carry extensive inventories or manage large storage facilities. 

While our members are logistics experts, pharmaceutical distribution has evolved over the last decade. This is no longer an industry focused solely on moving products from point A to point B. 

In exchange for a variety of distribution and logistics services that 

primary distributors provide to manufacturers, they charge bona 

fide service fees. These fees, which are not passed on to the customer, represent a fair market value for itemized services actually 

performed on behalf of the manufacturer that the manufacturer 

would have to perform otherwise for themselves. 

Our industry is a very high volume yet low profit margin industry with the industry margin just over 1 percent on average in 

2016. Moreover, in a recent 2017 study, the Berkeley Research 

Group concluded the pharmaceutical wholesale distributor profit on 

overall branded drug costs was just under 1 percent. 

Traditional pharmaceutical wholesale distributors purchase 

pharmaceuticals from manufacturers based on the wholesale acquisition cost, or WAC—a publicly available figure reported for each 

product by the manufacturer. WAC represents the manufacturer’s 

list price and does not include rebates, prompt payment, or other 

adjustments in price resulting from downstream or proprietary negotiation. Manufacturers set the WAC prices for their products and 

distributors are not privy to how that pricing decisions are made. 

Primary distributors typically sell branded drugs to downstream 

customers based on those WACs established solely by those manufacturers. Distributors might also sell generic drugs to downstream 

customers based on WACs or they may be based in part on response to the market, which includes competing generic drugs. In 

other words, wholesale distributors do not control the price of pharmaceuticals, but rather the price of pharmaceuticals is dictated by 

list prices determined by their manufacturers and other market 

forces including the WACs of generic drugs that compete with 

given generic drug products. 

67 

HDA distributor members add value within the supply chain and 

have minimal impact on the overall cost of drugs. Ultimately, the 

services provided by our members result in benefits to patients and 

consumers and have made the U.S. pharmaceutical supply chain 

one of the safest and most efficient in the world. 

Thank you. I would be happy to answer any question. 

[The prepared statement of Ms. Gallenagh follows:] 

68 


29424.049

Testimony of Elizabeth Gallenagh, Senior Vice President, Government Affairs and General 

Counsel for the Health care Distribution Alliance (HDA). 

House Energy and Commerce Subcommittee on Health 

December 13, 2017 

Good morning, Chairman Burgess, Ranking Member Green and members of the 

Committee. Thank you for the opportunity to participate in today's hearing. I am Liz Gallenagh, 

Senior Vice President, Government Affairs and General Counsel for the Health care Distribution 

Alliance (HDA). HDA is the national trade organization representing primary pharmaceutical 

distributors- the vital link between the nation's pharmaceutical manufacturers and more than 

200,000 pharmacies, hospitals, long-term care facilities, clinics and others nationwide. 

Since 1876, HDA has helped members navigate regulations and innovations to get the 

right medicines to the right patients at the right time, safely and efficiently. HDA's members 

include 35 national, regional and specialty primary distribution companies who are not just 

distributors, but are technology innovators, information management experts, security 

specialists and efficiency professionals. Their expertise streamlines the supply chain to ensure 

safety and efficiency, while also achieving cost savings for our nation's healthcare system. 

Role in the Supply Chain 

The U.S. healthcare supply chain is complex, and the nation's primary pharmaceutical 

distributors play a vital role within it. Each day hundreds of thousands of healthcare provider 

locations must receive needed medicines and other healthcare products from thousands of 

manufacturers. These manufacturers and providers are served predominantly by HDA's primary 

distributors, who operate out of about 176 warehouses and purchase directly from authorized 

manufacturers- a relatively small, but highly efficient and effective network. In fact, most 

pharmaceutical sales in the U.S. flow through primary distributors {95. 7%). 1 

1 HDA Research Foundation, 88" Edition HDA Factbook: The Facts, Figures and Trends in Healthcare (2017-2018}, 

2017. 
69 


29424.050

Every day HDA members work around the clock to safely and efficiently ship 15 million 

healthcare products (medicines, medical supplies, durable medical equipment, et al.) to 

pharmacies, hospitals and other healthcare providers to keep their shelves stocked with the 

medications and products they need to treat and serve their patients. 

Distributors are unlike any other supply chain participants- their core business is not 

manufacturing, and they do not prescribe medicines or dispense to patients. Their key role is to 

serve as a conduit for medicines to travel from manufacturer to patient while making sure the 

supply chain is fully secure and as efficient as possible. 

HDA distributor members focus significant resources on the safety and security of the 

supply chain, and their secure supply chain efforts may in fact be the most important service 

distributors provide to the overall pharmaceutical delivery system. With this committee's 

support several years ago, HDA strongly advocated for the enactment of the Drug Supply Chain 

Security Act (DSCSA), Title II of the Drug Quality Security Act, which sets a framework for unit 

level traceability of medicines by 2023. Today, HDA members are in the midst of Phase I 

implementation efforts and work to collaborate with FDA, state regulatory authorities and 

trading partners to build the systems and processes necessary to achieve unit-level traceability 

of prescription drugs by 2023, as outlined in the law. 

Relationship with Provider Customers 

On a daily basis, pharmacies, hospitals and other healthcare providers place orders 

with HDA distributor members for the medicines, supplies and equipment they need to serve 

their patients. Without pharmaceutical distributors, pharmacies and providers would have to 

carry weeks of inventory and undertake the time-consuming process of placing individual 

orders with each and every manufacturer for products needed by the healthcare provider on a 

daily basis. By working with full-line distributors, providers can maintain just-in-time 

inventories, saving pharmacies and hospitals the expense and staff necessary to carry extensive 
70 


29424.051

inventories or have large storage facilities, both of which would add significantly to their cost of 

operations. 

While distributors provide many services to the pharmacy provider community, the core 

services are supply chain related - providing on-time and complete shipment of ordered drugs 

in a safe and efficient manner. In addition, they often provide financial credit, pharmacy 

management systems and in-store retail support, among many other services. 

Traditional distributors serve a broad array of provider types- mostly retail and hospital 

settings, including chain pharmacy warehouses, mass merchandisers and food chains, and chain 

pharmacies (42%); hospitals, HMOs, clinics and nursing homes (22.7%); independent 

pharmacies (15.7%); mail order (16.4%). Specialty distributors (and specialty subsidiaries) serve 

other provider settings such as physician offices, home care, specialty pharmacy and some retail 

pharmacy. 2 

Relationship with Manufacturer Suppliers 

The work of primary distributors also enables manufacturers to concentrate on 

developing and producing needed medicines without the added expense and logistical 

challenges of determining how to get those medicines to the providers and patients across the 

U.S. However, pharmaceutical distribution has evolved over the last decade from simply 

managing warehouses and shipping goods. While HDA members are primarily supply chain 

logistics and operations experts, this is no longer an industry focused solely on moving products 

from point A to point B. Rather, pharmaceutical distributors provide a wide array of supporting 

services that enable the pharmaceutical supply chain to function efficiently and safely, 

delivering significant value to manufacturers and healthcare providers- and ultimately to 

patients. Some examples of these core services include: receiving orders and shipping 

pharmaceutical products in a safe, efficient manner; inventory handling and inventory 

management, providing manufacturers with data about where (and in which settings) their 

products are utilized; verifying downstream customer eligibility to purchase products at pricing 

2 HDA Research Foundation, BB" Edition HDA Foctbook: The Facts, Figures and Trends in Healthcare (2017-2018), 

2017. 
71 


29424.052

established under various programs or contracts between such customers and given 

manufacturers; and processing relevant charge backs to manufacturers. 

In exchange for the variety of distribution and logistics services that primary distributors 

provide to manufacturers, they charge manufacturers what are referred to as "bona fide 

service fees" for the provision of these services. These fees, which are not passed on to the 

customer, represent a fair market value for a bona fide, itemized service actually performed on 

behalf of the manufacturer that the manufacturer would otherwise perform (or contract for) in 

the absence of the service arrangement. This model reduces demand volatility- aligning order 

patterns more closely to actual patient demand and, eliminating artificial demand spikes, 

allowing for a supply chain that operates more smoothly and predictably. 

It should also be noted that without HDA members, each manufacturer would have to 

ensure that more than 200,000 pharmacy and provider settings receive the medications they 

need when they need them, employing substantial financial, logistical and staff resources to 

provide medicines and supplies to hundreds of thousands of dispensing sites. Because 

distributors provide these logistical, inventory and other service support which manufacturers 

and pharmacies would otherwise have to perform themselves, the pharmaceutical supply chain 

is more efficient, reliable and secure, and patients are able to get the medicines they need in a 

timely fashion, saving our healthcare system approximately $42 billion each year. 3 

Primary Wholesale Distributors' Role in Drug Pricing1 

The primary pharmaceutical distribution industry is a very high-volume, yet very lowprofit margin industry, with the industry margin just over one percent on average in 2016. In 

fact, overall profitability for the primary distribution sector shows little notable change over the 

3 The Center for Healthcare Supply Chain Research, The Role of Distributors in the U.S. Health care Industry, 2011. 4 HDA's antitrust policy strictly prohibits any discussions which constitute or imply an agreement or understanding 

between or among its members concerning: 1) prices, discounts, or terms or conditions of sale; 2) profits, profit 

margins or cost data; 3) market shares, sales territories or markets,; 4) allocation of customers or territories; 5) 

selection, rejection or termination of customers or suppliers; 6) restricting the territory or markets in which a 

company may resell products; 7) restricting the customers to whom a company may sell; or 8) any matter which is 

inconsistent with the proposition that each members company of HDA must exercise its independent business 

judgment in pricing its services or products, dealing with its customers and suppliers and choosing the markets in 

which it will compete. 

4 
72 


29424.053

past several years, even during recent market volatility. 5 Moreover, in a recent 2.017 study, the 

Berkeley Research Group concluded that the pharmaceutical wholesale distributor profit on 

overall branded drug costs was just under one percent. 6 

Traditional pharmaceutical wholesale distributors purchase pharmaceuticals from 

manufacturers based on the Wholesale Acquisition Cost ("WAC"), a publicly available figure 

reported for each pharmaceutical product by the manufacturer to various compendia such as 

Medi-Span and Red Book, which publish such prices. WAC represents the manufacturer's list 

price, and does not include rebates, prompt payment, or other adjustments in price resulting 

from proprietary negotiations between the manufacturer and wholesaler, downstream payer 

groups or other customers. Manufacturers (pharmaceutical, biologic, generic, etc.) set the WAC 

price for their products. Wholesale distributors are not privy to how such WAC pricing decisions 

are made. Wholesale distributors typically purchase pharmaceuticals from manufacturers 

based on WAC and they also charge manufacturers distribution fees related to their services, as 

previously discussed. 

Wholesale distributors typically sell branded drugs to downstream customers based on 

WACs established solely by pharmaceutical manufacturers. Wholesale distributors might also sell 

generic drugs to downstream customers based on WACs established solely by pharmaceutical 

manufacturers and published in the various pricing compendia or they may price generic drugs 

sold to downstream customers in response to the market, which includes supply of competing 

generic drug and considers the WACs for such generic drug products and competitors to such 

drug products. As such, wholesale distributors do not control the price of pharmaceuticals rather 

the price of pharmaceuticals is dictated by published WAC or other list prices determined solely 

by manufacturers of such products and other market forces, including the WACs of generic drugs 

that compete with a given generic drug product. 

5 Data obtained from Annual HDMA/HDA Foctbook, compiled and compared across multiple years . 

.s The Pharmaceutical Supply Chain: Gross Drug Expenditures Realized by Stakeholders; 2017; Table 2 

http:/lwww.thinkbrg.com/media/publication/863 Vandervelde PhRMA-January-2017 WEB-FINAL.pdf. 
73 


29424.054

Conclusion 

As I noted earlier, primary pharmaceutical distributors have evolved from providing basic 

inventory management and distribution to now offering a suite of services supporting many 

different operations of both manufacturers and healthcare providers. Ultimately, these services 

result in benefits to patients and consumers and have made the U.S. pharmaceutical supply chain 

one of the safest and most efficient in the world. 

Traditional pharmaceutical wholesale distributors' goal in the pharmaceutical supply 

chain is a simple one: add efficiency, security and timely delivery of products so providers can 

concentrate on patient care and ensure their patients have regular access to the medications 

they need. Historically, HDA distributor members have effectively achieved this goal and have 

had a positive effect on the supply chain and patients while taking costs out of the 

pharmaceutical supply chain and having minimal impact on the overall cost of drugs. 

Thank you. I am happy to answer any questions you may have. 

6 
74 

Mr. BURGESS. The chair thanks the gentlelady. 

The chair recognizes Mr. Merritt for 3 minutes. Summarize your 

opening statement, please. 

STATEMENT OF MARK MERRITT 

Mr. MERRITT. Thank you, Mr. Chairman, and members of the 

committee. 

Pharmacy benefit managers are the industry that employers and 

others hire to negotiate discounts and reduce prescription drug 

costs. 

We see too many reasons why drug pricing has become a focal 

point in recent years. First, as drug makers shift from making 

blockbuster drugs like Lipitor, which cost maybe $3 a day, to making much more expensive products like Sovaldi—a great product, 

but it costs $1,000 a day. Second, in the face of rising medical 

costs, more health plans are raising deductibles in order to keep 

premiums as low as possible. This means for the first time some 

patients who had grown accustomed to paying $2,500 for a $500 

drug are now seeing how expensive some of these drugs really are. 

It’s important to note that while the subject of today’s hearing— 

the drug supply chain—is important and worthy to be discussed, it 

has nothing to do with why drug companies raise prices. As always, 

pricing power and pricing decisions in any industry are driven by 

supply and demand and competition, not supply chains. 

Prices are set exclusively by drug companies with zero input 

from anybody else in the supply chain including PBMs. Further, 

supply chains are a routine part of how consumers access products 

in the marketplace today. Every industry uses them. They are not 

unique to health care or prescription drugs. 

In the simplest terms, the prescription drug marketplace is like 

any other—a market of sellers and buyers. Drug makers are the 

sellers and, like all sellers, set prices according to whatever they 

think the market will bear. Likewise, buyers, who we represent, 

want to pay as little as possible. These are the employers, unions, 

health plans, and government programs that hire PBMs to negotiate rebates, discounts, and other price concessions from drug 

makers and drug stores. These savings are used to reduce premiums, cost sharing, and other expenses. And some drug makers 

have tried to blame their own pricing decisions on the supply chain 

but this makes little sense. For example, Mylan used this excuse 

when they raised EpiPen prices 400 percent at a time when supply 

chain costs were relatively flat. Sovaldi had a launch price of 

$84,000 even though it involved no rebates at all. 

Some of the highest prices are in Medicare Part B, as in boy, 

where payments are set by the Federal Government without negotiations from PBMs or rebates. In any case, almost half of the 

RFPs large employers use when hiring PBMs now require PBMs to 

pass through 100 percent of the rebates and about 90 percent of 

rebates are passed through overall in the marketplace. 

While PBMs are proud that, according to CMS, drug trend only 

grew 1 percent last year despite rising list prices, we welcome manufacturers to offer alternatives to rebates as a way to get discounts. 

Payers—our clients—just want the lowest net cost wherever they 

can get them. 

75 

Thank you for having me here today and I look forward to answering any questions you may have. 

[The prepared statement of Mr. Merritt follows:] 

76 


29424.055

APCMA 

Testimony of Mark Merritt 

Pharmaceutical Care Management Association 

Before the 

UNITED STATES HOUSE OF REPRESENTATIVES 

ENERGY AND COMMERCE COMMITTEE 

SUBCOMMITTEE ON HEALTH 

"Examining the Drug Supply Chain" 

December 13, 2017 
77 


29424.056

Introduction 

Good morning. My name is Mark Merritt, President and CEO of the Pharmaceutical 

Care Management Association (PCMA). I appreciate this opportunity to appear before 

the Subcommittee at this hearing, "Examining the Drug Supply Chain." PCMA is the 

national association representing America's pharmacy benefit managers (PBMs), which 

administer prescription drug plans for more than 266 million; Americans with health 

coverage provided through self-insured employers, health insurers, labor unions, 

Medicare, Medicaid, SCHIP, and the Federal Employees Health Benefits Program 

(FEHBP). 

At the outset, I want to thank the Energy and Commerce Committee for your work with 

the Senate HELP Committee to improve generic competition and lower the cost of 

prescription drugs. FDA's faster approvals for generics and the listing of single-source, 

off-patent brand drugs, as contained in the FDA Reauthorization Act of 2017 (FDARA), 

should help foster a more competitive marketplace to improve the affordability and 

accessibility of prescription drugs for patients and guard against sudden, astronomical 

price hikes of decades-old prescription drugs. I also want to acknowledge the 

Committee's important work on Medicare Part D and Medicaid to ensure affordable 

prescription drug benefits for millions of vulnerable Americans. 

My testimony will describe the role PBMs play in helping patients and payers get the 

most for their benefit dollars. I will also outline how the Part D program vividly illustrates 

the value that PBMs bring and that making major changes could destabilize that 
78 


29424.057

successful program. Finally, I offer a number of common-sense, market-based policy 

proposals to reduce the cost of prescription drugs and to help curb the nation's opioid 

crisis. 

What is a Supply Chain? 

Manufacturers in all industries use supply chains to help bring their goods to market. 

Generally speaking, manufacturers sell in bulk to wholesalers, who then resell to 

retailers who in turn resell to consumers. Often manufacturers offer rebates, discounts, 

and other incentives to encourage greater sales of their products versus competing 

products. Since every supply chain involves some costs, manufacturers only use them 

to the degree they offer the most cost-effective means of distributing their product. 

Supply chains are not generally associated with why manufacturers raise prices. As 

always, pricing decisions and pricing power are primarily determined by supply, 

demand, and the level of competition a product faces in the marketplace-not 

distribution costs. 

All this is true in the drug supply chain, too, except that third party payers (employers, 

unions, insurers, government programs)-not consumers-pay most of the costs of 

prescription drug coverage. Typically, payers cover two-thirds and patients pay the 

other one-third in the form of premiums and out-of-pocket costs. Payers hire PBMs 

(which are not part of the supply chain per se) to reduce costs by promoting generics 

and negotiating rebates and discounts from drug makers and drugstores that want to be 

included in the benefit. 

2 
79 


29424.058

Operating in a competitive environment, PBMs typically reduce drug costs by 30°M. 

Thousands of America's largest, most sophisticated payers choose to hire PBMs, even 

though none are required to. The Centers for Medicare & Medicaid Services' (CMS) 

latest National Health Expenditure data also shows that even in the midst of rising drug 

prices PBMs are continuing to keep overall spending and out-of-pocket costs down. 

The Role of Rebates 

Central to manufacturer-PBM negotiations, brand drug manufacturers compete for 

formulary placement by offering rebates for moving market share, which are typically 

calculated and paid weeks or months after a drug is dispensed. As a result of these 

negotiations, PBMs can recommend benefit designs that stretch payers' finite dollars 

and reduce premiums and cost-sharing. These designs include cost-sharing incentives 

for patients to use the most affordable drugs, which often are generics. The highest 

cost-sharing is typically reserved for drugs with the least competitive discounts, or in the 

case of many high-priced, single-source drugs, no discount at all. PCMA supports 

benefit designs that ensure patients do not pay more in cost-sharing than the actual 

cost of the drug and innovations like electronic prior authorization that reduce 

physicians' administrative burden. 

Payers typically use rebate savings to reduce premiums and out-of-pocket costs for 

patients. Each payer determines what percentage of rebates is passed back to it, and 

how much (if any) it wants the PBM to retain as payment for services. While on average 
80 


29424.059

payers elect to receive 90% of rebates negotiated by PBMs,iii an increasing number 

require PBMs to pass through all of them. About 46% of commercial PBM contracts are 

negotiated with full pass-through of rebates to payers,iv and 100% of rebates in the 

Medicare Part D program are required to be reported to CMS. PBMs are committed to 

providing rebate transparency and audit rights to their clients. 

There is No Connection between the Prices Drugmakers Set and the Rebates 

They Negotiate with PBMs 

A recent study of the top 200 self-administered, patent-protected, brand-name drugs 

shows no correlation between the launch prices or price increases manufacturers set 

and the rebates they pay to PBMsv Some high-priced drugs have low rebates and 

some low-priced drugs have high rebates. Some high-priced drugs have no rebate at 

all. Like manufacturers in other industries, drugmakers set prices according to supply, 

demand, and the level of competitive alternatives available. 

Competition drives manufacturer price concessions. Evidence shows a strong 

correlation between lower net prices for, and more competition between, substitutable 

drugs. vi An analysis by Credit Suisse finds "a strong correlation" between the size of 

drug rebates and the extent that drugs are substitutable. vii Thus, drug manufacturers 

with "more unique" products can negotiate lower rebates than companies with more 

4 
81 


29424.060

substitutable products. viii This analysis confirms that PBMs negotiate lower drug costs 

when they can bring competition to bear. 

Exploring Trade Offs to Point-of-Sale (POS) Rebates 

POS rebates refer to contract arrangements where negotiated price concessions are 

estimated before the transaction and then applied immediately when a drug is 

dispensed. In the commercial market, though PBMs could implement it, few payers 

have chosen to apply rebates at the pharmacy counter. Frustration over high drug 

prices has led some public policymakers to explore ways to reduce costs for 

consumers, including requiring health plans in government programs to use rebates to 

reduce POS costs rather than premiums. However, such policies do not reduce costs; 

they only shift costs from one group of patients to another. 

POS Rebates Do Not Work in Medicare Part D 

POS rebates have proven unworkable in Medicare Part D and pose risks that could 

destabilize the program. Already permitted in Part D, POS rebates have been triedunsuccessfully-in the past. They lead to significant adverse selection and would 

increase premiums for all Medicare beneficiaries while reducing costs for a small 

minority. Requiring POS rebates in Part D would significantly increase costs to the 

program and taxpayers. According to CMS estimates, requiring 100% of rebates to be 

passed through at POS would, over the next 10 years: increase government costs up to 

5 
82 


29424.061

$82.1 billion; increase beneficiary premiums up to $28.3 billion; and provide a windfall to 

drug manufacturers of up to $29.4 billion.ix 

Additionally, requiring direct and indirect remuneration (DIR) pharmacy payments to be 

paid at POS would be a step backward from policymakers' goals to transform the 

Medicare program from a wasteful fee-for-service payment model to one based on 

quality and value. POPs and PBMs use performance-based payments to reward 

pharmacies that improve quality through, for example, increasing generic dispensing, 

improving medication adherence, and reducing inappropriate drug use. Alternatively, 

pharmacies that underperform and do not meet the performance metrics may not earn 

contractually agreed-upon bonus payments. Because such value-based arrangements 

use quarterly or annually measured incentives, a typical pharmacy's performance 

cannot be determined at POS. These arrangements are agreed upon and 

acknowledged in advance by pharmacies in their network contracts. 

Finally, mandating POS rebates and pharmacy DIR would expose plans to other risks, 

such as accusations of False Claims Act violations if they incorrectly estimated the size 

of rebates, which would be a virtual certainty. These points are especially important in 

light of CMS's current open docket request for information on the prospect of 

implementing POS rebates and POS pharmacy DIR in Part D. 

Negotiations with Pharmacies Reduce Costs for Consumers and Payers 

6 
83 


29424.062

PBMs also use value-based contracting to build a network of high-performing 

pharmacies. As noted above, based on negotiated, agreed-upon performance metrics, 

PBMs hold pharmacies accountable for performance on certain activities such as 

generic dispensing, cost-effective dispensing, improving medication adherence, and 

reducing inappropriate drug use. In turn, pharmacies performing well on such metrics 

earn bonus payments and preferred status. The ability of health plans and PBMs to 

construct networks that include some, but not all, providers-has long been used to 

increase quality of care and lower costs for patients. 

Nonetheless, for decades, pharmacies have lobbied to force PBMs to open up their 

networks to "any willing provider" meeting the same terms and conditions as other 

network members. If pharmacies know they will automatically be included in networks, 

they have a reduced incentive to offer PBMs the most competitive terms. Thus, any 

willing pharmacy (AWP) laws significantly reduce providers' incentive to engage in price 

competition and be held accountable for the quality of their care. An "any-willing 

pharmacy" bill introduced in Congress last year would undermine the availability of 

lower cost, preferred pharmacies and increase Medicare spending by $21 billion over 

the next 10 years, according to an analysis. 

PBM pharmacy networks include independent pharmacies that usually hire pharmacy 

services administrative organizations (PSAOs) to negotiate and contract with PBMs and 

other third-party payers on their behalf. A typical PSAO represents thousands of 

pharmacies. More than 80% of independent pharmacies (18, 103 of the 21,511 

pharmacies identified by National Council for Prescription Drug Programs data) use 

7 
84 


29424.063

PSAOs. PSAOs provide access to pooled purchasing power, negotiating leverage, and 

contracting strategies similar to those of large, multi-location chain pharmacies. 

The Success of Part D Showcases the Value of PBMs 

In the decade plus since the creation of the Medicare Part D Prescription Drug Benefit, 

policymakers and other observers have taken heightened interest in the work of PBMs. 

Widely recognized as one of the more successful government programs in recent 

history, Part D has provided unprecedented access to needed drugs for millions of 

Medicare beneficiaries, while consistently spending far below estimated levels. This 

success has been due to the structure of Part D, which allows PBMs to use the 

negotiating and management tools at their disposal to manage drug benefits. To make 

major changes to this successful system would be a mistake. 

Medicare Part D: A Case Study for How PBMs Use Direct and Indirect 

Remuneration (DIR) to Keep Part D Costs Down and Beneficiarv Premiums Low 

PBMs have been able to replicate the successful drug benefit management techniques 

they have long used in the private sector to benefit Medicare Part D. The program 

works through DIR, which is a technical term created by CMS specific to Part D that 

includes both manufacturer rebates and certain incentive payments to pharmacies. The 

vast majority of DIR payments in Part D comprise PBM-manufacturer negotiated 

rebates. A much smaller share is made up of incentive payment terms that pharmacies 

(or their PSAOs on their behalf) contractually negotiate with PBMs. 
85 


29424.064

According to a recent study, the price concessions PBMs negotiate with drug 

manufacturers and drugstores and report to CMS as DIR are generating significant 

savings for the federal government and are projected to save enrollees in stand-alone 

Part D plans $48.7 billion on their premiums over the next 10 years! 

CMS has also found that DIR contributes significantly to keeping Part D premiums low. 

Earlier this year, CMS released a report that found negotiated DIR price concessions 

have grown in recent years to moderate beneficiary premiums and reduce costs for the 

government<; The CMS report highlights how negotiated price concessions reduce 

premiums for Medicare Part D beneficiaries, which also lead to lower costs for the 

federal government-negotiated price concessions lowered per-beneficiary costs in Part 

D 28% on average!;; Stable and affordable premiums have contributed to a 90% 

satisfaction rate among Part D enrolleesxm 

Policy Recommendations to Improve Competition and Reduce Costs 

PCMA supports policies to lower drug costs through increased competition. The vast 

majority of the policy proposals outlined below to help increase competition in the 

marketplace and in federal programs would come under Energy and Commerce 

Committee jurisdiction. Our industry would be pleased to work with you and other 

stakeholders on the following proposals. 

9 
86 


29424.065

Eliminate use of Risk Evaluation and Mitigation Strategies (REMS) to delay 

competition. Some manufacturers have used REMS to prevent generic or 

biosimilar developers from getting sufficient quantities of a drug or biologic to 

develop a competitor to the innovator product. REMS were never intended for 

this purpose; this practice should be prohibited. The Fair Access for Safe and 

Timely Generics "FAST" Act, introduced by Representatives McKinley and Welch 

and cosponsored by Representatives Schrader, DeGette, and Schakowsky 

would address these abuses. 

• Stop anticompetitive product adjustments, i.e., "evergreening." Drug 

manufacturers sometimes use tactics such as "product hopping" or 

"evergreening," submitting applications to the FDA for approval of a "new" 

product that is essentially the same as the original product. These product 

lifecycle management tactics artificially extend drug exclusivity periods and delay 

the take-up of lower-cost generics. 

• Allow for FDA accelerated approval of brand drugs based on increasing 

competition. Accelerated review is granted to new drug applications that 

address "unmet need." The economic need for competition to lower prices should 

be a criterion of unmet need. 

Revisit and improve biosimilar labeling and naming. Substitutable biosimilars 

should bear identical names and labels to their innovator analogs. Use of 

10 
87 


29424.066

different names will confuse patients and providers and inhibit prescribing of 

biosimilars. 

Reduce innovator biologic exclusivity to seven years. Seven years of data 

exclusivity would still provide a sufficient return to manufacturers, while also 

speeding more affordable biosimilars to market. 

PCMA also supports enhancing tools in Medicare Part D, Medicaid, and commercial 

markets to increase competition and affordability. PBMs and health plans can best drive 

competition among drug manufacturers when they can give plan enrollees a strong 

incentive to use a competing, higher-value drug. This reduces costs and helps improve 

adherence among patients. Below are some strategies to strengthen these efforts. 

• Create a safe harbor for value-based drug price negotiations from Medicaid 

Best Price. Today any drug manufacturer must offer state Medicaid programs 

the lowest price it offers any other payer. This provision is seen as a price floor 

and is inhibiting creative value-based pricing arrangements. 

• Expand drug coverage options for Health Savings Account (HSA)-eligible 

high-deductible health plans (HDHPs). HDHPs associated with HSAs should 

have the option of covering prescription drugs with low or no cost-sharing prior to 

reaching the deductible, especially drugs that qualify for a preventive drug list. 

This policy can be achieved by expanding the current preventive drug list used 

by HDHPs. 

II 
88 


29424.067

Remove Medicare Part D's protected classes. Designating "classes of clinical 

concern" where all or substantially all drugs in a class must be covered allows 

drug manufacturers to name their price. CMS already applies careful plan 

formulary coverage checks to assure proper coverage. 

• Make biosimilars subject to the 50% Part D coverage gap discount. The 

ACA did not apply to biosimilars the 50% Part D coverage gap discount. This 

could have the unintended consequence of encouraging prescribing of more 

expensive innovator biologics when lower cost biosimilars are available. 

Encourage greater use of generics for Medicare Part D Low Income 

Subsidy (LIS) enrollees. MedPAC recommended allowing the Secretary of HHS 

to lower cost-sharing on generics and raise it for brands that have generic 

competition. Increasing the differential between brands and generics and 

allowing plans to lower generic cost-sharing would save money for enrollees and 

Medicare. 

Eliminate the tax deduction for direct-to-consumer (DTC) drug ads that 

mention a specific product. While DTC drug ads may encourage some people 

to see a doctor, they drive up unnecessary utilization and the cost of health care. 

In addition to proposals to find savings and efficiencies in the market and public 

programs, we also commend the Subcommittee for its work in helping to curb the 

12 
89 


29424.068

nation's opioid crisis. Below are three policy proposals that we believe would help that 

effort. 

Require E-prescribing (e-Rx) for Controlled Substances. Requiring eprescribing for controlled substance prescriptions would circumscribe pharmacy 

shopping, enable better prescription tracking, and reduce fraud. I want to thank 

Representative Mullin and the other cosponsors on the Energy and Commerce 

Committee, Representatives Kennedy, Tonko, and Long, for your work on H.R. 

3528, the Every Prescription Conveyed Securely Act. 

• Seven Day Opioid Prescription Limits for Acute Pain. To prevent patients 

from getting addicted to pain medication, prescriptions for acute pain should be 

limited to a seven days' supply. The limit would not apply to treatment of cancer 

or chronic pain, or the use of opioids in treating addiction or for patients in 

hospice care. This aligns with a recent recommendation of the Centers for 

Disease Control and Prevention. 

• Achieve Timely and Flexible Implementation of the Comprehensive 

Addiction and Recovery Act (CARA) Lock-ln. CMS included in its recent 

proposed Part D rule suggested regulations for implementing the CARA 

pharmacy and prescriber lock-in. Inexplicably, CMS has proposed that once 

beneficiaries are identified as being at-risk, they should have a six-month delay 

before being locked-in for controlled substances to a pharmacy. PCMA believes 

that at-risk beneficiaries should be locked in as quickly as possible to avoid 

13 
90 


29424.069

further harm to themselves and also to prevent fraud if they are diverting drugs. 

This program was established by Representative Bilirakis' Medication Safety and 

Drug Abuse Prevention Act, which passed last Congress and was cosponsored 

by Representatives Lujan and Long. Thank you for your leadership and we hope 

you will express concerns to CMS about their proposaL 

Conclusion 

PBMs evolved into their current role because they increase the value of prescription 

drug benefits. PCMA's member companies harness market forces and competition to 

corral drugs costs and deliver high-quality benefits and services to their payer clients 

and enrollees. In its search for solutions to address high drug costs, PCMA encourages 

the Subcommittee to pursue policies that foster and encourage competition to keep 

prescription drug costs and pharmacy benefits more affordable for employers, enrollees, 

taxpayers, and government programs. 

Thank you for the opportunity to testify. I am happy to answer any questions. 

'PR Newswire, "PBMs Provide Policy Solutions to Increase Competition, Reduce Rx Costs," Feb 04, 2016. 

n Visante: Pharmacy Benefit Managers (PBMs): Generating Savings for Plan Sponsors and Consumers, February 2016. 

JJ! Written Testimony of Joanna Shepherd, Ph.D., Emory University for the ERISA Advisory Council Hearing on PBM Compensation 

and Fee Disclosure, June 19,2014, Citing J.P. Morgan, "Pharmacy Benefit Management, Takeaways from Our Proprietary PBM 

Survey," May 21, 2014. 

!V See, Pharmacy Benefit Management Institute, "PBMI Research Report Trends in Drug Benefit Design," 2016. 

v Visante, Inc. Increasing Prices Set by Drugmakers; Not Correlated With Rebates, June 2017. Analysis prepared for PCMA 

vi Credit Suisse, "Global Pharma and Biotech: Exploring Future U.S. Pricing Pressure," April18, 2017 

vio Credit Suisse, "Global Pharma and Biotech: Exploring Future U.S. Pricing Pressure," April18, 2017. 

viii Credit Suisse, "Global Pharma and Biotech: Exploring Future U.S. Pricing Pressure," Apri118, 2017. 

tx CMS, "Medicare Program: Contract Year 2019 Policy and Technical Changes to the Medicare Advantage, Medicare Cost Plan, 

Medicare Fee-for-Service, the Medicare Prescription Drug Benefit Programs, and the PACE Program,D Federal Register, November 

28, 2017. 

14 
91 


29424.070

~Milliman, "Value of Direct and Indirect Remuneration (DIR): Impact on Medicare Part D Prescription Drug Plan (PDP) Program 

Stakeholders," Commissioned by Pharmaceutical Care Management Association, July 2017. https:/lwvvw.pcmanet.org/wp~ 

contenUuploads/2017/07Nalue-of-PDP-DIR_20170706.pdf 

XI CMS, "Medicare Part D- Direct and Indirect Remuneration (DIR)" January 19, 2017. 

https:l/www. cms.gov/Newsroom/MediaReleaseOatabase/F act~sheets/2017 ~F act~Sheet·items/2017 ~ 01 ~ 1 9-2.htm1 

"' CMS, Op. Cit. 

xm Morning Consult for Medicare Today, "Ten Years After Implementation, Nearly Nine in 10 Seniors are Satisfied with Part D," July 

2 0 16. http :lim edi caretod ay. ora/resources/senior ·S atisfacti on~s u rvey/ 

15 
92 

Mr. BURGESS. The chair thanks the gentleman. 

Mr. Eyles, you are recognized for 3 minutes to summarize your 

opening statement, please. 

STATEMENT OF MATT EYLES 

Mr. EYLES. Good morning, Mr. Chairman, members of the subcommittee. I am Matt Eyles, Chief Operating Officer of America’s 

Health Insurance Plans, the national association whose members 

provide coverage for health care. 

I appreciate the opportunity to testify on behalf of our members 

this morning and my testimony focuses really on three topics. First, 

the consequences of out of control drug prices, both excessive 

launch prices and supersized price increases, and the impact they 

have on consumers and the factors pointing to a broken pharmaceutical market. Second, any discussion of drug prices and the supply chain must begin with the list price, set solely by drugs companies, and which act as the starting point for plans and PBMs to 

negotiate lower prices for consumers. Third, AHIP’s policy solutions 

to promote more affordable drug prices. 

Out of control prices are the result of drug companies taking advantage of a market skewed in their favor. Too often, this skewed 

market has granted economic power to drug companies through 

price-dictating monopolies. For example, with no generic competitors, the list price of popular insulin increased almost 300 percent 

since 2007, while the CPI rose only about 15 percent. 

If you remember one message this morning, it is that the entire 

pricing process is driven off the list price of a branded drug, solely 

determined by the drug company, not anyone else, and the end result is everyone pays more. 

AHIP’s members negotiate with providers and drug manufacturers to cover high-quality treatments and services at the most affordable prices. Looking at the drug supply chain, we must keep 

two points in mind. First, health insurers offer comprehensive coverage under the pharmacy benefit for prescriptions delivered 

through retail pharmacies. This represents about 70 percent of 

drug spending. Second, plans provide coverage under the medical 

benefit for physician-administered drugs delivered in outpatient 

and inpatient settings. This covers about 30 percent of spending. 

Our discussion today focuses largely on that first bucket covered 

under the pharmacy benefit but plans provide coverage for both 

types and therefore have a unique perspective into the broader 

drug market. A 2017 AHIP analysis found that 22 cents of every 

dollar spent on insurance premiums goes toward prescription 

drugs. This is a conservative estimate by excluding hospital spending on drugs. 

But here’s the bottom line.: The 22 percent outpaces spending on 

physicians, inpatient hospital, and outpatient hospital services. So 

when drug prices go up, insurance premiums go up, and that’s an 

economic reality. 

For the committee’s consideration, we included recommendations 

in our written statement with three categories of policy solutions— 

first, delivering real competition through generics and biosimilars; 

second, ensuring open and honest pricing with greater transparency into how drug prices are set and when prices increase exVerDate Nov 24 2008 10:02 May 30, 2018 Jkt 037690 PO 00000 Frm 00100 Fmt 6633 Sfmt 6633 I:\MY DOCS\HEARINGS 115\HEARINGS\115-88 CHRIS
93 

cessively; and third, delivering value to patients by expanding efforts to link drug prices to clinical value and outcomes. 

Thank you for the opportunity this morning. We look forward to 

working with the committee to find solutions to affordable medications. 

[The prepared statement of Mr. Eyles follows:] 

94 


29424.071

-A, 

AHIP 

The Pharmaceutical Supply Chain and Prescription Drug Costs: 

"The Problem is the Price" 

by 

Matt Eyles 

Senior Executive Vice President and Chief Operating Officer 

America's Health Insurance Plans 

for the 

House Energy and Commerce Committee 

Subcommittee on Health 

December 13, 2017 
95 


29424.072

Introduction 

Chairman Burgess, Ranking Member Green and members of the subcommittee, I am Matt Eylcs, 

Senior Executive Vice President and Chief Operating Officer of America's Health Insurance 

Plans (AHIP), AHIP is the national association whose members provide coverage for health care 

and related services to millions of Americans every day. Through these offerings, we improve 

and protect the health and financial security of families, businesses, communities and the nation. 

We are committed to market-based solutions and public-private partnerships that improve 

affordability, value, access and well-being for the American people. 

We appreciate this opportunity to testify on issues surrounding the pharmaceutical supply chain 

and solutions that are needed to help millions of Americans who are burdened by out-of-control 

prescription drug prices. AHIP's members negotiate with health care providers and 

pharmaceutical manufacturers on behalf of consumers and other health care purchasers (e.g., 

employers, government) to provide coverage for high-quality treatments and services at the most 

competitive prices possible. Health insurance providers offer comprehensive coverage under the 

pharmacy benefit for prescription drugs delivered through retail, mail order, and specialty 

pharmacies. Health plans also provide coverage under the medical benefit for physicianadministered drugs, biologics, and devices in outpatient and inpatient settings. This gives health 

plans a unique perspective into the pharmaceutical supply chain and a 360-degree view of the 

broader U.S. health care system- working with pharmacy benefit managers and negotiating with 

drug and device manufacturers, pharmacies, physicians, and hospitals to ensure that enrollees 

have coverage for the treatments and services they need. 

As the committee explores the role of various participants in the supply chain, we urge you to 

recognize that the entire pricing process is driven entirely by the original list price of a branded 

drug- which is determined solely by the drug company, not by the market or any other 

participant in the pharmaceutical supply chain. Congress needs to address this reality- that the 

problem is the price- as part of any strategy for reducing pharmaceutical costs for the 

American people. 

Out-of-control prescription drug prices are a direct consequence of pharmaceutical companies 

taking advantage of a broken market for their own financial gain at the expense of patients. The 

lack of competition, transparency, and accountability in the prescription drug market has created 

extended, price-dictating monopolies with economic power that exist nowhere else in the U.S. 
96 


29424.073

economy. The end result is that everyone pays more- from patients, businesses and taxpayers to 

hospitals, doctors, and pharmacists. 

Bold steps are needed, at both the legislative and regulatory levels, to ensure that people have 

access to affordable medications. With the right solutions that increase competition, choice, and 

patient control, we can deliver affordable prescription drugs- while at the same time protecting 

and supporting innovations to deliver new treatments and cures for patients. 

Our statement focuses on the following topics: 

The consequences that out-of-control prescription drug prices have on consumers; 

How health plans work hard on behalf of all consumers to negotiate lower prescription drug 

costs, while prescription drug manufacturers set sky-high list prices that serve as the starting 

point for rebate negotiations and the overall pricing process; and 

Our recommendations for reducing prescription drug prices through market-based solutions 

that deliver real competition, create more consumer choice, and ensure that open and honest 

drug pricing is tied to the value delivered to patients. 

The Impact of Out-of-Control Prescription Drug Prices 

Rising prescription drug prices and costs impose a heavy burden on all Americans. From 

patients who cannot afford life-saving medications, to consumers who pay higher and higher 

premiums because of higher and higher drug prices, to employers who must divert dollars that 

could be used for salaries to pay for more expensive health services, to hardworking taxpayers 

who fund public programs like Medicaid and Medicare, the consequences are profound. 

It is important to understand the unambiguous root causes of this problem: lack of real market 

competition due to the extension and distortion of government-granted exclusivity and patent 

protections, opaque pharmaceutical pricing practices, questionable sales and marketing practices, 

and limited correlation between drug prices and the value they deliver to patients. 

Even for products that have been on the market for decades, sharp price increases are not 

uncommon. For example, one study shows that the price of insulin has increased more than 240 

percent over the past decade- from $88.20 per vial in 2007 to $307.20 per vial today- despite 

2 
97 


29424.074

the fact that insulin has been widely available for the last 90 years. With no generic competition 

in the U.S., diabetes patients are limited to brand-name versions costing hundreds of dollars per 

vial. 1,2 

EpiPens offer another good example. The unjustified price increases for EpiPens generated well 

deserved scrutiny last year. From 2008 to 2016, the list price of an EpiPen 2-Pak rose an 

astonishing 500 percent- with zero improvements to the quality ofthe medication. Because of 

this out-of-control price spike, the cost of co-insurance to cover the medication increased by 477 

percent ($127) 3

• The consequence for hardworking families is that they have less money in their 

pockets to buy gas, groceries, or save for college or retirement. 

Spending on prescription drugs continues to grow at a rapid and unsustainable rate, driven in 

large part by both high launch prices for new therapies and treatments as well as price increases 

for existing brand-name drugs. In 2015, U.S. spending on prescription drugs totaled $457 billion 

and represented 16.7 percent of total personal health care spending (includes retail prescription 

drugs and drugs provided in a hospital sctting).4 According to the Centers for Medicare & 

Medicaid Services (CMS), total prescription drug spending is projected to reach $597.1 billion 

by 2025.5 

According to the Milliman Medical Index, a widely used benchmark for estimating health care 

costs for a family of four with employer-sponsored health insurance coverage, prescription drug 

spending will increase by 8 percent in 2017, which is more than double the 3.6 percent increase 

in overall medical trend.6 The report notes that "because prescription drug expenses have grown 

more quickly than other healthcare expenditures, drugs have increased from approximately 13% 

ofthe total MMI in 2001 to 17.1% in 2017."7 Similarly, Segal Consulting, a prominent benefits 

1 Jeremy A. Green, M.D., Ph.D. and Kevin R. Riggs M.D., M.P.H. "\Vhy Is There No Generic Insulin? Historical 

Origins of a Modern Problem." New England Journal ofA1edicine; March 19, 2015. 2 Several Probes Target Insulin Drug Pricing, Kaiser Health News, October 28, 2017 

httos:/ /www.nbcnews.com/hea lth/health-ncws/sevcral-probcs-targct-insulin-drug-pricing-n815141 3 Calculated by using EpiPen list prices from 2008 and 2016, assuming a 30% co-insurance rate offofPBM 

payment rate, and using CllO's reported "typical" PBM payment rate of 85% of list price plus a $2.00 dispensing 

fee (https :/ /www .cbo.gov I sites/ default/fi les/11 Oth -co ngress-2007-2008/ reports/0 1-03-prescriptiond rug.pd D 4 HHS-ASPE Report-Observations on Trends in Prescription Drug Spending. March 8, 2016. 

https:/ I aspe. hhs.gov /pdf-report/observations-trends-prescription-drug-spend in a 

5 National Health Expenditure Projections, 2016-2025: Price Increases, Aging Push Sector to 20 Percent of 

Economy. Sean P. Keehan, et al. Health Affairs; March 2017. 

https:/ /www.hcalthaffairs.org/doi/pdf/l 0.13 77 /hlthaff.20 16.1627 6 2017 Milliman Medical Index. Chris Girod, Sue Hart, and Scott Weltz. May 2017. 

http:/ /www.m ill iman.com/up loadedFi les/insight/Period icals/mmi/20 17 -mi IIi man-medical-indcx.pd f 7 2017 Milliman Medical Index. Chris Girod, Sue Hart, and Scott Weltz. May 2017. 

http :I /www. m i IIi man.com/uploadedFi les/insight/Periodicals/ mm i/20 17-milliman-medical-i ndex.pd f 
98 


29424.075

consulting firm, estimates that prescription drug spending for employer-sponsored plans will 

increase by I 0.3 percent in 2018- with a 17.7 percent cost increase in specialty drugs and 

biologics. 8 Prescription drug spending trends are primarily driven by price inflation (8.8%) as 

opposed to increases in utilization (2.1 %), according to the Segal Consulting study. 9 

The pharmaceutical cost crisis is clearly demonstrated by numerous research findings: 

Out-of-Control Drug Prices aud Costs Are a Major Component of Premiums: A March 

2017 AHIP analysis concluded that 22 cents of every dollar spent on health insurance 

premiums goes to pay for prescription drugs- outpacing the amount spent on physician 

services, inpatient hospital services, and outpatient hospital services. 10 These costs impose a 

heavy burden on consumers, employers, government programs, taxpayers, and the entire 

health care system. When prescription drug prices go up, the cost of health insurance goes 

up. That is a fundamental economic reality: rising health care costs, including drug costs, are 

driving increases in the cost of health coverage. 

Financial Burden on Hospitals and Providers: An October 2016 study commissioned by 

the American Hospital Association and the Federation of American Hospitals cautioned that 

hospitals "bear a heavy financial burden when the cost of drugs increases and must make 

tough choices about how to allocate scarce resources." This study highlighted an example of 

one hospital for which the price increases of four common drugs (which ranged between 479 

and I ,261 percent) cost the same amount in 2015 as the salaries of 55 full-time nurses. 11 

Unfair Burden of High Drug Prices for American Consumers, Businesses and 

Taxpayers: In a March 2017 Health Affairs blog, researchers at the Memorial Sloan 

Kettering Center for Health Policy and Outcomes analyzed the 15 companies selling the top 

20 drugs (by sales) in the United States. Researchers reported that: (I) list prices in other 

developed countries averaged just 4 I percent of U.S. net drug prices; and (2) the additional 

8 Segal Consulting--High Rx Cost Trends Projected to Be Lower for 2018. Fall 20I7. 9 lbid. 

10 "Prescription Drugs Are Largest Single Expense of Consumer Premium Dollars," AHIP, March 2, 20 I7. 

https://www.ahip.org/health-care-dollar/. This AHIP estimate understates the actual impact of prescription drugs on 

insurance premiums, as drugs administered in hospital inpatient settings were excluded. 11 "Trends in Hospital Inpatient Drug Costs: Issues and Challenges," NORC, October II, 20I6. 

http://www.aha.org/content/I6/aha-fah-rx-report.pdf 

4 
99 


29424.076

income generated by higher U.S. net drug prices totaled $116 billion in 2015. 12 The authors 

further stated: "We found that the premiums pharmaceutical companies earn from charging 

substantially higher prices for their medications in the US compared to other Western 

countries generates substantially more than the companies spend globally on their research 

and development. This finding counters the claim that the higher prices paid by US patients 

and taxpayers are necessary to fund research and development. Rather, there are billions of 

dollars left over even after worldwide research budgets are covered." 

Higher Prices Often Do Not Mean Better Outcomes: While some recent high-priced, 

breakthrough medications have improved patient outcomes, this is not always the case. For 

example, an April2015 study by researchers from the National Institutes of Health (NIH) in 

JAMA Oncology examined 51 oncology drugs approved by the Food and Drug 

Administration (FDA) from 2009 through 2013. Researchers concluded that current pricing 

models were irrational and had no connection to better patient outcomes. Remarkably, the 

NIH researchers found that prices had no significant correlation to improvements in 

progression-free survival or overall survival.U With new cancer drugs now often costing 

well over $100,000 annually, manufacturers appear to be setting the price of new therapies 

based on the highest-priced oncology treatment approved most recently by the FDA rather 

than the value or the improved outcomes they deliver to patients. 

"Unreasonable" Drug Prices Forcing Tradeoffs between Taking Medicines and Other 

Necessities: A September 20I6 tracking poll from the Kaiser Family Foundation found that 

77 percent of Americans believe that prescription drug costs are "unreasonable." 14 The 

difficulty in affording unreasonably priced prescription drugs can lead to treatment nonadherence, which can harm patient health creating adverse outcomes and leading to 

expensive complications. According to a survey by Consumer Reports, many respondents 

took "potentially dangerous" steps to limit the impact of high drug costs: not filling a 

prescription (17 percent), skipping a scheduled dose (14 percent), or taking an expired 

medication (14 percent). This survey also found that 19 percent of respondents spent less on 

12 "R&D Costs For Pharmaceutical Companies Do Not Explain Elevated US Drug Prices," Nancy Yu, Zachary 

Helms, and Peter Bach, March 7, 2017. http://healthaffairs.org/blog/20 17/03/07/rd-costs-for-pharmaceuticalcompanies-do-not-explain-elevated-us-drug-prices/ 

""Five Years of Cancer Drug Approvals: Innovation, Efficacy, and Costs," Sham Mailankody, MB BS; 

Vinay Prasad, YID, MPH, JAMA Oncology, July 20I5. 

http:/ I on co logy .j amanetwork.com/ article.aspx?articleid=22 I 2206 14 Kaiser Health Tracking Poll: September 2016. httr://www.kff.org/health-costs/reportlkaiser-health-tracking-pollseptember-20 16/ 
100 


29424.077

groceries, and 15 percent postponed paying other bills so they could afford their prescription 

drugs. 15 

These facts paint a clear picture of the crisis we face: drug companies exploit a broken market to 

set seemingly unbounded prices for seemingly unlimited periods while consumers, businesses, 

and taxpayers bear the staggering costs. 

Understanding the Role of Health Plans in the Supply Chain: Negotiating Lower Costs for 

All Consumers 

Consumers are taking a more active role in their health decisions, including how to manage the 

rising prices and cost of prescription drugs, and health plans are providing better cost and quality 

comparison tools for individuals and families to make informed choices about their care. 

According to an AHIP study published in the American Journal of Managed Care (AJMC), 90 

percent of plans with price estimator tools educated consumers on their potential out-of-pocket 

costs, such as co-pays, coinsurance, and deductibles that they might incur for specific procedures 

or services. 16 Research shows that the advance availability of price information can help 

consumers make health care decisions tailored to their specific care needs. Additionally, many 

of these resources are easily-accessible consumer tools available through mobile apps, including 

coverage information, provider directories listing the network of participating and/or preferred 

pharmacies. This information gives consumers more control over their care and more choices 

for their coverage. 

Overall, when compared to the total spending for retail prescription drugs, consumer out-ofpocket spending- cash payments, deductibles, coinsurance, and co payments- have significantly 

decreased since the 1990s. Consumer out-of-pocket spending bas declined from 57 percent of 

U.S. retail drug spending in 1990 to 14 percent in 2015, and spending by commercial and 

government payers rose from 43 percent to 86 percent of U.S. retail drug expenditures during 

this same periodn A 2016 Kaiser analysis found that after insurance coverage for individuals in 

15 "Some Americans take risks with needed drugs due to high costs," Consumer Reports, September 2014. 

http://www.consumerreports.orglcro/20 14/09/some-americans-take-risks-with-needed-drugs-due-to-highcostslindex.htm 

16 "Characterizing Health Plan Price Estimator Tools: Findings From a National Survey," Higgins A, Brainard N, 

Yeselovskiy G., AJMC, February 2016. 17 Centers for Medicare & Medicaid Services (CMS), "National Health Expenditures Projections 2016-2025," and 

National Health Expenditure (NHE), "Historical and Projections 1960-2025," at https://www.cms.gov/ResearchStati sties-Data-and-Systems/Statistics-Trends-andReports/NationaiHealthExpendData/NationaiHealthAccountsProjected.html The NHE accounts detail how much 

6 
101 


29424.078

employer-sponsored coverage, the average out-of-pocket cost for a person who purchases 

prescription drugs is $12 a month. 18 

Importantly, since 2014, nearly all consumers with minimum essential coverage have been 

protected by annual limits on maximum out-of-pocket (MOOP) costs. With the exception of 

certain grand fathered plans in effect before March 2010, all health plans in the individual and 

group markets (including large group and self-insured plans) have maximum out-of-pocket 

limits. This includes protecting patients against catastrophic exposure and financial ruin because 

of rising drug costs. These MOOP limits are reset and updated annually, providing the financial 

protection that patients deserve. While the federal limit for individual coverage is $7,150 and 

$14,300 for family coverage in 2017, many health plans have set their out-of-pocket limits far 

lower. The vast majority of individuals with employer-sponsored coverage (and those covered 

under Medicare Advantage prescription drug plans and Medicaid) have substantially lower 

limits. 19 

Prices for specialty-drug medications often significantly exceed a health plan's maximum out-ofpocket limits- protecting consumers from one of the highest and fasting growing prescription 

drug segments. An AHIP analysis of 150 drugs on specialty-drug formularies found that over 

half cost more than $100,000 year- in other words, the monthly cost of many specialty drugs 

exceeds the annual MOOP.20 While these drugs often provide tremendous clinical benefits when 

medically necessary, their high prices and growing use for treatment of chronic conditions in 

larger populations threatens the availability of affordable coverage options for all consumers. 

With an expected 225 new specialty drugs coming to market over the next five years, health 

plans, employers, and other stakeholders are searching for innovative, market-based strategies to 

restrain cost growth while simultaneously maintaining access to safe and effective drugs for 

patients. 

consumers pay each year to fill retail prescriptions including cash purchases, insurance deductibles, co-payments, 

and coinsurance. Annual insurance premiums arc not included in out-of-pocket spending. 18 The Henry J. Kaiser Family Foundation. "New Analysis Finds Out-of-Pocket Prescription Drug Spending 

Decreasing on Average, But More People Spending in Excess of$1,000 a Year." October 2016. 19 "Employer Health Benefits 2016 Annual Survey" (exhibit 7.36), Kaiser Family Foundation and Health Research 

and Educational Trust, 2016. http://files.kff.org/attachment/Report-Employer-Health-Benefits-20 16-Annual-Survey 20 "High Priced Drugs: Estimates for Annual Per-Patient Expenditures for !50 Specialty Medications," A HIP, April 

2016. 

7 
102 


29424.079

Reducing Prescription Drug Costs Through Rebate Negotiations 

While prescription drug pricing in the private sector is complex, in many cases, health plans are 

able to negotiate with manufacturers to provide savings for all consumers. Health plans 

negotiate with drug manufacturers for lower prices- and then pass those savings on in the form 

of lower premiums and lower out-of-pocket costs for all consumers. The focus on how some of 

these savings, which sometimes take the form of "rebates," are distributed to consumerswhether to a small group of patients or across the broader covered population- is a deliberate 

tactic to obscure the more serious issues surrounding the lack of competition, transparency, and 

accountability in the pricing of prescription drugs. 

In discussing rebates, it is important to understand the role they play within the broader system 

for setting the cost of drugs that consumers pay at the pharmacy. It is also important to 

understand that for some branded drugs and biologics without therapeutic alternatives, 

manufacturers' willingness to negotiate on price is small or nonexistent. Further, rebates are not 

commonly found for physician-administered drugs, which account for 30 percent of prescription 

drug spending.21 

The bottom line is that the original list price of a drug is solely determined and controlled by the 

drug company- not the market- and it drives the entire pricing process. And if the original list 

price is high, the final cost that a consumer pays will be high. It is that simple: the problem is 

the price. 

Unfortunately, manufacturers of branded drugs and biologics are working to divert attention 

from high prescription drug prices and instead point to problems in the drug supply chain and the 

role of wholesalers and pharmacy benefit managers (PBMs). However, we should focus on how 

the supply chain actually works. Manufacturers sometimes sell their products directly to the 

pharmacy (e.g., large chain retail pharmacies), but more often sell their products through a 

wholesaler. The price that pharmacies and wholesalers pay is highly correlated to the original 

list price set by the manufacturer. Wholesalers and some pharmacies may acquire the drug at a 

modest reduction off the list price as a result of volume and/or prompt pay discounts. These 

discounts are not significant because wholesalers do not influence the "market share" of specific 

prescription drugs. Wholesalers then take possession of the drug and distribute and resell the 

21 "Trends in Specialty Drug Benefits," Pharmacy Benefit Management Institute, 2017. 

8 
103 


29424.080

drug to pharmacies (e.g., smaller community pharmacies) after a small markup above the 

discounted price.22 This total cost represents the pharmacy's acquisition cost. 

At this point, the consumer enters the process. For individuals who lack health insurance but arc 

prescribed a medication, they often pay the highest prices, especially for branded drugs. 

Typically, they pay the full list price set by the drug company (or the pharmacy acquisition cost) 

plus a markup. 

By contrast, for individuals with insurance who arc dispensed a prescription drug from a 

pharmacy in the health plan's network, the pharmacy typically communicates electronically with 

a PBM, which administers drug benefits under a contract with the health plan. From the PBM, 

the pharmacy receives confirmation of coverage; whether the drug is subject to any utilization 

management tools, such as prior authorization; whether there arc any potential safety issues, such 

as quantity limits or drug-drug interactions; the reimbursement amount to be paid by the plan; 

and the co-payment or co-insurance owed by the consumer. The total payment to the pharmacy 

is typically based on a negotiated contract rate between the pharmacy and the health plan (or the 

PBM acting on behalf of the health plan). This contract reimburses the pharmacy for its 

acquisition cost and provides a dispensing fee. 

The amount that the consumer or patient pays depends on several factors: (I) the negotiated rate 

between the plan and pharmacy; (2) the type of drug (i.e., branded or generic); (3) the plan's 

benefit design (e.g., co-pay or co-insurance); and (4) where the enrollee is within that benefit 

design at the time of purchase (e.g., in the deductible period, copayment period, MOOP limit or 

catastrophic phase for those in Medicare Part D). The pharmacy collects the appropriate cost 

sharing amount from the consumer and receives the remainder from the health plan or PBM at 

later settlement time based on the payment terms under the contract. (The process described 

above assumes that there are no manufacturer-sponsored drug coupons and/or co-payment cards, 

where the manufacturer directly pays a large portion of the consumer's cost sharing. These 

payment schemes are not operationally transparent to payers, distort an already dysfunctional 

pricing market, and further complicate a confusing process for consumers.) 

Given that the amounts charged by pharmacies for branded drugs reflects the pharmacies' 

acquisition costs, these charges are closely correlated to the list price set exclusively by the 

22 "Prescription Drug Pricing in the Private Sector," Congressional Budget Office, 2007. 

https :1 /www .cbo.govlsitcsld efault/fi les/1 I Oth-congress-2007-200 8/reports/0 l-03-prcscriptiond rug.pdf 

9 
104 


29424.081

pharmaceutical manufacturer. That is why out-of-control drug prices show up at pharmacy 

counters. It is also why health plans aggressively negotiate with manufacturers for ways to 

reduce the impact of these prices, so they can pass savings onto consumers. For example, if a 

health plan's pharmacy and therapeutics committee determines that two or more drugs are 

therapeutically equivalent and eligible for formulary inclusion, health plans (or PBMs) negotiate 

with manufacturers for rebates in exchange for plans placing the drugs on a preferred formulary 

tier and/or waving utilization management tools, such as step therapy protocols. Since drug costs 

comprise a significant portion of a health plan's total costs, these discounts, which typically take 

the form of rebates, reduce the net price of the drug. 

Rebate amounts typically arc calculated and paid by a manufacturer to a health plan on an 

aggregate basis, long after an individual prescription is filled by a consumer. Because rebates 

are extended based on actual aggregated utilization by a specific population, they are paid 

several months after the drug has been prescribed and dispensed and all the data can be 

reconciled. In designing their plan benefits and developing premium rates in advance of the 

upcoming coverage year, health plans calculate an estimate of the aggregate rebates they expect 

to receive. Since drug costs comprise a significant portion of a health plan's total costs, plans 

may usc these estimated discounts to reduce the premiums they charge for the overall benefit. 

Alternatively, plans may incorporate the estimates into lower point-of-sale pricing for individual 

drugs that generate the rebates. 

By reducing the net price and cost of drugs, all consumers benefit. The savings from discounts 

and rebates are passed on through improvements to benefit packages, reductions in premiums, 

and/or lower out-of-pocket costs. This represents a broad and direct benefit for millions of 

consumers whether they get their coverage through Medicare, on their own, or through their 

employer. 

An example of successful private sector negotiations between health plan sponsors and 

manufacturers can be found in Medicare Part D. Medicare prescription drug costs have 

increased by 8 percent annually, from about $67 billion in 2011 to almost $100 billion in 2016. 

During that same time, the average premium paid by beneficiaries only increased by $2 or about 

1 percent annually.23 

23 Medicare Trustees 2017 report. https://www.cms.gov/Research-Statistics-Data-and-Systems/Statistics-Trendsand-Reports/ReportsTrustFunds!Oownloads/TR20 17 .pdf 

10 
105 


29424.082

Preserving these health plan practices is essential to supporting market-based solutions, which 

we discuss in the next section, for providing consumers relief from high prescription drug costs. 

AHIP's Recommendations for Reducing Prescription Drug Prices 

The problem with prescription drug pricing does not lie with health plans, wholesalers, 

pharmacies, providers, or patients. The cost crisis is a direct result of actions by the 

pharmaceutical industry to take advantage of a broken market. As the committee explores 

strategies for reducing prescription drug prices, we urge you to consider our recommendations 

for effective, market-based solutions in three areas: (I) delivering real competition; (2) ensuring 

open and honest drug pricing; and (3) delivering value to patients. Many of these 

recommendations were raised in a report recently released by the National Academies of 

Sciences, Engineering, and Medicine entitled, "Making Medicines Affordable: A National 

Impcrative."24 

Delivering Real Competition 

Create a Robust Biosimilars Market: Biosimilars offer great promise in generating cost 

savings for consumers. Some of the costliest and most widely-used biologics have been on 

the market for decades without biosimilar competition. To achieve this promise, it is 

important to ensure that the FDA promulgates regulations that promote a robust market and 

ensure providers and patients have unbiased information available to them about the benefits 

of biosimilars. For example, FDA policies for the labeling, naming, and interchangeability 

of biosimilars should provide clarity, ensure safety, and avoid unnecessary regulatory 

hurdles. We also need to address anti-competitive strategies by pharma companies, such as 

the development of "patent estates," and tactics aimed at delaying the availability of 

biosimilars. 

Reduce Rules, Regulation and Red Tape to Generic Entry: The FDA should be provided 

the necessary resources to clear the backlog of generic drug applications, particularly for 

classes of drugs with no or limited generic competition. To address patent abuses, anticompetitive tactics such as "pay for delay" settlements and "product hopping" should be 

prohibited, and the Inter Partes Review (IPR) process through the U.S. Patent and Trademark 

24 National Academies of Sciences, Engineering, and Medicine. 2017. Making Medicines Affordable: A National 

Imperative. Washington, DC: The National Academies Press. https://doi.org/1 0.17226/24946 

II 
106 


29424.083

Office should be preserved. Additional legislation is needed to require brand manufacturers 

to share information and scientific samples to promote the development of generic drugs. 

Revisit and Revise Orphan Drug Incentives: The Orphan Drug Act is being exploited. We 

urge Congress to ensure that the Orphan Drug Act's incentives are used by those developing 

medicines to treat rare diseases- not as a gateway to premium pricing and blockbuster sales 

beyond orphan indications. In cases of rare diseases for which no effective therapy yet 

exists, we need to ensure that newly approved drugs are priced in accordance with their 

efficacy. 

Ensuring Open and Honest Price Setting 

Publish True R&D Costs and Explain Price Setting and Price Increases: As part of the 

FDA approval process, manufacturers should be required to disclose information regarding 

the intended launch price, the usc of the drug, and direct and indirect research and 

development costs. After approval, manufacturers should provide appropriate transparency 

into list price increases. 

Limit Third-Party Schemes that Raise Costs: Policymakers should examine and address 

the impact of drug coupons and co-pay card programs and related charitable foundations -

on overall pharmaceutical cost trends. These programs often work to steer consumers 

towards higher priced drugs, and hide the true impact of rising prescription drug costs. It is 

important to ensure that existing protections aimed at prohibiting their use in certain federal 

programs are sufficient. In the commercial market, payers need more transparency into when 

co-pay cards and coupons are being used. 

Evaluate DTC Advertising Impact: According to an article in the Washington Post, nine 

out of the ten biggest pharmaceutical companies spend nearly twice as much on sales, 

marketing, and advertising than they spend on research and development.25 We urge the 

committee to assess the impacts of the growth in direct-to-consumer (DTC) advertising, 

particularly broadcast advertising, and evaluate the best approaches for conveying 

information to consumers. As part of this assessment, it is important to examine the impact 

25 "Big pharmaceutical companies are spending far more on marketing than research," Washington Post, February 

11,2015. 

12 
107 


29424.084

of DTC advertising on physician prescribing behavior and/or its effect on generic drug 

availability and utilization. 

Delivering Value to Patients 

Inform Patients and Physicians on Effectiveness and Value: Increased funding is needed 

for private and public efforts to provide information to physicians and their patients on the 

comparative and cost-effectiveness of different treatments. These tools can help facilitate 

appropriate assessments about the value and effectiveness of different treatment approaches, 

particularly those with very high costs. The New York Times has highlighted a prime 

example from one of AHIP's members that has developed a "counter-detailing" program 

where the health plan uses representatives who previously worked in the pharmaceutical 

industry to educate physicians on lower cost but equally effective generic alternatives to 

high-priced branded drugs.26 

• Expand Value-Based Formulary Programs: It is important to promote value-based 

payments in public programs like Medicare for drugs and medical technologies, based on 

agreed-upon standards for quality and outcomes. 

Reduce Regulatory Barriers to Value-Based Pricing: We encourage Congress and the 

Administration to address existing statutory and regulatory requirements (e.g., Medicaid best 

price rules) that may inhibit the development of pay-for-indication and other value-based 

strategies in public programs. Specifically, it is important to examine whether Medicaid's 

best price requirements arc negatively impacting private sector negotiations between 

plans/PBMs and manufacturers by essentially creating a price floor for prescription drugs. 27 

Thank you for considering our perspectives on these important issues. We arc strongly 

committed to solving the cost crisis. With the right solutions that deliver real competition and 

create more consumer choices, we can bring down the cost of prescription drugs. We look 

forward to working with the committee to advance market-based solutions to ensure that 

consumers have access to affordable medications. 

26 "Selling Doctors on Cutting Drug Costs," New York Jlmes, June 6, 2017. 27 "Health Policy Brief: Medicaid Best Price," Health Affairs, August 10,2017. 

https://www.healthaffairs.org/doll 0.13 77/hpb20 171 008.000 173/full/ 

13 
108 

Mr. BURGESS. Thank you, Mr. Eyles. 

Mr. Nickels, you’re recognized for 3 minutes, please, to summarize your opening statement. 

STATEMENT OF TOM NICKELS 

Mr. NICKELS. Mr. Chairman, my name is Tom Nickels. I am Executive Vice President of the American Hospitals Association. I appreciate the opportunity to be here today on behalf of the—— 

Mr. WALDEN. Your mic’s not on. 

Mr. NICKELS. Thank you very much—our 5,000 hospital and 

health system members. I would like to briefly address three 

issues: the drug supply chain, drug pricing, and the 340B program. 

America’s hospitals rely on innovative drug therapies to save 

lives every day. Modern pharmaceuticals play a critical role in getting patients healthy and helping them maintain that health. 

The drug supply chain is, as Chairman Walden said, complex, 

with the number of steps between the development and delivery of 

a drug. Hospitals primarily intersect with the drug supply chain in 

their role as purchasers and dispensers of pharmaceuticals. At the 

beginning of the chain, our academic medical center members play 

a leading role in both the development and testing of new drug 

therapies. Studies show that these efforts discover drugs that have 

a disproportionately important clinical effect in therapies that can 

be used for widespread public health concerns. Further down the 

supply chain all hospitals are major purchasers of drugs used in 

clinical settings. 

Hospitals work with manufacturers and group purchasing organizations to negotiate the best prices for the drugs they use and reduce administrative expenses. Most hospitals do retain some direct 

contracting with drug manufacturers primarily for branded therapies for which there is no competition. Once a hospital acquires a 

drug, it manages its supply in hospital-based pharmacies who work 

with prescribing clinicians to develop and manage the formulary, 

following standards that take into account evidence-based clinical, 

ethical, legal, and other factors. 

Pharmacists also manage the dispensing of medications to the 

appropriate clinical staff who then deliver the drug to the patient. 

In terms of pricing, spending on pharmaceuticals, as has been 

noted, has increased dramatically over the last several years and 

the primary driver is higher prices. We see both higher launch 

prices for new drugs and increases in prices for existing drugs. 

Limited competition and drug shortages have also facilitated this 

growth. 

Whether GPO or a hospital is negotiating, the starting price, as 

has been pointed out, is the price set by the manufacturer. The 

ability of the GPO or hospital to obtain a discount off the price 

largely has to do with volume and whether and how much competition exists. In instances where no competition exists such as for 

many of the new high-cost specialty drugs, large discounts are not 

available. 

The burden of these high prices falls on all purchasers including 

patients and the providers who treat them. For example, hospitals 

frequently see patients show up in the emergency department or 

109 

return for follow-up care sicker than when they left because they 

were unable to afford their drugs. 

Hospitals as drug purchasers also face significant resource constraints as spending on drugs increase. Hospitals must make tradeoffs between investments in staff, technology, and facilities upgrade 

and paying more for drugs. 

Lastly, I want to mention the 340B program which permits safety net hospitals to care for communities with a high number of lowincome and uninsured to stretch scarce federal resources as far as 

possible, reaching more eligible patients and providing more comprehensive services. 

The 340B program enables these hospitals to serve their communities by reinvesting savings from reduced drug prices into programs that benefit vulnerable patients at no additional cost. 

Thank you very much for the opportunity to testify. 

[The prepared statement of Mr. Nickels follows:] 

110 


29424.085

American 

~ Hospital 

Association. 

Statement 

of the 

American Hospital Association 

before the 

1100 10th Street NW T W<J C~entar, Sune 400 Washington, DC 20Cll1·4956 

12021638-1100 Phone VV'MN.aha.org 

Health Subcommittee of the Committee on Energy & Commerce 

of the 

U.S. House of Representatives 

"Examining the Drug Supply Chain" 

December 13,2017 

On behalf of our nearly 5,000 member hospitals, health systems and other health care 

organizations, and our clinician partners including more than 270,000 affiliated physicians, 

2 million nurses and other caregivers and the 43,000 health care leaders who belong to our 

professional membership groups, the American Hospital Association (AHA) appreciates the 

opportunity to submit for the record our comments on the drug supply chain and the cost of 

medications. 

America's hospitals rely on innovative drug therapies to save lives every day. Without them, 

more lives would be lost to diseases like cancer and AIDS, and others who now can live 

comfortably while managing their chronic conditions would see their quality oflife deteriorate. 

In short, modern pharmaceuticals play a critical role in getting patients healthy and helping them 

maintain health. Hospitals primarily interact with the drug supply chain in their role as 

purchasers and dispensers of pharmaceuticals. They also play a crucial role in the development 

of new drug therapies. 

Spending on pharmaceuticals has increased dramatically over the past several years. The burden 

of this increase falls on all purchasers, including patients and the providers who treat them. For 

example, hospitals frequently see patients show up in the emergency department or return for 

follow up care sicker than when they left because they were unable to afford their medications. 

Just as many patients face difficult choices when considering purchasing medications, hospitals, 

as drug purchasers, face significant resource constraints and trade-offs as spending on drugs 

increases. 
111 


29424.086

The primary driver behind increased drug spending is higher prices, not increases in utilization. 

Within the health care field, "pharmaceuticals" was "the fastest growing category" in terms of 

pricing for every month of 2016 and for most months of 2017. 1 W c see both higher launch prices 

for new drugs and increases in prices for existing drugs. Limited competition and drug shortages 

have facilitated this price growth. 

Hospitals work with manufacturers and group purchasing organizations (GPOs) to negotiate the 

best prices for the drugs they use. However, for many drugs, the starting point for the negotiation 

is high, with some new drugs hitting the market at $55,000,2 $475,000,3 and even $750,0004 for a 

course of treatment. This price does not include the cost of managing and delivering the drug, or 

any of the ancillary services required to support the patient undergoing treatment. 

We explore these challenges in more detail below. 

HOW HOSPITALS AND HEALTH SYSTEMS INTERFACE WITH THE DRUG SUPPLY 

CHAIN 

The drug supply chain is complicated, with a number of steps between the development and the 

delivery of a drug. America's hospitals and health systems did not design the supply chain, but 

they do interface with it. At the very beginning of the chain, academic medical centers are 

responsible for a significant amount of the research used to develop and test new drugs. Closer to 

the end of the chain, all hospitals are major purchasers of drugs used in clinical settings. Below 

we provide more information on our members' roles in the drug supply chain. 

Research & Development. Academic medical centers play a leading role in both the 

development of the underlying science supporting new drug therapies (basic science research), as 

well as the development and testing of new therapies (applied or translational research). A 

combination of public and private funding supports this work, including grants from the National 

Institutes ofllealth, philanthropy and biopharmaceutical companies. 

A report from Tufts University underlined that "a close and synergistic relationship between [the 

biopharmaceutical and academic medical center] sectors is critical to ensuring a robust national 

capacity."5 The report noted that more than 50 percent of researchers at academic medical 

centers contribute to drug and device medical trials, and partnerships between biophannaceutical 

companies and academic hospitals have increased in recent years. 

A New England Journal of Medicine report underscored the benefits provided by public-sector 

research institutions (PSRI), which include academic medical centers and their affiliated 

universities. Specifically, the study's authors found that PSRl were responsible for 153 drugs, 

vaccines or new indicators for existing drugs approved by the Food and Drug Administration 

(FDA) between 1970 and 2009. They also found that hospitals and PSRls were predisposed to 

discover drugs that have a disproportionately important clinical effect6 and those that could be 

used for widespread public health concerns, including the treatment of cancer and infectious 

diseases, as well as vaccination development. 7 

2 
112 


29424.087

Role as Purchasers and Providers. Hospitals purchase drugs that clinicians use to treat patients 

in their facilities. Hospitals use several different approaches to acquire drugs. Nearly all hospitals 

work with GPOs to negotiate prices with manufacturers and to contract with wholesalers for 

delivery. GPOs enable hospitals to reduce administrative expenses by precluding the need to 

maintain the staff it would take to negotiate contracts for thousands of drugs. Instead, by relying 

on GPOs, this contracting function, which is not insignificant, is shared across hundreds or 

thousands of hospitals. This also often enables hospitals to achieve the best price, as they benefit 

from the negotiating power the GPO has as a result of aggregating purchasing volume. GPOs can 

save hospitals I 0 to 18 percent on the cost of drugs. 8 Hospitals pay GPOs in different ways, 

which may include a combination of upfront administrative fees, transaction fees and/or a 

percentage of discount obtained. One report found that GPOs save the health care system 

between $25 billion and $55 billion per year. 9 

Most hospitals do retain some direct contracting with drug manufacturers. This is primarily true 

for branded therapies for which there is no competition. In these instances, manufacturers are not 

compelled to negotiate with GPOs. In those instances, hospitals may directly negotiate with the 

manufacturer and contract with the wholesaler for delivery. Only a handful of hospitals directly 

contract for all of their drug supply. These are larger organizations that have both the patient 

volume and the staff capacity to make one-on-one negotiations worthwhile. A significant 

challenge arises for small hospitals that have neither the staff capacity nor the volume to enter 

into direct negotiations with manufacturers. In some instances, small, rural hospitals have been 

unable to obtain access to certain therapies. 

Whether hospitals are contracting directly or relying on GPOs, the pharmaceutical manufacturers 

set the starting price in negotiations. The ability of the GPO or hospital to obtain a discount off 

this initial price largely has to do with volume and whether, and how much, competition for such 

a therapy exists. In instances where no competition exists, such as for many of the new, high-cost 

specialty drugs, large discounts are not available. 

Once a hospital acquires a drug, it manages the supply in hospital-based pharmacies. Hospital 

pharmacists work with prescribing clinicians to develop and manage the formulary and follow 

standards for formulary development, which takes into account "evidence-based clinical, ethical, 

legal, social, philosophical, quality-of-life, safety and economic factors that result in optimal 

patient care." 10 Pharmacists also manage the dispensing of medications to the appropriate clinical 

staff, who then deliver the drug to the patient. 

HOSPITAL EXPERIENCE WITH DRUG SPENDING 

Purchasers of prescription drugs have faced significant increases in spending over the past 

several years. Last week, the Centers for Medicare & Medicaid Services (CMS) released updated 

National Health Expenditures (NHE) data that showed that retail drug spending increased by 1.3 

percent in 2016. While this level of growth may appear low, it follows two consecutive years of 

expansive growth in retail drug spending: 12.4 percent in 2014 and 8.9 percent in 2015. In other 

words, the lower growth comes on top of a much higher spending base for drugs. In addition, 

these figures capture retail drug spending only; they do not include spending on drugs purchased 

by providers, such as hospitals. 

3 
113 


29424.088

Detailed non-retail drug spending data is not publicly available, as it is not easily collected. 

Nearly all payments to hospitals for inpatient care are made on a per discharge (Diagnostic 

Related Group or DRG) or per diem basis, which means that all input costs are rolled into a 

single payment. Hospitals are responsible for managing input costs within that fixed payment 

amount and not all input costs are systematically reported publicly. 

In order to explore the experience of non-retail drug purchasers, the AHA and the Federation of 

American Hospitals worked with the NORC at the University of Chicago last year to collect and 

evaluate data on inpatient drug spending (sec Appendix A). The NORC found that increases in 

drug spending for inpatient care outpaced what the NHE reported for retail drug spending. 

Specifically, the NORC found that while retail spending on prescription drugs increased by 

10.6 percent between 2013 and 2015, hospital spending on drugs in the inpatient space rose 

38.7 percent per admission during the same period. 1112 

Price, not volume, is the primary driver of this increased spending. After examining data from 

two GPOs that collectively purchase drugs for more than 1,400 hospitals, the NORC was able to 

track changes in price, utilization and total spending for a select group of drugs. Consistently, 

changes in pricing drove increases in spending. These price increases, from the hospitals' 

perspective, appeared to be random, inconsistent and unpredictable: large unit price increases 

occurred for both low- and high-volume drugs and for both branded and generic drugs. 

Our members were not surprised to learn that their purchasing experience differs from what the 

NHE reports for retail drugs. In testimony to the Committee on Oversight and Government 

Reform of the U.S. House of Representatives, one drug manufacturer acknowledged targeting 

hospital-administered drugs for price increases. Howard Schiller, then-interim CEO and director 

ofValeant Pharmaceuticals, stated: "Because these drugs are hospital-administered, and not 

purchased by patients directly, increasing the cost of the drugs to hospitals would affect the 

hospital's profits on these procedures, but it should not reduce patient acccss." 13 

While the NORC study supports Mr. Schiller's admission that manufacturers target hospitals for 

price increases, we challenge his assessment that such practices do not reduce patient access. 

Researchers at the Cleveland Clinic found that patient access to Valeant drugs nitroprusside and 

isoproterenol declined after the company increased the prices for both substantially. From 2012 

to 2015, 53 percent fewer patients were treated with nitroprusside and 35 percent less were 

treated with isoproterenol. 14 This is because hospitals bear a heavy burden when the cost of drugs 

increases, in large part due to how hospital reimbursement it structured, and this has direct 

implications for the availability of certain drug therapies. Medicare, which is one of the largest 

payers for most hospitals and on which many commercial insurers base their rates, cannot keep 

up with new and frequently changing drug prices. The program relies on drug pricing data 

collected and reported by the Bureau of Labor Statistics, which docs a full "refresh" of drug 

pricing information only every five to seven years. This data lag means that hospital 

reimbursement does not necessarily increase proportionally to drug price increases. As a result, 

hospitals must divert other resources to cover higher drug costs, forcing difficult choices between 

providing adequate compensation to employees, many of whom are highly skilled in professions 

4 
114 


29424.089

facing shortages; upgrading and modernizing facilities; purchasing new technologies to improve 

care; or paying for drugs. 

A number of factors contribute to the increase in drug spending, and those factors have evolved 

over time. In the past several years, hospital have faced widespread price increases on existing 

drugs. While drug manufacturers have increased some prices by multiple hundreds or even 

thousands of percent, hospitals report that the I 0 to 20 percent increases on widely used generic 

drugs often have a greater impact on their budgets given the high volumes of these drugs that 

hospitals purchase. Increasingly, our members report that high launch prices and increased 

spending due to drug shortages are new challenges they face, as well as budget pressures 

associated with the ancillary service costs associated with highly complex and potent drugs. 

High Launch Prices. Drug manufacturers are increasing the launch prices for new drugs. These 

prices are the basis for negotiations with purchasers. Examples of recent launch prices include: 

Talz (Eli Lilly), used for treating psoriasis, costs $50,000 a year. 15 

Keytruda (Merck), used for treating melanoma, costs $152,400 a year. 16 

Kymriah (Novartis), used for treating leukemia, costs $475,000 for a course of 

treatment. 17 

Spinraza (13iogen), used to treat spinal muscular atrophy, costs $750,000 for the first year 

of treatment and $375,000 per year thereafter. 18 

Drug Shortages. Drug shortages also are a major contributor to increases in drug spending. 

Medications that experience shortages are largely injectable products that are off patent and have 

few suppliers; shortages typically arise from quality concerns that cause a halt to production. If a 

product has few competitors, this disruption cannot be absorbed by other companies and demand 

outpaces supply. This not only results in a shortage, but also causes prices to rise. For drugs with 

a sole manufacturer, shortages are exacerbated since there is no alternative, clinicians must 

scramble to find the drug or compound the drug in cases where it is possible. They also may 

recommend an alternative (often less effective) therapy, if one exists. This, in turn, can result in 

higher spending because manufacturers often capitalize on the situation by increasing the price 

of the alternative therapy. For example, a 2017 study that examined how drug prices change 

during supply disruptions 19 found that after quality-control issues forced a manufacturer of 

glycopyrrolatc- an injectable agent commonly used before surgery to reduce secretions- to 

suspend production, the remaining manufacturer increased the price of its product by 855 

percent. The list price remained at the new level even after production capacity was restored. 

Ancillary Costs. Many new drug therapies are highly potent and come with significant side 

effects. A recent example is Kymriah, a new blood cancer drug using "CAR-T cell therapy" 

through which patients' own genes arc extracted, modified and reinjected to kill leukemia cells. 

The potential side effects require extensive ancillary services to monitor patients and prevent 

infections and other adverse events for a prolonged period of time. 

According to the FDA, "Treatment with Kymriah has the potential to cause severe side effects. It 

carries a boxed warning for cytokine release syndrome (CRS), which is a systemic response to 

the activation and proliferation of CART-cells causing high fever and flu-like symptoms, and 
115 


29424.090

for neurological events. Both CRS and neurological events can be life-threatening. Other severe 

side effects ofKymriah include serious infections, low blood pressure (hypotension), acute 

kidney injury, fever, and decreased oxygen (hypoxia). Most symptoms appear within one to 22 

9m following infusion of Kymriah. Since the CD 19 antigen is also present on normal B-cells, 

and Kymriah will also destroy those normal B cells that produce antibodies, there may be an 

increased risk of infections for a prolonged period of time"20 (emphasis added). 

While these services do not directly increase the cost of the drug, they do impact the overall cost 

of care. 

HOSPITALS' APPROACH TO REDUCING DRUG COSTS 

Hospitals and health systems are committed to ensuring patients receive high-value care. 

Hospital pharmacists continually work to reduce the costs of drug therapies in order to maintain 

and expand access to care. Specific examples of approaches taken by hospitals include: 

Identifying equally effective and safe alternative therapies that may be less costly; 

Ongoing monitoring of pricing changes to anticipate upcoming needs; 

Improving inventory management, including by changing how and where medicines are 

stocked and how they are delivered to clinicians; 

Reducing waste by identifying safe approaches to splitting excessively large single dose 

vials into multiple doses; and 

Compounding therapies in-house. 

Despite these efforts, increased drug spending remains a challenge and one which we believe 

requires legislative and regulatory intervention. We urge Congress and the Administration to 

support patients and providers by taking immediate action to reign in the rising cost of drugs, 

including by passing the Creating and Restoring Equal Access to Equivalent Samples Act 

(CREATES Act) and protecting the 3408 Program. We also offer a broader set of 

comprehensive solutions in Appendix B. 

The CREATES Act. Generic drugs are one tool for reducing drug prices, as they increase 

competition after the monopoly enjoyed by drug manufacturer ends when a drug's patent 

expires. The CREATES Act targets two forms of anticompetitive behavior that are being used to 

block and delay entry of generic drugs. The first is known as sample-sharing. This occurs when 

brand-name drug companies refuse to sell samples of their product to potential generic 

competitors so the generic company cannot perform testing to show that its product is 

bioequivalent to the brand-name product, a prerequisite for approval by the FDA. The second 

involves participation in a shared safety protocol. This occurs when brand-name manufacturers 

whose products require a distribution safety protocol refuse to allow generic competitors to 

participate in that safety protocol, which is needed to gain FDA approval. The CREATES Act 

allows a generic drug manufacturer facing the sample-sharing delay tactic to bring an action in 

federal court for injunctive relief, such as to obtain the sample it needs. The bill also authorizes a 

judge to award damages to deter future delaying conduct. We urge Congress to pass the 

CREATES Act. 

6 
116 


29424.091

The 340B Program. Congress created the 3408 program to permit safety-net hospitals that care 

for communities with a high number of low-income and uninsured patients "to stretch scarce 

Federal resources as far as possible, reaching more eligible patients and providing more 

comprehensive scrviccs."21 Section 3408 of the Public Health Service Act requires 

pharmaceutical manufacturers participating in Medicaid to sell outpatient drugs at discounted 

prices to these health care organizations. For 25 years, the 3408 program has been critical in 

helping hospitals expand access to lifesaving prescription drugs and comprehensive health care 

services to communities across the country with a high number of low-income and uninsured 

individuals, at no cost to the federal government. 

Given the increasingly high cost of pharmaceuticals, the 3408 program provides critical support 

to help hospitals' efforts to build healthy communities. In 2015, the 3408 program accounted for 

only 2.8 percent of the $457 billion in annual drug purchases made in the U.S. However, 

hospitals were able to usc those savings to support many programs that are improving and saving 

lives.22 

Thirty percent of the hospitals that serve 340B communities are located in rural communities. 

Nearly 50 percent of those hospitals' communities significantly exceeded the minimum Medicare 

disproportionate share hospital (DSH) adjustment percentage of 11.75 percent, which is the 

qualifying threshold for the 340B program. In fact, one-fifth of these hospitals have a Medicare 

DSH adjustment percentage of more than 25 percent. Many 340B hospitals are financially 

vulnerable, and in 2015, one out of every four hospitals had a negative operating margin. 23 

The 340B program enables these hospitals to serve their communities by reinvesting savings 

from reduced drug pricing into programs that benefit their patients, particularly their vulnerable 

patients. In 2015, 3408 hospitals provided $23.8 billion in uncompensated carc.24 Examples of 

programs provided by 340B hospitals include: 

Financial assistance programs for patients unable to afford their prescriptions; 

Provision of clinical pharmacy services, such as disease management programs or 

medication therapy management; 

Increased access to other medical services, such as obstetrics, diabetes education, 

oncology services and other ambulatory services; 

Establishment of additional outpatient clinics to improve access to care; 

Community outreach programs; and 

Free vaccinations for vulnerable populations. 

In addition, an examination of hospital services illustrates that 340B hospitals provide access to 

essential services to their communities: 25 

Nearly two-thirds of 340B hospitals provide trauma care. 

Three-quarters of 340B hospitals provide pediatric medical surgical services. 

Nearly all 340B hospitals have obstetrics (OB) units. 

Approximately two-thirds of 340B hospitals provide psychiatric services. 

42 percent of 340B hospitals provide substance abuse or dependency services. 

7 
117 


29424.092

58 percent of340B hospitals have Neonatal Intensive Care Units (NICUs). 

Nearly all 3408 hospitals provide breast cancer screening. 

The 3408 program is under threat, especially as a result of a recent change in Medicare payment 

policy that reduces by nearly 30 percent, or $1.6 billion, Medicare payments to certain hospitals 

for outpatient drugs purchased under the 3408 program. Cuts ofthis magnitude will negate the 

intent of the program, reducing resources that hospitals use to expand access to care and services 

to vulnerable communities. We urge Congress to pass H.R. 4392, which would prevent these 

cuts from going into effect and reducing critical health care resources in vulnerable 

communities. 

CONCLUSION 

We appreciate the opportunity to provide these comments and support the Committee's efforts 

and attention to examining the issue of the drug supply chain and the cost of medications. We 

remain deeply committed to working with Congress, the Administration and other health care 

stakeholders to ensure that all Americans can access the drug therapies they need to lead healthy, 

happy and productive lives. 

1 Altarum Institute, "Price Briefs," October 2017, September 2017, August 2017, July 2017, June 2017. 2 Toich, L., "Will Hepatitis C Virus Medication Costs Drop in the Years Ahead?" Pharmacy Times, February 8, 

2017. http://www.pharmacytimes.com/rcsource-ccnters/hepatitisc/wi11-hepatitis-c-virus-mcdicaton-costs-drop-inthc-years-ahead 

3 Sagonowsky, E. "At $475,000, is Novartis' Kymriah a bargain-<lf another example of skyrocketing prices?" 

FiercePharma, August 31,2017, https://www.fiercepharma.com/pharma/at-475-000-per-treatment-novartiskymriah~a~bargain~or~just-another-example-skyrocketing 

4 Picci, A., "The cost ofBiogen's new drug: $750,000 per paticnt,"CBS News, December 16,2016. 

https:/ /w-ww .cbsncws.com/news/the-cost -of-biogens-new-drug-spi nraza-7 5 000 0-per-paticnt/ 5 Milne, Christopher-Paul, et al. Academic-Industry Partnerships for Biopharmaceutical Research & Development: 

Advancing Medical Science in the U.S. Tufts Center for the Study of Drug Development. April2012. 

http://csdd.tufts.edu/filesiuploads/tuftscsdd academic-industry.pdf 6 Forty-six percent of drugs developed by PSRis received priority reviews from the FDA- an indication that the 

drugs offered a substantial improvement over existing treatments. Only 20 percent of new drugs from the private 

sector received a priority review designation. 1 Stevens, Ashley J., et al. The Role of Public-Sector Research in the Discovery of Drugs and Vaccines. New 

England Journal of Medicine 364: 535-541. February 2011. 

'DeBenedette, V., "The Evolution of Group Purchasing Organizations," Modern Medicine, October 10,2016. 

http://drugtopics.modemmedicine.com/drug~topics/news/evolution~group-purchasing-organizations?page=O 3 9 1bid. 

10 American Society for Health-System Pharmacists, "ASHP Guidelines on the Pharmacy and Therapeutics 

Committee and the Formulary System," Accessed Dec. 9, 2017 at: https://www.ashp.org/-imedia/assetsipolicyguidelines/docs/guide1ines/gd1~pharmacy-therapeutics-committee-formularysystem.ashx?la=en&hash~EF I E4214CC91 C65097 AEEECE91 BF6EC985AE3E56 11 National Health Expenditure Data for 20!3- 20!5 12 "Trends in Hospital Inpatient Drug Costs: Issues and Challenges," American Hospital Association and the 

Federation of American Hospitals, October 11,2016. http:iiwww.aha.org/content/!6/aha-fah-rx-report.pdf 13 Statement of Howard B. Schiller, Interim Chief Executive Officer and Director, Valcant Pharmaceuticals 

International, Inc. before the Committee on Oversight and Government Reform of the U.S. House of 

Representatives, February 4, 2016. https:i/oversight.house.goviwp-contentiuploads/20 16/02/Statement-of-HowardSchiller-20 16-02-04.pdf 

8 
118 


29424.093

14 Khot UN, et al. Nitroprusside and Isoproterenol Usc after Major Price Increases, New England Journal of 

Medicine, August 10, 2017. http://dx.doi.org/1 0.1 056/NEJMc 1700244 15 Waxman, H. et.al, "Getting to the Root of High Prescription Drug Prices: Drivers and potential solutions," 

Commonwealth Fund, Ju1 2017. http://www.commonwea1thfund.orgl-lmedialfiles/publicationslfundreport/20 17/jul/waxman high drug prices drivers solutions report.pdf?la=en 16 Szabo, L., "As Drug Costs Soar, People Delay Or Skip Cancer Treatments," National Public Radio, Mar. 15, 

2017, https:llwww.npr.org/sectionslhealth-shots/20 17 103!151520 II 0742/as-drug-costs-soar-people-delay-or-skipcancer-treatments 

17 Sagonowsky, E. "At $475,000, is ]\;ovartis' Kymriah a bargain--or another example of skyrocketing prices?" 

FierccPharma, August 31, 2017, https://www.fiercepharma.com/pharma/at-475-000-per-treatment-novartiskymriah-a-bargain-or-just-another-exarnple-skyrocketing 

18 Picci, A., "The cost ofBiogen's new drug: $750,000 per patient,"CBS News, December 16,2016. 

https:l/www.cbsnews.com/newslthe-cost-of-biogens-new-drug-spinraza-750000-per-patientl 

19 Davies, B., Hwang, T., and Kesselheim, A., "Ensuring Access to Injectable Generic Drugs- The Case of 

Intravesical BCG for Bladder Cancer," New England Journal of Medicine, April 13, 2017. 2

° Food & Drug Administration, "FDA approval brings first gene therapy to the United States," August 30, 2017. 

https://www.fda.gov/NewsEvents/Newsroom/PressAnnouncements/ucm574058.htm 

21 https://www.hrsa.gov/opafindex.html 22 Assistant Secretary for Planning and Evaluation, "Issue Brief: Observations on Trends in Prescription Drug 

Spending," March, 20 I 6. https:l/aspe.hhs.gov/systemifiles/pdf/J 87586/Drugspending.pdf and The Health Resources 

and Services Administration, "FY 2018 Justification of Estimates for Appropriations Committees," 

https:llwww.hrsa.gov/sites/default/fileslhrsa/about/budgetlbudget-justification-20 18.pdf 23 AHA 2015 Annual Survey Data 24 AHA 20 I 5 Annual Survey Data 25 Ibid. 

9 
119 

Mr. BURGESS. Thank you, Mr. Nickels. 

Dr. Harmon, you’re recognized for 3 minutes to summarize your 

opening statement, please. 

STATEMENT OF GERALD HARMON 

Dr. HARMON. Thank you, Chairman Burgess, Ranking Member 

Green, distinguished members of the subcommittee. 

I am Gerry Harmon. I am a practising family physician from 

Parleys Island, South Carolina, and Chairman of the AMA Board 

of Trustees. 

I think we can all agree that our goal is to ensure patients have 

access to the right medication at the right time. I want to speak 

to the physician’s role of prescribing the most appropriate treatment and the challenges my patients and I face. 

Affordability in price can indeed be a major barrier, but so are 

the various administrative hoops that we have to jump through 

when prescribing medications. Such hoops includes things such as 

prior authorizations, frequently changing drug formularies, step 

therapy, nonstandardized forms, all put in place by insurance companies in an attempt to manage costs. 

These barriers usually delay treatment for my patients and, 

clearly, take time away from patient care. As an example, in the 

few days I’ve been away from my practice on a trip such as today, 

I received an email from a long-time patient who has recently 

changed his insurance coverage. His blood pressure medicine that 

he’s been stable on for years now is not on the new formulary 

under his new plan and he’s down to his last 30 days of therapy. 

I am going to have to call his pharmacy benefit managers—PBM, 

request a form and a fax number, fill out the form with some data 

points and fax it back. 

Eventually, I hope to get some ideas from the insurance company 

and/or the PBM about what types of different medications I might 

consider or steps I might follow in order to prescribe my patient’s 

medicine. I cannot do this in a standard form or electronically via 

email. My patient, meanwhile, is at risk for running out of medications or changing to a less effective therapy. Clearly, that’s going 

to endanger his health. He could end up going to the emergency 

room or having a serious illness such as a heart attack or a stroke, 

which adds enormous cost to the entire health care system. 

Such efforts to maintain cost and value in such an otherwise stable patient are, clearly, misdirected. In another venue, doctors who 

administer biologic medications to treat certain cancer, rheumatoid 

arthritis patients face even more costs and challenges than a primary care doctor like myself. 

Small community practices in particular are at a disadvantage 

relative to hospitals and large practices when it comes to requiring 

biological medications for special patients. Patients usually have to 

pay a high co-pay for medicine. We’ve alluded to that in other testimony. It could cost tens of thousands of dollars and the co-pay can 

be as high as 20 or 30 percent, and that’s a bunch of money to my 

patient population. 

When the patients cannot afford the co-pay, the physicians, who 

must pay for the medicines up front, cannot manage the debt, and 

the patients are referred to treated in the hospitals or outpatient 

120 

settings that are much more expensive. And these are just some of 

the challenges doctors face when helping patients navigate medicines. 

What could help physicians like myself? We’ve offered some opportunities for improvement in our written testimony. There are so 

many opportunities. We can discuss them almost ad infinitum. 

In closing, I would like to thank you. AMA looks forward to 

working with you on this issue. 

Thank you. 

[The prepared statement of Dr. Harmon follows:] 

121 


29424.094

TESTIMONY 

of the 

American Medical Association 

Health Subcommittee 

House Committee on Energy and Commerce 

RE: Examining the Pharmaceutical Supply Chain 

Presented by: Gerald Harmon, MD 

December 13,2017 

Division of Legislative Counsel 

(202) 789-7426 
122 


29424.095

2 

Testimony 

of the 

American Medical Association 

Health Subcommittee 

House Committee on Energy and Commerce 

RE: Examining the Pharmaceutical Supply Chain 

Presented by: Gerald Harmon, MD 

December 13,2017 

The American Medical Association (AMA) applauds the Health Subcommittee of the U.S. House of 

Representatives Committee on Energy and Commerce for convening key stakeholders to examine the 

pharmaceutical supply chain and consider well-crafted and effective public policy solutions that would 

alleviate the high cost of prescription drugs. 1 It is our goal to ensure that patients have access to and 

receive the right medical treatment at the right time, and we welcome the opportunity to share with the 

Subcommittee the steps that physicians take to help patients receive their medically necessary 

prescriptions or physician-administered drug treatments. Below we brietly outline what the escalating 

cost and complexity of obtaining these treatments mean for patient adherence, timely access, and health 

outcomes. The AMA has a large body of policies that address the rising cost of prescription drugs and we 

look forward to continuing dialogue to seck solutions to improve access, lower costs, and reduce the 

administrative burdens without stifling innovation. 

The cost to patients physician practices. and the health system 

Patients are facing mounting costs and administrative barriers to obtaining prescription drugs from a 

pharmacy or through physician-administered treatments. Patients and physicians often must navigate 

complex and resource intensive requirements. These arc consequential problems that may negatively 

impact the ability of patients to obtain needed medications in a timely manner and to maintain treatment. 

Physicians experience and see first-hand the difficulty and burden high pharmaceutical costs have 

imposed on their patients, on physician practices, and the broader health care system. The burden, 

however, is not solely caused by the escalating cost of pharmaceuticals, but the increase in medication 

utilization management policies due to those higher costs as well. Patients may take greater clinical risks 

when treatments are cost prohibitive. If patients delay, forgo, or ration their pharmaceutical treatment, 

their health status may deteriorate. This means patients who cannot afford their medication will 

1 Throughout this document the term pharmaceuticals and prescription drugs are referenced-both encompass 

biologicals and biosimilars as well. 
123 


29424.096

eventually require medical interventions in more costly care settings, such as emergency departments, 

when their condition is at a more advanced stage of disease. 

The time and expense that physicians and the extended care team, patients, and their caregivers spend 

complying with documentation requirements is another significant issue that needs to be addressed. 

Physicians and their staff will typically undertake multiple steps before the patient is able to receive their 

prescription, including: finding clinically appropriate but more affordable alternatives; identifying and 

applying for discounts or patient assistance programs; and filing appeals or exception requests continues 

to divert the finite resources away from direct patient clinical care to a large volume of paperwork, 

emails, facsimiles, and phone calls. Administrative burdens have also Jed to increasing delays in 

medically necessary care. As outlined below, the high cost of pharmaceuticals not only negatively 

impacts the patient who requires them and cannot afford them, the cost is also passed on to other patients 

when physicians and the extended heath care team are consumed with repetitive administrative minutiae 

documenting, often repeatedly, medical need in order to comply with expanding insurer medication 

management utilization program policies. In addition, the two pincers that patients and physicians are 

squeezed between-high priced pharmaceuticals and increasingly onerous documentation requirementscontinue to erode the physician-patient relationship, as well as lower morale and fuel burn-out among the 

health care team members. 

Two broad pathways: pharmacy-dispensed or physician-administered pharmaceuticals 

While physician practices are varied and patient coverage and preferences differ markedly, there are 

generally two different ways in which patients receive their prescription drug treatments: pharmacydispensed or physician-administered. 

First, a physician or other duly licensed clinician prepares a prescription and it is either transmitted 

electronically, or in some instances, provided to the patient who then takes it to a pharmacy. The 

physician is not involved in the acquisition or dispensing of the medication, but, as detailed below, this 

does not insulate physicians and their practices from administrative and other resources costs. The patient 

then must obtain the medication from a pharmacy. The dispensing pharmacy is responsible for obtaining 

any applicable payments from the patient and health insurer. For patients who receive a prescription from 

a clinician, many of the policies, processes, and challenges to ensure they receive and take their medicine 

are similar across Medicare and commercial insurers. For Medicare beneficiaries this may be a benefit 

under the Medicare Part D prescription drug benefit. Alternatively, Medicare Part D benefits may be 

bundled together with inpatient and outpatient covered services in a single private plan (referred to as 

Medicare Advantage/Part C). 

Alternatively, a physician may administer a pharmaceutical treatment to the patient. In this scenario, the 

physician must obtain, store, prepare, and administer the pharmaceutical. The physician is responsible for 

seeking reimbursement from any applicable insurer in addition to any applicable patient co-payment or 

deductible. Patients who have health insurance may have coverage for outpatient care that includes 

physician-administered pharmaceutical treatments, which, by way of example, for Medicare beneficiaries 

are covered and paid under the Part B benefit and are often referred to as Part B drugs. Part B drugs are a 

subset of pharmaceuticals that treat chronic and/or severe illnesses, such as cancer and rheumatoid 

arthritis, which require much greater physician involvement than a normal prescription that patients 

obtain from a pharmacy. Part B drugs typically must be injected or infused in a physician's office or 

outpatient facility, and often require clinical monitoring. Based on a recent U.S. Government 

Accountability Office (GAO) report, the general payment methodologies for physician-administered 

drugs vary across public insurers and commercial insurers. 
124 


29424.097

4 

There are different reimbursement systems for the Medicare Part B physician-administered drugs and 

those covered under Medicare Part D, and these differences are mirrored in the commercial market. The 

challenges that patients and physicians face are mounting under both pathways, as discussed below. The 

methods used by commercial and public insurers to cover and calculate payment for medication varies 

based on whether it is a pharmacy-dispensed or a physician-administered drug. This has implications for 

the requirements, tasks, and resources that physicians and their staff must expend to ensure that a patient 

has timely access to treatments. 

Pharmacy-dispensed pharmaceuticals 

With increasing frequency over the past decade, physicians no longer are able to prepare a clinically 

appropriate prescription for their patient and be reasonably assured that the patient will be able to receive 

the medication and take it on a consistent basis as prescribed. In 2016, 89 percent of prescriptions 

dispensed were for generic pharmaceuticals;' yet, the savings provided by generic use has been 

overshadowed by the increase in prices for brand drugs as well as for older, previously affordable, 

pharmaceutical treatments. These developments have led to a burgeoning number of more restrictive 

commercial and public insurer prescription drug plan designs and medication utilization management 

policies. 

When prescribing a pharmaceutical for a patient, physicians must consider clinical factors, patient 

preferences. and other circumstances, as well as the cost to the patient based on variable insurance benefit 

designs, such as drug formularies. Yet, as discussed below, physicians rarely have readily accessible, 

accurate, up-to-date information on a patient's coverage and the insurer's utilization policies, along with 

clinical options and cost, at the point-of-prescribing. Both public and commercial insurers now have a 

large number of utilization management programs, such as medication step therapy, dosing limits, and 

prior authorization. The lack of uniformity or consistency places additional strain on a physician practice. 

Prior authorization 

Insurers outline in their coverage design that certain pharmaceuticals are subject to the insurer's review 

and approval before a prescription will be covered, even if it is on the formulary. Typically, a physician 

and patient learn that prior authorization is required when the pharmacy staff notify them. The physician 

and clinical staff will then need to provide documentation in the format required by the insurer and meet 

the insurer's criteria. This will often entail a significant amount of physician, pharmacist, and their 

extended teams' time. Every insurer has its own forms, criteria, and processes. This lack of 

standardization exacerbates delays and overall complexity. If an adverse decision is made by the insurer, 

the physician and staff will often need to assist the patient with filing an exceptions request or an appeal. 

Both an exceptions request and an appeal involve additional time, delay, and paperwork. 

Step therapy 

Insurers have developed formularies of certain covered pharmaceuticals that require a patient to try a less 

expensive drug to ascertain whether it is effective before a more costly alternative will be covered. This 

step therapy requirement may not be known to the patient or physician in advance. The pharmacy staff 

will typically notify the patient and physician practice after the prescription is transmitted through eprescribing or provided by the patient to the pharmacy. This, in turn, will require additional clinician and 

staff time (for both the physician practice and the pharmacy) to determine whether the alternative 

medication is appropriate based on the particular medical needs of the patient. !fit is not, the physician 

will, after consulting with the patient, submit an exceptions request or appeal requiring the submission of 

additional documentation. In addition, it may require a subsequent patient visit and more time to assess 

the effectiveness of the treatment including submitting documentation to satisfy the insurer that the less 

2 Generic Pharmaceutical Access & Savings in the US., Association for Accessible Medicines (2017) 
125 


29424.098

expensive alternative was not effective for the patient. Step therapy "shifts clinical decision-making away 

from physicians and toward centralized policies that define treatment steps for patient populations based 

on the potential for more cost-effective care." 3 Evidence is lacking that step therapy approaches improve 

patient outcomes. Rather, step therapy can "delay access to the most efficacious therapies, potentially 

trades prescription spending for time and hospital costs to patients and providers," and "fail-first policies, 

as their name suggests increase the risk of dangerous side effects."' 

Quantity and dosing limits 

Increasingly, insurers are placing quantity and dosing limits on certain pharmaceuticals that are part of the 

covered formulary. Certain drugs may be limited to the amount that a patient may be prescribed per 

prescription for a certain time period. For example, one insurer limits patients to 30 tablets per 

prescription for levothyroxine per 30 days. Physicians may have to navigate the appeals or exceptions 

process for the patient, delaying necessary treatment and absorbing additional time and resources. In 

addition, insurers may alter the dose that they will cover midway through treatment, which can cause 

confusion and potentially life-threatening consequences for patients. 

The foregoing can create significant barriers for patients by delaying the start or continuation of necessary 

treatment and negatively affect patient health outcomes. The very manual and time-consuming processes 

used in these programs place excessive burdens on physicians, the health care team, and pharmacies, and 

divert valuable resources away from direct patient care. Commercial and public health insurers tout the 

benefits of these programs to drive value. This comes, however, at the cost of delayed or denied patient 

care and wasted time and increased inefficiencies on the part of physicians and other clinical staff. 

The most appropriate course of treatment for a given medical condition depends on the patient's unique 

clinical situation and the care plan developed by the physician in consultation with his/her patient. While 

a particular pharmaceutical might generally be considered appropriate for a condition, the presence of 

comorbidities or patient intolerances, for example, may necessitate an alternative treatment. The failure 

to account for this can obstruct proper patient care. Too often, insurer utilization management programs 

do not allow for flexibility, including the timely overriding of step therapy requirements and appeal of 

prior authorization denials. Physicians and their patients do not have rapid, standard appeals processes 

for negative prescription drug utilization management program decisions or other needed exceptions. Too 

many insurers still do not provide physicians with direct access, such as a toll-free number, to a provider 

of the same training and specialty/subspecialty for discussion of medical necessity issues. 

Health plans and pharmacy benefit managers (PBMs) may also change their formularies at any point 

during a patient's plan year to remove one pharmaceutical in favor of another. This means that the patient 

may be forced to switch to a drug that is less etTective, and it also is highly unlikely the patient receives a 

cost discount when the change is made. This switch may destabilize a patient or it will require additional 

resource expenditure hy the physician and extended health care team to file an exceptions request and/or 

to file an appeal. As a result, last year the AMA launched a grassroots campaign and website, 

TruthinRx.org, the goal of which was to expose the opaque process that pharmaceutical companies, 

PBMs and health plans engage in when pricing prescription drugs and to rally grassroots support to call 

on lawmakers to demand transparency. To date, over 150,000 individuals have signed a petition to 

members of Congress in support of greater drug pricing transparency. 

Finally, there is considerable variation between utilization review entities' prior authorization criteria and 

requirements and extensive use of proprietary forms. This lack of standardization is associated with 

3 Does A 'One-Size-Fits-All' Fonnulary Policy Make Sense? Adrienne Chung, Joanna MacEwan, Dana Goldman. 

Health Affairs Blog. 4 ld. 
126 


29424.099

significant administrative burdens for physicians and the extended health care team, who must identify 

and comply with each public and commercial insurer's unique requirements. Furthermore, any clinically 

based utilization management criteria should be similar-if not identical-across clinical utilization 

review entities. 

The foregoing are just some of the onerous aspects of helping a patient obtain a prescription written by 

their physician or other duly authorized prescriber on the health team. The negative impact on physicians 

and patients of such policies that have been applied by insurers to pharmaceuticals (as well as devices and 

medical services and procedures) has prompted the AM A-along with a growing number of national 

medical specialty societies and state medical associations- along with the American Hospital 

Association, the American Pharmacists Association, and other stakeholders to call upon health plans, 

benefit managers, and any other party conducting utilization management, as well as accreditation 

organizations, to apply Prior Authorization and Utilization Management Reform Principles (Reform 

Principles) developed by these stakeholders. The Reform Principles include a number of recommended 

solutions. 

Physicians are looking for the tools that would help their patients and their care teams to make the right 

clinical decision that meets patient clinical and coverage needs and personal preferences. There are 

promising examples that the AMA has committed to exploring and advancing. A recent publication on 

The Impact offn(ormation Techno/ocy on the Diffusion o(New Pharmaceuticals which is part of a 

National Bureau of Economic Research Working Paper Series, found that physicians with information 

about generic drug availability and patient insurer formulary data at point-of-prescribing will prescribe 

more generics. The researchers combined data on prescriptions and use of a point-of-care electronic 

pharmaceutical reference database for over 125,000 individual U.S. physicians. They found that 

physicians who relied upon the reference database prescribed a significantly more diverse set of products, 

were faster to begin prescribing new generic drugs, and had a greater propensity to prescribe generics in 

general. Interestingly, the researchers found that physicians using the reference database were not faster 

to prescribe new branded drugs. The researchers concluded that the results suggested improvements to 

physician information access could have important implications for the costs and efficiency of medical 

care. It is clear that transparency among plans to aid global databases that are well-designed and 

clinically validated and updated could reduce administrative burdens and increase value. 

Physician administered pharmaceutical treatments 

The challenges associated with securing authorization or complying with applicable utilization policies of 

commercial and public health insurers discussed above concerning pharmacy dispensed drugs apply as 

well for physician-administered pharmaceuticals. In addition, physicians must comply with additional 

state and federal laws, regulations, and standards related to the professional licensing, acquisition, storage, 

preparation, administration, and disposal (when applicable) of physician-administered pharmaceuticals. 

In addition, physicians must have compliance and training programs for staff along with adequate 

staffing. All of the foregoing factors are relevant when considering the methodologies employed by 

Medicare and other public and commercial insurers to reimburse for physician-administered 

pharmaceuticals. Larger practices and hospital outpatient departments are able to leverage economies of 

scale for acquisition, overhead, and compliance savings that smaller, community-based physician 

practices with established relationships with patients often cannot. 

In 2016, the GAO reported that compared to Medicare, other public insurers generally paid rates that were 

the same or lower than Medicare payment for physician-administered pharmaceuticals. 5 In the Veterans 

Choice Program the Veterans Health Administration reimburses providers at negotiated rates that, in 

5 Physician-administered Pharmaceuticals: Comparison of Insurer Payment Methodologies (GAO, August J, 2016) 
127 


29424.100

7 

general, cannot exceed, and are, according to the GAO, usually equal to, Medicare's rate. State Medicaid 

plans under fee-for-service reimburse providers at their acquisition cost, as defined by the state. The 

GAO found that states often define acquisition costs at Medicare's rate. Finally, the GAO noted that, in 

contrast to Medicare, two commercial insurers often had higher than Medicare's rate. GAO found when 

interviewing the two commercial insurers that it could be the case that the Medicare payment rates are 

used as a benchmark for negotiation and the final commercial insurer rates arc often above the Medicare 

rate. The GAO found that insurers' pharmaceutical utilization management and cost-containment 

approaches for physician-administered pharmaceuticals also varied. The GAO used as an example that 

certain insurers may be able to leverage purchasing power to negotiate lower payment rates. 

As the Medicare program serves as a benchmark for other public and commercial insurers, the following 

summarizes the current responsibilities and challenges that physician practices face under the Medicare 

Part B program for physician-administered pharmaceuticals. Currently, Part B drugs are set at the 

Average Sales Price (ASP) +6 percent. The ASP is defined as the volume weighted average manufacturer 

sales price net of all rebates, discounts, and other price concessions. Pharmaceutical manufacturers that 

participate in the Medicaid Drug Rebate Program (MDRP) are required to submit ASP sales prices and 

volume to CMS quarterly for each pharmaceutical. CMS then uses this data to calibrate the ASP rates in 

a subsequent quarter, with a two-quarter lag (i.e., first quarter sales are the basis for third quarter ASP 

payment rates). Under budget sequestration, however, Medicare is required to make a two percent 

reduction in its 80 percent share of covered charges, so that the actual rates are ASP+4.3 percent today. 

Pharmaceuticals paid under Medicare Part B generally fall into three categories: (I) pharmaceuticals 

furnished incident to a physician's service in the office or HOPD; (2) pharmaceuticals administered via a 

covered item of durable medical equipment; and (3) other categories of pharmaceuticals explicitly 

identified in the law. Physicians purchase the pharmaceuticals directly from manufacturers and 

distributors, and Medicare reimburses physicians for the cost of the pharmaceuticals. A separate payment 

is made for administration of the pharmaceutical. 

The ASP is an average, so nearly half pay more than average and nearly half pay less. Physicians who 

pay more than average, often small practices or rural providers, start at a disadvantage with this 

methodology. The rebates and discounts that ASP incorporates typically are only secured by hospitals 

and other large purchasers, which has over time reduced the ASP and created tremendous financial 

pressure on physician practices (small and mid-size) because they are not able to negotiate such discounts, 

nor do they have the financial reserves to benefit from prompt pay discounts. In addition, some 

beneficiaries may not be able to meet their 20 percent copayment, which then falls to the practice as debt. 

Another pressure is the two quarter lag time for ASP payment rates to reflect current prices-the 

fluctuation in price may be significant enough that physicians face losses. Furthermore, physicians can 

also be reimbursed inaccurately due to prompt-pay discounting programs where discounts negotiated 

between the manufacturer and the distributor are included in the calculation of the ASP, but not passed 

through to physicians decreasing their margins for reimbursement. In contrast, hospital outpatient 

departments (which are more expensive sites of service for Medicare) are often able to obtain 

pharmaceuticals below the existing reimbursement rate. 

It is already the case that many smaller practices have had to refer cancer and other patients who need 

chemotherapy and other expensive life-saving drugs to hospital outpatient departments, thereby 

undermining continuity of care and creating burdens for frail and medically compromised patients. A 

study by the Moran Company puts the shift in chemotherapy services for Medicare patients at 30 percent 

between 2005 and 2011. Data from the Medicare Payment Advisory Commission came to a similar 

conclusion, specifically noting that Medicare Part B drug expenditures in hospital outpatient departments 

grew at 20 percent a year between 2009 and 2012 compared to five percent a year in physician offices. 

Studies by Moran, Milliman, and A val ere all have found that this shift increases costs to both the insurers 
128 


29424.101

and patients. A 2012 study by Avalere concluded that after adjusting for patient risk the average total 

cost of care for chemotherapy patients was about 24 percent higher in the hospital outpatient department 

than in a physician office. It found that the cost of chemotherapy in the hospital outpatient department 

exceeds costs in the office by 42 percent to 67 percent, with the cost of the drug itself coming in at 25 

percent to 47 percent higher in the hospital outpatient department. 

For small physician practices, opportunities to select between pharmaceutical treatments can be limited. 

Physicians often have little flexibility to choose between different pharmaceuticals, either because the 

patient's condition will dictate use a particular drug treatment, or because eventually they arc going to 

have to use each of the options. As noted by MedPAC, in oncology, the appropriate medication regimen 

for a particular patient depends not just on the type of cancer but on the stage and other variants. Some of 

the pharmaceuticals are given together. Some are given sequentially; as the efficacy of the first choice 

drug wanes, a second and then potentially a third one will be used. Cancer drugs in particular are toxic, 

requiring special inventory management and safe handling by specially trained personnel which is another 

cost. 

When physicians are not able to offer physician-administered pharmaceuticals, the gains that could be 

realized from the various innovation initiatives for breakthrough drugs will be undermined by payment 

methods that forces physicians to refer to practices that do not have an established relationship with the 

patient, so the most appropriate targeted treatment can be received. Fragmentation of care for patients 

faced with serious health challenges can contribute to poor outcomes. 

Conclusion 

The AMA thanks the Subcommittee for this hearing and for careful consideration of the cost and 

administrative burdens associated with rising pharmaceutical costs. We welcome the opportunity to work 

closely with the Subcommittee moving forward. 
129 

Mr. BURGESS. Thank you, Dr. Harmon. 

Mr. Hoey, you’re recognized for 3 minutes, please, to summarize 

your opening statement. 

STATEMENT OF B. DOUGLAS HOEY 

Mr. HOEY. Thank you, Chairman Burgess, and Ranking Member 

Green and members of the subcommittee for conducting this hearing and for the invitation to testify. 

I am Douglas Hoey, CEO of the National Community Pharmacists Association. NCPA represents America’s community pharmacists including the owners of 22,000 independent community 

pharmacies. 

More than any industry segment, independent pharmacists are 

in underserved rural and urban areas. Local pharmacists are the 

medication experts on the health care team and, importantly, to 

consumers nationwide. These health care professionals are easily 

accessible. 

Pharmacists increase health care quality and decrease its costs 

by optimizing safe and effective medication use. Over the past few 

years, CMS has been testing new payment and care models across 

hundreds of community pharmacists and to date, nearly 300,000 

patients have been enrolled. Early findings suggest high patient 

satisfaction, improved outcomes, and reduced overall health care 

spending with reductions of greater than $1000 a year for those patients who received high clinical intervention. To achieve that future promise, however, systemic barriers must be overcome. We believe intermediary parties, pharmacy benefit manager middlemen, 

are increasing pricing complexity and contributing to higher prescription drug costs. 

Since their inception, PBMs have morphed from claims adjudicators into little known and largely unregulated corporations, and despite their immense market influence, PBMs are not subject to industry-wide regulation nor do they have an obligation to always 

put their clients’ interests above their own. Opaque PBM practices 

that require increased transparency including PBM-retained rebates and spread pricing, generic drug reimbursement schemes and 

pharmacy direct and indirect remuneration, or DIR, fees. 

And I will expand on our members’ current number-one concern, 

which are DIR fees. Now, these fees are assessed on pharmacies 

months after a prescription is filled. CMS has identified concerns 

from the rapid growth in DIR fees including higher beneficiary 

costs, accelerating patients into the donut hole, and the shifting of 

liability for Part B costs from plan sponsors to CMS. 

In the recently released Medicare proposed rule, CMS explicitly 

states they are considering requiring all price concessions from 

pharmacies to be reflected at the point of sale. 

NCPA strongly supports this approach. CMS estimates this 

would result in significant patient savings at the pharmacy 

counter, as well as overall savings over a 10-year period. 

In conclusion, it makes financial sense for Congress to demand 

increased true transparency into the prescription drug marketplace 

for all taxpayer-funded prescription drugs, and to fully utilize the 

expertise of the community pharmacist to identify potential savings. 

130 

Thank you. 

[The prepared statement of Mr. Hoey follows:] 

131 


29424.102

Statement for the Record: The National Community Pharmacists Association (NCPA) 

United States House of Representatives Energy and Commerce Committee Subcommittee 

on Health 

Hearing: "Examining the Drug Supply Chain" 

December 13,2017 

Chairman Burgess, Ranking Member Green and Members of the Subcommittee: 

Thank you for conducting this hearing on the pharmaceutical supply chain and how the delivery 

system may contribute to the rising costs of prescription medications. In this statement, NCPA 

would like to present our thoughts on the cost savings that can be realized by fully utilizing the 

services of the pharmacist and also how we believe an intermediary party- Pharmacy Benefit 

Manager (PBM) "'middlemen"- in the supply chain are increasing complexity and contributing 

to escalating drug costs. NCPA represents America's community pharmacists, including the 

owners of more than 22,000 independent community pharmacies. Together they represent an 

$80 billion health care marketplace and employ more than 250,000 individuals on a full or parttime basis. 

More than any other segment of the pharmacy industry, independent pharmacies arc often 

located in the underserved and rural areas that are home to many Medicare beneficiaries. In fact, 

independent pharmacies represent 52 percent of all rural retail pharmacies and there arc over 

1,800 independent community pharmacies operating as the only retail pharmacy within their 

rural communities. Pharmacists have more medication-related education and training than any 

other health care professional. Pharmacists can and do assist patients in optimizing the impact of 

medications and decreasing patients' costs by providing services focused on safe and appropriate 

1 
132 


29424.103

medication usc. For example, pharmacists provide medication management services, which arc 

especially important for patients who have complex care plans, take multiple drugs, or have 

chronic conditions. Additionally, to address hospital readmissions, pharmacists help patients 

transition between care settings. Pharmacists are the most accessible health care professional but 

unfortunately, patients do not always have access to pharmacies that are closest to them because 

certain community pharmacies arc excluded from preferred pharmacy networks by Pharmacy 

Benefit Managers ("PBMs"). Finally, pharmacists do not play a role in determining a patient's 

financial responsibility for prescription medications that they access through any prescription 

drug coverage. Ultimately, these amounts arc detennined by the insurer and the pharmacy 

benefits manager. 

Overly Concentrated and Largely Unregulated PBM Marketplace 

Three large companies lead the PBM market- Express Scripts, OptumRx and CVS Caremarkand these three companies collect more than $200 billion a year to manage prescription services 

for insurance carriers covering 180 million Americans and government programs servicing 

approximately 110 million more. 1 In addition, the largest PBM has increased its profit peradjusted prescription 500 percent since 2003. 2 Since their inception, PBMs have morphcd from 

claims adjudicators into little known and largely unregulated corporate giants that exploit their 

strategic position at the "middle" of nearly all drug transactions in the U.S. to extract profits from 

the upstream and downstream participants in the drug supply chain while providing questionable 

value to the ultimate consumer. PBMs are also heavily involved in and reap enormous profits 

1 How 'price culling' middlemen are making crucial drugs vastly more expensive, available at 

http://www.latimes.com/business/hilzik!la-fi-hiltzik-pbm-drugs-20 170611-story.html. 2 lnvestor's Business Daily, Nov. 21,2016, available at http://www.investors.com/politics/commentarv/a-sickcalculation-about -prescription-drugs/. 
133 


29424.104

from their involvement in federally supported or subsidized health care programs, like Medicare 

and Medicaid. 

Current Lack of Transparency Regarding PBM Retained Rebates and 

"Spread" Profits 

PBMs serve as the "middlemen" in most of all prescription drug transactions in the United 

States. They can leverage the number of beneficiaries in a particular plan to negotiate lucrative 

rebates from pharmaceutical manufacturers. They also formulate pharmacy provider networks 

that will supply or dispense these drugs to the plans' beneficiaries and in turn, charge the plan 

sponsor for these products. What most plan sponsors and consumers alike do not realize is that 

PBMs extract "spread" profits from both activities. PBMs typically claim they pass along 

approximately 90 percent of these manufacturer rebates to plan sponsors. However, this hinges 

on what is considered a "rebate." Rebate agreements between PBMs and manufacturers are 

considered "proprietary" and are not shared with plan sponsors. Also, many contracts allow 

PBMs to essentially "relabel" rebates. In this way, rebate amounts can be "reclassified" as 

"formulary management fees," ''health care data fees" or a variety of other creative monikers. 

Even in a contract in which the PBM is required to pass along all rebates, these reclassified 

amounts are not included. 

It is also through these activities that PBMs wield immense power in influencing precisely what 

prescription drug products will be considered "on formulary" or that will be covered by a 

specific health plan. Typically, the actual drug products selected are chosen by the PBM to 

garner the greatest amount of rebate dollars. In addition, this "rebate game" has attracted a great 

deal of attention lately and it has come to light that the proliferation of these rebates is causing 

drug manufacturers to offset their payments to PBMs by raising the list prices of medications. 
134 


29424.105

This dynamic is also extremely troubling considering the fact that in today's health care 

marketplace- in which many consumers receive prescription drug coverage under highdeductible plans- patient cost-sharing amounts for medications are based off these artificially 

inflated "list prices." Patient cost-sharing is a percent of the 'invoice' or retail price, not the net 

or rebated price. The Center for Medicine in the Public Interest confirmed this dynamic and 

specifically provided that rebates as percent oftotal price growth have increased ten-fold since 

In addition, the amount that the PBM reimburses a pharmacy for dispensing a drug is not the 

same amount that the PBM "charges" the plan for the same drug. The PBM "marks up" the cost, 

charging the plan more than the pharmacy is reimbursed, keeping the difference as pure profit. It 

is precisely these hidden spread amounts that should be disclosed. 

PBMs typically enter into contracts in which they will assume no fiduciary duty to employers or 

plan sponsors, which means that the PBM has no affirmative duty to disclose the fact that certain 

plan benefit designs may financially enrich the PBM or the fact that the PBM may be profiting 

from the sale of claims data derived from that plan sponsor. Ultimately, without any fiduciary 

obligation, there is no transparency or accountability for PBM conduct. 

3 Robert Goldberg, Drug Costs Driven by Rebates, Center for Medicine in the Public Interest, available at 

http://bionj .org/wp-content/up loads/20 15/11/drug-costs-driven-by-rebates. pdf. 

4 
135 


29424.106

Cost Savings to Health Plan Sponsors Could be Realized with Increased PBM 

Transparency 

The vast sums of money that PBMs are making by virtue of the drug spend of a particular plan 

should not be "proprietary" information on the part of the PBM. Instead, this information should 

belong to the plan. These disclosures could easily be protected by confidentiality agreements to 

address possible PBM concerns about such information weakening their negotiating stance with 

manufacturers. If plan sponsors have a clearer picture about the amount of money that is being 

made by their vendor by handling the plan's business, this may provide them with a greater 

ability to negotiate more competitive contracts in the first place. 

Lack of Transparency in Generic Drug Reimbursement 

In today's marketplace, generic drugs currently comprise approximately 86 percent of all 

prescriptions dispensed in the United States. 4 Given this fact, it is somewhat surprising that 

there is no standardized method for determining how pharmacies arc reimbursed for generic 

drugs. PBMs create and maintain "Maximum Allowable Cost" or MAC lists that set the upper 

limit or maximum amount that a PBM/plan will pay for most generic drugs. Pharmacies are not 

provided any insight into how drug products are selected to be put onto this list or how exactly 

these prices are determined or updated. In short, contracted pharmacies have zero insight or 

transparency into the MAC process and sign contracts without having any idea of the rate at 

which they will be reimbursed for most of the prescriptions they fill. In response to PBM secrecy 

surrounding the creation and maintenance of these lists, at least twenty-six states have enacted 

4 PhRMA, The Reality of Prescription Medicine Costs in Three Charts; May 27,2014, available at 

http://www.phrma.org.catalyst.the-reality-of-prescription-medicine-costs-in-three-charts. 
136 


29424.107

legislation to try to compel greater transparency into this system. The PBM industry in general 

has vigorously opposed these efforts and in fact is currently engaged in litigation with several 

individual states that have sought to compel compliance. 

PBM Industry Largely Unregulated 

Given the immense market influence that PBMs exert, one would expect these entities to be 

subject to the same type of comprehensive regulation that is currently required of commercial 

health insurers. However, PBMs are not subject to industry-wide regulation like what is 

generally required of commercial health insurers. There are no federal laws or regulations that 

are specific to the PBM industry. Instead, PBMs face a patchwork of regulations at the state 

level that are designed to curtail some of the more onerous PBM business practices such as 

abusive PBM audits of pharmacies and requirements related to timely MAC updates. However, 

even in states that have been able to pass these limited reforms, PBMs typically resist complying 

and have recently filed lawsuits against states. 

Explosion of Pharmacy "DIR fees" in the Medicare Part D program are Increasing Costs 

to Consumers and the Medicare Program 

Pharmacy direct and indirect remuneration ("DTR") fees are effectively clawback fees assessed 

on pharmacies retroactively months later, rather than deducted from claims on a real-time basis 

at the point-of-sale. Earlier this year CMS identified several concerns resulting from the rapid 

growth in pharmacy DIR fees 5

• First, beneficiaries face higher cost-sharing for drugs and are 

accelerated into the coverage gap or "donut hole" phase of their benefit. Second, more 

5 CMS, Medicare Part D- Direct and indirect Remuneration, available at 

https:llwww.cms.gov/newsroom/mcdiareleasedatabase/fact-sheetsl20 17 -fact-sheet-items/20 17-0 l-19-2.html. 

6 
137 


29424.108

beneficiaries reach the catastrophic phase of the benefit, for which CMS incurs approximately 80 

percent of the cost (HHS Office oflnspector General has noted6 that these catastrophic costs 

have tripled in recent years- from $10 billion in 2010 to $33 billion in 2015- driven by 

pharmacy DIR fees). Third, liability for Part D costs is increasingly being shifted from Part D 

plan sponsors to CMS. 

These findings were reinforced and bolstered by a report earlier this year by a leading actuarial 

firm commissioned by NCPA. 7 In addition, MedPAC recently warned 8 that, because of DIR, the 

gap between gross and net drug prices has grown 20 percent annually from 20 I 0-2015 and that 

"plan incentives [are l not aligned with beneficiary and Medicare." 

By utilizing tactics such as pharmacy DIR fees, the Part D plan sponsor or its PBM often 

receives additional compensation after the point-of-sale that serves to change the final cost of the 

drug for the payer, or the price paid to the pharmacy, for the drug. 

The point-of-sale price/"ncgotiated price" recorded on Prescription Drug Event ("POE") records 

is extremely significant. It is used to calculate beneficiary cost-sharing and to adjudicate the Part 

D benefit. Any fees or payment that are made after the point-of-sale are not reflected in the 

negotiated price but rather are reported to CMS separately. 

6 HHS Office of Inspector General, High-Price Drugs Are Increasing Federal Payments for Medicare Part D 

Catastrophic Coverage, available at https://oig.hhs.gov/oei/reportsioei-02-16-00270.asp. 

7 The Impacts of Prescription Drug Direct and Indirect Remuneration under Medicare Part D, Feb. 2017. 

8 Payment and plan incentives in Part D, April 7, 2017. 
138 


29424.109

Many beneficiaries and caregivers rely on the online Medicare Plan Finder to evaluate and 

choose a Part D plan. However, the data displayed on Medicare Plan Finder are based on pointof-sale prices. The vast proliferation ofDIR and post point-of-sale price concessions have 

rendered this drug price information grossly inaccurate. 

Fortunately, CMS is acutely aware ofDIR fees and their impact on Part D beneficiary and 

program costs. In the recently released Medicare proposed rule, "Contract Year 2019 Policy and 

Technical Changes to the Medicare Advantage, Medicare Cost Plan, Medicare Fee-for-Service, 

the Medicare Prescription Drug Benefit Programs, and the PACE Program," CMS explicitly 

states they are considering requiring all price concessions from pharmacies be reflected in the 

negotiated price that is made available at the point-of-sale and reported to CMS on a PDE record, 

even when such concessions are contingent upon performance by the pharmacy. NCPA strongly 

supports this approach. It would give independent community pharmacies greater predictability 

about their net reimbursement rates so they can make more informed operational decisions. In 

addition, it would not preclude any pay-for-performance arrangements between the Part D 

Plan/PBM and the pharmacy. Contrary to what the PBM industry has stated about this approach, 

CMS estimates that reflecting all pharmacy price concessions at the point-of-sale would result in 

significant beneficiary savings in cost sharing (at the pharmacy counter) as well as an overall 

savings (taking into account both premium amount and cost sharing amounts) over ten years. 

Conclusion 

In conclusion, the prescription drug marketplace continues to grow at an alarming pace. Large 

mergers continue to be announced every day while at the same time healthcarc costs and 

particularly prescription drug costs- are at an all-time high. The current business climate seems 

8 
139 


29424.110

to be one in which market power is increasingly concentrated in an ever-shrinking number of 

corporate entities. The overly concentrated and largely unregulated PBM industry exerts 

immense influence over how prescription drugs are accessed by the majority of Americans. 

Given the fact that the federal government is the largest single payer of health care in the United 

States, 9 it makes financial sense for Congress to demand increased transparency into this aspect 

of the prescription drug marketplace in order to identify potential savings. In addition, Congress 

could enact common-sense legislation to address the proliferation of PBM-generatcd pharmacy 

"DIR" fees to lower out-of-pocket costs to Part D beneficiaries and reduce federal government 

Medicare Part D spending. 

9 Troy, Tevi D., I! ow the Government As a Payer Shapes the Health Care Marketplace, American Health Policy 

Institute, 2015. 

9 
140 

Mr. GUTHRIE [presiding]. Thank you. The gentleman’s time has 

expired and I recognize Mr. Mitchell for 3 minutes for your opening 

statement. 

STATEMENT OF DAVID MITCHELL 

Mr. MITCHELL. Thank you. 

Chairman Burgess, Ranking Member Green, Chairman Walden, 

members of the committee, I am honored to be here today. 

I am David Mitchell and I am founder of Patients for Affordable 

Drugs. We are bipartisan. We focus on policies to lower prescription drug prices. We don’t accept funding from any organizations 

that profit from the development or distribution of prescription 

drugs. 

More importantly for today, I have an incurable blood cancer 

called multiple myeloma and prescription drugs are keeping me 

alive, literally. Right now, my treatment is 5 hours of infusions, 

carry a price tag of $450,000 this year. I am very grateful to the 

science and research communities for these drugs, and because my 

disease is incurable, it finds its way around drugs. It mutates. I 

need innovation of new drugs if I am going to stay alive. This is 

not theoretical for me. It’s literally life and death. 

But my experience has taught me one irrefutable fact, and that 

is that drugs don’t work if people can’t afford them. Since our 

launch in February, we’ve built a community of almost 20,000 

Americans from every state. Patients tell us terrible stories of skipping doses, cutting pills in half, even declaring bankruptcy, because 

of the price of their drugs. They’re scared, they’re angry, and they 

need help. 

I am going to highlight a few policy solutions for the drug supply 

chain. First, however, it is critical to note that prices set by drug 

corporations with government-granted monopolies are at the headwaters of the pricing problem. 

When retail prices set by drug corporations go up, all the players 

in the system make more money—drug manufacturer, PBMs, doctors, hospitals. The people hurt are patients, consumers, taxpayers, 

and employers who foot the bill. 

But the drug supply chain downstream is also a big part of the 

problem. Here’s a patient perspective on some elements. One, we 

should allow Medicare to directly negotiate lower prices for patients. Every other developed country in the world does this. We 

should, too. 

We need increased transparency throughout the supply chain. 

Three pharmacy benefit managers control almost 80 percent of the 

market and negotiate in secret, leaving consumers, taxpayers, and 

policymakers in the dark. 

Co-pay coupons and patient assistant programs are phony charities. They are designed to do one thing. That is keep prices high. 

They are not charity. They are marketing. According to City Research, for every $1 million spent on charitable donations, drug corporations reap as much as $21 million in return. We should lower 

drug prices and make co-pay coupons unnecessary. 

Finally, we have to ensure that patients pay based on rebated, 

not list, prices and that patients with insurance don’t pay more 

than they would if they paid cash. 

141 

Gag clauses should be outlawed. I am extremely encouraged that 

members on both sides of the aisle are here today focusing on drug 

pricing because, in my experience, the most enduring legislative solutions have come with bipartisan action. 

Thank you. 

[The prepared statement of Mr. Mitchell follows:] 

142 


29424.111

PATIENTS FOR AFFORDABLE DRUGs·· 

Statement of David E. Mitchell 

Founder, Patients For Affordable Drugs 

before the 

U.S. House of Representatives Subcommittee on Health 

of the Energy and Commerce Committee 

"Examining the Drug Supply Chain" 

December 13, 2017 

Chairman Burgess, Ranking Member Green, Members of the Subcommittee: I am honored to be 

here today. 

Section I. Background and Introduction 

My name is David Mitchell. I am the Founder of Patients For Affordable Drugs. We are a 

bipartisan, national patient organization focused on policies to lower drug prices. We don't 

accept funding from any organizations that profit from the development or distribution of 

prescription drugs. 

More importantly to today's hearing, I have an incurable blood cancer, and prescription drugs are 

keeping me alive. Several days ago, I received five hours of drug infusions that carry a price tag 

of more than $20,000 every time I get them. I've had them 22 times over the course of the year. 

So, $450,000 worth of drugs are keeping me upright. 

I am very grateful to the science and research communities in our country for these drugs. And 

because my disease is incurable, I need innovation and new drugs if I am going to live as long as 

I hope to. This is not theoretical for me-it is life and death. 

But my experience as a cancer patient has taught me one irrefutable fact: Drugs don't work if 

people can't afford them. 

Section 2. Patients are crying out for help 

Since our launch in February, we have built a community of almost 20,000 Americans across 

every state. 
143 


29424.112

Dalia Hunter from Texas wrote, "I've got Rheumatoid Disease. My monthly drug cost, after 

insurance, is somewhere from $700-$1,800 a month. There is no way to afford this so I've gone 

without these meds. Who knows what kind of permanent damage has been done to my joints." 

There are thousands of people like Dalia, who tell us devastating stories of skipping doses, 

cutting pills in half, and even declaring bankruptcy because of the prices of their drugs. 

People are scared and angry, and they need help. 

A September Harvard poll showed that 4 in 10 Americans want lowering prescription drug prices 

to be Congress' top priority. 

Sixty four percent of Americans, including a majority of Democrats, Independents, and 

Republicans, listed lowering drug prices as their top health care priority, according to a Kaiser 

Health poll. 

The message we hear from patients is simple. They understand that drug corporations have 

monopoly pricing power. Patients and taxpayers know the prescription drug pricing system in the 

U.S. is rigged against them. They want leaders in Washington to fight to lower the price of drugs 

and get something done. 

This is a central health care issue that impacts millions of people every day. We agree with 

President Trump: "Drug companies frankly are getting away with murder." And drug companies 

are not the only ones who take advantage of patients' pocketbooks. 

Sectio11J: The Supply Chai11 Is Part of the Problem 

Prices set by drug corporations with government-granted monopolies are at the headwaters of the 

problem we face. 

But the drug supply chain downstream is also part of the problem. 

When retail prices set by drug corporations rise, all players in the system make more moneydrug manufacturers, P!3Ms, doctors, and hospitals. The people hurt arc patients, consumers, 

taxpayers, and employers who foot the bill. 

There are steps we can take to help Americans struggling under high drug prices. 

Here is a patient perspective on some of the important issues in the supply chain and what can be 

done about them: 

Allow Medicare to negotiate lower costs for patients. The government grants drug 

manufacturers a monopoly for up to 12 years. Medicare negotiations would help balance that 

monopoly pricing power. Below is a chart that demonstrates why we need negotiations 

especially for brand drugs- the fastest growing sector of health spending. 
144 


29424.113

Increase transparency throughout the drug supply chain. Three pharmacy benefit 

managers control about 75 percent of the drug market. PBMs negotiate deals in secret, 

leaving consumers and policymakcrs in the dark. Americans can't tell if these corporations 

provide value in the form of rebates for patients or if they keep rebates to increase profits. 

We do know the combined operating profit of the three largest PBMs was $10.1 billion in 

2015, up 30% from 2013. 

Increased transparency would help consumers better understand drug prices. As 

recommended by the National Academies of Sciences, Engineering, and Medicine, Congress 

should require PBMs to disclose drug discounts and rebates, so we can ensure reductions in 

prices reach patients. The recommendation avoids specific disclosures that PBMs claim 

would inhibit their negotiating success. Instead, the report recommends that PBMs make 

quarterly disclosures at the national drug code level. We support this change. 

Follow the Trump Administration's lead to allow Part D Medicare beneficiaries to pay 

out-of-pocket costs based on rebated- not retail- drug prices. Right now, Medicare Part D 

beneficiaries pay out-of-pocket costs based on retail prices of drugs. Everyone else in the 

system employers, insurers, the government- pays based on rebated prices. The Trump 

Administration requested feedback on changes so patients get the benefit of the rebate price. 

We encourage Congress to support such a change. Congress should also cap patient out-ofpocket costs at the catastrophic level. With drugs costing $20,000 per month, the catastrophic 

costs can be crushing. 

Ensure patients with insurance don't pay more than they would if they paid cash. 

Supply chain contracts often forbid pharmacists from telling insured consumers that they 

could pay less if they paid cash rather than use insurance cards. These gag clauses are wrong 

and should be outlawed. 

Usc caution around outcomes-based pricing arrangements. First, it is important to 

distinguish between value-pricing and outcomes-pricing. Value-pricing is conducted by 

organizations like the Institute for Clinical and Economic Review, the American Society of 

Clinical Oncology, and the National Comprehensive Cancer Network. They examine the 

value of a new drug to patients and serve as one input for negotiations by private parties and 

the Veterans Administration. Value-pricing can be a useful tool. 
145 


29424.114

Outcomes-based pricing is different. It ties reimbursement of a drug to its effectiveness. 

While this sounds attractive, it's a disaster for patients. Outcomes-pricing in general 

stipulates that if a drug fails, the drug company will provide a refund. But that system 

contains a major flaw. It does not lower drug prices; it allows drug companies to keep prices 

high. Drug companies have the clinical data that tell them how many patients react positively 

to a drug and how many will fail. Rather than lower prices, drug companies will simply raise 

the price of a drug to compensate for failures. Furthermore, it is not clear any refunds will 

make their way to patients. It is also not clear how to use such a process for drugs like insulin 

where patients react differently as individuals and drug companies may want to claim user 

error if the patient doesn't do everything right to manage their disease. 

Work for lower prices instead of making patients rely on assistance programs and 

co pay coupons. Co pay coupons and patient assistant programs arc phony charities designed 

to do one thing: keep prices high. One MS patient called them band-aids-dirty, infected 

band-aids. They are not charity-they are marketing. According to Citi Research, 

for every $1 million spent on charitable donations, drug corporations reap as much as $21 

million in return. We should lower drug prices and make copay coupons unnecessary. 

Investigate the insulin market. Three insulin manufacturers command 80 percent of the 

market for this lifesaving drug. Together, the companies raised prices more than 300 percent 

in the past ten years- for a drug invented in 1923 and for which the patents were sold for $3. 

The prices move in lockstep and people with diabetes suffer at the hands of what can only be 

called an insulin cartel. Democratic and Republican members in the House are already 

looking into the insulin market. We encourage Congress to look into anti-competitive 

behavior and possible price-fixing by Eli Lilly, Novo Nordisk, and Sanofi. 

Section 4: Bipartisan action to restore balance is possible 

In conclusion, our health care system should maximize affordability and accessibility of drugs 

while ensuring a robust R&D pipeline and fair profits for companies all along the supply chain. 

That balance has been lost. The system encourages high prices that benefit big players. 

Consider this story from Jon Pavlus of Worland, Wyoming: "I've had diabetes for 52 years and in 

the last 6 years I've watched my insulin prices go from $6.75 a vial to $375 a vial. I can't afford 

this. I need help!" 

We hope to work with Congress to lower drug prices and let Americans focus on living healthy 

and productive lives rather than struggling with the rising cost of medicines they depend on. 

I am extremely encouraged that members on both sides of the aisle arc focused on these issues. 

In my experience, the most enduring legislative successes in our country have come with 

bipartisan action. 

4 
146 

Mr. BURGESS. Thank you, Mr. Mitchell, and I want to thank the 

entire panel for their testimony and we will move into the question/ 

answer portion of the hearing. 

We’d like to recognize the gentleman from Oregon, Mr. Walden, 

chairman of the full committee, 5 minutes for questions, please. 

Mr. WALDEN. I want to thank the chairman very much and, 

again, I want to thank all the witnesses today. You have helped us 

scratch the surface, get a better understanding from the start to 

the finish—from the molecular development to the patient who’s on 

a lifesaving drug. 

And, obviously, you have also outlined for us differences of opinion about how we achieve more affordable health care and not 

just—we are looking at this, by the way, not just at the drug chain 

but across the entire industry of health care. And it is a big one, 

it is an expensive one, and I know when I go home to Oregon it 

is on top of everybody’s minds. They may complain about their insurance premium or this, that, or the other thing. 

But at the end of the day, they all want to know why—you name 

it in health care—why it costs what it does or they want to know 

what it costs, because of lack of transparency. You don’t even 

know. There are all these schemes and things and I think we are 

all trying to get to the bottom of it and my goal is to have an informed process, beginning today, that lets you all make your case. 

And I would just be curious, as you all have heard each other 

talk, and we finished with Mr. Mitchell, who I’ve met with before 

in my office, and sorry for what you’re going through, obviously, 

but you make a very compelling case. 

You make some pretty strong statements about what needs to be 

changed and I would like to go to the other end because some of 

those are targeted at the pharmaceutical companies and see if we 

can get a response from Ms. Reilly on what Mr. Mitchell said and 

how we should be guided in this, and if others want to weigh in 

along the way that would be good as well. 

Ms. REILLY. Well, thank you for the question, and I think a lot 

of what I heard out of David’s mouth are things that we do agree 

with. 

For example, today, as I talked about and others talked about, 

our companies do provide robust discounts and rebates to pharmacy benefit managers and insurers, and unlike almost any other 

part of the health care system, those rebates and discounts aren’t 

passed back to the patients. 

If a patient with a deductible today ends up in the hospital before they reach their deductible, the price they pay is a negotiated 

price that that insurance company has negotiated on their behalf. 

It seems strange that if a patient instead needs a pharmaceutical 

before they reach their deductible, that they’re asked to pay a full 

unnegotiated price for the medicine and don’t get the benefit of 

that discount and actually earn money on every transaction. That 

doesn’t seem right to me and I think that does need to change. 

CMS just, earlier this year, posted their new Part D rule. In it, 

they put a request for information out about the potential for passing through discounts and rebates in the Medicare Part D program. 

We actually think that’s a good first step. Today, the evidence suggests by CMS that PBMs prefer medicines with high list prices and 

147 

high rebates because for those products they can use those rebate 

dollars to keep their premiums low and they also put people into 

catastrophic quicker and passing through—— 

Mr. WALDEN. Right. So I want to give them a chance to respond 

to that because I assume they will want to. 

So let’s go to the insurance plans. You have heard what Ms. 

Reilly said about consumers paying the full freight here and not 

being covered by insurance and no negotiation. Is that accurate? Is 

there something we should do about that? 

Mr. EYLES. So thank you, Chairman Walden, for the opportunity. 

What I would say is health plans negotiate on behalf of their members and consumers every single day across all parts of the supply 

chain, whether it be providers or drug manufacturers. 

To put this into context, I think you probably heard some of the 

statistics thrown around that 90 percent of the prescriptions are 

generic that are filled in this country. So that means about 10 percent are filled through retail—that are brands. Not all of those 

brands offer rebates. There’s a large number of brands that don’t 

offer rebates. So really we are trying to focus on a much smaller 

problem when the bigger problem really comes back to the price. Using Ms. Reilly’s example earlier of insulin of $400 a vial, a dec- ade ago that vial was only about $90. Right now, if prices of insulin 

increased only by the consumer price index rather than much, 

much higher rates, we’d only be paying about $100 per vial, all 

right, if you’re just following inflation. We wouldn’t be having this 

discussion about rebates—— 

Mr. WALDEN. So—— 

Mr. EYLES [continuing]. If it didn’t start with the price. 

Mr. WALDEN. So who can tell me why that insulin is the price 

it is today? 

Ms. REILLY. I would say, Chairman Walden, the net price of insulins have not changed all that significantly. What has changed 

is the levels of discounts and rebates that are being demanded in 

part because it is an extremely competitive market. 

As I mentioned before, insurance companies, PBMs, in the Part 

D program, for example, they like high list prices that come with 

high rebates because they can then use those rebates to keep their 

premiums low, attract patients to their health care plan. Unfortunately, what the problem is is they’re not sharing those rebates 

and discounts back with patients as they do if a patient ends up 

in the hospital or uses a physician and that’s what needs to 

change. 

Mr. WALDEN. All right. My time has expired. We didn’t get to the 

PBM’s view of this. I hope we do, coming forward, because this is 

the debate. Because at home the constituents say why is insulin 

$400 when it used to be a hundred dollars or whatever the number 

is, And that’s repeated time again, whether it is EpiPen or whatever. We can’t answer that either because I am not sure there is 

a good answer. 

So with that, Mr. Chairman, I’ve exhausted my time and I, 

again, appreciate your willingness to have this hearing and yield 

back. 

Mr. BURGESS. Chair thanks the gentleman. Gentleman does yield 

back. 

148 

The chair recognizes the gentleman from Texas, Mr. Green, 5 

minutes for questions, please. 

Mr. GREEN. Thank you, Mr. Chairman. 

A Harvard study found that there are more than three-quarters 

of the public believe that name brand prescription drugs are too 

high and an issue primarily driven by price increases in the absence of additional competition. Biologics represent the majority of 

these high-priced drugs representing 7 out of the 10 highest 

grossing pharmaceutical products in 2015. 

A landmark 2014 Rand study also estimated that biosimilars could save as much as $40 billion through 2024 in the United 

States alone, and we have another study from IMS Health opening 

markets to biosimilar competition health care systems could realize 

savings of more than 10 billion euros in the E.U. alone between 

2016 and 2020. The cumulative savings over the next 5 years in 

the E.U. and the United States would be 49 billion in euros. 

Mr. Davis, Mr. Merritt, do you agree that we should support policies to encourage a workable pathway for biosimilars as we in Congress do encourage bringing these product online and encouraging 

uptake by physicians and plans for their patients? Mr. Davis first. 

Mr. DAVIS. Congressman, thank you for your question. 

The short answer is yes, we represent biosimilar manufacturers 

today in addition to generic manufacturers, and as you stated, 

biosimilars hold the potential for so much promise in terms of increasing access and realizing savings because they will provide 

competition to the increasingly costly degree of specialized medicine and personalized medicine moving forward. 

There’s a couple challenges with respect to making sure that we 

realize the full potential of biosimilars here in the U.S. market. 

One is getting them to market, which is why we need to create 

some Fast Generics Act pass so that our members can actually gain 

access to the samples to do the pharmacovigilance to apply to the 

FDA to get biosimilars to the market. And then the second thing 

we have to look at, and we have to be candid about this, is right 

now there are eight biosimilars that have been approved by the 

FDA. There are only three on the market. The other five are tied 

up in endless litigation. 

So if we ultimately want to—we have a lot of catching up to do 

in terms of you mentioned the E.U. They are light years ahead of 

us in terms of utilization, access, and savings on biosimilars. 

We have the opportunity from a policy perspective to catch up. 

The Federal Government started scoring savings for biosimilars in 

2014 fiscal year. The first one wasn’t on the market until September of 2015. So we have more work to do there. 

Mr. GREEN. Mr. Merritt. 

Mr. MERRITT. And I would agree with what Chip said. Biologics 

are the future. Specialty products are the future and they’re very 

expensive. They’re very great products, as David Mitchell mentioned. 

But right now, they’re often unaffordable and the key is competition. Biologics already have 12 years of exclusivity. We’d like that 

to be down to seven so we can get competition started faster. 

We’d like these drugs to have the same name the way generics 

do with brand drugs on the regular market and a host of other 

149 

things because without competition, you’re not going to have savings and if you have more and more brand protection for every little minute change you make and if litigation ties these up for years 

and years, for a month, a couple of months, a year of being tied 

up in litigation can cost consumers billions of dollars. And so we 

are very aligned with the generics on this. 

Mr. GREEN. Mr. Chairman, I believe that our government’s approach to approving and integrating biosimilars in our health system would impact overall potential for competition and access to 

more affordable life changing drugs for patients. Let’s hope we can 

continue to support this developing market so that patients can realize the value and benefit of such treatments. 

Mr. Eyles, the complexity of the drug supply chain is hard to 

overstate as evidenced by all 10 of our witnesses this morning. 

They’ve been in the growing chorus calling for greater transparency 

in the drug supply chain. 

Some states have already taken action. California recently enacted legislation that would require reporting of certain price hikes 

and legislation that would be introduced in both the House and the 

Senate—that has been introduced would create a similar federal 

requirement. 

What we’ve already seen is some good actors taking meaningful 

steps to increase transparency. For example, Sanofi and Janssen 

have agreed to disclose their drug price increases each year. Sanofi 

also announced it would put limits on how much it will increase 

drug prices. But as you note in your testimony that more could be 

done to encourage open and straightforward price setting and highlight the need for disclosure of intended launch price. 

Could you discuss further why the disclosure of intended launch 

price would be helpful to insurers and how you believe such a disclosure be operationalized? 

Mr. EYLES. Thank you, Ranking Member Green. 

Yes, we’ve been very supportive of greater transparency into 

really both when it comes to launch prices and price increases. 

While we are not supportive of controlling prices, we think it is 

important to have more information out there in the public domain 

about exactly how prices are set. Right now, pharmaceutical prices 

are set in the black box. 

When a new product gets launched with a price of $475,000 no 

one really understands how that got set. 

Mr. GREEN. Well—— 

Mr. EYLES. We think ahead of time, having additional visibility 

into how prices get determined by the manufacturer and then price 

increases over time, particularly those on higher cost drugs and 

those that exceed certain thresholds, it’ll be important to understand other parts of the health care system have oversight and controls on them. 

For example, insurers have to report all of the inputs into their 

rates before they get approved. We are not looking to have specific 

approval of drug prices but we do think it is important to have 

greater transparency and greater dialogue around how are prices 

being set up front. 

Mr. GREEN. Well, Mr. Chairman, thank you. I know I am over 

time. 

150 

But transparency always works and, like you said, it works in 

other parts of the health care delivery system. So thank you for the 

time. 

Mr. BURGESS. Gentleman yields back. Chair thanks the gentleman. The chair recognizes the gentleman from Kentucky, Mr. 

Guthrie, vice chairman of the Health Subcommittee. 5 minutes for 

your questions, please. 

Mr. GUTHRIE. Thank you very much. Thanks for everybody being 

here today, and it is really a great day to start this process. I was 

invited not long ago to the White House with the majority leader 

and we met with the President. I want to tell you, we walked away 

with the President wanting action on this issue. He’s very focused 

on it. I think this is the beginning of a process that I hope will lead 

to an action as we move forward. 

I have some prepared questions but I will get back to what the 

chairman said. I don’t think we ever got a really good answer. If insulin is a competitive product and it was $90 10 years ago and it should be $100 if you just went through the standard inflation, why is it $400? It’s got to be somewhere between here and 

here it has increased in price and maybe, Mr. Merritt, you’d like 

to address that. 

Mr. MERRITT. Yes. And this happens with a lot of drugs, but you 

see it a lot in insulin is there are insulin products but they have 

new methods of administration—actually some better methods of 

administration and that creates a whole new patent protection for 

these products. 

And so that is how the prices go up and, again, on a very basic 

point, drug makers can charge whatever they want for a product. 

That’s not saying a price is right or wrong but it has nothing to 

do with anybody at this table except for the drug manufacturers. 

All that we can do is get the biggest rebates possible, the biggest 

discounts possible, pass it on to the plans and employers and have 

them use it to reduce premiums, cost sharing, or whatever each 

plan wants to do. 

But just the fact that we don’t control the prices, that they have 

patent protection with minor changes in the products, again, making the products better, that’s what gives them that pricing power. 

Mr. GUTHRIE. So the insulin—so Ms. Reilly, that would—so innovation has come from PhRMA. Therefore, you have invested the research dollars so you’re recapturing those resources dollars, therefore it is four times what it was? 

Ms. REILLY. Well, Mark is correct that there have been significant advancements in insulin. We now have long-acting insulins. 

We have an insulin that’s injectable with pens and other things. 

But, again, I would say the list price of the medicine is not what 

the manufacturer retains, and in the case of the insulin marketplace, there are multiple competing products. 

What manufacturers have retained over the last 5 years has 

been stable or declining and part of the reason for that is we do 

have PBMs that are buying these medicines that, again, CMS, 

MedPAC, and others have demonstrated that what they prefer is 

a high list price and a high rebate. 

That lowers the net price considerably. The rebates on average 

in the insulin market space are 65 percent. 

151 

Mr. GUTHRIE. Well, who sets the list price then? For what the 

PBMs have to charge, who sets the list price? 

Ms. REILLY. Well, and I want to respond to something that both 

Mark and Matt said with regard to the list price. The list price is 

not set in a vacuum. 

Our companies have to engage with PBMs and insurance companies every day in determining the list price and their preferences, 

quite honestly, matter significantly. And they matter to the extent 

that if they want a high list price with a high rebate and they’re 

telling a company when they control a hundred million lives, an individual one, that is their preference if that product is to get on formulary. 

Commonly, PBMs pick and choose amongst insulins and they say 

to a company, if you don’t give me the price I want, you’re off my 

formulary. And if you are buying on behalf of a hundred million 

Americans, more than countries like France and Germany, the leverage they exert is significant. 

Mr. GUTHRIE. So would you argue your market price is the list 

price less rebate? You know that going in—— 

Ms. REILLY. Yes. Yes. 

Mr. GUTHRIE [continuing]. Therefore, you have to set a higher 

list price to get the market price that you think you need to cover 

your—same way with biologics? 

Ms. REILLY. Just to stay flat. Yes. 

Mr. GUTHRIE. To stay flat. 

Mr. MERRITT. If I could just jump in for a second, it would be 

an anti-trust violation for those discussions to ever happen. Those 

discussions don’t happen. Manufacturers set the price according to 

however they want to move their products, whatever they think 

they need to do. PBMs have zero input into that. Health plans 

have zero input into that. 

Of course, we get the biggest rebates that we can, but remember, 

this is a chicken and egg thing. If the price goes up, we are going 

to get a bigger rebate because our clients, Matt’s companies and 

others are going to demand us to get bigger and bigger discounts. 

But the—— 

Ms. REILLY. I would argue—— 

Mr. MERRITT. No, I am not done yet. But the list prices are the 

list prices, and that is a drug maker thing. It has nothing to do 

with—— 

Mr. GUTHRIE. Well, let me—— 

Mr. BUCSHON. Mr. Chairman, I—Mr. Chairman—— 

Mr. GUTHRIE. Not—let me—— 

Mr. BUCSHON. He interrupted her testimony. 

Mr. GUTHRIE. I am going to let you finish your thought. 

Then—— 

Mr. MERRITT. Yes. That’s what I am saying. It’s just a basic 

thing. I think sometimes you can try to over complicate the whole 

issue of supply chain. 

Supply chain is just how you distribute products. Every industry 

uses them. They’re not exotic. They all use rebates. 

Mr. GUTHRIE. I got about 40 seconds. Yes, let me go back to—— 

Ms. REILLY. I would say you have to ask the question that if our 

revenue is flat or declining in the space of insulin and the list price 

152 

is increasing? It’s benefiting everyone that’s paid off of the list price 

including the PBMs and the health plans. 

Mr. GUTHRIE. So the argument the rebate doesn’t go to the consumer? 

Ms. REILLY. No, it does not get passed—— 

Mr. GUTHRIE. Do you have an answer for that, Mr. Merritt? 

Mr. MERRITT. It does. It goes to the client who may use it to reduce the cost of that particular drug—the cost sharing, or more 

commonly it is used to reduce overall. 

Mr. GUTHRIE. I guess I will have Administrator Eyles and AHIP. 

So the rebate does go to the consumer? 

Mr. EYLES. They go to people who purchase health insurance coverage. Yes, they go to everyone. That’s right. So when you look at 

filings that insurance companies have to file with every state department of insurance, there are specific lines dedicated to pharmaceutical rebates and when rates get approved those rebates are 

taken into account. There are different—— 

Ms. REILLY. I would argue that’s a perversity of insurance. 

Mr. GUTHRIE. Time is expired. I wish I had more time with that 

but—— 

Ms. REILLY. Right. The purpose of insurance is for healthy to 

subsidize the sick. We are evolving to a system where the sick are 

subsidizing the healthy through rebates. 

Mr. BURGESS. Gentleman yields back his time. Chair thanks the 

gentleman. 

The chair recognizes the gentleman from New Jersey 5 minutes 

for questions, please. 

Mr. PALLONE. Thank you, Mr. Chairman. 

I have long believed that one critical component of the successful 

drug supply chain is a robust generic manufacturing presence and 

market. 

Generics can continue to play a role in fostering increased competition and affordable access to medications, which is why I’ve 

continuously worked to provide generics with a level playing field 

and supported increased assistance and incentives including most 

recently through the FDA Reauthorization Act as a way to encourage a strong generic presence in our pharmaceutical market. 

So I wanted to ask Mr. Davis a couple questions. In your testimony you noted that generics operate under a very different business model than brand drug manufacturers. 

Can you further discuss how the business model for generic 

drugs is different than brand drugs and the different considerations generic drug manufacturers take into account when making 

product development decisions? 

Mr. DAVIS. Thank you, Ranking Member Pallone, and thank you 

for your leadership on ensuring a level playing field. I am happy 

to address that. 

The debate that you just heard between the branded industry 

and the PBMs and the insurers on rebates as a percentage of list 

price and discounts are for 11 percent of all prescriptions in the 

United States. 

It is not the generic business model. So if there is one thing I 

leave this committee with today it is to think of generics differently 

153 

than the way you think about policy that impacts the branded industry. 

We are a commoditized, not monopolized industry. As a result of 

that, the way the supply chain actually leverages driving prices 

down to where we are in 16 consecutive months of price deflation 

is by combining their resources and leveraging their purchasing 

ability where there are now three wholesaler retail pharmacy consortiums that are controlling 90 percent of the generic supply 

chain. 

So you have three suppliers who are driving the prices down 

lower than they have ever been before in the generic marketplace 

and as a result of that they are moving increasingly toward what 

are called single-sourcing contracts meaning they want to partner 

or contract with one generic company to fill a majority of their 

portfolio of purchasing needs. 

As a result of that, what we have seen is, quite frankly, an 

unsustainable supply chain for generics moving forward, if in fact 

we can ensure that there is robust competition on the buyer side 

in addition to the seller side. 

In 2000, there were approximately 200 wholesalers on the market. Today, there are three that control 90 percent of the supply 

chain. The buyer side is three. 

We are still 20 to 30 competitive generic manufacturers all competing for that business, and economics will dictate over time that 

you will see more consolidation on our side in an effort to level out 

that negotiating table. 

Mr. PALLONE. All right. I want to ask two more questions. 

You talked about how generic manufacturers operated in this 

commodity style market as a result of the multiple manufacturers 

marketing the same product. 

But do you want to explain a little better the role that plays in 

bringing the generic drug to market? 

Mr. DAVIS. Happy to do so. You have—— 

Mr. PALLONE. And then I’ve got one more question. 

Mr. DAVIS. Sure. You have a situation, Congressman, where the 

ability for a generic manufacturer, when you actually get to what’s 

called commoditized pricing in the generic marketplace, a decade 

ago it took eight, nine, or ten generic competitors to get to 80 to 

85 percent off the reference for the originator price. 

You get there now as soon as three, four, or five generic entrants, 

which is why the FDA commissioner has prioritized not just the 

first generic application at FDA but the first, second, and third. 

Our companies have to make decisions in a commoditized market 

that has varying price fluctuation upward and downward about 

what the sustainability is of the competitive market in any therapeutic area. So that’s a significant factor in determining if they go 

to market once they get approved and if they stay on the market 

once they are approved. 

Mr. PALLONE. All right. Then lastly, let me just ask briefly about 

the rebates. We’ve heard quite a bit of debate about the appropriateness or value of rebates in the drug supply chain. 

So what role, if any, do rebates play in the negotiations a generic 

drug manufacturer undertakes with payers and how does reimbursement traditionally work for generic drugs? 

154 

Mr. DAVIS. Thank you for that. It’s an important distinction. As 

I said, for 89 percent of the prescriptions in the U.S. that are generic, the traditional rebate model by and large does not apply. 

Generic companies are reimbursed in many ways based upon two 

things: their ability to meet that wholesaler demand with the three 

who control 90 percent of the market. 

By saying can you meet our volume requests and are you willing 

to meet the price that we are actually going to tell you we are 

going to pay for that product—let’s take generic Crestor, for example, rosuvastatin—and if you don’t—and if you’re not willing to 

offer it at 10 cents a capsule, one of your 19, 20, or 21 other competitors that are also marketing that will, and we will cut you out. 

So it is really about volume and ability to keep your price as low 

as possible. So it is an example of the market actually working. 

Mr. PALLONE. All right. Thanks a lot, Mr. Davis. 

Mr. BURGESS. Gentleman yields back. The chair thanks the gentleman. 

The chair recognizes the gentlelady from Tennessee, Mrs. Blackburn, 5 minutes for questions, please. 

Mrs. BLACKBURN. Thank you, Mr. Chairman. 

I appreciate that, and I appreciate the discussion that we are 

having here this morning on this issue. I will say I am a little surprised. There’s a lot of finger pointing that is going around. 

But I will tell you all, I think there is more than enough blame 

to go around for what we see transpiring in the marketplace and 

with the high cost. 

And listening to you all, I will tell you there is absolutely—it confirms to me why so many of my patients—my constituents will say 

as a patient who takes something regularly, they have tried to find 

other options in the marketplace—programs like GoodRX or I know 

there are several others—because they are very frustrated. 

And Mr. Mitchell, I appreciate the concerns that you bring to 

bear as a patient and someone who is using something. This is an 

issue that we need to address, and we need your best efforts in 

solving this. 

So I am going to focus on not things in the past, but as we move 

forward. And let’s put our attention there. And for each of you on 

the panel—and we are going to start with Ms. Reilly and work all 

the way down—what change would you like to see in the marketplace or what change in law should we make to make certain that, 

as Chairman Walden said, we are focused on access, delivery, and 

the cost of these pharmaceuticals to patients. 

Now, you are only going to have about 30 seconds. So Mr. Merritt, listen—make that good and concise for me. OK. Ms. Reilly, you 

are on. Let’s go right down the panel. 

Ms. REILLY. Great. I would say two things. The first, as I mentioned before, passing through those robust discounts and rebates 

that totalled over $100 billion last year back to patients. That 

would lower patient drug costs immediately. 

The second, which is more of a mid- to longer-term option, is 

moving our system towards one where-which moves towards a 

value-based system away from volume. Let’s reward companies 

that deliver medicines that are delivering the outcomes that patients and payers want. 

155 

Mrs. BLACKBURN. Thank you. 

Mr. DILENGE. Thank you. 

I mentioned at the outset that we are part of a coalition with insurers, PBMs, and others, and one of the ideas is in fact exactly 

what you were talking about in terms of patient information. 

We need to empower patients. Right now, they do not have good 

information about their choices. They don’t know about their 

formularies. Their formularies are constantly changing throughout 

the year. 

Their prices are changing, their co-pays, their co-shares. If they 

had more access to good information they’d be able to find cheaper 

medicine. 

Mrs. BLACKBURN. OK. Time’s up. 

Mr. DAVIS. Congresswoman, thank you. 

There are three things that we would recommend. The first is to 

repeal the misguided Medicaid penalty on generic drugs. It was 

passed in the fall of 2015 as part of the balanced budget agreement. 

It actually punishes generic manufacturers in the circumstances 

where they don’t take a price increase, and serves as a disincentive. 

Pass the CREATES Act, as I mentioned earlier, and include 

biosimilars in the coverage gap for Part D to ensure a robust 

biosimilars market, moving forward. 

Ms. GALLENAGH. Thank you. 

As wholesalers, we don’t actually take positions on transparency 

or on pricing issues. But I would say that our members would support anything that examines greater competition in the marketplace and better access for patients. 

Mrs. BLACKBURN. OK. 

Mr. MERRITT. I agree with a couple things that were said before. 

Value-based contracting would be great. The patent reforms that 

Chip and the generics industry have talked about, and also something that we haven’t talked about and may not come up today but 

electronic prescribing. 

We’d like doctors to be able to look at the formularies before they 

prescribe the drugs so patients aren’t surprised at the pharmacy as 

they can choose the least expensive option available. 

Mr. EYLES. Solutions that bring more competition through 

generics and biosimilars. That’s the first thing. That’s very important. 

The second is greater price transparency, both about how prices 

get set and how prices are increased, and we’d agree that it’s important to also move towards value-based pricing and outcomesbased pricing. 

Mr. NICKELS. I would agree with a number of the things that 

have been said already—greater competition, greater transparency. 

I would agree on the CREATES Act as a piece of legislation that 

should move forward and, of course, as I mentioned in my statement, protecting the 340B program. 

Dr. HARMON. I would tell you that not only is Mr. Mitchell the 

formal patient representative. All of us in the room are either patients or caregivers for patients. So we all wear that same appellation. 

156 

As a provider, as a physician, what I would like to see is transparency. It’s been alluded to. That’s not just a buzzword. It needs 

to be a reality and I need to eliminate these administrative hassles 

that interfere with delivering care for my patients. Thanks. 

Mr. HOEY. I have three suggestions. One would be the transparency with spread pricing. That’s what the pharmacy has paid 

and what the employer is charged, which are two different things. 

The employers charged more. The second would be pharmacy DIRs 

at the point of sale or prohibiting pharmacy DIRs altogether, and 

then the third would be eliminating the conflicts of interest that 

exist between a price giver and a price taker. 

So they’re giving prices but they’re also taking a price, and there 

is an immense conflict of interest. Thank you. 

Mr. MITCHELL. I would focus on promoting competition and making Hatch-Waxman work as intended. That means no more pay-fordelay. There’s a bipartisan bill to do that now. 

The CREATES Act is an incredibly important bipartisan bill. It 

would save more than $3 billion. That is important. But all elements of patent abuse that extend patents beyond what you intend 

with our laws should be addressed to promote competition because 

competition lowers prices. 

Mrs. BLACKBURN. You all did a great job staying under the time 

limit. I thank you all. 

And as I yield back, I will just say listen to what you said. Transparency, competition—basically, focusing on the patient and those 

are worthy goals. 

I thank you for the hearing and I yield back. 

Mr. BURGESS. Gentlelady yields back. Chair thanks the 

gentlelady. Chair yields to the gentlelady, Ms. Matsui from California, 5 minutes for questions, please. 

Ms. MATSUI. Thank you, Mr. Chairman. 

High drug prices are really at the top of the mind of our constituents and we’ve seen recent examples of extreme bad actors raising 

prices purely for profit motives. 

Congress does need to review and better understand drug pricing 

to ensure that we are incentivizing research and innovation and 

development of new drug treatments and cures without creating 

loopholes that can be taken advantage of. 

Drug pricing is particularly complicated because it is not transparent to the public and because drug companies often end up with 

monopolies, which we all know can drive up costs. We need an approach that focuses on the patient and the cost to the health care 

system, which will be tethered by ensuring that there is sufficient 

competition in the market place. 

Where there is more than one option for a drug or treatment, 

costs tend to be driven down. As we move toward precision medicine, we move away from multiple treatment options per person. 

So this is something we will only have to grapple with more and 

more. I know we talked about this. Let me follow up here. 

Ms. Reilly, when drug companies set the initial list price for the 

drug from which all of the components of the price follow, do manufacturers also publish or make available how they determine the 

list price? 

157 

Ms. REILLY. Well, companies—and to be honest, as PhRMA we 

don’t engage with our companies in terms of how they price their 

products. We can’t for anti-trust reasons. 

However, many companies have talked about their philosophies 

with regards to how they price their product and they look at a 

number of factors. 

They look at the prevalence of the disease. They look at existing 

treatments that are already in the market. 

Ms. MATSUI. How about the research and development costs that 

the company has done? 

Ms. REILLY. Research and development is a cost of doing business that, obviously, has to be recouped. But companies really are 

focusing on the value that a given medicine is bringing to market 

and the list price that we come up with is very much negotiated 

with the purchasers of the product. 

A PBM or insurance company does not have to cover our product. 

In fact, some proudly talk about the fact that they exclude certain 

products from formularies if they don’t get the price that they 

want. So they’re not done in a vacuum. 

Ms. MATSUI. All right. Let me switch here. 

Dr. Harmon, when a doctor prescribes a drug, how often do they 

know how much it will cost a patient? 

Dr. HARMON. Representative Matsui, they really only know if 

they do it a lot, because if I de novo prescribe a drug I have no 

idea. You heard it from some of the other panelists. 

Increase transparency on drug pricing and availability and formulary would greatly enhance my ability to adequately and accurately prescribe the right treatment for the right patient at the 

right time. 

Ms. MATSUI. So when doctors are familiar with certain drugs 

that they prescribe, they know to recommend to their patient if 

they have two generics that do the same job as a named drug. 

Do you tend to use this price information in a systemic way or 

anecdotally from what they hear from the patients? 

Dr. HARMON. Systemically. I try to be an evidence-based prescriber. So I deal with my medical literature and up-to-date treatments that are made available to me. I make that decision, Congresswoman Matsui. But also 99 percent of the time I write on my 

prescription blank or I sent the electronic prescription substitution 

authorized. 

Ms. MATSUI. OK. 

Dr. HARMON. Generics are available. Rarely do I prescribe the 

brand name. The only exception is if I know that their insurance 

plan ahead of time will authorize the brand and actually have a 

better affordability to the patient than a similarly priced generic. 

Ms. MATSUI. OK. Thank you. 

I want to ensure that we continue to encourage innovation and 

development of new cures and the ability to profit as part of that 

when you are in such a risky business. 

But I think the profit has gotten way out of control in many 

cases. I want to make sure the potential for profit is truly 

incentivizing innovation, not just lining investors’ pockets. 

Mr. DiLenge. What are examples of biologic companies that are 

innovating but also keeping prices low? 

158 

Mr. DILENGE. I think the vast majority are, and so we’ve seen, 

particularly over the last couple years but we’ve seen incredible 

market competition in biologics, not necessarily by biosimilars. 

I agree with Chip on some of his comments there. But among 

branded biologics there is intense competition. In fact, the time to 

entry for the second biologic in a class has dropped dramatically. 

And so what you are seeing is a lot of great competition and the 

second and third products are coming in usually cheaper than the 

first. 

Ms. MATSUI. OK. 

Mr. DILENGE. So we are seeing a lot of good competitive market 

dynamics in biologics. 

Ms. MATSUI. Well, I would say so, but I think when you increase 

more competition and eliminate the monopolies, because there are 

still some loopholes and ways for players along the chain to take 

advantage of this system with our without competition. 

So do you see—I guess Mr. Mitchell—do you see policy solutions 

that encourage innovation but close loopholes? 

Mr. MITCHELL. Can you pose that question again, ma’am? I 

didn’t hear it. 

Ms. MATSUI. OK. Do you see policy solutions that encourage innovations but close loopholes? 

Mr. MITCHELL. I think, most importantly, that we want to 

incentivize companies to invent new drugs and not invest time and 

money to milk money out of old drugs, and that’s why I place the 

emphasis in what I said to the lady from Tennessee on closing patent loopholes—— 

Ms. MATSUI. Right. 

Mr. MITCHELL [continuing]. That allow them to get more time beyond that which you intend under Hatch-Waxman instead of focusing their attention on developing new drugs, making more innovation. 

Ms. MATSUI. All right. Thank you very much. 

Mr. DILENGE. Ms. Matsui, if I just may respond real quick, I 

think it’s important to emphasize that the time to market for 

generics has stayed the same for two decades. 

So the idea that there is all this patent evergreening and that 

innovators are getting all these new patents and pushing out the 

time for generics the data just doesn’t support that. Thank you. 

Ms. MATSUI. OK. Thank you. I yield back. 

Mr. BURGESS. Gentlelady yields back. Chair thanks the 

gentlelady. 

The chair recognizes the gentleman from Texas, Mr. Barton, 5 

minutes for questions, please. 

Mr. BARTON. Thank you, Mr. Chairman and Ranking Member 

Green, for holding this hearing. We have established the number 

of witnesses we can have on one panel because there is no more 

room. 

[Laughter.] 

So we know that the number now is 10. This committee has jurisdiction over quite a bit of the U.S. economy. 

The three most complicated issues we deal with in terms of pricing are the price of gasoline—when it’s up everybody’s mad at us, 

the price of prescription drugs, which we are talking about today, 

159 

and the price of cable TV. And I may be using a misnomer for cable 

TV. It may not be cable TV anymore. 

But of those three, the one that is most complicated and the most 

byzantine pricing mechanism is drugs. I take six prescription drugs 

every day. 

I had a heart attack 6 years ago and I have high blood pressure 

and so I take six drugs. I couldn’t tell you what those drugs cost. 

My insurance company pays it. I pay a little bit of a deductible so 

I know what my deductible is when I get them filled every three 

months. I get a 90-day supply. 

Some of them are Plavix or Plavix, Lisinopril, Lipitor. Those are 

some of the name brands, and I think everything I am taking now 

is a generic. I don’t believe I use any of the name brands. 

So it’s good to have this hearing. I hope we learn something from 

it. It would be nice if we could come up with a simplified system 

for drug pricing and perhaps this hearing will begin that. 

My specific questions are going to deal with the pricing of 

biosimilars. Now, Congresswoman Eshoo and I worked together 

several years ago to get a biosimilar title in what’s now called the 

Affordable Care Act and there is just—it’s been one rocky ride trying to get biosimilars to the marketplace. 

And recently Congresswoman Eshoo and I led a letter that 48 

other members signed asking them to have a separate code at CMS 

for biosimilars. 

Mr. Davis, you represent both the generic drug companies and 

the biosimilar drug companies. You mentioned in your written testimony that biosimilars are more complicated, difficult to develop 

than traditional drugs. Could you expand on that briefly, please? 

Mr. DAVIS. Sure, Congressman. Thank you for the question. 

Biosimilars are a subset of biologics. So the reverse engineering 

process associated with biosimilars is heavily science weighted and 

much more expensive over time. So development programs for biosimilars can cost $150 million to $400 million in advance of filing the application. So what we need 

to recognize is that there are similarities in terms of the value that 

competition from biosimilars will present to traditional biologics in 

the market once they get there that is akin to the traditional small 

molecule versus generic competition that we’ve seen for years in 

the branded side. 

At the same time, we do need to recognize that they are a different class of drug and as a result of that, through the leadership 

of you, Congresswoman Eshoo, and others, be able to have a pathway established here in the U.S. as part of the Affordable Care Act 

through BPCIA. 

That pathway, as was suggested earlier, has not gone as smoothly as possible and there are several policy reasons why we are 

where we are, not the least of which was the potential to have different J codes for the originator product and all of the competitors 

in a separate one at CMS. 

Because of the leadership of this committee, CMS has announced 

a plan change to that as of January 1. So thank you for that as 

well. 

Another solution that would increase the uptick in interest on 

the part of our members to make the investments they need to 

160 

bring biosimilars to market will be making sure that biosimilars 

are treated like biologics in the Part D coverage gap. 

So it’s actually our members asking to be held to the 50 percent 

discount to make sure that the value that biosimilars from a pricing perspective doesn’t get lost as people go through the Part D 

program. 

Mr. BARTON. Mr. DiLenge, as Mr. Davis just said, CMS has announced that they’re going to reverse their earlier policy and assign 

a separate HCPCS code for each biosimilar rather than have a single payment rate. 

Do you believe that this promotes a more vibrant and sustainable 

market for biosimilars and hopefully over time reduces prices? 

Mr. DILENGE. Absolutely. We need to be able to incentivize for 

the reasons that Mr. Davis said. You need to really incentivize the 

biosimilar marketplace differently than you would a traditional generic marketplace. 

And so while you have all the generics in the same code and that 

works for that marketplace, it does not work for biosimilars. It 

won’t spur the investment. 

I talked earlier today about the investment that’s required for all 

types of innovation but biological innovation in particular is very, 

very expensive and you need to have the right incentives, and the 

Federal Government, the way they code—it sounds really arcane, 

coding, but it actually does impact what investors think about 

going into markets. 

Mr. BARTON. OK. Thank you, Mr. Chairman. 

Mr. BURGESS. Gentleman yields back. Chair thanks the gentleman. 

Chair recognizes the gentleman from Oregon, Dr. Schrader, 5 

minutes for your questions, please. 

Mr. SCHRADER. Thank you, Mr. Chairman. Very good hearing. 

Probably should have a follow-up, given the breadth of the group 

in front of us here. 

At the outset, I am not someone that blames the pharmaceutical 

industry or the supply chain for the problems we are seeing. This 

is just an outgrowth of industry developments and the innovation 

that’s out there, as pointed out, a lot of the starts on these innovative drugs fail—90 percent failure rate. 

That’s not generally a good business model. But these guys do it 

because they care about the marketplace and there, hopefully, is a 

profit to be made at some point in time. I would remind everybody 

that pharmaceuticals are not the highest cost in our health care 

system. But at the same time, they are one of the fastest rising 

costs and my guess is they will continue to increase in cost because 

of the tremendous excitement and innovation in precision medicine. 

It’s wonderful. 

As a little old country veterinarian that I had to do and I now 

look at as almost a barbaric kind of way are going to be so refined 

that people will not have some of the great side effects that we see 

today in the marketplace. 

But having said that, we are also stewards of the taxpayer dollar 

and as things get expensive and we have this wonderful opportunity in this country and hearing everybody talk about innovation 

that’s now occurring in particular in this country that’s great. 

161 

But we have to be able to afford things, and therefore we have 

to ask some tough questions and hopefully work on how do we all 

together make this medication at least slightly more affordable to 

the taxpayer and, frankly, to folks in the individual marketplace 

also. 

So having said that, Mr. Davis, can you talk to me a little bit 

about the REMS issue and restrictive access abuse—that sort of 

thing. Why, in particular, do we need an effective enforcement 

mechanism to address that? 

Mr. DAVIS. Congressman, thank you for the question and I would 

be remiss if I didn’t start by thanking you for your leadership on 

this issue as well as Congressman Welch. 

It’s important because—let me start with—REMS was created in 

2007 as part of the reauthorization for the prescription drug user 

fee program then, and REMS, in terms of ensuring patient safety 

is a very important program. 

The original statute—the authorizing statute—also said that 

REM should not be used for the unintended consequences of delaying competition from generics. 

The challenge we have is that’s exactly what, in many instances, 

it is being used for and the reason that there is no remedy for it 

is because there is no sufficient enforcement mechanism in the authorizing legislation from 10 years ago, and there have been constant efforts on the part of generic manufacturers in 2012 as part 

of the first generic user fee agreement that coincided with the reauthorization of the PDUFA. 

They came very close. There was a provision in the Senate 

version that actually would have remedied this issue. It’s 5 years 

later and it still exists. And if you want a robust biosimilars market and you want to make sure that competition gets to market 

sooner rather than later, claiming patient safety issues that have 

never been documented after the FDA certifies generic manufacturers will appropriately handle the samples they need to do the 

pharmacovigilance is just an excuse to prolong monopolies beyond 

their intended effect. 

Mr. SCHRADER. All right. 

Mr. Merritt, talking about PBMs, I remember a day 20 years ago 

when they were the godsend, if you will, to reducing drug prices 

and having someone knowledgeable deal with the panoply of drugs 

that are out there and getting it. 

I would like to think that still exists, obviously, or people 

wouldn’t be using you. There is a supply and demand. The reason 

they use PBMs is because they think they’re getting value. 

Some insurers had moved away from that a little bit here very 

recently and everyone talks nowadays about this black box, and 

given the fact that you guys have to talk about some of the rebates 

when you are reporting to Part D and CMS. 

Is there a way to inject some transparency in what you do without giving away proprietary information in the private insurance 

market? 

Mr. MERRITT. Yes. That’s a great question. 

Yes, Medicare Part D is a great example because consumers have 

transparency. They choose their plans. They can see what the premiums are, what the cost sharing is, what the drug selection is of 

162 

every plan, which is why you have 90 percent satisfaction with 

Medicare Part D. 

I agree with something Dr. Harmon said. It would be nice if 

there was that transparency in the doctor’s office so people weren’t 

surprised—the physician, the pharmacist, and the patient—as to 

what a drug actually costs a patient because Lori is correct, the 

cost sharing is different for different plans because different plans 

have different goals and different populations. 

So if there was electronic prescribing and doctors and patients 

seeing what the actual out-of-pocket costs were in the doctor’s office 

I think that would really help. 

Mr. SCHRADER. Very good. Well, I’ve got a ton of questions probably like everybody else here and I appreciate all the participants 

on the panel. 

I guess, Mr. Chairman, it’d be nice maybe to have a work group 

at some point in time, work with all our participants, the patient 

groups also, about what are some of the best solutions because I 

don’t think there is a silver bullet here that’s going to require everyone to get in the boat together and figure out how do we make 

sure we still have the most vibrant innovative pharmaceutical market in the world that is increasingly doing amazing things, from my 

perspective. 

Thank you, Mr. Chairman. Yield back. 

Mr. BURGESS. Chair thanks the gentleman. Gentleman yields 

back. 

Chair recognizes the gentleman from Illinois, Mr. Shimkus, 5 

minutes for questions, please. 

Mr. SHIMKUS. Thank you, Mr. Chairman. 

This is a great panel. Appreciate you all being here. I would recommend that we break it down. There’s too many—because I think 

all of us want to talk to each one of you. 

I know you can all come and visit with us but to have that interaction. Some of you are going to get lost in the shuffle and we 

apologize for that. 

I’ve spent a lot of time in this health care arena on orphan drugs, 

on antibiotic resistance. So and I, like some of my colleagues, understand the 90 percent failure rate, understand the R&D. 

We want to make sure there is a return. We are the innovators 

in the world but we just have to be careful. 

And then we’ve got these—how do you provide lifesaving drugs 

to a small population that you can’t get a return just from selling 

that drug to that individual. So that’s all part of this debate. 

The antibiotic thing, which Gene Green and I have worked on, 

we are floating tradeable vouchers somehow, having the company 

get some way to get a return on that so that they can have a readymade supply of something which you, hopefully, don’t have to use. 

Can you imagine asking a company to have something on the shelf 

that you hope you don’t use? 

So that’s why you all are there for the right reason, trying to 

make the system work. I really do appreciate it. 

This transparency debate is also key. It gets us frustrated and 

you just talk about drug prices in a hospital setting, but the hospital has a federal mandate called EMTALA—emergency room. 

Anybody can go. 

163 

High cost—how do they balance that versus an outpatient clinic 

that doesn’t have that mandate of that service? I think you always 

win with being transparent and then you help educate the consumer, and then the consumers say, well, that’s why I have to pay 

a little bit more because, shoot, the hospital’s paying for this emergency room access, which they have to do. 

So health care is a most challenging and frustrating payment 

process that we have and many years I tried to stay off this committee because I didn’t want to deal with it. They kept throwing 

me back on so I am stuck with it. 

[Laughter.] 

But I really want to talk to one provision too that I hear. I want 

to go to the local pharmacist. I think one provision that just really 

gripes me is this clawback issue. 

So here’s what happens. Doctor gives a prescription to a patient. 

A patient goes to a pharmacist. They pay the transaction or the insurance, and then months later tell me what happens. It’s hard to 

believe. 

Mr. HOEY. You’re leading right up to it, Congressman, exactly to 

the punch line. So months later, the money that the pharmacy collected from the consumer is taken back by the insurance plan, or 

the PBM. 

So for—— 

Mr. SHIMKUS. And the drug probably has already been consumed. 

Mr. HOEY. Hopefully it’s worked and that patient is doing fantastic on it. But the payment is still in play. 

So the pharmacy basically is forced to act like a mule to take the 

money from the patient and then that money is clawed back from 

the pharmacy to the health plan or the PBM. 

Mr. SHIMKUS. Can someone tell me why? Can someone defend 

that practice? Do you really want to try? 

Mr. MERRITT. No. No, we don’t defend the practice. It’s an outlier 

behavior. It’s something that is outlier behavior in the industry and 

we understand frustrations on that. And to the degree it exists, it 

exists rarely and hopefully more rarely in the future. 

Mr. SHIMKUS. Well, when our local pharmacists come to see us, 

especially the community-owned small ones, they show us. They 

show us the bill. 

They show us the receipt, so I hope that people are listening to 

the hearing and saying, we got to fix this. Because it’s just not 

right to offer a service, pay the cost and then for someone else later 

on to say, oh, you got to give us money back because whatever parameter. It’s not truth in advertising. 

It’s not truth in billing, and I am tired of it. I really am—and 

I hope it gets fixed. 

With that, Mr. Chairman, I am going to yield back before I get 

more angry. 

[Laughter.] 

Mr. BURGESS. The chair thanks the gentleman. The chair would 

remind the gentleman that he was the ranking member of this subcommittee when we were in the minority and I was down on the 

first row. So he’s got a lot of time in service here. 

[Laughter.] 

164 

Chair recognizes the gentlelady from Colorado, Ms. DeGette, 5 

minutes for questions, please. 

Ms. DEGETTE. Thank you, Mr. Chairman. 

Over the last 6 months, as many of the these panelists know, I’ve 

been working with Congressman Tom Reed, who is my co-chair of 

the Diabetes Caucus on what’s going on with insulin prices around 

drug pricing. 

And what we’ve learned across the whole drug chain is that 

there is a lack of transparency, which we’ve been talking about a 

lot in the hearing today, and we’ve also learned that there is a lot 

of finger pointing, which we’ve also seen in this panel today. 

It’s kind of good. It’s frustrating to have 11 witnesses but you 

hear all of that. And so I want to kind of focus on this issue of the 

complex web of financial and contractual relationships between the 

players here with the idea that maybe we can get to some more 

transparency and the ultimate goal being to help the patients. 

Ms. Reilly, I heard you talking about your view of how the market is working in your opening statement and I agreed with almost 

everything you were saying but you left one thing out and the 

thing you left out is why the price of insulin is $400 to begin with. 

Now, I know there are a lot of different delivery systems. There’s 

a lot of different kinds of insulin. We’ve moved away from the animal insulin. We don’t have a generic yet, although that’s coming 

soon, et cetera, et cetera. But some would say it’s not just the other 

players. PhRMA has a role in this, too. 

So I want to ask you and two other witnesses a very simple question as we go forward, and that is this. Will PhRMA, AHIP, and 

PCMA each agree to work with your member companies to share 

information with us about your contract with other supply chain 

players including sharing specific examples of contract terms? 

Obviously, I don’t want to undermine confidentiality. But until 

we know what the contract terms are it’s really hard for us to get 

that transparency. 

Yes or no, Ms. Reilly. 

Ms. REILLY. Well, we as—— 

Ms. DEGETTE. Yes or no would work. 

Ms. REILLY. I don’t have access to those contracts, Congresswoman. 

Ms. DEGETTE. Can you work with your members to try to get us 

that information? 

Ms. REILLY. You could probably work independently with them. 

As a trade association, we cannot be privy to confidential information. 

Ms. DEGETTE. You’re not going to help. 

OK. Mr. Merritt, can you help us with that? 

Ms. REILLY. It’s a violation of anti-trust. 

Mr. MERRITT. Yes. Yes. 

Ms. DEGETTE. OK. And Mr. Eyles, can you help us with that? 

Mr. EYLES. Yes. 

Ms. DEGETTE. OK. 

Now, I was listening with great interest to Mr. Guthrie’s questions about the PBMs and I want to ask you a couple of questions, 

Mr. Merritt, about this because I heard you say that the rebates 

always go back to the consumers. 

165 

But I know from my investigation they don’t always go back to 

the consumers in the form of lower drug prices. Isn’t that correct? 

Yes or no. 

Mr. MERRITT. Well, yes in the sense that—— 

Ms. DEGETTE. Thank you. 

Mr. MERRITT. No, but we give the rebates to the plans and then 

they sometimes—— 

Ms. DEGETTE. Right. But they don’t always go back in the form 

of lower drug prices. 

And so I want to ask you sometimes the PBMs actually make 

money off of the rebates paid by the pharmaceutical companies. Is 

that correct? 

Mr. MERRITT. That totally depends on the client. The client—— 

Ms. DEGETTE. But it could happen, right? 

Mr. MERRITT. If the client wants that to be that way. 

Ms. DEGETTE. Yes. That answer is yes. 

Now, my understanding is that some of your member clients pass 

some but not always all of the rebates onto their insurance or employer clients. Is that correct? 

Mr. MERRITT. It’s determined by the insurer but—— 

Ms. DEGETTE. Right. That’s correct. Some do, some don’t. 

Mr. MERRITT. A hundred percent of the big employers requires 

100 percent pass-through of those rebates. 

Ms. DEGETTE. But not everybody, right? Not everybody? 

Mr. MERRITT. Probably because they don’t want to. 

Ms. DEGETTE. Right. Yes. OK. 

Is it true that PBMs sometimes make money off administration 

fees paid by pharmaceutical companies that are separate from rebates? 

Mr. MERRITT. There are different fee agreements and there are 

different ways that we have to work—— 

Ms. DEGETTE. And so the answer to that is yes, too, isn’t it? I 

am sorry? 

Mr. MERRITT. Yes. 

Ms. DEGETTE. Thank you. 

Now, do your member companies sometimes include price protection clauses intended to insulate PBMs from drug price increases 

in your contracts with pharmaceutical companies? 

Mr. MERRITT. They’re intended to insulate our clients from price 

increases. 

Ms. DEGETTE. And so that answer is yes, right? 

Mr. MERRITT. Well, our clients. So I guess it would be that was 

there to insulate our clients from price increases. They want those 

there. 

Ms. DEGETTE. OK. Member companies sometimes include price 

protection clauses intended to insulate PBMs from price increases 

in contracts in pharmaceutical companies—yes or no? 

Mr. MERRITT. I guess it would be no. 

Ms. DEGETTE. OK. Do these price protection clauses sometimes 

allow your member companies to make additional money through 

clawbacks when a drug’s price increases? 

Mr. MERRITT. I am not aware of that in the clawbacks. 

Ms. DEGETTE. Yes. So if a drug price increases they can get 

clawbacks. Ms. Reilly, you were nodding. 

166 

Mr. MERRITT. Oh, I see. 

Ms. REILLY. Well, I was—yes, I actually have a document right 

here and it states Express Scripts has more than 90 percent of 

brand manufacturer contracts include price protections. 

Ms. DEGETTE. Can I get a copy of that? 

Ms. REILLY. Absolutely. 

Ms. DEGETTE. And Mr. Chairman, I would like to put that into 

the record. 

Mr. BURGESS. Without objection, so ordered. 

[The information appears at the conclusion of the hearing.] 

Ms. DEGETTE. OK. Mr. Chairman, as you can imagine I have 

many more questions and I apologize for making you answer yes 

or no. We have 5 minutes. 

I am going to submit these to the witnesses and I thought the 

idea that Mr. Schrader had to have a task force is an excellent 

idea. 

Thank you. I yield back. 

Mr. BURGESS. Chair thanks the gentlelady. The gentlelady yields 

back. 

The chair recognizes the gentleman from Ohio, Mr. Latta, 5 minutes for questions, please. 

Mr. LATTA. Well, thank you very much, Mr. Chairman, and to 

our panel, thanks very much for being here today. It’s been a very, 

very interesting discussion we’ve been having this morning. 

Several years ago, I sponsored the legislation on track-and-trace, 

from making sure that we don’t have adulterated counterfeit drugs 

entering the market. So this has been a really fascinating hearing 

that we’ve been having today. 

And I am also working on legislation right now to modernize and 

reform the FDA’s OTC monograph system. I would like to talk a 

little bit more about that to see how we examine ways to modernize 

the regulatory infrastructure of prescription drugs. 

As members, I believe we should always be looking for avenues 

to reduce burdensome regulation, foster innovation, spur competition, and provide certainty for consumers and businesses. 

And as we go forward, how can Congress help modernize the regulatory infrastructure at the FDA in order to bring these new 

medicines to market in a quicker manner? Because we had the 

hearing earlier this fall that was really fascinating to see how long 

it’s been going back to 1972 when you are looking at 45 years. 

So Ms. Reilly, if I could ask you, what can we do as members 

as we look at legislation to help modernize this infrastructure at 

the FDA? 

Ms. REILLY. That’s a great question, and I would congratulate 

this committee on recent passage of the Prescription Drug User Fee 

Act, PDUFA and GDUFA as well, because that’s a significant step 

forward in terms of modernizing the agency. I also think Commissioner Gottlieb has done a number of things on his initiative to 

move this in the right direction. 

There are a handful of areas that I think still need further work. 

Combination products—EpiPen has come up on a number of comments here before and I think more needs to be done to ensure that 

when we have combination products, be it auto injector products 

like EpiPen that you have got two different parts of the agency 

167 

that need to work more closely together so that we can spur competition, get those products to market sooner. 

I think innovative clinical trial design is another area. As was 

mentioned before, the medicines that are coming to market are 

very different than the medicines that came 20 years ago. And so 

we need to modernize clinical trial design and the regulatory tools 

that are used to review those products as well. 

And then I would say we need to continue to advance prescription-focused drug development. Having the patient at the center 

through the process of the Food and Drug Administration is vitally 

important but ensuring that patients I also heard as reimbursement decisions and coverage decisions are equally as important. 

Mr. LATTA. Thank you. 

Mr. DiLenge or—and Mr. Davis, would either of you like to comment on ways in which the FDA modernization or increased 

generics on the market would also help benefit our consumers and 

the patients out there? 

Mr. DAVIS. Congressman, thank you for the question. 

Yes, and then first I would second the recommendations that Ms. 

Reilly made. I think relative to the generic market, again, the leadership of this committee to pass the user fee agreement for the 

generics, we are only in. really, at the beginning of our sixth year 

of the user fee program with the FDA. The brands had a 20-year 

head start in many ways. 

So that system is much more refined. I think there is a shared 

both commitment and responsibility between our sector and the 

agency to make sure that we are driving as much effectiveness and 

efficiency through the generic and biosimilar approval processes. 

A simple example is first cycle approvals for generic applications 

historically have been very, very low—abysmally low. Under the 

leadership of Dr. Gottlieb, that has already begun to change. 

Mr. LATTA. Let me ask you this. Why has this been so, you know, 

dismal in the past? What has caused that? 

Mr. DAVIS. Quite frankly, I think if you look back I would certainly say on behalf of our members through the first GDUFA implementation the first 5 years engagement between the FDA and 

the industry in the first couple of years as the Office of Generic 

Drugs probably could have been more robust and mutually productive. 

By the time the FDA started having goals—associated timeline 

goals associated with approving ANDAs, they were well on their 

way to have already built OGD. 

The aggressive timelines in GDUFA II—8 months for a priority 

review, 10 months for a standard ANDA—will go a long way towards enhancing competition, getting ANDAs approved and then 

getting that competition out to the market. 

Mr. LATTA. Mr. DiLenge, would you like to comment? 

Mr. DILENGE. I would just completely agree with that. You know, 

we’ve learned a lot on the innovator side about how you improve 

first cycle approvals by the FDA. That is critical to getting even 

more brand-to-brand competition in the marketplace. 

We are doing that now on the innovator side. The generic industry, I think, can learn a lot from what we went through over the 

last 20-plus years of GDUFA and really learn with the new 

168 

GDUFA how they can interact with the agency in a better way to 

get more generic drugs through the process quicker on the first 

tray. 

Mr. LATTA. Thank you very much, Mr. Chairman. My time is 

about to expire and I yield back. 

Mr. WALDEN. Would the gentleman yield? 

Mr. DAVIS. If I could just add one follow-on comment? 

Mr. LATTA. Go ahead. 

Mr. DAVIS. It’s critically important for us to get more ANDAs approved earlier. Then we also need to make sure that there is a 

market where those holding those licenses will go to the market 

and not be tied up in endless delay through patent filings, extensions, evergreenings, and product topping as well. 

Where Tom and I would disagree is that is increasingly a significant issue that’s keeping generics and biosimilars from the market. 

Mr. DILENGE. And we do respectfully disagree with that. There 

is really no data to show that. 

Mr. LATTA. Thank you. And now, Mr. Chairman, my time has expired and I do yield back. 

Mr. BURGESS. Your time expired a long time ago. But I do need 

to recognize the chairman for an informational message. 

The chairman is recognized. 

Mr. WALDEN. Thank you, and with the indulgence the committee, 

I know a couple of members have asked about we need to have a 

work group. We need to have some sort of rump group to address 

this issue. 

Consider yourself on it if you are on the Health Subcommittee. 

That is the job of this committee. That is the job of other subcommittees that are looking at other things. The O&I Subcommittee is looking at 340B issues, about to issue a report. 

But this is where we are going to do regular order right here on 

the Health Subcommittee to look at the issues that you all are 

helping us get a better handle on, and I think there may be an opportunity to come back after the 1st of the year and continue this 

discussion. 

It, I am sure, isn’t the most fun thing for all of you to be at the 

same table together but it sure helps us, have you each go back 

and forth and tell us your points of view. 

And so I appreciate the committee’s indulgence. But the notion 

we are going to have a splinter group go off and do something, put 

a nail in that one because this is the splinter group. 

This is the Health Subcommittee. This is the Energy and Commerce Committee and we are going to go through regular order to 

get the answers that will work for consumers. 

With that, I yield back, Mr. Chairman. 

Mr. BURGESS. I thank the chairman for the observation. This is 

indeed the smoke-filled room. 

The chair recognizes the gentlelady from California, Ms. Eshoo, 

5 minutes for questions, please. 

Ms. ESHOO. Thank you, Mr. Chairman, and I want to thank 

Chairman Walden for the comments that he just made because it’s 

important that the work not only begin here but that the Members 

are responsible for shaping a policy around what we are discussing, 

which is so important. 

169 

I want to thank all the witnesses, all ten of you. Because I’ve listened to most—just about every—well, everything since we began, 

it’s a good exercise to just sit still and to listen to the questions 

that are asked and the answers that are given. 

Here are my observations. Number one, and I am proud of this— 

the United States of America and its genius has produced lifesaving drugs not only for people in the United States but for people 

around the world. 

So the research, the development that comes out of both the biotechnology industry, the pharmaceutical industry are really very, 

very important and I am proud of the work that I’ve done over the 

years to help advance that. 

I am a firm believer in it. The other observation I have is if we 

were starting from scratch and you all designed the system that 

you are here to talk about today, it really sounds like a Rube Goldberg plan, I have to tell you. 

And I don’t blame any one of you. You have told your story. 

You’re sticking to your story. But the fact of the matter is is that 

it’s not working well at all and it’s not healthy to have the antipathy in the country against you. 

It’s a very unhealthy thing. It really is, because on the one hand, 

people need the drugs. We had members speak to their own conditions and what they need to take. 

So this is crying out for reform. This is crying out for reform. 

And I think what I would just put you all on notice on—about is 

that we are going to reform. We need to reform. We have to answer 

to our constituents. 

We have to answer for what the costs are in the system that we 

oversee. The Federal Government is the major player and payer in 

the United States of America when it comes to health care. 

So there is going to have to be some give and take on these 

issues. Mr. Davis, I just want to say something about REMS. Yes, 

it put into place in 2007 and it was put into place to protect patients. You know that. 

Now, the FDA is the one that identifies the issues that need to 

be identified relative to safety and it’s why we have REMS. One 

of the drugs that comes to mind is sodium oxybate, commonly 

called the rape drug. 

So you said some things about REMS that I don’t think are really accurate because the safety relative to these drugs that are very, 

very dangerous if they get into the wrong hands—that we all need 

to gather around that. That’s a must. 

That’s not a Republican issue, a Democratic issue. It’s there for 

a very good reason because those drugs, as I said, if they fall into 

the wrong hands it’s dangerous. 

I want to thank pharmacists. I have to tell you, in my community in California and Silicon Valley it’s very difficult to find a 

small druggist anymore. They’re gone. They’re gone. They’re gone. 

It’s all the big guys now. 

And I am not saying that they may not be doing a good job for 

people to get their prescription drugs. But I can’t name one small 

druggist anymore, including a cousin of mine that was in the business his entire adult life. 

170 

So that says something about money because money is part of 

the business, and I think that that’s a real loss in my communities 

and I guess communities in different parts of the country. 

And to our friend at the end of the table, I think that you are 

a walking advertisement for the good things we did in the ACA because you would not be covered for anything in terms of what you 

are going through were it not for the reforms of the insurance industry that we took on in order for you to be covered and at least 

have peace of mind that you have coverage and that the lifetime 

limit caps were lifted as well because of the horrendous costs that 

pile up very quickly when you are dealing with what you are dealing with and I wish you well. 

I really wish you well, and thank you for bringing together people on a bipartisan basis. We need you to work with us and congratulations on not being dependent on the money of anyone that’s 

involved in the industry because it then actually, I think, diminishes or brings questions to the effort. 

So thank you to all of you and those are my observations. But 

I think that they more than hint at the work that we need to do 

because this is—if there were a chart that was brought into the 

hearing room today, starting with the top—research, development, 

and then where it goes and who’s involved at every level—it would 

outdo Johnny Carson’s roadmap that he used to point to. 

So thank you, Mr. Chairman, and I look forward to being a part 

of the solution at this committee relative to the cost of drugs in our 

country. 

Mr. BURGESS. Gentlelady yields back. Chair thanks the 

gentlelady. 

The chair recognizes the gentleman from New Jersey, Mr. Lance, 

5 minutes for your questions, please. 

Mr. LANCE. Thank you very much, Mr. Chairman, and my 

thanks to the panel. 

Ms. Reilly, CMS recently announced in a proposed Part D rule 

that it wants to require Part D sponsors to pass through a portion 

of manufacturer rebates and pharmacy price concessions at the 

point of sale. 

What is the ideal way in which you think this should function? 

Ms. REILLY. Well, thank you for the question and I think it is 

important and this is an important step I think that CMS is asking 

for information on this very issue. 

I think when Part D was originally designed the notion was just 

that, that the discounts and rebates that are negotiated—and they 

are significant in Part D—they’re larger than in the commercial 

marketplace—find their way back to patients at the point of sale. 

Today, those dollars are used by health plans and not disagreeing with keeping premiums low as an important goal. We believe, however, in work that we’ve done that not only could discounts and rebates get passed back to patients, that we could do 

it in a way that actually saves the government money—upwards of 

$20 billion over 10 years if we are able to pass those discounts back 

to patients because it will delay the time in which a patient enters 

the catastrophic phase of the benefit where the government picks 

up a large share of the cost and it will also lower the amount that 

the government is paying for low-income subsidies. 

171 

I think the proposal that was put forth in the CMS request needs 

some fine tuning. They talk about pass-through of discounts 

through a class of medicines. 

We think it actually would work better if it was done on an individual product basis because, quite honestly, companies are not all 

that interested in providing greater rebates if they’re going to be 

enhancing their competitors. 

Confidentiality is important, I think, to make this work. But I 

would argue this is a good step forward and could be transformational into changing some of the misaligned incentives that 

exist in the system today that, again, as CMS has previously noted, 

encourages insurers to pick drugs with high list prices and high rebates. 

We want them competing on delivering drugs that provide the 

best value at the lowest net price and this is a good step in that 

direction. 

Mr. LANCE. Would anyone else on the panel like to comment? 

Yes, sir. 

Mr. MERRITT. You do see some point of sale rebates happening 

in the commercial market where you have the whole health plan 

want to say, hey, look, we will raise premiums slightly in order to 

do that. 

We are seeing that happen there. In Medicare it’s difficult because CMS has noted this would raise cost to taxpayers by about 

$80 billion and would increase premiums for patients. And the reason that happens is because Part D reimburses plans based on the 

premiums, and if the premiums go up so does the cost to the government. 

And so I think when you think about point-of-sale costs you 

shouldn’t think about it in terms of reducing costs overall. It 

doesn’t reduce costs overall. 

It just shifts costs to taxpayers if it’s done wrong in Medicare 

and from healthy people to sicker people who need the medications 

and that’s a policy decision as to how CMS wants to approve it— 

look at it. 

One thing CMS said is if they do approach this, they want to do 

it in a cost-neutral way. I think that’s the thing that we are working on right now is trying to figure out how that would even happen. 

Mr. LANCE. Thank you. 

Yes, sir. 

Mr. HOEY. Congressman, we would say that the rebates allow for 

shell games to be played and because of the rebates those are often 

an unreliable—we do support pass through to the point of sale. 

However, we believe that it enables shell games if it’s not properly monitored and already we are starting to see rebates being relabeled. 

So what was a rebate yesterday is no longer a rebate. It’s an administrative fee. It’s some different category so it doesn’t fall into 

that rebate bucket. 

So there is a lot of shapeshifting going on that further complicates the pricing of the product. 

Mr. LANCE. And whose responsibility should it be to make sure 

that that does not continue to occur? Does that require a statutory 

172 

change or purely a change from the executive branch, in your judgment? 

Mr. HOEY. I think it would require a statutory change for that 

to happen. I do not think that the—that CMS—I can’t speak for 

them, of course, but I don’t know that they would say they have 

the regulatory authority to really police that. 

Mr. LANCE. Mr. Mitchell, you wanted to comment? 

Mr. MITCHELL. Yes, Congressman, if I may, please. 

I just want to bring it back to the patient impact of those outof-pockets paid on retail rather than rebate. The 12 highest out-ofpocket costs for drugs on Medicare Part D annually range from 

$4,400 a year to almost $12,000 a year. This really hurts people whose median income is around $26,000 

a year. We need to fix something in the system and the proposal 

from the Trump administration to allow the point-of-sale price paid 

by patients to be based on rebate if not retail is a good step in the 

right direction. 

It will move some money around unless you change benefit design. But we think the tradeoff is great to help people who are 

bearing the greatest burden and spread it a little more, even 

though it may have a slight premium impact. 

Mr. LANCE. Well, thank you. I got through one of five questions 

and I am already over time. 

I yield back. Thank you. 

Mr. BURGESS. Chair thanks the gentleman. 

The chair recognizes the gentlelady from Illinois, Ms. Schakowsky, for 5 minutes for questions, please. 

Ms. SCHAKOWSKY. Thank you for holding this hearing today, Mr. 

Chairman. 

I think it’s long overdue that this subcommittee and committee 

work on skyrocketing drug prices. AARP reported that in 2015 the average drug price was $13,000 

per drug for a year’s supply and that’s almost a quarter of the median U.S. household and four-fifths of the average Social Security 

benefit. 

Now, of course, not all of that money is out-of-pocket costs. But 

somebody ends up paying. 

Mr. Eyles, I want to ask you a question. Does the insurance industry have meaningful input into the list price? 

Mr. EYLES. No. We don’t have any input into the list price. 

Ms. SCHAKOWSKY. And does the insurance industry have any information about what the various factors that go into it including 

how much spending goes to research and development? 

Mr. EYLES. No, that’s not reported. 

Ms. SCHAKOWSKY. So let’s take Sovaldi for a minute. Gilead 

bought Sovaldi for about $11 billion, investing zero dollars in R&D, 

and made about $11 billion in year one by jacking up the list price 

to $84,000 per treatment—per cure, really. 

We learned this from Dr. Gerry Anderson, professor of public 

health at Johns Hopkins University. Dr. Burgess hosted him at a 

round table. And according to a Senate investigation, we found out 

that Sovaldi’s business model was to reach about 20 percent of the 

people with Hep C. There’s one out of five people who might be 

able to afford it, and that includes people on Medicare. If their coVerDate Nov 24 2008 10:02 May 30, 2018 Jkt 037690 PO 00000 Frm 00180 Fmt 6633 Sfmt 6633 I:\MY DOCS\HEARINGS 115\HEARINGS\115-88 CHRIS
173 

payment would be $5,000 they probably couldn’t afford it. And the 

rest of the people, well, too bad. 

We talked a bit about insulin. Mr. Eyles mentioned the decade 

increase. What I had was about 300 percent including the percent—including the period, by the way, that Alex Azar, who is now 

nominated to head HHS, was at Eli Lilly. And we know the names 

of people who died because they could not afford to get the insulin 

they needed. 

So this business model, this idea that we can just jack up prices 

past what people can afford, I wondered if our consumer could 

speak to that for just a minute. 

Mr. MITCHELL. Well, it’s not just insulin. Insulin prices have 

gone up 300 percent over the past 10 years and it’s because we 

have an oligopoly that controls the price of insulin. They move 

their prices in lockstep and they increase prices because they can. 

But you should also look at other drugs like multiple sclerosis 

drugs. 

They have increased 500 percent in price from 2004 to 2017, and 

when PhRMA says actually, our treatments are lowering cost of 

care, in 2004 the drugs accounted for 50 percent of treatment costs 

for multiple sclerosis but in 2017 they account for 75 percent of 

treatment costs. 

The drug I was on for 5 years called Revlimid, made by a company called Celgene, increased its price this year by 20 percent. 

This is a drug that was invented in the 1950s and which is being 

kept off of generic is preventing a generic. 

Ms. SCHAKOWSKY. Excuse me, so is your point that there was no 

additional research and development. The price just went up? 

Mr. MITCHELL. The price just went up. That’s all. 

Thank you, Congresswoman. 

Ms. SCHAKOWSKY. Thank you. I appreciate that. 

I want to get to the issue of rebates. Pharmaceutical companies 

talk on TV during these ads that are ubiquitous—if you can’t afford 

your drug come to us and maybe we can help you and my office, 

we take advantage of that. 

But I wanted to ask, really, yes or no, Ms. Reilly, do drug companies get a tax break for those rebates? 

Ms. REILLY. For the donations, yes. 

Ms. SCHAKOWSKY. For the donations. So if you set a list price 

that is up here and then you have a rebate to make it cheaper for 

some, is it the difference between the list price and the rebate that 

is considered a donation? 

Ms. REILLY. I would have to get back to you on that. I am not 

sure how that—— 

Ms. SCHAKOWSKY. But it could be as much as $100 billion because that’s what you were saying was about the donation. You 

said $100 billion. 

Ms. REILLY. No, no, no. 

Those aren’t donations. A hundred billion dollars are the rebates 

that our companies provide in terms of discounts for insured patients, right. That’s totally separate from patient assistance programs that help patients that lack insurance. That’s a totally different issue. 

174 

Ms. SCHAKOWSKY. How much is that money and—well, I am over 

time. I would like to know how much goes into those programs 

and—— 

Ms. REILLY. I would be happy to—— 

Ms. SCHAKOWSKY [continuing]. How much of a tax break companies get for lowering the price. 

I yield back. 

Mr. BURGESS. Gentlelady yields back. Chair thanks the 

gentlelady. 

Chair recognizes the gentleman from Virginia, Mr. Griffith, 5 

minutes for your questions, please. 

Mr. GRIFFITH. Thank you all for being here. I have to tell you, 

though, you all have raised my blood pressure today. Everybody is 

saying that this is the problem and that’s the problem and the bottom line is we have our working group, as the chairman said, 

which is going to be this subcommittee. 

I believe you all need a working group. Because if you all don’t 

solve this we are going to come in and come up with an answer 

and it may not be an answer that you end up liking. 

Now, one of the things I’ve heard today that I do like is transparency, and I understand Mr. Mitchell needs the manufacturers 

of the drugs, biologicals, whatever—needs a consumer patient advocate, needs the insurance companies out there—we all need that. 

We need our doctors. We appreciate that. Love my pharmacists. 

As you all know, I really think they’re front line folks for health 

care and most people, at least in districts like mine that are mostly 

rural, they’ve known their pharmacist for years. They trust their 

pharmacist. They want their pharmacist’s input, and we appreciate 

that. 

But here’s the question. Without transparency, Mr. Merritt, I 

can’t figure out for the life of me why the insurance companies 

can’t deal directly with the manufacturers and the pharmacists and 

what value is it that you are adding? 

Because what we’ve got is a big black box, and we dump the 

drugs in and we got people pointing fingers. And I am not going 

to ask you because that’s a question we are going to have to answer 

another day. I only have 3 and a half minutes left. That’ll take 

hours. 

But what I am seeing and what the public sees is we’ve got this 

big black box called a PBM. They’re saying they have to raise their 

prices so they can then give you a bigger discount and sometimes 

Mr. Eyles and the insurance companies like that and sometimes 

you like it and sometimes you get rebates back and sometimes you 

take money from the pharmacists back after they’ve already filled 

the prescription, or the insurance company does. 

But it all comes back. For the life of me, if we don’t get some 

transparency in there—and there must be something you are adding to the system and I look forward to you telling me after the 

meeting in a written form what that is. 

But I think we have to have some transparency so the average 

citizen in the United States understands why it is that you all are 

up here pointing fingers at one another and it comes back in big 

part to what’s going on inside that big black box called the PBMs. 

175 

Now, that being said, on the clawback, as I call it, or DIR fees, 

as you know, Mr. Hoey, I have a bill in along with my friend, Mr. 

Congressman Welch, and we’ve introduced a bipartisan bill that 

would put an end to this retroactive collection fees from pharmacies. 

And it’s interesting because we heard Mr. Merritt earlier say 

that’s an outlier. But when I hear from pharmacists in Pennington 

Gap and in Pulaski and in Salem and in all the small towns in my 

rural district with 29 jurisdictions that they’re having a problem 

with this, I think it must be the big boys and all of my small pharmacies are the outliers who are getting hit by this. Has that been 

your experience? 

Mr. HOEY. DIR fees are prevalent across every pharmacy that we 

know of that does business with Medicare Part D, which is every 

pharmacy. So DIR—— 

Mr. GRIFFITH. So it’s not an outlier, from your perspective? 

Mr. HOEY. No. The consumer co-pay clawbacks, I would not call 

them an outlier. Those are really one PBM that’s doing the most 

damage there. 

But DIRs is across the board. It’s suffocating independent pharmacies and it leads to some of the consequences that the congresswoman from California alluded to. 

Mr. GRIFFITH. And it’s interesting because they apparently do 

this analysis on Part D. I’ve been reading through the CMS rule 

analysis and at one point they say, our analysis of Part D plan payment and cost data indicates that in recent years,, DIR amounts 

Part D sponsors—that would be the insurance companies—and 

their PBMs actually received have consistently exceeded bid projected amounts and in another part of that analysis it says that 

that means it goes to their profit line. 

Mr. Mitchell and the consumers out there aren’t seeing all that 

in those savings. That’s going to profit. Does that happen a lot, Mr. 

Hoey? 

Mr. HOEY. Oh, absolutely. So the DIR fees—I think the CMS 

analysis from January show that DIR—over $80 billion have been 

paid in DIR fees over the last 6 years. And so where those DIR fees 

are going, some of them may be going to lower premiums. 

Maybe—— 

Mr. GRIFFITH. And I suspect some of them are going to lower premiums. 

Mr. HOEY. But some of it may not be going to that. 

Mr. GRIFFITH. But here’s the problem that the American public 

sees and if I’ve heard about it I know others have and those may 

ask questions about it as well and that is I’ve heard stories—and 

they’re anecdotal and people don’t want me to use their names and 

so forth—where they’ve gone to their pharmacist. 

The pharmacist has told them this is how much it’s going to cost 

and as I think it was Mr. Mitchell testified people are cutting their 

drugs in half or not taking all their doses they’re supposed to, and 

the pharmacist will say, well, if you pay cash and don’t use your 

insurance you can actually get it cheaper. 

Because of all the finger-pointing going on down on this end of 

the table as to who’s made the prices go up, you are actually better 

176 

off to deal outside the system and just buy it for cash. Have you 

found that to be true? 

Mr. HOEY. That is correct in some cases, and the pharmacies 

that do that are taking their business life in their own hands. 

Mr. GRIFFITH. I understand that. That’s why I can’t talk about 

it. 

Mr. HOEY. Yes, sir. 

Mr. GRIFFITH. Can’t talk about it much. So here’s the bottom 

line, folks. If that doesn’t say that there is something stinking in 

Denmark, nothing else does. 

We are going to have to work on it and that’s why you see Democrats and Republicans upset today. 

I yield back. 

Mr. GUTHRIE [presiding]. Gentleman yields back. 

The chair recognizes Mr. Sarbanes from Maryland for 5 minutes 

for questions. 

Mr. SARBANES. Thank you, Mr. Chairman. Thank the panel. 

I want to thank in particular Mr. Hoey for your testimony and 

for the work of the association. I agree with just about everything 

that my colleague just finished saying and I hope, as many members have emphasized today, that the message is getting through 

that on a bipartisan basis we are kind of reaching the end of our 

tether. 

And a lot of it just has to do with trying to catch smoke when 

it comes to how this pricing works. We have the whole chain represented here, I gather, and I listened to all your testimony as I 

was navigating the traffic coming in from Baltimore this morning. 

So I did listen carefully, and I guess, Mr. Hoey, I would be interested—anybody else who wants to volunteer—but transparency is 

a word we hear over and over and over again. 

What are the two or three things—not to set you up in direct opposition with Mr. Merritt but what are the two or three things in 

terms of more transparency on the part of the PBMs that you 

would predict the PBMs would scream the most about if those provisions were put in place? 

Mr. HOEY. We’ve talked about some of them as far as the rebates. That would certainly—— 

Mr. SARBANES. Yes. 

Mr. HOEY [continuing]. Cause, I think, a great deal of consternation. I think also there—on the generic side—and Chip mentioned 

earlier that 90 percent of the prescriptions are generic and there 

are very few rebates for those 90 percent. However, they’re sort of 

a de facto rebate that the PBM industry has created. 

One of those is through the consumer co-pay clawbacks that we 

talked about. As we indicated, it’s not every PBM that does that 

but it’s about a third of the market. The second is on the MAC 

prices. So a MAC price is on the generic side and what the PBM 

does is they set a ceiling for that generic price. That ceiling can 

vary from pharmacy to pharmacy, from day to day, from hour to 

hour. So the pharmacy actually has no idea what it’s going to be 

paid for a generic product at any time. 

In fact, when the consumer walks in for a prescription, the consumer often doesn’t know what they’re going to pay for that generic 

price, for that generic prescription, the pharmacist has no idea, and 

177 

really, the only entity with the perfect information is in the middle 

and that’s the PBM. 

And until the PBM tells the pharmacy what to charge the consumer, the pharmacy has no idea what they’re going to be paid and 

then what to charge the consumer. And furthermore, with DIR 

prices now, not only does the pharmacy not know until it processes 

that prescription, but it still doesn’t know until months later when 

more money is clawed back from it. 

So those practices make it almost impossible to run a small business and to predict cash flow, to invest in capital, and to hire employees. 

Mr. SARBANES. I appreciate it. I can’t help but see an analogy 

when we talk about how the prices can change from hour to hour 

and, frankly, as the PBMs would say that their role is critical and 

satisfying on demand need for drugs and the more I listen to it the 

more it sounds much like the discussion we have of the purchase 

and pricing of electricity. 

We’ve been doing a lot of hearings in this committee on electricity—modernizing the grid, how purchasing of electricity has 

these middle operators that have to assemble the resource and 

then sell it up the line and so forth. 

So that, to me, is a powerful analogy and, frankly, where it gets 

my head, just to send a shudder through the panel here today, is 

to the idea of regulation approaching a kind of utility regulation 

when you come—when it comes to drugs, which are needed by just 

about every American at some point in their life. This is something 

that traffics in the public space when you look at it that way. 

So this is where I come from, and somebody on the Republican 

side said that if the drug supply chain can’t be improved then we 

may start out in a place that you don’t like. 

But that’s where my head is, and with that I yield back. 

Mr. BURGESS [presiding]. Gentleman yields back. The chair 

thanks the gentleman. 

Chair recognizes the gentleman from Florida, Mr. Bilirakis, 5 

minutes for questions. 

Mr. BILIRAKIS. Thank you, Mr. Chairman. I appreciate it. Thanks 

for holding this hearing and I thank the panel as well. 

Quite a few of my constituents bring this up to me when I am 

home on the weekends—what about the importation of drugs from 

Canada? Are they safe? Is it an idea that has merit? 

Why don’t we start with Ms. Reilly, please. 

Ms. REILLY. I think there is, unfortunately, a misnomer that importing drugs from places like Canada—our belief is that oftentimes, particularly when people go on the internet and they think 

they’re buying a drug from Canada it often is not coming from Canada. 

In fact, in the past when the FDA did its investigation and ordered drugs from so-called Canadian internet pharmacies found 

that over 80 percent of them were coming from countries all over 

the world and many of those were not the medicines that they purported to be. 

Is it fair to say that if I walked into a Canadian drug store today 

to purchase a medicine would it be safe? Yes, it would. 

178 

But the Canadian market is 10 percent of the U.S. market and 

has repeatedly said that they don’t intend nor will be responsible 

for supplying the U.S. drug market. 

The idea of importation raises significant concerns from a safety 

perspective. We’ve heard from every FDA commissioner, both administrations going back for over 20 years. 

Trying to guarantee the safety of medicines that are coming in 

from all over the world is near impossible and would jeopardize a 

supply system today that has been remarkably safe for Americans. 

Mr. BILIRAKIS. How about Mr. DiLenge? Do you want to comment on that? 

Mr. DILENGE. Yes. First of all, I agree, obviously, with everything that Lori said but let me add another dimension to this, 

which is by importing what are you importing? You’re importing 

basically price controls on American intellectual property that 

other governments have imposed through their negotiations of drug 

prices. 

They don’t negotiate the foreign governments. They impose 

prices because they’re single purchasers, and what they are doing 

is, because I talked about it earlier, that vast majority of innovation is occurring in the United States. 

They are basically imposing price controls on American intellectual property. It should be investigated as an unfair trading practice—and we encourage that the Trump administration is trying to 

look at this, finally, as a trading practice problem. 

Mr. BILIRAKIS. Anyone want to weigh in? Maybe there is an opposing view. 

Mr. DAVIS. Congressman, I would just add from the generic perspective, and I respect and agree with the safety concerns that both 

Republican and Democratic administrations have found through 

the FDA commissioners, there is a practical effect with respect to 

generics. 

Because we have a more robust market-based competitive environment for generics here in the U.S., generics cost less in the U.S. 

than they do in Canada as a market basket. So it begs the question 

why would you be importing something that’s more expensive 

there? 

Mr. BILIRAKIS. OK. Thank you. I will move on to the next question. 

Mr. Merritt and Mr. Hoey, CMS recently published their 700- 

page proposed rule for Medicare Part D for calendar year 2019. 

One component was their proposed implementation of the drug 

management program for at-risk beneficiaries from the Comprehensive Addiction Recovery Act of 2016—and that was my provision. 

This drug management program, or lock-in, as we call it, is used 

in Medicare—of course, Medicaid programs and private insurance 

currently. 

Have you had a chance to review the regulations and what are 

your thoughts on CMS’s proposed implementation? We’ll start off 

with Mr. Hoey. 

Mr. HOEY. Yes, Congressman, we have had a chance to take a 

look at that and overall we support the way the Part D lock-in program is structured. 

179 

We would contrast that on the Medicaid program the prescriber 

and the pharmacy that the patient is locked into is chosen by the 

beneficiary and that’s not the situation with Medicare. In the Medicare plan it would be assigned by the plan. So we are concerned 

about that freedom of choice from the consumer. 

Also, with the Medicaid plan it’s administered by the state, and 

the Medicare program it would be administered, again, by the plan. 

So we are concerned about that. 

And lastly, we would be concerned by—since the Medicare plan 

is administering it, any situation where the patient would be 

locked into a plan that also owns pharmacies or they’re locked into 

their own mail order pharmacies. 

Mr. BILIRAKIS. OK. Fair enough. 

Mr. Merritt. 

Mr. MERRITT. Sure. The key with protecting at-risk patients is to 

make sure that they’re going to one doctor and one pharmacy and 

those two medical professionals are communicating. 

The challenge in the past has been doctor shopping and other addiction-related behaviors in which people are dying. It’s a real epidemic. 

The challenge we see at our first look at this is there are too 

many processes where you can’t simply work with a particular 

pharmacy in a local area to a beneficiary and that they have 6 

months essentially to work the system and not be at any particular 

pharmacy and we think for the at-risk patients—not for all patients, not for all drugs—but for at-risk patients on things like 

opioids, that’s a recipe for disaster. 

In 6 months people can literally lose their lives, and the whole 

goal of this program, I think, is patient safety and I think that’s 

what the president has been talking about, too. We do appreciate 

your leadership on this, though. 

Mr. BILIRAKIS. Sure. Absolutely. Thank you. I look forward to 

working with you in the future and get it right because if we are 

not safe nothing else matters as far as that is concerned. 

Well, I don’t have any more time, unfortunately. 

Mr. BURGESS. Gentleman’s time has expired. 

Mr. BILIRAKIS. Does anyone want to add something—— 

Mr. BURGESS. No. The gentleman’s time has expired. 

Mr. BILIRAKIS. All right. All right. All right. 

[Laughter.] 

Mr. BURGESS. The chair recognizes the gentleman from Missouri, 

Mr. Long, 5 minutes for questions, please. 

Mr. LONG. Ahead of Peter? OK. I didn’t realize that. 

Thank you all for being—— 

Mr. BURGESS. I thank the gentleman for pointing that out. But 

Mr. Welch is not on the subcommittee. Do I have that correct? And 

as a consequence, we will hear from subcommittee members first. 

So you are recognized for 5 minutes. 

Mr. LONG. I appreciate it. Thank you. Now that I have one 

minute left—— 

[Laughter.] 

In 1966 there was a movie, ‘‘Ten Little Indians’’ and when I look 

at our ten witnesses here today, all these folks were invited to a 

luxury mountaintop resort where they started getting knocked off 

180 

one by one from an unseen source. Nobody knew if it was one of 

them or who did it. 

So I am thinking that if we had you all go off for the weekend 

and come back, whichever one of you comes back next week you’d 

have the perfect response to all of this and we could get this deal 

settled. 

But it’s like Morgan said, everybody’s blood pressure gets raised 

on this. But if you think that we are the ones to come up with a 

solution, I hope that we can figure out something between then and 

now. 

Let’s see. Mr. Merritt, I am given to understand that Express 

Scripts—one of your members or your members is the only or one 

of the only PBMs that have implemented a comprehensive opioid 

solution. 

I myself have three friends that I grew up with that have all lost 

children within the last few years to this opioid crisis and to combat the devastating impact of opioid abuse, which includes, according to this, a 7-day fill, enhanced fraud, waste, and abuse prevention with providers and pharmacies as well as disposal bags for 

medication waste. 

Can you tell us a little bit more about this program and when 

your other member companies will be initiating similar programs? 

Mr. MERRITT. Well, let me talk about it as an industry as a 

whole, and I do really appreciate those moves by Express Scripts. 

I think what we see is that we are able to identify or the PBMs 

are able to identify people who are at risk. You can look at people 

who try to get the same scripts filled at multiple pharmacies, have 

gone to the same doctor to try to get multiple prescriptions. 

You can track drug stores that have unusual dispensing patterns 

or—which aren’t many but they do exist—and then providers or 

physicians who have unusual practices of prescribing and with that 

information you can identify at-risk people. 

It really is important to do the most important thing with any 

addiction is to limit the supply and have monitoring, as we were 

just talking about with Congressman Bilirakis, of medical professionals. 

And, again, this is not for regular people who don’t have a problem. This is for at-risk people on particular drugs. Express Scripts 

has done a lot on that regard. We do see that happening in the industry more. 

We are supporting electronic prescribing legislation right now, 

which would require these drugs to be electronically prescribed by 

physicians to a certain pharmacy so that safety could be improved. 

But, you know, we do see our industry taking a lot of good strides 

in this. 

Mr. LONG. In my state of Missouri we don’t have a drug registry. 

We are, I think, the only state that doesn’t have it. Our governor 

has tried to implement that but it hasn’t really gotten off the 

ground. 

We are down in the southwest—at least my district, southwest 

corner of the state joining Arkansas, Oklahoma, and Kansas, and 

the doctors that work the late shift on Friday night and Saturday 

night in these ERs, folks will come up from Arkansas, Kansas, over 

from Oklahoma—we are very close to all those states—and their 

181 

Dr. White is always retired. Dr. White retired in Arkansas and I 

really need my opioids. 

So they’ll come in and they’ll want to get their prescription filled. 

Well, guess what? That doctor has got two choices. He can fill that 

prescription or, according to Obamacare where you have to rate 

your physicians, the doctor can say, I am not going to fill this prescription for this guy. 

I know that he’s addicted to it and he needs help but he doesn’t 

need me to prescribe this. So he doesn’t fill it then the guy rates 

him down on his rating and then he’s no longer able to—so it’s a 

huge problem. 

So anything that you can share that you can help us with in that 

regard. Like I said, being the only state that doesn’t have the registry it’s—and being right down in the corner where you get three 

other states that all do and all the folks come in on the weekends, 

Friday, Saturday night, fill up the ER begging these doctors for 

their opioids. 

Ms. Reilly, real quickly, some call for government negotiation in 

Part D, framing the issue as if there is no competition in the marketplace or negotiation happening now when nothing could be further from the truth. 

Can you tell us about the current role in negotiating the Part D 

program and how that’s been responsible for bringing down prescription drug costs? 

Ms. REILLY. Absolutely. I think Part D has been the model of 

success with regards to competition. Today, as I mentioned before, 

those three large pharmacy benefit managers, they buy on behalf 

of 70 percent of all prescriptions in this country and they move 

their market leverage whether they’re buying on behalf of Medicare 

beneficiaries are those in the commercial market to put additional 

cost pressure. They’ve done it in such a way where we’ve had high 

beneficiary satisfaction. Costs of the program are half of what they 

were expected to be when Medicare Part D passed and premiums 

have been low. In fact, there was an amendment offered in this 

very committee to try and set premiums at a price of around $50. 

That’s never even gone into effect. We’ve never had an average premium that high. I think that speaks to the testament of the private 

market where there is a significant amount of competition. 

We talked earlier today—I think the evolution of the Part D program is to ensure that that robust competition and those rebates 

that are collected get passed back to the beneficiary to lower patient out-of-pocket costs. 

Mr. LONG. OK. Thank you. 

And Mr. Chairman, I don’t have any time but if I did I would 

yield it back. 

Mr. BURGESS. Chair thanks the gentleman. Gentleman yields 

back. 

We have been in this hearing a long time and my goal is to proceed without taking a break because then we will have votes on the 

floor in a little while and they’ll want to have to then delay things. 

But if anyone does need to take a quick break if you will just do 

so quietly and then join us back and I think the committee would 

understand. 

182 

So with that, I will recognize Mr. Bucshon of Indiana 5 minutes 

for questions, please. 

Mr. BUCSHON. Thank you, Mr. Chairman. 

Mr. Nickels, you seem kind of lonely there. No one has asked you 

any questions so I figure I might as well do that. 

[Laughter.] 

Mr. NICKELS. Thank you. 

Mr. BUCSHON. Yes. You mentioned 340B. It’s a program that I 

support. I have a lot of rural hospitals that really depend on it. 

But I am concerned about the dramatic expansion of the program 

since the Affordable Care Act, and I want to make sure that the 

program is being used for its original intent. 

And in that vein, I want to first remind everyone what the definition of a grantee is so that we know what the question is. Grantee eligible for 340B include black lung clinics, comprehensive hemophilia diagnostic treatment centers, federally qualified health centers, Native Hawaiian health centers, Ryan White HIV/AIDS program grantees, et cetera. You understand what grantees means. 

So what I would say is in the interest of making sure that the 

program is being used for its original intent, would you be supportive of reporting requirements for hospitals similar to what 

340B grantees are required to support, such as providing the number and percentage of individuals who are dispensed or administered 340B drugs disaggregated by insurance status, and the aggregate amount of reimbursement received for drugs purchased 

under 340B and/or provide contracts that would verify that a hospital meets the legal criteria for 340B eligibility? 

Mr. NICKELS. Thank you very much for the question, and to your 

point, 340B is a very important program to your hospitals, to rural 

hospitals throughout the country. 

It’s worth noting that the expansion of the 340B program, which 

occurred in 2010, did expand largely to rural hospitals, to children’s 

hospitals, and to cancer hospitals. So the dramatic increase has 

been because of the additional—— 

Mr. BUCSHON. Fair enough. Approximately half the hospitals in 

America are participating at this point, right? 

Mr. NICKELS. Right. Right. Right. Many of which—— 

Mr. BUCSHON. Which means half the hospitals in America must 

be in rural areas. 

Mr. NICKELS. Well, actually almost half are in rural areas. That’s 

correct. 

Mr. BUCSHON. Yes. OK. 

Mr. NICKELS. But also remember that cancer hospitals, children’s 

hospitals, and then DSH hospitals also qualify for the program. So 

it’s more than just rural. 

Mr. BUCSHON. So the question is, it seems to me if grantees, the 

ones I described, have—and it’s complicated, I understand that— 

have requirements to justify their participation in 340B that it 

would only seem fair that pretty much every participant in the program should be able to show that they’re benefiting low-income citizens, hospitals that can’t buy expensive cancer medicine. 

And so the question stands. Do you all support that type of a 

change? Because right now, as you probably know, in the law it 

doesn’t really prescribe that you have to justify where the money 

183 

that you save is going and the reality is, in order to make sure, 

from our standpoint, that the program is being utilized properly we 

need that information. 

Mr. NICKELS. Right. So you are correct. The eligibility for the 

program is in statute and not based on anything else. So there is 

subsets of my membership those are the ones who qualify. 

Having said that, we think they should all continue to qualify, 

but I do agree that further transparency in terms of where the dollars go is something we are certainly willing to discuss with the 

committee. We’ve been discussing it with HRSA for many years. 

Mr. BUCSHON. Right. That’s the point—you are discussing it for 

many years but we are not getting to an end point. So the question 

is it’s yes or no. You support transparency and this type of thing 

or you don’t. 

I understand the strategy if you don’t support it is to draw this 

out for—until we give up and decide not to try to change the law. 

It’s an up or down question to me. 

I am all about transparency. I was a heart surgeon before. I 

asked my hospital that I worked at once, hey, what’s the actual 

cost to do—a patient comes in, goes to the cath lab, gets a cath, 

goes to the OR, I do a three-vessel bypass surgery, what’s the cost, 

and they said, well, we can’t tell you that. And, honestly, they 

probably couldn’t, necessarily. 

So I am all about transparency. If the consumer knows, if the 

public knows, what’s wrong with that? 

Mr. NICKELS. Right. No, I would say we are certainly in favor of 

increased transparency, but not in favor of changing the statutory 

qualifications for the program that would result in rural hospitals 

being thrown off the program. 

Mr. BUCSHON. Well, that’s not what we are trying to accomplish. 

Mr. NICKELS. But if you want to talk about transparency—— 

Mr. BUCSHON. It’s the hospitals in rich suburban areas that are 

participating, that are buying up medical practices outside of their 

urban area and then adding all of those practices of the 340B program that I am concerned about. 

Mr. NICKELS. Right. And, again, those hospitals though still do 

have to qualify for the program based on the definition. 

Mr. BUCSHON. OK. Fair enough. 

Mr. NICKELS. But I do want to answer your question, which is 

yes, we are willing to discuss transparency and try to work on that 

with you. 

Mr. BUCSHON. All right. Fair enough. 

I yield back. 

Mr. NICKELS. Thank you. 

Mr. BURGESS. Chair thanks the gentleman. Gentleman yields 

back. 

Chair recognizes the gentleman from North Carolina, Mr. Hudson, 5 minutes for questions, please. 

Mr. HUDSON. Thank you, Chairman Burgess and Ranking Member Green, for holding this important hearing today. Thank you for 

all the witnesses. I know we’ve been here a long time. I’ve gone to 

the bathroom four times. I haven’t seen you all get up. So congratulations on your fortitude. 

[Laughter.] 

184 

But I do really appreciate this discussion. I had hoped that today 

we could start peeling back the onion a little bit on this complex 

issue of the drug supply chain and really start the process of finding solutions and I think we’ve really taken a really good step in 

the right direction. I think there has been some great discussion 

back and forth. I know it is a challenge to have ten folks at one 

table. 

But I think the ability to have this exchange has been really 

helpful, certainly for me, and I am excited to continue to work on 

this, Mr. Chairman. 

I would pose this first question maybe to the whole panel and 

whoever is interested in jumping in. But as more and more patients gravitate toward this issue that’s been discussed several 

times today about people moving toward low-premium high-deductible plans, due to the high cost of insurance plans available today. 

Patients need to be educated on how to best utilize these plans. 

Numerous studies have come out recently that show patients are 

not engaged in normal shopping behaviors such as discussing cost 

of service, comparing cost and quality services, or negotiating the 

price of services. Because patients are responsible for the full cost 

of their health care before they meet their deductible, expensive 

treatments during the deductible period can result in patients not 

adhering to their treatments, resulting in worse outcomes. 

My question to whoever would like to answer this is what are 

you doing to educate patients on the tools available to them to 

lower their out-of-pocket costs specifically as it relates to drug 

treatments before they meet their deductible. 

So, I don’t know—Mr. Eyles, I am sure you want to—— 

Mr. EYLES. Sure, Congressman. Thanks for the question because 

it’s a really important one, particularly how we engage patients 

and then consumers so that they have the information that they 

need. 

And our members are committed to developing the tools. Most of 

them have very robust web-based tools so that people can go on, 

understand whether their physician is in network or not, what the 

differences are between formularies, co-payments, what qualifies 

for being covered before the deductible. 

So at least for most individuals preventive services are covered 

before the deductible with no cost sharing so that people can go 

and get their annual physicals and understand what’s available to 

them. 

One of the challenges that we have, for example, with high deductible plans that are paired with a health savings account—and, 

again, our members are very supportive of that—are some limitations on the ability to cover services that would be defined as preventive ahead of time. So we think there are some important modifications that we could make to HSAs to improve them, make them 

better. 

But our members are committed to having very robust tools so 

that people understand cost, quality, and the status of their providers. 

Ms. REILLY. I would just also add, and I would agree with Matt’s 

comment about the need for a clarification in the IRS guidance to 

ensure that to the extent employers and others what to be able to 

185 

offer a high-deductible plan with a health savings account that 

they can offer preventative services, things like diabetes medicines 

before the deductible. 

I think the other important piece is we know from all of the literature that patients pick a plan based on premium price, and the 

lower the premium the higher the likelihood they gravitate towards 

those plans. 

What they don’t often realize is by signing up for a low-premium 

plan they’re signing up for a plan with a deductible that may be 

as high as $5,000 and that they will be responsible for all of the 

costs until they hit that point. 

One of the things that we pushed the previous administration on 

is to develop an out-of-pocket calculator similar to what exists in 

Medicare Part D where an individual can enter the information 

what drugs am I on, what physician do I use, so that they can get 

a real-life calculation in terms of what their costs are going to be 

depending on the plan that they pick. 

We don’t really have that yet today for the exchange plans and 

I do fear that oftentimes people end up buying plans which are not 

in their best interest, that aren’t going to cover the medicines they 

need, where their doctor is not in-network, and that’s a problem 

and needs to be improved, and transparency that allows patients 

to make better choices should absolutely be paramount. 

Mr. HUDSON. Mr. Hoey, did you want to jump in or anybody else? 

Mr. MITCHELL. I would just add those are both good ideas. I had 

a patient contact me over the weekend who’s taking an expensive 

subcutaneous drug for her cancer. The price went up $1,400. 

She said, I can’t get anyone to explain to me why. I don’t know 

who raised my price—my doctor, my insurer, the drug company. All 

of what Ms. Reilly just said needs to be done but there needs to 

be a way for patients to get their questions answered. 

It could be online. It could be on the phone. But the system is 

impenetrable for us and somehow something that approximates 

what happens in other industries where customer service is important needs to manifest itself on drug pricing. 

Mr. HUDSON. Anybody else want to jump in? 

Mr. HOEY. As far as at the counter that’s one area where pharmacists—we are sort of a rare breed in that we know the cost of 

the drug in some cases. We don’t know when we are going to get 

paid but we know the cost of the drug and we know the therapeutic 

effectiveness of it. 

So we can often help the patient, kind of guide them through, especially when they’re hitting prior authorizations that Dr. Harmon 

mentioned or some of the other hurdles that they hit at the 

counter. We can sometimes help them with that, especially in those 

high-deductible plans. 

Mr. BURGESS. The gentleman’s time has expired. 

Mr. HUDSON. Guess I should have paid better attention, Mr. 

Chairman. I apologize. 

Thank you for the answers. 

Mr. BURGESS. Well, the only reason I interrupt is the gentleman 

from Georgia, who has been very, very patient, and the gentleman 

from Georgia is recognized for 5 minutes for questions. 

186 

Mr. CARTER. Thank you, Mr. Chairman, and thank all of you for 

being here today. 

Mr. Merritt, I will start with you. Quite often, pharmacists are 

complaining about the fact that they’re being threatened for mailing or delivering drugs by the PBMs because the PBMs own their 

own mail order pharmacies. 

As you well know, pharmacies get contracts from PBMs unless 

it’s a closed network and they can either accept that contract and 

the terms of that contract or they can’t. 

If they accept it, then they can service the patient. If they don’t, 

then they can’t service the patient and that’s what they’re left with. 

Just a yes a no answer, if you will, Mr. Merritt—do you agree 

that pharmacists should be able to tell patients that if they pay 

cash for a medication they can get it cheaper? Yes or no. 

Mr. MERRITT. Yes. 

Mr. CARTER. You do agree with that? Then why is it that these 

contracts that I referred to earlier have gag clauses in it where it 

says that if the pharmacist indeed lets the patient know that if 

they pay cash it’ll be cheaper, that they could be kicked out of this 

contract and that contract can be terminated? 

Why is that? Can you explain that to me? If indeed, as you have 

said earlier, you are in favor of transparency, why are the gag 

clauses in there? Can you explain that to me? 

Mr. MERRITT. I don’t know, and we as an industry don’t defend 

that practice at all. So, we want people to pay the lesser of and in 

fact almost all the plans work together. The PBMs work together 

with what’s called lesser of logic so that automatically the person 

will pay the less. 

Mr. CARTER. Then why are the gag clauses in there? Why are 

they in there if you truly want to take care of the patient, if you 

truly want them to get their medication why is the pharmacist running the risk of being kicked out of the plan if they offer this information to the patient? 

Mr. Hoey, do you ever get any of your members complaining of 

this? 

Mr. HOEY. All the time. Our members are intimidated and most 

of the time will refuse to go on the record because of basically a 

business death penalty if they’re caught talking to media, talking 

too much. 

Mr. CARTER. Mr. Merritt, during the years 2010 through 2015 

CMS has said that DIR growth and rebate growth has grown 22 

percent per year whereas the Part D gross drug costs have only increased 12 percent. 

Can you explain why that difference is there? Why the DIR has 

grown 22 percent but the Part D drug costs have only grown 12 

percent? Is there a reason for that? 

Mr. MERRITT. Well, DIR—direct and indirect remuneration—is 

an important discounting tool in Medicare Part D. The federal—— 

Mr. CARTER. Can you explain why that difference exists? If the 

Part D costs have only increased 12 percent, why have the DIR 

fees increased 22 percent? 

Mr. MERRITT. Remember that—sure, and I understand. The 

PBMs—we get the discounts where we can. We pass them back to 

the plans and the plans use them as they see fit. 

187 

Sometimes usually they want to reduce premiums. They want to 

reduce overall cost sharing. It depends on their individual strategy. 

Mr. CARTER. And how far do these clawbacks of these DIR fees 

go? Are you aware? How far back do they go? Because I can tell 

you that my wife’s pharmacy in March got a bill for $10,337 that 

went back not 5 months but 5 years. 

Now, let me ask you about that. Those DIR fees, did you credit 

the government or the consumer with that? Did you go back those 

5 years and credit the government? Because what happens is this. 

We got a Part D program that has, as you well know and everyone on this panel well knows, has a doughnut hole in it. Mr. Mitchell, I am sure you are in this. I am sure you have Medicare. You 

pay so much until you get in that doughnut hole, then you have 

to start paying for it. That means that everyone out here who buys 

drugs has to start paying for it if you are on Medicare. And when 

you charge those higher prices—the list prices we’ve been referring 

to it as—that pushes people into the doughnut hole even more. 

Now, listen. It gets even better, folks. What happens next is that 

when you get pushed out of the doughnut hole, guess who starts 

paying for it then? The taxpayer. All of us. We get to share in it. 

My question to you, Mr. Merritt, are you sharing that? Are you 

sharing that with CMS to let them know, hey, you need to credit 

them back with this? Are you? 

Mr. MERRITT. Yes. CMS is aware of the DIR. They see all this 

information and they’ve been very clear—— 

Mr. CARTER. So when my wife’s pharmacy got hit for the $10,337, this PBM went back and credited CMS with that and 

went back to the patient and said, oh, you shouldn’t have been in 

the doughnut hole that quickly—we are going to go back and reimburse you that? So I just want to know because she’s going to ask 

me tonight about that $10,337. I mentioned it was $10,337 because that’s how much it was, and 

Mr. Hoey, have you had any other of your members who have experienced these type of things? 

Mr. HOEY. Both on the retroactive. We had a call this week from 

a member in the Midwest who went back 5 years, six figures on 

DIRs. Had another one just this year, also in the Midwest, one 

pharmacy taken back over $100,000 in DIRs from, really, three different plans. 

Mr. CARTER. OK. The last thing I will say is this. All of you said 

we need more transparency and I will tell you, Mr. Merritt, I 

pulled out your mission statement earlier today and it says pharmacy benefit managers reduce prescription drug costs and improve 

convenience and safety for consumers. Reduce prescription drug 

costs. 

Mr. MERRITT. Right. 

Mr. CARTER. How is that working out for everybody? If it were 

working out we wouldn’t be here now. If it were working out then 

we wouldn’t have had a 1,553 percent increase in prescription drug 

costs since PBMs started—1,553 percent increase. 

Mr. MERRITT. CMS said the growth was 1 percent last year. 

Mr. CARTER. Mr. Merritt, transparency is the key. The most immediate, the most significant impact that we can have on drug 

prices is to have transparency. 

188 

Thank you, Mr. Chairman, and I yield back. 

Mr. BURGESS. Chair thanks the gentleman. 

Chair recognizes the gentleman from Vermont. Not on this subcommittee but we welcome you today and you are recognized for 5 

minutes for questions. 

Mr. WELCH. Thank you very much and thank you for having this 

hearing. I thank the panel. It’s very helpful. 

First of all, this hearing is not about the value of the pharmaceutical industry. They create life-saving and pain-relieving drugs. 

It is not about trying to stifle innovation. Everyone on this panel 

wants to support that. 

It is about the lack of restraint and the pricing power that the 

pharma industry has that is resulting in immense heartache for 

families, and you can create a life-extending pain-relieving drug. 

But if you kill taxpayers with the price then it’s not accessible. 

So I want to talk a bit about that. First of all, my colleagues 

have talked about transparency. That’s essential. The opaqueness 

of the market works for the benefit of the folks pricing it. 

Ms. Gallenagh, you said at the very beginning that the whole 

chain down the line starts with the list price, correct? And I think 

a number of people on the panel agreed with that. The pharma 

companies establish the list price, correct? 

Ms. GALLENAGH. Yes. 

Mr. WELCH. They have no restraints on what they can do? 

Ms. GALLENAGH. I would say that the constraint is only our negotiation which, again, our net price is not what we earn, right, the 

list price. 

Mr. WELCH. Let me ask you this. Just get some things established here. 

When a company creates a product it gets a patent, correct? 

Ms. GALLENAGH. Correct. 

Mr. WELCH. And it gets a period of exclusivity. 

Ms. GALLENAGH. Correct. 

Mr. WELCH. It has a monopoly over that product for a period of 

time? 

Ms. GALLENAGH. It can sell that particular product. It doesn’t 

prohibit competing products that have the same effect, for example. 

Mr. WELCH. That particular product—— 

Ms. GALLENAGH. But we see significant competition well before 

patent—— 

Mr. WELCH. Do you have a problem answering the question? 

Ms. GALLENAGH. No, I am just trying to clarify. 

Mr. WELCH. That product for which you got a patent is something over which you control the price, correct? 

Ms. GALLENAGH. We control the price in negotiation with the 

purchaser of the product. Correct. 

Mr. WELCH. And the price that you set is based upon meeting 

obligations to shareholders in a return on profit, correct? 

Ms. GALLENAGH. It is based on a number of factors—the value 

the medicine provides and the like, yes. 

Mr. WELCH. Is it the case that at the end of that patent period 

that it is something given by public policy as incentive for doing 

the research any of your member companies have used legal maneuvers to extend that period of original exclusivity in the patent? 

189 

Ms. GALLENAGH. It’s impossible to extend the length of a particular patent. The current system works this way as a result of 

Hatch-Waxman. 

Mr. WELCH. Hold on a second. Have you ever heard the term 

evergreening? 

Ms. GALLENAGH. I have heard the term evergreening. Of course. 

Mr. WELCH. And evergreening is extending the life of the control. 

Is that correct? 

Ms. GALLENAGH. No. Evergreening the—— 

Mr. WELCH. Has a company in your organizational group, ever 

paid another company in return for not bringing their competing 

product to the market? 

Ms. GALLENAGH. Companies have entered into what’s known as 

a patent settlement wherein a generic company is trying to enter 

the market before the expiry of a patent. 

Mr. WELCH. According to you? 

Ms. GALLENAGH. Excuse me? 

Mr. WELCH. According to your company. If you pay somebody off 

not to bring their competing product to market, then you enjoy—— 

Ms. GALLENAGH. The generic company—— 

Mr. WELCH. —the pricing power of that exclusivity perk. 

Ms. GALLENAGH. The generic company is trying to bring a product to market prior to the patent expiring. There is—— 

Mr. WELCH. Isn’t there an argument over whether the patent period is a set period in time. 

Ms. GALLENAGH. Absolutely. 

Mr. WELCH. Exactly. So—— 

Ms. GALLENAGH. And it cannot be extended beyond that. 

Mr. WELCH. It doesn’t take a genius to figure out when that period is up. It’s called looking at a calendar, right? 

Ms. GALLENAGH. Correct. But drug—— 

Mr. WELCH. OK. So are you familiar with a recent effort by 

Allergan where they took their products and paid the Mohawk Indian tribe to take, ‘‘ownership,’’ as I understand it, as a way of having better defenses against competition? 

Ms. GALLENAGH. Yes, I am familiar with that and they used that 

through a process called inter partes review. 

Mr. WELCH. Can you give me any other example in the entire 

economy of the United States where the owner of a valuable intellectual property would pay someone else to take ownership of that 

product? 

Ms. GALLENAGH. That has been used in other—universities have 

used that, yes. It has happened. 

Mr. WELCH. And give me a specific example. 

Ms. GALLENAGH. I can get back to you on it. But I know there 

are universities that have—— 

Mr. WELCH. You don’t have a specific example now? 

Ms. GALLENAGH. I will get back to you. I know it exists. 

Mr. WELCH. Is there anyone here who can justify a practice 

where a seller of a product, like a pharmacy, after selling it, 5 

months, 6 months, or a year later has to rebate under a DIR? Can 

anyone justify that? Anyone—business model would it work with 

that situation? 

190 

Ms. GALLENAGH. If I understand your question, if you are asking 

whether discounts and rebates are common in industries then I 

would say absolutely. It is very common for industries to discount 

and rebate their products. That’s not uncommon. 

Mr. WELCH. All right. So the situation that you’ve been describing your company could work with if that happened to the pharmacy or if that happened to pharma? 

Ms. GALLENAGH. Different issue than what’s happening in the 

pharmacy. Absolutely. 

Mr. WELCH. So you justify what’s happening to pharmacists? 

Ms. GALLENAGH. No, I don’t justify what’s happening in the 

pharmacy. Absolutely not. 

Mr. WELCH. All right. Sir, please. 

Mr. DAVIS. Congressman, I just wanted to add for a clarifying 

point around the patents, you are right, and to the point that was 

made, a finite period of time as to when an individual patent is 

supposed to end. 

There is no such limitation on the number of patents filed on a 

product to extend its monopoly beyond the main ingredient patent 

that was originally filed and the best example of that is Humira, 

which generates the most revenue of any product in the U.S. and 

in the world at $16 billion per year. 

In the 3 years leading up to the main ingredient expiry on that 

drug, that manufacture filed 50 new patents on that product. So 

even if they were ultimately struck down, that company continues 

to enjoy a monopoly while litigation ensues and that is why it is 

so important to maintain the IPR process in addition to the court 

process that we have in federal court. 

Mr. WELCH. Yield back. Thank you. 

Mr. BURGESS. Gentleman’s time has expired. Chair thanks the 

gentleman. 

And I think we’ve been through the entire subcommittee with 

the exception of your chairman so I am going to recognize myself 

5 minutes for questions, and I may not take all 5 minutes because 

most of the information has been put out in front of the public 

today. 

I want to underscore what Mr. Griffith’s line of questioning started with and the recent publication from the National Academy of 

Sciences on ‘‘Making Medicines Affordable: A National Imperative,’’ 

in the preface of that report, which is lengthy, but in the preface 

they make the statement that public concern has reached a tipping 

point, and they go on to cite several examples that may have 

caused that tipping point to have been reached. 

But going further, they say those examples have had a sufficient 

impact on the health of citizens such as to attract sustained public 

attention and concern. 

A September 2017 survey of adult American priorities for Congress through the end of the current year found lowering prescription drug prices to be the highest ranked above minimum wage, reducing the deficit, rebuilding the nation’s infrastructure, reducing 

taxes, or any other of the six items considered. 

So Mr. Griffith’s point well taken and this has been a very informative panel. I want to thank all of you and I know there have 

191 

been some differences of opinion. We expected that. In fact, we welcome that. 

Mr. Griffith’s admonitions that there may be solutions that you— 

you are smarter about this stuff than we are by a lot and you may 

have solutions that you can arrive at, not necessarily individually 

but in collaboration. 

And I would just submit to you that those solutions may well be 

better than anything we or a federal agency can impose. But I 

guess the other side of that is if we are not moving towards some 

solutions to this problem then there likely will be some type of action, perhaps not by this subcommittee this year, perhaps not by 

this subcommittee next year, but there will be action taken— 

whether it be by agency or legislatively. 

Now, Mr. DiLenge, I am going to switch gears a little bit. I do 

want to ask you because some of your written testimony is actually 

fascinating—Mr. Nickels, in his testimony, gave us a list of several 

medications that were very high in price and one of them was 

Keytruda and a drug that was developed for malignant melanoma, 

and the United States president who was president when I was in 

medical school—Jimmy Carter—publicly disclosed in July of 2015 

that he had metastatic melanoma to his liver and his brain. And, 

of course, I thought the next story in that sequence was a state funeral. 

However, a year later, he’s speaking at the Democratic Convention. A year ago or a little bit less than a year ago he was at President Trump’s inauguration. It is a fantastic story—that when 

Jimmy Carter was elected president I was in medical school. That 

story would not have happened. 

Can you speak to that? 

Mr. DILENGE. Yes. It’s just one example of so many incredible 

miracles. There’s no other word for what happened with Jimmy 

Carter. 

Mr. BURGESS. It’s a gift. It’s a gift. 

Mr. DILENGE. It’s a miracle, and that is what the hard men and 

women who worked in our companies, and again, let me remind 

you all these are mostly start-up companies. 

They are trying to raise capital every day. I will give you one 

quick story of one of our companies right on the cusp of success— 

started in 2002, has raised $4 billion in public and private investment and partnerships with larger companies. 

It spent about $2.5 billion so far in R&D. It is hoping to get its 

first approval of a dramatically important drug next year from the 

FDA, and that’s after 15 years, OK, of every day working. They’ve 

had setbacks. They’ve had to reduce their staffs because it’s been 

hard to raise capital throughout that whole time period. 

This is the reality of what this body does. When it makes public 

policy it is directly impacting the investment decisions that are 

being made in companies like this one every day—can we afford to 

get that capital, to advance that R&D, to get to the next Keytruda. 

That’s exactly what is at stake here. 

Mr. BURGESS. And I don’t want people to become discouraged 

from hearing this from the information that we’ve gotten in this 

hearing. I am optimistic. 

192 

There have been people in my office just very recently, one with 

a potential gene therapy for a specific type of blindness and one 

with a therapy for hemophilia. Hemophilia, for crying out loud. 

This was never something that I thought when I was in training 

that day we would ever see and it will have a profound impact on 

Mr. Eyles’ business because of the ramifications. And these individuals also were talking about how do we prepare the—whether it’s 

CMS or private insurance—how do we prepare the payers for what 

is in development because, again, I consider it a gift to humanity 

that they are providing. 

Yes, there is going to be cost associated with that, with one of 

these therapies that we’re talking about it was a one-time therapy 

so a lot of research and development costs will have to be recouped 

on that one injection or one treatment—whatever it is. 

Mr. DILENGE. And I can I just add that, our industry has been 

criticized over the years for basically wanting people to be addicted 

to drugs, right, that we just want chronic conditions and we don’t 

ever want to cure people, we just want to keep them on drugs for 

the rest of their life. 

These new biotech miracles are actually going to cure people and 

a lot of them is maybe one-time injections of gene therapy. And 

that is why when you look at the pricing of those it’s going to be 

shocking. Let’s be honest about that. But the value that they deliver is far beyond those prices. 

Mr. BURGESS. And some of us have urged to allow the things 

that are in development—to allow discussions with CMS and payers before the FDA approval just because of the—— 

Mr. DILENGE. Thank you for your work on that, sir. 

Mr. BURGESS. Because it is so important. 

And Mr. Merritt, you mentioned something in your response to 

a question. I found it intriguing. I’ve been a big advocate of physician drug monitoring programs or prescription drug monitoring 

programs, I guess I should say, the PDMPs. I know it’s another 

layer we put on your life, Dr. Harmon. Apologize about that. 

But it is useful to know if someone is getting multiple prescriptions. But then you alluded to that with the data that you have 

available you can know who is at risk even before they might be 

identified as a risk to themselves or family or their physician. 

So that’s pretty powerful information, and I don’t know if there 

is a way for you to share with the person who is providing the care. 

But I hope we can find a way that your claims data or whatever 

we would call it can actually have a profound beneficial impact on 

what has become a national crisis. 

So, perhaps we will enter into more discussions about that. But 

that was an intriguing thought that you gave us today and I appreciate that. 

So once again, thanks everyone, for being here. 

Mr. Green, did you have any concluding thoughts? 

Mr. GREEN. No, Mr. Chairman. 

Mr. BURGESS. Anything else to add for the record? 

I want to thank all of you for your testimony and remind members that there are—oh, wait. 

I need to submit statements for the following for the record: the 

American Pharmacists Association, Senior Care Pharmacy CoaliVerDate Nov 24 2008 10:02 May 30, 2018 Jkt 037690 PO 00000 Frm 00200 Fmt 6633 Sfmt 6633 I:\MY DOCS\HEARINGS 115\HEARINGS\115-88 CHRIS
193 

tion, Coalition for Affordable Prescription Drugs, National Multiple 

Sclerosis Society, Express Scripts, Alliance for Transplants and Affordable Prescriptions. 

[The information fappears at the conclusion of the hearing.] 

Mr. BURGESS. Pursuant to committee rules, I remind members 

they have 10 business days to submit additional questions for the 

record. I ask the witnesses to submit those responses within 10 

business days of the receipt of those questions. 

Without objection, the subcommittee is adjourned. 

[Whereupon, at 1:15 p.m., the committee was adjourned.] 

[Material submitted for inclusion in the record follows:] 

194 


29424.115

Real Possibilities 

December 12, 2017 

The Honorable Greg Walden 

Chairman 

Committee on Energy & Commerce 

2125 Rayburn House Office Building 

Washington, DC 20515 

601 E Street, NW I Washington, DC 20049 

202-434-2277 i 1-888-0UR-AARP 1-888-687-2277 I TTY: 1-877-434-7598 

wvvw.aarp,org I twitter: @aarp I fooebook.w•m/o;ocp I youtube.com/11arp 

The Honorable Frank Pallone 

Ranking Member 

Committee on Energy & Commerce 

2322A Rayburn House Office Building 

Washington, DC 20515 

Dear Chairman Walden and Ranking Member Pallone: 

AARP commends the House Energy and Commerce Committee for holding this hearing 

entitled "Examining the Drug Supply Chain". Addressing the rising cost of prescription 

drugs is an ongoing priority for AARP members and all older Americans, regardless of 

party. Older Americans use prescription drugs more than any other segment of the U.S. 

population, typically on a chronic basis. In fact, on average, older Americans take 4.5 

prescription drugs every month. 1 

As launch prices of prescription drugs continue to skyrocket' and manufacturers are 

consistently increasing the prices of existing products3, older Americans are struggling 

to afford the drugs they need. According to a recent AARP Rx Price Watch report, the 

retail price of specialty drugs widely used by older Americans increased by an average 

of 9.6 percent in 2015- the largest increase since at least 2006. In 2015, the average 

annual cost for one specialty drug used on a chronic basis was $52,486, which is 

slightly less than the median U.S. household income, more than twice the median 

income for Medicare beneficiaries, and more than three times the average Social 

Security retirement benefit. 4 Moreover, a 2016 AARP Price Walch Report found that 97 

percent of brand-name drugs widely used by older Americans experienced a price 

increase above inflation in 2015.5 These trends helped push U.S. prescription drug 

1 Medicare Part D enrollees take an average of 54 prescriptions per year, or 4.5 different prescription drugs per month. Medicare 

Payment Advisory Commission (MedPAC), June 2016 Report to the Congress: Medicare and the Health Care Delivery System 

(\Nashington, DC, MedPAC, June 2016) 2 E. Silverman, "Cancer Drug Prices are High at Launch and Stay That Way," STAT News, May 2, 2016; D.M. Hartung, D.N. 

Bourdette, S.M. Ahmed, and R.H. Vv'hitham. "The Cost of Multlple Sclerosis Drugs in the US and the Pharmaceutical lndustry,H 

Neurology Vol 84(21): 2185-2192 3 http://\w.w.aarp.org/rxpricewatch 

4 S.W, Schondelmeyer and L. Purvls, ~Rx Price Watch Report: Trends !n Retail Prices of Specialty Prescription Drugs Widely Used 

by Medicare Beneficiaries, 2006 to 2015,~ AARP Public Policy Institute, September 2017. 

5 S.W. Schondelmeyer and L Purvis, "Rx Price Watch Report: Trends in Retail Prices of Brand Name Prescription Drugs Widely 

Used by Medicare Beneficiaries, 2006 to 2015," AARP Public Policy Institute, December 2016. 

Nctw Hamps!we l Puerto Rico 
195 


29424.116

spending to a record high of $425 billion in 2015, with expectations that such spending 

will surpass $600 billion by 2020.6 

Rising prices not only affect seniors' pocketbooks, but are large drivers of the growing 

cost of Medicare and other health programs. In 2015, Medicare Part D spent $137.4 

billion on prescription drugs, an increase of 13 percent compared to 2014; and Medicare 

Part 8 spent $24.6 billion on prescription drugs, an increase of 14 percent compared to 

20147. Affordability is a growing concern for many older Americans. A 2016 survey of 

the 50+ population found that over 80 percent believe that prescription drug prices are 

too high, and nearly 90 percent think it is important for politicians to support efforts to 

reduce prescription drug prices 8 

AARP stands ready to work with this committee to reduce the price of drugs, including 

improving our drug delivery system. However, we strongly believe that we need to have 

an honest discussion of how drugs are priced when they first come to the market, and 

how those prices increase over time. If prescription drugs continue to come to market 

with exorbitantly high prices, and those prices continue to increase beyond the rate of 

inflation each year, patients will struggle to afford the drugs they need no matter how 

efficient the drug delivery system is. 

AARP supports a number of critical reforms that will lower prescription drug costs and 

increase competition. Those reforms include: 

Price Negotiation: Unlike private insurance plans, Medicare cannot negotiate 

prescription drug prices with pharmaceutical companies. AARP supports 

enabling the HHS Secretary to use the bargaining power of Medicare's 55 million 

beneficiaries to negotiate for lower prescription drug prices. 

Prohibit Anticompetitive Pay-for-Delay Agreements: AARP supports 

prohibiting patent settlement agreements between brand name and generic drug 

manufacturers that delay the availability of less-expensive generic drugs, costing 

the US billions of dollars. 

• Close the REMS Loophole: FDA-required Risk Evaluation and Mitigation 

Strategies (REMS), structured plans for handling drugs associated with known or 

potential risks that may outweigh the drugs' benefits, are increasingly being 

abused to block generic or biosimilar manufacturers' access to samples of 

reference products. Since these samples are needed to develop generic and 

biosimilar products, such behavior effectively halts generic and biosimilar product 

development. Left unchecked, these unnecessary delays could cost consumers, 

government programs, taxpayers, and the health care system billions of dollars 

annually. AARP supports legislation that would close this loophole. 

6 IMS Institute for Healthcare Informatics, Medicines Use and Spending in the U.S.: A Review of 2015 and Outlook to 2020, April 

2016. 

7 https:l/www.cms.gov/Newsroom/MediaReleaseDatabase/F act-sheets/2016-F act-sheets-items/2016-11-

14.html 

' L. Mehegan and L. Skufca, "2015 Survey on Prescription Drugs," AARP Research, April2016. 

2 
196 


29424.117

• Importation: AARP believes that we should reduce barriers to global price 

competition by allowing for the safe importation of lower priced but equally 

effective drugs. There is no reason for Americans to continue paying the highest 

prescription drug prices in the world. 

Drug Price Transparency: AARP supports legislation to require greater price 

transparency when drug manufacturers implement unreasonably high price 

increases. 

Part D Rebates: By reducing spending on prescription drugs under Part D, both 

taxpayers and Part D enrollees will benefit. AARP supports requiring drug 

manufacturers to provide Medicaid drug rebates for prescription drug dispensed 

to low-income Part D enrollees. This change alone could save $145 billion over 

ten years, according to the Congressional Budget Office (CB0). 9 

Biologic Drugs: AARP supports reducing the market exclusivity period for 

brand name biologics from twelve years to seven years. This change would help 

get less expensive generic versions of biologics on the market sooner, yielding 

billions of dollars in savings over the next ten years. 10 

FDA drug approval process: AARP believes extra market exclusivity and 

expedited approval should only be granted in extremely limited circumstances 

and only for innovations that meet an unmet medical need or substantially 

improve upon existing therapies. Any efforts to expedite FDA approval 

processes should ensure that patient safety remains paramount. 

We appreciate the Committee's attention to the important issue of high prescription drug 

prices and we hope to work together to enact reforms that make drugs more affordable 

for older Americans and taxpayers. 

Sincerely, 

~A~ Joyce A. Rogers 

Senior Vice President, Government Affairs 

9 CBO, Options for Reducing the Deficff: 2017 to 2026, December 2016. 

1° CBO, Proposals for Health Care Programs-CBO's Estimate of the President's Fiscal Year2017 Budget, March 2016. 

3 
197 


29424.118

fA EXPRESS SCRIPTs· 

·-

HOUSE ENERGY AND COMMERCE SUBCOMMITTEE ON HEALTH HEARING: 

Examining the Drug Supply Chain 

STATEMENT FOR THE RECORD SUBMITTED BY: Express Scripts, December 13,2017 

At Express Scripts, we believe in practicing pharmacy smarter. We put medicine within reach of 

tens of millions of people by aligning with our customers, taking bold action, and delivering 

patient-centered care to make better health more affordable and accessible. 

Headquartered in St. Louis, Express Scripts is the nation's largest stand-alone pharmacy benefit 

manager (PBM). We manage drug benefits for more than 80 million Americans, including those 

in health plans, union-sponsored plans, state employee health plans, and public purchasers, 

including TRICARE, Medicare Part D, and Medicaid. Our services include providing networkpharmacy claims processing, home delivery pharmacy care, specialty pharmacy care, benefitdesign consultation, drug utilization review, formulary management, and medical and drug data 

analysis services. 

Express Scripts drives unique solutions to address rising prescription drug prices. As published 

in our 2016 Drug Trend Report 1

, the average list price for the most commonly used brand drugs 

increased 10.7 percent in 2017. Due to the tools that Express Scripts implemented in plans 

covering employees and their families, per-person spending last year on prescription drugs 

increased just 3.8 percent- 26.9 percent less than the 5.2 percent increase in 2015. Aligned with 

the best interests of our clients and patients, we are committed to doing whatever it takes to 

provide the best care and value. 

One tool traditionally used by PBMs is negotiating rebates with brand manufacturers and 

leveraging formulary placement. Claims that PBMs benefit from higher drug prices are entirely 

false: plan sponsors decide how rebate dollars are directed, and they use rebates to lower 

premiums and cost sharing for patients in those plans. In fact, Express Scripts' clients receive 89 

percent ofthe rebates the company negotiated with drug manufacturers. Express Scripts retains 

the rest in a fully transparent manner for doing our job to bring down drug costs. 

Our job at Express Scripts is to make sure our patients, and our clients who provide them a 

pharmacy benefit, are getting medicines at the lowest net cost. The simple fact is that the 

manufacturer is solely responsible for setting the list price for a brand drug and for increasing 

that list price. Rebates do not raise drug prices. Drugmakers raise drug prices, and they alone can 

lower them. 

Not all drugs are rebated, and yet brand manufacturers have raised the price on these drugs as 

well. For example, list orices for oral oncology medications2, which are not rebated or 

discounted to any significant extent, have doubled between 20 ll and 20 I 6, from $20 per unit to 

$40 per unit. Looking at the 39 medications on the market in 20IO, between 2010 and 2016: 

Six had I 00 to 200 percent inflation; 

One had inflation greater than 300 percent; 

One had inflation greater than 800 percent. 
198 


29424.119

fA EXPRESS SCRIPTS" 

·-

Additionally, the following list of prescription drugs that receive no rebate have experienced 

significant price growth in 2017: 

Drug Name Indication Manufacturer 2017 YTD Price Increase 

BANZEL Seizures Eisai Inc. 24.2% 

EFFEXOR XR Depression Pfizer Inc. 19.2% 

FIRAZYR Hereditary Angioedema Shire US Inc. 9.0% 

IMBRUVICA Cancer Janssen Pharmaceuticals Inc 8.4% 

ISENTRESS HIV Merck & Co. Inc. 7.9% 

LIPITOR High Blood Cholesterol Pfizer Inc. 18.2% 

MENOPUR Infertility Ferring Pharmaceuticals 11.9% 

ORKAMBI Cystic Fibrosis Vertex Pharmaceuticals Inc. 5.0% 

Janssen Pharmaceuticals Inc. I 

PREZISTA HIV Johnson and Johnson 7.9% 

PROGRAF Transplant Astellas Pharma US Inc. 14.2% 

PULMOZYME Cystic Fibrosis Genentech, Inc. 7.0% 

STRIBILD HIV Gilead Sciences Inc. 7.3% 

TRIUMEQ HIV ViiV Healthcare 7.9% 

Express Scripts supports policies that lower the price of prescription drugs by promoting 

competition in the marketplace and accelerating approval of generic drugs and biosimilar 

therapies. We are proud that our generic fill rate is more than 80 percent. Competition is the key 

to containing drug prices, and we look forward to working with the Committee on policies to 

achieve that goal. 

Beyond rebates and formulary placement, Express Scripts has led the industry in developing 

value-based payment solutions in our SafeGuard Rx program that can further address high-cost 

specialty drugs. Mechanisms such as indication-based pricing, outcomes-based pricing, remote 

patient monitoring, and early discontinuation reimbursement lower costs for drugs treating 

diabetes, Multiple Sclerosis, certain cancers, inflammatory diseases, and pulmonary conditions. 

Value-based reimbursement programs are implemented more easily in commercial markets, and 

solutions to regulatory barriers in public programs arc currently being explored. 

Finally, Express Scripts is now offering innovative solutions for consumers and patients who 

experience high drug costs due to being either uninsured or insured under a high deductible plan. 

Inside Rx is a new, partially owned subsidiary that leverages Express Scripts' purchasing power 

to expand affordable access to brand and generic medications for patients in need. Largely 

focused on the uninsured, JnsideRx provides significant discounts averaging 40 percent on 68 

commonly used prescription medications at the point-of-sale, resulting in an average savings of 

$81 per prescription. 

Similarly, Express Scripts will be launching SmartShare Rx3 in January 2018, a point-of-sale 

rebate solution that plan sponsors may choose to provide to their members while they are in the 

deductible phase of their pharmacy benefit. 
199 


29424.120

(jj EXPRESS SCRIPTs· 

·-

Express Scripts is also committed to improving drug price transparency for patients and doctors. 

Express Scripts has partnered4 with Surecripts to provide real-time information to physicians and 

patients at the time of prescribing through the patient's Electronic Health Record (EHR), 

including patient-specific cost sharing for that prescription drug. This information will allow 

patients to receive the most appropriate, cost-effective medication. 

Thank you for the opportunity to share information on the market-based solutions Express 

Scripts has developed to address further prescription drug costs. We thank the Committee for 

addressing this complex but crucial topic for American patients and families, and we hope to 

continue to be a resource to the Committee in its work on the drug supply chain. 

1 http://lab.express-scripts.comflab/drug-trend-report 

2 htto:lflab.express-scripts.com/lab/insights/industry-updates/the-cost-of-hope-5-things-to-know-about-the-costof-cancer·drugs 

'http://lab.express-scripts.com/lab/insights/industry-updates/sharing-smarter 

' http: f/1 ab .express-scripts. com/1 a b/insights/ drug-optic ns/health care-connectivity-improves-he althea re-itself 
200 


29424.121

Decen1ber13,2017 

AMERICAN PHARMACISTS ASSOCIATION 

STATEMENT FOR THE RECORD 

TO THE HOUSE ENERGY AND COMMERCE COMMITTEE 

SUBCOMMITTEE ON HEALTH HEARING: 

"EXAMINING THE DRUG SUPPLY CHAIN" 

As drugs become more and more expensive, complex, and personalized, the need to optimize 

their impact also increases. Pharmacists have more medication-related education and training 

than any other health care professional. Yet, despite their expertise and accessibility, 

pharmacists are often an underutilized health care resource in helping to address medication 

costs by improving the impact, and therefore, value of medications. The American Pharmacists 

Association (APhA), and our members appreciate the opportunity to provide our comments on 

the important role pharmacists play in patients' lives as you examine the drug supply chain in 

our country. 

Founded in 1852 as the American Pharmaceutical A~sociation, APhA represents 64,000 

pharmacists, pharmaceutical scientists, student pharmacists, pharmacy technicians, and others 

interested in improving medication use and advancing patient care. APhA members provide 

care in all practice settings, including community pharmacies, hospitals, long-term care 

facilities, community health centers, physician offices, ambulatory clinics, managed care 

organizations, hospice settings, and the uniformed services. 

Cost versus Value 

In order to get the greatest benefit from medications, patients must understand how to usc their 

medications safely and effectively. Pharmacists are the medication experts on the patient's 

health care team. Pharmacists today graduate with a Doctorate of Pharmacy degree, which 

requires six to eight years to complete. Pharmacists can and do assist patients in optimizing the 

impact of medications and decreasing patients' costs by providing services focused on safe and 

appropriate medication use. For example, pharmacists provide medication management 

services, which are especially important for patients who have complex care plans, take multiple 

drugs or have chronic conditions. Additionally, to address hospital readmissions, pharmacists 

help patients transition between care settings. 

Unfortunately, despite the fact that many states and Medicaid programs are turning to 

pharmacists to increase access to health care and address medication-related costs, Medicare 

Part B does not cover the services pharmacists can provide. Pharmacists arc trained to do more 

than place medication in a container and while 91% of Americans live within five miles of a 

community pharmacy', many of our Nation's seniors are medically underserved. Pharmacists 

are an underutilized health care resource which can positively affect the impact and value of 

medications, beneficiaries' care2 and the entire Medicare program. 

APhA strongly believes H. R. 592, the Pharmacy and Medically Underserved Areas 

Enhancement Act, is a proposal that will improve patient care, health outcomes, value of 

1 NCPDP Pharmacy File, ArcGIS Census Tract File. NACDS Economics Department. 2 CMS. Evidence Supporting Enhanced Medication Therapy Management. Center for Medicare and 

Medicaid Innovation. 2016. Available at: https: 1/innovation.cms.gov/Files/x/mtm-evidencebase.pdf 
201 


29424.122

medications,3 and consequently, the viability of the Medicare program. Introduced by 

Representatives Brett Guthrie and G.K. Butterfield, H.R. 592 has 240 bipartisan cosponsors. 

Similar legislation obtained 297 cosponsors in the 114th Congress. 

The legislation will enable Medicare patients in medically underserved communities to better 

access health care through state-licensed pharmacists practicing according to their own state's 

scope of practice. In medically underserved communities, pharmacists are often the closest 

health care professional and accessible outside normal business hours. Helping patients receive 

the care they need, when they need it, is a common sense and bipartisan solution that will 

improve outcomes and reduce overall costs. 

The importance of medication-related services cannot be overstated, especially in the Medicare 

program. Medications are the primary method of treating chronic disease and are involved in 8o 

percent of all treatment regimens. Moreover, the United States spends nearly $300 billion 

annually on medication-related problems, including nonadherence.4 Accordingly, not only will 

S.109 increase beneficiaries' access to health care, it will help improve their outcomesparticularly those impacted by medications. APhA appreciates the support by nearly all 

Committee members for the Pharmacy and Medically Underserved Areas Enhancement Act 

and urges its sv.ift passage to allow pharmacists to deliver these vital senices as providers in 

medically underserved areas. 

APhA also encourages the Committee, when considering policy changes, to look beyond isolated 

components of health care to determine cost and value. Because health coverage is frequently 

analyzed by the benefit type such as inpatient, outpatient, and drug coverage, a patient's overall 

services, costs and outcomes may never be reviewed comprehensively. Policies cannot continue 

to consider drug and medical coverage, and their related costs and outcomes, separately if we 

are to achieve true value in health care. Current coverage and payment policies related to 

prescription drugs place incentives on the short-term, focusing on cost containment for the 

product rather than weighing the overall clinical benefit to the patient and the impact to their 

medical costs. Breaking down the many silos within our health care system will help address 

that $300 billion dollars spent on medication-related problems-many of which are 

preventable.s 

Importation Detracts from Value-Based Care 

Broader importation laws will hinder the progress made to move U.S. health care delivery and 

payment towards value, as opposed to volume, and further fragment care. Because Canadian 

pharmacists may only fill prescriptions written by Canadian prescribers, expanded importation 

policies v.ill encourage Americans to seck care from foreign prescribers and pharmacists, whose 

systems and standards are not integrated into, or consistent with, U.S. systems or care. Valuebased care models and other efforts to produce savings and promote quality, such as outcomes3 See Avalerc Health. Exploring Pharmacists' Role in a Changing Healthcare Environment. May 2014. 

Available at: http: //avalerc.com I expertise /life-sciences /insights I exploring-pharmacists-role-in -achanging-healthcare-environment Also, See A val ere Health. Developing Trends in Delivery and 

Reimbursement of Pharmacist Services. October 2015. Available at: 

http: // avalere. com I exnertise I managed-care /insights /new-analysis-identifies-factors-that-can -facilitatebroader-reimbursement-a 

4 New England Healthcare Institute. Thinking Outside the Pillbox: A System-Wide Approach to 

Improving Patient Adherence for Chronic Disease. August 2009. Available at: 

http://www.nehi.net/nublications/lz-thinking-outside-the-pillbox-a-system-wide-apnroach-toimnro\ing-patient-medication-adherence-for-chronic-disease/view 

s]bid. 
202 


29424.123

based reimbursement, will be more difficult to measure and optimize if patients are allowed to 

receive care outside the model's mechanisms to drive results. 6 Moreover, because ofthe 

implementation of outcomes-based payment, U.S. health care providers and facilities may be 

unjustly penalized due to the actions of foreign providers or patients' reactions to non-FDA 

approved medications. 

Other negative events can result from broadened importation, such as increased adverse events 

and decreased medication adherence, as practitioners may make care decisions based on a 

patient's incomplete medical and medication profile. Pharmacist-provided services that help 

patients optimize medications, such as medication therapy management covered under 

Medicare Part D, may lose their value as medication reviews will likely not be 

comprehensive. APhA consistently emphasized the value of pharmacist-provided care services, 

noting that pharmacists' roles extend well beyond the dispensing of a medication. Patients 

benefit significantly when they have a relationship ·with a pharmacisu.s.o,,o,u The pharmacistpatient relationship will be seriously undermined if importation of non-FDA approved drugs is 

permitted. 

Thank you again for the opportunity to provide our perspective regarding the important role 

that the pharmacist plays in the drug supply chain. 

6 Centers for Medicare & Medicaid Sen;ces, (May 2016). CMS Quality Measure Development Plan: Supporting the 

Transition to the Merit-based Incentive Payment System (MIPS) and Alternative Payment Models (APMs), available 

at: https· I lv..'\nv .cms.gov /Mcdicare/Ouality-Initiatives-Patient-Assessment-Instr•Jments /Value-BasedPrograms/MACRA-MIPS-and-APMs/Final-MDP.pdf, last accessed: May 23, 2017. 

7 Phatak, A., Prusi, R., Ward, B., Hansen, L.O., V\7illiams, M.V., Vetter, E., Chapman, N. & Postelnick, M. (2015). 

Impact of pharmacist involvement in the transitional care of high-risk patients through medication reconciliation, 

medication education and post-discharge call-backs (!PITCH Study), Journal of Hospital Medicine, l1(1), 39-44. 

s McCullough, M.B., Petrakis, B.A., Gillespie, C., Solomon, J.L., Park, A.M. & Ourth, H. (2016). Knowing the patient: 

A qualitative study on care-taking and the clinical pharmacist-patient relationship, Research in Social and 

Administrative Pharmacy, 12(1), 78-90). 

9 Braaf, S., Rixon, S., Williams, A., Lieu, D. & Manias, E. (2014). Pharmacist~patient medication communication 

during admission and discharge in specialty hospital settings: implications for person centered healthcare, The 

International Journal of Person Centered Medicine 

w Schuessler, T.J., Ruisinger, J.F., Hare, S.E., Prohaska, E.S. & Melton, B.L. (2015). Patient satisfaction ";th 

pharmacist~led chronic disease state management programs, Journal a/Pharmacy Practice, 29(5), 2015. 

n Mossialos, E., Courtin, E., Naci, H., Benrimoj, S., Bam)', M., Farris, K., Noyce, P. & Sketris, I. (2016). From 

"retailers" to health care providers: Transforming the role of community pharmacists in chronic disease management, 

Health Policy .. l19(S), 628-639. 
203 


29424.124

1700 PENNSYLVANIA AVENU NW, S WASH!NGl N, 0006 

THE SENIOR CARE PHARMACY COALITION 

STATEMENT FOR THE RECORD 

BEFORE THE UNITED STATES HOUSE OF REPRESENTATIVES 

ENERGY AND COMMERCE COMMITTEE, HEALTH SUBCOMMITTEE 

"EXAMINING THE DRUG SUPPLY CHAIN" 

DECEMBER 13, 2017 

PHil FOGG, JR./ CHAIRMAN ALAN G. ROSENBLOOM j NT AN[) 
204 


29424.125

December 13,2017 

Page 2 of 14 

The Senior Care Pharmacy Coalition (SCPC) welcomes the opportunity to present this statement 

for the record before the United States House of Representatives Energy and Commerce 

Committee, Health Subcommittee, as part of its hearing, "Examining the Drug Supply Chain." 

SCPC commends the Chairman and Ranking Member for their focus on the pharmaceutical pricing 

and supply chain. As the only Washington-based organization exclusively representing the 

interests of long-term care (LTC) pharmacies, we suggest that the LTC pharmacy sector is a 

meaningful ecosystem through which to understand the pharmaceutical distribution chain, and 

particularly the invidious efforts of Pharmacy Benefit Managers (PBMs) to siphon billions of 

dollars out of that system at a cost to consumers and the federal government alike. 

There are many actors in the prescription drug markets - brand manufacturers, generic 

manufacturers, PBMs, wholesalers, group purchasing organizations (GPOs), Pharmacy Services 

Administrative Organizations (PSAOs), chain pharmacies, independent pharmacies, specialty 

pharmacies, home infusion pharmacies, LTC pharmacies, mail order pharmacies, Medicare, 

Medicaid, private insurers and of course consumers (including Medicare and Medicaid 

beneficiaries). Given that its members arc active participants in the distribution chain, and based 

upon years of analysis, SCPC believes that PBMs, together with their corporate siblings in 

horizontally and vertically integrated conglomerates, play a negative and damaging role in the 

supply and payment chain. For that reason, our remarks focus on PBM conglomerates. 

In Section I we provide important context concerning the LTC pharmacy sector. Section II 

describes the PBM industry, and the ways in which the three largest PBMs in the market today 

have created an "oligopoly" that harms patients, pharmacies and the federal government. Section 

III, focuses in more detail on how PBM pricing and contracting policies impact both consumers 

and independent LTC pharmacies. Finally, in Section IV, we conclude with recommendations for 

further Committee and legislative actions. 

Before addressing the details, we share with the Committee the findings of the Pacific Research 

Institute (PRI), which earlier this year conducted a comprehensive review of the literature 

surrounding PBMs and their business practices. 1 PRI concluded that PBMs "[c]rcate pricing 

uncertainty by incentivizing higher list prices for medicines that enable large rebates and discounts 

(which arc particularly valuable for PBMs)," and which result in: 

The large discrepancy between list prices and transaction prices caus[ing] higher patient 

co-pays than necessary (co-pays typically depend on list prices); 

For Medicare Part D beneficiaries, the higher list prices and higher co-pays ... push ring 

some] patients into the coverage gap ("donut hole") faster; 

lmpos[ ingj large, and often unknown, fees that crcat[ing] substantial revenue uncertainty 

and volatility, which are particularly problematic for small, LTC and specialty pharmacies; 

Increas[ing] PBMs' share of the gross expenditures at the expense of pharmacies and 

manufacturers; and 

1

Dr. Wayne Winegarden, The Economic Costs of Pharmacy Benefit Managers: A Review of the Literature, Pacific 

Research Institute (March 20 17), available at www.pacificresearchinstitute.org 
205 


29424.126

December 13,2017 

Page 3 of 14 

Through control of the drug formularies, impos[ing] undue influence on the medicines 

patients can access. 

We address these issues in detail below, and urge the Committee to explore these issues as it 

investigates the drug distribution chain. 

I. LTC Pharmacy Context 

The SCPC and its Members: SCPC's members serve about 700,000 residents daily in skilled 

nursing and assisted living facilities across the country. Our members represent 75% of all 

independent LTC pharmacy companies. 2 As described below, given the utilization of drugs in 

LTC settings, LTC pharmacy represents between six and eight percent of the prescription 

medication spend in the country. 

The LTC Sector: LTC pharmacies serve nursing homes, assisted living facilities, and other group 

and residential settings. LTC pharmacy differs substantially from retail pharmacy. LTC 

pharmacies are "institutional" or "closed door" pharmacies, which means they are not open to the 

public and do not sell convenience items as do retail pharmacies. Rather, they contract with LTC 

facilities and congregate care settings or payer intermediaries to provide pharmacy services to 

residents in those facilities or settings. 

There are four fundamental differences between retail and LTC pharmacy: 

l. Retail pharmacies sell myriad products beyond medications to consumers, but as "closed 

door" operations, LTC pharmacies do not face consumers. For many retail pharmacies, 

dispensing medications is a "loss leader," with financial success based on sale of 

convenience items. LTC pharmacies do not have this option. They succeed or fail based 

entirely on dispensing medications and providing a wide array of services required by 

statute, regulation and professional responsibility. 

2. The clinical responsibility of retail pharmacies ends when the patient leaves the pharmacy 

with a prescription. The clinical responsibility of LTC pharmacies is continuous and 

extended, from the time the pharmacy receives a prescription until the patient's transition 

from a LTC facility to home or another setting is complete. 

3. Retail pharmacies dispense the vast majority of medications in 30-day bottles. 3 To meet 

legal requirements and to ensure the safe dispensing of medications to the patients that they 

2 SCPC defines "independent LTC pharmacies" as those LTC pharmacies that are not part of a corporate family that 

includes a pharmacy benefits manager (PBM). SCPC believes that there are inherent conflicts of interest between 

pharmacies and PDMs, such that common ownership necessarily results in anticompetitive behavior. The largest LTC 

pharmacy company, Omnicare (which is not an SCPC member), controls roughly 50% of the LTC pharmacy market, 

with more than I ,000 independent LTC pharmacy companies serving the remainder the market. Omnicare is a wholly 

owned subsidiary ofCVS Health, which also owns Caremark, the largest PBM in the country, as well as Coram, the 

largest home infusion company, and CVS specialty, the largest specialty pharmacy. For a more extensive discussion 

of the anticompetitive market impact CVS Health has on drug prices, Medicare Part D beneficiaries, Medicare 

program costs and LTC pharmacies, see infra at 6-7. 

'It is noteworthy that yet another example of the undue and adverse impact ofPBMs and the corporate conglomerates 

of which they are a part, overall corporate strategy pushes consumers in the community away from retail pharmacies 
206 


29424.127

December 13, 2017 

Page 4 of 14 

serve, LTC pharmacies dispense prescriptions in specialized, "single unit dose" packages. 

In other words, the LTC pharmacy dispenses medications by individual dose specific to 

each patient for each medication administration (or "med pass") at the facility. LTC 

pharmacies employ sophisticated dispensing technology at both the pharmacy and the LTC 

facility to improve efficiency and reduce medication errors. LTC pharmacies also 

dispense and deliver prescriptions to patients 24-hours per day, 7 days a week, 365 days 

per year. LTC pharmacies pre-position "emergency kits" in nursing homes and other care 

facilities. LTC pharmacies reconcile prescriptions for opioids and other controlled 

substances at least daily and often by med pass. Finally, at least monthly and usually more 

frequently, LTC pharmacies review every patient chart (called Drug Utilization Review) 

and otherwise manage each care setting transition to ensure medication continuity between 

sites of care. 4 

4. Retail pharmacies receive payment before patients receive prescriptions; LTC pharmacies 

often provide medications before payers have confirmed payment. In retail, the pharmacy 

confirms payment from insurers and receives patient co-payments before giving patients 

medications. For LTC pharmacies, requirements that medications be delivered to patients 

within as little as two hours following receipt of a prescription or chart order, coupled with 

the insurance company/PBM's requirements to assure that prescribed medications are "on 

fonnulary" and professional and legal obligations to assure that patients receive clinically 

appropriate medications, often requires that LTC pharmacies release prescriptions for 

delivery to facilities before confirming payment. In some cases, as many as 30% of 

prescriptions leave the pharmacy before payment is confinned. 

The complexity of LTC patient conditions also distinguishes LTC pharmacy from retail pharmacy, 

and underscores the value LTC pharmacies deliver through their services to patients. The average 

resident in a skilled nursing facility (SNF) is a woman in her mid-80s suffering from multiple 

chronic conditions, has mild to moderate dementia who takes 13 prescription medications each 

month. 5 In assisted living facilities, the average number of prescriptions per patient is even higher. 

As a result, pharmacy services- not simply dispensing medications- are crucial to the quality of 

care for patients and increasingly important in preventing adverse events like re-hospitalizations, 

patient falls, polypharmacy complications, medication-induced dementia and other adverse drug 

reactions, thereby improving the quality of care and reducing Medicare expenditures. 

The Department of Health and Human Services (IIHS), through the Centers for Medicare and 

Medicaid Services (CMS), heavily regulates LTC pharmacies under the Medicare and Medicaid 

and toward mail~order pharmacies because mail~order pharmacies are less expensive to operate and have higher profit 

margins than retail pharmacies. For example, as the New York Times reported only four days ago, Carcmark, the 

largest PBM in the country and a subsidiary of CVS Health, charges consumers more for a prescription dispensed in 

a CVS retail pharmacy (another subsidiary of CVS Health and the largest retail pharmacy chain in the country) than 

the same prescription dispensed by CVS' mail-order pharmacy (yet another subsidiary ofCVS Health and the secondlargest mail-order pharmacy in America). "Prescription Drugs May Cost More With Insurance than Without It," New 

York Times (December 9, 2017), available at https://www.nytimes.com/2017/12/09/health/drug-prices-genericsinsurance.html. 

4 These activities are listed in and required by the Medicare Prescription Drug Program Manual (the Part D Manual), 

Chapter 5, Section 50.5.2. 5 Managed Health Care Associates, Inc., MHA Independent Long Term Care Member Study at 27 (2017). 
207 


29424.128

December 13,2017 

Page 5 of 14 

programs. The Medicare and Medicaid Requirements of Participation for skilled nursing facilities 

(SNFs) and nursing facilities (NFs) contain detailed Pharmacy Services requirements. 6 LTC 

facilities that participate in Medicare and Medicaid contract with independent LTC pharmacies to 

satisfy those requirements, which include specialized packaging, unit dose packaging, and delivery 

within specified time periods depending on the medication and the urgency of a particular 

prescription. 

Most importantly, LTC pharmacies must provide consulting pharmacy services on an ongoing 

basis. They are part of the care management team for every patient in a facility, and must conduct 

periodic drug regimen reviews of patients, participate with facility staff in medication 

reconciliation and be on-site at every facility at least once every month. In addition, the Medicare 

Part D Manual lays out specific requirements for pharmacies to qualify as LTC pharmacies eligible 

for participation in Part D networks. LTC pharmacies must comply with a far more extensive 

array of statutory and regulatory requirements than retail pharmacies. 

Part D is the largest single payer for patient medications in LTC facilities. Medicare Part A is the 

second-largest payer, with Medicaid Part B and a small amount of Medicaid the other primary 

payers. In 2015, SCPC sponsored a report which Avalere prepared describing the LTC pharmacy 

marketplace and major policy challenges the sector faces 7 

II. The PBM Marketplace· 

A Classic Oligopoly Harming Patients Pharmacies. and the Federal Fisc 

Who are the PBMs?: Three PBMs Caremark, Express Scripts and Optum- process nearly 75% 

of all prescriptions dispensed in America. For LTC pharmacies, these three PBMs process more 

than 90% of all prescriptions. Such a high degree of market concentration is the very definition 

of an oligopolistic marketplace. 8 Moreover, each of the three major PBMs is part of a corporate 

conglomerate that has gained significant control over multiple, interdependent markets in the drug 

distribution chain - not just the PBM market, but also the health insurance, wholesale and 

pharmacy (retail, LTC, specialty, home infusion and mail order) markets - through acquisitions 

both horizontal and vertical and through exclusionary conduct, all of which has accelerated 

dramatically over the past three years. 

6 The Part D Manual, Chapter 5, Section 50.5.2.; 42 C.F.R. § 483.5 and .60 (requirement that nursing homes provide 

specialized medication services); See Centers for Medicare and Medicaid Services, State Operations Manual 

(Publication No. 100-07), available at https://www.cms.gov/Regulations-and-Guidance/Guidance!Manuals/lnternetOnly-Manuals-IOMs-Items/CMSl201984.html. The major pharmacy-related bases for violation citations (F-Tags) 

include: F-Tag 309: Quality of Care; F-Tag 329: Unnecessary Drugs; F-Tag 332-333: Medication Errors; F-Tag 425: 

Pharmacy Services; F-Tag 428: Medication Regimen Review; and F-Tag 431: Storage, Labeling, and Controlled 

Medications. Note that the term "long-term care facilities" does not, under federal law, include assisted living 

facilities. 

7 Available at http://seniorcarepharmacies.org/wp-content/uploads/20 15/101 Avalere_ LTC _Pharmacy-the-EvolvingMarketplace-and-Emerging-Policy-Issucs.pdf. 

8 See FTC v. HJ Heinz Co., 246 F.3d 708, 724 (D.C. Cir. 2001) (recognizing that "[i]t is a central object of merger 

policy to obstruct the creation or reinforcement by merger of such oligopolistic market structures."). Cf United States 

v. Denspiy /nt'/, 399 F.3d 181, 187 (3d Cir. 2005) (market share of75-80% was "more than adequate to establish a 

prima facie case" of market power."). 
208 


29424.129

December 13, 2017 

Page 6 of 14 

1. UnitedHealth Group owns Optum Health, the country's third-largest PBM. UnitedHealth 

is the largest health insurer, largest Medicare Advantage (Part C) Plan sponsor, largest 

Medicare Part D Plan sponsor and largest Medi-Gap insurer in America. Within the last 

ten days, UnitedHealth Group agreed to buy the DaVita Medical Group unit, continuing 

the accelerating trend of vertical and horizontal integration of health care businesses. 

Optum will take control of DaVita Medical Group's nearly 300 clinics and half-dozen 

outpatient surgical centers. 

2. ESI, Inc., owns Express Scripts, the country's second-largest PBM. It also owns the largest 

mail-order pharmacy in America. Through Econodisc Contacting Services, Express Scripts 

is a co-owner of one of the three GPOs that purchase 91% of all generic medications 

purchased in the United Statcs. 9 

3. CVS Health owns Caremark, the country's largest PBM. CVS Health is the largest 

interlocking horizontally and vertically integrated health care 

insurance/PBM/provider/pharmacy conglomerate in the United States. The company owns 

the nation's largest retail, LTC and specialty pharmacy chains. The company also owns 

among the nation's largest mail order and home infusion pharmacies. It operates walk-in 

medical clinics co-located with CVS retail pharmacies inside Target department stores. 

CVS Health currently offers its own Part D plans under the brand name "SilverScript." 

CVS Health will be providing PBM services to Anthem, which insures 19 million 

Americans, as soon as 2019. CVS Health recently announced its intention to acquire Aetna, 

the country's third-largest health insurer. CVS Health also is a co-owner of Red Oak, 

another of the three GPOs that together purchase 91% of all generic medications sold in 

America. 10 

Such arrangements have created inherent incentives for these large PBMs to favor their own 

corporate affiliates and exclude competitors, and allow them the power to extract significant sums 

from today's diffracted drug distribution system. 

At a recent hearing before the Federal Trade Commission, Dr. Nccraj Sood of the University of 

Southern California (USC) Schaeffer School presented a thorough analysis of the PBM sector, and 

how PBMs are achieving excessive profits. 11 Dr. Sood's analysis effectively demonstrates the 

adverse impact of the PBM sector on patients, unaffiliated payers, pharmacies and free market 

competition. However, his analysis understates the impact on the LTC pharmacy sector. 

His analysis is based on the three largest publicly traded companies in each channel of the drug 

distribution chain- manufacturers, wholesalers, GPOs, PBMs and pharmacies. None ofthc three 

9 Chester (Chip) Davis, Jr., Association for Accessible Medicines, presentation to FTC & FDA workshop, 

"Understanding Competition in Prescription Drug Markets: Entry and Supply Chain Dynamics" (Nov. 8, 20 17)); see 

also National Academy of Sciences Report at 55. 

10 /d. 

11 Neera Sood, Ph.D., Professor and Vice Dean for Research, Sol Price School of Public Policy, University of Southern 

California, presentation to joint FTC-FDA Workshop, "Follow the money: The flow of funds in the pharmaceutical 

distribution system," (Nov. 8, 2017), available at 

h ttps:/ /www. ftc.gov I system/files/ d ocu me nts/ public_ events/ 12556 53/understanding_ competition _in _p rescri ptio 

n_drug_markets_workshop_slides_11·8·17.pdf (Slide 74-105). 
209 


29424.130

December 13, 2017 

Page 7 of 14 

largest pharmacy chains operates a LTC pharmacy. Dr. Sood notes that the three major PI3Ms 

control 75% of all prescriptions; for LTC pharmacy companies, these three companies control a 

significantly higher 90%+ of all prescriptions. Finally, since nearly half of the LTC pharmacy 

market is composed of smaller, independent LTC pharmacies, the disproportionate market power 

these PBMs wield in other markets becomes both overwhelming and necessarily anticompctitive 

in the LTC pharmacy arena. 12 

Rebates, DIR Fees, and PBM Profits: PBM representatives claim that their role in the drug 

distribution chain is one of negotiating drug discounts on behalf of purchasers (large employers, 

health plans, and others) to drive efficiency into the drug distribution system. 13 While that claim 

may have been true l 0 or 20 years ago, it is no longer the case. Rather, PBMs today are a 

destructive force in the drug distribution system, taking profits for themselves at a cost to patients, 

pharmacies, and the federal government. PBMs do this through two principle practices: first, they 

negotiate "rebates" from drug manufacturers, but rather than passing those rebates on to consumers 

(as they claim they do), they retain the vast majority of those rebates for themselves. 14 Second, 

PBMs have developed a series of opaque and unjustified "fees" that they charge pharmacies (which 

in turn effectively are required to "pay to be paid"). The Medicare program defines some of these 

fees as "Direct and Indirect Remuneration" or "DlR," which we address below. 

PBMs Harm Competition: PI3Ms today arc exacting billions of dollars from the drug supply chain 

without providing any value for consumers or the federal government. 15 Moreover, their 

consolidation and vertical integration exacerbate the harm to consumers, government payment 

programs, pharmacies and free market competition. Examples of anticompctitive practices by 

PI3Ms abound, especially in the LTC pharmacy space. 

12 By contrast, for example, retail pharmacy is dominated by chain pharmacies like CVS and Walgreens, which affords 

them greater comparative market power than LTC pharmacies. In addition, these chain pharmacies also participate in 

the same purchasing groups that purchase 91% of generic medications, underscoring not only their comparatively 

greater market power than LTC pharmacies, but also the opaque business relationships that create inherent conflicts 

of interest and strong incentives for conglomerates that own PllMs to usc PBMs as a tool to leverage their overall 

corporate interests at the expense of patients, pharmacies and government payment programs. 13 See generally http://www.pcmanet.org/po!icy-issues; see also Merritt, Testimony before the Senate HELP 

Committee, October 171 2017 at 1, available at https:/ /www.help.senate.gov/imo/media/doc/Merritt.pdf. 14 See National Academy of Sciences, Making Medicines Affordable (Dec, 2017) at 16, available at 

http://nap.edu/24946 ("The most prominent of these intermediaries are the pharmacy benefit managers (PBMs), 

who interact with prescription drug insurers-and sometimes directly with employers offering health insurance 

plans--to negotiate prices both with manufacturers and with retail pharmacies. Adding further to the complexity, 

drug manufacturers very commonly offer price rebates to PBMs, but no meaningful information exists to determine 

the size of those rebates, what portion of the rebates eventually results in lower prices for patients, or the portion that 

the PllMs retain as profit"). While the National Academy has been unable to quantify the portion that PBMs retain 

as profit, CMS has better data related to the Part D program and should be able to provide that estimate to Congress 

upon request. 15 National Academy of Sciences at 29 ("(t]he profits generated by PBMs ... coupled with insurer's profits and the 

margins on reimbursement for drugs administered in the hospital or outpatient setting ultimately affect the patients 

and their ability to pay for therapies, and do not increase the incentives to develop new drugs"). See also testimony of 

Lori M. Reilly, Esq. Executive Vice President, Policy, Research & Membership, PhRMA, before the Senate Health, 

Education, Labor and Pensions Committee (October 17, 2017), available at 

https://www.hclp.senate.gov/imo/media/doc/Rei!ly2.pdf. 
210 


29424.131

December 13,2017 

Page 8 of 14 

Contract "Negotiations." PBMs' ability to secure anti-competitive and one-sided contract terms 

from LTC pharmacies convincingly demonstrates the anticompctitive impact that PBM market 

consolidation and vertical/horizontal integration. In Eastman Kodak Co. v. Image Technology 

Services, the Supreme Court found that the ability of a firm to raise prices unilaterally constitutes 

direct evidence of market power. 16 LTC pharmacies must routinely accept contracts with payment 

fonnulas that allow PBMs to change prices daily and with no consideration of the prices 

competitors pay for the same medication and related services. SCPC's members are routinely 

forced to accept "take it or leave it" contracts which reflect the inordinate market power that PBMs 

wield in the LTC pharmacy market. (SCPC urges the Committee to consult CMS' Part D Group 

to learn of examples CMS has had to address for the last decade, and particularly in the last three 

years during the PBM industry's period of rapid consolidation.) In 2016, Caremark attempted to 

increase its already disproportionate market power by refusing to negotiate with the largest PSAO 

representing LTC pharmacies in negotiations for its 2017 contracts on behalf of Part D POPs. 

Caremark improperly tried to influence LTC pharmacies to accept its unilateral, pharmacy-bypharmacy contracts by refusing to honor key provisions of its existing contracts in 2016 unless the 

pharmacy accepted the unilateral contract for 2017. SCPC informed CMS of this predatory 

practic(:, and the agency instructed Caremark to honor its existing contracts. 

MAC Pricing- Another PBM Abuse. The Medicare Part D statute allows PDPs/PBMs to use a 

methodology known as Maximum Allowable Cost (MAC) pricing to establish payment rates for 

most generics. Under this methodology, the pharmacy does not know the payment rate for any 

medications at the time a contract is signed because MAC pricing allows the PDPs/PBMs to 

change payments on a day-to-day basis, provided that those changes are based on actual and 

identifiable changes in the marketplace. 17 

In 2015, SCPC asked Avalere to examine 24 million Part D claims for the eight-quarter period 

ending March 31, 2015 and, in part, to determine whether there is any relationship between PBM 

rate changes for commonly prescribed generics and identifiable marketplace changes. The results 

are deeply troubling. The resultant report, issued in November 2015, demonstrates there is no 

apparent relationship between changes in the amount a PBM pays for a medication and actual 

changes in the marketplace. 18 

For example, in April 2014, Omeprazole was the most commonly prescribed medication in 

America's nursing homes. On April 2, ExpressScripts paid about $1.22 for the cost of the 

medication. The next day, April 3, ExpressScripts paid about $0.58 for the cost of the same 

medication. Two weeks later, on April 15, ExpressScripts paid about $0.14 for the cost of the 

same medication. By contrast, for the entire month of April 2014, Caremark's payment for the 

same medication varied from $0.14 to $0.18. Optum paid a consistent $0.22 for Omeprazole every 

day of the month. 

1

6 504 u.s. 451,477-78 (1992). 17 See also Forbes, Reform Pharmacy Benefit Managers (PBMs) To Improve Pharmaceutical Affordability (March 7, 

2017) (noting inefficiency and impact of MAC prices). 18 The Avalere report is available at: http://seniorcarepharmacies.orglwp-content/uploads/2015/ll/20151116_SCPCMAC-Pricing-Analyses_FINAL.pdf and was introduced by Rep. Collins during a Judiciary Committee hearing. 
211 


29424.132

December 13,2017 

Page 9 of 14 

Either major PBMs have dramatically disparate access to market information or something other 

than marketplace changes are driving day-to-day payment changes. The latter seems far more 

plausible, particularly given PBMs' desultory compliance with a CMS regulation requiring that 

PBMs report information about payment rate changes under MAC pricing and the marketplace 

changes justifying each rate change. When confronted by Rep. Doug Collins (R-GA) during a 

hearing of the Regulatory Reform, Commercial and Antitrust Subcommittee of the House 

Judiciary Committee, witnesses from Caremark and ExpressScripts were unable to provide any 

explanation for, much less identify specific marketplace changes to justify, these day-to-day 

variations within an individual PBM or between PBMs. 19 They did acknowledge, however, that 

PBMs managed multiple formularies with differing prices for the same medication on the same 

day, with all payment rates calculated using the MAC pricing methodology. If MAC pricing truly 

were based on identifiable marketplace changes, then differing prices for the same medication on 

the same day by the same PBM simply due to different formularies logically could not occur. The 

most obvious explanation is unilateral price manipulation, another hallmark of an o!igopolistic 

marketplace. 

The regulation in question requires that PDPs, through their respective PBMs, report price changes 

and identify the marketplace changes justifying such changes weekly, and that they provide the 

reports in formats that are user-friendly for pharmacies. 42 C.F.R. § 423.505. PBMs have honored 

this regulation in the breach, such that no useful or user-friendly data has been reported to CMS 

since the regulation became effective in January 2016. We urge the Committee to examine this 

issue as well. 

DIR- PBMs' Uniustifiable Fees. PBMs process LTC pharmacy claims under Part D. In recent 

years, PBMs have imposed and continue to impose a surprising and growing array of fees on LTC 

pharmacies. These fees have little market-based justification; rather, they represent yet another 

example of PBMs wielding undue oligopolistic power to the detriment of consumers, government 

payers, LTC pharmacies and free market competition. 

PBM fees fall primarily into three categories: claims processing (or "point-of-sale" fees), "Direct 

and Indirect Remuneration" or "DIR" fees (post-point-of-sale clawbacks) and "quality" or 

"performance" fees (also post-point-of-sale). PBMs also regularly create and impose new fees 

without prior notice or explanation to LTC pharmacies, and no recourse for the LTC pharmacies 

but to "pay" the fees. 20 PBMs charge LTC pharmacies a claims processing fee ranging from $0.25 

to $1.00 per claim. A substantial majority of claims are processed on a computer-to-computer 

basis, and LTC pharmacies submit hundreds of millions of Part D claims annually. There simply 

is no market-based justification for such exorbitant fees, and policy analysts often overlook pointof-sale fees like claims processing fees in discussing the impact PBM practices have on the 

marketplace. 

19 The subcommittee hearing occurred on November 17, 2015, and was the third in a series of hearings on the state of 

competition in the health care marketplace. This specific hearing concerned "[t]he State of Competition in the 

Pharmacy Benefit Manager and Pharmacy Marketplaces." Https://judiciary.house.gov/press-release/regulatoryreform-subcommittee-to-hold-third-hearing-on-the-state-of-competition-in-thc-health-care-marketplace/. 

20 ~"Payment" of these fees is a misnomer, since PBMs typically subtract fees from future payments, making it even 

harder f<lr LTC pharmacies to contest or even obtain explanations of fees before PB:vls take monies from LTC 

pharmacies. 
212 


29424.133

December 13, 2017 

Page 10ofl4 

With respect to DIR fees, CMS recently concluded that PBMs do not pass these fees on to 

consumers or reduce Medicare expenditures on Part D; not only are the fees pure profit for the 

PBMs and POPs, but they actually and routinely misrepresent them to CMS: "[o]ur analysis of the 

Part D plan payment and cost data indicates that in recent years DIR amounts Part D sponsors and 

their PBMs actually received have consistently exceeded bid-projected amounts." 82 Fed. Reg. 

56240 (November 15, 2017). DIR fees have no clear market justification. Rather, they serve 

simply to drive up costs to the federal government, consumers and pharmacies to benefit PBMs' 

bottom Iines. 21 

PBM's Unconvincing Effort to Mask DIR Fees as "Quality" I Ioldbacks: With respect to "quality" 

fees, one example illustrates how PBMs and their corporate parents manipulate the system to 

impose fees on LTC pharmacies that not only increase profits for the PBMs but also increase 

profits for their corporate siblings. LTC pharmacies contract with assisted living facilities 

("ALFs") to provide prescription medications and pharmacy services to facility residents. 

In some of its contracts with LTC pharmacies that serve ALFs, ExprcssScripts imposes a postpoint-of-sale "quality fee." The quality fee is calculated such that the higher the percentage of90-

day prescriptions dispensed, the higher the score on this "quality" metric and the lower the fee 

imposed on LTC pharmacies. LTC pharmacies generally do not dispense in quantities greater than 

30-day supplies, and various payment programs strongly encourage- and in some cases require 

that the dispensing cycle be shorter. In particular, the Medicare program requires that brand name 

drugs be dispensed to nursing home patients in supplies no greater than I 4 days. 

More importantly, the longer the dispensing period, the greater the likelihood of patient noncompliance, particularly in environments like ALFs where residents are responsible to administer 

their own medications. The ExpressScripts "quality" metric in fact is inversely related to quality. 

It is directly related, however, to the percentage of mail-order prescriptions dispensed because 

mail-order pharmacies typically do dispense for 90 days. With ESI owning not only the 

ExpressScripts PBM but also the largest mail-order pharmacy in America, and with mail-order a 

realistic alternative for ALF residents to obtain prescription medications, this quality fee seems to 

be nothing more than naked exploitation by the PBM to benefit its affiliated mail-order business. 

It appears that Carcmark may have created a new fee imposed on LTC pharmacies beginning in 

2017 that is based on the same principle and, of course, Caremark's corporate parent, CVS Health, 

also owns one of the nation's largest mail order pharmacies. 

11 In the retail context, a corollary to these "clawbacks" through DJR fees, consumers often would pay Jess for 

prescription medications if they paid out-of-pocket rather than if they rely on insurance coverage, because the co-pays 

the insurers charge (as negotiated and administered by PBMs on behalf of health plans) are greater than the out-ofpocket cost for the consumer. "Prescription Drugs May Cost More With Insurance Than Without It," note 3, supra. 

As a consumer quoted in the article states: "It just doesn't seem right ... I just feel that the pharmaceutical industry and 

the health care industry are pulling these numbers out of thin air." The nexus between the pharmaceutical industry 

and the health care industry for consumers is the PBM industry, which of course is just a part of megalithic and 

oligopolistic conglomerates that are, in fact, pulling numbers out of thin air, a practice which Congress should stop 

immediately. 
213 


29424.134

December 13, 2017 

Page II of 14 

Summary: As clearly documented throughout the National Academy of Sciences Report, 22 all of 

these fees are opaque to consumers, LTC pharmacies and even the Medicare program itself. CMS' 

recent report underscores the need for transparency with respect to all of the fees and charges 

PBMs impose seemingly at whim on LTC pharmacies, particularly given the demonstrable and 

adverse impact on consumers, government payment programs and free market competition. 

The National Academy's first recommendation is that PBM transparency be mandated to 

understand the dollars that PBMs are retaining relative to their value: 

Potentially, this represents the largest opportunity among the committee's 

recommended actions. Transparency would help bring the margins of PBMs and 

3408 hospital and clinic plans toward a range that is more commensurate with the 

value they deliver. It might also lower prices from the biopharmaceutical 

companies. And transparency likely will reduce bad behavior and abuse in the 

market. Participants in the markets will perform better. 1 f properly structured, this 

would pass savings on to patients. Importantly, it would not inhibit investments in 

research and development. 23 

We urge the Committee to pursue PBM transparency- for the benefit of consumers, for the Part 

D program, and for pharmacies as well. 

III. The PBMs' Trifecta · Excess Profits for PBMs. Harm to Consumers Medicare & 

Pharmacies and Damage to the Free Market 

In its' January 19, 2017 analysis, CMS clearly demonstrated how PBM practices increase costs to 

consumers and the federal government. More specifically, for Part D beneficiaries who pay copays and deductibles (i.e., Part D beneficiaries who are not dually eligible for both Medicare and 

Medicaid), CMS analysis conclusively demonstrates that PBM practices result in higher out-ofpocket costs for beneficiaries. The analysis also confirmed that PBMs approve certain medications 

in part to force Part D beneficiaries through the "donut hole" in Part D coverage. There are two 

reasons for this: ( l) the more, and more expensive, the medications a beneficiary takes, the greater 

the revenue and profit for the PBM; and (2) the sooner the beneficiary reaches the donut hole, the 

greater the revenue and profit for the PBM and PDP because the federal government's share of 

overall payment for prescription medication increases to 85% once a patient enters the catastrophic 

layer of Part D coverage. 24 For PBMs, this is the trifecta- they retain the rebates and DIR fees 

which go directly to the bottom line, consumers are pulled through coverage layers of the Part D 

program quicker without PBMs having to share savings, and beneficiaries hit the Part D 

"catastrophic" coverage level sooner, reducing PBMs payment for beneficiaries and increasing 

federal costs to offset the PBM savings. 

"Report at 16, 50, 160. 23 Report at 160. 24 See. e.g., htpps://www.cms.gov!Newsroom/MediaRelcaseDatabaseiFact-shccts/20 17-Fact-Shcet-items/20 17-01-

19-2.html. 
214 


29424.135

December 13,2017 

Page 12 of 14 

PBMs also unduly and improperly harm pharmacies in the process by exacting unjustified DIR 

fees, which also go directly to the bottom line. Indeed, CMS's January findings were further 

sharpened in its recent Part D Proposed Rule, where CMS (referring to PBMs as "sponsors") more 

deeply analyzed how PBMs (mis)managc DJR fees and demonstrated how the PBMs keep these 

fees as profit, rather than use them for any legitimate purposes. In the Proposed Rule, CMS noted: 

"only a handful of plans have passed through a small share of price concessions to beneficiaries at 

the point of sale. Instead, because of the advantages that accrue to sponsors in terms of 

premiums ... the shifting of costs, and plan revenues, from the way rebates and other price 

concessions applied as DlR at the end of the coverage are treated under the Part D payment 

methodology, sponsors may have distorted incentives, 82 Fed. Reg. 56336, 56419 (Nov. 28, 2017). 

CMS is not the only entity to reach this conclusion; Dr. Sood concluded both that PBMs earn 

excess profit and that PBMs contribute to higher drug costs. 25 Further, a recent analysis by the 

Wakely Group evaluated the budgetary impact of legislation pending in Congress to eliminate DIR 

fees under Part D contracts. The Wakely Group analysis concluded that the legislation would save 

the Medicare program more than $3 billion over 10 years. 26 The necessary corollary to this 

conclusion is that DIR fees currently cost the Medicare program money, thereby increasing the 

cost to the federal government for prescription drugs under Part D. 

Consumer choice is also restricted by PBMs, although few consumers are aware of these 

restrictions. PBMs negotiate formularies based primarily on the rebates (for brands) and discounts 

(for generics) they and the plans they represent will earn. Thus, financial incentives for PBMs and 

PDPs determine the medications to which insureds will have access, rather than clinical 

considerations and the medical needs of an individual patient. Essentially, PBM and PDP profit, 

not patient quality or out-of-pocket cost, determines the medications to which enrollees have 

access. 

The result is twofold. Some consumers will receive less than optimal medications to treat their 

clinical conditions. Others will face higher prices for clinically optimal medications. In either 

case, consumers are adversely affected- either with inferior quality of care or higher out-of-pocket 

costs. 

Finally, LTC pharmacies clearly suffer from the unfair exploitation of market power detailed in 

Section II. This is not merely a threat to competitors, but it will increase costs to both consumers 

and the Part D program. As independent LTC pharmacies are forced out of the market by predatory 

pricing and practices, market concentration increases and prices inevitably increase as well. 

IV. Recommendatjons 

The issues and concerns raised at the Committee's hearing and in this written statement justify 

Congress taking a hard look at the PBM sector, and revisiting some of the assumptions that 

Congress bas made over the past decades when enacting Medicaid reforms and the Part D program. 

25 

https://www .ftc.gov /system/files/documents/pub lie_ events/125 5 65 3/undcrstanding_ competition _in _JJrescription .. dr 

ug_markets_workshop_slides_ll-8-17.pdf (Slides 91-96) 26 Available at http://www.ncpa.co/pdf/wakely-report.pdf. 
215 


29424.136

December 13,2017 

Page 13 of 14 

The Part D program began as a free market exercise, but has become an oligopolistic market 

benefitting only PBMs and the corporate conglomerates of which they are a part. Legislation is 

needed to enact PBM reforms, and require that PBMs not abuse their market position to the 

detriment of consumers, pharmacies or the federal fisc. 27 

First, Congress should consider legislation requiring PBMs to pass through all rebates. On 

November 16,2017, CMS issued a Proposed Rule that sought public input on several suggested 

approaches to compelling PBMs to pass all rebates on to Part D beneficiaries. The Subcommittee 

could accelerate development and consideration of such legislation by holding a hearing 

specifically focused on these issues. 

Second, Congress should enact pending legislation designed to eliminate or severely restrict the 

use ofDIR fees and to require greater transparency regarding PDP and PBM pricing and practices. 

See, e.g. H.R. 1038 (addressing DIR fees); H.R. 1316 (addressing PBM transparency). 28 Once 

again, the Subcommittee could accelerate consideration of pending legislation with a hearing 

focused specifically on these concerns. 

Third, the Subcommittee should hold a follow up hearing to evaluate how PBMs and the corporate 

conglomerates of which they are a part exploit undue market power in to the detriment of 

consumers (including Part D beneficiaries), the Medicare program and the free market. As part of 

that hearing, we recommend the Committee closely scrutinize the proposed CVS Health 

acquisition of Aetna in the context of the market power and leverage the corporate conglomerates 

particularly CVS Health- have been able to develop. 

Finally, the Subcommittee should refer related issues to the House Judiciary Committee for further 

investigation and evaluation from the perspective of the adverse impact on competition and the 

shocking degree to which the Medicare Part D program, and America's health care system, has 

become a creature of ever-larger oligopolistic corporate conglomerates rather than a free and fair 

marketplace. 

Conclusion 

SCPC thanks the Subcommittee for its focus on the drug distribution chain, and how PBMs drive 

higher prices and higher out-of-pocket costs. We welcome the opportunity to work with the 

Subcommittee in the future, and applaud further efforts by the Subcommittee to investigate and 

17 See also Forbes, To Improve Pharmaceutical Pricing, Reform PBMs And Fix Health Care's Systemic Problems 

(April4, 2017). 28 CMS has also sought comments in its recent Part D Proposed Rule on ways in which PBMs could be required to 

share rebates and DIR fees with consumers at the point of sale, rather than keep rebates and DIR fees as PBM 

profits. 82 Fed. Reg. 56336,56419 (Nov. 28, 2017). We encourage the Committee to work with the Agency to 

expand upon the Agency's ideas and to require PBMs to pass through the rebates, as Congress and CMS originally 

intended when the Part D Program was created. Unfortunately, the CMS approach to pharmacy fees is misguided. 

As explained more fully in the statement, PBM pharmacy fees are nothing more than exploitation of undue 

oligopolistic market power to the detriment of pharmacies more so than consumers. The appropriate market 

correction regarding pharmacy fees is eliminating them altogether, as various bills pending in both the House and 

Senate propose. 
216 


29424.137

December 13,2017 

Page 14 of 14 

legislate in this area so we can return to the free market principles that underlie the nation's laws 

and the Part D program. 

Alan Rosenbloom 

President & CEO 
217 


29424.138

Coalition for Affordable Prescription Drugs 

Statement for the Record 

U.S. House of Representatives Committee on Energy and Commerce, Subcommittee on Health 

December 13, 2017 

The Coalition for Affordable Prescription Drugs (CAPO) appreciates the opportunity to submit 

the following statement for the record. 

The Coalition for Affordable Prescription Drugs (CAPD) represents a diverse group of large 

employers, labor unions, health plans, public sector employees and retirees, and other 

stakeholders who partner with pharmacy benefit managers (PBMs) to help manage costs so 

that they can continue to offer affordable, accessible health and drug benefit coverage to their 

employees and members. 

We appreciate Dr. Burgess's convening of this hearing on the very real impact rising drug prices 

have on patients, employers, taxpayers, and our health care system. A new study shows that 

Americans believe that lowering drug prices should be a top priority for Congress.' 

An important fact in the debate over high drug prices is this: drug manufacturers-- and drug 

manufacturers alone-- set the price for prescription medicines. 

We are fortunate to live in a time of unprecedented medical breakthroughs. Manufacturers are 

developing treatments and cures for diseases like Hepatitis C that improve and extend the lives 

of patients. We all want patients to have access to these medicines, but the innovative power 

of these medicines is rendered moot when patients are unable to afford them because of the 

price set by manufacturers. 

The most impactful change to make medicines more affordable for patients would be for 

manufacturers to price medicines responsibly. Yet, manufacturers' prices continue to rise/ 

increasing by more than nine percent in 2016 alone, following double-digit increases every year 

since 2012. 

Year List price increase 

2012 10.0% 

2013 11.4% 

2014 13.7% 

2015 12.0% 

1 https:/ /www.politico.com/f/?id=00000160-2734-d0c8-a9eb-2ff71c200000 2 http://www. i mshea lth.co m/ en/thought-leadership/qui ntilesims-instit ute/re ports/medicinesuse-and-spending-in-the-us-review-of-2016-outlook-to-2021 
218 


29424.139

2016 9.2% 

It is important to realize that the prices set by manufacturers are the starting point. Pharmacy 

benefit managers (PBMs) use their size and scale to negotiate the lowest net price for 

prescriptions and drive down costs on behalf of employers, unions and other health care 

purchasers. 

Despite drug manufacturers setting higher and higher prices, pharmacy benefit managers have 

kept the net prices that their clients pay steady, increasing only 3.5 percent the same year3 that 

manufacturer list prices rose 9.2 percent. That difference represents savings for PBM clientsthe employers, unions, retirement plans and government programs that provide health care 

coverage to 266 million Americans4

• More than 90 percent of these savings are passed on to 

employers and unions and are used to lower out of pocket costs and premiums for employees 

and members. 

In addition to delivering savings through negotiations with drug manufacturers, PBMs support 

better health outcomes and help reduce health care costs through other strategies. Clinical 

expertise helps ensure the safest, most effective and affordable medications are dispensed, 

which in many cases is a generic drug. Patient-focused tools and programs also help to improve 

medication adherence, which is critically important to the nearly 50 percent of Americans with 

at least one chronic disease. 

However, one of the most significant barriers to medication adherence is high out of pocket 

costs. When drug prices increase, patient co-pays and premiums follow suit. The reality is this: 

if manufacturers set prices at more responsible levels- and increased them only at sustainable 

rates- potentially life-saving medicines would be more accessible to the patients that need 

them. 

Fortunately, greater focus is being placed on the prices that drug manufacturers set and the 

implications that ripple through the system as a result. As Gerard Anderson, Professor of 

Medicine at Johns Hopkins University School of Medicine, testified5 to the Senate HELP 

Committee in June, "Many people have argued that the Jist price is irrelevant because few 

entities actually pay the list price. However, the list price is often used to determine the amount 

of cost sharing that many patients will pay. Since the list price is the only price that is publicly 

announced, it becomes the basis for many cost-sharing agreements. Thus, patients are harmed 

when the list price goes up." 

3 http://www .i msh ealth .com/en/thought -leaders hip I q uintilesims-institute/re ports/medicinesuse-and-spe nd ing-i n-the-us-review-of -2016-outlook-to-2021 4 https :/ /www. pcma net.org/wp-conte nt/u ploads/2016/11/ROI-on-P BM -Services-FI NAL.pdf 5 https:/ /www.help.senate.gov/imo/media/doc/ Anderson4.pdf 
219 


29424.140

Ensuring greater access and affordability will also depend on fostering greater competition. 

Facilitating faster reviews of generics and biosimilars, identifying off-patent drugs with little or 

no generic competition, and ending anti-competitive practices that keep safe, effective 

alternatives off the market are also key to managing rising drug costs for patients. A 

competitive environment ensures that PBMs can effectively negotiate on behalf of their 

partners, ensuring access to needed medications and, at the same time, bending the cost curve 

of rising drug prices. 

CAPO is grateful for the opportunity to submit this testimony and eager to work with 

stakeholders to find new ideas and build on existing strategies to help drive progress for 

employers, employees, retirees, taxpayers- and for America's future. 
220 


29424.141

National 

Multiple Sclerosis 

Society 

December 11, 2017 

The Honorable Michael Burgess 

U.S. House of Representatives 

Chairman, Subcommittee on Health 

Committee on Energy and Commerce 

The Honorable Gene Green 

U.S. House of Representatives 

Ranking Member, Subcommittee on Health 

Committee on Energy and Commerce 

Dear Chairman Burgess, Ranking Member Green and Members of the Subcommittee: 

Thank you for the opportunity to submit comments to the Energy and Commerce 

Subcommittee on Health's hearing "Examining the Drug Supply Chain" on behalf of the 

National Multiple Sclerosis Society (Society). The Society works to provide solutions to the 

challenges of multiple sclerosis (MS) so that everyone affected by this disease can live 

their best lives. To fulfill this mission, we fund cutting-edge research, drive change through 

advocacy, facilitate professional education, collaborate with MS organizations around the 

world, and provide services designed to help people affected by MS move their lives 

forward. 

MS is an unpredictable, often disabling disease of the central nervous system, which 

interrupts the flow of information within the brain and between the brain and the body. 

Symptoms range from numbness and tingling to blindness and paralysis. The progression, 

severity and specific symptoms of MS in any one person cannot yet be predicted, but 

advances in research and treatment are moving us closer to a world free of MS. 

Access toMS medications, including disease-modifying therapies (DMTs), has 

transformed MS treatment over the last two decades. Today there are 15 FDA-approved 

DMTs that reduce disease activity and disease progression for many people with relapsing 

forms of MS, including the recent approval of the of the first ever therapy for primary 

progressive MS. These medications are crucial to people living with MS; yet high prices, 

escalating price increases, a complex and opaque supply chain, growing out-of-pocket 

costs, and confusing and inconsistent formularies create real barriers between people 

living with MS and their ability to access the medications they need to live their best lives. 

For a person with MS, getting your medication shouldn't feel like a full-time job. Living with 

MS is already difficult for individuals who often experience cognitive challenges and 

debilitating fatigue. Barriers for people in getting their medications can come in many 

forms. One individual described the challenges they encountered with the supply chain to 

receive their medication; "It took us over a month from the time my MS medication 

was prescribed to the time it was shipped to me. We had to personally coordinate 

between the physician's office, the insurance company, the specialty mail order 

pharmacy our plan requires us to use for this drug, another group our insurance 

uses to complete prior authorizations, the regular mail order pharmacy for our 

insurance, and the manufacturer's finance department." 

® 
221 


29424.142

This process does not describe a system that is designed with the patient in mind. Too 

often, people with MS report significant delays in getting their treatment or changing 

medications when a treatment is no longer working. These delays may result in new MS 

activity and added stress and anxiety from having to navigate a complex web of 

uncoordinated individual (yet increasingly inter-owned) systems, processes and entities to 

get their treatment. 

As there are no easy answer or solutions to this complex issue, the Society's Advisory 

Committee on Access to MS Medications- comprised of people with MS, family members, 

health policy experts and health care providers- released recommendations (also 

attached) as a part of the Society's "Make MS Medications Accessible Initiative" (Initiative) 

to ensure that MS medications are affordable and the process for getting them simple 

and transparent. 

The Initiative calls on all parties involved in the supply chain -pharmaceutical companies, 

insurance providers, pharmacy benefit managers, specialty pharmacies, health care 

providers, policy makers, and patients- to work together to address escalating prices and 

other issues that are creating significant barriers to treatment 

A critical element that is needed to address these barriers is increased transparency from 

all elements the pharmaceutical system and supply chain- manufacturers, insurers and 

pharmacy benefit managers. Improving the system will require all parties to be operating 

from the same level of information. Currently, it is difficult to assess deficiencies in the 

system and implement solutions because there is a lack of publicly available information. 

One individual with MS noted the challenges that result from a lack of public information on 

the cost of a therapy; "I hesitate to go on disease modifying drugs because of the 

cost, I work in the insurance industry and even if I have insurance coverage, the 

cost of these drugs is prohibitive and shifted one way or another. There needs to be 

much more transparency .•• " 

The Society believes Congress can serve a vital role in moving these conversations 

forward by: 

• Investigating the role of Intermediaries and roadblocks that impact pharmaceutical 

prices, access, and quality within the pharmaceutical supply chain, including fees at 

various points of the supply chain. 

Examining the perverse incentives within the supply chain for manufacturers to 

charge higher prices and then rebate more extensively. It appears that when this 

happens, many within the supply chain benefit- except for the patient who may be 

faced with a higher cost-share per month and/or during a deductible period or 

Medicare's coverage gap. 

• Considering the impact of mergers and consolidations within the health system and 

supply chain in decreasing competition and limiting choices for consumers (of 

insurers and distribution options). Do mergers and consolidations meet some of the 

staled goals of improving health outcomes? Are people with chronic illnesses 

impacted differently? Are there savings throughout the supply chain and health 

system due to mergers and consolidations? 
222 


29424.143

Ensuring that the supply chain and health care system works for the patient 

The pharmaceutical supply chain is an inherent part of the nation's health care system. 

For far too long, conversations about ways to improve the entire health system have 

occurred without input from whom we believe should be at the center of all of these 

decisions--the patient who relies on medications to live their best lives. We urge the 

Committee to schedule a hearing to hear directly from patients on how the health system 

and phamnaceutical supply chain can better meet their needs. 

We believe that the health care system should be simplified and coordinated so that 

patients can get their medication without stress or delay. The current system is not 

working for people with MS. In addition to the complexities already mentioned, 

requirements for individuals to use a particular specialty pharmacy can translate to realworld problems for people with MS. If they are unable to change the delivery date of their 

medication for instance, or if they're not home-their medication could be left out in the 

heat! cold or they may not be able to get an adequate supply if traveling. Disrupted 

treatment can result in negative health consequences for the person with MS-such as 

MS exacerbations-and higher costs to the healthcare system. 

Overwhelmingly, prior authorization requests are approved for MS medications, so 

simplifying and streamlining these processes just makes sense. Reducing paperwork and 

end of year burdens on both people with MS and their health care providers is a win for 

individuals and the health system alike. Large health offices report staff spend 20-30 hours 

per month on prior authorization, step therapy, appeals and other insurance coverage 

issues for people with MS. 

We call for stakeholders to work together to reduce redundancies in the system to 

increase efficiency and reduce the burden for the person with MS. The Society has 

specific recommendations on how to make the health care system work people living with 

MS; 

• Prior authorization should happen before the person with MS leaves the healthcare 

provider's office. 

• A person with MS should have the option to get their medication from multiple 

phamnacies; requiring a single specialty pharmacy may not work best for that 

individual. 

• Step therapy should make sense, and not result in detrimental delays in accessing 

appropriate medications. Individuals should not be required to fail on similar 

mechanisms of action, similar routes of administration or a medication they have 

failed previously. 

• Prior authorization approval should be good for a lengthy time period, including 

across multiple years, as long as the person is stable on the medication. 

• Allow multi-year approvals for patient assistance programs. 

It's also important for someone living with MS to get the right treatment and if it's working, 

be able to stay on that treatment. MS is a heterogeneous disease and medications may 

work differently for individuals. An individual with MS recently described the worry that 

results when coverage changes; "I worry the insurance companies or employers will 

tell the doctors to put me on a less expensive medicine. I do not want to change 

what is working." 
223 


29424.144

Thank you for the opportunity to provide our perspective on the U.S. supply chain and its 

impact on people living with MS. If you have any questions, please contact Senior Director 

of Federal Government Relations Leslie Ritter atleslie.ritter@nmss.org or 202-408-1500. 

We look forward to working with the Committee and all stakeholders as you work to 

improve the U.S. pharmaceutical supply chain to better serve people living with MS. 

Sincerely, 

Sari Talente 

Executive Vice President, Advocacy 

National Multiple Sclerosis Society 
224 


29424.145

Make MS Medications Accessible: 

Recommendations National 

Multiple Sclerosis 

Society 

Multiple sclerosis (MS) medications have transformed the treatment of relapsing MS over the 

last 20 years. Yet, many people living with MS cannot access the medications they need. 

Continually escalating prices are creating significant barriers to treatment, including higher 

costs, increased stress, and a greater burden for those who already live with a chronic, lifealtering condition. 

Studies show that early and ongoing treatment with a disease-modifying therapy is the best 

way to modify the course of the disease, prevent the accumulation of disability and protect the 

brain from damage due to MS. So why are these life-changing medications too often out of 

reach for those who need them? 

People with MS report high and rapidly escalating medication prices, increasing out-of-pocket 

costs, confusing and inconsistent formularies (the lists of medications an insurer will pay for), 

and complex approval processes that stand in the way of getting the treatments they need. 

These challenges can cause delays in starting a medication or changing medications when a 

treatment is no longer working. Delays may trigger new MS activity and cause even more 

stress and anxiety about the future for people already living with the complex challenges of an 

unpredictable disease like MS. 

It is time for change. People with chronic illnesses need to know that they'll be able to get the 

life-changing medication they need. The National MS Society is launching our effort to make 

medications accessible, reflecting the needs of the MS movement and rallying all parties 

involved- pharmaceutical companies, insurance providers, pharmacy benefit managers, 

specialty pharmacies, health care providers, policy makers, people with MS and others to 

work together to focus on getting people with MS the medications they need to live their best 

lives. 

Medications can 

Medications and the process for getting them must be: 

affordable, simple and transparent. 
225 


29424.146

Natlanal 

Multiple Sderosis 

Society 

The campaign recommendations were developed by the Society's Advisory Committee on 

Access toMS Medications, a group comprised of people with MS, family members, health 

policy experts and healthcare providers. They were informed by extensive stakeholder 

engagement and feedback, including a survey to gain the perspectives of more than 8,500 

people with MS. The recommendations are comprehensive, address the challenges across 

many stakeholders, and provide the basis for conversations to create change. No single 

stakeholder has all the solutions; we can only find the solutions together. 

Contents 

Affordable ...................................................................................................................................................................... 3 

Price ............................................................................................................................................................................... 3 

Insurance Plan Design ............................................................................................................................................ 4 

Market and Regulatory Considerations ........................................................................................................... 4 

Medicare ...................................................................................................................................................................... S 

Simple ............................................................................................................................................................................... s 

Get the Right Treatment to the Right Person ................................................................................................ 7 

Stay on Treatment that Works ............................................................................................................................ ? 

Simplify and Coordinate Paperwork and Processes ................................................................................... S 

Transparent .................................................................................................................................................................. B 

Clarify how Relevant Information Can Be Shared ....................................................................................... 9 

Transparency from Manufacturers ................................................................................................................... 9 

Transparency from Insurers and Pharmacy Benefit Managers .......................................................... tO 

Transparency within the System .................................................................................................................... 10 

Chart: Recommended Stakeholder Action ................................................................................................ 11 
226 


29424.147

Affordable 

National 

Multiple Sclerosis 

Society 

The high prices of the MS medications make treatment for many people unaffordable and 

inaccessible. MS disease modifying therapies first entered the market in the 1990s priced 

between $8,000-$15,000 per year. Newer medications have commonly been introduced to the 

market costing 25-60% higher than existing therapies.i 

Today, the average price of the MS treatments has increased nearly 400% since 2004. At the 

same time, insurance design increasingly moved from co-pays to co-insurance for specialty 

medications, with co-insurance forMS medications as high as 40%- which could be $2,600 

each month. On the health insurance exchanges created through the Affordable Care Act, more 

than 10% of silver plans have greater than 40% coinsurance for all the MS medications and 

nearly a third of plans place all covered MS therapies on a specialty tier. Reducing prices and 

limiting out-of-pocket costs will allow more people to access life-changing medications 

Price 

Innovation in MS has changed the lives of many people living with MS. We need innovation to 

continue, while finding a better balance between innovation and affordability, so that people 

with MS can get the treatments they need in a timely and affordable way. Pricing medications 

and determining price increases is a complicated area that requires greater openness and 

recognition that price does impact access. 

Recommendations: 

Limit price increases for medications that have been on 

the market for a considerable time. 

Reduce prices for medications that have drastically 

increased in price since first entering the market. 

Pricing for new treatments to the MS market should 

consider research and development costs, the value of the 

medication from the perspective of people with MS and 

health care providers, how price impacts patient access to 

medications and other medications on the market. 

Value-based pricing should be explored and must include 

patient engagement in determining value for a lifelong, 

chronic disease like MS. 
227 


29424.148

Insurance Plan Design 

National 

Multiple Sclerosis 

Society 

Specialty medications to treat a chronic disease like MS are expensive, yet crucial for people to 

live their best lives. A growing body of evidence suggests that higher cost sharing for specialty 

medications is associated with reductions in use. "In a recent study of people with MS and 

health insurance, those who reported a negative insurance change in the previous 12 months 

had greater odds of not taking their MS medications."; Out-of-pocket costs associated with 

insurance should not prevent someone from using the medication they and their healthcare 

provider decide is the best option. 

Recommendations: 

All available medications for a particular disease must not be on a specialty tier with coinsurance. 

Out-of-pocket costs should not be so high that individuals skip doses or abandon their 

medication entirely. Reduction in use and adherence data should be considered 

when determining out-of-pocket costs. 

Out-of-pocket costs for those with significant health expenses should be spread more 

evenly throughout the year so these costs arc not a disincentive to receiving needed 

treatment and care. 

Market and Regulatory Considerations 

Specialty medications do not follow a simple supply and demand economic model. Rather, 

product uptake is dependent on a complex economic supply chain and formulary design. 

Financial projections should take these factors into consideration and market expectations 

should be adjusted accordingly. Minor tweaks to existing products should not be afforded 

lengthy patent protections. Special incentives and possible regulatory intervention should 

occur when the free market docs not appear to be working. When encouraging competition 

like generics or biosimilars, it should be recognized that multiple generics are required in the 

market before price is significantly impacted. 

4 
228 


29424.149

Recommendations: 

Incentivize multiple generics or biosimilars for a reference product. 

National 

Multiple Sclerosis 

Society 

Increased HHS regulatory oversight of drug classes that do not fit the expectations of a 

competitive market. 

Eliminate lengthy patent protections for minor tweaks to existing products. 

Medicare 

People with MS report significant difficulties affordably accessing their medications through 

Medicare. Cost sharing for brand name medications is increasingly in the form of co-insurance 

rather than a copayment. In 2016, 31 o/o of Medicare prescription drug plan enrollees have coinsurance for preferred brand medications and 96% have co-insurance for non-preferred 

brand medications.'v In 2012,96% of those on Medicare taking an MS therapy reached the 

catastrophic coverage limit, and nearly half did so by February.v While the trend in other types 

of insurance is to limit out-of-pocket costs, people on Medicare currently have no limit on their 

financial burden. 

Recommendations: 

Limit the out-of-pocket costs for prescription medications. 

Allow Medicare to negotiate prices for medications. 
229 


29424.150

National 

Multiple Sclerosis 

Society 

Getting your medication shouldn't feel like a full-time job. Living with MS is already difficult for 

individuals who often experience debilitating fatigue and cognitive challenges. Too often, 

people with MS report significant delays in getting their treatment and added stress and 

anxiety from having to navigate a complex web of uncoordinated systems, processes and 

entities in the health care system to get their treatment. 

Make the Health Care System Work for the Person Who Needs the 

Medication 

The health care system should be designed for the ease of the person who needs the 

medication, so they can get their medication without stress or delay. Overwhelmingly, prior 

authorization requests are approved forMS medications, so simplifying and streamlining these 

processes just makes sense. Reducing paperwork and end of year burdens on both people with 

MS and their health care providers is a win for individuals and the health system alike. Large 

health offices report staff spend 20-30 hours per month on prior authorization, step therapy, 

appeals and other insurance coverage issues for people with MS. 

Recommendations: 

Prior authorization should happen before the person 

with MS leaves the healthcare provider's office. 

A person with MS should have the option to get their 

medication from multiple pharmacies; requiring a 

single specialty pharmacy may not work best for that 

individual. 

Step therapy should make sense, and not result in 

detrimental delays in accessing appropriate medications. Individuals should not be 

required to fail on similar mechanisms of action, similar routes of administration or a 

medication they have failed previously. 

Prior authorization approval should be good for a lengthy time period, including across 

multiple years, as long as the person is stable on the medication. 

Allow multi-year approvals for patient assistance programs. 
230 


29424.151

Get the Right Treatment to the Right Person 

MS is a heterogeneous disease and medications may work 

differently for individuals. Insurance and pharmacy benefit 

manager (PBM) coverage of the MS therapies is currently highly 

variable and based on rehate negotiations rather than expert 

advice, making it difficult for people with MS to move between 

plans. More consistency in coverage of MS medications across 

plans, with allowances for flexibility in finding the right 

treatment, would help simplify the system for people with MS 

and healthcare providers, and promote shared decision-making 

between a person and their healthcare provider. Today, the 

decision of which medication to use is often based on what's 

covered rather than what's best for the individual. 

Recommendations: 

Develop consensus prescribing guidelines, led by the MS 

healthcare provider community. 

National 

Multiple Sclerosis 

Society 

Ensure insurance plan design promotes access to treatments, particularly for those with 

chronic conditions, with decisions based on medical evidence and patient-centered 

factors. 

Invest in research like precision medicine and biomarkers, to further understanding of 

which treatment works best for which individuals. 

Stay on Treatment that Works 

Once a person with MS finds a medication that works, we should make it simple for that person 

to stay on their treatment. 

Recommendation: 

People should remain on a treatment that works for them regardless of changes in 

medication coverage and insurance plan changes. 
231 


29424.152

Simplify and Coordinate Paperwork and Processes 

People with MS should not be overburdened by paperwork or 

be responsible for coordinating different entities to work 

together just so they can get their medication. We can simplify 

and integrate processes so there are no delays in getting 

medication and the person with MS is not overwhelmed. 

Recommendations: 

Develop a uniform patient assistance application for 

patient assistance/co-pay programs across the 

manufacturer and non-profit programs. 

Different entities involved in providing medications 

must work together to coordinate their interactions to 

increase efficiency and reduce the burden for the person 

with MS- including the insurer, pharmacy benefit 

manager, specialty pharmacy and patient assistance program. 

National 

Multiple Sclerosis 

Society 

Reduce redundancies and develop integration in processes across stakeholders. 
232 


29424.153

National 

Multiple Sclerosis 

Society 

There is increased pressure on all health care consumers to make good choices. Yet, people 

have very little information about price and cost to make these decisions. Just the term "price" 

can mean several different things. The prices charged forMS medications, the actual cost paid 

for them, and the impacting decisions between a manufacturer price and a negotiated contract 

with an insurer or pharmacy benefit manager, are outside of the public realm. People with MS 

need more information to make informed choices; and we all need greater information to 

improve the system. 

Clarify how Relevant Information Can Be Shared 

Sharing of relevant information will allow stakeholders and individuals within the health care 

system to make better decisions. There are ways we can improve the information flow while 

keeping patient protections at the forefront. 

Recommendations: 

Clarify regulations to permit greater pre-approval information sharing between 

manufacturers and payers. 

Clarify regulations to allow greater information sharing regarding post-approval 

evidence on clinical and economic outcomes. 

Transparency from Manufacturers 

Innovation of new and better therapies is crucial and can be costly. 

People with MS support profitability for pharmaceutical manufacturers, 

but there must be a better balance between innovation and affordability. 

People with MS and others want to help find solutions, but to do so they 

need a greater understanding of research and development and other 

costs, as well as determining factors in setting price and price increases. 

Recommendations: 

Greater information and transparency about: 

o How determining factors are used to set prices 

o How price increases are determined, including frequency of 

increases 

o How prices and price increases support research and development, direct-toconsumer advertising and marketing to healthcare providers 

o Numbers of people assisted and money spent on patient assistance support 
233 


29424.154

Transparency from Insurers and Pharmacy Benefit Managers 

National 

Multiple Sclerosis 

Society 

For people with MS, the formulary (list of approved medications) is the most important part of 

their health insurance coverage and a deciding factor in the health insurance plan they choose. 

Criteria for formulary decisions should be easily available and include factors that are 

important to people taking these medications. 

Recommendations: 

Formulary coverage, including cost-sharing, must be easily 

accessible, understandable and searchable (if online) when 

people with MS are choosing a plan. 

• There must be a significant notification period of any changes 

in coverage in a single year and between plan years. 

Factors used in formulary decision-making should be 

transparent, and should include patient-centered factors. 

Transparency within the System 

The system is driven by rebates, which are negotiations between some 

parties involved in the supply chain but not all parties. This makes it 

difficult to understand the true benefit to the person taking a 

medication. 

Recommendations: 

The publics hould be allowed greater understanding of the stakeholders engaged in 

rebate negotiations, of the factors involved in rebates and the benefits to different 

stakeholders. 

Rebate benefits should be directly passed on to the person taking that particular 

medication. 

Greater understanding and transparency of the varying prices across the system and 

internationally is needed. 

10 
234 


29424.155

Chart: Recommended Stakeholder Action 

National 

Multiple Sclerosis 

Society 

Many of the recommendations above could be implemented by multiple stakeholders. Some 

require Congressional or regulatory action, others are best achieved through a change in 

business practices by one or more stakeholders, and other recommendations could be 

implemented by business practices or public policy change. 

Section Recommendation Stakeholder with Ability 

to Chamze 

Price Limit price increases for medications on . Pharmaceutical 

market for a considerable time. Manufacturers 

. Policy Makers 

Reduce prices for medications which have . Pharmaceutical 

drastically increased in price since first Manufacturers 

coming on the market. . Policv makers 

Pricing for treatments new to the MS market . Pharmaceutical 

should consider research and development Manufacturers 

costs, the value ofthe medication from the 

perspective of people with MS and healthcare 

providers, how price impacts patient access 

to medications, and other medications on 

market. 

Value-based pricing should be explored and . Government agencies 

must include patient engagement in . People with MS 

determining value for a lifelong, chronic . National MS Society 

disease like MS. . Pharmaceutical 

Manufacturers 

. Insurers 

. PBMs 

Insurance Plan All available medications for a particular . Department of Health 

Design disease must not be on a specialty tier with and Human Services 

co-insurance. . Policy Makers 

. Insurers 

. Employers 

Out-of-pocket costs should not be so high . Insurers 

that individuals skip doses or abandon their 

medication entirely. Reduction in use and 

adherence data should be considered 

when determining out-of-pocket costs. 

I 

11 
235 


29424.156

Section Recommendation 

Out-of-pocket costs for those with significant 

health expenses should be spread more 

evenly throughout the year so these costs 

are not a disincentive to receiving needed 

treatments and care. 

Market and lncentivize multiple generics or biosimilars 

Regulatory for a reference product. 

Considerations 

Increased HHS regulatory oversight of drug 

classes that do not fit the expectations of a 

competitive market. 

Eliminate lengthy patent protections for 

minor tweaks to existing products. 

Medicare Limit the out-of-pocket costs for prescription 

medications. 

Allow Medicare to negotiate prices for 

medications. 

Make the Prior authorization should happen before the 

Health Care person with MS leaves the health care 

System Work provider's office. 

for the Person 

Who Needs the 

Medication 

A person with MS should have the option to 

get their medication from multiple 

pharmacies; requiring a single specialty 

pharmacy may not work best for that 

individual. 

Step therapy should make sense, and not 

result in detrimental delays in accessing 

appropriate medications. Individuals should 

not be required to fail on similar mechanisms 

of action, similar routes of administration or 

a medication they have failed previously. 

National 

Multiple Sclerosis 

Society 

Stakeholder with Ability 

to Change 

0 Insurers 

0 Employers 

0 Policy Makers 

0 Government Agency 

0 Policy Makers 

0 Government Agency 

0 Policy Makers 

0 Policy Makers 

0 Government Agency 

0 Policy Makers 

0 Policy Makers 

0 Insurers 

0 PBMs 

0 Policy Makers 

0 Insurers 

0 PBMs 

0 Policy Makers 

0 Insurers 

. PBMs 

. Policy Makers 

12 
236 


29424.157

Section Recommendation 

Prior authorization approval should be good 

for a lengthy time period, including across 

multiple years, as long as the person is stable 

on the medication. 

Allow multi-year approvals for patient 

assistance programs. 

Get the Right Develop consensus prescribing guidelines, 

Treatment to led by the MS health care provider 

the Right community. 

Person 

Ensure insurance plan design promotes 

access to treatments, particularly for those 

with chronic conditions, with decisions based 

on medical evidence and patient-centered 

factors. 

Invest in research like precision medicine 

and biomarkers, to further understanding of 

which treatment works best for which 

individuals. 

Stay on a People should remain on a treatment that 

Treatment works for them regardless of changes in 

that Works medication coverage and insurance plan 

changes. 

Simplify and Develop a uniform patient assistance 

Coordinate application for patient assistance/co-pay 

Paperwork programs across the manufacturer and nonand Processes profit programs. 

Different entities involved in providing 

medications must work together to 

coordinate their interactions to increase 

efficiency and reduce the burden for the 

person with MS -including the insurer, 

pharmacy benefit manager, specialty 

pharmacy and patient assistance program. 

National 

Multiple Sclerosis 

Society 

Stakeholder with Ability 

to Change 

0 Insurers 

0 PBMs 

0 Employers 

0 Policy Makers 

0 Pharmaceutical 

manufacturers 

0 Non-profit assistance 

programs 

0 American Academy of 

Neurology 

0 Insurers 

0 Policy Makers 

0 Government Agencies 

0 National MS Society 

0 Pharmaceutical 

Manufacturers 

0 Policy Makers 

0 Insurers 

0 PBMs 

0 Policy Makers 

0 Pharmaceutical 

Manufacturers 

0 Non-profit Assistance 

Programs 

0 Healthcare Providers 

0 Insurers 

0 PBMs 

0 Specialty Pharmacies 

0 Patient Assistance 

Programs 

0 People with MS 

13 
237 


29424.158

Section Recommendation 

I Reduce redundancies and develop 

I 

integration in processes across stakeholders. 

' Clarify how Clarify regulations to permit greater preRelevant approval information sharing between 

Information manufacturers and payers. 

can be Shared 

Clarify regulations to allow greater 

information sharing regarding post-approval 

evidence on clinical and economic outcomes. 

Transparency , Greater information and transparency about: 

from 0 How determining factors are used to set 

Manufacturers prices 

0 How price increases are determined, 

including frequency of increases 

0 How prices and price increases support 

research and development, direct-toconsumer advertising and marketing to 

health care providers 

0 Numbers of people assisted and money 

spent on patient assistance support 

Transparency Formulary coverage, including cost-sharing, 

from Insurers must be easily accessible, understandable 

and Pharmacy and searchable (if online) when people with 

Benefit MS are choosing a plan. 

~ers 

There must be a significant notification 

period of any changes in coverage in a single 

year and between plan years. 

Factors used in formulary decision-making 

should be transparent, and should include 

patient-centered factors. 

National 

Multiple Sclerosis 

Society 

Stakeholder with Ability 

to Cham:!e 

. Insurers 

. PBMs 

. Specialty Pharmacies 

. Patient Assistance 

Programs 

. Government Agency 

. Government Agency 

. Pharmaceutical 

Manufacturers I 

. Policy Makers 

. Insurers 

. Insurers 

. Policy Makers 

. Insurers 

. Policy Makers 

14 
238 


29424.159

Section Recommendation 

Transparency The public should be allowed greater 

within the understanding of the stakeholders engaged 

System in rebate negotiations, of the factors involved 

in rebates and the benefits to different 

stakeholders. 

Rebate benefits should be directly passed on 

to the person taking that particular 

medication. 

Greater understanding and transparency of 

the varying prices across the system and 

internationally is needed. 

National 

Multiple Sclerosis 

Society 

Stakeholder with Ability 

to Change 

. Pharmaceutical 

Manufacturers 

. PBMs 

. Insurers 

. Policy Makers 

. PBMs 

. Insurers 

. Employers 

. Policy Makers 

. Pharmaceutical 

Manufacturers 

. Insurers 

'Hartung DM, Bourdette DN, Ahmed SM. Whitham RH. The cost of multiple sclerosis drugs in the US and the 

pharmaceutical industry: too big to fail? Neurology 2015;84:2185-2192 

tl Trish E, Xu J, Joyce G. Medicare Beneficiaries Face Growing Out-of-Pocket Burden for Specialty Drugs While in 

Catastrophic Coverage Phase. Health Affairs 2016: 35(9):1564-1571 

111 Wang G, Marrie RA, Salter A, Fox R, Cofield S, Tyry T, Cutter G. Health insurance affects the usc of disease· 

modifYing therapy in multiple sclerosis. Neurology 2016;87:1-10 

tv Hoadley J, Cubanski J, Neuman T. Medicare Part Din 2016 and Trends over Time. Kaiser Family Foundation. 

September 2016 

v Trish E, Xu J, Joyce G. Medicare Beneficiaries Face Growing Out-of-Pocket Burden 

15 
239 


29424.160

•• 

••• 

•• 

••• ALLIANCEforTRANSPARENT & 

AFFORDABLE PRESCRIPTIONS 

House Committee on Energy and Commerce 

Subcommittee on Health 

2125 Rayburn House Office Building 

Washington, D.C. 20515 

December 13, 2017 

Chairman Burgess, Ranking Member Green, and Members of the Subcommittee: 

The Alliance for Transparent and Affordable Prescriptions (ATAP) consists of seventeen patient 

and provider groups who are concerned about the role of pharmacy benefit managers (PBMs) 

in the rising cost of drugs. ATAP is funded entirely by membership dues and does not take 

funding from outside sources. We thank the Subcommittee for scheduling today's hearing 

entitled "Examining the Drug Supply Chain." ATAP was formed on a shared concern that PBMs 

play an increasingly harmful role in our supply chain. 

PBMs are third-party entities that manage and administer prescription drug plans for payers, 

including Medicare Parts C and D plans, TRICARE, the Federal Employees Health Benefits 

Program, employers, and health insurers. Among other functions, PBMs negotiate rebates with 

pharmaceutical manufacturers and manage drug utilization by beneficiaries. Unfortunately, 

there is very little transparency surrounding PBMs and their role within the delivery system, nor 

is there any requirement to pass negotiated savings onto patients. 

PBMs allege that they are saving costs through negotiating rebates and discounts, but patients 

have seen little to no benefit from those "savings." As physicians and patients, we have seen 

firsthand how out-of-pocket costs have risen year after year, even as patients' ability to access 

the medicines they need is compromised through restrictive formularies, tiering, and other 

aggressive utilization management techniques. In fact, the current system seems to encourage 

1 
240 


29424.161

manufacturers to increase their list prices-which are just the starting point for negotiationsand yet, patient cost-sharing is often based on those inflated list prices. 

We urge you to consider the following policy goals to build a better system: 

1. Increase transparency in the rebate system through agreed-upon definitions and public 

disclosure of price concessions. 

2. Reduce patient cost-sharing obligations via flow-through of price concessions. 

3. Improve access to treatments through transparent, clinically sound formularies. 

Increase Transparency 

The current lack of transparency, especially with respect to PBMs, has done little to reduce drug 

costs. One particularly problematic aspect stems from the reclassification of rebates and 

discounts received from manufacturers. Since there is currently no industry standard for key 

terms used in PBM contracts with manufacturers, plan sponsors, and pharmacies, each PBM 

can define terms on an ad hac basis. Because they are typically only contractually obligated to 

pass onto plan sponsors a specified portion of manufacturer "rebates," PBMs exploit the nontransparent nature of their contract negotiations with manufacturers to reclassify a portion of 

the rebates received as "fees" and other designations, allowing them to keep a significant 

portion of the rebate amount as profit. 1 

Another example revolves around the classification of products as "brands" versus "generics." 

PBMs are not required to follow Food and Drug Administration (FDA) definitions for what is and 

is not a "generic" drug. This allows the PBM to define as "generics" products that were not 

approved pursuant to Abbreviated New Drug Applications (ANDAs) by FDA, which is the 

generally understood definition of the term "generic." Conversely, it allows the PBM to define 

as "brands" products that were approved pursuant to ANDAs when that is financially beneficial. 

This lack of definitional agreement enables sleights of hands such as treating single-source 

1 "Comparing Pharmacy Benefit Managers: Moving Well Beyond the Simple Spreadsheet Analysis" by David 

Calabrese, RPh, MHP, Am. Health Drug Benefits, 2008 Jun; 1(5): 9-19. 

2 
241 


29424.162

generic drugs as brand products when financially beneficial or inflating generic substitution 

rates for products that were invoiced as brands. 2 For this particular example, the solution is to 

require PBMs to classify a product as a generic or a brand according to how the product was 

approved by the FDA, consistently across the product life. 

There are other examples of varying treatment of money streams and definitional games and 

trapdoors. Indeed, in the recent Part D rule3 released by the Centers for Medicare and Medicaid 

Services (CMS), the agency notes that variation in the treatment of rebates and price 

concessions may have a negative effect on the competitive balance under the Part D program. 

Additionally, the quality of information available to Part D beneficiaries is even less conducive 

to producing efficient choices when price concessions are treated differently by different Part D 

sponsors. 

Thus, as a first step in improving our current system, Congress must urge the Department of 

Health and Human Services to establish, with stakeholder input and subject to public comment, 

agreed upon definitions for terms commonly used in PBM contracts in any prescription drug 

plan financed by the government. In addition to creating industry standards, this will bring 

clarity and transparency to the various streams of money flowing to and from PBMs. Once 

definitional clarity exists, disclosure will be meaningful. 

Reduce Cost-Sharing 

Reducing patient out-of-pocket exposure may require different approaches depending on the 

payer. For example, in Medicare Part D, patient out-of-pocket costs could be calculated at the 

point of sale based on net prices that take into account rebates and other price concessions. In 

2 "When is a brand a generic? In a contract with a PBM." Linda Cahn, Managed Care (Sept. 2010), available: 

httos://www. man agedca rem ag.co m/ arch ives/2 010/9 /when-brand -generic-contract -p bm. 3 "Medicare Program; Contract Year 2019 Policy and Technical Changes to the Medicare Advantage, Medicare Cost 

Plan, Medicare Fee-for-Service, the Medicare Prescription Drug Benefit Programs, and the PACE Program." 

3 
242 


29424.163

ALUANCEforTRANSPARENT & 

AFFORDABLE PRESCRIPTIONS 

the Part D rule4 referenced above, CMS included a Request for Information (RFI), indicating that 

the agency is considering such a requirement. The agency notes that, in recent years, only a 

handful of plans have passed through a small share of price concessions to beneficiaries at the 

point of sale." CMS adds that "sponsors may have distorted incentives as compared to what we 

intended in 2005." 

As a result, the Part D rule contains an RFI related to requiring sponsors to include at least a 

minimum percentage of manufacturer rebates and all pharmacy price concessions received for 

a Part D drug in the drug's negotiated price at the point of sale. In other words; CMS is 

considering whether it should require sponsors to share with Medicare beneficiaries at least 

some portion of the price concessions negotiated by intermediaries. CMS provides ten-year 

impact estimates of a forced pass-through of 33%, 66%, 90%, and 100% of manufacturer 

rebates at the point of sale; at the lowest point of that range {33%}, beneficiaries would save 

$19.6 billion dollars in their out-of-pocket costs. While a pass-through policy would increase 

premiums, that increase is more than offset by the deep reductions in cost-sharing at every 

level of pass-through. Similarly, the per-member-per-month savings estimates provide by CMS 

tell us that, at a 33% pass-through, beneficiaries would save $30.33 per month, while, at a 

100% pass-through, beneficiaries would save $88.13 per month. 

Any argument that the policy would increase premiums is disingenuous as it does not factor in 

the offsetting impact of the large reductions in cost-sharing; the overall savings numbers 

calculated by CMS are the result of slight increases in premiums that are more than offset by 

large reductions in cost-sharing. With regard to requiring that all pharmacy price concessions 

be used to lower the price at the point of sale, CMS notes that such a policy "would affect 

beneficiary, government, and manufacturer costs largely in the same manner as discussed 

previously in regards to moving manufacturer rebates to the point of sale." 

We strongly support a pass-through policy and will file comments with the agency urging CMS 

4 /d. 

4 
243 


29424.164

ALLIANCEforTRANSPARENT & 

AFFORDABLE PRESCRI 

to proceed with such a proposal. Similar policies must be implemented in all prescription drug 

plans in which the government is a partner. 

Improve Access 

We understand that formularies and other utilization management techniques are a necessary 

part of reducing healthcare spending. However, the current system for developing formularies 

does not seem to be based on sound scientific evidence or accepted clinical guidelines, but 

rather on the cost of the product to the PBM. As prescribers and patients, we recognize that 

the formulary placement of a drug is in large part just the result of annual negotiations 

between the PBM and the manufacturer, and not the result of the latest science or clinical 

outcomes. 

To improve access to medically necessary prescriptions, any PBM involved in administering a 

prescription benefit plan related to any federal health program should publish up-to-date, 

accurate, and complete formulary lists. That would provide patients with information on tiering 

structures and any cost-sharing requirements for each tier, as well as restrictions on how and 

when the product can be obtained by the patient (such as dose or quantity limits, prior 

authorization, etc.). In addition, there should be one, single, transparent formulary used by 

both the PBM and the plan sponsor on whose behalf the PBM administers the prescription 

benefit to avoid duplicative or conflicting formularies. 

In closing, we also urge Congress to require the Federal Trade Commission to closely examine 

the PBM industry in its current form, as many of the aforementioned problems may be related 

to market consolidation. Combined, the two largest PBMs cover more than 170 million lives.s 

That is more than three times the size of the entire Medicare program. 6 Such a consolidated 

'Express Scripts covers 83 million. (Express Scripts Corporate Overview, downloadable at http:/llab.expressscripts.com/about.) CVS Care mark covers approximately 90 million. (CVS Health At A Glance, 

https://www.cvshealth.com/about/facts-and-company-information.) 

6 "An Overview of Medicare" by the Kaiser Family Foundation (April!, 2016), available: 

http :1/kff .o rg/m edi ca reli ss u e-b rief Ian-overview-of-medicare/. 

5 
244 


29424.165

ALUANCEforTRANSPARENT & 

AFFORDABLE PRESCRIPTIONS 

market, combined with a lack of transparency, means that PBM contracts with pharmaceutical 

manufacturers and pharmacies are one-sided and may amount to a "take it or leave it" demand 

for rebates and fees by the PBMs-with poor results for patients and drug spending in our 

federal health programs. Any additional consolidation of this industry should be avoided lest we 

inadvertently make a bad problem worse. To that end, we have urged the Federal Trade 

Commission to closely scrutinize the recently announced CVS Health acquisition of Aetna_? It is 

highly likely that this level of consolidation in an already consolidated, opaque market will 

cause far more harm than good for patients. 

We thank the Subcommittee for holding this important hearing and hope to be a partner as you 

examine pharmaceutical access and pricing. This is a crisis we can no longer ignore. For too 

long, the health of patients- both physical and financial- has suffered due to a morass of 

middlemen whose only incentive is to protect the bottom line. The good news is: it is not too 

late to change those incentives in a manner that prioritizes patients. We hope to work with the 

Subcommittee to accomplish just that. For more information, please visit: 

https://atapadvocates.com. 

Sincerely, 

American Association of Clinical Urologists 

American Bone Health 

American College of Rheumatology 

Association of Women in Rheumatology 

Coalition of State Rheumatology Organizations 

Florida Society of Rheumatology 

Global Healthy Living Foundation 

7 h ttps :1/www. washington post. com/business/ eco n amy/what -th e-cvs-aetn a-deal-means-for-the-future-of-healthea re/2017 /12/05/e14a8d 18-d907-lle 7-a841-2066faf731ef storv.html?utm term=.dcc383e8c5c8. 

6 
245 


29424.166

Lupus and Allied Diseases Association, Inc. 

National Organization of Rheumatology Managers 

New York State Rheumatology Society 

North Carolina Rheumatology Association 

Rheumatology Alliance of Louisiana 

Rheumatology Nurses Society 

Tennessee Rheumatology Society 

U.S. Pain Foundation 

7 
246 


29424.167

GREG WALDEN, OREGON 

CHAIRMAN 

FRANK PALLONE, JR., NEW JERSEY 

RANKING MEMBER 

ONE HUNDRED FIFTEENTH CONGRESS 

Ms. Lori Reilly 

Qeongregg of tbe Wniteb ~tateg 

~ourse of l\eprersentntibers 

COMMITIEE ON ENERGY AND COMMERCE 

2125 RAYBURN House OFFICE BuiLDING 

WASHINGTON, DC 20515-6115 Majority {2021225-2927 

Minority (202)225-3641 

January 8, 2018 

Executive Vice President for Policy, Research, and Membership 

Pharmaceutical Research and Manufacturers of America 

950 F Street, N.W.; Suite 300 

Washington, DC 20004 

Dear Ms. Reilly: 

Thank you for appearing before the Subcommittee on Health on December 13, 2017, to testify at 

the hearing entitled "Examining the Drug Supply Chain." 

Pursuant to the Rules of the Committee on Energy and Commerce, the hearing record remains 

open for ten business days to permit Members to submit additional questions for the record, which are 

attached. The format of your responses to these questions should be as follows: (I) the name of the 

Member whose question you are addressing, (2) the complete text ofthe question you are addressing in 

bold, and (3) your answer to that question in plain text. 

To facilitate the printing ofthe hearing record, please respond to these questions with a 

transmittal letter by the close of business on January 23,2018. Your responses should be mailed to Zack 

Dareshori, Legislative Clerk, Committee on Energy and Commerce, 2125 Rayburn House Office 

Building, Washington, DC 20515 and e-mailed in Word format to zack.dareshori@mail.house.gov. 

Thank you again for your time and effort preparing and delivering testimony before the 

Subcommittee. 

cc: The Honorable Gene Green, Ranking Member, Subcommittee on Health 

Attachment 
247 


29424.168

Attachment - Additional Questions for the Record 

The Honorable Earll. "Buddy" Carter 

Q: Does your organization support increased transparency into the following aspects of the drug supply 

chain? Yes or No will suffice. 

1. Rebate pass throughs 

Z. PBM "Spread" Profits 

3. Generic Drug Reimbursement Methodologies 

4. True price for prescription drug at point of sale 

5. Pharmacy Direct and Indirect Remuneration ("DIR") fees 

A, #1 -5: PhRMA is not opposed to transparency. We understand the need to strike a balance and 

provide consumers and employers with the kinds of information that will help them make better 

informed health care decisions. For example, lack of transparency in contracts between employers 

and PBMs has led many plan sponsors to question the share of rebate savings being passed through, 

how much the PBM is retaining for administrative fees, and whether the PBM is disclosing and passing 

on other price concessions, such as savings from price protection rebates.' 

However, we also believe that transparency for the sake of transparency can be a double-edged 

sword. While the presumption seems to be that all transparency is good and can have a positive 

impact on the market, the Federal Trade Commission has consistently stated over many years that 

requiring disclosure of PBM-manufacturer negotiated price information can "undercut vigorous 

competition on drug pricing" and "undermine competition ... between pharmaceutical manufacturers 

to offer discounts" which could "raise prescription drug prices for consumers."' 

The Honorable Chris Collins 

1. The pharmaceutical manufacturing industry is not a naturally attractive market as without 

government intervention, it would not exist as know it today. It does not adhere to price taking, 

product homogeneity, and free entry and exit. Accounting for the economic and societal 

benefits of developing life-saving medicine, many countries grant this industry with both a 

patent and market exclusivity period to promote a balance between new drug innovation, 

generic drug competition, and recouping what would otherwise be sunk costs. And while public 

perception is critical of pharmaceutical manufacturers, there are unfortunate economic 

challenges that do not allow for this industry to perform like a competitive market. The nature 

of policies like the Orphan Drug Act, the GAIN Act, and Title Zl that attempt to make this 

industry like a competitive market are somewhat paradoxical. Competition, therefore, is 

achieved over a considerable amount of time. 

a. It is projected that spending will decrease in the next five years as many pharmaceutical 

products with patent protection are set to expire. As it relates to patent protection and 

1 Midwestern Business Group on Health. Drawing a Line in the Sand: Employers Must Rethink Pharmacy Benefit 

Strategies. 5 eptem b er 2 017. h t tps://h i gh erl ogicd own I oa d .s3 .a mazon aws. co m/M BG H/4f71512a-e946-4060-9 57 5-

b27c6554Scb8/Uploadedlmages/Specialty%20Pharmacy/DMJ_MBGH_Line_in_the_Sand_RV12_9617.pdf 

2 T. Koslov and E. Jex, "Price Transparency or TMI?" Federal Trade Commission, July 2, 2015. 
248 


29424.169

market exclusivity, what current government policies towards manufacturers hinder the 

balance as described above? What current policies can be strengthened or improved? 

A: As your question notes, the U.S. prescription drug marketplace is unique, but competition shapes 

every stage of the process of bringing new medicines to patients. In the R&D process, companies race 

to bring to patients the first medicine in a therapeutic class. Once approved, a new medicine typically 

faces swift competition from other brands in its class. For example, less than a year after market entry 

of the first in a new class of hepatitis C (HCV) treatments, there were multiple competitors on the 

market that competed on both price and clinical effects. 

After a brand product is on the market for a limited time, generics may be approved and payers shift 

nearly all utilization to the generics. As a result, 90 percent of all prescriptions in the U.S. are now 

filled with generic medicines. The U.S. policy and regulatory framework established under the HatchWaxman Act and the Biologics Price Competition and Innovation Act strikes a balance between 

maintaining incentives for innovation while providing access to generic medicines and fostering 

biosimilar entry. 

As noted, additional incentives have been warranted in certain instances. Specifically, the Orphan 

Drug Act provides critical incentives to foster private-sector investment in treatments for rare 

diseases or conditions where it would otherwise be difficult to recover private investments given the 

limited number of patients affected. Similarly, the GAIN Act has sought to address the need for new 

anti-infective products, such as antibiotics. 

However, in certain areas the existing incentives for innovation may be insufficient. Below we note a 

few such areas where current policies could be strengthened or improved: 

The existing five-year new chemical entity data protection period that begins upon 

FDA approval of the new drug does not sufficiently reward investment in small 

molecule drugs, particularly for the novel and complex drugs currently under 

development. It provides less protection than in other developed countries and 

regions-particularly the European Union, where an innovative product receives 10 

years of exclusivity before generic approval, and potentially as much as 11. 

Similarly, the incentives provided by three-year exclusivity for a new use of a 

previously approved chemical entity have been significantly weakened and do not 

sufficiently support the types of innovations eligible for such exclusivity. Given the 

substantial investment required for the studies undertaken to obtain the approvals 

that lead to three-year exclusivity and the benefit to the public health from such an 

investment, we believe that FDA can, and should, take additional steps to ensure the 

proper balance between innovation and competition in this context. 

When patents are considered, patent challenges from generic manufacturers in the 

form of Paragraph IV filings have been filed more frequently and earlier in the brandname drug lifecycle, with many as early as four years after launch. The uncertainties 

of the patent system combined with the growing use of the inter partes review (IPR) 

process at the Patent and Trademark Office (PTO) could create significant challenges 

for innovative companies looking to develop new products. 

2 
249 


29424.170

2. Several brokers have touted how expensive some pharmaceutical products are, however, it is 

not a complete and accurate reflection of the pricing of the product when accounting time, 

investments made, general manufacturing costs, and the like. (Nor does it differentiate the 

majority of actors that contribute to the advancement of medical science from the minority of 

less scrupulous actors that do not.) Some brokers try to steer the conversation about drug 

pricing that ignore basic facts of economics. While public discussion last year was on Spinraza, 

not too long ago, it was the hepatitis C cure, Sovaldi, that sparked criticism. Despite its $84,000 

price tag, it is much less expensive when compared to traditional treatment models including 

surgical liver transplants. Between 2012 and 2014, Medicare spent nearly $560 million in Part A 

and Part B for around 7,000 patients. In 2014, 1,906 patients received a liver transplant and the 

cost per patient after the first year was $170,485 under Part A and $26,225 under Part B. It is 

also critical to bear in mind these figures are for HCV patients that qualified for a liver transplant 

and received one through the waiting list. 

a. It is Congress's responsibility to develop policies that address both societal and 

economic concerns- not to develop policies that are the result of a public relations 

campaign. Why do you think we are not having a real discussion on cost-savings in the 

long term- the upfront $84,000 cost for a less than a year treatment over poor 

performing and more expensive treatments over time? 

A: Most representations of prescription medicine costs are overstated. For example, the $84,000 

price for Sovaldi that is often quoted does not back out the sizeable rebates and discounts paid by 

innovative biopharmaceutical companies to insurers. In 2016, brand biopharmaceutical companies 

paid over $100 billion in rebates and discounts to government and private insurers overall', and it has 

been publicly reported that rebates and discounts for those HCV cures are currently between 50-60%.4 

Prescription medicines are often the most cost-effective means of preventing and treating disease. So, 

while it is true that medicines help patients live longer and healthier lives, in many cases medicines 

can also shift the treatment paradigm toward prevention by allowing patients to avoid expensive 

hospitalizations and long-term care. An article in Health Affairs echoed this sentiment and found that 

just an extra $1 spent on medicines for adherent patients with congestive heart failure, high blood 

pressure, diabetes and high cholesterol can generate $3 to $10 in savings on emergency room visits 

and inpatient hospitalizations. 5 

3. Within the last few years, some pharmaceutical manufacturers and insurers have entered into 

agreements that would move the traditional reimbursement model to a pay-for-performance 

pricing model. Merck has partnered with several insurers on its type II diabetes products, 

Amgen signed on with Harvard Pilgrim and Cigna with its Repatha, and Sanofi and Regeneron 

paired with Cigna on Praluent. The benefits are clear for insurers and manufacturers take an 

"eat your lunch" policy as their product, so to speak, is up to bat. 

3 Berkeley Research Group. The Pharmaceutical Supply Chain: Gross Drug Expenditures Realized by Stakeholder. 

January 2017. 4 Silverman E. What the 'Shocking' Gilead Discounts on its Hepatitis C Drugs Will Mean. Wall Street Journal. 

February 4, 2015. https://blogs.wsj.com/pharmalot/2015/02/04/what-the-shocking-gilead·discounts-on-itsh e patitis-c-d rugs-will-mean/ 5 Roebuck MC, Lieberman JN, Gemmill-Toyama M, et al. Medication Adherence Leads to Lower Care Use And Costs 

Despite Increased Drug Spending. Health Affairs. 2011;30(1):99. 

3 
250 


29424.171

a. While your industries are in the beginning stages of the pay-for-performance model, can 

you share preliminary results and elaborate on how this model may replace the current 

system and reduce drug spending overall? 

A. Pay-for-performance approaches for medicines are increasingly proliferating in the US healthcare 

system. Only seven of these private sector agreements were announced from the late 1990s to 2013; 

yet, 16 were announced from 2015 through early 2017, and roughly half a dozen more have been 

announced since then. These publicly disclosed arrangements are only the tip of the iceberg as some 

have estimated that five to ten times as many pay-for-performance contracts occur, but are not 

announced publicly. This growth demonstrates that both insurers and the biopharmaceutical industry 

are actively working to develop new ways to pay for medicines. 

In terms of results, there is initial evidence that payers with pay-for-performance arrangements have 

lower cost sharing as compared to payers without them, for the same medicines. Payers' support of 

outcomes-based contracts (another term for pay for performance pricing) show these contracts are 

achieving the desired results. According to a recent survey conducted by Avalere Health, 83% of 

payers that have already entered into outcomes-based contracts are considering entering into 

additional outcomes-based contracts beyond the ones they currently have in place. In addition, of 

payers surveyed that had entered into outcomes-based contracts, half saw improvements in patient 

management, 38% saw improvements in patient outcomes, and one-third achieved cost savings. In 

considering these results, it is important to remember that the types and number of arrangements in 

the marketplace today are very limited due to outdated regulations that were not designed to 

accommodate innovative payment approaches. We are eager for policymakers to modernize those 

rules, which could increase the benefits of these arrangements for patients and the healthcare 

system. 

4. In December 2016, the Senate Special Committee on Aging released an investigative report on 

significant price increases in prescription drugs whose patents have long expired. Specifically, 

out of the thousand or so companies in the US, the Committee evaluated four non-innovators or 

bad actors- manufacturers that do not contribute to the advancement in medical science and 

health outcomes. 

a. Following the investigation, the Committee recommended several policies aimed to de· 

incentive certain business models and close loopholes that created certain market 

failures. As Congress considers policies aimed at increasing competition to rein in off 

patent drug price hikes, what policies should Congress further explore? This includes 

policies listed in the Committee report. 

A: We applaud the efforts of the Senate Special Committee on Aging to address outlier behavior 

among companies whose business strategy entails significant price increases on drugs whose patents 

have long-expired rather than a focus on research and development, investment, and innovation. We 

further applaud the actions taken by Congress to address such behavior by taking steps to eliminate 

the backlog in generic drug applications at the Food and Drug Administration (FDA) and to foster 

competition in the area of drug-device combination products though proposals enacted as part of the 

21" Century Cures Act and the FDA Reauthorization Act (FDARA). 

4 
251 


29424.172

PhRMA has also been pleased to see Commissioner Gottlieb take steps to advance and implement 

several policy proposals that PhRMA has supported, designed to facilitate the entry of additional 

competitors where there are small patient populations and no patent or exclusivity protections 

serving as a barrier to entry. However, we would urge Congress to consider additional policies to 

incentivize generic competition, including awarding regulatory incentives to encourage more than one 

generic drug manufacturer to enter the market and expanding tax credits for the development and 

manufacturing of qualified generic drugs. In addition, as suggested in the Aging Committee report, we 

support proposals to waive ANDA user fees and award priority review vouchers upon approval of 

generic drugs where the reference drug has no remaining patent or exclusivity protection and no 

generic competition. We look forward to working with both Congress and FDA on developing 

additional solutions. 

The Honorable Diana DeGette 

1. Will PhRMA commit to working with your member companies to share information with my 

office about your contracts with other drug supply chain players, including sharing specific 

examples of contract terms? 

A: PhRMA does not have any source of information about specific types of deals or negotiations, and 

cannot comment on individual company pricing decisions or offer insight into this question. 

2. Please explain the factors pharmaceutical companies consider when setting the Wholesale 

Acquisition Cost (WAC) price. To the extent possible, please explain in the context of insulin 

and/or retail pharmaceutical products that have competing branded products in a therapeutic 

class. 

A: Manufacturer may base WAC pricing decisions on a range of factors including affordability, access, 

and reinvestment needs for R&D to develop tomorrow's innovative medicines. Rebates are used in 

private negotiations by manufacturers to gain access to payer formularies and determine level of 

formulary tier placement. Manufacturers pay rebates as a percentage of the current list price (WAC 

price) at the time the pharmacy dispenses the medicine to the patient. The manufacturer sets the 

"list" price of a medicine, but is actually paid the "net" price, which is the amount after rebates and 

any other discounts and fees have been removed. 

In recent years, net prices have been growing much more slowly than list prices. Focusing on list prices 

alone results in a perception that drug prices are growing at unsustainable rates, when the prices 

manufacturers actually receive are in fact growing at low single digit rates. According to IMS Institute 

for Healthcare Informatics, brand net prices grew at just 3.5% in 2016, after taking into account 

discounts and rebates. 

3. Do pharmaceutical companies ever feel pressure to raise list prices in order to be more 

competitive with PBMs and health plans in terms of formulary placement? To the extent 

possible, please explain in the context of insulin and/or retail pharmaceutical products that have 

competing branded products in a therapeutic class. 

A: Manufacturer may approach rebate negotiations in a number of ways, and pricing decisions are 

based on a range of factors including afford ability, access, and reinvestment needs for R&D to develop 

5 
252 


29424.173

tomorrow's innovative medicines. PhRMA does not have any source of information about specific 

types of deals or negotiations, and cannot comment on individual company pricing decisions or offer 

insight into this question. 

4. How do pharmaceutical companies develop life cycle management strategies for their products? 

To the extent possible, please explain in the context of insulin and/or retail pharmaceutical 

products that have competing branded products in a therapeutic class. 

A. As a trade association, PhRMA does not have access to proprietary company data regarding their 

life cycle management strategies. Generally, researchers follow the trajectory of the science in 

developing new treatment options, whether it is for a new medicines or additional research to expand 

treatments to additional patient populations, other diseases and conditions, or to provide new 

formulations, dosage forms, or drug combinations/regimens that meet the unmet medical needs of 

patients. In turn, these innovations may result in improved health outcomes and a reduction in 

unnecessary hospitalizations for patients. Further, these innovations increase brand-to-brand 

competition, spur continued innovation, and provide payers with increased leverage in negotiating 

rebates and other discounts. 

For example, continued innovation in insulins has resulted in robust brand-to-brand competition on 

both price and clinical effects and expanded treatment options for patients to help better manage 

their disease and avoid costly complications. Advances in insulin therapy include new delivery systems 

and longer-acting formulations which provide greater flexibility in dosing and easing treatment 

complexity. Given that fewer than half of Americans treated for diabetes have the disease successfully 

controlled, advances helping to facilitate patient adherence are remarkably valuable to patients.' 

Importantly, the broad range of long-, short-, and rapid-acting insulins available to patients has also 

enabled payers to leverage competition to negotiate substantial discounts and rebates on these 

medicines. u 

5. Do pharmaceutical companies ever stop offering or restrict access to previous versions of a 

product once a new/updated version comes out? Has this ever happened in the context of 

insulin? 

A. As a trade association, we are not privy to proprietary information about individual companies' 

business practices and therefore are not in a position to comment. However, the pharmaceutical 

market is extremely large with thousands of products on the market. Products may come on and off 

the market for many reasons reflecting the evolving nature of science and innovation, the changing 

needs of patients impacting demand, advances made in therapy, as well as removal due to safety 

issues that cannot be corrected. 

6. How do pharmaceutical companies change their marketing strategies for older versions of their 

products when new versions are approved for marketing? 

A: As a trade association, PhRMA is not privy to proprietary information about individual companies' 

marketing strategies and therefore are not in a position to comment. 

The Honorable Kurt Schrader 

6 
253 


29424.174

I agree with you that we can't only look at list prices when talking about how much we're paying for 

drugs. But we can't ignore list prices, either. In Part D, for example, when a beneficiary pays coinsurance 

in the donut hole, they are stuck paying a percentage of the list price of their drug-sometimes 

thousands of dollars per year. And the people in catastrophic coverage stage are often on the most 

expensive drugs, which never receive rebates anyway. How can we demand transparency from PBMs 

and others joining you at the table-which I agree with-and not demand some transparency from 

pharmaceutical manufacturers when they set list prices? You made a lot of claims at the hearing about 

how list prices are set while considering PBM discounts. I think that's fair, but you should be required to 

show your work. Would you be willing to work with us to create strong transparency standards fort he 

government to examine that will show how you come to list prices? 

A: When considering transparency proposals, it is important to be clear about what the transparency 

seeks to achieve. For example, it would be helpful if insurers shared more information about their 

prior authorization rules with consumers who are shopping for health plans. This would help inform 

patients' choice of plan. 

While I agree that list prices affect patient cost sharing today, my concern is that greater transparency 

into how list prices are set does nothing to reduce patient cost sharing. To help patients, it would be 

more productive to work on passing through manufacturer rebates to patients or clarifying the rules 

around what preventive services can be covered pre-deductible by high deductible health plans. 

Those ideas can improve patient affordability in ways that greater transparency, which could 

undermine existing beneficial competition, simply does not. 

1 Type 2 Diabetes in the Real World: The Elusive Nature of Glycemic Control Steven V. Edelman and William H. Polonsky 

Diabetes Care 2017 Aug; https;//doi.org/10.2337/dcl6-1974 

h Barrett P, Langreth R. The Crazy Math Behind Drug Prices: Intermediaries that Negotiate to lower Prices May Cause Them To 

Increase Too. Bloomberg Businessweek, June 29, 2017. https://www.bloomberg.com/news/articles/2017~06-29/the-crazy* 

math-behind-drug-prices· langreth R, Keller M, Cannon C. Decoding Big Pharma's Secret Drug Pricing Practices. Bloomberg. 

June 29, 2016. https://www.bloomberg.com/graphics/2016-drug-prices. 

7 
254 


29424.175

GREG WALDEN, OREGON 

CHAIRMAN 

FRANK PALLONE, JR .. NEW JERSEY· 

RANKING MEMBER 

Mr. Tom DiLenge 

ONE HUNDRED FIFTEENTH CONGRESS 

~ongress of tbt Wnittb ~tatts 

~ouse of l\epresentatibes 

COMMITIEE ON ENERGY AND COMMERCE 

2125 RAYBURN HousE OFFICE BuiLDING 

WASHINGTON, DC 20515-6115 Majority (202) 225-2927 

Minority {202) 225-3641 

January 8, 2018 

President, Advocacy, Law and Public Policy Division 

Biotechnology Innovation Organization 

1201 Maryland Avenue, S.W.; Suite 900 

Washington, DC 20024 

Dear Mr. DiLenge: 

Thank you for appearing before the Subcommittee on Health on December 13, 2017, to testifY at 

the hearing entitled "Examining the Drug Supply Chain." 

Pursuant to the Rules of the Committee on Energy and Commerce, the hearing record remains 

open for ten business days to permit Members to submit additional questions for the record, which are 

attached. The format of your responses to these questions should be as follows:(!) the name of the 

Member whose question you are addressing, (2) the complete text of the question you are addressing in 

bold, and (3) your answer to that question in plain text. 

To facilitate the printing of the hearing record, please respond to these questions with a 

transmittal letter by the close of business on January 23,2018. Your responses should be mailed to Zack 

Dareshori, Legislative Clerk, Committee on Energy and Commerce, 2125 Rayburn House Office 

Building, Washington, DC 20515 and e-mailed in Word format to zack.dareshori@mail.house.gov. 

Thank you again for your time and effort preparing and delivering testimony before the 

Subcommittee. 

cc: The Honorable Gene Green, Ranking Member, Subcommittee on Health 

Attachment 
255 


29424.176

QFR Responses from Tom Dilenge, Biotechnology Innovation Organization 

The Honorable Earll. "Buddy" Carter. 

Question 1: Does your organization support increased transparency into the 

following aspects of the drug supply chain? 

1. Rebate Pass Throughs 

2. PBM "Spread" Profits 

3. Generic Drug Reimbursement Methodologies 

4. True Price for Prescription Drug at Point of Sale 

5. Pharmacy Direct and Indirect Remuneration (DIR) Fees 

BIO supports the implementation of transparency measures that would apply across the 

health care spectrum. These measures should be grounded in the goal of improving timely 

access to information that supports informed patient/provider clinical decision making and 

health insurance enrollment decisions, and that helps ensure smarter healthcare spending, 

without distorting market dynamics or harming the innovation ecosystem. When applied to 

prescription drugs, as one element of the broader system, transparency should facilitate 

access to medications, while continuing to foster competition and the risk-taking required to 

deliver on the promise of future treatments and cures. 

In particular, these measures should: 

o Promote an environment that supports value-based approaches to healthcare delivery and 

payment that benefit the patient (e.g., enable access to data to facilitate the development 

and utilization of outcomes-based contracts and other value-based approaches). 

o Provide information that is meaningful to healthcare decision makers, and in particular, 

information that can be used by patients to improve their healthcare clinical and insurance 

enrollment decision making (e.g., plan-level information on prescription drug coverage and 

cost-sharing requirements; information regarding available patient support opportunities). 

o Provide information to inform patients of provider incentive programs that direct 

prescribers to adhere to pre-specified care regimens and what form those incentives take 

(e.g., a direct financial reimbursement from the insurer or hospital system to the provider if 

his/her prescribing behavior matches pre-determined clinical pathways). 

o Promote an understanding of the role and impact of each delivery channel participant on 

patient care, including the role of manufacturers, wholesalers, pharmacies, PBMs, and 

payers (e.g., highlight the value created for, distributed across, and extracted from the 

health care system by each player, and its impact on patient access to needed care). 

o Present a holistic picture of the healthcare marketplace and promote a broad definition of 

value (e.g., ensure that any publicly-released data is presented with appropriate context, 

including taking into account the role and impact of other relevant stakeholders). 
256 


29424.177

The Honorable Chris Collins. 

Question 1: It is projected that spending will decrease in the next five years as 

many pharmaceutical products with patent protections are set to expire. As it 

relates to patent protection and market exclusivity, what current government 

policies towards manufacturers hinder the [drug competition] balance as 

described above? What current policies can be strengthened or improved? 

At the outset, it is important to recognize that Congressionally-developed drug market 

competition policies - such as the Hatch-Waxman amendments have fostered a robust 

and competitive market for both innovative and generic biopharmaceuticals in the United 

States. As is noted by the Association for Accessible Medicines, in 2016 the U.S. 

marketplace for generic medicines represented 89% of all prescription fills the 

overwhelming majority of medication fills for patients.' Even more, the FDA recently 

announced an Agency record of 763 generic approvals in 2017. 2 Accordingly, the generic 

share of the U.S. prescription drug market is today among the highest of all industrialized 

countries. At the same time, the United States continues to be the world's top originator of 

new innovative medicines and treatments. More new medicines are researched and brought 

to market in the United States than in the rest of the world combined. By all accounts, 

efforts to foster both generic drug competition and the creation of new, original medicines 

have worked very well. 

And, increased competition is not limited to generic entry either. The FTC has noted that 

"approval of breakthrough or pioneer drug product[s are] increasingly followed by entry of a 

subsequent branded product. The head start that the breakthrough product has had over 

subsequent branded products has decreased over the past three decades from 8.2 years 

during the 1970s to 2.25 years during the 1990s."3 Unquestionably the competitive 

environment is thriving. 

To be sure, there are areas where improvements might better incentivize future innovative 

drug development; particularly important in light of how quickly and effectively competitive 

products come to market today. Such recommendations were the topic of BIO's extensive 

comments to FDA's 2017 docket on prescription medication market incentives.• 

Generally, policymakers should be mindful to preserve the delicate balance of rights, 

obligations, and procedures that has successfully incentivized drug development of both 

generics and innovators for more than 30 years. In recent years, this balance has 

increasingly come under pressure. For example, the use of so-called Inter Partes Review 

(IPR) proceedings for challenging patents administratively in the U.S. Patent and Trademark 

Office is threatening to undermine the detailed patent litigation and dispute resolution 

processes that were established for the orderly market entry of generic drugs under the 

1 See AAM/ Generic Drug Access and Savings Report 

'The number is almost 1,000 when accounting for temporary approvals. 3 See https://www.ftc.gov/sites/default/files/documents/reports/emerging-health-care-issues-follow-biologicdrug-competition-federal-trade-commission-report/p083901biologicsreport.pdf 

4 See Administering the Hatch-Waxman Amendments: Ensuring Appropriate Balance Between Innovation and 

Access. FDA Docket Number FDA-2017-N-3615. 
257 


29424.178

1984 Hatch-Waxman Act. 5 In another example, it is well-known that the Hatch-Waxman 3-

year data exclusivity for new approved pharmaceutical uses, as well as patent protection for 

new uses of a drug, can frequently be circumvented by generic applicants that label their 

products only for unprotected uses, even if it is perfectly foreseeable that a large 

percentage of generic sales will be for protected uses. Such developments are troubling and 

may need appropriate policy attention. 

Additional improvements that could be undertaken by the FDA involve the adoption of a 

more robust and two-sided policy surrounding labeling updates through the Changes Being 

Effected process. Doing so would permit both sides of the competitive paradigm -

innovators and generics- to participate in the labeling update process with FDA. This 

would inject much more certainty into the labeling process and enhance the ability of 

physicians and payers to recognize important labeling information quickly and efficiently. 

Additionally, we urge FDA and Congress both to consider new incentives for the 

development of non-addictive and non-opioid pain management products. Incentivizing 

these developments could help to significantly reduce dependence on addictive painkillers 

that contribute to the nationwide opioid epidemic. BIO has developed a suite of proposals 

aimed at facilitating more development in this area. Considerations like enhanced or 

streamlined FDA approval pathways for designated products and/or unique market 

exclusivities could go a long way towards an overhaul in pain treatment in the United 

States. 

Question 2: Why do you think we are not having a real discussion on cost-savings 

in the long term -the upfront $84,000 cost for a less than a year treatment over 

poor performing and more expensive treatments over time? 

Modern biotechnology is a young industry. But in just a few decades, the entrepreneurs, 

scientists, researchers and investors working in this field have firmly established themselves 

at the forefront of medical innovation. Innovation truly saves - not just lives, but real 

dollars as well. In fact, if biopharmaceutical researchers are able to develop a new medicine 

that delays the onset of Alzheimer's disease by just five years, America would save $367 

5 "Patent Challenges Upsetting Hatch-Waxman Act, Hatch Says" Bloomberg News Oct. 20, 2017 

https://www.bna.com/patent-challenges-upsetting-n73014471224/; see also: Patent Abuse is Undermining 

American Health Care, The Hill Oct. 212017, available at http://thehill.com/opinion/healthcare/351701-patent· 

abuse-is-undermining-american-health-care ("[R]ather than facilitate technology developments, IPR can chill 

advancements in prescription drugs. According to recent reports, it costs $2.6 billion to bring the average drug to 

market, only 12 percent of patented drugs receive FDA approval, and just 1 in 5 approved drugs cover their R&D 

costs. These manufacturers have explained that patent predictability is essential for generating investments in new 

medicines and engaging in beneficial joint endeavors with competitors."); Sen. Chuck Schumer (D-N.Y.) said in a 

2015 Senate hearing that "no one anticipated" that IPR would turn out to be such "a run-around for HatchWaxman.") 
258 


29424.179

billion in healthcare services by 20506 • To meaningfully bend the troubling healthcare cost 

curve, increased investment in new medicines is essential. 

On average, it takes 10-15 years to secure FDA approval of a new medicine, from initial 

discovery of a potential new molecule or approach, through pre-clinical and clinical 

programs, and through the FDA regulatory and approval processes7 • In addition, $2.6 billion 

is the average cost to develop and secure approval of a new medicine, taking into account 

all the trial and error and research failures along the way, and the cost of capital; this figure 

has skyrocketed in recent years, doubling since just 20038 • This is partly due to increased 

regulatory and payer demands for more and better data on drug safety and effectiveness. 

But it also has much to do with the new era of genomic and personalized medicine. 

These new medicines do not treat broad classes of patients in blunt ways. Rather, today we 

are seeing the development of entirely new ways to treat and ultimately cure disease for 

targeted patient populations using living organisms. New developments in cellular and gene 

therapies are using the patient's own cells to develop a medicine tailored specifically for that 

patient, or use other genetic techniques to repair or replace defective genes causing 

disease. Biotechnology is tackling the most challenging of problems, and the more we learn 

about our biology and the basis of disease, the more complex our R&D processes become. 

Furthermore, while these costs go up and up, the patient populations to be served are 

becoming more and more targeted, reducing the ability to spread these costs across wide 

patient populations. 

Yet despite their expense, these novel medicines offer tremendous value to patients, our 

healthcare system, and society overall. This value is often overlooked or deliberately 

ignored by payers because they tend to operate with a short-sighted, annual budgetary 

mindset, and may not realize the longer-term value of these medicines due to turnover 

among their covered beneficiaries. In short, we are paying for 21st century medicines with a 

20th century payment system focused on limiting volume and access rather than value. BIO 

supports efforts by policymakers and stakeholders to re-think the drug payment system, 

especially for one-time cures or other transformative medicines that may have significant 

upfront costs but that will reduce other, more expensive healthcare services in the future. 

Question 3: What would the impact be on innovation and for small startup biotech 

companies if Congress were to adopt price controls or other non-market based 

policies, some of which have been suggested today? 

The United States leads the world in innovative drug development, benefiting patients and 

caregivers around the globe by ensuring access to new cures and treatments for a range of 

diseases. This success is made possible by a number of factors: Outstanding scientists, 

savvy entrepreneurs and business leaders, a committed investment community and worldclass universities and research institutions. But that alone is not enough to succeed in 

getting new drugs across the finish line-and it is not enough to sustain long-term medical 

6 Alzheimer's Association, Changing the Trajectory of Alzheimer's Disease: How a Treatment by 2025 

Saves Lives and Dollars. Retrieved from 

https:f/alz.org/documents custom/ALZ Trajectory InfoSheet 01.26.15 Final.pdf 7 DiMasi J., Grabowski, H., Hansen, R. Innovation in the Pharmaceutical Industry: New estimates of 

R&D Costs. Journal of Health Economics, 2016, at pp, 20-33. 8 Ibid. 
259 


29424.180

innovation. Many other countries have similar capabilities. Rather what makes the United 

States stand out is its commitment to a competitive, free market system for drugs that 

doesn't impose artificial limitations on successful innovations. 

Biopharmaceutical innovation needs to able to attract the enormous amounts of private 

capital required to fund these challenging and incredibly risky endeavors. This in turn 

depends on a public policy environment that supports innovation and incentivizes such 

investment. That includes: 

Continued advancement of scientific understanding; 

Strong intellectual property (IP) rights and a reliable system for IP transfer, 

licensing, and collaboration; 

An efficient and predictable regulatory review process; and 

Transparent payment systems that reward innovation and encourage free-market 

competition. 

Setbacks in any of these areas can cause the entire innovation ecosystem to falter. The 

challenge can be particularly acute when it comes to capital formation for small companies, 

which are the vast majority of biopharmaceutical companies and account for 70 percent of 

the industry's future clinical pipeline. Private investment can flow to, and shift among, many 

different sectors, and investors will flee areas like biotechnology when they think policy 

decisions could adversely impact an already risky investment. Remember that the vast 

majority of drug research companies are not yet profitable, and most of these companies 

are relying on private investors to fund research into new innovative cures and therapies. 

It's also clear that, throughout history, advances in science and drug development in the 

United States have increased when Congress passed legislation that supports, promotes, 

and incentivizes the innovation being conducted in the Jab. On the flip side of that, shortsighted policy proposals and heated campaign rhetoric can have a chilling effect on medical 

innovation and the ability of the industry to attract the investment needed to fund clinical 

trials and other areas of drug development. The reality is that restrictive or narrow Jaws, 

regulations and insurance policies can scare away the private investment that is needed to 

fund biopharmaceutical research and to deliver new cures to patients in need. Without 

doubt, government-imposed price controls in the largest market in the world would 

seriously harm investment in the next generation of medical breakthroughs - not just in the 

United States, but across the globe. 

Question 4: While your industries are in the beginning stages of the pay-forperformance model, can you share preliminary results and elaborate on how this 

model may replace the current system and reduce drug spending overall? 

Although BIO does not have specific data regarding the value-based arrangements of 

certain manufacturers, these models, despite their early stages, hold much promise in 

terms of promoting value in the marketplace. BIO supports policies that would facilitate a 

robust marketplace for biopharmaceuticals and, in particular, would facilitate engagement 

between manufacturers and payors with respect to novel arrangements that may help to 

ensure patient access to innovative therapies. 
260 


29424.181

Potential regulatory barriers to developing and implementing novel arrangements (e.g., 

value-based arrangements) should be addressed. Specifically, in order to facilitate the use 

of value-based arrangements in the United States, Congress should: 

Create legislative carve-outs for Best Price and all other government pricing 

calculations and requirements as they relate to products sold or transferred under 

value-based arrangements. 

Require the Centers for Medicare & Medicaid Services (CMS) to work with 

stakeholders-including manufacturers, providers, patient and caregiver 

representatives, and payors-to establish parameters through notice-and-comment 

rulemaking for arrangements that meet this statutory exemption (e.g., value-based 

contracts that financially incentivize measurable improvements in quality of care 

and/or positive health outcomes) to allow for the flexibility needed in the evolving 

value-based arrangements space. 

Either expand existing, or create new, statutory exceptions to the Anti-Kickback 

Statute to clearly protect innovative value-based arrangements that meet certain 

requirements (e.g., that promote patient access and pose a low risk of patient or 

federal healthcare program abuse); or direct the Department of Health and Human 

Services (HHS) Office of Inspector General to implement such exceptions through 

the creation of new regulatory safe harbors. 

Stakeholders-including policymakers, patient advocates, providers, payors, and 

manufacturers-also should collaborate to consider laws and regulations impacting the 

robustness of the broader marketplace, including: 

Exploring tax incentives for early-stage research companies. 

Exploring mechanisms to promote a robust generics market upon expiration of all 

patents and statutory exclusivities applicable to the innovator product. 

Exploring mechanisms to support a robust biosimilars market, upon expiration of all 

patents and statutory exclusivities applicable to the innovator product, by attracting 

a broad range of companies and development programs. 

Question 5· Following the investigation, the Committee recommended several 

policies aimed to de-incentivize certain business models and close loopholes that 

created certain market failures. As Congress considers policies aimed at increasing 

competition to rein in off patent drug price hikes, what policies should Congress 

further explore? This includes policies listed in the Committee report. 

BIO has joined with stakeholders across the healthcare spectrum - including insurers, PBMs, 

employers, and patient groups - in a coalition that developed and supports consensus, 

market-based reforms to lower drug costs without harming innovation. Through the Council 

for Affordable Health Coverage9, BIO and our allies are working to: 

9 https: 1/www .cahc.netlprescription-drugs/ 
261 


29424.182

Increase marketplace competition by speeding regulatory approval of more 

innovative drugs, and promoting greater and faster generic and biosimilar entry once 

patents and exclusivities for innovator drugs have expired; 

Move towards a drug payment system that is based on value and patient outcomes 

rather than volume, by removing regulatory and legal barriers that hamper valuebased arrangements and communications between innovators and payers; 

Empower patients and providers with more data on drug costs and value to help 

them make more informed choices; and 

Oppose innovation-killing ideas like price controls, drug importation, or direct 

government "negotiation" of drug prices in Medicare. 

The Council estimates that, if fully adopted and implemented, these reforms could lower 

national health expenditures by $71 billion a year10• This approach also is consistent with 

the landmark 21st Century Cures Act shepherded through Congress last year by this 

Committee on a strongly bipartisan basis, as well as this Committee's more recently enacted 

Food & Drug Administration Reauthorization Act (FDARA). BIO was a strong supporter of 

both of these bills, which we believe will help expedite the delivery of new innovations to 

patients in need, while also speeding competition among branded medicines and from more 

generics and biosimilars. We all want to see FDA approve generic drugs as efficiently as 

possible and for the backlog of generic drug applications to be reduced quickly, More choice 

and competition is good for patients and the healthcare system overall. 

That said, it should be noted that, generally speaking, the United States has a robustly 

competitive market for drugs, where innovators compete vigorously with one another to 

produce safer and more effective medicines within the same class, and then compete on 

price as part of negotiations with powerful, sophisticated, and aggressive commercial 

middlemen such as insurance companies and pharmacy benefit managers who control 

patient access to these innovative products. While there are pockets of exceptions to this 

competitive environment, the reality is that the average innovator drug has a short period 

of time on the market without competition from other similar products (roughly two 

years11), and nearly nine out of every 10 prescriptions filled in America are for cheaper 

generic copies of once-branded drugs12 • 

10 Ibid. 11 See "Nearly All Later Entrants to Drug Classes Were in Clinical Testing or Regulatory Review Before 

First-inCiass Approval," Tufts Center for the Study of Drug Development, November 3, 2015, at 

http://csdd.tufts.edu/news/complete storv/pr ir november december 2015 12 Association for Accessible Medicines. Generic Drug Access & Savings in the U.S. (2016). Retrieved 

from https; 1/accessiblemeds. org/sites/default/files/20 17-07/2 017 -AAM-Access-Savi nqs-Report-2017-

web2.pdf 
262 


29424.183

GREG WALDEN, OREGON 

CHAIRMAN 

FRANK PALLONE, JR., NEW JERSEY 

RANKING MEMBER 

Mr. Chester Davis 

President and CEO 

ONE HUNDRED FIFTEENTH CONGRESS 

ctCongress of tbc Wnitcb ~tatcs 

J!)ouse of l\cprcncntatiben 

COMMITTEE ON ENERGY AND COMMERCE 

2125 RAYBURN HousE OFFICE BuiLDING 

WASHINGTON, DC 20515-6115 

Majority (202) 225-2927 

Minority (202) 225--3641 

January 8, 2018 

Association for Accessible Medicines 

601 New Jersey Avenue, N.W.; Suite 850 

Washington, DC 20001 

Dear Mr. Davis: 

Thank you for appearing before the Subcommittee on Health on December 13,2017, to testifY at 

the hearing entitled "Examining the Drug Supply Chain." 

Pursuant to the Rules of the Committee on Energy and Commerce, the hearing record remains 

open for ten business days to permit Members to submit additional questions for the record, which are 

attached. The format of your responses to these questions should be as follows: (I) the name of the 

Member whose question you are addressing, (2) the complete text of the question you are addressing in 

bold, and (3) your answer to that question in plain text. 

To facilitate the printing of the hearing record, please respond to these questions with a 

transmittal letter by the close of business on January 23,2018. Your responses should be mailed to Zack 

Dareshori, Legislative Clerk, Committee on Energy and Commerce, 2125 Rayburn House Office 

Building, Washington, DC 20515 and e-mailed in Word format to zack.dareshori@mail.house.gov. 

Thank you again for your time and effort preparing and delivering testimony before the 

Subcommittee. 

cc: The Honorable Gene Green, Ranking Member, Subcommittee on Health 

Attachment 
263 


29424.184

AAM Responses to Questions for the Record- December 13, 2017 Subcommittee on Health Hearing, 

"Examining the Drug Supply Chain" 

The Honorable Earl L. "Buddy" Carter 

Does your organization support increased transparency into the following aspects of the drug supply 

chain? Yes or No will suffice. 

1. Rebate pass throughs 

2. PBM "Spread" Profits 

3. Generic Drug Reimbursement Methodologies 

4. True price for prescription drug at point of sale 

5. Pharmacy Direct and Indirect Remuneration ("DIR") fees 

AAM: 

Generic drugs are distributed and reimbursed differently than the rebate model associated with brand 

drugs. For that reason, AAM's members typically have less insight into the mechanisms used by PBMs in 

negotiations with pharmacies, although these can come into play for some products competing directly 

with their reference product for formulary placement. Instead, generic drug manufacturers operate in a 

highly competitive market where the focus tends to be on aggressive price negotiations with wholesalers 

for generic medicines to reach the market. 

Nonetheless, AAM supports CMS exploration of new and innovative ways to ensure patients benefit from 

the savings created by competition. Under current policy, plans and pharmacy benefit managers (PBM) 

may see incentives to increase brand rebates rather than giving preferential treatment to a lower-cost 

generic. In these instances, DIR fees can be spread across the wider beneficiary pool, rather than shared 

directly with the patient. Providing for patients to receive discounts up front could reduce those incentives 

and allow the specific patient on the medication to recognize the savings created by generic competition. 

The Honorable Gus M. Bilirakis 

In your testimony, you mention the problem of the Medicaid penalty for generic drugs. Can you explain 

how this works on the brand side and why you think it doesn't work on the generic side? 

AAM: 

As you noted, the Medicaid Generic Penalty takes a policy that was designed for the brand drug market, 

and applies it to a market that operates in fundamentally different ways. While brand companies typically 

market a small number of high-margin products, many generic manufacturers market hundreds of 

products with varying levels of profitability or loss. Unlike the brand drug industry, in which a 

manufacturer sets a price for the drug and the price sees a generally upward price trajectory, generic 

drugs operate in a highly competitive marketplace where prices fluctuate rapidly. 

The problem with applying brand-based Medicaid inflationary penalties to generics is in the use of 

Average Manufacturer Price (AMP) calculations to measure manufacturer price increase. AMP 

calculations are reported both monthly and quarterly to CMS, and reflect all sales from a manufacturer at 

that time to Retail Community Pharmacies (RCP). However, because AMP is measured by sales during a 

set period, it is susceptible to regular fluctuations due to a generic manufacturer's customer mix. In 

quarters where a product is purchased at lower-volume AMP, calculations can rise despite no underlying 

change to the price of the product. For brand drugs, the general upward trajectory of the price masks 

these fluctuations and brands expect regular inflationary penalties. However, in the generic market these 
264 


29424.185

fluctuations can create much greater variability and lead to situations in which the generic manufacturer 

cannot predict when they will be subject to a penalty. 

This is why generic manufacturers are now subject to millions of dollars in additional rebates for products 

even in the absence of changes in the actual price of the product. These changes do not necessarily reflect 

any new price being set by the manufacturer, but may merely reflect new purchasing patterns. This is a 

direct result of a flawed methodology. 

These unpredictable, onerous penalties on often low-margin medicines create significant risk for 

manufacturers, and make it more challenging for manufacturers to continue participating in those 

markets. A recent analysis concluded that the penalty would "increase uncertainty, reduce revenues, 

encourage manufacturers to exit the market and discourage the entry of new manufacturers. The 

predictable effect of discouraging entry into competitive markets is that product availability will be 

hampered: shortages will be more likely, and the market forces that lead prices to fall will be dampened."' 

Ironically, the analysis also concluded that the penalty "will not only have little effect on generic prices, 

but it will also have the unanticipated and unintended consequence of increasing the likelihood of 

shortages for potentially life-saving generic medicines."' Accordingly, we urge Congress to repeal this 

penalty. 

The Honorable Chris Collins 

1. The pharmaceutical manufacturing industry is not a naturally attractive market, as without 

government intervention it would not exist as know it today. It does not adhere to price taking, 

product homogeneity and free entry and exist. Accounting for the economic and societal benefits 

of developing life-saving medicine, many countries grant this industry with both a patent and 

market exclusivity period to promote a balance between new drug innovation, generic drug 

competition and recouping what would otherwise be sunk costs. And while public perception is 

critical of pharmaceutical manufacturers, there are unfortunate economic challenges that do not 

allow for this industry to perform like a competitive market. The nature of policies like the Orphan 

Drug Act, the GAIN Act and Title 21 that attempt to make this industry like a competitive market 

are somewhat paradoxical. Competition, therefore, is achieved over a considerable amount of 

time. 

AAM: 

a. It is projected that spending will decrease in the next five years as many pharmaceutical 

products with patent protection are set to expire. As it relates to patent protection and 

market exclusivity, what current government policies toward manufacturers hinder the 

balance as described above? What current policies can be strengthened or improved? 

While it is true that spending growth on medicines is expected to slow over the next five years, overall 

spending is still expected to grow between 4 and 7 percent through 2021, according to Quintiles·IMS.' 

1 Manning and Selck, "Penalizing Generic Drugs with the CPI Rebate will Reduce Competition and Increase the 

likelihood of Drug Shortages," September 2017. https://www.accessiblemeds.org/sites/default/files/2017-

09/Bates-White-Wh ite·P ape r -Report -CPI-Pe n a lty-09-12-2017. pdf 2 /d. 

3 May 2017. Quintiles-IMS Institute. "Medicines Use and Spending in the U.S.: A Review of 2016 and Outlook to 

2021" available at: https://structurecms-staging-psyclone.netdnassl.com/client assets/dwonk/media/attachments/590c/6aa0/6970/2d2d/4182/0000/590c6aa069702d2d4182000 

O.pdf?1493985952 
265 


29424.186

This growth is anticipated entirely due to new launches and price increases in the branded pharmaceutical 

market. At the same time, generic manufacturers face significant price deflation and a great deal of 

uncertainty surrounding the expiry of brand exclusivities. In short, the balance of Hatch-Waxman has 

shifted unsustainably toward price growth for branded drugs. To improve balance and promote 

competition for high-priced brand drugs, Congress should curb anticompetitive practices implemented by 

brand manufacturers looking to excessively extend market monopolies. This includes stopping abuses to 

FDA-mandated REMS programs and voluntary restricted distribution networks (enacting the CREATES Act 

and FAST Generics Act), improving the patent system to prevent branded manufacturers from relying on 

noninnovative patents and setting up federal reimbursement systems that support patient access to 

lower-priced generic and biosimilar medicines. 

2. In December 2016, the Senate Special Committee on Aging released an investigative report on 

significant price increases in prescription drugs whose patents have long expired. Specifically, out 

of the thousand or so companies in the U.S., the Committee evaluated four non-innovators or bad 

actors- manufacturers that do not contribute to the advancement in medical science and health 

outcomes. 

AAM: 

a. Following the investigation, the Committee recommended several policies aimed to deincentive certain business models and close loopholes that created certain market 

failures. As Congress considers policies aimed at increasing competition to rein in off 

patent drug price hikes, what policies should Congress further explore? This includes 

policies listed in the Committee report. 

A significant barrier to competition is the challenge faced by many generic and biosimilar manufacturers 

obtaining the samples needed for generic or biosimilar development. This is a result of the misuse of 

systems designed to ensure the safety of medicines by certain brand drug companies focused on delaying 

or prevent competition. Such delays created by misuse, abuse or regulatory failure deserve Congressional 

attention. In short, if generic and biosimilar development is the subject of anti-competitive behavior, 

these safe, affordable medicines will never enter the supply chain. 

FDA Commissioner Gottlieb has repeatedly highlighted the abuse of FDA-mandated restricted distribution 

systems and restricted distribution systems that brand companies create on their own, without any 

mandate from FDA, to delay or completely prevent generic competition. 

This occurs when brand companies, using a Risk Evaluation and Mitigation System (REMS) or their own 

voluntary "safety" program as an excuse, refuse to sell samples of their products to generic and biosimilar 

companies so that they can conduct the requisite bioequivalence and other testing. AAM members that 

have sought to purchase brand products from wholesalers in the supply chain are often informed that the 

wholesalers' contracts prohibit the sale of the brand product for generic studies. To date, FDA has received 

more than 150 complaints of specific challenges to obtaining samples. 

This abuse injures competition. Commissioner Gottlieb recently testified that: 

Brand companies often have an incentive to refuse to agree to a single, shared system REMS. By 

prolonging the negotiations over a single, shared system REMS, they further delay generic drug 
266 


29424.187

approval and competition. We see prolonged negotiations and inability to agree on the terms of 

a single, shared system REMS regularly.• 

Unfortunately, we are concerned that FDA's enforcement authorities as provided in FDA Amendments 

Act (FDAAA) will not be adequate to fully stem the brand abuses that have become so widespread in 

recent years. For instance, the civil monetary penalties available under FDA's enforcement authority pale 

in comparison to the revenue available by impeding generic entry. Center for Drug Evaluation and 

Research (COER) Director Janet Woodcock, M.D., noted that "fines and everything might simply be 

considered a cost of doing business because there's so much at stake in delaying generic competition."' 

Also, the FDA's authority to address the brand abuses using voluntarily imposed restricted distribution 

system are highly limited. 

To address this problem once and for all, Congress must pass the CREATES Act, bipartisan and bicameral 

legislation introduced by Representatives Marino and Cicilline, to prevent the misuse of REMS and 

restricted distribution schemes to delay generic drug competition. AAM also supports Rep. David 

McKinley and Rep. Peter Welch's FAST Generics Act. 

The cost offailure is significant, and will only encourage anti-competitive practices to grow. In the absence 

of Congressional action, AAM members today must consider the difficulty involved in obtaining branded 

drugs when determining which generic development programs to pursue. Where access to brand drugs is 

subject to restricted access programs, some AAM members have determined that generic development 

was not feasible and decided against initiating these development programs. This means that patients 

and taxpayers lose out on opportunities for affordable access to life-saving medicines and our nation's 

health care system leaves savings on the table. 

The Honorable Frank Pallone. Jr. 

At the hearing, there was some discussion about the need for increasing competition in the 

pharmaceutical market. While not a silver bullet for rising drug prices, I believe competition from generic 

drug manufacturers is one way to help lower prices and increase access to medications for patients. One 

barrier this Committee has heard about previously is the use of REMS programs by brand drug 

manufacturers to delay competition through delaying or preventing generic and biosimilar manufacturers' 

access to samples of branded drug products. These samples are needed by generic and biosimilar 

manufacturers to conduct the bioequivalence studies needed for FDA approval. 

In 2014, FDA released guidance that was intended to help generic and biosimilar manufacturers access 

samples by providing a letter noting that FDA has determined that the generic or biosimilar 

manufacturer's study protocol and safety protections are "comparable" to those required under the 

brand's REMS. 

1. In your testimony, you noted that while "well-intentioned" the draft guidance has not helped to 

solve the problem of brand drug manufacturer's using REMS to impede competition. Why has 

FDA's draft guidance and letter process not been sufficient to address access to generic samples? 

4 Gottlieb, Scott. "Antitrust Concerns and the FDA Approval Process," Testimony before the House Committee on 

the Judiciary, Subcommittee on Regulatory Reform, Commercial and Antitrust Law, July 2017. 

https://www.fda.gov/NewsEvents/Testimony/ucmS68869.htm 

5 Testimony of Dr. Janet Woodcock at "Generic Drug User Fee Amendments: Accelerating Patient Access to Generic 

Drugs." Senate Committee on Health, Education, Labor and Pensions, January 2016. 

4 
267 


29424.188

AAM: 

As you noted, in 2014, FDA released a draft guidance that attempted to address this issue and to assist 

prospective Abbreviated New Drug Application (ANDA) applicants in their efforts to acquire the samples 

necessary to conduct bioequivalence testing. 6 The guidance explained that "FDA is aware of instances in 

which an Reference Listed Drug (RLD) sponsor has refused to sell drug product to a prospective ANDA 

applicant," and that the agency would review bioequivalence protocols to "facilitat[e] prospective generic 

applicants' access to RLD supplies to conduct the testing necessary to support ANDA approval."' At the 

prospective ANDA sponsor's request, FDA will send a letter to the RLD sponsor indicating that the 

proposed testing contains safety protections comparable to those in the applicable REMS and that FDA 

will not consider it a violation of the REMS for the RLD sponsor to provide sam pies to the designated 

potential ANDA applicant.• 

While AAM appreciates FDA's efforts to address this issue, the draft guidance unfortunately has often not 

been effective in facilitating the exchange of samples and, in some ways, has even exacerbated the 

problem. AAM members repeatedly have found that brand companies use the draft guidance to argue 

that their purported safety concerns regarding providing samples to generic companies are reasonable. 

Brand companies also have argued that obtaining a letter from the agency approving bioequivalence 

protocols is a legal requirement generic companies must fulfill even though the guidance makes clear that 

"(r]equesting or obtaining a letter from FDA is not a legal requirement."' In addition, AAM members have 

found that FDA's review time of these protocols can take more than a year. As a result, the draft guidance 

can provide further incentive for brand companies to refuse to engage with a generic company before 

FDA reviews its protocol. 

Last, even when AAM members obtain a letter from the agency, the guidance does not compel the 

availability of samples. AAM commends FDA for its efforts to address REMS and restricted access abuses, 

as well as efforts to publicize these abuses and seek additional support from stakeholders. But there is a 

limit to what FDA can do on its own. One of the key deficiencies in the current FDC Act is that the penalties 

available to the Agency to stem the kinds of anticompetitive tactics by the brands are insufficient to 

effectively deter bad behavior by the brands. Ultimately, FDA lacks the ability to, for example, compel 

brand companies to sell samples to generic manufacturers. Given the sky-rocketing prices for brand drugs 

today, every day on the market without generic competition can be worth millions of dollars for brand 

companies. Therefore, AAM encourages Congress to take immediate action by passing the CREATES Act 10 

and the FAST Generics Act." These bipartisan bills would prevent the misuse of REMS and voluntarily 

imposed safety programs to delay generic drug competition. 

2. Commissioner Gottlieb has been very outspoken in acknowledging that brand manufacturers use 

REMS abuse as a way to delay competition, and in fact, recently called on brand manufacturers 

6 FDA, Draft Guidance, How to Obtain a Letter from FDA Stating that Bioequivalence Study Protocols Contain Safety 

Protections Comparable to Applicable REMS for RLD, p. 2 (Dec. 2014), available at 

http://www.fda.gov/downloads/Drugs/GuidanceComplianceRegulatorylnformation/Guidances/UCM425662.pdf. 

'Jd. 

8 /d. 

9 /d. 

10 Creating and Restoring Equal Access to Equivalent Samples Act of 2017, S. 974, 115th Cong. (2017). 11 Fair Access for Safe and Timely Generics Act of 2017, H.R. 2015, 115th Cong. (2017). 
268 


29424.189

to "end the shenanigans." What further actions do you think FDA could take to end the practice 

of REMS abuse? 

AAM: 

There is a limit to what FDA can do on its own. This is why it is important for Congress to act on bipartisan 

legislation to prevent the misuse of REMS and voluntary restricted distribution programs to delay generic 

competition. Until these bills become law, however, AAM believes there are several regulatory steps FDA 

could take to help reverse this trend and to deter brand companies from abusing the REMS requirements. 

Again, however, even with these actions, AAM believes this will remain a significant problem until and 

unless Congress acts to pass legislation to fully stem these abuses. AAM provided a series of specific 

recommendations to FDA in response to the Agency's Federal Register Notice entitled "Administering the 

Hatch-Waxman Amendments: Ensuring a Balance Between Innovation and Access; Public Meeting; 

Request for Comments."" These comments are attached for your reference. 

3. Are there additional tools or authorities that Congress should consider that would help to address 

the abuse of the REMS program? 

AAM: 

Yes. The CREATES Act and the FAST Generics Act are presently pending before Congress. These bipartisan 

bills would prevent the misuse of REMS and voluntarily imposed safety programs to delay generic drug 

competition, and would save billions of dollars benefiting patients and taxpayers alike. We encourage 

Congress to quickly enact this legislation. 

The Honorable Diana DeGette 

1. Please describe how incremental innovations and so-called "product hopping" and 

"evergreening" affect the ability of generic companies to enter the market and build more 

competition in certain therapeutic classes. To the extent possible, please explain in the context of 

insulin. 

AAM: 

Incremental changes to branded products are often used for the purposes of extending branded 

monopolies rather than improving patient outcomes. Branded manufacturers use such changes to shift 

large patient populations from one branded drug to an incrementally different new one prior to the patent 

expiry of the legacy product in order to insulate themselves from generic competition. This practice is 

commonly referred to as "product hopping" or "evergreening." Additionally, branded manufacturers have 

begun filing large numbers of late-stage patents after the product has already been on the market for a 

number of years to delay market entry of less-expensive competitor biosimilar medicines. Even though 

these patents may be of questionable validity, they can create enormous costs for biosimilar 

manufacturers for who are forced to litigate each patent at significant cost. While AAM does not typically 

comment on specific products or product classes, or engage in validity analysis of any specific patents, the 

insulin market is certainly largely dominated by a number of branded products without any generic 

competition. 

2. Do Risk Evaluation and Mitigation Strategies (REMS) or limited distribution create barriers to entry 

for biosimilar insulin products? 

12 82 Fed. Reg. 28493 (June 22, 2017) (Docket No. FDA-2017-N-3615). 

6 
269 


29424.190

AAM: 

AAM is not aware of specific instances in which REMS or limited distribution are barriers to entry for 

biosimilar insulin products. However, as FDA leaders have noted, there are significant incentives for brand 

manufacturers to create such barriers. This is why we encourage Congress to enact the CREATES Act and 

the FAST Generics Act. 

Nonetheless, the development and market entry of biosimilar insulin products could face significant 

challenges unless Congress enacts legislation to place biosimilar medicines on a competitive playing field 

within Medicare Part D. Because biosimilars are precluded from offering the same 50 percent discount as 

brands in the Coverage Gap Discount Program, they face significant barriers to gaining formulary coverage 

and patient uptake. We encourage Congress to quickly include biosimilars in the Coverage Gap Discount 

Program, which is projected to save money for patients and the Medicare program. 

3. Given the FDA's recent focus on competition, what more do you think the agency can do to 

facilitate competition for medicines like insulin? 

AAM: 

We have heard anecdotally from our members that the insulin market presents unique challenges for 

generic manufacturers. There are market and regulatory barriers that manufacturers must consider. One 

notable issue is how FDA will handle the "Deemed to Be a License" guidance required by the Biologics 

Price Competition and Innovation Act (BPCIA), under which FDA will shift some New Drug Applications 

currently marketed under the Food Drug and Cosmetics Act to Biologic Licenses under the Public Health 

Service Act. The agency must ensure that insulin products are handled on a case-by-case basis that allows 

for substitution of appropriate products when necessary. Additionally, FDA needs to ensure that it reliably 

and quickly communicates with sponsors of follow-on products to ensure that applications move quickly 

through the agency. 

The Honorable Kurt Schrader 

1. One of the main concerns about solutions to REMS and restricted access abuse is the enforcement 

mechanism. Concerns have been raised about increasing the federal government's authority, 

whether increasing the government's enforcement authority will actually be effective and the risk 

of creating an environment for frivolous lawsuits. Can you help me understand why an effective 

enforcement is necessary to address REMS and restricted access abuse, and the best way to get 

at an effective enforcement mechanism? 

AAM: 

The CREATES Act is a narrowly tailored proposal to address the well-documented problem of REMS 

abuses. It does not establish any new requirements on brand companies. Brand companies need only 

allow the marketplace to work as it should -without limiting the ability of generic manufacturers to 

purchase samples at commercially-reasonable, market-based prices. Under the bill, only an affirmative 

defense that samples are available is necessary by brand companies to prevent litigation. 

But delaying generic competition can be incredibly profitable for most brand companies. This is why 

Center for Drug Evaluation and Research (CDER) Director Janet Woodcock, M.D., noted that "fines and 

everything might simply be considered a cost of doing business because there's so much at stake in 

delaying generic competition."" 

13 Testimony of Dr. Janet Woodcock at "Generic Drug User Fee Amendments: Accelerating Patient Access to 

Generic Drugs." Senate Committee on Health, Education, Labor and Pensions, January 2016. 
270 


29424.191

To deter this behavior, the CREATES Act authorizes the court to order a brand company to pay a generic 

manufacturer a monetary penalty up to the revenues accrued during the pendency of the lawsuit. This 

penalty would eliminate the brand company's monetary gain from forcing the generic to file suit, and 

incentivizes the brand company to simply make a reasonable offer to sell the samples in the first place. 

Contrary to claims that this would lead to frivolous litigation, we believe the bill would actually lead to 

less litigation. In too many instances today, private litigation is the only way for generic developers to gain 

access to brand drug samples. The reality is that these bills would provide clarity to all involved. They 

would give FDA clear authority to waive a shared REMS requirement. They would give clear enforcement 

and remedies for generic or biosimilar firms. They would give a clear safe harbor for brand drug firms 

against frivolous claims- in which they would merely have to show that they did not create barriers to 

purchase. They would even provide immunity against legal claims for any harm suffered in the 

development of a generic. In doing so, they would reiterate the original REMS statute- that REMS should 

not be a barrier to competition. 

2. You mentioned increased consolidation in the generic drug manufacturer market. How do you 

account for this increased consolidation, and how do we combat that to ensure there is maximum 

competition among generic drugs? 

AAM: 

Today, the generic drug manufacturing industry remains generally fragmented. More than 200 generic 

manufacturers compete to sell into increasingly consolidated wholesale and pharmacy purchasers. In fact, 

today, three purchasing groups account for as much as 90 percent of all generic drug purchasing. 14 As 

these purchasers move more and more toward single-source contracts for generic drugs, it often creates 

a dynamic where it is possible that no more than three generic manufacturers may be able to successfully 

market any given product. This risks future competitive success in the generic market as generic drug 

manufacturers may be forced to maximize economies of scale and consolidate themselves. 

An unfortunate yet foreseeable consequence of fewer generic manufacturers is a significantly increased 

risk of drug shortages. Evidence suggests that generic drugs are particularly susceptible to drug shortages, 

potentially related to existing market incentives as well as low reimbursement." Such shortages have a 

serious effect on patient care. Responding to a series of drug shortages in 2011, FDA Commissioner Scott 

Gottlieb, M.D., testified before Congress that many such shortages were a direct result of low 

reimbursement for older, low-margin products and that "many hospitals are being forced to ration key 

medicines and patients to sit on waiting lists for vital drugs."" 

"Fein, Adam, "The 2017-18 Economic Report on Pharmaceutical Wholesalers and Specialty Distributors." October 

2017 

15 Stromberg, C. (May 2014). Drug Shortages, Pricing, and Regulatory Activity. National Bureau of Economics 

Working Paper. htto:Uwww.nber.org/chapters/c13102.pdf 16 Gottlieb, Scott. "Drug Shortages: Why they happen and what they mean" Testimony before the Senate Finance 

Committee. December 2011. https:l/www.finance.senate.gov/imo/media/doc/Gottlieb%20Testimony1.pdf 

8 
271 


29424.192

GREG WALDEN, OREGON 

CHAIRMAN 

FRANK PALLONE, JR., NEW JERSEY 

RANKING MEMBER 

ONE HUNDRED FIFTEENTH CONGRESS 

({ongre~~ of tbe mniteb ~tate~ 

1!,tou9'e of ~epresentatibe9' 

COMMITTEE ON ENERGY AND COMMERCE 

2125 RAYBURN HousE OFFICE BuiLDING 

WASHINGTON, DC 20515-6115 

Majority (202)225-2927 

Minority (202) 225-3641 

January 8, 2018 

Ms. Elizabeth Gallenagh 

Senior Vice President, Govemment Affairs and General Counsel 

Healthcarc Distribution Alliance 

901 North Glebe Road; Suite 1000 

Arlington, VA 22203 

Dear Ms. Gallenagh: 

Thank you for appearing before the Subcommittee on Health on December 13, 2017, to testify at 

the hearing entitled "Examining the Dmg Supply Chain." 

Pursuant to the Rules of the Committee on Energy and Commerce, the hearing record remains 

open for ten business days to permit Members to submit additional questions for the record, which are 

attached. The format of your responses to these questions should be as follows:(!) the name of the 

Member whose question you are addressing, (2) the complete text of the question you are addressing in 

bold, and (3) your answer to that question in plain text. 

To facilitate the printing of the hearing record, please respond to these questions with a 

transmittal letter by the close of business on January 23,2018. Your responses should be mailed to Zack 

Dareshori, Legislative Clerk, Committee on Energy and Commerce, 2125 Rayburn House Office 

Building, Washington, DC 20515 and e-mailed in Word format to zack.dareshori@mail.house.gov. 

Thank you again for your time and effort preparing and delivering testimony before the 

Subcommittee. 

cc: The Honorable Gene Green, Ranking Member, Subcommittee on Health 

Attachment 
272 


29424.193

HDA Healthcare Distribution Alliance 

PATIENTS MOVE US. 

UNITED STATES HOUSE OF REPRESENTATIVES 

COMiVTITTEE ON ENERGY AND COMMERCE 

SUBCOMMITTEE ON HEAL Til 

"Examining the Drug Supply Chain" 

December !3, 2017 

Elizabeth Gallcnagh, Senior Vice President and General Counsel 

Response to Questions for the Record- January 22,2018 

The Honorable EarlL. "Buddy" Carter 

Does your organization support increased transparency into the following aspects of the drug 

supply chain'! Yes or No will suffice. 

1. Rebate pass throughs 

2. PBM "Spread" Profits 

3. Generic Drug Reimbursement J\tlcthodologics 

4, True price for prescription drug at point of sale 

5. Pharmacy Direct and Indirect Remuneration ("DIR") fees 

HDA is the national trade association representing primary pharmaceutical distributors- the vital link 

between the nation's phannaccutical manufacturers and more than200,000 phannacic:s, hospitals, longM 

tenn care facilities, clinics and others nationwide. Distributors arc unlike any other supply chain 

participants- their core business is not engaged in manufacturing and they do not prescribe medicines 

or dispense to patients nor do they provide coverage for prescription drugs or reimburse for prescription 

drugs. Their key role is to serve ns a conduit for medicines to travel from manufacturer to patient while 

making sure the supply chain is fully secure, fully functional, and as efficient as possible. 

Given the role of our members in the supply chain and because of their diverse customer base, HDA 

does not have an established position as to drug pricing transparency efforts related to other entities in 

the pharmaceutical supply chain. 

The Honorable Diana DcGctte 

l. Please explain that type of service model (e.g., direct store delivery, selfMwarchousing, 

dock-to-dock, drop shipments) your member companies most commonly usc for insulin 

products. 

Pham1aceutical distributors offer a wide array of delivery methods for specialty products, 

including insulin. Orders are shipped via the most appropriate transportation method 

depending on order size and service level agreements including small parcel shipments, 

courier delivery, and less than truckload for large hospital systems or large pharmacies. 

Manufacturers may mandate that distributors usc certain packing types tOr some products 

requiring specialty handling. 

901 North Glebe Road, SUite 1000, Arlmgton, VA 22203 • Mam (703) 787-0000 • Well www hcla org 
273 


29424.194

Examining the Dmg Supply Chain 

liDA- QFR Responses 

January 22, 2018 

2. Is the amount your member companic.s typically pay pharmaceutical manufacturers to 

acquire drugs typically tied in some way to the drug's WAC price? To the extent 

possible, please explain the context of insulin and/or retail pharmaceutical products that 

have competing branded products in a therapeutic class. 

Pharmaceutical wholesale distributors will generally purchase brand phannaceuticals at 

WAC or WAC with a slight percentage decrease adjustment based on negotiations 

between the individual wholesale distributor and the manufacturer. WAC represents the 

manufacturds list price, and does not include rebates, prompt pay, or other adjustment"> in 

price resulting from proprietary negotiations between the manufacturer and wholesaler. Each 

WAC is specific to the drug, strength, dosage form, package size, and manufacturer. 

Company negotiations, volume purchases, discounts. availability from multiple 

manufacturers and other contract terms and agreements may result in larger price 

adjustments off WAC particularly related to generic pharmaceuticals. Even after 

company negotiations the fundamental outcome remains static. 

The provisions in our organization's antitrust policy preclude flDA from being privy to, or 

providing a venue for any discussion about prices and/or the components of prices among 

members. As members may not discuss pricing, pricing fonnulas, policies or the tcnns of their 

purchase and sales contracts in any I [DA sponsored venue, the organization is unable to 

provide any comments or answer questions about specific drug products, including insulin, 

their prices or negotiations that take place between member companies and their suppliers 

and/or customers. 

3. Do pharmaceutical companies ever provide your member companies with discounts, 

additional payments, or other financial incentives to acquire data about the distribution 

of their products? 

In exchange for the variety of distribution and logistics services that primary distributors 

provide to manufacturers, they charge manufacturers what are referred to as ''bona fide service 

fees" for the provision of these services. Some examples of these core services include 

inventory handling and inventory management, providing manufacturers \Vith data about 

where (and in which settings) their products are utilized; verifying downstream customer 

eligibility to purchase products at pricing established under various programs or contracts 

between such customers and given manufacturers; and processing relevant chargebacks to 

manufacturers. 

These fees, which are not passed on to the customer, represent fair market value for a bona 

fide, itemized service actually perfonncd on behalf of the manufacturer that the manufacturer 

would otherwise perform (or contract for) in the absence of the service arrangement. This 

model reduces demand volatility- aligning order patterns more closely to actual patient 

demand and, eliminating artificial demand spikes, allowing for a supply chain that operates 

more smoothly and predictably. 
274 


29424.195

Examining the Dmg Supply Chain 

HDA- QFR Responses 

January22,2018 

4. Please explain how drug wholesalers and distributors work with PBMs to ensure access 

to insulin products. 

Pharmaceutical wholesale distributors do not contract with PBMs for rebates related to 

formulary placement of branded prescription drugs, whether insulin or othcMise. Rather, 

such relationships exist between phannaceutlcalmanufacturers and their agents with PBMs 

and the health plans to which such PBMs provide services. PBM-owned mail order and 

specialty pharmacies may contract with pharmaceutical wholesale distributors for prescription 

drug distribution services. 

Do your member companies' contractual relationships with PBMs ever extend beyond 

mail order pharmacy operations? If yes, please provide details on the other types of 

business arrangements PBMs sometimes have with wholesalers and distributors. 

To our knowledge, no. As noted above, pharmaceutical wholesale distributors do not contract 

with PDMs for rebates related to fonnulary placement of branded prescription drugs. PBMowned mail order and specialty pharmacies may contract with pharmaceutical wholesale 

distributors for prescription drug distribution services. 
275 


29424.196

GREG WALDEN, OREGON 

CHAIRMAN 

FRANK PALLONE, JR., NEW JERSEY 

RANKING MEMBER 

Mr. Mark Merritt 

President and CEO 

ONE HUNDRED FIFTEENTH CONGRESS 

<!Congrr~~ of tbe Wnttell $tate~ 

:J!)ouS'e of l\epren'entatiben' 

COMMITTEE ON ENERGY AND COMMERCE 

2125 RAYBURN HousE OFFICE BuiLDING 

WASHINGTON, DC 20515-0115 Majority (202) 225-2927 

Minority l202) 225-3641 

January 8, 2018 

Pharmaceutical Care Management Association 

325 7th Street, N.W. 

Washington, DC 20004 

Dear Mr. Merritt: 

Thank you for appearing before the Subcommittee on Health on December 13,2017, to testifY at 

the hearing entitled "Examining the Drug Supply Chain." 

Pursuant to the Rules of the Committee on Energy and Commerce, the hearing record remains 

open for ten business days to penn it Members to submit additional questions for the record, which are 

attached. The format of your responses to these questions should be as follows: (l) the name of the 

Member whose question you are addressing, (2) the complete text of the question you are addressing in 

bold, and (3) your answer to that question in plain text. 

To facilitate the printing of the hearing record, please respond to these questions with a 

transmittal letter by the close of business on January 23,2018. Your responses should be mailed to Zack 

Dareshori, Legislative Clerk, Committee on Energy and Commerce, 2125 Rayburn House Office 

Building, Washington, DC 20515 and e-mailed in Word format to zack.dareshori@mail.house.gov. 

Thank you again for your time and effort preparing and delivering testimony before the 

Subcommittee. 

cc: The Honorable Gene Green, Ranking Member, Subcommittee on Health 

Attachment 
276 


29424.197

APCMA 

Questions for the Record 

Committee on Energy and Commerce Subcommittee on Health 

Hearing entitled "Examining the Drug Supply Chain" 

December 13, 2017 

The Honorable Earl L "Buddy" Carter 

Does your organization support increased transparency into the following aspects of 

the drug supply chain? Yes or No will suffice. 

1. Rebate pass throughs 

PBMs are committed to providing rebate transparency and audit rights to their clients that 

sponsor coverage. On average plans elect to receive 90 percent of rebates negotiated by 

PBMs,' an increasing number require PBMs to pass through all of them. Roughly 46 percent of 

commercial PBM contracts are negotiated with 100 percent of rebates passed through to plans," 

and all rebates in the Medicare Part D program are required to be reported to CMS. 

2. PBM "Spread" Profits 

Some commercial market clients choose to have PBMs retain the spreads between what is 

negotiated between sponsors and other stakeholders. 

3. Generic Drug Reimbursement Methodologies 

State Medicaid programs and other sponsors use Maximum Allowable Cost (MAC) lists to 

incentivize pharmacies and their pharmacy service administrative organization (PSAO) partners 

to negotiate competitive prices for generic drugs. These are derived from its specific proprietary 

methodologies and it would be inappropriate to disclose this proprietary information. Any 

proposal that restricts the ability to place lower cost, generic drugs on a MAC list will increase 

costs for plan sponsors that use a PBM to manage their drug benefit. 

4. True price for prescription drug at point of sale 

PCMA supports transparency to consumers on cost-sharing so that they can make informed 

decisions in the marketplace. A recent CMS analysis of the Medicare Part D program found that 

requiring plans to use manufacturer rebates and pharmacy price concessions at the point-ofsale would raise premiums and increase the burden on taxpayers by $82 billion, while giving 
277 


29424.198

APCMA 

brand drug makers a $29 billion windfall. The fundamental problem is that policies of this nature 

do nothing to reduce high prices set by manufacturers. 

5. Pharmacy Direct and Indirect Remuneration ("DIR") fees 

In its January 2017 fact sheet on DIR, CMS describes the process as follows: 

Fees, payments, or payment adjustments made after the point-of-sale that change the cost of 

Part D covered drugs for Part D sponsors or PBMs must be reported to CMS as Direct or 

Indirect Remuneration (DIR). DIR results from payment arrangements negotiated independent 

of CMS, between Part D sponsors, PBMs, network pharmacies, drug manufacturers, and other 

parties involved in the administration of the Part D benefit. Manufacturer rebates comprise a 

significant share of all DIR reported to CMS. 

The final plan payments by CMS are, per statute, to be based on the costs actually incurred by 

Part D sponsors. These actual costs must reflect any applicable DIR. DIR is apportioned only 

between Medicare and the Part D plan, generally based on the share of the total Part D drug 

costs that each is responsible for over the course of the payment year. 

Sponsors must also factor into their plan bids an estimate of the DIR expected to be generated. 

Higher DIR leads to lower bids and, therefore, puts downward pressure on beneficiary 

premiums. 111 

Pharmacy DIR is part of the confidential and strategic negotiation process between pharmacies 

and PBMs. This information is reported to the agency by plan sponsors and accounted for as 

part of CMS' payments to the plan sponsors. Public disclosure of such agreements would cause, 

according to FTC, tacit collusion by drug manufacturers and pharmacies and raise costs for 

consumers. 

The Hongrable Rjchard Hud:znn 

While I can see the merits to benefit designs such as a step-therapy system, it also 

appears they can also delay patient treatments or result in inferior outcomes. To 

chronically ill patients, many of whom have issues with medication or treatment 

adherence, disruptions can be costly, both in aggregate terms to the system, and 

individually when they get sicker. How can you leverage data science and individual 

patient Information to maintain the merits of these benefit designs while using this 

targeted information to provide a more tailored service? Are your plans already 

leveraging ways to do this, and if not, why not? 

2 
278 


29424.199

APCMA 

Step therapy protocols ensure the right patients get the right medications at the right point in the 

care continuum, at lower net costs. Step therapy protocols are built on both clinical evidence 

and cost considerations. 

Pharmacy & Therapeutic committees, comprising independent clinician experts including 

physicians and pharmacists, develop evidence-based guidelines used in step therapy, and 

assure such protocols do not impair the quality of clinical care. 

Sponsors and PBMs continually seek better and more detailed evidence on the effectiveness of 

drugs for all their indications and subpopulations of patients, in an attempt to continuously 

improve coverage policies, formularies, and management techniques, including step therapy. 

Physicians whose patients need specific drugs for clinical reasons may communicate with 

health plans to demonstrate the patient's need. Most states and Medicare have expedited 

appeal procedures for emergency and extremely urgent situations where a patient's access to a 

specific drug must be expedited. PBMs also are able to track which drugs patients have already 

tried, so long as the patient remains enrolled in a plan served by the PBM. 

The Honorable Gus M. Bilirakis 

CMS recently published their 700-page proposed rule for Medicare Part D for 

Calendar Year 2019. One component was their proposed implementation of the drug 

management program for at-risk beneficiaries from the Comprehensive Addiction 

Recovery Act of 2016. This drug management program, or "lock-in," is used in 

Medicaid programs and in private insurance. Have you had a chance to review their 

regulations and what are your thoughts on CMS' proposed implementation? Are 

there improvements that need to be made either through regulation or statutory 

changes? 

PCMA supported the passage of the lock-in provisions under CARA and appreciates CMS 

undertaking the process to implement it. PBMs and Part D sponsors process many millions of 

prescription drug claims annually. PBMs are in the unique position of being able to identify 

patterns of potential misuse and abuse by at-risk Medicare beneficiaries. For example, when 

PBMs process claims for patients with insurance, they can identify at-risk behavior as well as 

potential doctor and pharmacy shopping. Electronic prescribing and electronic claims 

processing improves the ability to track these patterns as it also captures cash-paying 

transactions in addition to prescriptions covered by insurance. 

PCMA supports allowing for plan sponsor flexibility to lock the beneficiary into a specific 

prescriber(s) or specific pharmacy or both, based on the utilization behavior of the beneficiary. 

However, we are very concerned that the proposal to require a Part D plan sponsor to wait at 

least six months from the date the beneficiary is first identified as a potential at-risk beneficiary 

3 
279 


29424.200

APCMA 

before limiting that beneficiary to a given pharmacy or prescriber for frequently misused and 

abused drugs, and defeats the purpose of the lock-in program, which is to quickly take steps to 

reduce medication misuse in the Part D program. Without timely intervention, patients will 

continue to misuse opioids. In our comments on the proposed rule, PCMA urged CMS to allow 

for lock-in as quickly as possible once a beneficiary is considered at-risk. Furthermore, it is 

essential that CMS both preserve the flexibility of the current Drug Utilization Review (OUR) and 

Overutilization Monitoring System (OMS) programs while also providing flexibility for Part D plan 

sponsors and their PBMs to develop and implement their lock-in programs. 

The Honorable Diana DeGette 

1. Please describe whether and how pharmaceutical companies use intellectual 

property protections as part of your negotiations on rebates. Please explain in 

the context of insulin and/or retail pharmaceutical products that have 

competing branded products in a therapeutic class. 

In general, drug manufacturers use intellectual property (IP) protections such as patents and 

market exclusivities to create a temporary monopoly on selling a particular drug or biologic. 

These IP protections were designed to encourage more research. However, the system has 

come to be abused by manufacturers. In the case of insulin, drug manufacturers have 

continually adjusted formulations, creating insulin analogs that are easier to use and less likely 

to trigger dangerous low blood sugar episodes. These new formulations also serve to provide 

drug manufacturers with new IP protections and preserve the manufacturers' monopolies. This 

practice of making slight product changes to preserve monopoly protections is called 

evergreening, and it keeps brand prescription drugs under patent protection so other 

drug makers cannot copy formulas and offer lower-cost versions. 

2. Please describe how patient assistance programs and discount cards 

offered by pharmaceutical companies affect PBMs' ability to negotiate 

rebates. To the extent possible, please explain in the context of insulin 

and/or retail pharmaceutical products that have competing branded 

products in a therapeutic class. 

The notion of drug manufacturer patient assistance programs can be misleading when used 

for patients with health insurance. Such practices, including coupon and "free" drug 

programs, entice insured patients to use higher-cost medications when more cost-effective, 

clinically appropriate alternatives exist They undermine formulary cost-sharing strategies 

designed to give patients incentives to use the most cost-effective, clinically appropriate 

medications. For insured patients whose cost-sharing is paid by manufacturers, those 

plans-and ultimately, consumers-end up paying manufacturers the full cost of a drug. This 

formulary subversion is considered to violate anti-kickback statutes and is barred in federal 

programs, such as Medicare and Medicaid. Ultimately, these types of programs undermine 

4 
280 


29424.201

APCMA 

the expert pharmacy benefit management services that sponsors hire PBMs to perform on 

their behalf, and result in increased health care costs for all Americans. These schemes are 

carried out by drug manufacturers across most drug classes, including insulin. 

3. Are rebates collected by PBMs from pharmaceutical companies and passed 

onto PBM clients sometimes based on a percentage of list price (WAC) or 

some modified version of list price (e.g., WAC- or Average Wholesale Pricebased formulas)? If yes, is it possible that this rebate structure could put 

pressure on pharmaceutical companies to raise list prices? 

PCMA is not privy to contract negotiations of its members' business, but our understanding is 

that some contracts are negotiated based on percentage discounts from an industry standard. 

PBMs manage drug benefits to get sponsors and patients the lowest net cost, recommending 

benefit and cost-sharing designs that encourage the use of the most cost-effective, clinically 

appropriate drugs. The pharmaceutical industry introduced rebates as a method for providing 

price concessions; PBMs would welcome a different way to get to lowest net cost. 

PBMs respond to requests for proposals (RFPs) from potential clients, which lay out the payer's 

terms and conditions. Each plan determines what percentage of rebates it wants the PBM to 

pass through to it, and how much (if any) it wants the PBM to retain as payment for services. 

We understand that PBMs offer sponsors inflation protection against manufacturer price 

increases that also mitigates against PBMs having an incentive for manufacturers to raise their 

prices. 

Each drug manufacturer independently decides the price of its drug. The launch prices of new 

drugs and price increases of existing drugs bear no correlation to the rebates and discounts 

manufacturers negotiate with PBMs. There are high-priced drugs with low rebates and lowerpriced drugs with high rebates. It all depends on how much direct competition a given drug 

faces in the market. This data argues against the notion that PBM contracts with manufacturers 

pressure them to increase prices. 

4. Are administrative fees collected by PBMs from pharmaceutical companies 

sometimes based on a percentage of list price (WAC) or some modified 

version of list price (e.g., WAC- or AWP-based formulas)? If yes, is it possible 

that this fee structure could put pressure on pharmaceutical companies to 

raise list prices? 

Again, PCMA is not privy to the details of our companies' negotiations with drug manufacturers 

or other entities and has not even a general understanding of the basis for administrative fees. 

5 
281 


29424.202

APCMA 

5. When a pharmaceutical company chooses to raise a product's list price above 

an agreed upon threshold under a price protection clause, can that result in 

the pharmaceutical company paying an additional rebate? 

The question seems to describe what is called a price protection agreement. Some sponsors 

request this in order to set a ceiling price for drugs. Typically, when drug prices rise, a rebate is 

issued for anything that exceeds an agreed-upon price threshold. 

In practice, as evidence shows, neither price protection agreements, nor any other kind of price 

concession negotiated by PBMs drives the list price of drugs. Drug manufacturers set their 

prices and PBMs can negotiate price concessions to the extent manufacturers' products are 

substitutable for one another in the marketplace. 

'Drug Channels, "Solving the Mystery of Emp!oyer-PBM Rebate Pass-Through," January 14, 2016 

http://www.drugchannels.neU2016/01/solllinq~mysterv-of-employer-pbm-rebate.html 

11 See, Pharmacy Benefit Management Institute, "PBMI Research Report: Trends in Drug Benefit Design," 2016 1

" https:l/www.cms.gov/Newsroom/MediaReleaseDatabase/F act-sheets/2017 -Fact-SheeHtems/2017 -01-19-2.html 

6 
282 


29424.203

GREG WALDEN, OREGON 

CHAIRMAN 

FRANK PALLONE, JR., NEW JERSEY 

RANKING MEMBER 

ONE HUNDRED FIFTEENTH CONGRESS 

Mr. Matt Eyles 

([ongre~~ of tbe 1\niteb ~tate~ 

J!)ousc of l\cprcscntatibcs 

COMMITTEE ON ENERGY AND COMMERCE 

2125 RAYBURN HousE OFFICE BuiLDING 

WASHINGTON, DC 2051~115 

Majority (202) 225-2927 

Minority (202) 225-3641 

January 8, 2018 

Senior Executive Vice President and 

Chief Operating Officer for Policy and Regulatory Affairs 

America's Health Insurance Plans 

601 Pennsylvania Avenue, N.W.; South Building, Suite 500 

Washington, DC 20004 

Dear Mr, Eyles: 

Thank you for appearing before the Subcommittee on Health on December 13, 2017, to testify at 

the hearing entitled "Examining the Drug Supply Chain." 

Pursuant to the Rules of the Committee on Energy and Commerce, the hearing record remains 

open for ten business days to permit Members to submit additional questions for the record, which are 

attached. The format of your responses to these questions should be as follows:(!) the name of the 

Member whose question you are addressing, (2) the complete text of the question you are addressing in 

bold, and (3) your answer to that question in plain text. 

To facilitate the printing of the hearing record, please respond to these questions with a 

transmittal letter by the close of business on January 23, 2018. Your responses should be mailed to Zack 

Dareshori, Legislative Clerk, Committee on Energy and Commerce, 2125 Raybum House Office 

Building, Washington, DC 20515 and e-mailed in Word format to zack.dareshori@mail.house.gov. 

Thank you again for your time and effmt preparing and delivering testimony before the 

Subcommittee. 

cc: The Honorable Gene Green, Ranking Member, Subcommittee on Health 

Attachment 
283 


29424.204

__}y 

AHIP 

The Honorable Earl L. "Buddy" Carter 

Does your organization support increased transparency into the following aspects of the 

drug supply chain? Yes or no will suffice. 

1. Rebate pass throughs 

2. PBM "Spread" Profits 

3. Generic Drug Reimbursement Methodologies 

4. True price for prescription drug at the point of sale 

5, Pharmacy Direct and Indirect Remuneration ("DIR") fees 

AHIP's members have embraced the suggestion of the U.S. Federal Trade Commission (FTC) 

and the U.S. Department of Justice (DOJ) that "[p ]rivate payors, governments, and providers 

should furnish more information on prices and quality to consumers in ways that they find useful 

and relevant, and continue to experiment with financing structures that give consumers greater 

incentives to use such information." Thus, health insurance providers have designed innovative 

products that use information about cost and quality in their structures and empower consumers 

to use this information. 

AHIP also strongly supports transparency to provide policymakers with information that will 

help them design solutions to problems impacting consumers, such as the soaring price of 

pharmaceuticals. The focus of such transparency efforts should be the root of the problem: the 

list price of prescription drugs. Everything that happens in the drug supply chain follows from 

and is significantly impacted by the initial decision made solely by the manufacturer of where to 

set the list price. After that, everything that happens in the drug supply chain is impacted by and 

will change as a result of the list price due to changes by the manufacturer to that price. As a 

result, AHIP strongly supports transparency initiatives that give policymakers deeper insights 

into list prices, helping them better understand not only the what but the why of such prices. 

Of course, any transparency initiative should be guided by the insights of the federal competition 

agencies, the FTC and DOJ, on when such initiatives benefit consumers and when they harm 

consumers. The FTC and DOJ have indicated that making granular, non-public information 

about negotiated prices widely available can lead to higher prices and other consumer harms. 

Obviously, list prices are not negotiated, so making them transparent docs not implicate this 

concern. Other initiatives that do implicate non-public, negotiated prices do raise such concerns 

of harm, and therefore policymakers should proceed with caution to ensure that such efforts do 

not harm the consumers they arc attempting to assist. 
284 


29424.205

The Honorable Richard Hudson 

While I can see the merits to benefit designs such as a step-therapy system, it also appears 

they can also delay patient treatments or result in inferior outcomes. To chronically ill 

patients, many of whom have issues with medication or treatment adherence, disruptions 

can be costly, both in aggregate terms to the system, and individually when they get sicker. 

How can you leverage data science and individual patient information to maintain the 

merits of these benefit designs while using this targeted information to provide a more 

tailored service? Are your plans already leveraging ways to do this, and if no, why not? 

Health plan benefit designs leverage science by relying on existing evidence on safety and 

effectiveness. This evidence-based approach to coverage policy and medical management 

involves a systematic review of the safety and effectiveness of medical interventions, including 

drugs, devices, services, and procedures. In conducting these reviews, health plans rely on a 

variety of evidence-based resources, typically following a hierarchy of evidence that gives the 

most weight to randomized clinical trials. The types of evidence that health plans rely on include, 

but are not limited to: 

o Randomized Clinical Trials (RCTs) 

o Specialty society guidelines/best practices 

o Current scientific and clinical peer reviewed medical literature 

o CMS coverage decisions and quality metrics 

o Agency for 1-lealthcare Research and Quality (AI-IRQ) guidelines 

o United States Preventive Services Task Force (USPSTF) recommendations 

o Well-designed observational studies 

o Expert consensus 

Health plan coverage policies are also dictated to some extent by federal and state mandates, as 

well as employer/client requests. Additionally, health plans periodically review their coverage 

policies and update them based on new information/evidence, such as FDA safety notices, new 

drug/device approvals, new scientific/clinical research findings, and updated professional society 

guidelines. 

Health plans have adopted evidence-based medical management tools, including step therapy 

approaches, to improve care and reduce costs for patients. Step therapy typically involves 

prescribing a recognized safe and cost-effective drug before the approval of a more complex, 

costlier, or riskier drug or drug combination. Generic medications, for example, offer significant 

cost savings without any adverse impact on quality or outcomes. As a result, many health plans 

encourage prescribers and patients to usc generic medications as a first-line of treatment before 

progressing to brand-name medications. 

This evidence-based approach is complemented by opportunities for providers to communicate 

any unique needs and/or special circumstances regarding patients that could affect coverage. For 

example, health plans' step therapy policies can encourage physicians to prescribe a traditional, 

generic, non-steroidal anti-inflammatory drug (NSAID) for patients. However, if a patient has 

experienced side effects from the generic medication, the physician can request approval to 

prescribe the more expensive branded NSAID. 
285 


29424.206

The Honorable Gus Bilirakis 

CMS recently published their 700-page proposed rule for Medicare Part D for Calendar 

Year 2019. One component was their proposed implementation of the drug management 

program for at-risk beneficiaries from the Comprehensive Addiction Recovery Act of 2016. 

This drug management program, or "lock-in," is used in Medicaid programs and in private 

insurance. Have you had a chance to review their regulations and what are your thoughts 

on CMS' proposed implementation? Are there improvements that need to be made either 

through regulation or statutory changes? 

A HIP has thoroughly reviewed the CMS rule, including the provisions relevant to the lock-in 

program, and has responded with several suggestions. In general, AHIP supports the approach of 

implementing limits to access to coverage of opioids, including lock-ins. However, we have 

several recommendations to ensure that the finalized policy protects Medicare beneficiaries from 

misuse or abuse of opioids while retaining access to pain medications, reduces the burden placed 

on sponsors in administering such programs, and ensures the integrity of the Part D program. 

Frequently Abused Drugs- In light of overwhelming evidence that beneficiaries taking 

opioids in addition to other high-risk medications, such as hypnotic-sedatives and muscle 

relaxants, are at a higher risk of harm, we recommend that CMS continue to review 

evidence around the use of such high-risk medications and consider their inclusion into 

the list of frequently abused drugs when appropriate. 

Exemptions for Beneficiaries- AHlP recommends that CMS provide further 

clarifications around when and how to apply exemptions for beneficiaries in time for plan 

inclusion into bid applications. For example, there is a lack of clarity as to when the longterm care exemptions apply (e.g., drug utilization review (DUR), coverage limits) and 

how to implement the cancer diagnosis exemption. 

Case Management- AHIP believes that the expectation of three prescriber outreach 

attempts by phone after a written attempt is burdensome and unnecessary. Therefore, we 

ask that CMS consider a potentially less burdensome approach (e.g., two prescriber 

outreaches). We also ask for some clarification on potential scenarios where a 

beneficiary's group of prescribers disagree with each other on a proposed limit, such as a 

prescriber lock-in. 

Lock-in Programs- AHIP strongly supports the direction of using limits as part of the 

broader national strategy to stem the misuse and abuse of opioids. However, we have 

concerns with the proposal to prohibit the use of a prescriber lock-in until 6 months after 

the beneficiary is identified as being at-risk of misuse or abuse ofopioids. We believe 

that certain facts and circumstances would require that a prescriber lock-in be used 

immediately instead of being a last-resort option. We recommend that a shorter waiting 
286 


29424.207

period be used instead, as this would provide sponsors with more flexibility in structuring 

beneficiary protections against misuse or abuse of opioids. 

Beneficiary Preference for a Prescriber or Pharmacy- AHIP supports reasonable rules 

that honor beneficiary preferences. However, we find the beneficiary's unlimited 

opportunity to change preferences for prescribers and pharmacies to be problematic and 

burdensome. We also suggest that CMS consider requiring an at-risk beneficiary to 

provide a reasonable rationale when requesting a change in prescriber selection in a lockin program. 

Chain Pharmacies and Group Practices- AlllP understands that sponsors and their 

contracted PDMs often do not have access to prescriber tax identification numbers 

(TINs), as they are absent from pharmacy submitted claims. We recommend that CMS 

re-evaluate the proposed policy of using TINs and offer another more feasible option for 

those with difficulties in obtaining and working with TINs. We also recommend that 

CMS re-evaluate its policy for determining chain pharmacies, as identification of which 

pharmacies share real-time data may be difficult in many situations. 

Termination of a Beneficiary's Potential At-Risk or At-Risk Status- AHIP recommends 

that CMS allow the sponsor, prior to the expiration of the 12-month period, determine if a 

continuation is warranted, and if so, allow for extension of the designation for another 12-

month period. We believe this flexibility to continue limits without interruption is 

necessary to best protect against misuse and abuse of opioids. 

The Honorable Chris Collins 

Within the last few years, some pharmaceutical manufacturers and insurers have entered 

into agreements that would move the traditional reimbursement model to a pay-forperformance pricing model. Merck has partnered with several insurers on its type II 

diabetes products, Amgen signed on with Harvard Pilgrim and Cigna with its Repatha, and 

Sanofi and Regeneron paired with Cigna on Praluent. The benefits are clear for insurers 

and manufacturers take an "eat your lunch" policy as their product, so to speak, is up to 

bat. 

a. While your industries are in the beginning stages of the pay-for-performance model, 

can you share preliminary results and elaborate on how this model may replace the 

current system and reduce drug spending overall? 

Given the many challenges with skyrocketing drugs costs, health plans are exploring pay-forperformance models to try to negotiate arrangements that are based on outcomes. 

Outcomes-based contracting is part of a larger effort to promote quality, value, and 

accountability. These contractual arrangements provide enhanced financial incentives for drug 

manufacturers that are contingent on agreed-upon standards for quality care, performance, and 

health outcomes. 
287 


29424.208

These standards can include appropriate use (drugs being utilized for the right population versus 

overutilization), performance that matches that observed in clinical trials, as well as objective 

measures of health outcomes, such as hemoglobin Ale levels. Simply put, it is a contracting 

arrangement structured around a drug's performance, appropriate use of the drug, and the 

resulting patient outcomes. 

These arrangements are still in the beginning stages, and several barriers must be overcome to 

achieve widespread adoption. For instance, these arrangements are dependent on the existence of 

valid and reliable outcome measures, engagement of providers and patients to ensure medication 

adherence, and implementation of a tracking mechanism to track individual patients' clinical 

status over time to analyze the intervention's effects and measure success. Medicaid "best price'' 

rules and other regulatory barriers may also inhibit the development of value-based payment 

strategies. 

Despite these challenges, we expect to see more of these arrangements as various stakeholders 

struggle to find ways to combat the rising cost of drugs. It is important to point out that, while 

new approaches to payment models that link payment to outcomes may prove an important to 

tool to help make care, treatments, and technology more accessible to patients, they are not a 

panacea to the problem of excessively high drug prices nor are they appropriate for many 

drugs. We need to work together to deliver more affordable drug prices overall by incentivizing 

real competition, fostering innovation, and creating more consumer choices. 

The Honorable Frank Pallone, Jr. 

1. At the hearing, you were asked what change in the marketplace or change in the law 

Congress should consider to ensure that we are focused on access, delivery and the cost of 

pharmaceuticals to patients. You responded that one such solution would be great price 

transparency- "both about how prices get set and how prices are increased." You also 

noted in your written testimony that drug manufacturers should have to provide 

"appropriate transparency into list price increases." 

a. Will you explain further about what you mean by "appropriate transparency into list 

prices"? 

Pharmaceutical list prices remain a black box, justified by vague assertions of research costs or 

product value that are belied by the data. The simple facts are that pharmaceutical prices, too 

often, start at astronomical levels and increase at rates divorced from the cost of inputs, the 

amount of research involved, or any other reasonable justification. These prices have an 

enormously detrimental impact on consumers, and policymakers have justifiably sought to 

understand the way that such prices are set and changed. 

While different slates have taken varying approaches to pharmaceutical list price transparency, it 

is important that such transparency initiatives provide insight into the following areas: 
288 


29424.209

1. What is the original list price and how is the list price set? Everything that happens in 

pharmaceutical markets flows from the original list price. Policymakers need to better 

understand the process by which list prices are set so that they can ensure balance between the 

twin goals of: (I) encouraging the development of innovative medicines and (2) ensuring that the 

monopolies granted by patents and FDA regulations are not being misused to the detriment of 

consumers. 

2. What is driving significant list price increases? Policymakers need to understand 

when list prices increase and why. What is the relationship ofthese list price increases to input 

cost changes? What is their relationship to research costs? What is the relationship of price 

increases across products and across manufacturers and what do these mean about competition in 

pharmaceutical markets? 

3. What is the relationship between research and list prices? Pharmaceutical 

manufacturers have typically pointed to research costs as a significant driver of high list prices. 

What is the nature of this relationship and how does it compare to the relationship of nonresearch factors such as direct-to-consumer (DTC) advertising, detailing, executive 

compensation, and profits to list prices? The bottom line is that no direct connection exists 

between how much a pharmaceutical company spends on research to bring a specific product to 

market and its list price. 

All such initiatives should be informed by guidance issued by the FTC and the DOJ on the ways 

in which transparency can be beneficial and the ways in which it could lead to competitive harm. 

As a general matter, disseminating non-public negotiated prices poses a risk of competitive harm 

and should be avoided. While care should be used to avoid such harm, the FTC and DOJ 

guidance generally should not pose a barrier to transparency on non-negotiated items, such as list 

prices, which are the appropriate focus of such transparency initiatives. 

b. What specific policy recommendations would you offer to help achieve meaningful 

transparency in how prices are set and how prices are increased? 

We suggest that states pursue transparency legislation following the example of California. At 

the federal level, as part of the FDA approval process, manufacturers should be required to 

disclose information regarding the intended launch price, the use ofthe drug, and direct and 

indirect research and development costs. Both at the federal and state levels, manufacturers 

should provide appropriate transparency into list price increases. 

2. At the hearing we heard many perspectives on the drug supply chain and how each part 

of the chain contributes to the end price the consumer pays. In your testimony you noted, 

"The bottom line is that the original list price of a drug is solely determined and controlled 

by the drug company-not the market-and it drives the entire pricing process. And if the 

original list price is high, the final cost that a consumer pays will be high." 

a. Will you further discuss how the list price of a pharmaceutical is determined solely by 

the drug company and not the market or payers as we heard some allege in the hearing? 
289 


29424.210

Everything that happens in the drug supply chain follows from and is significantly impacted by 

the initial decision of the manufacturer of where to set the list price. Pharmaceutical list prices 

remain a black box, justified by vague assertions of research costs or product value that are 

belied by the data. The simple facts are that pharmaceutical prices, too often, start at 

astronomical levels and increase at rates divorced of the cost of inputs, the amount of research 

involved, or any other reasonable justification. After that, everything that happens in the drug 

supply chain is impacted by and will change as a result of changes by the manufacturer of that 

list price. As a result, AHIP strongly supports transparency initiatives that give policymakers 

deeper insights into list prices, helping them better understand not only the what but the why of 

such prices. 

These prices have an enormously detrimental impact on consumers, and policymakers have 

justifiably sought to understand the way that such prices are set and changed. These prices are 

also why health plans and PBMs aggressively negotiate with manufacturers for ways to reduce 

the impact of these prices, so that they can pass savings onto consumers. These savings 

negotiated by health plans and PBMs are important, but they are not enough to offset the trend of 

price hikes on decades-old brand name and generic medications, or six-figure launch prices for 

new ones. 

When the price of Acthar gel- a drug that was approved in the 1950s- goes from $41 

per vial to $42,000 in a few years 1

, no amount of discounts can counter a I 00,000 percent 

price hike. 

An analysis of the leukemia drug, Gleevec, found post-discount price increases of 15 

percent per year, every year since 20082

• The drug launched in 200 I at $30,000 per year 

and now costs over $100,000. Yet, Gleevec is the exact same product today in 2017 that 

it was at launch-no other industry operates in a fashion similar to the pharmaceutical 

industry. 

b. How docs the original list price affect the subsequent prices in each part of the supply 

chain as the drug moves from manufacturer to the end usc, the consumer? Is there a close 

relationship between the price the consumer pays at the pharmacy and the manufacturer's 

list price? 

The price that wholesalers, pharmacies, and consumers pay is highly correlated to the original 

list price set by the drug manufacturer. Wholesalers and some pharmacy purchasing 

organizations may acquire the drug at a modest reduction off the list price in exchange for 

volume and/or prompt pay discounts. These discounts are not significant because wholesalers do 

not influence the "market share" of specific prescription drugs. Wholesalers then take possession 

of the drug and distribute and resell to pharmacies (e.g., smaller community pharmacies) after a 

small markup above the discounted wholesale acquisition price. This total cost represents the 

pharmacy's acquisition cost. 

1 ProPublica, "The Obscure Drug with a Growing Medicare Tab." August 2014. 2 The Washington Post. "A window into one of the most baffling things about drug prices." March 2016. 
290 


29424.211

At this point, the consumer enters the process. For individuals who lack health insurance but are 

prescribed a medication, they often pay the highest prices, especially for branded drugs. 

Typically, they pay the full list price set by the drug company (or the pharmacy acquisition cost) 

plus a markup. 

By contrast, for individuals with insurance who arc dispensed a prescription drug from a 

pharmacy in the health plan's network, the pharmacy typically communicates electronically with 

a PBM, which administers drug benefits under a contract with the health plan. From the PBM, 

the pharmacy receives confirmation of coverage; whether the drug is subject to any utilization 

management tools, such as prior authorization; whether there are any potential safety issues, such 

as quantity limits or drug-drug interactions; the reimbursement amount to be paid by the plan; 

and the co-payment or co-insurance owed by the consumer. The total payment to the pharmacy is 

typically based on a negotiated contract rate between the pharmacy and the health plan (or the 

PBM acting on behalf of the health plan). This contract reimburses the pharmacy for its 

acquisition cost and provides a dispensing fee. 

The amount that the consumer or patient pays depends on several factors: (1) the negotiated rate 

between the plan and pharmacy; (2) the type of drug (i.e., branded or generic); (3) the plan's 

benefit design (e.g., co-pay or co-insurance); and (4) where the enrollee is within that benefit 

design at the time of purchase (e.g., in the deductible period, copayment period, maximum outof-pocket limit or catastrophic phase for those in Medicare Part D). The pharmacy collects the 

appropriate cost sharing amount from the consumer and receives the remainder from the health 

plan or PBM at a later settlement time based on the payment terms under the contract. (The 

process described above assumes that there are no manufacturer-sponsored drug coupons and/or 

co-payment cards, where the manufacturer directly pays a large portion of the consumer's cost 

sharing. These payment schemes are often not operationally transparent to payers, distort an 

already dysfunctional pricing market, and further complicate a confusing process for consumers.) 

Given that the amounts charged by pharmacies for branded drugs reflects the pharmacies' 

acquisition costs, these charges are closely correlated to the list price set exclusively by the 

pharmaceutical manufacturer. That is why out-of-control drug prices show up at pharmacy 

counters. It is also why health plans aggressively negotiate with manufacturers for ways to 

reduce the impact of these prices, so they can pass savings onto consumers. For example, if a 

health plan's pharmacy and therapeutics committee detetmines that two or more drugs arc 

therapeutically equivalent and eligible for formulary inclusion, health plans (or PBMs) negotiate 

with manufacturers for rebates in exchange for plans placing the drugs on a preferred formulary 

tier and/or waiving utilization management tools, such as step therapy protocols. Since drug 

costs comprise a significant portion of a health plan's total costs, these discounts, which typically 

take the form of rebates, reduce the net price of the drug. 

Rebate amounts typically are calculated and paid by a manufacturer to a health plan on an 

aggregate basis, long after an individual prescription is filled by a consumer. Because rebates are 

extended based on actual aggregated utilization by a specific population, they are often paid to 

health plans several months after the drug has been prescribed and dispensed and all the data can 

be reconciled. In designing their plan benefits and developing premium rates in advance of the 

upcoming coverage year, health plans calculate an estimate of the aggregate rebates they expect 

to receive. Since drug costs comprise a significant portion of a health plan's total costs, plans 
291 


29424.212

may use these estimated discounts to reduce the premiums they charge for the overall benefit. 

Alternatively, plans may incorporate the estimates into lower point-of-sale pricing for individual 

drugs that generate the rebates. In discussing rebates, it is important to understand that for some 

branded drugs and biologics without therapeutic alternatives, manufacturers' willingness to 

negotiate on price is small or nonexistent. rurther, rebates are not commonly found for 

physician-administered drugs, which account for 30 percent of physician drug spending.3 

By reducing the net price and cost of drugs through available rebates and discounts, all 

consumers benefit. The savings are passed on through improvements to benefit packages, 

reductions in premiums, and/or lower out-of-pocket costs. This represents a broad and direct 

benefit for millions of consumers whether they get their coverage through Medicare, on their 

own, or through their employer. 

c. Do you believe there can be meaningful action to lower prescription drug prices for the 

American people and for the taxpayer without reforms to address the manufacturer's 

original list price? 

The problem is the price. Period. Any strategy to reduce pharmaceutical costs for the American 

people must address that fundamental reality. 

d. Would you please identify one of two of the most important reforms that would help 

address high prescription drug prices that this Committee should be addressing in a 

legislative hearing? 

Create a Robust Biosimilars Market: Biosimilars offer great promise in generating cost 

savings for consumers. Some ofthe costliest and most widely-used biologics have been on 

the market for decades without biosimilar competition. To achieve this promise, it is 

important to ensure that the f<'DA promulgates regulations that promote a robust market and 

ensure providers and patients have unbiased information available to them about the benefits 

of biosimilars. ror example, FDA policies for the labeling, naming, and interchangeability of 

biosimilars should provide clarity, ensure safety, and avoid unnecessary regulatory hurdles. 

We also need to address anti-competitive strategies by pharma companies, such as the 

development of"patcnt estates," and tactics aimed at delaying the availability ofbiosimilars. 

Reduce Rules, Regulation and Red Tape to Generic Entry: To address patent abuses, anticompetitive tactics such as "pay for delay" settlements, "product hopping," and 

"evergreening" should be prohibited, and the Inter Partes Review (IPR) process through the 

U.S. Patent and Trademark Office should be preserved. Additional legislation is needed to 

require brand manufacturers to share information and scientific samples with generic and 

biosimilar developers to promote the development of these lower cost alternatives. 

Publish True R&D Costs and Explain Price Setting and Price Increases: As part of the f<'DA 

approval process, manufacturers should be required to disclose information regarding the 

intended launch price, the use of the drug, and direct and indirect research and development 

3 "Trends in Specialty Drug Benefits," Pharmacy Benefit Management Institute, 20 !7. 
292 


29424.213

costs. After approval, manufacturers should provide appropriate transparency into list price 

increases. 

3. At the hearing, we touched briefly on the role of third-party programs such as coupons, 

co-pay card programs, patient assistance programs, or related charitable foundations and 

the role they may play in the pricing of prescription drugs. In your testimony, you offered 

recommendations on the actions the Committee should take to address the problem of high 

drug costs. These recommendations included limiting third-party payment schemes that 

raise costs, such as drug coupons, co-pay card programs, and related charitable 

foundations. 

a. Will you discuss further how drug companies are using these programs and why you 

believe they help to drive up the cost of prescription drugs? How would limiting thirdparty programs such as drug coupons, co-pay card programs, and related charitable 

foundations address high drug costs? 

Drug coupons, co-pay card programs, and the related charity programs funded by pharmaceutical 

companies are predominately used to subsidize the patients' share of the treatment cost of 

branded drugs. This shields patients from directly experiencing the high costs of these drugs, and 

ultimately removes any incentives for patients to opt for lower cost, therapeutically equivalent 

alternatives. Meanwhile, health plans and payers must foot the bill for the entire cost of the drug, 

which gets passed on to consumers and employers in the form of higher premiums. 

This significant impact on health care spending was recently assessed by economists at Harvard, 

UCLA. and Northwestern4

: 

"We study the impact of co pay coupons on branded drugs first facing generic 

entry between 2007 and 20 I 0 ... We find that coupons increase branded sales by 

60+ percent, entirely by reducing the sales of bioequivalent generics. During the 

five years following generic entry, we estimate that coupons increase total 

spending by $30 to $120 million per drug, or $700 million to $2.7 billion for our 

sample alone." 

Of further concern, the use of these programs is growing. According to the IMS Institute for 

Healthcare Informatics, copay cards are used for 8 percent of all branded prescriptions. For some 

specialty drug classes, that percentage is much higher, as high as 70 percent for multiple 

sclerosis and rheumatoid arthritis drugs. 5 A 2014 report by the Office of the Inspector General of 

HHS noted, "when consumers are relieved of copayment obligations, manufacturers are relieved 

of a market constraint on drug prices.''6 

Coupons are a tacit agreement from manufacturers that drugs are unaffordable to patients, yet the 

coupons ultimately serve to increase the overall cost of drugs to the health care system by 

4 Dafny, Lee moreS., Christopher Ody, and Matt Schmitt. "When Discounts Raise Costs: The Effect of Capay 

Coupons on Generic Utilization." American Economic Journal: Economic Policy 9, no. 2 (May 2017): 91-123. 5 IMS Institute for Healthcare Informatics, "Medicines Use and Spending Shifts." Apri120!5. 6 HIIS, OIG, "Special Advisory Bulletin: Pharmaceutical Manufacturer Copayment Coupons." September 2014. 
293 


29424.214

directing patients to more expensive therapies. In fact, manufacturers are increasingly using these 

schemes as a strategy to increase the use of expensive branded medications when lower-cost 

generic alternatives come to market. 

The actual dissemination of coupons includes utilizing patient assistance programs (PAPs), either 

established within a drug manufacturer, often as a 50l(c)(3) private foundation, or through an 

independent charity. Generally, but dependent on the legal tax filing of the organization, donors 

to both manufacturer PAPs and independent PAPs can deduct their donations of inventory or 

cash. The size, funding, and scope of these organizations has grown rapidly in recent years. A 

2016 analysis of 2014 Internal Revenue Service (IRS) data found that charitable giving by I 0 

large manufacturer patient assistance programs rose from $376 million in 2001 to $6.1 billion in 

2014, accounting for 84% of all pharmaceutical giving and one-sixth of all U.S. corporate 

charitable deductions in 2014. 7 Charitable giving by five of the main independent charity PAPs 

increased from $2 million in 200 I to $868 million in 2014. 

Any Federal or State efforts to limit the ability for these payment schemes to direct patients to 

higher-cost drugs when a lower-cost, therapeutically equivalent therapy is available would 

protect individuals from higher costs on the back end due to premium increases. Additionally, 

federal policymakers should carefully scrutinize the cyclical nature of manufacturer charitable 

giving to patient assistance programs that may result in increased utilization of specific branded 

medications. We support the Committee's attention to limiting these market distortions to ensure 

that consumers have access to high-quality treatments at the most competitive price possible. 

b. You mentioned in your testimony that these programs are prohibited in certain federal 

programs. Is our enforcement of this prohibition robust? 

The use of co-pay coupons distributed by manufacturers is prohibited under the anti-kickback 

statute for individuals with federal health care benefits, including Medicare (including Medicare 

Part D), Medicaid, TRICARE, and Veterans Health Administration programs. However, private 

health plans used by individuals in the Federal Employees Health Benefit (FEHB) Program and 

private health plans offered as Qualified Health Plans (QHPs) under the Affordable Care Act 

(ACA) are not considered government programs, and those individuals may use co-pay coupons. 

Also, coupons distributed by independently-run charities are permitted to be used in conjunction 

with federal health care benefits, even if charities receive cash donations from drug 

manufacturers. 

In September of2014, the HHS Office of the Inspector General (OlG) released a report from the 

Office of Evaluation and Inspections (OEl) that reviewed the steps taken by manufacturers to 

prevent coupon use in concert with federal benefits. 8 Due to the anti-kickback statute, coupons 

generally include standard language noting that use is prohibited for beneficiaries in federal 

health programs. 

7 Austin Frerick, "The Cloak of Social Responsibility: Pharmaceutical Corporate Charity." TaT Notes, November 28, 

2016. 

8 HHS, O!G, "Manufacturer Safeguards !'v!ay Not Prevent Copayment Coupon Use for Part D Drugs," September 

2014. 
294 


29424.215

The report found that, of the manufacturers surveyed, manufacturers are not consistently 

including notices on coupons to inform individuals in federal health care programs that their use 

is prohibited. In addition, the report found that the use of coupons is not operationally transparent 

to Medicare Part D plans, "which impedes Part D plans and others from identifying and 

monitoring the usc of coupons for drugs paid for by Part 0."9 The report also raises the 

importance of maintaining beneficiary cost-sharing requirements, and the risk of coupons 

providing short-term financial relief to beneficiaries while ultimately increasing costs to federal 

health care programs and their beneficiaries. 

The report recommends that CMS work with manufacturers and pharmacies to improve the 

operational transparency of coupon use. This operational transparency is also a significant issue 

for commercial health plans, and a standard format for identifying coupons in pharmacy claims 

transactions is needed. Additional CMS guidance and oversight of coupon use in federal health 

care programs would be welcome, to help both manufacturers, pharmacies, and health plans 

understand the compliance measures required on the part of manufacturers to ensure that 

coupons are not being used in violation ofthe anti-kickback statute. 

c. What more can Congress do to address this problem, both in our federal health care 

programs as well as in the private insurance market? 

Limiting the ability for these payment schemes to direct patients to higher-cost drugs when a 

lower-cost, therapeutically equivalent therapy is available would protect individuals from higher 

costs on the back end due to premium increases. We support the Committee's attention to 

limiting these market distortions to ensure that consumers have access to high-quality treatments 

at the most competitive price possible. 

We also recommend HHS/CMS be directed to outline a strategy for ongoing assessment and 

monitoring of these payments schemes. Such an approach should include oversight of the 

practice of pharmaceutical companies donating to charitable organizations, to ensure that these 

charities arc operating as intended and that pharmaceutical companies arc not exerting influence 

over how the charities allocate their funding. 

Additional CMS guidance and oversight of coupon use in federal health care programs would be 

welcome, to help both manufacturers, pharmacies, and health plans understand the compliance 

measures required on the part of manufacturers to ensure that coupons arc not being used in 

violation of the anti-kickback statute. 

The Honorable Diana DeGette 

1. When designing pharmacy benefits and formularies for health plans, how do your 

member companies balance clinical evidence about various treatment options with 

contractual guarantees to pharmaceutical companies about formulary placement? 

'Ibid. 
295 


29424.216

Health plans' pharmacy benefit designs and formularies leverage science by relying on existing 

evidence on safety and effectiveness. This evidence-based approach to coverage policy and 

medical management involves a systematic review of the safety and effectiveness of medical 

interventions, including drugs, devices, services, and procedures. In conducting these reviews, 

health plans' pharmacy and therapeutics committees rely on a variety of evidence-based 

resources, typically following a hierarchy of evidence that gives the most weight to randomized 

clinical trials. The types of evidence that health plans rely on include, but are not limited to: 

o Randomized Clinical Trials (RCTs) 

o Specialty society guidelines/best practices 

o Current scientific and clinical peer reviewed medical literature 

o CMS coverage decisions and quality metrics 

o AHRQ guidelines 

o USPSTF recommendations 

o Well-designed observational studies 

o Expert consensus 

Health plan pharmacy policies and formularies are also dictated to some extent by federal and 

state mandates, as well as employer/client requests. Additionally, health plans periodically 

review their coverage policies and update them based on new information/evidence, such as 

FDA safety notices, new drug approvals, new scientific/clinical research findings, and updated 

professional society guidelines. 

2. To what extent do your member companies track how rebate dollars passed on by 

PBMs and pharmaceutical companies are used by health insurance plans? 

Rebate amounts typically are calculated and paid by a manufacturer to a health plan (or PBM) on 

an aggregate basis, long after an individual prescription is filled by a consumer. Because rebates 

are extended based on actual aggregate utilization of a specific population, they are paid several 

months after the drug has been prescribed and dispensed and all the data can be reconciled. In 

designing their plan benefits and developing premium rates in advance of the upcoming coverage 

year, health plans calculate an estimate of the aggregate rebates they expect to receive. 

Since drug costs comprise a significant portion of a health plan's total costs, plans may use these 

estimated discounts to reduce the premiums they charge for the overall benefit, improve benefit 

packages, and/or lower out-of-pocket costs. Alternatively, plans may incorporate advance 

estimates into lower point-of-sale pricing for individual drugs that generate the rebates. By 

reducing the net price and cost of drugs, all consumers benefit. This represents a broad and direct 

benefit for millions of customers, whether they get their coverage through Medicare, on their 

own, or through their employer. 

In discussing rebates, it's important to understand the role they play within the broader system 

for setting the cost of drugs that consumers pay at the pharmacy. For some branded drugs and 

biologics without therapeutic alternatives, manufacturers' willingness to negotiate on price is 

small or nonexistent. For generic prescriptions, accounting for 89 percent of dispensed 

medications, rebates or discounts are not generally offered. Further, rebates are not commonly 
296 


29424.217

found for physician-administered drugs, which account for 30 percent of prescription drug 

spending. 

3. Are rebate dollars retrieved from pharmaceutical companies or passed on by PBMs 

considered under the Medical Loss Ratio (MLR)? If yes, please explain how rebate 

dollars factor into MLR calculations. 

Health insurance providers must provide consumer rebates if they do not meet a set threshold for 

the percentage of revenue spent on medical claims (generally, 80 or 85 percent depending on the 

market). Prescription drug rebates are included in the medical loss ratio (MLR) calculation. 

The costs for prescription drugs are treated as other health claims, while prescription drug 

rebates are treated as revenue. Both claims and revenue are reconciled and reported in the second 

quarter of the year for the previous plan year for a set of products, and insurance providers file 

MLR reports with HHS at this time. Any rebates owed are distributed in the third quarter and are 

based on the average MLR ratio over the prior three years. 

The Honorable Kurt Schrader 

Many of my constituents have complained about increased deductibles, which increases the 

amount they have to pay out-of-pocket for their drugs. Sometimes they don't have a choice 

to go to a lower deductible plan. Why have there been an increased number of highdeductible health plans in the market'! 

Deductibles and other cost-sharing requirements are a common feature of both public and private 

health insurance coverage. In general, plans that feature higher cost-sharing (including 

deductibles) tend to have lower premiums while plans with lower deductibles tend to have higher 

premiums. The use of deductibles and other cost-sharing is an important way for employers and 

health plans to offer lower products with lower premiums-which is critically important in a 

competitive and price-sensitive market. 

Both premiums and deductibles have been increasing in recent years-reflecting increases in 

medical and pharmacy trend which, in turn, reflects both the utilization and prices of health care 

services. In the employer-sponsored market-where over 150 million Americans receive health 

insurance coverage-the average deductible for single coverage is $1,200. And, about half 

(45%) of workers covered in large group coverage are enrolled in a plan with a deductible that 

exceeds $1,000. 

Deductibles in the individual market (including on- and off-the exchange marketplace) tend to be 

higher, which is why implementation of the cost-sharing reduction (CSR) benefit program as 

intended is so important. For the 2017 plan year, most consumers-over 6 million-benefited 
297 


29424.218

from the CSR program which substantially reduce patient cost-sharing (including deductibles) to 

promote access to needed medical care and prescription drugs. By providing lower-income 

individuals with lower deductibles and other cost-sharing, the CSR program helps eliminate 

financial barriers to needed medical care. It is also important to note that all consumers benefit 

from annual out-of-pocket maximums-which caps patients' out-of-pocket spending to provide 

protection from catastrophic health care costs. 
298 


29424.219

GREG WALDEN, OREGON 

CHAIRMAN 

FRANK PALLONE, JR., NEW JERSEY 

RANKING MEMBER 

Ml'. Tom Nickels 

ONE HUNDRED FIFTEENTH CONGRESS 

<!Congregg of tbe Wniteb ~tateg 

~oust of .1\epresentatibes 

COMMITTEE ON ENERGY AND COMMERCE 

2125 RAYBURN HousE OFFICE BuiLDING 

WASHINGTON, DC 20515-6115 Majority l202) 225-2921 

Minority (202) 225-3641 

January 8, 2018 

Executive Vice President for Government Relations and Public Policy 

American Hospital Association 

800 lOth Street, N.W.; Suite 400 

Washington, DC 20001 

Dear Mr. Nickels: 

Thank you for appearing before the Subcommittee on Health on December 13,2017, to testify at 

the hearing entitled "Examining the Dmg Supply Chain." 

Pursuant to the Rules of the Committee on Energy and Commerce, the hearing record remains 

open for ten business days to permit Members to submit additional questions for the record, which are 

attached. The format of your responses to these questions should be as follows: (1) the name of the 

Member whose question you are addressing, (2) the complete text of the question you are addressing in 

bold, and (3) your answer to that question in plain text. 

To facilitate the printing of the hearing record, please respond to these questions with a 

transmittal letter by the close of business on January 23,2018. Your responses should be mailed to Zack 

Dareshori, Legislative Clerk, Committee on Energy and Commerce, 2125 Raybum House Office 

Building, Washington, DC 20515 and e-mailed in Word format to zack.dareshori@maiLhouse.gov. 

Thank you again for your time and effort preparing and delivering testimony before the 

Subcommittee. 

Subcommittee on Health 

cc: The Honorable Gene Green, Ranking Member, Subcommittee on Health 

Attachment 
299 


29424.220

American 

~ Hospital 

Association. 

January 23,2018 

The Honorable Michael C. Burgess, M.D. 

United States House of Representatives 

2336 Rayburn House Office Building 

Washington, DC 20515 

Dear Congressman Burgess, 

lll!10!11StreetNW 

Two CityCenter, Sune 400 Washingto~ DC 21Xlli-495E 1202)638-1100 Phone \J\I'VIffl.aha.org 

On behalf of our nearly 5,000 member hospitals, health systems and other health care 

organizations, and our clinician partners including more than 270,000 affiliated 

physicians, 2 million nurses and other caregivers- and the 43,000 health care leaders who 

belong to our professional membership groups, the American Hospital Association (AHA) 

thanks you for your continued efforts to understand and address the challenge of high and 

rising prescription drug prices. 

As we discussed during the December 2017 hearing on the drug supply chain, the high cost 

of drugs threatens patient access to care and health outcomes. In this letter, we respond to 

Congressman Carter's subsequent question regarding whether the AliA's supports 

increased transparency across several aspects of the drug supply chain. The AHA believes 

that increased transparency, in conjunction with other policies, will help the U.S. health 

care system achieve sustainable drug prices. While we generally support transparency in 

the areas identified, we strongly encourage Congress to focus first on transparency in list 

prices. 

All aspects of pricing along the drug supply chain are based off the initial list price, which 

is set solely by drug manufacturers. Payers, providers and the public have little infonnation 

about how drugs are priced, and this information gap challenges payers' abilities to make 

decisions regarding coverage and pricing of drugs, and often results in mid-year cost 

increases that providers are unprepared to manage. We specifically encourage Congress to 

advance transparency in drug prices by: 

Increasing the disclosure requirements drug manufacturers must meet related to 

anticipated or intended pricing for a drug at the time of application for drug 

approval. Information should include how research and development contribute to 

the price of the drug, and 

Issuing consumer and provider-facing reports on drug pricing that can help 

decision-making regarding a specific drug therapy. 
300 


29424.221

Congressman Burgess 

January 23, 2018 

Page 2 of2 

Thank you for the opportunity to provide additional input as you continue your 

investigation into the challenge of drug prices, Please contact me if you have questions, or 

feel free to have your team contact Aimee Kuhlman, AHA senior associate director of 

federal relations, at akuhlman@aha.org. 

~erely, 

kf!::t l'ho~. Jh 

Nickels 

Executive Vice President 
301 


29424.222

GREG WALDEN, OREGON 

CHAIRMAN 

FRANK PALLONE, JR., NEW JERSEY 

RANKING MEMBER 

ONE HUNDRED FIFTEENTH CONGRESS 

Dr. Gerald Harmon 

<tongre~~ of tbe Wniteb ~tate~ 

j!Joune of lL\tpreB'tntati\ltB' 

COMMITIEE ON ENERGY AND COMMERCE 

2125 RAYBURN HousE OFFICE BuiLDING 

WASHINGTON, DC 20515-6115 Majority (202)225-2927 

Minority (202) 225-31341 

January 8, 2018 

Chair, Board of Trustees 

American Medical Association 

330 North Wabash Avenue; Suite 39300 

Chicago, IL 60611 

Dear Dr. Harmon: 

Thank you for appearing before the Subcommittee on Health on December 13, 2017, to testify at 

the hearing entitled "Examining the Drug Supply Chain." 

Pursuant to the Rules of the Committee on Energy and Commerce, the hearing record remains 

open for ten business days to permit Members to submit additional questions for the record, which are 

attached. The format of your responses to these questions should be as follows: (1) the name of the 

Member whose question you are addressing, (2) the complete text of the question you are addressing in 

bold, and (3) your answer to that question in plain text. 

To facilitate the printing of the hearing record, please respond to these questions with a 

transmittal letter by the close of business on January 23,2018. Your responses should be mailed to Zack 

Dareshori, Legislative Clerk, Committee on Energy and Commerce, 2125 Rayburn House Office 

Building, Washington, DC 20515 and e-mailed in Word format to zack.dareshori@maiLhouse.gov. 

Thank you again for your time and effort preparing and delivering testimony before the 

Subcommittee. 

cc: The Honorable Gene Green, Ranking Member, Subcommittee on Health 

Attachment 
302 


29424.223

~M.~~ ASSOCIATION ~ ~ 

January 23,2018 

The Honorable Michael C. Burgess, MD 

Chairman 

Subcommittee on Health 

Energy and Commerce Committee 

2125 Rayburn House Office Building 

Washington, DC 20515-6115 

Dear Chairman Burgess and Ranking Member Green: 

GERALD E. HARMON, MD 

CHAIR, 80ARD OFTRUSTHS 

gernld.harrnon@ama--assn.org 

The Honorable Gene Green 

Ranking Member 

Subcommittee on Health 

ama-a.ssn.org 

t (312)464-4466 

f (312) 464-5543 

Energy and Commerce Committee 

2125 Rayburn House Office Building 

Washington, DC 20515-6115 

Thank you for the opportunity to testify before the Committee on Energy and Commerce Subcommittee on Health 

during the hearing entitled, "Examining the Drug Supply Chain," The American Medical Association (AMA) 

applauds your leadership and efforts to identify and address the factors, policies, and practices that impact access 

and affordability of medically necessary medication treatment for patients, The hearing was extraordinarily helpful 

to advancing informed public policy discussions, The AMA looks forward to working closely with you to identify 

and implement workable solutions. 

Below are the AMA's responses to the follow-up questions posed by the Honorable Congressmen EarlL, "Buddy" 

Carter and Frank Pallone, Jr.: 

The Honorable EarlL. "Buddy" Carter 

Does your organization support increased transparency into the following aspects of the drug supply chain? Yes or 

No will suffice. 

As outlined in my written testimony, the AMA strongly supports increased transparency. And, based on the hearing 

testimony, we support increased transparency in light of the complex policies and practices among insurers, 

distributors, pharmaceutical benefits managers (PBMs), and pharmacies. 

1. Rebate pass throughs. Yes, the A MA strongly supports increased transparency. 

2. PBM "Spread" Profits, Yes, the AMA strongly supports increased transparency 

3. Generic Drug Reimbursement Methodologies. Yes, the A1v!A strongly supports increased 

transparem.y 

4. True price for prescription drug at point of sale. Yes, the ..-H1A strongly supports increa.r;ed 

transparency. 

5. Pharmacy Direct and Indirect Remuneration ("DIR") fees, Yes, the AMA strongly supports 

increased tramparem.y. 

The Honorable Frank Pallone, Jr 

I understand that the AMA has been supportive of a ban on direct-to-consumer advertising. Can you explain why 

your organization and your members support a ban, and how you think a ban could help to address rising drug costs? 

AMAPLAZA I 330 N. WABASH AVE. I SUITE 39300 I CHICAGO, IL 60611-5885 
303 


29424.224

The Honorable Michael C. Burgess, MD 

The Honorable Gene Green 

January 23, 2018 

Page 2 

The following is the actual language of policies adopted by our House of Delegates (HOD) addressing this 

issue. The HOD is comprised of every national medical specialty society and state medical association, 

and has adopted extensive policies on the topic of direcfwto~consumer marketing that are the most 

responsive to the questions posed fn brief during the numerous HOD discussions of policy related to 

direct-to-consumer marketing, physician delegates regularly cited concerns that such advertising may have 

some benefits, but noted that such advertising often diverts the very limited time patients and physicians 

have together to discussions that are not relevant to a patient's diagnosis or to medically necessQJy and 

reasonable treatment options. In addition, during the AMA policy development process, physicians have 

also observed that the drugs promoted through such methods often do not have the same documented risk 

profiles of more established and often less expensive treatment options. Physician representatives have 

also noted during these discussions that such marketing may create unrealistic expectations when less 

expensive albeit equally effective treatments are available. Throughout the policy discussion about the 

impact on patient health outcomes and the physician-patient relationship, there is a generalized concern 

that the advertising promotes more expensive, costly treatment alternatives when less expensive 

alternatives with established risk profiles and evidence of relative efficacy among a larger and more 

diverse patient population are available. 

The specific policies: 

Direct-to-Consumer Advertisement of Prescription Drugs* 

Direct~to-consumer advertising may raise awareness about diseases and treaiment and may help inform 

patients about the availability of new diagnostic tests, drugs, treatments, and devices. However, direct-toconsumer advertising also carries the risk of creating unrealistic expectations for patients and conflicts of 

interest for physicians, adversely affecting patients' health and safety, and compromising patient physician 

relationships. In the context of direct-to-consumer advertising of prescription drugs, physicians 

individually should: 

(a) Remain objective about advertised tests, drugs, treatments, and devices, avoiding bias for or against 

advertised products. 

(b) Engage in dialogue with patients who request tests, drugs, treatments, or devices they have seen 

advertised to: 

(i) assess and enhance the patient's understanding oft he test, drug or device; 

(ii) educate patients about why an advertised test, drug, or device may not be suitable for them, 

including providing cost-~ffectiveness information about different options. 

(c) Resist commercially induced pressure to prescribe tests, drugs, or devices that may not be indicated 

(d) Obtain informed consent before prescribing an advertised lest, drug, or device, in keeping with 

professional standards. 

(e) Deny requests for an inappropriate test, drug, or device. 

(f) Consider reporting to the sponsoring manufacturer or appropriate authorities direct-to-consumer 

advertising that: 

(i) promotes false expectations; 

(ii) does not enhance consumer education; 

(iii) conveys unclear, inaccurate, or misleading health education messages; 

(iv)fails to refer patients to their physicians for additional information; 

(v) does not identify the target population at risk; 

(vi) encourages consumer selfdiagnosis and treatment. 

Collectively, physicians should: 
304 


29424.225

The Honorable Michael C. Burgess, MD 

The Honorable Gene Green 

January 23,2018 

Page3 

(g) Encourage and engage in studies that examine the impact of direct-to-consumer advertising on patient 

health and medical care. 

(h) Whenever possible, assist authorities to enforce existing law by reporting advertisements that do not· 

(i) provide a fair and balanced discussion of the use of the drug product for the disease, disorder, 

or condition; 

(ii) clearly explain warnings, precautions, and potential adverse reactions associated with the 

drug product; 

(iii) present summary information in language that can be understood hy the consumer 

(iv) comply with applicable regulations; 

(v) provide collateral materials to educate both physicians and consumers. 

•AMA Principles of Medical Ethics. (J'he Opinions are offered as ethics guidance for physicians and are 

not intended to establish standard~ of clinical practice or rules of law.) 

Direct-to-Consumer Advertising (DTCA) of Prescription Drugs and Implantable Devices 

I. To support a ban on direct-to-consumer advertising for prescription drugs and implantable medical 

devices. 

2. That until such a ban is in place, our AMA opposes product-claim DTC4 that does not satisfy the 

following guidelines: 

(a) The advertisement should be indication-specific and enhance consumer education about the 

drug or implantable medical device, and the disease, disorder, or condition for which the drug or 

device is used 

(b) In addition to creating awareness about a drug or implantable medical device for the 

treatment or prevention of a disease, disorder, or condition, the advertisement should convey a 

clear, accurate and responsible health education message by providing objective information 

about the benefits and risks of the drug or implantable medical device for a given indication. 

Information about benefits should reflect the true efficacy of the drug or implantable medical 

device as determined by clinical trials that resulted in the drug's or device's approval for 

marketing. 

(c) The advertisement should clearly indicate that the product is a prescription drug or 

implantable medical device to distinguish such advertisingfi'om other advertising for nonpres·cription products. 

(d) The advertisement should not encourage self-diagnosis and self-treatment, hut should refer 

patients to their physicians for more information. A statement, such as "Your physician may 

recommend other appropriate treatments, 11 is recommended. 

(e) The advertisement should exhibit fair balance between benefit and risk information when 

discussing the use of the drug or implantable medical device product for the disease, disorder, or 

condition. The amount of time or space devoted to benefit and risk information, as well as its 

cognitive accessibility, should be comparable. 

(/} The advertisement should present information about warnings, precautions, and potential 

adverse reactions associated with the drug or implantable medical device product in a manner 

(e.g., at a reading grade level) such that it will be understood by a majority of consumers, without 

distraction of content, and will help facilitate communication between physician and patient. 

(g) The advertisement should not make comparative claims for the product versus other 

prescription drug or implantable medical device products; however, the advertisement should 

include information about the availability ~f alternative non-drug or non-operative management 

options such as diet and lifestyle changes, where appropriate, for the disease, disorder, or 

condition 
305 


29424.226

The Honorable Michael C. Burgess, MD 

The Honorable Gene Green 

January 23,2018 

Page 4 

(h) In general, product-claim DTCA should not use an actor to portray o health care professional 

who promotes the drug or implantable medical device product, because this portrayal may be 

misleading and deceptive. If actors portray health care professionals in DTCA, a disclaimer 

should be prominently displayed 

(i) The use of actual health care professionals, either practicing or retired, in DTCA to endorse a 

specific drug or implantable medical device product is dL<couraged but if utilized, the 

advertisement must include a clearly visible disclaimer that the health care professional is 

compensated for the endorsement. 

OJ The advertisement should be targeted for placement in print, broadcast, or other electronic 

media so as to avoid audiences that are not age appropriate fOr the messages involved. 

(k) In addition to the above, the advertisement must comply with all other applicable Food and 

Drug Administration (FDA) regulations, policies and guidelines. 

3. That/he FDA review and pre-approve all DTCAfor prescription drugs or implantable medical device 

products before pharmaceutical and medical device manufacturers (sponsors) run the ads, both to ensure 

compliance with federal regulations and consistency with FDA-approved labelingfor the drug or 

implantable medical device product. 

4. That the Congress provide sufficient funding to the FDA, either through direct appropriations or through 

prescription drug or implantable medical device user fees, to ensure effective regulation of DTCA. 

5. Ihat DTCAfor newly approved prescription drug or implantable medical device products not be run 

until sufficient post-marketing experience has been obtained to determine product risks in the general 

population and until physicians have been appropriately educated about the drug or implantable medical 

device. The time interval for this moratorium on DTCA for newly approved drugs or implantable medical 

devices should be determined by the FDA, in negotiations with the drug or medical device product's 

sponsor, at the time of drug or implantable medical device approval. The length of the moratorium may 

vary from drug to drug and device to device depending on various factors, such as: the innovative nature of 

the drug or implantable medical device; the severity of the disease that the drug or implantable medica/ 

device is intended to treat; the availability of alternative therapies; and the intensity and timeliness of the 

education about the drug or implantable medical device for physicians who are most likely to prescribe it. 

6. That our AMA opposes any manufacturer (drug or device sponso1) incentive programs for physician 

prescribing and pharmacist dispensing that are run concurrently with DTCA. 

7. That our AAfA encourages the FDA, other appropriate federal agencies, and the pharmaceutical and 

medical device industries to conduct or fimd research on the effect of DTCA, focusing on its impact on the 

patient-physician relationship as well as overall health outcomes and cost benefit analyses; research 

results should be available to the public. 

8. That our AMA supports the concept that when companies engage in DTCA, they assume an increased 

responsibility for the informational content and an increased duty to warn consumers, and they may lose an 

element of protection normally accorded under the learned intermedimy doctrine. 

9. That our AkfA encourages physicians to be familiar with the above AMA guidelines for product-claim 

DTCA and with the Council on Ethical and Judicial Affairs Ethical Opinion E-9. 6. 7 and to adhere to the 

ethical guidance provided in that Opinion. 

/0, That the Congress should request the Agency for Heaithcare Research and Quality or other 

appropriate entity to perform periodic evidence-based reviews of DTCA in the United States to determine 

the impact of DTCA on health outcomes and the public health If DTCA is found to have a negative impact 

on health outcomes and is detrimental to the public health, the Congress should consider enacting 

legislation to increase DTCA regulation or, if necessary, to prohibit DTCA in some or all media. In such 

legislation, eve1y effort should be made to not violate protections on commercial speech, as provided by the 

First Amendment to the US. Constitution. 

11. That our AkfA supports eliminating the costs for DTC4 of prescription drugs as a deductible business 

expense for tax purposes. 
306 


29424.227

The Honorable Michael C. Burgess, MD 

The Honorable Gene Green 

January 23, 2018 

Page 5 

12. That our AMA continues to monitor DTCA, including new research findings, and work with the FDA 

and the pharmaceutical and medical device industries to make poli<y changes regarding DTCA, as 

necessary. 

13. That our AMA supports "help-seeking" or "disease mvareness 1

' advertisements (i.e., advertisements that 

discuss a disease, disorder, or condition and advise consumers to see their physicians, but do not mention a 

drug or implantable medical device or other medical product and are not regulated by the FDA). 

I 4. Our AMA will advocate to the applicable Federal agencies (including the Food and Drug 

Administration, the Federal Trade Commission, and the Federal Communications Commission) which 

regulate or influence direct-to-consumer advertising of prescription drugs that such advertising should be 

required to state the manufacturer's suggested retail price of those drugs. 

Thank you for considering the AMA's testimony and responses to the questions posed. 

Sincerely, 

~ ~/d-zu.-- Gerald E. Harmon, MD 

cc: James L. Madara, MD 
307 


29424.228

GREG WALDEN, OREGON 

CHAIRMAN 

FRANK PALLONE, JR., NEW JERSEY 

RANKING MEMBER 

ONE HUNDRED FIFTEENTH CONGRESS 

(!J:ongress of tbe Wniteb fa,tates 

7!,)ouse of l\eptesentatibes 

COMMITTEE ON ENERGY AND COMMERCE 

2125 RAYBURN HousE OFFICE BuiLDING 

WASHINGTON, DC 20515-6115 M~Jjority (202)225-2927 

Minority (202) 225-3641 

January 8, 2018 

Mr. B. Douglas Hoey 

CEO 

National Community Pharmacists Association 

I 00 Daingerfield Road 

Alexandria, VA 22314 

Dear Mr. Hoey: 

Thank you for appearing before the Subcommittee on Health on December 13, 2017, to testify at 

the hearing entitled "Examining the Drug Supply Chain." 

Pursuant to the Rules of the Committee on Energy and Commerce, the hearing record remains 

open for ten business days to permit Members to submit additional questions for the record, which are 

attached. The format of your responses to these questions should be as follows: (1) the name of the 

Member whose question you are addressing, (2) the complete text of the question you are addressing in 

bold, and (3) your answer to that question in plain text. 

To facilitate the printing of the hearing record, please respond to these questions with a 

transmittal letter by the close of business on January 23,2018. Your responses should be mailed to Zack 

Darcshori, Legislative Clerk, Committee on Energy and Commerce, 2125 Rayburn House Office 

Building, Washington, DC 20515 and e-mailed in Word format to zack.dareshori@mail.house.gov. 

Thank you again for your time and effort preparing and delivering testimony before the 

Subcommittee. 

cc: The Honorable Gene Green, Ranking Member, Subcommittee on Health 

Attachment 
308 


29424.229

PHARMACISTS 

t!.~co~:'1\t ASSOCIATION 

January 22, 2018 

Chairman Michael Burgess, M.D. 

Energy and Commerce Subcommittee on Health 

United States House of Representatives 

2125 Rayburn House Office Building 

Washington, DC 20515 

Re: Reponses to Questions for the Record Regarding the December 13,2017 

Hearing entitled" Examining the Drug Supply Chain." 

Dear Chairman Burgess: 

WWW.NCPANET.ORG 

Thank you for holding the December 13, 2017 hearing on Examining the Drug Supply Chain. I was 

honored to testify on behalf of America's 22,000 independent community pharmacies and provide 

their perspective on the role they play in our nation's drug supply chain. I am also pleased to provide 

responses to the Questions for the Record. I have enclosed my responses with this letter. 

B. Douglas Hoey, R.Ph., MBA 

CEO 

National Community Pharmacists Association 

THE VOICE OF THE COMMUNITY PHARMACIST 

IOQ Daingerfield Road 

Alexandria, VA 22314~2888 

(703) 683-8200 PH 0 N E 

(703) 683-3619 FAX 
309 


29424.230

Mr. B. Douglas Hoey, R.Ph., MBA 

CEO, National Community Pharmacists Association 

Questions Submitted for the Record for Congressman Earll. "Buddy" Carter 

1. We have heard about "clawbacks" being taken at the pharmacy and understand that there may be 

two different types- one in which the pharmacy collects money from the patient that the plan or 

PBM takes back from the Pharmacy- and one in which the PBM takes back money from the amount 

that the pharmacy earns from dispensing a medication. Could you provide more clarity and detail 

about these two different types of "clawbacks"? 

NCPA's Answer: 

The term "clawback" is often used in the supply chain industry to describe various types of PBM 

activity. Below, NCPA will discuss two types of clawbacks and suggest alternative language to describe 

each practice to avoid further confusion. 

First, pharmacy direct and indirect remuneration ("DIR") fees are effectively "clawback" fees assessed 

on pharmacies retroactively months later, rather than deducted from claims on a real-time basis at the 

point-of-sale when a prescription is dispensed. The clawback here is essentially the PBM's practice of 

taking back these fees from pharmacies months after the point-of-sale. NCPA primarily refers to these 

fees as retroactive pharmacy DIR fees. These fees take many forms: preferred network fees, "true 

ups" to various brand and generic effective rates, and adjustments due to performance compared to 

other pharmacies in Sponsors' Part D networks based on various contract provisions. Put simply, 

retroactive pharmacy DIR fees can be almost anything. The retroactive nature of these fees makes it 

exceedingly difficult for small businesses to operate and maintain a successful business. 

In addition, last year the Centers for Medicaid and Medicare Services ("CMS") identified several 

concerns resulting from the rapid growth in retroactive pharmacy DIR fees.' First, beneficiaries face 

higher cost-sharing for drugs and are accelerated into the coverage gap or "donut hole" phase of their 

benefit Second, more beneficiaries reach the catastrophic phase of the benefit, for which CMS incurs 

approximately eighty percent of the cost (The HHS Office of Inspector General has noted2 that these 

catastrophic costs that are driven by pharmacy DIR fees have tripled in recent years- from $10 billion 

in 2010 to $33 billion in 2015). Third, liability for Part D costs is increasingly being shifted from Part D 

plan sponsors to CMS. 

In contrast, copay clawbacks are a PBM practice by which PBMs manipulate copayments to secure 

additional revenue at the expense of the consumer. In these instances, instead of a traditional co pay, 

patients are unknowingly paying more than they should at the pharmacy counter. This practice is best 

explained through an example: the cost of a drug is $11.65, including tax and pharmacist's fee. The 

patient's copay, however, is $50.00. The PBM requires the pharmacy to use the patient's health 

1 CMS, Medicare Part D- Direct and Indirect Remuneration, available at 

https://www.cms.gov/newsroom/mediareleasedatabase/fact-sheets/2017-fact-sheet-items/2017-0l-19-2.html. 

2 HHS Office of Inspector General, High-Price Drugs Are Increasing Federal Payments for Medicare Part D Catastrophic 

Coverage, avaUable at https://oig.hhs.gov/oei/reports/oei-02-16-00270.asp. 

2 
310 


29424.231

insurance and charge the patient the $50.00 capay. The difference between the capay and the actual 

cost of the drug ($38.35, in this example) is called the "spread." When the spread is taken back by the 

PBM, this process is often called the "capay clawback." The patient pays the $50.00 capay to the 

pharmacy and the spread is sent back to the PBM. 3 

2. It is my understanding that many of your member pharmacies serve very rural or urban areas that 

are underserved by health care providers in general. What are some of the biggest challenges to 

your members in terms of remaining open for business and able to serve these patients? 

NCPA's Answer: 

Two of the biggest issues facing independent pharmacies are: 1) the lack of transparency regarding 

PBMs, including PBM spread profits, and generic reimbursement; and 2) patient access to pharmacies 

in preferred networks. 

The PBM Industry is Largely Unregulated 

PBM practices outlined in Answer 1 have a massive impact on an independent business' ability to 

operate and effectively serve patients. Given the immense market influence that PBMs exert, one 

might expect that these entities would be subject to the same types of comprehensive regulation that 

is currently required of commercial health insurers. However, PBMs are not subject to industry-wide 

regulation. In fact, there are no federal laws or regulations that are specific to the PBM industry. 

Instead, PBMs face a patchwork of regulations at the state level that are designed to curtail some of 

the more onerous PBM business practices such as abusive PBM audits of pharmacies and requirements 

related to timely Maximum Allowable Cost ("MAC") updates. Unfortunately, even in states that have 

been able to pass limited reforms, PBMs typically resist complying with no recourse. To this end, there 

are currently lawsuits filed against two states which attempted to legislatively address onerous PBM 

business practices. 

Second, in today's marketplace, generic drugs currently comprise approximately 86 percent of all 

prescriptions dispensed in the United States. 4 Given this fact, it is surprising that there is no 

standardized method for determining how pharmacies are reimbursed for generic drugs. PBMs create 

and maintain "Maximum Allowable Cost" or "MAC Lists" that set the upper limit or maximum amount 

that a PBM/plan will pay for most generic drugs. Pharmacies are not provided any insight into how 

drug products are selected to be put onto these MAC Lists or how exactly these prices are determined 

or updated. In short, contracted pharmacies have zero insight or transparency into the MAC process 

and sign contracts without having any idea of the rate at which they will be reimbursed for many of the 

prescriptions they fill. In response to PBMs' secrecy surrounding the creation and maintenance of 

these MAC Lists, at least 26 states have enacted legislation to try to compel greater transparency into 

this system. Unsurprisingly, the PBM industry has vigorously opposed these efforts and is currently 

3 NCPA, The Great Big Prescription Drug Clawback, May 20, 2016, available at http://www.ncpanet.org/newsroom/ncpa'sblog---the-dose/ncpa's-blog---the-dose---2016/2016/05/20/the-great-big-prescription-drug-clawback. 

4 PhRMA, The Reality of Prescription Medicine Costs in Three Charts, May 27, 2014, available at 

http://www.phrma.org.catalyst.the-rea!ity-of-prescription-medicine-costs-in-three-charts. 
311 


29424.232

engaged in litigation with individual states that have sought to compel their compliance with price 

transparency laws. 

Limited Preferred Pharmacy Networks 

Finally, with respect to patient access to pharmacies in rural and underserved areas, an overwhelming 

majority of Part 0 plans have created separate preferred pharmacy networks and many community 

pharmacies are excluded from these networks. As you have noted, independent pharmacists are the 

most accessible health care professional with 95 percent of Americans living within five miles of a 

pharmacy. Unfortunately, patients do not always have access to pharmacies that are the closest to 

them because certain community pharmacies are excluded from prescription drug plans ("POPs") by 

PBMs that create closed network provider lists. NCPA believes limiting access to community 

pharmacies severely thwarts the delivery of beneficial and accessible health care services to patients, 

and more specifically to some of our most vulnerable populations. 

If their local pharmacy is not included in a preferred network, a senior must either switch to a 

preferred network pharmacy or pay higher co payments or coinsurance to access the local pharmacy of 

their choice. In rural areas, accessing a preferred pharmacy may require significant travel. In urban 

areas, CMS recently found that fifty-four percent of preferred pharmacy networks fail to meet 

standards for access to pharmacies. 

In medically underserved areas, local pharmacies are an important part of the health care delivery 

system where patients can not only access prescription drugs but also receive services like 

preventative screenings and medication therapy management. Excluding community pharmacies from 

preferred pharmacy networks takes away choices from seniors and could lead to reduced access to 

medical services. To protect this important access to health care and to support more providers in 

POPs, NCPA recommends that community pharmacies in underserved areas be allowed to participate 

in Medicare Part 0 preferred pharmacy networks if they are willing to accept the contract terms and 

conditions that other preferred providers operate under. This gives seniors more choice, allows 

community pharmacies to compete, and preserves access to medical services in underserved areas. 

3. There seems to be an assumption that pharmacies play a role in determining the prices that 

patients pay when they arrive at the pharmacy to fill a prescription under their prescription drug 

coverage- If this is not the case, could you please elaborate as to exactly who is in control of this 

process? 

NCPA's Answer: 

Pharmacists are part of the supply chain that interacts directly with the patient and are keenly aware 

of the frustrations and challenges patients face when dealing with high drug costs. NCPA believes 

requiring retroactive pharmacy OIR fees to be calculated at point-of-sale is a policy that works to lower 

cost-sharing for patients, and ultimately save the patient money. 

NCPA would also like to point out that examining other activities in the supply chain could lower 

patient cost. For example, PBMs wield immense power in influencing precisely what prescription drug 

products will be considered "on formulary" or what will be covered by a specific health plan. Typically, 

4 
312 


29424.233

the PBM chooses specific drug products to garner the greatest amount of rebate dollars for its profits. 

Lately, the PBMs' "rebate game" has attracted a great deal of attention as it has come to light that the 

proliferation of these rebates is causing drug manufacturers to offset their payments to PBMs by 

raising the list prices of medications. This dynamic is extremely troubling because in today's health care 

marketplace in which many consumers receive prescription drug coverage under high-deductible 

plans- patient cost sharing amounts for medications are based off these artificially inflated "list 

prices." Patient cost sharing is a percent of the "invoice" or retail price, not the net or rebated price. 

This suggests that ultimately rebate dollars are not passed through directly to patients. The Center for 

Medicine in the Public Interest confirmed this report and has specifically stated that rebates as percent 

of total price growth increased ten-fold since 2011. 5 1n addition, the amount that PBMs reimburse a 

pharmacy for dispensing a drug is not the same amount that PBMs "charge" plans for the same drug. 

PBMs "mark up" the cost of drugs, charging plans more than pharmacies are reimbursed and keeping 

the difference as pure profit. We believe that these hidden spread amounts should be disclosed to 

plan sponsors. 

4. There has been a lot of discussion around retroactive pharmacy "DIR" fees in the Medicare Part D 

program and the disruption they are causing particularly in small pharmacies. Could you briefly 

provide some background and perhaps some potential solutions that could be utilized to ameliorate 

the problem? 

NCPA's Answer: 

Pharmacy direct and indirect remuneration ("DIR") are fees that are retroactively assessed against 

pharmacies months after the sale of a prescription, rather than deducted from claims on a real-time 

basis at the point-of-sale. These fees take many forms: preferred network fees, "true ups" to various 

brand and generic effective rates, and adjustments due to performance compared to other pharmacies 

in Sponsors' Part D networks based on various quality measures. Put simply, retroactive pharmacy DIR 

fees can be almost anything. 

The issue with retroactive pharmacy DIR fees is that these fees are not included in the "negotiated 

price" that is recorded on the "Prescription Drug Event" ("POE"). The point-of-sale price also known as 

the "negotiated price" that is recorded on the POE records is extremely significant because it is used to 

calculate beneficiary cost-sharing and to adjudicate the Part D benefit. Any fees or payments that are 

made after the point-of-sale are not reflected in the negotiated price but rather are reported to CMS 

separately. 

Further, as outlined in Answer 1, retroactive pharmacy DIR fees force beneficiaries to face higher costsharing for drugs and progress more rapidly into the coverage gap or "donut hole" phase of their 

benefit. Second, more beneficiaries reach the catastrophic phase of the benefit, for which CMS incurs 

approximately eighty percent of the cost (The HHS Office of Inspector General has noted 6 that these 

catastrophic costs that are driven by pharmacy DIR fees have tripled in recent years- from $10 billion 

5 Robert Goldberg, Drug Costs Driven by Rebates, Center for Medicine in the Public Interest, 

available at http:/ /bi onj .org/wp-content/uploads/20 15/ 11/drug-costs-driven- by-rebates.pdf. 6 HHS Office of Inspector General. High-Price Drugs Are Increasing Federal Payments for Medicare Part D Catastrophic 

Coverage, available at https://oig.hhs.gov/oei/reoorts/oei-02-16-00270.asp. 
313 


29424.234

in 2010 to $33 billion in 2015). Third, liability for Part D costs is increasingly being shifted from Part D 

plan sponsors to CMS. 

A leading actuarial firm reinforced and bolstered these findings in a report earlier this year 

commissioned by NCPA7 • In addition, MedPAC has recently warned' that because of DIR, the gap 

between gross and net drug prices has grown 20 percent annually from 2010-2015 and that "plan 

incentives [are] not aligned with beneficiary and Medicare." By utilizing tactics such as pharmacy DIR 

fees, the Part D plan sponsor or its PBM often receive additional compensation after the point-of-sale 

that serves to change the final cost of the drug for the payer or the price paid to the pharmacy for the 

drug. 

To address these concerns, and to help preserve access to independent community pharmacies, one 

solution would be to require Medicare Part D Plan Sponsors/PBMs to utilize point-of-sale discounts, 

rather than retroactive pharmacy payment reductions. This approach would also lower beneficiary 

cost-sharing and reduce Medicare program costs and liability. Finally, this approach would allow the 

use of pay-for-performance arrangements and encourage true quality incentive programs instead of 

misaligned programs that blur the line between reimbursement for ingredient cost and pharmacist 

performance. 

5. Some media accounts and legal complaints allege that patients have faced so-called "capay 

clawbacks." By virtue of these "clawbacks", patients sometimes incur higher cost-sharing than they 

would without their insurance. Allegedly, the differential is taken by the Pharmacy Benefit Manager. 

If PBMs are the "experts" in managing patients' drug benefit costs, how can any major PBM allow 

something like this to become a repeated practice? In your testimony, you stated capay clawback 

practices are being conducted by "outliers" in the industry. Has the PBM industry taken any steps to 

remedy this apparent "outlier" situation or is this a systematic practice that has gone unaddressed? 

NCPA's Answer: 

In our members experience, "capay clawbacks" are primarily assessed when a patient has a high 

deductible commercial health plan. There is one major PBM that assesses the vast majority of these 

"capay clawbacks." To our knowledge the PBM industry has not taken any steps to remedy this 

presumed "outlier" activity. Unfortunately, we still hear about examples where the patient is incurring 

higher cost-sharing by using their health plan/PBM than they would by paying the cash price for the 

drug. And after the prescription is dispensed the PBM recoups the capay amount from the pharmacy. 

7 NCPA, The Impacts af Prescription Drug Direct and Indirect Remuneration Under Medicare Part D, Feb. 2017. 8 MedPac, Payment and Plan Incentives in Part D, Apr. 7, 2017, available at http://www.medoac.gov/docs/defaultsource/defau!t-document-librarv/payment-and-p!an-incentives-in-part-d-april-2017-for-public.pdf?sfvrsn=O. 

6 
314 


29424.235

6. There have been public reports of PBM's relabeling rebate dollars with another name to retain the 

value. Do PBM's relabel fees to whatever they prefer such as "formulary rebates" vs. "administrative 

fees" vs. "price protection rebates"? Do PBM's profit from manufacturer price increases? 

NCPA's Answer: 

It is our understanding that PBMs do relabel rebate dollars with different names and by doing so are 

able to retain a higher share of the rebate. The higher the manufacturer sets the price of a drug the 

higher rebate the PBM may be able to retain. 

7. Gag clauses were briefly brought up in the hearing. Can you explain how your members are 

restricted by gag clauses included in the contracts between PBMs and pharmacists? What are some 

examples of the restrictions on what they can and can't say? Do you have any input on ways in 

which the pharmacists can ensure their patient is also paying the amount that is in their best 

interest? 

NCPA's Answer: 

Our members are in effect prohibited from sharing information with their patients regarding the cost 

of their medications. The real issue is that pharmacies can't share what they are being reimbursed, 

because that is considered confidential by the PBMs. Combine that with having to charge the patient 

what the PBM says at point-of-sale, requiring pharmacies to run the claim if the patient presents 

insurance, and agreeing to overly broad confidentiality provisions (that may incorporate the terms and 

conditions of the PBM's Provider Manual, which is often hundreds of pages and subject to unilateral 

revisions by the PBM at any time), and the pharmacy is hamstrung. For example, one of the largest 

PBMs uses a Pharmacy Provider Agreement that includes the following provisions that highlight the 

issues: 

Confidentiality: Provider acknowledges and agrees that in the performance of services 

hereunder, Provider will comply with the Confidentiality provisions set forth in the Provider 

Manual and as set forth in this Agreement. 

Contacting Sponsors or Media: Provider hereby agrees (and shall cause its affiliates, employees, 

independent contractors, shareholders, members, officers, directors and agents to agree) that it 

shalf not engage in any conduct or communications, including, but not limited to, contacting any 

media or any Sponsor and/or Sponsor's Members or other party without the prior consent of 

[PBM]. 

Violation of any of these provisions or others could very well lead the PBM to terminate the contract 

with the pharmacy and remove the pharmacy from the PBM's networks, resulting in the inability of the 

pharmacy to continue to service a significant percentage of its customers. 

For patients to pay the amount in their best interest it may be necessary to require health plans/PBMs 

to explicitly allow pharmacists to inform patients about the cost of the medication or the availability of 

any therapeutically equivalent alternative medication or alternative method of purchasing the 

prescription including but not limited to paying a cash price. 

7 
315 


29424.236

8. Does your organization support increased transparency into the following aspect of the drug 

supply chain? Yes or No will suffice. 

a. Rebate pass throughs 

b. PBM "Spread" Profits 

c. Generic Drug Reimbursement Methodologies 

d. True price for prescription drug at point of sale 

e. Pharmacy Direct and Indirect Remuneration ("DIR") fees 

NCPA's Answer: 

NCPA supports increased transparency into the following aspects of the drug supply chain: 

a. Rebate pass throughs-Yes 

b. PBM "Spread" Profits-Yes 

c. Generic Drug Reimbursement Methodologies-Yes 

d. True price for prescription drug at point of sale-Yes 

e. Pharmacy Direct and Indirect Remuneration ("DIR") fees-Yes 

question Submitted for the Record from Congressman Gus M. Bilirakis 

1. CMS recently published their 700-page proposed rule for Medicare Part D for Calendar Year 2019. 

One component was their proposed implementation of the drug management program from at-risk 

beneficiaries from the Comprehensive Addiction Recovery Act of 2016. This drug management 

program, or "lock-in," is used in Medicaid program and in private insurance. Have you had a chance 

to review their regulations and what are your thoughts on CMS' proposed implementation? Are 

there improvements that need to be made either through regulation or statutory changes? 

NCPA's Answer: 

We have reviewed the proposed Medicare Part D rule and the section implementing the drug 

management program. Our thoughts are the following: 

NCPA would like to voice support for CMS' conservative and uniform approach to implement the 

Comprehensive Addiction and Recovery Act of 2016 provisions in Medicare Part D. NCPA supports the 

frequently abused drug definition and urges CMS to finalize the proposal to designate opioids, except 

buprenorphine for medication-assisted treatment {MAT) and injectables, as frequently abused drugs. 

We also strongly support that this rule supersedes current policy, and sponsors no longer be allowed to 

implement the current policy for non-opioid medications. This is crucial for consistency and smooth 

implementation of the drug management program. 
316 


29424.237

NCPA supports the exemption of hospice, cancer, and LTC patients from drug management programs. 

We ask that in addition to these exempted individuals, CMS also exempt residents of any facility for 

which frequently abused drugs are dispensed for residents through a contract with a single pharmacy. 

This could be accomplished utilizing the NCPDP Patient Residence Field. Our members who provide 

pharmacy services to those residing in long-term facilities provide services to assisted living facilities 

(ALFs) in a very similar, if not identical, fashion. This is due to the need ALFs have because many 

patients are being admitted who would most likely qualify for a LTC facility if it were not for costcontainment measures. To require a resident of an ALF to receive pharmacy services from a provider 

outside of normal ALF operations is not feasible and leads to disconnects in care. 

We strongly support prescriber agreement to implement a pharmacy lock-in and that any notices sent 

from plan sponsors or PBMs be approved by the Secretary. NCPA feels it is vital that all notices sent to 

beneficiaries that are approved by the Secretary make very clear that any lock-in program applies only 

to frequently abused drugs. Our members are concerned that pharmacy lock-ins could be utilized to 

steer patients unknowingly to a pharmacy for ;ill their drug needs, not just opioids. It is also vital that 

the notices don't just simply offer beneficiaries a plan sponsor/PBM created list of prescriber(s) and 

pharmacy(ies) from which to choose. The beneficiary must be able to write in their prescriber and 

pharmacy of choice and not be limited to a list provided by the plan sponsor/PBM. NCPA also supports 

CMS' proposal to allow the beneficiary to submit pharmacy preference at any time and asks that this 

be included in the final rule. 

We agree with CMS that the additional reference to beneficiary preference in the context of 

reasonable access in CARA means that a beneficiary-allowable preference should prevail over a 

sponsor's/PBM's evaluation of geographic location, the beneficiary's predominant usage of a 

prescriber and/or pharmacy impact on cost-sharing and reasonable travel time. 

Since preference only is to be considered by plans/PBMs when delegating prescriber/pharmacy for 

purposes of the Part D lock-in program, there must be protections in place for continual access. Our 

members have relayed to us that a very common scenario with lock-in programs is when the lock-in 

pharmacy is closed and the patient has no alternative to obtain their medication. In these instances, 

we have learned of unfortunate hospital admissions. NCPA therefore recommends that there be a 

back-up plan in place for a beneficiary to obtain medications when their lock-in pharmacy is closed. 

The CARA Act provides that an "at-risk" patient may be "locked-in" to a pharmacy chain or group of 

pharmacies under common ownership and control. Also, if a PDP sponsor determines that a 

beneficiary's choice of pharmacy is determined to be a contributing factor in that beneficiary's "at-risk" 

status, the PDP sponsor may re-assign the beneficiary to another pharmacy. We feel strongly that if a 

PDP sponsor determines that a beneficiary's choice of pharmacy is contributing to his or her "at-risk" 

status and that pharmacy is part of a group of pharmacies under common ownership or control, the 

PDP sponsor may not simply assign that beneficiary to another location of that pharmacy chain. 

We urge CMS remain vigilant in ensuring appropriate patient access. We strongly recommend that 

CMS require plans/PBMs report percentage of times when beneficiary preference is/is not considered 

and to track which pharmacy the plan/PBM utilizes to override patient preference. 

9 
317 


29424.238

GREG WALDEN, OREGON 

CHAIRMAN 

FRANK PALLONE, JR., NEW JERSEY 

RANKING MEMBER 

ONE HUNDRED FIFTEENTH CONGRESS 

QCongress of tbe 1tnitell ~tates 

J!)ou!)c of l\cprcgcntatibcg 

COMMITTEE ON ENERGY AND COMMERCE 

2125 RAYBURN HousE OFFICE BuiLDING 

WASHINGTON, DC 20515--6115 

Mr. David Mitchell 

President and Founder 

Patients for Affordable Drugs 

1875 K Street, N.W.; Floor 4 

Washington, DC 20006 

Dear Mr. Mitchell: 

Majority {2021 225-2927 

Minority (202) 225-3641 

January 8, 2018 

Thank you for appearing before the Subcommittee on Health on December 13, 2017, to testiJY at 

the hearing entitled "Examining the Drug Supply Chain." 

Pursuant to the Rules of the Committee on Energy and Commerce, the hearing record remains 

open for ten business days to permit Members to submit additional questions for the record, which are 

attached. The format of your responses to these questions should be as follows: (1) the name of the 

Member whose question you are addressing, (2) the complete text of the question you are addressing in 

bold, and (3) your answer to that question in plain text. 

To facilitate the printing of the hearing record, please respond to these questions with a 

transmittal letter by the close of business on January 23,2018. Your responses should be mailed to Zack 

Dareshori, Legislative Clerk, Committee on Energy and Commerce, 2125 Rayburn House Office 

Building, Washington, DC 20515 and e-mailed in Word format to zack.dareshori@mail.house.gov. 

Thank you again for your time and effort preparing and delivering testimony before the 

Subcommittee. 

cc: The Honorable Gene Green, Ranking Member, Subcommittee on Health 

Attachment 
318 


29424.239

The Honorable Earl J, ''Buddy" Carter 

Does your organization support increased transparency into the following aspects of the drug 

supply chain? Yes or No will suffice. 

I. Rebate pass throughs Yes 

2. PBM "Spread" Profits No 

3. Generic Drug Reimbursement Methodologies I don't know what this means 

4. True price for prescription drug at point of sale Yes 

5. Pharmacy Direct and Indirect Remuneration (" DIR") fees We support a clear and transparent 

payment system for pharmacies with no gag clauses or clawbacks. 

The Honorable Frank Pallone Jr 

I. As we heard at the hearing, so many Members of this Committee have heard from 

family. friends, and constituents about their personal experiences with rising drug costs. 

I know I have heard concerns from constituents in my district about treatments and 

medications being priced out of their reach, leading them to make decisions about 

whether to fill their prescription in the first place, or whether to forego paying other 

bills in order to access the medication they need. One of the things that has struck me 

about the drug pricing conversation is that there are so many different problems 

happening in the market. For example, high drug prices no longer seem limited to just 

new blockbuster drugs, we have also seen the prices of some generic drugs rise rapidly. 

a. Can you discuss briefly what you and other patients you work with have 

experienced when it comes to prescription drug prices in the last few 

years? We've heard from tens of thousands patients from all over the 

country. Heartbreaking stories of cutting pills in half, skipping doses, 

going without food, even declaring bankruptcy because of high drug 

prices. People are hurting. They are angry, and they don't understand how 

this could be happening to them in the United States of America. 

b. In your opinion, what are some of the causes of rising drug prices? Is there a 

commonality into the circumstances around the different price increases that 

you have identified? The commonality is that drug companies set prices too 

high and raise prices without regard for patients or taxpayers. Drug companies 

get away with this behavior because the industry is given government~granted 

monopolies. And they abuse that power by blocking competition to maintain 

monopolies far beyond what is intended under the Hatch-Waxman Act. PBMs 

skim off the top by executing billions of dollars in secret deals. Hospitals and 

doctors make more money when drug prices rise because they are often paid on 

a percentage of list price. The system is built to benefit the rich and powerful. 

The people who suffer under ever-rising prices are patients, consumers, 

taxpayers, and employers. 

c. As this Committee examines potential policy solutions, what policy 

recommendations would you offer in regards to drug pricing that would 

offer patients greater relief from increased drug costs? 

Medicare should negotiate directly with corporations over the price of 

drugs. 

Patent law should be amended to outlaw pay-for-delay, product 
319 


29424.240

hopping, REMs abuses, and all other forms of manipulation that 

wrongfully extend patents and prevents generic competition to lower 

prices. 

PBMs should be required to conduct their business transparently. 

Drugs developed with taxpayer tunding should be priced so that US 

patients pay no more for those drugs than people in other developed 

countries. 

And Congress should require disclosure from drug corporations so patients, taxpayers, and 

policymakcrs understand how they set prices. For example: how much are drug companies 

spending on research and innovation? How much for marketing and advertising? How much for 

manufacturing and distribution? 

2. Mr. Mitchell as you know the National Academies of Sciences, Engineering, and 

Medicine recommended in a recent report that policy makers work to increase financial 

transparency in the drug supply chain. The report recommends that Congress require 

insurers and manufacturers to disclose more information about pricing. In your 

testimony you note that your organization is supportive of increased transparency, and 

specitically the report's recommendation that PBMs provide quarterly disclosures at 

the national drug code level. 

a. From the patient perspective, what information about the supply chain is 

publicly available to patients and what is not? 

When drug prices rise, it is very hard for patients to find out why prices went up 

and who is responsible for the increase. That should change. Policy makers and 

taxpayers should have access to retail drug prices and the average rebated 

prices. Patients should know if they can pay less by paying cash. We should be 

able to understand who is making how much money-drug companies, PBMs, 

insurers, doctors and hospitals. That information is need in the interests of our 

national health expenditures, and lawmakers need it to make informed decisions 

about how to set policy. 

b. Why do you think that sort of disclosure by PB Ms is the right approach 0 

Markets work best with information, Patients, consumers, and potential market disrupters cannot 

make informed choices without information. We need transparency around drug rebates and other 

charges, how much PBMs keep, how much goes to insurers, and if any money reaches patients and 

consumers in the form of lower prices or lmver premium. 

c. Is there other information you think is important for other members of the 

supply chain to disclose and why do you believe this is beneficial for patients? 

Clear disclosure of prices and choices should be made to patients. They should know, 

for example, if they can pay less by paying cash versus using their insurance. 

The Honorable Diana DeGette 

1. We understand that your organization collects stories from all over the country about how 

high drug prices are affecting patients. How often do you hear from patients experiencing 

a heavy burdetl due to the cost of their insulin? 

A very large percentage of the stories we receive come from insulin users-we estimate 
320 

Æ 


29424.241

around 15 percent. This issue touches Americans of every state, race, religion, job status, and 

political party. Taking insulin is not a choice- it is a matter of life and death for thousands of 

Amcric.ans across the country. 

2. Are there any common themes in patient stories about insulin that Congress should 

be aware of? 

Patients often express frustration. Like me. they do not understand how the price of 

insulin has risen so dramatically for a drug invented in the 1920s under a patent sold for 

$3. Patients often mention struggling to afford not only insulin. but all of the other 

supplies needed. They fear losing insurance and being unable to purchase this drug that 

is essential for them to live. 

3. Have you heard from many patients about their experiences with patient assistance 

programs (PAPs) run by pharmaceutical companies? Please identify any common 

themes that you think Congress should be aware of and explain in the context of insulin 

to the extent that it's possible. 

Common comments include: 

'"[ don't qualify for assistance" 

"Assistance program funding comes and goes and is unreliable" 

"l live in fear that assistance programs will not be there" 

Patients should not have to rely on these programs which are not charity but rather are 

marketing programs of the drug companies. It is estimated that drug companies make as 

much as $21 million for every one million invested in so-called assistance programs. Insulin 

should be affordable without patient reliance on company-controlled funding. 

4. Options to appeal health plan determinations are often available to patients who are 

not able to access the specific type of insulin they need. Have you heard from patients 

who have made appeals to health plans in an effort to get a specific drug? Please 

describe their experiences and any common themes that you think Congress should be 

aware of. 

Patient appeals can be made. But they too often take too long to be resolved, and insurance 

plan "rules'" often trump patient and physician judgement. lt is simple: When a patient and 

his or her physician repot1 that a given product is not performing for the patient for any 

reason-{)utcomes or side-effects-the patient must be able to receive the alternative 

product.