Executive summary

On January 29, the Senate Finance Committee held a full committee hearing, "Drug Pricing in America: A Prescription for Change, Part I," the first in a series of hearings focused on drug pricing. Chairman Chuck Grassley (R-IA) and Ranking Member Ron Wyden (D-OR) both noted tackling prescription drug costs as a top priority of the committee and expressed their disappointment with drug companies who declined to cooperate in the public forum. Both agreed to move forward in a bipartisan manner to close loopholes and bring transparency to the system, as well as explore policy options for bringing down costs for consumers. They also said they would more forcefully ensure drugmaker participation in future hearings.

Panelists included a mother of a child with insulin-dependent diabetes who struggles to afford the price of her son's medication, along with representatives from the American Action Forum, Laura and John Arnold Foundation, and Memorial Sloan Kettering Center for Health Policy and Outcomes, each of who brought forth several policy proposals for driving down drug costs. Among other priorities, the panelists agreed that it is valuable to explore reforming Part B incentives, such as moving to a flat fee reimbursement for providers; exploring changes to the Medicaid Best Price and rebate systems that drive up list prices and out-of-pocket costs for consumers; looking into binding arbitration or value-based pricing mechanisms for sole source and/or specialty drugs; and revising programs such as 340B, which may inadvertently interfere with market incentives.

• For more information: https://www.finance.senate.gov/hearings/drug-pricing-in-america-a-prescription-for-change-part-i

Opening statements

Senator Chuck Grassley (R-IA): "Tackling high prescription drug costs is one of my first priorities as Chairman of the Senate Finance Committee … We will look at all aspects of the prescription drug market and make changes where necessary. So, where do we start? I believe we should start with transparency … I believe it starts with putting the list price of a drug on television ads. I am confident in the ability of Americans to use this information to make the best decision for themselves. Drug advertisers want to tell consumers all of the benefits of the drugs … Senator Wyden and I introduced the Right Rebate Act last week. When enacted, this bill will close the loop hole that allowed the manufacturer of EpiPen to rip off taxpayers and consumers to as much as $1.27 billion. Speaking of transparency: I want to express my displeasure at the lack of cooperation from the pharmaceutical manufacturers recently … The companies that declined said they would discuss their ideas in private, but not in public … That is not what I mean when I talk about transparency." Full statement.

Senator Ron Wyden (D-OR): "This is the first in a series we will hold on this topic. So nobody is going away, and even if it means using our power to compel the drug company CEOs to show up, they will come before this committee. The crisis of prescription drug costs threatens too many lives and bankrupts too many people for the Congress to tolerate this ducking and weaving by the companies that caused it … There are several policy challenges to tackle. I'm especially troubled by health care middlemen who skim off enormous sums of money, when there's scant evidence they're getting patients a better deal … So let's pull back the curtain on what's really going on and see who really benefits from this arrangement … More than a decade of evidence shows that private Medicare Part D plans often do not do a good enough job of negotiating drug prices downward. So I believe Medicare ought to be able to use the collective bargaining power of 43 million seniors to get better deals for patients and taxpayers." Full statement.

Witness testimony

Kathy Sego, Mother of a Child with Insulin-Dependent Diabetes: "More than 30 million Americans have diabetes and approximately 7.4 million of them rely on insulin. For millions of people with diabetes — including my son, and all individuals with type 1 diabetes — access to insulin is literally a matter of life and death. There is no medication that can be substituted for insulin and nobody should ever have to go without it due to prohibitive costs. An American Diabetes Association study estimates that diabetes costs a total of 327 billion dollars a year, but for my family, the true cost cannot be calculated … Diabetes is an everyday struggle. Every meal, every snack, every workout must be calculated … Imagine if the one thing you relied on to survive was nearly out of reach because it was too expensive. That, for us, is insulin … Our family is not alone in this struggle. More than 7 million Americans use insulin and more than 400,000 have signed the American Diabetes Association's online petition calling for action to make insulin affordable for all who need it … This is not a call for a handout or a way to allow those who live with diabetes to be given a free ride. We just want to keep those 7 million alive without having to do what my son thought was his only option to stay alive." Full statement.

Douglas Holtz-Eakin, Ph.D., President, American Action Forum: "I hope to make four basic points: 1. The term "rising drug costs" is riddled with ambiguity; list prices, net prices, out-of-pocket prices, development costs, and total spending on drugs have displayed very different patterns over time. 2. There is rising demand for pharmacological therapies driven by an aging population, chronic disease and the development of specialty drugs. 3. In the face of rising demand, the only way to reduce prices is to increase supply and heighten competition. 4. In thinking about policy actions, it is important to recognize first existing policies that exacerbate price increases … Fundamentally, there is no broad prescription-drug pricing crisis. Indeed, in most instances, things are working just fine. Rather what we face are more nuanced challenges. For example, the price of specialty drugs and biologics, which are expensive to develop and manufacture and frequently treat a limited population. In these instances, particularly with oncology drugs, it is important to make sure that the cost of the treatments correlates to the value. Remember that the goal is not low cost, it is high value … Programs such as the Medicaid Drug Rebate Program and the 340B drug discount program interfere with the market incentives and shift, rather than reduce, the high cost of drug development. A more effective solution to high prices is greater competition in the supply and greater financial incentives on behalf of the payers and manufacturers to keep costs and prices down." Full statement.

Mark E. Miller, Ph.D., Vice President of Health Care, Laura and John Arnold Foundation: "MedPAC has recommended a set of policies that restructure Medicare Part D to give plans greater financial incentives and stronger tools to manage the benefit. Both recent republican and democratic administrations have proposed similar policies … Taken together, the proposals would reduce the amount that taxpayers pay to provide the Part D drug benefit to its 44 million beneficiaries. However, the proposals would also expose some beneficiaries to higher cost sharing. In turn, some consideration could be given to using some of the savings to help people with higher out-of-pocket costs … Recently, the Administration introduced the International Price Index (IPI) Model, which benchmarks Medicare reimbursement for Part B drugs to an international reference price. We believe models like the IPI are worth examining. They have a chance to reduce costs for beneficiaries and taxpayers significantly while still ensuring access to critical medications … The Medicaid rebate program is very successful at driving down average prices paid by the program relative to other payers. However, states are still struggling to afford new, high cost specialty drugs, where the rebate is less effective in lowering prices. Additionally, since states are essentially required to cover all drugs, they are not getting as good a price as they could if they had additional flexibility … States are working with the Administration to address this issue creatively … However, it is clear that more needs to be done both administratively and legislatively to provide states with additional flexibility to rein in spending." Full statement.

Peter B. Bach, MD, MAPP, Director, Memorial Sloan Kettering Center for Health Policy and Outcomes: "Subscription based payment for HCV treatment ("Netflix model"): Under our proposal, a purchasing coalition within a state would run an auction to obtain a market-based price for flat subscription payments for a set number of years during which time the coalition would work with the winning manufacturer to eliminate HCV infection in the state … Reform Part D: One solution to this problem is that at this point, a dozen years after the commencement of the program, plans could take over the risk (or at least the lion's share) that is currently borne by Medicare through individual level reinsurance … Insert competition where possible for high priced therapies: One option for Medicare would be to consider ways to use its coverage authority (particularly Coverage under Evidence Development) in conjunction with CMMI authority to test alternative payment approaches, with the objective of inserting price competition between CAR-T treatments … Recapture funds spent on discarded drugs: With this mandatory code now designating what part of each billed vial was discarded, CMS could, with appropriate authority, 'claw back' from the manufacturer those funds expended on discarded drugs recorded as billed with the JW modifier … Move to flat fee reimbursement for Part B drugs: Changing to a flat fee add on above ASP is a more rational policy. This flat fee should be calibrated to the complexity of handling, storing and preparing the product for administration, rather than having a mark-up that is based entirely on the cost of the underlying drug." Full statement.

Sen. Chuck Grassley (R-IA) asked Ms. Sego if she considered going to Mexico or buying insulin online, and she said that she cannot afford to travel so wants to focus on getting the best price here. Sen. Grassley asked each of the other panelists the one thing they should focus on for drug pricing. Dr. Holtz-Eakin said they should look to reform the 340B program, which leads to higher drug costs. Dr. Miller said there is a headwind between prices and spend on R&D, and that they can go after prices and spending and not impact innovation. He also said they should restructure Part D and consider reference pricing and binding arbitration for those drugs with no competition. Dr. Bach said they should pay more for drugs with higher value and develop policies to end monopolies. When asked about key issues in Medicaid drug rebate program, Dr. Miller said they should focus on capturing more savings for the taxpayer and ensure there are clear pathways for states to take up innovative models. Dr. Holtz-Eakin noted there is a tradeoff for rebates and that raising caps incentivize higher launch prices. Sen. Grassley also said they will be more insistent that drug manufacturers testify at future hearings.

Sen. Ron Wyden (D-OR) stressed that manufacturers are taking advantage of families and that reform is needed for Medicare Part D to remove incentives for higher prices. He asked what to do about sole source drugs with negotiation. Dr. Miller asked why the government would be better at negotiation than PBMs and said that Part D is currently not designed to deal with drugs like that. Sen. Wyden also said that the days are over where these drug manufacturers will get a pass. Sen. Wyden asked about taxpayer funding for research. Dr. Miller said his foundation has started to think about this, revisiting how taxpayer-funded innovations, such as innovations using NIH-funded basic science, could come back in part to benefit taxpayers down the road.

Sen. Debbie Stabenow (D-MI) asked Ms. Sego what she would say to drug company executives. She said people are at risk of dying and asked how they could be okay making a decision such as that, asking them to come to the table to create changes. Sen. Stabenow also said she believes in the importation of FDA-approved drugs, doesn't think 340B is the primary reason for drug price increases, and said that we know government negotiation works by looking at the VA. She also said she supports value based pricing and asked Dr. Bach for his opinion. Dr. Bach said the notion is not that patients should pay more if they need it more, but that if prices are linked to benefits then patient copayments should be low for those needed drugs due to reallocating away from overpriced drugs so that money is freed up for the drugs that matter most for patients.

Sen. Michael Enzi (R-WY) asked about the possibility of more upfront discounting of drugs. Dr. Miller said that prices established up front are carried through the supply chain, and that higher list prices mean that Medicare beneficiaries hit the catastrophic phase faster. Dr. Bach said the core challenge is that everything is indexed off the list price, and they should figure out a way to recalibrate the incentives in the catastrophic phase. Dr. Miller added that more people are hitting the caps now, mostly driven by the price of drugs.

Sen. Robert Menedez (D-NJ) asked about support for capping drug prices in Medicare. Dr. Holtz-Eakin said he prefers mechanisms that actually lower prices, and Dr. Miller agreed that they have to deal with the launch price issue, so they should consider that as part of the broader solution. Dr. Bach said there shouldn't be price inflation with no new benefits shown, and that prices should be based on the benefit provided by drugs. Regarding drug coupons, Dr. Bach said it is clear they benefit the manufacturers, as they are artificial price supports that lead to higher costs for patients elsewhere in the system. Regarding generic price collusion, Dr. Miller said it is not exclusive to generics, but that they need to open pathways through legislation such as CREATES to increase competition.

Sen. Benjamin Cardin (D-MD) asked why Medicare does not use competitive pricing for drugs that are competitive, and use mandatory arbitration or value-based pricing for other drugs. Dr. Miller said there is an issue of administrative complexity and it may be useful to have an agent do the negotiation on behalf of the government, but the ones with little competition may be an easier place to start. Dr. Bach said Medicare has tools for price competition in Part B, and if they were able to categorize drugs that fall in the same category by putting them in the same billing code (e.g. for CART-T) it would be a good start. Dr. Holtz-Eakin said they should look into anti-competitive behavior and specialty drugs in particular. He also suggested they reform Part D and separate out physician payment for Part B drugs.

Sen. Maggie Hassan (D-NH) asked about the Medicaid rebate program and misclassification of less expensive authorized generics Dr. Miller agreed that misclassification is something that should be addressed. When asked about the need for transparency, Dr. Miller also said that he strongly recommended the sunshine act when he was at MACPAC and that they should include payments to patient groups as a part of that.

Sen. John Cornyn (R-TX) asked why there is a general prohibition against rebates and kick-backs, but not when it comes to prescription drugs. Dr. Bach said rebates are delivered to the consumer indirectly and it results in less savings for those that use more. Dr. Holtz-Eakin added that the rebate system is undercutting the purpose of insurance. Dr. Bach added that the US provided monopoly protection to encourage R&D, however biologic drugs should have 12 years of exclusivity and they are currently getting much more, so they could examine the price of biologics when that period ends.

Sen. Johnny Isakson (R-GA) asked about coupons and patient assistance programs, to which Ms. Sego said she cannot use because her income is slightly too high and she has employer provided insurance. Dr. Miller added that these help patients at the moment but allow for manufacturers to keep prices high and then they are baked into the system. Dr. Bach added that the issue is highly complex and not easy for patients to navigate.

Sen. Cortez-Masto (D-NV) asked about Part B reforms. Dr. Bach said physicians are paid a percentage mark-up, resulting in less profit for using cheaper drugs, and that studies have showed doctors are influenced by this. He suggested moving to a flat handling fee so that this perverse inventive is removed, in addition to removing the handing of these drugs completely from physicians so they're not involved in the economics.

Sen. Patrick Toomey (R-PA) said that other countries have higher pharmaceutical spending in comparison to overall health spending, and that the percent of out-of-pocket spending is also lower in the US than the rest of the modern world. Dr. Miller said that the numbers are misleading because they're missing a significant part of spending in hospital offices and that the US pays top dollar for everything. Dr. Bach added that pharmaceutical spending in the US is around 14 percent of total spending.

Sen. James Lankford (R-OK) asked about the 340B drug program. Dr. Holtz-Eakin said the large discount results in increased prices elsewhere in the system. When asked about the Medicaid rebate system, he said that it inhibits firms to compete. Dr. Miller added that abandoning the rebate system would double costs, so they would need to replace it with an aggressive structure to lower starting prices. Regarding manufacturer costs and recouping of R&D, Dr. Miller noted that marketing and advertising costs often exceed R&D by 70 percent.

Sen. John Thune (R-SD) asked about the rebate system. Dr. Bach said that the current rebates system results in patients essentially experiencing the list price, as opposed to point of sale rebates where they see savings up front but it shifts to other costs in their health plan, resulting in higher costs for those that use more. Dr. Miller said that starting with a discounted price is the alternative. Dr. Holtz-Eakin added that changing incentives in the catastrophic coverage period would shift some of these list price incentives. Regarding non-profit generic drug manufacturers, Dr. Miller said he supports a group that is aiming to provide low-cost generics to their health systems.

Sen. Todd Young (R-IN) asked about increasing utilization due to age of population and potential strategies for that upstream issue. Dr. Holtz-Eakin said education on chronic disease and other similar initiatives have worked on a small scale for employers and could be used by federal or state governments. Regarding financial incentives, he said it is difficult to do individually, and there is evidenced-based research along those lines. Dr. Miller said we don't encourage that type of thinking and that it comes down to where we want to invest our money — drug spending or social determinants of health.

Sen. Steve Daines (R-MT) asked about 340B reform. Dr. Holtz-Eakin said it is not the biggest problem, but under their jurisdiction, and they should start with 340B and looking at Medicaid Best Price, as the demand is growing while supply is decreasing and these are exacerbating the problem. Dr. Bach said 1percent of specialty drugs make up 40percent of the spending, and that policies could be targeted to certain categories, such as diabetes and hepatitis B, as a way to start looking at specific solutions to these problems. He added that 340B is problematic because it distorts the commercial market, but he doesn't agree that bigger discounts drive up prices outside of the 340B program more broadly.

Sen. Bill Cassidy (R-LA) asked about international reference pricing and sole source drugs. Dr. Holtz-Eakin said he's not a fan at targeting certain drugs to get 30 percent cheaper, as US values access to new therapies. He added that alternative mechanisms such as identifying value and reimbursing for it are worth looking at. Regarding rebates, he said there is value to an entity like a PBM that collectively negotiates.

Sen. Maria Cantwell (D-WA) asked about market functions that give more discounts directly to consumers. Dr. Holtz-Eakin said the inability of Medicare to have a formulary means there is no advantage to negotiation and that it would mean a sea change to exclude access to some prescriptions. Dr. Miller said they could work through binding arbitration and the manufacturer could walk away if they didn't like the price, but it would be a game of chicken. Sen. Cantwell agreed more time should be spent on that question.

Sen. Thomas Carper (D-DE) asked where there is consensus among everyone. Dr. Holtz-Eakin said it is valuable to reform Part B incentives, explore back-end rebate system, and the vexing problem of specialty drugs. Dr. Miller agreed on changed to Part B and rebate schemes, along with going after anti-competitive activities, and said 340B should not be the top priority. When asked about which administration proposals are most promising or may not work, Dr. Miller said they should examine international price issue and protected classes in part D. Dr. Bach said the use of competitive acquisition, which removes doctors and hospitals from Part B economics, is a good part of Trump's proposed rule.

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