Christopher
Holt September 26, 2019
U.S. House of Representatives, Committee on
Education & Labor Subcommittee on Health, Employment, Labor, and Pensions
*The views expressed here are my own and not those of the American
Action Forum. I am indebted to my colleagues Douglas Holtz-Eakin, Tara O’Neill
Hayes, and Jonathan Keisling for their assistance.
Chairwoman Wilson, Ranking Member Walberg, and
members of the committee, thank you for the opportunity to testify before you
today regarding The Lower Drug Costs Now Act (H.R. 3) and drug costs broadly. I
hope to make three basic points.
·
Government negotiation
of drug prices, as outlined in H.R. 3, is not in any real sense a negotiation.
It amounts to federal price setting and would be a notable deviation from how
the federal government has traditionally engaged with markets and private
companies.
·
Proposals to tie drug
prices in the United States to those of other countries are price setting by
another name. Importing prices from other countries determined by their own
government intervention in the market is in effect importing those countries’
price-setting decisions—and potentially those countries’ access issues as well.
·
In the face of rising
demand, the only way to reduce prices without harming innovation or access to
treatments is to increase supply and heighten competition. There are actions
policymakers can take, and in some cases are taking, to incentivize lower
prices and more competition. Policymakers should be cautious in this
undertaking, however, as many proposals could do more harm than good.
Let me discuss each of these in turn.
Government Negotiation of Drug Prices
Title I of H.R. 3 would require the Secretary of
Health and Human Services (HHS) to enter into a binding negotiation process
with the manufacturers of at least 25 branded drugs each year—based on various
criteria that I will discuss below—regarding the maximum price Medicare or any
third party payer in the United States can be charged for that drug. The
premise is regularly repeated: Drugs, particularly those provided through the
Medicare Program including the Prescription Drug Program (Part D), are not
subject to any competitive pressures; rather, prices are dictated by
manufactures who can demand whatever they desire. But this premise is not an
accurate depiction of the reality.
Competition and Negotiation in Part D Under
Current Law
Direct negotiation by the Secretary of HHS is
indeed expressly forbidden in the Part D statute, a fact that certainly
contributes to some confusion over this issue. Yet the program nevertheless
sees aggressive negotiation over the prices of medications between Part D plan
sponsors and drug manufacturers. This competitive process is the key factor in
the program’s success to date. Today, Part D beneficiaries have access to 27
different plans, on average, enabling individuals to choose a plan that is
tailored to their needs.[i]
Because there are a number of plan options for beneficiaries, individual plans
have the ability to use preferential tiering strategies to negotiate discounts
for specific drugs. If a beneficiary requires or desires a specific medication
that is not on the preferred formulary (or covered at all) for one plan, they
can choose to sign up for a different plan that provides the medication at a
more desirable price.
If the government, however, were to seek to
negotiate the prices of specific drugs, the system would break down. Plans have
leverage to drive discounts because they can restrict or deny access to
specific medications or offer the medication in ways that make it more
desirable to their beneficiaries. For the federal government to undertake this
kind of negotiation, there would need to be a single federal formulary. In
other words, the Secretary would have to be willing to say no to many
treatments on behalf of all beneficiaries in order to drive discounts
system-wide. Beneficiaries’ choices would drop from 27 plans to 1. Further,
beneficiaries would no longer be able to shop for the plan that is best for
them; rather, they would have to simply hope the government was able to
negotiate a good deal for the drug(s) they need. Policymakers and the American public
have long been reticent to make that trade off. The Congressional Budget Office
(CBO) has repeatedly held that in absence of a willingness to deny coverage for
specific medications, the Secretary would not have the leverage necessary to
drive any savings to the Part D program.[ii]
In short, given these constraints, direct negotiation of drug prices by the
secretary would not work.
In contrast, the design of Part D has worked
incredibly well. As demonstrated in the following infographic, total program
expenditures came in far lower than initial CBO projections. Part D’s 10-year
cost (starting in 2006) was projected in 2004 to be $957.3 billion, after the
Medicare Modernization Act was passed but before the program started. By 2011,
the combination of five years of actual data and five years of projections
totaled $499.4 billion, for a cost under-run of $457.9 billion, or about 48
percent. The last CBO forecast for 2012 Part D spending made prior to
implementation was in 2005, and the projected 2012 spending in that year was
$126.8 billion. After the bids came in for 2006, the 2012 forecast was reduced
to $110.2 billion. In all but one of the next six years, the forecast for 2012
was reduced further. The actual amount was $55.0 billion – about 57
percent lower than the original pre-implementation forecast.[iii]
It is not uncommon for critics of the program to
cite the large number of name-brand drugs that came off patent during the early
years of the program—the so-called patent cliff—and the ensuing flood of
generic medications that entered the market as the reason the initial estimate
was so far off the mark. CBO was not caught flat-footed by this development,
however, as American Action Forum (AAF) President, and then-CBO Director,
Douglas Holtz-Eakin has recounted many times. CBO carefully studied the coming
deluge of generic treatments and accounted for that development in their
scoring of the program. What they failed to anticipate was how effectively the
competitive nature of Part D’s negotiations would drive generic uptake.
None of this is to suggest that Part D is not in
need of reforms. As AAF experts have previously written, Medicare Part D
reinsurance expenditures have grown rapidly for the federal government in
recent years. This growth has been driven by an increase in both the number of
beneficiaries reaching catastrophic coverage and the share of costs that each
of them incurs in the catastrophic phase. This rapid growth has caused reinsurance
expenditures to increase from less than one-third of the federal government’s
subsidy of the Part D program in 2007 to more than two-thirds of the subsidy in
2016. Increasing drug prices are one driver of this increase, but policies and
perverse financial incentives affecting the benefit design and insurers’
formulary decisions are also to blame. One way to realign incentives is a
restructuring of the program’s benefit design.
In 2018 AAF proposed to increase insurer liability in the
catastrophic phase to roughly 70 percent while simultaneously reducing the
government’s liability to 20 percent. Then move the drug manufacturer rebate
program from the coverage gap to the catastrophic phase to cover the remaining
costs. These changes will significantly increase the incentive for both
insurers and drug manufacturers to control costs. Further, AAF proposed
providing beneficiaries with true financial protection by imposing an
out-of-pocket cap. Plan sponsors and beneficiaries would also benefit from a
simplified benefit structure, since the coverage gap would be eliminated and
beneficiary co-insurance will be held steady at 25 percent above the deductible
until reaching the catastrophic threshold. Such reforms should encourage
behavioral changes that reduce overall program costs for all stakeholders.[iv]
Variations of this proposal have been included in both the Senate Finance
Committee’s drug pricing package and H.R. 3, though significant differences
exist between the specifics of the three versions.
Critique of Government Negotiation as Proposed
in H.R. 3
H.R. 3 seeks to bypass the problems with
government negotiation detailed above by empowering the Secretary to negotiate
on behalf of all third-party payers for a Maximum Fair Price (MFP), below which
Part D Plan sponsors and other payers in the group and individual markets could
presumably still negotiate better rates. In order to give the Secretary
leverage in these negotiations, without creating a national formulary, the
legislation proposes to enact draconian penalties—including a tax of up to 95
percent of the annual gross sales of a product when a manufacturer refuses to
enter into negotiation with the Secretary. Under the proposal, the Secretary
would choose a minimum of 25 drugs annually, from a list of 250 drugs that are
among the 125 highest cost drugs in Part D or Part B and either lack
competition as defined in the legislation or are insulin products. As a
starting point for the negotiation, the Secretary would establish a ceiling
price of 120 percent of the volume-weighted average price of the drug in
Australia, Canada, France, Germany, Japan, and the United Kingdom, or the
Average International Market (AIM) price. Once the negotiations conclude and
the new MFP is established, the manufacturer would be required to offer that
price to all payers, including private insurers in the group and individual
market. In other words, the federal government would set the price nationwide
for all payers. Manufacturers would be prohibited from increasing their price
above the rate of inflation. Additionally, payers could seek additional price
concessions—which could be particularly important in the commercial market
where some plans may well have negotiated lower rates for specific drugs than
the ultimate MFP—though it is unclear what incentives manufacturers would have
to go below the MFP. Finally, if a manufacturer were to charge more than the
MFP they would face civil penalties of 10 times the difference in the price
charged versus the MFP.
Three things seem worth noting. First, the
rhetoric of a voluntary-bilateral process seems facetious when any manufacturer
who declines to participate in the voluntary process is subject to the
aforementioned 95 percent tax on gross receipts. Additionally, the process of
reaching an agreement on an MFP cannot truly be said to be a negotiation when
the manufacturer is required to reach an agreement with the Secretary or else
be deemed not to have negotiated in good faith—and once again face the tax
penalty. Using rhetoric like “voluntary” or “negotiation” is not uncommon in
policy debates, but proponents of these policies should be forthright about
what it is they are advocating for. The process outlined in this legislation
appears to be neither voluntary nor a negotiation.
Second, the definition of a product lacking
competition is incomplete. Under H.R. 3, a drug is said to lack competition if
it is a brand-name drug and does not have a generic or biosimilar competitor.
While that phrasing may sound reasonable, it paints an incomplete picture of
competition in the drug market. Take the example of Sovaldi, Gilead’s
Hepatitis-C cure that was originally launched at $84,000 for a full course of
treatment. Sovaldi was a first ever cure for Hepatitis-C; previous treatments
sought to slow the disease’s progression, but they didn’t cure it and they were
expensive. Sovaldi was widely recognized as a cost-effective treatment,
improving quality of life for patients and lowering overall costs to the health
care system. But the upfront cost still caused understandable outrage, and
without competition and with enough demand, it remains true that however
reasonable Gilead’s price may have been, there was little downward pressure on
Gilead’s pricing decisions. Nevertheless, Sovaldi is not an example of market
failure. Rather, within two years, competitors Merck and AbbVie had also
introduced comparable Hepatitis-C treatments. And by February 2015, Gilead had
cut Sovaldi’s list price by 46 percent in the face of these competing products.
Under H.R. 3, however, Sovaldi would be considered to lack competition because
those other drugs are not generic copies. Rather, they are other brand-name
drugs that are similar in their curative effects. Thus, even though Sovaldi
faces competition from similar products, treating the same condition, for the
same population, resulting in demonstrable price concessions, H.R. 3 seems to
consider this situation a market failure.
Third, the scope of the proposal is broader than
it might first appear. While the Secretary is required to negotiate for 25
drugs annually, they can choose to negotiate for as many of the 250 eligible
drugs as they are capable of. Considering that the Food and Drug Administration
(FDA) approves an average of 33 novel drugs a year,[v]
it seems likely that eventually every single new drug would end up included in
this negotiation process. That is, every drug would have an absolute maximum
price, set by statute, of 120 percent of the AIM price, and all drugs would be
capped at the rate of inflation. Ultimately, there would be a government
mandated price for every drug, regardless of the population’s therapeutic needs
or the underlying bio-pharma economics.
Ultimately, at a very basic level, under H.R. 3,
the government would set the parameters for the negotiation. The government
would determine whether a manufacturer had complied with those parameters. And
the government would level substantial penalties on manufacturers who do not
comply with its price concession demands. The more one drills down, the clearer
it becomes that the process envisioned cannot be reasonably called a
negotiation. The power differential between the two parties is too dramatic.
The Average International Market Price
Returning to what is effectively H.R. 3’s price
ceiling, the AIM price, a deeper dive seems worthwhile. There is no doubt that
other countries pay less for medications than does the United States. There are
myriad reasons for this fact, but it remains a frustrating reality for
policymakers, the public, and most likely drug manufacturers themselves.
Further, there are, unfortunately, few easy solutions to this problem that are
without negative implications for U.S. patients.
H.R. 3 proposes to determine the AIM price for
targeted drugs based on a volume-weighted average price of the drugs in Australia,
Canada, France, Germany, Japan, and the United Kingdom. Manufacturers selected
for the negotiation process by the Secretary would then be limited in what they
could charge for the drug in question to no more than 120 percent of the AIM
price. In effect, the proposal imports foreign price controls as a baseline for
setting U.S. drug prices. While it is difficult at this juncture to evaluate
the full impact of this specific proposal, the Trump Administration has
proposed something similar, the International Price Index (IPI) which would cap
the price of some Part B drugs at 126 percent of an index of 14 countries,
including the countries selected for the AIM price. It is worth looking at some
of the implications of IPI to better understand the potential ramifications the
AIM price.
Impacts on Innovation
According to analysis by AAF’s Tara O’Neill
Hayes in comments to the Centers for Medicare and Medicaid Services (CMS) on
the IPI proposal, if the demo were applied to all Part B drugs, expenditures
for which now equal nearly $30 billion, revenues would be reduced approximately
$9 billion per year.[vi]
We have seen historically that reduced revenues do have significant impacts on
future investment and development decisions. Pharmaceutical development is an
inherently risky proposition, and substantial return on investment is necessary
to attract investor capital. To make the point, in 1986, research and
development spending by pharmaceutical firms in Europe exceeded that of the U.S.
by roughly 24 percent.[vii]
As European countries began restricting prices, investment by pharmaceutical
companies began to decline in those countries, while investment in drug
development in the U.S. expanded. Considering that the cost of successfully
bringing a drug to market has been estimated at approximately $2.87 billion,[viii]
the $9 billion in lost revenue per year potentially attributable to the IPI
proposal would be equivalent to the cost of three new medicines each year. In
the case of the AIM price, the figure would be set at 120 percent of the index,
rather than 126 percent in the IPI proposal, and the capped price would be
applied to all U.S. payers rather than limited to Medicare Part B, which
accounts for only 10 percent of all drug expenditures in the United States.[ix]
If the effect on drug development of the AIM price is similar to the impact of
the IPI, expanding those effects to 100 percent of the U.S. market would be the
equivalent of 30 fewer drugs a year, which is as previously noted nearly the
average number of new drugs approved by the FDA annually.
Access to Treatment
As further detailed in Haye’s comments to CMS,
in the United States, 89 percent of all 290 new medicines and 96 percent of the
82 new cancer medicines launched between 2011 and 2018 were available within
three months. In the 14 countries that CMS has identified for inclusion in the
IPI proposal, even after adjusting for population, only 51.5 percent of all new
medicines and 59.7 percent of new cancer drugs are available in these 14
countries within 17.4 months. Of the 54 new medicines launched during this
same period covered under Medicare Part B, only 28, on average, are available
in all 14 countries, and it took an average of 18 months for access to be
granted after their initial launch.[x]
Other countries that seek to limit drug spending through restrictive government
price controls have made the determination that lower spending is more
important than access to the range of innovative new drugs. Having the
government decide that Americans should not have access to new, innovative
treatments in a timely manner because the value of those treatments is not
worth the cost to tax payers, or in this case private payers as well, has long
been a bridge too far for both American patients and policymakers. Changing
that calculus would be a sea change. Markets provide an effective means for
determining value to consumers, one that policymakers should be reticent to
eliminate.
Lowering Drug Spending
In the face of rising demand, the only way to
reduce prices without harming innovation or access to treatments is to increase
supply and heighten competition. H.R. 3 does nothing to increase the supply of
drugs or the level of competition in the market. Effectively, H.R. 3 gives the
federal government the power to fix the price of specific medications at a
dollar figure determined by federal bureaucrats. This price fixing will
invariably have implications for both innovation and access to treatment. It is
often argued that manufacturers will continue to invest in R&D because,
after all, bringing new treatments to market is their business. It is necessary
to remember, however, that manufacturers depend on investment capital. Federal
policies that dramatically curtail return on investment will have a detrimental
effect on manufacturer’s ability to attract the capital necessary to continue
bringing new treatments to market. Instead policymakers should look to expand
supply and competition.
The FDA has helped in this undertaking by
approving a record number of generic drugs and biosimilars.[xi]
But other barriers to unlocking robust market competition remain.
Barriers to Entry
Manufacturers of innovator drugs rightly and
understandably want to protect their market share as long as possible. As
discussed, bringing a drug to market is a risky and expensive endeavor, and
investors need the promise of a formidable profit to be incentivized to make
that investment. And there can be no generic without first having the expensive
innovator drug. The needs of the investors to receive a return, however, must
be balanced with the needs of the consumers and taxpayers to afford those drugs
in order for the market system to remain sustainable. There are obvious
incentives for brand-name manufacturers to extend the length of their market
exclusivity through various means. Congress can scrutinize the opportunity to
create entry barriers, such as brand-name manufacturers allegedly abusing the REMS system and, if appropriate, legislate to
help even more generics come to market quickly.[xii]
(One such example is the CREATES Act.)
Legal Enforcement of Competition Policy
Another challenge is the case of single-source
generics. Often, once a generic drug has been on the market long enough, it
acquires enough of the market share that the brand-name manufacturer stops
producing its version of the drug. In many cases, the price reaches a low enough
point that other generic competitors also exit the market, leaving a sole
manufacturer. In some high-profile cases, we see what amounts to abuse of
monopoly power—that sole manufacturer taking advantage of its position and
dramatically increasing its price once there is no more competition and
consumers have no choice but to purchase the now high-priced drug. Congress
could look at incentives for second manufacturers and accelerating approval of
competitor products when such incidences arise.
Conclusion
It is also important to recognize that a shift
to tighter regulation of pharmaceutical pricing would involve tradeoffs. Other
countries that employ such approaches do not have timely access to the breadth
of pharmacological breakthroughs that U.S. patients enjoy. If the federal
government were to take a more directed approach to managing drug spend, such
as those proposed by H.R. 3, it would almost certainly lead to two types of
access issues. The first is simply a question of whether manufacturers would continue
to produce and sell targeted products at the government-established price. In
other countries that dictate prices, manufacturers have answered this question
negatively, leading to reduced access to treatments when compared with the
United States. Second, policies aimed specifically at drugs with particularly
high prices threaten to upend incentives for the most innovative new medical
treatments, which often by their very nature are more expensive to develop and
produce, and increasingly serve smaller patient populations. Federal
policymakers have historically been reticent to actively limit public program
beneficiaries’ access to the medications they and their doctors determine to be
best. H.R. 3 would potentially limit access for all U.S. patients.
[i] https://www.kff.org/medicare/press-release/people-on-medicare-will-be-able-to-choose-among-24-medicare-advantage-plans-and-27-medicare-part-d-drug-plans-on-average-during-the-open-enrollment-period-for-2019-new-analyses-find/
[iii] https://www.americanactionforum.org/research/competition-and-the-medicare-part-d-program/#_ftn7
[vi] https://www.americanactionforum.org/comments-for-record/comments-to-cms-on-proposed-international-pricing-index-for-medicare-part-b-drugs/
[ix] https://www.cms.gov/Research-Statistics-Data-and-Systems/Statistics-Trends-and-Reports/NationalHealthExpendData/NationalHealthAccountsHistorical.html
[x] “New Medicines Availability in IPI Countries vs
United States,” PhRMA analysis of IQVIA Analytics Link and FDA, EMA, and PMDA
data. December 18, 2018.
https://www.americanactionforum.org/testimony/testimony-on-the-lower-drug-costs-now-act-h-r-3/#ixzz60jXCYeSd
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