Government Reform to Reduce Drug Prices

Overview
Sharp increases in U.S. spending of prescription drugs are a subject of substantial political and
economic concern. Americans spend roughly $1 billion a day on prescription drugs. Medicare
1
Part D alone spends $193B annually on prescription drugs. In March, a Senate committee
reported that list prices for the 20 most-prescribed brand-name drugs for patients older than 65
years had increased 71% since 2012; the Consumer Price Index, by contrast, increased 9%
2
during that period. In a recent international comparison of health care costs, US pharmaceutical
3
prices were nearly double those of 10 other high-income countries. Anticipating continued
steady price markups and ever-higher launch prices, the Centers for Medicare & Medicaid
Services (CMS) has forecast that net spending for retail drugs will increase 6% each year
4
between 2017 and 2026, faster than any other major health care good or service.
Pharmaceutical prices put pressure on the government and consumer budgets. Since the advent
of the Medicare drug benefit in 2006, government entities have paid for approximately 40% of
5
the nation’s total retail prescription drug expenditure. They will also contribute to rising private
health insurance premiums, increasing costs for employers and workers.
In addition to their contribution to health care spending, increasing drug costs have important
clinical implications. Because cost-containment efforts require patients to pay higher copayments
for their medications, such increases can reduce the affordability of prescribed regimens and thus
6
patient adherence, leading to negative health outcomes.
High drug prices are not inherently bad. Certain expensive drug products are important clinical
7
breakthroughs. What is bad are prices that are difficult to justify in relation to their actual
contributions to patient outcomes.

1
“10 Essential Facts About Medicare and Medicaid Prescription Drug Spending.” ​Kaiser Family Foundation,
November 10, 2017.
2
US Senate Homeland Security and Governmental Affairs Committee, Minority Office. Manufactured crisis: how
devastating drug price increases are harming America’s seniors. https://www.hsgac.senate.gov/imo/media/doc
/Manufactured%20Crisis%20-%20How %20Devastating%20Drug%20Price%20Increases
%20Are%20Harming%20America's%20Seniors %20-%20Report.pdf. Published March 26, 2018. Accessed May 30,
2018
3
Papanicolas I, Woskie LR, Jha AK. Health care spending in the United States and other high-income countries.
JAMA. 2018;319(10):1024- 1039. doi:10.1001/jama.2018.1150
4
Cuckler GA, Sisko AM, Poisal JA, et al. National health expenditure projections, 2017-26: despite uncertainty,
fundamentals primarily drive spending​ g​ rowth. Health Aff (Millwood). 2018;37(3):482-492.
doi:10.1377/hlthaff.2017.1655
5
Department of Health and Human Services. Health, United States, 2015. http://www.cdc.gov
/nchs/data/hus/hus15.pdf#094. Published May 2016. Accessed July 13, 2016.
6
Shrank WH, Hoang T, Ettner SL, et al. The implications of choice: prescribing generic or preferred pharmaceuticals
improves medication adherence for chronic conditions. Arch Intern Med. 2006;166(3):332-337
7
For example, sofosbuvir (Sovaldi) was found to be a cost-effective treatment of hepatitis C infection even at its
2013 launch price of $84 000 per 12-week course in certain patient populations when viewed from a patient’s
lifetime horizon and a societal perspective. Najafzadeh M, Andersson K, Shrank WH, et al. Cost-effectiveness of
novel regimens for the treatment of hepatitis C virus. Ann Intern Med. 2015;162(6):407-419.
A key policy challenge is finding ways to restrain the prices of prescription drugs without
discouraging the development of new drugs that could have substantial health benefits.
Many solutions have focused on non-market-based solutions, such as government caps on prices,
8
mandates business practices, or further limits on consumer choice. These will be
counterproductive.
There are two marketplace-oriented approaches to solving this problem, mirroring the two causes
of high drug prices: promoting price negotiation during patent-protected exclusivity periods and
increasing non-patented competition. The Administration’s new Department of Health and
Human Services (HHS) “blueprint” to address and counteract high US prescription drug prices is
commendable in its endorsement of these market-based approaches, but further reforms –
including those previously endorsed by the President – are needed to fully ameliorate the
problem.
Patented: Enable Price Negotiation
One key reason drug prices remain high is that in most settings, consumers and insurers have
little power in price negotiations with manufacturers while the patents on their drugs are in
force.
Close the PBM Anti-Kickback safe harbor
Pharmacy benefit managers (PBMs) administer prescription drug programs for employers,
insurance companies and Medicare Part D. The three largest PBMs —CVS Caremark, OptumRx,
and Express Scripts—have a market share of 80% to 85%.
In the 1990s, PBMs became prominent intermediaries whose role would be to help employers or
insurers promote appropriate prescription drug use and decrease its cost. There have been some
recent isolated examples in which pharmacy benefit managers have done so for specific drugs
(most prominently for drugs treating hepatitis C or the pro-protein convertase subtilisin/kexin
type 9 inhibitors to reduce cholesterol levels).9
However, aggressive price negotiation is not the norm. This is not surprising because part of
pharmacy benefit managers’ annual fees are based on a given payer’s spending on drugs.
Although the details of such payments are rarely disclosed, when one of the largest pharmacy
benefit managers became a publicly traded entity, it was obliged to disclose its business model,
much of comes is a share of the rebates they negotiate with drug manufacturers so they have an
incentive to keep list prices high.10 That way, they can “bargain” for a discount more easily, but
the discounts they get are usually not disclosed to their customers and may not be passed on to
them.

8
Mandated transparency, RICO.
9
Pollack A. AbbVie deal heralds changed landscape for hepatitis drugs. New York Times.
http://www.nytimes.com/2014/12/22/business/pharmacy-deal-heralds-changed-landscape-for-hepatitis-drugs.ht
ml. Published December 22, 2014.
10
Martinez B. Merck kills Medco IPO plan, will spin off unit to holders. Wall Street Journal. http:
//www.wsj.com/articles/SB105103638029142500. Updated April 23, 2003.
Solution: To re-align incentives, the 2003 safe harbor that exempted pharmaceutical company
“rebates,” payments, or other inducements to PBMs from the Federal Anti-Kickback Statute
should be closed.
If this fails, the Federal Trade Commission (FTC) should take anti-trust action against the largest
PBMs, and should consider requiring PBMs to deliver rebates to the plans on whose behalf they
are acting.

Prohibit PBM gag clauses

Gag clauses prevent pharmacists from informing patients when a drug will be cheaper
out-of-pocket

Limit the reinsurance region to align market incentives to reduce prices for Medicare Part D
The reimbursement structure of Medicare Part D gives insurers and consumers little incentive to
use alternatives to high-priced drugs that might be just as efficacious as costlier drugs.
Medicare Part D prescription drug insurance, which covers 41 million people, includes
significant cost-sharing on the part of consumers for most beneficiaries: there is a $400
deductible and a 25 percent co-pay on annual spending of $3,700, and then the beneficiary enters
the “donut hole” where the person has to cover 100 percent of the costs. But after someone with
Medicare Part D spends $4,950 out of pocket, they pay only 5 percent of the costs, the insurer
pays 15 percent and the federal government bears the remaining 80 percent. Because the
government shields private insurers who sell the coverage from bearing much risk, this is called
the “reinsurance region.”
About one in every 10 Part D beneficiary spends enough to enter into the reinsurance region. The
share of spending covered in the reinsurance region has grown sharply over time: In 2007,
federal spending in this region accounted for about 25 percent of Part D per enrollee costs. In
2017, it was more than 55 percent. The increase reflects not an increase number of prescriptions,
but an increase in the average price of the drugs.
Solution: Congress should increase the insurer’s share of payments in the reinsurance region to
incentivize the private sector to negotiate for lower prices or use equally efficacious drugs.

Allow CMS to negotiate drug prices for Medicare Part D plans

Problem: Though Medicare accounts for 29% of the nation’s prescription drug expenditure,
federal law prevents it from leveraging its considerable purchasing power to secure lower drug
prices while requiring it to provide broad coverage, even though CMS sets or negotiates prices
for nearly all other Medicare goods and services.
Solution:
 - Congress should remove the restriction placed on CMS in the 2003 Medicare
Modernization Act to negotiate payments for drugs that don’t face much competition and
are covered by Part D.
o These negotiations should use the following framework to preserve the incentives
for innovation while allowing the government to limit the excessively high prices
that result from the absence of market forces:
▪ (1) The government should decide upon a base price that covers a
substantial portion of the research and development costs of the drug
manufacturer, and
▪ (2) negotiate a bonus addition to that price based on the benefits that the
new drug provides.

Enable Medicare and Medicaid to limit formularies to empower price negotiation

Problem: State Medicaid programs are generally required by law to cover all FDA-approved
drugs, even if a particular medication has alternatives that are safer, are more effective, or offer
greater economic value. However, Medicaid is also entitled to receive a rebate of at least 23.1%
of the average manufacturer price for most branded medications and is protected from price
increases exceeding inflation. In contrast, the Veterans Health Administration is entitled to a
rebate of at least 24% of the average price and also has broad authority to exclude products from
its formulary. As a result, particularly for drugs for which formulary alternatives are available, it
achieves additional discounts below what the Medicare drug program and state Medicaid plans
pay. Medicare requires insurers to cover all drugs in certain protected classes—nearly all cancer
drugs, for example—and at least two drugs for every other class, giving insurers little flexibility
to favor cheaper drugs.
Solution: Eliminate the requirement that Medicare cover all FDA-approved products in 6 drug
11
classes, and that Medicaid generally cover all FDA-approved products.
The threat of removal will enable the government programs to negotiate lower prices. Last year,
New York State passed legislation authorizing its Department of Health to use the threat of
removal of high-cost drugs from managed care Medicaid formularies to secure value-based,
supplemental rebates; coverage could still be provided for individual patients through an appeals
12
process. A similar program could be implemented nationally.

Non-Patented: Promote Competition

11
Although the blueprint supports Medicare drug benefit managers to negotiate lower drug prices for some
hospital-administered drugs and flexibility to manage high-priced drugs in protected classes such as oncology, the
blueprint does not support a similar policy for Medicaid.
12
Hwang TJ, Kesselheim AS, Sarpatwari A. Value-based pricing and state reform of prescription drug costs. JAMA.
2017;318(7):609-610. doi:10.1001/jama.2017.8255
Increase competition in the generics market
The only form of competition that consistently and substantially decreases prescription drug prices
occurs with the availability of generic drugs,whichemergeafter themonopoly periodends. The goal of
policy in this area should be to ensure that drug market exclusivity periods provide for fair return on
investment but do not indefinitely block availability of lower-cost generic drugs.

The generic drug market periodically experiences temporary shortages and massive price spikes.
The number of drug shortages increased from 154 to 456 between 2007 and 2012. In most cases,
the under-supplied drugs were generics, many of which were made by only a few manufacturers.
Because these manufacturers had significant market power, they were able to push up prices
when, for example, competitors were hit by manufacturing problems that lowered the quantities
they could produce. One obvious remedy for this problem is for new manufacturers to enter the
market when there are shortages. However, because drug companies must submit Abbreviated
New Drug Applications (ANDAs) to the Food and Drug Administration (FDA) to be able to sell
their generics, it takes time before new manufacturers can enter the market, resolve shortages,
and push prices back down.
Solution: The FDA should work with drug regulators in other countries to create a common
portal through which drug companies can easily submit applications to manufacture generic
drugs. This wouldn’t mean that the regulators would make joint decisions about whether to
approve an application, but would streamline the information gathering process so that more
drug companies would apply. The FDA should also work with high-quality foreign
regulators—such as those in Canada, the European Union, the United Kingdom, Japan, etc.—to
allow reciprocal drug approval for generics, meaning that if another country approved a generic
drug, that drug could be sold in the U.S. as well.

Encourage the development of not for-profit generic manufacturers

To addressing the shortage of manufacturers for low-volume generic drugs

Authorize importation of generic drugs from well-regulated markets

Take advantage of lower prices of brand-name and generic drugs in other countries
HHS could also authorize the importation of generic drugs from well-regulated pharmaceutical
markets outside the United States, since nearly all other federal programs and companies are
permitted to consider sources all over the world to get the best prices on what they buy

Maintain funding for the FDA Office of Generic

Application backlogs at the FDA Office of Generic Drugs have meant delays of 3-4 years before
a generic manufacturer can receive approval to make a drug not protected by any patents. After
the 2012 FDA Safety and Innovation Act required user fees to be paid by generic drug
manufacturers for such review, which provided more adequate funding for the office, the FDA
13
now reports being able to provide an initial response in approximately 15 months
More recently, the agency has prioritized reviews of generic drug applications when there are
fewer than 3 manufacturers of a product.

Prevent strategies that delay generic entry

Congress should pass stalled legislation to block specific strategies that brand-name
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manufacturers use to extend market exclusivity.
Compel sale of reference product samples to generic manufacturers so they can perform bioequivalence
testing
Manufacturers of brand-name drugs sometimes make it hard for generic drug manufacturers to
obtain samples of brand-name drugs, obstructing generic manufacturers’ efforts to duplicate
them. ​If a generic company cannot get samples of a brand-name drug, it cannot recreate it in
generic form, giving brand-name drug manufacturers an incentive to prevent generic companies
from getting samples. Drugs can face FDA-imposed “risk evaluation and mitigation strategies”
(REMS) that limit how they are distributed, and in other cases, drug companies can choose to
impose REMS limits on themselves. Such REMS limits can take many forms—for example, they
can require that physicians be trained to give the drug, patients be monitored while taking the
drug, and drugs be administered in specific settings.
Some drug companies claim that, because of these REMS, they cannot sell drug samples to
anyone but patients for whom they have been prescribed, even though the original legislation
laying out REMS regulation stated that it should not be used as an anti-competitive tool. The
legislation included no enforcement mechanism, however, so such practices persist.
Companies can patent these REMS systems, and then refuse to let generic drugs participate in
them. Since doctors do not want to need to become familiar with multiple REMS systems, this
can discourage the use of generic drugs, giving incumbents market power even when their drug
patents have already expired.
Solution: The FDA should make sure that brand-name and generic drugs can share REMS
systems and that drug companies cannot self-impose REMS restrictions, the FTC should
investigate REMS abuses, and makers of brand-name drugs should be required to sell samples of
their drugs to generic drug companies at market prices. This might require Congressional action.

13
Generic drug user fees: application review times declined, but FDA should develop a plan for administering its
unobligated user fees. US Government Accountability Office. https://www .gao.gov/assets/690/684950.pdf.
Published May 2017.
14
The blueprint calls only for further consideration of guidance on preventing the “gaming of regulatory
processes.”
Ban anticompetitive “pay for delay” tactics
Brand-name drug makers sometimes profit by paying a generic drug maker to stay out of the
market, denying consumers the benefits of competition.
Lawsuits between makers of brand-name drugs and makers of generics occur frequently. The
settlement often involves the generic maker paying a royalty to the maker who owns or controls
the relevant patent. But sometimes the maker of the brand-name drug agrees to pay the generic
maker to stay out of the market. “The generic is better off because it is sharing the brand’s profit;
the brand is better off because its patent remains in force so its profit is not entirely lost; and
consumers are worse off because they are denied the lower prices that result from generic entry,”
15
as a research report notes. The brand-name company has an incentive to make those payments
to maintain its monopoly.16
These tactics are especially damaging because the first company to submit an application to
make a generic version of a brand-name drug qualifies for six months of exclusivity, during
which no other generic can be approved for distribution. If a brand-name company pays the first
generic drug maker to delay entry, other generic drug makers are kept from entering as well.
Solution: The FTC should continue to challenge “pay for delay” tactics. Congress should pass
legislation stating that, if two companies collude this way, the brand-name maker will lose its
exclusivity and the generic won’t get first-mover exclusivity benefits. One way to identify
instances of “pay for delay” would be to look for patent cases settlements that involve a transfer
of money, and not just an agreement on when the generic can enter the market.

Provide greater flexibility for determining therapeutic equivalence and substitution

Entry of generic drugs into the market is often delayed. For pharmaceutical manufacturers,
“product life-cycle management” involves preventing generic competition and maintaining high
prices by extending a drug’s market exclusivity. This can be achieved by obtaining additional
patents on other aspects of a drug, including its coating, salt moiety, formulation, and method of
administration.17
The FDA could also exercise greater discretion to deem modified formulations (such as a capsule
instead of a pill) therapeutically equivalent, enabling automatic substitution by pharmacists,
18
which is currently not permitted.

15
Scott Morton and Boller
16
For example, in a patent challenge case related to the antibiotic ciprofloxacin (Cipro), the potential generic
manufacturer received upfront and quarterly payments totaling $398 million as part of the settlement and agreed
to wait until patent expiration to market its product.
17
For instance, the manufacturer of the proton-pump inhibitor omeprazole (Prilosec) received an additional patent
on the drug’s S-isomer, despite the absence of any compelling pharmacologic difference. This led to the creation of
esomeprazole (Nexium) as a newly branded product that was sold for $4 a pill, a 600% markup over the
over-the-counter version of omeprazole
18
The blueprint calls for greater flexibility for insurers to respond to price increases of drugs with single-source
generics in Medicare Part D, but does not address the possibility of expanded therapeutic equivalence
determinations.
Promote approval and widespread use of biosimilar drugs

Promulgate product-specific guidance on demonstrating biosimilarity

Brand-name biologic drug prices continue to rise because there are too few generic
competitors. ​Biologic drugs—or complex, large-molecule drugs grown from tissue—comprise
more than a quarter of prescription drug spending. Yet there are only five generic
biologics—called biosimilars—approved for use in the U.S. Europe has approved more than 20.
And no biosimilars have been granted “interchangeable” status by the FDA, which would allow
pharmacists to automatically substitute them for brand-name biologics when filling prescriptions,
as is currently often done with generics. The FDA does not plan to finalize its instructions on
what it takes to achieve “interchangeable” status until 2019, a task given to it by the 2010
Biologics Price Competition and Innovation Act.
Solution: The FDA should approve more biosimilars, and finalize its guidance on how
biosimilars can gain “interchangeable” status.

Current biosimilar naming practices make it hard for physicians and pharmacists to know which biologic
drugs have cheaper equivalent (generic) biosimilars
The FDA recently approved guidance that stated that biosimilar drugs must have four randomly
assigned letters appended to their names so that it is easy to tell them apart from the reference
drug, and thus easy to track in case there are problems. This may sound inconsequential, but
according to a research report, it “creates problems for bodies that administer directories of
drugs, those who design formularies, and those who wish to sort available drugs to find out what
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alternative treatments are available.” Such naming practices confuse doctors, pharmacists, and
consumers, and may make it less likely they will realize that the relevant biologic and biosimilar
are equivalent, “thereby preventing efficient substitution, slowing biosimilar market penetration,
and maintaining higher prices.”
Solution: The FDA should follow the recommendations of the World Health Organization and
give equivalent biologics and biosimilars the same root names.

19
The blueprint calls for educational outreach on biosimilars.
20
Scott Morton
Enable substitution of cheaper yet equivalent drugs
Generate and actively disseminate comparative- and cost-effectiveness evidence about drugs
To enhance brand-brand competition, the federal government, states, and payers should go
beyond the blueprint and sponsor the active dissemination of comparative-effectiveness evidence
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to physicians and patients, which can promote more evidence-based prescribing.

Curb government waste

Drug companies can profit from their “charitable” activities.
Drug companies get a tax deduction when they donate to outside patient assistance programs
(PAPs). In many cases, those programs cover the co-pay for eligible consumers who purchase
the donating drug company’s drug. This effectively leverages the drug company’s donation,
yielding a profit for the drug company from its charity. Drug companies can also form their own
PAPs, often structured as foundations, to which they donate drugs, gaining a tax deduction equal
to the cost of the drug plus half the market value. These drugs often go to individuals who would
not purchase them otherwise, but once started on a regimen, will continue on it even when the
PAP is no longer providing the drug.
Of the 15 highest-donating foundations in the U.S. in 2014, 10 of them were drug company
charities.
Solution: Congress should legislate that, if a charitable contribution leads to net profits for a
firm, it cannot count as a tax deduction. Additionally, in-kind donations to drug foundations
should either qualify for deductions equivalent to the drugs’ cost, or not qualify for any
deduction at all.

Drug manufacturers get “orphan drug” benefits in ways that lead to less competition without
commensurate societal benefits
The Orphan Drug Act of 1983 was passed to encourage drug manufacturers to create drugs for
markets too small to be profitable, particularly for diseases which affect few people. FDA can
award extra years of market exclusivity to these so-called “orphan drugs,” along with other
financial benefits and easier regulatory treatment. More than half of all new drugs are approved
for these orphan populations and over half of orphan approvals are first-in-class, meaning no
other approved treatment exists.
However, in some cases, the system is being abused. As a research report described it, “some
prescription medicines obtain orphan status years after they originally gained FDA approval to
treat a certain broad indication… Manufacturers can then run a clinical trial on a small off-label
22
use, prove effectiveness, gain orphan status, and raise price significantly.” While these
additional tests do have some societal value, such add-on approvals do not merit the strong
incentives that new orphan drugs deserve, particularly when drug companies repeatedly search
21
The blueprint does call for the inclusion of information on lower-cost alternatives in explanation of benefit
statements, but such notices usually go unread and unnoticed.
22
Scott Morton and Boller
for artificially narrow disease populations that they can serve to claim these benefits.
Additionally, orphan drug status relieves manufacturers from the requirement to sell at a discount
to hospitals and clinics serving lower income communities.
Solution: Congress should amend the Orphan Drug Act to award stronger benefits to new drugs
than to those already approved and to prevent drugs from repeatedly qualifying for orphan drug
exclusivity.