Promoting Competition to Lower Medicare Drug Prices

________________________________________

HEARING

BEFORE THE

SUBCOMMITTEE ON HEALTH

OF THE

COMMITTEE ON WAYS AND MEANS

U.S. HOUSE OF REPRESENTATIVES ONE HUNDRED SIXTEENTH CONGRESS

FIRST SESSION ________________________

March 7, 2019

__________________

Serial No. 116-9 __________________

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COMMITTEE ON WAYS AND MEANS

RICHARD E. NEAL, Massachusetts, Chairman JOHN LEWIS, Georgia LLOYD DOGGETT, Texas MIKE THOMPSON, California JOHN B. LARSON, Connecticut EARL BLUMENAUER, Oregon RON KIND, Wisconsin BILL PASCRELL, JR., New Jersey DANNY DAVIS, Illinois LINDA SÁNCHEZ, California BRIAN HIGGINS, New York TERRI SEWELL, Alabama SUZAN DELBENE, Washington JUDY CHU, California GWENDOLYNNE MOORE, Wisconsin DAN KILDEE, Michigan BRENDAN BOYLE, Pennsylvania DON BEYER, Virginia DWIGHT EVANS, Pennsylvania BRAD SCHNEIDER, Illinois TOM SUOZZI, New York JIMMY PANETTA, California STEPHANIE MURPHY, Florida JIMMY GOMEZ, California STEVEN HORSFORD, Nevada

KEVIN BRADY, Texas DEVIN NUNES, California VERN BUCHANAN, Florida ADRIAN SMITH, Nebraska KENNY MARCHANT, Texas TOM REED, New York MIKE KELLY, Pennsylvania GEORGE HOLDING, North Carolina JASON T. SMITH, Missouri TOM RICE, South Carolina DAVID SCHWEIKERT, Arizona JACKIE WALORSKI, Indiana DARIN LAHOOD, Illinois BRAD R. WENSTRUP, Ohio JODEY ARRINGTON, Texas DREW FERGUSON, Georgia RON ESTES, Kansas

BRANDON CASEY, Staff Director GARY J. ANDRES, Minority Chief Counsel

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COMMITTEE ON WAYS AND MEANS SUBCOMMITTEE ON HEALTH

LLOYD DOGGETT, Texas, Chairman MIKE THOMPSON, California RON KIND, Wisconsin EARL BLUMENAUER, Oregon BRIAN HIGGINS, New York TERRI SEWELL, Alabama JUDY CHU, California DWIGHT EVANS, Pennsylvania BRAD SCHNEIDER, Illinois JIMMY GOMEZ, California STEVEN HORSFORD, Nevada

DEVIN NUNES, California VERN BUCHANAN, Florida ADRIAN SMITH, Nebraska KENNY MARCHANT, Texas TOM REED, New York MIKE KELLY, Pennsylvania GEORGE HOLDING, North Carolina

AMY HALL, Staff Director GARY J. ANDRES, Minority Chief Counsel

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ADVISORY FROM THE COMMITTEE ON WAYS AND MEANS SUBCOMMITTEE ON HEALTH FOR IMMEDIATE RELEASE CONTACT: (202) 225-3943 February 28, 2019 No. HL-1

Chairman Doggett Announces Health Subcommittee Hearing on Promoting

Competition to Lower Medicare Drug Prices

House Ways and Means Health Subcommittee Chairman Lloyd Doggett announced today that the Subcommittee will hold a hearing, entitled “Promoting Competition to Lower Medicare Drug Prices” on Thursday, March 7, 2019, at 10:00 a.m. in room 1100 Longworth House Office Building. In view of the limited time available to hear witnesses, oral testimony at this hearing will be from invited witnesses only. However, any individual or organization not scheduled for an oral appearance may submit a written statement for consideration by the Committee and for inclusion in the printed record of the hearing. DETAILS FOR SUBMISSION OF WRITTEN COMMENTS:

Please Note: Any person(s) and/or organization(s) wishing to submit written comments for the hearing record can do so here: WMdem.submission@mail.house.gov.

Please ATTACH your submission as a Word document, in compliance with the formatting requirements listed below, by the close of business on Thursday, March 21, 2019.

For questions, or if you encounter technical problems, please call (202) 225-3625.

FORMATTING REQUIREMENTS:

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The Committee relies on electronic submissions for printing the official hearing record. As always, submissions will be included in the record according to the discretion of the Committee. The Committee will not alter the content of your submission, but reserves the right to format it according to guidelines. Any submission provided to the Committee by a witness, any materials submitted for the printed record, and any written comments in response to a request for written comments must conform to the guidelines listed below. Any submission not in compliance with these guidelines will not be printed, but will be maintained in the Committee files for review and use by the Committee.

All submissions and supplementary materials must be submitted in a single document via email, provided in Word format and must not exceed a total of 10 pages. Witnesses and submitters are advised that the Committee relies on electronic submissions for printing the official hearing record.

All submissions must include a list of all clients, persons and/or organizations on whose behalf the witness appears. The name, company, address, telephone, and fax numbers of each witness must be included in the body of the email. Please exclude any personal identifiable information in the attached submission.

Failure to follow the formatting requirements may result in the exclusion of a submission. All submissions for the record are final.

The Committee seeks to make its facilities accessible to persons with disabilities. If you require special accommodations, please call (202) 225-3625 in advance of the event (four business days’ notice is requested). Questions regarding special accommodation needs in general (including availability of Committee materials in alternative formats) may be directed to the Committee as noted above.

Note: All Committee advisories are available at http://www.waysandmeans.house.gov/

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WITNESSES Robin Feldman Director of the Institute for Innovation Law, UC Hastings School of Law Witness Statement Ameet Sarpatwari Assistant Director of the Program on Regulation, Therapeutics, and Law PORTAL, Harvard Medical School Witness Statement Amy Kapczynski Co-Director of the Global Health Justice Partnership, Yale Law School Witness statement Douglas Holtz-Easkin President, American Action Forum Witness statement Frederick Isasi Executive Director, Families USA Witness statement

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PROMOTING COMPETITION TO LOWER MEDICARE DRUG PRICES

Thursday, March 7, 2019

House of Representatives,

Subcommittee on Health,

Committee on Ways and Means,

Washington, D.C.

The Subcommittee met, pursuant to notice, at 10:02 a.m., in Room 1100,

Longworth House Office Building, Hon. Lloyd Doggett [Chairman of the Subcommittee]

presiding.

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*Chairman Doggett. Our Subcommittee on Health will come to order. I want to

start off by welcoming all of the new members that are on our health subcommittee, and I

look forward to working with Ranking Member Devin Nunes. I think we can have a

productive beginning to this Congress.

I have some brief opening remarks, and then I know Mr. Nunes will have some.

We are very fortunate to have the panel that we do this morning to continue the exploration

of prescription drug issues that we talked about only a couple of weeks ago here in the full

committee.

I was encouraged at that hearing to hear a number of comments from colleagues

from both parties about the medication problems that each of us has been hearing from our

constituents about. Today we have a special focus on the role that competition can play in

bringing down soaring drug prices and on the multiple barriers, deliberately constructed by

the industry, to prevent competition from working effectively.

One such solution is ending the pay-for-delay settlements where brand-name and

generic manufacturers agree to anticompetitive deals that keep competition off the market.

I have introduced legislation last session and again this time to prohibit this kind of

behavior and to try to encourage more competition. I hope that we can find common

ground on.

Our witnesses last month and again today offer more evidence of the reality that so

many Americans confront, where essential medicines are there but they cannot afford

them. And they either get those medicines with great difficulty, by jeopardizing their

financial health, or they do without the medicines.

Prices for the most common prescribed brand drugs under Medicare Part D have

soared up to 10 times the rate of inflation. And this is a problem not only for the

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individuals but for American taxpayers. The Medicare trustees expect drug spending to

nearly double over the next decade.

Unfortunately, there is no miracle cure for price gouging. While as our witnesses

explain, Congress should be engaged in a number of actions, I believe some of these are

within our committee's jurisdiction that we will hear about today, and some of them are

informative but a little outside of our jurisdiction and require working with colleagues on

other committees.

I believe that the most important of those measures is to use bargaining power to

lower prices for those who rely on Medicare, much the same way that the Veterans

Administration has done for years on behalf of our veterans.

When over 15 years ago the Medicare prescription drug program, which was voted

on in this committee, was narrowly forced through the House in the middle of the night

after considerable arm-twisting, one of the provisions that was inserted was a notable

section that provided a complete prohibition against Medicare negotiation of drug prices.

In 2007, every Democrat and 24 Republicans approved legislation to repeal that

costly limitation, but not surprisingly, it was blocked in the Senate. Medicare negotiation

is also the approach that Candidate Trump recommended to save hundreds of billions of

dollars through what he called "bidding.'' and he pointed out the reason that we do not do

this is "because of the drug companies.''

Importantly, that 2007 bill lacked a mechanism for addressing what happens when

negotiation is unsuccessful. The most common way of addressing that situation for a

manufacturer who will not negotiate is to simply refuse to cover the drug, to exclude it

from the list of approved drugs, or what is called the formulary.

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That of course produces claims that a lifesaving medication is being denied to

someone who is relying on Medicare, and that is basically the argument that fills the

multicolored ads in every Capitol Hill newspaper almost daily against the Trump

administration's pending Part D proposal. So I have advanced an alternative to that, which

we will hear more about today, as a way of assuring that every drug is available, but some

competition can hopefully bring the price down.

Unwilling to yield their monopoly power, we also hear a number of scare tactics

that insist there is no way to have reasonable prices and still encourage essential

innovation. Our witnesses today can respond to those arguments. I think all of us want to

encourage cures and treatments for dread diseases before we get them ourselves, or a

member of our family or a loved one or a friend, despite the immense lobbying power,

despite government-funded research, despite monopoly profits.

Big Pharma, I believe, has actually not done a very good job on innovating and

providing the medications that we need. It is seldom worried with a competitor, and so

monopolies and oligopolies are not known for their innovative spirit. They are not known

for that quality in any industry.

Over the last decade, 74 percent of all pharmaceutical patent applications were not

for new, innovative cures but were for modifying existing drugs, which often took the form

of what is referred to as "evergreening'' simply to protect monopoly pricing, not to provide

new drugs.

And taxpayers have been funding a significant amount of this research. From 2010

to 2016, every single newly approved drug relied on taxpayer-funded research. The

taxpayer pays for the research; the government approves a monopoly; and unlike other

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modern countries, the pharmaceutical company faces little or no restraint on the prices that

it charges.

During the last year, Big Pharma has changed its approach from denying that there

is any problem at all to pointing the finger at everyone else in the supply chain. Strangely,

I have heard Secretary Azar, who I hope will be before our full committee over the budget

in coming months, claim that Medicare negotiation is not necessary because Part D

insurers are already so adept at negotiating -- and then turn around and blame price hikes

on the prescription benefit managers who do the negotiating.

We do need to examine the practices of these PBMs, and they may well be

contributing to some of the high prices experienced by consumers across the country. But

without addressing the manufacturer who sets the price, I believe we will still have too

many people having to cut their pills when prices are not cut.

I believe we have a responsibility to ensure that patients come first, and that it is

their health and livelihoods that are the only things that are nonnegotiable. Unaffordability

and inaccessibility are not the unavoidable side effects of innovation; they are the result of

unrestrained monopoly power.

I thank all of our witnesses for joining us today to examine these issues, and

welcome the comments of our ranking member, Mr. Nunes.

*Mr. Nunes. Thank you, Mr. Chairman, and thank you to the witnesses for being

here today.

A few weeks ago we sat in this room and started a good conversation about the

broken incentives in the Medicare program. We committed to work together on a

bipartisan basis to lower out-of-pocket healthcare costs for Americans by cracking down

on overpriced drugs, empowering patients to choose the most affordable medicines for

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them, and eliminating the incentives in Medicare that reward bad actors and lead to higher

prices.

However, I am worried that some of the ideas advocated by my friends on the other

side of the aisle may go too far. We have not yet had a hearing on the Democrats' radical

plan to outlaw the private insurance Americans get at work, but we do have an opportunity

today to talk about one of the planks in the plan: the confiscation of intellectual property if

a manufacturer rejects the best offer of a Washington, D.C. bureaucrat.

That sort of policy, the seizure of medicines by an unhappy government agent, is

best left to socialist regimes, not here in the United States of America. Yet there are over a

hundred members of the majority party that do support it. It is a little shocking, and I want

to be clear that Republicans oppose this "control and confiscate'' agenda. Republicans are

fighting to ensure Americans have more choices, not less, and that the pipeline of

innovation for cures continues.

There is no silver bullet addressing the bad actors in the pharmaceutical industry,

but I think we can work to get the incentives right. And I pose three questions today, the

first being, why do we have a system that rewards manufacturers who charge the highest

price in a drug class? Second, why do we have a system that puts the taxpayers on the

hook for bailing out insurance plans? And third, why do we have a system that makes

cancer patients pay double for chemo based on where they get their treatment?

I hope our witnesses will be able to spend their time today answering these three

questions, not walking us through unprecedented policies like compulsory licensing, which

will squash hopes for future medical breakthroughs. I am hopeful that we can reach a

bipartisan agreement and bipartisan legislation that can pass the House and the Senate and

get signed into law by President Trump.

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Now I yield back the balance of my time.

*Chairman Doggett. Again, thank you so very much for your comments, and I

believe you set up the opportunity for a considerable debate on those issues. And to hear

from our distinguished panel, I would like to welcome first Robin Feldman. She is the

Arthur J. Goldberg Distinguished Professor of Law and director of Center for Innovation

Law at the University of California Hastings. She is a leading expert in access to

medicines and innovation law.

And I think I will just introduce each of you as you come up for consideration. So

Professor Feldman, if you would proceed, please.

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STATEMENT OF ROBIN FELDMAN, DIRECTOR OF THE INSTITUTE FOR

INNOVATION LAW, UC HASTINGS SCHOOL OF LAW

*Ms. Feldman. Thank you, Chairman Doggett and esteemed members of the

committee. I am honored to be here today to address an issue that is causing real pain for

patients and for those who are trying to help them.

Prescription drug prices are soaring. In the 5 years between 2011 and 2015,

Medicare spending for brand-name drugs rose 62 percent. And that is even taking into

account rebates. That is a hefty rise. It does not take sophisticated economics to know that

at some point, these price increases are unsustainable. And it is tough to tell patients in

Chicago to pay thousands of dollars for a drug when their cousin in Toronto pays 30.

So what is going on? Well, quite simply, our regulatory and payment systems

allow drug companies to drive patients into more expensive drugs while preventing

cheaper drugs from gaining a foothold in the market. At the center lie the intermediaries

known as PBMs who negotiate drug prices. Drug companies can ensure that their drugs

receive favorable treatment by providing lucrative rebate spreads and other types of

payments to the PBMs. Now, the terms of those deals are kept secret and staunchly

protected.

How do drug companies obtain the power for these secret deals? Using patents and

other rights, companies amass volume positions, and then they create contract terms that

will hobble generic when the generics finally do get to market. To do this, drug companies

have become masters at repeatedly extending their protections. In fact, I have seen in my

own research that drug companies are largely recycling and repurposing drugs these days

rather than inventing new ones. So more than three-quarters of the drugs associated with

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new patents are not new drugs coming on the market. They are existing ones. Thus,

instead of innovation, we are seeing secondary patents piled onto old drugs over and over

again.

When a company makes a secondary change to a drug, such as adjusting the drug's

dosage, the R&D investment is often far less than is required for the drug's initial

development. And in addition, the change may not mean much from a therapeutic

standpoint. So we may be lavishing rewards without getting the innovation that we

desperately need.

Now, deciding what a drug should cost is tricky. For example, the value of giving

my child a polio vaccine may be a million dollars per dose because it would be worth that

to avoid polio for my child. However, our healthcare system would collapse if we paid a

million dollars for every vaccination. If value is open-ended and has no sense of total

upper boundaries, we could value ourselves into budget oblivion.

Tax provisions also feed the patent and rebate games. Drug companies can donate

their inventory, earning special enhanced-value charitable deductions. In fact, such

programs represent 10 of the largest 15 charitable foundations in the United States as of

2014. That is a large chunk of our deductions.

Tax-deductible donations to patent advocacy groups also help push for policies that

increase drug prices. Advertising to consumers, which is supported by the business tax

deduction, also drives patients into higher-priced drugs. Advertising instructs patients,

"Tell your doctor to make sure the prescription says no generic substitution.''

With so many citizens upset and often scared about the cost of their medicines, the

time is ripe for change. It will require a partnership between Congress and regulatory

agencies, and it will require changes both large and small. So with this in mind, I

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respectfully suggest policy-makers consider the following changes to improve our Nation's

pharmaceutical markets.

First, close the tax loopholes that allow drug companies to essentially deduct the

cost of lobbying and other strategic behaviors.

Second, to minimize the ability of brand-name drug companies to keep refreshing

protection, implement a one-and-done principle in which a drug would receive only one

period of exclusivity. The choice of one could be left entirely in the hands of the Pharma

company -- perhaps one of their many patents, their orphan drug designation, their data

exclusivity -- and they can make the election at the time of the FDA approval.

Third, transparency is critical. Markets, like gardens, grow best in the sun, and

they wither without information. We should not put shackles around two of our greatest

powers, an open and free market and an informed citizenry.

And finally, the government funds an extraordinary amount of scientific research.

The NIH, through the addition of key provisions in grants, could improve consumer access

to things developed with that research.

*Chairman Doggett. Thank you.

*Ms. Feldman. Thank you very much.

[The prepared statement of Ms. Feldman follows:]

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*Chairman Doggett. Thank you very much for your testimony.

Dr. Ameet Sarpatwari -- close -- is a physician and an attorney. He is an instructor

in medicine and the assistant director of the Program on Regulation, Therapeutics, and the

Law at Harvard Medical School. He has focused on prescription drug development,

approval, and process, and related public health outcomes.

Doctor, thank you for coming down to be with us today.

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STATEMENT OF AMEET SARPATWARI, ASSISTANT DIRECTOR OF THE

PROGRAM ON REGULATION, THERAPEUTICS, AND LAW, PORTAL, HARVARD

MEDICAL SCHOOL

*Dr. Sarpatwari. Thank you for the opportunity to testify. Chairman Doggett,

Ranking Member Nunes, and members of the committee, my name is Ameet Sarpatwari. I

am an epidemiologist and lawyer in the Division of Pharmacoepidemiology and

Pharmacoeconomics at Brigham and Women's Hospital in Boston, and an instructor in

medicine at Harvard Medical School, where I help lead the Program on Regulation,

Therapeutics, and Law. I will focus my introductory remarks on the scope and origins of

the program, and the merits of some proposed solutions within the jurisdiction of the

committee.

Between 2011 and 2015, net spending on prescription drugs in Medicare Part B,

Medicare Part D, and Medicaid increased 156 percent, 59 percent, and 55 percent

respectively. Such growth has been driven by higher launch prices and markups on

existing brand-name drugs, which have greatly impacted patients.

In an October 2018 national survey, one-third of respondents stated that they

skipped a prescription fill in the past year due to cost. The pharmaceutical industry has

attempted to deflect responsibility for these developments, casting blame on PBMs for

allegedly not passing on rebates to payers or patients. However, drug manufacturers have

vigorously fought attempts to shed light on net prices, while reaping record profits.

At the same time, the pharmaceutical industry has argued that high prices are

necessary for innovation. Yet among the largest drug manufacturers, the average

proportion of revenues that go to research and development is less than 20 percent, about

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half the proportion that goes to marketing and administration. Additionally, more than half

of the most transformative drugs over the past three decades originated from public sector

research institutions.

The real reason we are seeing surging drug prices is because we allow

pharmaceutical companies to charge whatever the market will bear while also hindering

payers' negotiating ability and permitting strategies that undercut competition. Several

solutions have been proposed to address this problem.

In February, the administration issued a proposed rule to remove the safe harbor for

prescription drug rebates. The pharmaceutical industry is strongly championing the

proposal. However, its projected impact is dependent on questionable assumptions. While

it is true that PBMs have engaged in troubling business practices, they have also used

rebates to negotiate lower drug prices in many cases.

It is doubtful that absent other structural reforms, plan sponsors would be able to

extract similar savings. Rather than seeking to eliminate PBMs, a better solution would be

to set reasonable rules for their practices so that they can continue to contribute positive

inputs into the system such as promoting adherence and use of generics.

Greater use of value-based pricing, arriving at drugs' prices based on rigorous,

transparent, and replicable analysis of their benefits, would also be helpful, providing cost

savings while also incentivizing the pursuit of transformative innovation.

In promoting value-based pricing, however, it is critical to distinguish approaches

that claim its mantle but do not tie prices to its clinical benefit. For example, the

pharmaceutical industry has championed outcomes-based contracting, yet such contracts

often offer illusory savings. For example, a manufacturer can promise a refund in the

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event a patient does not respond to a drug, but price the drug such that the refund would be

largely symbolic.

Another promising reform would be to enhance the negotiating ability of public

payers. Importantly, it is the ability of the Veterans Administration to set its own

formulary and not cover drugs that do not offer patients added benefit that gives it greater

leverage than Medicare in securing reasonable prices.

The Medicare Negotiation and Competitive Licensing Act offers one possible way

forward. It would instruct the Secretary of the Department of Health and Human Services

to negotiate drug prices on behalf of Medicare Part D plans based in part on comparative

clinical and cost effectiveness so that a reasonable price can be reached that reflects the

value of the product, with the possibility of competitive licensing in the event that a

compromise cannot be reached for essential medicines.

Americans have identified taking action to lower drug prices as one of the most

important priorities for the new Congress. Their concern is understandable. We pay the

highest prices in the world, which are often not connected to the value the drugs provide.

Implementation of sensible reforms to increase the negotiating ability of payers and to

promote greater competition in the marketplace can help make drugs more affordable

without jeopardizing tomorrow's cures.

Thank you. I look forward to answering your questions.

[The prepared statement of Dr. Sarpatwari follows:]

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*Chairman Doggett. Thank you for your testimony.

Amy Kapczynski is a professor of law at Yale, and is co-director of the Global

Health Justice Partnership there. She is one of the Nation's leading experts on intellectual

property law and access to medicines.

Thank you for being here.

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STATEMENT OF AMY KAPCZYNSKI, CO-DIRECTOR OF THE GLOBAL HEALTH

JUSTICE PARTNERSHIP, YALE LAW SCHOOL

*Ms. Kapczynski. Chairman Doggett, Ranking Member Nunes, and members of

the committee, my name is Amy Kapczynski. I am a professor of law at Yale Law School,

and I am very honored to be here with you today.

I will stress two things in my comments. First, the core of the high drug price

problem is simple: Companies enjoy monopoly rights over drugs, and these are easily

abused. Second, there are viable solutions that can both bring prices down and protect and

even improve incentives to innovate.

Today drugs are regularly launched at prices in the hundreds of thousands of

dollars. Older drugs are subject to repeated price hikes, with no new innovation at all. The

price of recombinant insulin, for example, has tripled in the last 10 years, with no changes.

In New Haven, Connecticut, where I live, one in four people with diabetes are now

skipping doses or stretching or not filling prescriptions, risking serious health

consequences and even death, because they cannot afford their medicines.

At its core, the problem is actually quite simple. Originator drug companies enjoy

monopoly rights in the form of patents and other kinds of market exclusivity, and we

expect monopolies to do exactly what drug companies are doing. They set inefficiently

high prices and they increase prices wherever they can profit.

The industry has also become expert in extending their monopolies -- for example,

through collusive pay-for-delay settlements and by creating patent thickets, obtaining

patents that will eventually be invalidated as junk but that can give them several more

years of monopoly power.

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Fortunately, there are solutions. Congress can bring prices down and protect or

even improve incentives to innovate. One important way is by giving the government the

authority to negotiate fair prices. The Medicare Part D program, for example, pays 30

percent of all the retail prescriptions in the country, but is now barred from using its

purchasing power to bring prices down.

Congress should permit negotiation, and at the same time set out criteria to ensure

that companies are paid a fair price. What is a fair price? It needs to reflect what we want.

So we should pay well for what we value. So, for example, we should pay more for more

effective drugs, and we should take into account the costs and the risks associated with

drug development. This will help ensure that companies receive a fair return and that the

benefits of innovation are widely shared.

You will hear pharmaceutical companies say that negotiation will undermine drug

innovation. But industry spends twice on marketing, on average, what it spends on R&D,

and it benefits greatly from a lot of government funding and innovation.

Speaking more technically, the elasticity of innovation in the industry is relatively

low, so the impact of price reductions on innovation would likely be small in comparison

to the benefits. Indeed, government negotiation can benefit innovation.

So how can it do that? If we ensure we pay more for drugs that provide more value

to patients, companies will have more incentives to focus on developing those drugs.

Today, bringing a fourth or fifth "me, too'' drug to market, or upping your advertising

budget, may provide more attractive returns to companies than investing in breakthrough

research. Government negotiation can change that dynamic.

So what happens if companies refuse a fair price? There has to be a backstop to

ensure that companies come to the table. There are many different ways to do this, but the

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most promising way is to address the monopoly problem. If the company will not take a

fair price, the government can buy generic drugs instead, paying the patent-holding

company a royalty.

This approach is sometimes criticized by industry as "breaking patents.'' This is

misleading. Existing law already permits the Federal Government and its contractors to

buy products without regard to patents as long as reasonable compensation is afforded. In

fact, it has never been possible, throughout the long history of the United States, to stop the

Federal Government from using a patent.

There is a good reason, and that reason is to avoid the risk of what economists call

"holdup.'' Think about it like this. If a railroad is being designed, the last property holder

on the line can demand far more than their land is worth. That is the monopoly holdup

problem. And the government therefore has a right to take land, subject to fair

compensation. The government patent use power has a similar logic. It prevents holdup

and it gives fair compensation.

Importantly, competitive licensing also gives companies a strong incentive to

negotiate. So it is unlikely to be used often, precisely because it is an effective way to get

companies to the table.

Others have mentioned other important remedies as well, such as bills that would

end REMS abuse and pay for delay settlements. These, too, are very important steps that

can help bring prices down, and I urge you to consider them.

I welcome your questions.

[The prepared statement of Ms. Kapczynski follows:]

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*Chairman Doggett. Thank you so much for being here.

Dr. Holtz-Eakin, welcome back, a frequent presenter on a range of subjects to our

committee. He is President of the American Action Forum and an economic policy expert.

Thank you very much.

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STATEMENT OF DOUGLAS HOLTZ-EAKIN, AMERICAN ACTION FORUM

*Mr. Holtz-Eakin. Chairman Doggett, Ranking Member Nunes, members of the

committee, it is a privilege to be here today to discuss this important issue. Let me make

three points, and then I look forward to the chance to answer your questions.

The first point is that the conditions are ripe for upward pressure on drug prices.

We have -- in the United States, 60 percent of adults have a chronic condition, and 40

percent have two or more. Those are folks who will need medications. Eighty-six percent

of our healthcare spending is devoted to patients with chronic conditions, and that number

is 98 percent in the Medicare program, so there is going to be, as the population ages,

rising demand for drugs.

The supply side of the equation is pretty tight. It is very expensive to develop

drugs; it costs, on average, about $2.9 billion and takes, on average, 15 years. There are a

lot of misses in the drug development process. One in 1,000 formulas actually enters into

a clinical trial, and only 8 percent of those ultimately receive FDA approval. So it is a

system riddled with attempts at innovation that failed -- that is the nature of science -- and

leads to the potential for a tight supply. And any time you have a chronic price problem,

the problem really resides on the supply side in adequate supply and enhanced

competition. So those are the places to look.

The second main point that I want to make is that there are lots of different

measures of price or costs. There are list prices by manufacturers, net prices by -- list

prices net of the rebates provided by those manufacturers. There is the out-of-pocket cost

faced by consumers, beneficiaries in the Part D program. Some people point toward total

spending as the issue, or spending per capita, or the drug share in spending. And the

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reason to list all these is that if you look at the data, they tell different stories. Over the

past 6 years, for example, list prices rose between 7 and 13-1/2 percent per year, while net

prices rose between 1.9 and 4.7 percent, and out-of-pockets were flat at about $30, on

average. So you get a very different picture.

What I would recommend that the committee focus on is the two clear places where

we see upward pressure at the moment, and that is in specialty drugs, largely oncology

drugs, and in some sole source generics, where manufacturers have raised prices

dramatically for no apparent economic reason. Those are good places to focus.

And then thinking about the policy issues, I would urge the committee to think

about looking at existing policies that might actually be causing some of these problems as

a first step. For example, in my testimony, we mention the 340B program. The 340B

program was created to offset the unintended consequences of Medicaid best price, which

made it impossible to donate drugs to very poor Americans.

Unfortunately, the 340B program has strong incentives for consolidation of health

markets, as some research we have done has indicated, and it is very poorly targeted. It is

not obvious that those benefits are going to individuals who are in need of help affording

their prescription drugs. That would be a good thing for the committee to focus on.

It is also important to focus on places to enhance supply. Approvals at the FDA are

in fact a crucial part of this, and I think in recent years the FDA has done a much better job

at approving generics and making sure there was a second and third brand-name drug in a

class to produce some competition. The Hep C drugs are the best example of that.

But there are some additional places you could look. I would echo the call to look

closely at REMS abuse as a barrier to entry, and make sure that that system is not being

used to stop competition. More generically, I think competition policy in this industry

29

suggests that everyone ought to think hard about making sure that we have adequate

policing of competition.

And then the last would be to sharpen the incentives in negotiating in the Part D

program. The Part D program has been a tremendous success. It is our best-functioning

entitlement program. But over the years, some of the incentives for negotiation have been

diminished, and in my testimony, I outline a set of reforms that would put insurers and

pharma liable for the costs in the catastrophic region.

This would diminish the incentives for pharma to develop high-priced drugs, and it

would increase the incentives for the insurers to negotiate strongly for those drugs. That

would also slow the growth of the most expensive taxpayer exposure in Part D, which has

been the reinsurance program.

So I am pleased that the committee is looking at these issues. I am delighted for

the chance to be here today. And I look forward to answering your questions.

[The prepared statement of Dr. Holtz-Eakin follows:]

30

*Chairman Doggett. Thank you.

Frederick Isasi is the executive director of Families USA, one of the leading

national voices on healthcare generally, representing healthcare consumers and working to

ensure the best care is accessible and affordable to all. Thank you for being here.

31

STATEMENT OF FREDERICK ISASI, EXECUTIVE DIRECTOR, FAMILIES USA

*Mr. Isasi. Thank you very much, Chairman Doggett, Ranking Member Nunes,

and members of the committee. Thank you for the opportunity to speak with you today.

As you mentioned, I am the executive director of Families USA. We are a nonpartisan

nonprofit that has been working for nearly 40 years and has served as one of the leading

national voices for healthcare consumers here in D.C., but also in all the States around the

country. And thank you for holding this hearing.

We are meeting at an extraordinary time for our Nation's families. Despite the

progress we have made to reduce the number of uninsured, families across the Nation

struggle with healthcare costs, which continue to rise much faster than their paychecks.

Did you realize that almost half of Americans, 44 percent report not going to see

their doctors when they need to because they cannot afford it. And then about a third

report not taking prescription drugs because they cannot afford them. Of these, more than

two-thirds are choosing either to cut their pills in half or skip dosages, terrible gambles.

Think about the life that these Americans are living. Year after year, decade after decade,

this problem of healthcare costs, and in particular, prescription drug costs, is only growing

more acute.

In last fall's congressional elections, the American people sent a strong signal to all

of you. An astounding 82 percent of Republicans and 90 percent of Democrats said taking

action to lower prescription drugs should be a top priority for this Congress. This is a

bipartisan problem, and it needs a bipartisan solution.

And despite all the complex legal and economic discussions you have just heard

and we will engage in now, this is a very, very simple problem. Congress created a system

32

that provides a government-granted exclusivity to drug makers. Over time, the focus of

the industry has shifted, from creating innovative drugs that can save lives to doubling

down on high-powered lawyers to help them find loopholes, sue competitors, and

generally abuse the spirit in which Federal prescription drug laws were written. It is time

for Congress to reexamine and rewrite patent exclusivity laws to stamp out these abuses.

Short of this, other bold and important options are being considered, and we at

Families USA are strong supporters of the Medicare negotiation bill authored by Chairman

Doggett. The bill would allow Medicare to join other payers in negotiating prescription

drugs.

And we particularly like that it has a competitive licensing component, which is

really about providing a strong incentive for manufacturers to show up and negotiate in

good faith while protecting patient access. And of course, we are open to other proposals

that will get manufacturers to show up and negotiate in good faith.

I would like to use the rest of my remarks, my opening remarks, to tell you a story

about one Medicare beneficiary. It is a story about one person, but it really does tell the

struggle of millions of others.

Her name is Catherine, and she is from Wheeling, Illinois. She worked hard. She

had a career as a secretary. And then in her late 50s, she developed a cough. It was not

going away. How many of us have had a similar problem? Within three months of going

to the doctor for the cough, however, she was told that she had a rare lung disorder, and

that without a lung transplant she would not live to see the end of the year. And then her

condition worsened.

Her doctors prepared her to die, and Catherine prepared herself to die. And then

she got the call: A new lung had been found. She was going to live. This all happened

33

about 5 years ago, this incredible gift and a new chance at life. But unfortunately, her

experience has turned into something quite different.

Catherine takes 36 pills every day, including an anti-rejection pill and pain

medications. Each year, the cost of her medication puts her right into the Medicare Part D

donut hole. Catherine has to ration her medications to make them last until her benefits are

renewed at the beginning of each year. She spends an astounding $1,000 a month on her

medications, which is exactly half of her income.

Think about what this means. Catherine, after living through the experience of

almost dying, receiving a lung transplant, fighting for her life, is left to spend half of her

income to pay for these medications. You will not be surprised to know that Catherine has

sold her home. She has moved in with her parents. Her mom is 86, and her dad just

passed away at 89.

She lives an extremely frugal life. But as long as her drug costs escalate year over

year, she moves closer and closer to financial ruin and deep poverty. At the end of each

year, she finds herself thousands of dollars short. She lives each day with the anxiety of

wondering how she will find the money to pay for the drugs keeping her alive. That is the

life that Catherine lives with amazing grace and courage, as do so many other Americans.

Despite being one of the wealthiest countries in the world, despite spending two or

three times more than the rest of the world on healthcare, this is the life we give to

Catherine and so many Americans struggling with drug costs. Congress created this

problem, and it is time for action.

Thank you again for holding this hearing.

[The prepared statement of Mr. Isasi follows:]

34

*Chairman Doggett. Thank you very much.

I will defer my questions for a while and ask Mr. Thompson to begin.

*Mr. Thompson. Thank you, Mr. Chairman. Thank you for holding this hearing.

Thank you to all the witnesses for being here. It is a very important issue for all of us.

And every one of us on this dais have heard from our constituents about the ridiculous cost

of prescription drugs, and many of those are Medicare folks. So to look at the Part D

proposal is just, I think, a great place to start.

And in the Congress in this session, there are a number of proposals dealing with

the issue of the high prices of pharmaceuticals -- licensing to requiring negotiation,

arbitration systems, incentives to encourage participation in arbitration, tax penalties for

drug makers who do not negotiate, and relying on international reference prices to figure

this out.

So we all agree that we need to do something. But we need to make sure that the

avenue that we pursue is the most transparent way, and it is done without cutting access to

the needed drugs that our constituents rely on. And we do not want to stifle innovation. I

think we probably all agree on that.

And then in a district such as mine, and there are other folks on the dais from rural

areas, but rural areas suffer, as do underserved areas, for a whole additional set of issues.

And I know that the PBMs imposing direct and indirect remuneration fees has really hurt

my rural folks, and I suspect it is having the same impact in other underserved areas.

So I will start, Ms. Feldman, with you. What should we do about improving

transparency in this particular area?

*Ms. Feldman. You mentioned the rural areas and the independent pharmacists. In

many cases, those independent pharmacists are the best friend that a patient can have in

35

this process, and they are being mercilessly squeezed by the PBMs. In claw-back system

that you alluded to, PBMs pull back payments after the pharmacist filled the prescription

for the drug, and often the pharmacist cannot make any money.

Now, if you are a bit PBM and you own a big pharmacy, you are moving money

from one pocket to the other. But if you are an independent pharmacist, it can drive you

out of business. It is a terrible problem, particularly in rural America.

I do think that the focus has to be in a couple of areas. One, transparency: We

need to shine the light on the deals that are being made so that the market can work its

magic. And second, we need to rein in all of the protections that companies are piling on,

one after another.

*Mr. Thompson. And Dr. Sarpatwari, can you tell me what impact this rebate

bundling and pay-for-delay is having? And what sort of redress should we figure out for

that?

*Dr. Sarpatwari. Sure thing. My pleasure. I will start with the pay-for-delay. This

is a particular issue in terms of new, very innovate biologics that are coming on the market.

And there you have got a situation in which you have, as of February, I think, it was

something like 17 new biologics approved, but only seven -- biosimilars approved, but

only seven on the market.

The reason is that there were patent settlements in these cases. And the question is,

these patent settlements benefit the parties, but they do not benefit the public. And what is

essentially going on is we have, as a republic, said that we want to foster innovation, and

you should have a certain period of exclusivity as a reward for your innovation.

But these pay-for-delay settlements are extending that artificially. And there is

legislation pending in Congress that would force disclosure of those agreements to actually

36

be public. And in those cases, that would enable better assessment of whether or not they

are actually anticompetitive.

And then in the case of rebates, I think we need to be careful in general about

saying rebates are necessarily a bad thing. We have PBMs that have questionable business

practices, but we also know that these PBMs have great purchasing power and are able to

extract significant savings off of the price of drugs.

What we need to do now is regulate their practices to ensure that those rebates

actually are passed on to the payer and to the patient. So removing them from the system,

I think, without some solution is not going to be helpful. They can actually play quite a

good role in the system.

*Mr. Thompson. Thank you.

*Chairman Doggett. Thank you very much.

Mr. Nunes?

*Mr. Nunes. Thank you, Mr. Chairman.

Mr. Holtz-Eakin, I want to talk a little bit about the experience in the UK. You are

probably familiar with the drug Spinraza, a breakthrough treatment for spinal muscular

atrophy, especially for children. It is one of the most expensive drugs in the world. You

are familiar with it?

*Mr. Holtz-Eakin. I am.

*Mr. Nunes. Okay. Recently, a group of doctors in the UK wrote an open letter

about this crisis in The Guardian. Mr. Chairman, I would like to submit this letter for the

record.

*Chairman Doggett. Without objection.

37

*Mr. Nunes. Thank you, Mr. Chairman. The doctors write, "As physicians, there

is nothing more frustrating than knowing a medicine that can help your patients is out of

reach. For parents, hope is taken away, causing unimaginable heartbreak. As the

condition progresses, children are unable to regain lost function. Delay in treatment leads

to the worst outcome, early death.''

Mr. Holtz-Eakin, if we change Part D to have a single formulary that considers the

budgetary impact of providing coverage such as some of the bills that are before this

committee, can something like this happen to seniors in Medicare?

*Mr. Holtz-Eakin. Yes. I think that is a real concern. Right now the average

senior has a choice of 27 different plans with different formularies. Moving to a single

formulary runs the risk of having drugs excluded and the inability to access them.

*Mr. Nunes. Thank you, Mr. Holtz-Eakin. And under the compulsory licensing

provision in the "Medicare-for-All'' plan, what would happen if the Federal Government

said it would pay for a cure, but at a price the manufacturer felt was inadequate as defined

in the bill. Does the manufacturer have any recourse?

*Mr. Holtz-Eakin. No, not really. And I am deeply concerned at the possibility of

the compulsory licensing provisions. They undercut the basic innovation that has been the

hallmark of American medical science, and they are inconsistent with our approaches

elsewhere, where we in trade negotiations work very hard to provide protection for

intellectual property, and then this would reverse that at home.

*Mr. Nunes. So what is happening in the UK? Just nobody is able to get the drug

now unless you pay for it privately?

*Mr. Holtz-Eakin. It is a problem of access, yes. And it is not unique to that drug

or to the United Kingdom. I think most members are familiar with the administration's

38

Part B international price index proposal. One of the things that has not been highlighted

in that proposal is that of the 27 drugs they looked at, only 11 are available in every

country. People in other countries do not have access to the most recent therapies the way

the U.S. consumers do.

*Mr. Nunes. What are some of those drugs?

*Mr. Holtz-Eakin. I do not know off the top of my head. I would be happy to get

the list.

*Mr. Nunes. It is 11 of -- you said --

*Mr. Holtz-Eakin. Eleven of the 27 are available.

*Mr. Nunes. Of the 27.

*Mr. Holtz-Eakin. Sixteen are not uniformly available.

*Mr. Nunes. Well, thank you, Mr. Holtz-Eakin.

With that, Mr. Chairman, I yield back.

*Chairman Doggett. Thank you very much.

Mr. Kind?

*Mr. Kind. Thank you, Mr. Chairman. And thank you for teeing up such an

important hearing. I think all of us when we go home to our respective districts hear these

stories. It always comes up, whether it is in the grocery store, in my listening sessions,

stories as, Mr. Isasi, you testified to, about that woman and what she is going through with

her life.

So clearly in Houston we have got a problem. And it would behoove, I think, the

pharmaceutical industry to be stepping up with some constructive ideas on how they can

play an active role and be helpful in making sure that all of our pamphlets have access to

affordable yet quality-effective drugs in their lives. And I think that is the goal.

39

But I think all of us here on the dais too would agree that we are dealing with an

industry that does take considerable risk. I think, Ms. Kapczynski, there are certainly

nuggets of truth to what Dr. Holtz-Eakin testified to, that they invest money. They take the

risk. There are a lot of failures. They are entitled to a decent return on investment on the

drugs that they do hit on.

And yet trying to strike that right balance, I think, is really the challenge that this

committee has to wrestle with. We do not want to stifle the innovation. We also do not

want to see excessive profit-taking, too, where it is not necessary.

Is there any further guidance that you can provide us on how we can strike that

right balance between encouraging the risk and the R&D that needs to go into it, and the

failures, versus the high prices that our constituents are facing?

*Ms. Kapczynski. So I think the most important thing is to specify -- for example,

in Part D negotiating authority -- that you want to pay well for drugs that perform well,

that you want to provide a good return on investment for companies, and that you want

companies to be incentivized to provide drugs that really provide value to the American

public. Right?

And part of what is so beneficial about that is, as others have mentioned, right now

the system that we have encourages Pharma to tweak old drugs and to do a lot of

innovation that does not actually provide a lot of value to patients. And so what we want is

a system that provides more value when companies provide more value.

*Mr. Kind. Yes. Where are we on that? Obviously, under the Affordable Care

Act, we are trying to drive to value, to quality, the outcomes, and pay accordingly. How

are we doing on that front when it comes to the drugs, the prescription drugs, that patients

40

are using? Are we developing good quality measures to know what are viable and

effective drugs and which ones are not?

*Ms. Kapczynski. Well, I think part of the problem, for example, under Medicare

Part D is that we do not have a negotiating authority that can really look consistently at that

problem across drugs. And so to some degree, the PBMs are thinking about those issues,

but not in a systematic way, in a way that I think really is what we need.

*Mr. Kind. Dr. Holtz-Eakin, welcome back. You have made so many appearances

before our committee right now, I think you are probably entitled to a free coffee mug or

something. But welcome back.

*Mr. Holtz-Eakin. Thank you.

*Mr. Kind. Let me ask you something because the Government Accountability

Office just conducted a study back in 2017 in which they found, and I quote, "Between

2013 and 2017, the five largest U.S.-based drug companies spent 70 percent more on

marketing and administrative costs than on R&D. Furthermore, between 2006 and 2015,

the 25 largest pharmaceutical companies experienced an average sale revenue increase by

$241 billion, while only increasing their R&D budget by roughly $7 billion.''

Is there any reason to dispute these figures?

*Mr. Holtz-Eakin. Not that I know, no.

*Mr. Kind. Ms. Kapczynski, back to you again. Is that a problem, that there is so

much going into marketing and advertising versus R&D?

*Ms. Kapczynski. I think it is very clearly a sign of a problem. Right? What we

want is we want companies focusing their energy on real breakthrough innovations. And

the system that we have now is not really adequately encouraging that, and I think that is

something that can really be addressed as part of this process.

41

*Mr. Kind. Ms. Feldman, let me ask you because you mentioned in your testimony

the problem with the extension of patent protection. But do we also need to be looking at

the secondary patent system, as far as things that need to be cleaned up and corrected, so it

is not so easy for these patents to be extended unjustifiably or unnecessarily?

*Ms. Feldman. Absolutely. We want innovation. We want drug companies to go

back to the bench, and we want to give them a good reward when they invent something.

That is what we are trying to drive in this system. The secondary patents we have no are

absolutely distorting the incentives, and they are distorting the innovation we are getting.

*Mr. Kind. Mr. Isasi, let me quickly ask you, I am astounded by talking to doctors

who claim that their patients walk into their office demanding a brand-name drug because

of a commercial they just saw on TV. I would not feel confident doing that because what

do I know about what drugs I need and that? But yet it seems to be a powerful influence in

how drugs are being prescribed.

Would you agree that there is a problem as far as patients driving the demand for

these drugs, especially the brand-name and the cost that they are paying?

*Mr. Isasi. Absolutely. And we know the U.S. is one of the few countries that

allows that kind of direct-to-consumer advertising for this very reason. What we should do

is let medical science determine what is the right drug for that patient. And it is a really

serious problem that patients are being advertised to, and also they do not understand the

cost associated with the charge.

And so one proposal that the administration has made is to force manufacturers to

actually put that price in the advertisement. We support that. It is just one small step in

the right direction.

*Mr. Kind. Thank you. Thank you, Mr. Chairman.

42

*Chairman Doggett. Thank you, Mr. Kind.

Mr. Buchanan?

*Mr. Buchanan. Thank you, Mr. Chairman. And thank you, this is a very

important hearing. And I want to thank all of our witnesses as well.

As someone who has been in business 30 years, one thing I understand is free

markets and competition drives down lower prices. I look at generic drugs. I was looking

through there. We had more competition. We had lower prices. It is very simple to me in

terms of that. It is more complex as an industry, but as you give more transparency,

increase the pressure for competition, less monopolies, that is where I think we need to go.

I will also just add, I do a lot of town halls. I have done maybe 80 of them over the

years. And one person stood up on a little different aspect of healthcare, but mentioned to

me that they had lost their business and their insurance, and his wife had a bad back. She

needed an MRI. They really could not afford it.

He asked the doctor how much; he said $2200. He said, "Doc, I do not have

insurance. Is there any way I can get a better price?'' This is what he is telling me. This is

his story. He said, "If you do it for cash, I can do it for $1800.'' Then he says, "Well, I will

call you back. Let me check with my wife. I am sure we are going to do it.''

So he said, on the way home he thought, “well, he just dropped the prices 20

percent. I am going to dig around and just make a few phone calls that might be worth it.”

And he got it done for $400. So my point is, we need more transparency. We need more

competition.

So Dr. Holtz-Eakin, let me ask you: How do we create this idea of less monopolies

in a sense -- not that they all are because in the generics, it seems like there is an area that

43

there is an opportunity to do more in that space -- but how do we increase the competition

in the marketplace? Because without that, it is going to go the other way at some point.

*Mr. Holtz-Eakin. Well, I agree. And that was the essence of my written remarks,

was that we have to focus on enhanced supply and competition. As I noted, there are

really two places where we have seen sharp increases in drug prices, and one is in these

sole-source generics, where companies buy a drug and suddenly raise the price by

1000 percent. That strikes me as a place to focus, where that is not the kind of competition

we want. We want better performance out of something that is not even on patent.

And then the other area, which is the toughest, is this issue of on-patent specialty

drugs, where we have seen the largest increases recently. And they are certainly having

the FDA approve as many drugs as quickly as possible. As I mentioned, the Hep C drug,

Sovaldi, came in. A lot of furor about that. Once the competitors arrived, the prices came

down. There is no substitute for more competition in that case.

And then the other is to compete on the right grounds. And there has been a lot of

discussion of competing on value. I want to point out that this is more complicated, often,

than people appreciate. In the end, this is all about beneficiaries in Part D. It is about their

lives, the therapies they need, and the way they best take those therapies.

So what looks like a valueless change in delivery system a lot of the patient

advocacy groups want.

*Mr. Buchanan. Doctor, let me go on. Compulsory licensing, I just wanted to get

your thought. You have commented on the theft of intellectual properties.

But I want to not spend a ton of time on that. You can comment on it. But I

wanted to talk about the idea of reasonable compensation. How are you going to get, if we

are going to have the government involved, the reasonable compensation? What is that?

44

And then just in my mind, the sense of litigation or negotiation could take years, maybe, to

come up with a number that makes some sense. What are your thoughts?

*Mr. Holtz-Eakin. In most settings, reasonable compensation is an arm's length

transaction market price. And this is a situation where that does not exist. So I think you

are going to end up with a very complicated -- probably involves years of negotiation

and/or litigation to come up with that number.

*Mr. Buchanan. And then let me also add, I have probably more seniors -- I think I

am in the top four or five -- as anybody in the country. I am in Sarasota, Florida. In that

region, obviously, drugs and things are important.

When I do town halls, one of the big things that always comes up -- your thoughts

on it -- is the question that, why does the government not negotiate, ideally, and have a

little bit of a heavier hand in terms of pricing? The fact, when you look at what we are

spending on healthcare in general and you add it all up, it is probably close to a trillion

dollars in terms of Medicare and Medicaid and all the other things. What would you say to

the seniors in Florida?

*Mr. Holtz-Eakin. From the time the Medicare Modernization Act passed, when I

was CBO director, to the present, this comes up again and again. And the same facts

remain, which is that to get a better price, you need two things. You need to be able to

bring volume, have beneficiaries, and you need to have a formulary so that you can give

preferred treatment to the drug you are negotiating with.

The Secretary of HHS has lots of beneficiaries but no formulary. And I think it

would be a remarkable step in the United States to exclude access to drugs by creating a

single national formulary, and I do not think we are prepared to go there.

*Mr. Buchanan. Thank you, and I yield back.

45

*Chairman Doggett. Thank you.

Mr. Higgins?

*Mr. Higgins. Thank you, Mr. Chairman, and thank you for holding this important

hearing on this critical issue, and for your leadership throughout, to focus on the leverage

that the Federal Government has to negotiate down the cost of healthcare and up the

quality, including as it relates to prescription drugs.

My colleague, Ron Kind, focused in on the issue of industry advertising, the

pharmaceutical industry. They spent about $6 billion doing that. It is about a 10 percent

increase each year. And if you watch pharmaceutical ads on television, they do not target

consumers based on science. They target consumers based on emotion.

In most of the ads that you see, the people are typically good-looking. They are

happy. And it always happens to be sunny. And that is an emotional appeal directly to

consumers, bypassing the medical professionals that ought to be making these decisions.

The United States is one of only two countries that allows for direct-to-consumer

pharmaceutical advertising.

The Federal Government is the largest purchaser of healthcare, and the fastest-

growing expense of healthcare is the cost of prescription drugs. I have one thought and

two questions for each of you.

If you have a $1 trillion industry, the drug costs under Medicare are increasing

between 11 and 14 percent a year. But given the number of Medicare beneficiaries that

have the pharmaceutical benefit, the drug benefit, Medicare Part D, it is a lot of money but

it is a lot of leverage.

46

And I think that the Federal Government consistently fails to use the market

leverage of Medicare to drive down the costs of pharmaceuticals. We have been talking

about this issue for 20 years, and drug prices are at a 20-year high today.

So I have two questions. The first is: Is the pharmaceutical drug industry involved

in a conspiracy to fix drug prices in the United States? And if we were to use the market

leverage that we have under Medicare, by what percentage do you believe that we could

reduce the cost of drugs?

I also want to say that the idea of a conspiracy, a price-fixing conspiracy, is not

mine. According to Humana, a conspiracy led by an unprecedented increase of

2400 percent for drugs, 1000 percent, and 600 percent, 47 of the Attorneys General in

different States have joined this lawsuit alleging a conspiracy.

So each one of you, if you would respond about the conspiracy, yes or no, and by

what percent do you believe, using that leverage, we can cut drug prices in America?

Ms. Feldman?

*Ms. Feldman. Yes, sir. The name of the game in bargaining is bargaining power.

*Mr. Higgins. Right.

*Ms. Feldman. The bigger buyer you are, the more power and the more you can

drive that bargain. It has worked better in Medicaid than in Medicare. Why should the

government not help with negotiating and still leave room for folks on their own to see if

they can negotiate something better?

*Mr. Higgins. Yes or --

*Ms. Feldman. That is what I would do if I had that power. You wanted a yes.

*Mr. Higgins. A yes. And what percentage do you believe that, if we fully use that

marketing power, we could reduce the cost of prescription drugs?

47

*Ms. Feldman. That I am afraid I would have to think some more about. I do not

have a crystal ball. But it would be sufficient.

*Chairman Doggett. Doctor? Doctor, you are up.

*Dr. Sarpatwari. So to answer the question, should the government use its leverage

in a better way, yes, definitely. And I think that that could have a meaningful effect on

reducing drug spending.

Again, a percentage, I probably would not be able to offer. But I think the real

question is, you could reduce it as much as you want. But how much can you reduce it as

much as you want. But how much can you reduce it without affecting meaningful

innovation? And I think that you could reduce it substantially without affecting

meaningful innovation.

The second question as to conspiracy, I am not going to go into the legal question

of conspiracy.

*Mr. Higgins. Professor?

*Ms. Kapczynski. I would say with respect to the percent, one thing you might do

is look at Europe. Europe, on average, many countries there pay half what we pay. You

could also look at the VA, which pays substantially less, the figure there, something on the

order of 40 percent for many drugs and so forth. So those might give you some indication,

if that is helpful.

*Mr. Higgins. It is not. And I will tell you, I expected more, to be truthful. You

are all here, admonishing us to do more about this issue, and you have a certain degree of

leverage yourselves as experts in the area. And I have read figures that say that under the

VA, there is a 40 percent discount by using the market leverage of some 30 million

beneficiaries.

48

Again, this whole idea of a conspiracy is not something that I have brought up. It is

a lawsuit by Humana. It is joined by 47 Attorneys General. There is ample evidence to

support this. And we need the expertise of your industry to help us help the American

people because they --

*Chairman Doggett. Thank you very much. I believe --

*Mr. Higgins. And I will yield back.

*Chairman Doggett. -- your time is up.

Mr. Smith?

*Mr. Smith. Thank you, Mr. Chairman, and certainly thank you to our panel. I

think the discussions we are having today are productive, and I hope that we can come up

with some solutions. As mentioned before, this probably does need to be bipartisan in

nature.

I think that when you look at Medicare Part D, that competition between plans has

been a key factor in its success -- ask a lot of seniors -- allowing premiums to stay

relatively flat over the life of the program, and for the Part D program to come in

significantly under initial cost estimates.

It is interesting that the term "conspiracy'' has been brought up. I think that when

you look at this entire industry, it is heavily regulated and some of the providers in this

industry have probably figured out how to leverage some policy against some other policy.

And ultimately, though, we need to be very careful, very careful, that the government does

not just play into this and say that a single formulary is the answer. That is not what is

consumer-friendly. I do not think that is economically friendly. I do not think it is

scientifically friendly. And certainly I do not think it encourages more innovation.

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When you look at the most innovative aspects of the industry, that competitive

drive to come up with a better product, is worthwhile to serve consumers far better than the

heavy hand of the Federal Government coming in and think that, for example, a single

formulary is the answer.

So I hope that we can encourage competition, and consumer choices along the way.

I am a consumer of an EpiPen. Quite honestly, before the prices spiked on the EpiPen, I

was not really looking at the price to begin with. And then it got worse. And I think,

looking at that case and some others, that the longer a product has been around, the more

expensive it has become -- that to me is suspect, and let's look at that.

So Dr. Holtz-Eakin, what would you say causes such significant increases in price

on drugs which have already recovered their costs of research and development, in your

view?

*Mr. Holtz-Eakin. It is simply a case of inadequate competition. If you have got

something that is off-patent, a sole source generic, that is just exploiting market power,

pure and simple. And in some cases it strikes me, at least, as an abuse of market power. I

am concerned about that, and --

*Mr. Smith. So is there a role for government?

*Mr. Holtz-Eakin. -- I have an easy solution there. But I think monitoring the

effect of competition, and in every case making sure there are no barriers to entry. We

want to have an adequate supply.

*Mr. Smith. Take the EpiPen. It is purchased in the hope if not needing it. So it is

a little different type of a scenario, where a lot of people need to buy it whether they need

to use it immediately or not. So is there a role for government to encourage more

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competition? Can other panelists suggest what might be done to encourage more

competition?

*Ms. Feldman. So, sir, may I respond to the --

*Mr. Smith. Hold on. Let me --

*Ms. Feldman. Thank you.

*Mr. Smith. -- let Dr. Holtz-Eakin.

*Mr. Holtz-Eakin. You cannot force people in. That is a step too far. But you

want to make sure there are no barriers to entry, whether those are legal barriers like

patents, but that is the brand rule. What is really remarkable about these episodes is this

are non-branded drugs that have one manufacturer, and you want to always make sure that

people are competing effectively. And there is a role for competition policy here, whether

it is healthcare or any other area.

*Chairman Doggett. Okay. Ms. Feldman?

*Ms. Feldman. Thank you. Markets need to be fair, transparent, and efficient.

Government cannot be everywhere at once. You need the eyes of the market.

*Mr. Smith. Do you think we should avoid a single formulary?

*Ms. Feldman. I think that we have had a lot of success in this country with

allowing competition, both in terms of plans and in terms of drugs. I think that is a good

approach for our country when we can. But we need transparency because when the deals

are hidden in the back room, the market is blind. Competition cannot reign.

*Ms. Kapczynski. If I might, EpiPens have device patents on them. Right? So

that is not an example, actually, of competition. That is an example of the opposite.

Right? And I think these are some of the kinds of patents that Professor Feldman has been

talking about, where you can take all -- what is in it is old.

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But companies find way to pile on patents and to then interrupt competition, and

then hike prices over time. And we have seen that time and time again. And it is

obviously a problem. I think some of it goes back to thinking seriously, not just about

competition where there are not patents but thinking about bringing leverage over

circumstances where there are, where those are being abused.

*Mr. Smith. Okay. Thank you. My time is expired. Thank you, Mr. Chair.

*Chairman Doggett. Thank you.

And Ms. Sewell?

*Ms. Sewell. Thank you, Chairman Doggett. Thanks for hosting today's hearing

on the role of competition in playing and driving down drug costs. No one should die

because they cannot afford the best medicine and treatment available on the market. But

today there are too many Americans whose ability to obtain the medication they need to

lead a productive life is determined by their socioeconomic status. I represent a

constituency with some of the poorest health outcomes in amend. My constituents feel that

the impact of policies in Washington immediately affect their ability to purchase. And this

is especially true when it comes to health outcomes.

I will tell you the story of an Alabama single woman who is an insulin-dependent

diabetic. Like many diabetics, it has taken her years to find the right insulin mix. Years

ago when she was working as a home health nurse, she was on the insulin that her

insurance would cover. But it would make her sick and cause her to have seizures.

She now has a higher-paying job, so she has chosen to take an intermediate-acting

insulin even though it is much more expensive and her insurance will not cover it. She

takes it because it does not make her sick and it has fewer side effects.

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This week she found out that that insulin would cost her $1200 a month before her

deductible is reached. Fortunately, she was able to find a savings card from the

manufacturer yesterday that trimmed down her costs to $700. It is still very, very

expensive.

No one should be subject to less mobility or poor side effects because the drugs

they find or that they need are financially out of their reach. Many of my constituents are

insulin-dependent diabetics, and diabetes is one of those expensive, chronic conditions for

patients. Insulin is just one of the costs associated with it.

As representative of a constituency with high rates of chronic illness, I know full

well that we have got to focus on prevention to truly bring down costs across the system.

We must avoid any policy that would lead to increased hospitalization, decreased

productivity, or poorer outcomes. That is why I am interested in some of the value-based

proposals discussed here today in which Medicare pays for the value of a drug based on

outcomes.

I wanted to ask you, Doctor -- I think that you wrote in your testimony that the

prices we pay are not connected to the value that the drugs provide. How do we better pay

for the value of drugs? And should we be willing to reward innovative treatments that

improve the outcomes? I believe that was Dr. Sarpatwari -- I am sorry. I am probably

butchering that.

*Dr. Sarpatwari. That is okay. Sarpatwari.

*Ms. Sewell. But can you talk to us about the value of drugs and outcomes, how --

*Dr. Sarpatwari. Sure. In principle, the idea -- at current, we do not do a good job

of tying our prices or our reimbursement to the value that the drugs provide. And so the

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notion of value-based payment is a good idea. The question is: How do you operate that

in practice?

And the concept is, we need to make sure that at the end of the day, whatever

scheme is being proposed, that that actually ties to value. The problem I have personally

with outcomes-based contracts is it does not necessarily imply that the initial list price,

whatever that is, is reflective of the value of the product.

So you can say, and make very appealing, that you will give a full refund in the

case that you do not have this outcome. But if the initial price is not tied to value, those

savings can be very illusory. And so we need to be careful about outcomes-based

contracting for that point, but also for a second point, which is that the ability to track

outcomes in our current system and settings is logistically quite difficult.

And what outcomes are actually meaningful? There are a lot of ways in which this

system could potentially be gamed. And that is the only caution I would have in terms of

approaching that question.

*Ms. Sewell. Thank you. While I do not have time to espouse on this, I also agree

with several of my colleagues on reforms needed for the rebate system to increase uptake

of generics and to increase transparency across the board.

Mr. Chairman, I would like to ask to submit for the record written responses from

rural pharmacists in my district to questions I have asked about barriers to medication

access and nonadherence. I appreciate the perspective that the academics here today have

provided. I also value those of the pharmacists and practitioners in my area, and would

like to have those submitted for the record.

*Chairman Doggett. Thank you for that. Without objection, those will be made

part of the record.

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55

*Ms. Sewell. Thank you so much, and I yield back the balance of my time.

*Chairman Doggett. Thank you.

Mr. Marchant?

*Mr. Marchant. Thank you, Chairman Doggett.

Of course, the thing that I hear most about from my constituents about drug

prices – is their number one concern is the out-of-pocket cost. So if you get among a

group of people that have a similar hair color of mine and you begin to talk to them, it

really is not about the theory of pricing and discovery and breakthroughs, et cetera, et

cetera. The real thing they want to talk about is, why is this drug $5 and why is this drug

$35? And they really just want to talk about the out-of-pocket cost.

And I have got a letter from one of my constituents that I would like to read from.

It is a grandmother because in many instances, we find out that the high drug prices and

costs to a family a lot of times involves more than just the family. It involves the

grandparents. It involves the whole community in many instances.

"My grandson has type 1 diabetes and must have these drugs to live. The cost has

gone up so much that it is keeping our family strapped financially. So much of diabetes

supplies are not covered by many insurances, so when the drugs themselves increase by

over 200 percent, it is outrageous.'' And this grandmother is saying, “please, let's have a

bipartisan examination of this problem, and let's reach a conclusion.”

So this is really what most American constituents are thinking about. I would like

for each of you, if you would not mind, taking a stab at: What is the real relationship

between out-of-pocket and the cost of the drug? And what percentage of the people do you

think that is the only exposure that they really have to drug prices? Ms. Feldman?

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*Ms. Feldman. The out-of-pocket is what matters to patients. That is what is in

front of them when they decide to put their hand in their pocket. You asked about the

relationship between the list and the out-of-pocket?

*Mr. Marchant. No. The relationship between the actual price of drugs and the

pricing that is agreed on between all the benefit managers and the --

*Ms. Feldman. Yes.

*Mr. Marchant. And how that is reflected when the person goes to the pharmacy

and picks the drug up.

*Ms. Feldman. Sure. There are two issues. One is that we have strange bundled

rebate deals, and these are distorting the market. So consumers are charged higher copays

for buying the generic drug. That is entirely backwards. You get very strange effects like

that.

But in terms of, again, that relationship, often the out-of-pocket cost for a lot of

consumers is that very high price. It is not the deal that is struck for the PBM and the

insurance company. Thirty percent of consumers who have employer-sponsored plans

have to pay 100 percent of that high list until they meet their deductible.

A lot of people in Medicare and other types of plans have coinsurance.

Coinsurance is a percentage based on that high price. And then of course, I am sure you

have a lot of constituents who do not have prescription drug coverage or have no coverage

at all. Those high prices hurt, and it hurts in the pocketbook.

*Mr. Marchant. Thank you. Doctor?

*Dr. Sarpatwari. Sure. I would say that, yes, out-of-pocket costs are incredibly

important. But at the same time, patients are also paying high premiums. And so the total

cost to the system is also incredibly important.

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And here I think I just want to introduce one concept, which is that manufacturers

have done a great job in non-governmental programs in terms of trying to reduce out-of-

pocket costs while marking up the actual total cost. And what that essentially is through

mechanisms like patient copay support.

What that is at the end of the day, I think a good line is that is a wolf in sheep's

clothing. That ultimately results in higher costs to the entire healthcare system. So we

need to be focused not only on out-of-pocket costs, but recognize that the systematic costs

ultimately find their way back to the patient at the end of the day as well.

*Mr. Marchant. Thank you.

*Ms. Kapczynski. I agree that many patients are struggling with the out-of-pocket

part of the story. It is also the case, though, that if the prices themselves are rising, even if

out-of-pocket costs are not, that the insurance premiums are going up. The taxpayer has a

higher burden.

And you are starting to get restrictions on drugs and things like that as companies

are trying to address the high costs. So there are many ways that these high costs actually

end up affecting patients even though the out-of-pocket is the one that is so salient when

you go to get the drug at your pharmacist.

So I think we have to think about the problem together. If you only address the

out-of-pocket costs, these other things are going to be an escalating problem, and we do

not have a real solution.

*Mr. Holtz-Eakin. I think there are two important options on the table right now

for Part D. The first is the rebate/safe harbor proposal by the administration, which -- a lot

of uncertainty about that. But it will help those seniors who have the worst conditions and

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the biggest out-of-pocket costs. So by passing the rebate directly through to them, other

pieces of the system will have to change as well.

The second is, in my testimony we outlined a reform to Part D, which would give

beneficiaries an absolute maximum catastrophic cap where they are not liable for costs

forever, and eliminate the coverage cap. Those are things that are substantial and would

improve the program.

*Mr. Marchant. Thank you.

*Mr. Isasi. Let me give you a really simple answer. Remember that at least two-

thirds of the money flowing through the system is going to the manufacturer. So all this

discussion of PBMs and rebates, et cetera -- so really, right now the biggest impact on out-

of-pocket cost is the price that these manufacturers are charging. And we know the prices

are highest when they have no competition. And in diabetes medication and insulin, we

have seen almost a 300 percent increase in 10 years. Right? It is plain and simple. They

do not have competition, and they are abusing their power. So I think the number one way

to drive down out-of-pocket costs is make sure that they are charging a

reasonable price.

I just want to say one other thing, which is, there has been a lot of discussion about

the success of Part D in managing price. And I just want to say that is a myth, and it is

important to say this. Part D was designed to not have bargaining power. We have small,

regional plans that have very little negotiating power.

And it is true that Part D has come in way under cost. It has come in way under

cost because of generic substitution. That is true. And there is plenty -- we are happy --

*Mr. Holtz-Eakin. That is wrong.

*Mr. Isasi. Well, that is not wrong.

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*Mr. Holtz-Eakin. That is wrong.

*Mr. Isasi. There is terrific financial analyses. We are happy to share it with the

committee. But if someone is telling you that the Part D costs are low because the plans

that were designed to not be able to negotiate are doing a good job, they are not telling you

the truth.

*Mr. Marchant. You are on the chairman's time right now.

*Chairman Doggett. All right. Thank you very much.

And Mr. Evans?

*Mr. Evans. Thank you, Mr. Chairman.

A question that I would like to ask is, on this committee, at some point we have

been discussing the issue about trade and the exact impact. We have had the Trade

Representative come before the full committee. And as you know, generics account for

about 90 percent of the prescription drugs in the United States, but account for only 20

percent of drug costs.

So the question I want to ask someone, whoever wants to answer if you can, can

anyone please discuss any obstacles to drug price reform in the current renegotiation of

NAFTA, if you have any sense of that in terms of what are your thoughts and ideas

relating to that agreement. Is there anything in there that we should be aware of? I will

start with Ms. Feldman and go down the --

*Ms. Feldman. The regional agreements, like the one that is being negotiated now,

have sections that have very large protections for biologic drugs, higher than many other

countries have right now. For some of these, they have been higher than the ones we have

in the United States. Those will end up harming consumers, particularly for biologics,

which is the fastest-growing segment of the market.

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*Ms. Kapczynski. One of the really key issues in the so-called new NAFTA or

NAFTA 2.0 is biologic drugs exclusivity. So there is a very substantial increase in the

kind of protection. In fact, old NAFTA did not require special protections for these drugs,

and so it is sort of a new giveaway to the industry of a new protection for biologic drugs.

One of the things that many have talked about in this chamber is maybe we need to

lower some of the exclusivity for these biologic drugs, get the pros down, lower it down to

7 years. That would now be not possible for this chamber to do if the new NAFTA were

passed because it would require 10 years of exclusivity for biologic drugs.

There are also provisions about secondary patents in there that could have some

impact if Congress were to decide that they wanted the policy space to do something about

that. And so there is a real concern about the new NAFTA.

*Dr. Sarpatwari. And if I could just make one point, I think some argument there is

that if somehow by increasing prices abroad that we will allow prices to fall here. There is

no empirical evidence that suggests that would actually happen. So I think we need to

keep that in back of our minds when we talk about what reforms we want to pursue.

*Mr. Holtz-Eakin. When NAFTA was passed, there was not a market for

biologics. They did not exist. So as with digital goods and other things that have been

invented in the interim, trade agreements now attempt to provide comparable protections

for sales across borders, as are provided in the United States.

There is a fair and active debate about the appropriate length of exclusivity and

other protections. But what is going on in the USMCA is really just an attempt to bring it

up to modern standards.

*Mr. Isasi. What I would say is that there is a lot of concern about biologics. And

one of the things that this committee may not have a lot of visibility into is on the State

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level right now, the pharmaceutical industry has traveled around this country and changed

State laws to make it very difficult for doctors to actually prescribe biosimilars, once they

come to market.

So there has been a real concerted effort, both on the international trade side and

domestically, to make sure that the public can never really benefit from these generic

biosimilars when they come to market.

*Mr. Evans. I want to follow up on something that my colleague from Alabama

was raising to Ms. Feldman about insulin, which is the issue where I talk about the

disparities, really, in terms of what happens with people.

So can you speak very specifically -- because I was just saying to my colleague,

that seems like a very simple issue we should be able to do something about. And I do not

understand why it is so difficult. So do you want to speak on that issue?

*Ms. Feldman. Insulin drugs are a classic case of companies piling on protections.

I have studied all of the top insulin drugs, and each of them managed to extend their

protection by 20 years, at least. All of them piled on dozens of protections, some of them

as many as 55. That is what has driven the problem here. And it is just a perfect example

of what we need to address.

*Mr. Evans. Thank you, Mr. Chairman. I yield back the balance of my time.

*Chairman Doggett. Thank you, Mr. Evans.

Mr. Holding?

*Mr. Holding. Thank you, Mr. Chairman.

When I talk to constituents who participate in Part D, they all seem delighted. This

is one of the few areas where healthcare policy gets complimented. So I was taken aback

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somewhat by Mr. Isasi's comments, and so I would like to call upon Dr. Holtz-Eakin to

give his response.

*Mr. Holtz-Eakin. I disagree with his characterization of the Part D program. It

did come in about 30 percent below the projections that I made as CBO director at the

time. It was not because we did not anticipate the entry of generics. We certainly did.

We knew which drugs were going to go off patent. We had a long list of those.

We had information about the drug pipelines of the Pharma manufacturers at the time. So

we had a very good look at the first decade in the drug market, and all of those

developments were anticipated.

We underestimated the capacity of the combined prescription drug plans and PBMs

to strike deals with the manufacturers. And the power of the negotiation proved stronger

than anticipated, and it came in cheaper. I believe that is a big policy success.

*Mr. Holding. Good. I am going to follow up on Mr. Smith's line of questioning

regarding EpiPens. I know a fine young man at home who is about 8 yours old, a

strapping young man, very healthy, and when he was about 2, his 10-year-old sister gave

him a kiss on the cheek. And his cheek swelled up to be the size of a softball. It turned

out that his sister had just eaten a peanut butter sandwich, and that caused an allergic

reaction.

So this young fellow now travels around with EpiPens wherever he goes. And

EpiPens have gotten really expensive since Mylan acquired the EpiPen from Merck. In

2007 they were $94, and by 2016 they were $609. I think the out-of-pocket cost for this

young fellow at home is about $150 for a two-pack, and he is going to have to have those

for the rest of his life.

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And when, Dr. Holtz-Eakin, you responded to Mr. Smith, you said this is an

example of market power. Mylan is an actor here with market power, and they can

command the price that they want to command. They induced a generic vision, which was

somewhat less expensive, but still, they have the market power.

So when you come into an actor like Mylan, what do you do? Is there a market-

based solution to the instance of Mylan's kind of predatory behavior?

*Mr. Holtz-Eakin. I am not an expert in this area. But given my understanding of

what is going on, the delivery system is what is under patent. This was mentioned. That is

exactly right. There are competitors. Right? The drug itself is a generic, and there are

competitors that have not managed to affect Mylan's ability to increase prices.

But there are some competitors on the market. It does not look like we have

effective competition. That seems to me something worth looking at without making a

blanket assertion about the right solution to this, it is an important situation, where you

have a generic drug and the inability to get effective competition among the providers of it.

*Mr. Holding. All right. Now, the leaps and bounds in technology that are going

on, innovation with our drug companies is pretty astounding. And I have hopes that

someday they will invent the perfect medication so I do not have to diet and exercise any

more, and perhaps I can ingest that new medication via cigar and it will all be just really a

wonderful outcome.

So I want to make sure they always have the resources to do those innovations. But

we are hearing from constituents and family members, and everyone we talk to, that we

need to address drug pricing. So I look forward to working with my colleagues, my

friends, on this side of the aisle and the other side of the aisle, to try to find some solutions,

hopefully market-based, that will address these concerns.

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Thank you, and I yield back.

*Chairman Doggett. Thank you very much.

Ms. Chu?

*Ms. Chu. Yes. I would like to thank Chair Doggett for calling this important

hearing today, and for all the work he is doing on lowering the cost of drugs for American

patients today.

And I would like to follow up on the testimony so far by saying, well, it is pretty

safe to say that the pharmaceutical drug industry is doing quite well, and that the steady

trend of price increases is not due to the industry's lack of revenue. In fact, there are record

profits, high bonuses and salaries for CEOs, and many stock buybacks.

And as my colleagues Mr. Higgins and Mr. Kind pointed out, drug companies are

spending 70 percent more on ads than on R&D, and that these ads are driving patient

behavior. But Ms. Feldman, is it not also true that drug companies receive tax benefits for

these direct-to-consumer ads?

*Ms. Feldman. Drug companies do get a business tax deduction for their

expenditures on direct-to-consumer ads. They get a significant benefit for these. Ads can

drive patients to buying things that they do not realize they can get much cheaply a drug

like Treximet, that is an $800 combination of something you can buy for about $15.

*Ms. Chu. And are there other incentives in the tax code that drug companies are

exploiting? And if so, how can they be changed?

*Ms. Feldman. There are incredibly generous provisions related to donating your

inventory. As I mentioned before, 10 out of the 15 largest charitable foundations as of

2014 were drug companies doing this. They also can take deductions for donations to

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patient advocacy programs, and those programs sometimes push for policies that push

prices higher.

*Ms. Chu. And Mr. Sarpatwari, I think we have made it clear that drug companies

are getting a significant return on their investment. While we have heard a lot from drug

companies about the risks that they take in research and development of new drugs, I am

wondering if American taxpayers take on any risks through the NIH, and if so, how.

*Dr. Sarpatwari. Yes. So each year, NIH spends about $30 billion on research.

And as was mentioned by the chairman earlier, from 2010 to 2016, all of the new drugs

that came to market had some basis in government funding.

And so if we take a look at the most transformative drugs over the past 30 years,

more than half originated from public sector research institutes funded in part by the

government. There is a considerable amount of risk that the government assumes, and we

are not just talking about basic science research. We are talking about up to the

development of the product itself.

And while drug companies do an incredibly important job of conducting the pivotal

trials that are necessary to bring a drug to market, the public itself is not benefitting from

those investments that the government takes, oftentimes. And there are proposals out there

to reform that situation and make sure that American taxpayers are not paying twice.

*Ms. Chu. In fact, has the U.S. not poured over $900 billion in basic and applied

research for the pharmaceutical industry since the 1930s?

*Dr. Sarpatwari. That is correct.

*Ms. Chu. Ms. Feldman, can you elaborate on what actions Congress can take to

push back on patent abuse by drug companies, particularly as it relates to patents for NIH-

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funded discoveries? Do you think any of your proposals would be a barrier to additional

innovation, as drug companies often claim?

*Ms. Feldman. Innovation is critical, and we can do it well if we have a market

that is fair and efficient and transparent. My strongest recommendations are: keeping

open pricing information; allowing one period of patent protection, not dozens; closing tax

loopholes, ma'am, that you referred to; and using the power of government contracting

through the NIH and others to control behavior.

*Ms. Chu. In fact, is it not true that the big companies are relying now on small

companies to do the R&D? Can you explain what is going on there?

*Ms. Feldman. Yes. The innovation is not happening primarily in-house at the

large companies. It is happening at the universities. It is happening in smaller companies.

The large companies play an important role in getting this to market, but you have to look

at the entire system.

*Ms. Chu. And then do these large companies then buy the small companies?

*Ms. Feldman. I am sorry. I could not hear the question.

*Ms. Chu. Well, the small companies, it seems to me, take the risk at this point.

And then they do the R&D. And then have there not been instances where the large

companies then buy up the small companies after the small companies take all the risk?

*Ms. Feldman. Thank you. Yes. The reason that we justify large patent rewards is

because of the risk that is involved in doing the research. If the large companies are not

doing that research and taking that risk, and in fact if no one is taking that risk because

they are just tweaking the medicines that are out there, we are not getting a very good deal

here.

*Ms. Chu. Thank you. I yield back.

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*Chairman Doggett. Thank you very much.

The gentleman from New York, Mr. Reed?

*Mr. Reed. Well, thank you, Mr. Chairman. Thank you for hosting this and

having this hearing because I think there is a lot of bipartisan recognition that drug pricing

in America right now is a problem. We have all heard from our constituents. We all have

heard this issue as we have traveled around the country.

And I will also tell you, as the father of a type 1 diabetic, I have seen the insulin

issue myself firsthand. So I join with my colleagues in regards to trying to find a solution

to this problem. And I associate myself with my colleague from Wisconsin when he is

asking the pharmaceutical industry, the pharmacy benefit management companies, and

others to come to the table in good faith, to be part of the solution, to come up with a

solution to this drug pricing issue.

That being said, I am optimistic that even in this hearing today, at the core of the

testimony and the core of the information that is being provided, that the market pressure, a

free market system, is the tool that should be used to drive prices down. Even when we

talk about negotiation between the government and the pharmaceutical company as being

proposed by some of the members on this dais, the root core of that is market pressure.

And I appreciate that.

And I think that is where the solution lies rather than taking over this industry or

taking over this space with some type of government fiat because that is what I am

concerned about most when I hear the testimony today. And I hear the proposal of

negotiation by the Federal Government so long as the seller agrees with the price. If the

seller does not agree with the price, well, then what we are going to do is take your

property.

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That is an impossible free market system, to use market pressure in the most

effective way, in my humble opinion, because essentially what you are saying is, we are

going to give you the price because we are those in the government that know best. And

this is a fair price to offer you. And if you say no, we are going to take your property. No

other free market where you have a seller has the authority or the power to do that.

And my concern if we do this -- and maybe, Dr. Holtz-Eakin, you can comment on

this -- is if we do this, if we take that property away and say, if you do not accept our price,

we are going to do this, we is going to stay in the game to innovate?

And are you not creating a system where if I am a potential entrepreneur, I would

say, okay, you guys go negotiate with the Federal Government. And then when they take

your property, then I will start my business after you have already put in all your costs, all

of your research development, all your infrastructure, in making that investment and

putting your capital at risk and your life at risk.

So now I am the new startup just sitting on the sidelines, just sitting on the sidelines

and maybe manipulating and taking valuing of that situation.

So we have got to think this all the way through. So Dr. Holtz-Eakin, am I missing

something in that analysis of the proposal?

*Mr. Holtz-Eakin. No. I do not think so. It is a little ironic: After the fall of the

Soviet Union, many countries tried to establish market systems. And one of the first steps

that was necessary was to establish private property rights. If you do not have those, you

cannot have a market system.

*Mr. Reed. You cannot have a market system.

*Mr. Holtz-Eakin. So stripping property rights is not the solution.

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*Mr. Reed. And using the market pressure, and this is where I really want to

maybe -- for a minute here, out-of-pocket cost. where is that in the existing market system

as a calculation of pressure to drive that cost down? Because I do not see it. That is the

fundamental problem, I think.

When you are negotiating now in the existing marketplace, no one has taken into

consideration that out-of-pocket cost. It is between the list price and the net price, between

the pharmaceutical, the PBMs, and the providers. Where is the patient?

And also, when my colleague from Texas talked about going to the pharmacy, no

one talked about the doctor in this equation. The doctor already wrote the script. By the

time I get to the pharmacy, I do not have any negotiation because I already know what I

am buying.

So how do we bring the doctor and the patients into this marketplace to drive the

market pressure to get these out-of-pocket pressure going down, or costs going down?

*Mr. Holtz-Eakin. Well, certainly, of the things that are on the table right now -- I

mentioned the reforms to Part D that are in my testimony -- I think those make a lot of

sense and would --

*Mr. Reed. How do we get the doctor involved in this transaction who is writing

the script?

*Mr. Holtz-Eakin. There ought to be, in the magical world of electronic medical

records, the capacity to look and see what the current price of a pharmaceutical is at the

time the prescription is written.

*Mr. Reed. And that gets into the transparency. And I think transparency is

common ground here that we could explore. And with that, I yield back.

*Chairman Doggett. I thank the gentleman.

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Mr. Blumenauer?

*Mr. Blumenauer. Thank you, Mr. Chairman. I am just pondering my friend from

New York and trying to envision this as a pure free market because everything I heard

from most of our witnesses, and what I know about this, is that this is the furthest you can

get from a free market.

First and foremost, we have people here who have an exclusive right to this

product. They cannot legally have competition; this monopoly that the Federal

Government has decided, there is not going to be a free market. The Federal Government

pays for an extraordinary amount of the research that is used by this product. The Federal

Government pays the bill.

So on what planet is this a free market system? And I think your constituents and

my constituents would not confuse this with a free market by any stretch of the

imagination. To the best of my knowledge, and I am going to have two questions and the

panel can -- there is no free market anywhere in the world for pharmaceuticals. None.

What we have is the highest prices in the world because of our odd, complex,

hybrid system of modified protections. We have all these payers because it is hopelessly

complex. There is no free market on this. And if I have time left, I would be happy to

yield to you.

*Mr. Reed. I thank the gentleman.

*Mr. Blumenauer. But we have been spending a lot of time, some of us, dealing

with healthcare on this committee with the Affordable Care Act, the refinement, the efforts

to blow it up. But I have seen nothing that indicates there is a free market that is operating.

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What happens in the rest of the world is that they piggyback on us. They use some

of the research. They pay a fraction of what Americans pay. So I just reject that premise,

Tom.

But my question, and I just go down the row to our witnesses, time permitting -- I

hopelessly squandered half of it -- my two questions, quickly: Is there any place in the

world that has a free market for pharmaceuticals? And I think that could be a yes or no,

and if there is something -- but I would start with you, Ms. Feldman.

What is it that prevents, in our system, somebody taking insulin, which was

developed over a century ago, and just go back to the fundamental, no bells and whistles,

no special flavoring, no prize in the Crackerjack, but just bare insulin that kept people

alive -- what is preventing somebody from entering that market now, if we have a free

market?

*Ms. Feldman. The simple and quick answer: You can make drugs, but you

cannot get them to the patients if the health plans and the PBMs will not cover them on the

formularies. There are charitable foundations right now who are trying to do exactly what

you have said, but it is very difficult for them to get the plans to pick them up because of

the deals that the drug companies have made.

*Mr. Blumenauer. Is there a free market for pharmaceuticals anywhere in the

world?

*Ms. Feldman. In theory, we would have a free market when these protections

expire. I am still waiting for that.

*Mr. Blumenauer. I am.

*Dr. Sarpatwari. No. We do not have a free market anywhere in the world for

pharmaceuticals. And just to complement Professor Feldman's point, I think another

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critical issue in terms of getting other manufacturers of insulin to market is the notion that

we have talked about, $6 billion in direct-to-consumer advertisement. We have not talked

about $30 billion in marketing to physicians. And that is an extraordinarily large market

that is preventing the prescribing of cost-effective medications.

*Mr. Blumenauer. I have 30 seconds left. I would like to turn to you, but I want to

turn to my friend.

*Mr. Reed. You yield? Well, then let's be honest about the debate here today. If

you are not recognizing that we could have a free market pressure system to contain these

costs, then what you are offering is government-controlled takeover of the pharmaceutical

industry in America. And that is a fair debate to have.

If you want to rely on government control in this area, that is fine.

*Mr. Blumenauer. Reclaiming -- reclaiming --

*Mr. Reed. But what I do believe is that we could have market pressure --

*Mr. Blumenauer. Reclaiming -- reclaiming my time -- reclaiming my time --

*Mr. Reed. We could have market pressure drives these costs down.

*Mr. Blumenauer. Reclaiming my time --

*Mr. Reed. And I yield back.

*Mr. Blumenauer. Reclaiming my time, poppycock. And I look forward, under

the --

*Mr. Reed. I appreciate the substance of the debate, saying "poppycock.''

*Chairman Doggett. Mr. Blumenauer controls the time.

*Mr. Blumenauer. Under the leadership of the chair, I think we can dive into this

to really ferret it out, Tom, to find out what you think is free market about this. And I am

happy to have that debate with your constituents and mine. But it is not taking over

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anything. We have already set the rules. We have given them a monopoly. We paid for it.

We pay for the research. And I think we ought to be able to find something in between

there to follow through on the proposals. Thank you, Mr. Chairman.

*Chairman Doggett. Thank you.

Mr. Schneider?

*Mr. Schneider. Thank you. Again, I want to thank the chairman for hosting this

hearing, and the witnesses for joining us today, sharing your expertise with our

subcommittee. I also want to say this is a vitally important issue for many of my

constituents, including Catherine, Mr. Isasi.

I believe everyone here on both sides of the aisle is committed to ensuring our

patients have access to some of the truly amazing lifesaving treatments on the market

today. We may differ on how to get there, but we all share the same goal. And I hope we

as a committee do not lose our focus on the patients as we continue our work. There are a

lot of ways to address these issues. But whatever solution we reach, we have to make sure

we are first and foremost best serving our patients that need these drugs.

Today I want to discuss the specific many of you briefly touched on, as have my

colleagues: insulin. More than 30 million Americans have diabetes, and from 2002 to

2013, the total cost of managing diabetes in the United States collectively increased almost

30 percent.

According to the American Diabetes Association, care for those diagnosed with

diabetes account for one in four healthcare dollars spent in the United States each year.

That is an extraordinary amount of money, for both public and private payers, but is only

exacerbated by the fact that one in four diabetic admit to having rationed his or her insulin.

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Insulin is not new. The drug will be a century old in 2 years. But despite that,

insulin spending has increased dramatically over the last decade. The annual cost of

insulin for type 1 diabetics has doubled in the last 4 years even though insulin use has

remained relatively flat.

Mr. Isasi, you told a number of moving stories about patients and the cost of

prescriptions. But I was hoping you could touch briefly what effect the cost of insulin is

having on diabetic patients, particularly those enrolled in Medicare.

*Mr. Isasi. Thank you very much. It would be my pleasure. As we have talked

about, insulin is another good example of a part of the pharmaceutical market that has no

real competition. And they have used patents and new slight tweaks to continue to extend

their ability to not have competition.

Prices have increased, depending on which particular drug you are looking at,

about 300 percent in 10 years, so a complete abuse of competition. And the discussion

about Catherine, that was not a diabetic patient. But we have lots of patients around the

country who are struggling with this. Let me tell you the story of Wendy from Georgia,

from Champion, Georgia. She literally goes on her Facebook page and asks for donations

so she can pay for insulin every day.

Let me tell you about Alec Smith, which is a very famous story. Alec, 2 years ago

he was 26 on his parents' insurance. He got his insulin. He had type 1 diabetes, like we

have talked about. Alec came off his parents' insurance when he turned 26, and he stopped

being able to pay for his insulin. And then he died. He tried to cut his pills in half, or he

tried to cut his doses in half, and then he passed away.

Mallory from Wisconsin, she is also on insulin. She made the decision -- she turns

her insulin pump off because she is so scared of incurring more debt that she would rather

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just take the risk, to quote her directly, of not waking up than having to go into more debt

to pay for her insulin.

*Mr. Schneider. Thank you. And I appreciate those stories. I think these stories

and the issue is particularly timely because just this week one company, Eli Lilly,

announced they would be offering an authorized generic of its most popular insulin

product at half the price. That may sound great on the surface, but I think there is a lot

more that we can unpack.

If I can ask Dr. Sarpatwari, can you discuss what the new offer would mean for

patients, both insured and uninsured, and what it means for public and private payers?

Will it make a dent in what government spends each year, and will it help patients afford

their insulin?

*Dr. Sarpatwari. I think we need to be worried about what an authorized generic

actually means in terms of competition. On principle, like you said, it is good that we are

having a price decrease. But when we look relative to what other countries are paying for

their insulin, even this discount is a drop in the bucket.

And so we need to ask ourselves, why can we not get to the prices that other

countries are paying for their insulin? We also need to take a look at the role of authorized

generics and how authorized generics can actually lead to enhanced profits for the

companies, and whether or not that means how we can regulate better the intermediaries in

the system. So I will leave it at that.

*Mr. Schneider. Thank you. And I have just a few seconds left. But if I can turn

to Dr. Holtz-Eakin, you in your testimony talked about an example of how competition can

lower the price of drugs. The example was treatment for hepatitis C.

*Mr. Holtz-Eakin. Right.

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*Mr. Schneider. But this seems to be, if not unique, a very rare circumstance

where we are seeing that competition. What can we do as a committee, as Congress, to try

to create more opportunities for stories like that? Are there other examples you can point

to?

*Mr. Holtz-Eakin. I think one of the most important things is the FDA and the

processes that guide its approval decisions. Often it was to say, we do not want a second

drug. That is just a “me-too”. We have something for that already. That turned out to be a

mistake. You want the second drug. You want the third drug, if possible, so that someone

is always under pressure to keep their prices down.

*Mr. Schneider. All right. Thank you, and I went over. I appreciate the extra

time. I yield back.

*Chairman Doggett. Thank you.

Mr. Gomez?

*Mr. Gomez. Mr. Chairman, thank you so much, and thank you all for being here.

I always like to hear about -- when people talk about market and market pressures and just

what is causing prices to increase; and then at the same time, how it is going to solve all

the problems.

And one of my concerns is that when heart comes to medicine especially, it is not

like buying a car. Right? If you do not get insulin, you die. Right? It is a certain type of

insulin. You have that insulin. That is your choice. A few manufacturers. But you are

going to pay a price, and it is going to be high.

You want to go and buy a car, well, you do not have to buy the Lexus. You can

buy the $800 used vehicle that barely runs, but it is going to get you from point A to point

B. Very different. And I think that is what we tend to forget.

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I started listening to a lot of testimony, and I started -- I was curious about the

history of insulin after listening, and I looked it up. And this is something that has been

going on; this debate a price-gouging has been going on since it was invented, right, for the

use of treating diabetes.

There is an article, just for the record, that I found that basically said that three

companies were sued in 1941 for price-gouging regarding insulin. Did you guys know

that? So just for the American people's sake, this is not something new.

But what I think I am concerned about is I do not want to be here another 50, 75

years to have the same debate about price-gouging over pharmaceutical drugs. Right?

That is not where we want to be. We want to really look at the solutions and really look at

how do we fix the problem?

So that is something I was thinking about. I think it was Ms. Feldman mentioned

one period of exclusivity to deal with some of the issues. What would the opponents to

this say?

*Ms. Feldman. I call that one-and-done, one period of exclusivity and then you are

done. Pick any one you want. I think the opponents would say that they want to be able to

make changes and new improvements to drugs. And my answer would be that it does not

cost very much to make most of those changes that are out there right now, and so you

should be able to get your reward when you sell it.

You do not need a government-granted 20 years of monopoly. What we need is a

period of protection and that is it. When it ends, it ends.

*Mr. Gomez. Since you are taking Mr. -- Dr. -- I cannot see your name from here -

-

*Mr. Holtz-Eakin. Holtz-Eakin.

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*Mr. Gomez. Yes. What would your response to that concept be?

*Mr. Holtz-Eakin. That does not strike me as a bad concept at all. The issue is,

what is really one? And what proponents of the current system would say is, well, this

drug really is a new drug and it deserves a period of exclusivity. It is not really like the old

drug.

We know that is not always true. So the question is going to be: How can you

distinguish the one, which should get a period of exclusivity, from something which is not

genuinely an innovation?

*Mr. Gomez. Okay. So I am trying to see some agreement, which is rare. But I

am happy to hear that.

How would we go about finding that period of exclusivity?

*Mr. Holtz-Eakin. I think she should answer that. I have no idea.

*Ms. Feldman. So the proposal I have made is to let the drug company decide that.

It can take very different amounts of times to get through approvals, or to get your

medications stable. So when you get your approval, you as the drug company, you decide.

The strongest patent you have, maybe that is the one you want to go with.

The orphan drug exclusivity, maybe that is the one you want. Some other

protection you have gotten out there? Congress does not have to sweep away all the

protections it has created; just at the time of approval, tell the drug company, pick one.

*Mr. Gomez. Thank you. And before my time runs out, I also just want to ask one

question. Analysis shows that the top ten selling drugs in the U.S. from 2011 to 2015, as

you all know, were increased anywhere from 54 percent to 125 percent in just 5 years.

Drug list prices increase have outpaced general inflation, medical inflation, and overall

wage growth for many years.

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What can we do that will stop these arbitrary and indiscriminate list price hikes to

help patients afford their medications? This one -- easy question.

[Laughter.]

*Ms. Kapczynski. In 10 seconds, so obviously government negotiating power can

start to say we actually will only give you the value that your drug is worth, and you

cannot just keep hiking the price. And there have also been some proposals about specific

legislation to prevent price hikes, and Congress can consider that as well.

*Mr. Gomez. All right. Thank you. I am out of time, but I will yield back to the

chairman.

*Chairman Doggett. Thank you very much.

Mr. Horsford?

*Mr. Horsford. Thank you, Mr. Chairman.

This is an incredibly important hearing, and I continue to hear from my constituents

in Nevada about challenges that they face in obtaining lifesaving medications and

treatments due to prohibitive cost. And in my opinion, too much attention and focus is on

the drug manufacturers, the PBMs, and the insurance companies, and too little attention is

really on the patients.

This should be a patient-centered policy, and whatever is in the best interests of the

patient is ultimately what we should do. That is who I was elected by. That is who my

colleagues were elected by. And with all due respect, drug company monopolies and their

rights should not trump patient rights to quality healthcare and the ability to afford

lifesaving medication.

And it is personal because each of us has family members, constituents, ourselves,

who have been afflicted with serious disease that, but for lifesavings medications, we will

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not be alive. One person that I would like to share their story is Jayden from Pahrump. He

is one of my constituents who faces life-threatening choices when it comes to his

medications.

Jayden has diabetes, which has severely limited his mobility. This has impacted his

ability to not only make a living, but also prevents him from performing everyday tasks.

In fact, Jayden lost his job because he could not stand on concrete for 8 hours.

Without his job, he has a limited income and cannot afford his insulin, which costs

$250 a month. He often limits his insulin injections or simply goes without it when he

does not have the money to pick them up. Ladies and gentlemen, this is a very dangerous

decision that can result in long-term health complications or even death.

Now, we have all stated that Jayden should not have to face this tough and

inhumane choice, especially when we know that insulin prices were not always cost-

prohibitive. Now, in my home State of Nevada, I am proud that our State legislature,

under the leadership of Senator Yvanna Cancela last session, took steps to require

increased drug price transparency.

Our State law requires drug companies to disclose their opaque payment structure,

including rebates, how much it costs to make the drug, and the funding they provide to

assistance programs. I strongly believe that Nevadans deserve this information as they

continue to pay more and more for prescription drugs in order to stay well.

So Ms. Feldman, you have done a lot of work on transparency in the drug market.

What do you recommend Congress do to improve transparency in the drug market, and

how do you think transparency helps patients, who ultimately should be at the center of

this debate?

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*Ms. Feldman. First, thank you, sir, for reminding us that this is about real people.

I am not familiar with the details of Nevada, but it sounds very much like what I would

recommend on the national level. We need to bring transparency into pricing and end the

secret deals and the extra protections. If we do that, the closer we will come to a free and

fair market, and the better off we will all be.

*Mr. Horsford. And based on the prior hearing that we have had on this topic,

what is proprietary about disclosing costs around marketing and administration? Some

drug manufacturers are claiming that is proprietary information. Do you agree? And if so,

why is that proprietary? And if not, why should that information be part of the disclosure

process?

*Ms. Feldman. Drug companies claim price information as trade secrets. As

someone who has been in intellectual property law for decades, I find that a little puzzling.

However, it is information that, if you want to have approval of drugs, you ought to be

willing to share, and information that should be open in a market in any event.

Some people have claimed that if you put information out there, you will get

collusion. In my view, collusion happens when you have secrecy. You are less likely to

get collusion if everybody is out there, out in the open, and you can always deal with those

problems.

*Mr. Horsford. Well, right now we have three companies that market insulin, and

those costs have increased 197 percent. So if there is any questions around price-fixing, I

think we already know the culprit. Thank you.

*Chairman Doggett. Thank you.

Mr. Kelly?

*Mr. Kelly. Thank you, Chairman. Thanks for holding this hearing today.

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In the hearing promoting competition to lower drug prices -- that is the title of the

hearing -- it is very important to lower drug prices for all Americans. I think we all agree

on that. And there is probably not a single person in this room or sitting up here on the

dais that either does not rely on some type of pharmaceutical or have family or friends who

do that.

But the compulsory licensing is the government theft of intellectual property. I

firmly believe that. I am part of something called the Innovation Caucus, and I think the

main driver -- and I want to go with Dr. Holtz-Eakin on these things, the opinions in this --

there is nothing that drives improved products more than competition, and incentivizing

people to do that.

I do not want to see the government get into a situation where the government

determines what the price should be. Based on what? Based on what? If you can, Doctor,

just address that a little bit because a government-run system, I do not have any idea what

that would ultimately have on prescription drugs. Would we look like public utilities?

*Mr. Holtz-Eakin. I do not really know exactly. There have been proposals --

well, let's do it this way. We know that in the bulk of the economy, value is revealed by

people's spending decisions. They show their value by forking over their money for it.

The more that that can be relied upon, the more likely we are to have beneficiaries

that are happy with the system. And so the difficulty comes when you move away from

that. So, for example, if you decide to determine value by a group of clinicians, perhaps at

the launch of a drug, with no particular information about what patients might care about

in the use of that drug, then you have moved away from using the beneficiary who we care

about to determine value.

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And I think that is troubling because you then have to figure out who gets to pick

the clinicians, and then you get into the politics of that. And pretty soon that system does

not look like one that is getting closer to what people want. It is moving further away from

it.

*Mr. Kelly. Yes. I have just always thought that the model that we use in

America -- we are actually incentivizing people to go out and develop new products, new

services, whatever a consumer would decide was in her or his best interest. And then they

would flow to that type of a product.

I am really concerned with the idea that we think that somehow the Federal

Government has the ability to do this. There is nowhere in history where this type of

socialized economy has -- am I wrong on that, Doctor? I mean, you studied this. You

know it better than anybody.

*Mr. Holtz-Eakin. Yes. I would not want to characterize the U.S. health sector as

a perfectly free market. There is an enormous amount of government intervention. I think

the key at the moment is where you have the opportunity to move toward better use of

market forces, which have historically delivered better quality, lower prices, across the

globe -- and that is the debate we should be having. Where can we do that?

And in the current setting, there are some things that I think would be beneficial in

doing that, whether it is reform the Part D benefit design, or if you look at the rebate rule,

that would move away from having multiple prices. There would be a price, one price,

negotiated between manufacturers and PBMs on behalf of prescription drug programs.

That would be a step in the right direction, want more clarity, ability to compete on the

right grounds.

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*Mr. Kelly. Okay. I want to go back to this compulsory licensing that is also

called government theft in some areas. This is a question for every one of the witnesses.

So if we think that the government should seize the intellectual property of other

high-priced products like iPhones, cars, laptops -- somebody made reference to

automobiles -- what if the government were to decide what it is you should drive? Where

is it you should live? What it is that you should eat? Where is it you should go to church,

or maybe you should not even go to church anymore? I am just getting to the point here. I

am watching the idea of a bigger, bigger government dictating to the population that it

serves that, no, we know better than you. So I am really concerned.

So is more government control the answer to this, or less government control? And

looking again at the benefits of free markets and where we could go and why people do try

to innovate and change the course of the way things are going. I mean, I look what has

happened with pharmaceuticals. It is incredible what we have been able to do.

*Ms. Feldman. So, sir, I would return to something that I said earlier, which is,

government cannot be everywhere. You need the market. You need the eyes of the

market. And you need to let the market function in a fair and transparent and efficient

manner.

That is why I believe transparency is so important here. Right now the markets are

flying blind. We need to help them operate to the best extent they can.

*Mr. Kelly. Yes. Doctor?

*Ms. Kapczynski. If I may --

*Mr. Kelly. Yes, ma'am?

*Ms. Kapczynski. You can see that patents and these kinds of exclusivity are also

intervention. Right? That is part of the point. And I want to say, it is striking to me to

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hear government patent use described as theft. Alex Azar then would be a thief because

when he was general counsel of HHS, HHS relied on government patent use to say, wait.

We have an anthrax crisis. 9/11 had just happened. Cipro was an important drug.

And the company, Bayer, was trying to gouge the government on the price. And Alex

Azar is not a Soviet entity. He came in -- he was part of the process that said, look. You

cannot hold this up at this moment.

And he drove the price down, and he defended that. And he said, this is not theft of

property. This is using a law that exists, and we will pay compensation. And that is the

right way to do it.

*Chairman Doggett. Thank you. Your time is expired.

*Mr. Kelly. Okay. Thank you, Chairman.

*Chairman Doggett. And Mr. Rice?

*Mr. Rice. I am very wary of increased government control. I certainly believe in

the saying that you never know how expensive something can be until the government

gives it to you for free.

You said, Mr. Isasi, that the cost of insulin increased 300 percent in 10 years, and I

think you said that the average cost of drugs from 2011 to 2017 went up 60 percent. But

the government took control of the health insurance market in 2014, and the idea was to

increase competition and drive down cost.

Well, the exact opposite happened. We have one health insurance provider in

South Carolina now. We had five or six or 10 before. And the cost of health insurance

went up 230 percent in 4 years -- 230 percent. It will easily outpace your 300 percent

growth in 10 years in the prescription drug market.

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So I agree that this is not a purely free market. But the answer to high drug prices

is to move more toward a free market and not toward more government control because

time and time again, the exact opposite happens. You say we are going to drive down

prices, and in fact, recent experience, the Affordable Care Act, the numbers are there.

They are accurate. Four years, 230 percent increase in health insurance prices.

We had a panel on drug pricing two weeks ago, and the panel was unanimous that

this country is the most innovate country in the world in drug innovation. Do you all agree

with that? Anybody argue with that? And I think one of the reasons is because of the

patent protection we provide.

Ms. -- I do not know how pronounce your name -- Kapczynski?

*Ms. Kapczynski. Kapczynski.

*Mr. Rice. Kapczynski -- you are a patent intellectual property lawyer. Correct?

*Ms. Kapczynski. I am a law professor. But yes. I study intellectual property law

and patent law, yes.

*Mr. Rice. You sound very adverse to intellectual property protection. Do you not

believe that this intellectual property protection that we grant to pharmaceutical companies

has spurred this remarkable innovate market that we have in the United States?

*Ms. Kapczynski. I think the reason we have such an innovate industry is, in part,

that we have put a lot of money from the government side into innovation. And there

is evidence that the most pathbreaking, most risk-taking research is actually done by

government. Right? And then industry does play a role and patents do play a role.

I think the problem is that basic --

*Mr. Rice. Okay. So how would you modify the patent protection that we have

now? Would you lower the number of years off the bat that a company gets?

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*Ms. Kapczynski. Well, I think there are ways to tighten up the standards, right, to

say we are not going to give so many trivial patents for trivial innovations. We should

give patents only for more serious innovations. But I think at the end of the day, the other

reality you have to say is patents are -- they do function like monopolies. And so you can

be in a standard intro to economics course and people will say --

*Mr. Rice. I get very mixed messages from you. I would like to know specific

changes that you would like to see in the intellectual property arena.

Mr. Holtz-Eakin, do you agree that there needs to be changes in the intellectual

property arena for prescription drugs?

*Mr. Holtz-Eakin. The issue is a very simple one of tradeoffs, which is, at any

point in time once you have an invention, the economically desirable thing to do is to have

as many people use it as possible. And that means get rid of the ability to do monopoly

pricing.

The trouble is, you then do not get the innovation to begin with. So you have a

tradeoff in engendering innovation, and then the pricing of that innovation afterwards.

*Mr. Rice. So we --

*Mr. Holtz-Eakin. I cannot tell you the right number of years of patent protection

to get the right amount of innovation.

*Mr. Rice. So we have got to find this middle ground. And patent protection is

just one part of the problem. There are a lot of perverse incentives in the way Part D is

administered.

*Mr. Holtz-Eakin. I would start with a lot of the others first.

*Mr. Rice. The percentage reimbursement to physicians and hospitals drives them

to the most expensive drugs. The reinsurance program appears to be a huge problem. So

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there are a lot of things that we can do because there are a lot of really bad examples here.

I would never argue that there are not really bad examples.

One problem I see, one huge problem -- I will go to you, Mr. Isasi -- is I have a lot

of dentists in my district who used to give doxycycline or some type of antibiotic to their

patients before they did the work because an infection could get in their bloodstream. And

it was so cheap -- it was $5, it was out of protection -- they would give it to them.

And now the same prescription costs $100. It is not because there is some type of

patent protection; it is because it is so cheap that nobody wants to make it. All right? So

how would you fix that problem?

*Mr. Isasi. And you point to a really good example, the fact that -- I think nobody

here is hostile to the idea that the free market should be operating and we should create

competition. And the problem we have is that government-granted monopolies are written

in a flawed way, and we have these pharmaceutical companies abusing that.

*Mr. Rice. What I am telling you is these things have no patent protection. There

is no government-provided monopoly.

*Mr. Isasi. Well, in this case the point is that they make a lot more money by going

down a rabbit hole of making a small change to a drug than they would by producing these

antibiotics that we need as a country. And a lot of this is about the fact that they are

chasing the high-margin insured patient.

So they are trying to find those drugs that they can make a small tweak, and I have

got cancer and I will spend $50,000 a year, instead of the exact drug you are talking about,

which is -- the number one example is the one you are giving, which is, we need new

antibiotics that are not resistant. Right? And no one is developing them because the

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incentives that we are creating through this patent law does not actually serve the public

interest. It serves the interests of the pharmaceutical companies.

*Chairman Doggett. Thank you very much. Your time is expired. And I will

conclude with my own questions.

I view it as encouraging that there is bipartisan recognition of the serious problem

so many Americans are facing with, really, prescription price-gouging. The question is

whether we will have any bipartisan agreement on doing anybody about it. And that

remains far uncertain, particularly with regard to the last round of questions.

Now, there are some things we could do about this problem. We could write a nice

letter, a very respectful letter, to Big Pharma and ask them to please lower their prices so

that victims all across this country would not suffer. We could say pretty please with sugar

on it, which is basically what President Trump did in his Rose Garden press conference.

And he did manage to delay some price increases for all of six months. But the prices have

continued to rise.

Anyone who believes that pharmaceutical monopolies will yield their monopoly

profits, which are extraordinary, just for the public good has not observed with any level of

objectivity the performance of this industry over recent decades.

I favor a bipartisan solution. Indeed, all I want is for President Trump to follow the

advocate of Candidate Trump, who said that bidding would save this country hundreds of

billions of dollars. It is surprising to hear from the outset that our Republican colleagues

reject any backstop to negotiation. They do not offer any alternative to lower the prices

that Americans are paying for their drugs; they only criticize the alternatives that have been

advanced in the past.

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Now, one of those alternatives, referred to as the "heavy hand of government,'' just

happens to be the way that veterans who have served our country all over America get their

pharmaceuticals for reasonable prices today because the Veterans Administration uses a

formulary. And in some areas, we have had effective formularies in the private sector that

have helped to bring down prices.

But our Republican colleagues reject the idea of a formulary and say it will deny

lifesaving drugs to some Americans, even though it seems to have worked rather

effectively for the veteran population. And in view of their objections voiced before today,

I have offered an alternative called competitive licensing. And it has been really

extraordinary to listen to the criticism of it.

On the one hand, it is theft and confiscation, and there are no rights for those whose

property is taken. And on the other hand, their witness tells us one of the problems with

competitive licensing is that it will be tied up in the courts for years because what that plan

provides is, if the pharmaceutical company will not negotiate in good faith, they are

entitled to fair payment for the royalties and the licensing rights, not the taking of anyone's

property but the fair payment for their rights. And then they have a judicial remedy if they

do not think that fair payment was fair.

And let me ask you, Professor Kapczynski, given all of these extraordinary

comments that we might be denying people the right to go to church under this approach,

have the socialists and those who want complete government control during Republican

administrations, have they ever used the concept of licensing in other areas in order to

assure that our military had the equipment that it needed? Have they used essentially the

same approach that I propose in this competitive licensing bill?

*Ms. Kapczynski. Absolutely.

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*Chairman Doggett. Could you speak up just a little bit? I want everybody to hear

your answer after all of this condemnation we have listened to.

*Ms. Kapczynski. Absolutely. This approach is used all the time. Right? There

are examples where government patent use has been used to procure lead-free bullets.

Passport scanners. Right? There are many, many examples that we have of this because

this has existed in law for -- in the 1940s the law was passed, and prior to that, government

patent use, actually, you could never sue the government for patent infringement.

So yes, it has been used all the time, and it is used now, even currently. There are

a lot of examples in defense, but not only in defense, where government procuring -- you

say a government procurement officer just procured the lowest price, and then you get

compensation, as you say, which is a really critical part of the story.

And I will ask both you and your colleague from Harvard, you have looked at the

factors in the bill that outline both how prices would be determined as a fair price for the

drug, but also, how would someone who refused to negotiate and is then told that a

competitive license would be granted so that generic competition could come in and we

could rely on American competition to drive prices lower.

Are those factors fair? Are they the factors that need to be considered? Or are

there others that should be considered?

*Dr. Sarpatwari. I would say those factors are fair. And critically, what we are

talking about here is we are rewarding companies for transformative innovation. Two of

the essential criteria that would be factored in the compensation that a manufacturer would

get is the comparative effectiveness and safety of the drug. And in that case, if a

manufacturer brings a good drug to market, it will get handsomely rewarded.

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And in terms of the questions as to how do we decide what -- there are plenty of

schemes that are available in terms of determining what the value of a drug is. And there

are plenty of countries that use that scheme quite effectively.

*Chairman Doggett. Do you have anything to add on that?

*Ms. Kapczynski. No. I think that -- I take the same position.

*Chairman Doggett. Let me ask you as well because the other argument that has

been made that I find really incredible is the defense of Big Pharma on its record of

innovation and on its response to the needs that we have for new treatments, new cures,

noting, as I think one of you may have done, that in 2017, the Government Accountability

Office found that only 13 percent of all the new drug approvals were actually innovate

drugs.

They are masters in innovation when it comes to extending monopoly pricing for

decade after decade. But when it comes to innovation and finding the cures that

Americans need, is it not correct, Doctor, that they have a pretty sorry record? And I

would ask you, in responding, to also address this question of research into how effective

drugs are in comparison to each other, and what role comparative effectiveness should

play.

*Dr. Sarpatwari. At the outset, I want to agree with Dr. Holtz-Eakin that science is

incredibly difficult, and this is a risky proposition. But I think this statistic points out a

little bit of the innovation struggle with industry right now.

Markups on existing drugs accounted for 60 percent of the U.S. drug revenues

between 2014 and 2017. How the industry is sustaining itself is through price increases

right now. And in terms of the drugs that are coming to market, I think it is important that

we consider that not all of these drugs are actually that good.

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And I can go into statistics about showing about the value of these drugs, but just

the sign of FDA approval does not mean that the drug offers a remarkable benefit.

Increasingly, the FDA is approving drugs on the benefit of surrogate outcomes, and that

surrogate outcomes are later tied to hard endpoints that show that they do not actually

improve those hard endpoints.

Critically in all of this, and I have tried to make clear in this testimony, is really

where you are looking at the driving force of innovation is U.S. government-funded

research. Now, does that not mean that pharmaceutical companies are doing an important

job in this market? Yes, they are doing a critical job. It is risky.

But when we talk about innovation and the sources of innovation, we need to

recognize that that wellspring is really the Federal Government funding public sector

research institutions.

*Chairman Doggett. I want to thank all of you and all of our colleagues. There is

obviously vigorous debate about this. I would just close in returning testimony opening

comments, that we have a system where the taxpayers fund much of the research. The

government grants a monopoly in defiance of the free market. And then there is no

restraint against price; it is whatever a sick or dying person will pay for a little more time

or a little relief.

That system, relying on monopolies the government has approved, is not

innovating, is not meeting our needs, and we need to find ways to deal with it. I think it

will take more than just tweaking the system in order to solve these programs. But I look

forward to our continued engagement and work on this subcommittee and the full

committee.

And with that, our hearing is closed. Thank you.

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[Whereupon, at 12:23 p.m., the subcommittee was adjourned.]

Questions for the Record follow:

Rep. Terri Sewell, Question for the Record

Submissions for the Record follow:

The Guardian