Thanks to President Trump, the era of backdoor deals in the drug industry is coming to an end. The President is ushering in a new era: one where drug prices come down, discounts are delivered to your pocketbook, and every interest in our system finally has to put the American patient first.
As Prepared for Delivery
Thank you, Jason [Grumet]. Good morning everyone, and thank you to the Bipartisan Policy Center for inviting me to speak with all of you.
I’m pleased to be here to talk about the historic action President Trump put forth yesterday on drug pricing.
He’s proposed to replace today’s opaque system of rebates, which drives drug prices higher and higher, with a system of transparent and upfront discounts, delivered directly to patients, that will finally drive prices down.
When we published the President’s blueprint for lowering prescription drug prices last May, we heard a lot of stories about the high prices that millions of American patients struggle to pay for their drugs every month.
One story was about a woman from Kentucky, named Sue, who retired from an insurance company a couple years ago.
Sue has a genetic skin condition, an autoimmune disorder, that causes great discomfort to her. She found what she called a “miracle drug,” which helped treat it effectively.
Unfortunately, the sticker price for a year’s treatment on this drug runs into the tens of thousands of dollars. Sue was told that her out-of-pocket costs for the drug would be $7,200 a year on her Medicare Part D plan.
When she heard that price, she said, she just cried. She simply couldn’t afford it. She lives on Social Security and a small pension, amounting to about $24,000 a year.
She had to stop taking the drug she needed, and resort to less effective ointments and creams.
“It’s not fair,” she said. “I’m basically healthy. I eat healthy. I live healthy. I’ve done my part, and my country is not doing enough. I will not sell my house to pay for this medication—I’m leaving my house to my two sons. And it’s not like I can go back to work to pay for the medication—I’m 76, who’s going to hire me?”
Sue is right: This system isn’t working for her. She deserves better care.
That is why, yesterday, President Trump proposed the single biggest change to the way Americans’ drugs are priced at the pharmacy counter, ever—and it’s aimed squarely at helping patients like Sue.
We’re proposing a major change to our Anti-Kickback Statute safe harbors, which have always been about protecting legitimate, beneficial business arrangements from the threat of prosecution.
The drug industry has hidden behind these protections, building a shadowy system of kickbacks that has long drawn the ire of those concerned about prescription drug prices—both Democrats and Republicans.
President Trump is proposing to strip away these special-interest protections.
Today’s system has pushed the price of Sue’s drug higher and higher every year—the manufacturer hiked the price 6 percent just this January, in fact.
The President is proposing to replace this utterly broken system with transparent, upfront discounts, passed on directly to patients at the pharmacy counter.
First, let’s look at what’s wrong with the current system.
Sue was told that the out-of-pocket cost for her drug was going to involve coinsurance, 33 percent of its price, up to a certain point, and then larger and then smaller percentages after that.
No one told her that she was being asked to pay 33 percent of an inflated list price set by the manufacturer—a price the manufacturers claim no one pays.
No one told her that the net price paid by her Medicare drug plan was significantly less than the price from which her out-of-pocket costs were being calculated.
No one told her that her drug plan was getting a kickback from the drug’s manufacturer—a kickback that did not reduce the astronomical cost-sharing she would have to pay every month.
This backdoor system of kickbacks isn’t set up to serve Sue, and it isn’t set up to serve you, the American patient.
Today’s system is set up in the shadows, to serve entrenched interests: drug companies who set these prices so high, and the pharmacy benefit managers who receive tens of billions of dollars in rebates without patients ever knowing where the money goes.
In total, each year, more than $150 billion in rebates are passed around this system—and patients are left totally in the dark.
Under our proposal, the rebates moving around Part D, which in 2017 totaled more than $29 billion, will have to be passed directly to patients, right at the pharmacy counter.
Think about that: $29 billion of discounts, now reflected in seniors’ pocketbooks, at the pharmacy counter, starting January 1, 2020.
Any defenders of the status quo aren’t just arguing that patients like Sue shouldn’t get the full benefit of the discounts offered by manufacturers.
They’re actually arguing we’re better off if we don’t know where those discounts go at all.
They’re saying it’s okay to have a system where prices keep going up and patients suffer in the dark.
How can you possibly defend this catastrophically broken status quo that rewards higher prices, conceals kickbacks to middlemen, and denies seniors tens of billions of dollars of savings at the pharmacy counter?
That’s why President Trump has proposed a new framework for the industry, where the rebates negotiated on drugs like Sue’s are passed on, as upfront discounts, to the patients who buy those drugs.
While the benefits will vary for each individual, consider the effect it could have on patients like Sue.
Imagine you take an expensive drug, with a list price of thousands of dollars.
Say the drug’s manufacturer offers a 30 percent kickback, which is pretty typical.
Your out-of-pocket cost for that drug could be $2,000 a year in coinsurance. That is calculated, like much of Sue’s costs, from your drug’s list price.
It is not lowered by the kickback your drug plan is getting from the manufacturer.
Under the President’s proposal, we’d convert that 30 percent kickback into a 30 percent upfront discount.
Your coinsurance could drop by 30 percent.
That’s $600 in annual savings—$50 every time you pick up a month’s supply of your drug.
Bringing these discounts directly to patients will mean more than just lower costs at the pharmacy counter. It will also drive other changes in drug markets.
Perhaps most important, no more kickbacks means no more reason for drug companies to take the list price increases we hear about each January, including this January.
And, for that matter, there will be no more reason for the price increases they take every July. Or in August. Or in February. Or in March.
The President’s proposal will eliminate the single biggest reason for these seemingly perpetual drug price increases: today’s rebate system.
Let me lay out why.
Each year, drug companies tell us quite explicitly why they raise prices on so many drugs.
It’s because higher prices allow them to give larger kickbacks to drug plans, securing better placement on drug formularies.
That’s right: In drug markets, a higher price often makes your product more attractive, rather than less attractive. Today’s drug market works, essentially, like no other market.
In fact, keeping list prices high to allow for big rebates is fundamental to the current business models of the system’s middlemen, pharmacy benefit managers.
They actually complain when list prices don’t go up as much as they need them to.
Really, I can’t make this stuff up: One of these middlemen companies recently told investors that they’re facing “rebate headwinds” because prices and rebates aren’t rising quickly enough.
Passing discounts directly on to the patient will move us toward a real market for drugs.
In such a market, a drug’s list price, the number Sue would have to pay a share of, can be much closer to the net cost of the drug that the market produces.
Lower list prices will mean relief for the huge number of patients who are paying their drug costs as a share of list price. That includes not just seniors on Medicare Part D who need specialty drugs, like Sue, but also the 47 percent of Americans under age 65 on high deductible health plans, who pay based on list price until they hit their deductible each year.
Each January, Sue and so many other Americans see their out-of-pocket costs shoot up, as their deductible or out-of-pocket maximums reset for the new year.
Under a system of upfront discounts, their costs would be reduced throughout the year.
It will be vastly less common for patients to have to spend through a big deductible like so many patients are doing right now in January and February.
It will be much less common to see a big spike in your drug costs from one month to another.
Upfront discounts and lower list prices will mean a fundamentally fairer, more predictable, more transparent experience for any American who goes to the pharmacy to fill a prescription for themselves or a loved one.
What I’ve been describing for you is how today’s kickbacks don’t work for patients and don’t drive real price competition. But these kickbacks also sometimes prevent competition from entering markets in other ways, too.
We heard a story recently from a woman in Oregon, a retired nurse named Ann. She has what’s called chronic dry eye disease—a painful condition that impedes the production of tears.
When it goes untreated, it can cause severe damage to one’s eyes and vision. She’s been prescribed a drug that treats her effectively, but it costs her more than $2,000 a year out of pocket.
That number would almost certainly be lower if her drug plan passed on to her the discounts they get from the manufacturer.
Because Ann’s costs are so high, at times she hasn’t been able to take the full dose of her drugs, putting her not just in pain but at risk of permanent eye damage.
It’s not just about the fact that Ann likely isn’t getting the full value of discounts supposedly negotiated on her behalf. One thing she’s noted is that she’s been waiting for the price of her drug to go down—it’s been on the market for 16 years now.
A similar drug, also to treat chronic dry eye disease, was approved by the FDA a few years ago. But that drug has not been adopted by many drug plans, making it harder for it to drive down costs through competition.
Why not? Not because the new drug wouldn’t work for many patients, but because the old drug Ann takes offers a huge kickback to drug plans to block access to the new competing product.
So this kickback doesn’t lower Ann’s out-of-pocket costs, and it makes it less likely that competition between these two drugs could drive down those costs.
Again, how can you possibly defend this broken system?
A new system, where discounts go directly to the patient, will tear down this barrier to competition, sometimes known as the “rebate wall.”
Drug companies would then actually compete to have the lowest price, rather than the biggest kickbacks. This would be a gigantic step toward a system that puts patients like Ann first.
It’s not just patients with really high-cost drugs who are getting a bad deal, either. These kinds of shenanigans can be shockingly common.
I’ll give you a very recent example: This month, a drug company introduced a new generic version of a common asthma inhaler.
If you want to buy this new generic without insurance, just paying cash, you can expect to pay $35 or less for a month’s supply.
That’s the generic’s list price.
Compare that with the list price of the brand name alternative, which is almost $60.
But when the generic hit the market, pharmacies across America got a notification from at least one large middleman that said essentially the following: We won’t cover the generic. If someone comes in with our insurance, you cannot process the generic with their insurance card. We’ll only cover the brand drug.
If you’re wondering just how obscure these backdoor deals are, by the way, I’ll let you know how we found out about this notice: Somebody posted about it on LinkedIn.
That vaunted source of important news: LinkedIn!
By one estimate, a quarter of patients will pay more at the pharmacy counter by using their insurance to purchase the brand drug than they would if they just paid cash for the new generic.
Knowing that there’s a better deal to be had by paying cash, by the way, is a right the President guaranteed last year, by signing legislation to ban pharmacy gag clauses and bring transparency to the pharmacy counter.
The reason the drug plan wants patients to take the brand drug is because the brand drug gives the drug plan a kickback.
That’s how broken our system is: When a new option comes onto the market, instead of pharmacies across America being told, “Hey, there’s an affordable new option, you should tell your patients about it,” the insurer tells your pharmacist, “We’ll only cover the expensive incumbent option.”
You, the patient, are none the wiser unless your pharmacist tells you otherwise—and until we implement a system with upfront discounts.
I want to raise one final point about our proposal and how it will improve drug markets. You may be asking yourselves, why aren’t big rebates passed on to patients today?
Currently, as some have noted, our system almost acts like reverse insurance.
Large rebates on expensive drugs are used by middlemen not just to pad their profits, but to push down premiums for other customers.
This is the opposite of how insurance is meant to work—it’s supposed to protect people with the highest costs.
Thus, it is possible that some seniors could see a slight increase in their Part D spending, because they don’t use drugs. They don’t have big out-of-pocket costs that can be brought down through the new discounts, and they could see a very small increase in their premiums.
But the benefits of this system will materialize for this subset of these seniors when they do need prescription drugs, as almost all of us do eventually.
The painful part of our drug pricing system isn’t Part D premiums—it’s the sticker shock you get when you owe a share of an undiscounted, sky-high list price. That is what we are tackling today.
Further, we don’t believe even these small premium hikes are necessary or likely.
Part D plans have ways to avoid premium increases, including more use of generics, tougher negotiation, or lower overhead.
We believe Part D plans will use these tools to keep premiums steady, because they already compete incredibly aggressively on premiums. That part of our system works relatively well. The biggest problem, the pain point, is patients’ out-of-pocket spending at the pharmacy.
The American Patients First blueprint that the President released back in May laid out four strategies for lowering patients’ drug costs: boosting competition, creating incentives for lower list prices, improving negotiation, and lowering out-of-pocket costs.
Ending today’s kickback system is a step forward on each of those strategies. It will help open new avenues for competition and transparency, incentivize lower list prices, and allow negotiations to lower out-of-pocket costs as much as possible.
Passing discounts directly on to patients is a major step toward a whole new drug pricing system.
In closing, I want to emphasize this: Building a new system that really works will require cooperation—from drug companies that want to compete for patients, from pharmacy benefit managers who want to negotiate for patients, to physicians, pharmacists, researchers, and patient advocates.
Congress has an opportunity to follow through on their calls for transparency, too, by passing our proposal into law immediately and extending it into the commercial drug market.
Everyone who wants to put American patients first will have a key role to play in this new system. Patients’ interests, above all, will rule.
Thanks to President Trump, the era of backdoor deals in the drug industry is coming to an end.
The President is ushering in a new era: one where drug prices come down, discounts are delivered to your pocketbook, and every player in our system finally has to put the American patient first.
Thank you all for having me here today.