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Remarks to the Price of Good Health Summit

Alex M. Azar II
Price of Good Health Summit
January 15, 2019
Washington, D.C.

We’ll continue taking action within the scope of the President’s blueprint. But if we need to go beyond its four corners to bring down list prices and out-of-pocket costs, we will. This administration is open to working with Democrats and Republicans on these challenges. We are open to any ideas that preserve drug safety and keep the patient at the center. Nothing that meets that standard is off the table until prices come down.

As Prepared for Delivery

Thank you for that introduction, Joel [White], and thank you everyone for welcoming me here today.

It’s a pleasure to be here, because gatherings like this one represent important opportunities for problem-solvers to come together on some of the trickiest issues we face.

Everyone in this room understands the need for fundamental changes to our healthcare system, and I believe we have some shared principles for those changes: focusing on market forces and competition, addressing perverse government incentives, and driving for better value while always putting the patient at the center.

Those principles undergird the work we’re doing at HHS on each of the priorities I’ve laid out for the department: bringing down the high price of prescription drugs, reforming the individual market for health insurance, combating the opioid crisis, and creating a healthcare system where consumers can drive value.

I know all of you have ideas for how we can address each of these areas, and we’re eager to work with you on them.

The priority I specifically want to discuss today is drug pricing.

This topic rises to the fore every January when drug companies take annual price increases, just as they did this year.

But thanks to President Trump’s leadership, we have already seen some positive developments in drug pricing behavior.

From the release of the President’s drug pricing blueprint last May through the end of 2018, drug companies took 57 percent fewer price increases on brand drugs compared with the same period in 2017.

Some companies, such as Amgen, Merck, and Gilead, have cut the list price on certain drugs, and early data suggests that the 2019 price increases have been smaller and fewer in number than we saw in 2018.

From December 2017 to December 2018, one official measure of inflation in prescription drug costs actually went negative—the first time it has been negative in almost 50 years.

But drug companies have a lot further to go.

Smaller and fewer price increases or flat net prices aren’t going to be enough.

In fact, some manufacturers are still in denial about whether bringing down list prices is even an important goal. They claim that these skyrocketing prices don’t matter. But these prices do matter to patients, and our programs, in a number of important ways.

Every January, many of us patients see our insurance deductibles reset.

We have to start over again on paying for the drugs we need out-of-pocket, based on list price. This can mean thousands of dollars in drug costs for the 47 percent of Americans in high deductible health plans.

Meanwhile, patients taking specialty drugs often pay coinsurance, calculated as a share of list price. One hundred percent of seniors in Part D face coinsurance for at least some drugs.

Coinsurance could be, say, 25 percent of a drug’s list price—that’s what a Medicare Part D plan’s explanation of benefits would say.

This can create an interesting, perverse situation, as the real cost of a patient’s drug—the net cost to the plan and the net revenue received by the manufacturer—is often well below the list price, because of rebate payments made from the manufacturer to the plan.

For a drug with a $200 list price, a patient’s coinsurance might be 25 percent of the price, or $50. But after rebates, the real cost of that drug might be just $100.

That means the patient’s coinsurance, at $50, is actually 50 percent of the drug’s real cost—when they were told they’re only supposed to be owe 25 percent of the drug’s price.

It’s just one reflection of how list prices matter and how these third-party payments aren’t accruing to the patients who need them most.

One survey of employer coverage found that, overall, 49 percent of out-of-pocket drug spending is now in deductibles or co-insurance, as opposed to fixed copays.

Companies cannot claim list prices don’t matter when list prices help determine about half of out-of-pocket spending for the single largest type of health coverage in America.

Lower prices and lower out-of-pocket costs were two of the goals of President Trump’s drug-pricing blueprint.

The blueprint laid out how we can accomplish these goals by stoking competition, improving negotiation, creating new incentives for lower list prices, and bringing down out-of-pocket costs.

Since the release of the blueprint, we have taken action on most of the policy ideas we laid out—many of which were dismissed as just ideas at the time.

Today, I want to walk you through a number of the steps we’ve taken so far, and explain why they reflect the principles we all share for improving healthcare.

One place where competition currently thrives, but could work even better, is the way generic drug competition brings down prices.

The Food and Drug Administration approved a record number of generic drugs in Fiscal Year 2018, beating the record it had set in Fiscal Year 2017.

In October 2018, the FDA set another record, for most generics approved in a single month. According to the White House Council of Economic Advisers, generic approvals under President Trump have saved consumers $26 billion already.

Last year, Commissioner Scott Gottlieb also introduced a Biosimilars Action Plan, and the agency has approved 12 biosimilars under President Trump.

As the commissioner laid out last week, FDA is looking to improve the Purple Book, the reference work for biosimilars, and examining whether more actions may be necessary to clear up confusion around these drugs.

The FDA also approved a record number of new drugs and biologics in 2018: 59 new products.

In some cases, these are innovative treatments or cures, while in others, they provide new competition for existing products.

One hallmark of our blueprint is the recognition that sometimes we need systemic fixes, and sometimes we need targeted solutions to particular problems.

One area of concern is instances where just a single manufacturer is producing an off-patent drug. In some notorious cases, manufacturers have used this power to take dramatic price hikes.

That’s why we have FDA looking at how safe importation of drugs from abroad could help inject competition to address or prevent these price spikes, while not impairing intellectual property rights.

Where there is competition, we have to ensure that government rules aren’t getting in the way of private actors trying to harness it.

The Medicare Part D program, since it was created in 2003, has effectively used competition to keep down costs and come in well under budget.

But, as successful as Part D has been, the program still looks a lot like it did in 2003.

Now, I’d be happy to look like I did in 2003.

But I don’t think the same logic should apply to government programs.

Since Part D began, employers and private-sector insurers have worked in the commercial space to implement new negotiating tools that leverage competition to drive deep discounts.

These discounts are especially important when it comes to high-cost drugs for serious conditions like cancer.

That’s why we’ve proposed a historic overhaul of the Part D regulations regarding the program’s so-called protected classes.

The sole goal here is expanding patient access through lower costs, more competition, and more negotiation—using the tools that we know work because they’re used by many of the employers in this room.

We’ve also brought these tools to Medicare Advantage, which covers physician-administered drugs for seniors on MA. Private-sector plans get 15 to 20 percent discounts on drugs where MA plans currently get almost nothing in discounts.

We’ve already seen results, with at least one major insurer using these tools to have patients first use a much-lower-cost biosimilar, with lower out-of-pocket costs.

The President has also put forth a proposal to bring market forces and negotiation to the most costly physician-administered drugs in Medicare Part B fee-for-service.

Part B historically has not negotiated for lower prices at all and, unsurprisingly, pays almost twice as much as our peer countries do for the same drugs.

Under the new proposal, called the International Pricing Index model, Medicare would receive a share of the discounts that drug companies currently give other countries.

I want to lay out how we believe that this model, IPI, fits into a broader, market-based system for prescription drug pricing, because I know not everyone in this room may be a fan of what we’ve put forth.

The IPI model builds on the principles that all of us in this room share for solving drug pricing challenges: leveraging competition, gradually introducing the disruption that markets need, and driving down costs for patients.

The IPI model aims to cut the cost of the most expensive drugs in Medicare Part B by 30 percent.

That means going from paying 80 percent more than what other wealth countries pay for these drugs to 26 percent more.

Our target price, in other words, will still pay manufacturers more on average than they make in any other country on earth.

As a wealthy country, we’ll still be paying more than other wealthy countries—just not offensively more.

Pharma has gotten some stakeholders to claim that this plan would cause drug companies to not offer their drugs for sale in Medicare. Are we seriously to believe that a drug company will walk away from earning a 26% premium from the world’s largest payer to earn less from European countries?

These reductions will be phased in over five years: in the first year, 20 percent of the price will be determined by our international target, and 80 percent by the current Medicare pricing system. The following year, it will be 40 percent target price, 60 percent the current system, and so forth.

This gives drug companies time to adjust. In other countries, manufacturers will have time to negotiate a price more in line with what Americans pay. 

Where manufacturers don’t have leverage, they may have to continue giving cheaper prices overseas and take a cut in Medicare reimbursement. The ultimate results here will be driven by forces in the drug market and decisions drug companies make in response to them.

Some critics have argued that existing drug pricing deals with other countries aren’t voluntary, that the arrangements are compulsory.

This is belied by the fact that companies do sometimes decline to sell to countries because the price offered is too low. They don’t launch their drug there, or they delay its launch.

We know of no instances where a country has used compulsory licensing against a branded drug manufacturer over a product still under patent. Drug companies’ deals with our wealthy peers aren’t done looking down the barrel of a gun—the prices they receive are voluntary agreements.

In fact, the IPI model actually introduces a new competitive dynamic to the international landscape.

Because prices abroad will be tied to prices here in the U.S., drug companies will have a new reason to walk away from the negotiating table when other countries demand excessively low prices.

The socialist systems to which drug companies are giving better deals simply do not have power that’s comparable to the importance of participating in the Medicare program.

Just introducing this model has perhaps forever changed the dynamics around foreign freeriding.

Now that we’ve put forth this model, from now on, no drug company will ever agree to a discount in Europe without considering how it might affect the price they get in the United States.

For the first time, manufacturers will have to consider more than whether a lower price abroad makes sense based on marginal cost of production—they’ll have to think about how it affects their overall profits and return on investment for a given drug.

Another complaint about IPI is that today’s Part B system is already a successful market. I would submit that today’s system is not just a dysfunctional market, but in many or most cases, not a market at all.

Today in Part B, physicians face an incentive to prescribe more expensive drugs, because they are compensated as a percentage of a particular drug’s average sales price.

Under IPI, we plan to actually expand this pool of compensation and keep doctors whole, but calculate their payment with a method independent of prices.

We’ll also allow new private vendors to take title to drugs and compete for business in Part B. That will let physicians and hospitals get out of the risky business of purchasing and holding drugs—but if hospitals, PBMs, or other players want to compete in this space, they’ll be able to do that as well.

The inputs IPI uses for setting drug compensation is another avenue for more competition, too.

Today in Part B, even when there are competing drug products, Medicare just gets a bill, based on average sales price or ASP, and pays it—plus 6 percent.

Market-based competition often cannot drive down ASP because Medicare’s price-setting system dominates the market.

For at least 30 percent of Part B spending, Medicare purchases represent at least half of the market.

You don’t have to take my word for it: As MedPAC has put it, the ASP system “does not spur price competition among products with similar health effects.”

Take one example: Medicare spent over $1 billion on a particular eye drug in 2017. The price Medicare paid for this drug was almost 500 percent higher than the average price paid by economically similar countries. The company gets away with this because Medicare, which doesn’t ask for a discount, represents over 70 percent of the U.S. business for that drug.

The way ASP is calculated, it is impossible for seniors getting this drug through Medicare to receive a large share of the discounts provided to private payers.

I know the issue of Medicare’s market share within ASP is an issue raised by the Council’s comments on IPI, and I appreciate your interest here.

But our model goes further, by also addressing other flaws in the drug market.  While the drug I just discussed is still under patent, some of the most expensive drugs in Part B are not.

We all know there is potential for biosimilars to drive down the price that private employers, patients, and Medicare pay for some of the most expensive biologic drugs.

In the U.S., we’re not there yet. For one of the most costly drugs in Part B, for instance, the branded biologic has a 94 percent market share, even though two biosimilar competitors have been approved by the FDA. In European nations, there has been more widespread adoption of these particular biosimilars.

Part B pays a discounted price for this drug, but the discounts aren’t nearly as deep as they are in Europe.  

These discounts in Europe aren’t driven by governments’ market power—they’re driven by biosimilar competition.

In other words, the IPI model is not just a way to leverage the competition and negotiation done abroad, it is also a way to accomplish one of the goals I discussed earlier, which we all share: harnessing biosimilar competition.

There are a number of reasons why biosimilars haven’t taken off here in the U.S., and I’ve already mentioned one of them today: today’s system of rebates and the expanding list-to-net price gap.

In so many cases, today’s rebate system not only distorts pricing signals—it also discourages the introduction of new competition.

Pharmacy benefit managers and payers are happy to continue receiving a big rebate on a biologic, rather than go to the trouble of covering a biosimilar competitor with not just a lower net price, but a lower list price too.

What’s standing in the way of that competition is sometimes referred to as the “rebate wall.” It’s only a good deal for defenders of the status quo, whether that’s manufacturers selling certain drugs or pharmacy benefit managers negotiating big rebates.

It’s a bad deal for payers, like many of the employers in this room, who don’t end up with the lowest possible net costs. It’s a bad deal for patients, who owe more out-of-pocket for the drugs they need.

Of course, we also need pharmacy-level biosimilar interchangeability, so PBMs can break through the rebate wall, confident they can move share to the biosimilar, while sacrificing the branded rebate.

Disrupting the rebate status quo is a key piece of the President’s drug pricing blueprint, and it will be a key piece of delivering our ultimate goal: not just lower net drug costs, but lower list prices and lower out-of-pocket costs for patients.

We’ll continue taking action within the scope of the President’s blueprint.

But if we need to go beyond its four corners to bring down list prices and out-of-pocket costs, we will.

This administration is open to working with Democrats and Republicans on these challenges.  

We are open to any ideas that preserve drug safety and keep the patient at the center.

Nothing that meets that standard is off the table until prices come down.

That is an invitation to all of you: We know you have ideas, and many of you have brought them to us. A number of you have already been valuable allies in this fight.

So continue to engage with us.

Together, we can finally deliver what American patients need and deserve: a pharmaceutical market where drug prices finally go down, not up. Thank you so much for having me here today.


Content created by Speechwriting and Editorial Division 
Content last reviewed on January 15, 2019