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Remarks at Brookings on Drug Pricing

Alex M. Azar II
Brookings Institution
October 26, 2018
Washington, D.C.

Something has to change in how Medicare pays for physician-administered drugs. This is widely understood across the healthcare spectrum, and it’s been a long time coming. The only thing standing in the way is the one special interest that has benefited from this program far out of proportion to any other actor, for the last 15 years: the pharmaceutical industry.

As Prepared for Delivery

Thank you, Paul [Ginsburg], for that introduction.

It’s great to be here at Brookings today, because there are few places on earth where people get as excited as you do here over discussing how to fix complicated, broken government programs. I’m so pleased to say that’s what we’re here to do.

All of you understand the importance of dynamism and reform in government and the need for commonsense reforms to improve our largest government programs, like Medicare.

That is what President Trump put forth yesterday: a long-overdue reform for how Medicare pays for some of the most costly drugs the program covers.

One of the reasons that reforms like this don’t come along very often is that broken programs are protected by the special interests they serve. With apologies to the political scientists in the room, you don’t need to be a Ph.D. to know that.

In Medicare Part B today, the government gets the bill, and we just blindly pay it, plus 6 percent for the provider who administers it. There is no negotiation, and the payment mechanism actually encourages prescribing more expensive drugs.

With apologies to the economists in the room, you don’t need a Ph.D. to understand why this program is going to be the fastest growing part of Medicare.

Indeed, from 2011 to 2016, per-beneficiary spending on Medicare Part B drugs rose 10 percent a year.

The statement PhRMA put out yesterday on our plan protested that the United States currently “has a competitive marketplace that controls costs,” including in its “market-based Medicare Part B program.”

Cost control? Market-based? That doesn’t sound like the Part B drug program we run. Are there any others?

Something has to change in how Medicare pays for physician-administered drugs. This is widely understood across the healthcare spectrum, and it’s been a long time coming.

The only thing standing in the way is the one special interest that has benefited from this program far out of proportion to any other actor, for the last 15 years: the pharmaceutical industry.

Finally seeing this system reformed, in fact, is one of the pharmaceutical industry’s ultimate nightmares. I can tell you that because it used to be my job to have pharmaceutical nightmares.

But now we have a President who is definitely not afraid of upsetting drug companies and isn’t afraid of taking on ostensibly invincible special interests.

That’s why he was able to put forth the sweeping reform he did yesterday, which will bring a more realistic baseline price to how Part B pays for drugs, open it up to private-sector competition, and fix perverse incentives that are driving up costs.

Let me explain briefly how this works.

The payment model is based on a new report we put out on Thursday, which examined the gaps between what we pay and what other countries pay for the 27 highest-cost physician-administered drugs.

According to our research, right now Medicare pays 180 percent of what other wealthy countries pay for this set of costly drugs.

This has a real impact not just on Medicare, but on beneficiaries’ everyday budgets, because cost-sharing in Part B can range up to 20 percent of the cost of a drug.

For some drugs, the price differences are even greater. Sometimes, we’re not just paying 180 percent but 300 or even 500 percent of what other countries pay. This is a symptom of a completely broken system.

Our model would fix the situation by applying a portion of these discounts, which manufacturers have voluntarily given to other countries, to what Medicare pays moving forward.

Over the next five years, under this model, we will go from paying 180 percent of what other countries pay for these drugs to 126 percent of what they pay.

As prices drop, American patients paying coinsurance will see a directly proportional drop in their out-of-pocket costs for these very expensive drugs.

I’ll give you an example of how this will work.

There’s a drug that some cancer patients take to fight infections, which currently costs Medicare $4,700 each time it’s administered. Our wealthy peers pay an average of just $1,100 a dose.

Under our model, after the five-year phase-in, our price would be reduced to under $1,400 a dose.

Just a year into implementation, patients would already be saving $175 each time they get the drug. By Year 5, their coinsurance would be more than $600 lower.

This is a huge win for patients, especially those with expensive illnesses or conditions.

To understand the best way to implement this new system will work, we plan to roll it out as a model covering 50 percent of the country.

It’s not just patients in areas covered by the model who can benefit, however. As payments within the model are reduced, the average sales price Medicare pays will drop, reducing what patients outside the model pay.

It’s important to understand that this model will expand patient access, through lower prices. This is a pro-patient-access model.

We are going to lower drug prices substantially, for our most costly drugs, without restrictions on patient access and without harming innovation. Benefits will not change; formularies will not be imposed.

Let’s think about how implausible it is that patient access could be harmed. After full implementation of the model, we will still pay an average of 26 percent more for these drugs than our international competitors.

To believe that this is going to meaningfully impact patient access, you have to believe that drug companies somehow will find it appealing to sell a drug in Germany, Japan and other countries at lower prices—but not to the United States at higher prices.

Not only are drug companies never going to walk away from the world’s largest payer for prescription drugs, they’re certainly not going to walk away while they’re still getting paid a quarter more than they are elsewhere!

Patients will see benefits beyond just lower drug costs, because our model will end some longstanding perverse incentives created for physicians by today’s “buy and bill” system.

Our model will allow private vendors to take title to drugs and compete for business, letting physicians and hospitals get out of purchasing and holding drugs. Hospitals and physicians’ practices should be focused on caring for patients—not floating capital for pricey drugs.

There are important distinctions between what our model and the Competitive Acquisition Program that was attempted in the 2000s but failed to take off. Back then, among other restrictions, vendors were prevented from ordering drugs at will—they had to wait to order doses for individual patients, making it impossible to build a real business. On top of that, the CAP was voluntary. How could we expect doctors to be interested voluntarily choosing to give up making money on expensive drugs?

A similar mistake was made in rolling out the Part B demonstration under the Obama administration, which retained buy-and-bill and prevented vendors from taking title. It actually risked putting some practices underwater in the purchase of these drugs. It basically just took revenue from docs, without touching the underlying issue of out-of-control prices and foreign freeriding.

We believe being vendors of these drugs can be a competitive, important business opportunity for wholesalers and distributors, and, in some cases, for hospitals where they find a comparative advantage in doing the negotiation themselves. In so many cases, though, providers will be better served by being able to work with a private sector vendor than having to take title to the drugs themselves.

At the same time that we are relieving doctors and hospitals of having to buy and hold tens of millions of dollars’ worth of expensive drugs, we are actually expanding the pool of compensation available to them.

All of us know the Medicare Part B pricing system as ASP plus 6, but since the advent of budget sequestration, it has actually been ASP plus 4.3 percent. Our model takes it back to 6 percent, actually expanding the potential pool of compensation for physicians and hospitals.

This is moving in the opposite direction that the model proposed by the previous administration for Part B would have done, where many specialists who prescribe high-cost drugs would have seen compensation cut substantially.

We are seeking comment on the best ways to ensure compensation is at least steady for physicians and hospitals, while ending the incentives that the 6 percent add-on creates for prescribing more expensive drugs.

Today’s price-based compensation is a not-insignificant driver of higher drug spending, for patients and for the Medicare program. However exactly we end up, we are going to keep providers whole while replacing the system with compensation that’s independent of prices. We recognize that changes to this system have to work for the doctors who help care for the patients who need these drugs. We are eager to understand the best ways to do that, and the model generously solicits comment on it.

This model fits into a larger effort to spark real price competition and negotiation in drug markets. A number of these physician-administered drugs are biologics, and we haven’t yet succeeded in building a robust market for biosimilars. Earlier this year, we did approve the first biosimilar for one of these high-cost drugs.

But there isn’t nearly enough competition, in part because the current system actually penalizes doctors for seeking out more affordable alternatives.

Under our model, that will finally change. We aim to make sure that doctors make the same whether they’re prescribing a more expensive branded biologic or its biosimilar. This gives manufacturers a meaningful new opportunity to start bringing down prices through biosimilar competition.

In doing so, this is actually going to help expand choices for patients. We know that providers are concerned about how this could impact patient choice, but we are intent that this model not just keep patient access unfettered, but actually ensure that patients will have a choice of drugs from their provider that isn’t distorted by perverse financial incentives.

I want to now address the tired talking points that we’re already hearing from some quarters that this model will put a real dent in R&D investment.

Judging by drug companies’ reaction to any changes around Part B, the implication is that any system that does not pay precisely average sales price plus 6 percent isn’t capable of sustaining innovation. Indeed, yesterday the drug industry labeled me un-American and a socialist for suggesting any other system is possible.

These talking points are prima facie implausible—but they are mathematically unbelievable, too.

Our model will save $17 billion in Medicare drug spending over the next five years.

That’s $3.4 billion a year.

The pharmaceutical industry reports they spend an average of 21 percent of revenue on R&D. At most, this model could pull around $700 million out of their annual R&D budgets, which they boast are more than $70 billion a year.

These savings, while substantial for American patients and taxpayers, cannot possibly pull out more than 1 percent of R&D.

Of course, that is assuming companies cannot drive somewhat higher prices in Europe, which they can almost certainly do, and it assumes there’s nowhere in their operating budgets to find a few hundred million dollars in new savings or efficiencies.

The final point I want to raise is why we put out the model as an advance notice of proposed rulemaking. Brookings, of course, is one of those rare places where I could just blurt out, “As you know, it’s an ANPRM,” and I’ll get a lot of nodding heads.

It’s a highly deliberative way to go about policymaking, and it actually follows two separate requests for information, issued as part of the President’s drug pricing blueprint and the 2019 Medicare outpatient payment system rule.

On top of that, CMMI payment models are by their very nature deliberative: We believe strongly that this model is going to yield substantial benefits. But we are going to know exactly how big the benefits are, because of how CMMI assesses models.

We will not just measure the results in dollars saved. One good reason to lower drug prices, among many, is that we believe it can aid medication adherence. We’re planning to gather data on that, and we’ll also make sure to monitor patient access and quality.

But all of this deliberation has one goal: determining how we can use this model to lower drug prices while maintaining patient access and minimizing disruption for providers.

This President is not turning back: We will put American patients first by reforming how Part B pays for drugs, and this reference pricing model will happen.

What we’re open to figuring out is how to ensure that we reshape this system in a way that benefits patients, providers, taxpayers and everyone else who’s been losing out.

We will be attentive, for instance, to how the model may interact with the 340B drug discount program. We are open to understanding how hospitals that invest significant resources into serving vulnerable populations could be impacted by our plan.

There are a lot of savings to be shared here, and we have plenty of options to ensure that it’s implemented in a way that minimizes disruption.

We’re also open to shortening the transition period or increasing the discount beyond 30 percent—which would expand the pool of savings that could be used, and which we’ve closely considered. Congress also has the power to adopt this model sooner and broader, if it chooses to do so.

As I mentioned earlier, rarely do these kinds of broad-based wins exist in policymaking.

Here, there is so much to be gained because the Part B drug program, as set up for the last decade and a half, wasn’t really a win for anybody except the drug makers.

Still, we’re open to input from them, too: If there are other ways to introduce competition to this program, we’re open to them.

But we’ve waited five months for drug companies to come to the table on this particular issue, with real, non-self-serving proposals, and none of them did.

We have no doubt the drug industry will be stubborn in resisting these changes. But President Trump has amply demonstrated his determination in the face of special interests. The results of this fight will be no different—we will see another victory secured by this President for American taxpayers, American doctors, and American patients.

Thank you very much for having me here today, and I look forward to our discussion.

Content created by Speechwriting and Editorial Division 
Content last reviewed on October 26, 2018