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Remarks on Drug Pricing Blueprint

Alex M. Azar II
Stakeholders, news media and others
May 14, 2018
Washington, D.C.

For too long, there’s been a lot of talk on drug prices, and no action. Drug companies have insisted we can have new cures or affordable prices, but not both. I’ve been a drug company executive—I know the tired talking points: the idea that if one penny disappears from pharma profit margins, American innovation will grind to a halt. I’m not interested in hearing those talking points anymore, and neither is the President.

As Prepared for Delivery

Mr. [Coard] Simpler, I’m grateful to you for sharing your powerful story and for joining us today.

Thank you to everyone else, as well, for joining us here at the Humphrey Building or tuning in across the country.

Mr. Simpler’s experience is all too common. All of the players in our drug pricing system have let down patients like him.

For too long, there’s been a lot of talk on drug prices and no action. Drug companies have insisted we can have new cures or affordable prices, but not both.

I’ve been a drug company executive—I know the tired talking points: the idea that if one penny disappears from pharma profit margins, American innovation will grind to a halt.

I’m not interested in hearing those talking points anymore, and neither is the President.

High prescription drug prices like Mr. Simpler faces are a serious threat to the health and well-being of too many Americans. President Trump has told us at HHS to fix this problem, and we will.

The problem has multiple parts: high list prices, overpaying in government programs, high out-of-pocket costs, foreign-government freeloading. They are connected in a way that attempting to squeeze one end of the balloon won’t lead to lasting change.

But the complexity of the problem is no excuse for inaction or incrementalism. There are plenty of actions we can and will take administratively to shake up this system.

We do want to hear from industry, patients, and other stakeholders about what they think of the full range of changes we put out in our blueprint.

That’s because we’ve proposed a set of changes that are more sweeping than any drug-pricing initiative ever, more bold than any set of proposals set forth before.

I’m sure that pharmaceutical manufacturers took note on Friday when the President pointed out that they are one of the most aggressive industries when it comes to lobbying. Pharma spends more than $175 million a year trying to understand what the President and I are thinking.

So I’m going to save pharma some money and tell you what the President and I have planned. Pay attention, as there’s a lot on the way.

There are four strategies for reform set out in the administration’s drug-pricing blueprint: improved competition, lowering out-of-pocket costs, enhanced negotiation, and incentives for lower list prices. On each of them, we’re going to start taking action today.

I want to start with negotiation, because it’s so important—and there’s been some confusion on it, for a while now.

You heard President Trump make it clear on Friday how important tougher negotiation is.

That is exactly what our plan brings to Medicare, in an effective and targeted fashion. We are going to make negotiation more effective than it is today in our retail drug program, Part D, and bring negotiation to where it doesn’t exist, in physician administered drugs, Part B.

In Part D, we’ll be giving Medicare plans the same negotiating power that private sector plans already have—we know this approach works.

Let me briefly lay out how this will happen. We know right now that Medicare Part D is not getting the deals it should on some expensive, important drugs.

For instance, there are six types of drugs that are automatically put into Part D categories that are called “protected classes,” because they’re vital to treating some serious conditions.

Part D spends about $30 billion a year on these drugs. That’s almost 10 percent of what our entire country spends on drugs each year.

Yet Part D plans are hamstrung by current rules from really negotiating over drugs in these protected classes—allowing Pharma to run up huge profits on patients who desperately need these often-expensive drugs.

For example, the company that makes one of the 10 most common drugs in these categories raised that drug’s price 20 percent in the last 12 months. That particular drug, in 2015, cost $11,500 per month. Under Medicare Part D, that means seniors using the drug will typically owe an extra $115 every month. They just went from paying $575 per month to $690 per month, at a time when the average Social Security check is $1,400.

Typical private-market discounts for these drugs are in the 20 to 30 percent range. The average discount across all of these protected drugs in Medicare Part D is just 6 percent, and for some of them it’s 0.

A 6 percent discount—I’m sorry, that is not negotiating.

This administration has it within our authority to provide Part D plans with new tools to negotiate for these drugs.

For one-third of Medicare Part D spending, we can go from where plans effectively aren’t negotiating, to plans having real power to negotiate.

These are important drugs for patients with potentially debilitating conditions, so we will go about these reforms transparently. This process will not restrict patient access, but expand it through lower costs.

It’s important to understand that, because it isn’t true of the alternatives. You’ve probably heard before that Medicare could save tons of money by negotiating directly for drugs.

This just isn’t true, and you don’t have to take my word for it. The Congressional Budget Office, when it was run by Peter Orszag, who went on to work for President Obama, found that the idea of direct negotiation would generate almost no savings. The same conclusion was reached by President Obama’s Office of Management and Budget when it assessed the proposal in his budget.

The only way that direct negotiation saves money is by doing something this administration does not believe in: denying access to certain medicines for all Medicare beneficiaries, or setting prices for drugs by government fiat.

We don’t believe either of these proposals would put American patients first. They would move us toward the kind of socialized medicine systems that have such a notorious reputation for poor quality and access. This stacks right up there with the false promises of Obamacare: that if you like your plan, you can keep it, and if you like your doctor, you can keep seeing him.

But I don’t expect these ideas to go away, no matter how unlikely they are to work. If the pharmaceutical industry wants this idea off the table entirely, the only way is to come to the table with us, to engage in meaningful negotiation with Medicare Part D plans, and to stop the price hikes.

The President is also going to bring smart negotiation to billions of dollars’ worth of drugs in a part of Medicare where there is currently no negotiation at all. That’s Medicare Part B drugs, those administered in a physician’s office.

Right now in Part B, essentially as soon as a drug is approved by the FDA, it’s covered. Medicare gets a bill for the drug, composed of the standard price plus a 6 percent markup, and we pay it.

Compare that with the negotiation in Part D: Plans determine whether a drug should be covered or whether an alternative is superior. Plans negotiate discounts, rather than just paying full price.

You can imagine what happens when you’re developing a drug: It’s often much more appealing for the drug to go into Part B than D. Perversely, some of these drug development decisions are being driven by government reimbursement systems, rather than what’s best for the patient.

In short order, we will be issuing a request for proposal to make new use of an alternative system for buying Part B drugs, a Competitive Acquisition Program. We believe there are more private sector entities equipped to negotiate these better deals in Part B, and we want to let them do it.

More broadly, the President has called on us to merge Medicare Part B into Part D, where negotiation has been so successful on so many drugs. This is how we follow through on his promise to do smart bidding and tough negotiating for our seniors.

Before closing on negotiation, I want to be clear: This is a topic the President and I have discussed at great length, and the idea of direct negotiation in Medicare has come up. He is tired of the government getting bad deals on the drugs seniors need, and I couldn’t agree more.

We formulated this plan with fixing that problem as the No. 1 priority, and the President is following through on his promise. What we came up with is the smart, effective approach to tougher negotiation, and a more aggressive approach than has ever been tried before in our programs.

Another key way to bring down costs using our market-based system is through more competition. Thanks to thriving generic drug competition, Americans get better prices on generics than most European countries, but we can go further.

FDA Commissioner Scott Gottlieb, who is here today, has made it a top priority to stop drug manufacturers from gaming our patent system to block generic competitors.

In one of the most notorious examples, pharma companies use FDA safety rules or commercial distribution restrictions to block generic drug manufacturers from having access to samples of the branded drug.  Those samples are needed to perform the testing that gets generic drugs approved, giving consumers safe and effective lower-cost medications. 

We know that certain brand name manufacturers are abusing the system by blocking access to samples, and hiding behind FDA’s rules when they do it. FDA is going to begin publicly identifying drug companies suspected of engaging in these abusive practices. The agency has already received more than 150 inquiries from generic manufacturers about challenges with access-to-product samples from brand manufacturers. 

It’s time to shed light on these practices and call out the manufacturers who may be abusing the rules that built our free market for drugs. They’re using laws intended to promote the public health to pad their profits instead.

I want to raise a final point in the context of competition: Many people may be familiar with proposals to give our seniors access to cheaper drugs by importing drugs from other countries, such as Canada. This, too, is a gimmick. It has been assessed multiple times by the Congressional Budget Office, and CBO has said it would have no meaningful effect.

One of the main reasons is that Canada’s drug market is simply too small to bring down prices here. They are a lovely neighbor to the north, but they’re a small one. Canada simply doesn’t have enough drugs to sell them to us for less money, and drug companies won’t sell Canada or Europe more just to have them imported here.

On top of that, the last four FDA commissioners have said there is no effective way to ensure drugs coming from Canada really are coming from Canada, rather than being routed from, say, a counterfeit factory in China. The United States has the safest regulatory system in the world. The last thing we need is open borders for unsafe drugs in search of savings that cannot be safely achieved.

You can’t improve competition and choice in our drug markets with gimmicks like these—you have to boost competition and price transparency. That informs our third strategy, to reduce Americans’ out-of-pocket drug costs.

Today, some pharmacy benefit managers set contracts with pharmacies that prevent your neighborhood pharmacist from telling you when you could get a better deal on a drug by paying cash than by using insurance.

That’s because, when you use your insurance, the pharmacy benefit manager gets a cut of the deal—when you pay cash, they don’t.

You ought to know how you can get the best deal possible, and your pharmacist should be able to tell you how. So this week, CMS [Centers for Medicare & Medicaid Services] will be sending a letter to all Medicare Part D plan sponsors saying that we consider such behavior unacceptable.

If pharmacy benefit managers really believe in doing right by the patients they work for, there’s no reason they can’t end this practice and release pharmacists from these gag clauses, right now.

Ending gag clauses is part of a much broader effort CMS will be undertaking to bring more transparency to our drug markets. You ought to know how much a drug costs and how much it’s going to cost you, long before you get to the pharmacy counter or get the bill in the mail.

We want to consult with industry on how to get to that point, but [CMS] Administrator [Seema] Verma, whom we’re glad to have here today, is going to make it happen.

The final strategy we’re getting to work on, immediately, is a new set of incentives on list prices. Right now, our entire system—both industry practices and government rules—encourages higher and higher list prices. It’s time for drug prices to go down, not up.

One particular example is a deal that the Affordable Care Act contained for the pharmaceutical industry: Congress put a cap on the penalty that drug companies had been paying when they raised prices faster than inflation. 

Yes, you heard that right: Congress put a limit on how much companies would have to pay when they jacked their prices up beyond inflation.

That means drug companies can keep raising their prices rapidly, soaking up new profits from private insurance without paying any penalty in the Medicaid program. And this isn’t just a few medications: There are now more than 2,500 drugs that have hit this cap.

President Trump and I are working with Congress to look at overturning this cap and restoring the brake on runaway price increases.

But we can take more action to create incentives for lower list prices, too.

Right now, Medicaid pays for drugs based on something called the Average Manufacturer Price, or AMP.

In calculating what Medicaid pays, we ignore that the private sector isn’t paying anything like the AMP—they are actually paying the AMP minus a significant rebate.

If Medicaid is supposed to be getting a better deal than the private sector because it serves our most vulnerable, why not incorporate the private sector rebate into the AMP, lowering it significantly?

Just this change could drop what manufacturers get paid on many Medicaid drugs by 30 to 40 percent or more.  

As big as such a change would be, believe it or not, it’s a relatively incremental step in our plan. We can go a lot bigger.

We believe that the entire system of pharmacy benefit managers negotiating rebates needs to be re-examined. Right now, we’re asking a pretty straightforward question: What if, instead of the current system where drug companies get paid rebates and middlemen take a cut, we just had fixed-price discounts?

This would fix the situation where even the pharmacy benefit manager, who is hired to help keep prices low, makes money from higher list prices.

Pharmacy benefit managers are also getting paid by both sides of a transaction: the insurance companies, who pay a fee as their customers, and the drug companies they’re supposed to be negotiating against, who give them a cut of the rebates they receive and other fees.

It is easily within our power to forbid remuneration from pharmaceutical companies—to eliminate rebates, align interests, and end the corrupt bargain that keeps driving list prices skyward.

We’re also going to be looking at how pharmaceutical companies interact with the American public.

As of today, we have FDA and CMS working to examine how to require drug companies to post their list prices in direct-to-consumer advertising. When patients hear about a wonderful new drug, they should know whether it costs $100 or $50,000. A patient might even pay for a doctor’s appointment to discuss a drug, not knowing that the price puts it totally out of reach, and that’s unfair.

Drug companies don’t have to wait on us. Today, I am calling on America’s pharmaceutical manufacturers to level with the American public—be honest about what you’re trying to charge us, put your list price in your ads.

We believe Americans should know which drug companies are gouging consumers and which ones are being good actors for our communities.

So we’ll go beyond direct-to-consumer advertising: This week, CMS will be unveiling updates to its drug-pricing dashboard, which will offer much more detail than ever before about which companies are raising prices.

On top of that, I will be having regular meetings with CMS Administrator Verma and others to examine where prices are rising, and why.

That, of course, complements every conversation I have with the President—where, as I mentioned Friday, drug pricing tends to be the first thing we talk about, and the last.

He’s now laid down a marker about the need for reform. I can imagine he is going to be very interested in the next company that takes a price increase not justified by inflation or change in clinical benefit. I can tell you I wouldn’t have wanted to be the one to do that.

On the other hand, I expect the President will be interested in hearing which companies lowered their prices and took other actions to support the changes we want to make.

I should say that, because I have been in business—in this business—I understand that companies have systems that work and market positions that help them succeed.

But markets only work when they’re open to forces for change.

The American system works incredibly well in so many ways because we have a free market.

But right now, we have a drug pricing system that is protected from market forces—that is set up to benefit the manufacturers and the middlemen, not the patients.

We are open to all potential solutions for fixing this problem—assuming they are effective, safe for patients, and respect our seniors’ choice and access.

Industry leaders have an opportunity to get started on changing our system, today.

The necessary changes here represent opportunities—opportunities not just to better serve our patients and communities, but to move away from a system that frustrates so many Americans, and attracts endless political ire.

We look forward to working with industry to build a better system. But if industry isn’t willing to work with us to lower prices, President Trump and his administration will keep turning up the pressure—until the system finally puts American patients first.

Thank you all for listening today, and I look forward to working with all of you to make that a reality.

Content created by Speechwriting and Editorial Division 
Content last reviewed on May 14, 2018