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Remarks on Drug Pricing to the National Academy of Medicine

Alex M. Azar II
The National Academy of Medicine
October 15, 2018
Washington, D.C.

We are proposing to require American drug companies, for the first time ever, to include in their TV advertising the list price of any drug paid for by Medicare or Medicaid. Patients deserve to know what a given drug could cost when they’re being told about the benefits and risks it may have. They deserve to know if the drug company has pushed their prices to abusive levels. And they deserve to know this every time they see a drug advertised to them on TV.

As Prepared for Delivery

Thank you, Victor [Dzau], for that introduction. Good afternoon everyone.

I’m grateful to the National Academy of Medicine for inviting me here today, to share with all of you an update on the Trump administration’s view of one of the serious challenges our country faces.

As today’s event reflects, the NAM and its members have taken a leading role not just in advancing American science and medicine, but also thinking about how to help translate scientific discoveries into clinical benefits that reach patients.

HHS’s goals are not so different: to support pioneers who are expanding our understanding of medicine and science, while ensuring Americans enjoy the benefits of their discoveries.

But it is not always easy to achieve both of these goals at the same time—including in the area I want to discuss today, the market for prescription drugs.

New generations of complex and advanced medicines are unlocking new opportunities to extend Americans’ lives and health. These include the cancer innovations you have been discussing today. But at the same time, the cost of prescription drugs has risen dramatically—which is why the NAM has also turned its attention to the issue of drug pricing.

In 1970, when the National Academy of Medicine was founded as the Institute of Medicine, American prescription drug spending stood at $5.5 billion. In 2016, prescription drug spending stood at $328 billion—a four-times larger share of the economy than in 1970.

There are good reasons for this growth. Today, prescription drugs play a more important role in keeping us healthy than ever before. But the system for pricing and purchasing these drugs has not kept pace with their changing role, and today’s system leaves too many Americans struggling to afford the drugs they need.

The Trump administration has focused on four problems in particular: high and rising list prices for many drugs, government programs overpaying due to lack of negotiation tools, high out-of-pocket costs, and foreign-governments’ free-riding off of American investment in innovation.

In May, just over 150 days ago, President Trump released his American Patients First blueprint, which lays out a plan for fixing these problems. This blueprint lays out four strategies for putting American patients first: bringing down out-of-pocket-costs, boosting competition, strengthening negotiation, and creating incentives for lower list prices. Many of these strategies, and many of the specific actions we’ve taken, also map onto the recommendations of the NAM report from last November, on the national imperative of making medicines affordable.

Today, I want to address each of the four strategies in turn. I also want to announce new steps forward on a significant policy proposal that is laid out within the blueprint, on our efforts to create better incentives for drug companies setting list prices.

Out-of-Pocket Costs

First, I’ll address out-of-pocket spending, where we were pleased to see Congress take action recently.

Even before the blueprint was released, the administration had taken steps to bring down out-of-pocket costs for consumers: We changed how Medicare Part B pays for drugs under the 340B drug discount program so payments better match true drug costs, saving seniors $320 million in out-of-pocket costs this year alone. Since the blueprint, we have proposed to expand those changes to new sites of care, and also proposed to lower payments for certain new drugs in Part B for which seniors and taxpayers are overpaying.

More transparency and choices will also help reduce out-of-pocket costs. An HHS report earlier this year found that Medicare Part D plans spend $9 billion on brand-name drugs that have a therapeutically equivalent generic alternative. Choosing generics in these situations would mean $3 billion in total savings for Part D, including $1.1 billion in out-of-pocket savings for patients. Since the blueprint release, we reminded Part D plans of the tools they have to encourage use of generics—and we are looking at more avenues for action within the Part D program.

Too often, more affordable options have been hidden by our opaque system. But this week, President Trump signed two pieces of bipartisan legislation that will help shed some light, by banning gag clauses that prevent pharmacists from informing patients when they can get a lower price by paying cash. Within a week of the blueprint’s release, HHS had already informed Medicare plans that these clauses are unacceptable. We’re pleased that Congress has now responded to the President’s call by formally banning them.


Part of the reason why pharmacists can provide an attractive cash price for some drugs is that competitive markets have decreased costs for many generic drugs so dramatically. According to an FDA analysis, the introduction of just three generic competitors drives down prices by about half, and in many cases, more competitors keep driving the price even lower.

Under President Trump, before the launch of the drug-pricing blueprint, the Food and Drug Administration had already made it a priority to streamline approval of generic drugs, resulting in a record number of generic approvals in Fiscal Year 2017.

Since the blueprint, this has accelerated: Last week, FDA announced that it had set another record, with Fiscal Year 2018, approving even more generics than the year before. Importantly, 12 percent of the 2018 generic approvals were for complex generics, which can be especially expensive.

We estimate that just the results from 2017 alone will save American patients $8.8 billion this year. Since the blueprint’s release, FDA has also approved the first three generic drugs under a new pathway designed to support generic competition, the first generic version of the EpiPen, and three new biosimilars.

FDA’s success is in large part due to the Drug Competition Action Plan that Commissioner Scott Gottlieb unveiled last year. One element has been cracking down on ways drug manufacturers abuse FDA programs intended to protect the public health to pad their profits instead, and we appreciate the NAM’s recommendations on this front in your drug-pricing report. Already, FDA has gone after a number of ways manufacturers game the system, including the abuse of shared REMS programs to delay generic competition. Just last week, we issued new draft guidance making it clear that manufacturers should not be misusing the citizen-petition system to block generic competition and that abuse of this system could be referred to the FTC as anticompetitive behavior.

To complement the work in the generic drug space, this summer FDA also launched a Biosimilars Action Plan, to help build a market where there is price competition for biological products just as there is for small-molecule drugs today.

But even as we endeavor to build a real drug marketplace, there are still places where sole-source manufacturers of off-patent, off-exclusivity drugs have the power to take significant price increases that harm patient access.

That’s why, earlier this year, I directed FDA to stand up a workgroup to determine how to safely import sole-source drugs that face big price spikes and have no patent or exclusivity protections. This was not an idea in the blueprint, but it follows the principles of the blueprint, in that it could bring down costs without harming patient safety, choice or innovation.

There are also other areas where drug companies are taking advantage of well-meaning rules, including orphan-drug issues raised by the NAM’s work on drug pricing. Earlier this year, FDA finalized a guidance on orphan-drug designation requirements, making clear that we will no longer grant orphan-drug designations to drugs for pediatric subpopulations of otherwise common diseases.


We also recognize the need, as the NAM does, for government programs to do more effective negotiation for patients. We will be careful to ensure that this is done in a way that protects innovation, patient choice, and access—but there is plenty of room to update our programs and increase negotiation power.

This is especially true in Medicare Part B, where there is currently no price negotiation at all.

In Part B, Medicare gets the bill, and we pay it—plus an add-on fee calculated as a percentage of the drug’s price.

But for the first time ever, we have now introduced new tools to allow Medicare Advantage plans to negotiate discounts for drugs covered by Part B—in total, $12 billion in spending for 20 million beneficiaries.

Starting in 2019, plans will now have the ability to use step therapy to have patients try one clinically appropriate drug first, before moving on to other options. For the first time, MA plans will also be allowed to use consolidated programs for drugs covered under Parts B and D, bringing these programs closer together. At least half of the savings generated from new discounts will have to be passed onto patients.

These new tools will be coupled with strong patient protections: Existing prescriptions will be grandfathered in, an expedited appeals process is required, and step therapy must be coupled with a care-coordination plan.

Most importantly, patients will be able to exercise control over these tools—they will have exit rights. These negotiation tools will only be as common as patients want them to be, allowing us to leverage the power Medicare has as a purchaser without endangering patient choice.

As it happens, Medicare Advantage open enrollment begins today. We have already seen strong interest from plans in using these tools, meaning that patients could receive savings in plans they begin selecting this week. Just today, one insurer announced that it would be taking advantage of this opportunity to encourage patients to use lower cost biosimilar alternatives to an especially expensive biologic.

Medicare Part D, by contrast to Part B, does have strong competition for drugs and a strong track record of success. But as the private market has advanced, Part D no longer delivers the most competitive results for its beneficiaries. We like to say that Part D was a great drug plan for the year 2003 … and it’s still a great drug plan for the year 2003.

Many reforms for Medicare Part D plans are contemplated in the blueprint, including ideas like formulary flexibility put forth in the NAM’s drug-pricing manifesto. We have already announced one change, for the 2020 plan year, by allowing the use of indication-based formulary design and management.

Today, when a plan covers a drug for one FDA-approved indication, it has to cover all indications. A more appropriate or more affordable drug may not be covered because the plan has already been required to cover a therapeutic alternative. Allowing indication-based management will mean more tailored choices for patients and more power for Part D plans to bring down prices.

But again, patients maintain power over the system: If they want to vote with their feet, away from MA plans and Part D plans that use these tools, they can do so.

Incentives for Lower List Prices

The final strategy I want to address is incentives for lower list prices and there, too, we need to empower patients to improve the system.

We have already taken action in this area: Within a week of the drug-pricing blueprint, CMS’s drug-pricing dashboard began displaying pricing information for thousands more drugs than ever before and for the first time, the manufacturers that were responsible for price increases.

We have also worked with Congress toward restoring the Medicare Drug Rebate program’s brake on list-price increases, and implemented a change to ensure companies are not skipping out on rebates they owe by introducing line extensions of drugs.

But much more fundamental changes are needed to deflate the list-price bubble that manufacturers and other actors have created—and to help empower consumers to reduce drug prices as well.

That is why, today, I’m pleased to announce that President Trump is taking historic action to bring patients more transparency through consumer advertising.

We are proposing to require American drug companies, for the first time ever, to include in their TV advertising the list price of any drug paid for by Medicare or Medicaid.

Patients deserve to know what a given drug could cost when they’re being told about the benefits and risks it may have. They deserve to know if the drug company has pushed their prices to abusive levels. And they deserve to know this every time they see a drug advertised to them on TV.

Last week, President Trump signed legislation to give you the right to know the lowest-cost option at the pharmacy. This week, he’s proposing to give you the right to know your drug’s price when you see it advertised on TV.

For too long, drug pricing has been like no other market. Prices are completely opaque, and the industry actually makes a point of claiming that their list prices are often meaningless.

But that second part isn’t really true: List prices are meaningful to every American senior on Medicare Part D, who pay coinsurance for drugs as a share of list price for specialty and non-preferred drugs.  They mean a lot to the almost half of Americans under age 65 who have a high deductible health plan—meaning they can often pay thousands of dollars toward the list price of a drug before their insurance kicks in.

List prices matter to American patients. I’ve heard it personally from patients myself, and so has the President.

Taking action to protect consumers from opaque pricing is far from unprecedented. In fact, a very similar story unfolded more than 60 years ago, when large automobile manufacturers came under criticism for inflating sticker prices of cars, making it impossible for buyers to compare prices. Manufacturers protested that these prices weren’t meaningful, so mandating their disclosure wouldn’t help consumers. Doesn’t that sound familiar?

But since 1958, car companies have been required to post their sticker prices. People still get discounts when they go to purchase a car, but sticker prices are considered an important piece of consumer information.

There is no reason it should be any different for drugs. You buy a car every once in a while—but millions of American patients buy expensive drugs every month. And a year’s worth of the most advertised drugs, mind you, can cost more than a car.

Despite the ample precedent for this commonsense measure, the pharmaceutical industry has resisted it fiercely.

They may have succeeded in delaying Congress from implementing a legislative solution, but President Trump is undeterred.

It is no coincidence that the industry announced a new initiative, today, that will help make price and cost information more accessible. We appreciate their effort. But placing information on a website is not the same as putting it right in an ad, and it’s taken them five months since the President’s blueprint to start skating to where the puck is going.

The initiative is a helpful complement to, not a substitute for, what we’ve proposed today. We will not rely on voluntary action to accomplish our goals—including delivering transparency in other areas.

Various industry actors have also talked about moving away from the opaque system of rebates calculated as a share of list price, and yet action has been slow to materialize.

We believe today’s rebates, which help drive list prices skyward, are not necessary to a strong negotiating ecosystem. They could be replaced with a model driven by fixed-price, upfront discounts—a concept reflected in the NAM’s call for patients’ out-of-pocket costs to reflect net prices.

Players in the market can begin this shift now—or, as on advertising, we have the power to redesign the system for them.

When we rolled out the blueprint, I said that drug company executives should be thinking very carefully about who was going to be taking huge price increases in this new environment. While there is much more needed change to come, we have begun to see the shifts in behavior that we expected.

Earlier this year, 15 different pharmaceutical companies announced rollbacks of price increases, cuts in their prices, or price freezes for the rest of the year. Overall, companies have taken 60 percent fewer price increases for brand drugs this year than they did last year, while there have been 54 percent more brand and generic price decreases.

One company introduced an authorized generic of a highly expensive hepatitis C drug, long before the patent expired, so that patients could benefit from the lower cost-sharing they’ll get from a dramatically lower list price.

These actions would not have occurred without the blueprint President Trump put forth. Sometimes markets evolve on their own, but sometimes, it takes government to make the first move, to disrupt a broken system, and lay down new rules of the road. You’ve heard today we’re willing to do just that. We will not wait for an industry with so many conflicting and perverse incentives to reform itself.

When we change the rules, the market players will reorganize their businesses to fit the new world. And it will be a very different world for American drug pricing.

Today, I mentioned at least 17 separate actions we’ve taken since the blueprint’s release—and that is not exhaustive. If I got into all the RFIs and FDA guidances we’ve done, we’d be here all evening.

This President has already taken more action on drug pricing than any president in history—yet you’ve just seen the tip of the iceberg.

Almost all of these ideas I’ve mentioned today were included in the blueprint, and each of them alone is a significant accomplishment. But we will go beyond the four corners of the blueprint if we need to. Any ideas that could bring down costs while respecting innovation and patient choice are on the table.

Make no mistake: The American drug pricing market is already changing. But it’s going to have to change a lot more until American patients get the deal they deserve.

I appreciate the NAM’s contributions to this discussion, and look forward to working together on more solutions in the future. Thank you very much for listening today.

Content created by Assistant Secretary for Public Affairs (ASPA)
Content last reviewed on October 15, 2018