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Fixing Healthcare: Driving Value Through Smart Purchasing and Policy

Alex M. Azar II
AEI, Brookings USC Schaeffer, PBGH, and other policy and stakeholder groups
May 16, 2018
Washington, D.C.

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

As Prepared for Delivery

Thank you, Bill [Kramer], for that introduction. Good morning, everyone, and thank you for having me here today.

This gathering is focused on an important issue in our healthcare system: getting more value for what we, as patients and taxpayers, are purchasing.

This is an important priority across the entire healthcare ecosystem, but it is acutely important in the world of prescription drugs.

For a long time, there’s been a lot of talk about our country’s high drug prices, but little action.

Drug companies have insisted we can have new cures or affordable prices, but not both. Pharmacy benefit managers have argued that they are successfully holding down costs—while being complicit in skyrocketing list prices and rising out-of-pocket costs.

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

President Trump and I are tired of these talking points, and I suspect many of you are as well. Talk isn’t going to cut it anymore.

We understand this problem is complex and has multiple parts: high list prices, overpaying in government programs, high out-of-pocket costs, foreign governments’ underpaying for drugs. 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.

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’ve begun taking action this week, but we also have broader disruptive plans—something many of you in this room have recognized and pointed out. We look forward to engaging with you on these plans and tapping into your expertise.

So what are we doing, and what are we planning to do? I want to start with negotiation, because it’s so important—and there’s been some confusion on it.

President Trump promised to bring more negotiation and smarter bidding to our government programs, and that is exactly what this plan does.

We are going to make negotiation dramatically 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 one way this will happen. We know right now that Medicare Part D is not getting the deals it should on some expensive, important drugs.

There are six types of drugs that are automatically put into Part D categories 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.

The good news is that this administration has the authority to provide Part D plans with new tools to negotiate for these drugs, get real discounts, and bring these costs down.

So 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.

Another place we need more negotiation is not just high-cost drugs in the protected classes, but all high-cost drugs, which are driving the cost trends in Medicare. We’re concerned that plans may not be effectively managing formulary decisions with regard to high-cost drugs, even though CMS [Centers for Medicare & Medicaid Services] has approved those decisions, because of how CMS rates plans. In particular, plans may be excessively worried about being dinged by CMS’s star system, even when they’re using clinically appropriate management tools.

We want Part D plans to get better deals by having access to the same tools used by plans hired by private employers, like most of us have and with which almost everyone is happy.

I want to reinforce that we will go about these reforms transparently. Part D and the drugs it covers are vital for our seniors. 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 many times that Medicare could save tons of money just by negotiating directly for drugs.

This just isn’t true—and I am sure most of you know it. It’s appropriate to make this point here at an AEI-Brookings event, as scholars at these institutions, and all of you, prize evidence-based policymaking. We’re not skeptical of ideas like direct negotiation because of ideology—we’re driven by pragmatism and evidence.

The Congressional Budget Office, when it was run by Peter Orszag, 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. Lest you think I’m misreading the evidence here, I would direct you to Peter Orszag’s Twitter account, where he confirmed this interpretation on Monday.

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 are notorious for poor quality and access. Our plans, instead, rely on what we know works: using the free market to negotiate for our patients, while preserving their right to choose coverage that works for them—or, as the economists in the room would put it, preserving patients’ exit rights.

But I don’t expect ideas like direct negotiation to go away, no matter how unlikely they are to work. If the pharmaceutical industry wants them 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 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 drug development decisions are being driven by government reimbursement systems, rather than what’s best for the patient.

Moving away from the Part B system, often referred to as “buy and bill,” is a positive step not only for the patient, but for the provider. We don’t need doctors in the business of buying and selling expensive drugs—they should be able to make decisions based on 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 better deals in Part B and relieve doctors from doing the purchasing.

More broadly, President Trump has called on us to merge Medicare Part B into Part D, where negotiation has been successful on so many drugs. We already have a clear sense of where immediate opportunities for savings exist, and an announcement on how we intend to go about this process administratively is on the way very soon.

Bringing negotiation to Part B drugs is such a potent way to bring down prices that pharma is already protesting the idea. This is really on their list of worst nightmares.

So the industry pushed back yesterday, with one industry group saying they, quote, “have concerns about patient affordability and access” regarding our plans for Part B drugs.

I beg to differ: The single greatest threat to patient affordability and access to prescription drugs in America is high list prices, set by drug companies and incentivized by today’s system.

Negotiating these prices down isn’t a threat to patients—it’s the solution they need.

Let me be really clear about this: We are going to bring negotiation to Part B drugs, and we are going to give Part D plans more bargaining power.

It’s going to happen, so it would be most productive if the pharmaceutical industry came to us with a plan for these changes.

If pharma doesn’t come to us with a plan for which drugs make sense to move from Part B to D, we’ll decide that for them. And if pharma doesn’t come up with a solution to pricing the drugs where Part D is currently getting almost no discounts, we’ll fix that problem unilaterally, too.

I hope such plans are already in the works, because I know there are pharma companies that are heavily Part B-dependent, and ones that are heavily Part D-dependent. As the President said last week, the gravy train is about to be derailed.

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 has made it a top priority to stop drug manufacturers from gaming our patent system to block generic competitors. 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. In fact, 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.

On top of that, Commissioner Gottlieb is working aggressively to build a market for biosimilars, which have not taken off like many had hoped. FDA was proud to announce just the 10th biosimilar ever approved yesterday, a biosimilar for the anemia drug Epogen. The agency is going to continue work to pave the way for more such approvals and drive affordability for these important drugs.

I want to raise a final point in the context of competition: Many of you are familiar with proposals to give our seniors access to cheaper drugs by importing drugs from other countries, such as Canada. And many of you know, too, that this 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 will be sending a letter to all Medicare Part D plan sponsors saying that we consider such behavior unacceptable.

Ending gag clauses is part of a much broader effort CMS will be undertaking to bring more transparency to our drug markets. We need patients themselves to have the information to be smart purchasers: 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.

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.

We believe that the entire system of pharmacy benefit managers [PBMs] negotiating rebates needs to be re-examined. 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?

Right now, we have a principal-agent problem. Pharmacy benefit managers are 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, along with other administrative fees that are based on list price.

This means the PBM actually wins when list prices go up.

Imagine you take a $1,000 drug. The PBM working for your insurance plan negotiates a 30 percent rebate, $300, which gets sent back to your employer, minus a percentage cut for the PBM. Now imagine that the list price goes up to $1,500—now, the rebate would be $450, allowing the PBM to keep the added $150, while the patient pays significantly more in cost-sharing.

Even more perversely, PBMs often have contracts with payers that require them to secure a certain average percentage rebate across all drugs. In other words, to some extent, they actually need list prices to be high, so they can say they’re doing their job by negotiating big rebates.

I have seen how this system, from the perspective of drug manufacturers, makes it nearly impossible to cut list prices. If you want to cut the list price, PBMs have no incentive to do business with you—they actually have a disincentive to putting your drug on their formulary. If you cut the list price during the plan year, the PBM could actually be on the hook for some of the rebate dollars it promised the payer.

There are some PBMs that have moved away from this system, toward a fixed-price discount, and we applaud that. We would welcome the PBM industry coming forth with broader proposals for moving away from today’s system, including a plan for implementation with the pharmaceutical industry.

But we also have the administrative power to end this system ourselves—to eliminate rebates and forbid remuneration from pharmaceutical companies, 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.

We already have FDA and CMS examining 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.

Drug companies don’t have to wait on us—the industry could agree on its own to do this. The Pharma Code already requires disclosure of patient-assistance programs, and the industry used the Code to end the practice of handing out trinkets like pens and pads for doctors. There’s no reason the same can’t be done here.

One complaint I’ve heard from pharma is that we can’t put our list prices in ads because the prices change too often. To that, I say: Ah-ha. You get me.

We’ll go beyond direct-to-consumer advertising: Yesterday, CMS unveiled updates to its drug-pricing dashboard, which now highlights the drugs in Part B, Part D and Medicaid that have seen the largest recent price increases.

Some of the price increases are 500, 600, even more than 1,000 percent. I will be having regular meetings with CMS Administrator [Seema] Verma and others to examine which prices are rising, and why.

All of these ideas will mean dramatic change for the whole drug ecosystem. 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 dynamic 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.

I want to be clear about something I mentioned earlier: Our proposals in this realm are not driven by ideology; they are driven by a sophisticated sense of what we believe will work.

If they do not work, if our ideas do not deliver the results we need, we will be open to other proposals—regardless of ideological loyalties or special interests.

In closing, it’s worth noting that the drug pricing challenge is similar to the broader issue you will discuss today: how to secure greater value in our healthcare system. Using Medicare and Medicaid to effect this transformation in healthcare services is one of my other priorities as secretary, alongside solving the opioid epidemic and reforming the individual market for insurance.

But in some ways, as the composition of today’s event reflects, the private sector has already taken the lead on value-based care. Providers and payers have made progress on real solutions.

I wish the same could be said of drug pricing, but we’ve gotten a lot more talk than action over the years. Under this President, that will change.

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

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

Content created by Speechwriting and Editorial Division 
Content last reviewed on May 16, 2018