Senate committee works to understand balance between drug innovation, affordability

Drug pricing is a complex system in the United States, and costs vary significantly between different payers and consumers for a number of reasons, including rebates and discounts offered by manufacturers, drug patents, agreements with insurers, and changes from volume- to value-based payment systems. In a hearing before the U.S. Senate Committee on Health, Education, Labor & Pensions titled “The Cost of Prescription Drugs: How the Drug Delivery System Affects What Patients Pay,” experts testified about who pays for prescription drugs, and what that money pays for. In his opening statement, Committee Chair Sen. Lamar Alexander (R-Tenn) explained that this is the first of three planned hearings; the second hearing will consider the full drug delivery process and its associated costs, and the third hearing will focus on ensuring patient access to affordable drugs.

Dan Mendelson, President, Avalere Health, said in his testimony that consumer drug prices are “determined jointly by health system design, pharmaceutical company pricing, and decisions by health plans, pharmacy benefit management (PBM) practices, and other transactions involving distributors and pharmacies along the supply chain.” He explained that total costs often include payments for (1) the product; (2) services provided; (3) shipping; (4) rebates; (5) pharmacy reimbursement; and (6) costs associated with PBMs and third-party payers including reimbursement, share of rebates, and contractual obligations. Mendelson noted that most patients pay cost-sharing for prescription drugs based on list price, not net price, because many rebates are not shared directly with consumers. He added that the patient protections included in the Patient Protection and Affordable Care Act (ACA) (P.L. 111-148) led to payers increasing deductibles for consumers in order to offer lower monthly premiums. However, he said, the ACA’s cost-sharing reductions have allowed individuals using the health insurance exchange to pay less for drugs; Mendelson reminded committee members that the American Health Care Act (AHCA) (H.R. 1628) in its current form would repeal cost-sharing reductions.

Allan Coukell, Senior Director of Health Programs, Pew Charitable Trusts, testified that net pharmaceutical spending has increased 42 percent since 2006, but two-thirds of that growth has occurred in the past four years. He listed the following limitations on effective drug pricing competition:

  • monopoly pricing for new drugs;
  • lack of competition for some older drugs;
  • misaligned incentives and incomplete information for stakeholders, including payers, providers and patients at many points in the system, and
  • a historical willingness to cover new therapies without ensuring that their clinical benefits justify the price.

Coukell said that the cost of new medicines is rising, and that is largely responsible for increased drug spending—for example, high-cost specialty products, particularly biologics that are not used by many individuals, account for more than 40 percent of drug spending. He suggested that the 12 years of exclusivity granted to biologic manufacturers, particularly when compared with the five years that drug manufacturers get, is excessive.

Paul Howard, Ph. D., Senior Fellow and Director of Health Policy, Manhattan Institute, also spoke about the challenges involved with specialty medicines, such as those that treat hepatitis C, cystic fibrosis, and rheumatoid arthritis. He said noted that the vast majority of prescription drugs are “highly affordable,” and that the “outlook for innovation has never been brighter,” but mentioned the need for increased competition to reduce waste and ineffective care. Howard recommended that Congress “create incentives that reward providers who use medicines (both generic and branded) and technology to deliver care as efficiently as possible, while also empowering patients with the information they need to identify high quality providers.” He suggested changes to the 340B drug discount program, HHS and FDA coordination on safe harbors for innovative contractual arrangements, and broader Medicare, Medicaid, and patient-empowerment reforms.

Gerard Anderson, Ph.D., Professor of Medicine, Johns Hopkins University School of Medicine, also blamed high costs on specialty drugs and chronic conditions, but added that state and federal health care programs cannot afford to continue paying high prices for these expensive drugs for Medicare and Medicaid recipients, and are being forced to make “life or death decisions.” His recommendations are increasing competition and changing policies to increase access to pharmaceuticals, such as including drugs in bundled payments and accountable care organizations (ACOs) while eliminating rebates from PBMs and prescription drug plans. Anderson also recommended cracking down on abuse of orphan drug designations and allowing branded drugs to move to the generic market sooner. He suggested that negotiating drug prices, specifically by a single designated federal agency using existing authority under 28 U.S.C. §1498, and enacting price-gauging legislation.

An impossible course: navigating the generic drug label delay

In May 2016, the FDA put off until 2017 a decision about a Final rule that would allow generic drug companies to update their labels with new safety information similar to their reference product counterparts. This marks the third time since the FDA proposed the rule that it has been shelved in the face of opposition from the pharmaceutical industry and some lawmakers. The delay, with major ramifications for consumers and industry alike, was initially discovered in an update to a timetable for the rule and officially appeared in a Federal Register Notice in mid-June. The development dismayed consumer groups and representatives for trial lawyers, who had urged the agency to close a legal loophole that prevents patients harmed by generic drugs from suing manufacturers.

Unlike brand-name drug makers, generic drug makers are not permitted to make changes to a drug’s label without the FDA’s approval unless the brand name drug maker makes the label change first. Instead, generic drug makers must wait for the FDA to order them to change their label. Since the passage of the Drug Price Competition and Patent Term Restoration Act (P.L. 98-417) in 1984, known as the Hatch-Waxman Act, the FDA has approved over 8,000 generic drugs. The Hatch-Waxman Act provides an expedited approval process for generic drugs that have an identical reference listed drug (RLD). As a result, nearly nine in 10 prescriptions filled today in the U.S. are for generic drugs, yet only account for 28 percent of drug expenditures.

Two Supreme Court decisions have helped to establish the conflicting division faced by patients and drug makers regarding drug label. Under the federal Food, Drug, and Cosmetic Act (FDC Act) and the subsequent Hatch-Waxman Act amendments, a generic drug company “may not unilaterally change its labeling or change its design or formulation and cannot be required to exit the market or accept state tort liability.” Consequently, a state law is preempted in the event a generic drug manufacturer must take one of the aforementioned actions to comply with a state law duty. Thus, patients taking a generic prescription drug are unable to recover for alleged injuries from either the brand name or generic drug maker. The brand name drug maker is not liable because it did not sell the drug directly to the patient and the generic drug maker faces the “impossibility” of providing updates to the drug label without direction from the brand name drug maker.

This White Paper provides an overview of the laws and regulations establishing the foundation of drug labels. The White Paper will also discuss the impact of the Supreme Court decisions on consumers’ ability to sue a drug maker for its drug labels. Finally, this White Paper examines whether industry pressure or consumer sentiment will carry the day. As the public service announcement from the FDA attests, it may be difficult to get generic drug approval, but as follows in this White Paper, generic drug makers are also harder to sue.

Read further: “An impossible course: navigating the generic drug label delay.”

Hepatitis C drugs Sovaldi® and Harvoni® priced to maximize revenue, not access

Gilead Sciences, Inc. priced and marketed its Hepatitis C drug Sovaldi®–$1,000 per pill or $84,000 for a single course of treatment—to maximize revenue, rather than to foster broad, affordable access of the medicine, according to an 18-month investigation by the Senate Finance Committee. Sovaldi’s price was intentionally set high so that its follow-up drug, Harvoni®, could be more expensive, $94,500. Committee members Sens. Ron Wyden (D-Ore) and Chuck Grassley (R-Iowa) discussed the investigation’s findings, including the significant burdens placed on the Medicare and Medicaid programs by the drugs’ costs.


The Hepatitis C virus (HCV) is a contagious blood-borne virus that causes a liver infection known as Hepatitis C. Some individuals only develop short-term acute hepatitis C infection, but 70 to 85 percent of people infected with the virus develop a chronic infection that can result in long-term health problems, even death. The Centers for Disease Control and Prevention (CDC) warns that the majority of infected persons—an estimated 2.7 million Americans—might not be aware of their infection.

In 2013, Gilead obtained FDA approval to market Sovaldi, an antiviral medication that prevents HCV cells from multiplying. In the 18 months following Sovaldi’s approval, Medicare spent nearly $8.2 billion before rebates on Sovaldi and Harvoni. Over that same span, Medicare’s monthly spending on Hepatitis C treatments increased more than six-fold. Harvoni, a second-wave successor to Sovaldi that adds an additional ingredient to Sovaldi’s formulation, was approved for marketing in 2014. In that year, Medicare and Medicaid combined to spend more than $5 billion on the two drugs before rebates, with that total projected to climb in 2015. According to the Finance Committee, recent financial statements from Gilead show U.S. sales of Sovaldi and Harvoni totaled $20.6 billion after rebates in the 21 months following Sovaldi’s introduction.

Investigation findings

Over 18 months, the Senate Finance Committee reviewed 20,000 pages of Gilead’s internal company documents, dozens of interviews with health care experts, and a trove of data from Medicaid programs in 50 states and the District of Columbia. According to Wyden, there was no concrete evidence that Sovaldi’s price was set based on “basic financial matters” like research and development costs or Gilead’s acquisition of Pharmasset, which first developed the drug. He said that although “Gilead knew these prices would put treatment out of the reach of millions and cause extraordinary problems for Medicare and Medicaid,” the company chose to maximize revenue, “regardless of the human consequences.”

Among the investigation’s major findings:

  • Gilead justified Sovaldi’s high price point based on “price-per-cure” calculations that resulted in greater revenue per treatment than previous direct acting anti-virals.
  • Gilead underestimated the degree of access restrictions that it expected would result from its pricing decision.
  • Despite significant access restrictions, Gilead refused to offer substantial discounts and did not significantly modify its contracting strategy to improve patient access.
  • Although state Medicaid programs nationwide spent $1.3 billion before rebates on the drug in 2014, less than 2.4 percent of the roughly 700,000 Medicaid enrollees with Hepatitis C were treated with Sovaldi.
  • After competition entered the market, prices responded, but there are still significant concerns: particularly in the public payer community, about high costs for treating millions of people in the U.S. infected with Hepatitis C, as well as the budgetary effects of a future single source innovator that might not face competition as quickly.

Pricing reform

A new poll by STAT and the Harvard T.H. Chan School of Public Health found that most Americans believe the prices of brand-name prescription drugs are unreasonably high, with 70 percent saying Medicare should be able to negotiate lower prices for all prescription drugs. An additional 13 percent support negotiations for high-cost drugs only. The poll asked participants about the reasonableness of hypothetical situations, including one based on Gilead. In that case, 92 percent of respondents responded that it would be unreasonable if “a pharmaceutical company launched an exclusive new drug to cure hepatitis C and set the price at $1,125 per pill, or about $100,000 for a full course of treatment.”

Wyden and Grassley are committed to finding a bipartisan way to deal with high drug costs. Grassley said, “This report sheds light on one example of the pricing decisions made by one company with a new prescription medicine that entered the market without competition in high demand. This might be an example that received the most attention in some time, but it won’t be the last. I look forward to discussions with my colleagues and the public on the policy questions in the report.” Wyden added, “America needs cures for cancer, Alzheimer’s, diabetes and HIV. If those cures are unaffordable and out of reach to millions who need them, Congress will not have met its responsibilities to the American people. I reject the idea that America has to choose between soaring, out-of-reach drug prices and one-size-fits-all government policies. Solving this challenge will take fresh, bipartisan thinking and political independence to bring people together.”