Financial backing from government has been a characteristic of successful disease elimination programs around the world. The goals set out in Chapter 2 are feasible but ambitious, set in recognition of the United States’ resources and its responsibility to the global viral hepatitis elimination effort. This report describes the committee’s assessment of the best strategy for meeting these targets. The previous chapters have described ways to expand preventive services and treatment, strategies for reaching new patients, and ensuring successful treatment for those already in care. Eliminating the public health problem of hepatitis B and C is still a bold goal, and reaching it will require more money for prevention and treatment. This chapter discusses strategies to increase funding for viral hepatitis elimination and ways to reduce the cost of treatment.
Eliminating viral hepatitis will require increasing the preventive and therapeutic services currently available. The models presented in Chapter 2 depend on improvement to the diagnosis, treatment, and care of viral hepatitis patients. There will be an expense to finding these patients, as well as to the improved harm reduction, vaccination, and prevention of mother-to-child transmission programs described in Chapter 4 and the changes in service delivery recommended in Chapter 5.
But failure to act against viral hepatitis will also come at a high cost. The burden of hepatitis C, for example, is greatest among people born between 1945 and 1965 (Smith et al., 2012; USPSTF, 2013). As these patients
age, more of them will develop liver cancer and cirrhosis. Increasing cost and greater demand for treatment will put a particular strain on government payers (Pyenson et al., 2009). By a 2009 reckoning, Medicare alone stood to absorb a fivefold increase in hepatitis C expenses (from $5 to $30 billion per year) between 2009 and 2030 (Pyenson et al., 2009). The introduction of direct-acting antiviral therapies has only increased this estimate. A recent analysis estimated $136 billion in hepatitis C drug costs between 2015 and 2020 in the United States, of which government payers would fund $61 billion (Chhatwal et al., 2015).
Such estimates do not begin to account for later consequences of chronic viral hepatitis. Hepatitis C virus (HCV) infection has been a cause of about 2,000 liver transplantations a year over the last 15 years (HRSA, 2016b; Luu, 2015; Razavi, 2016). Chronic hepatitis B virus (HBV) infection, though considerably less common in the United States, accounts for another 6 percent of transplantations, over 400 annually (HRSA, 2016b; Luu, 2015). Transplantation poses complicated ethical questions to society, driven in part by the scarcity of donor organs relative to the number of transplant candidates. Action to prevent the downstream consequences of HBV and HCV infection would reduce this scarcity for the nearly 15,000 patients a year on the liver transplant list (HRSA, 2016c). Such action would clearly benefit these patients, almost 30 percent of whom die on the waiting list (Gheorghe et al., 2005; Kim et al., 2016).
A more direct estimate of the cost of inaction against viral hepatitis is shown in Chapter 2. Improving the diagnosis, treatment, and care for hepatitis B patients could result in a 50 percent cumulative reduction in HBV-related deaths by 2030. Similar measures, combined with unrestricted treatment of all hepatitis C patients, could result in a 65 percent reduction in the annual number of HCV-related deaths in 2030 compared to 2015. It is difficult to measure the cost to society of averting 90,000 deaths over the next 15 years. For the purposes of economic analysis, the Environmental Protection Agency assigns a statistical value of $7.4 million1 to a life saved (EPA, n.d.). At this rate, the cost of neglecting hepatitis elimination is over $666 billion before 2030.
The World Health Organization (WHO) reckons that viral hepatitis elimination could cost up to $11 billion a year by 2025 (Alcorn, 2015). In theory, the United States’ share of this sum should be considerably less, almost modest in the face of the human and financial costs of inaction. But the WHO estimate does not account for the high cost of health care in the United States, especially the high price of innovator pharmaceuticals. Between 2014 and the first quarter of 2016, the United States spent over $25 billion on hepatitis C direct-acting antivirals alone (Altarum Institute,
1 In 2006 dollars.
While elimination of hepatitis B and C as public health problems is possible in the United States, the goal cannot be met without increased appropriations. Congress is in the best position to marshal funds to implement the strategy outline in this report. In 2016, it allocated over a billion dollars to treat hepatitis C in veterans (Leston and Finkbonner, 2016; VA, 2016b). The committee commends this decision and sees complementary spending on testing and treatment among a wider patient group as the best strategy to protect the taxpayers’ investment. One way to increase spending on viral hepatitis would be a discretionary program either modeled on or adapted from the Ryan White Comprehensive AIDS Resources Emergency Act of 1990 (hereafter, the Ryan White Act).
A Discretionary Program
A discretionary program allows legislators a straightforward way to track the effects of their spending. Programs targeted to a specific disease are relatively easy to monitor over time. For viral hepatitis, the time in question is short—only 15 years. It might, therefore, be most efficient to use an existing framework to reach these patients. As discussed in Chapter 5, the Ryan White Act provides for HIV patients who cannot otherwise afford treatment, including full HCV treatment for beneficiaries who also have hepatitis C. Because there is significant overlap in risk factors for HIV and HCV, outreach and social services for people with HIV could be used for HCV patients.
About a third of HIV patients in the United States have viral hepatitis infections (CDC, 2014b). HBV and HCV are particularly dangerous to someone with HIV: the infections progress more quickly, and the risk of liver failure and liver-related death can be triple that of someone without HIV (CDC, 2014b; Grebely et al., 2013; Lo Re et al., 2014; Price and Thio, 2010; Thomas et al., 2011). With this in mind, the Health Resources and Services Administration (HRSA) recently reminded Ryan White program managers of their responsibility to screen HIV patients for HCV, and of guidelines for treating viral hepatitis with HIV coinfection (HRSA, 2015). Ryan White beneficiaries disproportionately represent groups at high risk of viral hepatitis. HRSA estimates that about 45 percent of its ~500,000 Ryan White clients are men who have sex with men; another 8.3 percent use injection drugs; roughly half fall in the 1945 to 1965 birth cohort (HRSA, 2016d). The program also reaches patients whom other assistance programs may not. As of 2013, before the Affordable Care Act was fully in effect, more than a quarter of Ryan White clients were uninsured (HRSA, 2016d).
One of the most meaningful features of the Ryan White Act is the AIDS Drug Assistance Programs it established in every state. Even states with a low disease burden received $500,000 infrastructure awards (IOM, 2004; Martin et al., 2006). Setting eligibility for assistance and enrollment in the program is a state responsibility; states purchase the drugs at discounts of 25 to 50 percent through the 340B program discussed later in this chapter. Patients enrolled in the program can seek treatment from any provider, but the state covers their medicines, an exception to the general rules of the 340B program. States have also negotiated directly with manufacturers for discounts beyond what 340B offers (Kaiser Health News, 2003). With help from the National Alliance of State and Territorial AIDS Directors, the states were able to reduce the cost of HIV drugs for Ryan White clients by $300 million below the 340B discount price in 2014 (ADAP Crisis Task Force, 2016). Cumulative savings between 2003 and 2014 for these patients were more than $2.3 billion (ADAP Crisis Task Force, 2016).
The drugs that cure hepatitis C infection are expensive, a problem discussed in the next section. The antivirals used to treat chronic hepatitis B are also costly. The Red Book lists a wholesale price for a year’s supply of entecavir and its generic version at $16,467 and $8,252.16, respectively (Truven Health Analytics, 2017). The average annual cost for tenofovir, for which no generic version exists, is listed at $11,973 (Truven Health Analytics, 2017). For Medicare Part D beneficiaries, out-of-pocket costs for both drugs range from about $10,000 to $18,000 (Q1Medicare, 2016). Both are listed on Medicare’s formulary as tier 5 specialty drugs, for which patients can expect to pay 25 to 33 percent, though some drug companies offer discounts to offset the out-of-pocket costs (Bristol-Meyers Squibb, n.d.; Gilead, n.d.; Q1Medicare, n.d.).
Since 2003, states have also been able to assist Ryan White beneficiaries with health insurance costs, such as premiums, coinsurance, co-pays, and deductibles, as long as the private insurer provides prescription drug coverage equivalent to what the state’s AIDS Drug Assistance Program would offer (HRSA, 2007, n.d.-d). The goal of this adjustment is to improve efficiency and save money, and HRSA is clear that in order for a health plan to be subsidized by the state, the cost sharing strategy needs to be cheaper, at least in aggregate, than purchasing the HIV drugs directly (HRSA, 2014). More importantly, this combination of access to the 340B prices and the ability to share the cost of private insurance allows states to stretch their drug assistance funding (HRSA, 2007, 2016a).
Nevertheless, as of June 2016, the National Alliance of State and Territorial AIDS Directors found that only 20 states covered direct-acting antivirals to treat hepatitis C in their AIDS Drug Assistance Program formularies (NASTAD, 2016). Treatment of people infected only with HBV or HCV (and not HIV) is disallowed under the Ryan White Act, the last reauthorization of which expired in 2013 (Kaiser Family Foundation, 2017;
As Chapter 5 discussed, Ryan White is the ideal infrastructure for reaching at least those hepatitis C patients who inject drugs. State Ryan White coordinators have, for the most part, already given extensive thought to questions of outreach among these patients and strategies to improve their adherence to treatment (CDPH, n.d.; Taylor, 2005). On the other hand, direct-acting antiviral therapy takes only 2 or 3 months. The strategy of buying insurance on behalf of a patient is less necessary for someone whose treatment will last only a short time. There is no reason states could not use their savings from cost sharing with private insurance companies to treat hepatitis C, however. By the same token, hepatitis B patients, who have a chronic viral infection, might be suitable candidates for assistance with health insurance.
Any modifications to the Ryan White Act should make it clear that any services for viral hepatitis patients would be in addition to the program’s goal of supporting treatment for poor and uninsured HIV patients. It is also important to remember that the Ryan White Act was passed out of concern for poor and uninsured people facing a lifetime of expensive HIV treatment. Loosening restrictions on its funding to cover expensive direct-acting agents would be entirely consistent with the spirit of the law. It would also hasten the elimination of two chronic viral infections that pose particular risk to people with HIV.
Government appropriations can go a long way to meeting the increased demand for services, vaccination, and treatment that viral hepatitis elimination will pose. At the same time, the political climate can sometimes prevent congressional action on public health problems. A federal appropriation of $1.1 billion for the response to Zika, a mosquito-borne virus that causes serious birth defects, was blocked for weeks during peak mosquito season in 2016 (Herszenhorn, 2016; McCarthy, 2016). If legislators cannot allocate funding for a disease with devastating consequences for newborns, it is realistic to consider the possibility that they will not come to quick agreement on spending for a disease widely associated with illicit drug use.
The price of the direct-acting antivirals that cure HCV infection is a major obstacle to wider treatment. Introduced at a list price of about $84,000 for a course of treatment, Gilead’s Sovaldi®2 (and later Harvoni®3 introduced at $94,500 a course) put a strain on the budgets of public and
2 The U.S. proprietary name of 90 mg of the viral NS5A inhibitor ledipasvir and 400 mg of sofosbuvir, a nucleotide inhibitor of the viral RNA polymerase.
3 The U.S. proprietary name for sofosbuvir.
private payers alike (Fegraus and Ross, 2014). By some estimates, introduction of these medicines accounted for a third of the sharp increase in prescription drug expenditures in 2014 (Martin et al., 2016). Such prices are not affordable for most payers. Faced with the unenviable task of allocating scarce treatment, payers gave first priority to the sickest patients, those with advanced fibrosis or at immediate risk of cirrhosis or end-stage liver disease (Barua et al., 2015; Brennan and Shrank, 2014; Canary et al., 2015; Graham, 2016b). Many also imposed sobriety requirements, fearing that the risk of reinfection in active injection drug users was too great to justify the expense of treating them (Barua et al., 2015; Canary et al., 2015; Ellwood, 2014; UnitedHealthcare, 2015). Such restrictions met with widespread criticism (Abram, 2015; Freyer, 2016; Harper, 2015; Ramey, 2016; Salzman, 2015). Overt drug rationing offends the American public, but it is difficult to know how else to solve the problem a recent Washington Post editorial described as “the de facto rationing” of “excessive drug prices” (Rizvi et al., 2016).
Repeated lawsuits, especially against Medicaid, have resulted in loosening restrictions on treatment (Graham, 2016a; NVHR and CHLPI, 2016). In November 2015, the Centers for Medicare & Medicaid Services (CMS) responded to the restrictions in Medicaid. In an open letter, CMS reminded its state contacts that they were not free to deny coverage for “medically accepted indications” of an approved drug, and that neither the state nor its managed care organizations could use a standard more restrictive than the label indication for treatment (DeBoy, 2015). In its letter, CMS acknowledged the strain direct-acting antivirals put on state budgets but pointed to increasing market competition as a force for lowering prices (DeBoy, 2015).
It is unlikely that market forces alone will lower the prices on these drugs sharply or quickly enough to meet the targets set in Chapter 2. The goals described depend on prompt, large-scale treatment of hepatitis C, and the price of these drugs is a major obstacle to unrestricted treatment, especially for institutions of limited means such as the prison system and state Medicaid offices. No direct-acting antiviral will come off patent before 2029, 1 year before the target elimination date (DrugPatentWatch, n.d.). As Chapter 2 makes clear, delaying mass treatment would result in tens of thousands of needless deaths and billions of dollars in medical costs. It is the government’s role to avoid such suffering, while still respecting the innovator drug companies’ rights to financial compensation for the risk they took to bring a valuable product to market (Conti et al., 2016). Bulk purchasing for volume discounts can help state Medicaid programs and other buyers manage the drug cost, though a licensing strategy loosely inspired by the Vaccines for Children program may be more effective.
Public Purchase and the Vaccines for Children Program
Vaccines were not always a universal entitlement in the United States. For decades, spotty immunization left society vulnerable to outbreaks. In 1988 a measles epidemic starting in California caused 123 deaths and more than 11,000 hospitalizations (Atkinson et al., 1992a,b; CDC, 1992; Dales et al., 1993; Orenstein, 2006). The epidemic lasted for several years; most of its 55,000 victims were preschool children living in poor, densely populated, urban neighborhoods (Hinman et al., 2004; Orenstein, 2006). The National Vaccine Advisory Committee determined that failure to immunize children aged 12 to 15 months had caused the epidemic, and recommended a federal grant program fund the purchase and delivery of vaccines for children who were not insured for them (National Vaccine Advisory Committee, 1991; Orenstein, 2006). By the mid-1990s a goal of 90 percent immunization coverage in preschool children and a measles elimination effort brought increased attention to gaps in vaccination (Orenstein, 2006).
Charging parents for immunizations put uninsured and underinsured children at risk for missing them (Orenstein, 2006). But the government was reluctant to purchase childhood vaccines outright, as many children were covered by private insurance; it seemed wasteful to spend taxpayer money to relieve insurance companies of their obligations (Orenstein, 2006). There was also concern that a single payer could force vaccine prices too low, disrupting the pharmaceutical companies’ risk calculation and discouraging future innovation (Orenstein, 2006). Created in 1993, Vaccines for Children was seen as a compromise between a single payer and the status quo (Hinman et al., 2004; Orenstein, 2006). Children under 19 who are eligible for Medicaid, uninsured, or whose insurance does not cover immunization, as well as any American Indian or Alaska Native child4 can receive free vaccination through the program (CDC, 2014c; Hinman et al., 2004).
Vaccines for Children is an entitlement, meaning it does not undergo the annual congressional appropriations process (Hinman et al., 2004). The Centers for Disease Control and Prevention’s (CDC’s) Advisory Council on Immunization Practices (ACIP) recommends vaccines for inclusion in the program, the CDC then negotiates prices with manufacturers and awards funding (allocated through CMS) to organizations such as state health departments that order the discounted vaccines (CDC, 2014a; Shen et al., 2009). The government contracts with a distributor to deliver vaccines to the over 44,000 private providers and public clinics registered with the program (CDC, 2014a; Shen et al., 2009). These vaccines are given free of charge, although providers can bill a standard office visit or administration fee, keeping in mind that no child can be denied a vaccine because
4 As defined by the Indian Health Care Improvement Act (25 USC 1603).
his or her family cannot afford the administration fee (Shen et al., 2009). The program makes publicly purchased vaccines available in the private sector, a feature that discourages referrals from private practice to public clinics, thereby relieving strain on health departments (Lindley et al., 2009; Zimmerman et al., 2001). Eliminating referrals also makes for more efficient practice with less chance to lose patients and information in transit (Hinman et al., 2004; Lindley et al., 2009).
State Medicaid programs and health departments save money because of Vaccines for Children, as do participating private clinics. Bulk purchase guarantees lower costs, and no clinic is obliged to front money to stock vaccines. Despite early worries, the program has not harmed manufacturers. ACIP regularly recommends new (often expensive) vaccines; schools and daycare centers often require immunization, sometimes with multiple doses (Lindley et al., 2009; Rosenthal, 2014). Vaccine manufacturers support the program, which reduces volume uncertainty and ensures access for uninsured and underinsured patients, a market they could otherwise miss (Coleman et al., 2005). And Vaccines for Children does not interfere with the strong private market, profits from which allow the companies to offer lower prices to the CDC (Shen et al., 2009).
A Similar Strategy for Hepatitis C
Much as the cost of vaccination contributed to the measles outbreak of the 1980s and 1990s, so can the high price of hepatitis treatment encourage future HCV outbreaks. This committee’s previous report concluded that cost is the main reason that only 7 to 14 percent of hepatitis C patients had initiated treatment with direct-acting agents by 2015 (NASEM, 2016). Access is particularly bad among patients for whom the government buys treatment. A study of 2,321 prescriptions for direct-acting antivirals written between November 1, 2014, and April 20, 2015, found 16 percent of patients received an absolute denial (Lo Re et al., 2016). The rate of denial varied by insurance type, however; 46 percent of Medicaid patients were denied treatment, compared to 5 percent of Medicare and 10 percent of private insurance patients (Lo Re et al., 2016). Similarly, a recent survey drawing on data from 41 states indicated that less than 1 percent of prison inmates known to have hepatitis C were being treated (Beckman et al., 2016).
Hepatitis C is an infectious disease. Because of the ongoing opioid epidemic, more people, many of them younger than 30, are at risk for HCV infection (CDC, 2016; Zibbell et al., 2015). As Chapter 2 made clear, without large-scale treatment, infection will continue to be a public health problem. There are, of course, differences between childhood immunization and hepatitis C treatment. Obviously, there are far more children than
hepatitis C patients, although the childhood vaccines are much cheaper than direct-acting antivirals, so the overall costs may be comparable. The means by which the government should buy the product is also different. As the direct-acting agents are still on patent, licensing rights to a patent would be an excellent way to increase access to treatment without significantly increasing costs for public payers.
Recommendation 6-1: The federal government, on behalf of the Department of Health and Human Services, should purchase the rights to a direct-acting antiviral for use in neglected market segments, such as Medicaid, the Indian Health Service, and prisons. This could be done through the licensing or assigning of a patent in a voluntary transaction with an innovator pharmaceutical company.
The idea of the government acquiring a patent is not new. A recent policy piece in Health Affairs argues that the federal government should invoke its power for “government patent use” to improve access to expensive but effective patent-protected medicines such as direct-acting antivirals (Kapczynski and Kesselheim, 2016). The authors cite 28 USC section 1498, which allows the government to use a patented product without permission in exchange for a payment of “reasonable and entire compensation” for the product (Kapczynski and Kesselheim, 2016). The Departments of Defense5 and the Treasury6 have invoked this provision in the manufacture of night vision goggles and fraud detection software (Kapczynski and Kesselheim, 2016).
Much the same way a single payer system for vaccines would have ended uneven immunization among children, so would government patent acquisition solve the problem of poor access to direct-acting antivirals. It could also have a chilling effect on innovation (Grabowski, 2016). Invoking section 1498 forces the patent holder to surrender market exclusivity rights at a price determined by the federal government. Patent holders have reason to doubt that they will get fair compensation when they have no ability to refuse the transaction. The innovator company could always sue the government, but the legal costs and the odds of losing the challenge may dissuade them. At the very least, legal fees could add to their expenses and detract from their overall return on investment. Fear that patent rights could be confiscated might also discourage pharmaceutical companies from investing in breakthrough research. Government takeover of a drug patent
5Gargoyles, Inc., and Pro-Tec, Inc., v. United States, 113 F.3d 1572 (Fed. Cir. 1997).
6Advanced Software Design Corp. v. Federal Reserve Bank of St. Louis, 583 F.3d 1371 (Fed. Cir. 2009).
would thereby increase access to direct-acting agents, but the cost to society may be too high.
There are times when the government is obliged to act in correction of market failures. With this in mind, the committee recommends a voluntary transaction between the federal government and a patent holder, wherein the companies producing direct-acting antivirals compete to license their patent to the federal government for use in neglected patients. The exact legal mechanism that would best serve this goal is debatable. The innovator companies and the government would need to determine if the situation is better suited to licensing, wherein the company issues revocable rights to a patent, or to assignment, wherein the company would permanently transfer ownership of its patent (Mendes, n.d.). One of the main differences between license and assignment is in how the rights are paid for: a licensee usually pays royalties for its rights, an assignee makes a lump sum payment (Mendes, n.d.). In practice the line between the two is not always clear, nor is it obvious how much of the “bundle of rights” guaranteed by a patent the innovator company has to transfer before an exclusive license becomes an assignment (Chapman and Fraser, 2010). In either case, the government would only have authority to use the drug in a narrow and clearly defined market.
The voluntary nature of the process guarantees the drug company reasonable compensation—the patent holder always has the option to walk away from the transaction if the price is not right. The innovator company would authorize its rights only in those market segments for which the taxpayer pays for treatment and access is limited, such as the uninsured, prisoners, and Medicaid beneficiaries. These are the least lucrative market segments in the United States; the buyers have serious budget constraints and access restrictions, making these markets ones the companies are not reaching otherwise. Limiting market would also control the cost to the government; it would not have to pay as much for the rights as it would if compromising the lucrative private market. Once the government acquires adequate rights, it would contract with manufacturers to produce the drugs and with distributors.
Projected Cost of the Buyout
About 700,000 people in state Medicaid programs and prisons are eligible for treatment with direct-acting agents.7 The exact prices state Med-
7 Combining the roughly 100,000 eligible prisoners (Beckman et al., 2016) and approximately 650,000 Medicaid recipients (Senate Committee on Finance, 2015), and assuming 50,000 of those were treated in 2015 and 2016, results in approximately 700,000 prisoners and state Medicaid participants eligible for treatment. Included in this estimate are the nearly
icaid programs and prisons pay for treatment are not public information, but the manufacturers’ financial reports and information on Medicaid’s mandatory discounts suggest costs of about $40,000 per treated patient.8 In 2014, about 17,000 patients in prisons and Medicaid programs received treatment with direct-acting antivirals.9 The models presented in Chapter 2 assume treatment for 260,000 patients a year (see Appendix B). Even if the United States continues treatment at the current rate, an unlikely scenario given the pressure to improve access to these drugs, there would be about 20,000 Medicaid patients and prisoners a year receiving direct-acting agents. So under the status quo, about 240,000 such patients will receive treatment in the next 12 years, generating about $10 billion in revenues for manufacturers.
Around 2028 the innovator companies’ period of market exclusivity will be ending, at which time their revenue would drop precipitously. Assuming a cost of capital of about 8 percent for pharmaceutical firms,10 the present value of this revenue stream (which takes into account that the revenues are accrued over a 12-year period) is about $6.5 billion. Currently there are five firms competing to provide direct-acting agents with varying market shares (FDA, 2016). Any of these firms should therefore be willing to license the patent for their direct-acting agent for underserved markets for less than $6.5 billion.
In practice, the expected costs would be much less than $6.5 billion as there are several firms competing in this market. Consider a firm anticipating control of one-third of the market over the next 12 years. Under the status quo, this firm expects to have a revenue stream with a present value of about $2 billion. This firm should be indifferent between the status quo and licensing its rights for $2 billion. However, if a competing firm licenses its drug to the government, then the revenue stream of the first firm would decline as it would have to compete with a cheaper generic in the same market segments. The government could, therefore, negotiate a price much lower than the present value of the revenue stream. The actual transaction amount will depend on the degree to which firms compete with each other
100,000 potential patients in the Indian Health Service dependent on state Medicaid programs as there are no HCV drugs on the service’s formulary (CMS, n.d.; Edlin et al., 2015; Indian Health Service, 2016; Leston and Finkbonner, 2016).
9 An estimated 949 prisoners (Beckman et al., 2016) and 16,200 Medicaid recipients (Senate Committee on Finance, 2015) were treated, resulting in about 17,000 patients who received treatment with direct-acting antivirals.
10 The cost of capital is the weighted average of the cost of equity and after-tax cost of debt, weighted by the market values of equity and debt (Damodaran, 2016). Cumulative market values for the entire sector are used for the weights.
to sell to the government. Both the government and the winning firm would benefit from the outcome of the negotiation.
After the government purchases rights to the patent, it would contract manufacturer to produce the drug for supply to neglected markets, such as Medicaid, the Indian Health Service, and prisons. Prices of other direct-acting agents would be expected to fall in those markets as they would be competing with a generic. Estimates of the production costs of direct-acting agents and gross profit margins of generic suppliers suggest that the price of generic direct-acting agents will be roughly $200 per patient (Hill et al., 2014). Assuming all 700,000 hepatitis C patients in those systems receive the licensed product, the total cost of the drug itself for Medicaid programs and prisons would be only $140 million over the license cost.
This solution solves the dual problem of high costs and poor access to direct-acting antivirals in the Medicaid and prison market segments. It does so by preserving the incentives for innovation as it involves a voluntary transaction between a patent holder and the federal government at a price agreeable to both parties. Under the status quo (where the government does not have rights to patent), we expect that the federal and state governments will spend about $10 billion over the next 12 years, providing direct-acting agents to about 240,000 Medicaid beneficiaries and prisoners. These costs will be split roughly evenly between the federal and state governments, as the federal government provides matching funds to state Medicaid programs. Under the scenario where the federal government follows this recommendation and buys rights to a patent for about $2 billion, the cost to the federal government is the $2 billion for the rights and $70 million for generic drug purchases. The costs to state governments are about $70 million for generic drug purchases. Thus, overall costs are significantly lower for state governments. Costs are also lower for the federal government in the long run, but the license requires higher upfront investment. Although this investment is large, it is a small fraction of total federal spending on health. Most importantly, the patent license results in an estimated 460,000 more patients receiving treatment, essentially solving the problem of poor access to direct-acting antivirals.
It is not clear which federal agency would be best suited to manage the licensing negotiations. HRSA is a natural choice, given its experience with the 340B program, as is the CDC, which negotiates Vaccines for Children. The Treasury may also be suitable, and the Department of Defense may have transferable expertise from other private sector negotiations. The committee does not presume to identify the best agency for the job; such a determination should be made at higher levels.
A more serious challenge lies in the potential of this recommendation to create parallel markets in one country: a market where a generic is available at lower cost and one where the same product is sold at the branded price. Innovator companies may fear that products intended for Medicaid patients would be sold illegally, undercutting their share of the private market.11 Such concerns may be exaggerated. There have been no reports of black market diversion from developing countries where the price of direct-acting agents is orders of magnitude lower than the U.S. market (McNeil, 2015). Furthermore, there are already parallel markets in the United States. The Department of Veterans Affairs (VA), for example, pays considerably less for medicines than other federal agencies, about 42 percent of the average wholesale price, because similar products compete for listing on its closed formulary (CBO, 2005; Kesselheim et al., 2016). There has been no widespread diversion from the VA system in its almost 20 years with a closed formulary, except for a few products with street value, opioid pain killers and drugs for erectile dysfunction, for example (VA, 2015, 2016a).
Unlike Viagra® or Percocet®, there is no underground market or off-label indication for direct-acting antivirals. If a Medicaid beneficiary were to sell one, he or she would have to first find another hepatitis C patient interested in buying. Far fewer private insurance patients are denied the treatment in the first place (Lo Re et al., 2016). It is not impossible that some would want to buy on the black market, but the risks of such action are real. Selling prescription drugs is a federal crime,12 and as long as treatment expansion proceeds as recommended in Chapter 4, the benefit is minimal. If such diversion became more than an anecdotal problem, some variant of directly observed treatment would be necessary. In Egypt, for example, where Gilead provided free sofosbuvir to 125,000 people in 2015, patients have to bring an empty pill bottle to the pharmacy to get a refill and break the seal on the new bottle in front of the pharmacist, essentially negating the product’s resale value (McNeil, 2015).
Critics of this strategy may maintain that it sets a dangerous precedent. If the government can buy a patent for hepatitis C drugs, they would reason, then why should it not do the same for other medicines? This is a harder criticism to answer except to say that the U.S. government is disinclined to such action. It has not invoked its rights under section 1498 since the 1960s (Brennan et al., 2016). The U.S. government is generally extremely supportive of the pharmaceutical industry, investing heavily in the science infrastructure that supports the industry and paying considerably more for medicines than other rich countries (Conti et al., 2016).
11 Arguments about product diversion are not relevant in prisons where all medicine administration is directly observed.
12 Controlled Substances Act. 21 USC § 841(a).
Direct-acting agents may also be a special case. These products have a remarkable success rate, curing an infectious disease of public health consequence. The government has reason to improve access to these drugs, thereby reducing or eliminating the future burden of hepatitis C, something that few products can offer. There may also be a unique combination of circumstances: several innovator companies all offering patent-protected products at the same time for high prices, increasing the chances that the government can negotiate a favorable price.
Negotiating a good license price depends, however, on the cooperation of the pharmaceutical industry. The companies could refuse to negotiate, though refusal would not be to their obvious financial advantage. As the previous section explained, this license would be used in an otherwise tightly restricted market, one the companies are not currently reaching. The chance to reach a relatively untapped market should be compelling. There is always a chance, however, that the firms would rather decline a new revenue stream, albeit a modest one, than license their patent rights.
Such refusal would have risks. First, it could be considered implicit collusion; the fewer companies competing to sell rights, the better the returns for the winner, after all. Such action could have serious consequences for the firms’ public image. In the current political climate, high drug prices are under scrutiny (Johnson, 2017a,b; Morgenson, 2016). Were these immensely profitable companies to refuse to cooperate with the government, especially a government acting against a public health threat and in the interest of some of the poorest and least powerful people in society, this scrutiny would be likely to increase.
Furthermore, the government has the authority to exercise its rights to patent use under section 1498 at any time. The last time the government even hinted at taking such action against drug company was in 2001, when, during the anthrax scare, the manufacturer of ciprofloxacin initially refused to lower its prices to support national stockpiling (Brennan and Shrank, 2014; Kapczynski and Kesselheim, 2016). The threat alone was enough to cause the manufacturer guarantee supply at a 50 percent discount (Kapczynski and Kesselheim, 2016). The same action could be considered for a direct-acting agent, as could the pooled purchasing strategies discussed later in this chapter.
It is possible that a government’s very reluctance to interfere in the pharmaceutical market emboldened Gilead to set the introductory price for sofosbuvir so high. An 18-month Senate Finance Committee investigation ended in the embarrassing publication of the company’s internal pricing
strategy, summarized in The Price of Sovaldi and Its Impact on the U.S. Health Care System (Senate Committee on Finance, 2015). The bipartisan report concluded that Gilead executives priced sofosbuvir as high as they thought the market would bear before triggering access restrictions (Senate Committee on Finance, 2015). They miscalculated that point, but did not respond to the restrictions by lowering prices (Senate Committee on Finance, 2015). Gilead offered Medicaid programs a 10 percent rebate only on the condition that they drop access restrictions, thereby increasing states’ total spending on the drug (Senate Committee on Finance, 2015). “By elevating the price for the new standard of care set by Sovaldi,” the report explained, “Gilead intended to raise the price floor for all future HCV treatments, including its follow-on drugs and those of its competitors” (Senate Committee on Finance, 2015, p. 118).
The government has to balance the pharmaceutical firms’ right to compensation against its duty to the millions of Americans who suffer from hepatitis C, to say nothing of the taxpayers who subsidize their treatment. Voluntary licensing or assignment of patent rights could help restore equilibrium to this equation. It might also discourage future introductory drug prices similar to those for sofosbuvir. In 2015, the Senate Finance Committee openly fretted about “the budgetary effects of a future single source innovator that might not face competition as quickly [as sofosbuvir]” (Carey et al., 2015). Action now could help avoid that problem.
Pooled Purchase and Other Cost Saving Strategies
It could take time to negotiate the transaction described in Recommendation 6-1. State Medicaid and prison health officers will need a strategy to make hepatitis C treatment more affordable in the meantime. There is also room for incremental change: public and private payers can take measures immediately to improve access to medicines. Bulk purchasing brings greater bargaining power with the drug companies and is a simple strategy frequently suggested to control the cost of medicines in the United States (Kesselheim et al., 2016; Shih et al., 2016). Box 6-1 describes how such a strategy worked in Massachusetts.
Outpatient prescriptions are a major and growing financial burden, second only to long-term care as Medicaid’s biggest expense (Peters, 2010). The 2003 Medicare Prescription Drug, Improvement, and Modernization Act created a drug benefit, usually referred to as Part D, which shifted some of the drug cost (those for people eligible for both Medicare and Medicaid) to Medicare (Kevles, 2014; Millar et al., 2011; Peters, 2010). Part D was created to make essential medicines more affordable for older people, but
The state Medicaid programs have other ways to control drug costs. Medicaid rebates are at least 23.1 percent of the manufacturer’s average wholesale price for most drugs (CMS, 2016a; Kesselheim et al., 2016). State Medicaid programs also use preferred drug lists and prior authorization to control costs (Soumerai, 2004). Drugs on the state’s preferred list are fully reimbursed without review or conditions (Millar et al., 2011). Access to a
13 Medicare Prescription Drug, Improvement, and Modernization Act, Public Law 108-173, 108th Cong. (2003).
medicine not on the preferred list depends on prior authorization, the process described in Chapter 4 that a prescriber or pharmacist must go through to gain approval to use a drug for which there is a cheaper alternative (Smalley et al., 1995). Prior authorization is meant to deter the careless use of an expensive medicine in cases where a cheaper one would do.
Starting in 2003, states have also used bulk buying pools to purchase Medicaid drugs (National Conference of State Legislatures, 2015) (see Box 6-2). Pooled procurement allows the states to benefit from economies of scale and can help reduce transaction costs and the administrative burden of the negotiation. Large procurements are less subject to price fluctuation over time (Andrus et al., 2009; DeRoeck et al., 2006; Huff-Rousselle, 2012). Producers also benefit from bulk purchasing arrangements, as the increased access means more people using their products.
But not all states access rebates and bulk purchasing arrangements to the same extent. Four states (Hawaii, New Jersey, New Mexico, and South Dakota) do not have Medicaid supplemental rebate programs; the rest negotiate either on their own, in pools, or some combination of single and pooled purchasing (i.e., negotiating the base rebate in a multi-state pool, and negotiating alone for an additional rebate) (CMS, 2016b; Dickson and Horn, 2016). The variation in practice among states accounts for widely different access within them (Dickson and Horn, 2016). For this reason, the Medicaid budget overview for fiscal year 2017 proposed that CMS and state Medicaid programs hire a private sector contractor to negotiate rebates for expensive medicines, a policy they estimate would save taxpayers $5.8 billion over 10 years (HHS, n.d.). The process would have to work through the private sector, as CMS is prohibited from managing such negotiations.
The 340B Program
Furthermore, not all uninsured or underinsured patients access Medicare or Medicaid. The 340B Drug Discount Program provides medicines at greatly reduced prices to safety net providers: the hospitals and clinics that serve the uninsured, Medicaid beneficiaries, and other vulnerable groups (HRSA, n.d.-c). Created in 1992, 340B aims to stretch limited federal funds for medicines. Unlike the drug rebates available to Medicaid programs, 340B discounts are generally provided up front to eligible providers, 26,907 organizations in 2014 (Fein, 2016).14 Participating hospitals and clinics
14 In some states the AIDS Drug Assistance Program may choose to receive rebates rather than front-end discounts. As of late 2016, 22 states get rebates and no discount; the others use some combination of direct purchase and rebate (Kaiser Family Foundation, 2014).
are meant to use the money they save on medicines for other services that would benefit their patients (HRSA, n.d.-a).
340B discounts are between 20 and 50 percent off average wholesale prices on prescription medicines and biologics, as well as over-the-counter drugs written as prescriptions (340B Health, n.d.; GAO, 2011). The exact 340B price for any given product is confidential, but HRSA calculates a maximum price through a formula determined by law (Apexus, n.d.).15 Additional discounts are available to clinics participating in the prime vendor program, in which one company negotiates a bulk discount for a group of 340B facilities, but care must be taken to avoid duplicate discounts for Medicaid patients (340B Health, n.d.; HRSA, n.d.-b). Therefore, clinics serving vulnerable populations need to decide before enrolling in the program if their Medicaid patients’ drugs will be purchased through 340B or through the state Medicaid program (HRSA, n.d.-b). Random audits and penalties help prevent duplicate discounts and ensure that manufacturers are honoring 340B prices. Facilities can be disqualified from 340B for mismanagement; manufacturers can be excluded from Medicaid and Medicare Part B (340B Health, n.d.).
340B is meant to stretch federal funds, so jails and prisons, usually a state responsibility, were excluded from the start. Nor are inmates Medicaid eligible, except for services provided while “a patient in a medical institution”16 (CMS, 2016c). There is nothing to prevent correctional health officers from arranging treatment for HCV-infected inmates at 340B clinics, however. Sixteen states do this; these states tend to have some of the best priced treatments for hepatitis C drugs (Beckman et al., 2016).
340B pricing and Medicaid rebates are regulated by law (Dickson and Horn, 2016). The formulas used to calculate prices for the VA and the Department of Defense vary somewhat from those used for Medicaid, but all involve the manufacturers’ reported prices to wholesalers and pharmacies (Dickson and Horn, 2016). The formulas by which these prices are calculated have been unchanged since the 1990s, despite dramatic changes in the market (Dickson and Horn, 2016). Pharmacy benefit managers and consolidated insurance companies now have influence on the market price of medicines, but the manufacturers have an incentive to hide these discounts in rebates, coupons, and other payments to insurers, not as reductions on the sticker price, because front-end discounts affect the calculation on which the government bases its pricing (Dickson and Horn, 2016). The Government Accountability Office estimates that if the formula used to calculate prices for Medicare Part B drugs (usually expensive medicines ad-
15 42 USC § 256(b).
16 Title 1905 of the Social Security Act. 42 USC § 1396d(a)(29)(A); 42 CFR §§ 435.1009, 435.1010.
The laws regulating the sale of medicines to the government are meant to protect the taxpayer from overpaying for an essential product. The Fair Pricing Coalition has suggested modifications to formulas through which various government agencies finance prescription drugs, most of which require legislative action (Dickson and Horn, 2016). To the extent such changes are possible, they should be supported as part of the solution to a wider problem of unaffordable prescription drugs.
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