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Making Medicines Affordable: A National Imperative (2017)

Chapter: 2 Complexity in Action

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Suggested Citation:"2 Complexity in Action." National Academies of Sciences, Engineering, and Medicine. 2017. Making Medicines Affordable: A National Imperative. Washington, DC: The National Academies Press. doi: 10.17226/24946.
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Suggested Citation:"2 Complexity in Action." National Academies of Sciences, Engineering, and Medicine. 2017. Making Medicines Affordable: A National Imperative. Washington, DC: The National Academies Press. doi: 10.17226/24946.
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Suggested Citation:"2 Complexity in Action." National Academies of Sciences, Engineering, and Medicine. 2017. Making Medicines Affordable: A National Imperative. Washington, DC: The National Academies Press. doi: 10.17226/24946.
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Suggested Citation:"2 Complexity in Action." National Academies of Sciences, Engineering, and Medicine. 2017. Making Medicines Affordable: A National Imperative. Washington, DC: The National Academies Press. doi: 10.17226/24946.
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Suggested Citation:"2 Complexity in Action." National Academies of Sciences, Engineering, and Medicine. 2017. Making Medicines Affordable: A National Imperative. Washington, DC: The National Academies Press. doi: 10.17226/24946.
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Suggested Citation:"2 Complexity in Action." National Academies of Sciences, Engineering, and Medicine. 2017. Making Medicines Affordable: A National Imperative. Washington, DC: The National Academies Press. doi: 10.17226/24946.
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Suggested Citation:"2 Complexity in Action." National Academies of Sciences, Engineering, and Medicine. 2017. Making Medicines Affordable: A National Imperative. Washington, DC: The National Academies Press. doi: 10.17226/24946.
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Suggested Citation:"2 Complexity in Action." National Academies of Sciences, Engineering, and Medicine. 2017. Making Medicines Affordable: A National Imperative. Washington, DC: The National Academies Press. doi: 10.17226/24946.
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Suggested Citation:"2 Complexity in Action." National Academies of Sciences, Engineering, and Medicine. 2017. Making Medicines Affordable: A National Imperative. Washington, DC: The National Academies Press. doi: 10.17226/24946.
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Suggested Citation:"2 Complexity in Action." National Academies of Sciences, Engineering, and Medicine. 2017. Making Medicines Affordable: A National Imperative. Washington, DC: The National Academies Press. doi: 10.17226/24946.
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Suggested Citation:"2 Complexity in Action." National Academies of Sciences, Engineering, and Medicine. 2017. Making Medicines Affordable: A National Imperative. Washington, DC: The National Academies Press. doi: 10.17226/24946.
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Suggested Citation:"2 Complexity in Action." National Academies of Sciences, Engineering, and Medicine. 2017. Making Medicines Affordable: A National Imperative. Washington, DC: The National Academies Press. doi: 10.17226/24946.
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Suggested Citation:"2 Complexity in Action." National Academies of Sciences, Engineering, and Medicine. 2017. Making Medicines Affordable: A National Imperative. Washington, DC: The National Academies Press. doi: 10.17226/24946.
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Suggested Citation:"2 Complexity in Action." National Academies of Sciences, Engineering, and Medicine. 2017. Making Medicines Affordable: A National Imperative. Washington, DC: The National Academies Press. doi: 10.17226/24946.
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Suggested Citation:"2 Complexity in Action." National Academies of Sciences, Engineering, and Medicine. 2017. Making Medicines Affordable: A National Imperative. Washington, DC: The National Academies Press. doi: 10.17226/24946.
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Suggested Citation:"2 Complexity in Action." National Academies of Sciences, Engineering, and Medicine. 2017. Making Medicines Affordable: A National Imperative. Washington, DC: The National Academies Press. doi: 10.17226/24946.
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Suggested Citation:"2 Complexity in Action." National Academies of Sciences, Engineering, and Medicine. 2017. Making Medicines Affordable: A National Imperative. Washington, DC: The National Academies Press. doi: 10.17226/24946.
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Suggested Citation:"2 Complexity in Action." National Academies of Sciences, Engineering, and Medicine. 2017. Making Medicines Affordable: A National Imperative. Washington, DC: The National Academies Press. doi: 10.17226/24946.
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Suggested Citation:"2 Complexity in Action." National Academies of Sciences, Engineering, and Medicine. 2017. Making Medicines Affordable: A National Imperative. Washington, DC: The National Academies Press. doi: 10.17226/24946.
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Suggested Citation:"2 Complexity in Action." National Academies of Sciences, Engineering, and Medicine. 2017. Making Medicines Affordable: A National Imperative. Washington, DC: The National Academies Press. doi: 10.17226/24946.
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Suggested Citation:"2 Complexity in Action." National Academies of Sciences, Engineering, and Medicine. 2017. Making Medicines Affordable: A National Imperative. Washington, DC: The National Academies Press. doi: 10.17226/24946.
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Suggested Citation:"2 Complexity in Action." National Academies of Sciences, Engineering, and Medicine. 2017. Making Medicines Affordable: A National Imperative. Washington, DC: The National Academies Press. doi: 10.17226/24946.
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Suggested Citation:"2 Complexity in Action." National Academies of Sciences, Engineering, and Medicine. 2017. Making Medicines Affordable: A National Imperative. Washington, DC: The National Academies Press. doi: 10.17226/24946.
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Suggested Citation:"2 Complexity in Action." National Academies of Sciences, Engineering, and Medicine. 2017. Making Medicines Affordable: A National Imperative. Washington, DC: The National Academies Press. doi: 10.17226/24946.
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Suggested Citation:"2 Complexity in Action." National Academies of Sciences, Engineering, and Medicine. 2017. Making Medicines Affordable: A National Imperative. Washington, DC: The National Academies Press. doi: 10.17226/24946.
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Suggested Citation:"2 Complexity in Action." National Academies of Sciences, Engineering, and Medicine. 2017. Making Medicines Affordable: A National Imperative. Washington, DC: The National Academies Press. doi: 10.17226/24946.
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Suggested Citation:"2 Complexity in Action." National Academies of Sciences, Engineering, and Medicine. 2017. Making Medicines Affordable: A National Imperative. Washington, DC: The National Academies Press. doi: 10.17226/24946.
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Suggested Citation:"2 Complexity in Action." National Academies of Sciences, Engineering, and Medicine. 2017. Making Medicines Affordable: A National Imperative. Washington, DC: The National Academies Press. doi: 10.17226/24946.
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Suggested Citation:"2 Complexity in Action." National Academies of Sciences, Engineering, and Medicine. 2017. Making Medicines Affordable: A National Imperative. Washington, DC: The National Academies Press. doi: 10.17226/24946.
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Suggested Citation:"2 Complexity in Action." National Academies of Sciences, Engineering, and Medicine. 2017. Making Medicines Affordable: A National Imperative. Washington, DC: The National Academies Press. doi: 10.17226/24946.
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Suggested Citation:"2 Complexity in Action." National Academies of Sciences, Engineering, and Medicine. 2017. Making Medicines Affordable: A National Imperative. Washington, DC: The National Academies Press. doi: 10.17226/24946.
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Suggested Citation:"2 Complexity in Action." National Academies of Sciences, Engineering, and Medicine. 2017. Making Medicines Affordable: A National Imperative. Washington, DC: The National Academies Press. doi: 10.17226/24946.
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Suggested Citation:"2 Complexity in Action." National Academies of Sciences, Engineering, and Medicine. 2017. Making Medicines Affordable: A National Imperative. Washington, DC: The National Academies Press. doi: 10.17226/24946.
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Suggested Citation:"2 Complexity in Action." National Academies of Sciences, Engineering, and Medicine. 2017. Making Medicines Affordable: A National Imperative. Washington, DC: The National Academies Press. doi: 10.17226/24946.
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Suggested Citation:"2 Complexity in Action." National Academies of Sciences, Engineering, and Medicine. 2017. Making Medicines Affordable: A National Imperative. Washington, DC: The National Academies Press. doi: 10.17226/24946.
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Suggested Citation:"2 Complexity in Action." National Academies of Sciences, Engineering, and Medicine. 2017. Making Medicines Affordable: A National Imperative. Washington, DC: The National Academies Press. doi: 10.17226/24946.
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Below is the uncorrected machine-read text of this chapter, intended to provide our own search engines and external engines with highly rich, chapter-representative searchable text of each book. Because it is UNCORRECTED material, please consider the following text as a useful but insufficient proxy for the authoritative book pages.

2 Complexity in Action As has already been emphasized, the market for prescription drugs in the United States is unlike most other markets for consumer products. In fact, it is unlike even other health care markets—which themselves differ from conventional markets. In conventional markets, consumers can search for available alternatives with access to information, including discounts, reviews, and ratings. Such information enables purchasers to make informed trade-offs relating to price and quality. In the case of biopharmaceutical products, such comparative information is technical and complex, and generally inaccessible. Moreover, clinicians generally do not have information about cost-sharing details and the general financial situation of their patients. As a result, the traditional process where consumers directly search for products has to a considerable degree been replaced by insurance companies that assess benefits and costs of drugs and steer patients’ choices using insurance plan design. In contrast, the safety, efficacy, production, and distribution of prescription drugs— although not their pricing—are all highly regulated in the United States. Such regulations are intended to balance a variety of considerations, including, in particular, the needs to protect the public and to reward the risky endeavor of investing in research and development. In protecting the public, regulations are intended to ensure that drugs are both safe and effective. The severity and impact of disease need to be balanced with the possible side effects of treatment, and also with the harms that may arise from the lack of availability of those drugs. For example, lack of access to treatments for infectious diseases due to cost not only result in death of an individual, but can also lead to infection and death of others. Regulations naturally influence the pricing of drug therapies, which are ultimately paid for by patients, their families, and society as a whole, whether through direct payments, insurance premiums or taxes. The processes for ensuring that various, sometimes conflicting goals are reasonably satisfied add both to the financial costs of developing drugs and to the risks and consequences of product failure. Arguably, the best interests of patients should be paramount. To begin exploring how one might approach these potential trade-offs this chapter describes the highly complex biopharmaceutical supply chain, from drug discovery through development, distribution, financing, and the end use by patients. THE THREE “Rs”: RESEARCH TO RESULTS AND RETURNS Biomedical Research Basic biomedical research, which is usually conducted in universities and specialized research organizations, is usually the first step in a long sequence of activities that ultimately produces safe, effective, and approved drugs. Much of this research is not intended to result in directly marketable biopharmaceutical products, but rather to gain a mechanistic understanding of health, disease, and fundamental science. Historically, though, a certain amount of basic research has led to opportunities to develop new medications, at which point the applied research and development efforts commonly shift from the university or research institute setting to corporations, the latter of which bring the skills and resources necessary to develop, produce, and market prescription drugs. Almost all of these corporations operate on a for-profit basis and PREPUBLICATION COPY: UNCORRECTED PROOFS 39

MAKING MEDICINES AFFORDABLE 40 depend on the free market for the capital that makes them viable as developers and manufacturers of the drugs sought by patients. Researchers involved in basic research are often poorly positioned to develop their findings into a commercially viable product. The passage through the transition from discovery to development—often termed the “valley of death”—has been (and can be further) facilitated by “incubators,” organizations that help bridge the valley between discovery and application. Such technology development facilities and related clinical trial networks have been established in many forms by research universities, private corporations, state governments, and others (IOM, 2010, 2012). These joint arrangements have served an important role in making many drugs available for the benefit of patients. Inventions emerging from research funded by the government can be patented by the university or organization performing the research. The technology covered by the patent can then be further advanced by the patent owner or licensed to others for industrial development. This situation was created by the Bayh–Dole Act, which assigned property rights for federally sponsored research to the inventors and their institutions rather than to the government funder (e.g., the National Institutes of Health), as had previously been the case (NRC, 2011). This major shift in how property rights were assigned led to a significant expansion in drug discovery and development within universities and other research institutions. The U.S. biopharmaceutical industry is structured as it is today in part because of the Bayh–Dole Act and the response of universities and researchers to that act (Gabriel, 2014). The annual number of patents filed and licensed from government-sponsored research is estimated to have increased by almost a factor of 10 since the passage of the Bayh–Dole Act, thereby adding billions of dollars to the U.S. gross domestic product (Economist, 2002; Schacht, 2009). The act motivated collaboration between academia and industry, that in turn has helped enhance the transition of products from the laboratory to the public and resulted in better treatment options for patients. Translational research and clinical development can be conducted in companies both large and small. Many “spin-off” entities have been created by universities to move basic science into more advanced stages of product development. These entities commonly receive investments from venture capital firms or individuals who gain partial ownership of the products of the entity in exchange for their infusion of capital. This investment process is fraught with risk to both the discoverer and the investor. Each step of the biopharmaceutical research and development process has a high failure rate even before a drug gets to the point where it is ready for regulatory review. As a result, the returns on investment for successful drug products may appear to be abnormally high, since the average expected return, from the manufacturer’s point of view, must also compensate for many failures. Financial markets reward those who invest in riskier ventures by providing them with higher-than-average returns. More risk leads to a higher average reward for success, thereby encouraging investments that might not otherwise occur. Legal Exclusivity Patent law gives an inventor exclusive right for a period of time to the use of an invention as an incentive to invent. In exchange for the legal period of exclusive use10 of the invention, patent holders must provide sufficient information in the patent (which is a public document) to 10 The term “legal monopoly” and related variants—including “regulated monopolies” as noted in this study’s statement of task— have also been used by some to refer to the exclusive market protection feature bestowed by U.S. patents. PREPUBLICATION COPY: UNCORRECTED PROOFS

MAKING MEDICINES AFFORDABLE 41 allow others to use the invention once the period of exclusivity has ended. During the exclusivity period, patent holders have the right to prevent others from using or bringing to market products covered by the invention without the patent-holder’s permission. Patents, like other forms of property, can be sold, leased, or licensed on terms mutually agreeable to the parties. Because biopharmaceutical product markets are international in scope, inventors often seek patent protection in many countries, the patent laws of which are generally coordinated through the World Intellectual Property Organization based on the Patent Law Treaty adopted in 2000. In the United States, the Leahy–Smith America Invents Act brought U.S. patent law into general alignment with these international standards. In biopharmaceutical products, a single item often involves many patents, ranging from the chemical entity itself to the forms of delivery and sometimes even the packaging. Thus, a situation can arise where multiple patent holders mutually claim infringement by others. In such cases, agreements between the various patent holders may be necessary to bring the product to market in its final form. Patent holders are generally responsible for enforcing the exclusive use of their patent through civil court action against alleged infringement. Under 35 U.S.C. Section 284, a patent owner can claim “damages adequate to compensate for the infringement, but in no event less than a reasonable royalty.”11 The standard 25-year exclusivity period—resulting from the Hatch–Waxman Act—begins when the patent is granted, but marketing of the drug in the United States requires approval from the U.S. Food and Drug Administration (FDA). This process can take from 1 year to over a decade depending on the drug, shortening the effective time during which the patent has economic value. A natural tension arises in regulatory policy between safety and efficacy versus incentives for product development. One could imagine a hypothetical world wherein no FDA safety and efficacy rules existed, but only the patent exclusivity period existed. This would increase the incentives to invest in product development but could greatly reduce the safety and efficacy of drugs appearing on the market. At the other extreme, one could imagine a world with the FDA processes in place as is the case today, but shorter (or no) legal exclusivity created by patent rights. This would likely lead to less investment and a lower rate of drug discovery and development than is achieved with the current system. Testing and Regulation Once drugs have been developed, they must pass a rigorous regulatory review conducted by the FDA in the United States before they can be marketed—and, if they are to be sold abroad, after review by the corresponding agencies in other countries. To gain market approval, drugs must demonstrate both safety and efficacy. The very nature of this approval process demands considerable time and money and, once again, poses the risk of failure at every step of drug development. The first step in the regulatory review process involves animal testing to determine whether the drug indeed affects the intended target and to gather basic safety information concerning toxicity. Assuming that the results are satisfactory, the manufacturer will next file an investigational new drug (IND) application with the FDA, setting the formal review process in motion. For the subsequent human testing, the FDA seeks to ensure that adequate consent 11 An alternative to a patent for an inventor is to protect the invention as a “trade secret,” in which case the legal protections of patent law are not provided, but the period of exclusive use is also not limited by law. The trade secret path is not normally available to the biopharmaceutical industry because of the disclosures that the FDA requires in order for a product to be licensed for sales. PREPUBLICATION COPY: UNCORRECTED PROOFS

MAKING MEDICINES AFFORDABLE 42 anhuman subject protection procedures are in place (Arrowsmith and Miller, 2013; FDA, 2006). Only a very small subset of new discoveries (1 out of 1,000 to 2,000 candidates) reaches the stage of IND application (AACR, 2011).12 Phase I (initial human) trials—which typically involves 20 to 80 healthy human volunteer subjects—seek to characterize drug concentrations in blood and plasma and how the drug is metabolized and to detect the most common side effects (FDA, 2016). However, in the case of severe conditions such as cancer, phase I trials may be conducted in patients with end-stage disease who have exhausted all standard therapies. Phase II trials commonly involve several hundred human subjects and pursue several goals. First, they assess whether the drug has the potential to be effective against the target disease by testing them in patients with the disease in question, randomizing between the treatment and a placebo drug or the standard of care, or both. Researchers carrying out these trials continue to monitor side effects and safety issues. A phase II trial also seeks to determine the optimal dosing regimen (total amount, spread over a specific number of doses) and perhaps the duration of the required treatment. Approximately 70 percent of phase II trials are unsuccessful and the drug candidates are abandoned, either because the drug was no more effective than the placebo or because additional safety concerns arose during testing on the expanded number of subjects (FDA, 2017a). Phase III trials further expand the number of patients involved in the testing—commonly into the thousands—and continue to assess the safety and efficacy of the drug against either a placebo or the existing standard care, depending on the status of current therapeutic options. If no current therapies exist, these studies will use placebo controls. If an existing therapy has been shown to have clinical benefit, the ethics of human subject testing normally precludes withholding that therapy. In this case the randomization compares the new drug against the existing treatment (the standard of care). Phase III studies are crucial for regulatory review, and sample sizes are predetermined to ensure that a sufficient statistical base exists to support a final FDA regulatory approval decision. About half of all the drugs that reach phase III do not proceed to market (Arrowsmith, 2011), and judging by historical trends, only about 5 to 10 percent of IND applications ever gain FDA approval (Van Norman, 2016). The safety of human subjects is of extreme importance in these studies. Clinical trials in the United States have an independent body of experts (including clinicians and statisticians) to monitor safety by regularly reviewing interim data for the treatment being assessed and for control groups in order to spot any differences that may exist between them in either safety or efficacy. Most such trials are “double-blind”; that is, neither the researcher nor patient is aware of which specific treatment is being provided to a specific patient. Pre-specified measures are used to determine efficacy, and a review is conducted to assess the rates of adverse events, including mortality. The monitoring committees have the authority to recommend that a randomized trial be stopped at any time if major safety concerns appear or if the evidence of efficacy is so strong that there is an ethical imperative to place the therapy into general use as quickly as possible. 12 One approach to for reducing prices is reducing the IND failure rate. In recent years there have been a number of efforts to do so through such steps as making otherwise proprietary clinical data, especially on failed drug candidates, publicly available to all researchers. This report acknowledges that reducing IND failure rate is critical in the drug development process; however, this topic could not be considered in detail amidst the competing demands of other topics presented in the study scope. Furthermore, the committee lacked the necessary expertise on this topic. PREPUBLICATION COPY: UNCORRECTED PROOFS

MAKING MEDICINES AFFORDABLE M A E 43 Upon success completion of a phase III trial, th next step is for the sp U sful he ponsor of thee drug to file a new dru applicatio (NDA), su fi ug on ubmitting th results fro the clinic trial to the he om cal e FDA. Th manufactu also sub he urer bmits proposed labeling i information (highly detaailed data on n safety, effficacy, and dosage, and the indicatio for which it will be a on h approved) inttended for use by clinicians The FDA will inspect the facilities where the drug will be produced in order to as s. e n ssess safety an manufactu nd uring quality standards. If everything is acceptab the FDA will approv y I g ble, A ve marketin of the new drug for the specified indication. P ng w i Patients can t then gain acc to the n cess new drug by prescription from a quali p ified profess sional. Once a drug is available to consumers, it enters th phase IV safety review, known as O i t he s post-mar surveilla rket ance. The sponsor, typica the drug manufactur must sub ally g rer, bmit periodiic safety repports to the FDA. These data play a major role in ensuring c F n continued dru safety, ug sometime revealing adverse effe that occur too rarely to have bee detected e es ects y en even in the large phase III trials. Per th Prescripti Drug User Fee Act, a these cos are borne by the he ion all sts sponsorin organizat ng tion, includin the cost of the FDA r ng o review proce itself. Th timeline fo the ess he or entire proocess varies, but historic data indic that it ca take as lo as 15 yea (see Figu 2- , cal cate an ong ars ure 1) (FDA, 2015; Ng, 2015). It gen , 2 nerally takes less time to approve generics becau of the da s o use ata previousl generated for the com ly d mparable brannded drugs a also less time for tho products that and s ose s meet the criteria of th Orphan Drug Act. he D FIGURE 2-1 A typic timeline for drug discovery and d E cal developmen nt. NOTE: FDA = U.S. Food and Dr Adminis F rug stration. SOURCE Adapted from AACR 2011. E: f R, Competitive Market Strategies Follo M owing Produ Launch uct “Evergre eening” of Exclusivity E PREPUBLI ICATION CO OPY: UNCOR RRECTED PR ROOFS

MAKING MEDICINES AFFORDABLE 44 While evergreening is not a formal concept within patent law, it is a commonly used term that refers to various techniques for extending the legal exclusivity granted by the patent (Dwivedi et al., 2010). The practices include patenting the method of administration, patenting a minor reformulation with no therapeutic advantages, and even patenting the metabolites produced in the body after the drug is ingested (Kesselheim et al., 2006). As an example, one biopharmaceutical company filed for a patent to administer their drug after crushing it and spreading it on applesauce (Kesselheim and Mello, 2006). Evergreening—with various versions referred to as “product hopping,” “product switching” or “line-extension”—is frequently used when high-revenue branded drugs (i.e., “blockbusters”) reach the end of their patent life (Carrier and Shadowen, 2016; Jones et al., 2016). Under ordinary circumstances, once a branded drug reaches the end of its patent term, the manufacturers of generic drugs are provided an opportunity to enter the market. The manufacturers of the branded drug can stall a generic competitor from entering the market by filing patents that cover not only the active ingredient, but also secondary features of the drug such as methods of formulation. A recent analysis of all drugs on the market between 2005 and 2015 found that at least 74 percent of new patents for drugs were for existing drugs. This addition of new patents and associated exclusivities was especially pronounced among blockbuster drugs. Of the roughly 100 best-selling drugs, almost 80 percent had their patent protection extended at least once, with nearly 50 percent extending patient protection more than once (Feldman and Wang, 2017). While these patents are generally considered weaker and less novel than the original patent, they can allow the branded company to allege that the competitor will infringe these additional patents. Litigation by generic firms against branded manufacturers can help to counteract evergreening, as one analysis found that weaker patents are more likely to draw challenges from generic manufacturers (Hemphill and Sampat, 2012). Another recent analysis found that, particularly in recent years, branded firms have been less likely to win cases involving challenges to peripheral features of drugs than those involving challenges to active ingredients (Grabowski et al., 2017). However, the cost of litigation can be a deterrent to generic manufacturers, and litigation (even when ultimately unsuccessful) can be an important mechanism for extending the market exclusivity of the branded drug (Rumore, 2009). Evergreening also sometimes refers to the creation of so-called “me too” drugs, in which minor modifications are made by manufacturers to the active ingredients in an existing pharmaceutical product. These new molecules may offer little or no additional clinical benefit compared with the existing molecules, but can nevertheless provide a substantial new stream of revenue to the branded manufacturer. From industry’s perspective, evergreening has been considered a legitimate business strategy to increase revenue. What critics may see as the exploitation of loopholes may well be seen by corporations as legitimate “product lifecycle management” and therefore an approach to maximize shareholder value.13 13 Policy developments such as the Medicare Modernization Act (MMA) have prevented companies from filing a series of patents staggered to protect specific features of biopharmaceutical products such as isomers and metabolites—patents that could otherwise result in a longer period during which manufacturers could sue for patent protection in the event they are challenged by a generic entrant. Under the Hatch–Waxman Act, a manufacturer is granted a 30-month stay during the resolution of such a challenge, during which the generic manufacturer cannot sell its product. Some observers have called for the FDA to tighten the criteria for approving minor modifications of existing drugs. For example, rather than making non-inferiority the standard for approving new applications, the FDA could in some cases (such as when a generic drug is already available) require new drug applications to demonstrate superiority over existing drugs (Gagne and Choudhry, 2011). PREPUBLICATION COPY: UNCORRECTED PROOFS

MAKING MEDICINES AFFORDABLE 45 Delaying the Entry of Generic Products “Pay-for-delay” reverse settlements between manufactures of branded drugs and prospective generic entrants have emerged because of the incentives for generic entry created under the Hatch–Waxman Act. Specifically, the act grants 180 days of generic market exclusivity to the first generic firm to successfully demonstrate either that a patent is not legitimate or that the generic product does not infringe the existing patent. This provision— known as “Paragraph IV”—often concerns challenges to peripheral aspects of a patented medication design. For example, the patent on the active ingredient in omeprazole (Prilosec) expired in 2001, but patents on the coating of the pill and other properties were in effect until 2007 (Kesselheim et al., 2011). In response to Paragraph IV challenges, manufacturers can countersue the generic entrant, and can delay the generic application for 30 months. Given the uncertainty of litigation and the likelihood that a patent holder will lose its protection on a relatively weak patent, it is often mutually advantageous to the generic firm and the firm owning the patent to enter into a pay-for-delay agreement. Specifically, the firms can settle on a payment to cover the 180-day period that exceeds the amount the generic manufacturer might have earned if it were participating in the market but less than what the firm with the patent would have lost due to generic entry. Pay-for-delay keeps prices higher than they would be if a generic competitor were able to enter the market immediately. One analysis of the economic impact of pay-for-delay settlements in response to Paragraph IV challenges found that settlements tend to inflate prices and reduce the quantity of prescriptions for several years after the settlement—long after the protected 180-day period. For each settlement, the authors estimated a loss of $835 million in consumer benefits over 5 years. Conversely, the study found that eliminating settlements would tend to increase consumer welfare and have a minimal effect on the investment in research and development and the entry of new drugs into the market (Helland and Seabury, 2016). Pay-for-delay settlements have received substantial regulatory scrutiny, especially in those cases where they may violate antitrust law.14 Under recent legislative proposals, reformulations of existing drugs can attain an additional two years of protection from generic competition if they are shown to (as quoted from H.R.1353: PATIENT Act): • “promote greater patient adherence to an approved treatment regime relative to the previously approved formulation or design of the drug; • reduce the public-health risks associated with the drug relative to the previously approved formulation or design of the drug; • reduce the manner or extent of side effects or adverse events associated with the previously approved formulation or design of the drug; • provide systemic benefits to the health care system relative to the previously approved formulation or design of the drug; or • provide other patient benefits that are comparable to the benefits described above.” Such provisions highlight the challenges of effectively regulating the instances where product modifications might offer real benefits to patients, but any such benefits have to be weighed against the impact of delaying the entry of low-cost generics. 14 In recent years the Federal Trade Commission has pursued antitrust cases against a number of pay-for-delay settlements. In the 2013 case of Federal Trade Commission v. Actavis, the U.S. Supreme Court held that reverse payment settlements should receive antitrust scrutiny, but it did not conclude that such agreements should be presumed to be illegal; instead the court advised that they need to be evaluated on a case-by-case basis (Boumil and Curfman, 2013). After the Actavis case, lower courts have grappled with how to determine if specific cases meet the PREPUBLICATION COPY: UNCORRECTED PROOFS

MAKING MEDICINES AFFORDABLE 46 Another approach by branded manufacturers uses the Risk Evaluation and Mitigation Strategies (REMS) process to delay generic entry. The FDA requires REMS as a safety strategy to manage known or potential risks (FDA, 2017b), but the FTC has expressed concern about “the possibility that procedures intended to ensure the safe distribution of certain prescription drugs may be exploited by brand drug companies to thwart generic competition” (FTC, 2014a, p. 1). A recent study estimates that this could lead to about $5.4 billion in unnecessary spending on branded drugs annually (Brill, 2014). This analysis also highlighted that REMS and associated programs could also be used to also impede the market entry of biosimilars. THE MARKET STRUCTURE The complexity and interdependence within the biopharmaceutical supply chain makes it extremely difficult to understand the motivation and behavior of its various participants, even under the best of circumstances. Nonetheless, any analysis of the availability and affordability of prescription drugs needs to take into account the frequently and extensively altered incentives, trade-offs, and constraints imposed on these markets, and the ultimate impact they have on individual patients. A “Conventional” Market To understand the complexity of the pharmaceutical market, it is useful to first consider the characteristics of more conventional markets, such as those for automobiles, food, and consumer electronics. Each of these products involves the transformation of raw materials into final tested products. As shown in Figure 2-2, goods flow from manufacturers to consumers, and money flows from consumers back to manufacturers. Consumers collectively pay $X1 to retailers, who in turn pay $X2 to wholesalers, who in turn pay $X3 to manufacturers. The gross margin for retailers, $X1 – $X2, must cover the costs of conducting business and provide profits for their investors. Similarly, wholesalers retain $X2 – $X3 to cover their costs of operation and profits. Manufacturers receive $X3, which pays such costs as those associated with compensating its workforce, product development and manufacturing, and a return to investors. In larger firms these “investors” are typically shareholders in corporations, bondholders, or lenders. In order of legal priority, investors (particularly, shareholders) have the last claim on assets. These residual claimants bear the greatest financial risk and in a typical financial market, demand the greatest returns on their investments. threshold for antitrust violations. Courts have searched for evidence of settlement amounts (either monetary or in- kind) that suggest an improper payoff intended to have an anticompetitive effect (Perkins Coie LLP, 2016). PREPUBLICATION COPY: UNCORRECTED PROOFS

MAKING MEDICINES AFFORDABLE M A E 47 FIGURE 2-2 A typic market in a free ente E cal n erprise econo omy, showin the flow o products a ng of and revenues across the participants. p A Simplified Standard Health Ca Market Model d are The U.S. heal care mark differs fr T lth ket rom the abov standard b ve business mo in a uniq odel que way: in health care, a third party— health in h —a nsurer—inte ervenes in the flow of go e oods and servvices, in the flo of money and someti ow y, imes in the choices of pr c roducts availlable to indivvidual consumers. People de esire health insurance no only becau health ca is critica and ot use are al intrinsica expensiv but also because the need for hea care serv ally ve, b n alth vices is often highly n unpredict table. This creates a sign c nificant finan ncial risk to both individduals and to society as a whole. This risk appe in many ways, perh ears y haps most no otably in the fact that 5 ppercent of patients account for half of all he a h ending, and the top 1 pe ealth care spe ercent accoun for one-fif of nt fth all medic spending. Conversely the half with the least health care spending acc cal y, counts for ju ust 3.1 perce of medica spending (Cohen and Yu, 2012). ent al These data hi T ighlight how unevenly th financial b w he burden of heealth care is spread and tthus why it is important to have some sort of insu o urance agains this risk— st —just as hom meowners purchase home insurance, auto in nsurance, dissability insurrance, and li insurance in response to ife e e financial risks in thos areas. How se wever, unlik the case w these oth forms of insurance, t ke with her f the behavior of consume can be aff ers fected quite strongly by the simple f that they have health fact y h PREPUBLI ICATION CO OPY: UNCOR RRECTED PR ROOFS

MAKING MEDICINES AFFORDABLE M A E 48 insurance Specifical because health insura e. lly, h ance subsidi izes the cost of medical c care, its pres sence increases the use of health care because peop become l s h b ple less sensitive to its price (Newhouse e e, 1993). Si imply put, if consumers pay less than they would otherwise (because of insurance) t f n d f to visit a cli inician or un ndergo a proc cedure or bu prescriptio drugs, the become m uy on ey more likely t do to those thinngs. Figure 2-3 illu ustrates how these consi w iderations al the flow of services.15 Individual lter ls, often throough their emmployer, pur rchase or are provided w health in e with nsurance pol licies for themselv and their families, usually paying part of the annual prem ves g mium (see Bo 2-1 for a note ox on the role of employ in the co yers ontrol of dru prices). T ug Then, when o obtaining serrvices such a as clinician care, dental care, hospit care, or em tal mergency ro oom visits, o when buyi products the or ing s, individua or associat party pro al ted ovides a coppayment to th health car provider, as specified in he re the contr between the insuranc plan and the patient. T insuranc plan then pays a separ ract ce t The ce rate amount to the clinicia or the hos an spital as specified in their contracts. For people without health insurance clinicians maintain set list prices that they col lect directly from the co e, t t y onsumer (wh atho, this point can approp t, priately be called the “pa c atient”) or w waive a part o all of such charges as or h charitable contributio or bad de Howeve the great majority of t ons ebt. er, transactions take place n not directly between the patient and provider but with the he b p t ealth plan as an intermed diary. FIGURE 2-3 A simp E plified health care marke with third- h et -party health insurance. h NOTE: This figure also omits tw other form of interme T wo ms ediaries that consolidate bargaining t e power. Retail pharma R acies use phaarmacy servvices adminis stration orga anizations to negotiate w o with pharmacy benefit ma y anagers, and they also us group purc se chasing orgaanizations to negotiate w o with wholesal lers. 15 Because most health ca transactions involve perso services ra are onal ather than phys sical goods, Fi igure 2-3 does not include a wholesale level of the supply chain, but in some cases (e.g durable med w l g., dical goods suc as wheelcha ch airs, walking aids, or oxygen supplies) a who s olesale level would appear in the medical tr w n ransactions as well. This has been omitted in Figure 2-3 for simplicity. PREPUBLI ICATION CO OPY: UNCOR RRECTED PR ROOFS

MAKING MEDICINES AFFORDABLE 49 For people ages 65 and over and younger adults with permanent disabilities covered by Medicare, low-income people enrolled in state Medicaid programs, or individuals in special federal programs devoted to military service members and veterans, the relevant governmental programs become the health insurance plan, and taxpayers substitute for employers as payers for some of the cost of health insurance. BOX 2-1 The Role of Employers in Containing Prescription Drug Costs Most large employers offer health insurance to their employees, but those who self-insure may have the most at stake in terms of financial risks. The Kaiser/HRET 2017 Employer Health Benefits Survey found that, in 2017, 60 percent of covered workers are in a self-funded plan (KFF and Health Research & Educational Trust, 2017). Furthermore, the Employee Benefits Research Institute reported that, in 2015, nearly 40 percent of firms self-insured at least one health plan that they offered, compared to 26.5 percent in 1999 (EBRI, 2016). As one might expect, the attractiveness of self-insured plans varies with firm size. Over 80 percent of firms with 500 or more employees self-insure at least one plan, compared with about 25 to 30 percent for mid-sized firms (100–499 employees) and under 15 percent for smaller firms (under 100 employees). The proportion of employees in self-insured plans also breaks down by firm size. While 81 percent of covered employees at firms with 1,000–4,999 employees are in self- insured plans, that percentage drops to 47 percent at firms in the 200–999-employee category and only 23 percent at smaller firms (KFF and Health Research & Educational Trust, 2017). Similarly, of those companies with self-insured plans, 70 percent have over 1,000 employees and 80 percent have at least 500 employees (BLS, 2016). Self-insured employers have the most direct link between their health care costs and their company profits and thus, logically, the greatest interest in controlling those costs. In the world of prescription drug insurance (about which no specific data exist regarding self-insurance rates), many of these employers will contract directly with PBMs to manage their pharmaceutical drug insurance because they believe that there is an economic benefit in doing so. A Simplified Biopharmaceutical Market Figure 2-4 illustrates the structure of a very simplified market for biopharmaceuticals which includes many of the basic players, including patients, clinicians, drug manufacturers, health plans, and pharmacy benefit managers. There are several distinctive characteristics of this market that are worth noting. First, individuals cannot simply choose to buy medications, but rather require a prescription from a clinician. Without such a prescription, pharmacists are not permitted to dispense prescription drugs.16 16 The same “permission” is required for some types of medical care (most obviously hospitalization), where patients cannot “admit themselves” into a hospital for (say) a surgical procedure or medical treatment. PREPUBLICATION COPY: UNCORRECTED PROOFS

MAKING MEDICINES AFFORDABLE M A E 50 FIGURE 2-4 A simp E plified bioph harmaceutica products m al market inclu uding health insurance an nd pharmacy benefit ma y anagers. The “manufac T cturer” in Fi igure 2-4 inccludes produucers of brannded and gen neric product ts. Pharmacy benefit ma y anagers (PBM serve as intermediar between both health insurance p Ms) s ries n h plans and retail pharmacies and the ma l s anufacturers of prescripti drugs. A full portray of the ma ion yal arket for biophharmaceutica products would also sh the regu al w how ulatory inter rvention of th FDA and the he d U.S. Pate and Trad ent demark Offic (USPTO). These addi ce . itional eleme are omit from Fig ents tted gure 2-3 in ord to focus on the produ and finan der uct ncial flows w within the prrescription ddrug market. As indicated in Figure 2-4 there are multiple path A 4, m hways betwe the drug manufactur een g rer and the patient. Before the creation of prescription drug i p insurance, th sole pathw operated he way d much as displayed in Figure 2-2: drug manuf n facturers sol to wholesa distributo who sold to ld ale ors d retail pha armacies wh sold to pat ho tients posses ssing a prope prescriptio This rem er on. mains the primmary pathway for patients without drug insurance today. For those with drug insur h ative pathwa exist. In one case, th PBMs (and rance, alterna ays he major ph harmacy chai operate mail-order services, sell ins) s ling medicin directly t patients (w nes to with the usual requiremen of a prescr l nt ription from a clinician) and collectin copayments from the ng e patients and payment through in a ts nsurers. The other option for such pa n atients is to g directly to a go o retail pha armacy and offer the cop o payment specified in the insurance p plan. In this l latter pathwaay, the retail pharmacy has previousl purchased the drug fro a wholes distribut and the PBM h ly d om sale tor, compensates the reta pharmacy (per the con ail ntract betwee the PBM and the pha en armacy) for t the cost of th drug plus a processing fee. he g PREPUBLI ICATION CO OPY: UNCOR RRECTED PR ROOFS

MAKING MEDICINES AFFORDABLE 51 A More Complete Portrayal of the Biopharmaceutical Market Figure 2-5 is a more descriptive illustration of today’s biopharmaceutical enterprise, with several additional participants beyond what is shown in Figure 2-4, but still omits elements of the distribution mechanism for certain drugs used to treat specific patient populations. In particular, many drugs are purchased by hospitals and dispensed or administered to patients cared for in the inpatient hospital and outpatient clinic setting. Drugs dispensed to patients in the hospital or infused or injected during an inpatient hospital stay are purchased by hospitals through wholesalers and distributors and are covered under Part A of Medicare, and inpatient benefits provided by state Medicaid programs and commercial insurers covering the non-Medicare eligible population. Use of these drugs by Medicare beneficiaries is largely covered through payments to hospitals under prospective bundled reimbursement arrangements. In 2013, Medicare spent $112 billion on payments for drugs and pharmacy services (MedPAC, 2016); 16 percent of this total (approximately $18 billion) was for drugs billed under Part A. Standalone and hospital-based clinics purchase drugs from wholesalers and distributors and dispense or administer these drugs to patients as part of outpatient care. These drugs are covered under Part B of Medicare, and outpatient medical benefits provided by state Medicaid programs and commercial insurers covering the non-Medicare eligible population. In 2013, 15 percent of total Medicare spending on prescription drugs was for those covered under Part B (approximately $17 billion) (MedPAC, 2016). In contrast, 57 percent of total Medicare spending on prescription drugs in 2013 was on outpatient prescription drugs covered under Part D (both stand-alone drug plans and Medicare Advantage drug plans) (approximately $63 billion). Drugs covered under outpatient medical insurance benefits have an unusual payment structure: clinicians, outpatient clinics and hospital-based clinics purchase these drugs at their wholesale acquisition cost and then bill insurers and patients for their use and are paid a reimbursement price. This system is commonly called “buy and bill.” Since 2006, standalone and hospital-based clinics that administer drugs in the outpatient setting covered under Medicare Part B have been reimbursed at the average sales price of the drug plus 6 percent plus an administration fee. Commercial insurers set reimbursement rates for these drugs using average sales price, average wholesale price, or another metric, and also reimburse for administration fees. Figure 2-5 also displays several interlinked communication channels involving pharmaceutical manufactures, clinicians, and patients. While some health care markets (and most non-health-care markets) employ direct advertising to consumers, this form of marketing has several distinct features when applied to prescription drugs. Pharmaceutical companies collectively spend billions of dollars annually to “inform” and influence the choices of clinicians and patients. They do this with direct visits to clinicians (referred to as “detailing”), presentations and booths at professional medical meetings, by providing free samples to clinicians, and advertising in medical journals, and also directly providing copay coupons to patients. PREPUBLICATION COPY: UNCORRECTED PROOFS

MAKING MEDICINES AFFORDABLE M A E 52 FIGURE 2-5 A broa E ader represen ntation of the current pri e ivate sector rretail market for prescrip t ption drugs. Th structure of the marke would var in the case of federal supported plans. Drug he et ry es lly d g supplies to clinicians for direct ad s dministration to patients and through Medicaid occur in s h different pathways an are not sh nd hown here. BARG GAINING POWER AN FORMU P ND ULARY MA ANAGEMEN NT In any market a buye bargaini power is usually dete m er’s ing s ermined by t factors: their ability to two y walk awa from the deal, comple ay d etely or in pa and the v art, volume of go oods they ar purchasing re g. For buye to be able to negotiate on price th must hav credible a ers e e hey ve alternatives o other than purchasin from the seller (OECD 2009). If a purchaser is always go ng D, f r oing to buy the product whatever the price, th seller can charge wha price they like. r he n at In the biophar n rmaceutical sector, buye often app to be in a weak posi ers pear ition, with lit ttle alternativ but to pur ve rchase the dr whatever the price. T drug ma rug r The anufacturers have a stron ng bargainin position, because thei products are protected from compe ng b ir a d etition by pa atents, and payers are under rstandably re eluctant to deny patients the drugs th need. Ev where pa d s hey ven ayers do hav ve credible alternatives, the fragmen nature of the U.S. h a nted o health care syystem weake their ens bargainin position. ng Health care payers typica seek to gain bargaini power in drug pricin negotiatio H ally g ing n ng ons through tier-placeme and throu formular design (G t ent ugh ry GAO, 2007). A formulary describes y which dr rugs a health care payer will cover fo which dise w or ease indicati ions, and at w cost. what PREPUBLI ICATION CO OPY: UNCOR RRECTED PR ROOFS

MAKING MEDICINES AFFORDABLE 53 Formularies can be “open” or “closed.” An “open” formulary ostensibly covers all drugs, but typically includes mechanisms to constrain usage of drugs the payer considers too expensive, such as tiering, with higher tiers requiring greater patient cost sharing, prior authorization, or more tightly defined permissible indications. A “closed” formulary allows for drugs the payers deems very expensive or otherwise undesirable to be excluded from coverage. Formularies are used to steer patients and prescribing clinicians toward generic substitutes, biosimilars, drugs with similar therapeutic efficacy for the same disease, or other therapeutic options. Formularies contribute to payers’ bargaining power by enabling them to restrict the volume of prescriptions in response to higher prices. Placing a drug on a higher tier triggers higher copayment from patients and therefore discourages the use of the high-priced drugs. Narrowing the indications for which a drug can be used also constrains the potential volume. Excluding the drug entirely from coverage is the most powerful lever, one most readily employed when alternatives exist to treat the same condition. For example, in 2014, Express Scripts, a PBM that covers 25 million people, negotiated a significant discount from AbbVie on its new hepatitis C drug (Viekira Pak), by making it the exclusive option in their formulary, while excluding both competitor drugs Harvoni and Sovaldi (Pollack, 2014; Wilensky, 2016a). All of these levers work by restricting access to the drug in some way or other: if they did not, they would not contribute to the payer’s bargaining power. This points to the importance of another crucial aspect of formulary design: the basis on which these restrictions are imposed. In some contexts, such as in the United Kingdom, the British National Formulary is determined through an assessment informed by the National Institute of Clinical Evaluation. In the United States, in part due to a lack of broad agreement on how to define and assess “value,” many different approaches are used in formulary design, and transparency about decision making may be lacking (Frank and Zeckhauser, 2017). Some other countries operate formulary systems that provide much greater ability to restrict or exclude drugs from coverage than is the case in the United States. The health systems in the United Kingdom and Australia, for example, explicitly apply cost-effectiveness and related criteria to determine whether drugs will be included in the formulary. Total exclusion from coverage is relatively rare. What happens more frequently is that approval for the most expensive drugs is only given for a tightly defined set of indications. Even if a drug is excluded from the formulary, this does not generally prohibit patients from purchasing the drug, but removes it from the realm of insured products and services. However, the exclusion of drugs from a national formulary can generate significant controversy, since there are almost always some patients who would benefit from inclusion and who protest its removal By contrast, in the United States, the Centers for Medicare & Medicaid Services (CMS) makes coverage determinations for Medicare enrollees based on the language of the original legislation that created the program: that the treatment be “necessary and reasonable.” Historically, CMS and its predecessor organizations have relied on approval by the FDA for those determinations, and have not used cost as a component of coverage determinations (Neumann et al., 2005, 2008). In other areas of health care, most notably the Prospective Payment system for hospitalization in Part A and the Resource-Based Relative Value System in Part B, Medicare sets prices administratively, using a combination of historical costs and efficiencies that have been deemed achievable. The Congressional Budget Office (CBO) has not expressed confidence in this strategy as a way to produce savings on drug costs (CBO, 2014; Wilensky, 2016b), but to date, there is no CBO estimate on the effect of allowing the U.S. Department of Health and Human Services (HHS) to negotiate both drug prices and formulary PREPUBLICATION COPY: UNCORRECTED PROOFS

MAKING MEDICINES AFFORDABLE 54 placement (Shih et al., 2016). Individual states in the United States also encounter various challenges, each specific to them, in curbing prescription drug costs, with related implications on their formulary structure, a topic explored in Box 2-2. Formulary designs in the United States typically put greater reliance on tiering than explicit exclusion, with drugs that are allocated to the higher tiers requiring higher cost sharing by patients. The logic is that higher cost sharing will simultaneously make patients more reluctant to use such drugs and, by imposing some of the costs on the individual patient, reduce the burden on the overall insurance pool and thus, control consumer premiums. However, tiering with high cost sharing can also have downsides, since it can lead to reduced adherence or the discontinuation of medications because of high out-of-pocket costs to consumers.17 Such designs may also discourage consumers with high drug expenditures from enrolling in health plans (Happe et al., 2014; Huskamp and Keating, 2005), which could further adversely affect health outcomes. But without such formulary controls within pharmacy benefit plans, insurance premiums would rise, potentially also leading to lower enrollment and similar undesired health consequences. The tiered price mechanism can be used by insurers to negotiate better prices for branded drugs (Duggan and Scott Morton, 2010) If insurance plans do not have some cost-control mechanisms in place, increased coverage leads both to higher utilization (Newhouse et al., 1993) and higher costs from providers who have any ability to set their own price. But when cost controls such as tiered prices and prior authorization enter, the net effects are theoretically ambiguous. The introduction of Part D in Medicare provided a way to estimate the net effects. One analysis tracked the prices of the most commonly prescribed branded (non-generic) drugs in Part D upon its introduction, and concluded that, on net, the extended coverage and strengthened bargaining power of the buyers (collectively, through the insurance plans) caused a reduction in many prescription drug prices (Duggan and Scott-Morton, 2010). Specifically, the analysis noted that “Part D plans have succeeded in negotiating lower price increases for Part D enrollees—approximately 20 percent lower than they otherwise would have been.” Balancing national affordability (which translates into premium costs to consumers or to the taxpayer) and individual affordability (as reflected in copayment costs for specific drugs) is the complex task facing those designing drug insurance plans and associated formularies. But it seems clear that from a payer’s perspective, effective bargaining cannot take place without the ability either to exclude drugs from a formulary or place them in unfavorably high tiers. Formulary management and effective bargaining go hand in hand. In sum, significant price negotiating power entails a payer being able to refuse a deal, and a formulary that allows coverage restriction, whether through exclusion, tightening permissible indications, or tiering. The placement of drugs in a formulary needs to be based on some logic. Ideally, this would be an assessment of cost and value to both patients and society. In addition to formulary design, the other major determinant of a buyers’ bargaining power is their scale: buying more product translates into greater bargaining power. In the world of prescription drug insurance, a commonly used measure of scale would be “covered lives.” However, this is a far from perfect measure of drug purchasing scale, because the rate of using prescription drugs varies enormously by age, among other factors. People over age 65 spend approximately three times the amount per year on prescription drugs as adults under age 65, a point not captured by the “covered lives” metric. 17 This topic is further discussed in the insurance design section of Chapter 3. PREPUBLICATION COPY: UNCORRECTED PROOFS

MAKING MEDICINES AFFORDABLE 55 In the United States, private payers are relatively fragmented. Currently, the largest private health insurance company (United HealthCare) has 14.1 percent of the total U.S. population, the second largest (Aetna) has 10.1 percent, and the top eight firms together have less than half of the U.S. population insured (AISHealth, 2016). Compared with other industrial sectors, this would be considered a relatively “low” level of concentration among buyers, meaning even the largest firms would have relatively weak bargaining power. This fragmentation of purchasing power is a primary reason for the emergence of the PBMs, a form of market intermediary that appears almost unique to the United States. The PBMs negotiate prices and manage formularies on behalf of payers, whether private insurers or self- insured large employers, exploiting the fact that PBMs have achieved far greater scale and thus have greater purchasing power. Recent estimates show that the top three PBMs cover 85 percent of the individuals with prescription drug insurance (Sood et al., 2017). Increased concentration among PBMs undoubtedly enables them to have greater purchasing power versus manufacturers. However, it also enables them to have greater market power versus payers. While some PBMs act as agents for payers, receiving a fee for their services, in many case PBMs act as principals, retaining a share of the discount they have negotiated from the manufacturer. In a sense, the market concentration of PBMs can be seen as a double-edged sword from the patient and payer perspective: it enhances the ability of the PBMs to extract bigger discounts from the manufacturer, and also the ability to pass on less of these discounts to the patients than would be the case if they were less concentrated. These dynamics are obscured by the lack of clear information in the public domain, and the increasing integration between PBMs and insurance companies and retail pharmacies.18 Besides the private health insurance markets, the U.S. federal and state governments collectively provide health insurance coverage for a significant portion of the population, including Medicare (55 million), Medicaid (74 million), Veterans Affairs hospitals and clinics (8.9 million), TRICARE for active duty and retired military and their families (4.7 million), and prisoners (2.2 million). Yet, the buying power for these different organizations is highly diffuse. Even within Medicare’s 55 million enrollees, bargaining power is highly dispersed because HHS is prohibited by statue19 from negotiating drug prices. Here again the PBMs play a central role. For virtually all of those enrolled in Part D insurance for prescription drugs dispensed through retail channels, price negotiations are delegated to the PBMs. However, for the six protected classes of drugs in Part D, for which inclusion on formularies is mandatory, PBMs may not achieve discounts because there is no real lever for negotiation. Part D retail drugs represent approximately 60 percent of the total cost of prescription drugs dispensed under Medicare. The remainder is covered under Medicare Parts A and B through sales directly to hospitals, clinics, infusion centers, and providers’ offices. These non-retail drugs—which may well constitute over half of all prescription drug spending—come through channels that have relatively weak bargaining power, and generally lie outside the domain of PBMs, entities with the strongest bargaining power currently. Enabling HHS to negotiate drug prices for all Medicare enrollees would increase bargaining power versus drug manufacturers if HHS also had effective formulary control. The legislative “non-interference” clause of the MMA prohibited CMS from negotiating or 18 In October 2017, CVS, the pharmacy chain, proposed to acquire Aetna one of the largest health insurers in the country (Mattioli et al., 2017). Aetna had previously sought a merger with Humana, another large health insurer, a move that was abandoned after a federal judicial ruling against the proposed merger (Tracer, 2017). 19 Section 1860D-11(i) of the the Social Security Act. 42 U.S.C. § 1395w-111(i). PREPUBLICATION COPY: UNCORRECTED PROOFS

MAKING MEDICINES AFFORDABLE 56 administratively setting prescription drug prices and instead advanced private market competition as the means of setting prices (Channick, 2006). However, in every other sphere, whether in purchasing big items like defense equipment or for infrastructure and transportation projects, or in buying more routine items like utilities, uniforms, or stationery, the government uses its scale in price negotiations to the benefit of taxpayers. Furthermore, characterizing this approach as being tantamount to price control or regulation is misleading, and the effect of not allowing HHS to negotiate prices is to tilt the balance of bargaining power further in favor of drug manufacturers. There are many questions regarding scope and mechanism that would need to be addressed before HHS could undertake negotiation if given the authority by the U.S. Congress to do so. For example, HHS would have to determine which drugs would be subject to negotiations, what would be negotiated (i.e., price, formulary placement), and how to implement negotiated prices in Part D plans (Shih et al., 2016). A pricing model to guide decisions would need to be defined, including how various types of evidence and other considerations would inform conclusions on drug value and price. Factors such as evidence of clinical benefit and the impact of drug pricing on future research and development would likely play a role (Shih et al., 2016). A recently proposed payment framework for negotiation focuses on drugs that are “high cost (e.g., $1,000 per month), incur high levels of Part D program spending (more than $500 million), and have few close substitutes” (Frank and Zeckhauser, 2017, p. 11). The goal of this framework is to develop a negotiated payment system that would simultaneously enable profits for manufacturers and improve health outcomes for patients. This proposal also uses quality- adjusted life years as a key metric to assess the “value” of drugs, the subject of the following section. While one cannot readily estimate the extent of available purchasing power that a consolidated federal agency might have, it would almost certainly exceed the largest power currently available in the private sector (85 million covered lives). If one takes the 55 million covered lives in Medicare and uses the multiplier of three times the average per-person spending that leads to 165 million effective “covered lives.” Adding other federal and state agencies would further increase the strength of bargaining power available to the government, should that power be granted through legislative authorization. Price negotiations in biopharmaceutical markets exhibit a number of factors that differentiate them from other kinds of markets: most notably the price-setting power arising from government-granted exclusivity and the political challenges buyers face in limiting access to prescription drugs, some of which are deemed as “lifesaving.” These factors are exacerbated in the United States by the way formularies are designed, the relative fragmentation of private payers, and the diffusion of governmental purchasing power, not least through the legal restriction on CMS negotiating prices. PREPUBLICATION COPY: UNCORRECTED PROOFS

MAKING MEDICINES AFFORDABLE 57 BOX 2-2 Role of State Governments State governments have been challenged by high and increasing prices of drugs that have implications for their potential bargaining power and formulary design. Between 2013 and 2014, total Medicaid prescription drug expenditures grew from $37.1 billion to $42.3 billion, a 24.6 percent increase and the highest rate of growth since 1986. Growth slowed to 13.6 percent in 2015. This surge in expenditures is in part related to several new high-cost specialty drugs to treat serious conditions that commonly afflict state Medicaid beneficiaries (Martin et al., 2016). States provide access to a broad range of health and non-health services for low-income individuals and families, often to meet federal requirements (Stuard et al., 2016). The per capita cost for Medicaid beneficiaries is about $2,000 more than the per capita cost in the commercial insurance market because Medicaid enrollees often have complex, expensive health needs (CMS, 2015). Patients and clinicians want to have access to new therapies through state Medicaid programs, but these programs operate under fixed budgets that require legislative approval and are subject to state constitutional limits that often include a balanced budget requirement. In some cases, states have been faced with class-action lawsuits over access to therapies (Ollove, 2016). Unlike commercial insurers and Medicare, state Medicaid programs have very few options to shift costs to Medicaid enrollees through premium or cost- sharing requirements, which are largely prohibited by federal law. Furthermore, except for very limited exceptions, the Medicaid Drug Rebate Program requires coverage of all products made by manufacturers that enter into federal rebate agreements. As a result of these requirements, Medicaid essentially has an open formulary. Some states develop criteria for determining which patients should have access to expensive medications (e.g., based on severity of the condition). This is discussed in Chapter 3. THE “VALUE” OF DRUGS One common proposal to moderate the cost of prescription medicines has been to adopt the so-called “value-based pricing” for drugs, although the meaning of the term “value” varies widely among the participants in the biopharmaceutical sector. A fundamental challenge facing those who would apply value-based pricing is how to determine whether a drug intervention is in fact of “value,” especially when sufficient evidence is lacking. It is not even straightforward to determine what “evidence” means (IOM, 2011, 2015a; Mayo-Wilson et al., 2015, 2017; NRC, 1985, 1989; Page et al., 2012; Stewart and Parmar, 1993). Syntheses of clinical trial evidence are known to be biased in some cases, and thus may introduce additional distortion referred to as “metabias” (Goodman and Dickersin, 2011). Moreover, the trial and meta-analysis outcomes that are studied and reported frequently do not overlap, so the results are of little use or benefit to patients (Juthani et al., 2017; Saldanha et al., 2017). Conclusions from these studies may be more relevant to clinicians than to patients and consumers. However, the challenges of developing and identifying reliable evidence are becoming increasingly well understood, and some remedies have been proposed (IOM, 2011; NRC, 1985, 1989). At the very least, data need to be collected in a way that provides reliable evidence that can be used to inform what “value” means. In concept, if value is characterized properly and agreed upon, a value-based approach may lead to more efficient resource allocation and improved patient outcomes (Garber and Phelps, 1997; Sorenson et al., 2017). Applying such PREPUBLICATION COPY: UNCORRECTED PROOFS

MAKING MEDICINES AFFORDABLE 58 an approach could also eliminate “indication creep,” the expansion of the use of drugs and interventions that are less likely to benefit the populations. In the United States, value assessments have been frequently conducted in the realm of oncology by evaluating changes in life expectancy and costs over time (Howard et al., 2010; Lakdawalla et al., 2010; Lichtenberg, 2009; Woodward et al., 2007). Table 2-1 describes the factors considered in various value frameworks. Despite its application in many areas and other Organisation for EconomicCo-operation and Development countries (WHO, 2015), expanding the use of value assessments into the practice of actual pharmaceutical pricing and payment in the United States presents a number of challenges. The first is that, as noted earlier, there is ongoing debate about the best methods to assess value (Rubin, 2016). Value assessments often involve cost-effectiveness analysis, in which the ratio of the added health gains from a medical intervention to the added costs of treatment is calculated, and a pre-established cutoff value is used to determine what interventions are worthy of support (Frakt, 2016; Neumann et al., 2016). The use of a quality-adjusted life-year as the health outcome measure in cost-effectiveness analyses has gained wide acceptance in many countries and is used in coverage and reimbursement decisions. The National Institute for Health and Care Excellence in the United Kingdom, for example, uses cost-effectiveness to provide advice about which drugs and treatments should be made available in their National Health Service (Sussex et al., 2013). A recent statement from the American College of Cardiology and the American Heart Association also concluded that “it is important to consider both the cost-effectiveness and total cost of burden of performance measures before selection” (Anderson et al., 2014). However, simply using cost-effectiveness as the outcome measure leaves out other factors such as public perceptions of a disease, political interests, social justice and other practical considerations, that need to be taken into account when making important societal decisions (Phelps and Madhavan, 2017; Phelps et al., 2017), and many frameworks do take those elements into consideration as well (Rawlins et al., 2010). Another value-based approach would be to assess comparative effectiveness. In its simplest terms, comparative effectiveness analysis compares the therapeutic benefits of different interventions. In some randomized controlled drug trials, the comparison is a placebo treatment with no known therapeutic effects. However, even “placebo effects” can be significant, attesting to the powerful effect of the human mind on physiologic functioning. The effects may be larger when study participants are told that the drug being tested on them is very expensive (Lewitt and Kim, 2015). More importantly, despite the widespread application of cost-effectiveness criteria to coverage decisions in insurance programs in other countries (Sussex et al., 2013), federal law in the United States sharply limits the extent to which comparative effectiveness research findings can be used as the basis for coverage decisions in the Medicare program (Rosenbaum and Thorpe, 2010). Commercial insurers, however, do not face this legal restriction. Effectiveness can, of course, have multiple dimensions. For drugs that affect life expectancy (as with many drugs for cancer, heart disease, strokes, and some neurological diseases, survival time is a key measure of effectiveness. But these drugs have many other relevant dimensions of effectiveness as well. Treatments (as with many chemotherapy options) often have significant adverse side effects. Some drugs may enhance the quality of life even if they do not extend it, or may even improve the quality of life for caregivers (e.g., in the case of dementia patients). Most drug therapies are effective for some patients but not for others. Side effects are also variable, affecting some patients and not others. This inconsistency in individual responses may be due to variability in disease presentation and progression, co-morbidities, PREPUBLICATION COPY: UNCORRECTED PROOFS

MAKING MEDICINES AFFORDABLE 59 differences in the patients’ biological makeup and drug dynamics in their body, and adherence to the medication regimen. The fundamental issue is “incremental effectiveness”—the additional benefit brought about in comparison to alternatives. Some newer drugs have limited incremental effectiveness compared with older drugs (including generics), but nevertheless do improve patient conditions at least to some extent. The growing thirst for methods to measure “value” has led to the emergence of a number of proposed measures for specific disease conditions, including models for assessing the value of therapeutic options for cancer and heart diseases, as well as taxonomies to assess the strengths and limitations of different value frameworks (Mandelblatt et al., 2017). One approach would be to conduct post-launch surveys of therapeutic effectiveness and then adjust payments in proportion to actual (versus forecasted) success rates (Barlas, 2016). In its most extreme form, this approach would pay only for cures. Such an approach was used experimentally by the U.K. National Health Service, but no conclusions could be made about whether it was actually effective or workable in practice (Garber and McClellan, 2007). In the United States, a similar approach is being tested by Novartis, the manufacturer of a very expensive new cell-based immunotherapy for cancer, in which payment for the therapy will only be made when pediatric and young adult patients with Acute Lymphoblastic Leukemia respond to the treatment by the end of the first month of therapy (Novartis, 2017). Ultimately, the lack of a broad consensus on the definition of “value” is a hurdle to advancing a uniform approach to value-based purchasing. Nonetheless, health insurers are beginning to apply various approaches to foster use of treatment regimens that they consider a better value. For example, the Institute for Clinical and Economic Review is funded by many insurers and PBMs to undertake value assessments within the U.S. setting. PBMs use those value assessments in negotiations with manufacturers. In addition, some insurers have been experimenting with value-based insurance design, in which patient cost sharing is aligned with the value of treatments (Gibson et al., 2015; Lee et al., 2013). Some use value assessment to assign the position of drugs in formularies. Insurers have also been defining preferred treatment pathways and incentivizing clinicians to follow them (DeMartino and Larsen, 2012; Gesme and Wiseman, 2011; Zon et al., 2016). However, one criticism of this approach is a lack of transparency on how treatment regimens are selected for pathways (IOM, 2015b). A recently announced collaboration between Optum and Merck also aims to promote a value-based form of contracting referred to as “Outcomes-based Risk Sharing Agreements” (UnitedHealth Group, 2017). Manufacturers have also relied on value statements to justify launch prices for new drugs (McKinsey & Company, 2013). In sum, the use of value assessments of products is not an alternative to “market forces” but they could potentially be used as tools to enhance market performance. Markets in general can work better when participants are well-informed about the relative value of the goods they are trading. PREPUBLICATION COPY: UNCORRECTED PROOFS

MAKING MEDICINES AFFORDABLE 60 TABLE 2-1 Examples of Value Frameworks Organization Factors Considered Description American College of Clinical benefit versus risks Magnitude of treatment effect ranges from class I (“benefit [greatly exceeds] risk,” “procedure or Cardiology–American Magnitude of net benefit treatment is useful or effective”) to class III (“no benefit, or harm,” “procedure or treatment is not Heart Association Precision of estimate based on useful or effective and may be harmful”). Precision of treatment effect ranges from level A (“data (ACC–AHA) quality of evidence derived from multiple randomized trials or meta-analyses”) to level C (“only consensus opinion of Value (cost-effectiveness) experts, case studies, or standard of care”). Value corresponds to cost-effectiveness thresholds (high: less than $50,000 per QALY; intermediate: $50,000 to $100,000 per QALY; low: more than $150,000 per QALY). The framework lists the clinical benefit and value designations without combining them. American Society of Clinical benefit A therapy can be awarded up to 130 points. Clinical benefit (≤80 points) reflects end point and Clinical Overall survival magnitude of benefit, with preference given to evidence on overall survival if available. Toxicity Oncology (ASCO) Progression-free survival (±20 points) reflects the rate of grade 3 to 5 toxic effects with treatment relative to standard of Response rate care. Bonus point score reflects palliation (10 points if therapy improves symptoms) and Toxicity increased time off all treatment (≤20 points). The framework doesn’t combine each drug’s point Bonus factors Palliation score and cost. Time off all treatment Cost per month Institute for Clinical Incremental cost-effectiveness plus Cost-effectiveness ratio must not exceed a threshold ranging from $100,000 to $150,000 per and Economic Review care value components QALY. Selection of final threshold is based on (a) comparative clinical effectiveness, reflecting (ICER) Comparative clinical effectiveness “judgments of the health benefit magnitude” and “strength of a body of evidence”; (b) other Other benefits and disadvantages benefits and disadvantages, including such outcomes as factors influencing adherence or return Contextual considerations to work; and (c) contextual considerations, including “ethical, legal, or other issues” (e.g., high Budget impact burden of illness, availability of alternative treatments). Budget impact is acceptable if a drug’s introduction is compatible with an annual health care budget increase of GDP growth plus 1 percent. ICER reverse-engineers a “value-based price benchmark” that independently satisfies both the cost-effectiveness and budget-impact criteria Memorial Sloan Efficacy (survival) Framework assigns values to each domain. Efficacy is assessed as improvement in overall Kettering Toxicity survival, if available. Efficacy score also reflects evidence quality. Toxicity is a drug’s impact on Cancer Center Novelty probability of severe side effects and treatment discontinuation. Novelty is scored as 1 (novel (DrugAbacus) Research and development cost mechanism of action), 0.5 (“known target but different mechanism of targeting”), or 0 (“next-in- Rarity class”). Research and development cost corresponds to the “number of human subjects enrolled Population health burden in the approval trials for the first indication.” Rarity is the 2015 projected disease incidence. Population health burden is the annual years of life lost to the targeted disease in the United States. “Fair price” is the product of the scores, each of which is scaled by a user-adjusted weight. National Efficacy Each area is scored on a scale of 1 to 5, with 1 indicating least favorable and 5 most favorable. Comprehensive Safety The framework presents the scores separately. There is no explicit synthesis. Stakeholders judge Cancer Network Evidence quality acceptability on the basis of their overall impression of the listed factors. (NCCN) Evidence consistency PREPUBLICATION COPY: UNCORRECTED PROOFS

MAKING MEDICINES AFFORDABLE 61 Affordability European Society for Toxicity The framework assesses the clinical benefit for cancer drugs using a structured approach to Medical Oncology Quality of life derive a relative ranking of the magnitude of clinically meaningful benefit that can be expected Magnitude of Clinical Overall survival from a cancer therapy. It is developed only for solid tumors. Clinical benefits are measured on Benefit Scale Progression free survival the basis of oncology-specific thresholds for overall and progression-free survival outcomes. (ESMO-MCBS) Long term survival Scores are awarded by virtue of improvements in the variables under investigation in a comparative trial or cohort study. The ESMO score ranges from 1 (worst) to 5 (best). NOTE: GDP = gross domestic product; QALY = quality-adjusted life-year. SOURCE: Adapted from Neumann and Cohen, 2015. PREPUBLICATION COPY: UNCORRECTED PROOFS

MAKING MEDICINES AFFORDABLE 62 OPACITY IN THE SUPPLY CHAIN As the public concern and frustration over increasing drug prices escalate, it has become clear that information needed to directly establish the sources of these increases is lacking. Prescription drug manufacturers blame the PBMs and insurers, saying that their price discounts are not wholly passed on to consumers (Walker, 2016). Manufacturers also say that since their rebates are commonly calculated as a fraction of the list price, reducing the manufacturer’s list prices would cause the PBMs to terminate the existing contracts because a lower list price would mean a lower discount to the PBMs (Vandervelde and Blalock, 2017). The PBMs blame both the drug manufacturers for raising prices and the insurers for not passing discounted prices on to consumers (Hopkins and Tracer, 2017). Drug manufacturers have the ability to use a portion of their sales revenue to stimulate demand by creating incentives for various participants in the biopharmaceutical supply chain and beyond. The primary incentives they use are discounts and rebates, each of which can take a number of different forms (Eickelberg, 2015). Between 2010 and 2014, the average rebates from drug manufacturers to insurers increased by 10 percentage points, from 18 percent to 28 percent of list price, for branded drugs (QuintilesIMS, 2016), and they continue to climb. List prices grew 9.8 percent in 2016, modestly less than the 10.8 percent increase in 2015. The resulting increases in drug prices added $8.7 billion to 2016 net income for the 28 companies analyzed in a Credit Suisse report. Rebates in 2016 were up by almost 2 percentage points from the average of 35.7 percent in 2015 (Credit Suisse, 2017), and were estimated to be around $130 billion (Goldberg, 2017). Average rebates have also risen over time in the Medicare Part D program, from 8.6 percent in 2006 to nearly 20 percent a decade later (CMS, 2016). Rebates to PBMs can actually increase out-of-pocket spending for patients who pay a percentage of their drug's list price and those paying deductibles, as the discounts are rarely passed through to the patient at the point of sale (CMS, 2017; Dusetzina et al., 2017). The effects of such pricing strategies have been demonstrated to drive up out-of-pocket spending for patients on Medicare Part D even when net prices received by manufacturers are virtually the same (Dusetzina et al., 2017). For specialty drugs nearly all plans require enrollees to pay a percentage of their drug’s price (Dusetzina and Keating, 2015; Jung et al., 2016; Polinski et al., 2009; Yazdany et al., 2015). Recognizing the role of rebates for increasing spending by beneficiaries and the federal government, in 2016 the Medicare Payment Advisory Commission outlined recommendations for restructuring Medicare Part D to provide incentives to sponsors to improve cost protections and reduce catastrophic spending. Specifically, they would require higher cost sharing from Part D plan sponsors and eliminate patient out-of-pocket contributions in the catastrophic phase of coverage (currently set at 5 percent of drug costs with no lifetime or annual out-of-pocket maximum). They would also require manufacturer payments in the coverage gap to stop counting toward patient out-of-pocket spending (MedPAC, 2016). The interaction between rebates and list prices can be complicated. For example, market price negotiations based on a drug’s list price can even induce drug manufacturers to further increase their drug prices (Hopkins and Tracer, 2017). Furthermore, some private insurance companies have begun to operate their own PBMs (Kirchhoff, 2015), and retail pharmacies have been merging with PBMs to provide integrated health services. These consolidations can produce conflicts of interests regarding decisions about the inclusion of drugs on a PBM’s formulary (Cook et al., 2000). In this complex supply chain many opportunities exist to enhance various participants’ revenue and profits—often at the expense of patients. The only sources of data available to PREPUBLICATION COPY: UNCORRECTED PROOFS

MAKING MEDICINES AFFORDABLE 63 understand this system come from the participants, who release data and statements that conflict with each other and justify their positions. The relevant data needed to conclusively analyze this system do not exist at present, and, indeed, some of the participants (most notably the PBMs) argue that revealing their transactions would actually increase the drug prices paid by patients. Arguments for and Against Transparency The biopharmaceutical sector is rife with divergent, strongly held views regarding the concept of transparency.20 As noted earlier, various participants in the prescription drugs pricing debate offer divergent statements about who is responsible for high and steadily rising drug prices, but with little to no relevant data to support their claims. In addition, some urge greater transparency in the biopharmaceutical sector, while others assert that transparency would harm competition and thus negatively affect consumers. Proposals vary widely concerning what information should be reported, to whom, and whether this information should be linked to price control measures. No empirical studies demonstrate that transparency in the biopharmaceutical supply chain will cause harm to patients. However, the debate, including in public testimonies, continues about whether transparency would weaken the market and pose harm to patients (Balto, 2014, 2015, 2017; Shepherd, 2014). Opponents of transparency cite a series of letters from the Federal Trade Commission (FTC) (FTC, 2004, 2006, 2009, 2011, 2014) to state officials regarding policies on the disclosure of financial transactions among the participants in the biopharmaceutical supply chain. For example, in a 2014 letter to the advisory council of the Employee Retirement Income Security Act, the FTC noted that “mandatory disclosure requirements may hinder the ability of plans to negotiate an efficient level of disclosure with PBMs” and that such disclosures, if they reveal discounts negotiated with PBMs, “may result in less aggressive pricing by, or even collusion among, pharmaceutical manufacturers” (FTC, 2014b). These concerns relate to state-by-state information and hence are more likely to reveal confidential contract information than data aggregated to the national level. Proponents argue that lack of transparency negatively affects patients and enables the largest PBMs to engage in anticompetitive behavior, including securing kickbacks from drug manufacturers in exchange for exclusivity arrangements that may keep lower priced drugs off the market (Balto, 2014). There is no way to test these claims in a controlled experiment. However, transparency has improved the functioning of markets in other sectors of the economy (see Box 2-3), and the potential gains from improved transparency in the biopharmaceutical sector appear to outweigh the potential risks emerging from increased transparency. The primary questions pertain to what level of information is needed and who would have access to the information. For example, the information would not need to be used directly by consumers to lead to improvements in market functioning. It could be used by other participants in the distribution chain for biopharmaceutical products, by specialists who study market behavior, and by regulators to control these markets. 20 Public debates over transparency continue to be intense and unresolved, with numerous price transparency bills proposed at both the state and federal level. Recent legislation proposed in both chambers of Congress would expand transparency by requiring pharmacy benefit managers to provide information for public posting on how much they rebate various drugs. Such price information could decrease the likelihood of excessive profiteering, particularly among pharmacy benefit managers—an industry mainly controlled by three firms. Several states have also introduced bills concerning drug price transparency. Much of this legislation is aimed at drug manufacturers. PREPUBLICATION COPY: UNCORRECTED PROOFS

MAKING MEDICINES AFFORDABLE 64 One way to improve transparency in the pharmaceutical supply chain would be to require manufacturers to disclose detailed information on a drug-by-drug basis for their gross and net prices (the difference reflecting discounts given within the supply chain and discounts given directly to patients). Information about the prices paid at the end-stage of distribution in retail pharmacies or their mail order counterparts and by hospitals, clinics, nursing homes, and other relevant organizations that purchase and directly administer drugs to patients would also need to be gathered in parallel. Logically, the difference between what the manufacturers report and what the final distributors (e.g., retail pharmacies, hospitals, doctor offices) report has been retained in the intermediary system either as costs or profits. These data may provide clarity about the interactions—specifically the flow of funds and products—among the intermediaries of the biopharmaceutical supply chain, or they may point toward necessary regulation for additional data gathering from each participant in the biopharmaceutical supply chain. This proposed would involve a sequential process of first gathering information at the two ends of the supply chain—manufacturers at one end and consumer payments at the other—with the understanding that more refined data may be needed later to completely understand how the biopharmaceutical supply chain operates. Experience from other sectors would suggest that transparency on supply chain costs tends to reduce these intermediary costs (see Box 2-3). PREPUBLICATION COPY: UNCORRECTED PROOFS

MAKING MEDICINES AFFORDABLE 65 BOX 2-3 Transparency Lessons from Other Sectors The mandatory disclosure of information (with regulatory intent) has become an important component of policies across the economy (Fung et al., 2007). In 1976 the U.S. Congress passed the Government in the Sunshine Act which affects the operations of the U.S. Congress, federal commissions, and other legally constituted governmental groups. The stated purpose of the act was to ensure that the public is informed about the impact that regulatory staff, officials, and other participants in the process have on decision making. In 2010 the Physician Payments Sunshine Act was enacted by Congress as part of the Affordable Care Act to increase the transparency of financial relationships among clinicians, teaching hospitals, and the manufacturers of drugs, medical devices, and biologics (Pham-Kanter, 2014). Practices from other fields, such as finance, hospitality, occupational safety, and transportation, suggest that transparency does offer certain benefits to the public. For example, federal and state legislators applied transparency policies to improve the health and safety of foods through the passage of the Nutrition Labeling and Education Act of 1990. This act provides the U.S. Food and Drug Administration with specific authority to require nutrition labeling of most foods regulated by the agency and to require that all nutrient content claims and health claims be consistent with agency regulations. The U.S. Congress has also mandated transparency policies in the workplace through the Occupational Safety and Health Act. Another area where transparency policies have been applied is auto safety and fuel economy ratings, through the implementation of Corporate Average Fuel Economy (CAFE) standards. The CAFE standards set the average new vehicle fleet fuel economy, as weighted by sales that a manufacturer must achieve. The disclosure policies and the regulatory mechanism supporting them have led to lower energy consumption as auto makers complied with the fuel economy standards for cars and light trucks. The enactment of the Home Mortgage Disclosure Act is another application of transparency policies. The act requires financial institutions to maintain and disclose to the public specific information about mortgages. Still another example of transparency policy is the Securities Exchange Act, which regulates exchanges, brokers, and over-the-counter markets and provides for monitoring the required financial disclosures. Transparency policies that are targeted—that is, require specific information to be disclosed in a standardized format to achieve a clear public policy purpose—have been found to be generally effective, as opposed to broad right-to-know disclosures (Fung et al., 2007). Targeted policies that have been reported as having worked particularly well include those related to mortgage lending disclosures and corporate financial disclosures (Fung et al., 2007). However, it is important to note that most disclosure laws do not directly affect decisions regarding the pricing of individual products or individual transactions. Profitability Across the Supply Chain Another argument in favor of transparency is based in the importance of understanding the profitability of the participants in the biopharmaceutical supply chain. Such an understanding would, at minimum, help bring clarity into how the biopharmaceutical supply chain affects prescription drug prices in the United States compared with those in other nations. Of greatest importance in this question is how profitable the manufacturers of branded and generic drugs are, because their profitability is commonly seen as a source of funds for investing in new research and development to bring new life-saving and life-enhancing products to the market. PREPUBLICATION COPY: UNCORRECTED PROOFS

MAKING MEDICINES AFFORDABLE M A E 66 To address th question, four key sou T his urces of infoormation wer reviewed. The first w a re . was 2015 proj ojection in Fo orbes showin the top 10 most profi ng itable industr for 2016 (Chen, 201 tries 6 15). The listin showed generic pharm ng g maceutical companies as the most pr s rofitable sector (with 30 percent margin), whi major pha m ile armaceutical companies appeared fo l ourth on the list (25.5 perrcent margin) and biotechn a nology comp panies were sixth on the list (24.6 peercent margin Other n). industries in the list included: inv i vestment ma anagers (29.1 percent ma 1 argin), tobac (27.2 per cco rcent margin), Internet and software se d ervices (25 percent marg p gin), and variious banks ((between 22 and 24 percen margin). nt The second so T ource was a recent study published b the Unive y by ersity of Sou uthern Califoornia that asses ssed the prof margins for various in fit f ndustries (So et al., 20 ood 017). This sttudy found branded pharmaceuti p icals to be th industry with the grea he w atest profit m margins (28 ppercent) and generic pharmaceutic to be fou (26 perc p cals urth cent), with to obacco and a alcoholic beeverages in between. The reporte rate at wh profit ha been grow ed hich as wing in the ppharmaceutic sector cal significan outpace the rates of all other re ntly ed o eported secto of the U. economy ors .S. y. FIGURE 2-6 Averag sector net margins for companies in the bioph E ge t r s harmaceutica sector and al d comparab industrie ble es SOURCE Sood et al 2017, Figu 4. E: l., ure PREPUBLI ICATION CO OPY: UNCOR RRECTED PR ROOFS

MAKING MEDICINES AFFORDABLE 67 Third, corporate bond ratings on major pharmaceutical companies from the Morningstar bond rating agency were reviewed for insights into the financial health of companies. While some of these companies in the biopharmaceutical sector did not have bond ratings (some companies do not issue corporate bonds), of those with a rating provided by Morningstar, which accounted for 86 percent of the market capitalization considered, the bond ratings were all A– or higher, with one AAA rating (Johnson and Johnson), the highest rating given by Morningstar. The lowest bond rating among pharmaceutical companies (three firms representing 4.5 percent of the total market capitalization) was BBB–.21 For the sake of comparison, the bond ratings of some familiar corporations in other sectors of the U.S. economy were Microsoft: AAA; Exxon: AA+; Google: AA; Apple Computers, Chevron, Intel: AA–; Home Depot, IBM: A+; Amazon, Shell Oil (Royal Dutch), Starbucks, U.S. Steel: A; McDonalds: A–; Southwest Airlines: BBB+; Ford Motors, General Motors, Hewlett Packard, Verizon: BBB; T-Mobile, United/Continental Airlines: BB, and Sprint: B. However, a concern about the future profitability of biopharmaceutical companies emerges from a recent analysis from Deloitte LLP (2016), which reported a steadily declining return on investment (ROI) for research and development in the biopharmaceutical sector. According to that report, the ROI fell steadily from 10.1 percent in 2010 to a low of 3.7 percent in 2016. The analysis focused on the performance of 12 large-cap companies (i.e., companies with a large market capitalization) since 2010. A group of mid-cap companies that were also newer companies had a higher average ROI, but their return also showed a decline—from a prior peak of 17.7 percent to 9.9 percent in 2016. The report’s summary statement stated, “Costs per asset have stabilized for the original biopharma cohort, but forecast peak sales per asset continue to decline” (p. 2). Share of Costs and Profits within the Biopharmaceutical Supply Chain This section presents available assessments of share of costs and profits in the biopharmaceutical supply chain. However, these assessments used different methodologies and data that differ in scope; thus, they are not directly comparable. One recent analysis of profitability across the biopharmaceutical drug supply chain illustrates the difficulties in working with currently available data for U.S. firms (Sood et al., 2017). The U.S. analysis, reported in a white paper, used financial information that is publicly available through the Securities and Exchange Commission (SEC) for firms that are publicly traded on stock markets—a subset of the entire market that selectively eliminates both privately held firms and smaller firms. The omission of smaller firms may be more important at the front- end research and development stage of the market than further along the supply chain, but the omission is relevant to some extent at all levels of production and distribution. The approach used for this white paper also excluded not-for-profit organizations. A further complication arises because some of the intermediaries in the supply chain operate in more than one segment of the supply chain, e.g., both as a PBM and insurer, as a PBM and retail pharmacy, or other similar combinations. 21 AAA = extremely low default risk; AA = very low default risk; A = low default risk; BBB = moderate default risk; BB = above average default risk; B = high default risk. PREPUBLICATION COPY: UNCORRECTED PROOFS

MAKING MEDICINES AFFORDABLE M A E 68 While public reports gene W erally separa these diff ate ferent lines o business into different of t areas of profit, the ch p hoice of exac where to report prof remains s ctly o fits somewhat ar rbitrary on th he part of th reporting entity. For example, if a $1 million r he e rebate is received from a drug manufact turer by a PB that reb could be retained at the PBM lev (where it would incr BM, bate e vel t rease the repor PBM pro margin), or it could be passed al rted ofit long to an afffiliated insu or retail urer pharmacy The same $1 million would have different eff y. w fects on prof margins d fit depending on the n underlyin level of economic act ng tivity, and it would appe smallest o a percentage of reven ear on nues if it were reported as being accru by the lar e ued rgest of the c component b businesses. With these co W onsiderations in mind—a emphasi s and izing that the committee does not vie e ew these data as conclus sive—the ana alysis does shed light on the profitab s n bility of vari ious element of ts the biophharmaceutica supply cha The key result is pre al ain. y esented in Fi igure 2-7, w which shows t that $41 out of every $100 spent in pr o rescription drugs is retai d ined in the su upply chain, including , wholesal lers, retailers PBMs, and insurance companies ( Sood et al., 2017). This would suggest s, d c that the in ntermediarie in the U.S biopharma es S. aceutical suppply chain co onsume a gre eater fraction of n 22 total cost than is app ts parently the norm in othe nations. As noted ab er bove, the disstribution-rel lated costs in six comparat countries averaged 32 percent o end-user p s tor s 2.7 of price based o a simple on average and 28 perce based on a population a ent n-weighted a average (Qu uintilesIMS I Institute, 20114). The Sood analysis also estimated gross and net margins f each sect segment by brand d d n for tor, ted ded drug, genneric drug, and the total market, and found the fo m ollowing: ne margins re et esulted: 28.1 percent for branded drug manufa f d acturers, 18.2 percent for generic ma 2 r anufacturers, and 26.3 , percent overall. o 22 Another study by Kana avos et al. (201 found that distribution ma 11) d argins vary gre eatly at differen levels of nt wholesale and retail segm ments among 27 member state of the Europ es pean Union. However, none o these includ of de distribution segments com n mparable to he ealth insurance and PBM marrkets in the Uni States. ited PREPUBLI ICATION CO OPY: UNCOR RRECTED PR ROOFS

MAKING MEDICINES AFFORDABLE M A E 69 FIGURE 2-7 Flow of a hypothet E o tical $100 ex xpenditure o prescriptio drugs cov on on vered under private in nsurance thro ough the U.S biopharma S. aceutical suppply chain. SOURCE Sood et al 2017, Figu 2. E: l., ure The intention behind repo T n orting these internationa and domes data is to emphasize that i al stic o these data are unavoi idably incommplete in sco and do no provide in ope ot nformation o many key on y participan in the va nts arious markets. The limit tations inher rent in using SEC filings to garner su s uch data also point to the need for mo granular information than the SE database can reveal. ore n EC To assess the flow of fund through th distributi system, a Barclays E T ds he ion Equity Reseaarch analysis using public available data from tw PBMs (E u cly wo Express Scrip and CVS estimated that, pts S) in 2015, an industry-wide total of $115 billio was either provided a discounts t or retained by on r as to those invvolved in the distribution of pharmac e n ceutical prodducts (i.e., th hose organiza ations betwe een the manu ufacturers an the consum nd mers). This was estimate to have be 27 perce of what g w ed een ent gross sales wou have bee based on the listed pr uld en, rices. The Ba arclays estim of how this $115 bi mate illion is distribu is prese uted ented Figure 2-8. FIGURE 2-8 Total gross-to-net dollars contr E g ribution acro the bioph oss harmaceutical supply ch hain. NOTE: FDA = U.S. Food and Dr Adminis F rug stration; PBM = pharma benefit m M acy manager. SOURCE Barclays, 2017, Figur 1. E: re In some cases the Barcla analysis could not de n s, ays c etermine whe ether the fun were bein nds ng retained or passed alo in the su o ong upply chain because the analysts had no informa b d ation from ceertain of the par ution system.23 For exam rticipants in this distribu mple, the ana alysis found t $9 to $1 that 10 billion was either “re w etained by Distributor or Passed to DDispenser” at the distribu t ution level. Manufacturers direct paid fees to PBMs ($1.5 to $2.0 b tly billion) and a additionally retained $5 billion of rebates thro f ough the com mmercial inssurance (non ngovernment sector, w another $23 tal) with billion pa assed to Med dicaid progra and $21 billion pass to Medic ams 1 sed care. The fin $31 billio in nal on the comm mercial secto is describe as “passed to payers” with no und or ed d derstanding o how much of of h this $31 billion was passed along to consume in terms o lower dru prices (ve b p g ers of ug ersus being retained by payers to cover costs or as profits b o s). 23 These ga in available data cannot be repaired usin existing dat sources. One of the recomm aps e b ng ta e mendations in t this report focu used on new da gathering is designed to re ata s emedy this defe providing a direct metho for assessing how fect, od g much is rettained by the distribution sys d stem and how much passes to consumers. m o PREPUBLI ICATION CO OPY: UNCOR RRECTED PR ROOFS

MAKING MEDICINES AFFORDABLE M A E 70 In a separate analysis of 2015 data, th Berkeley Research Gr n 2 he roup (Vandeervelde and Blalock, 2017) provided estimate of the dist es tribution of g gross revenu in the ph ues harmaceutica al distributi system. They began with gross sales informa ion T ation from m manufacturer estimating a rs, g total of $469 billion in 2015, and then estima the porti $ i d ated tions receive by branded manufactu ed urers (47 perce and gene manufac ent) eric cturers (23 percent), whi implied a total of 70 percent rece p ich eived by manuf facturers. It was estimate that other in the supp chain rec ed rs ply ceive 27 per rcent of the t total, with 4 pe ercent consumed in other rebates and fees (see F r d Figure 2-9). FIGURE 2-9 Share of 2015 net drug expend E o ditures realiz by manu zed ufacturers and intermedia aries in the bio opharmaceuttical supply chain. SOURCE Vanderve and Blal E: elde lock, 2017, Figure 3. F This calculation diverges from that of Sood et al. (20 d m 017) in sever ways. First, the Berke ral eley Research Group’s me h ethod did no separate op ot perating cos from prof Second, their analys sts fits. sis began wi total sales at gross lis prices, whereas Sood e al. assesse the flow o funds only ith st et ed of y through retail sales in r nvolving commmercial ins surance plan Sood and colleagues estimated th ns. d hat the manu ufacturer reta ained 58 percent of sales dollars, usi as a base the actual a s ing e amounts spen by nt consumers on retail sales (e.g., in pharmacies and other r s n s retail distribuution outlets Thus, the s). figure of 58 percent of sales calcu f o ulated by So et al. (in effect, portr ood n raying net sa after ales subtractin rebates given to PBM and others does not d ng Ms s) directly corre espond to th 70 percent he t figure (gr ross revenue calculated by the Berk e) d keley Resear Group. rch A 2014 publication repor the proportion of tot pharmace rted tal eutical costs attributable to the distribution syste (comprise of wholes em ed salers and re etailers) in diifferent counntries (QuintileesIMS, 2014). Current es stimates of th populatio of these s countries were used to he ons six s calculate a population n-weighted average of th data. The distribution a he e n-related cos in these si sts ix nations averaged 32.7 percent of end-user pri based on a simple av a 7 f ice n verage and aaveraged 28 percent when a population-weigh average was used (s Figure 2- w hted e see -10). The da from this ata report da came from a sampling of drug tra ata m g ansactions in five signific areas of pharmaceu n cant f utical products: antibiotics, diabetes, ep , pilepsy, hypeertension an respiratory diseases. H nd y However, the e analysis did not inclu other im d ude mportant areas of drug spe ending in the United Sta e ates, most notably cancer and other specialt drugs. c ty PREPUBLI ICATION CO OPY: UNCOR RRECTED PR ROOFS

MAKING MEDICINES AFFORDABLE M A E 71 FIGURE 2-10 Price build-up acr E ross five the erapy areas in seven coun n ntries. (CIF=Co insurance and freigh charges; CNF=Cost, n insurance, and freight charges) ost, e, ht C no , t NOTES: 2013 popula ation-adjuste average. The study’s description of the count ed T tries chosen for the analy stated: ysis Brazil: Upper-middle income cou U e untry with laarge retail ouut-of-pocket market and a major mar t rket in the reg gion. India: Loower-middle income cou e untry with a large out-of- f-pocket mark but unde ket ergoing channge and implementing mechanisms to control the build-up of drug prices o e f s. Indonesia Lower-mi a: iddle income country wi little price regulation and relative large out e ith n ely t-of- pocket sp pending. Kenya: Excluded by the committ for discussion in this report since the IMS stu did not E tee e udy provide exact data on that countr costs. Fu e n ry’s urthermore, t data reliability for K the Kenya was ve ery small (on 30 drug prices in the sample com nly p mpared to thoousands in otther nations)). Netherlands: High-in ncome count with a rat try tional approa to pricin and margi and usef as ach ng ins, ful a baseline country fo comparison purposes. or Russia: High-income market with a high leve of out-of-p H e h el pocket, mix of regulated and unregu d ulated market. South Afrfrica: Upper- -middle inco country with a large proportion of the medic market ome e cine funded privately, but a highly tra t ansparent pri icing system in place. m SOURCE QuintilesI E: IMS Institute 2014, Exh e, hibit 12, p. 2 21. In summary, each analysi differs in its methodol n is i logy to estim the pote mate ential amounnt captured by the interm mediary part ticipants in the biopharm t maceutical su upply chain. Part of the . challenge in making these compa e arisons, as no oted, is that various anal lyses employ different y approach to definin total drug spending, part is the dif hes ng g p ffering assummptions mad about the de pass-thro ough of disco ounts and rebbates, and pa is whethe the issue i framed in terms of the art er is e share of list price or the share of the price ult l t timately paid by the pati and the i d ient insurers. Sim milar methodological diffe erences also bedevil cros b ss-country co omparisons, as do varyin approache to ng es the inclusion of sales and value-a s added taxes. PREPUBLI ICATION CO OPY: UNCOR RRECTED PR ROOFS

MAKING MEDICINES AFFORDABLE 72 Thus, existing data do not adequately answer a question of fundamental interest: When a pharmaceutical company provides a discounted price, how much of that discount actually reaches patients at the other end of the distribution system? Without knowing the answer to this basic question, it is impossible to determine responsibility either for the levels of prices or their rates of increase over time. This lack of clarity has led to numerous situations in which different participants in the supply chain point to other participants as the source of high and increasing prices. One cannot know with reasonable clarity how much money is retained at various levels, or how much of that which is retained is due to operational costs and how much is profit. For example, while Sood et al. (2017) assembled this type of information, that analysis is limited by several important omissions: (1) it included only companies that are publicly traded (SEC data), and (2) it only assessed the distribution through the retail pharmacy sector for those with insurance. Thus, public programs such as Medicaid, veterans’ benefits, TRICARE, and the 340B program, among others, are excluded, along with sales to clinicians who purchase and then directly administer prescription drugs.24 FINDINGS Based on the material presented in this chapter, the following findings are offered: Finding 2-1: The complexity, confusion, and conflicting information associated with the pricing of prescription drugs result in opaqueness of financial transactions among the participants in the biopharmaceutical supply chain. Finding 2-2: Mandatory disclosure and public reporting of reliable information regarding financial flows and margins (which currently does not exist) would allow a fuller understanding of how participants in the biopharmaceutical supply chain operate and how they influence final prescription drug prices to the consumer. This would improve market performance and provide the basis for future policy changes as needed. Finding 2-3: Various participants in the biopharmaceutical supply chain point to other participants as the main contributors to high and rising drug costs. The resulting discord and lack of meaningful information to evaluate those competing claims undermines the ability to confidently understand the root causes of price increases and when they are appropriate. Finding 2-4: While some suggest that greater transparency across the biopharmaceutical supply chain could harm rather than benefit consumers, there is no compelling evidence to support this claim. Moreover, practices from other fields, such as banking, consumer loans, occupational safety, and automotive manufacturing, suggest that transparency does benefit consumers. 24 This same omission accounts for the difference between estimates that prescription drugs account for 10 percent of U.S. health care costs versus other estimates of 16 percent. The former estimate includes only the retail sales portion of total sales. PREPUBLICATION COPY: UNCORRECTED PROOFS

MAKING MEDICINES AFFORDABLE 73 Finding 2-5: Most large employers self-finance their health insurance contributions for their employees and hence have a direct and significant interest in controlling health care costs. Finding 2-6: Extensions of product exclusivity based on minor modifications to existing patents—known as “evergreening”—adversely affect consumers. Finding 2-7: “Pay for delay” strategies employed by companies to keep generic competitors out of the market reduce access to reasonably priced generics. Finding 2-8: In the United States, formulary control relies heavily on tiering, which can have mixed consequences. Placement of a drug in a higher tier can reduce adherence to the treatment plan, with potential harms to patient health, but the tiered price mechanism can also be used by insurers to negotiate better prices for branded drugs. Finding 2-9: In the United States the bargaining power of federal and state governments has been undercut by laws restricting what they may negotiate and exclude from coverage. Because prices tend to be lower when the purchaser has bargaining power that is at least comparable to that of the seller, the United States could achieve lower prices for prescription drugs by consolidating bargaining power and providing greater flexibility in formulary design. Finding 2-10: Section 1861 of the Social Security Act, which requires that Medicare cover “reasonable and necessary” medical services, in conjunction with language in other statutes limiting the extent to which comparative effectiveness information can be used in Medicare coverage decisions, has precluded consideration of cost or cost- effectiveness in coverage decisions. Finding 2-11: Value-based approaches to drug purchasing decisions and formulary control are well established in some other OECD countries where they are seen as critical to containing price pressures and ensuring affordability. Finding 2-12: In the United States, although approaches for assessing the “value” of drugs have been developed and deployed in several clinical areas for a number of years, there remains considerable debate about the use of value- based approaches in the pricing and purchasing of drugs, as well as for designing insurance benefits. Finding 2-13: Rebates, discounts, and financial arrangements among biopharmaceutical companies, intermediaries, purchasers, and health care providers—coupled with tiered cost-sharing arrangements in health insurance plans—often do not benefit consumers even when intended to do so, and at times may even harm consumers and society at large. Finding 2-14: Although the available data are not fully comparable, they indicate that intermediaries in the U.S. biopharmaceutical supply chain extract a higher PREPUBLICATION COPY: UNCORRECTED PROOFS

MAKING MEDICINES AFFORDABLE 74 fraction of total prescription drug spending than do the entities performing similar functions in other countries. The next chapter considers in greater detail some of the main factors influencing affordability. These range from pricing policies to market exclusivity, and from patient assistance programs to the availability and clarity of information affecting the choices available to patients and their clinicians, and also presents related findings. PREPUBLICATION COPY: UNCORRECTED PROOFS

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Making Medicines Affordable: A National Imperative Get This Book
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Thanks to remarkable advances in modern health care attributable to science, engineering, and medicine, it is now possible to cure or manage illnesses that were long deemed untreatable. At the same time, however, the United States is facing the vexing challenge of a seemingly uncontrolled rise in the cost of health care. Total medical expenditures are rapidly approaching 20 percent of the gross domestic product and are crowding out other priorities of national importance. The use of increasingly expensive prescription drugs is a significant part of this problem, making the cost of biopharmaceuticals a serious national concern with broad political implications. Especially with the highly visible and very large price increases for prescription drugs that have occurred in recent years, finding a way to make prescription medicines—and health care at large—more affordable for everyone has become a socioeconomic imperative.

Affordability is a complex function of factors, including not just the prices of the drugs themselves, but also the details of an individual’s insurance coverage and the number of medical conditions that an individual or family confronts. Therefore, any solution to the affordability issue will require considering all of these factors together. The current high and increasing costs of prescription drugs—coupled with the broader trends in overall health care costs—is unsustainable to society as a whole.

Making Medicines Affordable examines patient access to affordable and effective therapies, with emphasis on drug pricing, inflation in the cost of drugs, and insurance design. This report explores structural and policy factors influencing drug pricing, drug access programs, the emerging role of comparative effectiveness assessments in payment policies, changing finances of medical practice with regard to drug costs and reimbursement, and measures to prevent drug shortages and foster continued innovation in drug development. It makes recommendations for policy actions that could address drug price trends, improve patient access to affordable and effective treatments, and encourage innovations that address significant needs in health care.

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