Incentives that drive the rising costs of prescription drugs and how to resolve them were the subjects of testimony at a hearing held Wednesday by the House Ways & Means Committee's health subcommittee.
Testimony presented at the hearing -- titled -- examined how drug spending has continued to rise in the U.S., reaching $344 billion in 2018 and mainly on the strength of rising prices. Experts noted that pharmaceutical companies have received tax breaks and patent advantages, yet these measures have not paid off in price reductions or truly innovative therapies.
At the same time, speakers said, independent patient assistance programs (IPAPs), patient advocacy organizations (PAOs), and drug manufacturers' provision of free drug samples to clinicians are contributing to the price increases.
Pharmaceutical companies have "profit margins as high as 60%" and are gaming the system through tax advantages and patents, Lloyd Doggett (D-Texas), committee chair, said as he set the stage for the subsequent testimony. He said pharmaceutical companies pay Irish taxes, but Americans don't pay Irish drug prices, and that drug companies received $76 billion in tax breaks -- "most of which went to stock buybacks and dividends."
Additionally, pharmaceutical company research has largely focused on tweaks and follow-up therapies, not innovation, and assistance programs have contributed to the problem by steering patients to high cost drugs through practices "cloaked as charity," Doggett said.
High Cost of Drug Samples
Also giving testimony, Ge Bai, PhD, of the Carey Business School and the Bloomberg School of Public Health at Johns Hopkins University in Baltimore, recommended tax and disclosure policies related to drug manufacturers' financial contributions to IPAPs and PAOs, as well as to drug manufacturers' provision of free drug samples to clinicians.
"Although these programs improve drug access and the well-being of some patients to some extent, they often lead to market distortions, price increases, and inefficient prescription drug spending," Bai said.
In 2016, drug manufacturers spent $13.5 billion providing fully tax-deductible drug samples, she added, noting that most of the promoted drugs are new and expensive brand-name drugs that have less expensive but clinically equivalent alternatives on the market. If patients begin a prescription for the drug that they initially used as a sample, both the patients' out-of-pocket expenditures and their insurance plans' prescription drug spending are likely to be higher as a result, she said.
Drug manufacturers should be required to disclose the transaction details of free drug samples provided to clinicians, Bai continued. This policy option has been proposed in the Sunshine for Samples Act of 2019, a bipartisan proposal introduced by Representatives Judy Chu (D-Calif.) and Devin Nunes (R-Calif.). The bill would require drug manufacturers and other medical products suppliers to report to the Department of Health and Human Services the number and value of free drug samples given to clinicians each year, and be posted on the Open Payment Database.
Independent Patient Assistance Programs
Bai explained that IPAPs grew rapidly after prescription drug benefits were added to the Medicare program. In 2006, the combined financial assistance provided by the top five largest IPAPs totaled $50 million. In 2015, it grew to $1.4 billion, representing an annualized growth rate of 39%, she testified.
IPAPs receive cash donations, primarily from drug manufacturers, and use them to provide financial subsidies to eligible patients by covering their deductibles, co-pays, co-insurance, or premiums for their prescription drugs. Manufacturers claim a tax deduction for their cash donations.
By defraying patients' out-of-pocket expenditure for a specific drug, IPAPs eliminate patients' exposure to price, desensitize them from the drug's affordability, and enhance the utilization of the drug. These factors encourage manufacturers to raise prices, she said.
A $1 financial contribution to an IPAP was estimated to generate from $6 to $30 in incremental profit for a pharmaceutical company, she noted, adding that the financial contributions from drug manufacturers to IPAPs also can generate tax savings for the manufacturer.
Further, a 2019 study co-authored by Bai and published in , found that major IPAPs "only covered insured patients, did not design their eligibility criteria to favor low-income patients, and disproportionately covered expensive drugs and off-patent brand-name drugs."
Bai recommended eliminating or reducing the tax deduction for contributions from manufacturers and requiring IPAPs "to report the names, addresses, and donated amounts of major donating entities" and making the information publicly available.
In addition, she advised similar disclosure for financial relationships between drug manufacturers and PAOs. Such a policy option would be an amendment to extend the Physician Payments Sunshine Act of 2010, which requires drug manufacturers and other medical products suppliers to disclose all financial relationships with clinicians and teaching hospitals.
Manufacturer Patient Assistance Program
Juliana Keeping, a patient advocate and mother of a child with cystic fibrosis, related how her son Eli is responding well to , a two-drug combination that costs $307,000 a year and is made affordable to her family through a co-pay assistance program through the drug's maker, Vertex.
"Typically, the way patient assistance programs work for families like mine is through a yearly application," Keeping said. "What drug companies look for in these applications is not how much a family needs the assistance. Drug companies and patient assistance programs are trying to figure out how much your insurance will pay for the drug. Of course, a drug company will gladly cover my $100 co-pay or $4,000 deductible if my insurance company will pay them more than $300,000 for my son's drug. It's simple math. And a great investment if you're a drug manufacturer."
Nearly all patient assistance programs -- 97% -- require patients to be on insurance in order to participate. "Subsidizing the cost of a patient's co-pay or co-insurance each month is well worth it when the company will be paid for the entire cost of the drug by the insurance company," she said.
"If I lost my job or changed insurance, I would once again be at risk of not being able to afford the medications at all," Keeping continued. "Additionally, programs often limit the amount of time patients are permitted to receive assistance. This means patients may rely on a program for years but suddenly have the rug yanked out from under them."
Tweaks Instead of Innovation
Aaron S. Kesselheim, MD, JD, of Harvard ľֱ School/Brigham and Women's Hospital in Boston, presented data indicating that a high proportion of pharmaceutical company revenues come from reformulations of existing drugs. Of the 25 brand-name drugs with the highest Medicare Part D spending in 2017, "we found that 41% -- 11 of 27 -- of the active ingredients had previously been approved by the FDA in other formulations or products," he said.
Kesselheim also faulted the FDA's Accelerated Approval pathway, which allows promising new drugs to be approved based on preliminary evidence from changes in lab tests or imaging studies on the condition that drug companies perform post-approval confirmatory trials. For example, the muscular dystrophy drug eteplirsen (Exondys) was approved in 2016, but an FDA letter in August 2019 noted that the post-approval confirmatory trials that the company promised to complete by May 2021 had not yet even been started.
"Eteplirsen was reported to initially cost $300,000 or more per year for each patient. The tax code could be changed to tax a company's profits after a certain reasonable period of time at a much higher rate if a manufacturer fails to complete its agreed-upon FDA-mandated post-approval trials," he said.
Offshoring and Profits
Finally, , of the Council on Foreign Relations, focused on the growing trade deficit in pharmaceutical products and how created new incentives for the offshoring of pharmaceutical production.
"Many pharmaceutical companies conduct the bulk of their research and development in the United States, but then seek to minimize their tax burden by transferring their intellectual property to places like Bermuda and producing their drugs in yet another low tax jurisdiction like Ireland," he explained, adding that the drugs are then imported back to the U.S.
The biggest sources of pharmaceutical imports are "countries known for their high tolerance of transfer pricing games and generous tax treatment of multinational firms," he said. The U.S. exports $65 billion to $70 billion in pharmaceuticals and imports $150 billion. "Ireland alone accounts for about a quarter -- $35 million to $40 billion -- of total pharmaceutical imports," he said.
"Like many Americans, I love the Irish -- but the U.S. tax code should not be designed to put Ireland first," Setser said.
Pharmaceutical companies used the windfall from the 2017 tax cut to buy back their own stock, he noted. By the first quarter of 2019, total announced buybacks by pharmaceutical companies alone reached $79 billion.
"High prices and rising imports of pharmaceuticals only highlight the urgency of reforming the new tax code to make sure that firms that offshore profits and jobs aren't rewarded, and global companies pay the same rate as American small businesses," he said.