On February 26, 2019, the Senate Finance Committee heard testimony from top executives representing seven high-profile drug manufacturers.  This hearing was the second to examine drug pricing in America. The Committee’s questions to executives from Pfizer, Merck & Co., Johnson & Johnson, AbbVie, Bristol-Myers Squibb, Sanofi, and AstraZeneca were aimed at identifying why already-high drug prices continue to climb and what can be done to stop the trend. The hearing comes during a period of increasing pressure on pharmaceutical manufacturers and others in the drug supply chain to improve patient access to drugs, increase transparency in drug pricing, and stop the trend of significant price increases.  This type of high profile hearing just confirms that these pressures will continue, and as a number of proposals to address drug prices work their way through Congress and multiple federal agencies, the discussion around drug pricing reforms will undoubtedly continue.  Following on ML Strategies’ coverage of the Senate hearing, below are a handful of key takeaways from the hearing.

1. Drug manufacturers support the Trump Administration’s proposed rebate reform rule. 

The testifying executives expressed support for HHS’ recently proposed rule that would amend the Anti-Kickback Statute’s discount safe harbor to eliminate protection for rebates paid from drug manufacturers to plan sponsors or their PBMs under Medicare Part D, and to Medicaid managed care organizations. Their views align with the position taken by the pharmaceutical manufacturer trade group PhRMA, as well as the initial response from the Association for Accessible Medicines, the industry group representing generics and biosimilars.  When asked whether the drug companies would lower drug list prices if rebates were eliminated, several executives indicated that list prices would come down so long as the same rules applied across business segments.  Whether the elimination of rebates would also occur in the companies’ commercial businesses seems to be a key factor in determining what impact HHS’ proposed rule may have on list prices.  As Kenneth Frazier, Merck & Co.’s Chairman and CEO put it: “Assuming that we do change the systems on the commercial side and the Medicare side so that no one company faces a disadvantage, we would be lowering list prices.” 

2. PBMs remain at the center of the drug pricing discussion.

As drug manufacturers face mounting criticism regarding rising drug costs, they have sought to deflect some of the attention toward PBMs.  Testifying executives emphasized PBMs’ negotiating power as a significant reason for rising list prices.  Senators participating in the hearing seemed determined, however, to keep the focus on drug makers’ role in the drug pricing system, and letting PBMs face scrutiny separately.  Sen. Ron Wyden (D-OR) promised that PBMs would “have their day before [the] committee” while accusing drug manufacturers of “always point[ing] the finger elsewhere” to explain increasing drug costs. Other Senators echoed Sen. Wyden’s feelings that drug makers have significant blame for rising drug prices and cannot hide behind PBMs.

3. Americans shoulder a disproportionate share of pharmaceutical research and development costs.

The drug manufacturers voiced opposition to proposed reforms that tie domestic drug prices to those charged to consumers in other countries.  When asked how these companies can turn a profit overseas while charging lower prices for their drugs, AbbVie’s Chairman and CEO Richard Gonzalez explained that higher prices in the U.S. support drug research and development for products sold around the world.  He warned that tying domestic prices to an international price index could result in research and development stagnation.  The drug manufacturers acknowledged also benefitting from U.S. tax payer-funded research, meaning American consumers are funding pharmaceutical research and development through taxes in addition to paying higher prices.  The drug company executives conceded that the average drug price paid in the U.S. is the highest in the world and that the drug manufacturers themselves are responsible for setting list prices.

4. Value-based arrangements could play a larger role in solving the problem.

There is support among the drug manufacturers for value-based purchasing arrangements that tie drug payments to patient outcomes.  The testifying executives expressed a desire to enter into value-based contracts but cited various operational and regulatory barriers.  They pointed to the Anti-Kickback Statute, as well as HHS’ proposed rebate reform rule, as examples of potential roadblocks to broad adoption of risk-sharing arrangements.  Nevertheless, multiple executives explained how their companies had already begun engaging in value-based agreements with an eye toward expanding their use in the future.

5. Congress and drug manufacturers seem to agree that the current system cannot persist indefinitely.

Pascal Soriot, CEO of AstraZeneca, acknowledged in his written statement that “the current system is not sustainable—for patients, payers, and society as a whole,” a view shared by other executives.  Despite this general consensus that the status quo is not sustainable, the drug makers differ in their preferred solutions to change the system.  Several of the executives made the rare move of admitting that some level of government intervention may be required to address the problem.  As Mr. Soriot put it, “The government has to step up and change the rules.”  Other executives rejected the idea that government intervention could introduce effective solutions to lowering drug prices and improving consumer access to drugs.  For example, Johnson & Johnson’s Executive Vice President/Worldwide Chairman of Pharmaceuticals asserted that “[w]hen it comes to making more biosimilars available for patients and their physicians, competition, not government intervention, is the best approach.”