AmericanPatients FirstThe Trump Administration Blueprint to Lower Drug Pricesand Reduce Out-of-Pocket CostsMAY 2018

The U.S. Department of Health & Human ServicesHubert H. Humphrey Building200 Independence Avenue, S.W.Washington, D.C. 20201Toll Free Call Center: 1-877-696-6775

AmericanPatients FirstThe Trump Administration Blueprint to Lower Drug Pricesand Reduce Out-of-Pocket CostsMAY 2018

“One of my greatest priorities is to reducethe price of prescription drugs. Inmany other countries, these drugs costfar less than what we pay in the UnitedStates. That is why I have directedmy Administration to make fxing theinjustice of high drug prices one of ourtop priorities. Prices will come down.”— PRESIDENT DONALD J. TRUMP

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5 The Secretary of Health and Human ServicesWashington, D.C. 20201Message from the SecretaryTHE UNITED STATES is first in the worldin biopharmaceutical investmentand innovation. Combining our freemarket system and generous public investment made America hometo the first chemotherapy treatments for cancer, the first effectivetreatments for HIV, the first curefor Hepatitis C, and now, the firsttherapies that turn our own immunesystems against cancer.But too often, this system has notput American patients first. We haveaccess to the greatest medicines inthe world, but access is meaninglesswithout affordability.When it comes to the cost of prescription drugs, our healthcare system faces four major challenges: highlist prices for drugs; seniors and government programs overpaying fordrugs due to lack of the latest negotiation tools; high and rising out-ofpocket costs for consumers; and foreign governments free-riding off ofAmerican investment in innovation.Alex M. Azar IIThese problems have often beendiscussed, but gone unaddressed.Under President Trump, that has nowchanged. This blueprint is a historicplan for bringing down the high priceof drugs and reducing out-of-pocketcosts for the American consumer.The time to act is now: Not onlyare costs spiraling out of control, butthe scientifc landscape is changingas well. Securing the next generationof cures for the next generation ofAmerican patients will require radical reforms to how our system works.Our blueprint will bring immediaterelief to American patients while alsodelivering long-term reforms.The men and women of theDepartment of Health and HumanServices (HHS) are looking at everyfacet of HHS’s programs, authorities, and spending. Working withour partners in the private sector,we will turn this vision into action,and thereby improve the health andwell-being of every American.

CONTENTSI. Trump Administration Blueprint in Brief. 9II. What’s the Problem? .12III. Trump Administration Accomplishments on Drug Pricing .18IV. Responding to President Trump’s Call to Action . 23V. Further Actions Under Review and Opportunities for Feedback .26

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I. Trump Administration Blueprint In Brief 9 I. Trump AdministrationBlueprint in BriefHHS has identifed four challenges in theAmerican drug market: High list prices for drugs Seniors and government programs overpaying fordrugs due to lack of the latest negotiation tools High and rising out-of-pocket costs for consumers Foreign governments free-riding of of Americaninvestment in innovationUnder President Trump, HHS has proposed a comprehensive blueprint for addressing these challenges, identifying four key strategies for reform: Improved competition Better negotiation Incentives for lowerlist prices Lowering out-of-pocket costsHHS’s blueprint encompasses two phases: 1) actions thePresident may direct HHS to take immediately and 2)actions HHS is actively considering, on which feedback isbeing solicited.

10 American Patients FirstIncreased CompetitionImmediate Actions Steps to prevent manufacturergaming of regulatory processessuch as Risk Evaluation andMitigation Strategies (REMS) Measures to promote innovationand competition for biologics Developing proposals to stopMedicaid and Afordable CareAct programs from raising pricesin the private marketFurther Opportunities Considering how toencourage sharing of samplesneeded for generic drugdevelopment Additional eforts to promotethe use of biosimilarsBetter NegotiationImmediate Actions Experimenting withvalue-based purchasingin federal programs Allowing more substitutionin Medicare Part D to addressprice increases for singlesource generics Reforming Medicare Part D togive plan sponsors signifcantlymore power when negotiatingwith manufacturers Sending a report to the Presidenton whether lower prices on someMedicare Part B drugs could benegotiated for by Part D plans Leveraging the CompetitiveAcquisition Program in Part B. Working across theAdministration to assess theproblem of foreign free-ridingFurther Opportunities Considering further use ofvalue-based purchasing infederal programs, includingindication-based pricing andlong-term fnancing Removing governmentimpediments to value-basedpurchasing by private payers Requiring site neutralityin payment Evaluating the accuracyand usefulness of currentnational drug spending data

I. Trump Administration Blueprint In Brief 11 Incentives for LowerList PricesImmediate Actions FDA evaluation of requiringmanufacturers to include listprices in advertising Updating Medicare’s drug-pricingdashboard to make price increasesand generic competitionmore transparentFurther Opportunities Measures to restrict the use ofrebates, including revisitingthe safe harbor under the AntiKickback statute for drug rebates Additional reforms to therebating system Using incentives to discouragemanufacturer price increases fordrugs used in Part B and Part D Considering fduciary statusfor Pharmacy BeneftManagers (PBMs) Reforms to the Medicaid DrugRebate Program Reforms to the 340B drugdiscount program Considering changes toHHS regulations regardingdrug copay discount cardsLowering Out-of-Pocket CostsImmediate Actions Prohibiting Part D contractsfrom preventing pharmaciststelling patients when theycould pay less out-of-pocketby not using insurance Improving the usefulnessof the Part D Explanationof Benefts statement byincluding information aboutdrug price increases andlower cost alternativesFurther Opportunities More measures to informMedicare Parts B and Dbenefciaries about lowercost alternatives Providing better annual, or morefrequent, information on costs toPart D benefciaries

12 American Patients FirstII. What’s the Problem?TODAY’S COMPLEX U.S. PHARMACEUTICAL MARKET is characterized by highand rising list prices, increasingconsumer out-of-pocket costs, anda new era of high-cost drugs lackingcompetition. Recent developmentsand challenges in the market includea business model built on opaque rebates and discounts that favor highlist prices, a generational loss ofpatent exclusivity, the AffordableCare Act’s taxes, rebates, and expansion of the 340B drug discountprogram, expansion of international price controls, government programs lacking modern negotiationtools, and changes in insurance benefit design that shifted the burden ofrising prices to consumers.i. A Recent Drug Pricing HistoryA Business Model Is BornThirty years ago, the majority of prescriptions flled at retail pharmacieswere cash transactions. Over time,however, health plans began to oferdrug coverage to compete for newmembers, knowing the beneft couldbe ofered at relatively low cost.But the complexity, price, andbenefts associated with prescription drugs dramatically increasedduring the 1990s. U.S. drug spending grew between 11 and 17% peryear in the 1990s, as both prices andvolume soared.1As more complex and more expensive drugs came on the PBM AgreementShare of Manufacturer RebatesReimbursement for Consumers’ RxInsuranceContractCopaymentDispensedDrugsNetwork AgreementPrime Vendor AgreementPharmaciesPayment forDispensed DrugsShipped Bulk DrugsPayment forWholesale DrugsPharmacyBenefits ManagerDistributorFormularyRebates & Other FeesPayment forWholesale DrugsDrugManufacturerFormulary AgreementShipped Bulk DrugsDistributor AgreementFIGURE 1ADAPTED FROM: Fein,Adam. J., The 2016Economic Report onRetail, Mail and SpecialtyPharmacies, Drug ChannelsInstitute, January 2016.

Ii. What’s The Problem 13 FIGURE 2350 400 350Retail PrescriptionDrug SpendBILLIONS 300 250 200SOURCECMS Ofice of the Actuary 150 100 50 -19 5198019851990199520002005201020152020 GROWTHplans used formularies and copayments to manage utilization andkeep drug costs low. But drug manufacturers paid rebates and discountsto be ofered as preferred drugs withlower copays, and few drugs wereexcluded from coverage.In response to rising prices, privatehealth plans began to use closed formularies to manage drug spending andnegotiate higher rebates and discountsfrom drug manufacturers, holdingdown increases in net drug prices.Medicare and Medicaid EvolveMedicare Part D introduced new dynamics to the market, as the frsttruly insured prescription drug beneft. Part D plan sponsors agreed toaccept the fnancial risk of providingcovered drugs to Medicare benefciaries in exchange for a per-benefciary, per-month payment.Part D Plans negotiated aggressively to keep premiums anddrug costs low for cost-consciousMedicare benefciaries, and the PartD Plan Finder brought transparencyto premiums, formularies, and drugprices. Private health plans outsideof Medicare adopted the tools usedby Part D plans, and Part D has inlarge part succeeded at holding downcosts for seniors.Meanwhile, drug spending hasbeen held down in the Medicaid program by other tools. The program’srules prohibit the use of closed formularies, but states use “preferreddrug lists” to negotiate larger supplemental rebates than required bylaw and limit the use of drugs madeby manufacturers not ofering supplemental rebates. As a result, drugmanufacturers have faced pressureto ofer higher rebates to maintain volume, or risk losing revenuegrowth caused from being excludedfrom markets.A Generational Loss of ExclusivityAround two decades after the boomin drug spending of the 1990s, beginning in 2012, the expiration ofpatents of popular drugs—many“blockbuster drugs” with U.S. sales

14 American Patients Firstof 1 billion or more—led to the lossof over 140 billion in drug manufacturer revenue.2 New generic competition coincided with a slowdownin new product development, creating additional fnancial pressure.Afordable Care Act Taxesand RebatesThe Affordable Care Act (ACA)shifted costs and changed theMedicaid Drug Rebate Program inways that may have driven up prices for consumers, especially in theprivate market.The ACA also created a new taxon branded prescription drug salesto Medicare, Medicaid, and othergovernment health care programs.Drug companies paid 2.5 billion in2011, based on their market sharein government programs, a numberthat increased to 4.1 billion in 2018.The ACA also increased the mandatory Medicaid base rebate on brandname drugs to 23.1%, and extendedthe Medicaid rebate to drugs purchased by Medicaid Managed CareOrganizations, more than doublingthe number of Medicaid coveredlives using rebate-eligible drugs.3,4This expansion of discounts mayhave placed pressure on list prices byforcing drug manufacturers to raiseprices overall.340B GrowthThe ACA also increased the demandson the 340B drug discount program:For one, it made critical access hospitals and other hospital types el-igible for the frst time, while theACA’s Medicaid expansion mademore hospitals eligible by increasing their Disproportionate ShareHospital enrollment.5In fact, the number of 340B hospitals grew from nearly 1,700 in 2011to 2,479 in 2017. The number ofnon-hospital covered entities, ofsite clinics or “child sites,” hospitaloutpatient departments, and contract pharmacies also grew substantially.6 As a result, discounted drugpurchases made by covered entitiesunder the 340B program totaledmore than 16 billion in 2016—nearly a 400% increase in purchasesfrom 2009.7 The additional billionsof dollars in discounted sales and thecross-subsidization necessary mayhave created additional pressure onmanufacturers to increase list price.Growth in InternationalPrice ControlsThe global financial crisis in 2008spurred austerity measures inmost European countries, including more aggressive use of existingdrug price controls. Between 2010and 2011, 23 countries implemented 89 distinct measures to containgovernment spending on prescription drugs. Most used their single-payer healthcare systems toimpose drug price controls alongside increased copayments, value-added tax rates on prescriptiondrugs, and other measures.8In 2013, the World HealthOrganization published a paper de-

Ii. What’s The Problem 15 scribing the growing use of external reference pricing, or the practice of using the price of a medicinein one or several countries to derivea benchmark or reference price forthe purposes of setting or negotiating the price of the product in a given country.9 Every time one countrydemands a lower price, it leads to alower reference price used by other countries. Such price controls,combined with the threat of marketlockout or intellectual property infringement, prevent drug companies from charging market rates fortheir products, while delaying theavailability of new cures to patientsliving in countries implementingthese policies.ii. Where We Are TodayIndustry ImpactThe loss of patent exclusivity on successful products, new ACA taxes, andrequirements to extend higher rebates and discounts to a markedly increased Medicaid and 340B population created an estimated 200 billionof downward pressure on pharmac