At Drug Hearing, Senators Discuss Meanings Of Price And Value—And Debate Health Reform

On Tuesday, June 13, the Senate Health, Education, Labor, & Pensions (HELP) Committee held the first of three planned hearings on high drug prices. This hearing, titled “How the Drug Delivery System Affects What Patients Pay,” was designed to elicit basic information about how drug prices, overall spending, and patient costs have changed over time, and about the drivers of these metrics. The hearing featured four non-industry witnesses, with the plan that industry representatives will be included in future hearings.

One of the most important points to come out of the hearing was that there is bipartisan concern about high drug prices. Even if there is as yet little agreement on what to do about it, Senators of both parties came out against the heavy burdens high drug prices have put on patients. More specifically, there were a number of topics which dominated the discussion, and I review three key areas below.

The Elephant In the Room

Although the stated focus of the hearing was about drug prices, the real focus of the hearing quickly became clear. Every Senate Democrat on the committee began their allotted time by discussing health care reform, blasting the secretive process by which Republicans are moving their health care bill through the chamber and opposing the bill’s substance. Ranking Member Patty Murray (D-WA) even asked Chairman Lamar Alexander (R-TN) if he would hold hearings on the bill. He responded that none were planned, and argued that her question was more appropriately directed at Senator Hatch, the Chair of the Finance Committee. Of course, the HELP Committee does also have jurisdiction over health care reform (the two committees oversee different portions of the issue), and HELP held dozens of roundtables, hearings, and walkthroughs in the lead-up to the passage of the Affordable Care Act.

The partisan dynamic became even more pronounced when Chairman Alexander and Senators Susan Collins (R-ME) and Lisa Murkowski (R-AK) left to attend a private health care lunch with President Trump, leaving Senator Bill Cassidy (R-LA) as the sole Republican in the room with half a dozen (and at times, more) Democratic Senators, each of whom took the opportunity to criticize the health care bill. Senator Elizabeth Warren (D-MA) in particular took pains to link the question of drug access and affordability to the question of health care reform. For instance, health plans offered on the individual market prior to the Affordable Care Act were not required to cover prescription drugs. Further, if estimates that the Republican bill would kick more than 20 million Americans off of insurance are accurate, those Americans would presumably lose their existing access to affordable medications.

Which Prices Matter, and Why?

A number of Senators focused on the distinction between the list price of a drug, the price that is publicly reported by pharmaceutical companies, and the net price of the drug, a confidential price that takes into account the discounts and rebates provided in the system. Typically, discussions about year-over-year price increases have focused on the list prices of drugs, and net prices rise more slowly. However, both are still rising faster than the increase seen more generally in health care.

The pharmaceutical industry has often taken the position that the confidential net price is the one that should matter in analyzing the problem of high drug prices, not the public list price. But as a number of Senators and panelists noted at the hearing, patients’ cost-sharing obligations are often calculated on the basis of list price, not the net price their insurer has negotiated. When coupled with the rise of high-deductible health plans, patients are increasingly being asked to pay large amounts out of pocket for their prescription drugs, a dynamic which has fueled much of the public anger over high drug prices.

As was brought out in a colloquy between Senator Robert Casey (D-PA) and panelist Dan Mendelson of Avalere Health, these higher prices may lead to decreased patient adherence—and decreased patient adherence may increase costs elsewhere in the system. For instance, chronic disease patients who do not stay on top of their medications may be more likely to be hospitalized. A number of Senators, particularly Senator Cassidy, expressed confusion and concern over this net price/list price dynamic, which we should expect to reappear in future hearings.

Being Specific About Value-Based Pricing

From the very beginning of the hearing, we heard a lot about value-based pricing. Senators and panelists expressed optimism (sometimes cautious, sometimes not so much) about the possibility that value-based contracts for drugs may help achieve a number of benefits in the system. There’s just one problem: it wasn’t clear that everyone had the same idea of what “value-based pricing” was. This matters, because when Senators and panelists invoked particular benefits, those may be true of only some types of value-based contracts.

The administratively simplest form of value-based contracting would be to implement a system like the one used by the Institute for Clinical and Economic Review (ICER), which aims to calculate a single price for a particular drug depending on its value to patients: How much additional health does the drug provide, on average, and how much is that “worth” to society? It is this type of value-based pricing panelist Professor Gerard Anderson of Johns Hopkins Bloomberg School of Public Health had in mind when he stated that many of these formulas require us to calculate the value of a human life.

But this is not the type of contract industry most commonly means. Helpfully, Senator Todd Young (R-IN) asked the panelists to focus specifically on outcomes-based contracts. These contracts can be structured in many ways, but a common arrangement is for a drug company to commit to providing a rebate to payers if a drug fails to meet particular targets for health improvements. Mendelson argued that there are a number of legal and regulatory obstacles, particularly including the Stark laws and the Medicaid best-price rule, which would need to be changed to enable these contracts.

At least as regards the Medicaid best-price rule, I and others have argued that it is not the monolithic barrier to these contracts that it is often presented to be. Further, the best price rule by law does not affect contracts in Medicaid itself or in Medicare Part D. If the government is truly interested in these types of agreements, it should consider leading by piloting them through its own programs.

Perhaps most importantly though, as noted by panelist Allan Coukell of Pew, “It is as yet unclear whether [value-based contracts] will reduce spending.” For some drugs, we might end up spending less. But for others, we might end up spending more. Outcomes-based contracts and other forms of innovative contracting arrangements may provide more flexibility to both pharmaceutical companies and insurers, particularly regarding unproven therapies. Further, they may (but do not have to) better align payment with “value” in the ICER sense. But they do not necessarily lead to lower spending overall, and they must be part of a broader discussion about high drug prices.

Over the next few weeks, we can expect Affordable Care Act repeal to dominate the health care landscape. But as Senator Alexander noted, the committee plans to hold a second hearing next month on the drug development process, so stay tuned.

Note:  The author serves on ICER’s Midwest Public Advisory Council.

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