National State Attorney General Program

at

Columbia Law School

Pharmaceuticals Conference

May 11, 2007

Director

Policy & Strategy

John Rother, JD

Rx Drugs in Context

Costs for National Health Expenditures

Bill

ions

Overall Medicare Costs compared to Overall Health Costs

Projections

Source: CMS, National Health Accounts

$0

$600

$1,200

$1,800

$2,400

$3,000

$3,600

1993 1998 2002 2004 2006 2014

Rx Drug Increases in 10 years (1995 thru 2004) Big Portion of Rising HC Bill

4.3%

14.9%

0.9%

4.8%

3.5%

9.1%

2.9%

2.4% 4.3%

0.8%2.8%1.5%

26.8%

20.9%

Hospital Care

Physician and Clinical Services

Dental Services

Other Prof. Services

Home Health Care

Other Non-Durable Medical Products

Rx Drugs

Durable Medical Equipment

Nursing Home Care

Other Personal Health Care

Admin. & Net Cost of Priv. HealthInsurancePublic Health Activity

Research

Structures & Equipment Sou

rce:

Cal

cula

tions

by

PP

I AA

RP

usi

ng C

ente

rs fo

r M

edic

are

& M

edic

aid

Ser

vice

s, O

ffice

of t

he A

ctua

ry, C

Y 1

960-

2004

Nat

iona

l Hea

lth E

xpen

ditu

re D

ata

Hospital CareHospital Care

Rx DrugsRx Drugs

Physician &Physician &Clinical Clinical ServicesServices

27%

21%15%

U.S. Total Drug Expenditures as Percent ofNational Healthcare Expenses: 1988 to 2010

23.8%

10.7%

19.2%

16.6%

8.1%

0%

5%

10%

15%

20%

25%

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

% of NHE

Source: Compiled by the PRIME Institute, University of Minnesota from data found in Pharmaceutical Benefits Under Medical Assistance Programs, National Pharmaceutical Council, 1975 to 2002 and in HCFA Form 64.

Doubled share in 10 years

Projected

Will havetripled share

22.1%

Today

0%

10%

20%

30%

40%

50%

60%

Cumulative Rise 2000 thru 2006

Average Rx Manufacturers’ Price Increases Far Outpacing Inflation

Yea

rs r

efer

to c

hang

e fr

om p

revi

ous

year

. Sou

rce:

AA

RP

Pub

lic P

olic

y In

stitu

te A

pril,

200

7

Ave

rag

e %

Ch

ang

e

Inflation 20.3%

53.6%

$13

$31

$30

$20

$0

$20

$40

$60

$80

$100

Out of Every $100

Distribution of Gross Revenues for U.S. Drug Companies by Expense Type

Net Profit

Taxes & Other Costs

Cost of Production

Research & Development

Marketing, Advertising, & Administrative Costs

Source: Compiled by the PRIME Institute, University of Minnesota from data found in DHHS, CMS, Jan 2003, and

from Bloomberg, analysts models, & corporate annual reports. Presented by AARP Rx Watchdog Forum February 2005

$6

Generic Substitution Rates in USA, 1984-2006

•More than half of Rx drugs dispensed in USA are GENERIC

•Yet they account for only 13% of total Rx costs

Pe

rce

nt o

f Rx

Fill

ed

0%

10%

20%

30%

40%

50%

60%

USA in a Global Context

-$500

$0

$500

$1,000

$1,500

$2,000

$2,500

Bil

lio

ns

of

do

lla

rs

Above ESAWESAW

Excesses, Gaps in US HC Spending

ESAW = Estimated Spending According to WealthSource: OECD; MGI analysis McKinsey & Company

28%

40%36%

27%-57%

-70%82%

15%

Below ESAWOverall

Rx

Lessons from Europe

• Price transparency - a precondition for good policy and fair competition

• U.S. prescription drug pricing now takes place in a black box

The “Black Box” of U.S. Pharmaceutical Pricing

U.S. Pharmaceutical Supply & Payment

DrugManufacturer

ConsumerPharmacy

Pharmacy Benefit Manager(PBM)

Employer/Plan Sponsor

or Health Insurer

WholesaleDistributor

U.S. Pharmaceutical Supply & Payment

Source: AARP---Based on work of The Health Strategies Consultancy (now Avalere Health) for the Kaiser Family Foundation

DrugManufacturer

ConsumerPharmacy

Pharmacy Benefit Manager(PBM)

Employer/Plan Sponsor

or Health Insurer

WholesaleDistributor

U.S. Pharmaceutical Supply & Payment

DrugManufacturer

Pharmacy

M.D.

Advertising

RxRxRx

Consumer

Payment for Marketing and Advertising

Source: AARP---Based on work of The Health Strategies Consultancy (now Avalere Health) for the Kaiser Family Foundation

Lessons from Europe (con’t)

• Comparative Effectiveness information held by the industry and by other governments; using effectiveness as a basis for pricing has been successful in Europe.

• Truly innovative medicines should receive high reimbursement; “me-too” drugs required to show cost savings

State & Federal Strategies to Lower Rx Drug Costs

State Strategies

• Large purchasing pools

• Comparative Effectiveness[Oregon Evidence-based Practice Center]

• Transparency [e.g. NY program requiring that pharmacies post prices online]

• NH court case on physician profiling

Federal Strategies

• Secretarial negotiation for Medicare– Very narrow rejection in Senate –

needed 60 votes– With no formulary – CBO estimates no

savings– Veto threat

S. 1082, the Prescription Drug User Fee Amendments sponsored by Senator Kennedy– Reauthorize Prescription Drug User Fees that help fund FDA– Also includes some Rx drug safety provisions and other

amendments– Currently on the Senate floor (and will likely pass by today)

S. 316 – the Kohl-Leahy bill – Would prohibit generic manufacturers from accepting

anything of value as part of a patent settlement with a brand name company

– Offered as an amendment to PDUF– Unclear whether will pass as part of that measure 

Federal Strategies

S. 1088 – the Stabenow-Lott bill– “Lower Prices Reduced with Increased

Competition and Efficient Development of Drugs” Act

– Many of its provisions on PDUFA, offered as part of a “managers’ amendment”

– Expected to pass

S. 623 – the Clinton-Schumer biologics bill.– As part of PDUFA, there was a “sense of the

Senate” amendment that essentially said that the Senate HELP Committee should report out a generic biologics bill by June 13

– Key players are working on proposals

Federal Strategies

HR 1038 –– Waxman-Emerson biologics proposal -

identical to the Clinton-Schumer proposal - issue moving more slowly in the House, though two hearings already held

HR 380 –– Emanuel-Emerson importation proposal– This is the House companion to Dorgan-

Snowe

Federal Strategies

PDUFA Reauthorization in the House– The House moving more slowly than Senate;

hasn’t drafted language yet, just starting process

– Expected to move in the House, get conferenced with the Senate bill over the summer

– Unknown at this time whether the House will try to include Rx safety and other measures on the PDFUA reauthorization or whether it will simply move a “cleaner” piece of legislation.

Federal Strategies

HR 1902 – the Rush-Waxman legislation– similar to the Kohl-Leahy bill– Energy & Commerce Committee held a hearing on this

issue last week– Unknown at this time whether sponsors will try to attach

this to PDUFA

HR 2184 – Comparative effectiveness research – Monday, Rep. Allen (D-ME) introduced legislation to

expand comparative effectiveness research (including a significant increase in funding)

– Senator Clinton working on similar legislation

Federal Strategies

Federal Strategies

S. 242 – the Dorgan-Snowe importation legislation– Co-sponsored by 33 Members of Senate– Allows for safe importation of Rx drugs from abroad– Offered as amendment, the

measure passed by voice vote Monday– However, “poison pill” amendment sponsored by

Senator Cochran also passed by a vote of 49-40• Requires that before any importation system can be

implemented the Secretary of HHS must certify safety of imported drugs

• Similar provision already part of current law

• Stronger political support possible if Canada does industry negotiating for us

• Unlikely to produce much in short-term savings• Plays off of public anger in being played for fools

Longer-Term Agenda

• Generic biologics • Continuing Comparative Effectiveness

studies • Focus on marketing costs

– DTC advertising– Physician detailing– Payments to physicians

• “Date certain” patent expiration policy

Consumer Strategy

Consumer campaign for “Wise Use” – Counters detailing, DTC and other

questionable marketing

– Promotes use of generics

– Fosters full compliance• Continue taking full prescription until finished• Continue on with maintenance drugs

– Encourages shopping around for price

– Has patient proactively inform physician about every health and Rx substance taken

– Focuses patients on knowing side effects to watch for

Pharmaceuticals Only Part of Reform

• Rx pricing, patent, advertising, and detailing practices only one component of broader health reforms needed

Future Agenda

• The AG’s nationwide have great opportunities to influence pharmaceutical pricing by creating:

– Better market rules– More effective consumer protections

National State Attorney General Program

at

Columbia Law School

Pharmaceuticals Conference