BILL ANALYSIS Ó
AB 463
Page A
Date of Hearing: April 28, 2015
ASSEMBLY COMMITTEE ON HEALTH
Bonta, Chair
AB
463 (Chiu) - As Introduced February 23, 2015
SUBJECT: Pharmaceutical Cost Transparency Act of 2015.
SUMMARY:
1)Requires that pharmaceutical companies file an annual report
with the Office of Statewide Health Planning and Development
(OSHPD) regarding the pricing of prescription drugs.
Specifically, this bill:
1)Requires that a pharmaceutical manufacturer that sells a
prescription drug in California file a report with OSHPD if
the wholesale acquisition cost (WAC) of the drug is more than
$10,000 annually or per course of treatment. The report must
include the following:
a) The total cost of production of the drug, including:
i) Research and development costs, both to the
manufacturer and any predecessor companies;
ii) Clinical trial and regulatory costs, both to the
manufacturer and any predecessor companies;
iii) Materials, manufacturing, and administration costs
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of the drug;
iv) Costs paid by any other entity, including federal,
state, or other governmental programs or any form of
subsidy, grant or other support;
v) Acquisitions costs of the drug, including patents,
licensing, or acquisition of another corporate entity;
and,
vi) Marketing and advertising costs for the promotion of
the drug.
b) A cumulative annual history of the average wholesale
price (AWP) and WAC increases, and which month the
increases took effect;
c) Total company profits attributable to the drug; and,
d) Total amount of financial assistance the manufacturer
has provided through patient prescriptions assistance
programs, if available.
2)Requires that the information provided in this report be
audited by a fully independent third-party auditor prior to
filing.
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3)Requires that the report be filed with OSHPD annually, on a
form prescribed by OSHPD, no later than May 1 of each year.
4)Requires OSHPD to issue an annual report to the Legislature
outlining the information submitted pursuant to this section,
and that OSHPD post the report publicly on its Website.
5)Requires OSHPD to convene an advisory workgroup to develop the
submission form. Specifies that the workgroup must include, at
least, representatives from the pharmaceutical industry,
health care service plans and insurers, pharmacy benefit
managers, governmental agencies, consumer advocates and
physicians.
EXISTING LAW:
1)Establishes OSHPD, and designates OSHPD as the single state
agency to collect specified health facility or clinic data for
use by all state agencies.
2)Requires hospitals to make and file with OSHPD certain
specified reports, including a Hospital Discharge Abstract
Data Record, an Emergency Care Data Record, and an Ambulatory
Surgery Data Record..
3)Requires OSHPD to compile and publish summaries of individual
facility and aggregate data that do not contain
patient-specific information for the purposes of public
disclosure.
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FISCAL EFFECT: This bill has not been analyzed by a fiscal
committee.
COMMENTS:
1)PURPOSE OF THIS
BILL. The author asserts that as prices for both new and
existing prescription drugs continue to rise, it is critically
important to analyze drug price and underlying costs
associated with individual medicines to inform the development
of policies that will ensure access to affordable medications.
Legislation is needed to enhance transparency in prescription
drug pricing so policymakers and purchasers can deliver on the
promise of health care coverage and affordability. According
to the author, manufacturers should report data to the State
of California in order to provide taxpayers, policymakers and
consumers with insight into cost centers associated with drug
development and availability.
2)BACKGROUND. Specialty drugs offer striking therapeutic advances for a
range of very serious conditions, including cancer, hepatitis
C, rheumatoid arthritis, and multiple sclerosis. The high
costs of specialty drugs are placing an increasing burden on
payers, employers, and patients. Specialty drugs' high prices
raise questions about their affordability, whether their cost
is worth the clinical benefits they provide, and the financial
model of the current healthcare system. Notably, new
Hepatitis C virus (HCV) treatment options that cure the
underlying disease with remarkable efficiency offer a drastic
improvement over previous therapies. Payment systems will be
stressed in the short run by this cure, but will benefit in
the long run by the avoided downstream costs such as liver
transplants. Policy makers are faced with balancing the need
to reward pharmaceutical breakthroughs in order to ensure the
innovation of future cures with the fact that payers and
patients have limited resources to afford very high prices.
3)WHAT MAKES A DRUG "SPECIAL"? Historically, a majority of
drugs approved by the US Food and Drug Administration (FDA)
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were small-molecule products, manufactured using simpler
processes, typically self-administered, and most often
dispensed through retail pharmacies. Today, many drugs being
approved each year are being lumped into a poorly defined
group known as "high-priced specialty drugs." These drugs are
often large molecule or biologic products; which means they
are produced using advanced biotechnology and may require
special administration, monitoring, and handling. According
to a 2012 report by United Healthcare<1>, treatment for
complex or life-threatening health conditions now includes the
use of certain drugs broadly referred to as specialty drugs.
While no standard definition exists, specialty drugs generally
are defined as having one or more of the following
characteristics:
a) Complex to manufacture, requiring special handling and
administration;
b) Injectable or oral, self-administered or administered by
a health care provider;
c) Costly, both in total and on a per-patient basis (taken
by a relatively small share of the population who have
complex medical conditions); or,
d) Difficult for patients to take without ongoing clinical
support (making them challenging for providers to manage).
----------------------
<1>
http://www.unitedhealthgroup.com/~/media/UHG/PDF/2014/UNH-The-Gro
wth-Of-Specialty-Pharmacy.ashx
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Historically, specialty drugs were usually injectable drugs
and were used to treat conditions like cancer, rheumatoid
arthritis, multiple sclerosis, and growth disorders; today,
their use has expanded beyond those conditions to include
treatment for other chronic and inflammatory conditions and
through other modes of administration. The FDA has approved
about 300 drugs which many consider "specialty," compared to a
mere handful available two decades ago. In recent years 70%
of new drugs approved by FDA have been specialty drugs.
4)EXPENSIVE AND SPECIAL. Most of the conditions targeted by
these specialty drugs tend to be chronic and progressive in
nature and can impact quality of life, along with morbidity
and mortality. Examples include growth hormone disorders,
rheumatoid arthritis, asthma, multiple sclerosis, hepatitis C,
hemophilia, cancer, and lupus. Cancer drugs represent a very
large segment of specialty drugs, and can cost up to $10,000
per month. Cancer drugs traditionally are delivered either
through IV fluid or through injection in a physician's office
or hospital, and were often covered through the plan's medical
benefit, rather than pharmacy benefit. Recently, oral
anticancer medications have also been used in cancer treatment
either as an adjunct to IV therapy, as a substitution for IV
therapy, or alone. Oral anticancer medications are being
prescribed more frequently for cancer treatment, and an
estimated 25% of anticancer agents currently in development
are oral cancer treatments. With the advent of oral
chemotherapeutics, and recent changes in benefit designs, some
of most expensive drugs have been shifted to pharmacy benefit
instead of medical benefit.
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Another group of high-cost specialty drugs are "orphan drugs,"
those that are developed to treat very rare diseases. The FDA
provides orphan status to drugs and biologics which are
intended for the treatment, diagnosis or prevention of rare
diseases/disorders that affect fewer than 200,000 people in
the U.S., or are not expected to recover the costs of
developing and marketing a treatment drug. Because orphan
drugs treat very rare conditions, their high price tag is
often justified to balance the need to fund manufacturers'
research and development toward medical breakthroughs that
might not otherwise happen. In recent years, concerns have
been raised by payers that manufacturers are charging prices
typically reserved for orphan drugs for new drugs that treat a
significantly larger population. Due to expected approval of
more specialty drugs, the movement of expensive drugs into
pharmacy benefits, and charging specialty drug prices for
non-specialty drugs, the high cost of prescription drugs is at
the forefront for the public, payers, and policymakers.
5)COST SHARING TIERS. Prescription drug benefits are a specific
type of covered benefit usually subject to cost sharing as
part of the medical benefit or a separate outpatient
prescription drug benefit. The separate drug benefit designs
can be characterized by the number of tiers (up to four) into
which drug classes and specific medications are assigned.
Each tier has a distinct cost sharing level and/or form; the
lower tiers are less costly to both the enrollee and to the
health plan or insurer. Some payers use a four-tier system
which includes specialty drugs in the fourth tier; typically
the most costly drugs. The four-tier design frequently
results in greater enrollee out-of-pocket expenses.
In 2013, the annual California HealthCare Foundation employer
benefits survey found that 66% of covered California workers
had a three- or four-tier cost sharing formula for
prescription drugs. Nationally, 82% of covered workers were
subject to three- or four-tier formulas.
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6)The $1,000 pill. In December 2013, the FDA approved a drug
produced by Gilead Sciences called Sovaldi for the treatment
of HCV. Sovaldi represents a significant advance in therapy
for HCV as it provides a higher cure rate, allows for a
shorter duration of treatment, has fewer adverse side effects,
and opens up treatment options for individuals with comorbid
conditions for which traditional treatments are
contraindicated. While the drug has been found to be
remarkably effective (curing 90% or more patients over the
course of 12 weeks, according to the FDA), Gilead Sciences has
come under heavy fire for the price of the drug treatment.
Sovaldi is priced at $1,000 per pill, which brings the cost
associated with a 12-week treatment regimen to $84,000.
Gilead Sciences reported sales of $10.3 billion for Sovaldi in
2014 alone. Critics have raised additional concerns due to
variation in costs globally. According to an April 13, 2014
article in the San Francisco Chronicle, Gilead prices the
treatment at $57,000 in the United Kingdom, $66,000 in
Germany, while in Egypt and other developing countries the
treatment costs $900, which is 99% less than the U.S. cost.
After nearly a year of market exclusivity for Sovaldi, in late
2014 Abbvie gained FDA approval to market rival HCV treatment
Viekira Pak. Pharmacy benefit managers (PBMs), like
ExpressScripts and CVS Caremark quickly signed deals agreeing
to exclusive coverage for specific brand drugs on their
formulary, in return for a hefty price discount on the drug.
At least two more competitor drugs are currently in final
stages of clinical trials and could be on the market in the
near future; the increased competition in the market is
expected to bring costs down significantly. In early 2015,
Gilead announced it would be offering rebates of up to 46% on
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Sovaldi now that multiple rival drugs have entered the market.
Many insurers and government programs have tried to limit
their financial exposure by reserving Sovaldi and other new
drugs for patients with more advanced liver disease. This has
raised concerns among patient advocates that cost-containment
measures might force patients to wait until their condition
has dangerously worsened before they are deemed eligible for
the cure.
7)INCREASING DRUG COSTS. A report by the IMS Institute for
Healthcare Informatics states that total U.S. spending on
medicines was $373.9 billion in 2014, an increase of 13.1%
from the amount spent in 2013<2>. This is the highest single
year increase since 2001 (when growth reached 17.0%). This
increase is attributed to a combination of increased pharmacy
usage by newly insured patients, increasing drug costs, and
fewer branded drugs losing patent exclusivity to generics.
Spending on specialty drugs dwarfs all other drugs. Generic
drugs represent nearly 80% of drugs dispensed, and of the
remaining branded drugs, only about 3% are specialty drugs.
Despite that, over the past five years, specialty medicines
have accounted for 73% of total prescription drug spending
growth.
According to Centers for Medicare & Medicaid Services (CMS),
prescription drugs account for 10% of all healthcare dollars
spent. Spending increases in all categories of health care
--------------------------
<2> IMS Institute for Healthcare Informatics. Global Outlook for
Medicines Through 2018. November 2014.
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each year. The CMS National Health Expenditures (NHE) report
found that healthcare spending in all segments grew 3.6% in
2013. CMS projected prescription drug spending growth would
be 6.4% in 2015, driven by increases in the use of
prescription drugs among people who are newly insured and
those who move to more generous insurance plans as a result of
the premium and cost-sharing subsidies offered by the Patient
Protection and Affordable Care Act (ACA). In late 2014, IMS
projected that despite a temporary increase in U.S. spending
growth in 2014, it would moderate to 5 to 8% over the next few
years, coming back in-line with overall healthcare spending
growth.
8)EXCLUSIVITY, PATENTS, AND GENERIC DRUGS. When new drugs come
to market, they are patented for approximately 10 to 12 years.
The time that a patent covers starts from the initial FDA
application, therefore, while patents generally cover a
molecule for 20 years, the time it takes each drug to come to
market varies, and therefore the remaining patented time
varies among drugs. As drugs come off patent the presence of
generic competition dramatically reduces price. For example,
blockbuster drugs such as Lipitor, Cymbalta and OxyContin have
recently come off patent as part of a wave of billions of
dollars' worth of brand blockbuster medications losing patent
protection<3>. This led to unprecedented availability of
generic drugs, while the resulting competition among
manufacturers and suppliers of new generic medications drove
down drug costs substantially in most of the top therapy
classes. The high rate of generic utilization in recent years
has led to more than 80% of prescriptions being now filled
with generic medicines. However, the pace of price reductions
has begun to slow and some generic drugs; for example,
doxycycline and oxycodone, available generically for many
years, experienced considerable price increases in 2014.
9)PRICE BENCHMARKS. Knowing how much a drug costs is difficult;
---------------------------
<3> The 2014 Drug Trend report, Express Scripts Labs, March 2015
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there are many different prices for each drug and different
ways of expressing those prices. In the US, the two most
common ways of stating drug prices are the WAC and AWP.
Neither one, though, is a real price that anyone pays, nor are
they what their names imply. Rather, they're standardized
ways of expressing a price, thus allowing comparisons to be
made from one drug to another. AWP is a benchmark that has
been used for over 40 years for pricing and reimbursement of
prescription drugs for both government and private payers.
Initially, the AWP was intended to represent the average price
that wholesalers used to sell medications to providers, such
as physicians, pharmacies, and other customers. However, the
AWP is not a true representation of actual market prices for
either generic or brand drug products. AWP has often been
compared to the "list price" or "sticker price," meaning it is
an elevated drug price that is rarely what is actually paid.
AWP is not a government-regulated figure, does not include
buyer volume discounts or rebates often involved in
prescription drug sales. As such, the AWP, while used
throughout the industry, is a controversial pricing benchmark.
10)STICKER PRICE vs ACTUAL PRICE. The WAC price of a drug on
the market, as originally announced by the company is rarely
the price paid. The actual price paid by any one payer is
proprietary information, which complicates discussions of
value and cost to consumers. Drug companies negotiate with
payers - Medicare, Medicaid, insurers, and pharmacy benefit
plans - to set an initial gross sales price. Drug
manufacturers pay rebates back to government entities,
creating a difference between gross sales for a drug and net
sales. The rebates are not publicly available, and vary
highly among payers and for different drugs. Estimates put
them between 2% for innovative new drugs all the way to 60%
for drugs that have several competitors are generics on the
market.
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Federal law requires manufacturers to provide rebates to CMS
and state Medicaid agencies. The program requires a drug
manufacturer to enter into, and have in effect, a national
rebate agreement with the Secretary of the Department of
Health and Human Services (HHS) in exchange for state Medicaid
coverage of most of the manufacturer's drugs. These rebates
are paid by drug manufacturers on a quarterly basis to states
and are shared between the states and the Federal government
to offset the overall cost of prescription drugs under the
Medicaid program. According to the Department of Healthcare
Services (DHCS), drug manufacturers are required to pay a
Medi-Cal rebate for all outpatient drugs that are dispensed
and paid for by the Medi-Cal program. In addition, some
manufacturers have agreed to pay supplemental Medi-cal rebates
above the standard rebate. Federal law requires rebates for
prescriptions offered through the AIDS Drug Assistance Program
(ADAP), in part because of the high cost of HIV/AIDS
medications. According to the Kaiser Family Foundation, drug
manufacturer rebates account for 40% of the annual ADAP
budget<4>.
11)The cost of developing drugs. The research and development
process is complex, costly, and time-consuming. According to
the California Biotechnology Foundation, it takes 10 to 15
years and costs $1.2 billion, on average, to advance on
potential new medicine from a research concept to an
FDA-approved treatment. Failure is built into the research
system. Roughly 95% of candidates entering clinical trial
will eventually fail. On average, only one out of every 10
thousand potential new compounds becomes a new drug.
According to the Pharmaceutical Manufacturers of America
(PhRMA), out of every 5 to 10 thousand screened compounds,
only 250 enter preclinical testing, five enter human clinical
trials, and one is approved by the FDA.
---------------------------
<4>
http://kff.org/hivaids/fact-sheet/aids-drug-assistance-programs/
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Due to the complexity and length of time invested in research,
it is difficult for analysts and researchers to assess exactly
how much it costs to bring one drug to market. The timeframe
of development can last for decades, and may be a combination
of efforts from multiple companies or previous research on
other drugs. An analysis of publicly available data performed
by Forbes magazine in 2013 estimated the cost of bringing a
drug to market can vary from $350 Million to $4.5 Billion<5>.
12)PUBLICLY AVAILABLE INFORMATION. Publicly traded
manufacturers report significant amounts of financial data to
shareholders and the government in annual U.S. Securities and
Exchange Commission filings. The items include such things as
research and development costs, marketing, sales, advertising,
information technology, legal defense, the cost of raw
materials, and more. These reports are filed on an annual
basis, and not compiled over the lifetime of drug development.
Additionally, these reports contain aggregate information for
all products on the market and currently being developed by a
manufacturer. Some small companies might bring a single drug
to market in a given year, but larger companies might have
many drugs approved for market every year. For example, in a
recent filing by Pfizer they stated that in one year they had
276 projects in all phases of development; 13 were in phase 3
clinical trials, 65 in earlier phases of clinical trials, and
---------------------------
<5>
http://www.forbes.com/sites/matthewherper/2013/08/11/how-the-stag
gering-cost-of-inventing-new-drugs-is-shaping-the-future-of-medic
ine/
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the remaining 200 were in very early discovery phases.
13)SUPPORT. Supporters believe that this bill is necessary due to the
lack of transparency surrounding the pricing of prescription
drugs. Proponents state that the public and policymakers
should know more about the pricing of drugs in order to
determine if the value is worth exorbitant costs. The ACA has
increased transparency across our health care system but
unfortunately not regarding prescription drug costs and
pricing. Anthem Blue Cross writes that this bill will bring
the increasing cost of pharmaceuticals into to the broader
conversation around how to control health care costs in the
coming years. While the focus of controlling costs is
generally directed at health plans and insurers, it is time
for drug manufacturers and other entities to participate in
this conversation and offer solutions to reduce costs. The
California School Employees Association and other supporters
believe that the information provided by this bill will
provide accountability into the pricing process and help the
public know what the costs are based on. AIDS Healthcare
Foundation believes that the lack of drug pricing transparency
has been a detriment to the state and its citizens for too
long. Many of the supporters argue that high prescription
drug prices affect the overall cost of delivering health care,
which threatens the long-term success of the ACA and put
enormous cost pressures on state and local governments.
Health Net states that health plans, insurers, hospitals, and
physicians are all required to submit extensive cost and
quality data to regulators to guide them in their policy
making. If the high cost of these new specialty drugs is
justified by the investment the pharmaceutical companies have
made to develop, manufacture, and market these drugs then the
reporting requirements of this bill will demonstrate this.
14)OPPOSITION. Opponents argue this bill will result in increased costs
without tangible results. The Biotechnology Industry
Organization states that this bill does not provide adequate
context for the complex issue of pricing, which is based not
just on manufacturers' costs, but also on market forces and an
assessment of value that cannot simply be reduced to a few
lines on a balance sheet. The Pharmaceutical Research and
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Manufacturers of American (PhRMA) opposes this bill and claims
it would create new burdensome reporting requirements on an
industry that should otherwise be dedicating its resources to
bringing new therapies and cures to prescribing physicians and
their patients. PhRMA asserts that the information required
by this bill would be difficult to ascertain, and complying
with the reporting requirements imposed in the bill will be
costly for the life sciences industry. The Orange County
Business Council states that these types of disclosures are
limited due to confidentiality and proprietary reasons because
substantial competitive information can be gleaned from costs
associated with specific research and development information
and sales and marketing information by marketplace
competitors.
15)RELATED
LEGISLATION. AB 339 (Gordon) limits copayments, coinsurance,
and other cost sharing for specialty drugs to 1/24 of the
annual out-of-pocket limit applicable to individual coverage
for a supply of up to 30 days (about $275 for the 2015 plan
year). Prohibits a plan or contract from placing all or most
of the prescription medications that treat a specific
condition on the highest cost tier tiers of their drug
formulary. Creates a framework for assigning specialty drugs
into formulary tiers. This bill is pending in this Committee.
16)SUGGESTED AMENDMENTS:
a) Finite timeframe of reporting. Generally accepted
accounting principles require companies to keep records
going back seven years. As drafted, this bill would
require disclosure of financial information regarding the
entire development process of a drug, which could
potentially go back over a decade or more. The author
should limit disclosure of information going back a finite
number of years, such as the previous seven years.
b) Reporting the cost of failed drugs. Most potential
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compounds never make it all the way to being an approved
drug. Companies invest significant resources in research
and development of projects that ultimately fail, which is
a factor in determining their business model. The author
should amend this bill to include a provision for reporting
aggregate expenditures on developing drugs that fail to
succeed through the process to market approval.
c) Proprietary and contract information. Some of the
information that would be provided by companies pursuant to
this bill might be proprietary. For example, wholesale
materials and manufacturing costs could reveal proprietary
business information. The licensing and acquisition costs
of purchasing another business are often kept confidential
under the terms and conditions of that contract. The
requirements of this bill might open the state to
liability. The author should amend the bill to ensure that
proprietary or trade secreted information is kept
confidential by OSHPD.
REGISTERED SUPPORT / OPPOSITION:
Support
AIDS Healthcare Foundation
America's Health Insurance Plans
Anthem Blue Cross
Association of California Life and Health Insurance Companies
Blue Shield of California
California Association of Health Plans
California Hepatitis Alliance
California Labor Federation
California Nurses Association
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California PACE Association
California Professional Firefighters
California School Employees Association
California Teachers Association
Consumers Union
Fresno Chamber of Commerce
Greater West Covina Business Association
Health Access
Health Net
Industry Manufacturers Council
Kaiser Permanente
Laborers International Union of North America Local 777 and 792
Los Angeles Area Chamber of Commerce
Molina Healthcare
Montebello Chamber of Commerce
National Multiple Sclerosis Society
Ontario Chamber of Commerce
Richmond Chamber of Commerce
San Gabriel Valley Economic Partnership
San Gabriel Valley Regional Chamber of Commerce
San Ramon Chamber of Commerce
SEIU California
Small Business Majority
State Building and Construction Trades Council, AFL-CIO
Torrance Area Chamber of Commerce
Torrance Area Chamber of Commerce Governmental Affairs Policy
Group
UFCW Western States Council
Valley Industry and Commerce Association
Young Professionals Chronic Disease Network
Opposition
AbbVie
Allergan
Amgen
Astellas Pharma
BayBio
Biocom
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Biogen
Bayer
BioMarin Pharmaceutical
Biotechnology Industry Organization
Boehringer-Ingelheim
California Healthcare Institute
California Manufacturers & Technology Association
Eisai
Genzyme
Irvine Chamber of Commerce
Orange County Business Council
Otsuka Pharmaceutical Development & Commercialization, Inc
Pfizer
Pharmaceuticals Research and Manufacturers of America
Sanofi
Sunovion
Takeda Pharmaceutical Company
TechNet
Analysis Prepared
by: Dharia McGrew / HEALTH / (916) 319-2097