Rx List Price Inflation Penalty Endorsed By US HHS Secretary

Senate Finance Committee’s approach to penalize companies for raising WAC list prices is not a ‘price control,’ but a reasonable approach to change the incentives that distort pricing in the supply chain, US HHS Secretary Alex Azar says.

HHS is firmly in favor of the inflation penalty model included in the Senate Finance Committee’s bipartisan drug pricing bill, the US Health & Human Services Secretary Alex Azar said in his testimony to the committee on 13 February.

The Trump Administration has made clear that it supports the Finance effort, but has stopped short of an explicit endorsement of the bill. That is clear in the President’s budget proposal for fiscal 2021: rather than itemize proposed changes to address pricing, the budget sets aside $135 billion in savings to come via legislation. (Also see "Trump Administration Signals Deference To Congress On Drug Pricing Policy" - Pink Sheet, 11 Feb, 2020.)

Azar maintained that approach during the first hearing in the annual cycle of budget testimony: the President is eager to sign meaningful, bipartisan legislation, Azar said, and the Finance plan “is certainly one that fits the bill.” However, “if there are other approaches that can get to the floor and get passed” the Administration is eager to work on those as well.

Having toed the line of not endorsing the Finance bill explicitly, Azar then made clear his enthusiasm for the committee’s approach to inflation caps, which would require manufacturers who raise WAC (wholesale acquisition cost) list prices to repay those increases to Medicare Part D – even if the underlying net Medicare price is not increasing.

The inflation provision is unusual: rather than recouping inflationary increases in Part D itself – the way the Medicaid program recoups inflationary increases in net Medicaid prices – the bill would instead penalize list-price increases that often are not reflected in net Part D prices. That provision of the bill is a sticking point for many Senate Republicans, and actually prompted the majority of Finance Committee GOP members to vote against the bill in mark-up. (Also see "Point-Of-Sale Rebates May Be Added To US Senate Finance Drug Pricing Bill" - Pink Sheet, 25 Jul, 2019.)

‘No Material Impact On Innovation,’ Azar Says

In an exchange with Delaware Democrat Sen. Tom Carper, however, Azar made clear his view that the approach has considerable benefits. Carper specifically asked Azar to respond to concerns by GOP members that the provision amounts to “price controls.”

“I fundamentally disagree with the notion that the inflation penalty provisions … constitute price caps or price controls,” Azar declared. “These are reasonable restrictions on price increases that create a financial disincentive to the year-after-year price increases that we see. As long as those incentives are in the system, we will continue to see year-after-year price increases.”

“These drug companies already sign contracts with the middlemen with long-term price predictability guarantees. This is not an alien concept for the drug companies,” he observed. “We would just see the benefit for our beneficiaries and taxpayers.”

Finance Committee Chair Chuck Grassley (R-IA) interjected to ask Azar to elaborate. The secretary cited  the overall impact of the proposed bill on the incentives in the supply chain via the proposed re-design of the structure of Part D itself.

“One of the important innovations of the Grassley-Wyden package,” he said, is to fundamentally change the status quo, where “the middlemen have every incentive to jack up the drug prices” in order to move beneficiaries as quickly as possible to the catastrophic portion of the benefit.

Azar was similarly direct in rebutting the claim that the Finance bill would adversely affect innovation. The legislation would “still leave plenty of room for profit margin” and would have “no material impact on innovation,” Azar told Carper.

The prominence of drug pricing themes was not surprising but still noteworthy in the context of other pressing issues, including the emerging SARS-CoV-2 virus, the ongoing regulatory debate over vaping, and the broader health care debate embodied in the Trump Budget and on the Presidential campaign trail.

In opening statements, Grassley began with the drug pricing issue; Ranking Democrat Ron Wyden (Oregon) closed with it. It was then the subject of the first question by Grassley to Azar, eliciting Azar’s praise for the Finance bill – and his message to his former colleagues in the pharmaceutical industry: “This is a reasonable package and it is bipartisan,” he said. “I don’t understand why big pharma isn’t supporting it. These are important reforms.”