News & Events

Capturing the Benefits of Competition for Patients

Speech by Scott Gottlieb, MD
Commissioner of Food and Drugs
America’s Health Insurance Plans’ (AHIP) National Health Policy Conference
“Capturing the Benefits of Competition for Patients”
March 7, 2018
Washington, DC

(Remarks as prepared for delivery)


Good morning, and thank you for inviting me to speak today about “Affording Tomorrow’s Cures.”

To some, this may seem to be an unfitting topic for me to discuss: the FDA, after all, doesn’t -- and shouldn’t -- regulate drug prices.

The FDA’s mission is to promote and protect public health, and helping ensure access to medicine is a vital part of this mission.

One of the primary ways that FDA helps create access is through efficient review of drug and biologic applications to determine if they’re safe and effective for their intended use. 

But Congress also has charged FDA with advancing policies that maintain a balance between encouraging and rewarding medical innovation and facilitating robust and timely market competition.

And access to medicines is a matter of public health.

I want to focus my remarks today on access to generic and other follow-on medicines and, in particular, on the market for biosimilars – or follow on versions of branded, innovator biologics.
Novel drugs can address unmet medical needs, promote our shared public health goals, and help reduce the costly morbidity from disease. 

To enable this innovation, I firmly believe in the importance of market based incentives that encourage continued entrepreneurship, investment and risk taking – all leading to the discovery and costly development of new medicines. The investment needed to underwrite the significant time and risk it takes to develop a novel medicine can be substantial.

We support this innovation, and will continue to do so.

At the same time, robust competition expands patient access to more affordable products like generics and biosimilars.

And it widens their public health benefits.

I’m concerned about that balance today. Because while we see a growing number of sponsors pursuing biosimilar development programs, the economics of development are currently unstable; and the pipeline of biosimilar products that we hope for could be dramatically affected by the weakening of market incentives to bring these products to patients.
While it can cost about $10 million to develop a generic version of a small molecule drug, the complexity of manufacturing and testing biosimilars currently requires much more significant outlays by biosimilar sponsors: typically $100 million to $250 million per program.

We’re committed to advancing policies that help make that process more efficient. But the cost of developing biosimilar drugs is always going to be substantially more expensive than copying a small molecule drug.

At the same time, biosimilars not only present opportunities for significant cost savings, they can dramatically expand patient access to therapies. One 2017 study from QuintilesIMS -- done at the request of the European Commission -- found that competition from the introduction of  biosimilars in the EU dramatically increased patient access. In fact, the report noted that “all products in these therapy areas…are contributing to [increased] patient access” as prices fall.  

Millions of American patients stand to benefit from increased utilization of lower-cost, high quality biosimilar products.

The public health benefits of a robust, competitive market for biosimilars are impossible for us to ignore.  Strong market incentives are critical to future biosimilar development in the same way these incentives are key for the development of innovator drugs and biologics.

FDA is invested in making sure that the new biosimilar pathway works, and that we can help facilitate a robust market for these products. So, we take note when we see market practices that can reduce the incentive for sponsors to invest in the development of biosimilars in the first place.

In competitive insurance markets, savings from the competition between branded drugs, generics, biologics, and biosimilars should be passed along to patients, employers, and payors. Or it can be redirected towards the coverage of new generations of innovative products that improve outcomes,  keeping overall healthcare spending growth in check, while offering a useful bundle of insured products and services. 

Insurance, after all, would be significantly less valuable if it didn’t include access to innovative products that can improve peoples’ health.

But I’m concerned that, in some cases, this isn’t the way markets are operating today. It’s a particular concern when it comes to biologics.

And it’s probably impacting that expected competition I talked about.

Let me lay out the problems as I see them, and then how they’re impacting the market for the development of biosimilars in particular.

Current rebating and contracting practices -- combined with the increased consolidation that we’re seeing in many segments of the drug supply chain -- has produced some misaligned incentives.

The top three PBMs control more than two-thirds of the market; the top three wholesalers more than 80%; and the top five pharmacies more than 50%.  Market concentration may prevent optimal competition. And so the saving may not always be passed along to employers or consumers.

Too often, we see situations where consolidated firms -- the PBMs, the distributors, and the drug stores -- team up with payors. They use their individual market power to effectively split some of the monopoly rents with large manufacturers and other intermediaries rather than passing on the saving garnered from competition to patients and employers.

The consolidation and market concentration make the rebating and contracting schemes all that more pernicious.

And the very complexity and opacity of these schemes help to conceal their corrosion on our system – and their impact on patients.

In the long run, the interests of patients, providers, and manufacturers are not well served by these arrangements, precisely because these practices encourage large list price increases to fuel the pricing schemes.

And so, we continue to see a backlash against these Kabuki drug-pricing constructs -- constructs that obscure profit taking across the supply chain that drives up costs; that expose consumers to high out of pocket spending; and that actively discourage competition.

Patients shouldn’t be penalized by their biology if they need a drug that isn’t on formulary. Patients shouldn’t face exorbitant out of pocket costs, and pay money where the primary purpose is to help subsidize rebates paid to a long list of supply chain intermediaries, or is used to buy down the premium costs for everyone else. After all, what’s the point of a big co-pay on a costly cancer drug? Is a patient really in a position to make an economically-based decision? Is the co-pay going to discourage overutilization? Is someone in this situation voluntary seeking chemo?

Of course not. Yet the big co-pay or rebate on the costly drug can help offset insurers’ payments to the pharmacy, and reduce average insurance premiums. But sick people aren’t supposed to be subsidizing the healthy.

That’s exactly the opposite of what most people thought they were buying when the bought into the notion of having insurance.

Now I understand that there’s a perverse incentive to use that rebated money to lower premium costs, since most health plans compete on the sticker cost of their premiums. But we’re living in a world where financial toxicity is a real concern for patients. And every member of the drug supply chain needs to take responsibility for addressing it.

This isn’t to say that PBMs haven’t deployed innovative contracting practices that help save money, or benefit consumers. Generic substitution is just one of those success stories. The buying power of large PBMs and formulary design is one reason that 81% of all small molecules drugs are available in generic formulations, and prices can fall by up to 80-90% after FDA approves multiple generic competitors.

Lower cost generics often have nominal or even zero-dollar co-pays compared to their branded competitors. This reduces cost burdens on patients, and it potentially improves treatment adherence as well. 

Furthermore, the fact that our healthcare system largely promotes automatic generic substitution in place of a branded drug when there’s a generic substitute available has resulted in generics representing nearly 90% of all prescriptions dispensed in the U.S., up from just 13% in 1980. Yet generic drugs make up only 26% of prescription drug costs. 

That’s real savings for patients and our healthcare system overall.

Generic drug competition provided an estimated $1.46 trillion in savings to the U.S. health care system from 2005-2015; and it generated $253 billion in savings in 2016 alone. The FDA continues to work on new ways to advance efficient generic drug reviews through policy.

These efforts have led to a record number of generic drug approvals in 2017 -- with more than 1,000 generic drugs approved. About 25% of all available generic drugs were approved in roughly the last five years.

Of course, small molecule drugs are not the only area where FDA works diligently to ensure efficient review and approval to further Congress’s intent to balance innovation and competition. Biologics are another.

And this is an area where I have some of my most significant concerns about the long-term impact of the pricing and rebating mischief.

Biologics include proteins or other by-products of living cells. These medicines play a critical role in the treatment of many serious illnesses, including rare genetic disorders, autoimmune diseases, and cancer.

They’ve become a mainstay of modern medicine.

And sometimes, they’re the only effective treatment options available to patients. They often operate at the cutting edge of medical science.

About a third of new drugs approved by the FDA are biologics.

Taken together, biologics now account for about 40% of all U.S. drug spending -- and 70% of spending growth -- from 2010-2015.

Recognizing both the importance of biologics, and their growing cost, in 2010, Congress created a new pathway for FDA approval of lower-cost, follow on biologics.

This provision was passed as part of the Biologics Price Competition and Innovation Act or BPCI Act.

This new law created an abbreviated pathway for follow-on biologics; known as biosimilars and interchangeables.

The idea is to enable more competition, and lower cost options for patients, once exclusivity has lapsed on the reference drug.

But if we’re not able or willing to support the development of this market as it matures -- and pursue policies and practices that encourage sponsors to invest in biosimilars by enhancing regulatory predictability and encouraging market acceptance of the products -- then the resulting competition we seek, and that patients need, will be derailed.

We must do more to ensure that the current pipeline of biosimilar products reaches patients as safely and efficiently as possible, and that the full potential of biosimilar products to improve patient health is realized once products meet the FDA’s high standards for approval.

This is why we’ve challenged ourselves across the agency to consider what additional steps FDA can take to encourage biosimilar competition.

Bringing more drug competition to the market, and addressing the high cost of medicines, is a top priority of the Administration and of the Secretary of Health and Human Services.

And we’re working closely with Secretary Alex Azar on crafting policy options that can improve competition, access, and the chance for patients to benefit from safe, effective, and lower cost biosimilar alternatives.

For instance, the FDA is examining our biosimilar program to better integrate policy and review functions that can provide greater scientific and regulatory clarity for sponsors, and greater efficiencies in the review of biosimilar and interchangeable applications.

We’re also developing information resources and tools that can assist biosimilar sponsors in developing high quality biosimilar and interchangeable products using state of the art analytical techniques.

The development and validation of these tools, and other reforms, can support the conduct of smaller, targeted trials, and bring more biosimilars to market in a much more cost-effective and timely manner.

These are just some of the efforts we’re pursuing as part of a much broader plan to make the development process for biosimilars more efficient. We hope to have much more to say on this plan soon as we unveil our comprehensive approach in our Biosimilar Access Plan.

The FDA is also committed to educating clinicians and patients about the safety and effectiveness of FDA approved biosimilars through various formats – including videos, webinars, and conferences.

When Hatch Waxman first passed more than 30 years ago, initially there was reluctance to use generic drugs. Doctors and patients didn’t fully understand that the new medicines were just as safe and effective as their branded counterparts. It took education and time.

We’re seeing similar reluctance when it comes to the biosimilars. So the FDA is doing its part to educate providers and patients about biosimilars to promote understanding of these products.

Physician and patient confidence in the quality and safety of biosimilar products is critical to their market acceptance. And at FDA, we want to address any misconceptions or concerns that may be out there.

We expect as providers gain more experience with these products, their comfort will increase as well. But we need your help in these efforts.

Finally, the FDA recognizes that creating efficient economies of scale for biosimilars requires a global market. This means harmonizing requirements for their development, and sharing regulatory experience across national boundaries. And so, we’re especially focused on strengthening partnerships with regulatory authorities in Europe, Japan, and Canada. These partnerships can facilitate global economies of scale in biosimilar development programs.

We’ve approved nine biosimilars, and five in 2017. This included the first two biosimilars approved for the treatment of cancer.

As of January, 60 biosimilars were enrolled in the FDA’s Biosimilar Development Program. To give you a sense of the breadth of activity, we’ve received meeting requests to discuss the development of biosimilars for 27 different reference products.

Despite our efforts, however, of the nine products we’ve approved for marketing in the U.S., only three are currently marketed.

Delays may be attributed, in part, to ongoing litigation.

But the pipeline, while rich, may not be as robust as it ought to be.

And this is where the industry’s rebating and contracting practices combine to raise another, perhaps even more insidious barrier to biosimilars taking root in the U.S., and gaining appropriate market share.

And it takes me back to where I started my conversation today.

This gets me to how the consolidation, and the contracting schemes that it helps facilitate, can discourage the development of new biosimilars.

I’m sure everyone in the room today is familiar with the delaying tactics that some branded manufacturers have engaged in to delay access to generic competitors – dubbed “pay for delay.”

For example, in some cases, “pay for delay” involves branded drug manufacturers splitting monopoly rents with generic manufacturers who have 180-day Hatch Waxman exclusivity.

Under this system, generics that meet certain criteria are eligible for 180-day exclusivity.  In certain cases, these applicants can “park” their applications to delay triggering market entry of generic competition.

They can then delay entry of generic competition in return for a cash transfer or agreement by the innovator not to launch an authorized generic until after six-month exclusivity expires.

Many insurers and PBMs have rightly spoken out against these practices, arguing that they’re anti-competitive and hurt consumers.

And the Supreme Court, in FTC v. Actavis ruled that the FTC and private parties could challenge these agreements under antitrust law, although the Court also found that they were not presumptively illegal.

But the crux of these pay for delay schemes are also taking root in the biologics market. Except this time, in these biosimilar pacts, the tactics are dressed in the guise of rebates and contracting provisions between manufacturers and PBMs that discourage biosimilar market entry.

This is a position that some observers have dubbed the “rebate trap”. 

Currently, PBMs and insurers profit from the spread between Wholesale Acquisition Cost (WAC) and the actual rebated price.  These rebates can amount to tens or hundreds of million dollars in annual PBM revenues.

Manufacturers typically tie these rebates to volume, or having a health plan maintain a drug on a preferred formulary status. So, if a health plan puts a biosimilar in that preferred formulary position, the plan might lose the rebates on their entire volume of the innovator biologic.

Here’s the rub.

When biosimilars launch, their initial discount is typically on the order of 15% or 20%. And unless the plan can switch all their patients over to the biosimilar, the cost of the lost rebates on the patients who remain on the original biologic won’t be offset by value of the discount on the biosimilar, and the smaller number of patients who are started on it.

This is especially true since the number of patients who’ll immediately migrate to biosimilar therapy is likely to be small, making it difficult for biosimilar sponsors to launch with deep, volume-based rebates.

This means that PBMs have a significant financial incentive to limit the uptake of biosimilars to continue the flow of large rebate payments.

And health plans have a big disincentive to switch to the biosimilar, and loose the incumbent rebates paid on the innovator biologic.

Everybody wins. The health plans get the big rebates. The PBMs get paid on these spreads. And branded sponsors hold onto market share.

Everyone that is, but the patients, who in the long run, don’t benefit from the full value of increased competition Congress intended.

Biologic sponsors don’t have to do much more than hold these rebates hostage – or even simply lower the WAC price of the reference product to meet that of the biosimilar entrant – to make the economics of market entry highly unattractive

And once biosimilar makers see that the system is rigged against them, what’s the incentive for a biosimilar maker to pour money into future investments to develop these lower cost alternatives?

The rigged payment scheme might quite literally scare competition out of the market altogether. I fear that’s already happening.

I’ve been on the record as advocating companies move away from rebate based contracts.  I think they actively harm patients in high deductible health plans, or patients who are forced to utilize products on non-preferred tiers. They can find themselves paying coinsurance based on a list price that no insurer pays. In fact, in some cases, a non-insured cash pay patient would pay less – this is certainly not the purpose of having insurance. Money from rebates paid by sick patients who need medicines is used to subsidize everyone else in the system.

More transparent pricing signals would encourage the rapid market uptake of lower cost products, and force manufacturers to better establish the real value of their products relative to price, including through innovative payment contracts.

But payors are going to have to decide what they want: The short-term profit goose that comes with the rebates, or in the long run, a system that functions better for patients, providers, and those who pay for care.

Payors are going to have to decide this as well:

Do they want to continue to benefit from monopoly rents today, or help generate a vibrant biosimilar market that can help reset biologic pricing – and drug pricing more generally - through competition.

These are binary choices. You can’t have your cake – or in this case, your rebates – and a vibrant market for biosimilar competition too.

Yesterday, there was an intriguing development when it comes to these rebates. United Healthcare, one of the nation’s largest insurers, announced that it would pass along full drug rebates to more than 7 million people in its fully insured plans starting next year.

This is a potentially disruptive step.

I spoke to Dan Schumacher, United Healthcare’s CEO last night, and he briefed me on his company’s new effort.
This change could amount to hundreds, or even thousands of dollars in savings for patients, particularly those in high deductible health plans.

This could make the difference between patients affording their medicines and remaining adherent, or stopping effective therapy to save on out of pocket costs.  That’s not a good choice for anyone.

I hope that others in the industry consider disrupting the current model. 

It’s time to stop the shell games over drug pricing, and start competing on delivering better health outcomes.

If we’re serious about seeing the market for biosimilars take shape, it’s going to require a payment system that gives products that are currently in the pipeline a chance to enter the market once they’re approved.

The more that biosimilar makers see that the current system is stacked against them, the fewer new entrants that will cross into this space.

The FDA will do its part by laying out an efficient path for showing how biosimilar products can demonstrate interchangeability with their branded counterparts. But we can solve only one part of this equation.

Payors can also lead the way in formulary design by making biosimilars the default option for newly diagnosed patients. They can share the savings with patients, maybe by waiving co-insurance.

Or they can reduce administrative barriers when patients and providers use biosimilars, like lifting prior authorization requirements imposed on physicians. FDA has a strong interest in seeing the biosimilar market grow. But some of that is going to be up to the choices you all make.

Payors can also help us by doing more to educate clinicians about the safety and value of biosimilars, to encourage appropriate adoption.

We’ll know that we’ve been successful when there’s a biosimilar market that can sustain multiple competing biosimilar and biologic options.

For instance, in an FDA analysis of the market for white-blood cell stimulating biologics – which can help cancer patients fight off infections when they are taking chemotherapy – we’ve seen pricing relative to the incumbent biologic, Neupogen, decline by 34% after the approval of two competitors, with the competitors capturing nearly 50% of the market share, and saving payors $150 million annually.

The FDA will continue to maintain strong incentives for innovation.

We’ll continue to advance new regulatory science tools that ensure patients benefit from rapid advances in science and technology that have the potential to treat diseases that were once thought intractable.

I truly believe that we’re in the midst of an epoch of medical innovation.

The impact of the innovations we’re laying claim to will be comparable to the introduction of antibiotics in the mid-20th Century.

But patient access to these innovations will depend on reforms that require every incumbent in the drug supply chain to take greater restraint for putting patients at the heart of their decision-making process.

It will depend on steps we take, working together, to empower market competition based on delivering the best clinical outcomes. Doing this with the long run in mind. And patient care at the heart of what we do. 

We’re not there today.

Instead, we have a lot of finger pointing that ignores shared complicity for pricing practices that are eroding trust in both payors and innovators.

I hope that you’ll act before that trust is eroded completely.

We have the capacity to make this system work a lot better for patients.

Thank you.   

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