Existing law establishes the Office of Statewide Health Planning and Development, which is vested with all the duties, powers, responsibilities, and jurisdiction of the State Department of Public Health relating to health planning and research development.

This bill would require each manufacturer of a prescription drug, made available in California, that has a wholesale acquisition cost of $10,000 or more annually or per course of treatment to file a report, no later than May 1 of each year, with the Office of Statewide Health Planning and Development on the costs for each qualifying drug, as specified. The bill would require the office to issue a report annually to the Legislature outlining the information submitted pursuant to this act, and the office would be required the bill and to post the report on its Internet Web site. The bill would also require the office to convene an advisory workgroup, as provided, to develop the reporting form required by this act. bill. The bill would require the office to maintain the confidentiality of any information submitted by a prescription drug manufacturer pursuant to those provisions that the director of the office deems to be confidential and proprietary.

Existing law establishes the Office of Statewide Health Planning and Development, which is vested with all the duties, powers, responsibilities, and jurisdiction of the State Department of Public Health relating to health planning and research development.

This bill would require each manufacturer of a prescription drug, made available in California, that has a wholesale acquisition cost of $10,000 or more annually or per course of treatment to file a report, no later than May 1 of each year, with the Office of Statewide Health Planning and Development on the costs for each qualifying drug, as specified. The bill would require the office to issue a report annually to the Legislature outlining the information submitted pursuant to this act, and the office would be required to post the report on its Internet Web site. The bill would also require the office to convene an advisory workgroup, as provided, to develop the reporting form required by this act.

Date of Hearing: January 12, 2016

ASSEMBLY COMMITTEE ON

, Chair

ABPCA Bill Id:AB 463 Author:() – As Amended Ver:January 4, 2016

SUBJECT: 6.

SUMMARY: Requires pharmaceutical companies to file an annual report with the Office of Statewide Health Planning and Development (OSHPD) containing specified information regarding the development and pricing of prescription drugs. Specifically, this bill:

1. Establishes the Pharmaceutical Cost Transparency Act of 2016, which 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.
2. Requires the report to include the following:
   
   1. The total cost of production of the drug, including:
      
      1. Research and development costs, both to the manufacturer and any predecessor companies;
         
      2. Clinical trial and regulatory costs, both to the manufacturer and any predecessor companies;
         
      3. Materials, manufacturing, and administration costs of the drug;
         
      4. Costs paid by any other entity, including federal, state, or other governmental programs or any form of subsidy, grant or other support;
         
      5. Acquisitions costs of the drug, including patents, licensing, or acquisition of another corporate entity; and,
         
      6. Marketing and advertising costs for the promotion of the drug, as specified.
         
   2. A cumulative annual history of the average wholesale price (AWP) and WAC increases, and which month the increases took effect;
      
   3. Total company profits attributable to the drug;
      
   4. Total amount of financial assistance the manufacturer has provided through patient prescriptions assistance programs, if available; and,
   5. The total costs of drugs or research projects that failed to succeed through the process to market approval.
3. Requires the report in 2) above to be audited by a fully independent third-party auditor prior to filing.
   
4. Limits the reporting of information required by 2)a) above from five years prior to the filing date of an Investigational New Drug application with the United States Food and Drug Administration (FDA) to the approval date of the New Drug Application by the FDA. Permits a manufacturer to separately provide information outside of this time frame.
   
5. Requires that the report be filed with OSHPD annually, on a form prescribed by OSHPD, no later than May 1 of each year.
   
6. Requires OSHPD to issue an annual report to the Legislature outlining the information submitted pursuant to this measure, and to post the report publicly on its Website.
   
7. 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.
   
8. Requires OSHPD to maintain the confidentiality of any information that the director deems to be confidential, proprietary information of the prescription drug manufacturer and the disclosure of which would cause the manufacturer competitive harm, as specified.
   
9. Finds and declares that the report required by this measure imposes a limitation on the public right to access that information

EXISTING LAW:

1. Establishes OSHPD and requires each organization that operates, conducts, or maintains a health facility to make and file with OSHPD certain specified reports, including a hospital discharge abstract data record that currently includes 19 elements of data per admission that are required to be included.
2. 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.

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 that drive drug pricing 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. The high price of some prescription drugs has raised questions about their affordability, whether their cost is worth the clinical benefits they provide, and the financial model of the current healthcare system. The rising costs of prescription drugs are placing an increasing burden on payers, employers, and patients. 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 have been significantly impacted by the cost of these drugs since their arrival on the market, but many argue that patients and payers will benefit in the long run by the avoided downstream costs such as cancer treatment and liver transplants. Other high priced drugs offer striking therapeutic advances for a range of very serious conditions, including cancer, rheumatoid arthritis, multiple sclerosis, and many others. Policymakers 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. THE RISING COSTS OF DRUGS. 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^[1]. This is the highest single year increase since 2001 (when growth reached 17.0%). According to the Centers for Medicare and Medicaid Services (CMS) prescription drug spending growth was predicted to be around 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). Additionally, fewer branded drugs are losing patent exclusivity to generics.

CMS also found that prescription drugs generally account for 10% of all healthcare dollars spent. The CMS National Health Expenditures report found that healthcare spending in all segments grew 3.6% in 2013. In late 2014, IMS projected that despite a temporary increase in U.S. spending growth in 2014, pharmacy spending would moderate to 5% to 8% over the next few years, coming back in-line with overall healthcare spending growth.

• 1. Specialty and High-Cost Drugs. Historically, a majority of drugs approved by the FDA were small-molecule products, manufactured using simple processes, were self-administered, and most often dispensed through retail pharmacies. Today, many of the drugs being approved each year are being lumped into a poorly defined group known as "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^[2], 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:
     1. Complex to manufacture, requiring special handling and administration;
        
     2. Injectable or oral, self-administered or administered by a health care provider;
        
     3. 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,
        
     4. Difficult for patients to take without ongoing clinical support, making them challenging for providers to manage.

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 considered specialty drugs.

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 the expensive drugs have shifted to pharmacy benefit instead of medical benefit.

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 market price 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.

• 1. The $1,000 Pill Sparks Controversy. In December 2013, the FDA approved a drug produced by Gilead Sciences called Sovaldi for the treatment of HCV. Sovaldi represents a significant advancement in treatment 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 initially pricing Sovaldi at $1,000 per pill. 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, 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 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.

1. DETERMINING THE COST TO CONSUMERS IS DIFFICULT.
   1. Price Benchmarks. Knowing how much a drug costs is difficult; 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 the actual price paid by a payer, 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.
      
   2. Sticker Price vs Actual Price Paid Varies Widely. The WAC price of a drug on the market, as originally announced by the company is also rarely the price paid by a payer. The actual price paid by any one payer is proprietary information, complicating 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 or generics on the market.

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^[3].

• 1. Impact on State Finances. With the state Medi-Cal program covering nearly one-third of Californians, combined with CalPERS, ADAP, state hospitals, and corrections, the state and taxpayer liability for increasing drug costs is significant. According to a December 2015 report published by the U.S. Senate Committee on Finance, Medi-Cal’s fee-for-service system alone spent nearly $25 million treating roughly 340 patients with Sovaldi and Harvoni in 2014^[4]. Med-Cal fee-for-service represents only a fraction of the entire Medi-Cal population, so the full amount spent by the state is likely much higher. The 2015-16 California state budget allocated $228 million for high cost drugs to DHCS and the Department of Corrections and Rehabilitation. In December 2015, it was reported that CalPERS spent $438 million on specialty drugs, and increase of 32% from the previous year. This represents one quarter of the total drug costs paid by CalPERS, while only 1% of the prescriptions filled.
     

1. 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 5,000 to 10,000 screened compounds, only 250 enter preclinical testing, five enter human clinical trials, and one is approved by the FDA.
   

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].

• 1. Exclusivity, Patents, and Generic Drugs. Patent exclusivity for a new molecule starts when the initial new drug application is filed with the FDA. 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 – typically 10 to 12 years. 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^[6]. 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 the most popular drugs. 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.
  2. Publicly Available Reports and Information. Publicly traded companies report significant amounts of financial data to shareholders and the government in annual U.S. Securities and Exchange Commission (SEC) 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, a recent filing by Pfizer 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 the remaining 200 were in very early discovery phases. The Committee notes that some of the information required by this bill is available in these SEC filings, but this information is reported in aggregate for the company as a whole, not broken down by specific drug as this bill would require.

1. 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 threatens the long-term success of the ACA and put enormous cost pressure 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 policymaking. 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.

1. SUPPORT IF AMENDED. The California Association of Physician Groups (CAPG) would support a bill that demonstrably produced a transparency program that reflects the true value of a drug, even if it carries a high price tag. CAPG states that unfortunately, even with the recent amendments, this bill falls short of a viable solution to this problem for several reasons, including: most of the information sought in the filing process will likely be deemed to be proprietary and thus will not end up being publicly reported; the failure to recognize and include the actual drug pricing after rebate produces data that does not reflect the true market cost of the targeted drugs; and the failure to address the rapid inflation of generic drug costs, which impact a much broader segment of the patient population.
2. 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 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.

REGISTERED SUPPORT / OPPOSITION:

Support

AIDS Healthcare Foundation

American Federation of State, County and Municipal Employees, AFL-CIO
American Medical Students Association
America's Health Insurance Plans
Anaheim Chamber of Commerce

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

California PACE Association

California Pan-Ethnic Health Network

California Professional Firefighters
California School Employees Association
California Teachers Association

CALPIRG

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
L.A. Care Health Plan

Molina Healthcare

Montebello Chamber of Commerce
National Council of Asian Pacific Islander Physicians

National Multiple Sclerosis Society
National Physicians Alliance

Ontario Chamber of Commerce
Public Citizen's Global Access to Medicines Program
Redlands Chamber of Commerce
Richmond Chamber of Commerce

San Gabriel Valley Economic Partnership

San Gabriel Valley Regional Chamber of Commerce
San Mateo Area 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

UFCW Western States Council
United Nurses Associations of California/Union of Health Care Professionals
Universities Allied for Essential Medicines
Valley Industry and Commerce Association, Healthcare Committee
Young Professionals Chronic Disease Network

Opposition

AbbVie

Allergan

Amgen

Astellas Pharma

BayBio
Bayer
Biocom
Biogen

BioMarin Pharmaceutical
Biotechnology Innovation Organization

Boehringer-Ingelheim
Bristol-Myers Squibb

California Life Sciences Association

California Manufacturers & Technology Association

Eisai
Eli Lilly

Genzyme
Genentech
GlaxoSmithKline
International Foundation for Autoimmune Arthritis

Irvine Chamber of Commerce
Mental Health Systems

Orange County Business Council

Otsuka Pharmaceutical Development & Commercialization, Inc.

Pfizer

Pharmaceuticals Research and Manufacturers of America

Sanofi

Sunovion

Takeda Pharmaceutical Company

TechNet
UCB

Analysis Prepared by:

1. IMS Institute for Healthcare Informatics. Global Outlook for Medicines Through 2018. November 2014. ↑

2. http://www.unitedhealthgroup.com/~/media/UHG/PDF/2014/UNH-The-Growth-Of-Specialty-Pharmacy.ashx ↑

3. http://kff.org/hivaids/fact-sheet/aids-drug-assistance-programs/ ↑

4. http://www.finance.senate.gov/ranking-members-news/wyden-grassley-sovaldi-investigation-finds-revenue-driven-pricing-strategy-behind-84-000-hepatitis-drug ↑

5. http://www.forbes.com/sites/matthewherper/2013/08/11/how-the-staggering-cost-of-inventing-new-drugs-is-shaping-the-future-of-medicine/ ↑

6. The 2014 Drug Trend report, Express Scripts Labs, March 2015 ↑

Date of Hearing: April 28, 2015

ASSEMBLY COMMITTEE ON HEALTH

Bonta, Chair

ABPCA Bill Id:AB 463

Author:(Chiu) – As Introduced Ver: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:
   
   
   

   1. The total cost of production of the drug, including:
      
      
      

      1. Research and development costs, both to the manufacturer and any predecessor companies;
         
         
         

      2. Clinical trial and regulatory costs, both to the manufacturer and any predecessor companies;
         
         
         

      3. Materials, manufacturing, and administration costs of the drug;
         
         
         

      4. Costs paid by any other entity, including federal, state, or other governmental programs or any form of subsidy, grant or other support;
         
         
         

      5. Acquisitions costs of the drug, including patents, licensing, or acquisition of another corporate entity; and,
         
         
         

      6. Marketing and advertising costs for the promotion of the drug.
         
         
         

   2. A cumulative annual history of the average wholesale price (AWP) and WAC increases, and which month the increases took effect;
      
      
      

   3. Total company profits attributable to the drug; and,
      
      
      

   4. 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.
   
   
   

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.

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) 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 Healthcare¹, 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:

1. Complex to manufacture, requiring special handling and administration;
   
   
   

2. Injectable or oral, self-administered or administered by a health care provider;
   
   
   

3. 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,
   
   
   

4. Difficult for patients to take without ongoing clinical support (making them challenging for providers to manage).

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.

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.

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 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 2013². 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 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 protection³. 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; 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.

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 budget⁴.

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.

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 Billion⁵.

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 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 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:

1. 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.
   
   
   

2. Reporting the cost of failed drugs. Most potential 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.
   
   
   

3. 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

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
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

Date of Hearing: April 21, 2015

ASSEMBLY COMMITTEE ON HEALTH

Bonta, Chair

ABPCA Bill Id:AB 463

Author:(Chiu) – As Introduced Ver: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:
   
   
   

   1. The total cost of production of the drug, including:
      
      
      

      1. Research and development costs, both to the manufacturer and any predecessor companies;
         
         
         

      2. Clinical trial and regulatory costs, both to the manufacturer and any predecessor companies;
         
         
         

      3. Materials, manufacturing, and administration costs of the drug;
         
         
         

      4. Costs paid by any other entity, including federal, state, or other governmental programs or any form of subsidy, grant or other support;
         
         
         

      5. Acquisitions costs of the drug, including patents, licensing, or acquisition of another corporate entity; and,
         
         
         

      6. Marketing and advertising costs for the promotion of the drug.
         
         
         

   2. A cumulative annual history of the average wholesale price (AWP) and WAC increases, and which month the increases took effect;
      
      
      

   3. Total company profits attributable to the drug; and,
      
      
      

   4. 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.
   
   
   

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.

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) 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 Healthcare¹, 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:

1. Complex to manufacture, requiring special handling and administration;
   
   
   

2. Injectable or oral, self-administered or administered by a health care provider;
   
   
   

3. 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,
   
   
   

4. Difficult for patients to take without ongoing clinical support (making them challenging for providers to manage).

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.

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.

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 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 2013². 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 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 protection³. 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; 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.

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 budget⁴.

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.

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 Billion⁵.

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 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 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:

1. 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.
   
   
   

2. Reporting the cost of failed drugs. Most potential 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.
   
   
   

3. 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

California PACE Association
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

National Multiple Sclerosis Society

Ontario Chamber of Commerce
Richmond Chamber of Commerce

San Gabriel Valley Economic Partnership

San Gabriel Valley Regional 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
Valley Industry and Commerce Association

Opposition

AbbVie

Allergan

Amgen

Astellas Pharma

BayBio
Biocom
Biogen

Bayer

BioMarin Pharmaceutical

Biotechnology Industry Organization

Boehringer-Ingelheim

California Healthcare Institute

California Manufacturers & Technology Association

Eisai

Genzyme

Orange County Business Council

Otsuka Pharmaceutical Development & Commercialization, Inc

Pfizer

Pharmaceuticals Research and Manufacturers of America

Sanofi

Sunovion

Takeda Pharmaceutical Company

Analysis Prepared by:

Dharia McGrew / HEALTH / (916) 319-2097