Ropes & Gray’s podcast series, IP(DC), focuses on developments in intellectual property law from the vantage point of Ropes & Gray’s office on Pennsylvania Avenue in Washington, D.C.

The Trump Administration has targeted U.S. drug prices through a number of as yet unsuccessful cost control schemes—with the promise of more to come. At the same time, Congress is looking to restore patenting options for some technical areas such as medical diagnostics, while combating patent “ever-greening” for blockbuster drugs and treatments. Given this storm of legal issues, this IP(DC) podcast tackles the Administration’s confusing efforts to reign in drug pricing to date, while touching upon competing policies at play on the patent side of the business. In this episode, health care partner Tom Bulleit joins IP partners Scott McKeown and Matt Rizzolo.

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Transcript:

Scott McKeown: Welcome to the IP(DC) podcast, a podcast covering recent D.C.-based developments in intellectual property law. I'm Scott McKeown, chair of Ropes & Gray's Patent Trial and Appeal Board practice. And I am joined, as always, by my partner, Matt Rizzolo, an IP litigator in Ropes & Gray's IP litigation group based here in D.C. We've got an interesting show for you today that goes a bit beyond your run-of-the-mill patent-focused developments. Today, we'll explore both the business end and intellectual property aspects of biopharma.

Matt Rizzolo: Did you know that prescription drug prices were too high? Well, if you didn't, you haven't been listening to President Trump. A few years ago, then-candidate Trump told us that pharmaceutical companies were "getting away with murder," and he promised to take action if elected. Our partner, Tom Bulleit, who heads the health care practice in our D.C. office, is also the leader of our working group on drug pricing, and has been closely following initiatives by the administration, Congress, and the states that are looking at bringing down drug prices. We're very fortunate to be joined by him today. Tom, can you give us an overview of what's going on in this area?

Tom Bulleit: Thanks, Matt. All of this really kicked off in 2018, although candidate Trump went so far as to support the controversial idea of direct government price negotiation with manufacturers, the administration's 2017 health policy efforts were devoted mostly to the ultimately unsuccessful effort to repeal the Affordable Care Act. But in 2018, the administration stepped up its game, first with a Rose Garden presentation of their “American Patients First” strategy, called the Blueprint, to curb prescription drug prices. The Blueprint sets four priorities that have spurred various administration initiatives over the past year: improve competition, improve negotiation with drug makers, incentivize lower prices, and reduce out-of-pocket costs. The FY 2020 budget that the administration released Monday, March 11 also contains several of these ideas. And since then, the administration has released a flurry of final and proposed regulations that I'll get into.

Scott McKeown: Tom, so what exactly has the administration been doing to further these proposals?

Tom Bulleit: Well, I'll start with improving competition and improving negotiation with drug makers. First, you need to understand that there are several structural impediments to affecting drug prices with either of these. The first is that drugs covered under Medicare, either administered in physician offices under Medicare Part B, or acquired from pharmacies under Medicare Part D, have statutory protections that prevent forcing doctors or patients to choose cheaper drugs. Part B essentially covers anything a doctor thinks is medically necessary, and pays according to a statutory formula that almost all the time gives doctors a 6% markup – so as a rule, they have no incentive to choose cheaper drugs. And although Part D plans negotiate prices with drug makers, they're required to cover all of the drugs in six protected classes – without getting technical, these are drugs that treat HIV, mental illness, cancer, epilepsy, and those who've had organ transplants. That really ties the hands of plans trying to get lower prices because they can't exclude similar drugs just because they're expensive.

Matt Rizzolo: Given that the Trump Administration is stuck with these coverage requirements, what has it done so far to target drug prices?

Tom Bulleit: Well, effectively, what the administration has tried to do is tinker around the edges. In May, they published a final rule called “Modernizing Part D and Medicare Advantage to Lower Drug Prices and Reduce Out-of-Pocket Expenses.” This allows Part D and Medicare Advantage plans to use step therapy and prior authorization for new starts of the protected categories, except HIV drugs; outside the protected classes, to exclude biosimilar products in the same way they can exclude drugs that have a generic equivalent. But it did not include the more impactful proposal of allowing Part D plans to exclude protected class drugs if the price increased beyond a certain threshold. Then in June, they announced that they were withdrawing a proposed rule that would have prohibited rebates, that's after the fact discounts, to health plans and pharmacy benefit managers. And it also would've created a new safe harbor for rebates that are passed through to beneficiaries at the point of sale. This was after the Congressional Budget Office showed that was not saving any money overall, and actually costing taxpayers about $177 billion over the next ten years. Then recently, they announced that a major health care overhaul will be announced in the fall. That will include the proposal for international reference pricing, which would tie Medicare Part B spending on drugs to amounts paid in foreign countries, which are generally lower. Some in Congress, and the White House is being coy on their position, want to apply that principle to Medicare Part D as well. That is something that could be really impactful, but Senate Finance Chairman Grassley is skeptical of this, and it's doubtful that it could be done by rule as opposed to by act of Congress. So while it's a big idea, it's a long way from having any effect.

FDA's taken some steps to try and improve competition from generics, issuing lists of drugs that could be subject to generic competition, and issuing guidance to make it easier for generic makers to force brand makers to provide the sample needed to reverse engineer the generic. And recently, Secretary of HHS Azar has bowed to the President's insistence that FDA authorize re-importation of drugs from Canada, though that is still in the rulemaking process. But FDA's actions likely will have only modest effects on drugs prices. It's unlikely that the Canadian government will allow the relatively small amount of prescription drugs sold to Canadian pharmacies to be diverted to the U.S. market. And there's no special reason to think that drug makers will increase the amount they sell to Canada to make up the difference. Also, the FDA approval process is only one aspect of whether a potential manufacturer of generics or biosimilars would view the market as profitable. More radical steps, such as finding a way to penalize drug companies for so-called pay-for-delay arrangements are contained in bills that Congress is currently considering, and in the President's budget, but it's doubtful that there is sufficient bipartisan consensus to enact the stronger measures.

Scott McKeown: Tom, let me ask you a little bit about the interaction with the Canadian market. Let's assume that the President is able to get some kind of legislation or rule in place that would open up the Canadian market. Would that not encourage gray market or black market goods?

Tom Bulleit: Yes, that's a really good point, Scott. One would think that it probably would, but that, of course, would undermine the premise of re-importation, which is that the drug supply chain in Canada is safe. So it's probably not in anybody's interests to have a system that encourages gray or black market importation, rather than importation that comes through the correct drug supply chain.

Scott McKeown: Just following up on that, so what has been going on to encourage lower list prices and to reduce out-of-pocket costs for patients?

Tom Bulleit: Well, the administration's early tactics in encouraging lower prices are best described as price shaming, calling out publicly the drug companies that raise their prices. The President prevailed on some drug companies to avoid any mid-year increases in 2018, but most of those companies raised their prices at the beginning of 2019. The administration issued a final regulation to require direct to consumer ads to show the list price of Medicare and Medicaid covered drugs, and Johnson & Johnson recently announced that it would begin to do so. The administration seemed to think that by limiting this rule to drugs covered by Medicare, the administration could avoid the compelled speech, First Amendment concerns that drug makers raised about being required to put prices in their ads. And indeed, they did in a way – the lawsuit by pharma got the rule vacated in the trial court based on the conclusion that CMS's authority to issue regulations for the "efficient administration of federal health care programs," simply didn't give the Agency regulatory authority over this issue at all. Even if the rule were to go into effect, there's little reason to think that this kind of soft pressure would lead drug makers to conclude that they should change their business models. And with the withdrawal of the proposed regulation creating a new safe harbor for pass-through rebates, the administration really has nothing going on that's likely to advance the Blueprint's fourth priority of reducing out-of-pocket costs. There has been some talk of adding the pass-through rebate to a Senate bill, and that may stand some chance of enactment.

Matt Rizzolo: So you anticipated my next question: what has Congress done, if anything, that would have an effect on prescription drug prices?

Tom Bulleit: Well, in two words, nothing much, although there's been a lot of talk. The most interesting proposal, and one that may stand some chance of enactment in the fall, is called the “Bipartisan Prescription Drug Pricing Reduction Act,” that the Senate Finance Committee reported out on July the 25th. Although it's opposed by pharma, the White House has endorsed it, and Chairman Grassley has been touting this an alternative that should be palatable to conservatives. Meanwhile, Speaker Pelosi continues to negotiate a more radical bill with the White House, and one that reportedly would incorporate the international reference pricing proposal that the White House is considering for Medicare Part B, and some have speculated Medicare Part D as well. Because only the PDPRA, in my view, is likely to have enough Republican votes to get past the Senate, and it may not, it's worth mentioning a few of its provisions.

The CBO estimates it would cut Medicare expenditures by $85 billion and Medicaid by $15 billion over ten years, and would save beneficiaries $27 billion in out-of-pocket costs, so that's something. Most impactful, the bill would require rebates to Medicare for any Part B drug whose list price increased above the rate of inflation, as measured by the CPI-Urban. The bill would also increase the number of drugs for which price reporting to Medicare is required. It would include drug company consumer coupons as price reductions, and it would narrow the definition of bona fide service fees that don't have to be treated as price reductions in reporting.

There are also some wonkier provisions, and the effect of all that is that the average sales price, or ASP, which is the basis on which Medicare pays for Part B drugs, should move downward, though by how much is a real question. And the flipside, of course, is that it encourages higher list prices to mute the impact.

The bill would also make a major change to the Part D benefit. Currently, this benefit has a deductible phase (consumers are out-of-pocket), an initial coverage phase (the beneficiary pays 25%), a coverage gap, which people call the donut hole (this year that's roughly out-of-pocket expenditures of $3,800 to $8,100, and in that donut hole the generic manufacturer pays 63%, the beneficiary pays 37% for generics, and brand manufacturers pay 70%, the beneficiary pays 25%, and the plan pays 5%), and a catastrophic phase (where Medicare pays 80%). The bill would cap out-of-pocket spending for consumers, eliminate the donut hole, and transfer brand name manufacturer liability for costs in the donut hole phase to the catastrophic phase. As with Part B, manufacturers would also have to pay a rebate to Medicare for price increases above the CPI-Urban.

There are a bunch of things that the bill would do for Medicaid as well, including increasing the maximum rebate that manufacturers have to pay, eliminate the pricing benefit that manufacturers currently get for having an authorized generic, and eliminate the ability of a pharmacy benefit manager to pocket any difference between the price it pays for the drug and the amount it pays the pharmacy. And in the area of price shaming, the bill would adopt the strategy adopted by many states which, in the last couple of years, have enacted laws to require drug makers to post their price increases, and in some cases a justification for the price increases.

Scott McKeown: Some other activity on the Hill recently, also designed to impact drug pricing, and we mentioned this on our last podcast, but there's been the Term Act, for example, which we discussed very briefly last time. This legislation is intended to combat what some have termed “evergreening,” which is the concept where drug companies obtain multiple patents on the same drug in order to extent patent protection and prevent generics from entering the market. Most notably, the Term Act would impose significant restrictions, but just on the biopharma industry – it would not touch other types of patents. In short, what the Term Act would do is flip the presumption of validity for many biopharma patents and force a disclaimer of those patents that would extend the monopoly beyond that first patent in time on a key drug.

We also mentioned earlier that drug pricing can be a bipartisan issue, and the We Paid Act is an example of that. It was introduced by Chris Van Hollen of Maryland and Rick Scott of Florida, and would require companies that have received research funding from NIH and other agencies for drug-related patents to follow specific pricing restrictions for the drugs they are selling that are covered by those patents. The authors anticipate that 20% to 25% of drugs would be impacted after enactment, although this would not have retroactive effect for drugs currently on the market. And then there's also H.R. 3391, which is the Affordable Prescriptions for Patients Through Improvements to Patent Litigation Act, which is quite a mouthful. That legislation would look to simplify the so-called patent dance for biosimilar patents created under the Biologics Price Competition and Innovation Act, or BPCIA. While the BPCIA was intended to create a streamlined assertion process, like what was done for Hatch-Waxman, many have found it to be ineffective and over complicated. Others, however, think that it's too early to tell.

Matt Rizzolo: So a lot of people say that D.C. is very sleepy in the summer, but that's an awful lot of activity. On top of all that, we even saw an op-ed from the New York Times last month that called for the "seizing of patents," by the federal government, through a couple of different methods. First, through an eminent domain-like statute, 28 U.S.C. 1498, which effectively allows the government, or anyone with the government's permission, to get a compulsory license at a rate of "reasonable compensation." Some may recall that this provision was much discussed in the wake of the anthrax scares of the early-2000s, where many were worried about a shortage in the drug Cipro, or price gouging, that Cipro was made by Bayer, and the government used 1498 as leverage to get price concessions. The Times also in this op-ed called for the government to look at using so-called march-in rights, which is something the government has never done before. March-in rights, at a high-level, come into play where a federal government agency has provided the research funding that led to a patented invention, and they allow the funding agency either on its own initiative or at the request of a third party, to march-in, ignore the exclusivity of the patent owner, and grant additional licenses to other reasonable applicants. Here, conceivably, in the pharma context, that would be a low-cost generic.

Scott McKeown: And finally, as we discussed last episode, there's also an effort underway to redefine the law of patent subject matter eligibility – we have not seen that re-worked bill as of yet. Finally, last month, the Stronger Patents Act was reintroduced – this was a bill that's been introduced four or five times now to no effect. This may be more in the way of political theater to try to get big tech in line with the 101 effort, but that effort is playing out. But let me go back to you, Tom. I'll go back to you for the last word. Do you have any ultimate takeaways for us on the pricing issue?

Tom Bulleit: Well, probably the shortest takeaway is that almost nothing that's happened so far is likely to move the needle appreciably on drug prices or on drug out-of-pocket costs. The really big ideas that would be impactful, direct negotiation of federal health care programs with manufacturers, mandatory international reference pricing for all federal health care programs, are just unlikely to happen. There's no political support on the Republican side for direct negotiation, and precious little for international reference pricing. If the administration tries to impose international reference pricing by regulation, it'll get stuck in litigation, which I suspect will ultimately be successful in stopping it as outside CMS's demonstration authority, and small-scale demonstrations won't have any great effect. The PDPRA could have some impact, especially the increased rebates for price increases that exceed the rate of inflation, but that won't reduce prices, it'll just limit future price increases. The out-of-pocket maximum for a restructured Part B would help with what beneficiaries have to pay at the pharmacy, and that would be helpful to consumers.

Everything else, frankly, is little more than rearranging the furniture. Just a few examples:

The proposed rule to eliminate Part D rebates to plans and allow pass-through rebates to consumers would dramatically reorganize the drug supply chain to the disadvantage of pharmacy benefit managers, but there's no reason to think that it will lead to lower list prices. It might reduce out-of-pocket drug costs, but at the expense of higher premiums for those Part D plans. And there's no certainty that drug makers would seek to implement those pass-through rebates.

Step therapy and prior authorization will improve the ability of Part D plans to steer patients to lower-cost drugs, but as long as there are protected classes that must be covered, the effects are likely to be marginal.

Transparency of price increases and price shaming haven't shown any effect yet – I see no reason to think that they will.

In sum, the administration's creating a new environment where there will be lots of work for trade and professional associations, lobbyists, lawyers. Consumers might see some modest relief on point of sale cost sharing, though potentially at the expense of higher premiums. But substantially lowering drug prices, I wouldn't hold my breath.

Scott McKeown: So the saga continues. Thanks to you both for joining me, it'll certainly be interesting to see how this all shakes out in the fall and beyond. That's all the time we have for today's episode, and we hope that you're able to tune in on future episodes where we continue to discuss IP developments from the Washington D.C. perspective. So on behalf of Tom Bulleit, Matt Rizzolo, and Scott McKeown of Ropes & Gray, thank you for listening.