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P.O.

Box 10841
Eugene, Oregon 97440
p/f: 541.257.8878
info@t1df.org
November 30, 2017
www.t1df.org

Members of the Senate H.E.L.P. Committee by email


United States Senate
Washington, D.C. 20510

RE: Follow-up Questions Regarding Alex Azars Nomination to Serve as Secretary of Health and
Human Services

Dear H.E.L.P. Committee Chairman, Ranking Member, and Committee Members:

As you and your staff are preparing follow-up questions to submit to Mr. Azar by Friday, we hope you
will take into consideration the clarifications we offer below and the potential follow-up questions we
list at the end of this letter.

Id like to begin by thanking members of the H.E.L.P. committee for their bipartisan attention during
yesterdays hearing to the crisis now facing Americans with type 1 diabetes, for whom access to insulin
and glucagon emergency kits isnt an issue of choice or convenience, but a matter of life and death. As
accurately described by Mr. Azar during a November 2016 talk at the Manhattan Institute, current drug-
channel actors have collectively created a pricing crisis for the uninsured, and a cost-sharing crisis for
those insured under high deductible and high cost-sharing benefit designs.

This crisis has been caused by a dual pricing system based on reimbursement contracts. Its not this
systems dysfunction, but rather its ruthless efficiency, that has caused list prices for 20-year-old insulins
to skyrocket. The US dual pricing reimbursement schemewhich manufacturers are now attempting to
export internationallyis designed to allow price discrimination, prevent arbitrage, and generate supra-
competitive financial returns for all drug-channel actors, at the expense of consumers. During
Wednesdays hearing, Sen. Collins expressed concern regarding co-pay clawback schemes that can
lead to consumers overpaying by $10 or $20 per prescription. But for heavily rebated brand-name
diabetes drugs, the dual-pricing system is now forcing the uninsured (and some insured) to pay several
times the net prices insurers pay. For example, current retail price for a glucagon emergency kit is
$300; we believe the cost to insurers is $55.02 or lower. These kits may cost Eli Lilly and Novo Nordisk
no more than $5 to produce.

The excesses of this reimbursement regime, developed during the 1990s but exponentially increasing
in recent years, have been incorrectly blamed on the Affordable Care Act. This confusioncorrelation
without causationhas facilitated calls for pro-consumer solutions to problems that do not exist. In

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the meantime, the pricing system actually responsible for skyrocketing increases in insulin list prices
has been left unchallenged. This pricing system has forced uninsured individuals to pay skyrocketing
list prices no corporate actors pay; it also allows insurers to price discriminate against insured
individuals with chronic medical conditions, breaching the intent, and possibly the letter, of the anti-
discrimination mandate of the ACA. As stated by Sen. Murray in her opening statement, [t]he last
thing our HHS should be doing is encouraging more discrimination in our healthcare system."

T1DF thus commends committee members efforts, during Wednesdays hearing, to shift the national
conversation away from outdated assertions of manufacturer-only price-fixing and toward more
specific questions regarding manufacturers specific responsibility as the actors who set list prices in a
reimbursement system where other actors also contribute to and profit from high list prices. As
acknowledged by Mr. Azar, when questioned on this topic by Sen. Baldwin: Everybody in the system
owns a piece of this. He also answered Sen. Kaine, when pressed regarding culpability for
skyrocketing insulin list prices, "Everyone shares the blame here. While this would include himself as
former president of Lilly USA, we cannot exonerate other participants in a process that has gravely
injured Americans who need insulin to stay alive.

As correctly stated by Mr. Azar, the current system is not working for patients who pay out of pocket
Insulin prices are high and they're too high. The system may fit for the stakeholders behind the
scenes. Senator Kaine also accurately described consumers as hostages rather than actors in this
pricing system. Whether you are a free-market Republican or pro-consumer Democrat, you should
understand that the status quo is not a sustainable option.

A more equitable pricing system could take several forms. But all viable alternatives have certain
characteristics in common. As outlined by Sen. Paul, these alternatives all allow for free price arbitrage
(reimportation is an example of price arbitrage, though not necessarily the most practical). Truly viable
alternatives also rely on net price transparency. Any alternative must, however, deliver to insured
individuals the benefit of the best net pricing of any commercial players in the system that Mr. Azar
explained, in his response to Sen. Frankens questioning on drug prices, PBMs already obtain on behalf
of insurers.

Free price arbitrage and net price transparency throughout the drug channel (from manufacturers to
insurers) are not, however, on Mr. Azars agenda. Prior to the hearing, T1DF warned that, at this point in
the US drug pricing crisis, general questions on high drug prices will be met with vague replies on
'value-based pricing (Activists Implicate Trump's Health Nominee Alex Azar in Insulin Price-Gouging
Scheme, TruthOut, November 28, 2017). As predicted, when specifically questioned by Sen. Bennet
regarding his strategy to bring U.S. list prices within the range of European counterparts, Mr. Azar

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instead vaguely argued for a shift to a "value-driven" Medicare (for which he also advocated in his
opening statement). When pressed by Sen. Whitehouse, Mr. Azar suggested that he would use
Medicare as the value-based pricing Trojan horse because it has enough concentration of life to
become a vehicle for "changing the [private health insurance] system.

Value pricing and outcome-based models, apparently preferred by Mr. Azar and supported by
powerful interests like the Laura and John Arnold Foundation and their think tanks (e.g. ICER and Yales
CRIT), do not constitute alternatives to the current reimbursement scheme. These models are variations
on the current model and would perpetuate reimbursement contracting and dual pricing. In these
systems, instead of being mechanically driven by increased rebates, the high public list price would
supposedly be scientifically validated by a central authority vested with the authority to thus fix prices
(and thus create an actual price fixing cartel). The low secret net price would remain secret, albeit
based on some new metricwhose only purpose might be to sound less like a rebate than the current
post-sale volume discount on which T1DFs current lawsuits focus. The approach Mr. Azar advocates
would disconnect the point of sale transaction (consumer buying the drug) from the rebate transaction
thus increasing opacity and frustrating attempts by consumers to assess the actual net cost to plan of
their drugs. Value-pricing systems would give manufacturers a license to inflate list price (life, and thus
insulin, is priceless) while covering up for insurers overcharging in the guise of cost-sharing based on
the public list priceas no one would be able to calculate, at the time of the POS transaction, the drugs
actual net cost to the third-party payer.

We are grateful for Sen. Pauls spirited defense of free price arbitrage, although the form he is
advocates is impractical: all lawmakers should keep in mind that reimportation may aid insulin users in
border states but cannot be a nationwide solution for any pharmaceutical that requires close cold-
chain management. Sen. Paul understands that a free market pricing system relies on the availabilityto
consumersof accurate price information and free price arbitrage among all market actors.
Reimportation is just one example of price arbitrage, i.e. the ability of market actors to freely chose the
supplier/vendor offering the best prices, services or products. Reimportation of drugs, i.e. price
arbitrage between international healthcare markets, is impractical. Instead, U.S. consumers should be
allowed to perform free price arbitrage at home, between U.S. health plans. Customers on the
independent/ACA market should have access to full pricing information that would allow them to
chose the third-party payer (insurer) who has negotiated the lowest net prices and that offers the best
services. Americans on employer insurance should know that theiror their colleaguesinsulin actually
represents a fairly modest cost to their company plan. And Americans who are uninsured would be
able to compare pharmacies cash prices to payers net prices and then demand equal access to
healthcare services and drugs.

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We are also thankful for Sen. Youngs inquiries regarding Mr. Azars statement he made on November
3, 2016, at the Manhattan Institute. Our outdated pricing system indeed creates a crushing burden on
both insured and uninsured individuals. As president of Lilly USA, Mr. Azar continued the companys
participation in opaque reimbursement contracts with PBMs and insurers, knowing that large rebates
were not reaching consumers. In November 2016, he acknowledged, [Eli Lilly USA] may be paying 50
to 60% rebate to the insurance company, but the patient isnt seeing that. Mr. Azar also admitted that
at the other end of Lillys reimbursement contracts a significant number of people who already paid
premiums for their health insurance then end up paying more than their insurer does for a medicine.
Mr. Azar has also publicly recognized that when Lilly raised list prices to accommodate massive
rebating to insurers, this system caused actual harm to people with diabetes: [W]hen patients have to
pay more than 50 or $100 to fill a prescription huge numbers of them simply walk away. That renders
them less healthy and more likely to rack up a big [medical] bill later on (Manhattan Institute,
11/2016). Yet list price for Humalog has increased by over 1,000% since Lilly first brought it to market
in the late 1990s. With rebates on Humalog now estimated to be 75%+ off list price, some patients may
now pay as much as four times their insurers net drug cost. Mr. Azar also oversaw, during 5 years as
president of Lilly, a greater than 100% increase in its list price for emergency injectable glucagon kits.
High list prices for glucagon kits deter insulin users from buying and carrying these kitswhich treat
severe hypoglycemia, a potentially life-threatening side effect of Lillys own insulin products.

We also hope committee members paid close attention to Mr. Azars reluctance to reply on the record
regarding corporate accountability and personal executive liability stemming from corporate
misconduct. We are grateful that Sen. Warren raised these crucial questions in relation to present
investigations and patient insulin lawsuits (as well as Lillys past corporate history). We are also grateful
for Sen. Casey's requests that Mr. Azar commit to answering all questions on the record, though
again, we noted Mr. Azars evasive answer. These questionsand Mr. Azars repeated refusal to commit
to basic accountability and transparency standardsshould be a matter of bipartisan concern when
considering the nomination of any potential HHS appointee recently departed from an executive role
in an industry he would be tasked with regulating. From one perspective, Sen. Young may be right
when he says, If anyone can help solve this problem [drug price crisis], it's Alex Azar. Though he may
aid the solution not in the capacity of HHS Secretary but rather as potential adverse witness in one of
the insulin and glucagon overpricing lawsuits filed by T1DF and now pending in the U.S. District Court
for the District of New Jersey. Sen. Warrens questions were not rhetorical; and Mr. Azars refusal to
support corporate accountability should raise a red flag. He stated during the hearing that he is
committed to "the American people." Yet so far he has refused to commit on three key questions: (1)
personal liability for executives in fraudulent corporate behavior, (2) specific industry accountability for

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list prices and manufacturers broader role in the dual-pricing system, and (3) answering all questions
posed on the record.

We respect Sen. Pauls and Sen. Isaksons outrage regarding pharmaceutical companies "gaming the
[patent] system." We hope they will also share our outrage regarding insurers gaming the drug dual-
pricing system, charging patients for list prices they do not pay, and in the process cooperating with
manufacturers in inflating list prices that the uninsured are forced to pay.

On the subject of insurers overcharging insured individuals, we were, finally, troubled by Sen. Hassans
suggestion that ending a current system recognized to place an untenable burden on people with type
1 diabetes (among others) would cause premiums as a whole to increase. Its disingenuous to hint that
lower cost-sharing will raise premiums while failing to acknowledge that under the current system
patients using highly rebated drugs like insulin arent sharing the cost of their drugs but paying the
entire cost and beyond. This kind of premium-threatening language is especially troubling given the
allegations in T1DFs current lawsuits that patients are being defrauded by industry actors. T1DF must
protest any suggestion to the American public that we should continue robbing Peter because Pauls
premiums will otherwise increase. (In specific reference to insulin, the threatened premium increase is
counterfactual. Even if true, it would constitute a de facto endorsement of price discrimination.)

Before moving on to our specific questions, it may be helpful to summarize how drug channel actors
PBMs, manufacturers and last but not least insurersfacilitate the eventual patient injury. We
understand this injury as follows:

Insured individuals are injured because insurerswith the tacit or contractual complicity of
manufacturers, PBMs, and other system actors including government agenciesconceal from
them the very low net prices that result from negotiated price concessions (volume discounts,
conditional rebates, fees, outcome-based price concessions, etc.). This deception allows insurers
to base cost-sharing on a price that far exceeds the drugs actual net cost to plan. This system of
dual pricing (high public list price, low secret net price), relying on reimbursement contracts
between insurers and manufacturers, prevents Americans from making informed consumer
decisions regarding health insurance: individual consumers do not know the actual cost/price to
plan of the healthcare goods and services they are consuming. To add insult to injury, this system
further allows health plans to stigmatize and shame their insured plan members with chronic
conditions for the alleged cost of their treatment (articulated on the basis of list price, not net
cost to plan). Insured individuals with diabetes are shamed and blamed by insurers and health
plan managers for others premium increases.

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Uninsured individuals are injured because they are forced to buy their drugs from pharmacies
at an inflated price no corporate actor pays (insurers negotiate much lower net prices).
Pharmacies acquire insulin and other rebated specialty drugs from manufacturers, via distributors
(i.e. wholesalers under a fixed fee distribution contract with manufacturers). This system allows
manufacturers to control the price of the rebated drugs at the point of salethey know exactly
how much price concession they can pass back to insurers without undermining their net price
targetand thus their gross revenues. Each time a competitor increases its list price and offers a
larger rebate (to gain access to preferred placement on insurer formularies), a manufacturer
increases its own drug list price in order to match or beat the competing rebate offer. This
competition on rebating is the perverse incentive that Credit Suisse and other insider experts
often refer toit incentivizes insurers to choose more expensive drugs with higher rebates, as
those heavily rebated drugs can be used to generate increased cost sharing payments that
now, for insulin, far exceed insurers net cost. Uninsured Americans are, meanwhile, exposed to
skyrocketing unrebated prices, fueled by the demands from insurers and PBMswhose fees
depend on rebate sizefor ever-increasing rebates. The dual-pricing system also delivers to
manufacturers unconscionable profits: for analog insulin, unrebated list prices (pharmacies
usual and customary or cash price) are three to four times larger than the net price
manufacturers obtain after delivering rebates and other price concessions to PBMs and insurers.
Uninsured people who qualify for a manufacturers patient assistance program or PAP are asked
to pay a price that is more than twice the net price offered to commercial payers, again delivering
to the manufacturers unconscionable profits (which manufacturers represent to patients and the
public as a generous concession).

We hope when submitting follow-up questions to Mr. Azar you will consider posing one or more of the
following:

Responding to a question from Sen. Young regarding HSA/HDHP and patient cost-sharing, you
referred to law preventing an insurer from covering costs until the person with the HSA/HDHP
has met their deductible (exception for preventive care). Specifically in reference to two
definitions of US drug prices(1) public list price (a stated manufacturer list price or acquisition
cost for a pharmacy or cash price for an uninsured) and (2) secret net price (either net price
received by manufacturer after subtracting all price concessions and rebates, or net cost to plan
after PBMs/insurers receive rebates, fees and other price concessions from manufacturers)
would you please clarify whether the term costs as you used it in your response to Sen. Young
refers to list or net price? Alternatively, if you refer to another pricing concept, would you please
define that concept?

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You stated during Wednesdays hearing that insulin prices are too highand that these high
prices work for stakeholders behind the scenes. More specifically, you said in comments at the
Manhattan Institute in Fall 2016 that in some cases patients pay more than their insurers do for
medicine. Would you please explain, in terms ordinary Americans can understand, how this
happens and what can be done to make sure cost sharing amounts are based on the true net
cost to plan, i.e. the lowbut secretnet price third party payers are actually paying for the drug?

Based on your understanding of the laws and regulations governing insurance, should cost
sharing be based on the acquisition cost of the drug by the pharmacy or on the net cost to plan
for private insurers?

It may be the case that insurers were/are basing cost sharing on the unrebated acquisition cost of
drugs instead of net cost to plan (the acquisition cost minus any rebate and price concession
received from manufacturers and via PBMs). This practice that could foreseeably result in drug
rationing and thus physical harm to individuals. If evidence mounts that insurers have been
basing cost sharing on a price other than net cost to plan, would you fully support a DOJ
investigation into this practice, even if such an investigation were also to target manufacturers,
including your former colleagues at Eli Lilly?

Manufacturers have been marketing Patient Assistance Programs as a panacea that would cure
the injury the current pricing system imposes on uninsured individuals. But Lillys own documents
suggest that these programs only discount insulin by 40% off a skyrocketing list price, while
insulin sold to commercial insurers is now reported to be discounted by up to 75%. A review of
European prices, U.S. historical prices, and insulin cost of production would suggest that, despite
very large rebates, the net prices paid by U.S. insurers are themselves supra-competitive. The
price thus offered to low-income uninsured individuals via these PAP programs might thus be
beyond supra-competitive level. Based on your experience and extensive industry knowledge,
would you agree that insulin manufacturers derive unconscionable profits from these patient
assistance programs?

Some brands of fast-acting analog insulin sold in the US are sold in Europe, Australia and Canada
at a fraction of their public U.S. list prices. These prices, in single payer markets, are in fact
roughly equivalent to (though still slightly lower than) than the net price U.S. commercial payers
actually pay manufacturers. Based on your extensive industry knowledge, would you agree that
analog insulin could thus be profitably sold in the US for less than $50 per 10 ml vial?

Similarly, glucagon emergency kits are sold overseas at prices ranging on average from about
$25 to $40. Based on your extensive industry knowledge, would you also agree that glucagon

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emergency kits could be profitably sold in the U.S. for less than $55.02 an average insurer
price documented in a 2015 article authored by Eli Lilly employees?

Youve alluded in past talks to value-based pricing as an option for transforming the system. Your
opening statement indicates that you plan to use Medicare as a Trojan horse for imposing
outcome-based rebating on the healthcare industry, and supporting data-sharing that puts the
individual patient at the center of decision making.

- How would a value-based pricing systemwhere either independent third-party or in-house


insurance experts decide the value of drugs based on esoteric factorsbring the prices paid
by uninsured individuals (for life-saving drugs that are relatively cheap to manufacture) down
to the general price range paid by commercial insurers in the U.S. and individuals in
European single payer markets?

- Do you agree with the Laura and John Arnold Foundationfunded Institute for Clinical and
Economic Review (ICER), when they state in a March 2016 report titled Insulin Degludec
(Tresiba, Novo Nordisk A/S) for the Treatment of Diabetes: Effectiveness, Value, and Value-
Based Price Benchmarksthat achieving levels of value more closely aligned with patient
benefit would require relatively modest discounts (8-10%) from the current list price of Novo
Nordisks insulin degludec Tresiba? The current average cash price of Tresiba is about $539
for a box of five 3ml flextouch pens (U-100) that may cost less than $10 to manufacture.

- Individuals with type 1 diabetes need insulin to stay alive. Pricing their insulin using value-
based pricing methodology, i.e. estimating in a supposedly scientific manner levels of value
more closely aligned with patient benefit, would be akin to pricing their lives. As a
proponent of value pricing, what value would you place on a year of life for a person with
type 1 diabetes?

Thank you again for your attention to the concerns of your constituents with type 1 and other insulin-
dependent diabetes. Please dont hesitate to contact us if we can be of any assistance. Your staff can
reach me at 541.257.8878 (PST) or julia.boss@t1df.org.

Sincerely,

Julia Boss
President

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