MERCK & CO., INC. et al v. UNITED STATES DEPARTMENT OF HEALTH AND HUMAN SERVICES et al

Filing 1

COMPLAINT against All Defendants ( Filing fee $ 400 receipt number 0090-6188695) filed by AMGEN INC., ELI LILLY AND COMPANY, ASSOCIATION OF NATIONAL ADVERTISERS, INC., MERCK & CO., INC.. (Attachments: #1 Declaration of C. Garthwaite, #2 Declaration of R. Dhar, #3 Declaration of R. El-Dada for Merck, #4 Declaration of J. Oleksiw for Lilly, #5 Declaration of D. Marek for Amgen, #6 Civil Cover Sheet, #7 Summons to U.S. Department of Health and Human Services, #8 Summons to Alex M. Azar II, #9 Summons to U.S. Centers for Medicare and Medicaid Services, #10 Summons to Seema Verma, #11 Summons to U.S. Attorney General, #12 Summons to U.S. Attorney for DC)(Bress, Richard)

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UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF COLUMBIA
MERCK & CO., INC., ELI LILLY AND
COMPANY, AMGEN INC., and
ASSOCIATION OF NATIONAL
ADVERTISERS, INC.,
Plaintiffs,
v.
UNITED STATES DEPARTMENT OF
HEALTH AND HUMAN SERVICES,
ALEX M. AZAR II, in his official capacity as
the Secretary of the United States Department
of Health and Human Services, CENTERS
FOR MEDICARE & MEDICAID
SERVICES, and SEEMA VERMA, in her
official capacity as the Administrator of the
Centers for Medicare & Medicaid Services,

Case No. __________________

Defendants.
EXPERT DECLARATION OF PROFESSOR CRAIG GARTHWAITE
JUNE 14, 2019

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Table of Contents
I.

Qualifications ..........................................................................................................................3

II.

Background and Assignment ..................................................................................................4

III.

Summary of Findings..............................................................................................................5

IV. Overview Of The Prescription Drug Supply Chain And Pricing ...........................................5
A.
B.
V.

WAC captures only one part of the complex prescription drug supply
chain ...............................................................................................................................6
Consumer cost-sharing structures are varied .................................................................8

The Final Rule Requires Disclosure Of WAC, Which Does Not Represent
The Price That The Overwhelming Majority Of Consumers Pay For
Prescription Drugs ..................................................................................................................9
A.

Commercial Plans: Tens of millions of commercially insured
consumers pay drug prices entirely unrelated to WAC ...............................................10

B.

Medicaid: Nearly all Medicaid enrollees have only flat copayments for
prescription drugs and are unaffected by WAC ...........................................................15

C.

Medicare: Medicare enrollees face a complex set of cost-sharing rules,
but rarely incur costs that are close to WAC ...............................................................17

D.

Uninsured: WAC may not be fully determinative of their out-of-pocket
costs..............................................................................................................................23

VI. Consumers’ Out-Of-Pocket Costs Vary Considerably And Are Difficult To
Reliably Predict Based On WAC..........................................................................................24
A.

Due to the complexities of drug pricing and cost sharing, out-of-pocket
costs generally bear little—or no—relation to WAC ..................................................25

B.

Claims data from actual individuals demonstrate the variability and
lack of predictability of out-of-pocket costs ................................................................27

C.

The literature shows that consumers struggle with cost sharing
concepts........................................................................................................................30

VII. Conclusion ............................................................................................................................32

2

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I.

Qualifications
1.

I am the Herman R. Smith Research Professor in Hospital and Health Services and

a tenured Associate Professor of Strategy at the Kellogg School of Management, Northwestern
University. I am also the Director of the Program on Healthcare at Kellogg. At Kellogg, I teach
courses in the economics of strategy and healthcare strategy and organize Kellogg’s healthcare
business curriculum. In addition, I am a Research Associate at the National Bureau of Economic
Research, and a Faculty Associate at the Institute for Policy Research at Northwestern University.
2.

I received a PhD in Economics from the University of Maryland at College Park, a

Master’s in Public Policy from the Gerald R. Ford School of Public Policy at the University of
Michigan, and a B.A. in Political Science from the University of Michigan.
3.

Prior to my graduate studies, I was an Economist at Public Sector Consultants in

Lansing, MI, and the Director of Research and Chief Economist at the Employment Policies
Institute, in Washington, DC.
4.

My research focuses on a variety of issues including drug pricing and innovation,

the effect of expanded patent protection on drug pricing, the effects of increases in demand on
innovation by U.S. pharmaceutical firms, and the relationship between health insurance
expansions and high drug prices. My research has been published in journals such as the Quarterly
Journal of Economics, the American Economic Review, the Review of Economics and Statistics,
the Journal of Health Economics, The New England Journal of Medicine, the Annals of Internal
Medicine, and Health Affairs, and has been profiled in media outlets such as the New York Times,
the Wall Street Journal, the Washington Post, and Vox.
5.

I have testified before the United States House of Representatives and the United

States Senate on matters including competition in prescription drug markets, consolidation in

3

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healthcare markets, and healthcare reforms. My full curriculum vitae is attached to this declaration
as Appendix A.
6.

In forming my opinion, I relied on the various materials and documents discussed

in this declaration, which are listed in Appendix B.
7.

I am being compensated at the rate of $750 per hour. In addition, I receive

compensation based on the work that Analysis Group, Inc., performs in support of my declaration.
My compensation is not contingent on the nature of my findings or on the outcome of this
litigation.
II.

Background and Assignment
8.

In its recently published final rule, the Centers for Medicare and Medicaid Services

(CMS) mandates that Direct-to-Consumer (DTC) television advertisements for prescription drugs
and biological products that are reimbursed by Medicare or Medicaid include the so-called “list
price,” which is defined in the rule as the Wholesale Acquisition Cost (WAC) for a typical 30-day
regimen or typical course of treatment for that product.1
9.

I have been asked by counsel for Plaintiffs to describe the relationship of that WAC,

which is the price for wholesalers,2 with the price—or out-of-pocket cost—that consumers incur
when acquiring prescription drugs. In addition, I have been asked to describe, more generally, the
roles played by various stakeholders in the U.S. healthcare system in relation to the pricing of
prescription drugs.

1

Department of Health and Human Services, Centers for Medicare & Medicaid Services, 42 C.F.R. Part 403,
[CMS—4187—F], RIN 0938—AT87, “Medicare and Medicaid Programs; Regulation To Require Drug Pricing
Transparency,” Federal Register, Vol. 84, No. 91, Friday, May 10, 2019, Rules and Regulations, pp. 2073220758. Hereinafter I refer to this as the “final rule.”

2

42 U.S.C. § 1395w-3a(c)(6)(B) (defining WAC as “the manufacturer’s list price” to “wholesalers or direct
purchasers,” “not including prompt pay or other discounts, rebates or reductions in price”).

4

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III.

Summary of Findings
10.

In the following sections of this declaration I show that:
•

For more than 120 million Americans, a drug’s WAC has no direct relationship
to their out-of-pocket costs at the pharmacy counter. These consumers will
make only a flat copayment. The amount of that copayment is unrelated to
WAC. And it is almost always a small fraction of WAC—particularly for
branded medications.

•

Even when consumers’ out-of-pocket costs are related in some way to WAC,
for example, when a consumer has a coinsurance obligation, the consumer’s
cost is almost always substantially lower than WAC. This is due to the nature
of different cost-sharing arrangements typically used by health insurers in the
United States.

•

Moreover, the relationship (or lack of relationship) between WAC and out-ofpocket costs is complex and subject to considerable variation across consumers,
and even variation for the same consumers over time. As a result, most
consumers are unlikely to be able to reliably predict their true out-of-pocket
costs for a specific prescription based on disclosure of WAC alone.

•

Therefore, for the overwhelming majority of Americans, WAC will grossly
overstate their out-of-pocket costs for prescription drugs and will not provide
meaningful information to them.

IV.

Overview Of The Prescription Drug Supply Chain And Pricing
11.

The actual costs of prescription drugs—both the costs to consumers and to

insurance providers—are the result of a patient’s unique healthcare needs, the availability of

5

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insurance and the specifics of the insurance plan, and a complex series of negotiations between
manufacturers, wholesalers, pharmacies, pharmacy benefits managers, and health insurers.
12.

Before explaining how the consumer’s out-of-pocket costs differ from the so-called

“list price” for which disclosure is required in the final rule, I first provide an overview of the
prescription drug supply chain and the various prices paid by different stakeholders. I then describe
the key components of consumer cost-sharing.
A.

WAC captures only one part of the complex prescription drug supply chain

13.

The supply chain of a pharmaceutical drug begins with manufacturers, who

research, develop, and produce the drugs. Manufacturers typically sell their pharmaceutical
products to wholesale distributors (“wholesalers”).3 Wholesalers, in turn, distribute the drugs from
the manufacturers to pharmacies, hospitals, and other medical facilities.4 Pharmacies and
healthcare facilities purchase drugs directly from wholesalers and ultimately dispense them to
consumers.
14.

While the physical movement of pharmaceutical products from manufacturer to

wholesaler to pharmacy to consumer is straightforward, the calculation of the price paid for the
drug at each step in the supply chain is far more complex. First, the pharmaceutical manufacturer
sets a price for their product known as the Wholesale Acquisition Cost (WAC)—the cost at which
a wholesaler acquires prescription drugs from the manufacturer.5 WAC is the price that the final

3

“Follow the pill: understanding the U.S. commercial pharmaceutical supply chain.” Prepared for The Kaiser
Family Foundation by The Health Strategies Consultancy LLC, March 2005, at p. 4, available at
https://www.kff.org/wp-content/uploads/2013/01/follow-the-pill-understanding-the-u-s-commercialpharmaceutical-supply-chain-report.pdf (“KFF ‘Follow the Pill’), (viewed June 13, 2019).

4

KFF “Follow the Pill,” p. 8.

5

Wholesalers may pay a price that is discounted from WAC. Examples of discounts they may receive are “volume
discounts, prompt pay discounts, and discounts related to the sale of short-dated products.” The wholesaler may
receive a distribution fee from the manufacturer for its services. See KFF “Follow the Pill,” p. 18.

6

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rule calls the “list price.” WAC is rarely representative of, and is almost always substantially higher
than, the cost incurred by consumers at the pharmacy counter.
15.

Pharmacies acquire prescription drugs from the wholesaler. Pharmacies may

negotiate an acquisition price directly with wholesalers or with manufacturers, who might extend
discounts through the wholesalers. Pharmacies also negotiate with Pharmacy Benefits Managers
(PBMs) on the reimbursement amount and inclusion in preferred pharmacy networks—these
negotiations can reduce the price paid by the pharmacy for a drug to a cost below WAC.6 The
pharmacies then dispense prescription drugs to consumers and typically receive compensation
from two sources: (1) third-party payers (i.e. commercial health insurers or government
programs such as Medicare and Medicaid) and (2) consumers themselves.
16.

In a separate set of negotiations, PBMs work with third-party payers (i.e., insurance

companies) to negotiate a more favorable price for prescription drugs. PBMs pool together many
health plans and are able to leverage that scale to negotiate rebates from manufacturers. Rebates,
or discounts off a product’s WAC, incentivize volume and market-share-based savings and result
in lower prices paid by health plans. They play a particularly important role in the sale of branded
(rather than generic) prescription drugs. Plans may also agree to place particular drugs onto
preferred formulary tiers in exchange for even deeper discounts.7 The differential tiers can affect
a consumer’s out-of-pocket costs, as preferred tiers are typically associated with lower consumer
cost-sharing.
17.

These rebate arrangements are specific to particular pharmaceutical products,

payers and PBMs. In other words, purchases of one drug could entail a large rebate for one insurer

6

KFF “Follow the Pill,” p. 14.

7

KFF “Follow the Pill,” p. 14.

7

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and a comparatively small rebate for another. Rebates, however, can be substantial, and insurance
companies’ net costs are therefore often meaningfully lower than WAC.8 Furthermore, the revenue
from these rebates is used to reduce insurance premiums for health plan beneficiaries, and can also
be passed on to consumers to reduce out-of-pocket costs at the pharmacy.9 Hence, WAC does not
reflect—and is often considerably higher than—the eventual cost of the drug to the ultimate
purchasers.
B.

Consumer cost-sharing structures are varied

18.

Consumers pay a share of the cost associated with obtaining a prescription drug

from a pharmacy, hospital, or other medical facility. More than 90% of Americans carry health
insurance.10 For that population, the amount they pay—their out-of-pocket cost—is determined by
the particulars of their cost-sharing arrangement with their health insurer, which can vary
considerably.
19.

Health insurers offer a wide range of health plans that differ in the premiums to be

paid by beneficiaries, as well as the magnitude and structure of the cost-sharing arrangements they
require. Cost-sharing typically includes one or more of the following elements:
•

Copayments—a flat fee per prescription or medical service, unrelated to WAC;
copayments for prescriptions will typically vary by formulary tier (e.g.,
preferred brand, non-preferred brand);

8

Dubois, Robert W. “Rx Drug Costs: List Prices Versus Net Prices and The Importance of Staying Within the
Data,”
Health
Affairs
Blog,
March
13,
2019,
available
at
https://www.healthaffairs.org/do/10.1377/hblog20190312.446522/full/ (viewed June 5, 2019).

9

Abelson, Reed. “UnitedHealthcare Says it Will Pass on Rebates from Drug Companies to Consumers,” New York
Times, March 6, 2018, available at https://www.nytimes.com/2018/03/06/health/unitedhealth-drug-prices.html
(viewed June 13, 2019).

10

9% of Americans are uninsured, see “Health Insurance Coverage of the Total Population,” Kaiser Family
Foundation, 2017, available at https://www.kff.org/other/state-indicator/total-population/ (viewed June 5, 2019).

8

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•

Coinsurance—a set percentage of a medical service or a drug’s price;

•

Deductible—a pre-defined limit up to which the consumer pays the full price
charged by the pharmacy.11

20.

For most insured consumers in the United States, these specific cost-sharing

arrangements are limited by a cap on the total out-of-pocket spending for which the consumer can
be liable for his or her drug and medical services in a year; 99% of employer-sponsored
commercially insured beneficiaries have plans that cap their out-of-pocket spending.12 As of 2018,
the average out-of-pocket maximum for individual coverage among all employer-sponsored
commercial plans was $3,872.13 In addition, the Patient Protection and Affordable Care Act (ACA)
mandates that out-of-pocket spending for an individual be no higher than $7,350 for ACAcompliant marketplace plans.14 Medicaid plans cap out-of-pocket spending at 5% of an individual
or family’s income.15
V.

The Final Rule Requires Disclosure Of WAC, Which Does Not Represent The Price
That The Overwhelming Majority Of Consumers Pay For Prescription Drugs
21.

The final rule requires manufacturers to inform consumers of the so-called “list

price” of an advertised prescription drug. “List price,” however, is not the price at which
prescription drugs are sold to consumers. Instead, “list price” is defined by the final rule as WAC—
i.e., the price at which prescription drugs are sold to wholesalers.

11

“Cost Sharing,” Healthcare.gov, https://www.healthcare.gov/glossary/cost-sharing/ (viewed June 5, 2019).

12

Claxton, Gary, Matthew Rae, Michelle Long, Anthony Damico, and Heidi Whitmore, “Employer Health Benefits:
2018
Annual
Survey,”
Kaiser
Family
Foundation,
2018,
p.
130,
available
at
http://files.kff.org/attachment/Report-Employer-Health-Benefits-Annual-Survey-2018 (“KFF 2018 Employer
Health Benefits Survey”)

13

KFF 2018 Employer Health Benefits Survey, p. 133.

14

KFF 2018 Employer Health Benefits Survey, p. 130.

15

Rudowitz, Robin, Rachel Garfield, and Elizabeth Hinton, “10 Things to Know About Medicaid: Setting the Facts
Straight,” Kaiser Family Foundation, March 2019, available at http://files.kff.org/attachment/Issue-Brief-10Things-to-Know-about-Medicaid-Setting-the-Facts-Straight (viewed June 5, 2019).

9

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22.

The price that the vast majority of individual consumers pay for prescription drugs

is substantially lower than an amount that resembles the full WAC for their prescription
medication. For over 120 million Americans who only have copayment requirements, the price
they pay for prescription drugs has no direct relationship to WAC. At most, the amount of a
copayment is only loosely and indirectly related to WAC, to the extent that an insurer considers
WAC and rebates when deciding which copayment tier of its formulary to place a particular
product. But even then, drugs with different WACs will be on the same copayment tier. For those
transactions for which WAC may be relevant to out-of-pocket costs (e.g., when the consumer is
paying coinsurance that is related to WAC), consumers also typically pay substantially less than
WAC—particularly for branded drugs.
23.

But the price each consumer pays varies considerably based on the particulars of

their insurance plans and other variables. Below I discuss how common insurance plans affect a
consumer’s out-of-pocket costs.16
A.

Commercial Plans: Tens of millions of commercially insured consumers pay
drug prices entirely unrelated to WAC

24.

With respect to commercial insurance plans, below I separately discuss employer-

sponsored plans from other forms of commercial plans (such as Affordable Care Act-compliant
plans).
25.

Employer-sponsored plans. As of 2017, 156 million Americans (49%) received

health insurance coverage through an employer-sponsored plan.17 As I describe next, as of 2017,
between 39% and 51% of employer-sponsored beneficiaries are shielded entirely from a drug’s

16

The statistics included in the section that follows rely on national averages based on publicly available
information, and may differ for particular manufacturers or particular drugs due to variation in patient segments.

17

“Health Insurance Coverage of the Total Population,” Kaiser Family Foundation, 2017, available at
https://www.kff.org/other/state-indicator/total-population/ (viewed June 5, 2019).

10

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WAC as a result of the cost-sharing and prescription drug coverage in their plans. That percentage
may be significantly larger for any particular drug. As a result, WAC is irrelevant to the amount
that tens of millions of Americans with employer-sponsored plans pay for prescription drugs.
26.

As an initial matter, Americans who receive health insurance coverage through

their employers generally do not have to pay a deductible for their prescription drugs and,
therefore, are not exposed to WAC on that basis. According to a Kaiser Family Foundation report,
85% of employer-sponsored health insurance beneficiaries have some form of annual deductible.18
However, the deductible that applies to healthcare services generally does not apply to prescription
drugs for 95% of beneficiaries on HMO plans, 92% on PPO plans, 91% on POS plans, and 83%
on high deductible health plans.19 Therefore, the large majority (approximately 90%) of employersponsored health insurance beneficiaries have no deductible for prescription drugs.
27.

Among all covered workers, the vast majority (82%) are on plans with at least three

tiers of cost-sharing for prescriptions (typically generic, preferred brand, and non-preferred
brands).20 For those employees, approximately half to two-thirds of plans use copayments rather
than coinsurance for prescription drug cost-sharing, depending on the medication’s tier.21 By
definition, a consumer who pays a copayment for a prescription drug pays only a set copayment
(i.e., a set fee of, say, $15, or whatever the fixed amount is set by a plan), irrespective of WAC of
the prescription drug.

18

KFF 2018 Employer Health Benefits Survey, p. 104.

19

KFF 2018 Employer Health Benefits Survey, p. 121.

20

The count of tiers of cost-sharing does not include tiers that cover only specialty drugs. KFF 2018 Employer
Health Benefits Survey, p. 155.

21

The percentage of employees with copayment for second tier (“preferred”) drugs is 76% on non-HDHP plans and
52% on HDHP plans. For third tier (“non-preferred”) drugs, 73% of employees on non-HDHP plans and 47% on
HDHP plans have copayments. For fourth tier drugs, 56% of non-HDHP employees and 43% of HDHP employees
have copayments for prescription drugs, see KFF 2018 Employer Health Benefits Survey, p. 158.

11

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28.

Even those covered workers who do have a coinsurance obligation pay substantially

less than WAC. For plans with three or more tiers of drug coverage, the average coinsurance ranges
from 19% for first-tier drugs to 36% for third-tier drugs.22
29.

Thus, considering the percent of workers in each plan type with no deductible

applicable to prescription drug purchases and no coinsurance, an estimated 61 million to 80 million
(39% to 51%) of employer-sponsored insurance beneficiaries do not incur costs for prescription
drugs that have any relation to WAC. This is a conservative estimate, as it does not include
individuals on two-tier or single-tier plans, some of whom may also have no coinsurance or
deductible.23
30.

For those few beneficiaries of employer-sponsored plans who do have a deductible

for prescription drugs, although their out-of-pocket cost may bear some relation to WAC, their
cost can still be far below WAC and cannot be easily calculated simply by knowing WAC. Some
of these individuals have a separate prescription drug deductible from their general medical care
deductible. For those individuals, a 2017 report found that the average prescription drug deductible
was only $149.24 This would be quickly satisfied, especially given that the final rule does not apply
to prescription drugs with an annual WAC of less than $420 (or $35 per month).25 Across all
employer-sponsored plans with a deductible of any kind (either prescription drug, medical, or

22

KFF 2018 Employer Health Benefits Survey, p. 159.

23

More limited information is provided in the KFF 2018 Employer Health Benefits Survey for single and two tier
plans, but the vast majority of workers are not on these plans. As noted above, employer-sponsored plans with
three or more tiers of prescription drugs are by far the most common, see KFF 2018 Employer Health Benefits
Survey, p. 155-156.

24

Claxton, Gary, Matthew Rae, Michelle Long, Anthony Damico, Gregory Forester, and Heidi Whitmore,
“Employer Health Benefits: 2017 Annual Survey,” Kaiser Family Foundation, 2017, p. 159, available at
http://files.kff.org/attachment/Report-Employer-Health-Benefits-Annual-Survey-2017.

25

The final rule does not apply to prescription drugs with WAC less than $35 per month, which is equivalent to
$420 annually. 42 C.F.R. § 403, p. 20732.

12

Case 1:19-cv-01738-APM Document 1-1 Filed 06/14/19 Page 13 of 58

both), the average deductible was $1,573 in 2018.26 Of the 20 drugs with the highest direct-toconsumer advertising expenditures as specified in the final rule, WAC for a single 30-day supply
of nine of these drugs would immediately exceed the $1,573 average deductible.27 Moreover, for
many consumers, their deductible would also be consumed by other healthcare services over the
course of a given coverage year, such as other prescriptions, doctor visits, and the like. Thus, many
factors, including a consumer’s year-to-date consumption of all medical services, his or her
insurance contract design, and the prescription drug’s formulary placement all affect out-of-pocket
costs.
31.

Of those plans that have a deductible for prescription drugs, only a small minority

require consumers to pay coinsurance once the deductible is met. However, among beneficiaries
of plans with three or more tiers, the average coinsurance is substantially lower than WAC, ranging
from an average of 19% for first-tier drugs to 36% for third-tier drugs.28 In other words, after only
the first month of treatment on many of the drugs with the highest DTC advertising expenditures,
the consumer with such a coinsurance plan will still only be paying on average 19%-36% of WAC.
32.

Non-employer commercial insurance. There were 20.5 million Americans (7%

of the population) with commercial insurance not provided through an employer in 2017.29 Of
these, approximately 12.2 million were insured through a state health insurance marketplace, while
the remainder purchased plans directly from insurance companies.30 Approximately half (49%) of

26

KFF 2018 Employer Health Benefits Survey, p. 103.

27

42 C.F.R. § 403, p. 20741.

28

KFF 2018 Employer Health Benefits Survey, p. 159.

29

“Health Insurance Coverage of the Total Population,” Kaiser Family Foundation, 2017, available at
https://www.kff.org/other/state-indicator/total-population/ (viewed June 5, 2019).

30

“Marketplace enrollment 2014-2019,” Kaiser Family Foundation, 2019, available at https://www.kff.org/healthreform/state-indicator/marketplace-enrollment/ (viewed June 5, 2019).

13

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all those enrolled in an ACA-compliant plan in 2016 (purchased both on or off the marketplace)
were on high-deductible plans, with an individual deductible of at least $1,500.31 Marketplace
plans are categorized based on generosity of coverage (silver, gold, and platinum). Currently, of
all those enrolled in marketplace plans, 31% are in bronze plans (3.5 million people), 59% in silver
(6.8 million people), 8% in gold (960,000 people), and 1% in platinum (106,000 people).32 As of
2016, the deductible in a large number of marketplace plans (58% of silver plans, 65% of gold,
and 93% of platinum) does not apply to prescription drugs.33
33.

According to a 2016 report from the Commonwealth Fund, both copayments and

coinsurance are used for cost-sharing on marketplace plans, with the use of coinsurance increasing
across tiers. Specifically—as of 2016—68% of marketplace plans used copayments for generic
drugs, while only 14% used coinsurance. For preferred brands, the proportion using copayments
was 62%, while coinsurance was used by 23%. For non-preferred brand drugs, 41% of marketplace
plans used copayments while 37% used coinsurance, and for specialty drugs, only 16% had
copayments while 60% of plans used coinsurance. The specific plans also vary, with platinum
plans most often relying on copayments and bronze plans most often relying on coinsurance.34

31

Hamel, Liz, Jamie Firth, Larry Levitt, Gary Claxton, and Mollyann Brodie, “Survey of Non-Group Health
Insurance Enrollees, Wave 3,” Kaiser Family Foundation, May 20, 2016, available at https://www.kff.org/healthreform/poll-finding/survey-of-non-group-health-insurance-enrollees-wave-3/ (viewed June 6, 2019).

32

Totals on each marketplace plan level do not count those on non-marketplace ACA-compliant plans.
“Marketplace Plan Selections by Metal Level.” Kaiser Family Foundation, 2019, available at
https://www.kff.org/health-reform/state-indicator/marketplace-plan-selections-by-metal-level2/?dataView=1&currentTimeframe=0&sortModel=%7B%22colId%22:%22Location%22,%22sort%22:%22asc
%22%7D (viewed June 10, 2019).

33

Rae, Matthew, Larry Levitt, and Gary Claxton, “Patient Cost-Sharing in Marketplace Plans, 2016,” Kaiser Family
Foundation, November 13, 2015, available at https://www.kff.org/health-costs/issue-brief/patient-cost-sharingin-marketplace-plans-2016/ (viewed June 5, 2019).

34

Gabel, Jon, Matthew Green, Adrienne Call, Heidi Whitmore, Sam Stromberg, and Rebecca Oran, “Changes in
Consumer Cost-Sharing for Health Plans Sold in the ACA’s Marketplaces, 2015 to 2016,” The Commonwealth
Fund,
May
2016,
p.
8,
available
at
https://www.commonwealthfund.org/sites/default/files/documents/___media_files_publications_issue_brief_20
16_may_1875_gabel_changes_cost_sharing_marketplaces_rb_v2.pdf (viewed June 11, 2019).

14

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B.

Medicaid: Nearly all Medicaid enrollees have only flat copayments for
prescription drugs and are unaffected by WAC

34.

Almost 65 million Americans (21% of the population) receive health insurance

from Medicaid—which includes roughly 12 million Americans who are eligible for both Medicare
and Medicaid coverage.35 Almost none of these individuals incur a cost for prescription drugs that
is based on or calculated from WAC—and many get access to drugs with no payment at all.
35.

Instead, Medicaid beneficiaries have no prescription drug deductibles; rather, their

prescriptions are purchased with capped copayments or no payment at all—and at levels that are
mere fractions of even the most common copayments in the commercial market.36 For preferred
prescription drugs, all Medicaid enrollees pay a federally mandated maximum $4 copayment—
regardless of WAC.37 For non-preferred drugs, Medicaid beneficiaries at or below 150% of the
federal poverty level pay a maximum $8 copay—again, regardless of WAC.38
36.

By statute, states are allowed to require Medicaid enrollees above 150% of the

federal poverty level to pay up to 20% of the state’s cost (as I discuss next, this would be 20% of
the greatly discounted price paid by state Medicaid plans, not WAC).39 But no state exercises this

35

“Health Insurance Coverage of the Total Population,” Kaiser Family Foundation, 2017, available at
https://www.kff.org/other/state-indicator/total-population/ (viewed June 5, 2019); “Data Analysis Brief:
Medicare-Medicaid Dual Enrollment 2006 through 2017,” CMS Medicare-Medicaid Coordination Office,
December 2018, p.1, available at https://www.cms.gov/Medicare-Medicaid-Coordination/Medicare-andMedicaid-Coordination/Medicare-Medicaid-CoordinationOffice/DataStatisticalResources/Downloads/MedicareMedicaidDualEnrollmentEverEnrolledTrendsDataBrief20
06-2017.pdf.

36

“Medicaid Benefits: Prescription Drugs,” Kaiser Family Foundation, 2018, available at
https://www.kff.org/medicaid/state-indicator/prescription-drugs/ (viewed June 5, 2019). For comparison, for
employer-sponsored commercial plans the average copay was $11 for first-tier, $33 for second-tier, $59 for thirdtier, and $105 for fourth-tier drugs. See KFF 2018 Employer Health Benefits Survey, p. 155.

37

“Cost Sharing Out of Pocket Costs,” Medicaid.gov, available at https://www.medicaid.gov/medicaid/costsharing/out-of-pocket-costs/index.html (viewed June 5, 2019).

38

“Cost Sharing Out of Pocket Costs,” Medicaid.gov, available at https://www.medicaid.gov/medicaid/costsharing/out-of-pocket-costs/index.html (viewed June 5, 2019).

39

“Cost Sharing Out of Pocket Costs,” Medicaid.gov, available at https://www.medicaid.gov/medicaid/costsharing/out-of-pocket-costs/index.html (viewed June 5, 2019).

15

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option. All states except Kentucky currently require only fixed copayments for non-preferred drugs
regardless of income level. Kentucky is the only exception, but it imposes only a 5% coinsurance
on the state’s cost of the non-preferred drug for adults above 150% of the poverty line, and even
that amount is capped at only $20 per purchase, with no coinsurance required for children at any
poverty level.40 Currently in Kentucky, there are approximately 650,000 adults enrolled in
Medicaid, and only a small subset of them are over 150% of the poverty level.41
37.

Furthermore, with respect to Medicaid, even the government pays costs that bear

little resemblance to WAC. States purchase drugs for Medicaid under the “Best Price Guarantee”
whereby they are entitled to pay either 23% off average manufacturer price (for branded
medications) or the maximum discounted rebate price, whichever discount is greater.42 State
Medicaid plans may also negotiate additional supplemental rebates.43 Finally, Medicaid is also
guaranteed an adjustment if a drug’s price rises faster than inflation, which can translate to sizeable
discounts for older drugs with significant price increases.44

40

“Cost-Sharing Requirements for Selected Medicaid Services for Section 1931 Parents,” Kaiser Family
Foundation, January 1, 2019, available at https://www.kff.org/medicaid/state-indicator/cost-sharingrequirements-for-selected-medicaid-services-for-section-1931-parents-january/ (viewed June 5, 2019);
“Premium and Cost-Sharing Requirements for Selected Services for Medicaid Adults,” Kaiser Family
Foundation, January 1, 2019, available at https://www.kff.org/health-reform/state-indicator/premium-and-costsharing-requirements-for-selected-services-for-medicaid-expansion-adults (viewed June 5, 2019).

41

“Monthly Child Enrollment in Medicaid and CHIP,” Kaiser Family Foundation, March 2019, available at
https://www.kff.org/medicaid/state-indicator/total-medicaid-and-chip-childenrollment/?currentTimeframe=0&selectedRows=%7B%22states%22:%7B%22kentucky%22:%7B%7D%7D%
7D&sortModel=%7B%22colId%22:%22Location%22,%22sort%22:%22asc%22%7D (viewed June 5, 2019).

42

“Medicaid Drug Rebate Program,” Medicaid.gov, available at https://www.medicaid.gov/medicaid/prescriptiondrugs/medicaid-drug-rebate-program/index.html (viewed June 5, 2019).

43

“State
Prescription
Drug
Resources,”
Medicaid.gov,
available
at
https://www.medicaid.gov/medicaid/prescription-drugs/state-prescription-drug-resources/index.html
(viewed
June 5, 2019).

44

Baghdadi, Ramsey, “Medicaid Best Price,” Health Affairs Health Policy Brief, August 10, 2017. DOI:
10.1377/hpb20171008.000173.

16

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38.

As a result, Medicaid plans benefit from the largest rebates in the entire industry.

Indeed, the Medicaid and CHIP Payment and Access Commission has reported that in aggregate
“[d]rug rebates reduced gross Medicaid drug spending by more than half (54.5 percent) in FY
2017” relative to what cost would be if WAC was paid.45
C.

Medicare: Medicare enrollees face a complex set of cost-sharing rules, but
rarely incur costs that are close to WAC

39.

In 2017, 42.8 million Americans were covered only by Medicare (14% of the

population), with an additional 12 million receiving both Medicaid and Medicare benefits (dual
eligibility).46 I have already addressed the dual-eligible population in my discussion of Medicaid
above.
40.

Medicare-only enrollees pay out-of-pocket costs that are, at certain times and for

certain drugs, calculated as a percentage of the pharmacy negotiated price, which itself is based on
WAC. But due to the complexity in cost-sharing rules and their variability across hundreds of
available prescription drug plans, as well as changes in cost-sharing calculations depending on
features such as year-to-date spending and formulary placement, out-of-pocket costs will vary over
the course of the year for the same prescription drug for different consumers on the same Medicare
plan—and even for the same consumer, depending on the consumer’s other healthcare costs

45

“MACStats: Medicaid and CHIP Data Book,” MACPAC, December 2018, p.38,
at https://www.macpac.gov/wp-content/uploads/2018/12/December-2018-MACStats-Data-Book.pdf
June 5, 2019).

46

“Health Insurance Coverage of the Total Population,” Kaiser Family Foundation, 2017, available at
https://www.kff.org/other/state-indicator/total-population/ (viewed June 5, 2019); “Data Analysis Brief:
Medicare-Medicaid Dual Enrollment 2006 through 2017,” CMS Medicare-Medicaid Coordination Office, p. 1,
available
at
https://www.cms.gov/Medicare-Medicaid-Coordination/Medicare-and-MedicaidCoordination/Medicare-Medicaid-CoordinationOffice/DataStatisticalResources/Downloads/MedicareMedicaidDualEnrollmentEverEnrolledTrendsDataBrief20
06-2017.pdf.

17

available
(viewed

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accrued year to date. This makes it extremely difficult for Medicare beneficiaries to gauge out-ofpocket cost on the basis of WAC.
41.

Medicare Part B includes coverage for medical services as well as for physician-

administered prescription drugs for beneficiaries enrolled in traditional fee-for-service Medicare.
For Part B drug coverage, Medicare beneficiaries first must meet a standard $185 deductible. They
then typically pay a 20% coinsurance calculated based on the drug’s Average Sales Price (ASP)
plus a 6% markup.47 ASP is reported to CMS by manufacturers and reflects the average price
charged by manufacturers to purchasers, after accounting for rebates and discounts. For many
prescription drugs reimbursed through Part B, ASP plus 6% is considerably lower than WAC,
while for others the two may be more similar. Medicare beneficiaries, however, are unlikely to
know a drug’s ASP, much less know whether WAC provides a reasonable proxy for ASP plus 6%,
and therefore will have difficulty predicting their expected coinsurance. In addition, many
beneficiaries also purchase Medigap supplemental policies, which provide wraparound coverage,
some of which can be used to cover any coinsurance burden from Part B expenses. Approximately
1 in 4 people with traditional Medicare are enrolled in Medigap.48

47

In general, ASP + 6% is the statutory rate for drugs administered in an outpatient or physician office setting.
However, due to sequestration provisions introduced in the 2011 Budget Control Act, the reimbursement is
effectively reduced to ASP + 4.3%. Werble, Cole, “Medicare Part B,” Health Affairs, August 10, 2017, available
at https://www.healthaffairs.org/do/10.1377/hpb20171008.000171/full/ (viewed June 12, 2019). “Medicare costs
at a glance,” Medicare.gov, available at https://www.medicare.gov/your-medicare-costs/medicare-costs-at-aglance (viewed June 10, 2019); Sachs, Rachel. “Administration Outlines Plan to Lower Pharmaceutical Prices in
Medicare
Part
B,”
Health
Affairs,
October
26,
2018,
available
at
https://www.healthaffairs.org/do/10.1377/hblog20181026.360332/full/ (viewed June 10, 2019); “Part B,” Center
for Medicare Advocacy, available at https://www.medicareadvocacy.org/medicare-info/medicare-part-b/ (viewed
June 10, 2019).

48

Boccuti, Cristina, Gretchen Jacobson, Kendal Orgera, and Tricia Neuman, “Medigap Enrollment and Consumer
Protections Vary Across States,” Kaiser Family Foundation, July 11, 2018, available at
https://www.kff.org/medicare/issue-brief/medigap-enrollment-and-consumer-protections-vary-across-states/
(viewed June 5, 2019).

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42.

Approximately 43 million Americans (14% of the population) are enrolled in a

Medicare Part D prescription drugs plan, with about half (20.4 million) enrolled in a
privatelyadministered Medicare Advantage Plan (MA-PD) and the rest in standalone fee-forservice Medicare Prescription Drug Plans (PDPs). (Some of these individuals, as noted above, are
also covered by Medicaid.)49 Medicare Advantage plans must provide coverage that is at least as
generous as traditional Medicare, and nearly 90% of those plans also supply drug coverage.50
43.

With respect to deductibles, as of 2018, 45% of all Medicare Part D beneficiaries

had no deductible at all.51 For those that have deductibles, both MA-PD and PDP prescription drug
plans impose a maximum $415 deductible (as of 2019), after which beneficiaries pay either a
copayment or coinsurance on the next $3,405 of prescription drugs.52 The precise cost to
consumers of their prescription drugs during this phase varies widely and depends on both the type
of drug a consumer is taking, their other healthcare expenses, and the cost-sharing specifics of
their plan, making the relationship to a drug’s WAC difficult to discern.

49

Jacobson, Gretchen, Anthony Damico, and Tricia Neuman, “A Dozen Facts about Medicare Advantage,” Kaiser
Family Foundation, November 13, 2018, available at https://www.kff.org/medicare/issue-brief/a-dozen-factsabout-medicare-advantage/, (viewed June 5, 2019); Cubanski, Juliette, Anthony Damico, and Tricia Neuman.
“Medicare Part D in 2018: The Latest on Enrollment, Premiums, and Cost Sharing,” Kaiser Family Foundation,
May 17, 2018, available at https://www.kff.org/medicare/issue-brief/medicare-part-d-in-2018-the-latest-onenrollment-premiums-and-cost-sharing/ (viewed June 5, 2019); “Health Insurance Coverage of the Total
Population,” Kaiser Family Foundation, 2017, available at https://www.kff.org/other/state-indicator/totalpopulation/ (viewed June 5, 2019).

50

Graham, Judith, “Medicare Vs. Medicare Advantage: How To Choose,” Kaiser Health News, October 19, 2017,
available at https://khn.org/news/medicare-vs-medicare-advantage-how-to-choose/, (viewed June 5, 2019).

51

Cubanski, Juliette, Anthony Damico, and Tricia Neuman. “Medicare Part D in 2018: The Latest on Enrollment,
Premiums, and Cost Sharing,” Kaiser Family Foundation, May 17, 2018, available at
https://www.kff.org/medicare/issue-brief/medicare-part-d-in-2018-the-latest-on-enrollment-premiums-and-costsharing/ (viewed June 5, 2019).

52

“Yearly deductible for drug plans,” Medicare.gov, available at https://www.medicare.gov/drug-coverage-partd/costs-for-medicare-drug-coverage/yearly-deductible-for-drug-plans (viewed June 5, 2019); “Costs in the
coverage gap,” Medicare.gov, available at https://www.medicare.gov/drug-coverage-part-d/costs-for-medicaredrug-coverage/costs-in-the-coverage-gap (viewed June 5, 2019)

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44.

There are multiple additional reasons why a Medicare Part D beneficiary cannot

easily predict what his or her out-of-pocket cost will be for a given prescription.
45.

First, the amount that a Medicare beneficiary will pay depends on the type of

medication and the specific plan.
a.

For preferred brand drugs, only 23% of PDP and 1% of MA-PD plan
enrollees are required to pay coinsurance—approximately only 5 million
beneficiaries in total.53

b.

For non-preferred drugs, although nearly all PDP plan enrollees (25.1
million people) pay coinsurance, 88% of enrollees on MA-PD plans (18.3
million people) have copayments for non-preferred drugs rather than
coinsurance.54

c.

Finally, for specialty drugs, defined as a drug that costs at least $670 per
month, all Medicare Part D enrollees are subject to some level of
coinsurance.55 However, a CBO report estimates that just 300,000 Medicare

53

Cubanski, Juliette, Anthony Damico, and Tricia Neuman. “Medicare Part D in 2018: The Latest on Enrollment,
Premiums, and Cost Sharing,” Kaiser Family Foundation, May 17, 2018, available at
https://www.kff.org/medicare/issue-brief/medicare-part-d-in-2018-the-latest-on-enrollment-premiums-and-costsharing/ (viewed June 5, 2019).

54

Cubanski, Juliette, Anthony Damico, and Tricia Neuman. “Medicare Part D in 2018: The Latest on Enrollment,
Premiums, and Cost Sharing,” Kaiser Family Foundation, May 17, 2018, available at
https://www.kff.org/medicare/issue-brief/medicare-part-d-in-2018-the-latest-on-enrollment-premiums-and-costsharing/ (viewed June 5, 2019).

55

Cubanski, Juliette, Anthony Damico, and Tricia Neuman. “Medicare Part D in 2018: The Latest on Enrollment,
Premiums, and Cost Sharing,” Kaiser Family Foundation, May 17, 2018, available at
https://www.kff.org/medicare/issue-brief/medicare-part-d-in-2018-the-latest-on-enrollment-premiums-and-costsharing/ (viewed June 5, 2019).

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Part D members (1.4%) who received no other subsidies from Medicaid or
an employer took a specialty drug in 2015.56
46.

Second, for those Medicare beneficiaries who are responsible for paying

coinsurance on their prescription medication, there are federally-mandated limits on the percentage
coinsurance that any consumer would have to pay. For non-preferred brand drugs, the maximum
coinsurance allowed for Medicare beneficiaries is 50%, while preferred brand coinsurance is
capped at 25% and specialty drugs are capped at 33% coinsurance.57
47.

Third, the price on which the Medicare beneficiary’s cost-sharing is based is the

price negotiated by the pharmacy, not WAC.58 This negotiated price is difficult, if not impossible,
for a Medicare beneficiary to discern, as it can vary by pharmacy due to preferred pharmacy
networks—limited networks of pharmacies that Medicare Part D plan sponsors use to lower costs.
One study found considerable variation in the negotiated price paid by Medicare plans at different
pharmacies. For example, the study looked at the most common package size and type of the

56

Anderson-Cook, Anna, Jared Maeda, and Lyle Nelson, “Prices for and Spending on Specialty Drugs in Medicare
Part D and Medicaid: An In-Depth Analysis,” Congressional Budget Office Working Paper Series, March 2019,
p. 29, available at https://www.cbo.gov/system/files?file=2019-03/55011-Specialty_Drugs_WP.pdf.

57

Pearson, Caroline F., Kelly Brantley, and Miryam Frieder, “Majority of Drugs Now Subject to Coinsurance in
Medicare Part D Plans,” Avalere, March 10, 2016, available at https://avalere.com/press-releases/majority-ofdrugs-now-subject-to-coinsurance-in-medicare-part-d-plans (viewed June 5, 2019).

58

“Medicare Clarifies ‘Negotiated Prices’ Under Part D,” CMS.gov, January 6, 2009, available at
https://www.cms.gov/newsroom/press-releases/medicare-clarifies-negotiated-prices-under-part-d (viewed June
5, 2019).

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cholesterol drug Crestor.59 For a single day’s supply of Crestor, there was variability in price of
$1.32 (with a mean price of $5.15) between the 25th and 75th percentile.60
48.

Therefore, even when Medicare beneficiaries pay coinsurance for prescription

drugs, they are paying at most 50% of the negotiated price, which itself is may be less than WAC.
Their out-of-pocket cost is therefore at most half of WAC. Furthermore, this price will vary by
pharmacy and is difficult for consumers to discern in advance based on a WAC they may observe
in ads.
49.

Fourth, the amount a Medicare beneficiary has to pay for one prescription of a

particular drug changes depending on how much they have spent in the aggregate so far that year.
After a Medicare beneficiary has spent $3,820 on prescription drugs, he or she enters the coverage
gap phase, where the beneficiary pays no more than 25% of the negotiated price of a brand-name
drug (with the manufacturer covering an additional 70%) or 37% of the negotiated price of a
generic drug.61 In 2016, approximately 5.2 million Medicare Part D enrollees who were not
covered by low-income subsidies reached the coverage gap.62

59

More specifically, the study looked at the most common National Drug Code (NDC) for Crestor. The NDC
uniquely identifies the manufacturer, product strength and dose information, as well as package size and type for
a specific version of a drug. “National Drug Codes: What is a National Drug Code (NDC)?” Idaho MMIS,
February
9,
2018,
p.
1,
available
at
https://www.idmedicaid.com/Reference/NDC%20Format%20for%20Billing%20PAD.pdf (viewed June 10,
2019).

60

Starc, Amanda and Ashley Swanson, “Preferred Pharmacy Networks and Drug Costs,” National Bureau of
Economic
Research,
Working
Paper
24862,
July
2018,
p.
9,
available
at
https://www.nber.org/papers/w24862.pdf.

61

“Costs for Medicare drug coverage: Costs in the coverage gap,” Medicare.gov, available at
https://www.medicare.gov/drug-coverage-part-d/costs-for-medicare-drug-coverage/costs-in-the-coverage-gap
(viewed June 5, 2019).

62

Cubanski, Juliette, Tricia Neuman, and Anthony Damico, “Closing the Medicare Part D Coverage Gap: Trends,
Recent Changes, and What’s Ahead,” Kaiser Family Foundation, August 2018, p. 2, available at
http://files.kff.org/attachment/Data-Note-Closing-the-Medicare-Part-D-Coverage-Gap-Trends-Recent-Changesand-Whats-Ahead (viewed June 5, 2019).

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50.

When beneficiaries’ drug expenses total $5,100 in out-of-pocket spending, they

enter the “catastrophic coverage” range, where they are responsible for paying only 5%
coinsurance on the negotiated price for the remainder of the plan year.63 Notably, while in the
coverage gap, the manufacturer’s contribution of 70% of the drug cost counts towards the
beneficiary’s out-of-pocket cost, which can accelerate the process of reaching catastrophic
coverage.64
51.

Thus, throughout all phases of Medicare drug coverage, beneficiaries pay out-of-

pocket costs that are based on the drug’s negotiated price, but in ways that are typically heavily
discounted and can be difficult to infer for any given prescription fill or refill—i.e., that price will
vary for the same product throughout the year.
D.

Uninsured: WAC may not be fully determinative of their out-of-pocket costs

52.

Uninsured Americans represent the population responsible for paying drug costs

that most closely resemble WAC. However, as of 2017, only 9% of the population (27.8 million
Americans) were without health insurance.65 Although no formal cost-sharing with an insurer is
available to the uninsured, there are a variety of ways in which they can receive cost assistance.
For example, most pharmaceutical manufacturers offer programs to provide discounts or free
products for need-based, eligible consumers.66 The programs may be offered directly through the

63

Doshi, Jalpa, Amy Pettit, and Pengxiang Li, “Addressing Out-of-Pocket Specialty Drug Costs in Medicare Part
D: The Good, The Bad, The Ugly And The Ignored,” Health Affairs Blog, July 25, 2018, available at
https://www.healthaffairs.org/do/10.1377/hblog20180724.734269/full/ (viewed June 5, 2019); “Catastrophic
Coverage,” Medicare.gov, available at https://www.medicare.gov/drug-coverage-part-d/costs-for-medicaredrug-coverage/catastrophic-coverage (viewed June 6, 2019)

64

“Costs for Medicare drug coverage: Costs in the coverage gap,” Medicare.gov, available at
https://www.medicare.gov/drug-coverage-part-d/costs-for-medicare-drug-coverage/costs-in-the-coverage-gap
(viewed June 5, 2019).

65

“Health Insurance Coverage of the Total Population,” Kaiser Family Foundation, 2017, available at
https://www.kff.org/other/state-indicator/total-population/ (viewed June 5, 2019).

66

For example, see information about programs for need-based eligible individuals for AbbVie
(https://www.abbvie.com/patients/patient-assistance/program-qualification/humira-program-

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manufacturer or through an affiliated foundation. Indeed, every one of the manufacturers of the 20
drugs with the highest DTC advertising spend referenced in the final rule offers an assistance
program for patients that provides medication at no cost to eligible consumers. Eligibility for these
programs related to the top 20 DTC drugs can reach up to 500% of the federal poverty line, and
many offer up to 12 months’ worth of coverage. In addition to these no-cost programs, some drugs
have more than one patient assistance option, offering uninsured consumers discounts ranging
from 36-75% off WAC regardless of income.67 Importantly, the variability of the structure of these
low-income assistance programs means that an uninsured individual watching a commercial listing
WAC has no systematic way of predicting how that price reflects what they would be required to
pay for the product if they were to seek out a prescription.
VI.

Consumers’ Out-Of-Pocket Costs Vary Considerably And Are Difficult To Reliably
Predict Based On WAC
53.

For the reasons discussed above, the overwhelming majority of Americans do not

pay an amount that resembles or is related to WAC when purchasing prescription drugs. The outof-pocket costs for the same prescription drug vary by consumer—and can vary even for the same
consumer over the course of the year—based on whether a consumer has insurance, the design of
his or her insurance plan, and his or her other healthcare expenses. As a result of these
complexities, without very specific data even the people most knowledgeable about prescription
drug pricing and health insurance structures would be challenged to reliably predict a given
consumer’s out-of-pocket costs in any given year, let alone for any particular transaction. But,
unsurprisingly, and as discussed below, most Americans are not well-informed about drug pricing

selection.html#myabbvie), Lilly (http://www.lillycares.com/aboutlillycares.aspx), Amgen
(http://www.amgensafetynetfoundation.com/resources-faqs.html), and Merck (https://www.merckhelps.com/).
67

For example, see Pfizer RxPathways
(https://www.pfizerrxpathways.com/sites/default/files/PfizerRxPathwaysMedicineList1.2.19-0951_1.pdf).

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and how their own health insurance works. For these reasons, most Americans cannot be expected
to accurately predict their out-of-pocket costs from a prescription drug’s WAC, let alone from the
disclosure of WAC in a short commercial.
A.

Due to the complexities of drug pricing and cost sharing, out-of-pocket costs
generally bear little—or no—relation to WAC

54.

Out-of-pocket costs are generally minimally related—or entirely unrelated—to

WAC, such that a consumer may well pay lower out-of-pocket costs for a prescription drug that
has a higher WAC. For example, consider two hypothetical drugs that could be used by a
consumer. Drug A has a WAC of $1,000 per month, and Drug B has a WAC of $900. The
manufacturer of Drug A has agreed to give an insurer a rebate of 25%, resulting in a net price to
the insurer of $750. The manufacturer of Drug B is only providing a 10% rebate, for a net price to
the insurer of $810. In this example, Drug A, the preferred drug by the plan, carries a copayment
of $50 per prescription, while Drug B has an $80 copayment. As a result, a consumer prescribed
the drug with higher WAC will have lower out-of-pocket costs than if he or she was prescribed
the drug with the lower WAC. Complicating matters, this scenario could be reversed for a
consumer insured by a different company; for that consumer’s insurance company, it may be that
the manufacturer of Drug B offered that insurer the larger rebate, resulting in the insurer placing
it on a tier with a lower copayment than Drug A. In that case, the consumer in question will pay
lower out-of-pocket costs if prescribed Drug B than Drug A.
55.

As an additional example, consider a consumer with a $1,500 deductible, a 20%

coinsurance for a specialty drug he or she needs to treat a chronic condition, and a total out-ofpocket maximum of $3,000. The drug has a WAC of $1,500. Even assuming the pharmacy’s retail
price is close to WAC and the consumer was using no other drugs, this consumer will face at least
three different out-of-pocket-costs for the same drug in the same plan year: his or her first

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prescription would cost approximately $1,500; once the deductible is met, the next five
prescriptions would cost approximately $300 each (20% of $1,500); and for the remainder of the
year the out-of-pocket cost would be zero, since the out-of-pocket maximum has been met.68 To
complicate things further, this same consumer would face different costs yet if he or she had other
medications or received medical services, which would add to the consumer’s overall healthcare
spending. The additional spending could bring the consumer to his or her deductible limit or outof-pocket maximum even sooner, and perhaps before she has paid anything at all for the drug in
question.
56.

Certain additional complexities further hamper consumers’ ability to accurately

estimate their costs. First, manufacturers increasingly are making copayment coupons available to
beneficiaries of commercial insurance.69 These can further reduce consumers’ out-of-pocket costs,
which further complicates predictions of out-of-pocket costs. In addition, certain tax-advantaged
tools can affect consumers’ out-of-pocket costs. For example, many employers offer flexible
spending accounts (FSA), in which pre-tax dollars can be set aside by employees to cover certain
healthcare expenses such as copayments, coinsurance and deductibles. Hence, when an FSA is
used to finance such expenses, the economic cost to consumers is further reduced due to the tax
benefit. Similar logic applies to funds used from health savings accounts (HSAs). It is unclear how
salient these tax benefits are for consumers when they consider their spending on specific

68

As discussed above, pharmacies can negotiate their own discounts when they purchase drugs. As a result, the
retail price they charge would be determined based on this discounted price to the pharmacy, which can vary
across pharmacies, and not based on WAC. However, for simplicity, I use WAC in this example.

69

Van Nuys, Karen, Geoffrey Joyce, Rocio Ribero, and Dana P. Goldman, “A Perspective on Prescription Drug
Copayment Coupons,” USC Schaeffer Center for Health Policy & Economics, February 2018, p. 2, available at
https://healthpolicy.usc.edu/wpcontent/uploads/2018/02/2018.02_Prescription20Copay20Coupons20White20Paper_Final-2.pdf (viewed June
10, 2019).

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prescription drugs throughout the year, and to what degree they explicitly consider them, but they
introduce yet another complicating factor for consumers in estimating their out-of-pocket costs.70
B.

Claims data from actual individuals demonstrate the variability and lack of
predictability of out-of-pocket costs

57.

Examples from actual individuals further illustrate the variability of out-of-pocket

costs for prescription drugs—as well as their lack of relationship to WAC. To demonstrate this
point, I examined data from OptumHealth Care Solutions, Inc., a large database of health insurance
claims data for beneficiaries of employer-sponsored plans.71 I reviewed the complete medical and
pharmacy claims data for select individuals over a one-year period (2016). While these data
contain detailed information on spending, they lack detail on many specific features of the
insurance design. Therefore, in the analysis below, I infer many of these features from the observed
spending of the individuals. For this illustrative analysis, I reviewed claims data for individuals
who filled at least one prescription for one of the following four medications: Ibrance, Xeljanz,
Lyrica, or Farxiga. These products were selected because they are included in the final rule’s list
of top 20 drugs in terms of DTC advertising spending and because they reflect a variety of
therapeutic areas and manufacturers. However, these examples are not meant to imply that these
individuals are statistically representative of any population. Instead they serve as context for how
the complicated design of an insurance plan can influence spending throughout the year.

70

See, for example, Consumer Reports, “How to Use FSAs, HSAs, and HRAs to Cut Your Healthcare Costs”
(https://www.consumerreports.org/healthcare-costs/how-to-use-fsas-hsas-hras-to-cut-healthcare-costs/).
In
particular, they report that “More companies and insurers are offering these options as a way to combat higher
healthcare costs, but people are wary about using them,” and “there’s a serious lack of understanding of how these
plans work.”

71

The database consists of claims data for approximately 20 million privately-insured individuals covered by 84
self-insured Fortune 500 companies with locations in all areas of the United States for services provided during
the 17-year period, 1999 through 2017:Q1. The database contains complete medical and pharmaceutical claims
for the under age 65 (non-Medicare) population, as well as data for supplemental coverage for beneficiaries
eligible for Medicare. The database does not contain claims for people covered solely by Medicare.

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58.

In the examples below, the relevant claims for an individual beneficiary are grouped

by month.72 Monthly costs are broken out by out-of-pocket categories (copayment, coinsurance,
deductible) and amounts paid by the plan. Importantly, the amounts paid by the plan reported in
the prescription drug claims data do not reflect any manufacturer rebates, which are processed only
after the claim has been adjudicated. Therefore, the total cost reported on prescription drug
claims—plan paid plus out-of-pocket costs—reflects the gross price of the prescription as
dispensed at the pharmacy.
59.

Exhibit 1 shows the monthly cost breakdown for a consumer enrolled in a PPO plan

who filled prescriptions for Ibrance, a medication for breast cancer. WAC for Ibrance was
$10,342.50 in 2016, but the consumer paid only a copayment of $36 for each Ibrance prescription,
spending a total of $468 over the course of the year, or less than 1% of WAC. Knowing WAC for
Ibrance would give this consumer no information regarding his or her true out-of-pocket costs, and
assuming the consumer paid WAC would wildly overstate the consumer’s true out-of-pocket costs.
60.

In Exhibits 2(a) and 2(b), the consumer is enrolled in a PPO plan with a health

savings account (HSA), which indicates a high deductible health plan.73 Exhibit 2(a) captures the
consumer’s prescription drug claims for Xeljanz only, while 2(b) describes all drug claims for the
consumer. This consumer begins the year taking a different medication (Enbrel—for which he or
she pays $1,500 in deductible and $640 in copayments), and only begins taking Xeljanz in May.
This plan has a deductible that applies to prescription drug benefits, but because the consumer had

72

The exhibit charts may include prescription drug claims for the drug of interest alone, all prescription drug claims,
or all claims for prescription drug and medical services—as needed. Below the horizontal axis of each exhibit, I
indicate whether a patient filled a prescription for the drug of interest in that month. The WAC prices shown each
month correspond to the drug of interest’s WAC price on the first day of that month. WAC prices obtained from
IBM Micromedex, available at http://www.micromedexsolutions.com/ (viewed June 13, 2019).

73

“Publication 969 (2018), Health Savings Accounts and Other Tax-Favored Health Plans,” IRS.gov, available at
https://www.irs.gov/publications/p969 (viewed June 8 2019).

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already met his or her deductible by that time, his or her out-of-pocket cost for Xeljanz was only
a $160 copayment per prescription (totaling $1,440), while the plan paid $3,327.65 to $3,641.78
per prescription each month (totaling $31,021.89).74 There are two main takeaways from this
example: (1) as with the consumer in Exhibit 1, this consumer’s out-of-pocket costs for his or her
medication are a small fraction of WAC (approximately 5%); and (2) had the consumer filled a
Xeljanz prescription earlier in the year, he or she might have faced higher out-of-pocket costs due
to the deductible.
61.

Exhibits 3(a) and 3(b) describe a consumer filling prescriptions for Lyrica. This

consumer was also enrolled in a PPO plan with a HSA (indicating a high deductible plan). As seen
in the exhibits, that deductible applied to his or her drug benefits. This consumer filled a
prescription for Lyrica in 11 months of 2016. As seen in Exhibit 3(a), WAC for Lyrica was
$517.54, but the retail price was only $431.47. The consumer was responsible for the full cost of
the drug in January ($431.47) before meeting his or her deductible with other prescriptions in
February (Exhibit 3(b)). The consumer then paid only a copayment of $60 for each Lyrica
prescription each month through October. For the remainder of the year (two more Lyrica
prescriptions), the consumer had no out-of-pocket costs whatsoever for Lyrica because he or she
had likely met the annual spending cap due to total healthcare spending. In this example, the retail
price varies considerably from WAC, thus even when the consumer is responsible for the full cost
due to his or her deductible, the cost is considerably lower than WAC. In addition, the consumer’s
costs further vary during the year, with three different levels of out-of-pocket spending per Lyrica
prescription, the last of which is zero.

74

WAC for Xeljanz in 2016 increased from $3,169.19 to $3,468.36 on June 1, 2016, increasing the price the plan
paid for this patient’s prescriptions from $3,327.65 through May 31 to $3,641.78 for the rest of the year.

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62.

Finally, Exhibits 4(a), 4(b), and 4(c) show a consumer filling prescriptions for

Farxiga. The consumer is enrolled in a PPO plan with a HSA (again, indicating a high deductible
health plan). This patient meets his or her deductible with medical and non-Farxiga drug expenses
in January and February. As a result, his or her out-of-pocket cost for Farxiga is a monthly flat
copayment of $90 in February and May. In June, however, this consumer appears to meet the
plan’s out-of-pocket maximum, and incurs no out-of-pocket costs for his or her Farxiga or any
other drug or medical expenses for the remainder of the year. Not only did this consumer face
changing out-of-pocket costs for Farxiga over the year (which in all instances were substantially
lower than WAC and even zero in some months), but also his or her cost-sharing was likely
affected by other healthcare spending earlier in the year. It is also worth noting that this consumer
was subject to coinsurance for non-Farxiga drugs, while he or she only paid copayments for
Farxiga. This further illustrates the difficulty—even for a well-informed consumer—to predict outof-pocket costs based on WAC for a given prescription.
C.

The literature shows that consumers struggle with cost sharing concepts

63.

Given the complexities of drug pricing and the structures of health insurance plans,

unsurprisingly, many consumers are not well-informed about their health insurance coverage. This
makes it further unlikely that consumers will be able to predict their out-of-pocket costs based on
WAC.
64.

Few Americans understand the complex structure of insurance benefits and cost-

sharing, and how their own plans would operate in practice with respect to a given prescription.
One 2013 study of Americans with private health insurance found that “only 14% of [consumers
were] able to answer correctly 4 multiple choice questions about the four basic components of
traditional health insurance design: deductibles, copays, coinsurance and maximum out of pocket

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costs.”75 Another 2013 study of employees of one large company found that the vast majority of
workers were unable to answer questions about high-level health plan benefits and their own recent
healthcare spending.76 Market research by Consumer Reports corroborated this point. They found
that “consumers can’t review ‘traditional’ health plan information like deductibles, co-insurance
levels and benefit maximums and figure out what it means for them.”77 Research found that
consumers were unfamiliar with terms like “co-insurance, annual benefit limit, allowed amount,
out-of-pocket limit and drug tier . . . Yet these terms are used to describe key features present in
almost all health plans.”78
65.

Additional research indicates that Medicare Part D beneficiaries are no different

from the general public—they likewise do not understand their health coverage well. A 2019 report
finds that a majority of Part D beneficiaries “find it difficult to determine the current and future
formularies of the plans they evaluate.”79 Another study of Medicare Part D beneficiaries found
that “regardless of age, gender, predicted drug expenditures or the predictability of drug demand
consumers underweight out of pocket costs relative to premiums and fail to consider the
individualized consequences of plan characteristics; as a result, they frequently choose plans . . .

75

Loewenstein, George, Joelle Y. Friedman, Barbara McGill, Sarah Ahmad, Suzanne Linck, Stacey Sinkula, John
Beshears, et al, “Consumers’ Misunderstanding of Health Insurance,” Journal of Health Economics 32, no. 5,
2003, p. 22, available at http://nrs.harvard.edu/urn-3:HUL.InstRepos:17190506.

76

Handel, Benjamin R. and Jonathan T. Kolstad, “Health Insurance for ‘Humans’: Information Frictions, Plan
Choice, and Consumer Welfare,” National Bureau of Economic Research Working Paper, August 2013,p. 17-18,
available at https://www.nber.org/papers/w19373.pdf.

77

“What’s Behind the Door: Consumers’ Difficulties Selecting Health Plans,” ConsumersUnion Health Policy
Brief, January 2012, p. 4, available at https://www.mnsure.org/assets/MR-CUConsumerSelect_tcm34183778.pdf.

78

“What’s Behind the Door: Consumers’ Difficulties Selecting Health Plans,” ConsumersUnion Health Policy
Brief, January 2012, p. 4, available at https://www.mnsure.org/assets/MR-CUConsumerSelect_tcm34183778.pdf.

79

Heiss, Florian, Daniel McFadden, and Joachim Winter, “Who Failed to Enroll in Medicare Part D, And Why?
Early Results,” Health Affairs Vol 25, No 5, September/October 2006, p. w352, available at
https://www.healthaffairs.org/doi/full/10.1377/hlthaff.25.w344, (viewed June 5, 2019).

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[where] an alternative plan provides better risk protection at a lower cost.”80 Overall, the research
shows that consumers have a great deal of difficulty understanding their health insurance benefits
generally, and prescription drug coverage and cost-sharing specifically.
66.

As seen in the claims data examples discussed above, even if an individual were

well-informed of this complex pricing structure, it would be extremely complicated to predict with
much reliability what his or her specific costs would be, as they are often influenced by the
utilization of other medical services and prescription drugs (and their associated costs), much of
which may be unpredictable (e.g., an accidental fall leading to an Emergency Room visit). To
further complicate the analysis, he or she would also need visibility into how his or her specific
plan classified a specific drug (i.e., preferred, non-preferred), and how his or her specific treatment
plan (i.e., the dosage and frequency he or she was prescribed for a given drug) relate to the typical
regimen.
VII.

Conclusion
67.

Over 120 million Americans pay an out-of-pocket cost for prescription drugs that

is entirely unrelated to WAC—a price charged to wholesalers and direct purchasers. These
consumers pay a fixed copayment substantially below the cost of the drug to wholesalers. Because
WAC is irrelevant to the out-of-pocket costs they incur, the final rule’s required disclosure of the
so-called “list price” will be highly misleading to these consumers with respect to their own outof-pocket costs.
68.

For the remaining consumers whose out-of-pocket costs are in some way tied to

WAC, their share is typically just a fraction of WAC. And within this group of consumers, the cost

80

Abaluck, Jason and Jonathan Gruber, “Heterogeneity in Choice Inconsistencies Among the Elderly: Evidence
from Prescription Drug Plan Choice,” American Economic Review. 2011 May, p.1, available at
https://www.ncbi.nlm.nih.gov/pmc/articles/PMC4319794/ (viewed June 5, 2019).

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a particular consumer incurs and its relationship to WAC is a complex calculation that is subject
to variation over time and across consumers, making WAC a poor benchmark for consumers to
predict their out-of-pocket expense.
69.

In all, for the vast majority of Americans, the disclosure of WAC will present

consumers with information that grossly overstates their out-of-pocket costs for prescription drugs.
I declare and state the foregoing is true and accurate to the best of my knowledge.

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APPENDIX A
CURRICULUM VITAE

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CRAIG GARTHWAITE
Strategy Department
Kellogg School of Management, Northwestern University
2211 Campus Drive, Evanston, IL 60208
Email: [e-mail]
APPOINTMENTS
Kellogg School of Management, Northwestern University
Herman Smith Research Professor in Hospital and Health Services, 2017-Present
Associate Professor of Strategy (with tenure), 2016 – Present
Director, Program on Healthcare @ Kellogg, 2016 - Present
Assistant Professor of Strategy, 2010 - 2016
Senior Lecturer and Donald P. Jacobs Scholar in Management and Strategy,
2009 - 2010
National Bureau of Economic Research
Research Associate, 2016-Present
Faculty Research Fellow, 2011-2016
Institute for Policy Research, Northwestern University
Faculty Associate, 2015 - Present
EDUCATION
Ph.D. Economics, University of Maryland at College Park, 2009
M.A. Economics, University of Maryland at College Park, 2008
M.P.P Gerald R. Ford School of Public Policy at the University of Michigan, 2001
B.A. Political Science, cum laude, University of Michigan, 2000
PUBLIC SERVICE
Member, Congressional Budget Office Technical Review Panel for the Health Insurance
Simulation Model (2018-Present)
Member, Health Affairs Council on Spending and Value (2018-Present)
Testimony, United States House of Representatives, 2018
- House Judiciary Committee, Subcommittee on Regulatory Reform,
Commercial and Antitrust Law: “Competition in the Pharmaceutical Supply
Chain: The Proposed Merger of CVS Health and Aetna”
Testimony, United States House of Representatives, 2019
- House Judiciary Committee, Subcommittee on Regulatory Reform,

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Commercial and Antitrust Law: “Diagnosing the Problem: Exploring the
Effects of Consolidation and Anticompetitive Conduct in Health Care
Markets”
Testimony, United States Senate, 2019
- Senate Judiciary Committee, Subcommittee on Antirust, Competition Policy,
and Consumer Rights: “Your Doctor/Pharmacist/Insurer Will See You Now:
Competitive Implications of Vertical Consolidation in the Healthcare
Industry”
ACADEMIC PUBLICATIONS
“The Impact of Early Discharge Laws on the Health of Newborns,” (with William
Evans and Heng Wei), Journal of Health Economics, 2008, 27(4): 843-870.
“The Economic Benefits of Pharmaceutical Innovations: The Case of Cox-2 Inhibitors,”
American Economic Journal: Applied Economics, 2012, 4(3): 116-137.
“Empirical Evidence on the Value of Pharmaceuticals,” (with Mark Duggan), in The
[Oxford] Handbook of the Economics of the Biopharmaceutical Industry: Oxford
University Press: Oxford, 2012: 463-492.
“The Doctor Might See You Now: The Supply Side Effects of Public Health Insurance
Expansions.” American Economic Journal: Economic Policy 2012, 4(3): 190-217.
“Heterogeneity in the Benefits of Greater Treatment Intensity” (with William Evans),
The Review of Economics and Statistics, 2012, 94(3): 635-649.
“Can Celebrity Endorsements Affect Political Outcomes: Evidence from the 2008
US Democratic Presidential Primary,” (with Tim Moore), The Journal of Law,
Economics, and Organizations, 2013, 29(2): 355-384.
“Demand Spillovers, Combative Advertising, and Celebrity Endorsements,”
American Economic Journal: Applied Economics, 2014, 6(2): 76-104.
“Giving Mom a Break: The Effect of Higher EITC Payments on Maternal Health” (with
William Evans), American Economic Journal: Economic Policy, 2014, 6(2): 258-290.
“Public Health Insurance, Labor Supply, and Employment Lock,” (with Tal Gross and
Matthew Notowidigdo), Quarterly Journal of Economics, 2014, 129(2): 653-696.
“Health Spending Slowdown Is Mostly Due to Economic Factors, Not Structural
Change in the Health Care Sector” (with David Dranove and Christopher Ody),
Health Affairs, 2014, 33(8): 1399-1406.

36

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The Economic Downturn and its Lingering Effects Reduced Medicare Spending
Growth by $4 Billion In 2009–12 (with David Dranove and Christopher Ody),
Health Affairs, 2015, 34(8): 1368-1375.
Investment Subsidies and the Adoption of Electronic Medical Records in Hospitals
(with David Dranove, Chris Ody, and Bingyang Li), Journal of Health Economics,
2015, 44: 309-19.
The Market Impacts of Product Patents in Developing Countries, (with Mark
Duggan and Aparajita Goyal), American Economic Review, 2016, 106(1): 99-135
The Black/White Educational Gap, Stalled Progress, and the Long Term Consequences
of the Emergence of Crack Markets, (with William Evans and Timothy J. Moore), The
Review of Economics and Statistics, 2016, 98(5): 832-847.
Affordable Care Act’s Medicaid Expansion Led to Substantial Decreases in
Uncompensated Care but Levels and Many Hospitals Remain High,” (with David
Dranove and Christopher Ody), Health Affairs, 2016, 35(8): 1471-1479.
How do Hospitals Respond to Negative Financial Shocks? The Impact of the 2008 Stock
Market Crash (with David Dranove and Christopher Ody), The RAND Journal of
Economics, 2017, 48(2): 485–525.
Insurance Expansion and Hospital Emergency Department Access: Evidence from
the Affordable Care Act, (with John Graves, Tal Gross, and Matthew
Notowidigdo), Annals of Internal Medicine, Feb 7 2017, 166(3):172-179
Success and Failure in the Insurance Exchanges (with John Graves), New England
Journal of Medicine, March 9, 2017, 376(10):907-910
The Economics of Indication Based Pricing (with Amitabh Chandra), New
England Journal of Medicine, July 2017, 377(2):103-106.
Hospitals as Insurers of Last Resort, (with Tal Gross and Matthew Notowidigdo),
American Economic Journal: Applied Economics, 2018, 10(1): 1-39.
The CVS–Aetna Merger: Another Large Bet on the Changing U.S. Health Care
Landscape (with Austin Frakt), Annals of Internal Medicine, January 9, 2018.
The Orphan Drug Act at 35: Observations and an Outlook for the Twenty-First
Century, (with Nicholas Bagley, Benjamin Berger, Amitabh Chandra, and Ariel D.
Stern) in Innovation Policy and the Economy, 2018, Volume 19, pages 97-137,
National Bureau of Economic Research, Inc.
Characterizing the Drug Development Pipeline for Precision Medicine, (with
Chandra, Amitabh, Garthwaite, Craig and Stern, Ariel Dora Stern), Economic

37

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Dimensions of Personalized and Precision Medicine, 2018, National Bureau of
Economic Research, Inc.
It’s Time to Reform the Orphan Drug Act (with Nicholas Bagley, Amitabh
Chandra, and Ariel D. Stern), NEJM Catalyst, Dec 19, 2018.
WORKING PAPERS
Guns and Violence: The Enduring Impact of Crack Cocaine Markets on Young
Black Males, NBER Working Paper #24819, under review, (with Bill Evans and
Timothy J. Moore)
Pharmaceutical Profits and the Social Value of Innovation, NBER Working Paper
#20212, under review, (with David Dranove and Manuel Hermosilla)
Insurance and the High Prices of Pharmaceuticals, NBER Working Paper #22353,
under review, (with David Dranove and David Besanko)
OTHER PUBLICATIONS
The Impact of the ACA’s Medicaid Expansion on Hospitals’ Uncompensated Care
Burden and the Potential Effects of Repeal (with David Dranove and Christopher
Ody), Commonwealth Fund Issue Brief, May 2017.
“A Floor and Trade Proposal for Hospital Charity Care,” The Hamilton Project
working paper.
CASES
Starbucks: A Story of Growth, (with Jen Brown and Meghan Busse), 2011. Kellogg
Case #5-211-259.
The Global Aircraft Manufacturing Industry, 2002-2011 (with Jen Brown), 2012.
Kellogg Case #5-312-505.
Sovaldi: Pricing a Breakthrough Drug (with Meghan Busse), 2015
PERMANENT WORKING PAPERS
“The Effect of In-Utero Conditions on Long Term Health: Evidence from the 1918
Spanish Flu Pandemic,” April 2008 (First Draft, July 2007).
TEACHING
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Core Business Strategy (STRT 431), Kellogg School of Management, 2009-Present
Foundations of Strategy, Kellogg-HKUST EMBA, 2016-Present
Strategy Frameworks Kellogg EMBA, 2017-Present
Healthcare Strategy (STRT 443), Kellogg School of Management, 2017-Present
Healthcare Strategy (STRTX 945), Kellogg School of Management EMBA, 2017-Present

HONORS AND AWARDS
Lavengoood Professor of the Year Finalist, 2019
Lavengoood Professor of the Year Finalist, 2018
Kellogg Faculty Impact Award, Healthcare Strategy, 2018
Poets and Quants 40 Best Under 40 Professors, 2015
Kellogg Faculty Impact Teaching Award, Business Strategy, 2012
Kellogg Faculty Impact Teaching Award, Business Strategy, 2012
Kellogg Chairs’ Core Course Teaching Award, 2011-2012
International Institute of Public Finance (IIPF) Young Economists Award, 2011
Kellogg Faculty Impact Teaching Award, Business Strategy, 2010
University of Maryland Third Year Paper Fellowship

INVITED PRESENTATIONS
2008:
2009:
2010:
2011:

2012:
2013:

2014:

2015:

University of Notre Dame
Chicago Booth Graduate School of Business
University of Wisconsin-Madison, Dartmouth College, University of Notre Dame
AEA Annual Meeting, University of Illinois-Chicago, Olin Business School at
Washington University, Harris School of Public Policy at the University of
Chicago, Indiana University SPEA, National Tax Association Annual Meeting,
AcademyHealth Research Insights Meeting
AEA Annual Meeting (Presenter and Discussant), Society of Labor Economists
Annual Meeting, NBER Summer Institute, University of Illinois UrbanaChampaign, University of California-Davis, Columbia University
University of Chicago Health Economics Workshop, University of British
Columbia, University of California-San Diego, University of Kentucky, Texas
A&M University, Wharton School of the University of Pennsylvania, University
of Maryland, Brookings Institution, UC-Davis Poverty Center
AEA Annual Meeting, Northwestern Law School, RAND Corporation, Rice
University/University of Houston, HDMS User Forum, Bates/White Life Science
Conference, Vanderbilt University, University of Michigan RWJF Scholars,
Northwestern University Economics Department
AEA Annual Meeting, Stanford University, University of California-Irvine,
MIT/BU Health Economics Seminar, Syracuse University, NBER Summer
Institute, UT-Austin, University of Maryland
39

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2016: Harris School of Public Policy at the University of Chicago, Owen School of
Management, Vanderbilt University.
2017: National Tax Association Annual Meeting
2018: University of Georgia, Auburn University, Harvard University, Boston
University, American Enterprise Institute, University of Southern California
2019: Ohio State University, Louisville, Emory University, University of Utah
(Scheduled)
ACADEMIC ACTIVITIES
Co-Editor, Journal of Public Economics, (2016 – Present)
Reviewer: American Economic Review, Quarterly Journal of Economics; Journal of
Political Economy; Econometrica; Review of Economic Studies; New
England Journal of Medicine, The Journal of Public Economics; American
Economic Journal: Economic Policy; Health Affairs; The Review of
Economics and Statistics; The Journal of Industrial Economics; The
Journal of Health Economics; The Journal of Human Resources; Journal
of Policy Analysis and Management; International Journal of Industrial
Organization; Health Economics; Social Science and Medicine; Economic
Inquiry
PAST EMPLOYMENT
Employment Policies Institute, Washington, DC
Director of Research and Chief Economist, 2003-2005
Public Sector Consultants, Lansing, MI
Economist, 2002-2003
OUTSIDE ACTIVITIES
Affiliated Consultant, Analysis Group (2018-Present)

40

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APPENDIX B
DOCUMENTS RELIED UPON

41

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“42 U.S. Code § 1395w–3a. Use of average sales price payment methodology,” Legal
Information Institute, available at https://www.law.cornell.edu/uscode/text/42/1395w-3a
(viewed June 13, 2019).
Abaluck, Jason and Jonathan Gruber, “Heterogeneity in Choice Inconsistencies Among the
Elderly: Evidence from Prescription Drug Plan Choice,” American Economic Review. 2011
May, p.1, available at https://www.ncbi.nlm.nih.gov/pmc/articles/PMC4319794/ (viewed
June 5, 2019).
Anderson-Cook, Anna, Jared Maeda and Lyle Nelson, “Prices for and Spending on Specialty
Drugs in Medicare Part D and Medicaid: An In-Depth Analysis,” Congressional Budget
Office Working Paper Series, March 2019, p. 29, available at
https://www.cbo.gov/system/files?file=2019-03/55011-Specialty_Drugs_WP.pdf.
Baghdadi, Ramsey, “Medicaid Best Price, " Health Affairs Health Policy Brief, August 10, 2017.
DOI: 10.1377/hpb20171008.000173
Boccuti, Cristina, Gretchen Jacobson, Kendal Orgera and Tricia Neuman, “Medigap Enrollment
and Consumer Protections Vary Across States,” Kaiser Family Foundation, July 11, 2018,
available at https://www.kff.org/medicare/issue-brief/medigap-enrollment-and-consumerprotections-vary-across-states/ (viewed June 5, 2019).
“Catastrophic Coverage,” Medicare.gov, available at https://www.medicare.gov/drug-coveragepart-d/costs-for-medicare-drug-coverage/catastrophic-coverage (viewed June 6, 2019)
Claxton, Gary, Matthew Rae, Michelle Long, Anthony Damico, Gregory Forester and Heidi
Whitmore, “Employer Health Benefits: 2017 Annual Survey,” Kaiser Family Foundation,
2017, p. 159, available at http://files.kff.org/attachment/Report-Employer-Health-BenefitsAnnual-Survey-2017.
Claxton, Gary, Matthew Rae, Michelle Long, Anthony Damico and Heidi Whitmore, “Employer
Health Benefits: 2018 Annual Survey,” Kaiser Family Foundation, 2018, p. 130, available
at http://files.kff.org/attachment/Report-Employer-Health-Benefits-Annual-Survey-2018
(“KFF 2018 Employer Health Benefits Survey”)
“Cost Sharing,” Healthcare.gov, https://www.healthcare.gov/glossary/cost-sharing/ (viewed
June 5, 2019).
“Cost Sharing Out of Pocket Costs,” Medicaid.gov, available at
https://www.medicaid.gov/medicaid/cost-sharing/out-of-pocket-costs/index.html (viewed
June 5, 2019).
“Cost-Sharing Requirements for Selected Medicaid Services for Section 1931 Parents,” Kaiser
Family Foundation, January 1, 2019, available at https://www.kff.org/medicaid/stateindicator/cost-sharing-requirements-for-selected-medicaid-services-for-section-1931parents-january/ (viewed June 5, 2019)

42

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“Costs for Medicare drug coverage: Costs in the coverage gap,” Medicare.gov, available at
https://www.medicare.gov/drug-coverage-part-d/costs-for-medicare-drug-coverage/costs-inthe-coverage-gap (viewed June 5, 2019).
Cubanski, Juliette, Anthony Damico and Tricia Neuman. “Medicare Part D in 2018: The Latest
on Enrollment, Premiums, and Cost Sharing,” Kaiser Family Foundation, May 17, 2018,
available at https://www.kff.org/medicare/issue-brief/medicare-part-d-in-2018-the-latest-onenrollment-premiums-and-cost-sharing/ (viewed June 5, 2019).
Cubanski, Juliette, Tricia Neuman and Anthony Damico, “Closing the Medicare Part D
Coverage Gap: Trends, Recent Changes, and What’s Ahead,” Kaiser Family Foundation,
August 2018, p. 2, available at http://files.kff.org/attachment/Data-Note-Closing-theMedicare-Part-D-Coverage-Gap-Trends-Recent-Changes-and-Whats-Ahead (viewed June 5,
2019).
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44

Case 1:19-cv-01738-APM Document 1-1 Filed 06/14/19 Page 45 of 58

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Case 1:19-cv-01738-APM Document 1-1 Filed 06/14/19 Page 46 of 58

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46

Case 1:19-cv-01738-APM Document 1-1 Filed 06/14/19 Page 47 of 58

Exhibit 1

Case 1:19-cv-01738-APM Document 1-1 Filed 06/14/19 Page 48 of 58

Exhibit 1 - IBRANCE drug claim cost analysis
IBRANCE patient - PPO - Claimant 25018549301648
Co-pay

$25,000

Coinsurance

Deductible

Plan paid

WAC

$20,000

$15,000

$10,000

Claimant paid co-pays
every month of either:
$36 (for 1 Rx)
$72 (for 2 Rxs)

$5,000

$0
Yes

Yes

Yes

Yes

Yes

Yes

Yes

Yes

Yes

Yes *

Yes

Yes

Jan

IBRANCE Rx?

Feb

Mar

Apr

May

Jun

Jul

Aug

Sep

Oct

Nov

Dec

2016
* Note that in October 2016 the claimant filled two IBRANCE prescriptions
Sources: [A] Micromedex (WAC data); [B] OptumHealth Care Solutions (claims data)

Case 1:19-cv-01738-APM Document 1-1 Filed 06/14/19 Page 49 of 58

Exhibit 2

Case 1:19-cv-01738-APM Document 1-1 Filed 06/14/19 Page 50 of 58

Exhibit 2(a) - XELJANZ drug claim cost analysis
XELJANZ patient - PPO w/ HSA - Claimant D1003701501458
Co-pay

$8,000

Coinsurance

Deductible

Plan paid

WAC

$7,000

$6,000

$5,000

$4,000

$3,000

$2,000

$1,000

$0
No

No

No

No

Yes

Yes

Yes

Yes *

Yes

Yes

Yes

Yes

Jan

XELJANZ Rx?

Feb

Mar

Apr

May

Jun

Jul

Aug

Sep

Oct

Nov

Dec

2016
* Note that in August 2016 the claimant filled two XELJANZ prescriptions
Sources: [A] Micromedex (WAC data); [B] OptumHealth Care Solutions (claims data)

Case 1:19-cv-01738-APM Document 1-1 Filed 06/14/19 Page 51 of 58

Exhibit 2(b) - Drug claim cost analysis
XELJANZ patient - PPO w/ HSA - Claimant D1003701501458
Co-pay

$8,000

Coinsurance

Deductible

Plan paid

WAC

$7,000

$6,000

$5,000

$4,000

$3,000

$2,000

$1,000

$0
No

No

No

No

Yes

Yes

Yes

Yes *

Yes

Yes

Yes

Yes

Jan

XELJANZ Rx?

Feb

Mar

Apr

May

Jun

Jul

Aug

Sep

Oct

Nov

Dec

2016
* Note that in August 2016 the claimant filled two XELJANZ prescriptions
Sources: [A] Micromedex (WAC data); [B] OptumHealth Care Solutions (claims data)

Case 1:19-cv-01738-APM Document 1-1 Filed 06/14/19 Page 52 of 58

Exhibit 3

Case 1:19-cv-01738-APM Document 1-1 Filed 06/14/19 Page 53 of 58

Exhibit 3(a) - LYRICA drug claim cost analysis
LYRICA patient - PPO w/ HSA - Claimant D1002677601853
Co-pay

$600

Coinsurance

Deductible

Plan paid

WAC

$500

$400

$300

$200

$100

$0
Yes

Yes

Yes

Yes

Yes

No

Yes

Yes

Yes

Yes

Yes

Yes

Jan

LYRICA Rx?

Feb

Mar

Apr

May

Jun

Jul

Aug

Sep

Oct

Nov

Dec

2016
Sources: [A] Micromedex (WAC data); [B] OptumHealth Care Solutions (claims data)

Case 1:19-cv-01738-APM Document 1-1 Filed 06/14/19 Page 54 of 58

Exhibit 3(b) - Drug claim cost analysis
LYRICA patient - PPO w/ HSA - Claimant D1002677601853
Co-pay

$3,500

Coinsurance

Deductible

Plan paid

WAC

$3,000

$2,500

$2,000

$1,500

$1,000

$500

$0
Yes

Yes

Yes

Yes

Yes

No

Yes

Yes

Yes

Yes

Yes

Yes

Jan

LYRICA Rx?

Feb

Mar

Apr

May

Jun

Jul

Aug

Sep

Oct

Nov

Dec

2016
Sources: [A] Micromedex (WAC data); [B] OptumHealth Care Solutions (claims data)

Case 1:19-cv-01738-APM Document 1-1 Filed 06/14/19 Page 55 of 58

Exhibit 4

Case 1:19-cv-01738-APM Document 1-1 Filed 06/14/19 Page 56 of 58

Exhibit 4(a) - FARXIGA drug claim cost analysis
FARXIGA patient - PPO w/ HSA - Claimant 56010846700246
Co-pay

$450

Coinsurance

Deductible

Plan paid

WAC

$400

$350

$300

$250

$200

$150

$100

$50

$0
No

Yes

No

No

Yes

No

Yes

Yes

Yes

Yes

Yes

Yes

Jan

FARXIGA Rx?

Feb

Mar

Apr

May

Jun

Jul

Aug

Sep

Oct

Nov

Dec

2016
Sources: [A] Micromedex (WAC data); [B] OptumHealth Care Solutions (claims data)

Case 1:19-cv-01738-APM Document 1-1 Filed 06/14/19 Page 57 of 58

Exhibit 4(b) - Drug claim cost analysis
FARXIGA patient - PPO w/ HSA - Claimant 56010846700246
Co-pay

$3,000

Coinsurance

Deductible

Plan paid

WAC

$2,500

$2,000

$1,500

$1,000

$500

$0
FARXIGA Rx?

No

Yes

No

No

Yes

No

Yes

Yes

Yes

Yes

Yes

Yes

Jan

Feb

Mar

Apr

May

Jun

Jul

Aug

Sep

Oct

Nov

Dec

2016
Sources: [A] Micromedex (WAC data); [B] OptumHealth Care Solutions (claims data)

Case 1:19-cv-01738-APM Document 1-1 Filed 06/14/19 Page 58 of 58

Exhibit 4(c) - Drug and medical claim cost analysis
FARXIGA patient - PPO w/ HSA - Claimant 56010846700246
Co-pay

$10,000

Coinsurance

Deductible

Plan paid

WAC

$9,000
$8,000
$7,000
$6,000
$5,000
$4,000
$3,000
$2,000
$1,000
$0
No

Yes

No

No

Yes

No

Yes

Yes

Yes

Yes

Yes

Yes

Jan

FARXIGA Rx?

Feb

Mar

Apr

May

Jun

Jul

Aug

Sep

Oct

Nov

Dec

2016
Sources: [A] Micromedex (WAC data); [B] OptumHealth Care Solutions (claims data)