Trump proposal would upend drug industry by overhauling rebates in Medicare

Posted at 9:49 PM, Jan 31, 2019

The Trump administration unveiled a proposal Thursday that could radically change the way many drugs are priced and paid for in Medicare and Medicaid.

The plan calls for effectively banning drug makers from providing rebates to pharmacy benefit managers and insurers in Medicare Part D- and Medicaid-managed care plans. Instead, drug companies would be encouraged to pass the discounts directly to patients at the pharmacy counter and would pay pharmacy benefit managers a fixed fee.

The move, which was immediately praised by pharmaceutical companies but panned by insurers and pharmacy benefit managers, would be one of the most substantial steps in the Trump administration’s quest to lower drug prices.

“If this rule goes into effect in its current form, it would be the largest change the administration has yet announced on drug pricing,” said Rachel Sachs, an associate law professor at Washington University.

However, the actual impact of the proposal remains unclear. It’s likely that Medicare and Medicaid patients with high drug costs would save money, but the shift could result in larger premiums for all beneficiaries.

The administration estimates that 30% of Medicare Part D enrollees spend enough that their savings would likely exceed any premium hikes. It also projects that federal spending could rise between $35 billion and $196 billion over 10 years since the government provides various subsidies in the Part D program.

Also, the effect on drug costs for the more than 150 million Americans who get their insurance on the job remains to be seen. While the proposed rule changes could touch aspects of the commercial insurance market, the Health and Human Services Department acknowledged that Congress has more power to ban rebates in that area.

Rebates have long been a controversial part of the US drug industry and are blamed for incentivizing many players to keep list prices high. Manufacturers dole out billions of dollars in discounts every year, but these savings don’t usually trickle down directly to consumers.

Under the proposal, rebates that amount to 26% to 30% of a drug’s list price may be passed on to patients, the department estimates.

Drug companies, however, may not actually provide discounts at the pharmacy counter. Instead, they could eliminate the rebates and lower the list prices of the medicines, among other options.

Here’s how rebates work: Pharmacy benefit managers negotiate rebates from drug manufacturers to insurers in exchange for better coverage terms — often in the form of lower copays for brand-name drugs. This makes it more likely that the insurers’ enrollees will choose that cheaper brand-name medication over a competitor’s version. The pharmacy benefit managers, however, also keep a portion of the rebate for themselves.

The rebate figures are eye-popping. Insurers received $89 billion in rebates, reducing their spending on prescription drugs to $279 billion in 2016, according to estimates from Altarum, a research and consulting firm. This doesn’t include the portion of the rebate that pharmacy benefit managers keep, which isn’t disclosed.

The Pharmaceutical Care Management Association, which represents pharmacy benefit managers, and America’s Health Insurance Plans, an industry group for insurers, said Thursday that the proposal could increase consumers’ expenses. Both pointed the finger at drug makers for high costs.

“PBMs keep coverage affordable by negotiating rebates with drug-makers, which are used to enhance benefits and reduce beneficiary cost sharing and premiums,” said JC Scott, the association’s president.

Drug manufacturers, meanwhile, laid the blame for high prices on others in the industry.

“This proposal would also fix the misaligned incentives in the system that currently result in insurers and pharmacy benefit managers favoring medicines with high list prices,” said Stephen J. Ubl, the chief executive of PhRMA, a trade group for drug makers.

Lowering drug prices is also a top priority for Congress, with two committees holding hearings on the matter this week. Some Democrats, however, do not agree with HHS’s latest move.

“The Trump administration’s rebate proposal will increase government spending by nearly $200 billion and the majority of Medicare beneficiaries will see their premiums and total out-of-pocket costs increase if this proposal is finalized,” Reps. Richard Neal of Massachusetts and Frank Pallone of New Jersey said in a statement. “While we agree that the cost of prescription drugs must be addressed, we are concerned that this is not the right approach.”