After promising reforms to lower drug prices, President Trump doubled down on a set of rules that, in their current iteration, could have the opposite effect: increasing costs for patients, employers, and taxpayers instead of addressing high drug prices set by manufacturers.
We take a closer look at the policies announced and explain what they are, what they do, and whether they are likely to lower drug prices.
Lowering Prices for Patients by Eliminating Kickbacks to Middlemen, aka the Rebate Rule
- What it is: The U.S. Department of Health and Human Services (HHS) finalized a rule that would effectively eliminate certain protections for pharmacy benefit managers (PBMs) — industry middlemen — to provide rebates in Medicare Part D. The final rule came a few months after President Trump announced an executive order reviving and completing rulemaking for a proposed rule originally published in early 2019 that was abandoned amid concerns that it would increase premiums for seniors.
- What it does: The final rule amends a safe harbor in the federal anti-kickback law for discounts negotiated between drug manufacturers and PBMs on behalf of Medicare Part D plans, as well as provides new safe harbors for “point-of-sale” discounts and PBM service fees. The rule was finalized as it was proposed with a few exceptions. Most notably, the change to the safe harbor definition for rebates is not applicable to Medicaid managed care programs. The new safe harbors for point of sale discounts and PBM service fees will only apply to Medicare Part D.
- Would it lower drug prices? No. The policy would shift costs, increasing premiums for seniors on Medicare, without lowering prices. Manufacturers would likely withhold certain discounts and shift to pharmacy chargebacks — PBMs recouping the difference between the costs of acquisition and reimbursement received by the pharmacy — without lowering list prices while PBMs will lose leverage to extract additional discounts from manufacturers for formulary placement. In fact, this policy is one often embraced by drug manufacturers themselves as their preferred solution for high prescription drug prices, despite evidence that some of the highest priced prescription drugs in Medicare have little to no rebates. When the policy was initially proposed, the Congressional Budget Office estimated that it would increase premiums for Medicare beneficiaries as well as increase federal spending by $177 billion. Medicare actuaries also estimated the rule would result in premium increases as well as $196 billion in federal spending. The final rule included several financial analyses — unusual for rulemaking — reinforcing that risk, stating “all beneficiaries could experience higher premiums, with only some experiencing lower out-of-pocket costs.” In general, the analyses found that premiums would go up because out-of-pocket prices go down and because plans lose some leverage to negotiate lower prices from manufacturers. Many Medicare beneficiaries who take brand-name drugs would experience lower out-of-pocket costs under this rule. Beneficiaries taking primarily low rebate brand-name drugs or generic drugs would not benefit much.
- What’s the catch? Despite the administration’s promises that the rebate policy would not result in increased federal spending, higher premiums for seniors, or increased out-of-pocket costs, the final rule will increase premiums for Medicare Part D beneficiaries and taxpayers.
“Ending Global Freeloading on the Backs of American Citizens and American Patients”, aka the New “Most Favored Nation” Rule
- What it is: The Centers for Medicare and Medicaid Services (CMS) published an interim final rule to test reimbursing providers for prescription drugs in Medicare Part B using an international reference pricing model called “most favored nation.” This rule came after an executive order this summer and a proposal first introduced in October 2018 known as the International Pricing Index (IPI) Model.
- What it does: The mandatory model would replace the current reimbursement to a subset of providers for certain Part B physician-administered drugs that have the highest spending. Under the current regulatory framework, Part B reimburses providers for physician-administered drugs based on the average sales price (ASP) paid in the U.S. commercial market plus a 6 percent add-on administration fee. Under the new rule, providers will get reimbursed on a formula that phases out ASP to the lowest price across higher income countries within the OECD. The model will be run over seven years, moving within four years to a reimbursement structure fully tied to the lowest “most favored nation” price. Instead of a percentage add-on fee, providers will get reimbursed at a flat rate of $146.55 per dose for these drugs.
- Would it lower drugs prices? If implemented, yes — but there are problems with the way it’s designed that could prompt drug manufacturers to respond in financially damaging ways. While Medicare actuaries estimate the rule would lower Part B drug prices by 25 percent, saving $114 billion — including $28 billion in beneficiary premiums — they also mapped out three possible responses from pharma: 1) manufacturers lower drug prices so providers get reimbursed for the drugs they purchase, resulting in savings 2) manufacturers refuse to lower drug prices, resulting in financial losses for providers or 3) manufacturers raise international prices. It’s also worth noting that while the actuaries assumed 70 percent uninterrupted drug availability, they also estimated there could be a significant loss of access for Medicare beneficiaries.
- What’s the catch? In the absence of legislation directly addressing manufacturers’ prices, there’s a risk that Medicare will lower its reimbursement rates, but manufacturers’ prices may not follow. Manufacturers in drug classes where there are alternatives available may be forced to lower their prices or lose market share. If they don’t respond to the downward pricing pressure, market forces may shift beneficiaries to cheaper alternatives without any interruption to their access to medications. In addition, the manufacturers that are selling drugs that are highly dependent on the Medicare market are also likely to lower prices in response. The issue arises when a manufacturer has a product with few competitors — or one that can be easily pulled from the Medicare population without significant loss of revenue. Administrative approaches to curbing costs will need to be more carefully designed to avoid access problems.
Despite President Trump’s claims that these rules are the most significant drug pricing reform thus far, both rules are underwhelming in their attempt to rein in drug prices. Most notably, the Administration’s actions do not directly address manufacturers’ pricing, but target other parties in the supply chain that respond to prices set by manufacturers — PBMs and providers.
Congress and the Administration should be leveraging the government’s significant purchasing power to align incentives to promote a functioning market, such as Part D redesign, inflation-based rebate penalties in Part B and Part D, and changing Part B reimbursement to encourage utilization of high-value drugs.
In addition, a policy that includes international reference pricing should ideally directly restrain prices set by manufacturers. For example, in H.R. 3, the drug reform bill passed by the House last year, the negotiation and link to international reference pricing is tied to an agreement signed by the drug manufacturer to honor the agreed-upon lower prices in both Medicare and the commercial market.
In order to address high drug prices, a comprehensive approach that reduces launch prices and price increases for both public and private payers is necessary to make drugs affordable for patients, employers, and taxpayers.