The Trump administration is trying in myriad ways to answer demands from consumers for lower prescription drug prices—a topic that got serious attention before the Senate Finance Committee on Tuesday where top executives of seven major drug companies testified.
The president announced his “American Patients First” agenda in May, offering nearly 30 policy recommendations to modernize payment policies and expand competitive price negotiations, and the administration is forging ahead with action on these and many other recommendations.
The latest proposal from the Department of Health and Human Services—and one that got a number of questions from senators—is designed to shed sunlight on the complex deals involved in drug purchasing, targeting the “rebates” that flow through the $325-billion-a-year prescription drug spending pipeline.
The proposed rule published by HHS in January is designed to lower prescription drug prices and out-of-pocket costs by encouraging manufacturers to pass discounts directly on to patients and bring new transparency to prescription drug markets.
Pharmacy Benefit Managers (PBMs) are middlemen in the drug supply chain who negotiate discounts from drug manufacturers and retail pharmacies on behalf of employers and health plans. Drug companies pay rebates (and an administrative fee) to the PBMs in exchange for priority placement on drug “formularies”—the list of drugs the plans cover.
But the rebates create significant distortions in pricing, and patients generally are in the dark about the deals between the payers and the PBMs. Pulling the curtain back on these arrangements reveals the perverse incentives that keep drug prices high and force many patients to pay more when they pick up their prescriptions at the pharmacy counter.
Because rebates generally are calculated as a percentage of the list price of a drug, the higher the list price, the greater the rebate payment. It’s like a retailer marking up the price of sweaters so she can hold a 50% off sale. But the stakes are much higher with prescription drugs.
Sally Pipes of the Pacific Research Institute explains how it works: Consider a vial of insulin with a list price of $300. The patient’s insurance requires a 25% co-insurance payment when she picks up her medicine at the pharmacy counter. Based upon the list price, she pays $75. But if her co-insurance were based instead on the net price, she would owe just $21.25.
During Finance Committee questioning, Merck CEO Ken Frazier said, “We’ve been asked to lower list prices. We have lowered list prices in the past and found that it creates a financial disadvantage for the company, and it doesn’t get us more volume because of the incentives in the system. So if we change all the incentives at one time, then list prices can come down.” Companies that don’t play along lose market share to competitors who do.
The Trump administration’s proposal would replace the current system of rebates paid by drug manufacturers to the PBMs with direct discounts for patients at the pharmacy.
HHS Secretary Alex Azar explained: “Every day, Americans—particularly our seniors—pay more than they need to for their prescription drugs because of a hidden system of kickbacks to middlemen. President Trump is proposing to end this era of backdoor deals in the drug industry, bring real transparency to drug markets, and deliver savings directly to patients when they walk into the pharmacy.
“This proposal has the potential to be the most significant change in how Americans’ drugs are priced at the pharmacy counter, ever, and finally ease the burden of the sticker shock that millions of Americans experience every month for the drugs they need,” Azar said.
The rule would apply to rebates on prescription drugs paid by manufacturers to PBMs in Medicare Part D Prescription Drug plans and Medicaid managed care organizations to provide “a new level of transparency to a system that has been shrouded in secrecy for decades,” the administration says. Consumers and drugmakers believe employer and other commercial plans will likely follow.
Because the rebate rule will address the variety of classes of drugs in Part D, those with chronic conditions such as diabetes could expect to see savings at the pharmacy. Seniors with conditions that require specialty drug treatment often take more and more expensive drugs and stand to see the biggest savings.
American Action Forum president Doug Holtz-Eakin said in earlier testimony to the Senate Finance Committee that spending on these more expensive “specialty drugs” is soaring, from $11.5 billion on the top drugs in 2010 to $151 billion in 2017. While 98% of all drugs have an out-of-pocket cost of no more than $50, copayments for specialty drugs can be in the thousands.
Several months ago, Amgen reduced the list price of its biologic drug, Repatha, by 60%, from $14,600 to $5,850 a year. Repatha is used to treat patients who have high levels of cholesterol but do not respond to traditional statins.
Too many patients who had been prescribed the drug were walking away from pharmacies empty-handed because of the sticker shock of their co-insurance payment. By lowering the list price, Amgen could significantly lower the patient’s co-insurance payment. Sanofi followed suit by similarly lowering the price of its competing drug, Praluent.
But months after that announcement, only 6% of patients have been placed on a fixed-dollar copay formulary tier for the lower list price for Repatha because PBMs resisted restructuring patient copayments around the lower price. Repatha is a perfect example of why this new rebate rule is needed to break open the payment system that encourages higher list prices and even blocks access to lower costs for seniors when a company lowers its list price.
One PBM even put it in writing. Optum Rx, which is owned by the UnitedHealth Group, sent a letter to at least two large drug companies outlining several demands that companies must meet if they want to lower their list prices.
The letter required at least seven quarters notice before any list-price reduction. And if a drug company lowers its list prices, Optum wanted rebates equivalent to what they would have received before the price cut.
HHS explained that its rebate rule “would, for the Medicare Part D and Medicaid managed care programs, remove the safe harbor exemption for rebates applied after the point-of-sale and establish a new safe harbor that would enable a pharmaceutical manufacturer to offer reduced prices on a prescription pharmaceutical product (referred to as chargeback discounts) when they are applied at the point-of-sale.”
PBMs say they could restructure their business model but need more time to renegotiate multi-year contracts.
The industry is facing time pressures following release of the HHS rule. The bid cycle for Medicare Part D drug plans starts June 1, and plans need to decide whether they think the new HHS rule will take effect for next year and price accordingly, or stick with the current model in their 2020 bid pricing, anticipating a longer transition. Getting the timing right is important.
“The new rule would move from back-end rebates to up-front discounts,” one pharmaceutical executive said to me. Lowering list prices is an “easier and cleaner path to getting discounts to patients.”
Negotiations are expected to get even fiercer, he said, as patients push for even lower list prices once they see the savings. The goal is to benefit the patient so they can afford the drugs their doctors have prescribed for them.
But, like most things in the health sector, there are no simple, straightforward solutions—including amending rebates.
Joe Antos of the American Enterprise Institute explained the tradeoffs in testimony he delivered recently to the House Ways and Means Committee:
“The net impact of this proposal on patients is uncertain. To the extent that current rebate levels are passed in whole to patients at the pharmacy counter, those who rely more heavily on prescription drugs will see some reduction in out-of-pocket cost. But health plan premiums are likely to rise, offsetting those savings. Moreover, it is far from certain that price negotiations under the new rules would yield the same or lower prices net of the rebate. Negotiated prices might rise, partly offsetting the benefit to patients.
“The Medicare actuary estimates that households would save $93 billion in lower out-of-pocket spending for prescription drugs over the next decade, but their insurance premiums would rise by $50 billion.
“On balance, persons with high drug costs would gain, but those with lower needs for medications would pay more for their health coverage. Moreover, the proposal would add fuel to medical cost inflation. Total drug spending would increase by $137 billion and Medicare drug spending would increase by $196 billion. While the intention of this proposal is to relieve the cost burden on patients, that would not be accomplished without imposing new costs on others,” Antos concludes.
HHS counters, however, that “Replacing safe harbor protections for opaque rebates with transparent discounts is expected to lead to lower Part D spending for Medicare beneficiaries as a whole, because the projected reductions in out-of-pocket costs are larger than potential increases in premiums.” The bottom line is that the impacts from this proposal are difficult to grasp given the dramatic change to the system.
The Pharmaceutical Research and Manufacturers of America (PhRMA), which represents the major pharmaceutical and biologic companies, is supporting the rebate revisions to reduce out-of-pocket costs to consumers and drive more transparency and competitiveness in the industry. It too says the rebate rule would lower costs for seniors when their monthly premiums and lower out-of-pocket spending are combined.
“We support the Administration’s proposal to reform the rebate system, which will ensure patients have access to negotiated rebates at the pharmacy counter. The billions of dollars flowing through today’s system seem to benefit everyone except the patient,” President Steve Ubl said yesterday in a statement.
PhRMA supports delinking supply chain payments from the list price of a medicine. “Pharmacy benefit managers and other entities in the supply chain should not be paid off the list price of a medicine.”
My colleague Doug Badger explains that the system of rebates is deeply embedded throughout government programs. “As with most problems that government seeks to solve, much of the drug pricing problem is a government creation. It insists that drug manufacturers provide a 23.1% percent rebate to the federal government in Medicaid, for example, and many states negotiate additional rebates. Moreover, with the exception of Part D, if a manufacturer offers a private payer a better price on its drug than it does on Medicaid, then it must give Medicaid that same price—deterring price reductions with other payers.”
He cites examples of other programs—340B, the Part D coverage gap, and the VA program—where the government also demands big discounts on drugs. “In short, the government requires manufacturers to provide a large discount on their drug prices for a substantial portion of the market. That induces manufacturers to set high list prices, which the government then presents as a problem that only government can solve.”
Another part of the HHS proposed rule would require drug companies that advertise their medicines to consumers to include the list price in the ads. But list prices are very misleading, as we have seen. If a patient were to think that the list price is what they would have to pay at the pharmacy, they would surely get sticker shock and stay away.
There no way for the ads to specify what an individual patient would pay at the pharmacy because health plans have countless ways of calculating co-pays, co-insurance, etc. What would make more sense would be requiring the drug companies to include a web address in the ad where people could use a calculator that would let them know, at least approximately, what their share of the cost would be based upon the health plan they are in.
Finally, American Action Forum president Doug Holtz-Eakin explained the larger picture in testimony to the Senate Finance Committee: Prescription drug spending as a percentage of total National Health Expenditures has remained steady at 10% for decades, dwarfed by spending on hospitals and physicians. Annual price growth was only 6% in 2018. On a per capita basis, real net spending has grown by only 1% since 2007 and actually declined by 2.2% in 2017. But it is spending on specialty drugs, representing only 2% of volume but 46.5% of all expenditures, that is the target of policymakers.
The administration’s rebate rule highlights the core issue of spending on expensive specialty drugs and how current payment arrangements distort these prices. The proposed rule would address this by giving patients who use specialty drugs up-front discounts at the pharmacy counter. But a real solution to high drug prices (and high health care prices in general) is a more market-based system and less government intrusion.
The closest thing we have as a model is the Medicare Part D program that relies on genuine competition among drug plans and consumer choice, with government as the referee. That program, despite being defaced and distorted by Congress, still serves as the best model for how to get drug pricing right.