President Donald Trump made bringing down high drug prices a priority even as a candidate. On Thursday, his administration announced what might be its biggest move yet on that front. A proposed rule would outlaw the current system of drug-price negotiation in some government programs, in a step toward reforming an opaque system that has been blamed for higher costs.
Under the current system, drugmakers pay rebates to pharmacy benefit managers — the group of companies that negotiate prices on behalf of health care providers — in order to secure market share. Those rebates get passed on to plan providers, which generally use them to reduce the premiums paid by patients. They’re also are a source of profit for the PBMs, which keep a slice of rebates or take other related fees from clients and drugmakers.
The proposed rule would end the use of these type of rebates in Medicare Part D and Medicaid managed-care plans, which cover upwards of 50 million Americans. As written, it should go a ways toward eliminating market distortions and help some patients. But when proxies for the pharmaceutical industry are cheering a policy on, as they are in this case, it’s a sign that this isn’t a simple win. Every health care policy comes with trade-offs, and this one is no exception.
One problem with the way things work now is that it can encourage PBMs to favor the most expensive and heavily rebated drugs over more cost-effective treatments. It also creates an incentive for drugmakers to boost the list prices they charge in order to increase rebates and secure PBM favor. Those rebates often don’t fully factor into the price charged to health-plan beneficiaries who pay a certain portion of drug costs themselves. People in the deductible phase of plans or who have to pay co-insurance for expensive drugs are subjected to a formula based on the artificially inflated pre-rebate list price instead of the negotiated net price that their health plan actually pays.
The government plan would end the exemption from anti-kickback rules that enables the current rebate system. Instead, it will only allow rebates that are fully passed on to consumers. It would also prohibit deals between PBMs and drugmakers that are based on sales volume in favor of fixed-fee arrangements.
The administration’s proposal is focused on lowering out-of-pocket spending for beneficiaries. That’s a laudable goal, but one that comes at a cost. Premiums would jump because those big rebate checks will evaporate, offsetting some of the savings. Also, the lower drug costs would disproportionately flow to beneficiaries that spend a lot on heavily rebated medicines in competitive classes. So their savings would come, at least in part, at the expense of those that don’t. There will likely be plenty of other unforeseen consequences.
This rule won’t apply to the bigger private market for now, and the industry has been at pains to claim that rebates aren’t its primary source of profit. Health insurer Cigna Inc., which greatly expanded its presence in the PBM business with its recent $50 billion-plus purchase of Express Scripts Holding Co., said on its earnings call Friday that it doesn’t see the rule having a major effect on its business. But the fact is, Medicare Part D is a big deal for PBMs and the insurers, like Cigna, that have merged with them in recent years. This would be a serious disruption to the status quo. If the rule goes through as proposed, PBM leverage and negotiating power would likely be weakened.
That’s probably one of the reasons the pharmaceutical industry seems to like the administration’s proposal. The rebate system takes a lot of flak, but PBMs have used it to massively reduce the net price paid to drugmakers for medicines in competitive classes. To be sure, the proposal won’t be pure nectar for drug companies — they won’t, for instance, be able to use rebates to stave off cheaper competitors as effectively. But it does little to impact the industry’s nearly unlimited pricing power. If anything, it may enhance it by weakening its biggest pricing opponent.
The current rebate system is convoluted and flawed, and the Trump administration‘s proposal takes a step toward improving it for some patients. An even better drug-pricing plan would do more to use the government’s scale to push back not just against PBMs, but pharma, too.
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Max Nisen is a Bloomberg Opinion columnist covering biotech, pharma and health care. He previously wrote about management and corporate strategy for Quartz and Business Insider.