On July 10th, following push-back from pharmacy benefit managers, insurers, and officials within the White House, the Trump Administration withdrew a proposed rule that would have banned drug rebates and passed savings onto beneficiaries in Medicare Part D and managed Medicaid plans. The administration theorized that by eliminating rebates, which can be as steep as 26 percent to 30 percent of a drug’s list price, manufacturers would lower list prices and thus lower costs for consumers at the pharmacy counter. The rebate rule, which was set to be implemented by January 2020, was intended to be a major step toward eliminating rebates in the drug pricing system and ensuring drug affordability for consumers.

However, if implemented the rule was expected to increase Part D premiums for Medicare beneficiaries and cost the federal government more than $175 billion over 10 years via higher Medicare and Medicaid premium subsidies, per an analysis of the rule by the Congressional Budget Office. These factors – in addition to the proposal’s lack of popularity among payers and PBMs – contributed to the President’s decision to abandon the rule despite strong backing from pharma and Health and Human Services Secretary Alex Azar.

For every winner, a loser

The withdrawal of the proposed rule is certainly a win for pharmacy benefit managers and insurers, who have a considerable financial interest in ensuring the survival of rebates. Payers and PBMs also believed that the rule, if enacted, would not have brought down drug prices. However, the rule could have spurred similar movement against rebates in the commercial sector and substantially threatened PBM and insurer profits tied to rebates.

Pharma will continue to be caught between a rock and a hard place, with consumers and the administration demanding lower prices and PBMs demanding rebates in exchange for satisfactory formulary placement. With some PBMs, like OptumRx, demanding guaranteed rebate dollars even if a drug’s list price decreases, pharma will have a more difficult time balancing the demands of consumers and PBMs.  Drug manufacturers have stated previously that a rebate ban, if it extended across Medicare, Medicaid, and the commercial market, would increase the likelihood that they would lower drug prices.

Where do we go from here?

To make progress on one of his major campaign goals, which is sure to resurface in the lead-up to the 2020 presidential election, President Trump is looking to Congress to produce or follow-through on bipartisan legislation that could curb drug costs. In June 2019, Senators Lamar Alexander (R-TN) and Patty Murray (D-WA) introduced the Lower Health Care Costs Act (Senate Bill 1895, also referred to as the “Alexander-Murray Bill”) that would require PBMs to pass-through 100 percent of rebates or other discounts from drug manufacturers to group health plan sponsors. It is worth noting that the bill, which moved through the Senate Health Committee in June, also addresses a host of other topics that directly impact the drug industry, including pricing transparency, spread pricing, and patent protections for generics.

The administration may also turn to other measures to curb pricing, such as international reference pricing. On July 5, President Trump announced the administration was preparing an executive order introducing a so-called “favored nations clause” that would tie drug prices paid in the United States to prices paid in other countries. The administration previously attempted to improve price transparency by forcing manufacturers to present list prices in television advertisements. However, on July 9 – one day prior to the rebate rule’s withdrawal – U.S. District Judge Amit Mehta blocked the pricing transparency effort, arguing that HHS did not have the power to issue such a rule.

Drug rebates, because of the way they are embedded within the pricing landscape, are a stubborn issue for their opponents. Insurers and PBMs have for years benefited from the rebate system, which pharma argues is flawed and a key contributor to high list prices.  As with many regulatory changes in the healthcare industry, nothing comes easy, and changes to rebates are no exception. With no end to rebates currently in sight, and with the administration slated to put more steam behind legislation and proposals targeting pricing and transparency, life stands to become even more difficult for pharma.


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