One part of President Trump’s State of the Union address that received bipartisan cheers was the call to lower prescription drug prices. A “next major priority for me, and for all of us,” said Trump, “should be to lower the cost of health care and prescription drugs — and to protect patients with pre-existing conditions.”
Last week Trump’s Department of Health and Human Services quietly proposed a new rule to fundamentally reform the biggest driver of rising prescription drug prices: the “Kabuki” drug rebate pricing system.
The regulation would essentially eliminate the middlemen between government health insurers and drug manufacturers known as pharmacy benefit managers (PBMs). As sole drug purchasers, PBMs ultimately decide what medicines health plans cover and how much consumers pay for them. The billions of dollars of payments, known as rebates, that PBMs demand from drug manufacturers in exchange for agreeing to place certain medications on insurance plans are the main prescription drug cost culprit. Eliminating these rebates will cause these dollars to flow back to patients in the form of lower drug prices.
Current Medicare regulations provide PBMs with a “safe harbor” from the Anti-Kickback Statute in the Social Security Act, allowing them to accept rebates that would be considered anticompetitive in other areas of the economy. This safe harbor has turned drug distribution into a pay-to-play scheme, dominated by three PBMs that control about 80 percent of prescription drug plans.
The HHS rule would end PBM control over government drug prices by eliminating this safe harbor protection. This is perhaps the single most important deregulation since the federal deregulation of transportation nearly 40 years ago. It can have the same positive effects on price, quality and innovation.
PBM rebates account for nearly the entire recent increase in prescription drug list prices. According to recent disclosures, while list prices of prescription drugs increased by 37 percent between 2011 and 2017, net prices after rebates only grew by a little more than 1 percent per year. Data from SSR Health indicates that net prices actually fell by 5.1 percent in 2018. Major manufacturers such as Merck, Sanofi and Johnson & Johnson disclosed that their net prices are actually falling. Almost every drug company that announced January 2019 list price increases revealed that the hikes were to cover rebate costs.
Rebates now account for about one-third of prescription drug sales, about $166 billion of the $455 billion spent annually. Rebates have more than doubled this decade. Because rebates are a percentage of list price, a government investigation has found that PBMs place more expensive prescription drugs on insurance plan formularies.
Where do these hundreds of billions of rebate dollars go? Most of it is passed on to insurance companies and used reduce overall premium costs for employers. While saving some money on monthly premiums is nice, it’s cold comfort for those with rare or chronic conditions who are forced to pay dramatically higher drug prices, with no direct relief at the prescription counter, as a result of this rebate system.
Roughly one-in-five patients
Ironically, these sickest patients have the prescription drug needs that generate the bulk of rebates in the first place. Just 2 percent of the sickest Americans make up about 3 percent of prescriptions dispensed but fully one-third of rebates and out-of-pocket costs. Analyzing this situation, Food and Drug Administration Chief Scott Gottlieb complained, “Sick people aren’t supposed to be subsidizing the healthy.”
Eliminating rebates “would counteract the incentives behind rising list prices,” says HHS. Given the fraction that rebates play in list prices, pharmacy counter prices could quickly come down by one-third and allow companies to offer important medicines for a few dollars a month.
Deregulating drug channels will allow — indeed, force — manufacturers to compete on prices and performance rather than cronyism and access. “This rule provides a clear pathway,” concludes HHS, “for drug companies instead to compete to have the lower price and out-of-pocket cost to the patient.”
Before transportation deregulation, trucking, airline and rail prices were set by a handful of large companies controlling transport access to particular routes rather than letting customers decide. Eliminating these controls dramatically lowered prices, improved service and increased innovation. By eliminating the PBM cartel, the same revolution can occur with prescription drugs.
