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Will restricting use of rebates in federal programs carry over to commercial insurance?
Over the past week and culminating in President Trump’s State of the Union address, the White House is following through on a few of the proposals floated in the “American Patients First” plan for addressing drug costs. The element that has garnered the most attention is a proposal—which can be carried out unilaterally via executive action, provided that it survives legal challenges—to remove the allowance for so-called “back door” rebates when drug plans negotiate prices with manufacturers.
Details of the proposal were published by HHS on Jan. 31, a week after the government shutdown ended. The safe harbor provision, originally in the Medicare Modernization Act that created Medicare Part D, allows PBMs and managed care plans to receive discounts without violating anti-kickback statutes. The HHS proposal would instead allow only discounts only as recognized at the pharmacy counter or other purchasers. The effect of this is to remove the extra cost that patients pay (as copays or coinsurance) that are based on the undiscounted, list price of drugs; in addition, the rebate funds that are either kept by the PBM, or flow back to the insurer, are eliminated.
While drug prices could come down, and percentage-based copays would certainly be reduced, the loss of rebate funds to insurers could mean that insurance costs rise. HHS believes that the net will still be a benefit to patients. HHS estimates that 30% of Part D beneficiaries are “likely” to net lower costs—those whose copays or coinsurance for expensive medications are highest—while more beneficiaries could see lower costs depending on other actions by PBMs and plans. Pharma forgoes some $130-150 billion in revenue through rebates annually--nearly a third of overall industry revenue; but it's not as if that money will magically appear in consumers' pockets.
While calling the action “the most sweeping change to how Americans’ drugs are priced at the pharmacy counter, ever” (which kind of blows Medicare Part D, among other epochal antecedents, out of the water), HHS is creating a variety of knock-on effects that could change industry marketing practices. Manufacturers use rebates to garner preferential formulary positions, and in some cases, PBMs have been supportive of higher-priced drugs over cheaper ones because the rebate generates more revenue for them. Wholesaler-distributor revenues could also be affected, to the extent that their fees are based on a percentage of list price.
To a significant degree, PBMs have anticipated regulatory changes like this one; by the end of last year, the Big Three PBMs (Express Scripts, CVS Health and Optum) had already merged with insurers, which both lowers their dependence on rebate revenue, and broadens their revenue streams to include insurance premiums. David Cordani, CEO of Cigna (now the owner of Express Scripts) told financial analysts that the action “will not have a meaningful impact on our growth or earnings trajectory” of the company in 2019.
PBM associations had negative, but relatively muted, reactions. “Any proposals to eliminate PBM-negotiated rebates must consider the impact it will have on Medicare beneficiaries' access to affordable prescription drugs and costs to taxpayers,” stated the Pharmaceutlcal Care Management Assn. The Academy of Managed Care Pharmacy, a professional association, issued a statement saying that “We need a competitive marketplace that allows payers to negotiate prices with manufacturers to ensure lower overall costs for consumers. Any new system must include the use of proven managed care pharmacy levers, such as formularies and utilization,” management tools, to help people get the right medications, at the right time and at the right cost."
Todd Edgar, SVP at consulting firm Precision for Value (and a former top PBM executive) says that smaller PBMs and plans are going to have a difficult time adjusting to the new environment. “The larger health plan aligned PBMs will be in a better position to adjust to decreased revenue as a result of rebates being passed to the beneficiary, as they have more options for creating/expanding other revenue streams to offset any losses.”
Although Medicare Part D, and Medicaid, are major components of US healthcare, the rebate revision could have a more significant impact on the pharma industry if it carries over into commercial plans. There could be a call for federal legislation to that end; the pharma industry has connected responsibilities between how it markets to commercial insurance plans and federal ones. “In a perfect world, we would use the Part D space to determine if this approach works as intended,” says Edgar, “and what, if any, corrections need to be made prior to implementing in the commercial space, so the hope would be for a few years as a “pilot” program before expanding.” He also cautions that the revision could have a deleterious effect on the “robust” patient assistance programs that exist today, if manufacturer revenues are significantly affected.
Besides the rebate revision, the Trump Administration is also pushing the idea of requiring disclosure of drug pricing in advertising, along with a higher degree of price transparency across the board. In his State of the Union address, President Trump revisited the topic the “global freeloading” of other countries obtaining drugs at lower costs than the US, presumably by legislating some form of international reference pricing. He also proposed an expanded effort on eradicating HIV/AIDS in the US (presumably by budgeting more for prevention, which would boost sales of Gilead’s Truvada product), and allocating $500 million over 10 years for childhood cancer treatment.