HHS on Thursday released a proposed rule aimed at lowering prescription drug prices by revising federal protections that currently allow drug manufacturers to pay rebates to Medicare Part D plans, Medicaid managed care plans, and pharmacy benefit managers (PBMs).
Drugmakers currently establish a price for their drugs and then negotiate with PBMs to reach an agreement on a discount for the products, which the drugmakers pay to PBMs on behalf of health insurers in the form of rebates. PBMs and insurers typically share the rebates, and have faced criticism for not passing those savings along to consumers.
Trump administration officials have been critical of the rebates, and suggested the administration could look to the change the rebate system as part of broader efforts to lower prescription drug prices. HHS' Office of Inspector General (OIG) last year sent a proposed rule to the White House Office of Management and Budget titled "Removal of Safe Harbor Protection for Rebates to Plans or [Pharmacy Benefit Managers (PBMs)] Involving Prescription Pharmaceuticals and Creation of New Safe Harbor Protection," which was rumored to target the rebate setup.
Proposed rule details
HHS on Thursday released the proposed rule, which would alter safe harbor protections under the federal Anti-Kickback Statute so that they no longer allow drugmakers to pay rebates tied to a percentage of a drug's list price to Medicare Part D plans, Medicaid managed care plans, and PBMs. The change would take effect Jan. 1, 2020.
Instead, HHS proposed two new safe harbor provisions:
- One that would allow PBMs and insurers to negotiate rebates with drugmakers as long as those rebates are shared directly with patients at the point of sale; and
- Another that would allow PBMs to receive fixed fees for services provided on behalf of insurers.
The new safe harbor provisions would take effect 60 days after the proposed rule is finalized.
HHS is accepting public comments on the proposed rule for 60 days.
HHS Secretary Alex Azar said the proposed rule has the "potential to be the most significant change in how Americans' drugs are priced at the pharmacy counter."
The proposal is intended to make negotiations between PBMs and drugmakers center on changing a drug's actual list price, rather than on potential rebates for specific insurers, "Vitals" reports. But HHS said the proposal would only effect Medicare and Medicaid, and that the administration would need Congress to approve similar changes for private insurers.
According to "Vitals," the proposed rule is expected to lower out-of-pocket prescription drug spending for consumers, but it also could lead to increases in Medicare Part D premiums and federal spending. Part D premiums are expected to increase between 8% and 22% if the proposed rule is finalized.
However, HHS said it expects the savings Part D beneficiaries see from lower drug costs will exceed the increase in premiums. A senior HHS official said, "Given that Part D is such a premium-sensitive market, we fully expect PBMs and Part D plan sponsors are going to negotiate more aggressively or make other changes such that they won't have to increase premiums while still passing on lower costs at the pharmacy counter."
Several observers applauded the proposal, calling it the right step to address a longstanding issue.
Sen. Ron Wyden (D-Ore.) applauded the proposal, but called on the administration to take further action. Wyden said, "For years, I've said the middlemen have no accountability and consumers don't see any savings at the pharmacy counter. I'm going to go the next step and push to force drug companies to lower their list prices to fully account for the removal of rebates rather than pocket the difference as a windfall."
Stephen Ubl, president of Pharmaceutical Research and Manufacturers of America, said, "This proposal would … fix the misaligned incentives in the system that currently result in insurers and … PBMs favoring medicines with high list prices." He continued, "Our current health care system results in patients often paying cost-sharing based on the list price, regardless of the discount their insurer receives. We need to ensure that the $150 billion in negotiated rebates and discounts are used to lower costs for patients at the pharmacy."
However, others raised concerns over the proposed rule's potential effects on government spending.
House Ways and Means Committee Chair Richard Neal (D-Mass.) and House Energy & Commerce Committee Chair Frank Pallone (D-N.J.) in a statement said the proposed rule would increase government spending by about nearly $200 billion.
Matt Eyles, president and CEO of America's Health Insurance Plans, said the proposed rule is "well intentioned but misguided." He said, "The focus on rebates has been a distraction from the real issue. The problem is the price. Manufacturers have complete control over how drug prices are set."
J.C. Scott, president of the Pharmaceutical Care Management Association, said, "[E]liminating the long-standing safe harbor protection for drug manufacturer rebates to PBMs would increase drug costs and force Medicare beneficiaries to pay higher premiums and out-of-pocket expenses, unless there is a viable alternative for PBMs to negotiate on behalf of beneficiaries."
According to Inside Health Policy, the proposal could face legal challenges from PBMs (Diamond, "Pulse," Politico, 2/1; Clason, CQ News, 1/31 [subscription required]; Baker, "Vitals," Axios, 2/1; Winfield Cunningham, "PowerPost," Washington Post, 2/1; Pear, New York Times, 1/31; Swetlitz/Florko, STAT News, 1/31; Cohrs, Inside Health Policy, [subscription required], 1/31; HHS release, 1/31).
Advisory Board's take
Lindsay Conway, Managing Director, Pharmacy Executive Forum
This proposal is merely the latest in a series of major policy reforms put forth by the Trump administration to lower prescription drug costs. Yet it also may be one of the most consequential. Given the complexity of the U.S. drug market, it would likely have wide-ranging implications, including consequences that may be difficult or impossible to anticipate.
“This proposal would have the greatest impact on Medicare beneficiaries who pay co-insurance”
Generally speaking, PBMs negotiate the largest rebates on highest cost brand-names drugs. Consequently, this proposal would have the greatest impact on Medicare beneficiaries who pay co-insurance (i.e. a percentage of the list price of the drug, as opposed to a fixed copay) for higher cost medications. Typically these are patients with complex and chronic disease. Because out-of-pocket costs tend to inversely correlate with medication adherence, the proposal may improve these patients' ability to take their medication as prescribed.
Presumably, requiring PBMs to share rebates with beneficiaries at the point of sale will translate into higher premiums for all Medicare Part D plan beneficiaries, although it's unclear how much premiums would change. Higher premiums could drive down participation in the Part D program, so PBMs will still be under pressure to keep plans affordable, and, as a result, will likely turn their attention to other cost control measures.
It's important to note that this proposal would not affect Medicare Part B drugs (i.e. most infused and injectable drugs), which comprise 50% or more of most health systems' drug spending. That said, approximately 80% of health systems operate retail or specialty pharmacies, which may dispense drugs to Medicare beneficiaries, and this proposal would change the calculation of Medicare beneficiaries' out of pocket costs at the point of sale.
Advisory Board research leaders—working across our payer, provider, and life sciences programs—will be analyzing the potential ripple effects of this policy reform across the coming weeks. Look for more detailed commentary from us very soon. In the interim, please send your questions to me at ConwayL@advisory.com.
Then, to find out more about PBMs, including how to navigate PBM-employer relationships, PBM contract red flags, and five features of a transparent PBM contract, view our research report and infographic on How Pharmacy Leaders Can Help Reduce Employee Health Benefit Costs.
Editor's note: Advisory Board is a subsidiary of Optum, which separately owns OptumRx, a pharmacy benefit manager. All Advisory Board research, expert perspectives, and recommendations remain independent.