Disrupting the Pharmaceutical Supply Chain
While President Trump again called for lower prescription drug prices for American consumers in his 2019 State of the Union address, in May 2018, the Trump administration released American Patients First, their “blueprint” for lowering prescription drug prices and out-of-pocket expenses for American consumers. A key component of this Administration blueprint is a proposed 123-page administrative rule, released by the Office of Inspector General, U.S. Department of Health and Human Services (HHS), on January 31, 2019. “This proposal has the potential to be the most significant change in how Americans’ drugs are priced at the pharmacy counter, ever, and finally ease the burden of the ‘sticker shock’ that millions of Americans experience every month for the drugs they need,” said HHS Secretary Alex Azar.
Under the proposed rule, HHS eliminates the Anti-Kickback Statute’s discount “safe harbor” protection provision for pharmaceutical manufacturer rebates to Medicare Part D prescription drug plan (PDP) sponsors and Medicaid managed care organizations, including those paid through pharmacy benefit managers (PBMs). In addition, the proposed rule would establish a new Anti-Kickback Statute safe harbor for specific pharmaceutical discounts offered by manufacturers directly to a federal healthcare program beneficiary at the point of sale, along with a separate safe harbor shielding flat-fee payments for PBM administrative services provided to pharmaceutical manufacturers. Secretary Azar has attacked PBM rebates as “a hidden system of kickbacks to middlemen” that is responsible for increasing prescription drug costs for Americans.
Recently, the National Business Group on Health found in their Large Employers' 2019 Health Care Strategy and Plan Design Survey that three-in-four employers responded that they do not believe drug manufacturer rebates are an effective tool for helping to reduce pharmaceutical costs, and over 90 percent of respondents would embrace an alternative to the existing rebate-driven system. Moreover, in January 2019, America’s Health Insurance Plans, in conjunction with Morning Consult, conducted a poll that found 86 percent of Americans saying that the rising costs of prescription drugs is important to them.
Several pricing practices of PBMs have undergone criticism in recent years, with the major business practice of “spread pricing” being at the forefront. Spread pricing is the difference between what a PBM pays the pharmacy for a drug and what the PBM charges its client organizations for the drug. This confidential (and thus non-transparent) business practice between contracting parties is alleged to be more costly for all parties involved in the delivery of pharmaceuticals. Under the proposed HHS rule, spread pricing practices end, as pharmaceutical manufacturers no longer pay PBMs rebates or discounts directly. However, also under the proposed rule, PBMs will have a new safe harbor created for flat-fee administrative services. This new regulatory arrangement, as proposed, will require the development of a new, and potentially transparent, business model for manufacturers, PBMs and health insurers.
Presently, Medicare Part D prescription drug plans under the existing payment model use rebate savings to reduce enrollee premiums. However, the proposed revisions to the discount safe harbor affect beneficiary spending on premiums. In its analysis of the proposed rule, HHS utilized Centers for Medicare & Medicaid Service’s Office of the Actuary (as well as two independent actuarial firms) to assess the anticipated impact of the proposed changes on both premiums and consumer out-of-pocket expenses. Yet, the Administration’s analysis could only estimate that the proposed rule may reduce federal spending by approximately $100 billion over ten years, or increase federal spending by upwards of $140 billion over the ensuing decade – a vexingly wide variance in economic impact on the national budget.
Moreover, while approximately 30 percent of Medicare Part D recipients having chronic medical conditions or requiring expensive medicines would accrue some savings at the pharmacy counter under the proposed rule, HHS estimates premiums to increase from 8 percent to 22 percent, while the average cost per patient to pay-out-of-pocket would decline 9 percent to 14 percent for Medicare drug plans. Thus, according to HHS, the new system would operate as an insurance plan is intended, i.e., assisting those most vulnerable Americans with high out-of-pocket pharmaceutical expenses.
In addition, since the proposed rule only applies to the Medicare and Medicaid programs, HHS cautions that there is no provision in the rule proposal that amends the discount safe harbor provision that excludes any price reductions offered by pharmaceutical manufacturers to a single payer. Therefore, if a pharmaceutical manufacturer offered a rebate or discount on a drug to a health insurer for its commercial plans, with either the explicit or the implicit intention that the product receive an exclusive formulary placement across all drug plans (including Medicare Part D PDPs), such financial remuneration would explicitly fall outside the discount safe harbor.
Noting this limitation with the proposed rule, HHS Secretary Azar, in a February 1, 2019 speech at the Bipartisan Policy Center, challenged Congress to “follow through on their calls for transparency, too, by passing our [rebate] proposal into law and extending it into the commercial drug market.” However, with Democrats controlling the U.S. House of Representatives, and not favoring the rule’s approach to reforming federal healthcare programs, it is highly unlikely that an extension of this proposal to commercial health plans will occur in the 116th Congress.
Whether or not this proposed rule is the right approach for lowering the out-of-pocket cost of prescription drugs for Americans is up for debate – but not the issue of reforming a pharmaceutical pricing system that most stakeholders find opaque and unsatisfactory.
Thomas A. Hemphill is David M. French Distinguished Professor of Strategy, Innovation, and Public Policy in the School of Management, University of Michigan-Flint and a policy advisor at the Heartland Institute.
