Not So Fast on Ending Rebates for Prescription Drugs

Not So Fast on Ending Rebates for Prescription Drugs
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Give President Trump credit for acting on his promise to bring down prices for prescription drugs. But one policy idea his administration has proposed needs a second look.

The Department of Health and Human Services has proposed a rule that would end rebates that drug companies pay to Part D and Medicaid-managed organizations for the prescription drug equivalent of preferential shelf placement and instead require savings from any such rebates be passed along to consumers.

It’s as if Congress passed a law that required baseball teams to stop selling beer but allow beer companies to sell their beer directly to customers at the stadium. If there are enough beers at the stadium for competition, prices may go down slightly – or not. But beer is a big profit center for baseball; tickets prices would have to climb substantially.

Similarly, if this regulation goes final – its comment period just ended, and the decision on when to move forward will come this summer – it may even mean lower prices for some drugs in some cases.

But Big Pharma – the beer companies in our scenario -- will realize a windfall  of up $100 billion per year, according to one study, and ticket prices – what Part D participants pay in premiums and taxpayers shell out for Medicare and Medicaid – would go up.

According to a study performed for America’s Health Insurance Plans, an industry trade group, participants would pay $85.7 billion more per year in premiums and the government would pay $410 billion more for drugs for Medicaid patients. Premiums for seniors could rise as much as 50 percent, and premiums for Part D participants could climb 25 percent or, according to the federal Centers for Medicare and Medicaid Studies’ Office of the Actuary, from $3.20 to $5.64 per month.

The rebates would be illegal under federal anti-kickback statutes, but they are protected by a safe harbor provision in Department of Health and Human Services regulations. The change would specifically exclude these rebates from the safe harbor and remove an effective negotiating tool that has helped pharmacy benefit managers, Medicaid-managed care organizations and Part D plan sponsors to negotiate substantial savings on prescription drugs.

Someone in the administration seems to realize the problem with the new regulation. As Christopher Jacobs pointed out in The Federalist, the comment period ended earlier this month, insurers must submit bids to offer Part D coverage next year by June 3, and the administration pointedly did not tell insurers to submit two plans – one for if the rule went through and one for if it didn’t – because it did not want the cost differences laid bare for fear of having it used as a cudgel against Republicans up and down the ballot in 2020.

The stakes of getting this right are enormous. The federal government spent $471 billion on prescription drugs in 2016 and is projected to spent $584 billion by 2020. Spending on health care already stands at 18 percent of GDP and figures to increase as the population ages.

We’re told drug companies must charge these sums to pay for research and development of new drugs – that we’re, in essence, paying for drug innovation for the rest of the world – and no one can question that our drug industry is the world’s most innovative and productive.

But they’re recovering those costs – drug companies make 176 percent of what they spend on research and development just on their U.S. sales, and they hike profits by, in essence, re-patenting certain drugs to prolong the period in which they can be sold at premium prices.

And they’re racking up profits on drugs at the top of the price scale. In 2017, the top 5 highest cost Part D drugs (ranked by total program spending) represented just 1.7 percent of all drugs prescribed but accounted for 42 percent of its spending. Of those 50 drugs, 46 had no competition from other drug makers.

Specialty medicines routinely cost $50,000 or more per year, and patients typically pay about 27 percent of this amount – or about $14,000 – out of pocket.

These are not the people who need a break in the drug pricing scheme of things, and there’s no guarantee they would do anything to lower drug prices if they couldn’t pay the rebates anymore.

What we do know is such a move won’t be cheap, and it will come at the expense of underprivileged people, hard-working taxpayers and those who purchase drug prescription plans through Medicare Part D or otherwise. And we can’t afford that.

Brian McNicoll is a former director of communications for the House Committee on Oversight and Government Reform and a former senior writer for the conservative Heritage Foundation.

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