Under the Trump Administration, the rate of growth in prices of medicines has flattened and even fallen for the first time in decades. The U.S. Bureau of Labor Statistics recently reported a decline of 1.3% in prescription drug prices in February, compared with the same month a year before – data confirmed by pharmaceutical benefit managers (PBMs) such as Express Scripts and by the research firm SSR Health.
On Wednesday morning, the President’s Council of Economic Advisers Tweeted:
And it wasn’t hype. The decline in drug prices remains the great untold story of 2019. A major reason for the dramatic change appears to be a policy ofstreamlining approvals of generic drugs, which represent about nine out of tenprescriptions filled.
Now, the Department of Health and Human Services (HHS) has taken a step that could have an even greater impact on how and how much Americans pay for medicines. On Feb. 6, HHS published a proposed rule in the Federal Register that seeks to replace rebates to PBMs and health plans with discounts to patients at the point of purchase.
The rule applies only to the Medicare Part D drug benefit and to Medicaid managed care organizations, but the concept is already spreading to commercial plans. Employers believe the current system is broken, according to a survey by the National Business Group on Health last year. Three out of four employers do not believe rebates are an effective tool for driving down drug costs, and 90% would welcome an alternative to the rebate system. That system obscures actual drug costs, and it causes employees to reach deeper into their own pockets to pay for the most advanced medicines.
The HHS proposal would overturn a practice that thrives on opacity and provides incentives for PBMs to drive drug manufacturers to keep raising their list prices. Under the current system, rebates are based on a percentage of the list price; the higher the prices, the greater the rebates.
Delivering Savings to Patients Directly
“Every day,” said Alex Azar, the HHS Secretary, in announcing the new policy, “Americans – particularly our seniors – pay more than they need to for their prescription drugs because of a hidden system of kickbacks to middlemen. President Trump is proposing to end this era of backdoor deals in the drug industry, bring real transparency to drug markets, and deliver savings directly to patients when they walk into the pharmacy.”
Azar said the 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 sticker shock.”
The comment period ended on Tuesday. It could become final as early as November and go into effect on Jan. 1, 2020 -- though drug manufacturers, hospitals, and insurers are asking for more time before the change is implemented. Also on Tuesday, PBM executives testified before the Senate Finance Committee, arguing that the current system holds down costs for Americans.
Sen. Charles Grassley (R-Iowa), the chairman, recognized that PBMs were appropriately negotiating hard with drug companies. “This system of private entities negotiating is what I envisioned as an author of [the] Part D program,” he said. “I still believe that this is absolutely the right approach.… However, as this hearing indicates, it’s our duty to understand how the system is working today and what we can do to improve it.”
The notion that drug manufacturers negotiate prices with PBMs is not controversial. The problem is that, rather than simply getting a good price for their ultimate customers – America’s consumers – the PBMs extract large rebates from manufacturers after drugs are purchased, and a considerable portion of those rebates adheres to the PBMs’ own bottom lines. Rather than exploring remedies, the Finance Committee concentrated on something simpler. As Rachel Bluth of Kaiser Health News put it, “The Senators seemed focused on getting an answer to one central question: What the heck is a pharmacy benefit manager?
No More Safe Harbor
“Rebates,” according to a report last year by the consulting firm Milliman “are mostly used for high-cost brand-name prescription drugs in competitive therapeutic classes where there are interchangeable products (rarely for generics).” The aim of the PBMs is to get pharmaceutical manufacturers to pay to have their drugs placed in formularies and to secure preferred “tier” placements.
Rebates now average 26% to 30% of a drug-- and much higher (over 60%) in some cases.
Such rebates, under normal circumstances, would violate the federal Anti-Kickback Statute, but a safe harbor provision protects the practice for PBMs. The HHS proposal would remove that safe harbor. Instead of rebates after the fact, discounts would be applied at the point of sale. In other words, the benefits of lower prices would flow directly to patients.
During Tuesday’s hearing, much of the criticism of rebates revolved around secrecy. In his opening statement, the ranking Democrat on the committee,Sen. Ron Wyden (D-Ore), said he saw the “hearing as a chance to examine one of the most gnarled, confounding riddles in American health care today. Pharmacy Benefit Managers are among the most profitable companies in the nation. What PBMs do to earn all those profits is a mystery.”
As the Milliman report explained:
Rebate contract terms are trade secrets and vary widely among brands, pharmaceutical manufacturers, and health insurers, but tend to be highest for brands in therapeutic classes with competing products. This secrecy makes cost comparisons of competing brands on the basis of price alone very difficult (if not impossible) to estimate.
Rebates therefore create a “black box” in the prescription drug distribution chain—the patient (and often the commercial health insurer) does not know how much the pharmaceutical manufacturers are paying in rebates, and how much of the rebates PBMs are keeping before passing the remainder to the health insurer.
Out-of-Pocket Payments Now Based on List Prices
A fact sheet from HHS explains that if patients are “spending out-of-pocket up to their deductible, they typically pay a drug’s list price.” And if patients are paying “co-insurance, as is common for expensive specialty drugs, they typically pay it as a percentage of a drug’s list price, even if the plan received a rebate.”
Imagine a medicine with a cost of $300 a month, reduced by 30% to $210 by rebates. Patients with co-insurance might have to pay 20% out of their own pockets. But the 20% is applied to the list price of $300 (thus, $60), not to $210 (where it would be $42). HHS wants to end this practice, noting, “In some cases, a patient’s co-pay can actually be higher than the net price paid by the health plan after rebates.”
Under Part D, Medicare beneficiaries are responsible paying out of pocket 5% of the cost of their drugs once they reach the catastrophic part of their coverage (after about $8,100 of total spending). That 5% is applied, again, to the list price of the drug, not to its price after rebates.
The HHS proposal refers to a study by the Office of the Inspector General that found “that beneficiaries' out-of-pocket costs for drugs with an average price of more than $1,000 per month in catastrophic coverage [under Part D Medicare] increased by 47 percent from 2010 to 2015. While beneficiaries paid an average of $175 per month in 2010 for each high-priced drug in catastrophic coverage, this amount increased to $257 per month in 2015. OIG also found that “the percentage of beneficiaries who were responsible for out-of-pocket costs of at least $2,000 per year for brand-name drugs nearly doubled [between 2011 and 2015.”
From 10% of Drug Costs to 28%
Rebates are rising. The IQVIA Institute for Human Data Science found that the difference between invoice spending (that is, the amount paid by drug distributors, or roughly the list price) and net spending (accounting for all price concessions) increased from $74 billion in 2013 to $130 billion in 2017 for retail drugs. HHS found “a similar trend of growing differences between list and net prices. Manufacturer rebates grew from about 10 percent of gross prescription drug costs in 2008 to about 20 percent in 2016 and are projected to reach 28 percent in 2027 under current policy.
Higher out-of-pocket costs mean lower adherence to physicians’ prescriptions – a serious danger to the nation’s health. Research has shown that higher co-payments lead to patients’ discontinuing medicines to treat such conditions asdiabetes and hypertension.
Another concern raised by HHS in its proposal is that rebates can distort decisions on the best medications for patients:
The rebate system could be skewing decisions on which drugs appear on a beneficiary's drug formulary, and a drug's placement on the formulary. It may also have a paradoxical effect on competition, which would normally be expected to decrease prices among competitors. The use of rebates creates a financial incentive to make formulary decisions based on rebate potential, not the quality or effectiveness of a drug.
Current System Discourages Biosimilars
Perhaps the best hope for constraining drug costs is more use of generics and biosimilars. (According to the Food & Drug Administration, “A biosimilar is a biological product that is highly similar to and has no clinically meaningful differences from an existing FDA-approved reference product.”) But in its fact sheet accompanying rebate proposal, HHS stated:
The current rebate system discourages the use of safe, effective lower-priced generics and biosimilars. A growing number of Part D plans have moved generic drugs to non-preferred tiers, and we have yet to realize the potential of biosimilar competition for high-cost biologics. Too often, this is because insurers and Part D plan sponsors can extract higher rebates for brand drugs and biologics.
At the same time, manufacturers of brand drugs and biologics can prevent generic or biosimilar competition by increasing the size of the rebates they pay for a drug or group of drugs, and condition the payment of those rebates on maintaining their exclusive formulary position. This makes it easier for PBMs and insurers to collect bigger rebates on already-existing sales volume than it is to lower drug spending by using lower costs drugs.
Excluding rival drugs with “rebate walls” or “bundled rebates” distorts our free market system, discourages generic competition and biosimilar adoption, and causes patients to pay more out of pocket.
Optum Expands Point-of-Sale Discounts
Even before the proposed rule goes into effect, one large PBM is already making changes – and they go beyond Medicare clients. OptumRx, owned by UnitedHealthcare, announced March 12, that it is expanding “consumer point-of-sale prescription drug discount programs,” launched Jan. 1 in a limited way, “to apply to all new employer-sponsored plans.”
According to the an Optum press release:
Just two months into the year, the existing program has already lowered prescription drug costs for consumers by an average of $130 per eligible prescription. UnitedHealthcare data analytics demonstrate that when consumers do not have a deductible or large out-of-pocket cost, medication adherence improves by between 4 and 16 percent depending on plan design, contributing to better health and reducing total health care costs for clients and the health system overall.
The shift to discounts at the point of sale, rather than rebates afterwards, will almost certainly mean higher premiums. But Optum reports “modest increases” in premiums, in the low single digits. A blog entry by Holly Campbell of PhRMAlast month said that under the proposed HHS rebate rule, premiums would rise only by $3 to $6 per month.
“Experts,” she writes, “estimate less than one-third of beneficiaries would actually experience this increase. And savings at the pharmacy counter would more than offset premium increases for many beneficiaries. For example, a patient with diabetes taking five medicines, including insulin, could save nearly $900 a year.”
The writing is on the wall – or at any rate, in the Federal Register. The opaque system of rebates is almost certainly coming to an end. If HHS is correct – and it seems to be – the beneficiaries will be America’s consumers.
Coda: Spread Pricing
Sens. Grassley and Wyden on Tuesday took another step that threatens the power of PBMs. They asked the HHS Inspector General to investigate a practice called “spread pricing.”
As Wyden said,
PBMs are paying one set price to pharmacies for a particular drug, but they’re turning around and charging Medicaid and other health-care payers far more for that same prescription,” Wyden said in his opening remarks at a hearing Tuesday. “If there are changes that can be made to clamp down on this exploitation of Medicaid, I hope the committee will consider it. In my view, it’s as clear a middleman ripoff as you’re going to find.”
Bloomberg News has been doing its own investigation for months, and most of the action, up to now, has been in the states, with legislation in Arkansas, Louisiana, Montana, New York, Virginia, and more. Robert Langreth, David Ingold, and Jackie Gu of Bloomberg found, for example, that wholesalers charge less than $20 for a month’s worth of the heartburn drug Nexium, but, thanks to spread pricing, Medicaid plans in Arizona, Georgia, Kentucky, Nevada, and Ohio were paying $130.
Intense scrutiny of drug middlemen is not going away.
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