Issue No. 63: With Fanfare, White House Issues Four Orders on Drug Prices, But What Would They Actually Mean?
President Trump on July 24 signed four executive orders intended to “deliver lower prescription drug prices to American patients.” Some of the orders resurrect ideas that have been discussed for years. Some could have beneficial effects on Americans’ out-of-pocket costs and on their health. Others are likely to be harmful or impossible to implement. STAT News called the orders “a last-ditch effort by the White House to cut drug costs before the November election.” And, according to Reuters, “experts say they are unlikely to take effect in the near term and in some cases lack specifics.”
Regulatory orders can take months, even years, to implement. For example, the White House first announced a rebate reform order two years ago, placed it in the Federal Register eight months later, then rescinded it five months after that and is now bringing it back.
Still, the newly announced orders are worth examining in detail. Even if they do not affect policies this year, some may be brought back in the future, perhaps by a Biden Administration. Democrats could find it easier to pass legislation similar to Speaker Nancy Pelosi’s H.R. 3, the Lower Drug Costs Now Act, by pointing to the Trump Administration’s own price-control proposals.
President Trump has already achieved a major (but rarely recognized) success in constraining drug prices by removing regulatory barriers that harmed competition. The Administration could continue on that path by adopting a variety of policies that would quickly reduce out-of-pocket expenses, especially for seniors. We will mention some at the end of this newsletter.
For now, let’s turn to the July 24 orders. The three most important concern requirements that: 1) prices for certain Medicare Part B drugs not exceed what any other wealthy country pays, 2) pharmacy benefit managers (PBMs) pass on to consumers the rebates that the PBMs demand from drug manufacturers, and 3) the Department of Health and Human Services (HHS) ease the way for states to import drugs from Canada, where they are generally cheaper. All three, in slightly different forms, have long histories. Let’s take them in turn:
Price Controls Based on What Other Countries Pay
This rule would require Medicare to cap what it pays for a drug at the lowest price paid by in countries that have roughly the same income levels as the United States. The rule would apply only to a limited number of the most expensive Part B medicines (administered in doctors’ offices and hospitals), but it would provide a model for broader price controls.
When he announced the order, however, President Trump said, “We’re going to hold that until August 24, hoping that the pharmaceutical companies will come up with something that will substantially reduce drug prices. The clock starts right now.” So far, such alternatives have not been made public. Indeed, as Politico headlined on July 28: “Drugmakers refuse to attend White House meeting after Trump issues executive orders on costs.”
The change closely tracks a previous proposed rule that was placed in the Federal Register on Oct. 30, 2018. In that case, the price of an affected Part B drug would be capped based on a formula derived from an average of prices charged by a group of foreign countries, called an International Pricing Index (IPI).
In a speech five days earlier, President Trump criticized pharmaceutical companies for having “rigged the system” by charging higher prices in the U.S. than abroad. In fact, those companies would be thrilled to be able to charge as much in Paris as in New York. The system-riggers are not drug firms but foreign countries, nearly all of which operate nationalized health care systems, where prices are set -- and access to medicines determined -- by government agencies.
The IPI was widely mocked for including such countries as Greece in a basket of foreign prices from which the Centers for Medicare and Medicaid would derive a mandatory U.S price ceiling. Left out of the basket were Switzerland, which ranks second to the U.S. in per-capita drug spending, as well as seven of the nine countries with the highest per-capita global GDP.
The new proposal is even harsher. Rather than 126% of the mean price of the basket, the U.S. price would be reduced to the lowest price among other wealthy countries. This new reference, or index, price would be termed the “most-favored nation” (MFN) price.
The Costs of International Reference Pricing
The original 2018 proposal was eventually dropped, perhaps because of research showing that price controls of this nature would have a devastating effect on pharmaceutical innovation. It is still unclear which drugs would be affected, but Part B payments for some critical drugs are substantial. For example, reimbursements for Regneron’s Eylea, for example, which treats macular degeneration, a disease that leads to blindness, totaled $2.5 billion in 2017, without subtracting rebates. An MFN rule could cut revenues by 30%.
Regeneron is currently spending large sums to develop a “double antibody cocktail for the treatment and prevention of COVID-19.” The drug entered late-stage clinical trials on July 6. Would potentially life-saving medicines like these even be developed if an MFN rule slashes future revenues?
As we wrote in our Newsletter No. 47:
Drug companies would like nothing better than to insert some equity into what American and patients in other countries are paying for drugs, but they can’t without the help of their own government. Most foreign nations run monopsony drug purchasing operations; in other words, government agencies are the only purchaser of pharmaceuticals. The result, as the President said, is that “American consumers…subsidize lower prices in foreign countries through higher prices in our country.”
The gap is real, but to adopt an IPI or MFN scheme is to import a critical component of foreign nationalized health care systems. While that component is limited, it is a classic foot in the door, and according to new research, it will have immediate and detrimental consequences.
When the IPI was first proposed by the White House, one reaction was to urge the President to exert pressure on the Europeans, Canadians, and others, mainly through trade agreements, to end their own price controls and stop their free-riding. Instead, the White House has returned to what’s called “reference pricing” – letting others determine what Americans pay.
In its press release on the orders, the Department of Health and Human Services (HHS) listed rebates first – and with strong language. The order, said HHS, would…
End a shadowy system of kickbacks by middlemen that lurks behind the high out-of-pocket costs many Americans face at the pharmacy counter. Under this action, American seniors will directly receive these kickbacks as discounts in Medicare Part D. In 2018, these Part D discounts totaled more than $30 billion, representing an average discount of 26 to 30 percent.
Like international indexing, rebate reform has a bumpy history. On May 11, 2018, President Trump declared that it would be a significant part of the Administration’s strategy for constraining drug prices. In a Rose Garden speech, he said, “Our plan will end the dishonest double-dealing that allows the middleman to pocket rebates and discounts that should be passed on to consumers and patients.”
After a long delay, HHS on Feb. 6, 2019, placed a highly detailed proposal for a rebate-reform rule in the Federal Register. In a speech on June 13, HHS Secretary Alex Azar took dead aim at a rebate system that, he said, “pushes prices perpetually higher.” PBMs require rebates of drug manufacturers to secure a favored place in their formularies. Favored drugs are placed in lower tiers, with lower cost-sharing required, so patients and physicians have an incentive to choose them. The proposed rule, said Azar, would replace “this rebate system with upfront discounts for seniors at the pharmacy counter.”
Rebates are notoriously opaque, but it is clear that they have grown rapidly. A 2018 study by the research firm Altarum placed the total in 2016 at $89 billion, more than doubling in four years. Nearly the entire amount goes to insurers. By turning rebates, which are particularly high for Medicare Part D, into discounts for patients, not only would medicines be less expensive but the price on which co-insurance payments are calculated would be reduced.
The HHS proposal in 2019 would have ended the safe harbor from liability afforded rebates to PBMs under the federal Anti-Kickback statute, which is part of the Social Security Act. Instead, it would protect “point-of-sale reductions in price on prescription pharmaceutical products.”
But less than a month after Azar’s June 2019 speech, the White House announced a sudden change of mind: “Based on careful analysis and thorough consideration, the president has decided to withdraw the rebate rule.” Now, a year has passed, and rebate reform is back.
Why did the White House balk? One objection raised by presidential aides was that insurers, forced to pass rebates on to consumers, would make up the lost revenue by raising premiums. In addition, a Congressional Budget Office study estimated that spending for Medicare and Medicaid would rise by a total of $177 billion between 2020 and 2029 as a result of losing rebates. That figure may sound high, but it is only 1% of total Medicare and Medicaid spending projected over the period.
Lower Out-of-Pocket Costs Improve Health
Even those estimates were questioned at the time by critics who argued that lower out-of-pocket costs would encourage patients to fill prescriptions they were neglecting because of the expense. Higher adherence would improve health, which in turn would lower overall care costs for federal programs.
A Milliman study in January 2019 for the Assistant Secretary of HHS for Planning and Evaluation looked at six scenarios, including decreases in branded drug prices by drug manufacturers and increased formulary controls by PBMs. For four of the scenarios, net government spending actually fell – in one case by $100 billion over 10 years and in another by $79 billion. All six cases projected that, for beneficiaries, premiums would rise and cost sharing would fall. On net, in five of the six scenarios, spending by beneficiaries would decline.
Then, there is the matter of premiums. “At the end of the day, while we support the concept of getting rid of rebates and I am passionate about the problems and the distortions in system caused by this opaque rebate system, we are not going to put seniors at risk of their premiums going up,” Azar was quoted by The New York Times as saying after the July 10 , 2019, to decision to pull the plug.
In fact, premium increases would almost certainly be a small percentage of a small number. For 2020, the Part D base beneficiary monthly premium is $32.74, a decline from the previous year. A study by the California Department of Managed Healthcare estimates the average increase as a result of rebate reform at 0.4%. A separate study found that the majority of Medicare Part D beneficiaries would see no increase at all. In that research, Erin Trish and Dana Goldman of the Schaeffer Center for Health Policy and Economics at the University of Southern California, began by estimating that “eliminating rebates would increase beneficiary-paid monthly premiums by an average of $4.31.” They wrote, “Our estimate is in line with those reported by HHS.” This tiny rise in Part D premiums would be overwhelmed by the out-of-pocket savings for seniors at the drug counter.
Besides modeling data, we also have real-world evidence of the extent to which patients may benefit. Last year, Optum, a PBM and part of the United Health Group, released data regarding its own program that follows the outline of rebate reform. Optum concluded that, when negotiated prescription plan discounts are passed on at the point of sale patients saved an average of $130 per eligible prescription. In addition, prescription drug adherence improved by 4% to 16%. In other words, patients paid less out of pocket and were more compliant with the medications that they were prescribed.
The new executive order, however, contains what sounds like a poison pill: premiums can’t rise. That appears to be an effort to kill rebate reform, which would have the most beneficial effect of any of proposed changes. Still, it can be saved if the proposal is improved as the precise terms are written.
The third major proposed change affects the importation of drugs from other countries – another contentious issue that is revived every few years. According to a July 24 HHS press release, the executive order actually takes three separate steps. It would “create a pathway for safe personal importation through the use of individual waivers to purchase drugs at lower cost from pre-authorized U.S. pharmacies” and “authorize the re-importation of insulin products made in the United States” if the HHS Secretary finds that it’s necessary for “emergency medical care.” The third step is the most important. It instructs the Secretary to “finalize a rule allowing states to develop safe importation plans for certain prescription drugs.”
Under a provision in a 2003 law, HHS has the power to approve state programs to import medications from Canada. But to gain that approval, the HHS Secretary has to certify the practice would pose “no additional risk” to the public’s safety and “result in a significant reduction” in cost for the “American consumer.” As a Wall Street Journal editorial on April 16, 2019, commented, “These are high bars,” and “No secretary has ever made such a judgment, and it’s hard to see why Florida deserves such a special federal blessing.” The editorial referred to Florida because the state passed legislation permitting importation.
Eight months later, the Food & Drug Administration, an HHS agency, issued a draft rule that “would allow states, wholesalers and pharmacies to import certain medicines from Canada.” But again, while there was fanfare, there has been action. Now, the President is ordering HHS to set a final rule.
The FDA has a long record of opposition to importation, in both Democratic and Republican administrations. Scott Gottlieb, Trump’s first FDA Commissioner, was a staunch foe. Three years ago, just before Gottlieb took office, his four predecessors – two appointed by President Obama and two by President George W. Bush – came out against legalizing drug importation, writing that it would ‘‘harm patients and consumers and compromise the carefully constructed system that guards the safety of our nation’s medical products.’’
Policing drug imports – even from Canada and even of medicines made in the United States initially – would be a nightmare for the FDA, which is responsible for the 3.8 billion prescriptions filled domestically.
The FDA explains on its website:
We appreciate that there is a significant cost differential between drugs available here and those in other countries/areas. However, many drugs sold in foreign countries/areas as "foreign versions" of approved prescription drugs sold in the United States are often of unknown quality with inadequate directions for use and may pose a risk to the patient's health….FDA cannot assure the consumer that the drug purchased in the foreign country/area would be the same product his or her physician's prescription is written for.
Former FBI Director Louis Freeh led a team on an extensive study in 2017 of the effects of importation on security. He concluded that importation “would increase the threat of illegitimate products entering the United States, fueling criminal organizations’ activities and profits “and that “already overburdened law enforcement and regulatory capacity would be unable to ensure a safe prescription drug supply.”
The Dangers of Counterfeit Drugs
But aren’t Canadian drugs safe? An FDA official testified in 2007, “Of the drugs being promoted as ‘Canadian,’ 85 percent appeared to come from 27 countries around the globe.” Gottlieb said last year, “When a consumer goes online to buy medicines purportedly from Canada, they may get a medicine sourced from elsewhere that could be counterfeit, expired or misbranded.”
Counterfeiting is an enormous problem globally. As Reuters reported in 2018 on a law-enforcement operation that led to 859 arrests:
Coordinated police raids in 116 countries have netted 500 tons of illicit pharmaceuticals available online, including fake cancer medications, counterfeit pain pills and illegal medical syringes, the Interpol police organization said.
Importation would be a bonanza for criminals. The Freeh report noted, “Counterfeiters certainly understand that the U.S. market is highly profitable and will readily exploit any deregulation of currently strict drug importation laws as a means to get their illegitimate products into the U.S.”
Another issue is that even if safety is assured, drugs imported from Canada won’t come close to meeting U.S. demand. Canada’s population of 39 million is less than one-eighth that of the United States. It is unlikely that drug manufacturers will send extra supplies of medicines to Canada, only to have them re-imported into the U.S. at lower cost.
As Azar, until recently a foe of importation, said in 2018:
[Canada is] a lovely neighbor to the north, but they’re a small one. Canada simply doesn’t have enough drugs to sell them to us for less money, and drug companies won’t sell Canada or Europe more just to have them imported here.
In fact, Canada itself would be likely to outlaw a flow of pharmaceuticals to the United States. But suppose it did not and suppose U.S. manufacturers did send extra drugs to Canada. In that case, we can expect that middlemen, including distributors and PBMs, would certainly take a cut. Simple economic theory would lead to the conclusion that the price of imported drugs would rise to meet the price of U.S. drugs.
In 2004, during a congressional session when a drug-import bill passed the House but died in the Senate, the Congressional Budget Office (CBO) issued what is probably the most definitive report on the prospective effects of importation.
The CBO concluded that “permitting the importation of foreign-distributed drugs would produce at most a modest reduction in prescription drug spending.” Even if imports were allowed from “a broad set of industrialized countries,” the reduction would be about “$40 billion over 10 years, or about 1 percent. Permitting importation only from Canada would produce a negligible reduction in drug spending.”
Azar may have had it right when, two years ago, he called re-importation “just a gimmick.”
Insulin and Epi-Pens
The final executive order is narrowly drawn. It would require federally qualified health centers (FQHCs) that “purchase insulins and epinephrine in the 340B program to pass the savings from discounted drug prices directly on to medically underserved patients.”
FQHCs are hospitals, clinics and other health care providers that provide primary care services in underserved areas. The 340B program, which has generated much of its own controversy because of how much it has expanded and how lightly it is enforced, requires drug manufacturers to provide outpatient medicines at significantly reduced prices. Responding to complaints that patients are not getting the benefits of price reductions and that the cost of insulin and injectable epinephrine has risen so much, the President wants Americans with little or no health insurance to get discounts for treatment of diabetes and severe allergies. Diabetes afflicts 34 million Americans, including 27% of those 65 years or older.
The US Can Do More to Constrain Prices
President Trump promised at the start of his Administration to reduce what Americans pay for drugs. He has, in fact, achieved – or is well on the way to achieving – that goal through American solutions. The most effective method has been to boost generic competition through regulatory changes. That market-based approach is far different from the direct intervention to set prices that the executive order on MFN requires.
The FDA approved a record 1,171 generics last year, including 107 first-time generics. Caremark, the largest pharmaceutical benefit manager (PBM) with 30% of the U.S. market, reported that the average prescription filled by its members cost 0.1% less in 2019 than in 2018. Express Scripts, with 23% of the market, reported an average price increase of just 0.9% last year. Out-of-pocket (OOP) drug costs for Caremark members declined $1.50 per month over the year, and two-thirds of members had annual OOP expenses of less than $100 in 2019. Another PBM, Prime Therapeutics, reported that prices for members of its Medicare plan declined by 0.4%.
The Trump Administration’s accomplishment, however, has been little understood by the public, in part because of a stream of media reports that focus on list prices, which are meaningless figures that ignore discounts and rebates. Typical is this Consumer Reports headline from last November: “The Shocking Rise of Prescription Drug Prices.” In fact, the Bureau of Labor Statistics reports that drug prices in 2019 rose less than prices of food, shelter, and medical care as whole.
It is ironic that a Republican White House that has already done more to constrain drug prices than another other administration would be proposing price controls and drug importation as solutions – multiple times.
There Are Alternative Routes to Reductions
Instead, the President could follow the path that has been so effective with generics by insisting on regulatory changes that would increase the use of biosimilars, which are, as the FDA puts it, “highly similar to and has no clinically meaningful differences from an existing FDA-approved” biological product, that is, a complex, large molecule “produced through biotechnology in a living system, such as a microorganism, plant cell, or animal cell.”
Biological products are among the most costly medicines, and biosimilars would provide competition that could reduce prices in a breathtaking way – as generics have done for small-molecule drugs. Only a handful of biosimilars have entered the market in the U.S., in glaring contrast to Europe, where they are already driving down prices. The Administration could make a major effort to ease not just FDA approval but market access to biosimilars.
In addition, the White House could immediately change rules that prohibit the use of co-pay assistance for Medicare. Co-pay cards and coupons, issued by pharmaceutical companies, have saved members of commercial health insurance plans billions of dollars, but such assistance is prohibited for Medicare. Why, especially now during the COVID crisis, should seniors be forced to pay large sums out of their own pockets when manufacturers are willing to defray the cost?
Finally, Medicare Part D could be revised, to place a cap on catastrophic expenditures by seniors. Incredibly, while such caps exist for commercial plans, they are absent for Part D. The Administration currently has the authority to provide this protection to the 22 million enrollees in Medicare Advantage plans, though legislation would be required to apply it throughout Part D.
Media reports on the new executive orders have stressed the upcoming election and the previous false starts, with the implication that the President is acting cynically and politically. Perhaps. While rebate reform is a simple change, long overdue, other proposals will certainly make it easier for politicians of both parties to enact changes that will bring the U.S. closer to a European-style nationalized health care system. Those changes could ultimately harm Americans’ health by making future pharmaceutical breakthroughs far less likely. Worse, they appear unnecessary at a time when alternatives to lowering out-of-pocket costs abound.
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