With only weeks left in its tenure, the Trump Administration’s ambivalence toward pharmacy benefit managers (PBMs) appears to have been resolved at last. On Nov. 20, HHS Secretary Alex Azar and the HHS Office of Inspector General (OIG) “finalized a regulation to eliminate the current system of drug rebates.”
The finalizing took awhile. In a Rose Garden speech back in May 2018, President Trump used brutal language to condemn “the dishonest double-dealing that allows the middleman to pocket rebates and discounts that should be passed on to consumers and patients.” But it took until Feb. 6, 2019, for the Department of Health and Human Services (HHS) to place a proposed PBM rebate rule in the Federal Register. Azar, in a speech on June 13, said he would end a system that “pushes prices perpetually higher.”
But just a month later, on July 11, 2019, 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.” Almost precisely a year later, the rebate plan was revived when President Trump on July 24 signed four executive orders intended to “deliver lower prescription drug prices to American patients.” And on Nov. 30, the 148-page final rule was published in the Federal Register. It is presented as a revision of the original proposed rule of February 2019. Major parts would go into effect as soon as Jan. 29, 2021. The final version varies only slightly from the original proposal.
The Rise of the Middleman
PBMs were created as middlemen between insurance plans (including Medicare and Medicaid) and patients. Their job is to negotiate prices with pharmaceutical manufacturers and pharmacies, administer benefits, and validate a patient’s eligibility. Today, the largest PBMs have been subsumed within huge corporations. For example, CVS Caremark, a PBM with 103 million members, is owned by CVS Health, the largest pharmacy chain in America, and ranks fifth on the Fortune 500 for revenues; UnitedHealthcare, the largest U.S. health insurer, owns OptumRx, whose members fill 1.3 billion prescriptions annually; and two years ago, Cigna, the fourth-largest health insurer, bought Express Scripts, a PBM with 83 million members, for $67 billion.
PBMs have clout, and one way they use it is by demanding rebates from drug manufacturers in return for placing medicines in their formularies, or lists of drugs approved for reimbursement, and for putting those medicines in favored tiers, or categories with varying co-payment or co-insurance requirements.
Rebates – along with other concessions such as discounts, fees, and chargebacks – have been rising sharply in recent years. According to the blog Drug Channels, the average annual increase from 2015 to 2019 has been 11.5%, and what editor Adam Fein calls the “gross-to-net bubble,” the gap for brand-name drugs between their sales at list prices and their sales at net prices after rebates and other concessions, reached $175 billion. In a Dec. 21 article in Health Science Journal, Wayne Winegarden of the Pacific Research Institute and Robert Popovian of Pfizer point out that drug list prices rose 41.5% over the past five years but net prices (the actual market prices after rebates and other concessions) rose just 8.5%, compared with overall medical inflation of 14.5%.
Rebates now average 26% to 30% of the list price of a drug-- and much higher (over 60%) in some cases. Rebates’ proportion of total Part D spending doubled from 2006, according to a report by the Boards of Trustees of the Federal Hospital Insurance and Federal Supplementary Medical Insurance Trust Funds.
Ending the ‘Safe Harbor’
Rebates have become massive, and, for Medicare prescriptions, they appear on their face to run afoul of the law. According to the OIG at HHS:
The Federal anti-kickback statute provides for criminal penalties for whoever knowingly and willfully offers, pays, solicits, or receives remuneration to induce or reward, among other things, the referral of business reimbursable under any of the Federal health care programs.
But HHS created a “safe harbor” to allow PBM rebates – a harbor that would be eliminated under the final rule that was filed on Nov. 30. The rule applies to the Medicare Part D benefit, which serves 46 million seniors. Instead of rebates, HHS wants discounts at the pharmacy counter, so Part D beneficiaries would, under this new process, pay less for individual prescriptions. In addition, the price on which a beneficiary’s out-pocket costs are based is generally the gross price before rebates, and if rebates are prohibited, co-insurance and co-pay outlays would also decline. Says a report by the Altarum Institute:
The concern is that PBMs, in their role as intermediaries, have diverted much of the potential savings to their own bottom lines, a concern intensified by the lack of transparency around the proprietary rebate amounts. Examples include…PBMs pressuring manufacturers to increase their list prices with a commensurate increase in rebates. This benefits PBMs doubly since they are often paid fees based on a percentage of list price and also retain a share of rebates.
An ICER white paper by Amanda Cole and colleagues in March 2019 explained how the rebate system is especially harmful to patients who require specialty drugs for chronic conditions:
All would agree that higher list prices hurt many patients who need ongoing drug treatment, since the increase in the use of co-insurance and of high-deductible plans has meant that rising numbers of patients are required to pay their out-of-pocket share for drug coverage in relation to the list price, not the negotiated rebate price.
A fact sheet from HHS points out that if patients are “spending out-of-pocket up to their deductible, they typically pay a drug’s list price” – that is, the price before the rebate. 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.”
The fact sheet uses this example. Assume that a drug’s list price is $300 for a monthly prescription. A 30% rebate to a health plan would reduce the cost to that plan to $210. Assume also that a patient’s health plan requires co-insurance of 20%, paid out of the patient’s own pocket. But that 20% applies to the list price of $300 (thus, $60), not to $210 (where it would be $42). So, the net cost to the insurer is now $150 ($210 minus $60). 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.”
The July 10, 2019, Meeting Leads to Reversal
The Trump Administration identified “high and rising out-of-pocket costs for consumers” as one of the top four challenges in its May 2018 American Patients First blueprint. Rebate reform would seem to be a good way to meet that challenge. Then why did the White House balk in the summer of 2019 when it withdrew its plan? And why is this time different?
The decision to withdraw the original rebate proposal in the Federal Register came July 10 at a meeting that included Trump; Azar; Larry Kudlow, the director of the National Economic Council in the White House; Tomas Philipson, a University of Chicago health economist who a few days later would be named Acting Chairman of the Council of Economic Advisers (he’s now back in Chicago); Kellyanne Conway, Counsellor to the President; and Seema Verma, Administrator of the Centers for Medicare and Medicaid Services (CMS).
According to a Bloomberg Law report, “Trump decided to kill the rule because of the high cost to the government and because of a concern that the rule could benefit drug companies, according to two sources briefed on the meeting.”
The Bloomberg article also pointed to a possible revenge motive: getting even for the Administration’s “recent loss in a lawsuit that challenged a rule requiring drugmakers to put their list prices in direct-to-consumer advertising.” Ideology may have played a role as well. Philipson and Kudlow are well-known free-market advocates, averse to government standing between negotiations between private parties.
In addition, the insurers and PBMs, with considerable political clout, mounted strong opposition. As Fein wrote at the time, “The removal of the rebate rule is a big win for PBMs. In the short term, changing the rebate game was an existential threat to an important element of PBMs’ profitability.”
The main issue, however, appeared to be costs. Two months before the White House decision, the Congressional Budget Office (CBO) issued a report on the possible effect of the rule on the federal budget, estimating that spending for Medicare and Medicaid would rise by a total of $177 billion between 2020 and 2029. In an earlier study, the Office of the Actuary at CMS estimated that cost to the government will total $196 billion.
"Why be for something that CBO says has a tremendous cost and there aren’t ways to pay for it?" Axios quoted a Senate aide as saying.
Reducing Out-of-Pocket Costs for Seniors
While $177 billion looks like a large number, it is actually only 1% of projected Medicare and Medicaid spending over the 10-year period, and, more important, it is offset by reduced costs for beneficiaries. Under this analysis, Medicare (the Medicaid effect is tiny, and Medicaid was eliminated from the final rule), is a loser mainly because, as an insurer, it would not receive previous rebates. But Medicare beneficiaries are winners, and the Administration, after all, has as its goal reducing out-of-pocket costs for seniors.
The CBO report was controversial. Change assumptions about behavior generated by new incentives under the rule, and you get much different results. For example, a Milliman study in January 2019 for the Assistant Secretary of HHS for Planning and Evaluation looked at six scenarios, such as 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.
The threat of premium increases for Part D beneficiaries is an even greater political obstacle than increased government spending. But, again, the amount of those increases – or even if they will occur at all – is under debate. In their December paper, Winegarden and Popovian use data from the annual report of the California Department of Managed Health Care to conclude that “if the insurer wanted to maintain current revenues” in the face of rebate losses, “it would have to increase premiums by $3.41 per month…. This implies that the total Medicare Part D premiums would rise from $350 annually to $391 annually.” The premium increases would be minuscule compared with out-of-pocket savings on co-pays and co-insurance, especially for the sickest Medicare patients. The authors write:
The policy trade-off is a $1,451 reduction in costs for the patients bearing the brunt of the affordability crisis in exchange for a $41 increase in annual premiums for all Medicare Part D enrollees.
Static Vs. Dynamic Effects of Rebate Reform
The authors call these “static effects.” As for dynamic effects: It stands to reason that lower out-of-pocket costs will increase adherence to prescriptions that often go unfilled when seniors can’t afford them. And a lack of adherence to prescribed medicines, as many studies have shown, mean higher costs in other parts of the health care system as, for example, patients with diabetes land in the hospital. CBO has estimated that a 1 percent increase in the number of prescriptions filled by beneficiaries causes Medicare spending on medical services to fall by roughly 0.2%. Taking increased adherence into account leads to between $381 and $1,522 in average annual per-capita government cost savings overall for the 1 million highest-cost Medicare Part D patients.
A separate study found that the majority of Medicare Part D members would see no increase in premiums 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, estimated that “only about 13 million of the 43 million Part D beneficiaries would see their premiums increase.” Many of the others either get their coverage through Medicare Advantage plans that use federal dollars to offset premiums or qualify for low-income subsidies.
OptumRx has experimented, with excellent results, on “consumer point-of-sale prescription drug discount programs,” accompanied by “modest increases” in premiums, in the low single digits. According to an Optum press release early in 2019:
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 Confirmation Question and Other Challenges
The final rule includes a condition that the HHS Secretary confirm that rebate reform will not raise costs for government or beneficiaries – and won’t even raise premiums. When the provision was revealed, “understandably, many people thought this condition was a loophole that would ultimately prevent a final rule and that the Rebate EO [executive order] itself was purely theatrics,” said a Mintz.com commentary.
But the confirmation requirement turned out to be no poison pill. Wasting no time, Azar issued a statement on Nov. 20:
My extensive experience in this field, coupled with the fifteen-year history of the program, supports my projection that there will not be an increase in federal spending, patient out-of-pocket costs, or premiums for Part D beneficiaries under the Final Rule implementing the Executive Order. The rule will make beneficiary medications more affordable and lead to lower cost sharing for patients as chargebacks will decrease the costs they ultimately pay at the pharmacy counter by up to thirty percent of the drug's list price.
It is worth reading Azar’s entire confirmation statement, which also makes the point that costs and premiums depend on the reaction of PBMs to margin pressure as a result of not receiving Medicare rebates. The Secretary writes:
There is a discrete set of possibilities: (i) the middlemen could see their margins decline; (ii) insurers and manufacturers could agree to greater concessions; (iii) insurers could increase beneficiary premiums; or (iv) some combination of these possibilities. In terms of stakeholder analysis, the vigorous opposition of middlemen to regulatory reform that would so clearly benefit patients and allow their client insurers to attract and maintain customers suggests that the middlemen believe the outcome would be compression of their margins.
Azar’s confirmation is critical to the final rule, and it may be challenged on the grounds that it does not comport with previous estimates by CBO and CMS, nor does it present its own analytical data for costs and premiums.
Another danger for implementing the rule -- noted by, among others, Rachel Sachs of Washington University in St. Louis in an article in Health Affairs -- is the question of whether HHS actually withdrew its original proposed rule in 2019. OMB’s Unified Agenda entry for the rule lists it as “withdrawn” as of July 2019. “Ordinarily,” writes Sachs, “if an agency withdraws a previous proposed rule, it cannot proceed directly to the final rule stage (as it did here) if it changes its mind about the withdrawal.” Instead, the agency has to start all over again at the Notice of Proposed Rulemaking stage, requesting comment and going through a longer process. Sachs writes that “if it is determined that the rule was officially withdrawn in 2019, the final rule could be invalidated.”
The Pharmaceutical Care Management Association, the trade group for PBMs, has already stated that it “will explore all possible litigation options to stop the rule from taking effect and destabilizing the Medicare Part D program that millions of beneficiaries rely on.”
Biden’s Administration, And Trump’s
Finally, there’s the new Administration. Trump is placing his successor in a position where it will be difficult to rescind a rule that lowers out-of-pocket costs for seniors. He is doing the same with the most-favored-nation plan for imposing European prices on certain Medicare drugs, as we discussed in Issue No. 65.
As worthy as rebate reform may be, however, President Biden could decide on more comprehensive changes, perhaps in the form of legislation that can survive the executive orders of future presidents. He could try, for example, to extend the rebate ban to commercial policies. Fein predicts that if rebates end across the board, current drug prices will fall and then rise more slowly each year, biosimilars (generic-like therapies for complex biological products) will be adopted more quickly, and pharmaceutical companies will bid for formulary inclusion in open auctions.
Despite the on-again-off-again nature of its support for rebate reform, the current Administration has spent time and political capital promoting the merits of discounts at the pharmacy counter over what can be characterized as kickbacks to insurers and their middlemen. If rebate reform remains intact, it could become both an important legacy for Donald Trump and certainly a boon to Medicare beneficiaries.
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