Three months ago, Alex Azar, the HHS Secretary, explained, in his typically blunt fashion, why the Trump Administration wanted to end the “hidden system of kickbacks to middlemen.” Azar was referring to payments extracted from drug manufacturers by powerful pharmacy benefit managers (or PBMs), companies that determine the medicines that patients can access under their insurance plans.
Azar left little doubt why change was necessary. “Every day,” he said, “Americans, particularly our seniors, pay more than they need to for their prescription drugs.” By ending “this era of backdoor deals,” he continued, President Trump will “deliver savings directly to patients when they walk into the pharmacy.”
In short, the President wants to lift the burden of drug costs for patients. He is not out to cut federal spending or transfer wealth from one industry to another. He wants people who are sick to save some money and improve their health. That has been the Administration’s intention from the start, and it has achieved notable – though often unnoticed -- success.
The Food & Drug Administration took the first big step by easing approval of generic medicines to increase competition and drive down prices. The Bureau of Labor Statistics reports that the pharmaceutical price index is down 0.4% for the year ending March 31, compared with a 1.9% increase in U.S. prices overall. Converting drug rebates to consumer discounts is the Administration’s second big step. We explored the measure at length in No. 43 of this newsletter, but, the rebate proposal is so important that developments in the past two weeks prompted this update.
CBO Issues Report on Budget Impact
On Feb. 6, the Department of Health and Human Services published a proposed rule in the Federal Register that seeks to replace rebates to PBMs, insurers and health plans with discounts to patients at the point of purchase, perhaps as soon as next year. The rule, which would end a safe harbor for rebates that would otherwise have violated the 1972 federal Anti-Kickback Statute, applies only to Part D of Medicare and to managed care organizations (MCOs) that participate in Medicaid, but the anticipated change is alreadyaffecting some commercial insurance plans.
The Congressional Budget Office (CBO) last week issued a seven-page report on the possible effect of the rule on the federal budget. CBO estimated that spending for Medicare and Medicaid would rise by a total of $177 billion between 2020 and 2029. That looks like a large number, but put it in perspective. Total Medicare and Medicaid spending over the 10-year period is projected at $17.1 trillion, so the increase would be about 1%, or about $50 per year for every American. More important, the CBO report was based on necessarily shaky assumptions. Change the assumptions, and you get much different results – including, as one respected research firm found, governmentsavings.
What is not disputed is that Medicare beneficiaries will be winners – which was, after all, the very purpose of the change. Not only will consumers pay less at the pharmacy but they will be more likely to fill their prescriptions and “better adhere to their prescribed drug regimens if their costs were lower, as they would be under the proposed rule.”
More Medicine Utilization Means More Savings
on Hospital and Physician Care
Greater utilization is a cost to the government that CBO estimates at about $10 billion. But, says the CBO, “the increase in the number of beneficiaries following their drug regimens would also reduce spending for services covered under Parts A and B of Medicare, such as hospital and physician care, by an estimated $20 billion over that period.”
As obvious as this statement may be, it is a remarkable one for a government budget agency to make: Spending more on drugs means spending less on health care overall because drugs make people well, so they don’t have to use hospitals and doctors as much. The CBO even published a monograph on this subject in 2012 titled, “Offsetting Effects of Prescription Drug Use on Medicare’s Spending for Medical Services.”
For example, Hepatitis C (HPC) kills more Americans than any other infectious disease. Before the advent in 2014 of the first drug that cures HPC, a significant proportion of patients with the disease ended up saving their lives only through a liver transplant, at an average cost of $813,000. That expense – not to mention pain and suffering caused by the disease itself – can be avoided now with a three-month course of a medicine at a total cost to all payers of less than one-tenth the price of a transplant.
Very simply, lower out-of-pocket drug costs (as the new rebate rule will produce) will lead to more people taking the medicines they need, in turn making them healthier.
Milliman Finds Very Different Result
Still, despite this saving, the CBO finds that net $177 billion loss to the Treasury over five years. But CBO also admits in its report that other organizations have come up with different results.
The consulting firm Milliman engaged in a thorough study for HHS earlier this year that looked at seven possible scenarios, each distinguished by different behavioral changes. Milliman found that in four of the scenarios, the government actually saved money – as much as $100 billion in one case. In three scenarios, the net increase in government spending ranged from $18 billion to $139 billion. In another study, the Office of the Actuary of the Centers for Medicare and Medicaid Services (CMS) estimated that cost to the government will total $196 billion.
The CMS study, which was released in August 2018, projected that the out-of-pocket savings to consumers would total $93 billion and be offset by premium increases of $50 billion.
Those anticipated premium increases, as Wayne Weingarten of the Pacific Research Institute wrote in Forbes, are evidence “that the patients who require expensive medicines have been subsidizing the premiums for all other patients. Such a financial arrangement violates the fundamental premise of health insurance.” It does, but the arrangement, unfortunately, is at the heart of our upside-down system of reimbursement for medicine costs. Ending the current rebate system will help patients who are carrying the heaviest burden today because list prices for drugs, on which co-payments are based, will decline.
And put those potential Part D increases in context. For 2019, the average Part D premium is $32.50 a month, down from $33.59 in 2018. HHS forecasts that, after rebate reform, premiums will rise between $2.70 and $5.64 a month – well below the average out-of-pocket savings and a special boon to seniors who rely on more advanced medicines.
How Will Behavior Change?
More dubious was CMS’s forecast that pharmaceutical manufacturers would not turn all of the current rebate money into discounts. Instead, the manufacturers “would withhold about 15 percent…and would negotiate discounts approximately equal to the remaining 85 percent.” CBO concluded that this estimate was “reasonable and adopted it.”
But why is it reasonable? Using economic common sense, we would expect that the future net price (where rebates are replaced by discounts) should be approximately the same as the current net price (that is, under the rebate regime). The current net price is the result of hard bargaining between drug manufacturers and PBMs; it’s doubtful that the bargaining would be much different under an all-discount regime.
In fact, in one of its scenarios, Milliman makes the assumption that PBMs will respond to being deprived of rebates by tightening their formulary controls and even forcing manufacturers to make additional price concessions, “which could be even greater than the equivalent rebate arrangements today.”
CBO neglects to point out that this trend – the increased administrative burden and restricted access for patients and the increased cost-sharing – has been growing in recent years and can be expected to continue. The Milliman scenario that reflects this narrative, which the researchers call “Increased Formulary Controls and Increased Price Concessions” and which produces the $100 million in savings for the U.S. Treasury, may be the most plausible of all.
And let’s not forget one of the major aims of the reform: increasing transparency. Today, rebates are a closely secret, but imagine what will happen with reform. The largest concessions a manufacturer makes to a plan will suddenly become known to all the other plans, putting downward pressure on prices. This is another reason that post-rebate reform price concessions could be greater than they are today.
Making projections on the effect of ending rebates on government spending means guessing the behavior of some huge players: consumers, PBMs, insurers, pharmacies, and drug manufacturers. CBO and CMS do not have a great track record in this regard. When Medicare Part D was enacted, CBO projected that the average premium in 2013 would be about $60. In fact, it was $31.17.
Eyes on the Prize
The precise dollar effect of the reform may be a mystery, but the value to senior Americans is not. A year ago, HHS issued a blueprint called, “American Patients First.” Its aim was clear: “bringing down the high price of drugs and reducing out-of-pocket costs for the American consumer.”
Under the current, almost absurdly complex system for pricing drugs and reimbursing their costs, rebates play an outsized and pernicious role. They are opaque, they provide a perverse incentive to increase list prices, and they harm patients by boosting what they have to pay out of their pockets. Ending rebates addresses all of those deficiencies at what is at worst a low cost to the Treasury – and what may be no cost at all, or even a small profit.
The CBO study, in fact, can be seen as a form of indirection. It’s critical to keep our eyes on the prize. The goal is constraining costs to consumers and improving their health. This, undoubtedly, rebate reform will do.
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