Magazine Article | April 12, 2019

Rebate Rule Pends As Congress Begins Moving Rx Bills

Source: Life Science Leader

By John McManus, The McManus Group

Amid the hyperbolic rhetoric regarding pharmaceutical price increases that is dominating the healthcare debate in Washington came the understated report by Congress’s Medicare Payment Advisory Commission (MedPAC) that costs for Medicare’s outpatient prescription drug program (Part D) had actually declined from 2016 to 2017. MedPAC also reported that monthly beneficiary premiums have been stable since 2007 at around $30 a month.

Then what is the policy problem driving the populist agenda to slash pharmaceutical spending?

Answer: Rising list prices and patient out-of-pocket spending.

Unlike every other sector in healthcare where insured patients benefit from negotiated prices when they receive care, patients pay inflated list prices when they fill their prescriptions. Price concessions for prescription drugs are provided by manufacturers retrospectively through substantial rebates paid to pharmaceutical benefit managers (PBMs), often months after the prescription has been filled.

According to a recent poll conducted by the Kaiser Family Foundation, 75 percent of seniors say that affording their prescription drugs is easy, including even a majority who are taking four or more prescriptions. But those seniors who do claim difficulty in affording their drugs are taking specialty medications with expensive prescriptions. These are the drugs that typically have high rebates — which do not make their way back to the patient.

The current rebate schemes have prompted anticonsumer behavior that fuels high prices. For example, in December Optum sent a contract amendment to all Medicare Part D drug manufacturers telling them that any price decrease must be announced at least eight months in advance and that if a company did lower its price, it would still owe Optum the higher rebate. Likewise, Prime Therapeutics sent a letter to providers stating it would require patients to receive only the branded version of Advair at $500. The PBM would not offer the generic version, which is less than $200 to beneficiaries.

Why do PBMs prefer the more expensive drugs, which cause beneficiaries to pay higher costs at the pharmacy counter? Fat rebate checks from pharmaceutical coampanies.

Proposed Rebate Rule Will Reduce Out-Of-Pocket Costs But Fiscal Impact Uncertain
In January, the Trump Administration issued a proposed rule that would eliminate the safe harbor from the antikickback law, which currently protects rebates. The Health and Human Services Secretary commented, “Every day, 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.”

HHS has now received 24,000 comments on the proposed rule, and the comment period hasn’t
even closed!

One particularly influential letter came from the GOP Doctors Caucus — composed of former physicians who are now Republican Members of Congress and are viewed as the healthcare conscience of the party. The March 4 letter stated, “The proposed rule would promote better patient access to clinically beneficial drugs by eliminating the ‘rebate wall.’ Presently some products with high list prices may have preferred formulary placement because they offer high rebates, while lower cost, therapeutically equivalent — or even superior products — risk being denied access unless they too inflate their price for the sake of richer rebates.”

A final rule could be issued this spring for implementation in 2020. Manufacturers and plans are reportedly negotiating 2020 contracts on a dual track with a contingency that the rule may or may not go into effect.

A key factor fueling the uncertainty is the widely divergent actuarial analysis on the impact of the proposal on federal spending and beneficiary premiums.

The CMS Office of the Actuary (OACT) analysis suggested that the proposal may raise Medicare costs by $196 billion over 10 years because it projects that about one-quarter of the rebates will not be passed on in lower point of sale prices. In addition, that projection takes a static view on how plans and manufacturers would respond to the new reality of a world without rebates.

However, the Milliman actuarial firm submitted analysis assuming manufacturers would reduce list prices to net prices and provided different scenarios based on stakeholder behavior changes that could produce a range of savings up to $188 billion over 10 years. Behavior changes included:

  • Increased formulary controls (moving members to lowest-cost alternatives)
  • Increased price concessions (price concessions higher than rebates to keep plans sponsor-neutral)
  • Reduced price concessions in Medicare Part D to offset list price decreases in other markets (decreased list prices would cause manufacturers to lose money due to lower reimbursement in the commercial market)
  • Decreased brand-unit cost trend (manufacturers will not increase prices as quickly without rebates)
  • Increased utilization (may use more branded drugs now that they are more affordable).

That OACT projection has piqued the interest of Speaker Pelosi’s office, who now views blocking the rebate rule as a twofer to 1) deny President Trump a victory in reducing seniors’ out-of-pocket costs; and 2) capture the savings which could then be used to spend on liberal priorities, such as shoring up Obamacare or increasing discretionary budget caps, which are set to expire later this year.

It will be up to the Congressional Budget Office (CBO) to produce the critical analysis that will determine how legislation blocking the rebate rule is scored and to sort out the dueling actuarial assumptions offered by OACT and Milliman. If the CBO scores the rule as costing the federal government money, look for Democratic attempts to legislatively block the proposal even if finalized.

House Begins Moving Rx Legislation
Meanwhile, House committees are now moving less controversial pharmaceutical legislation, which has bipartisan support. The Energy & Commerce Committee recently approved bills that would promote faster generic approvals and adoptions:

  • penalizing brand name manufacturers that prevent generic manufacturers from obtaining samples needed to perform product equivalence testing for FDA approval
  • prohibiting pay-for-delay agreements, whereby a brand name manufacturer compensates a generic manufacturer to delay the entry of a generic drug into the market
  • modifying the FDA Purple Book on biologics/ biosimilars and the FDA Orange Book on brand name drugs/generics to provide up-to-date information on patents
  • allowing the FDA to approve a subsequent generic application prior to the first applicant’s date of commercial marketing when several conditions are met.

The Ways & Means Committee is developing a bipartisan package of bills focused on pricing transparency. All of these bills are expected to be on the floor by the end of April.

But the two elephants in the room are whether the administration will finalize the rebate rule and whether it will issue a formal proposed rule on its International Pricing Index proposal that would tie Medicare Part B drug prices to foreign countries.

John McManus is president and founder of The McManus Group, a consulting firm specializing in strategic policy and political counsel and advocacy for healthcare clients with issues before Congress and the administration. Prior to founding his firm, McManus served Chairman Bill Thomas as the staff director of the Ways and Means Health Subcommittee, where he led the policy development, negotiations, and drafting of the Medicare Prescription Drug, Improvement and Modernization Act of 2003. Before working for Chairman Thomas, McManus worked for Eli Lilly & Company as a senior associate and for the Maryland House of Delegates as a research analyst. He earned his Master of Public Policy from Duke University and Bachelor of Arts from Washington and Lee University.