By John McManus, president and founder, The McManus Group
Pressure had been building for more than a year for something to be done about drug prices, and specifically inflated list prices to the patient at the pharmacy counter that do not reflect the substantial rebates manufacturers are providing.
Where was all the money going? How could the list price and patient copays for drugs keep rising when the net prices — accounting for manufacturer rebates — stayed level?
In November, the Trump administration asked the same question when CMS issued a proposed rule that could pave the way for a fundamental restructuring of how negotiated price concessions are passed on to the patient in Medicare Part D. It is the first substantial rulemaking of the Part D program since it was first implemented over 10 years ago. (CMS has been running the program primarily through annual, subregulatory “call letters.”)
The rule makes the case that manufacturer and pharmacy fees must be passed on to patients at the point of sale in order to reduce out-of-pocket costs and correct emerging distortions in the program.
On the last day of the Obama administration, CMS issued a report noting that direct and indirect remuneration (DIR) — resources collected by plan sponsors from pharmaceutical manufacturers and pharmacies often months after the patient had received their prescription — had nearly tripled from 2010 to 2015, growing twice as fast as gross Part D costs.
That report, and growing ire from patients around the country at rapidly increasing prices at the pharmacy counter, prompted CMS to undertake a fundamental reexamination of this area.
At issue is how CMS interprets the term “negotiated price” in the statute. In the proposed rule, CMS noted, “To date, sponsors have elected to include rebates and other price concessions in the negotiated price at the point of sale only very rarely.”
More troubling, CMS found that the current system has distorted pricing behavior. CMS stated, “Plans sometimes opt for higher negotiated prices in exchange for higher DIR and, in some cases, even prefer a higher net-cost drug over a cheaper alternative. This may put upward pressure on Part D program costs and shift costs from the Part D sponsor to beneficiaries who utilize drugs in the form of higher cost-sharing and to the government through higher reinsurance and low-income cost-sharing subsidies.”
CMS went on to castigate current pharmacy benefit manager practices: “Sponsors have negotiated more high-price, high-rebate arrangements, especially in recent years, which has caused the proportion of costs for which the plan sponsor is at risk to shrink when those higher rebates are not passed on at the point of sale. Under current rules, therefore, Part D sponsors may have weak incentives, and, in some cases even, no incentive, to lower prices at the point of sale or to choose lower net cost alternatives to high-cost highly rebated drugs when available.”
Because the structure of the Part D benefit requires the plan to cover only 15 percent of the costs once a beneficiary hits the catastrophic threshold while Medicare covers 80 percent, any rebates and other DIR the plan collects above its projected bid primarily contributes to profit, not lower premiums. CMS notes, “Our analysis of Part D plan payment and cost data indicates DIR amounts Part D sponsors and their PBMs actually received have consistently exceeded bid-projected amounts.”
In the proposed rule, CMS solicits comments from stakeholders on how to reform DIR and its impact on beneficiaries, competition, and efficiency in Part D. Specifically, CMS is contemplating requiring a minimum percentage (but not all) of cost-weighted average of rebates to be provided at the point of sale. It may limit application of this policy to “categories or classes that most directly contribute to increasing Part D drug costs in the catastrophic phase of the coverage or drugs with high-price high-rebate arrangements.”
A key issue is how requiring more price concessions to be provided at the point of sale will impact beneficiary premiums. The average Part D plan premium has grown by about 1 percent, annually, in the last five years and is projected to decline in 2018. Rapidly increasing DIR is a major reason for this stability.
But rapidly increasing DIR has turned the fundamental concept of insurance on its head. The sickest beneficiaries with the highest drug costs are cross-subsidizing all other beneficiaries, many of whom have no drug costs at all, who benefit with a lower premium.
Congress is now more intensely examining the drug supply chain. On December 13, the House Energy & Commerce Committee convened a 10-member panel of stakeholders to seek their views on how the drug supply system may contribute to the rising costs of prescription drugs.
Mark Merritt of the Pharmaceutical Care Management Association, representing PBMs focused on CMS’s Part D proposal, said, “Requiring point of sale rebates in Part D would lead to adverse selection and would increase premiums for all beneficiaries while reducing costs for a small minority.” He also cited CMS’s estimate that it would reduce a manufacturer’s cost for providing the 50 percent required discount for drugs in the coverage gap by $29.4 billion if 100 percent of the point of sale cost were passed through.
But Merritt failed to mention the reason the manufacturer’s discount would decline: fewer beneficiaries will hit the coverage gap because they will be paying lower copays on drugs, which reflect the price concessions provided by the manufacturers in the first place. Therefore, beneficiaries will progress more slowly through the benefit, and fewer will require the manufacturer discount in the coverage gap.
In the hearing, the National Community Pharmacists Association attacked the growing influence and consolidation of the PBM industry. “Since their inception PBMs have morphed from claim adjudicators into little-known and largely unregulated corporate giants that exploit their strategic position at the ‘middle’ of nearly all drug transactions in the U.S. to extract profits from the upstream and downstream participants in the drug supply chain while providing questionable value to the ultimate consumer.”
Lori Reilly of PhRMA lamented that negotiations between biopharmaceutical companies and payers do not always make their way directly to the patient. “Unlike care received at an in-network hospital or physician’s office, health plans base cost-sharing for prescriptions filled in the deductible or with coinsurance on undiscounted list prices, rather than on prices that reflect negotiated rebates and discounts. Enrollment in high-deductible health plans and use of coinsurance for prescription drugs has grown sharply in recent years, increasingly exposing patients to high out-of-pocket costs based on undiscounted prices.”
She also took aim at hospital markups of prescription drugs, noting an October 2017 Moran Company study showing, “Hospitals charge prices that are on average nearly five times higher than their acquisition costs and are reimbursed up to three-and-a-half times their acquisition costs by commercial insurers.”
Energy & Commerce chairman Greg Walden (R-OR) concluded the hearing by warning all 10 stakeholders in the drug delivery chain that members of Congress are eager to develop solutions on drug pricing, and each stakeholder had to come to the table with solutions.
CMS is presently in receiving mode, and the various industries are now planning their lobbying campaigns to influence the final outcome of a rule that could substantially change Part D and also influence commercial practices. Since 2018 is expected to be a light year legislatively, all eyes will be on how the Trump administration decides to advance the ideas it has laid on the table.
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.