Trump Targets The Pharmaceutical Industry

By John McManus, president and founder, The McManus Group

A few minutes into a freestyle press conference on Jan. 11, ostensibly called in response to a specious and salacious intelligence report on his ties to Russia a mere week before his inauguration as the 45th U.S. president, Donald J. Trump launched an unprovoked broadside against … the pharmaceutical industry!

He seemed to criticize recent inversions, but more importantly vowed to go after the industry: “Our drug industry has been disastrous. They’re leaving left and right. They supply our drugs, but they don’t make them here, to a large extent. And the other thing we have to do is create new bidding procedures for the drug industry, because they’re getting away with murder. Pharma has a lot of … lobbyists and a lot of power. And there’s very little bidding on drugs. We’re the largest buyer of drugs in the world, and yet we don’t bid properly. And we’re going to start bidding, and we’re going to save billions of dollars over a period of time.”

The nine biggest pharmaceutical companies promptly lost roughly $24.6 billion (or 1.7 percent) in market cap in 20 minutes.

And then over the following weekend, Trump doubled down in an interview where he said he will demand Medicare and Medicaid negotiate directly with drug companies and vowed to use his bully pulpit (read: Twitter feed) to lower drug prices, like he has been attempting to do against Lockheed Martin for its overbudget F-35 program.

Nervous pharmaceutical executives across the country braced themselves for Twitter attacks on their companies and blockbuster products. Should they respond to an attack or just hunker down and hope to work the legislative process where a generally friendly Republican Congress might provide some respite? Trump made his view clear on the latter approach, referring to pharmaceutical companies, “They’re politically protected, but not anymore.”

Some may dismiss the Trump fusillades as populist hyperbole. But he inherits considerable executive authority ceded by the then-Democratic Congress when it created the Center for Medicare and Medicaid Innovation (CMMI), which can ignore and override long-standing statutory law to “test” new nationwide demonstration projects in Medicare and Medicaid.

How about a test of a new Part D plan that uses Veterans Affairs prices, which are limited by statute and also severely restrict the choice of drugs? Professor Joanna Shepherd, professor of law at Emory University School of Law, recently observed, “Private Medicare Part D plans cover an average of 85 percent of the 200 most popular drugs, with some plans covering as much as 93 percent.” She also stated that “The Department of Veterans Affairs (VA), one government program that is able to set its own formulary to achieve leverage over drug companies, covers only 59 percent of the 200 most popular drugs.” Most seniors would not take kindly to that type of rationing.

In addition, an (certainly less than) Independent Payment Advisory Board (IPAB) this year is expected to have the ability to exert its power to extract an arbitrary amount of savings from Medicare. We will find out if that power is triggered when the CMS Office of the Actuary issues its report in Q2. If IPAB is not appointed (as appears likely), Trump’s Department of Health and Human Services (HHS) gets to develop and implement the policies to achieve those savings. Taken together, we’re in for a very wild ride.

But are Trump’s attacks misdirected? In its January meeting, the Medicare Payment Advisory Commission (MedPAC) noted that the Part D monthly beneficiary premium has remained remarkably stable from 2009 to 2016 — rising just $2 in that period (from $29 to $31).

But it expressed concern that reinsurance payments, which finance 80 percent of the spending in the catastrophic part of the benefit, are growing much more rapidly, rising 25 percent per year between 2010 and 2015. Less than 9 percent of Medicare beneficiaries have enough spending to reach the catastrophic threshold, yet they account for 53 percent of the spending, up from 40 percent in 2011. MedPAC suggests reducing the 80 percent reinsurance subsidy, but the underlying subsidy for the initial benefit is 75 percent — not much difference.

MedPAC notes that growth in prices of single-source drugs is overwhelming the effects of generic use. A key factor is that “Plans have incentives to put high-price, high-rebate drugs on their formularies.” Why is that, and where is that pharmaceutical rebate revenue going?

The National Community Pharmacists Association (NCPA), representing 22,000 independent pharmacies across the country, fingered pharmaceutical benefit managers (PBMs). In a January letter to Trump to respond to his press conference, NCPA pointed out that half of the 400 percent price increase for the EpiPen went to PBMs, and “Similarly, insulin prices have also skyrocketed, yet the net revenue per prescription received by drug manufacturers is reportedly falling sharply.”

NCPA’s letter goes on to state: “Little–known PBMs have grown over the past few decades from prescription- processing companies into enormous corporations that hold the key to rising drug costs and operate in a virtual black box. Three large PBMs now control 80 percent of the market. … Over time these companies have morphed into little-regulated entities 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 consumer.”

A key problem is the percentage rebate large PBMs typically demand of pharmaceutical companies. This gives PBMs an inherent incentive to prioritize highercost products on their formularies — the higher the price, the more revenue the PBM can extract. This pricing scheme also hampers competition, as new entrants who may have a drug of equal or superior clinical value cannot obtain patient access because PBMs protect high-volume legacy products that can generate more rebate revenue. Products launched at a cheaper price are at an inherent disadvantage because of reduced profit potential to the PBM.

Robert Goldberg, cofounder and VP of the Center for Medicine in the Public Interest, points out, “Cash rebates that drug companies give to discount [their] products are now pocketed by insurance companies or used to subsidize other line items. ... Rebates now make up 30 percent (or $115 billion) of total drug spending. Indeed, 77 percent of the retail price increase in drugs since 2006 goes to rebates.“

He goes on to state, “When auto companies offer new car rebates, the cash is applied to reduce the price of the car in the dealership. In our healthcare system, the cash rebates go to the insurance companies and pharmacy benefit management firms. And when we pay for our prescription at the drug store, we are charged the list price.”

To President Trump’s point — can the “bidding” process be improved in Medicare? Absolutely!

1. Congress should ensure that patients are actually benefitting from price negotiations between pharmaceutical manufacturers and PBMs that contract for Part D plans. The Medicare statute requires Medicare plans to provide a mechanism for patients to benefit from negotiations at point of sale, but that has never been enforced.
2. Similarly, the 340B drug discount program has certainly benefitted qualifying hospitals, but the statute does not require those discounts to be passed on to patients. Mega-hospital systems are reaping millions in 340B discounts by charging their customers full price for these products, but their patients — even those who are uninsured and indigent — are not experiencing any savings. 340B is ripe for reform!
3. Finally, a reformed tax code that substantially reduces the corporate rate will do much to deter inversions that were initiated only because U.S.-based multinational companies could not repatriate offshore earnings without substantial penalty.