Trump Unveils Drug Reforms: Rebates To PBMs At Risk

By John McManus, The McManus Group

After months of delay and suspense, in a Rose Garden ceremony, President Trump and HHS Secretary Alex Azar announced a comprehensive approach to prescription drugs, which they claimed would address major challenges:

1. high and rising drug and out-of-pocket costs
2. seniors and government programs overpaying for drugs due to lack of negotiation tools
3. foreign governments catching a free ride on industry innovation.

Trump and Azar’s speeches were accompanied by a blueprint that identified changes for immediate review and take-up, as well as a far-reaching exploration of hundreds of ideas intended to address pricing distortions that have arisen in the pharmaceutical supply chain and other government policies that hamper competition and effective negotiation.

The plethora of proposals included many familiar in health-policy circles:

• halting anticompetitive behavior of companies that delay market entry of generics
• removing regulatory barriers that prevent the experimentation of value-based payment arrangements
• undertaking demonstrations that explore site-neutral payments for drug administration
• examining moving certain drugs from Part B (which are paid average sales price plus 6 percent) to Part D, which are subject to plans’ formulary authority and negotiating leverage.

Review and Possible Elimination of Safe Harbor for Manufacturer Rebates
But the administration also plowed new ground with some surprisingly creative ideas to address the pricing distortions that have arisen in the pharmaceutical market. Most notable is the administration’s interest in reviewing and possibly eliminating the current safe harbor from the antikickback statute, which permits PBMs (pharmacy benefit managers) to collect rebates from pharmaceutical manufacturers. Without that safe harbor, payments from manufacturers would be illegal and PBMs would have to rely solely on revenue from their insurance clients.

Azar commented, “We are calling into question the entire structure of using rebates as the method of negotiating discounts in the pharmacy channel. Because, right now, every incentive is for the drug company to have a very high list price and to negotiate rebates down, often in a very nontransparent way. What if instead we said, ‘No rebates; flat price, fixed-price contracts?’ Take away this  so-called gross-to-net spread that removes that and makes people indifferent to what the list price is in that system and takes away the incentives where even the PBM makes money from higher list prices.”

Azar then focused on the heart of the antikickback law’s exemption: PBMs are deriving most of their revenue from suppliers’ — pharmaceutical manufacturers’,  not their clients’ — health plans.

Azar said, “They’re taking it from both sides. They’re getting compensated by their customers — the insurance companies — but they’re also being compensated by the drug companies they’re supposed to be negotiating against. They’re getting rebates and keeping some of the rebates. They’re getting administrative fees. Should we move to a fiduciary model where the PBM works for the insurance company or the individual and is only compensated by the insurance company or individual? Forbid remuneration from the pharmaceutical company so that it’s all completely on one side there, with a complete alignment of interest.”

The statement was jarring because the Trump administration can alter or eliminate the safe harbor that permits manufacturer rebates under its current authority. Since the safe harbor was provided administratively (shortly after passage of the Medicare Modernization Act of 2003), it can be eliminated without Congress enacting a law.  It’s unclear whether the political will is there to substantially alter or eliminate a practice that has become ingrained as the primary vehicle to channel price concessions. But the Trump administration clearly put it on the table.

Foreign Government Free-Riding
President Trump also targeted “foreign government free-riding” whereby developed countries “extort unreasonably low prices” from manufacturers. Trump said,  “In some cases, medicine that costs a few dollars in a foreign country costs hundreds of dollars in America for the same pill, with the same ingredients, in the same packaging, made in the same plant. It’s unfair and it’s ridiculous, and it’s not going to happen any longer.”

The president has directed the U.S. Trade Representative to fix this “injustice,” a top priority during trade discussions.  While this approach is entirely consistent with President Trump’s intention to fundamentally renegotiate most major trade deals, it remains unclear what tools the U.S. has to actually compel foreign governments to raise prices. Nonetheless, White House staff has made it clear that they are eager to expand this initiative beyond “jawboning.”

Initiatives that Adversely Impact Manufacturers
While the drug industry was pleased with the focus on PBMs and extortion — like negotiating techniques of foreign governments — it has exposure on other initiatives delineated in the blueprint:

• require manufacturers to disclose the list price of their drugs in direct-to-consumer advertisements (It’s unclear how this would be implemented — price for dose, price for therapeutic regimen, price per year?)
• eliminate the requirement to provide at least two drugs per therapeutic class in Part D, giving plans greater negotiating leverage and restricting patient choice
• provide greater flexibility for plans to control the cost of single-source drugs that do not provide price concessions, including those in the six protected classes
• eliminate the 100 percent Medicaid rebate cap to provide greater penalties for manufacturers that raise prices above inflation
• resurrect the dormant Competitive Acquisition Program for physician-administered drugs to negotiate lower prices in the Part B program.

PhRMA President Steve Ubl commented: “While some of these proposals could help make medicines more affordable for patients, others would disrupt coverage and limit patients’ access to innovative treatments. The proposed changes to Medicare Part D could undermine the existing structure of the program that has successfully held down costs and provided seniors with access to comprehensive prescription drug coverage.”

Despite the hand wringing, shares of drug stocks rose after the President’s speech. The Nasdaq Biotechnology index rose 2.7 percent, but shares of PBMs also rose comparably.

However, Dr. Peter Bach of Memorial Sloan-Kettering Cancer Center and a perennial critic of the drug industry gave the administration credit, commenting, “It’s not everything I hoped for, but this is a sign the administration wants to work on a number of fronts, and I’m encouraged by that.”

Now that the administration has opened the debate, stakeholders have 60 days to evaluate the extensive proposals and submit comments to the request for information. That will then form the basis for future regulatory and legislative action.

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.