In late July, President Trump signed four Executive Orders related to prescription drug pricing. The President described the orders as “bold and historic, very dramatic action to reduce the price of prescription drugs.” Health care experts though, have noted that the orders are a compilation of ideas that the U.S. Department of Health and Human Services (HHS) has been working on for nearly two years in some cases, and has yet to come up rules that can deliver the hoped for savings. “This is the sound and fury signifying nothing,” said Ameet Sarpatwari, assistant director of Harvard Medical School’s Program on Regulation, Therapeutics and Law in an interview with National Public Radio.
One Executive Order addresses the complicated system of discounts – called rebates – which health plans and Pharmacy Benefit Managers (PBMs) negotiate with drug manufacturers to lower overall costs for consumers. Technically, the Executive Order would only apply to Medicare Part D plans and participants, though analysts expect that changes in a system as large as Medicare would eventually impact all prescription drug benefit plans. Instead of rebates going to the PBMs, the rule change would apply some discounts directly at the point of sale so consumers would pay the lower price. The President has heralded the plan as “eliminating kickbacks to middlemen,” inferring PBMs are to blame for high prescription drug costs.
Is the President correct? And perhaps more importantly, what system is better at keeping costs down for consumers?
Government spending under the Trump order
In January, 2019, HHS proposed a rule change that was essentially the same as the rebate reform order President Trump signed in July. This earlier proposal was dropped in the summer of 2019 after a Congressional Budget Office (CBO) study showed removing the rebates would increase federal spending by about $177 billion over the 2020-2029 budget period. A study done by the Office of the Actuary of the Centers for Medicare and Medicaid Services (CMS) estimated an even bigger cost increase – more than $196 billion over the same time period.
Without the current system of rebates, the cost of prescription drugs would go up dramatically for the payer, in this case Medicare Part D. Increased government spending would be necessary to cover the higher drug costs – $177 billion by the CBO’s estimate. Individual premiums would go up as well because premiums reflect a portion of the aggregated total costs paid by the plan.
The Trump Executive Order does not meet the stipulation that “the action is not projected to increase Federal spending, Medicare beneficiary premiums, or patients’ total out-of-pocket costs.”
Just as the 2019 proposal was dropped because it could not meet the stipulation that “the action is not projected to increase Federal spending, Medicare beneficiary premiums, or patients’ total out-of-pocket costs,” the Trump order may eventually amount to a “sound and fury” talking point in a presidential election campaign.
Individual consumer costs under the Trump order
When President Trump claims that consumers could pay as much as 50 percent less for a drug under the terms of his Executive Order, he’s leaving out critical information. Only a minority of beneficiaries use drugs with high rebates. For the majority that don’t use those drugs, total out-of-pocket costs and premiums would increase due to the lack of rebates being more uniformly spread out to impact all beneficiaries.
Research from the independent actuarial firm Milliman showed mixed results regarding the impact on consumer drug spending. Nearly all Medicare Part D participants would experience increased premium costs, though some could see decreases in the prices paid for selected individual drugs. Some drugs are highly rebated by the manufacturers, while others are only slightly or not at all. Rebates are also subject to change – manufacturers can and do change the drugs they will discount and how much the discount will be.
Individual savings, according to additional Milliman research are impacted by these three factors:
- The specific plan in which an individual is enrolled;
- The prescription drugs an individual needs to take;
- Eligibility for income-based government subsidies.
Rebates shown to control overall costs
The current rebate system is complex, but essentially it keeps overall costs down because the rebates are applied to provide across the board savings to every participant’s advantage. Rebates used in this manner flatten over all costs instead of decreasing the cost of any one individual drug. This is especially important as HHS analysis shows that 45 percent of brand-name drugs did not have rebates.
The current rebate system flattens costs for all instead of decreasing the cost of any one individual drug.
The lower prices negotiated by PBMs create pressure on drug manufacturers to set lower prices for all, from those paying cash at the counter to the huge sums spent by Medicare Part D. In effect, PBMs function as a check against drug manufacturers unilateral control over the prices that consumers pay whether they are part of a PBM plan or not.
The current rebate system creates an overall framework for significant prescription drug cost savings, as the CBO, CMS, Milliman and other analyses confirm. The claim that PBMs function as “middlemen” taking “kickbacks” from the pharmaceutical industry is a purposeful mischaracterization that belies their proven track record of negotiating lower prices – something Republican legislators have staunchly refused to allow in the huge Medicare and Medicaid systems.
Charging in the wrong direction
In targeting the current rebate system, President Trump is leading a charge in the wrong direction. The rebate system is not responsible for increased costs. Rather, it is a response to the high prices drug manufacturers set for their products. Presidential and legislative efforts should focus on bringing high drug prices into an affordable orbit, together with mandates to assure drug research and innovation continue.
The Executive Order on rebate reform is only one of four orders related to prescription drug costs signed by the President. Trump praised all four orders as achieving “tremendous prescription drug price reductions.” While this article only discusses the rebate reform order, analysis on the others reveal similar cracks in the grandiose picture painted by the President. The other orders include importing certain drugs from Canada; insulin and Epipen access for low-income individuals (which in large part is already in place); and a fourth order that would tie a limited class of Medicare Part B drug prices to the lowest found in other medically advanced countries.
This final order was not formally released in order to give the pharmaceutical industry time to come up with its own alternative. Trump blames other countries for negotiating better drug prices, saying this unfairly saddles the U.S. with drug research and development costs. However, industry investments in research and development are dwarfed by their marketing budgets, a fact that changes the U.S. health care landscape and the President chooses to ignore.