The Trump administration just took its first step toward upending the pharmaceutical supply chain. HHS proposed sweeping aside rebates drugmakers pay PBMs and some Medicare and Medicaid plans, threatening PBM revenue and blunting a tool pharma uses to win deals with payers.
Though analysts figure the rule won't be implemented as now proposed—and because it's so complicated, likely to be delayed until 2021 in whatever form it finally takes—it would be a double-edged sword for drugmakers. On the one hand, the rule would hamper negotiations for payer contracts, but on the other, it could remove the incentive for list price increases that have drawn public criticism.
Under the proposal rolled out Thursday afternoon, the administration would scrap current rules exempting rebates from federal kickbacks law and offer the "safe harbor" protection to discounts for patients and fee-for-service deals between PBMs and their employer and insurer clients. In a fact sheet released Thursday, HHS Secretary Alex Azar called it "potentially the most sweeping change to how Americans’ drugs are priced at the pharmacy counter, ever."
"Potentially" is the key word here. Bernstein analyst Geoffrey Porges said his firm sees the plan "as a trial balloon with considerable devilment in the practical details and implications." Though the 123-page rule does show the administration is serious about acting against rebates, it "seems unlikely to be implemented as it has been proposed so far," Porges added.
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Under the current proposal, the changes would apply to pharmacy benefits managers, Medicare Part D plans and Medicaid managed care plans, all of which negotiate with drugmakers to win behind-the-scenes discounts off their list prices. The undisclosed rebate amounts give drugmakers the freedom to vie for formulary exclusives and offer better deals to select payers—but they've also forced up prices in some key drug classes as companies make room to offer bigger rebates, drugmakers say. Because of the rising discounts, drugmakers are feeling the squeeze as growth in net prices shrinks.
"Rebates have resulted in the frequent perverse pattern of recently launched drugs having to raise prices in order to gain market share (by having higher rebates)," Porges pointed out.
The PBMs have argued—and argued Thursday—that they don't deserve that blame. Drugmakers raise prices "because they can," CVS, which owns one of the dominant PBMs, said in a statement. The benefits managers have been a "convenient target" in the pricing debate, but they're really consumers' "last line of defense," the statement reads.
Cigna, owner of the rival PBM Express Scripts, echoed those comments in a statement, saying drug rebates keep Medicare premiums low, and changing them would drive up costs for the government and premiums for beneficiaries.
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The average sale, rebate and allowance offered by pharma companies to insurers grew from 28% to 41% in the five years ended in 2017, according to an analysis released last year by analysts at Wells Fargo. Under the new plan, fees would be just that—fees, not tied to the list price of drugs, "and would thus remove the industry-channel alignment towards ever-higher drug prices," Porges noted.
Meanwhile, PBMs pocket a portion of the rebates, allegedly depriving their clients of negotiated savings—and often cutting patients out of the discounts completely. Patients pay out of pocket based on a drug's list price, rather than the net price after rebates. The new rule would "ensure that patients' out-of-pocket costs are aligned with the net, rather than list prices, as the two differ by approximately 30-35% on average in Medicare," Porges said.
And in the end, it could be a good thing for pharma, Bernstein analyst Ronny Gal noted Friday. The plan doesn't appear to shackle pharma's ability to raise drug prices or to tie the size of drug discounts to market share. Plus, "reducing patient out-of-pocket costs reduces public anger at pharma," he noted—and pharma has been footing the bill for some of the out-of-pocket costs anyway, in the form of patient assistance and copay discounts.
Finally, "the transition from rebates to discounts will provide pharma with opportunity to raise net prices without raising list prices," Gal figured.
Novo Nordisk CEO Lars Fruergaard Jørgensen praised the proposal in a Bloomberg interview. He said the current rebate system is "problematic," and that his company applauds "that the administration is taking initiative to seek ways to make sure that patients get access to the rebates." Novo has paid outgrowing rebates to middlemen in recent years, including an average of 68% off its list prices in 2018, the CEO said.
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For PBMs, though, the changes would be a punch in the gut, and Gal figured the benefits managers are the plan's "primary target." Though upending the Part D portion of the PBM business wouldn't be much of a hit, if the changes spread to their commercial business, margins are likely to suffer, he said. Gal's firm estimated the companies keep a big enough share of those rebates to account for 30% of their gross margins, and new fees wouldn't be able to make up all of the difference.
CVS and Cigna each said they pass on the lion's share of rebates they receive for their commercial clients—98% on average for CVS and 95% to "core commercial clients" for Cigna.
The changes could well spread into commercial insurance. Increased transparency could in itself force changes in commercial negotiations; presumably, the formerly secret net prices would show up on Medicare beneficiaries' drug bills, and thus each company's discounting strategy would be exposed.
Whatever the impetus, Gal figured the overhaul won't stop with government programs. "We believe changes to the rebate model could spill into non-Part D segments, causing greater impacts to PBM profitability," he said.
The Pharmacy Care Management Association quickly jumped on the administration's proposal. "We are concerned ... that eliminating the longstanding safe harbor protection for drug manufacturer rebates to PBMs would increase drug costs and force Medicare beneficiaries to pay higher premiums and out-of-pocket expenses, unless there is a viable alternative for PBMs to negotiate on behalf of beneficiaries," the association said in an emailed statement.