Ending drug rebates will increase Medicare Part D premiums. Most seniors will be insulated from it

Health and Human Services Secretary Alex Azar’s announcement of a plan to end kickbacks in the pharmacy distribution chain could shake up the multibillion-dollar prescription drug market. If put into effect by 2020 as proposed, the so-called list prices of drugs will likely plummet in the Medicare Part D system.

Some Democrats and Republicans expressed hope that the plan could be expanded to the commercial sector. But with so much at stake, don’t expect the middlemen known as pharmacy benefit managers who profit from the kickbacks to go quietly. They are marshaling an argument that could prove particularly scary to seniors who watch their Part D premiums closely.

The pharmacy benefit managers’ argument should get shut down fast.

Under today’s rules, pharmaceutical manufacturers set a list price for each of their drugs. At the pharmacy counter, patients pay deductibles and co-insurance based on that list price, and their insurance company pays the rest. But behind the scenes, PBMs negotiate discounts off those list prices for themselves and their insurance clients. This practice creates incentives for manufacturers to raise list prices to make room for higher rebates to the pharmacy benefit managers, who determine which drugs are covered at what levels of cost-sharing.

The PBMs argue that large portions of the rebates they negotiate flow to insurers, who in turn use these rebate dollars to help hold the line on premiums for all Part D participants. They claim that eliminating rebates could result in higher costs for Part D insurance for already stretched seniors.

This argument packs some power because research demonstrates that people enrolled in Part D often don’t choose the best plan (in terms of lowest total costs) and that beneficiaries tend to focus myopically on premiums when picking a plan. Although participation in Part D is voluntary, many seniors take part in it. If premiums increase too much, beneficiaries might drop their coverage, which could be harmful to them, and would undermine the program’s success in achieving nearly universal prescription drug coverage for seniors. Some might even argue that the healthy will flee the market, renewing early concerns about a “death spiral” in Part D.

There are several reasons why we shouldn’t give in to these scare tactics. First, Part D premiums are heavily subsidized by the federal government, so beneficiaries would be responsible only for a portion of the increase. We estimate that eliminating rebates would increase beneficiary-paid monthly premiums by an average of $4.31, a 13 percent increase over the average beneficiary-paid monthly premium of $34.10 in 2016. Our estimate is in line with those reported by HHS.

Second, only a minority of beneficiaries would ever see these premium increases. Almost half of Part D beneficiaries (42 percent) get their drug coverage through a comprehensive Medicare Advantage plan. Medicare Advantage plans often use extra federal dollars to reduce or completely offset the Part D premium for beneficiaries. Another 10 percent of Part D beneficiaries get their benefits through their employers, who often subsidize these premiums as well.

Third, the most financially vulnerable beneficiaries qualify for low-income subsidies. That means the federal government pays all or nearly all of their Part D premiums. At the end of the day, we estimate that only about 13 million of the 43 million Part D beneficiaries would see their premiums increase.

Finally, we need to face the fact that Part D premiums have been artificially held in check by big increases in supply chain rebates, which have doubled from 10 percent of total Part D program spending in 2006 to around 20 percent today. That means seniors who need expensive drugs are subsidizing their healthy counterparts by paying ever-higher co pays and deductibles linked to rising list prices.

Eliminating rebates will increase the cost of Part D premiums. But most beneficiaries are insulated from these costs — including the most vulnerable individuals — and phasing in the policy or providing additional premium subsidies for a transition period can minimize the effect on the others.

The poor market dynamics of recent years and the perverse incentives in the supply chain must not stand in the way of a better drug policy for U.S. seniors.

Erin E. Trish, Ph.D., is associate director of the Leonard D. Schaeffer Center for Health Policy and Economics at the University of Southern California. Dana P. Goldman, Ph.D., is director of the Schaeffer Center. He serves as a consultant to drug companies and holds equity in Precision Health Economics.