Earlier this month, the Congressional Budget Office delivered bad news for anyone hoping for a quick fix on the high price of prescription drugs. The CBO projected that a rule proposed in January by the Department of Health and Human Services aimed at lowering out-of-pocket costs on pharmaceuticals would actually cause federal spending to rise without cutting drug prices across the board.

The high price of prescription drugs is one of the most vexing public policy issues in Washington, and the Trump administration should be commended for its focus on this real but frustrating challenge. Yet the CBO report should be proof enough that the proposed HHS rule, which would prohibit pharmacy benefit managers from receiving rebates from manufacturers on prescription drugs, is not the answer the nation needs.

This proposal merely shifts costs among consumers while likely granting a financial boon to drug manufacturers. The administration should scrap this proposed rule and instead concentrate on policies that lower the cost of drugs for all Americans.

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Pharmacy benefit managers function as knowledgeable middlemen who work with insurers to use aggregate demand and market expertise to lower drug costs for consumers. They also negotiate rebates directly from drug manufacturers, which are shared with insurance companies and used to lower premiums for consumers.

The existence of these middlemen means that prescription drugs end up with two different prices: There’s the list price, or the original price tag. There’s also the net price, calculated after all rebates and discounts have been taken into account, and it’s this one that determines total pharmaceutical spending. The original price, however, is still critically important to patients. For many of the 43 million beneficiaries in Medicare Part D, the 27 million uninsured Americans, and others covered by commercial or employer insurance, the list price of a drug is used to determine out-of-pocket prescription expenses. Rebates don’t directly help those Americans, and that is part of the reason why nearly one-third of adults reported not taking a prescribed medication in 2018 because of the cost.

The proposed HHS rule is intended to help pass savings along to consumers who have trouble paying for medications. There’s just one problem: prohibiting rebates will most likely raise, not lower, the total cost of pharmaceuticals. Any savings at the pharmacy counter would be more than offset by increases in drug insurance premiums.

The federal government has admitted as much. In recent studies, the Centers for Medicare and Medicaid Services’ Office of the Actuary determined that the rule would result in an increase in federal spending by about $196 billion between 2020 and 2029. That projection is similar to the CBO’s prediction that federal spending would climb by $177 billion under the proposed rule. Even worse, it did not assume list prices would go down at all.

That’s not what taxpayers and the Medicare beneficiaries who pay premiums want to hear.

If the rule is instituted, pharmacy benefit managers would lose a powerful negotiating tool when facing down pharmaceutical companies. In a recent congressional hearing, no drug manufacturer would commit to ensuring that future list prices would be cut to match today’s net prices.

The loss of rebates would also make it easier for drug manufacturers to figure out what their competitors are negotiating with pharmacy benefit managers. Transparency is usually a good thing for markets, but not in this case. Most economists believe that full price transparency can lead to tacit collusion among companies that sell similar drugs — much as competing airlines often set the same prices.

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It makes political sense that the White House would target pharmacy benefit managers. Sixty-three percent of Americans blame them for higher drug prices, according a tracking poll by the Kaiser Family Foundation. While there is a need for greater transparency and reforms for the pharmacy benefit manager model, this particular change risks promoting smart politics over smart policy.

Instead of trying to craft rules that raise overall costs to target niche concerns, the White House should dedicate itself to working with Congress to develop a comprehensive legislative strategy that lowers prices for everyone and uses the savings to protect all Americans from high out-of-pocket costs.

As part of that strategy, the White House and Congress should follow a 2016 recommendation by the Medicare Payment Advisory Commission to shift the financial risk of catastrophic drug prices off the payer — Medicare Part D — and onto pharmacy benefit managers. This would create a stronger incentive for these companies to negotiate better prices, avoid expensive pharmaceuticals that happen to have big rebates, and generate savings for patients and taxpayers.

In the end, it’s good that the Trump administration is trying to grapple with the complex world of drug prices. But its current proposal is an unnecessary distraction from a larger debate about how we pay for drugs, a distraction that conveniently takes the focus off the pharmaceutical industry.

John Arnold is co-chair of Arnold Ventures.

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  • You are assuming that a large part of rebates get to the insurance companies. I think in actuality most of the rebates stay with the PBM’s because of their opaque nature. The insurance companies never know how much the rebates are.

  • You know I wish everyone who commented on this article would spend one day in an independent retail pharmacy
    and see what effects how much a patient pays and what doesn’t.
    Let’s start by quoting the PBM’s ” Drug rebates are used to secure a manufacturers preferential placement on a
    formulary”. What does this sound like to you ? Well it certainly has nothing to do with lowering the cost to the patient. In fact this sounds like extortion by the PBM’s ! The PBM’s are saying if you pay us a drug rebate then we’ll
    place your drug on formulary. This vig payment should NOT be a criteria for a drug being on formulary! Now, why
    would this increase government spending ? You know what brings down prices ? competition brings down prices!
    Of course if there is no other manufacturer then there should be a cap over WAC (wholesale acquisition cost).
    The PBM should set up the formulary so the lowest price NDC is the prefered mfger. This will lower cost to the patient. As far as retail price goes (AWP), it allows the PBM to steal that price spread that they made so many hundreds of millions of dollars. I’ve been saying this for a long time, Get rid of Retail Price !! Why should these PBM’s be allowed to charge any patient this bogus made up price that really means nothing. The only thing it does do is it puts the Medicare part D patient into the donut hole that much faster! The kicker is, that the PBM knows that the patient over paid the pharmacy big time ! So a month later the PBM claws back a huge chunk of this payment(they know the exact cost to the Pharmacy) as a D.I.R fee !!
    OK let’s talk about transparency.Is there any reason in the world why there shouldn’t be transparency regarding PBM’s ?, Their multiple MAC (maximum allowable cost) price lists, where the money that their taking from everyone involved in the drug chain including the patient is coming from and going to ? Why shouldn’t every pharmacy be paid the same price for a drug dispensed? We need a level playing field!! PCMA’s vice president of governmental affairs told the NYS legislature under oath that PBM’s INTENTIONALLY underpaid independent pharmacies.
    These PBM’s should have a fiduciary duty to their clients. But they don’t, PBM’s shouldn’t be allowed to own pharmacies, but they do ! is this not a conflict of interest ? They say there’s a firewall between the PBM and pharmacy.
    MY ASS THERE’S A FIREWALL !!!!
    There are very few laws that govern PBM’s. This is the problem ! If they get caught with their hand in the cookie jar they
    just pay what they have to and then back to business as usual. No one goes to jail? really ?
    When the final drug pricing rule came out on thursday,I was in shock ! How can the government not see that this is out right stealing !!!! Gee, I always wondered if CVS paid D.I.R fees ? If they do …. they pay it to themselves anyway !

  • John Arnold is clearly in favor of the sick subsidizing the healthy. God forbid premiums go up a few dollars… Also, I think it’s funny how the guy made an argument that transparency is bad… I wonder who is paying this guy to write this stuff? My guess is either Cigna or United Health.

  • This was extremely well written and 100% accurate. This ruling, even though well intended, will only increase premium costs on participants and employers who sponsor retiree health benefits. I’m very hopeful that common sense will prevail and this will be abandoned.

  • In addition to — and maybe instead of — trying to get the government to control the pharmaceutical industry top-down, why not take direct action and support companies dedicated to pricing therapies so they are more available to all patients, with profit following? There is nothing stopping motivated investors, payers, and even patients from funding development and commercialization of medicines at a price they find acceptable. We have seen that with hospitals creating CivicaRx to ensure steady supply and price of generic hospital drugs. Just Biotherapeutics seeks to do the same with complex biologics, and reVision Therapeutics in ophthalmic drugs. Haven (the healthcare venture created by Amazon, Berkshire Hathaway, and JPMorgan Chase) intends to do this in employee healthcare. Leverage the power of free market competition and minimize government regulation.

  • Distraction takes Focus off of pharmaceutical company .That is what caught my eye and reading this. The focus on the pharmaceutical company is apparently in the wrong place. If anybody was on the ball they would realize that would have cost them to advertise as it seems like there’s a lot of advertisement for medications which is ridiculous since medication should not be advertised any place. They should be studied by our doctors and used appropriately.

  • Mr. Arnold’s op-ed reflects multiple misunderstandings about pharmaceutical markets and the likely impact of the rebate rule. I will highlight just a few of the crucial issues.

    1) Mr. Arnold credulously cites the CBO and OACT analyses, both of which place a very price tag on the proposed rule. Both reports focus primarily on how manufacturers would adjust their overall pricing and rebate strategies.

    Alas, actuaries are good at math, but bad at behavior. Neither report models the likely countervailing changes in PBM or plan behavior. Behind the scenes, PBMs have already begun signaling how they would react to reduce costs if rule is finalized.

    2) Mr. Arnold glosses over the massive market distortions that the gross-to-net bubble is causing. To his credit, he acknowledges that the undiscounted list price is a poor benchmark for computing patients’ out-of-pocket costs.

    However, there are many other significant problems, including: (1) PBMs currently have incentives to select higher-priced, heavily rebated drugs instead of alternatives with lower list prices, (2) people with chronic, complex diseases generate billions in rebate dollars are subsidizing the premiums of healthier people, and (3) PBMs prefer higher list prices, because their compensation is linked to a percentage of list prices.

    The MedPAC proposal is a reasonable starting point, but addresses none of these fundamental distortions.

    3) Finally, Mr. Arnold misdiagnoses the impact of transparency.

    Theoretical fears of tacit collusion are overblown. Today, a manufacturer can make an educated guess about its competitor’s rebates, thanks to ongoing feedback from the contracts that get awarded.

    As I see it, increased transparency would have a much greater impact on PBMs and plans. That’s because manufacturers offer a range of rebates: Some plans get smaller-than-average rebates, while other plans get larger-than-average rebates.

    More transparency would therefore lead to an increase in average rebates, i.e., a decrease in net prices. With greater transparency, PBMs receiving smaller-than-average rebates will demand to be closer to the average. Those receiving greater-than-average rebates will refuse to pay more. Consequently, the average rebate will rise and average net prices will fall. (The variance around the new, lower average will also shrink.) There will be a race to the bottom, and drug spending will decline.

    Finally, I note that Mr. Arnold propose no other solutions beyond suggesting that the White House work with Congress to “develop a comprehensive legislative strategy.” It’s a noble sentiment, but one that quickly confronts the many competing interests in a messy, fractious democracy. The HHS rebate rule is the first major effort to change the rules of a broken drug channel. It deserves much more careful consideration.

    • Love when a successful oil trader confuses luck with brains. Not sure what the PBMs have donated to your foundation but their essentially illegal kick-back scheme needs to be stopped immediately. By creating fair and transparent competition, the list prices of most drugs will go down quickly. And then you can focus your resources on the the real problem, the payor and provider costs, middleman mark-ups and medical fraud, which capture about 88% of healthcare dollars. Even if all drugs were free, it would have little impact on the overall cost of healthcare in the US. Go to your local hospital and see what they charge to infuse a patient with a novel drug. You might be surprised to see the cost to insert a needle into the patient costs 2x what the drug itself cost. I love your enthusiasm but if this piece reflects your priorities, i think you need to re-focus your efforts on the real problem and let Trump and his advisors fix this problem with market driven transparency.

    • I appreciate the comments of Mr. Fein, though respectfully disagree with his claims.
      – You can choose to believe the two external, objective actuarial analyses commissioned by CMS that concluded total spending would rise (as I “credulously” do), or you can believe Mr. Fein’s unsupported claim that some other unspecified outcome will occur.

      You can choose to believe the nonpartisan Congressional Budget Office that total spending will rise by $177 billion over 10 years, or you can again believe Mr. Fein’s unsupported claim that some other unspecified outcome will occur.

      You can choose to believe the robust literature in economics that transparency in wholesale prices leads to higher prices, or you can believe Mr. Fein’s unsubstantiated claim that such “theoretical fears… are overblown.”

      – I appreciate the Mr. Fein acknowledges that I understand the problems with the current rebate model. But there are better ways to deal with this issue that do not compromise the negotiating leverage of PBMs and increase the total cost of drugs. These include moving at least some drugs from co-insurance to co-pay, capping out of pocket expense, or applying class level discounts. Unfortunately, editors do not want op-eds to read like white papers and thus I did not have the space to expound on other options.

      – The language that sick people are “subsidizing the premiums of healthy people” is highly imprecise. A fundamental outcome of insurance is that those without incidents subsidise those who do have incidents. In health insurance, healthy people subsidize the sick. Lowering the out of pocket expense of those who are sick increases the cost of insurance for all. Thus the subsidy from the healthy to the sick will decrease (which may or may not be good policy), but to state that sick people are subsidizing healthy people is misleading.

      – Mr. Fein criticizes me for not proposing solutions. Arnold Ventures, under the leadership of the past executive director of MedPAC, Mark Miller, has identified and proposed fixes for approximately a dozen inefficiencies, bad incentives, or market failures in the space. Each is designed to lower the total cost of pharmaceuticals, improving access for individuals while lowering the cost to individuals and governments. An op-ed on the part D rebate rule is not the right venue for this list.

      – At a recent Congressional hearing, the CEOs from 6 (?) pharma companies were individually asked if any would pledge to match their current net prices if rebates were ended. Not one CEO said yes. The rebate prohibition fixes one problem while creating another. Let’s spend the energy and political will on solutions that will lower the total cost of drugs, not raise them.

    • I work for one of the Big 3 PBMs..none of what you said is true or even close to accurate. Don’t make this political. Sometimes good intended ideas are still bad ones.

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