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.
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.
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.