Here's what to expect when Trump outlines his policy to bring down drug prices

Bertha Coombs

Updated Sun, May 6, 2018, 7:06 PM

Azar's comments and the uncertainty over how the new policies will impact the drug supply chain weighed on the stocks of pharmacy benefit managers and drug distributors last week. Shares of pharmacy giant CVS Health CVS and pharmacy benefit firm Express Scripts ESRX fell about 9 percent for the week, despite strong earnings reports; shares of distributors AmerisourceBergen ABC and McKesson MCK declined 7 percent.

One of the key issues the Trump administration outlined in its budget earlier this year was passing on discounts pharmacy benefit managers (PBMs) negotiate with drug makers to seniors in Medicare Part D drug plans.

Those discounts, or rebates, have come under fire for pushing pharmaceutical firms to inflate their list prices, which has contributed to higher out-of-pocket costs for consumers, from critics including the Trump administration's FDA commissioner.

"One of the dynamics I've talked about before that's driving higher and higher list prices is the system of rebates between payers and manufacturers," FDA Commissioner Scott Gottlieb said in a speech last Thursday, suggesting the administration is looking at changing the law.

Under current laws, Medicare recipients aren't eligible for direct drugmaker coupons because of anti-kickback laws, Gottlieb suggested that rebates should be reclassified to fall under regulatory scrutiny.

"Such a step could restore some semblance of reality to the relationship between list and negotiated prices, and thereby boost affordability and competition," Gottlieb said.

For now, the administration is looking at requiring that at least 33 percent of that rebate be passed on to seniors, according to a source familiar with the discussions. Some published reports say there is a push for 100 percent pass-through of rebates to seniors.

Insurers and pharmacy benefit managers argue that passing on all of the discounts to seniors who buy expensive drugs, will result in higher premiums for all Part D enrollees.

"Keep in mind ... as you've heard us and quite frankly others talk about the dynamic here (is) that 100 percent of that rebate value in Part D is passed through the plan's design in the form of a lower premiums," said CVS Health CEO Larry Merlo on his company's earnings call. "So, as it relates to the PBM, that would have no impact on profitability if that ended up moving forward."

"I think the concern that exists ... (is) what's the dynamic as it relates to beneficiary premiums going up?" Merlo said.

While specialty drug prices have risen, Medicare Part D plan premiums have remained relatively stable in recent years, another senior plan provider noted.

"It's going to put pressure somewhere. If it doesn't put it on the Part D premiums, it's going to likely place it on folks that are likely outside of Medicare age ... people under 65," said Richard Cantu, co-founder of a Medicare supplement plan that was acquired by eHealth in January.

In 2016, the Congressional Budget Office estimated that passing on a 23 percent discount for low-income seniors in Part D plans would result in more than $140 billion in Medicare savings over 10 years, but would also likely result in higher costs and spending in other parts of the nation's health system.

"Drug manufacturers would be expected to set higher 'launch' prices for new drugs as a way to limit the effect of the new rebate, particularly for new drugs that do not have close substitutes," reducing the Medicare savings over time, CBO analysts wrote in their report.

"Employment-based health insurance plans would probably negotiate larger rebates to offset a portion of the higher prices, but state Medicaid programs would pay more for new drugs, which in turn would increase federal spending," the CBO concluded.

"Price transparency is not going to be enough to slow costs. There also needs to be a mechanism to either remediate the problem and/or deter future bad behavior," by drug makers who set high prices, said Les Funtleyder, health care portfolio manager at E Squared Capital Management.

Azar said the administration's new proposal will take aim at high list prices on drugs, as well as expanding the Medicare program's ability to negotiate prices on more drugs under Medicare Part D drug plans, and the problem of "foreign governments free-riding off of American investment in innovation."

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