Here's why Big Pharma is cheering a new proposal from the Trump administration that's supposed to tackle high drug prices

  • The Trump administration wants to bring down US drug prices by getting rid of the rebates that are widely used in the drug pricing system.
  • That could actually be a huge victory for drug companies.
  • Drug companies say they’re being unfairly vilified for rising pharmaceutical prices – and have blamed the very feature of the US drug system that the Trump administration is trying to get rid of.

The Trump administration just proposed a major change to how the US drug pricing system works, in an effort to bring down the cost of prescription medications for patients.

Drug prices coming down sounds like a setback for drug companies. But it could actually be a big victory.

Here’s why: Drugmakers have been vilified for raising the prices of their treatments year after year.

But they claim the criticism is unjustified. Because of the complicated way that the US healthcare system works, drug companies say they’re only taking home a small fraction of those increases.

Instead, they say a big chunk of the money goes to middlemen, known as pharmacy benefit managers, or PBMs. Drugmakers make payments to PBMs (known as rebates) to get them to include a particular drug on their lists of which prescriptions a patient can take. PBMs, in turn, blame drugmakers for setting high costs for their treatments, and say they’re negotiating discounts on behalf of patients.

Why the Trump administration is taking an approach to drug prices favoured by the pharmaceutical industry

The Trump administration on Thursday appeared to side with big pharma, by proposing a ban on those rebates. The proposal applies in the government-funded Medicare health program, which covers the elderly and some disabled individuals, and in some parts of the Medicaid program for low-income people. The proposal says this will help lower drug prices, but doesn’t require drug companies to lower the prices of the drugs themselves.

Health and Human Services Secretary Alex Azar said the proposal is aimed at all parts of the healthcare system.

“This proposal has the potential to be the most significant change in how Americans’ drugs are priced at the pharmacy counter, ever, and finally ease the burden of the sticker shock that millions of Americans experience every month for the drugs they need,” he said in a statement.

But Democrats said the administration isn’t doing enough to curb high drug prices.

“Under the Trump Administration’s proposal, Big Pharma could see even bigger profits and even less restraint on what they charge seniors,” House Speaker Nancy Pelosi, a California Democrat, said in a statement. “President Trump must work with Congress to deliver the real, tough legislation needed to actually drive down the price of prescription drugs for seniors and families across America.”

How rebates work, and what Trump wants to change

Still, there’s some reason to believe pharma about the role of rebates. Take the US drug giant Pfizer, which decided to increase prices on about 10% of the drugs it makes in January of 2019, in most cases by around 5%.

Trump may have shamed Pfizer for increasing drug prices, but that isn’t stopping drugmakers from doing more of the same

Pfizer has said that all of those increases won’t make it any richer, but rather will go straight back into rebates. Drug companies like Pfizer often pay back, in a year, more than $US100 billion in discounts like rebates.

Patients at the pharmacy counter, meanwhile, don’t always benefit from the drug price discounts that companies get. Sometimes, they end up paying all or a portion of the public, list prices of the drugs, instead.

That’s where the new Trump administration proposal comes in. HHS wants to get rid of rebates in the government Medicare program, and instead push drugmakers and PBMs to provide those rebates in the form of discounts directly to patients. Drugmakers would also be able to pay PBMs a fixed fee for their services.

The idea is that this would help bring drug prices down overall, and reduce how much people insured through Medicare pay at the pharmacy. While the proposal doesn’t directly affect the health insurance that employers provide to their workers, because Medicare is a huge and influential program, if the change goes through, the administration hopes it would affect the rest of the US drug system, too.

The Trump administration just proposed a ban on a little-known practice in the pharmaceutical industry that’s been blamed for high drug prices

The drug industry lobby support the proposal, while health insurers oppose it

The drug industry lobbying group PhRMA, which once ran an ad campaign to highlight that drug discounts don’t always get passed down to patients, praised the new Trump administration proposal.

“We applaud the Administration for taking steps to reform the rebate system to lower patients’ out-of-pocket costs,” Stephen Ubl, president and CEO of PhRMA, said in a statement.

Ubl went on to describe the move as fixing the “misaligned incentives” in the US drug system, and said it would help patient with persistent, chronic diseases like diabetes in particular.

Health insurers and PBMs, meanwhile, said it lets the pharmaceutical industry off the hook.

“Big Pharma has been working nonstop to deflect attention from outrageously high prices by convincing Americans that health insurance providers and their PBM partners are the problem,” America’s Health Insurance Plans, the industry’s main lobbying group, said in a statement. “From the start, the focus on rebates has been a distraction from the real issue – the problem is the price.”

Read more:

Business Insider Emails & Alerts

Site highlights each day to your inbox.

Follow Business Insider Australia on Facebook, Twitter, LinkedIn, and Instagram.