The Trump administration just took its biggest step yet to bring down the cost of prescription drugs — and it's dividing the healthcare industry

  • The Trump administration just proposed a new rule that could bring down the cost of prescription drugs for patients.
  • The Department of Health and Human Services wants to ban some payments, called rebates, between drugmakers and middlemen.
  • Rebates are negotiated between middlemen called pharmacy benefit managers and drugmakers, and are linked to individual drugs. They’re usually passed along to health plans, but don’t always make it to the patients taking the drugs.
  • These rebates have historically been protected from the Anti-Kickback Statute.

The Trump administration just made a big move against a little-known pricing practice that the pharmaceutical supply chain depends on.

On Thursday, the Department of Health and Human Services (HHS) said it’s proposing a rule that would effectively ban some payments between big pharma companies and middlemen that have been blamed for driving up drug prices. HHS said the move is designed to lower the cost of prescription drugs for patients, a major goal for the administration.

“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,” HHS Secretary Alex Azar said in a statement.

The Trump administration is targeting payments called rebates, which big pharma companies pay to middlemen known as pharmacy benefit managers, or PBMs. Drugmakers offer those rebates to PBMs to get them to include a particular drug on their lists of which prescriptions a patient can take.

Rebate payments act as incentives to pick one drug over another

While these rebate payments – which act as incentives to pick one drug to cover over a competitor – may sound a lot like a kickback, they’re technically protected from the Anti-Kickback Statute.

That would no longer be the case under the new proposed rule, at least 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.

Instead, drugmakers and PBMs would be pushed to provide those rebates in the form of discounts directly to patients at the pharmacy counter. Drugmakers would also be able to pay PBMs a fixed fee for their services.

The healthcare industry is divided on the proposal. PBMs and insurers said the proposal would weaken their ability to negotiate lower costs for patients, while big pharma said it would benefit patients.

Drugmakers currently pay out more than $US100 billion in rebates annually. Rebates are a big business for PBMs such as Express Scripts, CVS Caremark, and OptumRx. CVS Health, which operates Caremark, fell 1.9% on Friday. Cigna, which owns Express Scripts, lost 3.5%. UnitedHealth Group, the owner of OptumRx, slipped 1.2%.


Read more:
The Trump administration has a little-known practice in the pharma industry in its crosshairs

Eliminating rebates could increase the cost of health insurance, but would lower how much people have to pay for some drugs

To be sure, there’s still a fair amount to be worked out. It’s a proposed regulation change, which means there’s still time for feedback from the industry, and the final rule could be different. And it’s not clear how the new regulation would affect the health-insurance plans provided by employers to their workers, because it doesn’t directly apply to those health plans.

HHS Secretary Alex Azar on Friday called on Congress to pass a law that would similarly ban rebates in employer-provided health insurance, unless they’re given to patients.

Generally, eliminating the rebates could increase the cost of health insurance, because rebates right now are often kept by health-insurance companies. The biggest benefit would be to people who need lots of expensive prescription medicines, particularly if they have health-insurance plans that require them to pay a fixed percentage of the cost of their drugs.

The healthcare industry is divided on the proposal

The health insurance industry said that the proposal lets big pharmaceutical companies off the hook for their role in high drug prices. “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, acting as so-called ‘middlemen,'” Matt Eyles, the CEO of America’s Health Insurance Plans, the industry’s main lobbying group, said in a statement. “We are not middlemen – we are your bargaining power, working hard to negotiate lower prices with drug makers.”

JC Scott, the president of the Pharmaceutical Care Management Association, the lobbying group that represents PBMs said that while he’s been encouraged by proposals that use PBMs to increase competition and reduce cost, he has concerns about making changes to the protections given to rebates.

“We are concerned, however, that eliminating the long-standing safe harbour protection for drug manufacturer rebates to PBMs would increase drug costs and force Medicare beneficiaries to pay higher premiums and out-of-pocket expenses, unless there is a viable alternative for PBMs to negotiate on behalf of beneficiaries,” Scott said.

PhRMA, the main lobbying group for drugmakers, has long blamed PBMs for driving up the cost that patients pay for prescription drugs. The group said it favours the proposal.

“We applaud the administration for taking steps to reform the rebate system to lower patients’ out-of-pocket costs,” PhRMA CEO Stephen Ubl said in a statement. “Our current health care system results in patients often paying cost-sharing based on the list price, regardless of the discount their insurer receives.”

Business Insider Emails & Alerts

Site highlights each day to your inbox.

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