HHS Proposes Eliminating Drug Rebates to Cut Medicare Prescription Costs

On Jan. 31, Department of Health and Human Services Secretary Alex Azar floated a proposed rule to lower the prices and out-of-pocket costs of prescription drugs by having manufacturers give discounts to patients instead of insurers. HHS essentially wants to eliminate the existing drug rebate process and encourage direct discounts to Medicare patients.

HHS also claims it wants to provide transparency in the prescription drug market and remove the veil of hidden rebates and other pricing methods currently conducted between companies and pharmacy benefits managers (PBMs). Typically, the rebates and other pricing initiates given by manufacturers to PBMs and insurers are not passed through to patients.

“Every day, Americans—particularly our seniors—pay more than they need to for their prescription drugs because of a hidden system of kickbacks to middlemen. President Trump is proposing to end this era of backdoor deals in the drug industry, bring real transparency to drug markets, and deliver savings directly to patients when they walk into the pharmacy,” said Secretary Azar, a former Eli Lilly executive, in a statement.

“This historic action, combined with other administrative and legislative efforts on prescription drug pricing, is a major departure from a broken status quo that serves special interests and moves toward a new system that puts American patients first. Democrats and Republicans looking to lower prescription drug costs have criticized this opaque system for years, and they could pass our proposal into law immediately,” the statement went on to say.

What’s the Problem?
Currently, pharmaceutical companies pay rebates as a percentage of a drug’s list price, a discount that payers then can spread around to lower costs for all members of an insurance plan. On average, the net price of a drug after rebates is between 26% to 30% less than the list price set by drug-makers, HHS said. One major problem, says HHS, is that this system doesn’t necessarily reduce patient out-of-pocket costs for any given drug. Rather than lowering patient out-of-pocket costs, the chief purpose of the current system of rebates has become securing favorable drug coverage—an effect HHS called “pernicious” in a fact sheet released alongside the proposed rule.

So, what is HHS Doing?
If finalized, the HHS proposal would:

• Expressly exclude from safe harbor protection under the Anti-Kickback Statute rebates on prescription drugs paid by manufacturers to pharmacy benefit managers, Part D plans and Medicaid managed care organizations.
• Create a new safe harbor for prescription drug discounts offered directly to patients, as well as fixed fee service arrangements between drug manufacturers and PBMs.
• Provide a new level of transparency to a system.
• Prescription drug rebates may be passed on directly to patients and reflected in what they pay at the pharmacy counter.
• Address the most significant incentive drug manufacturers cite in raising their list prices every year, the pressure to provide larger and larger rebates. This rule provides a clear pathway for drug companies instead to compete to have the lower price and out-of-pocket cost to the patient.

By encouraging negotiated discounts that are reflected in cost-sharing methods like co-insurance, used for many expensive drugs in Medicare Part D, the proposal is projected to provide the greatest benefits to seniors with high drug costs. Additionally, because savings would be passed on directly to patients, the agency is anticipating reduced out-of-pocket costs on medications.

Industry Reaction
The Pharmaceutical Research and Manufacturers of America, the industry’s top lobbying group, immediately praised the rule for focusing on patients. “We need to ensure that the $150 billion in negotiated rebates and discounts are used to lower costs for patients at the pharmacy,” said Stephen Ubl, president and CEO of PhRMA.  Drug-makers have argued for years that the rebates they pay are not actually benefiting patients.

However, as could be expected, the Pharmaceutical Care Management Association, the main PBM lobbying group, blasted eliminating the safe harbor protection for rebates. The move 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,” the group said in a statement.

America’s Health Insurance Plans, a trade group representing insurers, also criticized the proposal claiming that HHS’ plan would undermine its ability to extract savings.

The critics may have a point. In a call with reporters HHS admitted that actuarial analyses found Part D premiums could go up on average $3 to $5 per member per month. The proposed rule does acknowledge that the rule’s benefits would accrue to beneficiaries who use drugs most often, particularly expensive ones. For most, decreases in out-of-pocket costs may not offset the expected rise in premiums.

And, on the Horizon
While HHS has the regulatory authority to make changes to Medicare rules, it has to rely on Congress to implement a similar plan for the commercial market. Lawmakers in Congress and the Senate are on it, and are exploring options to lower drug costs as well.  The U.S. Senate Finance Committee and the House Oversight Committee started hearings on Tuesday, Jan. 29, focused on dealing with high drug prices. The House Oversight and Reform Committee announced sweeping investigations of drug pricing and indicated he had sent detailed information requests to 12 major drug manufacturers.

HHS is currently accepting comments on the proposal. Under the current proposal, the changes to the Anti-Kickback Statute would take effect Jan. 1, 2020, while the new safe harbors envisioned would become effective 60 days after the final rule is published in the Federal Register.

“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,” said Azar in a statement.