Executive Orders

President Trump signed several executive orders about drug pricing. What does it all mean?

Today, Donald J Trump signed several executive orders around drug pricing. I am cautiously optimistic on the outcome here. I encourage you to read the source documents yourself, available here (see orders signed on 7/24/2020).

First, I will summarize my understanding of these orders:

1) The Health Resources and Services Administration, which oversees the 340b drug pricing program, will require Federally Qualified Health Centers to pass on their 340b discounts on insulin and epinephrine (Epipens) to their uninsured patients. This will be a big deal for those patients, but won’t have a very large effect outside of that relatively limited circumstance. 340b is a big deal, but this won’t really change much about that program. If you want to know more about it, I encourage you to search “340b drug channels adam fein” and spend 10 hours reading Adam Fein’s voluminous writings about 340b.

2) The Centers for Medicare and Medicaid Services will finalize their proposed “International Pricing Index” rule, which would reduce the reimbursement to Medicare Part B providers for covered medications from their current “Average Sales Price” plus a percentage methodology to a price based on the average price paid by OECD countries for that medication. If this is implemented, PhRMA will not be pleased. I doubt that the administration has the authority to implement this rule without an act of Congress.

3) This order requires the department of Health and Human Services to create a process to allow legal re-importation of prescription drugs. Because of the price differential for branded prescription products in the USA compared to other countries, there is an opportunity to reduce prices for patients. However, this order is directly opposed to multiple acts of Congress and the expressed position of the Food and Drug Administration, and therefore stands very little chance of being implemented.

4) This order requires the Secretary of Health and Human Services to finalize the so-called “rebate rule” which would remove the Safe Harbor for drug “rebates” and other kickbacks to Pharmacy Benefits Managers and health insurance carriers. I believe that this order stands the best chance of being implemented, though well-moneyed special interests including PCMA and AHIP will fight their hardest to stop this order. This order is perhaps the most confusing to the general public, and requires some background to understand.

So for that background - let’s start with the Anti-Kickback Statute, which states “b)Illegal remunerations

(1)Whoever knowingly and willfully solicits or receives any remuneration (including any kickback, bribe, or rebate) directly or indirectly, overtly or covertly, in cash or in kind—

(A)in return for referring an individual to a person for the furnishing or arranging for the furnishing of any item or service for which payment may be made in whole or in part under a Federal health care program, or

(B)in return for purchasing, leasing, ordering, or arranging for or recommending purchasing, leasing, or ordering any good, facility, service, or item for which payment may be made in whole or in part under a Federal health care program,

shall be guilty of a felony and upon conviction thereof, shall be fined not more than $100,000 or imprisoned for not more than 10 years, or both.” (emphasis added).

Pharmacy Benefits Managers (PBMs) are the quintessential middlemen in the world of pharmacy. They stand between a patient, their health plan, their pharmacy, and the manufacturers of prescription drugs to facilitate dealings between these stakeholders. In the context of this rule, the most important thing to understand is that PBMs create “formularies,” also known as “preferred drug lists” or “lists of covered drugs.” These formularies determine a) how much money you the patient pay for any given drug billed via your insurance b) which medications you can purchase under your benefit c) where you can receive these medications and d) the process for getting other medications approved. Since the prescription drug marketplace in the USA is ~$450 billion, and there are numerous similar medications, there are a lot of opportunities to save (and make) money via medication selection.

For example, Omeprazole 40 mg capsules cost about $0.06/capsule to a pharmacy today, while Omeprazole-Sodium Bicarbonate 40-1100 mg capsules cost about $5/capsule. Requiring someone to get Omeprazole 40 mg instead of the combination with baking soda would save an insurer (or a patient) $4.94/capsule if they paid the pharmacy at invoice price plus a reasonable fee (which they don’t, but I’ll get into that another day). The point here is that a formulary can be a very important tool to save health plan sponsors money.

Several years ago, PBMs discovered that they could use the formulary to pit manufacturers against each other and skim a substantial profit for themselves in the process. The method for doing so is to take two or three me-too drugs, and talk to the manufacturers of those products in mafia-like fashion. “Nice SGLT-2 inhibitor you’ve got there, Farxiga - clever name. It’d be a shame if 1/3 of the country couldn’t buy it for any kind of reasonable price.” The PBM then negotiates with the manufacturer of Farxiga (and the other competitor products, Steglatro, Jardiance and Invokana) and asks for a rebate - a kickback - in order to cover Farxiga instead of the other products. Typically, this rebate comes in the form of a percentage of the list price of the medication. Farxiga today has a list price (or WAC) of $517.31 for a typical 30 tablet prescription. Let’s suppose that the PBM negotiated a 40% rebate for this product. How this would work in terms of the flow of funds is as follows.

1) Wholesaler A purchases Farxiga from Astra-Zeneca and Bristol Meyers Squibb for $517.31. Wholesaler A gets an inventory management fee of $30 at the end of the year from AZ/BMS for keeping ordering levels steady.

2) Wholesaler sells Farxiga to Joe’s Pharmacy for $500.

3) Mrs. Jones presents to Joe’s Pharmacy with a prescription for Farxiga. Joe’s Pharmacy bills Large PBM for Farxiga. Large PBM instructs Joe to collect $100 from Mrs. Jones, and states that they will send Joe a check for $405.

4) Large PBM sends an invoice to Mrs. Jones’ Medicare plan for $405 plus a $0.50 processing fee.

5) Large PBM sends an invoice to AZ/BMS for $206.94.

6) If Large PBM is honest and the Medicare plan is smart, Large PBM sends Medicare plan a check for ~90% of the $206.94 - $186.23.

Large PBM has netted $20.69 in retained rebates and a $0.50 processing fee = $21.19.

Since the PBM keeps a percentage of the list price, they have a large incentive to prefer a product with a higher price and a large rebate, rather than a product with a lower price and no rebate. An example here would be Stelara (list price ~$20,000/box) vs. Humira (list price ~$5000/box). Preferring Stelara over Humira could mean 2-4x the profit to the PBM if the percentage rebate is the same.

Normally, this kind of arrangement would be rightly seen as an “illegal remuneration” for “recommending purchasing” a product reimbursed by a federal program. However, at the start of the Medicare Part D program, PBMs and their lobbying group, PCMA, convinced the Department of Health and Human Services that this kind of arrangement was beneficial, so HHS created a “Safe Harbor” rule under which if the PBM and manufacturer obey certain rules, the rebate will NOT be prosecuted as an illegal remuneration.

Today’s executive order requires HHS to finalize a rule from a year ago that would remove that safe harbor, returning these kickbacks to being illegal under the Anti-Kickback Statute. Since it was rule-making, not statue that created this safe harbor, rule-making can remove it.

I believe that implementing the “rebate rule” will be a positive thing for patients and the federal government, because PBMs won’t have incentives to favor more expensive products to capture the higher rebate, but will instead make more rational cost-saving formulary placement decisions (preferring the $5000 drug instead of the $20,000 drug). It will also be a large boon to PhRMA companies, who will no longer have to share a portion of their price with the PBM. I hope that the new regime will also change their incentives to price their products more affordably for everyone, rather than for the largest PBM bully that can extract a 70% rebate. I expect that they will reprice their products to a lower price that represents approximately what they were receiving after paying out the rebate to maintain goodwill and to keep their products preferred on formularies, but they are the only ones who can make that decision.

Anyway, this has been a fun first pass at writing some commentary on the weird world of prescription drugs and their pricing. Thanks for reading, and let me know if you think my assessments here are valid or if I’m off the deep end.

-Benjamin