Rebate Rule: PCMA Point, Counterpoint
President Trump signed an executive order instructing the HHS secretary to finalize the proposed "rebate rule." The PBM lobby, PCMA, responded. Let's break down their response.
Predictably, the Pharmaceutical Care Management Association, PCMA, the lobby for the largest pharmacy benefits managers dislikes the concept of their otherwise illegal kickbacks being illegal. I encourage you to read their response to the Executive Order here.
In this article, I’ll break down PCMA’s response and give my explanations for why I still think that banning kickbacks is a good idea.
PCMA President and CEO JC Scott’s statement:
Mr. Scott has 4 points:
1) changing policy during COVID is bad because government expenditures will go up when they’re already up from COVID.
2) getting rid of rebates is a boon to manufacturers because only manufacturers can set prices. The administration is being very trusting of PhRMA to lower prices on their own.
3) PBMs pass 99.6% of their rebates in the Medicare Part D program to plan sponsors.
4) The administration should have made this change BEFORE 2021 Medicare Part D bids were filed.
So… are these statements true, false or somewhere in between? Let’s take them one at a time.
1) They say to never let a crisis go to waste. Yes, government expenditures are high and deficits are increasing, but I disagree with the assessment that removing a corrupt system will increase costs. Kickbacks are an enormous incentive to increase overall costs. If there is no shift in formulary structures and PhRMA decides that they don’t need goodwill, he is probably right that costs will increase. However, I don’t believe that formularies will remain static, nor do I believe that every PhRMA executive is THAT greedy. This brings us to point #2.
2) PhRMA executives want to make money and return profits to their shareholders, but what they REALLY don’t want is government price controls. If they don’t drop prices enough to offset most of the increased costs due to loss of rebates, they’ll very likely be looking at a system of government price controls - the current administration has already shown an appetite for them in Medicare Part B (see the proposed International Pricing Index), and a potential Biden administration would likely have an even stronger bent toward price controls.
3) While it is literally true that PBMs return 99.6% of the rebates to the Medicare Part D plan sponsors, this conceals the fact that in most of this program, the plan sponsor is simply another business division of the same company. Take for example the state of Ohio. The #1 Part D Plan (PDP) by market share is EnvisionRx Plus PDP (Contract ID S7694-014). It has an enrollment of ~150,000 seniors, constituting a 19% market share of Ohio PDP participants. Its PBM is EnvisionRxOptions. Both the plan and the PBM are owned by the same parent company, Rite Aid. The second plan is SilverScript Choice PDP (S5601-028) with a 13% market share. Its PBM is CVS/Caremark. SilverScript Choice is owned by CVS/Health. The third plan is AARP MedicareRx Preferred (S5820-013) with a 10.5% market share. This plan is owned by United Health Group, whose OptumRx division is the PBM. Fully 42.5% of PDP participants are on these 3 plans where the plan sponsor and PBM and vertically integrated. Congratulations to Rite Aid, UHC and CVS/Health - you are so noble to pass 99.6% of your rebates from your PBM to your insurance arm.
4) yes, absolutely they should have implemented this change before bids were filed, or else they should delay implementation till the 2022 contract year. That does not impact whether this is a good idea or not.
After Mr. Scott’s statement, PCMA states a few “facts.”
1) Part D Premiums will increase dramatically. They very well might and that will likely put the kibosh on this rule being implemented at all - the EO specifically instructs the HHS secretary to make sure that premiums WON’T go up before implementing this rule change. But I believe that premiums SHOULD go up. They are artificially low because rebates take money from the sickest patients in the form of copayments and give it to the healthiest patients in the form of lower premiums. That’s the opposite of how insurance is supposed to work. Making this change will put Medicare Part D back right side up where the healthy subsidize the sick.
2) “This is the most expensive regulation in history.” Medicare Part D was supposed to be an INCREDIBLY expensive program. The CBO and the actuaries were about the most wrong they have ever been about how expensive a proposed law would be. I believe this will go the same way. If this regulation proves to be as expensive as the bean counters suggest, I am certain that Congress will impose price controls.
3) “Beneficiaries are concerned about changes to Part D.” If you structure a poll the right way, you can get people to say whatever you want. And yes, if you asked my grandmother if she supported a change that would increase her premiums without providing the context that she would pay less for her medications at the pharmacy counter as a result, she would agree that she wouldn’t like that change.
4) “The proposed rule does nothing to address prescription drug prices” - Not directly, no. And as per my above commentary, if everything else stayed the same, this would cause a massive increase in overall spending on prescription drugs and be a massive windfall to manufacturers. However, removing the kickbacks from the system dramatically changes the logic of pricing a prescription drug in the USA. Currently, manufacturers have every incentive in the world to ask for the highest price possible and then discount it from there to the acceptable price to each individual payer. This means that they can capture their full $5000 charge from a small employer, $4000 from a mid-sized employer, $3000 from a large employer, $2000 from Medicare and $1000 from Medicaid. Without rebates in the system, they would have to choose ONE price for everyone. Rebates are necessary for manufacturers to be able to price discriminate in this fashion. Without rebates, they would have to set a single price that ALL players would have to accept, or else accept a lower volume of sales. With rebates out of the system, a rational manufacturer will likely compete on list price, rather than on price net of rebates. Failure to reduce their list prices will be punished by removal from formularies in favor of lower priced competitors, negative press releases, and being called into congressional hearings.
I believe that a rebate-less system will result in lower net spending because of the change in pricing decision-making by PhRMA companies. I believe that if spending does not go down after rebates are removed from the system, the government will enact price controls, similar to every other country in the world that doesn’t have a PBM industry.
I may be wrong, but there’s only one way to find out, and that’s for Alex Azar to finalize the “rebate rule.” I, for one, hope that he will.