Today the Trump administration released an Executive Order that would turn on its head the pharmaceutical rebate system, a retrospective discount that has been used for decades to keep drug prices low and Medicare Part D premiums stable and affordable.  Any future discounts that are negotiated between pharmacy benefit managers (PBMs) and drug manufacturers would have to be based on the list price, not a rebate.  While that seems reasonable and simple to do, the likely result will be a surge in drug plan premiums, instability in the marketplace, followed by lawsuits.

PBMs are hired by employers and insurers to negotiate drug prices and manage pharmaceutical benefits.  A July 2019 Government Accountability Office report found that PBMs retained less than 1 percent of the rebates and passed the rest to their plan sponsors, like the employer, to keep costs down.  Rebates, instead of up-front discounts, have been used by them and pharmaceutical manufacturers since 1996 due to a settlement of a class-action lawsuit by thousands of retail pharmacies against pharmaceutical manufacturers and wholesalers, claiming they violated both the Sherman Act and Robinson-Patman Act antitrust laws.

In particular, the pharmacies argued that the manufacturers and wholesalers violated the Robinson-Patman Act by not offering the same low discounts they offered larger entities, like hospitals and health plans.  Those discounts were based on volume and formulary placement.  To settle the lawsuit, the court pronounced two commitments that (1) a manufacturer cannot refuse to reduce prices based entirely on an entity’s ability to purchase a large volume and (2) if retail pharmacies and buying groups can affect market share similar to what is seen by larger healthcare entities, they would be eligible for the same discounts.  Thus, the rebate system was born based on moving a certain amount of market.

A presidential order will do nothing to change the underlying currents and anti-trust laws that will likely raise their heads with upfront discounts based on volume and formula placement for some but not all.  There is nothing that would prevent another lawsuit from small retail pharmacies complaining they are not getting the same large discount that hospitals or chain pharmacies may be able to receive due to volume.

CAGW has no problem with upfront discounts if it would make pharmaceutical transactions more transparent, encourage competition and keep costs low but that will likely take an act of Congress to change the current antitrust laws, not an unwise and ill thought-out executive order.