For several days, it has been reported that President Trump is writing numerous Executive Orders (EO) to lower drug costs, along with addressing other issues.  Some of the ideas supposedly being considered are linking U.S. drug prices to those found overseas, eliminating the rebates that drug companies pay pharmacy benefit managers (PBMs) based on volume purchases and placement on their formularies, and allowing insurers to jointly negotiate drug prices, a proposal White House Chief of Staff Mark Meadows introduced while in Congress.

According to the July 10 Inside Health Policy, one of the proposals being floated is supported by White House Trade Adviser Peter Navarro, to include a Buy American requirement in one of the drug pricing proposals.  That would be ironic, because it would have the opposite effect of what he is intending.  Not only would a Buy American policy increase drug costs, an immediate result would be drug shortages, a dangerous situation during a pandemic.

Attempting to link U.S. drug prices to drug costs in Europe is contrary to President Trump’s strong opposition to government-controlled healthcare, like Sen. Bernie Sanders’ (I-Vt.) “Medicare for All.”  That proposal adopts many of the policies found in government-run programs in Europe and elsewhere, like price controls on pharmaceuticals and rationing to drive down costs.  One way to control costs is to limit access to the newest drugs.  For example, Americans get access to 89 percent of innovative drugs, including 96 percent of new cancer drugs.  In France and Germany for example, citizens only get access to 48 percent and 62 percent of new drugs, and 66 percent and 73 percent of new cancer drugs respectively.

The rebate conundrum has been a topic of discussion for a few years.  Rebates are offered by pharmaceutical companies to pharmacy benefit managers (PBMs) as a price concession based on volume and formulary placement.  PBMs have been around since the 1960s and are utilized by employers and insurance companies to manage their drug benefit plans and in the Medicare Part D program.  Rebates have been utilized as an alternative to up-front discounts due to a 1996 class action lawsuit.  Pharmacies alleged that pharmaceutical manufacturers violated the Sherman Antitrust Act by selling pharmaceuticals at significant discounts to health maintenance organizations, which had more restrictive formularies.

The rebate process has been criticized as being difficult to understand, lacking transparency, and distorting the market.  But a July 2019 Government Accountability (GAO) report found that PBMs retained less than 1 percent of the rebates and passed the rest to their plan sponsors, like the employer.  The plans use these savings to help offset the growth in drug costs and keep drug benefit premiums low in the private market and in Medicare Part D.  GAO also found PBMs are primarily compensated by fees obtained from plan sponsors, not the rebates.

Because of 1996 lawsuit, it will likely take congressional action, not an EO, to allow pharmaceutical manufacturers to offer upfront discounts based on volume purchased, rather than after-the-fact rebates.

The Meadows proposal would allow competing insurers to jointly negotiate wholesale acquisition prices of a prescription drug directly with a drug manufacturer, if there is no single wholesale acquisition price jointly determined between the insurance issuers or their designated agents.  Apparently, this effort is intended to address a concern that three PBMs manage 80 percent of pharmacy benefits in the county and therefore “dominate” the market.  But three private companies still provide competition and while Citizens Against Government Waste is not opposed to the legislation, we are not convinced that competing insurers would utilize this law or that it would lower drug prices significantly, if at all.

Concern over high drug costs is understandable but adopting more big-government policies like price controls or Buy American mandates will not lower costs.  And these proposals are not what conservatives expect from an administration that has been reducing regulations.  They are also questionable during this pandemic.

The U.S. pharmaceutical market has already been distorted thanks to government price controls with Medicaid drug benefit rebates, the 340B discount program, Medicare Part B average sales price reimbursement policy, the VA drug benefit, and the coverage gap in Medicare Part D.  Doubling down on the problem with more bureaucratic solutions will not lower costs and only hurt future innovation.