New Rules Will Fail to Lower Drug Prices | Citizens Against Government Waste

New Rules Will Fail to Lower Drug Prices

The WasteWatcher

On Friday, November 20, President Trump announced two final rules that he claims will lower drug costs in Medicare Parts B and D.  That is not accurate.  Since the rules both adopt price controls, they will simply further distort the marketplace than bring any true reform and relief for seniors in Medicare.

One is an interim final rule that adopts a most favored nation (MFN) pricing policy for drugs in Medicare Part B.  Citizens Against Government Waste (CAGW) has long opposed this scheme because it adopts the socialistic price control policies found in other countries that have hurt their pharmaceutical research and development.  Now these countries free-ride on our research and development.  This was always a terrible idea and it is even worse now that safe and effective COVID-19 vaccines have been developed in record time.  Innovation for future medications will be seriously compromised if the MFN rule is finalized.

A November 18 Inside Health Policy article noted that if the MFN interim rule was adopted, is likely the pharmaceutical industry would challenge the decision in court because the process has “tight restrictions” on their use and would require an agency to prove it would be “impractical, unnecessary, or contrary to the public interest” to go through the traditional rulemaking process.

The other rule that was adopted would change the rebate procedure among pharmaceutical companies and Medicare Part D drug plan sponsors, like health insurers and pharmaceutical benefit managers (PBMs).  Instead of a rebate to lower drug costs, the rule would require an upfront discount for seniors.  While this may sound like a good idea, it raises a lot of questions and concerns, and highly likely more legal challenges.

Drug companies used to provide upfront discounts on their products to health plans in exchange for large volume discounts and being placed on a specific drug formulary tier.  But due to a class action lawsuit in 1994 in which thousands of retail pharmacies of all sizes sued declaring price discrimination and citing the Sherman Antitrust Act and the Robinson-Patman Act, there was a settlement and the rebate process was created in its place.  The Foley Hoag law firm provides a good overview of the process.

The settlement agreement expired in 1999, but the two antitrust laws still exist.  As a result, Foley Hoag lawyers imply there could be a similar lawsuit instigated by pharmacies to force equity in pricing once the rebate rule was instituted.

Another issue that has been raised in implementing the November 20, 2020 final rebate rule once again involves administrative process concerns.  In July 2019, the Trump administration withdrew an earlier attempt to change rebates to upfront discounts.  There was no explanation given for the decision except that the administration was encouraged about bipartisan conversations to lower drug costs.  Some news sources speculated there was concern the rule would raise drug plan premiums.  (Seniors would likely have seen those increases just before the 2020 election.)

According to a November 17, 2020 Inside Health Policy article, when the Trump administration withdrew their earlier attempt to implement the change in July 2019, it was assumed by policy makers in Washington that any renewal of the rebate rule would require a restart of the rulemaking process.  However, that did not officially occur because the withdrawal was never published in the Federal Register and therefore not officially terminated.  Says Inside Health Policy, “No one disputes that rulemaking must restart when rules are withdrawn, but they disagree over whether the administration withdrew the proposed rebate rule.”  As a result of the rule, the PBMs are threatening a lawsuit.

When President Trump announced the final rule on rebates he said, “Currently, drug companies provide large discounts on the price of prescription medicines, including nearly $40 billion in rebates to Medicare Part D plans last year alone.  Yet often, middlemen stop those discounts from going to the patients — which is what we’re interested in; not the middlemen — who need it the most.  So, the patients are going to be now getting the benefit, instead of these very wealthy individuals.” 

The problem with the president’s analysis is that an August 14, 2020 Government Accountability Office report, “Medicare Part D - Use of Pharmacy Benefit Managers and Efforts to Manage Drug Expenditures and Utilization,” found that, “PBMs retained less than 1 percent of these rebates, passing the rest to plan sponsors.  Plan sponsors in turn may use rebates to help offset the growth in drug costs, helping control premiums for beneficiaries.”  In other words, a large percentage of the rebate was used to keep drugs and premium costs down for Medicare beneficiaries.

CAGW has called for reform to Medicare Part D, but the rebate rule is not the answer.  It will result in a further distortion of the pharmaceutical marketplace, which has already been harmed by congressional intervention with policies like implementing a price control in the Part D coverage gap of 50 percent due to the Affordable Care Act and then increasing that amount to 70 percent due to the Bipartisan Budget Act of 2018.  These policies have pushed beneficiaries through the coverage gap and into the catastrophic phase more quickly, where the taxpayer carries a 80 percent share, and has raised costs.  We prefer a redesign of the Part D program similar to one that has been put forth by the American Action Forum that would “realign incentives” and place more risk on insurers and PBMs to encourage robust negotiation and protect beneficiaries from catastrophic financial risk by capping their out of pocket expenses.

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