Proposed rules would shake up drug pricing by ending rebates to middlemen

(Daniel Acker | Bloomberg) Under new draft rules by the Trump administration, drug manufacturers would no longer be able to give rebates to middlemen, known as pharmacy benefit managers.

Washington • The Trump administration on Thursday proposed bringing transparency to one of the most secretive aspects of drug pricing by ending the widespread practice of rebates to middlemen — an effort to reduce what consumers pay for prescription medicine.

Under draft rules announced by Health and Human Services Secretary Alex Azar, drug manufacturers would be allowed to offer discounted prices directly to consumers but would no longer be able to give rebates to the middlemen, known as pharmacy benefit managers.

The rules, if they become final next year, would apply directly to older Americans who buy medicine under Medicare drug plans and low-income people with Medicaid managed-care plans.

Some drug policy experts praised the proposal as a strong first step, even though the changes would pertain just to the government's two largest health insurance programs. As with many other health policies that began with those public programs and filtered into the private sector, they predicted that the government insurance plans would set a strong example for private insurers.

"It's a cockamamie system that's never made any sense,'' said David Balto, who was a policy chief for the Federal Trade Commission under the Clinton administration. "When it comes to the PBM claims of saving money through their rebate schemes, everyone's going to realize the emperor wears no clothes.''

President Donald Trump and Azar have made constraining drug prices a central piece of their health-care agenda. Since issuing a blueprint last spring, they have insisted that rebates — which they portray as "hidden kickbacks" — are a big problem in controlling what people pay for medicine. Most of the health-care rules the administration has sought to change have gone through.

HHS officials said that drug prices after rebates tend to be one-quarter to 30 percent lower than the list price but that many consumers pay the list amount as part of their insurance deductibles and other co-payments. And they contend that the rebate system discourages the use of lower-cost generic drugs.

The health-care industry is split on the validity of those arguments.

Matt Eyles, president of America's Health Insurance Plans, said insurers and the pharmacy benefit managers with whom they work "are not middlemen — we are your bargaining power. . . . We cannot achieve those savings if our leverage and negotiating power is weakened through harmful actions like this proposed rule."

"The focus on rebates has been a distraction from the real issue — the problem is the price," Eyles said in a statement. "Manufacturers have complete control over how drug prices are set. Already this year, more than three dozen drug makers have raised their prices on hundreds of medications."

The main trade group that represents pharmacy benefit managers, which negotiate rebates on drugs for employers and health insurance companies, also predicted the administration's proposal would be counterproductive. The change "would increase drug costs and force Medicare beneficiaries to pay higher premiums and out-of-pocket expenses, unless there is a viable alternative for PBMs to negotiate on behalf of beneficiaries," J.C. Scott, president of the Pharmaceutical Care Management Association, said in a statement.

For the drug manufacturers, PhRMA President Stephen Ubl applauded the administration's proposal, saying it would lower patients' out-of-pocket costs and "fix the misaligned incentives in the system that currently result in insurers and pharmacy benefit managers favoring medicine with high list prices."

Independent analysts praised the proposal for helping to end distortions in the market.

"It's about time," said Sam Richardson, a professor of health economics at Boston College. . . . We know that rebates have been increasing substantially over the past few years. There's little business or economic justification for that.''

Consumer advocates, who are among the drug industry's fiercest critics, also lauded the move, with some caveats. "If enacted, the proposed rule should lower prescription drug prices for patients in government programs and help those with the highest prescription drug costs most of all,'' said David Mitchell, president of Patients for Affordable Drugs.

Thursday’s proposed rule change will undergo 60 days of public comment. The rules that allow existing rebates would be eliminated at the start of next year, and the new discounts provided directly to consumers would become available 60 days after the rule became final.