New Plan for Lowering Drug Costs

Addressing an issue that has been increasingly getting national attention, officials of the Trump administration have proposed a plan to lower the prices of prescription drugs. According to Health and Human Services (HHS) Secretary Alex Azar, the proposal “has the potential to be the most significant change in how Americans’ drugs are priced at the pharmacy counter, ever, and finally ease the burden of the sticker shock that million of Americans experience every month for the drugs they need.”

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The key to the proposed legislation has to do with ending what the Trump administration calls “backdoor rebates.” These are rebates that pharmaceutical manufacturers pay to Medicare Part D drug plans and Medicaid managed care organizations. Secretary Azar has said that the rebates have brought about a “perverse incentive” for drug makers to make drug prices artificially high. “Every day,” he charged, “Americans — particularly our seniors — pay more than they need to for their prescription drugs because of a hidden system of kickbacks to middlemen.”

Typically, insurers (including Medicare Part D) hire what are known as pharmacy benefit managers (PBMs) to negotiate prices with drug companies and the PBMs get rebates from the companies. The PBMs keep a portion of the rebates and pass the rest on to plan providers, which normally use them to lower the cost of premiums. The proposed plan would ban PBMs from receiving these rebates. The idea is that the insurers who negotiate prices would pass savings directly back to consumers. HHS contends that the savings could amount to as much as 30 percent. Although the changes, if enacted, would affect only patients covered by Medicare and Medicaid, the expectation is that the private market will eventually adopt the new guidelines. HHS has pointed to a recent survey of large employers that found that three out of four agree that rebates are not an effective way of lowering drug costs.

The plan has not been finalized and will be subject to a 60-day period for public comment. Drug manufacturers were, in general, open to the changes; for example, the industry trade group, Pharmaceutical Research and Manufacturers of America, endorsed the proposal. The initial reaction in Congress was varied, with some members expressing concern that premiums and out-of-pocket costs would rise for Medicare beneficiaries.

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