What You Need To Know About Trump’s Latest Drug Pricing Moves

On Friday, President Trump appeared at a White House news conference to discuss several health care proposals. Here’s what you need to know about the administration’s executive actions and their implications.

What actions did the administration announce?

The two biggest proposals announced by the Department of Health and Human Services on Friday involve drug pricing.

MFN Rule: The administration promulgated a 258-page interim final rule implementing a “most favored nation” policy towards Medicare Part B drugs administered in outpatient settings. The rule, issued under the authority granted by Obamacare, establishes a seven-year demonstration program beginning Jan. 1, 2021.

The new program will set prices for the 50 most widely used Medicare Part B drugs at the lowest price paid by any member of the Organization for Economic Cooperation and Development with a gross domestic product equal to 60 percent of U.S. GDP per capita. Over the next four years, prices will phase in from the current benchmark, the average sales price, to the MFN metric.

Furthermore, the demonstration program will change the dispensing fee paid to physicians administering Part B drugs from 6 percent — an incentive structure that pays doctors more if they prescribe more expensive medicines — to a flat fee.

Rebate Rule: The administration also finalized a 345-page rule amending the federal Anti-Kickback Statute (a summary of the rule is available here). Then, beginning in January 2022, the rule will effectively prohibit drug companies from paying rebates to pharmaceutical benefit managers, unless those PBMs pass on those rebates to consumers at the point of sale.

A hypothetical example explains the rebate rule’s impact. A given drug may have a list price of $100, but the pharmaceutical company could give the PBM a $30 rebate for covering the drug on its preferred drug tier. Many PBMs currently use these rebates to lower premiums for the plan — not to lower the price of the drug for the specific individual buying the prescription.

While plan participants as a whole pay lower premiums under the current structure, the individual buying the drug has his cost-sharing linked to the higher list price (i.e., $100) rather than the list price net of rebates ($100 minus $30, i.e., $70), thereby paying more out-of-pocket. The rebate rule would prohibit these arrangements in government programs, ensuring the beneficiaries of Medicare cost-sharing would get tied to the list price net of rebates ($70 in the example above).

Will the rules lower drug prices?

The MFN proposal will lower prices, but critics charge these reductions will come at too great a cost. A Health and Human Services Department report released on Friday claimed that Medicare pays just more than twice as much as other OECD countries on the 50 Part B drugs subject to the MFN program. The rule itself claims the program will yield net savings of $85.5 billion over its seven-year span.

Critics of the proposal charge that drug prices in part reflect the high cost of developing successful new pharmaceuticals — as much as $2.6 billion, by one estimate. Some conservatives argue that the MFN program — which effectively imports price controls used by countries with socialized medicine systems like Great Britain and Canada — will lead companies to invest less in new treatments and therapies, as the Congressional Budget Office concluded last year when analyzing a price control regime proposed by House Democrats.

As to the rebate rule, it will have differing impacts on different groups of seniors. Beneficiaries with high drug costs will almost certainly benefit from having rebates passed on to them at the point of sale, lowering their out-of-pocket spending.

In theory, the rebate rule could increase beneficiary premiums, and thereby overall federal spending by the federal government on Medicare Part D. All else equal, if PBMs give rebates — currently used to lower premiums for all beneficiaries — to the individual beneficiaries buying drugs at the point of sale, premiums would likely rise.

When the administration first issued the rebate rule last year, the Medicare actuary estimated that it would raise Part D premiums from $3.20 to $5.64 per month — news that first prompted attempts to hide the effects of higher premiums via a federal bailout, and then saw the administration kick the rebate rule into the proverbial long grass.

In response to language in President Trump’s July executive order indicating that the rebate rule does not raise Part D premiums, HHS Secretary Alex Azar issued an opinion Friday stating that “there will not be an increase in federal spending, patient out-of-pocket costs, or premiums for Part D beneficiaries” under the proposal.

Azar, a former drug company executive, claimed that robust competition among insurers in the Part D marketplace will keep premiums in check, even after insurers lose access to drug company rebates. His opinion, however, carries no legal weight and could bear little resemblance to how the rule works in practice.

What about drug prices for private insurance plans?

Not directly, no. The MFN program only affects Medicare Part B, which covers drugs administered in physician offices, and does not affect Medicare’s coverage of outpatient drugs through Part D. Likewise, the rebate rule only directly affects government programs regulated by the Anti-Kickback Statute.

PBMs and employer-provided plans could decide to change their business practices in response to the rebate rule, but any action compelling them to do would require congressional approval.

Will these executive actions get challenged in court?

Almost certainly. The MFN rule, in particular, was issued as an interim final rule, with the proposal scheduled to go into effect in six weeks — and without any public comment. While the administration had previously issued an advance notice of proposed rulemaking in October 2018, that proposal contained numerous differences when compared to the MFN rule. For instance, the 2018 proposal linked Medicare Part B drugs to the average price among an international peer group, whereas Friday’s proposal tied prices to the lowest price among international peers.

Under the Administrative Procedure Act, the executive can issue interim final rules only for “good cause” — an emergency like the COVID-19 pandemic, for instance. Given that the proposal remained in limbo for more than two years, it seems highly unlikely that HHS can argue that taking public comment on the revised MFN proposal before finalizing it was “impracticable, unnecessary, or contrary to the public interest,” as the statute requires (the fact that Friday also represented the last day to finalize rules taking effect before Inauguration Day on January 20 also does not represent “good cause”).

The rebate rule could get challenged on similar procedural grounds. While HHS said in its fact sheet that “the Department never withdrew the rule from consideration,” a White House spokesman said on the record last summer that the administration had done just that. Those comments, and the fact that a proposal first issued in January 2019 languished for more than 20 months, will likely prompt lawsuits from opponents of the rebate rule (such as PBMs) that HHS needed to put the proposal out for another round of comments before finalizing the rule.

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