After a massive corporate tax cut and widespread deregulation, there aren’t many industries fearing that the Trump administration will put them out of business—with one exception. An industry responsible for extracting billions of dollars in profits from prescription drug purchases could soon see its gravy train disappear.
I’m not talking about drug manufacturers; they continue to skate by with fake concessions and half-measures. In fact, the Trump administration’s most aggressive actions on drug prices have been undertaken on behalf of Big Pharma. Sadly, that’s often how things get done in Washington, where corporate greed only gets struck down when pitted against a more powerful corporate adversary. It would be far preferable to overhaul the entire system causing drug prices to spiral out of control, but I guess you must start somewhere.
The Department of Health and Human Services (HHS) and the Food and Drug Administration, both led by drug company veterans, have started with pharmacy benefit managers (PBMs), the middlemen who negotiate prices with drug companies on behalf of health plans and reimburse pharmacies after sale. PBMs exploit an information advantage in this multi-sided market to skim as much as one in every five dollars out of every prescription drug purchase, harming pharmacies, health plans, and consumers alike.
Three companies control 85 percent of the entire PBM market, and by the end of the year all of them could be tied to a major health insurer. Optum Rx is already a division of UnitedHealth, CVS Caremark has proposed a merger with Aetna, and Express Scripts wants to merge with Cigna. But the Trump administration, while potentially waving those mergers through, has also attacked the PBMs’ business model.
In February, Trump’s Council of Economic Advisers condemned the PBM oligopoly for its significant market power, calling for an industry breakup. It also hinted at a major problem with how PBMs get paid.
PBMs negotiate rebates with drug companies, and while they’re supposed to pass them on to health plans, they frequently keep the rebates for themselves. It’s like payola, only for the drug industry, and it’s growing: Over the last five years, rebates have tripled to $153 billion. This creates incentives for higher list prices, which in turn can generate higher rebates from which PBMs can skim. But higher list prices also mean higher out-of-pocket payments, and seniors more quickly hitting the Medicare “doughnut hole,” where they must pay full freight for their prescriptions after reaching a certain monetary threshold. The rebate-based pay model drives up costs across the system.
The Trump administration’s rather thin blueprint for lowering drug prices in May endorsed more rebate disclosure. But last week, the administration set in motion a process to kill rebates altogether.
A proposed rule from HHS would eliminate the safe harbor protection for drug industry rebates. The safe harbor provision has protected PBMs from anti-kickback statutes, which prevent any company from paying off another to increase its business. Without the safe harbor, PBMs could not negotiate a rebate with a drug company, and then make that drug available to customers through its formulary, without violating the law.
“If you eliminate the safe harbor, you can’t demand rebates, you’d have to simply lower the cost of drugs,” says antitrust attorney David Balto, a former policy director at the Federal Trade Commission. This would severely shrink a major source of PBM profits, and align incentives toward lowering list prices. The proposed rule has yet to be finalized, but PBM stock prices sunk the day after it was revealed.
The PBMs’ chief lobbyist, the Pharmaceutical Care Management Association, blasted the proposal, saying it wouldn’t reduce drug prices and rested on shaky legal footing. But the industry’s traditional defenders have vanished. The Federal Trade Commission, which has historically waved through every PBM merger and defended the industry from regulation, issued comments on the White House blueprint but remained conspicuously silent on PBMs.
Until now, the health-care agencies governing prescription drugs resisted changing the safe harbor. “Somehow [HHS Secretary Alex] Azar and [FDA commissioner Scott] Gottlieb figured this out, when the Obama people drank the PBM Kool-Aid,” Balto said.
The Trump blueprint on drug prices also endorsed eliminating PBM contract clauses that place pharmacists under “gag orders,” preventing them from telling patients about cheaper out-of-pocket options. A bill that would bar gag orders passed a Senate committee on Wednesday.
All in all, the last two weeks have been a wipeout for PBMs. That pleases drug manufacturers, who have consistently fingered PBMs as the source of all problems in the market. Whether using discounts or rebates, drug company profits are unaffected; they’re trying to divert the middlemen’s money to consumers without having to give up a dime. And in the process, just maybe taking some of the heat for stratospheric drug prices off themselves.
The actions from the Trump administration aimed at drug companies have been notably weak. The FDA announced last week that it would explore temporary drug importation from abroad when companies jack up generic drug prices without any substitutes. But the FDA didn’t implement that change; it formed a working group. And by limiting its concern to generics rather than all drugs, the FDA curtailed the impact. (By the way, Obama’s FDA already allowed importation of generic alternatives to the cancer drug Doxil in 2012, so this is nothing new.)
Meanwhile, the string of announcements from major drug companies that they would pause price increases on products through 2018 was nothing but a shell game, mirroring a similar tactic they embraced in the 1990s. The drug companies reserved the right to raise prices in 2019, and Celgene, Novartis and Roche did not roll back the increases they’d put in place earlier in the year. Novartis’ cancer drug Gleevec jumped $120,000 a year from 2001 to 2017; it’s now staying at this incredibly inflated price.
Taking the cake in chutzpah, Merck announced actual price cuts for seven drugs, but one of them, Zepatier, recorded $0 in sales for the first quarter of the year. The other six accounted for 0.1 percent of Merck’s total sales. Merck’s blockbuster drugs didn’t get any price decreases.
Regardless of such PR stunts, drug prices continue to soar, preventing life-saving medicines like PrEP, which could halt the AIDS epidemic, from reaching large sections of the population, particularly the poor and people of color. Polling shows Americans don’t believe the Trump administration is doing much to stop drug price gouging. That’s because the administration isn’t taking proven steps to really make an impact.
They could open up importation, not just to generics but all drug categories. They could prosecute patent abuse—cases where drug companies pay off generic rivals to delay competition, deny generic makers samples of drugs they want to copy, or invoke tribal sovereignty to protect exclusivity. They could break up drug company conglomerates to spur competition, and have the FDA get involved much more aggressively to prevent drug treatments that are priced too high to be accessible.
Alternatively, they could end the patent monopoly racket altogether by publicly financing all pharmaceutical research, saving hundreds of billions a year in consumer (and government health program) costs. Even now, the government funds enough drug research to shake up the market. Under the Bayh-Dole Act of 1980, the government could mandate that any drug benefiting from federally funded research and development (which would include every drug approved in the United States between 2010 and 2016) must be made available on “reasonable terms,” or re-licensed to other companies that will.
That makes the crackdown on PBMs a lesser option. But that it’s an option at all during the Trump era is a small miracle, and still a serious advance over the status quo. “When I go to get Lipitor at the pharmacy, the PBM makes $50,” says Balto. “When I get a TV at Walmart, Visa, which is doing the same thing as a PBM, connecting markets through a network, gets $1.” Flushing out the enormous middleman profits in the drug supply chain is worth doing, even if drugmakers are promoting the idea to deflect from their own problems. After all, if the reforms go through, the next time Big Pharma won’t have anyone else left to draw away the blame.