Many people are unaware that prior to 2006, Medicare did not pay for most outpatient prescription drugs. Former President George W. Bush used to say that Medicare will pay for treating a heart attack, but won’t pay for the drugs that would have prevented the heart attack in the first place. With the implementation that year of the Medicare prescription drug benefit, also known as Medicare Part D, the Bush administration improved Medicare’s benefit design for all Medicare enrollees.
At the time, I was part of the team at the U.S. Department of Health and Human Services that implemented Part D, and my job was to provide legal advice to HHS and the White House as the benefit was being implemented. I’ve been thinking about that experience recently as President Donald Trump and his appointees at HHS — many of whom I know and respect — have targeted high drug prices. But in their zeal to address a legitimate public policy issue, will they damage the Part D benefit upon which 43 million Medicare enrollees rely?
One big issue is rebates — the price concessions that drug companies pay to the health plans and pharmacy benefit managers that help structure a Part D plan’s benefit design. Many well-regarded, high-ranking officials at HHS, including the secretary and the commissioner of the Food and Drug Administration, have criticized these payments. They say that they simply encourage drug companies to raise their prices. Their solution is to end rebates or else substantially curtail current rebate arrangements.
But are rebates really the problem? Let’s consider some facts.
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First, rebates are directly responsible for lowering Part D premiums and program spending. This year’s Medicare Trustees report expressly credits rebate payments for a drop in fiscal 2019 premiums. Think about that for a minute: A practice that has been shown to lower Part D costs and premiums may be replaced with a “solution” that will increase those costs and premiums.
Part D has a high satisfaction rate among enrollees in part because premiums have grown very slowly over the life of the program compared to health care spending overall. The average monthly Part D premium in 2006 was $22. Next year, it will be $32.50. That’s an average annual increase of only 3.7 percent. No other area of health care has shown such slow cost growth.
Second, these rebate payments aren’t a payoff to line Part D plans’ or their subcontracted PBMs’ pockets. Instead, they’re a legitimate tool used to extract significant price concessions from drug manufacturers off the list price of a brand-name drug, as well as fair and reasonable compensation for the services PBMs provide.
Drug companies make rebate payments in most cases to obtain greater volume and formulary access. The rebates are then almost entirely passed through to beneficiaries in the form of lower overall Part D premiums (and in some cases are passed directly on to the consumer in the form of lower out-of-pocket costs).
Rebates are also used to design a benefit package so that Part D enrollees are guaranteed that when they show up at the pharmacy counter or order prescriptions through a mail service, they will receive the right drug, in the right dosage form and strength, at the right time. One of the reasons for the success of Part D is that decisions regarding plan design are based on clinical decisions made by physicians and pharmacists, not by politicians.
The current rebate system is a protection against restraints of trade by all participants involved in getting drugs to patients. A lawsuit from the mid-1990s tested the discount system that was then in place, and the parties reached a settlement agreement upon which the current system, with rebates calculated and paid after the fact, relies. Ending rebates will reintroduce the same restraint of trade concerns that led to the 1990s litigation — and any system that forces across-the-board price concessions will reduce the level of overall price concessions as competition would be discouraged.
Part D is a success because it relies on price competition to keep program costs as low as possible for enrollees. As HHS seeks to lower drug prices, it should not interfere with that model.
Seniors depend on getting the medications they need that keep them healthy, and Americans depend on the cost savings from averted emergency care and hospitalizations.
Thomas Barker is a partner at the law firm of Foley Hoag and co-chairs the firm’s health care practice, and prior to joining Foley Hoag, Barker served in a series of high-ranking positions at the Department of Health and Human Services during the administration of President George W. Bush.
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