Trump Making Progress in Reducing Drug Prices

Dana Goldman is director of the Leonard D. Schaeffer Center for Health Policy & Economics at the University of Southern California. He serves as a consultant to drug companies and holds equity in Precision Health Economics. Anupam Jena is the Ruth L. Newhouse associate professor of health care policy at Harvard Medical School, an internist at Massachusetts General Hospital and consultant to Precision Health Economics and drug companies.

Surprise! The Trump administration is actually making progress to reduce drug prices, and not just by “browbeating” pharmaceutical executives.

The Centers for Medicare & Medicaid Services recently announced new options to increase competition for physician-administered drugs and lower the cost of some innovative medications, and the Food and Drug Administration is exploring importation to create more competition in the generics market.

These reforms will help. But the real game changer is under review at the Office of Management and Budget. Although details are under wraps, it is clear that Health and Human Services Secretary Alex Azar wants to end kickbacks in the pharmacy distribution chain that are costing Medicare and taxpayers billions of dollars.

Here’s how it works. Health-care plans — either from private insurance or the government — have long relied on companies known as pharmaceutical benefits managers, or PBMs, to administer their drug coverage. Initially, PBMs played an important role in bringing down drug costs, serving as the middlemen between drug manufacturers and health plans. This setup was good for everyone: PBMs — leveraging their colossal size to purchase drugs at a discount price — offered cheaper coverage for health plans, and drug companies got access to more consumers.

But the system has broken down over time as PBMs have consolidated; today, just three PBMs account for 85 percent of the market. It’s now common practice for PBMs to receive kickbacks from drug companies to give special treatment to the manufacturer’s products — typically more expensive brand-name drugs — so that customers buy them. This gives both drug companies and PBMs a perverse incentive to raise, not lower, drug prices. The higher the price, the larger the PBM kickback and the more the drug company sells.

This might be fine if patients and the government also benefited, but they do not. These kickbacks don’t show up in the prices Medicare beneficiaries pay at the pharmacy counter. This raises out-of-pocket costs — especially for the sickest patients — and quickly moves Medicare patients into “catastrophic” spending, where the government foots more of the bill.

Kickbacks is an uncomfortable word. PBMs much prefer to call the money they pull from drugmakers “rebates,” implying a systemwide benefit. But history is not on their side.

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