President Trump has made it a priority to decrease the costs of prescription drugs for Americans, and he has never wavered from this commitment. The President has taken bold action from protecting the ability of pharmacists to help patients fill prescriptions at the lowest available cost to fixing loopholes in Medicare that allowed hospitals to keep prescription drug discounts meant for patients. None of these actions was easy, and the President is working each day to stand up for the American people against entrenched interests. On January 31, 2019, we issued a proposal to save even more money for seniors by ensuring they get the full value of prescription drug discounts negotiated on their behalf. Pursuant to Section 4 of the Executive Order on “Lowering Prices for Patients by Eliminating Kickbacks to Middlemen,” (“Executive Order”) issued on July 24, 2020, I confirm that in my view the Final Rule implementing the Executive Order is not projected to increase Federal spending, Medicare beneficiary premiums, or patients’ total out-of-pocket costs.
My views on pricing of prescription drugs and premiums are informed by two decades of deep experience in pharmaceutical pricing, payment, and reimbursement. I helped to establish the Medicare Part D program, and despite its doubters, the program has been more successful than we could have imagined, with Part D costs significantly undercutting projections. I then went on to spend nearly a decade supervising pricing, reimbursement, and access negotiations with plan sponsors and pharmacy benefit managers at a Fortune 500 pharmaceutical company. This experience provided me a front row seat to witness how distorted our drug pricing system has become, and how middlemen and others manipulate the system to patients’ detriment. With this experience as a lens, I have reviewed the analyses prepared within the Executive branch, as well as outside expert opinions, including those of Milliman, a highly respected international actuarial and benefit analysis firm that advises many of the nation’s health insurers on the design and financing of pharmacy benefits.
Currently, Part D pharmacy benefit managers (PBM), the middlemen between a benefit plan and a pharmaceutical manufacturer, use rebates both to reduce premiums for a plan’s beneficiaries and to enhance their own earnings. By requiring that all rebates flow through to the point of sale, PBMs will face pressure on the margins they currently maintain by virtue of their position as middlemen. The question of the effect of the Final Rule implementing the Executive Order on Federal spending, Medicare beneficiary premiums, or patients’ total out-of-pocket costs then turns on what happens as a result of this margin pressure. There is a discrete set of possibilities: (i) the middlemen could see their margins decline; (ii) insurers and manufacturers could agree to greater concessions; (iii) insurers could increase beneficiary premiums; or (iv) some combination of these possibilities. In terms of stakeholder analysis, the vigorous opposition of middlemen to regulatory reform that would so clearly benefit patients and allow their client insurers to attract and maintain customers suggests that the middlemen believe the outcome would be compression of their margins.1 In economic terms, we must examine how this policy change will impact the distribution of welfare in the market (“welfare” in this case meaning a measure of the total benefit available from an economic transaction such as the purchase of Part D coverage, comprised of an aggregation of producer and consumer surplus). This distribution will largely be determined by the market power and price sensitivity of each party. For this reason, any reliable analysis of the impacts of the policy must consider and take into account associated behavior changes.
The fifteen-year life of the Part D program has demonstrated that the Part D insurance market is highly competitive, highly efficient, and highly elastic, with research indicating that beneficiaries place a greater weight on premiums than on out-of-pocket costs or the comprehensiveness of the benefit. 2,3 Even the slightest increase in premium compared to one’s competitors can erode market share and initiate an adverse selection spiral. Additionally, insurers gain and maintain market share through auto enrollment of beneficiaries receiving a low income subsidy, but only if the insurer’s premium is at or below the benchmark. If these beneficiaries are auto-assigned to a plan by CMS, and their plan’s premium rises above the benchmark, CMS reassigns them. This means the plan could lose enrollment if the premium rises, while plans would increase enrollment by holding down the premium without incurring any additional marketing expense.4 Insurers’ corporate boards also aggressively hold executives to account, and missing the benchmark often leads to a change in leadership. In the context of the high price elasticity of demand in this market, these factors have worked in concert to deter premium increases. Insurers will go to great lengths to avoid increasing Part D beneficiary premiums and placing themselves at a competitive disadvantage.
One behavioral effect that is particularly important to consider, given historical evidence of the behavior, is the persistence of negotiations and the resulting increases in price concessions. Rebates have consistently increased as PBMs have become more and more sophisticated and as negotiations with pharmaceutical companies have intensified. Requiring these price concessions won by PBMs to flow through to the consumer in the future does not alter the current market power of any market participant. The parties negotiating drug prices and formulary placement will not change as a result of the Final Rule implementing the Executive Order. They have full knowledge of the concessions previously made and will likely be iteratively negotiating with each other for several years into the future. The value of PBMs is to shift the distribution of welfare in favor of consumer surplus, and the proposal does not alter the value of this service for their customers, particularly as PBMs themselves compete for business from insurers, continue to gain better negotiating leverage from working on behalf of more covered lives, and are otherwise directed by their insurer customers or owners in the context of a Part D market that is extremely competitive on premiums and total beneficiary costs.
My extensive experience in this field, coupled with the fifteen year history of the program, supports my projection that there will not be an increase in federal spending, patient out-of-pocket costs, or premiums for Part D beneficiaries under the Final Rule implementing the Executive Order. The rule will make beneficiary medications more affordable and lead to lower cost sharing for patients as chargebacks will decrease the costs they ultimately pay at the pharmacy counter by up to thirty percent of the drug’s list price.
I look forward to implementing the Final Rule as contemplated by the President’s Executive Order so we can put money back in the pockets of Medicare beneficiaries and continue to lower prescription drug prices.
Secretary Alex M. Azar II
- 1. It is also worth noting that one major U.S. insurer has already transitioned, for its commercial offerings, to the policy described in the proposed rule.
- 2. Abaluck and Gruber. Evolving Choice Inconsistencies in Choice of Prescription Drug Insurance. Am Econ Rev. 2016 Aug., 106(8): 2145–84.
- 3. Heiss, Leive, McFadden and Winter. Plan Selection in Medicare Part D: Evidence from Administrative Data. J Health Econ. 2013 Dec., 32(6): 1325–44.
- 4. The Medicare Prescription Drug Program (Part D): Status report, MedPAC Ch. 14, March 2020.