Eliminating Rebates in Medicare Part D Will Not Reduce Drug Prices.

• Author: Schlecht, Eric V.
• Position: BRIEFLY NOTED

On July 24, President Trump issued four executive orders intended to reduce drug prices. One of them targets pharmacy benefit managers (PBMs) by prohibiting drug company rebates arranged by PBMs representing insurers under Medicare Part D. The order is the latest step in a years-long battle between the Trump administration and PBMs.

The Trump administration believes PBMs are unnecessary and costly middlemen between pharmaceutical companies and consumers. This belief reflects a common fallacy and risks doing more harm than good to consumers and the public fisc. Moreover, by narrowly focusing on PBMs, the administration ignores the large structural problems that are driving up drug prices. In fact, PBMs not only add value by negotiating lower prices for health care providers, they also play an integral role in constraining government expenditures under Medicare Part D.

Part D's perverse incentive / PBMs foster free-market competition within Medicare Part D by negotiating with drug companies. The goal of these negotiations is explicitly to reduce the net price paid for pharmaceuticals by program enrollees and the government. PBMs also do this for the privately insured, thereby helping health plan sponsors and their beneficiaries save money.

In its current form, Medicare Part D seems almost as if it were designed to encourage high list prices for brand-name drugs. Part D consists of four payment stages for enrollees:

* The deductible stage, in which beneficiaries pay 100% of the cost of drugs. The deductible is currently capped at $435, although some plans provide a lower amount or even a $0 deductible.

* The "initial coverage" stage, in which insurers pay for some of the costs of covered drugs. Depending on the plan, patients pay a copayment (a set amount per drug) or coinsurance (a percentage of the cost of drugs).

* The "coverage gap" stage, during which the drug plan is responsible for only 5% of brand-name drug costs and the patients and drug manufacturers shoulder the remainder of the costs (more on that below).

* Finally, there is the "catastrophic coverage" stage. Once a patient's out-ofpocket costs reach a certain threshold ($6,350 in 2020), the government pays 80% of covered brand-name drug costs, the drug plan pays 15%, and the patient pays only 5%.

Obviously, drug makers have an incentive to reduce their liability in the coverage gap stage. They do this by charging high prices, thereby hastening patients' move to the catastrophic...