FederalHealthcareTrump Administration Issues New Regulatory Rules Hoping to Lower Prescription Drug Prices

Prescription drugs are costly due to their inelastic demand, but the Trump administration's latest order intends to save consumers money.
November 24, 2020
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In a midnight hour maneuver, the Trump administration issued new Medicare regulatory rules last week that would tie prescription drug prices to the lowest among “most favored nation” status countries and eliminate middlemen rebates.

The administration contends this would reduce costs paid by Medicare enrollees and save over $85 billion over seven years — $28 billion in savings from patients’ out of pocket expenses.

Signed back in July, the two new rules had to go through regulatory review and public comment periods before implementation.

Medicare generally covers half of the healthcare costs for its around 44 million recipients.

Nearly 4.3 million Texans are enrolled in Medicare according to the Centers for Medicare and Medicaid Services (CMS). Average spending per Medicare beneficiary in Texas in 2018 was 15 percent higher than the national average at $11,627.

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For the top 50 drugs covered by Medicare Part B, an analysis by the Department of Health and Human Services (HHS) found that Americans paid more than twice as much for those drugs as comparable countries.

The “most favored nation” rule targets prices patients pay for doctor-administered drugs that fall under Medicare Part B, as opposed to over-the-counter or prescription drugs available at pharmacies.

Trump said in a presser last week, “Until now, Americans have often been charged more than twice as much for the exact same drug as other medically advanced countries. We would be having a drug — identical drug, same company — and we’d pay many times the price of what that drug would sell for in certain countries.”

Doug Badger of the conservative Heritage Foundation criticized the “most favored nation” rule, saying, “Instead of importing price controls, the Trump administration should pursue bipartisan Medicare reforms that would cap seniors’ out-of-pocket spending on prescription medicines and save taxpayers tens of billions of dollars.”

Opponents of the rule are also concerned it will cause prices, whether premiums or that of non-Medicare-covered prescriptions, to increase as an offset and give other countries the ability to influence American drug costs.

Annual Medicare Part B drug costs have grown at an 11.5 percent annual rate over the previous five years.

Seema Verna, administrator for the CMS, said, “The current system creates incentives for drug manufacturers to price Medicare Part B drugs as high as they can in the U.S. system because the program pays doctors more when they prescribe more expensive drugs, even when a lower cost, clinically-equivalent alternative is available. The Most Favored Nation Model will lead to lower drug prices for seniors.”

The second rule would eliminate rebates that pharmacy benefit managers (PBMs) —  third-party price negotiators for insurance companies — receive from drug manufacturers. The rule is intended to move the savings insurance companies get from rebates to patients.

HHS estimates this could save Medicare Part D recipients up to 30 percent.

The department added, “[T]he projected reductions in out-of-pocket costs are larger than potential increases in premiums.”

Alex Azar, HHS Secretary, said of the new rule, “With the final rebate rule, we are taking on a broken system and delivering big discounts directly to American patients. Our action on rebates has the potential to be the most sweeping change to how Americans’ drugs are priced at the pharmacy counter, ever, by delivering discounts directly to patients and bringing much-needed transparency.”

Ike Brannon, visiting fellow with the libertarian Cato Institute, says this could discourage PBMs from negotiating lower prices with manufacturers for the general public.

“Constraining health care costs is extremely difficult, especially in a marketplace like ours where the recipient of the treatment is largely insulated from its direct cost. Constraining Pharmacy Benefit Managers by eliminating their ability to procure rebates for insurance companies will make it more difficult for them to negotiate discounts,” he said in 2018 during discussions of eliminating the rebates entirely.

In an October Forbes editorial, Brannon defended PBMs, stating, “Drug prices are high in the U.S. because pharmaceutical companies charge high prices. There is no escaping this reality when it comes to reducing prescription drug prices.”

In both rules, the Trump administration hopes that the savings — either from the most favored nation price control or the rebate elimination — will trickle down to consumers rather than cause manufacturers and insurance companies to raise their prices proportionally.

Healthcare pricing has been a focus for the Trump administration which is currently in court fighting for its healthcare price transparency rule that requires hospitals to post their actual prices rather than mere estimates.

Being regulatory rules and not ratified legislation, the next administration could reverse each rule after jumping through the necessary bureaucratic hoops.

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Brad Johnson

Brad Johnson is an Ohio native who graduated from the University of Cincinnati in 2017. He is an avid sports fan who most enjoys watching his favorite teams continue their title drought throughout his cognizant lifetime. In his free time, you may find Brad quoting Monty Python productions and trying to calculate the airspeed velocity of an unladen swallow.