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TRACTION or TALK: The Impact of the Administrations Approach to Prescription Drugs

Posted by Seth Denson

Feb 13, 2019 7:24:12 AM

When it comes to health care, targeting the cost of Prescription Drugs has become to the Trump Administration what the ACA was to the Obama Administration – its primary focus. Since his inauguration, President Trump has continuously challenged the pharmaceutical industry, even appointing Alex Azar, a former Big Pharma Exec, to head the Department of Health and Human Services. During his recent State of the Union address, the President continued his rallying cry stating, “It is unacceptable that Americans pay vastly more than people in other countries for the exact same drugs, often made in the exact same place. This is wrong, this is unfair, and together we will stop it. We will stop it fast,” he said. However, when it comes to prescription drugs, the Administration may be reaching the limit on what it can do on its own and ultimately will need Congress to pass new legislation to move the needle much further. Recognizing this, the President went on to say in the SOTU address when referring to prescription drugs, “I am asking the Congress to pass legislation that finally takes on the problem of global freeloading and delivers fairness and price transparency for American patients.” But Congress may be faced with a challenge when addressing this issue, as the most common approaches aren’t without their possible political ramifications. For example:

  • Allowing Americans to import cheaper drugs from Canada may be a challenge as it could be seen as undercutting U.S. jobs;
  • Tying prices in the United States to what companies charge in foreign countries could be seen as price fixing; and
  • Allowing the U.S. Government to negotiate costs in Medicare Part D may prove difficult because of the ultimate power of Pharma lobbying.


HHS has recently proposed a plan to eliminate rebates to Pharmacy Benefit Managers (PBMs). Rebates are a form of price concession (or kick-back) paid by a pharmaceutical manufacturer when a specific targeted quantity of a drug is distributed and PBM’s are in effect middle-men or wholesalers who negotiate pricing between the manufacturer of the drug and the retail pharmacy in which it’s purchased. The PBM is also responsible for setting the formulary structure in which insurance companies set copay's and coinsurance levels. Rebates which are a key component to price negotiation, have historically been retained by the PBM; however, most recently rebates have been shared among both the PBM and the Health Plan Sponsor. That said, since rebates are often negotiated as a percentage, both PBMs and pharmaceutical companies benefit from price hikes.

Currently, within Medicare and Medicaid managed-care plans, rebates are structured into the pricing negotiated between the manufacturer and PBM’s. The proposal put forth by HHS would eliminate a legal provision that allows drug makers to negotiate in this way, and instead would force discounts made on rebates to go directly to the consumer, and PBMs would be paid a fixed fee for their service.

While this proposal only applies to Medicare and Medicaid drug plans, the hope is that by forcing a new way in which drugs are negotiated on behalf of the United States largest consumer (the Federal Government), the private market would or could ultimately follow suit.


Many analysts (myself included), don’t believe that this new proposal will impact PBM’s all that much and as such will have little impact on drug prices. While I don’t have an issue with the elimination of rebates, most PBM’s have already begun sharing or “passing through” the rebates to payers. PBM’s make money in two key ways:

  • REBATES – think of this as a commission bonus on a drug – distribute more, and the manufacture pays a bonus/commission; and
  • SPREAD (this is where the real money is) – In effect, the PBM will purchase large quantities of drugs based on a quantity based price (this is called the AWP or Average Wholesale Price) then mark it up based on different quantity. For example, the AWP from a manufacturer might be one price for 100 pills, but a much lower price based on 1,000 pills. In essence, PBM’s get a bulk rate. But when they go distribute the drug, they do so based on lower quantity AWP keeping the spread as profit. WHO COULD IT HURT? In short, this proposal hurts insurance companies. Here’s why – it’s insurers who ultimately get the line share of the rebates in today’s market.

Rebates, which the administration is going after, are just bad – they incentivize a distributor to intentionally price a drug at a lower rate within the insurance formulary structure to push consumers to that drug (even if there might be a lower cost drug available). They need to go, and for the past 12-24 months, PBM’s have begun to realize that as this process became more public, it would keep them in a bad light. For this reason, PBM’s have already been shifting towards a more pass-through model, in essence giving the rebates to the payer (i.e. insurance company in most cases). CVS, for example (which is one of the three largest PBM’s in the country) reported keeping only 2% of the total rebates it negotiated in 2018.


Rebates have less impact on the manufacturer than other influencers. The real loser in this proposal would be the Health Insurance Industry. In recent years, rebates have largely been passed through to the health insurance company (the actual payer once the consumer pays there copay), or the TPA (Third Party Administrator) for self-funded plans. This has been the strategy of the PBM and has kept the insurance market quiet when PBM’s influence the market price of drugs. In essence, it’s been a payoff. PBM’s give this ‘bonus/commission’ the Health Insurance Company who, because of the Managed Loss Ratio mandate in the ACA, needed a way to generate more profit while remaining compliant with the law. So the PBM gives up the bonus but continues to keep the spread. WIN/WIN. According to a study by research firm Altarum, an estimated $89 billion in rebates were paid to health insurers in 2016. With PBM’s making the majority of their money off of the ‘spread’ of the drug and the manufacturer getting their pay day regardless, one would think that Health Insurers would be the ones mostly likely to lose in this new proposal, given that they , they are getting a significant cut of the rebate kickback. But, before we cry “foul” on behalf of the insurance industry, wait – there’s more to the story.


In the end, most health insurers won’t like losing the rebates, but they’ll be okay. Here’s why – they now own the PBM’s, or vice versa. While not all PBM’s are directly owned by or own insurance companies, many are. Yes, based on the brilliance of our justice department (which has approved these monopolistic acquisitions/mergers) over the past decade, the three largest PBM’s (which control approximately 70-80% of the drug distribution in the U.S.) are now owned or own health insurance companies:

  • CVS owns AETNA
  • CIGNA owns Express Scripts
  • United Healthcare owns OPTUM

In addition, other insurers like Blue Cross and Humana are often stakeholders in their PBM’s as well (on a state by state basis).

So, in the end, PBM’s make record profits on the spread, share the manufacturer bonus/commission (REBATE) with the Health Insurer who then gets to raise your health insurance premiums based on the price charged, not what the true cost/expense was.


If the Trump Administration wants to get serious about driving down the cost of prescription drugs, eliminating rebates, while a good start, will amount to as much as throwing a pebble in the ocean and expecting the waves to rise. What the Federal Government should do is focus on things that could actually impact costs:

  • Allow for faster approval of drugs by the FDA
  • Allow for foreign testing in approved countries into the U.S.
  • Allow for free-trade with countries like Canada, Great Britain and France who have strict guidelines when it comes to quality and oversight.

In a free market system, competition is necessary to allow the consumer to operate effectively.These things mentioned above along with a requirement of more transparency (which the Trump Administration is pursuing), limiting the practice of continued patent extensions for drug manufacturers and eliminating the monopolistic structure in which the healthcare industry continues to consolidate will all have an impact on cost.Our system in the U.S. is responsible for the vast majority of the innovation and advancement in medicine and that is the direct result of our free-market structure.As such, in a free market system, it is the consumer, not the government, with the most effective control.Government overreach and intervention risks economic impact as well as a possible interruption in the advancement of medicine.The Trump Administration along with Congress should realize this and rather than control the free market, effectively set the environment to allow the free market structure to work more effectively.

Topics: prescription drugs, Trump, congress, pbm, costs, hhs, big pharma, pharmaceutical, legislation

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