By Newt Gingrich and Joe DeSantis
Originally published in The Hill
The cost of prescription drugs is a significant factor in the lives of millions of Americans. Because these Americans and their families and friends know that drug costs can be a significant part of the monthly budget, this topic will be a big issue in the next election.
Democrats — many of them planning to run for president in 2020 — already are out with several destructive proposals. Having worked with companies and organizations across the health care industry, it has become clear to us that these ideas would raise taxes, decrease competition and destroy the incentive system for drug development. Democrats would create a world of fewer American jobs, fewer new drugs to treat and cure diseases, and fewer choices for patients and doctors.
However, Republicans should take heed: It won’t be enough to simply criticize the left’s proposals. Attacking opponents’ plans will not change the fact that prescription drug costs are a major problem for Americans. We need real solutions of our own.
This is why the Trump administration’s proposal to prevent secret rebates and discounts between drug manufacturers and pharmacy benefit managers (PBMs) and to encourage direct discounts to patients in Medicare Part D and Medicaid is so important.
Not only will this plan save patients money at the pharmacy counter, it will begin to fix the broken economics of drug pricing that cause the huge increases in prices and out-of-pocket costs we have witnessed over the past decades.
Current drug pricing structure is stuck in an escalating spiral of higher list prices (the sticker price of a drug) and decreasing transparency. The central dynamic fueling this vicious cycle is obvious: In this system, PBMs, whose job it is to negotiate drug discounts on behalf of payers such as insurers and large employers, benefit from higher list prices on drugs. This is precisely the opposite dynamic you would want if your goal is to lower prices.
The PBMs benefit from higher prices because they typically are paid based on how much money they can save their clients. In addition, they often negotiate additional rebates with the manufacturers that are largely invisible to the clients. The higher the list price of a drug, the steeper the discounts and rebates the PBMs can negotiate, and the more money they make.
This “spread model” of payment presents all sorts of problems. For example, it is usually the PBMs who choose which drugs are covered, and to what degree they are covered. Since they are paid more for negotiating bigger discounts, that means PBMs have an incentive to cover more expensive drugs with steeper discounts instead of cheaper drugs with smaller discounts.
In addition, the drug manufacturers understand the PBMs incentives, so they respond by constantly ratcheting up the list prices of drugs. This creates more negotiating space for both parties to make more money.
Of course, the savings from these discounts and rebates are ultimately supposed to be passed on to employers and patients in the form of lower insurance premiums. A significant portion of the savings might be — but there’s no way to tell.
The problem for patients is that the amount they pay out-of-pocket until they reach their annual deductible, and often even their co-insurance, is based on the list prices for the drugs rather than the discounted rates negotiated by the PBMs.
So, out-of-pocket costs for patients continue to increase, while companies in the prescription drug supply chain pad their bottom lines with the savings.
This is why the Trump administration’s proposed rule is so revolutionary. It would change federal anti-kickback statutes to prevent drug manufacturers from offering rebates and discounts to PBMs, Part D insurance plans, and Medicaid managed care organizations.
Meanwhile, the rule would create a safe harbor for discounts offered directly to patients. This would have the effect of guaranteeing that all savings are passed directly to patients in the form of lower out-of-pocket costs.
In addition, the rule changes the way PBMs can be paid by insurers providing plans in Medicare Part D. The new rules would have the effect of requiring fixed fees for their services, instead of the spread model that incentivizes higher list prices.
Criticism of the proposed rule points out that by preventing insurers and PBMs from receiving discounts and rebates, the reduced savings would lead to higher premiums. However, the increase in Part D premiums is projected to be only around $5 per month, according to the Department of Health and Human Services (HHS). At the same time, patients’ costs could be reduced by as much as 30 percent, which is the average amount drugs are currently discounted from the list price. For many expensive drugs, the reduction could be much higher.
The proposed rule would only impact drugs sold as part of Medicare Part D and Medicaid. HHS lacks the authority to apply this change to the entire drug purchasing system. That would require an act of Congress — which is exactly where Republicans have a significant political opportunity.
This year, Senate Majority Leader Mitch McConnell (R-Ky.) should work to pass legislation that would apply the proposed changes in Part D to all drug purchasing. Similar legislation should be introduced in the House, and Speaker Nancy Pelosi (D-Calif.) should be challenged to schedule a vote on it. This would put her in a tough spot.
Requiring that all drug discounts be passed directly to patients would be a popular idea that should be easy for elected officials to understand and explain to voters. If she refuses to allow a vote on the bill, Pelosi will have to explain why she is preventing such a sensible reform. If she allows the vote, it gives Republicans a clear win on drug pricing to run on in 2020.
Beyond politics, it would be the right thing to do. This action takes away a major incentive that drug companies cite to defend list price increases. It would save patients money and — unlike the Democrats’ expensive big-government schemes — the reform tackles the root cause of escalating prescription drug costs without sacrificing the incentive system responsible for America leading the world in creating cures and treatments.
It would be a significant step toward fixing the health care system in America.