The Trump administration's announcement Thursday to end safe harbor protections for drug rebates through pharmacy benefit managers, Medicare Part D plans and Medicaid managed care organizations dinged payer stocks Friday and riled up the health insurance sector.
The policy change was expected. Sky-high drug prices have been a frequent target of President Donald Trump and his HHS Secretary, and PBMs often get the blame. Those companies, now largely owned by the biggest payers like CVS-Aetna's Caremark and UnitedHealth's Optum, however, say they play an important role in the pharmaceutical supply chain and end up protecting consumers and saving them in out-of-pocket costs.
In addition to the rebate changes, which would go into effect in January 2020, the proposed rule would create new legal safe harbors for fixed fee agreements between PBMs and drug manufacturers as well as discounts patients receive at the pharmacy counter.
Overall, it's a blow for payers and PBMs, and while the new rule would not apply directly to commercial plans, ripple effects are likely with such a major change in how Medicare drug pricing is negotiated. Leerink analysts said that without the federal rebates, commercial rebates are likely to shrink, lest they look like an illegal bribe for better formulary changes. Smaller rebates are less effective, so if the proposal is implemented as-is, "commercial rebates could very likely be eliminated," analysts wrote in a note Friday.
Still, Jefferies analysts predicted the proposal's impact on PBMs should be minimal, though the largest may lose some competitive advantage "as they will no longer be able to subsidize premium bids with rebate dollars."
And Express Scripts spokesman Brian Henry told Healthcare Dive "rebates are just one funding mechanism in the basket of services" it offers, adding, "it is short-sighted to look at one component of our offering as having a disproportionate impact on our business model."
The health insurance lobby nonetheless was quick to denounce the proposal. America's Health Insurance Plans criticized the administration's decision as "well-intentioned but misguided" and insisted that rebate savings go directly to consumers and save them on premiums and cost-sharing.
In a statement, AHIP CEO Matt Eyles pointed the finger squarely at Big Pharma. "From the start, the focus on rebates has been a distraction from the real issue — the problem is the price," he said. "Manufacturers have complete control over how drug prices are set. Already this year, more than three dozen drug makers have raised their prices on hundreds of medications."
Eyles suggested HHS "go back to the drawing board and start over with this proposed rule."
Pharmaceutical Care Management Association CEO JC Scott echoed those sentiments. Eliminating safe harbor protections "would increase drug costs and force Medicare beneficiaries to pay higher premiums and out-of-pocket expenses, unless there is a viable alternative for PBMs to negotiate on behalf of beneficiaries," he said in his statement for the PBM trade lobby.
The move comes as the sector is rapidly evolving and major insurers have snapped up increasingly lucrative PBMs. In a recent interview, Leerink analyst Ana Gupte told Healthcare Dive putting medical and pharmaceutical benefits under one umbrella makes sense. "I think it's a natural evolution of where this industry needs to go," she said. "At the end of the day, the pharmacy benefit is integral to management of an insured member as a whole person."
Cigna just closed its acquisition of Express Scripts, the country's largest PBM, for $67 billion. During the company's fourth-quarter earnings call Friday, CEO David Cordani said he didn't think the rule would have a "meaningful impact" on Cigna's growth. He suggested the change could accelerate value-based programs with pharmaceutical companies.
CVS Health's PBM, CVS Caremark (the nation's second-largest), went through a public spat last week with Walmart. The retail giant pulled out of Caremark's network, citing an inability to agree on pricing, only to rejoin three days later. The companies did not release details on how an agreement was achieved.
This week, Anthem announced it was pushing up the launch of its PBM, IngenioRx, to the second quarter of this year — nine months ahead of schedule. That means it will divorce from Express Scripts earlier than the expected date of Dec. 31. Anthem said in its fourth quarter earnings call Wednesday it expects to save $4 billion a year through the switch.
In its Q4 report, UnitedHealth Group said its PBM, OptumRx, grew revenues by 9.1% for the year to nearly $70 billion.
As market and policy analysts pored over the 123-page rule, much is unknown about what the policy change would mean for PBMs and patients if it is finalized. For Part D beneficiaries, the change would likely mean an increase in monthly premiums but a decrease in cost-sharing.
Tricia Neuman, senior vice president of the Kaiser Family Foundation, noted on Twitter the HHS analysis has 10-year budget impact estimates that range from $99.6 billion to $196.1 billion. "That range in savings/spending estimates illustrate the complexity of financial arrangements between drug companies, pharmacy benefit managers, plans & beneficiaries, & the difficulty in predicting how each will respond if the current rebate system is upended to address problems," she wrote.
HHS admits enough in its proposal: "It is difficult to predict the full extent of the transfers created by this proposed rule in the absence of information about strategic behavior changes by manufactures and Part D plan sponsors in response to this rule."
A senior HHS officials said on a call with reporters, though, that because Part D "is such a premium-sensitive market," the department expects plan sponsors "are going to negotiate more aggressively or make other changes such that they won't have to increase premiums while still passing on lower costs at the pharmacy counter."