President Donald Trump’s efforts to make good on promises to lower prescription-drug costs suffered a couple of major setbacks this week. With luck, though, these reversals may clear a path for better solutions.
A judge started the week by derailing a Trump administration plan to force drugmakers to disclose the high list prices of their medicines in TV ads. Then, late Wednesday, the White House confirmed it is scrapping an ambitious effort to change how the government pays for drugs. The now-dead plan called for eliminating some of the rebates received by pharmacy benefit managers (PBMs) – the middlemen that negotiate drug costs for health plans.
With both efforts, the administration was trying to solve a real problem – soaring drug prices – by tackling it in different ways. The ad initiative was meant, quite simply, to shame companies into lowering prices. The other effort, aimed at PBMs, sought to address a quirk in the way U.S. drugs are bought and sold that’s kept prices high and rising.
Currently, drugmakers pay big rebates to PBMs to secure market share for medicines. Those savings don’t always flow to patients, though. PBMs profit off of rebates, and seniors can face out-of-pocket charges that are based on the undiscounted sticker price of medicines. The system encourages PBMs to pick expensive drugs over more cost-effective options and drugmakers to raise prices.
The proposed rule would have replaced rebates in Medicare with direct discounts for patients. But it only targeted one part of the problem, and the fact that pharmaceutical companies were rooting heartily for the rule speaks to the likely mixed impact of this particular solution.
PBMs aren’t perfect, but they have driven major price reductions, and the rule would have weakened their negotiating leverage. While direct discounts could save money for seniors that take expensive drugs, eliminating rebates would likely boost premiums for everyone else. Healthier beneficiaries and people who aren’t on Medicare probably wouldn’t have seen the benefit. That’s because the rule naively relied on drugmakers to forgo the windfall created by vanishing rebates and substantially cut list prices. Those cuts would hurt their profitability in the lucrative private market, which the proposal didn’t touch. The non-partisan Congressional Budget Office projected that the plan would increase Medicare spending by $170 billion over a decade.
The ad proposal had a similar problem, beyond the fact that it appeared to be a legal overreach by the administration. It relied on guilt to compel drugmakers into lower prices rather than any real mechanism and was bound to create confusion. I say good riddance to both.
These failures leave just one major pillar of the administration’s drug-price platform fully intact. Luckily, it’s the most important one: a plan to index the cost of certain medicines that Medicare pays to the lower prices that are available abroad. It’s controversial; critics argue that it effectively imports foreign price controls. But the fact that it’s the last big piece standing may boost President Trump’s investment in seeing it through.
The indexing proposal is limited in that it would only apply to a subset of drugs and Medicare beneficiaries. The true silver lining will come if the administration’s collisions with the boundaries of executive power convince it to support legislation in Congress. A bill is less likely to be shredded by judges, and it can target the entire drug market instead of limited snippets. House Speaker Nancy Pelosi is reportedly negotiating with the administration on major legislation that would allow the government to use its buying power to cut prices directly. The government would no longer subcontract the job to for-profit PBMs with bad incentives, and it wouldn’t rely on drugmakers to become altruists.
It might seem like a long shot, but it isn’t so long ago that the president was advocating for this kind of policy on the campaign trail. President Trump’s support would go a long way toward convincing Congressional Republicans to get over their traditional distaste for government intervention (and working with Democrats).
No one likes to lose, least of all the president. But at the end of the day, if these failures convince the administration to focus on better policies that could help more than a subset of Americans, it could be a bigger win for all.
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Max Nisen is a Bloomberg Opinion columnist covering biotech, pharma and health care. He previously wrote about management and corporate strategy for Quartz and Business Insider.
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