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CBO: Proposed Rule on Medicare, Medicaid Drug Rebates Would Raise Drug Spending

The Trump Administration’s proposed rule that would effectively ban drug rebates in Medicare and Medicaid would raise — not reduce — spending on prescription drugs, the Congressional Budget Office (CBO) says in a new estimate. Drug company profits would grow, and federal spending for Medicare and Medicaid would rise by $177 billion over ten years.

Currently, drug companies may pay rebates to pharmacy benefit managers in Medicare Part D and Medicaid health plans in exchange for coverage or preferential treatment for their medications. Under the proposed rule, drug manufacturers could still offer discounts to purchasers — but only by reducing the list price of a drug or by making payments to pharmacies that are passed on to beneficiaries (termed “chargebacks”).

The proposed rule would reduce pharmacy benefit managers’ bargaining power, CBO concludes. In particular, they could no longer demand discounts based on meeting targets for the share of prescriptions filled with a manufacturer’s drug. As a result, CBO estimates, drug manufacturers would recoup about 15 percent of the amount they now pay in rebates, increasing their profits. (The Office of the Actuary at the Centers for Medicare & Medicaid Services has made the same estimate.) The remaining 85 percent of current discounts, CBO finds, would take the form of chargebacks rather than reductions in list prices. Implementing a system of chargebacks would also entail significant additional administrative costs.

Medicare beneficiaries who use prescription drugs would generally incur lower cost-sharing charges under the proposed rule. Under current rules, beneficiaries’ cost sharing is a fraction of a drug’s list price. Under the proposal, it would be based on the price after accounting for chargebacks. For beneficiaries, the reduction in net prices would also reduce the annual Part D deductible and the spending level on health costs at which catastrophic coverage begins.

By reducing discounts and cost sharing, the proposed rule would increase costs for Medicare prescription drug plans and thus increase Part D premiums for all beneficiaries. Since the federal government subsidizes about three-quarters of basic premiums, higher premiums would also mean higher federal spending.

All things considered, the proposed rule would substantially increase federal Medicare spending, CBO estimates — by $170 billion over ten years. Although much of this additional spending would benefit Medicare beneficiaries who are major consumers of Part D drugs, part of it would add to drug company profits.

While the proposed rule would have mixed effects on Medicare, in Medicaid it would raise federal and state costs without helping beneficiaries. The new chargebacks in Part D would reduce the average manufacturer price of drugs, which would reduce the statutory rebates that drug companies must pay Medicaid in order to participate in the program. Drug companies would also withhold most of the negotiated supplemental rebates they now pay to Medicaid managed care organizations, CBO concludes, and Medicaid could recover only some of these lost rebates. In total, the proposed rule would increase federal Medicaid spending by about $7 billion over ten years, CBO estimates. State costs would rise as well, and drug companies would be the beneficiaries.

In his “Blueprint to Lower Drug Prices,” President Trump promised to “reduce the price of prescription drugs” and “give [Medicare] Part D sponsors more negotiation power with drug makers.” The proposed rule would do the opposite. And while it wouldn’t apply to employer-sponsored and other private health plans, the CBO estimate raises serious questions about proposals to disallow drug rebates in the commercial sector as well.