Health

Max Nisen is a Bloomberg Gadfly columnist covering biotech, pharma and health care. He previously wrote about management and corporate strategy for Quartz and Business Insider.

The Senate finance committee's grilling this week of Tom Price, President Trump's nominee to head the Department of Health and Human Services, offered the usual combination of artful dodging and tiny scraps of information.

But sifting through the mostly non-answers revealed one interesting exchange, where Price may have cracked the door a bit on new drug-pricing policy.

Senator Ron Wyden of Oregon asked Price if he'd work with Democrats to let Medicare negotiate drug prices, something Trump recently advocated. Price suggested he was open to exploring the possibility there was a better way of doing things than the current state of affairs, in which pharmacy benefit managers (PBMs) do all the negotiating. 

In fact, the Centers for Medicare & Medicaid Services (CMS) published a report on January 19 illustrating the system's flaws. If any of this attention results in a more-active government role in price negotiations, then that would be bad news for both PBMs and drugmakers. 

Trump Droptimism
Biotech shares and the stock of the leading independent pharmacy benefit manager soared with Donald Trump's election, but have given those gains back as he has proven to be less friendly than expected
Source: Bloomberg

The law that created the Medicare Part D drug benefit in the early 2000s explicitly prevents the government from directly negotiating drug prices. So PBMs negotiate prices on behalf of the private health-insurance companies that administer Medicare Part D. Any rebates drugmakers give are split between the PBM, the insurer, and Medicare. 

PBMs have been extremely effective at avoiding list-price increases in some crowded drug classes. The rebates they get can cut the premiums Medicare beneficiaries pay; they've helped keep premiums mostly unchanged from 2010 to 2015, despite 12 percent growth in total drug costs for Medicare.

On the Rise
Rebates are growing rapidly as a share of Medicare Part D drug spending
Source: CMS

But the dovetailed rise of prices and rebates has notable negative consequences, according to the CMS study. First, it can lead to higher out-of-pocket costs for seniors. Drugmakers can respond to higher rebates either by accepting less revenue or by continually boosting list prices. Guess what they end up doing. The portion of drug costs that seniors pay is based not on the lower, post-rebate price, but the constantly inflating list price.

Hiking
Prices rose substantially in 2015 on some of the Medicare Part D drugs that seniors pay the most for out-of-pocket
Source: Bloomberg
*for beneficiaries without a low income supplement

Rapidly rising drug prices and rebates have shifted more overall drug spending into the so-called catastrophic phase of the Part D benefit, a spending cutoff after which Medicare covers 80 percent of drug costs. The result has been a substantial increase in Medicare's portion of total drug spending in recent years. 

The analysis paints a picture of a system that may be working better for PBMs -- which gain some of their revenue from taking an undisclosed slice of the rebates they negotiate -- and insurers than for beneficiaries or taxpayers. 

The drug industry has tried to put the blame for ever-rising prices on PBMs, trying to focus attention on those rising rebates instead of list prices. A recent industry study found that only 63 percent of drug spending goes to the manufacturer, with the rest to the PBM. 

But of course drugmakers are not blameless. Plenty of price increases are motivated purely by profit and more than make up for the higher rebates they pay to keep market access.

Switching from the current system to government negotiation is definitely not a preferred outcome for drugmakers. There's a chance the government might be able to negotiate or mandate discounts in excess of those created by the private market, which would cut further into pharma profits. And once it starts, it's a slippery slope to even broader government price-meddling.

For PBMs, any reevaluation of the way Medicare pays for drugs could result in an unwanted public airing of what critics see as their role in higher prices. Major PBM shares fell Wednesday on speculation Trump might specifically call out the industry. 

If the CMS report is any guide, then any potential review of the system by Price likely won't flatter anyone in the health-care business. And if that leads to something like a reform-minded alliance with Democrats, then the current unease in biopharma and among PBMs will quickly escalate to terror. 

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

  1. Price's full quote: "Right now the PBM's are doing that negotiation. I think it is important to have a conversation and look whether there is a better way to do that. And if there is, I am certainly open to it." 

To contact the author of this story:
Max Nisen in New York at mnisen@bloomberg.net

To contact the editor responsible for this story:
Mark Gongloff at mgongloff1@bloomberg.net