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Morningstar | Rebate Rule Is Dead: Supply Chain Benefits, Drug Firms Pressured

First reported July 10 by Axios, the Trump administration is not planning to finalize the proposed rule altering the flow of drug rebates purchased through Medicare Part D plans. The rule would have changed the business model of pharmacy benefit managers, requiring any negotiated discounts to be passed directly to the beneficiary at the point of sale rather than used as a mechanism to lower the costs to the insurance plan overall. While this led to a rally for PBMs/insurers and distributors, drug stocks sank as investors wondered where President Donald Trump's focus will turn next. Taking rebate reform off the table puts pressure on Congress (particularly the bipartisan Senate Finance Committee team of Chuck Grassley and Ron Wyden) to reveal a drug-pricing package this month that stands a chance of passing in both chambers. Potential reforms here, while likely to reduce costs for Medicare patients, also look more modest for both payers and drug firms.

We think that the remaining proposal under review at the budget office--the Medicare Part B international price index--is unlikely to be implemented even if finalized, as Congress has power to block the rule, or a judicial review could find this massive demonstration an overextension of the authority of the Center for Medicare and Medicaid Innovation, or CMMI.

As an alternative, we expect a Senate drug pricing package could include other Part B reforms but also include a cap on out-of-pocket spending in Medicare Part D. We anticipate such a proposal would see more widespread support from policymakers and, as a result, have a higher likelihood of success. We think such changes would be both manageable for drug firms and more effective in achieving the bipartisan policy goal of lower healthcare costs for Americans.

For additional detail on our analysis of the effects of the rebate rule's elimination, please see our report, "Rebate Rule Is Dead: Supply Chain Benefits, Drug Firms Pressured."