Government price-setting of prescription drugs is zombie legislation that just won’t die. After briefly being excised due to opposition from moderate legislators, the latest version of congressional Democrats’ $4 trillion Build Back Better reconciliation bill includes a provision to allow the government to set Medicare drug prices. “Democrats announced they have sealed a deal [on] pharmaceutical drug costs for seniors,” announced the Associated Press last week.
The consequences of prescription drug price-setting in terms of reduced access to new and existing medications have been well-documented. The nonpartisan Congressional Budget Office estimated that a previous iteration of this plan would result in 59 fewer innovative drugs coming to market over the next 30 years because of reduced investor interest needed to fund notoriously expensive drug development.
While this price-setting effort receives much attention, another stealth drug-pricing provision in the BBB bill hasn’t come under the spotlight even though it would destroy the best opportunity to substantially lower drug prices in a generation. Namely, the bill plans to repeal President Trump’s prescription drug rebate rule, finalized in November 2020, which Democrats’ own estimates suggest could save seniors $145 billion in lower medication costs.
Understanding the potential of this rebate rule and the massive consequences of scrapping it requires passing U.S. Prescription Drug Pricing 101—not the most captivating subject, but required reading for an informed perspective on this issue.
Here’s the Sparks Notes version: For drug manufacturers to bring their treatments to market, they must pay enormous fees to health insurers and their affiliated pharmacy benefit managers to get placed on their formularies (their lists of covered drugs). These “rebates” get tacked on to the underlying net prices of drugs to form their list prices. Rebates account for around 40 to 50 percent of list prices.
The rapid growth of rebates accounts for the entire increase in prescription drug list prices in recent years. In fact, prescription drugs’ net prices—the list price minus rebates—have fallen in recent years. The list price of a popular insulin brand, for instance, has risen by 141 percent since 2012, yet its net price has decreased by 53 percent as rebate demands soar.
The falling real price of medications (absent rebates) is cold comfort for patients who must contend with artificially inflated list prices. They bear the brunt of these high prices before their deductibles and must pay a portion as co-insurance after they meet them.
The U.S. Department of Health and Human Services addressed this Kabuki-theater drug pricing last year with its rebate rule requiring Medicare to pass along its roughly $30 billion in annual rebates to patients in the form of lower prices at the prescription counter. This underreported move would have resulted in massive drug savings for seniors. Without the misaligned incentives associated with these kickbacks, this rule would also encourage Medicare plans to choose cheaper generic drugs (with much smaller rebates) for their formularies.
Since Medicare is a government program, the government partly controls its rebate dollars. Democrats saw this enormous pot of funds and recognized its potential to help fund the BBB’s various expensive social and environmental programs. Hence the bill’s provision to scrap the rebate rule from taking effect. The $145 billion the government recoups from this move is $145 billion more that seniors must pay in the form of rebate-pumped drug prices.
There are three main reasons there isn’t more public anger over Democrats’ move: 1) the rebate rule hasn’t taken effect, so there’s no change from the broken status quo; 2) the mainstream media ignores any drug-pricing proposal that doesn’t involve price controls; and 3) health insurers and PBMs, which are afraid the rebate rule may expand into the commercial market and threaten their gravy train, are major Democratic Party donors.
This current lack of public outrage over the BBB’s rebate rule repeal is misplaced. Voters should be aware of this BBB black eye. Combined with the undead price-setting provision that will reduce access to medications for those who need them most, this bill has two of them.