Ineffective Rebate Rule Would Burden Taxpayers With An Extra $200 Billion

Mike Madrid
Partner at GrassrootsLab, and a nationally recognized expert on Latino voting trends. In 2001, named one of America's "Most Influential Hispanics" by Hispanic Business Magazine.

The cost of health care in this country is rising at unsustainable rates thanks in no small part to the sky-rocketing costs of prescription drugs. Today, one-in-four Americans can’t afford their medications, causing many to ration their medications – sometimes with deadly consequences. Others are forced to choose between paying for their medications or paying for groceries. Not only does this crisis come at immense personal costs for patients and their loved ones, but the ramifications are felt economically throughout the country as people are forced to spend more and more of their incomes on medications.

As an AARP representative recently noted during a congressional hearing, “these escalating prices will eventually effect all of us in the form of increased taxes or cuts to public programs or both. In other words, every single person in this room is paying for high prescription drug prices, regardless of whether you’re taking a medicine yourself.” A recent analysis from Bloomberg Government found that from 2013 through 2017, Medicare spending on 22 drugs increased by 500% as pharmaceutical companies continue to raise list prices year after year.

While Congress is taking important steps to lower the costs of prescription drugs by advancing market-based solutions like the CREATES Act and “pay for delay” legislation that aim to increase competition and boost transparency, the administration’s proposed Rebate Rule threatens this progress by increasing drug manufacturer’s monopolistic power in the drug supply chain.

In our current system, drug manufacturers set a list price for a medication. Pharmacy benefit managers (PBMs) than negotiate rebates with drug manufacturers based off of these list prices on behalf of insurance companies. These rebates are then passed onto patients in the form of lower out-of-pocket costs. Without PBMs, pharmaceutical companies would have complete control over the drug supply chain.

The Rebate Rule would bar PBMs from negotiating rebates on Medicare Part D drugs but at the same time does not require pharmaceutical companies to lower their list prices. In fact, the administration’s own analysts at the Centers for Medicare and Medicaid Services (CMS) predict that the Rebate Rule could actually cause prices to increase before leveling out to the same prices they are now.

This wouldn’t be so bad if it weren’t for the Rebate Rule’s costs to taxpayers and Medicare Part D recipients. Government and industry analysts, from CMS, the Congressional Budget Office and Avalere Health estimate that the Rebate Rule could cost the federal government between $187 billion and $400 billion, making it one of the most expensive regulations in U.S. history.

These same analysts also all agree that this proposal would also cause premiums to spike for over two million California Medicare Part D recipients – elderly and disabled populations who are often living on a fixed income. The CMS analysts estimate that premiums would rise 25 percent, while the analysts at Avalere Health estimate premiums could spike as high as 40 percent.

For far too long pharmaceutical companies have price-gouged patients through measures like pay for delay and patent-thicketing that block competition and allow these companies to continue raising prices as high as they like. Instead of rewarding and encouraging this type of monopolistic behavior, lawmakers should instead focus on market-based solutions that increase competition and transparency. Our physical and fiscal health depend on it.

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