Editor's Note: This is a complimentary research note published by Healthcare Policy analyst Emily Evans. CLICK HERE to get COVID-19 analysis and alerts from our research team and access our related webcasts.
There are few things as dangerous and unpredictable as a politician with no race to run. Special interests, constituent demands and public perception lose their influence, leaving the elected to do almost anything within their power.
While that may seem like a terrible thing, and sometimes it is, that freedom to act can also abruptly alter a political dynamic and dissolve decades old impasses. President George W. Bush, for example, in the final weeks of his presidency opened certain public lands for drilling, a move opposed by conservationists for years.
The real beauty of end of term executive actions lies in their blamelessness. With the person responsible long gone, what would have been a political knife fight becomes a foregone conclusion. President Bush’s Executive Order on drilling was quietly extended and expanded by President Barack Obama, leaving opponents on their back foot.
Drug prices are easily as contentious as drilling on public lands. For that reason, the conventional wisdom in Washington and among the chattering classes is that a President Biden, long known as a friend of the pharmaceutical industry, would take aim at Pharmacy Benefit Managers and avoid conflict with PhaRMA once inaugurated.
That is, until the White House released two rules Friday afternoon.
The Most Favored Nation Interim Final Rule establishes a model for pricing 50 or more single source Medicare Part B drugs price based on the lowest per capita GDP-adjusted price of any non-US member country of OECD with a GDP per capita that is at least 60% of US GDP. The second rule finalizes the Part D rebate rule that was supposedly withdrawn in July 2019.
These releases are a change-up from the original plan that assumed victory Nov. 3. Had that been the case, the administration would have waited on the Part D rebate rule until after the election, forcing PhaRMA back the negotiating table they left in July, to sort out a compromise. MFN would be the stick and the rebate rule would be the carrot.
The release of the rules puts president-elect Biden in quite the spot. While he has long standing support from the pharmaceutical industry, his left flank advocates for price policy like the MFN rule. Everyone, save a few insurance companies, hate the PBMs but release of that rule leaves Biden few options or reasons to change the negotiating dynamic with the pharmaceutical industry.
There will be lawsuits, of course. However, you should never underestimate the wiliness or creativity of government lawyers. Nor should you ignore the broad latitude the courts have given the Trump administration with rulemaking.
The most probable outcome is that the Biden administration defends the rules in court and moves forward with implementation all the while assigning blame to a man in Florida.
If these rules survive a change in power and the courts, they have the potentially to make a significant impact on the business of manufacturing, distributing and selling pharmaceuticals.
The Medicare Part D rule eliminates the safe harbor for manufacturer rebates and replaces it with one that allows them at the point of sale. It also creates another safe harbor for fixed administrative fees paid to PBMs. Importantly, the safe harbor also requires written disclosure by PBMs to health plans of their arrangements with pharmaceutical manufacturers. The Secretary of HHS can request similar written information. The Part D rebate rule goes into effect Jan. 1, 2022.
The Most Favored Nation Rule creates a 7-year demonstration project through which at least 50 single source Medicare Part B drugs will be reimbursed based on prices paid in OECD countries. The demonstration would be phased-in over three years by blending the new reimbursement method with the current one based on ASP. Additionally, the 6% add-on payment paid to physicians for administering the Part B drugs in the model will be replaced by a $148 flat payment. The MFN rule goes into effect Jan. 1.
Not part of the rules but also released Friday is the withdrawal of FDA guidance on Unapproved Drug Initiative. This 2006 effort was meant to inspire collection of clinical data on old drugs like epinephrine in exchange for some market exclusivity. It had the unwelcome effect of making Epi-pens really expensive.
There are sure to be unintended consequences but from where we sit today, the combined effects of these rules in the short term should be:
- An increase in Medicare Part C premiums due to a diminished subsidization by drug rebates. How much more will depend on the extent to which drug manufacturers retain rebates.
- Greater formulary control by Part D plans with greatest attention paid to branded drugs with limited competition
- Less Part D drug abandonment and greater medication adherence
- Reduced hospital acquisition of physician practices especially in the oncology specialty
- Upward price pressure in OUS markets for Part B which may be met with political response
- Reduced cost-sharing
These near-term results will contribute to a system already under deflationary pressure from deregulation, new entrants and greater price scrutiny by employer sponsored plans.
Long term, it is hard to anticipate the ever-nimble American health care system. We are dubious that, after the half trillion dollars the federal treasury has poured into the research and development of drugs and diagnostics in response to COVID, innovation will suffer anytime soon. What we are bound to discover is that a significant chunk of the U.S. health apparatus was being underwritten by the pharmaceutical industry with a very predictable result of higher prices.
One of the most valued survival skills for successful lobbyists is the disciplined avoidance of lending campaign support to an incumbent’s challenger. The primary reason is you may end up being wrong, in which case you find yourself with a new enemy or, at a minimum, on mute for some time.
A secondary reason, if you are right, is that there is enough time between an election and an inauguration for your new enemy to do some damage to your cause. This result is known as a lose-lose in politics.
Following these rules plus a lot of party agnosticism, PhaRMA’s power in Washington has endured despite the occasional appearance of scandal, ever rising prices and, until recently, not terribly compelling innovation.
Even for the Disrupter-in-Chief, PhaRMA’s influence proved daunting. All four years of the Trump presidency were marked with proposals on drug prices that were sent up the flagpole only to be reversed, sometimes after a little West Wing Hara-Kari. Legislative proposals fared no better.
Then election 2020 happened.
As he clearly demonstrated at the news conference Friday the president believes the pharmaceutical industry, and especially PFE, actively thwarted his second term ambitions by withholding interim phase 3 data until after the election. We have previously discussed why, from a public health perspective, the delay made some sense given the political charge COVID carries.
However, the company also appears not to have provided the White House with a preview of the data before its release and inexplicably tried to distance itself from Operation Warp Speed and federal support for COVID-19 vaccine development, a move that drew bipartisan rebuke.
While the pharmaceutical industry now gets a new president in the White House, they probably also bought themselves a lot of misery on Capitol Hill. Republicans who had grown wearing of defending the industry in the face of shifting public opinion, can now take up the president’s grievance. Democrats, outside of those representing New Jersey, will be busy keeping their caucus together in the face of left leaning demands for European-style price setting. That leaves few interested parties for reversing President Trump’s midnight rulemaking.
Add the canons of lobbying to the list of things forgotten during the Trump presidency.
Call with questions after you get rid of the Kris Kristofferson earworm. Breakdown of the drug rules' specifics will be out by Tuesday morning.