Biotech and Pharma

Trump's health chief intensifies attack on drug middlemen, suggests getting rid of rebates

Key Points
  • Health and Human Services Secretary Alex Azar spoke at a hearing Tuesday with the Senate Committee on Health, Education, Labor and Pensions.
  • Azar outlined the Trump administration's plan to lower the cost of prescription drugs, including possibly moving away from a system of rebates.
  • President Donald Trump has attacked drug middlemen.
Alex Azar, secretary of Health and Human Services
Eric Thayer | Bloomberg | Getty Images

Health and Human Services Secretary Alex Azar intensified the Trump administration's attack on drug middlemen Tuesday, even suggesting the elimination of discounts that critics say inflate pharmaceutical prices.

President Donald Trump unveiled his administration's blueprint to lower drug prices last month. It includes rethinking rebates, or discounts that firms called pharmacy benefit managers negotiate with manufacturers. Azar expanded on the idea in a hearing with the Senate Committee on Health, Education, Labor and Pensions.

Pharmaceutical companies set the advertised price, known as the list price. Pharmacy benefit managers, or PBMs, negotiate discounts, or rebates, down from this. Critics argue the practice inflates drug prices because it encourages manufacturers to set higher prices.

They're a favorite target of the pharmaceutical industry, which says it's a way for middlemen to profit from high drug prices. Azar, a former executive at drugmaker Eli Lilly, suggested possibly scrapping them in favor of a more straightforward pricing system.

"We may need to move toward a system without rebates, where PBMs and drug companies just negotiate fixed-price contracts," he said. "Such a system's incentives, detached from these artificial list prices, would likely serve patients far better, as would a system where PBMs receive no compensation from the very pharma companies they're supposed to be negotiating against," Azar said.

Removing rebates within the Medicare Part D prescription drug program "is something that is and should be on the table," he said. The administration believes it has the regulatory authority to modify the statute that allows rebates.

They're currently exempt under the anti-kickback statute. Food and Drug Administration Commissioner Scott Gottlieb last month suggested the federal government should re-examine this.

Azar's comments on Tuesday about moving toward a system where drug companies negotiate fixed-price contracts echo those that Gottlieb made in 2016 while he was a resident fellow at the American Enterprise Institute.

"The key is can we detach the incentives of everybody in the system from these artificial list prices," Azar said Tuesday. "Rebates are a cut, a percent, of that artificial list price and they basically foment this game we have of list price goes up, rebate goes up, where everybody's winning except the patient, who ends up paying out of pocket."

Health insurers, including Aetna and UnitedHealth Group, have recently started passing along rebates to some consumers amid growing demand for transparency. CVS Health, which operates a PBM, Caremark, says it shares 100 percent of rebates directly with patients.

Replacing the current rebate system with one using "fixed-price contracts," as Azar calls them, could have enormous implications. Of course, that's assuming the Trump administration could implement such a change.

"Eliminating rebates would be a 'black swan event' for drug channel companies," Adam Fein, CEO of Pembroke Consulting's Drug Channels Institute, told CNBC in an email. "Everyone in the drug channel system would need to restructure and renegotiate their agreements. Revenues at wholesalers, pharmacies and PBMs would collapse. Their profits would become more visible and likely lower."

Pharmaceutical Care Management Association, the PBM industry's lobbying group, reiterated its stance that drugmakers are the ones to blame for high drug prices because they're the ones who set them in the first place.

"The easiest way to lower costs would be for drug companies to lower their prices," the group said in a statement. "Manufacturers have chosen to negotiate price concessions with PBMs using rebates, which are calculated and paid months after a drug has been dispensed. Simply getting rid of rebates and other price concessions would leave patients and payers, including Medicaid and Medicare, at the mercy of drug manufacturer pricing strategies."

Trump attacked middlemen last month in a Rose Garden speech unveiling his administration's plan to lower drug prices last month. He said "they're rich" and "they won't be so rich anymore."

Despite the tough talk, critics have said the plan might not do much to lower prices right away. However, it's still early days, and the real risk could come later.

"Bottom line: This administration seems committed to long-term disruption," Fein said.