The Rebate Rule: US Pricing Proposal Becomes Congressional Piggy Bank

A policy eliminating rebates in the Medicare Part D program will be delayed until Jan. 1, 2026 – and is very likely to be repealed altogether. If that staves off more draconian reforms, the biopharma industry will celebrate.

When the bipartisan infrastructure bill becomes law later this year, the US pharmaceutical industry will have contributed over $50 billion in “savings” to fund the new investments – but most companies won’t in fact feel the loss of a single penny.

Welcome to the world of Congressional Budget Office “scoring,” the official process by which Congress keeps track of how much new laws will cost or save the Treasury.

In this case, CBO says that the federal government will end up saving over $50 billion from a provision in the infrastructure bill that delays the implementation of a 2020 rule banning rebates in the Medicare Part D program by three years. (Also see "Senate Infrastructure Legislation ‘Pay Fors’ Not So Bad For Pharma But Real Threat is Ahead" - Pink Sheet, 2 Aug, 2021.)

The rebate rule was hastily finalized at the end of the Trump Administration with a Jan. 1, 2022 effective date. That has already been pushed back a year by the Biden Administration in the context of litigation challenging the process and substance of the rule. (Also see "Medicare Part D Rebate Rule Delayed Until 2023 As PBMs Notch Legal Win" - Pink Sheet, 31 Jan, 2021.)

The pharmaceutical industry, by and large, supports the rule, seeing it as addressing the fundamental issues tied to the disconnect between “list” and “net” prices that help color the drug pricing debate. If rebates are eliminated, Medicare beneficiaries will pay lower prices at the pharmacy counter most of the time when they are filling prescriptions.

Of course, they will also most likely pay higher premiums for the Part D insurance in the first place – and, at least according to CBO, the actual net prices paid to manufacturers will also be higher. Thus, the budget analysts “score” the policy as costing the Treasury significant amounts: approximately $170 billion over 10 years (with the rule not even taken effect until the third of those 10 years).

CBO explained its rationale for estimating that eliminating rebates would increase federal spending in 2019. At the time, the proposed rule encompassed Medicaid Managed Care as well as Part D; the final rule focuses only on Part D, which is also where CMS saw the vast majority of the cost impact. (Also see "One More Score: CBO Projects HHS Rebate Proposal Would Boost Part D Spending $170bn" - Pink Sheet, 2 May, 2019.)

A three-year delay is, then, bad news for the industry – at least on paper. The reality is that there is essentially no way the Biden Administration will allow the rebate rule to take effect, and so a three-year delay at least keeps it on the books – as opposed to a formal withdrawal of the regulation as might otherwise happen.

As a practical matter, the only way the rule could possibly take effect at this point is if a Republican Administration takes over after the next Presidential Election in 2024. With a new President sworn in Jan. 20, 2025, there would be no feasible way to implement the rebate ban before Jan. 1, 2026. Thus a three-year legislative delay has no real consequence, and may increase the possibility that the rule will formally stay on the books through Biden’s first term.

On the other hand, passing a three-year delay now captures about $50 billion in “savings” that would otherwise count towards a full legislative repeal – and therefore reduces the amount that the industry can painlessly contribute to the next major legislative push, the much larger and ambitious $3.5 trillion Reconciliation plan that is moving in parallel with the bipartisan infrastructure bill. (Also see "Will Pharma End Up Paying For The Infrastructure Bill?" - Pink Sheet, 25 Mar, 2021.)

The prospects of the Reconciliation process are far less certain: Democrats cannot lose a single vote in the Senate, and just three in the House. But if it moves forward the pharmaceutical industry will be expected to contribute “hundreds of billions” of dollars to help offset the $3.5 trillion in spending. Assuming the three-year delay is already enacted, that means that repealing the rule altogether will likely come in around $120 billion in savings rather than $170 billion.

Now, if the Reconciliation plan ends up being a vehicle for a drug price “negotiation” plan modeled on the House’s HR 3 international reference pricing bill, the missing $50 billion from repealing the rebate rule will look like small change: HR 3 scores as saving on the order of $500 billion.

But if the pharmaceutical industry and/or moderate Democrats can steer the drug price provisions into less draconian directions, that $50 billion sure would come in handy to make the final contribution look as big as possible. But the remaining $120 billion is at least a good, painless start.

The Congressional budget math is not the reason the pharmaceutical industry backed the rebate rule. But if it ends up sparing more painful cuts in a difficult legislative climate, the rebate rule could still end up paying off big time for brand name companies.