A Short Eulogy For The Rebate Rule

The rebate rule is dead, but we should pay tribute to the failed endeavor.

“It is right and seemly that now, when we are lamenting the dead, a tribute should be paid to their memory,” Pericles opened his famous funeral oration. 

While we can come nowhere close to Pericles in eloquence, it would only be “right and seemly” to pay a tribute to the Trump Administration’s now-withdrawn rule that would have eliminated rebates as we know them. (Also see "Pharma's Big Defeat: US Rebate Proposal Hits The End Of The Road" - Pink Sheet, 11 Jul, 2019.)

Well-Written And Honest

The proposed rule was a masterclass in writing. It was not Tolstoy, to be clear, but the clarity and organization of the rule was almost peerless. It began with a discussion of how PBMs are paid from all the players in the system, then moved seamlessly to Part D spending trends, manufacturer fees to PBMs, the existing safe harbor as we know it, the actual proposed elimination of the safe harbor, the new safe harbor for discounts, and then multiple independent analyses (including the CMS actuarial analysis) on the impact of the rule over time. If you wanted a deep look at how the US pharmaceutical industry actually works, it was all right there in the rule.

In addition, the rule was remarkably and refreshingly honest. There were over 50 areas in the rule requesting comments from stakeholders with HHS acknowledging it did not know how a given change would impact the supply system and Part D.

Part D Destabilization Was Under-Appreciated

In many ways, the death of the rebate rule is a victim of Part D's success. Pharma has often pointed to the program's competitive design as the preferred approach when reform of other programs has been debated, and industry has been quite effective at blocking reforms to Part D itself, like loosening the protected classes or implementing rebates for drugs used by dual-eligibles. (Also see "A Complete Retreat: “Protected Classes” Stay Protected In US Medicare" - Pink Sheet, 21 May, 2019.)

Now that pharma was one who wanted to reform Part D, however, industry failed to overcome the same argument that it itself has effectively wielded in the past – namely that policy makers shouldn't tinker with the popular, consistently under-budget program.

The rule always held an inherent risk of destabilizing Part D if it had been implemented under the proposed timelines – even with a one-year delay that was built into it to get all systems readied. HHS acknowledged that it was almost impossible to model due to the impact on so many different participants in the Part D and the supply chain.  

“The Department recognizes that modifications to the discount safe harbor will affect beneficiary and government spending on Part D plan premiums and cost sharing. However, it is difficult to predict manufacturer and Part D plan behavior in response to this regulation,” the rule stated. That was just one area in the rule where HHS expressed not knowing the long-term impact.

That is a scary thought if you are a drug company. One might go so far as to say drug manufacturers dodged a potential bullet. Azar himself admitted in a 11 July session with reporters that President Trump and his advisors were worried about risk to premiums for beneficiaries – especially with the election around the corner and Florida a major swing state. Thus, the rule was withdrawn.

Count us among those who do not believe the price tag (approaching $200 bil. over 10 years) was the real issue (see tax reform).

Shifted Discourse To The Middlemen

For all the talk that drug manufacturers lost or were defeated by the rule being withdrawn, that really is not true. Sure, the stock market reacted to the news by sending insurer/PBM stocks surging -- an indication that they won and biopharma lost. That is because the metaphorical lives of the PBMs were spared.

In reality, the rule was the embodiment of an overwhelmingly successful campaign by the biopharma industry to focus policy attention on the whole supply chain and in particular, the PBM middlemen. Will drug manufacturers lament the loss of roughly a 15% increase in net drug prices (CMS’ actuarial analysis) for the duration? Of course. But withdrawing the rule was like waking up from a dream for drug manufacturers. The world is the same as it was. While the international price index (IPI) now increases in importance as a drug pricing policy priority for the administration, the focus on PBMs is likely to be pseudo-permanent.

(A quick aside on the IPI: if it is published, it will be in a much earlier phase – as a proposed rule, rather than a final rule. Can it stand the test of time? Does the administration really want to set a reference pricing precedent on a collection of foreign countries? We shall see.)

Azar Last Man Standing

The decision to withdraw the regulation was reportedly made earlier in the week of 8 July during an Oval Office meeting. Trump, Acting White House Chief of Staff Mick Mulvaney, assistant to the President Joe Grogan, and Azar were among the small group in the meeting. Azar was the only person to defend the rebate rule, so the story goes, and Trump made the decision to pull the regulation himself.

Azar deserves “tribute” for trying to overhaul the rebate paradigm that has established itself over roughly three decades. In that vein, Azar had taken it almost as his personal cause on drug pricing.

However, when added on top of being reportedly overruled on drug importation (i.e. make it happen), it is difficult to see where the secretary goes from here.

“They passed away from the scene, not of their fear, but of their glory,” Pericles said. The rebate rule has passed away from the scene, but will not soon be forgotten.