Rhetoric Versus Reality on Prescription Drug Plans

Ever since the presidential campaign, President Trump’s rhetoric on drug prices and companies sparked fears of sweeping change potentially creating winners and losers in the Health Care sector, particularly the Pharmaceuticals industry. Trump has repeatedly said drug companies are “getting away with murder” and promised to bring prescription costs way down—perhaps by allowing Medicare to start negotiating drug prices with pharmaceutical companies or loosening rules on importing cheaper drugs. But after all the talk, hype and rumors, a May 11 Rose Garden announcement gave investors a lot more clarity on what the administration has in mind. Turns out, it isn’t much, and gridlock likely blocks most of it. This shows how campaign rhetoric is often far removed from actual policy—a typically bullish force. Big campaign promises spur fears of sweeping change, which a more moderate reality assuages.

If you haven’t gotten around to perusing the Department of Health and Human Services’(HHS) 44-page policy blueprint,^[i] allow me to summarize its most important planks. The first addresses the issue of rebates, which Pharmacy Benefit Managers (PBMs) typically secure when negotiating drug prices with pharmaceutical companies on behalf of the health plans and patients they represent. Instead of reducing the drug’s list price, drug makers offer rebates to PBMs in order to get their products on PBMs’ “formulary lists,” which allow the relevant health plans to cover them. Terms differ among health plans, but industry groups estimate PBMs pass back approximately 90% of total rebate dollars to health plans and employers. Yet patients don’t always benefit directly, as surveys show health plans most often use the rebates to reduce their own costs. One study by the Drug Channels Institute found that just 15% of rebates end up offsetting patient premiums and out-of-pocket costs. As a result, PBMs take a lot of heat as “middlemen” driving consumer costs higher.

To address this, the plan would require PBMs to pass along at least one third of these rebates to Medicare Part D patients at the pharmacy counter. (Medicare Part D covers prescription drugs.) Some feared the plan would force PBMs to pass through all rebate dollars, so this is a relief for pharmacies as well as health insurers. Moreover, HHS can’t implement this without Congressional action—likely a major hurdle.

Second, the administration’s plan would cap price increases on drugs covered under Medicare Part B—those administered by a physician in a hospital or clinic—to the rate of inflation. Whether this refers to economy-wide or health care inflation specifically is unclear, but should Congress approve, the impact would likely be quite minor either way. Medicare Part B prescription drug price inflation averaged 3.2% annually from 2012 – 2015 (the latest years for which data is available).^[ii] Since prescription drug spending under Medicare Part B accounted for just $24.6 billion in 2015^[iii] (or 8% of total prescription drug spending), capping price increases to 2% annually would reduce future Medicare Part B spending by about $330 million per year from current projections. This pales in comparison to the $309 billion in total US drug spending in 2015.^[iv]

President Trump also said he will instruct the US Trade Representative^[v] to pressure other countries to relax their drug price controls. Theoretically, US pharmaceutical companies would then earn more profits abroad, allowing them to charge lower prices in the US. This is also a climb down from previous, more aggressive White House proposals. These involved tying Medicare reimbursements to drug makers to the (capped) prices other governments pay—thus lowering them significantly, likely cutting into pharma firms’ revenues—or imposing tariffs on other countries to force them to relax drug price controls.

Setting trade discussion priorities doesn’t require an act of Congress, but it is difficult to imagine any concrete actions coming from this. Asking for something in trade negotiations and getting it are very different things, and other governments have plenty of their own incentives to preserve the status quo. Potentially inviting voter ire by appearing to cave to US demands and hike drug prices probably strikes few pols abroad as a wise strategy.

Rounding out the major provisions, the plan asks the FDA to consider requiring drug makers to disclose drugs’ (pre-rebate) list prices in their advertisements. This doesn’t require congressional action either, but “consider” doesn’t mean “implement,” much less lay out how. Besides, this seems pretty innocuous either way, as it is mostly about spurring transparency and competition.

Conspicuously absent in all this are those sweeping campaign promises—drug importation and Medicare negotiation reforms. The Administration’s plans are mostly technical tweaks and proposals already outlined in its February budget request for the next fiscal year, which Congress is currently ignoring like most other presidential budgets. The more substantive aspects amount to requests for Congress to do something. But prescription drug policy is contentious and gridlock reigns—especially in an election year—so broad agreement on major changes appears unlikely.

This is how so many election-season pledges play out. They start as grand policy proposals—often spooking investors—but eventually get watered down or scrapped altogether. Politicians looking to the next election tend to avoid radical policies that might hurt them at the polls. Deep inter- and intraparty divisions also block consensus. These forces are typically bullish, since stocks generally don’t enjoy massive policy overhauls creating winners and losers. The losers’ distress usually outweighs the winners’ delight, knocking sentiment. Also, once bold promises go in the dustbin, investors can stop imagining worst-case scenarios and start subconsciously appreciating gridlock’s benefits. Such gridlock—in the US and elsewhere—is one pillar supporting this bull market.