President Trump calls the tax reform bill his “Christmas gift” to the American people. But another, less-noticed policy change could also put some serious cash back into people’s pockets by channeling billions in drug rebates to consumers.
The Centers for Medicare and Medicaid Services (CMS) said in a Nov. 16 memo that it was looking at the rebates issue in its proposed rules for the Medicare Part D program for 2019. According to the agency, drug companies increased the amount of price rebates by 20% a year between 2010 and 2015, but consumers saw little of the savings.
Twenty percent a year compounded over five years is 248%, savings that are likely to make a big difference to families struggling to pay the bills. Although the prices for the underlying drugs have been discounted, the savings were typically siphoned away by the industry’s middle-men, the agency said.
In the Nov. 16 proposal, the agency raised the issue as part of a “request for information,” allowing industry players and the public to provide feedback to the agency regarding potential changes to the current rules.
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One idea raised by CMS is to require that some portion of the price discounts be passed on directly in the price paid by consumers. In addition to saving consumers money, this would also help increase transparency in drug pricing, an issue that many experts attribute to increasing drug costs over recent decades. Because costs are often hidden in the drug market, economic incentives are distorted compared to other markets.
Any way you look at it, the issue is highly significant for Medicare and Medicaid enrollees. CMS estimated that directing some of the rebates to consumers could lower costs by $10.4 billion.
With that amount of money at stake, you can expect the current beneficiaries of the old rules to mount a vigorous lobbying campaign to protect their profits.
However, the CMS notice should provide optimism consumers who stand to benefit from the changes. The agency’s account of the situation was clearly premised on the idea that this money — the billions in savings from government-mandated drug rebates — is intended to benefit the millions of individuals buying drugs, not a handful of politically-connected companies.
Changes like passing rebates on to consumers that increase transparency in drug pricing are a key reason behind the successes of the Part D program, experts say.
Part D consistently receives extremely high marks from seniors enrolled in its plans, yet came in 40% under budget in its first decade of existence. Furthermore, premiums on Part D plans are actually going down, unlike the skyrocketing prices on the Obamacare markets.
The core mechanism by which markets increase productivity and thus increase wealth is through companies vying against each other for market share. But that’s difficult with all the obfuscation, conflicts of interest, and blurred lines that mark the drug market’s middle-men industry.
Perhaps it’s not the biggest policy change this holiday season, but putting $10.4 billion into the pockets of consumers is nothing to sneeze at. The move by CMS to begin work on this issue is promising, and could be a major positive change if the agency follows through.