ViewPoints: Pharma dodges another Presidential bullet as PBMs take more heat

As expected, a budget proposal released from the White House this week takes aim at high drug prices, though with the blows falling closer to pharmacy benefit managers (PBMs) than to drug manufacturers. But with all plans subject to change, should pharma expect its current blue sky scenario to hold?

What happened

A budget proposal handed down from President Donald Trump on Monday outlined the administration's spending goals for health services programmes, including the FDA, NIH and Medicaid and Medicare. From the long list of outlays, potential changes to Medicaid and Medicare are among the most striking, further advancing the idea that Medicare Part D beneficiaries should receive a portion of drug rebates that would otherwise be retained by PBMs.

The budget isn't the first place to air the idea; the Center for Medicare and Medicaid Services (CMS) is already collecting comments on a proposed rule that would offer the pass-through of rebates, and a similar measure was proposed by the President's Council of Economic Advisors (CEA) last week.

Interestingly, the budget proposal also included a huge outlay for the FDA, which would get an extra $473 million next year- its largest ever funding increase.

Does it matter?

The budget proposal has some unquestionably good news for biopharma, which is once again seeing the administration focus on rebates rather than list prices as it pays lip service to high drug prices. In fact, Morgan Stanley analysts argue the biopharma's biggest win from the proposal is in the form of rebate pass-throughs and the resulting "improved pharma public relations among seniors and enhanced volumes due to greater access." (See ViewPoints: Presidential sabre-rattling loses lustre)

But just how bad is the news for PBMs? Morgan Stanley estimates that if enacted, the proposal would move 10 percent to 30 percent of rebate values from PBMs to patients- translating into headwinds of up to $430 million for CVS, or $60 million for Express Scripts. That said, a separate proposed change would allow Medicare formularies to cover only a single drug from a given treatment class, instead of  the current standard of two products- greatly increasing PBM negotiating power and resulting rebate values. Accordingly, share values for PBMs showed a minimal market reaction on Monday, suggesting that investors are taking the possible encroachment of Amazon into the drug distribution space much more seriously than any regulatory actions.

What's next

This budget proposal, like last year's, is subject to substantial change as it moves down the appropriations pipeline. In fact, last year's Presidential budget had included a measure to slash FDA funding and require drug manufacturers to make up the difference in the form of higher application fees – an idea that was summarily ignored in the final FDA budget.

Some of the proposed changes will be more difficult to implement than others; the shrinking of  Medicare formularies to cover only a single treatment class, for example, is likely to face protest from both biopharma and patients. Other proposals, like the pass-through of rebates to Medicare recipients, could require new legislation to get off the ground. But according to analysts at Morgan Stanley, a new rebate policy could enjoy a relatively easy path to execution via "an updated interpretation of the Part D statutory requirement."

But perhaps most pharma-friendly element of the budget proposal is in what it's missing; despite prior campaign promises, there is no mention of either drug importation or negotiation power for Medicare- all signs that at least for now, another drug pricing bullet has been definitively dodged.

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