The Trump Administration has proposed a major change in the way drugs are priced for Medicare beneficiaries. The new rules would upend the current complex and opaque pricing system for pharmaceuticals, lower prices for users of some costly drugs (though not others), and raise Medicare Part D premiums for everyone.

Whether you win or lose under the new system would depend on how much you spend on medications each year and what drugs you use. Some Medicare recipients would pay much less for prescription drugs—in some cases thousands or even tens of thousands of dollars less. Others would pay higher insurance premiums but see no little or no reduction in their out-of-pocket costs.

The rule, proposed by the Department of Health & Human Services (HHS), is one of a slew of proposals aimed at reducing drug costs. This one would change the bizarre way drugs are priced today. Currently, manufacturers set artificially high list prices. They then negotiate rebates with middlemen, called pharmacy benefit managers (PBMs), that effectively reduce the market price.

Why should you care?

Why should you care? The reason is that your cost-sharing under Part D usually is based on the higher list price, not the lower net price. That means you are paying more for a prescription at the drug store.

For example, The Kaiser Family Foundation calculates that in 2018, a typical Part D enrollee paid 40% coinsurance for non-preferred drugs, and that 4 in 10 were in plans that charged 33 percent coinsurance for a high-cost specialty medication.

Imagine you need a drug that carries a list price of $1,000 for a monthly supply, before the rebate. An average rebate ranges from 25 percent to 30 percent. So the post-rebate price is, say $700. But your coinsurance would still be $333 or one-third of the $1,000 list, instead of $231 or one-third of $700. You’d save $100 each month.


Even worse, the current system encourages drug makers to jack up their list prices even higher so they can offer the PBMs ever-bigger rebates in exchange for having their products included in the PBM’s list of favored drugs. This not only raises prices, but it makes it harder for consumers to buy lower-cost generic drugs that are excluded from the formulary. The pay-to-play drug companies get more sales, the PBMs earn bigger profits, and consumers pay more.

HHS says the proposed rule would replace these rebates with point-of-sale discounts for consumers. But what would it mean at the drugstore counter?

For most consumers, not much. HHS estimates its proposal would reduce average monthly drug costs by just a few dollars. But, if you have a chronic condition that requires ongoing expensive medications, you could save a lot more.

There is even a catch to that, however. Drugmakers do not pay rebates for many expensive drugs that have no competitors. Thus, buyers of those products would not   benefit from the new rule.

While about one-third of Medicare recipients would save at least something at the drug counter, most everyone would pay higher Part D premiums. HHS estimates the increase would range from $3.20 to $5.64 per month. With the average Part D monthly premium now about $33, that’s a hike of up to 17 percent.

 The doughnut hole

Then there is the matter of the dreaded Part D coverage gap, or doughnut hole. For 2019, beneficiaries must pay more of their prescription costs once their spending hits $3,833.75 until it reaches $7,653.75. After that, the government picks up nearly all of their costs. The new rules would keep many beneficiaries out of the coverage gap entirely. On the other hand, lower copays also would keep more enrollees from spending through the gap and benefiting from nearly complete catastrophic coverage.

Even the Trump Administration is uncertain about how drug makers, PBMs, and insurance companies will respond to these massive pricing changes. Indeed, the Administration estimates that the proposal could reduce in federal spending by about $100 billion over 10 years–or increase spending by as much as $140 billion.

Finally, remember this change would apply only to Medicare, not people who have insurance through their employers or through the health exchanges. However, if the rule is adopted, there is a good chance private insurers will follow.

But that’s a big if. Not surprisingly, these changes have already drawn opposition from the PBMs. But some Democrats and many consumer groups also object to Trump’s drug rebate plan, both because it would result in premium increases and because they prefer that Medicare negotiate prices directly with drug makers. The Trump Administration has identified a problem. But it remains to be seen if it has found the cure.