President Issues Executive Order on Drug Pricing

August 4, 2020

On July 24, 2020, President Trump issued Executive Order 13939, which seeks to lower drug prices by eliminating or discouraging rebates paid to pharmacy benefit managers (PBMs) and other middlemen involved in purchasing drugs on behalf of Medicare Part D insurance plans. According to the order, PBMs negotiate prices with drug manufacturers at amounts lower than the list prices that a Medicare patient would pay for drugs. The difference between the amount paid by the patient and the amount the PBM negotiated is kept by the PBM as a rebate.

Federal kickback statutes have a safe harbor that protects these rebates, and the order seeks to eliminate or narrow this safe harbor in an effort to discourage or prevent PBMs from contributing to higher drug prices paid by Medicare patients. Accordingly, the order instructs the Secretary of Health and Human Services to begin the rulemaking process to both deny safe harbor protection for these rebates and to create new safe harbor protections for patient discounts while allowing for bona fide PBM service fees. However, the secretary must first determine that these new rules would not add to the federal debt, increase Medicare premiums or patient out-of-pocket costs.

Although the order specifically targets Medicare Part D drug plans, the elimination or narrowing of the federal kickback safe harbor could affect employer plan sponsors. We will continue to follow and report on any potential developments concerning these requirements.

Executive Order 13939 »