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US drug rebate reforms may dent PBMs' near-term profitability, says Fitch report

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US drug rebate reforms may dent PBMs' near-term profitability, says Fitch report

President Donald Trump's reforms on drug manufacturer rebates to lower prices of prescription medicines could impact profitability of pharmacy benefit managers and distributors in the near term, according to a Fitch Ratings report.

Depending on terms of contracts the pharmacy benefit managers and distributors have with drugmakers, profit margins could be indirectly dented as the Trump administration takes steps to tighten scrutiny over price increases, the rating agency said.

PBMs, often called middlemen, negotiate with biopharmaceutical companies for rebates that insurance plans use to lower premiums.

In May, Trump vowed to reign in prices through his American Patients First strategy that seeks to "eliminate" the middlemen. "We're very much eliminating the middlemen," Trump said May 11 while unveiling the plan. "They're rich. They won't be so rich anymore."

As part of the plans, the rebates could be made available to consumers at point-of-sale and its usage restricted. This is expected to disrupt the business models of these middlemen in the near term, the Fitch report said.

The Trump administration has already submitted a request in the fiscal 2019 budget to make PBMs and Medicare Part D drug plans share a portion of their rebates with patients at the pharmacy counter.

At the crux of the problem is the opacity surrounding the way rebates are negotiated and portions retained by the various players in the supply chain, Fitch said.

"We believe such ambiguity highlights the need for better disclosure by industry participants on the amount and accounting methodology for rebates. Increased clarity on the relationship between list and negotiated prices could help to highlight the true margins retained within the healthcare supply chain and explain whether efforts to consolidate negotiating power is driving the increase in vertical M&A within the industry," the ratings report said.

While PBMs and distributors could try to "resolve these issues" through new contracts and deals, it might be "insufficient" to sustain present profit margins, the report added.