Episode 1 – New Pharma Tariffs Explained

Mike Stull (0:10)

Hi everyone, I’m Mike Stull, and with me.

Madison Connor (0:13)

Madison Connor.

Mike Stull (0:14)

And welcome to Health Care Headlines, a new series in our podcast episodes where we will tackle timely topics that are of interest to our clients and consultants. And today we’re going to talk a lot about pharmaceutical tariffs.

So a lot of action this week, Madison. I will say that it is Friday, October 3rd, when we are recording this. And so.

Madison Connor (0:42)

In the morning.

Mike Stull (0:43)

Yes, in the morning.

So, there are always changes as it relates to legislative and regulatory affairs. And so we want to make sure we give that disclaimer. So we’ll give you what we know as of this time.

But what is the latest on pharmaceutical tariffs and what can we expect in terms of them taking effect?

Madison Connor (1:04)

Yeah, so lots of announcements over the last week, I would say. So, you know, when we think from a historical perspective, where are we coming from? And really, a lot of this started back in April.

And there were announcements of these broad baseline tariffs from the Trump administration. And up until this point, pharmaceuticals were largely exempted from those tariffs. There were announcements along the way that there could be room for an industry-specific pharmaceutical tariff.

That’s under Section 232 of the Trade Expansion Act. But before that happens, the federal government has to complete an investigation into the national security implications of importing prescription drugs. So that investigation concluded.

We were expecting an announcement by August 1st, I think was the deadline that everyone was targeting. And August 1st passed, no announcement. But then last Thursday afternoon, the first ever pharmaceutical tariffs were announced.

It’s 100 percent tariff on branded pharmaceutical products. There were some exemptions as well. So, if drug manufacturers were in construction, building or breaking ground on facilities in the United States, they were exempt.

And also, generics were exempt. This only applied to brand products. I think another important point to bring up, too, is that all of the agreements that had all the countries that had standalone trade agreements with the United States, these tariffs would not apply to.

So if you think, for example, the European Union, there is a trade agreement between the United States and the European Union to cap those tariffs at 15 percent. So those would also be exempted from these branded product 100 percent tariffs. But then fast forward to earlier this week, the tariffs were supposed to go into effect on October 1st and they were delayed.

So for now, those tariffs will not be going into effect on October 1st. And there was not an announcement of when we could expect these to come back into play. But I suspect that they will.

Mike Stull (3:13)

And we know that 60 percent of the drugs that are imported come from the EU. So the fact that those are covered under that trade agreement cover a majority of the drugs imported. Also, a big announcement this week right in the Oval Office with the CEO of Pfizer, Trump Rx, a website that is run by the federal government where patients can purchase directly from manufacturers.

How, if at all, will that play into the tariff delay?

Madison Connor (3:47)

I think it really does play into the tariff delay. And one of the indications made by the Oval Office when the tariff delay was announced, which on the one hand probably is due to the fact that if you announce tariffs on September 25th, it’s going to be pretty hard to operationalize those by October 1st. But also, the administration said that perhaps there’s a chance that they don’t even need to move forward with these tariffs because they’re hoping that drug manufacturers will come to the table to negotiate with Trump Rx through the direct-to-consumer channels, as well as the other specific concessions made by Pfizer in this trade agreement.

So one is that the Medicaid market is going to have most favored nations pricing available from Pfizer. And Pfizer also agreed to sell specific drugs through Trump Rx at reduced prices, although there were no actual metrics mentioned as to how that’s going to work, as well as agreeing to lots of onshore expansion in the United States. And as a result, was able to negotiate a three-year reprieve from those tariffs.

So, I think that the hope is, and part of the announcement was, they’re going to continue to negotiate with drug manufacturers while holding out tariffs as an alternative if those negotiations don’t take place.

Mike Stull (5:19)

So we talked about Medicaid. We talked about direct-to-consumer. How about commercial plans?

Madison Connor (5:25)

For the commercial plans, it’s Trump Rx in its initial stage, the way that it has been rolled out, will probably have a limited impact to commercial plans just because this is a direct-to-consumer advertising platform where you’re paying that cash price outside of the insurance benefit. But certainly, if you have a drug that’s not covered by your plan and you’re able to get that through Trump Rx, it might be a great alternative, as well as mostly will be impactful to the uninsured population. And I did want to note, Trump Rx will not actually be purchasing and selling drugs.

Rather, it will be a comprehensive website of the manufacturers that have reached agreements with the administration, and it will then direct patients out to those manufacturer websites to actually purchase the drugs.

Mike Stull (6:18)

Yeah, it’ll be interesting to see if you go back and listen to PBM 101 webinars that we’ve done over the past, just how drugs go from manufacturer to patient and the prices that they have when they go into the wholesaler and then the retail pharmacy. So if you’re cutting a specific deal on price over here, direct with the patient, how does that get reflected into the price that the product has when it goes through the supply chain? So a lot of moving pieces and parts that we have to figure out here.

Last piece for today. So, we know that government is officially shut down. We’re on day three of the government shutdown.

Any additional delay or uncertainty from that and any other federal things you may be tracking?

Madison Connor (7:18)

You can’t ignore that being a huge piece of the puzzle here. Even when we were trying to decide what day do we record this episode, every day there was some piece of breaking news. We’re like, we’ll push it out.

We’ll push it out. And here we are on Friday morning. We can’t push it out any further.

But certainly the government shutdown plays into this as well. So you can’t necessarily enforce tariffs if there’s no one there to enforce them. Although we don’t know whether or not which parts of the government will be deemed essential.

But against the backdrop of this shutdown, there was a lot that we were expecting over the next month. So I believe by October 1st, we were supposed to have new rules for machine-readable files for prescription drugs. So that was a requirement under the transparency and coverage rule that initially went into effect in 2022.

So we’ve been waiting for a rewrite of those rules, those pesky files to hopefully make health care prices more transparent and a usable format for plans to understand costs. So we will continue to wait for those announcements, hopefully in the next few months. And then also, we’re waiting for additional regulations, proposed rules for 408b2 disclosures under ERISA.

So these have to do with the reasonability of fees paid to plan service providers. So those are your broker compensation and disclosure rules, as well as any plan service providers paid. And one of the executive orders released by the Trump administration in February had to do with cracking down on plan service provider fees in the context of your pharmacy benefits plan.

So certainly something that we expect. I believe the drafts of the rules were sent to the Office of Management and Budget over two weeks ago. So that is one of the final stops before they’re released to the public.

So, we will anxiously keep our eyes open for those and comment, if needed, on those proposed regulations whenever we see them.

Mike Stull (9:20)

Yeah, obviously a big thing in the pharmacy benefits space and all of health care in terms of reasonableness of fees being paid to third-party service providers. So we will certainly look forward to those rules.

Madison Connor (9:36)

And hopefully they’re written in a way that is not entirely cumbersome to employers. So hopefully it’s a rule that helps employers make sense of their plans and is not overly burdensome and doesn’t do it in a way that makes litigious parties continue to file lawsuits under the proliferation of ERISA litigation that we’ve seen lately. So hopefully it’s something helpful for employers and not cumbersome.

Mike Stull (10:04)

ERISA litigation, topic for another day. So, thanks, everyone, for joining us on this first episode in the Health Care Headlines series. And we hope you found this useful and timely.

Timely is the key word with these episodes. And we’ll see you here next time.