How new rebates affect drug prices
An increasingly popular culprit in the debate over high drug prices is the pharmaceutical rebate, the after-the-fact discounts that form the heart of the nation’s arcane — many would say broken — market for prescription drugs. Now, a growing chorus wants to get rid of them, or at least change the way they are applied after drug companies have already set their prices. Rebates, critics say, have pushed up the list price of brand-name drugs, which consumers are increasingly responsible for paying. Insurers generally get to keep the rebates without passing them along to their members. Recently, the drug industry’s largest trade group, the Pharmaceutical Research and Manufacturers of America, took aim at the rebate system, proposing a change to the way middlemen handle rebates, and how those companies are paid. Here’s what you need to know about rebates.
What is a rebate?
Pharmaceutical rebates are similar to the type customers get for buying, for example, a toaster — discounts that are redeemed after the transaction has taken place.
Except with the toaster, the consumer gets to keep the money. With drug rebates, it is the insurer or employers who usually reap the benefit.
Under the current system, drugmakers set a list price for their products, then negotiate with pharmacy benefit managers like Express Scripts or CVS over how much of a discount they will provide off that list price.
The size of the rebate depends on a range of factors, including how many drugs are used by the insurers’ members, and how generously the product will be covered on a formulary, or list of covered medicines.
Most of the rebate — and sometimes, all of it — goes to those who are paying the bill for the drugs, mainly insurers or large employers who cover their workers’ health care.
Insurers and employers get their rebates in lump sums that they say are often used to offset general health care costs and to hold down premiums.
What’s all the fuss about?
Although rebates have been used to negotiate drug prices for years, they did not catch much attention until 2011, when CVS Health, which operates one of the country’s largest pharmacy benefit managers, announced it was excluding 34 drugs from its national formulary.
The rebate then became a potent negotiating tool, pitting drug companies against one another in an effort to secure a place on the formulary. Other benefit managers, like Express Scripts, soon followed suit.
But that has led to an escalating game, where drug companies raise their list prices to maintain their profits and to offer bigger rebates.
Some say the system has created a series of perverse incentives, where the middlemen have an interest in keeping the list price high. In addition to pharmacy benefit managers, wholesalers and pharmacies are also paid based on a percentage of the list price.
Drugmakers — on the defensive after weathering attacks by President Don- ald Trump, other elected officials and the public — have pointed fingers at the pharmacy benefit managers, saying they are under pressure to raise list prices to keep all of these players happy.
But pharmacy benefit managers and insurers disagree, arguing that rebates are a diversion and that negotiating tactics have kept total drug costs in check.
How are consumers affected?
Even as insurers’ drug spending has grown slowly, critics say the rebate game has served to inflate the list price of drugs, which consumers are increasingly responsible for paying. This is especially true for expensive specialty drugs, which treat serious conditions like cancer and multiple sclerosis — and whose prices have been skyrocketing.
As the cost of these products has gone up, insurers have raised deductibles and out-of-pocket contributions so that many of the sickest Americans must now pay thousands of dollars a year to cover their drug costs. These out-of-pocket costs are calculated using something close to the list price of a product, not the net price.
What’s being proposed?
Alex M. Azar II, the secretary of health and human services, has singled out rebates as a primary way that patients’ costs could fall.
“Right now, everybody in the system makes their money off a percentage of list prices,” Azar testified in June before a Senate committee. “We may need to move toward a system without rebates.”
Last week, the Trump administration signaled that it might try to end the “safe harbor” exemption that protects rebates from falling under anti-kickback laws. That would affect government programs like Medicare’s Part D drug plans, but it would not affect private plans — like
those offered by employers. Changes to large programs like Medicare often have a rippling effect across the industry.
How likely are rebates to disappear?
It’s unclear. The drug industry, though it has not called for an end to rebates, has targeted them and blamed the pharmacy benefit managers for the current
situation. The industry is one of the most powerful lobbying forces in Washington, and with the support of Azar — until recently a top executive with Eli Lilly — it is not to be underestimated.
But doing away with the rebate would create disruption that may be fought by a host of players.
“Things that seem simple, like let’s cut the list price, are not actually simple,” said Adam J. Fein, of the Drug Channels Institute.
Under the current rebate system, he said, “unless everybody does it at the same time, you can’t reset the system. That’s the challenge of this.”