Medication Management

Rumble Over Drug Rebates As Pharma, Payers Duke It Out

Pharma and Trump administration officials decry them as backroom deals. But payers and PBMs say rebates are an important negotiating tool with drugmakers. Take it away and drug expenditure will go up even faster.

Thomas Reinke
Contributing Editor

Rebates remain front and center in the ongoing ruckus over high drug prices. Critics claim they are a primary driver of high drug prices because drug companies raise prices in response to payers’ demands for rebates in exchange for preferred placement on their formularies. They also vilify rebates as secretive backroom deals that line the pockets of PBMs, health plans, pharmacies, and drug distributors at the expense of consumers.

Escalating controversy

PBMs and payers object. They say the rebates they get from drugmakers are largely passed on to health plans and patients and save consumers billions of dollars in the form of lower premiums and copays.

The controversy has escalated since the May release of the Trump blueprint for lowering drug prices and a June Senate committee hearing on that document. Stakeholders on all sides have responded with flurries of comments. Although there are shades of gray, the debate has become increasingly binary: Either keep rebates or get rid of them.

The get-rid camp has major players, including HHS Secretary Alex Azar, FDA Commissioner Scott Gottlieb, and the drug manufacturers. In June, Azar testified before the Senate Health Education Labor & Pensions committee.

“We may need to move toward a system without rebates, where PBMs and drug companies just negotiate fixed-price contracts,” testified Azar. “Such a system’s incentives, detached from these artificial list prices, would likely serve patients far better, as would a system where PBMs receive no compensation from the very pharma companies they’re supposed to be negotiating against.”

The previous month, Gottlieb pointed a finger at rebates during his keynote speech at the Food and Drug Law Institute Annual Conference. “One of the dynamics I’ve talked about before that’s driving higher and higher list prices, is the system of rebates between payers and manufacturers.”

“What if we took on this system directly,” Gottlieb continued, “by having the federal government re-examine the current safe harbor for drug rebates under the Anti-Kickback Statute? “Such a step could help restore some semblance of reality to the relationship between list and negotiated prices, and thereby boost affordability and competition.” A couple of months later, HHS drafted a rule that would, in fact, remove the safe harbor protection for rebates. It was sent to the Office of Management and Budget for comments. As we went to press it had not been released to the public.

In a conference call with investors in August, Pfizer CEO Ian Read predicted an end to rebates. Meanwhile, PhRMA, the drug manufacturers’ trade association, has called on PBMs and health plans to share rebates with consumers.

Too much pricing freedom?

AHIP, the insurer trade group, is taking a very public stand in defense of rebates. “For drugs with rebates, rebates are not the cause of high drug prices,” insists Greg Berger, the group’s executive director of Medicare policy.

To add some ammunition to its arguments, AHIP hired Milliman to prepare a report on rebates and Part D drug prices. “Among drugs with rebates, the report shows similar levels of drug price increase regardless of the level of rebate,” says Berger. “There didn’t appear to be a relationship between list price growth and the level of rebates over time.”

Greg Berger

The focus on rebates is not the central issue with high drug prices, says Greg Berger, AHIP’s executive director of Medicare policy. “Drug companies are free to increase prices as they choose.”

However, the report’s analysis is limited to price increases specifically for brand drugs with rebates. The study did not look at the possibility of price shifting where small price increases and higher rebates in brand drugs with stiff competition provoked manufacturers to implement higher price increases for their exclusive drugs, those without competitors or rebates.

Berger adds that the focus on rebates is not the central issue surrounding high prices. “Drug companies are free to increase prices as they choose,” he says. This pricing freedom, he says, is the fundamental cause of high drug prices.

AHIP’s written comments in response to the Trump blueprint echoes Berger’s comment: “High drug prices and price increases are driven entirely by drug manufacturers,” it said. The letter went on to discuss the price of new medications, particularly cancer drugs: “Launch prices for new treatments and specialty drugs can be staggering. According to the National Cancer Institute, most cancer drugs launched between 2009 and 2014 were priced at more than $100,000 per patient per year, with more recent drugs featuring prices that exceed $400,000.”

“Given this pricing power, rebates are one of only a few tools available to us as leverage to negotiate lower costs,” says Daniel Nam, AHIP’s executive director of federal programs. “If you take that tool away, it is going to lead to higher costs.”

Winners and losers

The elimination of rebates could potentially increase expenditures for brand drugs if payers do not find an alternative tool that reduces drug costs (for example, negotiating lower prices to begin with). A report by Altarum, a not-for-profit health care research and consulting organization, estimates that $89 billion in rebates were paid to payers in 2016. By Altarum’s reckoning, state Medicaid plans got the largest slice of that pie, $32 billion, followed by Medicare Part D plans ($31 billion), commercial health plans ($23 billion), and other payers ($3 billion).

One of the great unknowns is who will win and who will lose if rebates go away. In a recent blog post, consultant Adam Fein provided an analysis that says the two largest PBMs, CVS and Express Scripts, have taken steps to protect themselves if rebates went away. Fein wrote that CVS retains only 2% of commercial rebates ($300 million) for itself and it passes 98% ($14.7 billion) of rebates to plan sponsors. Express Scripts retains $400 million in rebates and passes 95% of all rebates and other concessions back to health plan clients and their customers. Fein interprets these disclosures as the PBMs saying they will be able to survive if rebates go away.

Eliminating rebates will have the greatest impact on patients. Medicare and commercial insurance rebates totaled $54 billion in 2016, according to the Altarum report. It is not known how much of that $54 billion directly benefits patients and how much goes to the insurers and CMS. Several credible studies have shown, though, that Part D rebates lower premiums.

Net value question mark

It was a bit grandiose, but in August HHS issued a report on the first 100 days of its efforts to rein in drug prices. The report covered progress in four areas: increased competition, better negotiation, incentives for lowering list prices, and lower out-of-pocket costs.

On the subject of rebates, the report said “Rebates calculated as a share of list price and paid by drug companies to payers are not necessary to drive a strong negotiating ecosystem. This system could be replaced with a model that benefits patients every time a negotiation happens. Imagine a world where manufacturers drop their list price to their current net value and PBMs leverage their negotiating skills in lowering those prices further with upfront fixed-price discounts, based on the same tools they use today. Patients would find themselves paying less every time one of these negotiations occurs.”

That’s a very rosy picture.

But there may be some pitfalls to eliminating rebates altogether, particularly that step where “manufacturers drop their list prices to their current net value.” The Altarum report highlights the fact that despite all the attention that rebates have gotten, drug manufacturers pay them on only about a third of drugs. The list price minus the rebate amount is a rough-and-ready way to calculate a drug’s “net value.” So how would the net value of the two thirds of brand drugs without rebates be calculated?

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