How Are Drug Rebates Still a Thing?

A series of policy defeats means that drug rebates will continue to obstruct pricing transparency and, quite possibly, to drive prescription drug price increases.

It was a bad week for transparency.

On Monday, a federal judge said that the Trump administration lacked the legal authority to require drugmakers to disclose their prices in TV ads.

On Thursday, Human Services Secretary Alex Azar (himself a former pharmaceutical executive) announced that the administration will not proceed with a proposal to curb industry rebates, the result of super-secret deals between drugmakers and PBMs.

Both proposals, aimed to tamp down sharply rising drug costs for consumers and the federal government, are effectively dead in the (shark-infested) waters.

INDUSTRY COMPLEXITY IS PART OF THE PROBLEM Scripta has long argued that PBM rebates represent of the most nefarious forms of market manipulation affecting the price we pay for necessary medications.

The rebates paid by the drug companies are essentially kickbacks—payment in return for a coveted place on the formulary that determines what drugs are covered under a given plan.

Of course, the PBMs and their representatives argue differently. In a recent Op-Ed published in the Wall Street Journal, Joseph Antos and James C. Capretta, both fellows at the American Enterprise Institute, argued that, “A rule designed to save patients money would end up having the opposite effect. rebates are price discounts, not kickbacks. They reduce prices based on sales volume: Drug companies charge less when more of their drugs are sold to patients.”

But since the deals are shrouded in mystery, who’s to say for sure? The fact remains that for years, drug makers, drug wholesalers, pharmacies, and pharmacy benefit managers (PBMs) have thrived in a complex system that conceals profiteering.

How complex is that system? Read our recent post on the subject of pricing complexity or check out this video explainer from the Wall Street Journal:

So to be clear: under the current system, PBMs negotiate confidential rebates and discounts on many branded prescription drugs. While PBMs claim to pass those rebates on to insurers and thereby to customers (more on that below), because the deals are secret, we don’t know for sure how much they pocket themselves.

What we DO know is that the result is formularies that favor the drugs that Big Pharma wants you to buy, which are not necessarily the most cost-effective drugs and not even necessarily the most effective drug for a given indication.

There’s a LOT of money at stake.

Americans spend $360 billion dollars a year on prescription drugs.

No wonder drugmakers argued that requiring them to disclose list prices in television ads amounted to coercion that would violate their free speech rights under the Constitution. And no doubt the beancounters in their back rooms were cheering the government’s decision not to proceed with a proposal that would force them to disclose the results of these deals.

PBM REBATES ARE NOT WORTH IT The American Association of Retired Persons (AARP) had said in an April letter that the administration’s rule could lead to higher drug prices. A separate report indicated that the proposal could cost the federal government about $200 billion over a decade.

This, of course, is the same logic that we see in talking to payors, including municipalities and self-insured businesses, who are afraid to risk the pass-through rebates that their PBMs dangle every year. Scripta has shown, however, that in many cases those rebates do not outweigh the potential savings achievable through negotiation and better plan and formulary design.

Give the pharmacy benefit experts at Scripta a call. We don’t mind swimming with sharks.

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Sourcing and additional reading:

• From our blog: “Supply Chain Complexity and Rx Pricing Games,” February 7, 2019

• “Trump Administration Drops Plan to Curb Drug Rebates,” Stephanie Armour, Wall Street Journal, July 11, 2019

• “Drug Rebates Aren’t ‘Kickbacks’,” Joseph Antos and James C. Capretta, Wall Street Journal Opinion, September 16, 2018

• “Judge strikes down Trump rule requiring drug prices in TV ads,” The Associated Press, via NBC News, July 9, 2019

• “Trump signs executive order to compel disclosure of health-care prices,” Amy Goldstein, The Washington Post, June 24, 2019