[Updated 3/13/19, 12:20pm. See below.] With public and political winds blowing in the same direction, significant reform of the complicated U.S. drug-pricing system seems ever more likely. One part of the system that the Trump administration wants to overhaul are the secret rebates that drug makers, insurers, and middlemen negotiate behind closed doors.
Replacements for those rebates, however, could have unintended consequences, says a nonprofit watchdog group that in the past decade has been a key amplifier of the drug-price debate.
The watchdog, the Institute for Clinical and Economic Review (ICER) of Boston, typically weighs in on the value of a single drug, often—but not always—with a skeptical eye on the price set by the drug maker. ICER also evaluates entire classes of drugs.
But in a paper released yesterday, ICER and a UK research group called the Office of Health Economics take on a much broader topic: The potential pros and cons of three alternatives to the U.S. rebate system. Those alternatives are at the moment theoretical, although one of them—putting the rebate amount into consumers’ pockets—aligns with one of the Trump administration’s proposals for lowering high drug prices.
The paper’s authors write: “Rebates have become an extremely contentious topic, praised by many as the best tool available to provide competitive leverage for payers seeking lower net prices, but reviled by others who view it as the chief sin in a system that punishes sick patients.”
These rebates decrease the money a drug maker keeps when a prescription is filled. In use for more than two decades, their benefit to patients’ pocketbooks is questionable at best, say critics. Instead, rebates are often shared between insurers and their negotiators, known as pharmacy benefit managers, or PBMs.
The drug industry has also long insisted that rebates add layers of cost to drugs; the PBMs use some of the fees to pad their own bottom lines. Companies like Express Scripts (NYSE: [[ticker:ESRX]]), CVS Caremark (NYSE: [[ticker:CVS]]), and a few others are now some of the most powerful entities in the healthcare world. They have significant negotiating leverage with pharmaceutical companies, because they control the lists of drugs that are preferred for use by each of their clients, such as hospitals and medical groups. A drug can get onto one of these lists, or “formularies,” if its manufacturer bows to demands from a pharmacy benefit manager for a price break.
Critics of the drug industry say pharma companies try to foist responsibility for high prices onto the PBMs. At a recent Senate hearing on drug pricing, Senator Ron Wyden (D-OR) warned a group of pharma executives against “pointing fingers at the middlemen,” noting that 40 percent of drugs on the market don’t come with a rebate.
The executives ignored his warning and called for Congress to abolish rebates. The same Senate committee has scheduled a hearing to grill PBM executives on April 3. [Updated to include the hearing date.]
A 2017 study cited by the new ICER paper calculates that 41 percent of prescription drug spending goes to intermediaries, matching the amount that flows back to the drug maker. (The percentages tip higher to drug makers for branded drugs, and higher to intermediaries for generic drugs.)
A Trump administration proposal for the sprawling federal Medicare program would force all the cash negotiated as rebates to flow back to patients. Otherwise, negotiated rebates would be considered illegal kickbacks.
TRUMP UNCERTAINTY
The complexity of the debate is apparent in the proposal. As Washington University health policy professor Rachel Sachs noted last month, “One particularly striking feature of the proposed rule is the level of uncertainty that the administration has about its effects.” (Sachs is a member of one of ICER’s regional advisory councils.)
Sachs says the administration isn’t sure how much good its proposal would do, because it’s not sure what strategies insurers and PBMs would roll out in response.
Meanwhile, in the private insurance market, which the Trump proposal doesn’t address directly, signs of movement are afoot. Insurers and PBMs have begun offering point-of-sale rebates to patients. UnitedHealth Group (NYSE: [[ticker:UNH]]) took a step in that direction last year, and just yesterday it said that its new employer-sponsored plans will require those rebates starting next year.
According to the paper, the two largest PBMs have also said that rebates are no longer a significant part of their business model. “The U.S. thus appears poised for dramatic changes to a fundamental part of the drug pricing and coverage landscape,” the paper states.
The ICER paper plays out “what if” scenarios for three alternative proposals on rebates. People looking for easy answers will be disappointed.
“There is no perfect solution that eliminates all the challenges created by rebates while leaving payers with a similar level of negotiating leverage to help moderate costs,” the authors write. “It is even possible
