Home Opinion-Premium The illusion and cost of drug rebates

The illusion and cost of drug rebates

By: Peter J. Pitts, a former FDA associate commissioner, is president of the Center for Medicine in the Public Interest.

President Trump and every declared candidate for the Presidency want to lower drug costs. And, surprise, it’s the President who has made a bold move towards a workable free market solution. 

His new proposal cracks down on the price-gouging practices of middlemen in the drug supply chain — Prescription Benefit Managers, the mega-corporations that insurers employ to administer their drug benefits.

The Administration’s new proposal impacts Medicare Part D, the federal prescription drug benefit for seniors and those living with disabilities. Beneficiaries can expect more money in their pockets as a result of the proposed rule. Kudos to the President and HHS Secretary Azar for putting patients first. 

The Trump plan imposes new restrictions on how PBMs share rebates and discounts in the Part D program. Currently, insurers hire PBMs to negotiate with drug manufacturers. PBMs are able to secure big discounts — usually through rebates — by promising to include specific medicines on preferred insurer formularies.

These rebates aren’t pocket change. By one estimate, the average rebate knocks off nearly 40 percent of a brand name drug’s list price. That’s billions of dollars annually.

In theory, these savings should flow down to insurers and beneficiaries and result in lower out-of-pocket pharmacy costs. But that isn’t how it’s working. 

The current system encourages PBMs to favor medicines that carry higher rebates rather than lower list-priced drugs. As a result, patients do not directly benefit from significant price negotiations in the market today. 

A recently leaked contract with the nation’ largest PBM, Express Scripts, offers some insight into how PBMs operate.

For starters, PBMs exploit the definition of “rebate” to their financial favor. Rather than categorizing all discounts as rebates, PBMs deduct “administrative” and “service” fees from the discounts they receive. They also slap drug manufacturers with “inflation payments” to account for annual price increases. These tactics hide the true value of manufacturer discounts.  

PBMs have been wildly successful with these tactics. The nation’s three largest PBMs — who together control three-quarters of the market — earned a handsome $10 billion in profits in 2015. 

President Trump is right to target America’s greedy intermediaries. 

Should his plan take effect, PBMs will no longer receive rebates for prescription drugs in the Part D program. Most importantly, the pharmaceutical industry would be encouraged and empowered to pass rebate dollars to patients instead. 

Patients will save big. By one estimate, if just one-third of the total discounts PBMs negotiate for Part D was passed on to patients at the pharmacy counter, Medicare beneficiaries would have an extra $20 billion in their bank accounts over the next ten years.