The State of Drug Rebates

Although the use of drug rebates has been under discussion for some time, in May, “

,” opened the door for renewed debate.

"Today's rebate system is set up in the shadows to serve entrenched interests-drug companies who set these prices so high and the pharmacy benefit managers who receive billions of dollars in rebates without patients ever knowing where the money goes," said HHS Secretary Alex Azar in early February of this year.

The Blueprint points a finger at PBMs and insurers who drive up drug prices by demanding high rebates in exchange for increased utilization. Among its proposals are requiring Part D plans to apply rebates at the point-of-sale (POS) and a rule to withdraw the “safe harbor” protection under anti-kickback laws, eliminating rebates in Medicare that have permitted manufacturers to negotiate with payers for formulary placement.

The Blueprint also says that when prices are higher, PBMs, wholesalers, and plans receive higher rebates with little incentive to lower drug costs.

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At question, among other issues, are whether PBMs are double dipping by receiving payments from both insurers and drug manufacturers; whether rebates lower drug costs for consumers; and if rebates serve any other purpose than negotiating a position on a formulary by drug companies.

“Manufacturers have chosen to negotiate price concessions with PBMs using rebates, which are paid months after a drug has been dispensed and are used by payers to reduce premiums and out-of-pocket costs for patients,” according to the Pharmaceutical Care Management Association (PCMA). “At this time, rebates are the only usable price concession available.

“As long as manufacturers are reticent to offer up-front discounts, fearing they will violate antitrust law, limiting or eliminating plans’ ability to negotiate price concessions after a drug is dispensed would only come at the expense of patients, who would face higher drug costs,” the organization says.

Joe Paduda, president, CompPharma, LLC, a consumer and payer research organization in Maggie Valley, North Carolina, is not convinced that the administration is really tackling the issue.

“The government cannot negotiate prices with manufacturers, but it is a good faith effort for Congress to try to gain lower prices,” he says. “Competition needs to increase, and the FDA should speed up the development of generics.”

Do consumers benefit from rebates?

On January 31, the Trump administration proposed that health plans and middlemen serving Medicare Part D and Medicaid beneficiaries in managed care plans be required to give consumers the benefit of discounts they receive on prescription drugs. Under this proposal, rebates from manufacturers to PBMs would be considered illegal kickbacks-essentially the end of the safe harbor protection ruling for discounts and rebates paid from manufacturers to PBMs.

In addition, the proposal creates a new safe harbor for prescription drug discounts offered to beneficiaries at POS and for certain fixed fee service arrangements between drug makers and PBMs.

While lowering Medicare beneficiaries’ out-of-pocket (OOP) costs, the rule could generate unintended consequences-increasing premiums from 8% to 22%, according to HHS.

Secretary Azar says rebates might be passed onto consumers, who could potentially realize reductions of 30% or more in their OOP costs for drugs, such as insulin and statins. Sicker beneficiaries with higher drug costs are expected to benefit the most.

The public has 60 days to comment on the proposal. The proposed effective date for the regulation is January 1, 2020.

A white paper by Milliman on drug rebates, coauthored by Maggie Alston, senior healthcare analytics consultant, and Gabriel Dieguez, principal, says eliminating the protection could “increase transparency in net pricing and improve the competitiveness of generic and biosimilar products which could result in increased competition and lower prescription drug prices.

“To the extent this action resulted in pharmaceutical manufacturers lowering their negotiated prices to a post-rebate level, some patients would benefit from lower OOP costs,” the paper says.

“Roughly 85% to 90% of drugs claims are for generics, which for the most part are priced below their brand name counterparts. This accounts for 15% or less of total drug costs in the United States. The remaining 10% to 15% of prescription drug claims are for brand drugs and while the associated costs of brand drugs are much higher than those for generics, costs for brand drugs account for only 35% to 40% of U.S. drug costs, says Mesfin Tegenu, RPh, president of PerformRx LLC, a Philadelphia-based PBM. “Pointing to rebates as a culprit is not accurate and does not solve the issue of high drug prices.”

“Specialty drugs, a category which incidentally has no or very low manufacturer rebates, is at the heart of the cost issue. Although specialty drugs comprise less than 1% of all pharmacy claims dispensed, they make up almost 40% of U.S. healthcare drug costs. These are the drugs that require a change in the price curve,” he says.

Express Scripts says drug pricing and rebates are not linked; thus, taking away rebates would not stop a drug company from raising its prices. The PBM points to registered price increases above 15% for non-rebated drugs treating infertility, depression, high cholesterol, and transplants as an indication that rebates aren’t a key driver of higher costs.

The end of rebates

Mike Kolar, senior vice president and general counsel, Prime Therapeutics, a PBM based in Eagan, Minnesota, doesn’t believe that complete elimination of rebates will result in lower drug prices.

“Instead, we support exploring innovative approaches, such as designating a portion of rebates for use in lowering member out-of-pocket costs or premiums, or investing in programs to improve outcomes,” he says.

Armed with information on pairing the right drugs with the right patients and applying the most effective formulary strategies and clinical programs, the PBM can negotiate with manufacturers for the best possible pricing-whether though rebates or other avenues such as value-based contracts-to lower drug spend for clients, Kolar says. Prime also supports PBM transparency around rebate revenue to health plans and plan sponsors.

Prime believes that rebate elimination will not result in dollar-for-dollar reductions from current list prices to net cost. “While some manufacturers are taking steps toward this with the introduction of authorized generics that are generally priced lower than their own brand drugs and carry no rebates, there is no guarantee that widespread decreases to true net will occur or would be sustained,” Kolar says.

Related article: PBM Performance-Based Pharmacy Networks Aim to Cut Costs

“If rebates are eliminated, health plans will likely experience increased drug spend and member premiums may increase to offset the lost rebate savings,” he says.

Despite the energy being devoted to rebates, Paduda doesn’t think they will ever disappear and if so, not soon. “Other payment mechanisms will take their place,” he says. “We need to eliminate direct and indirect remuneration (DIR) fees and tie reimbursement to outcomes, to clinical levers, not financial ones.”

Bill Resnick, chairman/CEO of EmpiRx Health, a PBM headquartered in Montvale, New Jersey, agrees with Paduda that if rebates disappear, they will show up in another form of remuneration, such as discounts or value-added mechanisms.

“Rebates are embedded in the system, along with DIRs and manufacturers driving utilization to get their drugs on the best tiers,” he says. “They don’t help with cost and payment; they are just part of the economics of the drug industry and have no reason to be in the marketplace. They will never outpace the cost of drugs and don't demonstrate lower overall drug costs.”

Resnick favors “optimizing” rebates over “maximizing” them-EmpiRx Health first looks at each drug’s clinical appropriateness and overall cost and then at what can be achieved in rebates for those drugs.

“The PBM industry tends to see the rebate as an opportunity to loosely manage utilization. Surprisingly to most outside the industry, many PBMs strive to maximize rather than optimize rebates, providing more units with rebates even when there isn’t a medical need for the product,” Resnick says.

If rebates should disappear, the distribution model would shift and become more of a direct-to-consumer distribution, along with a push toward value-based contracts away from fee-for-service, according to Alston.

“Without rebates, manufacturers in competitive classes would need to find ways to distinguish their products leading to value-based contracts, and plans would need to better manage formulary decisions,” she says.

Glen Stettin, MD, chief innovation officer for Express Scripts, a PBM headquartered in St. Louis, agrees that if rebates go by the wayside, some alternative will fill the gap-especially because the federal government is the largest beneficiary of rebates as a Medicare/Medicaid payer, he says.

“To manufacturers, rebates are a way to establish a differentiation by providing higher volume customers with larger discounts, but they could discount drug prices by just lowering them without a rebate,” he says. “Rebates offer different prices for different customers, an advantage for manufacturers. That’s why a flat fee would offer the wrong kind of incentive.”

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Without rebates, Stettin says Express Scripts would use a management fee aligned with costs. “The objective is for us to provide the benefit of using affordable, effective drugs to control chronic conditions, improve adherence, and lower opioid use,” he says. “If we meet all guarantees, we will get a fee and if not, a lesser amount that puts the process at risk.”

Express Scripts rolled out its National Preferred Flex Formulary on January 1, 2019, to provide a way for plans to cover lower list price products, such as new authorized alternatives with less reliance on rebated brands.

Stettin says drugs that best fit the new formulary are those in categories that are competitive and appropriate for most members with the same indication. Harvoni (ledipasvir/sofosbuvir) is the first product managed through the new formulary. Some manufacturers are already participating, weaning them off rebates.

“Our program enables payers and health plans the option to choose a lower price option or the original branded drug, which might have a rebate, and provides cash-paying members and those with coinsurance or high deductibles immediate access to lower priced drugs,” Stettin says.

He says the PBM is straightforward in providing rebates-whether they are a percent of the cost of a drug for an amount per claim-because whatever a contract guarantees, the PBM lives up to those expectations or pays a client. Express Scripts says that it returns 90% of the rebates it negotiates with drug manufacturers directly to its clients, a 100% pass through for plan sponsors offering Medicaid, according to the PBM.

Resnick says that most PBMs simply provide guarantees around discounts and rebates; thus, they have little to no accountability for actual utilization because more units equal more margin. “It’s the concept of fee-for-service, the same misaligned structure that health care providers are proactively trying to move away from,” he says.

“The EmpiRx model offers discount guarantees and rebate guarantees, but where we differ is by adding in a client-specific, clinical guarantee that commits us to demonstrate appropriate utilization,” Resnick says. “Until we reach the guarantee, we are at full-risk for this amount; we begin to make margin only when we exceed this client commitment.”

An alternative: point-of-sale rebates

POS rebates have been suggested as a potential partial solution to the rebate debate. Resnick says POS rebates occur when the PBM places the approximate value of the rebate into the member/client cost share at the time the drug is dispensed, but is only applicable to coinsurance, not copayments.

“Right now, rebates don’t affect patients at POS as promised,” Milliman’s Dieguez says. “Members are buying drugs at sticker price so they don’t receive the benefit of rebates. Although a PBM might claim 100% pass-through, it withholds hidden fees. Retention of rebates without transparency can legally make formulary decisions based on bottom line, but it should be the fiduciary responsibility of PBMs to act in the best interest of their clients.”

Alston cites the advantages of POS rebates as lowering cost sharing for beneficiaries filling scripts, potentially slowing down the pace for Medicare beneficiaries entering the gap where cost sharing is greater. For example, a 20% coinsurance on a $1,000 script with a 30% rebate is $140, while the same beneficiary would pay $200 without a POS rebate. 

“On the other hand, by passing rebates to beneficiaries at the POS, plans lose a valuable source of revenue that keeps premiums low for all beneficiaries,” Alston says. “Premiums may increase, in the short run, if rebates are applied at the POS.”

Mari Edlin, a frequent contributor to Managed Healthcare Executive, is based in Sonoma, California.