Filling the rebate void

Why eliminating rebates might be a good but short term fix to lower drug prices

HHS’s proposal to eliminate drug rebates should have the intended consequence of increasing transparency into drug pricing in the short term. But the long view is that value-based pricing or alternative co-pay agreements will do more to align drug prices and benefit patients.

The HHS move would take away the key negotiating tool PBMs and insurers use to obtain discounts on pharmacy-administered drugs, and likely dissolve the distinction between the wholesale acquisition cost (WAC) -- or list price -- and the negotiated net price.

The sizes of a rebate, which is undisclosed, typically dictates a drug’s placement on a PBM or payer’s formulary. How much the PBM keeps to itself is also undisclosed.

PBMs argue rebates are important because the savings are passed along to the other members of the supply chain, and bring down plan premiums.

Critics say rebates create a perverse incentive for drug makers to raise list prices, and this comes at the expense of patients. For drugs in “specialty” tiers with cost-sharing, patients pay about 10-40% of the WAC. That means when companies raise list prices patient co-pays go up, even if net prices to PBMs and insurers stay the same or decrease. In other tiers, patients pay fixed co-pays, usually $10-$40 per prescription, which are not influenced by the increased list price.

HHS Secretary Alex Azar has repeatedly stated he believes that rebating practices harm consumers by driving up list prices and co-pays.

“The time for using rebates to buy formulary access, we have suggested, may soon be coming to an end.”

Alex Azar, HHS

They can also stifle competition because lengthy rebate agreements lock in preferred places on formularies, meaning that even if new drugs come to market with lower list prices, they are relegated to non-preferred status.

“The time for using rebates to buy formulary access, we have suggested, may soon

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