1:38 PM
Sep 21, 2018
 |  BioCentury  |  Politics, Policy & Law

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 be coming to an end,” said Azar in comments to the 340B Coalition on July 9. “We are examining whether we need to disrupt the entire system of rebates, which drives list prices ever higher while patients keep paying more. Eliminating rebates within the Medicare program, pushing the system toward fixed-price discounts, is well within our administrative powers,” he added.

On July 18, Azar took what could be the first step toward restructuring the relationship between PBMs and drug companies. The HHS Office of Inspector General (OIG) submitted a proposed rule to the White House Office of Management and Budget (OMB) that would remove the safe harbor rule that keeps negotiated net price confidential and replace it with a new “safe harbor protection.” On Aug. 21, the Centers for Medicare & Medicaid Services (CMS) submitted a proposed rule seeking regulation to require greater drug price transparency.

OMB and HHS have not released any details about the proposed rule or a timeline, but the earliest a change could be implemented is plan year 2020, given that Part D plan requirements for 2019 have already been announced (see “Getting Serious”).

Payers and market access KOLs contacted by BioCentury agree that the improved price transparency afforded by the rule should translate into lower cost-sharing co-pays for those tied to the net price. Net prices for certain drugs that currently don’t have preferred formulary status should also go down -- at least in the near term. But opinions are divided as to whether a rebate-free system would be able to rein in drug prices over the long term.

The PBM Express Scripts Holding Co. was one of several voices that expect the change to lead to higher prices, by hamstringing PBMs’ power and removing their incentive to negotiate.

Regional payer Harvard...

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