drub-rebates photo of a pharmacy
By the time you pay your co-pay or co-insurance for your drugs, the price has already been increased by middleman rebates,(Photo Source: iStock Photo)

Come get your free money! Buyers love rebates, right? It means a discount on the purchase price to the benefit of the customer, right? Well, not always. And it certainly doesn’t occur in the arena of prescription drug rebates.

Most people agree that prescription drugs have made life better. It is also evident that the cost of these medications is simply unreasonable for many Americans. This makes healthcare both unaffordable and inaccessible.

The role of pharmacy benefit managers (PBMs)

It has long been difficult to discern what is driving high prescription drug costs. This is, in part, because we don’t know what happens behind closed-door negotiations between the middlemen pharmacy benefit managers (PBMs) and drug manufacturers.

It is understood that these parties negotiate rebates related to new therapies. They also bundle older therapies together to protect market share from emerging generic competition. All of this impacts what patients pay, whether in the form of co-pays, deductibles, or out-of-pocket expenses.  

This endless circle of negotiations also drives up therapeutic list prices. These are the prices a manufacturer puts on particular products. That’s because when PBMs demand rebates, manufacturers in turn raise list prices to maintain their profit margins.

In fact, research from the Schaeffer Institute at the University of Southern California (USC) shows there is a positive correlation between drug rebates and list prices. They found that on average, every $1 increase in rebates is associated with a $1.17 increase in list prices. Notably, this increase isn’t because of time trends as that was controlled for in the study along with the exclusion of drugs with high Medicaid share.

It also affects patient out-of-pocket costs

Patient out-of-pocket spending goes up when there are high list prices. This is because the portion the patient pays is based on the list price. Hence, if there is a high list price then a disproportionate burden is placed on the buyer (patients) in the form of high-cost sharing. This is particularly true when the patient’s out-of-pocket share is coinsurance (a percent of the list price) as opposed to copay (a fixed amount).

Unlike other industries where rebates benefit the buyer at the point-of-sale, patients seem to see no direct benefit from these negotiated drug rebates. All of this begs the questions – if rebates are flowing through the health system, where are they going and how are they being used?

Redirecting Rebate Returns

On July 24, the Trump administration signed a new Executive Order specifying that Medicare Part B will not be subject to “retrospective reductions in price that are not applied at the point-of-sale.” They are specifically referring to reductions in price that benefit health plan sponsors, pharmacies, or PBMs instead of patients.

The order also authorizes Health and Human Services (HHS) to create new avenues that would permit “health plan sponsors, pharmacies, and PBMs to apply [negotiated] discounts at the patient’s point-of-sale in order to lower the patient’s out-of-pocket costs…”

This is a positive step forward to changing market dynamics to give patients direct benefit from these discounts and help reduce patient spending. But we must remember that it only impacts a portion of patients who need to access prescription medications.

It does not impact those with private insurance or no insurance. Until this is addressed, secretly negotiated rebates will continue to cost patients rather than save them money.

How patients are harmed by drug rebates

To better understand how patients are harmed by rebates, let me take you through a hypothetical case.

Patient Jane Smith is on Medicare. She gets her biologic medication from her local pharmacy. She has a chronic disease and must have reliable and affordable access to this therapy.

The medication prescribed by her doctor is designated by her health plan as a Tier 5* drug. It carries a 30% coinsurance. The list price of a 30 day supply of her drug is $333.33, therefore her share of cost is $100/month. 

If the correlation described by the Shaeffer Institute holds true and the rebate is now increased by $15, then $17.55 ($15 x 1.17) is added for a new list price of $350.88. Her 30% coinsurance out-of-pocket would then increase to $105.26  

***

      *Understanding formulary tiers

There is variation in the way health plans create their formulary tiers. Some have 3 tiers, others 4, 5 or even 6 tiers.

In order to explain what tiers are and how they work, let’s look at BlueCross/Blue Shield’s Medicare Formulary Tiers:

        • Tier 1: This prescription drug tier consists of the lowest-cost tier of prescription drugs, most are generic.
        • Tier 2: This tier consists of medium-cost prescription drugs. Most are generic but some are brand name prescription drugs
        • Tier 3: This prescription drug tier consists of high-cost prescription drugs Most are brand-name prescription drugs that are preferred by your insurance plan.
        • Tier 4: The prescription drug tier that contains higher-cost prescription drugs. Most are brand-name prescription drugs that are not preferred by your insurance plan and some specialty drugs.
        • Tier 5: This prescription drug tier consists of the highest-cost prescription drugs, most are specialty drugs.

***

Shedding light on the secrecy of the system

I hope this discussion sheds light on some of the secrecy of the system and the middlemen that are a part of it. And, I hope you now understand how patients are harmed financially by this system.

This is because there is more than a dollar-for-dollar increase in list price when rebates increase. Therefore, the PBMs’ demand for rebates is partially responsible for the increasing list prices that make medications unaffordable for patients across the country.

The Schaffer Institute data further suggests that rebates are part of the problem but also part of the solution. Rebates have a role in increasing drug prices. I believe, if fairly distributed, that they could also have a role in lowering drug prices, potentially lowering patient cost and thereby increasing access to medication.

This begs the question: If PBM’s main claim to business is that they are bringing patient costs down and yet their need for higher rebates is causing the opposite effect, why are they so opposed to reforms that actually may accomplish that goal better than the current system?

The Burden Remains on Patients

Over the past decade, what patients pay for prescription drugs (the sticker price after manufacturer discounts) increased more than three times faster than the rate of inflation. This is according to a study published in the Journal of American Medicine.

  • Impact of chronic illness

This is a huge burden particularly for people living with chronic illnesses. These individuals often require long-term (or lifetime) access to medications.

The drugs they take are often high-priced, complex medications. As a result, these patients have a much higher average drug spend than people without such illnesses. Whenever they fill or refill their prescriptions, they are faced with the burden of high out-of-pocket costs.

As rebates flow through the system and secret negotiations continue, drug prices go up. Some patients may find that they can no longer afford the therapies prescribed by their health care team. This means that these patients are forced to take a chance with their health in the face of financial struggle.

  • Non-adherence to treatment can lead to expensive complications

When a patient is forced to abandon their medication because they can’t afford it, they take a chance that their health could deteriorate leading to complications that require expensive interventions.

Surely, what we’ve learned during the COVID-19 pandemic is that we do not want to overwhelm our health systems with easily avoidable scenarios. Making medications affordable and accessible to patients is the ultimate goal. This will lead to an increase in medication adherence. And, it would potentially improve health outcomes and reduce negative outcomes.

If rebates and PBMs are in fact, partially responsible for the increase in list prices and therefore the increase in patient out-of-pocket spending, we need to work towards eliminating or reducing rebates negotiated by PBMs.

The bottom line about drug rebates

We need more transparency and regulation in our healthcare system to make medications more affordable. We must shine a spotlight on how rebates and drug prices are related and negotiated. It will help improve our ability to advocate for policies that benefit patients rather than middlemen.

As a first step, HHS needs to implement the President’s Trump new Executive Order swiftly and make sure patients get their needed and long overdue, drug discounts.

Related Content:
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The Crazy Way Drugs are Priced and What Can Be Done About It

Steven R. Newmark, JD, MPA

Steven Newmark, JD, MPA, is the Director of Policy and General Counsel of the Global Healthy Living Foundation. GHLF is a 501c3 with the mission to improve the quality of life for people with chronic illnesses. Steven leads global advocacy and policy initiatives. He was most recently Special Counsel to the President of NYC Health + Hospitals in New York City.

Before that he served as the Senior Health Policy Adviser to New York City Mayor Bill de Blasio. He also served as General Counsel in Mayor de Blasio’s Public Advocate office, and as a Health Sciences Litigation Associate at Orrick, Herrington & Sutcliffe, LLP in New York City where he was part of the team that successfully defended the Vaccine Act before the Supreme Court in Bruesewitz v. Wyeth.

Additionally, he has taught Public Policy at Columbia University and is an Adjunct Professor in U.S. Health Policy at the City University of New York, Baruch College. He received his Juris Doctor from Fordham University School of Law and his Master of Public Policy and Administration, Advanced Policy and Management from Columbia University School of International and Public Affairs. He received his Bachelor of Arts, Philosophy, Politics and Law from the State University of New York at Binghamton.

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