Rebates are dead, long live discounts?

Private price negotiation is a hallmark of the US health care system – banning rebates does not make that any less true.

Vantage views

Rebates are going away – so says none other than Pfizer’s chief executive, Ian Read. But what might come after is anybody’s guess. Price negotiation is an essential part of the US healthcare system, where payers battle with hospitals, physicians and pharma companies to maximise their own profits, to the point that nobody knows what the real price of a drug is. 

Moreover, it is still not clear how banning rebates would interact with new payment models such as outcome-based reimbursement – which by its nature involves some retrospective payments. Rebates might be on the way out, but could effectively persist with another name and in a slightly different form.

Public enemy no. 1

Rebates have become a particular villain as the US drug cost debate has evolved, and have been blamed for the inflation of list prices, resulting in higher co-payments for patients because these are linked to the list rather than the rebated price.

The administration has proposed eliminating rebates in Medicare by withdrawing the “safe harbour” in anti-kickback laws that has permitted them – with the ultimate goal of reducing Medicare beneficiaries’ out-of-pocket costs (More change needed to make US pricing truce permanent, July 24, 2018).

In Pfizer’s second-quarter earnings call Mr Read said he agreed with this step. But he went even further, saying eliminating rebates in Medicare would lead to pharma abandoning their use in private insurance schemes too, because it would reveal what insurers were paying government programmes.

His stance appears to support greater transparency in drug pricing, which should in theory bring costs down. But the fact that Mr Read, the sector’s most forceful advocate for maximising drug prices, supports this proposal should be taken as a sign that pharma can turn any changes in the current model to its advantage.

And it should be noted that the pharmacy benefit manager CVS has come out against banning rebates, arguing that these help restrain list price growth, and that patients prescribed drugs through CVS pay cost-sharing based on the net price. 

Commenting on Mr Read’s remarks, David Mitchell, founder and president of Patients for Affordable Drugs, told EP Vantage that he supported the elimination of rebates because they hide net prices. But he went on to point out that eliminating rebates would do nothing to help keep list prices in line.

Everybody does it

One reason is that list prices are likely to remain artificially inflated as long as they are seen as a starting point rather than the final price. And it is naive to believe that the system would naturally evolve into one in which insurers pay the list price – after all, the government’s own federal supply schedule that sets prices for drug purchases by veterans’ hospitals and other government-run facilities similarly uses its buying power to achieve discounts.

The healthcare sector is notorious for its lack of transparency on prices. Payers offering volume in the form of covered lives battle health systems and pharma companies behind closed doors to get the best price possible, using exclusions on one side and loss of access to advanced medical treatment on the other as the penalty for failing to agree.

These fundamental forces will not vanish just because the federal government takes away one tool; in other words, by no means should pharma expect to be able to begin charging the list price the moment rebates become illegal.

Mr Read did offer an olive branch to payers by talking about the system “accommodating itself to negotiations on value and net price”. To the extent that withdrawing rebates prods recalcitrant pharma companies into negotiating over the clinical and economic value of new agents, this would be positive.

The danger is that these value-based contracts often contain clauses that require pharma companies to reimburse insurers if drugs underperform, an arrangement that looks so close to a rebate that it could unintentionally be banned.

The pharma sector should, of course, be careful what it wishes for. Moving away from rebating would almost surely create winners and losers in pharma as well as in the insurance sector – and going to value-based negotiation would put at a disadvantage those companies that have lagged behind in innovation. Like, say, Pfizer.

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