Why eliminating rebates won’t solve the US pricing problem

A recent US push to end drug rebates might improve transparency, but will do nothing to address the root cause of rising drug costs.

At the root of the Trump administration’s push to eliminate drug rebates in government health plans is a desire for price transparency and reduced patient cost-sharing.

For politicians looking to be re-elected this is an attractive option that is likely to be enacted because it could have immediate payoff for prescription-filling beneficiaries; yet it does nothing to address the underlying drivers of drug price inflation. Overall, the piecemeal approach to restraining drug costs revealed in a government “blueprint” published in May will have only a limited effect – and big changes are unlikely unless payers gain stronger negotiating power, something from which President Trump has so far backed away.

Still, the elimination of rebates could be a fairly quick win for the administration – at least in terms of making noise about lowering drug prices. Rebates perversely raise drug costs, critics say, by giving pharma companies an incentive to increase list prices. This in turn elevates the amount patients pay in coinsurance, which is based on those list prices rather than the real price paid by the insurer post-rebate.

Rebates: already banned, but...

Anti-kickback legislation puts rebates on questionable legal grounds in federal health programmes like Medicare and Medicaid, since in theory these price reductions could be viewed as an inducement to prescribe a specific drug. However, “safe harbour” regulations issued by the Department of Health and Human Services (HHS) have authorised rebates if they are granted at the time of sale.

In other words, redefining a rebate as a “discount” makes it lawful. Thus, declaring rebates illegal is something the administration could accomplish simply by rescinding the safe harbour protection, without the need to pass legislation subject to a congressional vote.

This might require some time to enact, if rescinding the safe harbour protections is subject to federal rulemaking. But the process – which would would require a draft proposal and a round of public comment usually lasting 30 to 60 days before issuing a final regulation – would be relatively quick compared with getting legislation through Congress. 

Some believe, however, that a threat to rescind the rebate safe harbour is a bargaining chip in a bigger game with pharma. Cowen analyst Rick Weissenstein writes that the administration could achieve the same effect for patients if PBMs agreed to lower cost-sharing fees for Medicare beneficiaries based on the rebates they receive from pharma, something that would not require HHS to rewrite the safe harbour rules. However, this approach might not lower drug prices overall. 

Limited impact?

How a rebate ban would hit the pharma, health insurer and consumer sectors is hard to predict. Certainly, if list prices were to come down it would benefit prescription-filling consumers whose coinsurance fees at the pharmacy are based on those list prices.

However, if this resulted in a corresponding rise in the net price paid by insurers or PBMs because they could no longer use rebates as a negotiating tool, a negative impact would be felt across all premium-paying insurance enrollees, who would be tapped to make up the difference, according to the consulting group Altarum.

Drug price inflation has many causes, including companies maximising their prices to try and defray R&D costs, a lack of competition in specialised disease areas, and company mergers.

Step changes in technology like the arrival of gene therapy and sophisticated cell therapies like CAR-T have led to an acceleration of prices at the top end – not to mention high R&D costs that pharma groups want to justify.

Meanwhile, at the other end of the scale, some older drugs facing patent expiry have escaped intense competition because of generic consolidation, meaning their developers have been able to raise their prices with little restraint.

And biosimilar uptake, which could put a brake on spending on biological therapies, has been slowed by crafty contracting and lingering physician concerns about safety.

All of these factors and others have led to spiralling drug costs in the US, and increasing worry about how new therapies will be funded. Measures that tinker at the edges, like eliminating rebates, could generate positive headlines for the politicians involved, but are unlikely to make a real difference in the long term.

Regardless of how benefits are designed, in the current system the higher prices will be paid somehow. When pharmacy fees are reduced the costs will be shifted onto the larger population of Medicare beneficiaries, as well as US taxpayers.

To contact the writer of this story email Jonathan Gardner in Virginia at jonathang-us@epvantage.com or follow @ByJonGardner on Twitter

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