Rebate Challenge Alters Drug Pricing Debate

Health and Human Services (HHS) Secretary Alex Azar opened an important new chapter in the accelerating campaign to alter marketing and pricing policies for prescription drugs in the United States. In a landmark proposed rule change, Azar announced on Jan. 31, 2019 that the Trump Administration would seek to end current rebate practices by making it illegal for manufacturers to provide special discounts to health plans and insurers serving Medicare, Medicaid, and other government health programs.

The proposed strategy is to remove the current safe harbor protection from the federal Anti-Kickback Statute for rebates or discounts provided to Medicare Part D drug plans and certain state Medicaid programs. Manufacturers traditionally offer sizeable rebates and discounts to insurers in return for favorable placement on formularies that encourage prescribing of the firm’s products over competitors. Instead, the new rule calls for plans to pass on such rebates directly to beneficiaries at the pharmacy counter.

The broader rationale for this policy change is to discourage manufacturers from raising list prices regularly and frequently, a strategy that pharma companies claim is necessary to offset ever-rising demands for higher rebates from payers and plans. This practice may be beneficial to patients with broad drug coverage that permits them to share in the savings gained by the plan. But beneficiaries who face high out-of-pocket costs for drugs-either because they use many expensive brand drugs, lack adequate coverage, or carry high-deductible plans-often feel the impact of the higher list prices.

Pharmacy benefit managers (PBMs) and insurers claim, and even HHS agrees, that the policy change would lead to higher premiums for Medicare Part D plans due to the loss of these discounts and rebates. But while secretary Azar predicts that premiums would rise just a few dollars a month, others anticipate much higher costs for all beneficiaries.

Biopharma companies applaud the proposal as a way to avoid frequent price increases, which could deflect cost-cutting demands. The Biotechnology Innovation Organization (BIO) said the new policy would reduce the “perverse incentives” driving the current affordability crisis by limiting the use of rebates to “pad the profits of middlemen.” The Pharmaceutical Research and Manufacturers of America (PhRMA) similarly applauded changes in the rebate system to “ensure that the $150 billion in negotiated rebates and discounts are used to lower costs for patients at the pharmacy.” A main benefit for manufacturers is that the change would reduce the number of patients pushed into the Medicare coverage gap, or “donut hole,” where pharma companies have to cover more of drug costs.

Generic-drug makers back the new policy for a different reason:  the proposal would prevent brand drug companies to use “rebate traps” to block patient access to more affordable generic or biosimilar medicines. The problem referred to here is the practice of plans to offer incentives for patients to utilize more expensive brand therapies that offer high rebates, instead of shifting them to cheaper generics that would reduce costs for the healthcare system more broadly.

Commercial market impact?

While the rule would only change regulations affecting government-funded health programs, secretary Azar also called on Congress to enact legislation that makes this change for commercial health plans. It may be, moreover, that Congressional approval is needed to alter current policy for Medicare and Medicaid, a position suggested by PBMs and insurers. Congressional support may be difficult, though. Sen. Ron Wyden (D-Ore) backed the plan as a way to impose accountability on PBMs but complained that more was needed to reduce drug prices. House Democratic leaders were more critical, claiming that the change would increase government spending by $200 billion and would raise premiums considerably on drug plans for seniors. Republicans were more supportive but called for in-depth analysis of the broader impact of the policy change.

The HHS proposal, moreover, permits PBMs to charge manufacturers fees for services related to formulary and plan management, which observers fear would merely encourage companies to continue current practices under new terminology. PBMs claim they pass rebates on to clients that provide health coverage to employees or beneficiaries, and don’t retain the fees as profits. But the impact on current practices would be much greater if rebate practices were altered for the larger commercial market.

HHS wants the new policy to be implemented in January 2020, providing a year for public comment and final rulemaking. But the anticipated legal and policy battle is expected to extend the debate much longer and could end up killing the plan. Meanwhile, states are weighing in on rebate limits and may take further action to implement policies similar to that proposed by HHS. The only area of agreement in the rebate debate is that no one knows how the proposed change will impact PBMs and insurers, drug costs and pricing, and government spending, and that it’s impossible to predict the outcome as all parties devise responses to the rule change.