Health Law & Business News

INSIGHT: Eliminating Drug Rebates Could Raise Insurance Premiums

March 4, 2019, 9:01 AM

A new proposed federal rule removes safe harbor protections under the federal anti-kickback statute for rebates paid by drug manufacturers to PBMs, Medicare Part D plans, and Medicaid managed care organizations.

The goal is to lower drug prices, but fails to require drug companies to lower the prices of the drugs themselves.

In response, insurers and pharmacy benefit managers (PBMs) are voicing concern about its impact on the industry and patient’s pocketbooks. Insurers anticipate having to raise Medicare Part D premiums, while PBMs will be forced to rethink their entire business models.

America’s Health Insurance Plans has accused the Department of Health and Human Services of laying blame for the health system’s current high prices at the feet of insurance provider’s and their PBM partners and deflecting attention away from the price setting practices of drugmakers.

CVS blames drugmakers for high drug costs, stating that while PBMs have become a convenient target, the reality is that they serve as a last line of defense for the consumer.

The Critical Role of PBMs

PBMs negotiate with the various drug companies who market drugs for various condition. Drug companies give PBMs discounts, called rebates, and the PBMs pass most of the rebates through to the insurer and then to the consumer, in the form of lower premiums.

PBMs have proven extremely effective at incentivizing the use of generic drugs over costly branded drugs. In the United States, nearly 90 percent of all prescriptions written today are for inexpensive generic drugs, in large part thanks to the sophisticated formulary techniques that PBMs introduced.

PBMs serve patients and payers alike, delivering transparency, collaborating with clients, patients and payers to save money and reduce costs. PBMs help stakeholders navigate the complex world of drug pricing and high cost specialty drugs and create effective solutions that curb costs for Fortune 100 clients and health plans.

The specialty drug is of key interest. Specialty drugs are a class of pharmaceuticals which are higher in cost and are generally for a much more focused value. These drugs target, for example, orphan diseases (conditions that affect fewer than 200,000 people nationwide) or conditions such as hepatitis C. Some estimate that specialty pharmacy costs may account for 40 percent of total drug spending by 2020.

The new proposed rule would essentially shift money away from PBM efforts to curb these costs and put it back into the coffers of Big Pharma.

PBMs have been pushing for greater pricing transparency, although this is not the fundamental issue in drug pricing. The larger issue is a fragmented market serving smaller patient populations, creating more individualized therapies that are, by definition, higher cost and that render patient compliance more difficult to ensure.

Protecting Consumers

The role of PBMs is to protect patients—a function that is increasingly vital. In fact, each of the five largest health insurance companies in the country has an associated PBM, or is developing capabilities to launch one.

PBMs provide bargaining power and strive to negotiate lower prices with drugmakers to save seniors and other patients approximately 50 percent a year on their prescription drug and related medical costs.

A majority of rebates and discounts are passed back to patients, according to insurance executives. In fact, rebates reduce costs for patients and insurers. Without these cash flows, it is more likely that drug costs for patients and insurers would go up rather than down.

What’s more, the proposed rule could lead to higher premiums to make up for the roughly $29 billion paid in rebates to PBMs and insurers.

The Price/Rebate Dynamic

Moving forward, PBMs are now tasked to educate and explain to clients the effect of the rebate rule on their contracts and business model and help them understand the price/rebate dynamic. The way it works now, manufacturers are incentivized to raise drug list prices in the interest of offering ever-larger rebates to PBMs in exchange for preferred placement on formularies.

These rebates, however, are rarely used to lower consumers’ out-of-pocket drug costs because they generally pay a sum based on a drug’s list price.

If the proposed rule goes into effect, health insurers will likely have to raise Medicare Part D premiums because they currently use the rebates to push premiums down. That can be problematic for Part D plans because one of the main factors they compete on are low premiums. Companies with integrated PBMs, such as CVS Health Corp., UnitedHealth Group and Cigna Corp., will no longer be able to subsidize premium bids with rebate dollars.

PBMs face even more impactful disruption because they would need to determine how to transition the revenue they are receiving now from a percentage-of-a-rebate-type contract to a fixed-fee agreement.

As PBMs and the entire health-care marketplace braces itself for the impact of the propose rule, the news should serve as a wake-up call for PBMs to play a greater role in guiding policy makers in Congress toward a clearer understand of value drivers in drug pricing.

A Message for Policymakers

If policy makers begin to recognize that price setting, and not rebates, is the health-care system’s Achilles heel perhaps they can strike a legislative balance that strengthens the industry and allows a platform for constructive dialogue.

The bottom line is that PBMs play an important role in the pharmaceutical supply chain and are positioned to protect consumers and save them out-of-pocket costs. PBMs have an established and successful track record of implementing consumer-friendly, market-based tools, such as negotiating with drug manufacturers, to reduce costs for consumers.

Given rising costs, the changing nature of prescription drugs and increased disease state complexity, if PBMs didn’t exist in the health-care system today, they’d have to be created.

Author Information

Dea Belazi is the president and CEO of AscellaHealth, a national PBM with almost two million lives under management. He has more than 18 years of experience in the health-care industry, mostly developing and managing pharmacy benefit management companies.

To read more articles log in. To learn more about a subscription click here.