Published by Forbes
On Thursday, U.S. Health and Human Services Secretary Alex Azar released a long-anticipated rule that could transform the prices that people pay for prescription drugs, and the broader pharmaceutical market. It involves a formerly obscure topic: rebates paid by drugmakers to pharmacy benefit managers.
How rebates work today
For a detailed discussion of how rebates work, see my previous piece on the topic. The basic idea is this: let’s say you have a medical condition for which there are multiple pharmaceutical treatments. In a normal market, like automobiles, the car companies will compete with each other to charge consumers the lowest price for comparable quality. But it doesn’t work that way with drugs, because for most people, a good chunk of their prescription drug costs are funded through health insurance.
So your health insurer works with a specialized type of company, called a pharmacy benefit manager, to negotiate with the various drug companies who market drugs for your 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 America, 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.
Second, the use of rebates incentivizes PBMs to steer patients to costlier, branded drugs when inexpensive generics or biosimilars would be just as good. Indeed, as I testified to Congress last week, incumbent drug companies will often “dump” their product onto the market, using PBM rebates, or threaten the withdrawal of rebates on other products, to ward off the entry of less-costly generics and biosimilars: a tactic that insiders call the “rebate wall.”
The new Trump administration rule
Trump’s proposed regulatory change would end the practice of PBM rebates in the Medicare and Medicaid programs as of January 1, 2020. As a result, any discounts that PBMs negotiate with drug manufacturers would have to apply to the “list price” that patients using those drugs pay, instead of being transmitted in the form of rebates that reduce everyone’s premiums.