How so-called rebates drive up the cost of prescription drugs

Rebates demanded by pharmacy middleman from drug manufacturers are driving up Americans’ prescription-drug costs by billions of dollars.

A Dispatch analysis of financial records from the country’s largest drug manufacturers found that practices of the pharmacy benefit managers, also known as PBMs, push the list price of their drugs well beyond actual costs.

In short, PBMs tell manufacturers that if they want their drugs to be covered by the insurance companies they work with, the manufacturers need to provide the PBMs with “rebates.”

In 2017, the country’s largest pharmaceutical companies spent $74.6 billion on research and development to create their brand-name drugs, according to financial reports. They also spent $116 billion to get those medications from their warehouses to wholesalers, and then via pharmacy benefit managers, hospitals and pharmacies to consumers.

These costs affect all patients because the rebates are factored into the price of name-brand prescription drugs.

“PBMs, because of their market power, demand higher and higher rebates. Manufacturers, in response to that, raise their list prices so as not to affect their revenues,” said Neeraj Sood of the University of Southern California’s Schaeffer Center for Health Policy & Economics, speaking at a hearing of the California Department of Insurance in June.

Pfizer CEO Ian Read said in a recent interview that the rebates demanded by PBMs account for 40 percent of the list price of his company’s brand-name drugs. Pfizer officials said the company paid nearly $6.5 billion in drug rebates in 2017.

“Effectively, patients who buy pharmaceuticals are subsidizing the rest of the health industry,” Read said. “And so, removal of the rebates, I believe, will be very beneficial to patients and our industry.”

CVS Caremark, the naton’s leading PBM, disagrees.

“Drug manufacturers alone are responsible for the list prices they set. We have been able to keep drug-cost inflation under control in spite of steady price increases by manufacturers. In 2017, drug-price growth for PBM clients was only 0.2 percent, despite manufacturer price increases of nearly 10 percent,” said CVS spokesman Michael DeAngelis.

“In fact, if list-price increases were the result of a manufacturer’s need to address rebates, you would expect rebates and list prices to be rising in correlation. But that’s actually not the case,” he said.

The exact dollar amounts that manufacturers pay to PBMs is unknown because of a lack of transparency in the industry and supply chain. Six of the largest pharmaceutical companies declined to release information when contacted by The Dispatch.

The Dispatch has spent this year investigating drug pricing and the actions of PBMs, who make nearly $400 billion a year as part of the country’s health-care system. Ironically, PBMs historically served as claims processors but more recently, as they became more involved in managing benefits, they have touted their role as helping to control the rapid rise in health-care costs.

The Dispatch investigation has found that in addition to rebates, PBMs also profit through spread pricing, which involves billing insurers far more for drugs than the PBMs are paying pharmacists to dispense the medications. The difference between those two numbers is the spread, and that money is retained by the PBMs.

A study released two months ago by the Ohio Department of Medicaid backed up the Dispatch findings and showed that PBMs CVS Caremark and Optum Rx collected $224 million in taxpayer money from spread pricing in one year, charging rates three to six times the industry standard.

Ohio Attorney General Mike DeWine has launched an investigation and announced plans to sue CVS Caremark. State Auditor Dave Yost also is investigating the practice of spread pricing and is scheduled to release findings this week. Ohio legislators in both parties also are delving into the practice.

And President Donald Trump said last month that he is considering removing the federal provision that exempts rebates from anti-kickback laws.