Pharmaceutical Rebates — Keeping The Right Score

Pharmaceutical Rebates — Keeping The Right Score

Sometimes the important reforms are those that address the mundane details. The Administration’s proposed changes to how pharmaceutical rebates are paid fall into this category.

While far from a panacea, this reform could meaningfully improve the pharmaceutical market. For this reason, the Congressional Budget Office’s (CBO) just released “budget score on the proposal is disconcerting.

A budget score from the CBO estimates the impact of policy changes on the federal budget. In this case, the CBO estimates that between 2020 and 2029 the proposed reform would increase spending for Medicare “by about $170 billion and spending for Medicaid by about $7 billion”.

The CBO made several questionable assumptions that make their estimates unreliable. However, even if the CBO’s estimates were accurate, it would still make sense to implement the reform because the current pricing system is opaque, rife with distortions, and harms patients. The purpose of the reform is to fix these problems.

Without getting too bogged down by the minutiae, under the current system patients’ payments are based on the list prices of medicines, which do not reflect the discounts and rebates that manufacturers pay directly to the pharmacy benefit managers (or PBMs). PBMs are the middlemen that manage pharmacy benefits and negotiate prices on behalf of most health insurers. They are, effectively, the gatekeepers between drug manufacturers and patients.

Since PBMs’ compensation is partly based on the discounts they negotiate, they earn more money when list prices are growing quickly, but the discounts PBMs negotiate on behalf of payers grow just as fast, leading to stable/slowly growing net prices.

Systemic drug expenditures are based on net prices, which have been growing slowly due to the sharp growth in discounts. The problem arises because patients’ prescription costs, which are tied to the artificially rising list prices, are growing excessively fast.

The Department of Health and Human Services’ (HHS) proposed reform would end the practice of rebates being paid to PBMs and would require that all rebates are paid at the pharmacy counter instead. While only applicable to Medicare and Managed Medicaid markets, the reform would ensure that patients’ costs also decline when large discounts are negotiated on their behalf.

This begs the question, how does ensuring that patients don’t overpay for their medicines lead to higher expenditures for the government? The answer is that the CBO expects that “pharmaceutical manufacturers would withhold some of the discounts they previously negotiated”.

In other words, the CBO has not determined that the proposed policy change will increase the costs for the government. It has simply assumed that it would without any evidence to substantiate this assumption.

It is also a curious assumption. PBMs and payers are aware of the current costs they are paying for medicines. Knowing what they pay now, wouldn’t insurers insist that their PBMs prevent any increase in their net costs? In fact, why not assume that, on behalf of their clients, PBMs would “demand higher discounts”.

Manufacturers, on the other hand, are aware of the prices they currently receive for the medicines they sell and are incented to ensure their revenues aren’t reduced.

Due to these competing forces, the likely outcome is that the net prices will be similar to where they are now – the current prices that all parties have already agreed are acceptable. The only difference is that patients will now benefit from the price discount as well.

Cutting patients costs will reduce the revenues that insurers have been using to offset the premiums for everyone else, and could likely cause overall premiums to rise as a result. However, should premiums rise, this means that patients who require expensive medicines have been subsidizing the premiums for all other patients.

Such a financial arrangement violates the fundamental premise of health insurance. Patients need health insurance to reduce the financial costs associated with certain adverse health outcomes such as requiring very costly medicines to better manage diseases. Patients experiencing these risks should not be underwriting the costs for everyone else.

Just as importantly, there are many other more effective cost-saving reforms that can, and should, be implemented. For example, biologic medicines are dramatically improving the quality of health care that patients are receiving, but these medications are very costly. Biosimilars are lower cost versions of these medicines, which can be 30% cheaper or more.

In an examination of this issue, I found that greater use of just one biosimilar (the biosimilar versions of infliximab) could save Medicare and private insurers around $400 million annually. Over the potential biosimilar universe, this could mean billions of dollars in annual savings. However, current payment practices and government regulations are discouraging the use of biosimilars. Policy reforms that eliminate these obstacles would generate large systemic savings while improving the quality of health care.

Ultimately, these are the most important goals that health care reform must address – ensure high-quality health care at affordable prices. HHS’ proposed regulatory change would eliminate disincentives that are currently making medicines less affordable for the most vulnerable patients and, as a result, is an important improvement to the current health care system.

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