Rebate Rule Will Hold Middlemen Accountable

COVID-19 has exposed a variety of inadequacies in America’s healthcare system that leave our most vulnerable populations at risk.

First and foremost is the cost of prescription medications, a significant barrier to high-quality care for seniors living on fixed incomes and those who have lost jobs or seen wages decline. As such, it is critical for the incoming Biden administration to prioritize lowering drug prices.

And while it may be tempting to ignore the policies of the current administration, ongoing efforts to rein in drug middlemen, primarily Pharmacy Benefit Managers (PBMs), have proven effective and must remain a cornerstone of President-elect Biden’s healthcare agenda.

PBMs deny consumers low prices and greater choice through complicated kickback schemes, and policymakers must work to restrict these arrangements that prevent patients from being able to afford the medicines they need.

Although President Trump’s team has faced plenty of criticism for its various drug pricing initiatives, the administration was effective in shining a light on all actors throughout the drug distribution system.

Previous thinking assumed that manufacturers (drug producers) and pharmacies (drug distributors) received all the dollars, but a broader scrutiny showed that tremendous sums of money go to middlemen, who take large cuts for simply facilitating financial payments.

And this amount has skyrocketed even more recently because the PBM market lacks the three essential elements of competition — choice, transparency and minimal conflicts of interest.

Rebates, discounts and other price concessions from manufacturers have more than doubled over a seven-year period — up from $74 billion in 2012 to approximately $175 billion in 2019.

Despite this astounding leap, co-pays, coinsurance and deductibles all continue to rise. PBMs are pocketing an increasing share of rebates, while charging customers higher prices for drugs than what they pay retail pharmacies for dispensing them.

Simply put, PBMs are pocketing a huge portion of rebates intended for patients.

Study after study has shown that PBMs’ hidden drug rebate schemes inflate drug costs and deny patients necessary treatments. For example, if the list price of a drug were $450 in 2019, and the PBM negotiated a 60 percent discount with an admin fee of 4 percent, the medication would be reduced to just $160.

However, the average patient on a high-deductible plan still paid 243 percent of the true net cost last year since the payer collected money from the prescription but paid nothing to offset the patient’s costs. Now take this scenario and apply it to 2020, where more consumers than ever are struggling to afford their medicines. You end up with a record number of patients left out to dry, while PBMs continue to rake it in.

Last month, the current administration finalized its rebate rule for Medicare Part D drug plans. This rule excludes rebates on prescription drugs issued by manufacturers to PBMs and Medicare Part D plans from safe harbor protection under the anti-kickback statute.

The rule creates a new safe harbor, protecting discounts that are intended for patients at the point of sale. In essence, it ensures that discounts on prescription medications provided by manufacturers to PBMs are actually passed along to customers and reduces their out-of-pocket costs.

Patients will see far more savings at the pharmacy counter, and the ability of PBMs to coerce manufacturers into raising list prices to finance large rebates disappears.

Access to medications has become increasingly difficult for older Americans and those struggling with disabilities or chronic conditions. Insurers and PBMs have been the prime culprits of this conundrum.

The market’s lack of competition and a skewed incentive structure empower middlemen to use hidden rebate schemes to choose which drugs insurers and employers cover, forcing manufacturers to raise list prices to offer larger rebates.

Ultimately, consumers, especially those without coverage, end up paying more just to pad the pockets of middlemen.

In 2018, the White House Council of Economic Advisors said it best: “Three PBMs account for 85 percent of the market, which allows them to exercise undue market power against manufacturers and against the health plans and beneficiaries they are supposed to be representing, thus generating outsized profits for themselves.”

This leaves policymakers with a straightforward remedy. Middlemen must not be allowed to pocket consumer rebates by taking advantage of market power and a lack of transparency.

In 2021, decision-makers must implement this rule and continue their work to close the loopholes that permit these rebate schemes.