Issue No. 58: Rebate Reform, Suddenly Dropped by the White House, May Be Convincing Enough for a Comeback
On May 11, 2018, President Trump declared that rebate reform would be a significant part of the Administration’s strategy for constraining drug prices. In a Rose Garden speech, he said, “Our plan will end the dishonest double-dealing that allows the middleman to pocket rebates and discounts that should be passed on to consumers and patients.”
Then, last summer, five months after the Department of Health and Human Services placed a proposed rebate-reform rule in the Federal Register, the Administration backtracked. What happened? And is rebate reform truly dead, or is there a convincing case for a comeback?
Why the White House Originally Wanted
to Reform the Rebate System
The prescription drug supply chain “middlemen” mentioned above include wholesalers, distributors and most notably, pharmacy benefit managers, or PBMs. PBMs determine the composition of formularies, the medicine chest that patients can access under their insurance plans. They extract rebates from drug manufacturers and then pocket the money themselves or pass a percentage of it on to insurers (some of which, like Cigna and UnitedHealth, own PBMs), to federal and state governments, or to private health plans.
Rebates are payments from sellers to buyers, and, in the health-care sector, they would be illegal under the 1972 federal Anti-Kickback Statute if it were not for a special safe-harbor exemption applying to PBMs That exemption would be eliminated under HHS’s proposed rule, which Secretary Alex Azar said would end the “hidden system of kickbacks to middlemen.” He added, “Every day, Americans, particularly our seniors, pay more than they need to for their prescription drugs.” By ending “this era of backdoor deals,” he continued, President Trump will “deliver savings directly to patients when they walk into the pharmacy.”
The Administration’s objective with the proposed rule was to replace rebates with discounts to patients at the point of purchase, perhaps as soon as 2020. The rule applied only to drugs under Part D of Medicare and to managed care organizations (MCOs) that participate in Medicaid. Congress would have to pass laws to reform the rebates for the commercial plans that cover most Americans, but, frequently, changes to Medicare and Medicaid flow to the rest of the reimbursement system.
‘Finally Ease the Burden of Sticker Shock’
Azar was not exaggerating when he said that rebate reform “has the potential to be the most significant change in how Americans’ drugs are priced at the pharmacy counter, ever, and finally ease the burden of sticker shock.”
According to a report last year by the consulting firm Milliman, “Rebates are mostly used for high-cost brand-name prescription drugs in competitive therapeutic classes where there are interchangeable products (rarely for generics).” The aim of the PBMs is to get pharmaceutical manufacturers to pay to have their drugs admitted to formularies and to secure preferred “tier” placements.
Says an April 2018 report by the Altarum Institute:
The concern is that PBMs, in their role as intermediaries, have diverted much of the potential savings to their own bottom lines, a concern intensified by the lack of transparency around the proprietary rebate amounts.
Examples include PBMs retaining more than their agreed upon share of rebates through re-labeling rebates as fees and PBMs pressuring manufacturers to increase their list prices with a commensurate increase in rebates. This benefits PBMs doubly since they are often paid fees based on a percentage of list price and also retain a share of rebates.
The role of rebates has increased in recent years, and they now average 26% to 30% of the list price of a drug-- and much higher (over 60%) in some cases. According to Altarum (see Exhibit 4 in the report), rebates for branded drugs under Medicare in 2016 averaged 31%; for Medicaid, 61%. Rebates’ proportion of total Part D doubled from 2006, according to a report by the Boards of Trustees of the Federal Hospital Insurance and Federal Supplementary Medical Insurance Trust Funds.
“There is general agreement,” said a white paper last March by Amanda Cole and colleagues for the Institute for Clinical and Economic Review (ICER), “that the gap between list price and net price is widening as a cumulative sum: over the five years between 2012 and 2016 the total value of pharmaceutical manufacturers’ off-invoice rebates and other price concessions more than doubled from $59 billion to $127 billion.”
In 2017, Adam Fein reported in the blog Drug Channels, new data from the research firm IQVIA revealed that “manufacturers of brand-name drugs in 2017 reduced list price revenues by an astonishing $153 billion. Those reductions came primarily from rebates, discounts, and other payments to the drug channel. That figure has grown by 10% from the 2016 figure, even though net prices for brand-name drugs grew by only 1.9%.”
The Rebate Dynamic
Critics argue that to satisfy the demands of powerful PBMs, pharmaceutical manufacturers raise their list prices so that PBMs can capture more money from the proportion of that price they charge. The higher list price also means that patients face higher out-of-pocket costs for their medicines. Thus, as Fein noted, the gap between list and net price grows – and consumers are harmed.
The ICER white paper explained a key part of the dynamic:
All would agree that higher list prices hurt many patients who need ongoing drug treatment, since the increase in the use of co-insurance and of high-deductible plans has meant that rising numbers of patients are required to pay their out-of-pocket share for drug coverage in relation to the list price, not the negotiated rebate price.
A fact sheet from HHS points out that if patients are “spending out-of-pocket up to their deductible, they typically pay a drug’s list price” – that is, the price before the rebate. And if patients are paying “co-insurance, as is common for expensive specialty drugs, they typically pay it as a percentage of a drug’s list price, even if the plan received a rebate.”
The fact sheet uses this example. Assume that a drug’s list price is $300 for a monthly prescription. A 30% rebate to a health plan would reduce the cost to that plan to $210. Assume also that a patient’s health plan requires co-insurance of 20%, paid out of the patient’s own pocket. But that 20% applies to the list price of $300 (thus, $60), not to $210 (where it would be $42). So, the net cost to the insurer is now $150 ($210 minus $60). HHS wants to end this practice, noting, “In some cases, a patient’s co-pay can actually be higher than the net price paid by the health plan after rebates.”
Under Part D, Medicare beneficiaries are currently responsible paying out of pocket 5% of the cost of their drugs once they reach the catastrophic part of their coverage (after about $8,100 of total spending in 2019: see Figure 4 here). That 5% is applied, again, to the list price of the drug, not to its price after rebates. Part of the rebate goes to the insurer and part to the federal government.
The 2018 report by Milliman pointed out the perverse incentives that rebates can cause with Part D, adding expenses for both patients and the government. Says the report, “A very high rebate can mean that the Medicare Part D plan’s retained portion of the rebate exceeds its liability. In this case, the Medicare Part D plan would have a financial incentive to prefer a high-cost prescription drug over a lower-priced alternative, which would increase costs to patients and the federal government.”
The Problem of Rebate Secrecy
A further problem with the rebate system is that it is so opaque. As the Milliman report explained:
Rebate contract terms are trade secrets and vary widely among brands, pharmaceutical manufacturers, and health insurers, but tend to be highest for brands in therapeutic classes with competing products. This secrecy makes cost comparisons of competing brands on the basis of price alone very difficult (if not impossible) to estimate.
Rebates therefore create a “black box” in the prescription drug distribution chain—the patient (and often the commercial health insurer) does not know how much the pharmaceutical manufacturers are paying in rebates, and how much of the rebates PBMs are keeping before passing the remainder to the health insurer.
It is no wonder, then, that in its comprehensive blueprint of May 2018, “American Patients First,” HHS listed among its potential action items: “Measures to restrict the use of rebates, including revisiting the safe harbor under the AntiKickback statute for drug rebates.” The document criticized “a business model built on opaque rebates and discounts that favor high list prices.”
The Administration thus made a strong case for reforming rebates and used tough language to criticize a secretive system that was raising out-of-pocket costs for seniors and increasing government expenses.
July 10 Meeting Leads to a Reversal
In a speech on June 13 in Washington, Azar argued that the “prescription drug market is so characterized by opacity, backdoor dealing and market concentration that it’s really not a market at all—and we need active steps to restore competition.” He added:
For instance, the current shadowy system of drug rebates pushes prices perpetually higher, allowing all actors in the system to make more money every year, while patients keep paying more out-of-pocket. Does that sound like any market you’ve heard of?
That’s why we’ve proposed replacing this rebate system with upfront discounts for seniors at the pharmacy counter.
But then, just 28 days later, the White House announced a sudden change of mind: “Based on careful analysis and thorough consideration, the president has decided to withdraw the rebate rule.”
But why? The decision came July 10 at a meeting that included Trump; Azar; Larry Kudlow, the director of the National Economic Council in the White House; Tomas Philipson, a University of Chicago health economist who a few days later would be named Acting Chairman of the Council of Economic Advisers; Kellyanne Conway, Counsellor to the President; and Seema Verma, Administrator of the Centers for Medicare and Medicaid Services.
According to a Bloomberg Law report, “Trump decided to kill the rule because of the high cost to the government and because of a concern that the rule could benefit drug companies, according to two sources briefed on the meeting.”
The Bloomberg article pointed to the Administration’s “recent loss in a lawsuit that challenged a rule requiring drugmakers to put their list prices in direct-to-consumer advertising.” It is hard to see how the disclosure lawsuit was germane to rebate policy, but it may have stirred animosity in some quarters. In addition, the insurers and PBMs, with considerable political clout, mounted strong opposition.
Two months before the White House decision, the Congressional Budget Office (CBO) issued a report on the possible effect of the rule on the federal budget. CBO estimated that spending for Medicare and Medicaid would rise by a total of $177 billion between 2020 and 2029. "Why be for something that CBO says has a tremendous cost and there aren’t ways to pay for it?" Axios quoted a Senate aide as saying. Certainly, $177 billion looks like a large number, but it is actually only 1% of projected Medicare and Medicaid spending over the 10-year period.
The CBO report was based on assumptions that were highly speculative. Change assumptions about behavior, and you get much different results. A PhRMA blog makes the point that the CBO report “fails to account for the stronger incentives that the proposed rule could create to negotiate the best value for patients.”
Study Finds Government Costs Fall in Four of Six Scenarios
A Milliman study in January 2019 for the Assistant Secretary of HHS for Planning and Evaluation looked at six scenarios, such as decreases in branded drug prices by drug manufacturers and increased formulary controls by PBMs. For four of the scenarios, net government spending actually fell – in one case by $100 billion over 10 years and in another by $79 billion. All six cases projected that, for beneficiaries, premiums would rise and cost sharing would fall. On net, in five of the six scenarios, spending by beneficiaries would decline.
Two months before the White House meeting, an article in Health Affairs by Joe Antos and James Capretta of the American Enterprise Institute argued:
It is tempting to blame high prices on unnecessary middlemen, but those middlemen have been hired by employers and health plans with the expectation that they will be effective at holding down overall costs. Undercutting the ability of PBMs to secure rebates would shift power and leverage to drug manufacturers. It is hard to see how taking that step would lead to lower overall costs for consumers.
But the truth is that rebate contracting is only one tactic to constrain prices. There are many other means at the disposal of PBMs without the negative consequences of the rebate system. For example, some insurers use a net-price contracting and pass all the savings on to the members.
By contrast, a study published in the Journal of the American Medical Association last month, funded by the Laura and John Arnold Foundation, looked at the placement of branded drugs in Medicare Prescription Drug Plan formularies when a generic equivalent was available. Researchers found that “72% of Part D formularies had a lower cost-sharing tier and 30% of Part D formularies had fewer utilization controls on branded drugs for at least one multisource drug.” In other words, PBMs and Insurers preferred costlier alternatives due to higher rebates than lower-priced generic medicines; leaving patients and the healthcare system to absorb the cost.
In addition, the argument that, as Bloomberg put it, the Administration balked because the proposed rule benefit pharmaceutical manufacturers would appear to be irrelevant. Does it make sense to render policy decisions on the basis of whether they harm one industry group or another? Or on the basis of whether the decisions achieve the kind of goals laid out in the 2018 HHS blueprint: better health and lower costs for consumers?
Yes, both better health and lower costs. This paragraph from the CBO report is instructive:
Lower prices on prescription drugs reduce beneficiaries’ out-of-pocket costs. Beneficiaries who do not fill some of their prescriptions because their current out-of-pocket expenses are high would be more likely to fill them and to better adhere to their prescribed drug regimens if their costs were lower, as they would be under the proposed rule.
In CBO’s estimate, the additional Part D utilization stemming from implementing the proposed rule would increase federal spending for beneficiaries who are not enrolled in the low-income subsidy program over the 2020–2029 period by a total of about 2 percent, or $10 billion.
However, the increase in the number of beneficiaries following their drug regimens would also reduce spending for services covered under Parts A and B of Medicare, such as hospital and physician care, by an estimated $20 billion over that period. On net, those effects are projected to reduce Medicare spending by $10 billion over the 2020–2029 period.
Political Fears Over a Minuscule Premium Increase
One simple explanation for the rejection of rebate reform at the July 10 White House meeting was the prospect that health plans would compensate for lost rebate revenues by boosting Medicare Part D premiums. And who wants to be responsible for a hike on seniors with an election approaching?
“At the end of the day, while we support the concept of getting rid of rebates and I am passionate about the problems and the distortions in system caused by this opaque rebate system, we are not going to put seniors at risk of their premiums going up,” Azar was quoted by The New York Times as saying after the July 10 decision.
But objections to premium increases may have been disingenuous while the real reasons were more political – a response to intense advocacy by the insurers, unhappiness with the successful legal opposition to disclosure regulations and fear of being seen as helping pharmaceutical companies in any way.
After all, premium increases would almost certainly be tiny. A study by the California Department of Managed Healthcare estimates the figure at 0.4%.
A separate study found that the majority of Medicare Part D members would see no increase at all. In that research, Erin Trish and Dana Goldman of the Schaeffer Center for Health Policy and Economics at the University of Southern California, began by estimating that “eliminating rebates would increase beneficiary-paid monthly premiums by an average of $4.31.” They wrote, “Our estimate is in line with those reported by HHS.”
The minuscule premium increases, as the Milliman report found, would easily be overwhelmed by out-of-pocket savings on co-pays and co-insurance. The biggest beneficiaries of this change, by far, will be sickest seniors, whose out-of-pocket spending will fall and whose health will improve.
Trish and Goldman also found that “only about 13 million of the 43 million Part D beneficiaries would see their premiums increase.” Many of the others either get their coverage through Medicare Advantage plans that use federal dollars to offset premium or qualify for low-income subsidies.
One large PBM, OptumRx, owned by UnitedHealthcare, has experimented, with excellent results, on “consumer point-of-sale prescription drug discount programs,” accompanied by “modest increases” in premiums, in the low single digits.
According to an Optum press release early in 2019:
Just two months into the year, the existing program has already lowered prescription drug costs for consumers by an average of $130 per eligible prescription. UnitedHealthcare data analytics demonstrate that when consumers do not have a deductible or large out-of-pocket cost, medication adherence improves by between 4 and 16 percent depending on plan design, contributing to better health and reducing total health care costs for clients and the health system overall.
An Irresistible Policy Change?
It is also far from clear that a political calculus that eschews rebate reform for fear of tiny increases in premiums is a winning one. Without rebate reform and without point-of-sale advertising disclosures (struck down by a federal court two days before the White House meeting on rebates), President Trump could be “vulnerable to Democrats’ attacks that he isn’t following through on his promises to lower drug prices,” wrote Stephanie Armour in the Wall Street Journal.
As a result, the Administration may soon take another look at rebate reform. The Administration record on constraining drug prices – mainly by easing approvals of generic drugs – is confirmed by Bureau of Labor Statistics data, which show declines for pharmaceuticals in 10 of the last 16 months and by reports from research firms and PBMs like Express Scripts. But the White House has done a surprisingly inadequate job of publicizing the achievement.
Rebate reform would be a solid policy accomplishment, relatively easy to explain. The Administration would almost certainly benefit from a reform that addresses what Americans care about most in health care: reducing the amount of money comes out of their own pockets and gaining access to drugs that address the worst illnesses. After the White House implements the reform, Congress will be under pressure to follow by making similar changes for commercial policies.
As an election nears, rebate reform may be turn out to be irresistible policy.
Online newsletter dedicated to helping you understand the costs and benefits that sometimes lie obscured in our complicated health care system