Disclosures suggest rebates and insurers responsible for rising out-of-pocket drug costs

Disclosures suggest rebates and insurers responsible for rising out-of-pocket drug costs
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With just six weeks to go until the midterm elections, candidates from both parties are looking for wedge issues to turn out support.

Democrats hope that prescription drug prices are one of those issues. House Minority Leader Nancy PelosiNancy Patricia D'Alesandro PelosiTrump celebrates judge's decision tossing core tenets of ObamaCare Pelosi gets her swagger on Young girl's death draws new scrutiny over US treatment of migrants MORE has instructed her colleagues to campaign on a three point plan of President TrumpDonald John TrumpBiden, Sanders lead field in Iowa poll The Memo: Cohen fans flames around Trump Memo Comey used to brief Trump on dossier released: report MORE, the economy, and health care costs — specifically the cost of prescription drugs. Missouri Sen. Claire McCaskillClaire Conner McCaskillThe Year Ahead: Tech braces for new scrutiny from Washington McCaskill: 'Too many embarrassing uncles' in the Senate FEC votes to allow lawmakers to use campaign funds for personal cybersecurity MORE, one of the most vulnerable Democratic Senators, has made prescription drug prices her signature issue. "I’m going after the pharmaceutical companies," she says.

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Yet recent disclosures by CVS Health and Express Scripts — the two biggest pharmacy benefit managers (PBMs), which are middlemen between drug manufacturers and insurers — suggest a different culprit for rising out of pocket drug costs: insurers themselves.

CVS Health disclosed that for 2018, it passes through 98 percent of the rebates it receives from drug manufacturers to insurers. It estimates that it will keep only $300 million of $15 billion of rebates from drug manufacturers. Express Scripts made a similar recent disclosure, revealing that it passes 95 percent of its rebates on to health plan clients and their customers. These disclosures beg the question: What are insurers doing with their billions of dollars in rebates?

The answer: At best they are subsidizing premium costs for all members, with little-to-no direct drug cost relief for chronically ill patients who need it most. At worst they are using these rebates to bolster profits. A recent survey by the Pharmacy Benefit Management Institute reveals that more than two-thirds of insurers use rebate payments to offset their overall spending on drug costs. Only 11 percent use rebates to offset member premiums. And just 4 percent report using rebates to reduce patient out-of-pocket costs at the point of sale.

A quick background if you're unfamiliar with the rebate system: PBMs and insurers demand drug manufacturers pay a significant fee — a rebate (perhaps better described as a kickback) — to get access to insurers' plans. In theory, these rebates are supposed to be passed on to patients in the form of lower drug prices. In practice, they drive up the list prices of prescription drugs and only have a negligible impact on reducing patients' out-of-pocket drug costs. Rebates are estimated to make up about one-third of total list prices, according to the Berkeley Research Group.

These rebates are responsible for almost all recent drug price inflation. Consider: Gross spending on brand-name drugs grew by 37 percent, or $222 per person from $609 to $831, between 2011 and 2017. But when rebates are factored in, spending only increased by 9 percent — or about 1 percent per year. The difference between these skyrocketing list prices and the virtually flat net prices after rebates is known as the gross-to-net bubble.

These rebates have become public enemy number one for patient advocates who want to lower the burden of out of pocket drug prices. Earlier this year, Food and Drug Administration chief Scott Gottlieb criticized these "Kabuki drug-pricing constructs” that profit the industry at patients' expense.

Insurers benefit from the rebate system in two ways. First, they get more funds at their disposal to control health purchasing decisions of patients, steering them to more profitable yet potentially less effective drugs. Second, they benefit from the rebate-induced rising list prices because they structure their plans so that drug deductibles and coinsurance are based on a drug's non-discounted, pre-rebate list price. This shifts more of the cost burden onto patients.

Consider how unfair this system is for patients with chronic diseases. They generate the rebates because of their conditions but don't receive any special portion of the funds, which are primarily used to offset total plan costs for the employer or subsidize premiums for all members. Under this system, sick patients subsidize the healthy.

What can be done? Short of eliminating the rebate system entirely, policymakers should demand that insurers use their rebate funds to reduce drug price costs at the point of sale. This would direct the rebate funds to those who need them most as intended, significantly reducing the out of pocket prescription drug price burden for those with chronic diseases.

Yet insurers and politicians would rather trumpet list drug prices because it better suits their respective financial and political interests. Voters should take the time to educate themselves on the real drivers of out of pocket drug prices: the Kabuki rebate system and the insurers who profit from it.  

Terry Wilcox is the co-founder and executive director of Patients Rising.