Washington must change the system that encourages high drug prices

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“Take away our rebates? We’ll just up premiums.” This is the threat from pharmacy benefit managers (PBMs) and insurers if rebates are passed back to seniors in Medicare.

PBMs determine the formularies for Medicare beneficiaries, thus controlling what drugs they can get, where they can get them and how much they will pay for them. Ideally, placement on the preferred formulary should be based on efficacy, safety and lowest list price. However, preferred status is determined by highest price concessions from manufacturers in the form of rebates and administration fees.

{mosads}For years, PBMs have disguised the billions of dollars in rebates and fees they pocket from manufacturers by describing them as “savings” to the health care system. These rebates are kickbacks to the PBM from the manufacturer for preferred placement on the formulary.


Now that the Department of Health and Human Services wants these rebates passed directly back to the patients, PBMs are throwing an industry-wide temper tantrum and threatening to raise premiums on the nation’s seniors.

Until the last year or two, most people probably have never heard of PBMs — but they play a significant role in drug pricing. In order to provide large (i.e., competitive) rebates to PBMs, manufacturers are incentivized to raise their list prices. Medications become unaffordable, as a patient’s coinsurance is based on the inflated list price, rather than the true cost to the PBM.

These rebates are often described as being “like kickbacks.” This is incorrect. They aren’t like kickbacks, they are kickbacks, which is why safe harbor provisions were necessary in the first place. It’s a backward system that is overdue for an overhaul and the Department of Health and Human Services’ proposed rule is a start. While removing safe harbor for rebates to PBMs, the rule would allow rebates to be passed directly to patients — ultimately lowering their out-of-pocket costs.

Manufacturers have an important role in this discussion as well. As some have noted, patient costs will not go down if rebates are discontinued and manufacturers do not reduce prices. However, if formularies become based on lower list prices, as opposed to higher price concessions, competition to get on the formulary will actually result in lower prices.

While PBMs are using scare tactics and threaten to raise premiums on Medicare beneficiaries if this rule is implemented, in reality 93 percent of (non-low income subsidy) beneficiaries take at least one medication. This leaves only 7 percent  who may not benefit from lowered cost of medicines. Lowered deductibles and copays might also benefit Medicare beneficiaries.

Instead of battling with each other, both Republicans and Democrats need to take a step back and see this issue for what it is. There should be outrage among our leaders in Washington about this obvious money grab, which puts patients in the continuous position of wondering how they’re going to afford the medications they need. However, due to the fractured state of our politics, this issue has already turned into a political football.

If there’s any issue that lawmakers from both sides of the aisle should be able to come together on — this is it. It won’t be easy. Insurers and PBMs continue to rely on fear and lack of understanding of this murky system to keep the status quo in place.

But in order to give relief to patients, Washington must change the system that encourages higher list prices, take the billions in “savings” from the pockets of the middleman and allow them to be passed directly to the consumer.

Dr. Madelaine Feldman is a rheumatologist. She is a clinical assistant professor of medicine at Tulane University School of Medicine. Dr. Feldman received the Distinguished Service Award for Tulane Medical School.

Tags Drug prices Health care

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