How 'rebates' on medications keep costs up

[Editor's note: This story originally was published by Real Clear Health.]

By Madelaine A. Feldman & Wayne Winegarden
Real Clear Health

As Congress once again takes up legislation to reduce drug prices, one of the most important yet overlooked areas for reform is rebate walls.

Rebate walls, also known as rebate traps, block competition in parts of the U.S. prescription drug market, especially immunology, which is home to some of the costliest drugs. They can favor older, more expensive and even less effective drugs over newer, more effective, and often cheaper alternatives.

Thanks to rebate walls, patients are routinely forced to “fail first” on certain medications before their prescribed medicine is covered by insurance. This can lead to higher health care costs and discourage innovation.

These lose-lose outcomes are prompting bipartisan scrutiny. President Biden’s new health secretary, Xavier Becerra, as well as Sen. Amy Klobuchar (D-Minnesota) have criticized them. So have Republican lawmakers, including John Cornyn (R-Texas) and Sen. Chuck Grassley (R-Iowa), the ranking member on the Senate Judiciary Committee. Working together, they can tear down these walls, improve patient outcomes, and lower health care costs.

Here's how rebates work for prescription drugs: Manufacturers of blockbuster drugs set high list (“sticker”) prices but offer large rebates to get preferred placement on drug formularies constructed by pharmacy benefit mangers (PBMs). This results in low net prices for PBMs or the health insurance plans they serve. That’s good, except many PBMs and health insurance plans base patients’ costs on the high list prices.

Rebates can become walls when a manufacturer’s drug evolves into a blockbuster and the manufacturer ties its rebates to large volume targets. Newer or less expensive drugs are typically approved for fewer indications and taken by fewer patients, so they cannot match the blockbuster’s large dollar value of rebates. Sometimes, the manufacturer of the blockbuster drug even ties its large rebates to retaliatory measures, such as the claw back of rebates. To hit the performance target and avoid the retaliatory measures, PBMs and health insurers block competing drugs through formulary placement.

This blocking of competing drugs takes two main forms: exclusion from coverage and utilization management.

Exclusion: PBMs’ “exclusion lists” have ballooned over the past decade. PBMs and insurers exclude from coverage medicines which do not offer as much in rebates, some of which have lower list prices or better efficacy.

Utilization management: PBMs and insurers often implement utilization management tools such as prior authorization, an administrative hurdle for physicians, or step therapy, which requires patients to try an array of treatments the PBM prefers before it pays for a less profitable one. These tools maintain rebate walls by forcing patients onto preferred drugs.

Rebate walls reduce patients’ adherence to their medicines, often resulting in worse health outcomes. A 2019 study showed that patients whose insurance plans required step therapy had roughly 20-25% lower odds of treatment effectiveness. Worse health outcomes raise costs overall, as sicker patients require treatment for their complications.

Rebate walls can also deny patients’ access to cheaper medicines. A Pacific Research Institute study calculated that competition among brand-name drugs leads to 14-26% lower prices for people covered by employer-based insurance. For expensive immunology drugs, those lost savings translate to patient out-of-pocket costs that are roughly $5,000 higher per year.

The cost impact is even bigger when rebates discourage competition from biosimilars—which are lower-cost versions of expensive biologic medicines. The average price for such drugs is 30% lower than their brand-name competitors, and some biosimilars are more than 50% cheaper.

Systemwide, rebate walls are costing patients and employers hundreds of thousands of dollars every year in lost savings. At the same time, rebate walls reduce the commercial prospects for new drugs, leading to fewer new medicines being developed.

The Biden administration and Congress could tear down rebate walls in one swoop by requiring all rebates to be passed on to patients. Patients would benefit from immediate savings at the point of sale. Such a change—known as the rebate rule—was adopted by the Trump administration late last year for Medicare Part D drug plans. If left in place by the Biden administration and extended to employer-sponsored insurance, it would end rebate walls—saving money for patients and the overall health care system.

Alternatively, rebate walls could be lowered in smaller steps aimed at improving competition. One step is greater scrutiny from antitrust authorities—the Federal Trade Commission and state attorneys general. Another is to limit the use of utilization management tools—prior authorization and step therapy—for non-medical reasons. Some states have passed legislation restricting step therapy, allowing patients to step over these requirements if certain criteria are met.

Tearing down rebate walls would restore competition to pharmaceutical markets, benefiting both the physical and financial health of Americans.

Madelaine A. Feldman, M.D., is a rheumatologist, president of the Coalition of State Rheumatology Organizations, and serves as chair of the Alliance for Safe Biologic Medicines. Wayne Winegarden, Ph.D. is a Sr. Fellow and Director of the Center for Medical Economics and Innovation at the Pacific Research Institute.

[Editor's note: This story originally was published by Real Clear Health.]

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