- Rebates offered by drug makers incentivize insurance companies to cover some drugs over others.
- Those rebates are sometimes tied to bulk purchases, causing patients to have limited, expensive options.
- Rebate reform would do a lot of work to drive down costs.
- Dr. Winegarden is a Sr. Fellow in Business and Economics with the Pacific Research Institute.
- This is an opinion column. The thoughts expressed are those of the author.
- Visit Business Insider's homepage for more stories.
America needs to do something about drug prices.
One of the biggest added costs in our system are caused by drug rebates, or the concessions manufacturers pay directly to health plan sponsors . Our broken drug rebate system stifles competition needlessly costing patients thousands of dollars while worsening health outcomes.
Luckily, President-elect Biden will begin his term with bipartisan support for reform, and he should start by eliminating anti-competitive practices collectively known as "rebate walls."
Mr. Biden, tear down that wall
Here's how rebate walls work. Manufacturers of blockbuster drugs will set high list prices - that is the raw "sticker" price - for these medicines but offer exceptionally large discounts, which result in low net prices for insurers. This sounds great, except patients' costs are based on the inflated list prices. Average Americans do not benefit from the large and fast-growing rebates.
The rebate wall becomes problematic because the manufacturers of blockbuster drugs will sometimes tie their rebates to volume targets. So in order to qualify for the discount, the insurer has to sell a certain number of doses.
Since the rebates offered by the blockbuster drug dwarf what new entrants can offer, insurers and pharmacy benefit managers (PBMs) will discourage the use of competitive medicines or block them from the drug formulary (the list of drugs covered by the insurer) entirely so they can hit the volume target and get a discount from the giant manufacturers. When this rebate wall strategy is successful, patients are denied access to medicines that could be just as efficacious but cost less.
The access barriers created by rebate walls prevent market competition from occurring\. Patients are pushed towards one drug from a big manufacturer instead of another competing brand name drug or a generic option that could be cheaper. All of these types of competition generate significant healthcare savings for consumers.
The cost of the wall
A new economic analysis conducted for the Pacific Research Institute looks at just how much this rebate wall strategy is costing patients with employer-sponsored health insurance, patients who are on Medicare, and patients who require drugs that are infused in a clinical setting.
While the individual situations vary, the study found that patients could end up with thousands of dollars in potential savings if rebate wall practices were eliminated. For the most expensive biologic drugs that are infused in a clinical setting, patients could save more than $6,000 if the competitive barriers from a rebate wall were removed.
Costs are only one-way patients lose. Anti-competitive rebate wall practices create access restrictions that worsen patient outcomes and cause other types of healthcare spending to increase.
For example, rebate wall barriers inappropriately create access restrictions that include "fail-first" or "step-therapy" policies. These policies require patients to first use and fail on the preferred drug before they can access a competitive product. These rules can delay appropriate care and can create long-term health impacts for patients with degenerative or progressive diseases. Moreover, access restrictions make it more likely that a patient will fail to take their prescribed medicine, leading to worse health outcomes and higher costs of care.
Because they've had time to establish a large market share, drugs with high sales volumes also tend to be older, more expensive drugs while the drugs that are frozen out tend to be newer and lower-priced. These newer medications are typically less expensive and often more effective for patients or a targeted sub-group of patients. By losing access to these new medicines, patients are often being denied access to more appropriate treatments.
Tearing down these walls should be a top policy priority for Biden's Federal Trade Commissioners, as well as Republican and Democratic members of Congress. The most effective reforms will fix the broader problems with the current rebate system. Requiring greater price transparency coupled with ensuring that all rebates benefit all patients would go a long way to correcting the problem. It would remove the incentives to artificially inflate list prices and allow patients to benefit from lower net prices, which are growing much more slowly.
Rebate reform would fundamentally change the incentives that drive the pharmaceutical market. Instead of competing based on the size of the rebates, drug companies would compete based on the actual net prices of medicines. With rebates no longer driving the market process, the ability to game the system via rebate wall tactics would disappear because new competitors would compete with established brands by selling their drugs at a lower net price. Insurers would be able to include these drugs on their formularies without fear of losing the sizable rebate revenues.
Wayne Winegarden is a Senior Fellow in Business and Economics and Director of the Center for Medical Economics and Innovation at the Pacific Research Institute. Download the new study "Tear Down These Walls" at www.medecon.org.