As a follow up to Adam Okun’s blog earlier this week, I wanted to provide more details. With employers and consumers facing rapidly increasing drug costs, the pharmaceutical industry has been the target of significant criticism for its lack of transparency and conflicting incentives. A major point of contention is drug rebates. The problem with rebates is that they drive a lot of profit for drug middlemen and are used by manufacturers to secure market share. And therefore, the powerful pharmaceutical industry has been using its clout with legislators to protect them.
Pharmacy benefit managers establish a list of preferred drugs called formularies, which steer patients to choose a particular drug in a therapeutic category over another. These decisions are often based upon which manufacturer pays the biggest incentive to the middleman. The ability of a lower-cost or more effective drug to compete against entrenched competitors is impacted by manufacturers who may tie rebates not to just one drug, but to a basket of drugs which they produce.
You might be thinking that a rebate sounds anti-competitive (and it is); however, they’re allowed because of an exemption from the federal anti-kickback statutes.
Last week, the U.S. Department of Health & Human Services (HHS) delivered a major blow to this exemption. Proposed regulations were issued which remove this safe harbor exemption for drug rebates paid on Medicare Part D and Medicaid managed care organizations. While there is a 60-day comment period, it seems that this change will go into law.
My guess is that the commercial market will soon follow suit with this sensible change. It is likely why CVS announced earlier this year that it would seek to eliminate rebates for direct consumer purchases.
This change will cause significant ripples in the market and there may be some short-term price pressures as the markets realign. Long term, however, this is an important change which will reduce complexity and increase transparency.