Every month, drug companies offer up nearly $13 billion in rebates and other discounts.
Patients don’t see these savings at the drugstore, though. The supply chain all but ensures that discounts instead flow to insurers and the “pharmacy benefit managers” they hire to administer their drug benefits.
The Trump administration recently sent shockwaves through the healthcare industry by proposing a plan to upend this system.
If the plan takes effect — and if it works as policy wonks hope it might — Americans who rely on prescription drugs should see their pharmacy costs plummet. That would make it easier for them to afford the medicines they need.
The proposal takes aim at PBMs, who negotiate with drug companies on behalf of insurers.
Drug companies generally offer large discounts in exchange for preferred placement on “formularies” — i.e., the list of drugs an insurer covers. In 2017, for example, Eli Lilly’s average rebate was north of 50 percent. Rebates for insulin often exceed 70 percent.
The Department of Health and Human Services estimates that if these rebates were shared with patients at the point of sale, pharmacy bills would drop by about 30 percent.
Today, though, patients don’t benefit from these discounts. Insurers tie copays and coinsurance to the pre-discounted list prices of drugs. PBMs pass most of the money they receive from drug makers back to insurers, who use the money to lower premiums for all their customers. PBMs keep the rest.
In any other industry, rebates like these would be classified as illegal kickbacks. But a special carve-out in the federal anti-kickback statute exempts PBM rebates from the normal rules. This enables what HHS Secretary Alex Azar has accurately described as “a hidden system of kickbacks to middlemen.”
The Trump administration wants to eliminate that special carve out. A new rule would make it illegal for drug companies to pay rebates directly to middlemen under Medicaid and Medicare Part D. They could still offer discounts, just as long as they shared them directly with patients.
This would make a serious dent in patient out-of-pocket costs. The rule would save Medicare Part D beneficiaries up to $28 billion over a decade, according to one analysis. A study from my organization, the Partnership to Fight Chronic Disease, found that making rebates on diabetes drugs directly available at the pharmacy counter would save each patient $791 per year.
The president’s reform will be especially beneficial for the 133 million Americans battling at least one chronic condition. These patients spend nearly three times more on medicines than individuals with no chronic diseases.
Today’s drug supply chain benefits insurers, pharmacy benefit managers, and drug companies — but doesn’t benefit patients. The Trump administration’s proposal is an essential first step towards straightening out this backwards system.
Kenneth E. Thorpe is a professor of health policy at Emory University and chairman of the Partnership to Fight Chronic Disease.
