To Tackle High Drug Prices, Tear Down the Rebate Wall

In a period of deep political polarization, politicians on both sides of the aisle agree that Americans are paying too much for pharmaceutical drugs. During the 2020 presidential election, both Joe Biden and Donald Trump made lowering drug prices a central pillar of their respective campaigns, suggesting in the next four years there could be a real legislative effort to lower drug prices.

The bipartisan consensus reflects the reality that American consumers face some of the highest drug prices in the world, averaging $1,200 per person each year. The high cost of medications has forced approximately 30% of Americans to skip a prescription because of the cost of medication while 18% say the cost of medication has prevented them from paying for basic necessities.

While numerous pieces of legislation have been proposed to lower drug prices, such as the Lower Drug Costs Now Act, Congress should turn its attention to the practices of Pharmacy Benefit Managers (PBMs) and their anticompetitive practices. Of particular concern should be the existence of rebate walls that inflate the price of prescriptions for consumers, limit access to biosimilar and generic alternatives, and destroy innovation.

PBMs act as middlemen between insurers and patients and administer prescription plans. In this role, they not only determine how much patients pay for their medication but also what medications patients can access and when. This power has led PBMs and drug manufacturers to reach agreements that establish rebate walls whereby the manufacturer will offer a significant discount to PBMs on their drugs if PBMs meet a set dollar amount. These agreements lead PBMs to limit the availability of competitive drugs on their formulary, which prevent patients from getting access to lower-cost substitutes.

Rebate walls leave consumers paying more for medication. When developing pricing, PBMs use a list price that does not reflect the billions of dollars of kickbacks from manufacturers. Because consumers see this inflated list price, patients pay higher copays, deductibles and other out-of-pocket costs.

In 2019, the estimated spending on a list price of drugs was $671 billion, however, accounting for kickbacks the total spending was only $356 billion. If these savings were passed on to consumers, and they actually paid the prices PBMs paid, they would undoubtedly be facing significantly lower costs for their medications.

One of the major anti-consumer effects of rebate walls is that patients lose access to alternative medication that might be cheaper or more effective than the medication covered by the PBM. To meet the quota required to achieve substantial discounts, PBMs often limit patient access to alternative medications that may be just as effective or cheaper unless the medication covered by the rebate wall has been tried first. This approach, commonly referred to as first and fail, is problematic for consumers because it not only limits their access to cheaper alternatives that might be on the market, but failure to take the correct medication can often exacerbate medical conditions, leading to negative health outcomes for consumers.

Rebate walls also stifle innovation by preventing newer alternatives from reaching the market. This is highly anti-consumer because competition and access to generic and biosimilars have routinely been shown to be the most effective mechanism for lowering the cost of drugs.

A 2019 study published by the Food and Drug Administration has shown when a generic competitor enters the market, the cost of the competitor is often 39% lower than the incumbent and 54% lower when two generics enter the market.

The existence of exclusionary policies toward potential competitors that prevent rival pharmaceutical companies from fairly selling their products has the effect of preventing them from raising the necessary capital to conduct further research. This problem is particularly acute in the pharmaceutical industry where it can take up to 15 years and about $1 billion to develop new products. The reality is that with rebate walls, innovation is stifled, and consumers lose potential access to future treatments.

Recently, there has been movement at the state and federal level to regulate PBMs. The Supreme Court recently ruled in a unanimous decision that state governments have the authority to implement greater regulations on the behavior of PBMs and limit their ability to harm consumers. Six states currently have statutes that require PBMs to report rebate information while eight have laws requiring them to be licensed by the state

The Federal Trade Commission is also aware of the harmful effects of rebate walls on consumers. While investigating the merger of pharmaceutical companies AbbVie and Allergan’s, the FTC was made aware that rebate walls established by AbbVie have created “substantial barriers to AstraZenaca’s ability” to bring competitive drugs to market. In a letter to the FTC’s director of competition, David A. Balto warned that AbbVie’s rebate walls designed to protect their drugs Humira and Skyrizi had not only prevented AstraZeneca’s cheaper alternative Brazikumab from entering the market but had led “to higher prescription drug prices” and “reduced consumer choice.”

While both political parties support lowering drug prices, it is readily apparent that it cannot happen unless legislators act to remove the anticompetitive and anti-consumer effects of rebate walls and kickbacks that inflate prices and keep competitive drugs away from patients. While these practices remain in place, it seems that American consumers will continue to pay higher than average drug prices.

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