Do Drug Discounts Contribute to Rising Prices?

August 3, 2018

Managed Healthcare Executive asked key opinion leaders their thoughts on the drug rebate controversy. Here’s what they said.

In the midst of soaring pharmaceutical costs and promises from drug makers to help curb costs, some are complaining that drug rebates contribute to high costs.

Drug rebates arose in the 1990s in response to litigation that brand pharma had violated antitrust laws. 

“First you have to understand what the ‘discount’ is, it is actually a rebate; think mailing in the barcode off of a cereal box,” says Nicholas W. Carris, PharmD, assistant professor, University of South Florida College of Pharmacy and Morsani College of Medicine. “But now imagine the grocery store kept the money from the rebate. That seems to be our situation. The National Academy of Sciences noted that pharmaceutical manufacturers offer rebates to PBMs, but that we don’t reliably know the amount of those rebates, and what part of the rebate contributes to lower cost for patients versus higher profits for PBMs.”

Managed Healthcare Executive asked key opinion leaders their thoughts on the drug rebate controversy. Here’s what they said.

Carris:

“Is healthcare the only industry where a discount might cause consumers to pay more? Discount based on ‘purchasing power’ is the crux of the argument for CMS to negotiate drug prices. However, when applied through PBMs to negotiate rebates (an after-the-fact price reduction) it is uncertain where the money actually goes. Until there is total transparency (as called for by the National Academies of Sciences, Engineering, and Medicine) we cannot know for sure. Though based on the apparent desire for status quo among benefit managers, my guess is the ‘discounts’ do contribute to rising prescription drug costs.”

Julie Rubin, PharmD, BCPS, director of clinical services for CompleteRx:

“I do believe that rebates contribute to a small degree of the rising prices. Manufacturers and insurances brokers raise their prices to help offset their rebates. Rebates are only found on specialty and brand items. Copays are often based on list prices and not the cost after the rebate. Aetna and United Healthcare are finding ways to ensure that the rebates are being passed to the end user since in many cases we never see the rebate.”

Jonah Houts, vice president of government affairs at Express Scripts:

“Rebates do not raise drug prices. Drug makers do, and they can lower them at any time. At Express Scripts, we’ve always been in favor of voluntary price decreases that would make medications more affordable for our plans and their members. Lower list prices would not harm formulary status or patient access.”

Rob Piazza, product manager, Analytics, at Benefitfocus:

“Do they ‘contribute’ to rising pharma costs? Yes, they do, but that doesn’t mean eliminating rebates will fix this problem. The reason why they contribute to rising drug costs is that they undisputedly add confusion to an already confusing industry. Whenever you don’t explicitly communicate the cost of a good or service to a consumer you’re hurting consumerism, not promoting it. The reality is companies can ‘pad’ profit margins when consumers don’t understand if they’re getting a good deal or not. Why won’t eliminating rebates fix the rising drug cost problem? Because all of these large companies involved in the supply chain are going to make up the difference one way or another. If they can’t maintain a certain margin through a discounting strategy, then they’ll increase prices, premiums, deductibles, etc. It’s basically ‘whack-a-mole.’ However, as a consumer, I’m more willing to shift or spend my money on services that are more transparent with their pricing.”

Bob Marino, managing consultant, OneDigital:

“Initially, the general consensus on rising drug prices was they were due to the drug manufacturers trying to recover significant research and development costs for brand name medications they developed. What has now led to the push to increase the cost for certain medications is the use of rebates and discounts. A drug manufacturer will use a ‘middleman'-a pharmacy benefit manager or PBM, to help distribute and sell their medications. The PBM helps to put together formularies which include drugs with greater rebates or discounts. They also receive a portion of the rebates as well. The drug manufacturers in turn keep their prices high or increase them to pay the discounts or rebates. The PBM’s can ‘leverage’ for more rebates by choosing to offer or not offer a drug manufacturer’s medication on the formulary. This practice leads to artificially inflated pricing and greater costs for all consumers. We as benefit consultants see the results in the increases in pharmacy trends and costs our employer groups are being charged.”

Steve Wojcik, vice president, Public Policy, National Business Group on Health, Washington, D.C.:

“There are incentives all along the supply chain, starting with initial pricing from the manufacturers until the point of sale to patients, to raise prices. It would be better to have more reasonable pricing from the get-go and all along the line rather than discounts, rebates, and other ways to adjust prices retroactively.”

Mike Cantrell, RPh, Esq, senior director, regional operations, Omnicell:

“There are many factors that drive price increases (e.g., R&D, raw materials, competitive landscape, regulatory burden), but I don’t know that I would include discounts in that group. Generally, price concessions are given in an effort to sell more units of a particular drug, or other drugs within the manufacturer’s product portfolio. Granted, the method by which the price to which the discount is pegged is determined by the manufacturer, the payer of the drug product is concerned with a dead net cost (net of discounts, rebates, and other price allowances), not a top line price. Savvy payers are constantly looking for opportunities to reduce their drug spend (generally by leveraging a competitive pharmaceutical market) and drug discounts seem more like competitive market drivers, rather than market inflators.”

Ed Francis, a senior director with West Monroe Partners, based in Chicago, and leader of the firm's services and solutions:

“Drug pricing rebates are non-value activities that can incentivize counterproductive behavior in the drug value chain. By providing incentive to PBMs and payers, they introduce profit into the selection process that should be more tied to value clinical outcomes.  Drug pricing generally lacks transparency and, therefore, makes it very difficult to understand where oversize profits exist and where actions are taken in the name of profit rather than best clinical outcomes. The rebate system is certainly a major aspect of this, but I would also include internal efforts by PBMs and payers to classify drugs as ’branded’ rather than generic, thereby creating opportunities for pricing arbitrage. I would also suggest that there are channel incentives that move patients to get drugs from more profitable outlets.”

Joseph Honcz, RPh, MBA, VP, Payer Access Solutions of Precision For Value:

“As the light continues to shine brighter and brighter on the often-hidden components of drug costs, it’s clear that this complicated matter that involves many variables. Given this complexity it’s unlikely that flipping only one of the pricing levers, such as removing rebates, will actually reduce the drug costs. Rather, removing rebates will likely shift the financial equation so that there are different winners and losers, and in this case pharma would reap considerable increased profits. That being said, with the recent proclamation from Pfizer’s CEO that we are ‘going to go to a marketplace where we don’t have rebates’ should force one to contemplate if they are ready to hit the reset button and, like Walmart, rollback their prices. A rollback at an industry scale would be unprecedented and require coordination at the federal level; as a result, it’s difficult, if not impossible, to see that happening. What could be a more likely scenario is if rebates are eliminated without a rollback, one should expect both increased premium levels and reduced access in the form of more restricted formularies and benefit designs.”