Senate Drug Price Hearing Spotlights Rebates

Leaders from seven major drug makers defended their pricing at this week’s high-profile Senate Finance Committee hearing that demonstrated bipartisan support for some significant reforms to control costs. The executives pushed back on some proposals, but they also expressed support for steps to lower costs while pointing a finger at pharmacy benefit managers (PBMs), telling lawmakers that they can’t cut their list prices under the current rebate system.

Rebates are a hot topic in the drug pricing debate. Theoretically their purpose is to increase competition among manufacturers and to lower net costs. In most cases the patient does not participate directly in the financial value of the rebate as it is retained by the employer or public sector entity. These plan sponsors often indicate that they are leveraging these rebates to keep the overall premium cost down across the entire population. Additionally, a very high rebate may result in misaligned incentives by placing high cost/high rebate drugs in a preferred position on formularies—ultimately increasing the sticker price at the pharmacy.

The drug company executives told senators as much, noting that under the rebate system higher list prices actually help them compete with rivals to have their products included in plan formularies because they result in higher rebates paid to PBMs. PBMs often determine the formularies used by health plans based in part on rebate negotiations.

Some drug makers favor eliminating the rebate system. AstraZeneca CEO Pascal Soriot said at the hearing that “the government has to step up and change the rules. Rebates have to go.”  Earlier he said that if rebates were eliminated in both government and private drug plans, “we would definitely reduce list prices.”

Mercer also called for reforms to the rebate system in both government and private plans in its July 2018 comment letter to the Trump administration on how to lower drug prices. Changes to the system are needed to achieve a value-based model, Mercer said, noting that changes should include increased transparency of price and rebate information to employers.

The Department of Health and Human Services issued a proposed rule in January that would make the rebates drug makers give to health plans and PBMs subject to fines under a federal anti-kickback statute. The proposal would apply only to federal programs. It’s not clear if HHS will be able to finalize the proposal; legal challenges could very well delay or block implementation.

Major legislation to reform the rebate system isn’t likely before the 2020 elections, though the issue will remain in the spotlight. The Finance Committee is considering holding a hearing devoted to the topic, so PBM executives could soon be sitting in the same chairs as the drug company CEOs.

Geoff Manville
by Geoff Manville

Partner, Mercer’s Law & Policy Group

Register for Mercer US Health News to receive weekly e-mail updates.