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HHS Proposes Eliminating Drug Rebates to Cut Prescription Costs

HHS is proposing a drastic change to the prescription drug market by eliminating drug rebates and passing savings directly to Medicare Part D beneficiaries instead.

Prescription drug rebates and Medicare Part D

Source: Thinkstock

By Jennifer Bresnick

- HHS has announced a proposal that would essentially eliminate the existing drug rebate process and instead encourage direct discounts to patients in an effort to control the costs of prescription drugs.

The proposal would exclude drug rebates from safe harbor protection under the Anti-Kickback Statute, leaving pharmacy benefit managers (PBMs) and manufacturers open to legal action for participating in rebate agreements.

“Every day, Americans—particularly our seniors—pay more than they need to for their prescription drugs because of a hidden system of kickbacks to middlemen. President Trump is proposing to end this era of backdoor deals in the drug industry, bring real transparency to drug markets, and deliver savings directly to patients when they walk into the pharmacy,” said HHS Secretary Alex Azar.

“This historic action, combined with other administrative and legislative efforts on prescription drug pricing, is a major departure from a broken status quo that serves special interests and moves toward a new system that puts American patients first. Democrats and Republicans looking to lower prescription drug costs have criticized this opaque system for years, and they could pass our proposal into law immediately.”

Instead of rebates that offer discounts to PBMs without savings being passed on to patients, the agency is proposing that discounts should be given directly to patients and reflected in the out-of-pocket cost for medications.

READ MORE: Price of Insulin Doubles, Increasing Spending for Members, Payers

These direct-to-patient discounts would receive safe harbor protection under the existing kickback laws.

In Medicare Part D and private insurance plans, the average difference between the list price of a drug and the net price after a rebate ranges from 26 to 30 percent, HHS said in an accompanying fact sheet.  But the savings typically do not result in lower out-of-pocket spending for patients. 

Individuals with high deductible plans for prescription drugs generally pay list price, while co-insurance is usually calculated as a percentage of list price regardless of whether the PBM received a substantial rebate.

“By encouraging negotiated discounts that are reflected in cost-sharing methods like co-insurance, used for many expensive drugs in Medicare Part D, the proposal is projected to provide the greatest benefits to seniors with high drug costs,” HHS says.

The proposal may also encourage the use of lower-cost generics and biosimilars by removing the incentive to prioritize brand name therapies with higher rebate potential.

READ MORE: CA Governor Addresses Prescription Drug Costs, Healthcare Access

“At the same time, manufacturers of brand drugs and biologics can prevent generic or biosimilar competition by increasing the size of the rebates they pay for a drug or group of drugs, and condition the payment of those rebates on maintaining their exclusive formulary position,” HHS asserts.

“This makes it easier for PBMs and insurers to collect bigger rebates on already-existing sales volume than it is to lower drug spending by using lower costs drugs.”

HHS hopes the proposal, if enacted, will significantly lower costs for seniors on Medicare.

“By removing the incentives that reward list price increases, patients who have out-of-pocket costs based on list price will save. This includes patients who are spending through a deductible, using a drug not covered by their insurance, or who pay co-insurance that is tied to the list price. If drug companies offer discounts directly to the consumer, patients will save at the pharmacy counter,” HHS said.

Close to a quarter of Part D plans require a co-insurance payment for preferred brand drugs, and most use co-insurance for non-preferred brand name pharmaceuticals.  Lowering the list prices for these products will produce savings across the deductible, co-insurance, and coverage gap phases of the benefit, HHS argues.

READ MORE: PBMs, Specialized Formularies Reduce Managed Care Prescription Costs

Around 30 percent of Part D beneficiaries, mainly those with the highest drug costs, would see a net savings under the plan.

“Individual savings will vary based on annual drug costs and type of drugs they take, but sicker beneficiaries or those with higher drug costs are most likely to save the most,” HHS said. “The new system would work as insurance is intended to: where those with especially high out-of-pocket drug costs will be most likely to benefit.”

HHS has the regulatory authority to bring these changes to Medicare, but will have to rely on Congress to implement a similar plan for the commercial market, the fact sheet concludes.

“The current discount safe harbor has not been updated since the establishment of the Medicare Part D program, and the regulations we are proposing today are designed to specifically address, for the first time since implementing the Part D program, certain payment arrangements among participants in the prescription drug supply chain,” HHS said.

“This rule provides a clear pathway for drug companies instead to compete to have the lower price and out-of-pocket cost to the patient.”

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