Percentage-Based Rebates Drive Up Prices And Suppress Competition
Zeroing out rebates and “passing savings along to patients” would send a powerful message. But doing so is not a panacea for high drug costs. Rebates and other price concessions offer valuable leverage in negotiations between manufacturers and payers, and they should remain a part of the formulary management process. The safe harbor concept must evolve to help create and support new models that improve health outcomes, promote competition, and manage overall health care spending. Rather than eliminating rebates altogether, the health care policy world should modernize the safe harbor in a way that encourages innovative, value-based purchasing arrangements.
The problem with rebates, as they function currently, is that list-price-based rebates and administrative fees can and do elicit percentage-based payments to health care middlemen. The result is a preference for higher-priced products, and anti-competitive behavior that blocks access to other medications. Unsurprisingly, manufacturers are willing to raise prices and transfer the greatest list-price-based rebate value to middlemen to secure preferred formulary position at the expense of real free-market competition, while also limiting the therapeutic options of physicians and patients.
The current system encourages payers to favor medicines that carry higher rebates than lower list-priced drugs. Because PBMs retain a portion of negotiated rebates and other price concessions as compensation for their services, list prices are rising rapidly even as net prices have held steady. A key unintended consequence of this dynamic is that patients do not directly benefit from significant price negotiations in the market today. This is not the case in other health care sectors, as patients already benefit from price negotiations that result in lower direct hospital and physician costs.
Rebates that are tied to formulary restrictions also create an incentive for entrenched market leaders to “bid” incremental rebates to prevent or limit access to competitive medicines. This model, coupled with escalating patient cost-sharing requirements, harms patients by driving up prices and reducing access to innovation.
Transforming Rebates And Fees to Help Patients
An analysis by Amundsen Consulting shows that more than 55 percent of patients’ out-of-pocket spending for brand medicines is based on the list price of the medicine, even though their health insurer may be receiving a steep discount. Government policies should encourage rebate dollars to flow back to patients taking prescription drugs. This could be accomplished directly, through rebate pass, or through other measures that enhance the level of coverage provided by the prescription drug benefit.