Altering PBM Rebates Alone Won't Solve Drug Pricing Woes, Authors Say

While policymakers are grappling with ways to reduce to cost of expensive prescription drugs, one of the proposed solutions—targeting rebates negotiated by pharmacy benefit managers (PBMs)—will not on its own be enough to reduce overall pharmaceutical spending, according to a new brief from The Commonwealth Fund.

While policymakers are grappling with ways to reduce to cost of expensive prescription drugs, one of the proposed solutions—targeting rebates negotiated by pharmacy benefit managers (PBMs)—will not on its own be enough to reduce overall pharmaceutical spending, according to a new brief from The Commonwealth Fund.

The brief’s authors, Elizabeth Seeley and Aaron S. Kesselheim, reached out to 5 experts and conducted a literature review, and they found 2 main themes—the practice of rebates and the prospect of future changes to the industry.

There is an overall lack of transparency in prescription drug pricing, given the complex web between PBMs, drug companies, and health plans. PBMs negotiate a rebate from pharmaceutical companies and in turn pass some of the rebate back to health plans; in return, the drug company may receive better placement for its product on a multi-tiered formulary. The size of the rebate, and its impact on price, is typically murky.

Manufacturers pay the rebates at the point of sale to the PBM, and these rebates can make up 40% or more of the drug’s list price. The size depends on a number of factors, including the number of competing products and the formulary placement.

By negotiating rebates, PBMs say they tackle the issue of high list process set by pharma companies. But since drug-specific rebates are kept confidential in contracts between manufacturers and PBMs, commercial payers have limited ability to assess savings success.

PBMs report that in many of their contracts, 90% of rebates are passed on to health plans and payers, although small payers and employers have reported that they did not receive that percentage.

Critics contend that PBMs may have an incentive to prioritize high-priced drugs over more cost-effective medicines, since PBMs are reimbursed partially on the rebates they obtain, which are calculated as a percentage of a drug’s list price.

As a result, policymakers have begun questioning the PBMs in a larger context—how do they impact the value of pharmaceutical spending overall?

There have been 2 main proposals put forth about rebates—a pass-through to payers and a pass-through to patients. Similar to a paper released last month by the Institute for Clinical and Economic Review (ICER), however, the authors of the current brief found potential unintended consequences to the reforms.

Passing rebates to payers

If, as some in Congress as well as HHS have suggested, rebates are passed to payers, there could be unintended ramifications, the authors suggest. If PBMs are not allowed to keep any of the rebates they negotiate, they may have reduced incentives to negotiate greater savings.

Another alternative includes a legislative requirement that PBMs pass through at least 90% of their rebate savings to all payers, including small health plans and employers—in other words, to enforce what the PBM industry claims is current practice. The authors note some challenges with this approach. If there is no public disclosure of rebate levels, manufacturers could offer lower rebates, or may not grant rebates at all. However, the authors suggest that the government could avoid public disclosure of confidential data through the use of a central oversight body, similar to the Medicaid Best Pricing Rule, that requires manufacturers to submit their best price data to CMS.

Passing rebates to patients

UnitedHealthcare announced a plan to pass rebates back to customers to reduce their out-of-pocket costs (OOP), and last year, HHS proposed tying Medicare Part D beneficiary cost-sharing to rebate levels. The authors said that, while this approach may improve transparency and reduce OOP costs in the short term, the change would also result in higher overall drug spending from reduced savings passed on from PBMs to health plans, and ultimately, higher health plan premiums. As a result, the Congressional Budget Office estimates a budget increase of $43.4 billion over 10 years to cover the additional premium increases for Part D plans.

More recently, HHS proposed to exclude rebates from safe harbor protections that currently shelter drug makers’ rebates from penalties under the federal anti-kickback statute, and would create new safe harbor for discounts offered to patients, as well as fixed-fee service arrangements between drug makers and PBMs. Manufacturers and PBMs could negotiate rebates on behalf of Medicare beneficiaries only if the rebates are fully passed through at the point of sale. The authors write that, if passed, “this regulatory change could completely alter the current pharmaceutical reimbursement methodology in the [United States] without a clear understanding of the impact.”


It is unlikely that drug makers would lower list prices in the absence of rebates; more likely they would keep them around the same level, the authors write. Instead, they might choose to offer up front discounts to different PBMs, which may not be any more transparent than rebates.

Another option could be a system based on a comparison of clinical value; the authors noted that both CVS and Express Scripts have introduced new reimbursement models for PBM formulary management, which could signal a realization by the industry that change is on the horizon. What remains unknown is the degree to which price and rebate data must be publicly available and whether changes improve the value of drugs purchased.

In deciding what creates value in the context of overall healthcare spending, the authors wrote, policymakers seeking to reform pharmaceutical reimbursement rebates will need to consider these changes in light of vertical consolidation in the healthcare industry as well as new market entrants, such as the Amazon-PillPack combination.

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