3866_TIA_Blog (1)-2-1Howard Deutsch co-wrote this blog post with Joe Stevens.

As the end of 2019 nears, a critical drug pricing question remains unanswered: Is the pharma “rebate wall” crumbling or are the rumors of its demise exaggerated? With the current “high list price, high rebate” model, pharma has been operating in a worst of both worlds scenario, taking blame for high list prices without reaping profits commensurate with those prices. Looking to break this cycle, pharma companies are beginning to bypass government and regulatory bodies, health insurers and PBMs in their efforts to address the rebate issue themselves, and we think that’s a wise move.  

In the political sphere, the White House proposed a regulation to end the rebates that pharma companies dole out to payers and PBMs (about $150 billion annually) but later withdrew that support. The industry’s lobbying body, PhRMA, has consistently backed proposals to reform the rebate system to better serve patients. Health insurers and PBMs also seem to be preparing for an end to the old rebate model by rolling out patient-friendly programs. Optum announced earlier this year that its rebates would flow through the patients at point of sale and Express Scripts explicitly introduced an option that favors low list price drugs over high list price, high rebate ones.

However, voluntary adoption of concepts like these has been limited to date, and PBMs remain largely beholden to customers who expect large rebate streams, so we can’t count on payers to tear down the rebate wall. While the prospect of major, government-driven reform has come and gone for now, actions by several pharma manufacturers suggest that the industry may drive change on its own. And it seems that many are in favor of replacing the current contracting practice with a “low list price, low rebate” model. Although it’s far from a universal solution, we think it could work.

Patients Typically Don’t Benefit From Rebates, but That’s Changing

In the last 12 months, Gilead’s Harvoni and Epclusa, Lilly’s Humalog, Amgen’s Repatha, and Regeneron and Sanofi’s Praluent have all done something that was previously unthinkable: They launched “cut-rate” versions of branded drugs at significant discounts to the existing prices. Gilead and Lilly created an “authorized generic” by essentially rebranding the same product, whereas Amgen and Regeneron/Sanofi created different SKUs for their marketed products and sold them at a lower price. In a move that would surely seem puzzling to those not immersed in the “Twilight Zone” world of pharmaceutical pricing and distribution, these companies chose to simultaneously market high- and low-cost versions of their drugs. 

Competition certainly plays a role in the companies’ decisions to release lower-cost versions of their marketed products, and that has led to giving payers steep discounts off the products’ list prices. For example, in launching its authorized generic, Gilead CEO John Milligan noted in a company statement that it will be sold at “a price that is similar to what health insurers and governments will pay for our branded HCV medicines,” which is more than 60% off the list price. Lilly CEO Dave Ricks similarly noted in a company blog that “plans typically don’t directly pass on to patients the rebates they receive from pharmaceutical companies” when launching Lispro (the Humalog authorized generic) at a 50% discount off the branded price. Around the same time, Sanofi reduced its insulin prices, and Novo Nordisk recently followed suit, proving that competitive disruption can have a trickle-down effect.

But while rebate rates have grown sky high, patients aren’t experiencing relief at the pharmacy. Instead, rebates are largely used to offset premium growth among the healthy, turning the concept of health insurance on its head. And some pharma companies’ efforts to step in haven’t worked out as intended. In launching the lower-priced version of Humalog, Lilly executives explained in their launch announcement that “The vast majority of patients have flat co-pays … so the price they pay at the pharmacy will not change,” and that their authorized generic is for “people with high-deductible insurance plans, the uninsured, or people in the coverage gap of Medicare Part D.”

When we take a closer look, it seems that some manufacturers have enabled the high-price narrative to perpetuate by acquiescing to the contours of the existing rebate system. Indeed, policymakers continue to call out insulin prices specifically, precisely the category in which Lilly acted.

Pharma Chips Away at the Rebate Wall

We reached a new milestone with Amgen’s plans to eliminate the higher-priced version of Repatha. To explain why, company executives stated in a press release that “some Medicare Part D plans have not transitioned to the lower list price option of Repatha” even a year after it became available. This caused about a half of patients to “face affordability challenges that need to be addressed.” This effectively puts the ball in the insurers’ court to increase access for Repatha. Along those lines, Amgen’s announcement ends with a challenge for payers to “do their part: cover the lower list price option of Repatha.”

Does Repatha’s move portend an end to rebates? Perhaps not. First, the core misalignment between pharma and the funders of health insurance (typically employers) remains. Pharma wants its discounts to go directly to those who need treatment, while employers often prefer that rebates go into a premium pool facilitated by PBMs. Second, reduction in list prices for drugs in competitive categories could just set new baselines for rebate contract negotiations. If manufacturers continue to negotiate against one another for exclusive access after cutting their sticker prices, they may find themselves in the even more painful position of pairing low list prices with high rebates. On the flip side, some of these efforts should chip away at drug discount totals while simultaneously diminishing the middleman’s power.

Hepatitis C, diabetes and cardiovascular care are certainly not the only therapy areas with “high list, high rebate” market dynamics. Perhaps as more companies act accordingly, treatments in other categories like respiratory and inflammatory will follow suit. Some of the industry’s pioneers are charting that path now, and there’s evidence that they don’t need to rely on legislative or regulatory action to at least nudge the rebate system toward reform.

In a world where Medicare anti-kickback policies and commercial co-pay accumulators make it difficult to lower patient out-of-pocket costs, transitioning from a “high list, high rebate” model to a “low list, low rebate” model is a logical and patient-friendly step in the right direction. The stakes are high: If we can successfully transition to this model and wean U.S. healthcare off rebates, we may be able to achieve true price transparency for patients, and maybe that’s not such a bad thing. It might not be feasible for drug manufacturers to unilaterally eliminate rebates, but as they add more sizable cracks in the system, we may once again hear the cry, “Mr. Azar, tear down this wall.”


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Topics: Howard Deutsch, Joe Stevens, pharma drug pricing, drug rebates, rebate wall, policies and regulations, out of pocket costs