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Contributed Content: 2 Alternatives to Ineffective Prescription Drug Rebates

Analysis  |  By Sandra Clarke  
   July 25, 2024

Prescription drug rebates were once a good idea. Not any more.

Editor’s Note: Sandra Clarke is the EVP and Chief Operating Officer of Blue Shield of California.

What happens when you squeeze a balloon? While the air inside shifts away from where you put pressure, the total air volume is still trapped inside. Prescription drug rebates largely work the same way: Rather than removing excess costs from the system, rebates often shift costs from one area to another.

And like an opaque balloon, it’s impossible to see what’s happening inside the drug pricing system.

Rebates exemplify drug pricing’s unfairness, lack of transparency, and limited competition, because they can enable runaway list prices and hidden fees, resulting in higher member costs and a false sense of savings.

Traditionally, pharmacy benefit managers (PBMs) negotiate drug prices with drug manufacturers without providing visibility into the process, the actual costs or hidden fees they collect. As part of this negotiation, PBMs and manufacturers agree to a rebate amount (and often fees) that the manufacturer will pay the PBM on prescriptions for the manufacturer’s drug covered by the PBM’s clients based on the drug’s list price and the volume dispensed.

Where rebates went off track

Ideally, rebates should lower costs for health plans, employers and members. Instead, they have morphed into a system that frequently does the opposite. Misaligned incentives, opaque markets, information asymmetries and barriers to competition have resulted in a dysfunctional system that does not generate fair prices or value for patients.

Rebates now often result in the use of higher-cost drugs with higher out-of-pocket costs for members instead of clinically equivalent, lower-cost medications. They are often given for expensive, branded drugs prescribed at high volumes.

Brokers, consultants, and health plans do not have visibility into how drug prices are set, only the understanding that the more a rebated drug is used, the bigger the rebate check. Health plans and employers have limited insight into whether they’re paying a fair price or getting the best value. Further, rebate offerings claimed as transparent often do not disclose hidden fees. 

Are rebates worth saving?

While some in the pharmaceutical ecosystem say rebates are worth saving, I believe they are largely a trap. The data suggests that rebates are raising medication costs, not lowering them. Rebates are positively correlated with increased list prices, according to the Leonard D. Schaeffer Center for Health Policy & Economics. The Schaeffer Center found a $1.17 list price increase for every $1 rebate increase.

Sandra Clarke, EVP and Chief Operating Officer at Blue Shield of California. Photo courtesy Blue Shield of California.

With my background as a health plan CFO, a pharmaceutical company head of finance, and other executive healthcare financial roles, I know that the numbers and incentives don’t add up. It’s time to pop the balloon and do away with most rebates in their current form.

Forget rebates: Try these options instead

Manufacturers deserve to make a fair profit. They should be rewarded for contributions that help patients receive innovative and life-saving medications.

Instead of using rebates, I suggest two more equitable ways to compensate manufacturers:

  • Net price: The net price model delivers value by promoting direct negotiations with manufacturers and establishing a fair net price for the drug. It generates savings by lowering the list price and removing intermediaries' fees, while enabling more transparency and lowering barriers to competition. This model is better for employers, plans and members, as each stakeholder knows exactly what they are paying for. This more transparent pricing may not change the cost of every drug but would make a difference for many.
  • Value-based pricing: Some newer payment models focus on a value-based approach to reducing costs while increasing transparency and maintaining quality and safety for consumers. A qualified third party evaluates the drug’s efficacy compared to alternatives, and considers related costs and savings. Adding a fair margin for the manufacturer, the price then reflects the treatment’s overall value based on efficacy and relevant costs.

Another option: Adjust the price should the drug not work in a real-world setting as it performed in clinical trials. Other countries already widely use value-based pricing, and the model is increasingly popular in the United States. One study showed that in 2021, 56% of health plans had at least one outcomes-based contract in place. Value-based medication pricing is best for expensive specialty drugs and others with high price tags, when the effectiveness and health benefits are more variable.

Popping the balloon

Just moving the air inside a balloon doesn’t reduce its volume, and the same goes for drug rebates. To achieve real changes, healthcare needs to remove unnecessary costs from the system to provide savings.

Eliminating counterproductive rebates is one step, but not the only one. We need several new, innovative ways to make drug pricing more transparent and ultimately, more affordable. Making the pricing system simpler and more transparent can lead to lower costs and healthier patients, helping create a more sustainable health system overall.

Editor's note: Care to share your view? HealthLeaders accepts original thought leadership articles from healthcare industry leaders in active executive roles at payer and provider organizations. These may include case studies, research, and guest editorials. We neither accept payment nor offer compensation for contributed content.

Send questions and submissions to content director Amanda Norris at anorris@healthleadersmedia.com.


KEY TAKEAWAYS

Traditionally, pharmacy benefit managers (PBMs) quietly negotiate drug prices with drug managers, including a rebate amount paid by the manufacturer to the PBM.

Instead of lowering drug costs, these rebates now often result in the use of higher-cost drugs with higher out-of-pocket costs for members.

The healthcare industry should move away from rebates and examine alternatives to compensating drug manufactuers.


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