The Trump administration is close to issuing a new rule that could effectively ban rebate payments from drug manufacturers to pharmaceutical benefit managers, or PBMs. The plan is misguided. A full ban would backfire and increase costs to consumers.
The regulation, now under review at the Office of Management and Budget, could remove the safe-harbor protection for rebate payments under an anti-kickback law. But rebates are price discounts, not kickbacks. They reduce prices based on sales volume: Drug companies charge less when more of their drugs are sold to patients.
PBMs are at the center of the debate. Private employers and insurers, faced with rising drug costs, have turned to PBMs to manage their drug benefit programs. PBMs develop lists of covered drugs, or formularies, negotiate discounts and rebates with drug makers, and pay claims. PBMs lower the cost of the benefit by steering patients toward preferred drugs.
PBMs have more leverage than employers or insurers because they negotiate on behalf of numerous clients. When more than one patented drug is available for an illness, manufacturers offer rebates for preferred placement.
The Trump administration says that because consumer payments are based on prices before rebates, patients don’t benefit from the savings. That’s only part of the story. PBMs typically require lower out-of-pocket payments from patients who use preferred drugs, and they save consumers money by steering them toward generic drugs.
Consumers also benefit directly from rebates paid to PBMs. The Altarum Institute estimates that in 2016 PBMs earned $11 billion in profits and passed on $89 billion in rebates to employers and insurers. Health plans in turn have strong incentives to pass on rebate revenue to their enrollees in the form of lower premiums and better coverage. A ban on rebates would make coverage more expensive and less generous.
Yet while a complete ban on rebates would backfire, Medicare’s drug benefit needs to be fixed, because it favors rebates rather than lower prices. Above a modest level of drug spending, private Medicare drug plans (mostly insurance plans tied to PBMs) are responsible only for a small portion of a patient’s drug costs—15% once a beneficiary’s expenses exceed the annual catastrophic threshold, $5,000 in 2018. The Medicare program pays for 80% of the costs above this threshold, and beneficiaries pay the remaining 5%.
Because insurers and PBMs pay such a small portion of the costs above the catastrophic threshold, they are less sensitive to high drug prices than they should be. High prices at the pharmacy push beneficiaries above the catastrophic threshold quickly, so the government begins picking up most of the bill. Medicare drug plans prefer rebates over lower prices because they can use rebate payments to lower their premiums, leading to higher enrollment and greater leverage with drug makers.
Not surprisingly, spending for the drug benefit has become distorted. The government spent $37 billion in 2017 covering expenses for beneficiaries above the catastrophic threshold, up from $9 billion in 2008.
This problem can be fixed not with a ban on rebates, but by requiring insurers and PBMs to pay more of the costs for drugs above the catastrophic threshold. If Medicare plans were responsible for 80% of the cost instead of 15%, they would have an incentive to press for lower prices for their high-cost patients. That would produce a better balance between lower list prices and rebate payments.
Administration officials claim they want to lower drug prices with market incentives, but a broad-based attack on drug rebates is the opposite of a market solution. Streamlining regulations to bring new products more quickly to the market, reforming Medicare’s drug benefit design, and removing unnecessary interference that impedes competition would do far more to promote affordable and effective medicines for Americans.
Mr. Antos is a resident scholar in retirement and health policy at the American Enterprise Institute. Mr. Capretta is a resident fellow at AEI.
FAQs
Kickbacks can take the form of rebates or fraudulent billing for nonexistent services in the advertising business. Clients pay the price with higher costs or a lower level of service than they normally would expect for their money.
What is the drug rebate rule? ›
October 1, 2022 – The start of the first 12-month applicable period for which drug companies will be required to pay rebates to Medicare if their prices for certain Part D drugs increase faster than the rate of inflation over the 12-month period.
Are drug kickbacks legal? ›
Medical and pharmaceutical kickbacks come in many forms. But in every kickback case, healthcare providers will provide some material benefit in return for other providers prescribing or using their products or services. In most instances, kickbacks are illegal according to anti-kickback laws.
What is the role of rebates in the pharmaceutical industry? ›
Rebates represent a way to negotiate drug discounts and constitute an important tool to control drug costs.
Why are kickbacks illegal? ›
Kickbacks are considered a form of bribery and anti-competitive conduct. Employees who report kickbacks may have causes of actions under several federal laws, including: The False Claims Act. The whistleblower may have the right to a portion of money the government recovers based upon the whistleblower's information.
What is an example of an illegal kickback? ›
Generally, a kickback is an illegal payment or transfer of something of value in exchange for receiving preferential treatment for the goods or services provided by the person providing the bribe. These can take many forms including cash payments, gifts, inflated bills, or anything which has inherent value.
How do insurance companies make money on prescription drugs? ›
Insurers often pay an administrative fee to PBMs for their services, although PBMs frequently generate additional revenue when acquiring rebates from drug manufacturers and through retaining a portion of the payment rates PBMs set for insurers and retail pharmacies.
What is the difference between discount and rebate in pharma? ›
Discounts are immediate, rebates are delayed. But like discounts, rebates come in a handful of varieties, such as volume rebates, product mixes and stocking incentives. Lets dive in to unpack these in detail!
How does rebate work? ›
A rebate is a refund offered to a customer by a manufacturer, distributor or retailer when a customer makes a purchase. Sometimes referred to as a retroactive discount, rebates are often used as an incentive or marketing tactic to attract customers.
Do doctors get kickbacks for prescribing drugs? ›
Kickbacks can be unlawful
A pharmaceutical company making personal financial payments to physicians (cash, vacation, expensive meals and so on) to prescribe their drug can be unlawful. A doctor should assess a drug before prescribing it.
(a) Section 8 violation. Any violation of this section is a violation of section 8 of RESPA (12 U.S.C. 2607).
When did kickbacks become illegal? ›
Prior to 1986, the "kickback" was required to be for the inducement or acknowledgement of a subcontract. Covered class of "kickback" recipients--The Act prohibits "kickbacks" to prime contractors, prime contractor employees, subcontractors, and subcontractor employees. These terms are defined in the Act.
How effective are rebates? ›
Boost in sales volume: Rebates can incentivize customers to purchase more than they typically would by offering a monetary reward for reaching certain volume thresholds. This strategy effectively drives up sales figures and can be particularly useful during periods of low demand or when launching new products.
How do PBMs negotiate rebates? ›
PBMs negotiate drug prices with manufacturers, usually by offering a spot for a drug on the payer's formulary in exchange for paying the manufacturer a lower price and receiving a rebate. PBMs may also negotiate with pharmacies, offering them a place in the payer's network for specific drug prices.
What is rebate strategy? ›
Rebate marketing is a strategic promotional tool that businesses deploy to incentivize purchases by offering consumers a partial refund or discount after they've bought an item. Learn About Rebate & Channel Manager Rebate Strategy Guide. Table of Contents.
What is considered a kickback? ›
A "kickback" is a term used to refer to a misappropriation of funds that enriches a person of power or influence who uses the power or influence to make a different individual, organization, or company richer. Often, kickbacks result from a corrupt bidding scheme.
What items are considered kickbacks? ›
Examples of illegal kickbacks include:
- Paying cash or benefits to a person to encourage referrals or to encourage the purchasing of goods/services.
- Fee splitting arrangements (i.e. paying a management company an excessive part of the service fee that is paid to the physician)
Kickbacks Explained
For example, a purchaser paying for goods that have inflated costs & such a purchaser will receive a kickback from the seller of goods. White-collar employees conduct such crimes. The intention behind paying the kickback may be good or bad, but the practice in itself is unethical.
What type of expense is a rebate? ›
Rebates are a type of sales promotion strategy where a payment is made to the buyer after purchase. Money is returned either as a lump sum or a percentage of the purchase price. From an accounting perspective, rebates are typically treated as a revenue when they are earned, rather than at the time of purchase.
