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These 'Rebates' Don't Result in Savings

Real Clear Policy


Two former Trump administration officials have taken to the Wall Street Journal to defend the practices of pharmacy benefit managers, the middlemen who negotiate drug prices with the manufacturers on behalf of the insurers. The authors are perplexed as to why fellow Republicans would be concerned about these middlemen using their leverage to extract “rebates” from drug manufacturers. They claim the rebates result in lower premiums and savings for patients.


Here's the problem: It’s not true. In Texas, the data show that over 99% of the rebate is retained by the PBMs and insurance companies. The PBMs spread out roughly $10 million to enrollees, while they and the insurers pocketed over $2.2 billion.


As for premiums, research from the Kaiser Family Foundation shows an increase in year over year. When confronted, in light of low utilization due to COVID in 2020, insurers changed their defense, saying that premium determinations would be speculative on future need and utilization rather than on historical data.


Tellingly, the authors even admit in the piece that they oppose a new rule that would require the PBMs to pass on the lower purchase price of drugs directly to Medicare patients “at the point of sale.” They threaten that if they had to pass on the savings directly to patients, they would raise prices somewhere else. In other contexts, that’s called a shakedown.


The kicker is that the PBMs vehemently oppose any transparency into their kickback operation. They call it “exhaustive snooping.” By that logic, every time someone loads up Amazon and compares prices they could be accused of “snooping.” Most of us just call that shopping.


It’s not hard to understand why the PBMs want to keep the system in place. Huge profits and no accountability is good work if you can get it.


The more significant problem for patients is not just that the companies aren’t passing on the savings. It’s that the system also incentivizes higher and higher drug prices.


Under their kickback system, the more expensive the drug, the bigger the rebate and the larger the payday for the PBM and insurer. This creates a perverse incentive for PBMs to include the highest priced drugs over those that are more cost-effective for patients.


But it gets worse.


To offset the cost of the rebate and make sure it is included on the insurer’s formulary, the manufacturers will raise the price of the drug even further. This creates an upward spiral of ever-increasing drug prices.


So why are Republicans and Democrats both opposed to a system that operates in the dark, extorts kickbacks, hordes the cash, and drives up drug prices for patients? Hmm, I wonder.



About the Author: David Balat is the director of the Right on Healthcare initiative at the Texas Public Policy Foundation.

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