HHS Proposes Targeting PBM Rebates for Prescription Drugs

Passing along manufacturers’ discounts to consumers could lower prices

Stephen Miller, CEBS By Stephen Miller, CEBS February 7, 2019
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On Feb. 6, the Department of Health and Human Services (HHS) published a proposed rule to lower prescription drug prices by encouraging drug manufacturers to pass their rebates directly to consumers instead of to pharmacy benefit managers (PBMs), which act as intermediaries between health plans and pharmacies.

While the proposal primarily targets Medicare and other government health plans, it could eventually alter rebate practices involving employer-sponsored group plans, policy experts said. That's because of the size of the Medicare prescription drug market: In 2017, 42.5 million Medicare beneficiaries were enrolled in Part D prescription drug plans, according to the Centers for Medicare & Medicaid Services. If drug makers change their rebate practices for Medicare Part D plans, they may be likely to change them for all plans, including employer-sponsored coverage.

Comments on the proposed rule can be filed with the HHS through April 8. If finalized, the proposed rule would go into effect Jan. 1, 2020.

PBM Rebates Condemned

As third-party administrators of prescription drug programs, PBMs develop and maintain the formulary that lists drugs covered by the plan and the amount of coverage provided (often specified by tiers for generic, formulary-brand, nonformulary-brand and specialty drugs), contract with pharmacies, negotiate discounts and rebates with drug manufacturers, and process and pay prescription drug claims.

Advocates of greater price transparency for prescription drugs argue that drug makers pay higher rebates to PBMs for expensive medications, giving PBMs an incentive to include higher-cost medications on plan formularies when less-expensive alternatives are available.

"Every day, Americans—particularly our seniors—pay more than they need to for their prescription drugs because of a hidden system of kickbacks to middlemen" that, while not illegal, is unfair to consumers, HHS Secretary Alex Azar stated.

According to an HHS fact sheet released with the proposal, "PBMs play an important role in negotiating with drug companies. But if the negotiation favors higher rebates instead of lower cost drugs, it can lead to higher list prices." Prescription drug rebates amount to, on average, 26 percent to 30 percent of a drug's list price, the HHS said.

"It is important to remember that in addition to PBMs, these 'rebates' benefit both insurance companies and drug makers by allowing them to charge even higher prices–leaving the patients and taxpayers to ultimately to foot the bill," wrote Kevin R. Campbell, CEO of PaceMate, a health care data management company based in Sarasota, Fla.

To counter this incentive to favor higher-cost drugs, the proposal would:

  • Exclude the prescription drug rebates that manufacturers pay to PBMs—those working with Medicare Part D plans and Medicaid managed-care organizations—from safe-harbor protection against legal actions under the federal Anti-Kickback Statute. The statute prohibits payments in exchange for services under a federal health care program.
  • Create a new safe harbor for prescription drug discounts offered directly to patients under these programs.

[SHRM members-only toolkit: Managing Health Care Costs]

Employers Also Target Rebates

"The proposed rule exercises HHS's regulatory authority to address the rebate system as it relates to federal health care programs," said Brian Marcotte, CEO of the National Business Group on Health (NBGH), a Washington, D.C.-based employers coalition. "However, actions implemented in Medicare often spill over to the private market, and I suspect employers will be watching this proposal closely," he noted.

When negotiating pharmaceutical benefits, large employers have already begun to require that PBM rebates be passed along to consumers at the pharmacy counter, Marcotte pointed out. "The administration's proposal tracks with efforts many of our members have taken to pull the value of rebates forward to benefit patients at the point of sale," he noted. "Thus, HHS's proposal picks up on the momentum from large employers and, more importantly, underscores the inefficiency of the pharmaceutical supply chain."

More than 90 percent of employers would welcome an alternative to the current rebate-driven approach, according to NBGH's Large Employer 2019 Health Care Strategy and Plan Design Survey, conducted in May and June 2018 with 170 large U.S. employers.

"If finalized in its current form, this proposed rule would almost certainly be the largest change to the prescription drug pricing system the administration has put forward so far," blogged Rachel Sachs, an associate professor of law at Washington University in St. Louis. However, "as with previous efforts, it remains to be seen whether—and how aggressively—the administration will move to finalize and implement any of these changes."

Other Administration Efforts

A major initiative by President Donald Trump's administration seeks to lower drug prices and reduce out-of-pocket costs for consumers, and the proposed rule is part of that effort. 

In October, Trump signed into law the Patient Right to Know Drug Prices Act, which makes it illegal for insurers or PBMs to enact "gag clauses" that prevent pharmacists from discussing cheaper price options with consumers who have individual-market or employer-sponsored drug coverage. A similar law was enacted to protect enrollees in Medicare Part D plans.

Related SHRM Articles:

Navigating the Changing Prescription Drug Market, SHRM Online, November 2018

For 2019, Employers Adjust Health Benefits as Costs Near $15,000 per Employee, SHRM Online, August 2018

Trump's Drug Blueprint Could Alter PBM Contracting, SHRM Online, May 2018

Negotiating Price Transparency with PBMs Pays Off, SHRM Online, January 2017


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