Drug rebates: Who pays, who profits, how can we make drug prices more equitable?

June 5, 2017

“In the United States, pharmaceutical pricing lacks transparency leading to a system in which there is a range of prices for the same medication.”

These are the findings of a new study appearing in the May 30 issue of JAMA Internal Medicine and led by a researcher from the University of North Carolina at Chapel Hill.

The study found that at the heart of the price disparities are rebates, which actually may increase costs for Medicare Part D beneficiaries and the federal Medicare program, while decreasing costs for drug manufacturers, Part D (drug) insurance plans and other pharmaceutical players.

Dr. Stacie Dusetzina

Dr. Stacie Dusetzina

The lead author, Stacie Dusetzina, PhD, assistant professor of health policy and management at the UNC Gillings School of Global Public Health and of pharmaceutical outcomes and policy at the UNC Eshelman School of Pharmacy, and her co-authors provide examples in the study of how rebates work, why they are problematic and which changes in policy could help produce savings for the Medicare program and people on Medicare Part D.

Dusetzina also is a member of the UNC Lineberger Comprehensive Cancer Center.

While the terms of rebate agreements are not made public, manufacturers generally offer rebates against the list price of branded, on-patent drugs to receive better formulary positioning – signaling better value to physicians and patients. As list prices have increased dramatically for many products in recent years, rebates have become greater, sometimes amounting to hundreds or thousands of dollars per prescription fill.

While this lowers prices for the health plan (because rebates are paid to the plan after the sale), patients do not benefit directly and may be charged the higher list price when filling their prescriptions. This initially may not affect some who need the drug, especially if their insurance calls for the payment of a flat fee, or copayment.

Increasingly, however, Medicare Part D plans ask the patient to pay as much as the total cost of the drug’s list price through deductibles or a fixed percentage of coinsurance. The number of medications offered with coinsurance in Part D plans rose 23 percent in two years, from 35 percent in 2014 to 58 percent in 2016. Many of the drugs covered in this way are high-cost specialty drugs to treat cancer, hepatitis C, rheumatoid arthritis and other diseases.

Rebates also have a negative impact upon the amounts paid by the Medicare program. As the list price of a drug increases, the greater share of Part D spending shifts from manufacturers and plan sponsors to Medicare. When patients reach the catastrophic coverage threshold of $8,071, which means that they likely have spent nearly $5,000 out of pocket, Medicare pays 80 percent of costs, private insurers pay 15 percent, and patients pay 5 percent. As people live longer and survive formerly terminal illnesses, the drug burden for the Medicare program becomes ever greater. Medicare costs for catastrophic coverage tripled between 2010 and 2015 – from $10.8 billion to $33.2 billion.

Dusetzina and colleagues offer two options for reforming Part D coverage that involve lowering patient out-of-pocket costs and removing incentives for insurers to speed through the stages of the Part D benefit.

To lower patient out-of-pocket costs, the researchers propose that patients pay copays, and not coinsurance, on all drugs. Part D insurers also could calculate patient out-of-pocket costs on the basis of the payer’s post-rebate price, rather than on the basis of list price, which tends to be inflated.

“This isn’t a perfect solution, as it doesn’t address spending on the Medicare program directly,” Dusetzina said, “but it would decouple the patient’s out-of-pocket costs from list prices. Given trends we have seen – and continue to see – in list prices of drugs, this solution could be important to make sure that seniors can afford their medications.”

A second option to lower out-of-pocket spending for beneficiaries is to pass along the rebates at the pharmacy counter. Plans still could use percentage-based cost sharing (deductibles and coinsurance), but patients would be allowed to pay those based upon the reduced price of the drug negotiated by their plan rather than the higher list price.

“We have been told by the pharmaceutical industry that list prices don’t matter – that nobody pays list price,” Dusetzina said. “However, our health-care system rapidly has moved from flat fees to percentage-based cost sharing that uses list prices in those calculations. This isn’t only a problem for Medicare beneficiaries but also for the growing number of patients who have high deductible health plans and for uninsured patients.”

Missing from the equation is adequate data about rebates on individual drugs offered by manufacturers to Plan D insurers. The researchers call for the Centers for Medicare and Medicaid Services to require this information and to develop an alternative design that would lead to savings both for Medicare recipients who need drug therapy and the Medicare program.

Co-authors of the study are Rena M. Conti, PhD, associate professor of health policy and economics at the University of Chicago, and Peter B. Bach, MD, MAPP, director, and Nancy Yu, consultant, both at the Memorial Sloan Kettering Cancer Center’s Center for Health Policy and Outcomes.


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Gillings School of Global Public Health contact: David Pesci, director of communications, (919) 962-2600 or dpesci@unc.edu