The Trump administration has a little-known practice in the pharma industry in its crosshairs (ESRX)

The Trump administration has a little-known practice in the pharma industry in its crosshairs (ESRX)

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Donald Trump Chip Somodevilla/Getty Images

A pricing practice the pharmaceutical supply chain relies is one of the targets of President Donald J. Trump's speech Friday about ways to lower drug prices.
Rebates, which are negotiated through middlemen called pharmacy benefit managers and passed along to health plans, often make it so the patients don't have to pay the full list price for drugs.
However, with the rise in high deductible health plans, patients have been on the hook for the whole cost even though the rebates have been paid out. It's prompted officials to criticize rebates.
Criticism from federal officials has led some healthcare experts and lobbyists to believe that rebates may at some point go away.

Before you ever walk up to the counter at your local pharmacy, a lot has already happened to get your prescription drug ready for pickup.

For a single prescription drug, there are often five companies involved, from development all the way to your medicine cabinet. These companies are responsible for everything from making the drug and setting its price to distribution to your local pharmacy, negotiating how much you're expected to pay for it, and covering the rest of the cost. Each company makes a tidy profit along the way. And as drug prices increase, so do those profits.

It's at the pharmacy counter that you find out exactly how much you're going to be on the hook for. It could be a flat copay of $5 or $20, or — as is increasingly the case for those on high deductible health plans — the full amount that can be hundreds of dollars.

Often, that large amount doesn't factor in a key payment that acts as a discount to the list price drugmakers set, known as a rebate.

The rebates, which drugmakers pay out more than $100 billion of, is a big business for pharmaceutical middlemen (otherwise known as pharmacy benefit managers) like Express Scripts, CVS Caremark and Optum RX. And that practice could be in jeopardy. President Donald J. Trump is expected to lay out a plan on Friday to lower drug prices, in which he'll echo some of the concerns expressed by some of his top health officials about the pressure people are feeling from high drug prices.

While these rebate payments — which act as incentives to pick one drug to cover over a competitor — may sound a lot like a kickback, they're technically protected from the Anti-Kickback Statute.

FDA Commissioner Scott Gottlieb suggested at the Food and Drug Law Institute's annual conference on May 3 that the government re-evaluate the protection rebates have. By getting rid of that protection, it could "some semblance of reality" to the way drug prices are set, making them more affordable.

The Food and Drug Administration, which Gottlieb oversees, has oversight into whether or not a drug is approved, but the agency does not play a role in determining how much the medication costs once it's on the market.

But Gottlieb isn't the only one in the Trump administration investigating the role pharmaceutical middlemen are playing in drug pricing pressure. Centers for Medicare and Medicaid Services administrator Seema Verma called out the relationships PBMs have with drugmakers and health plans.

"But PBMs are serving two customers – being paid both by manufacturers for getting on formularies and by plans for managing their drug benefit. This makes it unclear who they’re actually aligned with," Verma said at the American Hospital Association's annual meeting. "The bottom line is that all of the incentives are lined up for manufacturers to set higher and higher prices."

The comments sent PBM stocks falling. CMS, which purchases drugs through Medicare and Medicaid plans does have a hand in the conversation about how much medication costs, though the government currently can't negotiate prices for drugs that are part of Medicare's Part D program, which covers most prescription drugs.

This criticism from federal officials has led some healthcare experts and lobbyists to believe that rebates may at some point go away.

Pharmacy pharmacist prescription drugs Reuters/Gary Cameron

A life without rebates

Imagining a future in which there aren't rebates is already something PBMs like Express Scripts have thought about.

"Express Scripts would continue to negotiate lower prices from pharmacies and pharmaceutical manufacturers and pass those savings to its client," the company said in an April slide deck presentation at a shareholder meeting. But, the company said, health plans wouldn't be able to fund other Express Scripts services by sharing rebates. The company would come with other ways to charge for those services.

PBMs are paid by health plans and self-insured employers to negotiate lower prices, as well as perform other services like process claims and run mail-order pharmacies.

Dr. Robert Dubois, the chief science officer National Pharmaceutical Council, a health policy research organization that represents pharmaceutical companies told Business Insider that getting rid of rebates could help lead to lower list prices that have been inflating to counter the high rebates needed to be paid out.

"On some level it seems like a good thing, as long as you then deal with the initial problem that we give discounts all the time to volume purchasers," Dubois said. In the meat industry, for example, Costco doesn't pay the same price for meat as the local butcher. In the absence of rebates, other differential pricing could appear in its place that provide discounts to the list price.

Mark Merritt, CEO of the Pharmaceutical Care Management Association, the lobbying group that represents PBMs, said that the companies would be happy to give up rebates, so long as there'd be a way to control costs.

"I don't think that people should be under any illusion that if the rebates went away that pharma would lower their prices commensurately," Merritt told Business Insider.

Should the government intervene and force rebates out of the picture, the hope would be to find a replacement that can still save money, which Merritt hasn't seen yet. One way the government's explored would be through passing rebates directly at the pharmacy counter.

It's something the biggest health insurer in the US, UnitedHealthcare, has committed to. In March it announced that starting in 2019, some of its members on high deductible plans would be eligible to get rebates for their medications. So, for example, in the case of a patient went to the pharmacy for a medication that under their high deductible cost $700, that might get lowered to $400 after factoring in the rebate the insurer receives.

The concern with passing rebates directly to patients is that it'll lead to higher monthly premiums for members, since the rebates won't be there to offset those costs.

"We haven’t seen any ideas yet from the government that would allow or encourage discounts same or greater than they are right now," Merritt said.

Goldman Sachs said in a research note on Monday that the profit PBMs make off of rebates is much lower than it may seem, since they're passing the majority on to health plans, employers, and other clients.

"We think the profit garnered by the PBMs directly from rebates is likely overstated, as CVS has noted that it currently keeps only 5% of rebates as profit, passing along the remainder to clients and both CVS and ESRX already have meaningful percentage of clients opting for a full pass-through model," the note said.

Getting rid of rebates could help the industry get to a place where prescriptions are paid for based on how well they work rather than how many are used, a practice known as value based care.

"Changes to rebate structures could drive an accelerated uptake of value based drug pricing contracts, at least on a limited set of specialty medications where outcomes can be more easily measured," Morgan Stanley analysts said in a note Tuesday. They noted that companies like UnitedHealth Group, CVS-Aetna, and Cigna-Express Scripts would be in the best position to take advantage of that transition.

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