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Federal regulators launch investigation into drug rebates said to drive up prescription costs

Photo: Getty Images

The Federal Trade Commission last week announced what some observers believe could be a game-changer when it comes to the rising cost of prescription drugs.

The agency — which is meant to protect fair competition — said it would look into the murky practice by which drugmakers grant rebates and other fees to insurer-owned pharmacy middlemen in exchange for better treatment of their products. The FTC wants to know whether that system is encouraging insurers and their middlemen to unfairly exclude cheaper drugs based on secret benefits they’re getting from drugmakers.

“American families and businesses should never pay higher prices for medicine due to unlawful business practices,” the commission said in a policy statement. “For this reason, challenging healthcare industry conduct that may raise prices and stifle innovation is a top priority for the Federal Trade Commission… and the commission will use its full authority under the FTC Act to do so.”

There’s some evidence that the system of rebates and discounts raises drug costs.

The three largest drug middlemen, CVS Caremark, OptumRx and Express Scripts, together control more than 70% of the marketplace. Known as “pharmacy benefit managers” or PBMs, they contract with insurers, create pharmacy networks, determine reimbursements and facilitate transactions.

Crucially, they also negotiate big rebates and other fees with drugmakers in exchange for favorable placement on the PBMs’ “formularies” — lists of which drugs are covered and which of those will have the lowest copayments.

In other words, if a drugmaker wants its product to be covered by a PBM and be most attractive to consumers, it has to provide big rebates and other fees to do so. PBMs often boast that they pass rebates on to their customers, but the deals are often non-transparent and it’s hard to know whether some of the funds they used to call “rebates” have simply been reclassified as “fees.”

In fact, the PBMs enjoy an exemption from federal anti-kickback law that allows them to engage in the practice of extracting rebates and fees. The Trump administration proposed ending the exemption, but never acted on it.

Granting ever larger rebates and fees appears to be driving up list prices of drugs. A 2020 paper published by the University of Southern California’s Schaeffer Center found that each $1 increase in rebates correlated with a $1.17 increase in list prices.

And while insurer-affiliated PBMs aren’t paying those list prices, others, such as the uninsured, are. Also, deductibles and payments by Medicare recipients in the coverage gap pay can be based on those inflated list prices. In addition, if the PBMs and their affiliated insurers are quietly pocketing a portion of the rebates and fees they’re getting, those paying for coverage would seem to face higher prices as well.

Industry groups representing insurers and drug manufacturers didn’t immediately respond to requests for comment.

But there’s at least limited evidence that the current system can crowd out cheaper alternatives.

An analysis last year concluded that over a three-month period, the biggest Medicare Part D managed-care plans were forcing 60% of patients needing the multiple sclerosis drug dimethyl fumarate to buy the most-expensive, brand-name version if they wanted their insurance to cover it. Almost all of the rest had to make higher copayments if they wanted an alternative, the report by 46brooklyn Research said.

The branded drug, Tecfidera, carries a list price of more than $8,000 a month, while generic versions can list for less than $900 a month. The drug also could cost as little as $40 a month when purchased at pharmacies operating completely outside the insurance/PBM system.

Perhaps not coincidentally, all of those big insurers — which cover 85% of Part D recipients — are affiliated with PBMs. CVS, UnitedHealth and Cigna are owned by the same corporations that own the top-three PBMs, while Anthem, Centene, Humana and Kaiser had affiliated PBMs of their own, often contracting part of their business out to one of the big three.

The FTC said it intends to determine whether the health care giants are using such “vertical integration” to stymie competition and drive up costs.

For many years, the Commission has received complaints about rebates and fees paid by drug manufacturers to pharmacy benefit managers (PBMs) and other intermediaries to favor high-cost drugs that generate large rebates and fees that are not always shared with patients,” the agency’s policy statement said. “These rebates and fees may shift costs and misalign incentives in a way that ultimately increases patients’ costs and stifles competition from lower-cost drugs, especially when generics and biosimilars are excluded or disfavored on formularies.”

Marty Schladen is a reporter for the Ohio Capital Journal, which first published this report.

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