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

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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. Read more

CVS sometimes forces people to use its pharmacies. Now the Supreme Court will weigh in

Photo by Marty Schladen, Ohio Capital Journal.

[Editor’s note: In September, North Carolina Gov. Roy Cooper signed Senate Bill 257 into law — a measure that will increase state regulation of “pharmacy benefit managers” in hopes of better protecting consumers. As the following story by reporter Marty Schladen of the Ohio Capital-Journal makes clear, however, many PBM practices remain controversial and will soon come before the U.S. Supreme Court.]  

It’s a practice long complained of in multiple states.

CVS Health and other massive corporations often use their pharmacy middleman subsidiaries to force people to get the most expensive class of drugs from the businesses’ own mail-order pharmacies. Some call the practice “patient steering.”

CVS and companies such as UnitedHealth and ExpressScripts/Cigna say the arrangements save patients money. But some patients, oncologists and other health providers say it threatens lives.

Now the U.S. Supreme Court is poised to weigh in. In a little more than a month, it will hear arguments in a California case in which AIDS patients are claiming the practice discriminates against them.

Known as “pharmacy benefit managers” or PBMs, the middlemen work with insurance companies or government programs like Medicare and Medicaid to facilitate prescription-drug transactions. They negotiate rebates with drugmakers, decide what drugs are covered and they determine how much to reimburse pharmacies that dispense drugs as part of their health plans.

But the function that’s in dispute in the California case is how PBMs structure their pharmacy networks.

Each of the big three PBMs is affiliated with a major insurer and each is part of a corporation that is among the 13 largest in the United States. And the combined PBMs are estimated to control well over 70% of the pharmacy-middleman marketplace.

They’re also frequently in direct competition with the retail pharmacies whose reimbursements they control. CVS owns the nation’s largest retail chain and each of the big three owns a mail-order pharmacy for “specialty drugs” — the most expensive class of medicines, which can cost upward of $100,000 a year.

Increasingly, the big-three PBMs have been saying they won’t cover super-expensive specialty drugs if patients get them at their oncology centers or their AIDS clinics. It’s increasingly the case that the only way PBMs will cover them is if patients get them through the mail from a PBM-owned pharmacy.

Critics say the point is to pad profits, but the PBMs maintain that they do this to help their customers. Read more

Biden administration announces “comprehensive” plan to fix high drug prices

Prescription drugs sit on a pharmacist’s counter. Photo by John Moore/Getty Images.

The U.S. Department of Health and Human Services last week issued its plan to address high drug prices as part of President Joe Biden’s push to take on anticompetitive practices across the economy.

But while it addressed in detail abusive practices by drugmakers, it was a lot more superficial about the practices of much-larger corporations that serve as drug middlemen and as some of the country’s largest insurers.

The report, “Comprehensive Plan for Addressing High Drug Prices,” was produced by HHS and forwarded on Thursday to the White House Competition Council pursuant to Biden’s July 9 executive order Promoting Competition in the American Economy.

The council held its first meeting on Friday.

The report notes the harm being done by rapidly inflating prices in the $370 billion drug marketplace, where medicine costs almost twice as much as it does in other countries in the Organization for Economic Cooperation and Development, a 38-member group of mostly developed economies.

“Americans pay too much for prescription drugs,” it says. “We pay the highest prices in the world, which leads to higher spending. Higher spending puts pressure on private and government payers to raise premiums or make benefits less generous. Lack of affordable access to prescription drugs and other health care services leads to worse health outcomes.”

Most of the solutions it offers deal with manufacturer abuses.

For example, it takes on a practice called “pay for delay,” in which a maker of a brand-name drug with exclusive access to the market pays generic competitors to delay bringing their products into the fray, thereby keeping up prices.

The report also proposes methods to promote production of generic and biosimilar drugs and it proposes to bring down costs through direct negotiations between huge programs such as Medicare and the companies that make them.

However, the report is much lighter on proposals about what to do about pharmacy benefit managers — middlemen who handle the transactions. That marketplace is dominated by three corporations that are among the country’s 15 largest and they’re also huge players in insurance and pharmacy.

The rebates the companies, known as PBMs, negotiate with manufacturers have been shown to increase the list prices of brand-name drugs, and the companies are also suspected of playing a big role in keeping prices of generics artificially high.

Critics have said that a lack of transparency in PBM rebate negotiations leads them to believe the companies are profiting handsomely at the expense of everyone else. Read more

Reports: Drug manufacturers and middlemen both responsible for rising consumer costs

Photo by John Moore/Getty Images.

The world of prescription drug pricing can be bewildering — intentionally so, some critics of the industry claim. 

Whether that’s true or not, several reports this year show that the supply chain’s alchemy of list prices, rebates and net prices hurts consumers. And a U.S. Senate report says drugmakers and middlemen share the blame.

The media often breathlessly report increases in list prices of more-expensive, brand-name drugs. “Big drugmakers just raised their prices on 500 prescription drugs,” read the headline of a January story by CBS News, for example.

But the story didn’t mention that government payers, insurance companies and the middlemen they hire usually pay far less than the list price. As Johnson & Johnson owner Janssen Pharmaceuticals reported, the net cost of its branded drugs actually fell by 14.4% since 2016.

That’s because big payers hire middlemen known as pharmacy benefit managers to handle drug transactions. Among their functions, they determine which drugs are covered and which of those will require low copayments from consumers or even no copayment at all. This, of course, gives consumers an incentive to ask doctors to prescribe those products.

Branded drugs are usually under patent, so it’s important for manufacturers to sell them at a premium while the drugs still have exclusivity so their makers can recoup research costs and turn a profit. In exchange for preferred insurance treatment, drugmakers offer pharmacy benefit managers steep rebates and other discounts off of their products.

And it’s not just Janssen that’s doing so, Adam Fein wrote last month in his influential publication, Drug Channels. Eli Lilly, GlaxoSmithKline, Novartis and Sanofi all saw drops in their net prices in 2020, Fein wrote. A sixth large manufacturer, Merck, saw an increase of less than 1%.

Without understanding how drug pricing works, it just seems logical to blame drug manufacturers for what seem like increasing costs. But that’s not the case, and Fein criticized those who should know better for not embracing the complexity of how prices are ultimately determined. Read more