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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