White House reversal on Proposal to Eliminate Drug Rebates and Pushing Discounts to Point-of-Sale

The White House has reversed its ruling from earlier this year that would have amended the safe harbor regulations eliminating traditional rebates and requiring discounts be moved to the point-of-sale.  The ruling was designed to decrease the overall cost of drugs and lower the out-of-pocket cost burden for Medicare and Medicaid recipients with the largest impact being to the Medicare population and health plans.  While the proposed ruling was well intentioned, most industry association and organizations predicted that while it would decrease the member impact at the point-of-sale, the overall impact would likely produce higher premiums and increase the cost of the program to the federal government.  Some estimated federal costs could expand by $177 billion over the next ten years.

The ruling to amend the safe harbor regulations and eliminate drug rebates was specific to Medicare and Medicaid.  However, Health and Human Services Secretary Alex Azar had called on Congress to follow-suit in the commercial market and pass legislation that would eliminate traditional drug rebates.  The industry had started to react to the pressures from HHS and congress with PBMs either launching or promoting point-of-sale rebate programs for their government and commercial clients.  In fact, one large PBM stated that all new commercial business that goes live after 2021 will only contain a point-of- sale rebate option while allowing existing plans to continue with the traditional rebate arrangement.  All of this led to concern in the industry and across the commercial market as the proposed legislation was projected to actually increase overall cost for members and employers.

Drug pricing and the impact of rebates continues to be a fiercely debated topic in the pharmaceutical  industry across legislators, public interest groups and industry insiders.  While everyone agrees that there is an affordability issue there are many different ideas on how to address.  Some manufacturers have worked to tackle rebates by launching authorized generics, products that are equivalent to the brand products launched by the same manufacturer at a reduced list price with a reduced rebate.  Biosimilars have also entered into the marketplace that have a significantly reduced rebate or result in no rebate payment at all.  While these new products contain a lower list price, some PBMs have not added the products to their formularies because PBMs state that the original product, including the rebate, still results in a lower net cost.  Even with these measures the “gross to net bubble”, the difference between the list cost and the net cost after applying the rebate, continues to grow with some plans achieving 20%-30% of their plan spend coming back in rebates.

For commercial groups, point-of-sale rebates do not have actual impact on the cost of the drug but simply moves the discount from a post-utilization payment to the plan sponsor to a discount for the members at the point-of-sale.  While any attempt to lower drug costs should be supported, point- of- sale rebates simply move dollars from a retro payment to a point-of-sale discount.  This change does not have any material impact on the overall cost of drugs and in fact, payors may not realize the full value of the rebate as PBMs will typically account for the time value of money in the discount that they offer at the point- of-sale. This will diminish the overall value of the rebate application.  Implementing point-of-sale rebates comes down to a business decision on the part of the plan sponsor as to whether they want to decrease the member cost at the point-of-sale or use their rebate dollars to offset premiums or fund other healthcare or benefit initiatives.

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