Report finds that drug rebates drive up consumer costs

Discounts by pharmaceutical manufacturers to drug middlemen appear to be driving up list prices and ultimately some consumer costs, a new report by a team of researchers at the University of Southern California said.

The phenomenon appears to be another symptom of an uncompetitive marketplace, they said.

The middlemen, known as “pharmacy benefit managers,” have long contended that drug makers are largely to blame for the rising cost of medicine. They also have said that rebates and other discounts they extract from manufacturers are largely passed on to their customers.

That‘s part of the value the middlemen bring to the marketplace, they say. But a lengthy investigation by The Dispatch has raised questions about whether the PBMs engage in anti-competitive practices that increase prices and damage health outcomes.

“There is no causal relationship between the prices drug manufacturers set and the rebates they negotiate with PBMs,” Greg Lopes, a spokesman for an industry group, said in an email Monday.

However, Tuesday‘s white paper said a data analysis found that for every dollar in discounts drug makers give to pharmacy benefit managers for a brand-name drug, the list price goes up $1.17. That increase is felt by uninsured people paying full price and by people whose coinsurance and deductibles are based on the list price.

“This suggests that reducing or eliminating rebates could result in lower list prices, thereby decreasing out-of-pocket costs for uninsured patients and for insured patients with deductibles or coinsurance,” says the report, titled “The Association Between Drug Rebates and List Prices.”

Its authors, led by Neeraj Sood, an expert in health costs and insurance markets, explained how the sheer size of pharmacy benefit managers might be forcing up costs by squeezing ever-more discounts out of drug makers.

Three of them – Express Scripts, CVS Caremark and OptumRx – control about 80 percent of the marketplace. One of the things they do is create and manage drug formularies. Those are the lists of drugs that are covered by your insurance and at what cost.

So if a drug company makes a brand-name drug and it wants millions of insured people to be able to get it for a small copayment or none at all, it has to offer major discounts to the big three PBMs. And since the discounts frequently are not transparent, it‘s often unclear how much of them is passed on to insurers and their clients and how much is simply pocketed by the PBM.

Meanwhile, it can create warped incentives for PBMs – which are supposed to be selecting the most effective drugs at the best prices, Sood and his colleagues wrote.

“This dynamic can drive the perverse result in which PBM formularies favor drugs that offer higher rebates over similar drugs with lower net costs and lower rebates,” they wrote.

Brand-name drugs are still under patent, but in some cases generic drugs can be found on the market with similar properties. The researchers discovered that discounts for drugs with no generic equivalents appeared to force list prices up more than those that had generic equivalents.

The team based its findings on the use of a data tool that quarterly tracks list prices and estimates net prices of brand drugs. Cautioning that the tool had not been formally validated, the report notes that it is used “in high-stakes investment decisions by Wall Street banks and in drug value assessments by the Institute for Clinical Effectiveness Research.“