Trump forcing insurers to pass rebates to consumers won’t lower drug prices

President Trump’s recent speech about lowering drug price has been both lauded as long-overdue and derided as an overly-broad policy blueprint that lacks real action steps.

Among the most absurd ideas the President surfaced is requiring health insurers to pass on to their members a portion of the rebates they get from drug manufacturers. While it sounds good on the surface, this policy, if implemented, would accomplish exactly nothing.

If Congress approved this proposal, it would increase healthcare costs by making expensive brand-name drugs covered by the rebates cheaper and thus more attractive to doctors and patients. Moreover, the mandate would apply only to a portion of the 11% of dispensed drugs that are brand-name medications. It would have no effect at all on what consumers pay out of pocket for generic drugs, because pharmaceutical companies don’t provide rebates on generics.

To understand why the policy would ultimately fail, we have to revisit why drug rebates were created in the first place. Rebates originated in the 1990s in confidential back-room deals between pharmaceutical firms and pharmacy benefit managers (PBMs). PBMs like Express Scripts and Caremark manage the drug benefits for health insurers and self-insured employers. They draw up and establish lists of common and preferred drugs, called formularies, that their health plan clients agree to offer as covered benefits.

Pharma manufacturers desperately wanted their products to be in those formularies so that physicians would prescribe them to patients and carriers would pay for them. To ensure they would be included in the formularies, the manufacturers paid PBMs rebates geared to the wholesale price of the medications and, in some cases, to their sales volume. Eventually, the health plans found out that the PBMs were revising their formularies to maximize their own profits from the manufacturers’ rebates, and they began to demand a portion of those rebates. Recently, the larger carriers have started their own PBMs or acquired existing firms, so the rebates now flow directly to them.

For consumers with health insurance, this shell game has meant higher copayments. That’s because the insurers raised their copays on brand-name drugs as their costs went up, to discourage physicians from prescribing them. The pharmaceutical companies reacted to the growth in copays, which was having the intended effect of restricting the sale of expensive medications, by hiring third-party firms to offer discount coupons. These coupons lower consumers’ out-of-pocket copay or eliminate them altogether on many brand-name medications. These so-called “copay assistance programs” often have the effect of encouraging physicians to prescribe these drugs rather than a cheaper generic, because their patients have no copay or a lower copay.

For their part, insurance carriers hate copay assistance programs. Because the discounts in most programs taper off after the first three refills, the carriers could be on the hook for hundreds or thousands of dollars once the patient has become accustomed to taking an expensive brand-name drug.

So, if insurers are required to pass on the drug rebates to consumers, the financial impact on the health plans would be profound. With patients’ out-of-pocket costs covered by the rebates, physicians would feel free to prescribe more brand-name medications, thereby raising the cost to the insurers and, ultimately, overall health costs.

Among the 50 proposals in Trump’s “blueprint” to lower drug costs, another suggestion also stands out as a nonstarter: The President wants to eliminate insurance company gag rules that prevent pharmacists from telling consumers when they could save money by not using their insurance. That seems reasonable, but what pharmacist in a chain drugstore is going to tell a patient that the prescribed drug is available at Costco/Safeway/Ralph's for $5? The elimination of the gag rule would never cause the patient to change pharmacies – and only rarely would the patient benefit by paying that particular pharmacy's cash price.

Nevertheless, transparency on generic drug prices is the key to lower drug costs for consumers, since generics account for the vast majority of prescription drugs. If, while prescribing, physicians could see how much a particular generic cost at neighborhood pharmacies and whether some outlets charged less in cash than the patient’s insurance copay, then they could direct patients to the pharmacies where they could get the best price. That would lower out-of-pocket costs for their patients and would also force retail outlets to compete on price.

Tom Borzilleri is the CEO and founder of InteliSys Health (www.intelisyshealth.com) and a former PBM CEO.

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