- Key executives of seven top drugmakers will testify about drug prices at a US Senate committee hearing today. The last time a top pharma CEO faced tough questions about drug prices, we learned about a crucial feature of US drug prices called rebates.
- Drug rebates are a common business practice in the US. Drugmakers pay them and other discounts to get health insurers and pharmacy-benefit managers to cover their medications.
- But rebates have also been blamed for driving too-high US drug prices.
- The practice became more widespread because of a forgotten 1990s class-action lawsuit brought by mom-and-pop pharmacies, according to one expert, Scott Gottlieb, who now leads the US Food and Drug Administration.
- Drugmakers are expected to point fingers at rebates and intermediaries on Tuesday. But Sen. Chuck Grassley, who is chairing the hearing, has already said that isn’t the right approach.
CEOs from top drug companies like Pfizer and Merck will be in the hot seat today, as they’re set to testify before US senators at a hearing about high drug prices.
The last time a top pharma executive faced tough questions from members of Congress about prices, we learned something crucial about how US drug prices work – and it’s likely to inform Tuesday’s hearing.
By 2016, Mylan had raised the price of its lifesaving EpiPen allergic-reaction treatment by more than 500% over several years, sparking public outcry.
Hauled before lawmakers that fall, Mylan CEO Heather Bresch said Mylan wasn’t reaping much of the financial benefits of those price increases. Instead, she said, Mylan had to give industry intermediaries large discounts and after-the-fact rebates.
Of the more than $600 that an EpiPen two-pack cost that year, Mylan made just about $100 after things like rebates, she said.
Drug rebates are a common feature of the US health system, used by drugmakers in negotiations with intermediaries to get their medicines covered by health insurers. Rebates have also been blamed for driving up the cost of drugs in the US. And the Trump administration even recently proposed getting rid of rebates to bring down drug prices.
But one expert, Scott Gottlieb, writing for Forbes, agreed with Mylan. He said a flawed system was at play, one that benefited everyone but patients.
Describing the model as “byzantine” and “inept,” he called on Congress to do something. Gottlieb, by the way, now heads the US Food and Drug Administration, which makes sure medications are safe and effective but doesn’t regulate their prices.
“The convoluted arrangement by which drugs are priced and sold arose accidentally as a result of litigation. But now that this inept system is firmly entrenched, bringing rationality to the selling model is going to disrupt inter-reliant business practices,” he wrote. “As much as the drug makers complain about the rebating scheme, they’ve grown as dependent on its subterfuge, opacity, and inequity as everyone else in the system.”
Driving drug prices up?
You may already know about rebates from products like clothing and TVs.
In the healthcare world, businesses, rather than consumers, are often the ones that receive rebates and other discounts on prescription drugs. Intermediaries like pharmacy-benefit managers bargain for these discounts, from which they typically get a cut.
Critics say these practices drive up a drug’s public “list” price. And people at the pharmacy counter may end up paying some or all of a drug’s higher list price.
That may sound convoluted – which is exactly the word Gottlieb used.
In explaining how this rebate system arose, Gottlieb pointed to a 1990s class-action lawsuit that he said permanently shaped the drug-pricing landscape.
Discounts have long been a part of how drugs are sold in the US. In the 1990s, drugmakers offered them to companies that bought a lot of their medications, including a type of health insurer called a health maintenance organization, or HMO.
Pitched as a way to cut down on rising health costs, HMOs grew rapidly in the early 1990s. Those who pay for HMOs get both health insurance and healthcare through them, so the organizations had significant influence over what their doctors prescribed.
- Hollis Johnson/Business Insider
A forgotten 1990s lawsuit
Pharmacies, meanwhile, felt that they were getting a bad deal. So they fought back by suing drug companies.
Drugstore and supermarket pharmacy chains came together with thousands of independent pharmacies in a class-action lawsuit against 23 big drug companies, alleging they had illegally conspired to fix prices, according to a 1996 New York Times report.
The pharmacies won a settlement of more than $408 million. As part of the settlement, the drug manufacturers did not agree to change their practices, according to The Times.
But it did change the way they structured the discounts, Gottlieb told a Senate subcommittee in October 2016.
Instead of offering discounted prices on the front end, drugmakers started hiding them by offering discounts after customers bought the medicine, said Gottlieb, then a resident fellow at the American Enterprise Institute, an influential conservative think tank.
Not everyone agrees with Gottlieb. As lawyers from the firm Foley Hoag said in a report last year, rebates existed before that 1990s lawsuit. They found, though, that it did influence how rebates are used today.
That’s because rebates started getting linked to how much of a drug that a partner business, like a pharmacy-benefit manager, was able to sell to customers. This was intended to help drug companies avoid antitrust concerns and other lawsuits.
Gottlieb argued that a system of up-front discounts would give people lower drug prices at the pharmacy counter.
A proposal to ban rebates today
The Trump administration has signaled it wants to ban those rebates in Medicare, the government-funded health program that covers elderly people and some people with disabilities, and in some parts of the Medicaid program for people with lower income.
Those changes were brought up in a new proposal geared toward lowering drug prices, and the Trump administration hopes it will have an even further reach, affecting those who have commercial health insurance as well.
But drugmakers on Tuesday are likely to focus again on rebates and discounts and point a finger at the role of intermediaries like pharmacy-benefit managers.
But Sen. Chuck Grassley, who chairs the Senate Finance Committee, which is organizing the hearing, has already said he won’t accept that.
The price ppl pay for Rx drugs is complex+covered in secrecy There's plenty of room for transparency+improvement at every part of the supply chain b4 drugs reach patients That's why we are having a series of hrgs on the issue in the Finance Cmte Tmrw is the 2nd this Congress
— ChuckGrassley (@ChuckGrassley) February 25, 2019
I hope the drug co CEOs testifying tmrw don't try to blame everyone but themselves/take no responsibility for their role in fixing the problem We already understand there are other factors to consider Tmrw is abt the part drug cos can do to lower costs for patients+taxpayers
— ChuckGrassley (@ChuckGrassley) February 25, 2019
Like Mylan’s Bresch, pharmaceutical companies have insisted there’s a large discrepancy between their products’ list prices and what they actually get to keep. And rebates are one part of that.
Importantly, though, the new Trump administration proposal wouldn’t require drug companies to lower the prices of the drugs. The companies could even benefit from a shift on rebates – and they applauded the rebate proposal when it came out in February.
“We applaud the Administration for taking steps to reform the rebate system to lower patients’ out-of-pocket costs,” Stephen Ubl, president and CEO of the main pharma-industry lobbying group, said in a statement at the time.
- Read more:
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