America’s drug rebate system is broken

Rebates and discounts are generally viewed as important competitive tools that lower prices for consumers, and rightly so. But consumers should beware when discounts create competitive restrictions that reduces their choices and increases their costs. Such is the case when dominant drug manufacturers use rebates to keep lower-priced drugs off the market – practices referred to as “rebate walls” or “rebate traps.” Fortunately, the Federal Trade Commission in a recent report to Congress suggests its poised to shine a spotlight on these anti-competitive tactics.

Rebate walls come in many forms. A typical rebate wall occurs when manufacturers of blockbuster drugs tie their rebates to volume targets, and even stipulate retaliatory measures to claw back rebates if competitor drugs are allowed onto the insurers’ formulary (the list of medicines approved for coverage). A blockbuster drug generates billions in sales, which in turn generates enormous rebate revenues for insurers and pharmacy benefit managers (PBMs), organizations that manage insurer formularies. The potential loss of these revenues encourages PBMs and insurers to prefer the blockbuster drug to competitors. These lower-cost competitors are, effectively, blocked from entering the market and can’t compete.

The evidence demonstrates that the rebates are pocketed by the middlemen and are not reducing consumer costs — in many instances, consumer costs are actually higher. These anti-competitive contracting practices are an important reason why drug list prices are rising — and why many insured patients don’t see savings from rebates.

Rebate walls can also harm patients’ health. One of the most common and pernicious rebate wall tactics is to require that patients “fail first” on a blockbuster drug before insurers will cover an alternative medicine. What this means is if your doctor prescribes a certain medicine to treat your condition, you may have to take another medicine for 90 days and prove that it didn’t work before your insurance plan will cover the medicine your doctor prescribed. Delaying appropriate treatment like this can create long-term problems for patients, especially people struggling with degenerative or progressive diseases.

Not surprisingly advocates from both sides of the aisle — including Rep. David Cicilline (D-R.I), former HHS Secretary Azar, and former FDA Commissioner Scott Gottlieb — have identified rebate walls as an exclusionary practice raising substantial competitive concerns.  

With this track record and the Biden administration eager for a win on drug costs, it’s easy to see why the FTC is coming down so hard on rebate walls. But it’s not merely a political ploy. Even the agency’s Republican commissioners agree that rebate walls may be limiting competition and merit greater scrutiny.

In its report to Congress, the FTC highlighted precedents where the agency has challenged discounting practices that actually suppressed competition. Based on these precedents, the agency could issue a rule that limits rebates offered by blockbuster drugs that can treat a range of disease to a single indication. However, the scope for FTC rulemaking is limited.

At the federal level, a lasting solution to rebate walls is more likely to come through Congress. Members of both parties have criticized these practices, including Sen. Klobuchar (D-Minn.), Cornyn (R-Texas), and Grassley (R-Iowa), the ranking member on the Senate Judiciary Committee. The FTC report should raise the profile of this issue with a broader coalition of lawmakers and spur many to take action on lowering drug prices. Expect to see Congressional hearings in the months ahead.

States can take action, too. West Virginia became the first state to pass a law requiring that prescription drug rebates are passed on to patients. While this will save every patient money at the pharmacy checkout counter, it may not completely solve the problem.

FTC’s report should land as a national wake-up call. Our broken drug rebate system isn’t making Americans healthier —only poorer. Ending rebate walls is a first step towards fixing it.

David Balto is a former policy director of the Federal Trade Commission and a public interest antitrust attorney who represents consumer groups.

Wayne Winegarden, Ph.D., is a senior fellow in business and economics with the Pacific Research Institute, director of the Center for Medical Economics and Innovation at PRI, and the principal of Capitol Economic Advisors.