Proposed drug supply chain rule is mere table ante for broader ‘rebate’ reform

At his one-year anniversary press conference last week, President Biden announced that his administration is pivoting to targeted, more achievable policy priorities. The administration previewed this scaled-back effort earlier this month by proposing a new rule to reclaim roughly $2 billion annually from the convoluted prescription drug supply chain for seniors.

The CY 2023 Medicare Advantage and Part D Proposed Rule would redirect so-called Direct and Indirect Remuneration (DIR) fees that pharmacies pay to Medicare plans to more than 50 million Medicare beneficiaries in the form of lower prices at the prescription counter. 

This action to reduce burdensome prescription drug costs is welcome, but its value is primarily symbolic. It will hardly put a dent in the nearly $500 billion U.S. prescription drug market. However, as part of a broader commitment to streamlining the inflationary prescription drug supply chain, this rule could make a meaningful impact on patients’ lives. 

The Biden administration can achieve significant prescription drug cost reductions — on the order of around 50 percent or more for some medications like insulin — by following the courage of its convictions and addressing the biggest distortion in the drug supply chain: enormous rebates paid by manufacturers to middlemen known as pharmacy benefit managers (PBMs).

Some background: Health insurers and their associated PBMs demand that drug manufacturers pay them “rebates” — to the tune of nearly $200 billion a year — in return for placement on health plans’ formularies (the list of drugs they promise to cover). These so-called “rebates” drive up drug costs and make up 40 to 50 percent of list prices. 

Last year, a Senate Finance Committee report found these rebates, which manufacturers pay “all in the hopes that their product would receive preferred formulary placement,” are a prime reason for the increasing cost of drugs like insulin.

Rebates account for the entire amount of drug price increases in recent years. In fact, net drug prices (list prices minus rebates) have actually fallen over the past few years. The list price of a popular insulin brand, for instance, has risen by 141 percent since 2012, yet its net price has decreased by 53 percent as rebate demands soar. 

The Senate report found that rebates paid by insulin maker Sanofi for placement on CVS Caremark’s formulary rose from around 3 percent to over 50 percent in just five years. The report revealed that the manufacturer Lantus offered the PBM OptumRX an astounding 80 percent rebate for a box of its insulin pens, accounting for $339 of its $425 cost. The drug pricing firm 46Brooklyn concludes that diabetics would save an average of $1,000 per year if rebates were eliminated. 

Rebates also indirectly increase prescription drug spending by incentivizing PBMs to avoid placing less expensive drugs, with associated smaller kickbacks, on their formularies. For instance, PBMs have refused to place a cheap, nonbranded insulin called insulin glargine on their preferred formularies. A 2019 class-action lawsuit accused PBMs of conspiring in a bribery scheme to raise insulin prices to increase their kickbacks. 

The U.S. Department of Health and Human Services addressed this Kabuki-theater drug pricing in 2020 with a rebate rule requiring Medicare to pass along its roughly $30 billion in annual rebates to seniors in lower medication costs. Without the misaligned incentives associated with these kickbacks, this rule would also encourage Medicare plans to choose cheaper generic drugs such as insulin glargine for their formularies.

However, under pressure from PBMs and insurers, the Biden administration delayed the rule until 2023. Last year’s infrastructure legislation punted it another three years until 2026. The Build Back Better bill, which passed the House of Representatives last year but has stalled in the Senate, would terminate the rule altogether to help pay for the legislation’s myriad social and environmental initiatives. 

While the rebate rule is on life support, the recent DIR proposal suggests the Biden administration understands how the distortionary prescription drug supply chain hurts patients. Biden can reassert his bipartisan bona fides to bolster his lagging poll numbers by campaigning to bring this meaningful cost control measure back from the dead. 

Supporting DIR changes while continuing to oppose rebate reform demonstrates a cognitive dissonance on much-needed prescription drug fixes. While this DIR proposal is marginally beneficial for patients, it’s mere table ante for more meaningful supply chain streamlining.

Terry Wilcox is the executive director of Patients Rising.