Attempt to reduce use of drug rebates may benefit drug companies: CBO

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Alexander Gaffney Senior Manager, Health Research Institute, PwC US May 10, 2019

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Drugmakers may stand to modestly benefit from a recent CMS proposal that would eliminate the use of prescription drug rebates in Medicare Part D and by Medicaid managed care organizations, a change that would allow drug companies to pass on much of what they now spend on rebates to consumers instead, while keeping the rest.

The analysis by the Congressional Budget Office (CBO) determined pharmaceutical companies would likely use 85 percent of what they now spend on rebates on point-of-sale rebates to patients, which CMS’ rule would for the first time allow, while retaining the remainder, about 15 percent.

Because pharmacy benefit managers (PBMs) would no longer receive rebates, which in many cases are passed on to the drug insurance plan to use the money to lower premiums, CBO estimated that premiums would increase. This in turn would require CMS to increase its premium support. The government now subsidizes 74.5 percent of basic beneficiary premiums, CBO noted. This would increase federal spending by $177 billion over 10 years, the agency estimated.

HRI impact analysis

The Trump administration’s proposal contains numerous unknowns, and so CBO and CMS, in their analyses, have had to make some significant assumptions. One of the key questions concerns how pharmaceutical companies will change their prices if rebates go away.

CBO said it believes drug companies will keep 15 percent of the rebates they now pay, and pass along the remaining 85 percent to discounts for the PBMs or point-of-sale chargebacks for consumers. CMS, in its analysis, estimated that drug companies would keep 15 percent, and use a quarter of the remaining 85 percent to lower lists prices, with the remaining cash paid out as consumer-focused rebates and chargebacks.

Also unclear is exactly how the rebate rule might change commercial behavior. Without rebates, some PBMs may have little incentive to offer favorable formulary coverage for a particular drug, or may be incentivized to instead cover alternative, lower-cost products such as a biosimilar instead of its biologic predecessor. What HHS hopes is that by eliminating the use of rebates, point-of-sale rebates may reduce costs for consumers whose drugs cost the most, even if it may increase premiums for other consumers. 

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Trine K. Tsouderos

HRI Regulatory Center Leader, PwC US

Tel: +1 (312) 241 3824

Alexander Gaffney

Senior Manager, Health Research Institute, PwC US

Tel: +1 (202) 836 1604

Jason Ranville

Senior Manager, Health Research Institute, PwC US

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