Competition & Regulation

The Hill: Our broken drug rebate system makes Americans sicker and poorer

Writing in The Hill, David Balto, a former policy director of the Federal Trade Commission in the Obama Administration, and Wayne Winegarden, an economist with the Pacific Research Institute, discuss the growing pressure on public officials to address anti-competitive industry practices known as “rebate walls” or “rebate traps”.
“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.
The authors explain how rebate walls are formed when blockbuster drug makers tie their rebates to volume targets that only huge market players can achieve and threaten punitive measures if the insurer allows other drugs to compete on a level playing field.
“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.”
These perverse practices explain why drug prices are rising – rebates are generally a percentage of list price (“sticker price”), so the higher the price, the bigger the rebate – and why out-of-pocket costs for patients continue to rise despite rising rebates (hint: PBMs are pocketing the discounts, not passing them on to patients).
All of this is bad for our health. One of the chief tactics these companies use to block competition and enrich themselves is requiring that patients first take the insurer’s preferred medicine – regardless of what a doctor has prescribed – and prove it doesn’t work before the appropriate medicine is covered (known as “step therapy” or “fail first”). You don’t need to be a doctor to understand that preventing a patient from receiving the right treatment can cause serious problems, especially when it comes to degenerative or progressive disease.
With millions of Americans struggling with their health in the wake of a pandemic, it’s no surprise this issue is gaining traction in Washington, D.C. The Biden Administration is under pressure to lower drug prices, and the FTC’s new report to Congress on rebate walls is a strong signal that these anti-competitive rebate wall practices are in the scopes.
But as Balto and Winegarden point out, this isn’t a partisan witch hunt. Even the FTC’s Republican commissions agree that rebate walls limit competition. Former HHS Secretary Azar and former FDA Commissioner Scott Gottlieb flagged these anti-competitive practices in the Trump administration, and there is considerable bipartisan support for action in Congress, including from Representative David Cicilline (D-RI), and Senators Klobuchar (D-MN), Cornyn (R-TX), and Grassley (R-IA).

Read the full article at The Hill for Balto and Winegarden’s full analysis and recommendations.