Eliminating rebates in the pharmaceutical industry

HHS
head Alex Azar testifies before the Senate Finance Committee in
Washington
Thomson
Reuters

• As the pressure to lower drug prices increases,
  the Trump administration and the pharmaceutical industry
  are shifting the blame onto pharmacy benefit managers, the
  middlemen of the drug operation.
• 
  Eliminating PBMs would be getting rid of
  rebates — a key
  payment
  
   that acts as a
  discount to the list price drugmakers set.
• Goldman Sachs published a research report last week,
  saying rebate retractions could be positive for pharmaceutical
  companies with diverse portfolios of new and innovative drugs.
  However, they could have adverse effects on companies who rely
  heavily on legacy drugs in over-crowded markets.

In the wild witch hunt of who’s to blame when it comes to
high costs in drug pricing, the latest victim has been pharmacy
benefit managers.

Dubbed the middlemen of the drug industry, PBMs include
companies like Express Scripts, CVS Caremark, and Optum RX who
work with insurers that pay for drugs to negotiate lower
prices with drug companies. As part of this process, drugmakers
pay out more
than $100 billion in rebates to PBMs, a financial
arrangement that Health and Human Services Secretary Alex Azar
has criticized.

Azar said that PBMs have an incentive to keep drug prices
high because of rebates. 

“Right now, everybody in the system makes their money off a
percentage of list prices,” Azar testified in
June before a Senate committee. “We may need to move toward a
system without rebates.”

Pfizer CEO Ian Read said a healthcare model without rebates
will be beneficial to patients and the industry
broadly. 

“With the removal of rebates, we will remove the sort of,
what we call the rebate trap, whereby access is denied to
innovative products because of a strong position over another
products with its rebates,” he said Tuesday on a company earnings
call. 

“I believe we are going to go to a marketplace where we don’t
have rebates.”

A research report released by Goldman Sachs last Tuesday took a
look at how eliminating rebates might impact pharmaceutical
companies. Rebates have been used historically to promote healthy
market competition between drugmakers. But these systems are
sometimes
hijacked by larger pharmaceutical companies to protect their
own drugs. Because of the way drug markets are shaped, some
pharmaceutical companies tend to benefit from rebates while
others lose out. 

Goldman Sachs categorized the drug portfolio of major
pharmaceutical companies into three categories: innovative,
stable and legacy. Innovative portfolios boast new drugs and
therapies where there is little to no competition in the market.
Stable portfolios contain drugs that treat general consumer
and animal health and vaccines. Theses are drugs with steady
sales over time but no remarkable growth or profitability. Then
there are the legacy drugs, which have been used for a long time
with proven safety and efficacy but face a lot of competition
from generic brands.