Are Rebates the Reason for Soaring Drug Prices?

As the debate surrounding drug prices continues, I find that many of those involved point their fingers at a single factor or another party in the system as the problem. Many of the conversations I find myself having and often overhear tend to start with a similar premise somewhere along the lines of “40% of a branded drug price is due to rebates.”

This is a misconception that leads those in the conversation to draw the conclusion that drug rebates are the driver of our drug cost problem here in the United States. While drug rebates certainly play a role in drug pricing, I do not think that role is as straight forward as many would like to make it out to be.

There are a variety of sources providing statistics on rebates and the pieces taken by each stakeholder in the process. One of the easier, more digestible pieces of content I have come across is, “The Pharmaceutical Supply Chain: Gross Drug Expenditures Realized by Stakeholders” shared by the Berkeley Research Group. This report provides numbers based on all drug expenditures and breaks them down to brand drug expenditures. I have chosen to focus on the brand drug expenditures as generic spending and rebating are not usually the focus of rebate debates.

The report said that 62.6% of net expenditures on brand name drugs are realized by manufacturers. This seems to line up pretty well with the commonly expressed “40% of price is due to rebates,” though it does not tell the complete story. While it is easy to repeat and issue blame, we have to take a closer look into what that 40% comprises to understand the role each party plays in the reality of rebates.

To start, I believe the stake holder that seems to get the least amount of scrutiny within the debate is the Federal Government. Based on the expenditures report data, in 2015, 12% of brand name drug expenditures came back to federal programs (Medicare, Medicaid, etc.) in the form of rebates and related fees. This means that these federal programs account for about 1/3 of all rebates and rebate like payments. As a taxpayer and Medicare contributor, knowing this information leads to an increase concern in the current talks about limiting or eliminating rebates. Unless talks are coupled with an another cost control measure, it could mean a significant financial burden for these programs and those of us contributing financially to them.

Next, let us take a look at the party that seems to take the brunt of the blame surrounding rebates, pharmacy benefit managers (PBMs.) In looking at the data available in the expenditures report, PBMs—and their downstream clients such as health plans and self-funded employer groups—receive rebates that account for 16.5% of brand drug spend. While this is larger than the government programs as an absolute percentage, commercial plans cover 78% more people than government sponsored programs. This means that government programs are receiving more rebate dollars per member than commercial plans receive.

It is important to note where the remainder of the non-rebate money ends up so we can full understand the debate about increasing drug prices. In looking at brand drug expenditures, pharmacy profit margin accounts for about 5.8%, wholesaler margin and PGO fees account for 3.1%, and patient cost assistance,  like coupons, come in at nearly 2% of the total. While each of these numbers may be smaller than the rebate amounts, they represent enough money and influence that they have to be considered in the eventual solutions we find to rising drug prices.

Personally, I do not think that there is anything inherently wrong with drug rebates. Most industries have bulk purchasing discounts and rebates especially when a purchaser agrees to exclusive or limited supplier contract terms. When you have nearly identical products, like we often find between drugs in the same class, there has to be a way to differentiate those products. This differentiation is often found in price including rebates.

If we as a society do want to overhaul or eliminate drug rebates, there are additional factors we need to consider. Each of these stakeholders—manufacturers, PBMs, downstream clients, government programs, supply chain entities, and patients—will need to come to the table willing to discuss their position and how each can contribute to an overall solution.

Russ J Spjut, PharmD, is owner of Formulary Intel Consulting. He is a residency trained pharmacist in managed care with experience in both commercial and Medicare Part D PBM operations. He has been involved in formulary management, P&T committee presentations, clinical program development, formulary strategy, clinical analysis, client management, and review of coverage determination requests for a major health care management company.

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