Instead of eliminating drug rebates, use average sales price to set co-insurance levels

Changing key elements of the U.S. health care system can be effective and in the best interests of patients. It can also be ill-advised.

Presidents George W. Bush and Barack Obama were largely successful in implementing “radical” changes to the health care system, the former instituting a drug benefit for seniors through the Medicare Part D prescription drug program, the latter extending health insurance to the uninsured through the Affordable Care Act.

In contrast, President Bill Clinton’s first administration was tainted by its failure to implement an ambitious plan to reform the health care system. More than 20 years later, President Trump proposed a sweeping change in January 2019: eliminating the rebates that pharmacy benefit managers negotiate with manufacturers for federally sponsored prescription drug plans. After much public review, analysis, and debate, the Trump administration abandoned the proposal in August 2019.

Nearly a year later, the Trump administration in July restated its intention to do away with rebates for Medicare Part D drugs as one of several new executive orders aimed at lowering prescription drug costs. One of the administration’s goals in revisiting the rebate elimination plan is to reduce the potential for unintended incentives created by the protection of rebates under the safe-harbor provisions of the Anti-Kickback Statute.

One such incentive is that pharmacy benefit managers may give preferential status (referred to as formulary management) to drugs with higher list prices but that offer higher rebate revenues to the pharmacy benefit managers, as rebates are typically a percent of the list price.

In the past, rebate revenue was often retained by pharmacy benefit managers. Today, the vast majority of rebates flow back to health plans. Nevertheless, patient co-insurance payments (the percentage of a drug’s cost that a patient pays) for higher-cost specialty drugs are often based on list prices, and not on the actual or “net” cost to the pharmacy benefit manager or insurer after rebates.

We offer an alternative proposal that could achieve the administration’s objective of lower drug costs for patients without fundamentally altering the existing model: set patient co-insurance levels based on the average sales price (ASP). The average sales price is the average net price — the price after rebates and discounts are taken into account. This would not require completely abandoning the pharmacy benefit manager rebate model and price negotiation in managing formularies. It would provide more transparency to patients and other stakeholders about the actual costs of their prescription drugs.

Manufacturers already report average sales prices to the Centers for Medicare and Medicaid Services for Medicare Part B drugs. Extending this mechanism to Part D drugs would ensure that patients pay co-insurance based on net costs after rebates. This would also preserve the discretion that pharmacy benefit managers and insurers have in managing formularies based on non-price factors like the comparative effectiveness of medications.

One might argue that a more equitable approach might be to set patient co-insurance levels based on the costs that pharmacy benefit managers and insurers actually pay for drugs, namely the plan-level net costs after rebates. While setting co-insurance levels based on individual plans’ net costs would lead to greater price transparency, it would involve significant additional reporting requirements and administrative burden, and it is not certain that the result would be lower total cost of care.

It could also lead to more limited options for patients, as pharmacy decision makers would be pressured to focus increasingly on price alone, as opposed to accounting for the comparative effectiveness of therapies, the ability of medications to offset other health care costs, and the value of innovative medicines.

Although the current system of rebates to pharmacy benefit managers (and more generally rebate-driven formularies) has its issues, it is not clear to us that eliminating negotiated rebates, or complete transparency to net prices, would be in the best interest of patients if the goal is to lower patients’ total cost of care while maintaining or improving quality of care and treatment options.

Completely eliminating Medicare Part D rebates is not essential for lowering the costs that patients pay for medications. It was an imperfect approach when it was originally proposed, and it remains so. As an alternative, setting co-insurance for high-cost specialty therapies based on their average sales prices (ASP) could lower patient co-insurance costs while providing greater price transparency, and is feasible to implement.

Andrew Parece and Matthew Majewski are vice presidents of Charles River Associates, a global consulting firm. The views expressed here are the authors and not those of their employer or other organizations they are affiliated with.