How so-called rebates drive up the cost of prescription drugs

August 12, 2018

Rebates demanded by pharmacy middleman from drug manufacturers are driving up Americans' prescription-drug costs by billions of dollars.

A Dispatch analysis of financial records from the country’s largest drug manufacturers found that practices of the pharmacy benefit managers, also known as PBMs, push the list price of their drugs well beyond actual costs.

In short, PBMs tell manufacturers that if they want their drugs to be covered by the insurance companies they work with, the manufacturers need to provide the PBMs with "rebates."

In 2017, the country’s largest pharmaceutical companies spent $74.6 billion on research and development to create their brand-name drugs, according to financial reports. They also spent $116 billion to get those medications from their warehouses to wholesalers, and then via pharmacy benefit managers, hospitals and pharmacies to consumers.

These costs affect all patients because the rebates are factored into the price of name-brand prescription drugs.

"PBMs, because of their market power, demand higher and higher rebates. Manufacturers, in response to that, raise their list prices so as not to affect their revenues," said Neeraj Sood of the University of Southern California's Schaeffer Center for Health Policy & Economics, speaking at a hearing of the California Department of Insurance in June.

Pfizer CEO Ian Read said in a recent interview that the rebates demanded by PBMs account for 40 percent of the list price of his company’s brand-name drugs. Pfizer officials said the company paid nearly $6.5 billion in drug rebates in 2017.

“Effectively, patients who buy pharmaceuticals are subsidizing the rest of the health industry,” Read said. “And so, removal of the rebates, I believe, will be very beneficial to patients and our industry.”

CVS Caremark, the naton's leading PBM, disagrees.

"Drug manufacturers alone are responsible for the list prices they set. We have been able to keep drug-cost inflation under control in spite of steady price increases by manufacturers. In 2017, drug-price growth for PBM clients was only 0.2 percent, despite manufacturer price increases of nearly 10 percent," said CVS spokesman Michael DeAngelis.

"In fact, if list-price increases were the result of a manufacturer’s need to address rebates, you would expect rebates and list prices to be rising in correlation. But that’s actually not the case," he said.

The exact dollar amounts that manufacturers pay to PBMs is unknown because of a lack of transparency in the industry and supply chain. Six of the largest pharmaceutical companies declined to release information when contacted by The Dispatch.

The Dispatch has spent this year investigating drug pricing and the actions of PBMs, who make nearly $400 billion a year as part of the country’s health-care system. Ironically, PBMs historically served as claims processors but more recently, as they became more involved in managing benefits, they have touted their role as helping to control the rapid rise in health-care costs.

The Dispatch investigation has found that in addition to rebates, PBMs also profit through spread pricing, which involves billing insurers far more for drugs than the PBMs are paying pharmacists to dispense the medications. The difference between those two numbers is the spread, and that money is retained by the PBMs.

A study released two months ago by the Ohio Department of Medicaid backed up the Dispatch findings and showed that PBMs CVS Caremark and Optum Rx collected $224 million in taxpayer money from spread pricing in one year, charging rates three to six times the industry standard.

Ohio Attorney General Mike DeWine has launched an investigation and announced plans to sue CVS Caremark. State Auditor Dave Yost also is investigating the practice of spread pricing and is scheduled to release findings this week. Ohio legislators in both parties also are delving into the practice.

And President Donald Trump said last month that he is considering removing the federal provision that exempts rebates from anti-kickback laws.

Ohio Medicaid's situation

But for those on the receiving end of rebates — including not only PBMs but also government entities and some private employers — the revenue would be tough to give up.

State officials say that drug rebates reduce prescription-drug costs in Ohio’s Medicaid program by half, as they do for similar tax-funded programs in other states, seemingly inflating list prices and reducing overall costs at the same time.

“While the presence of rebates may contribute to the increase in a list price for a drug, the presence of rebates does not increase pharmacy-benefits spending to (the Ohio Department of Medicaid) because our increased rebates offset the large majority of the list-price changes," said Medicaid spokesman Tom Betti.

In 2017, drug manufacturers provided $1.9 billion in rebates to Medicaid, the state and federally funded health-insurance program for 3 million poor and disabled Ohioans. That’s 51 percent of the $3.7 billion that Ohio Medicaid spent on prescription drugs last year.

The bulk of Ohio’s rebate money comes through the federal Medicaid Drug Rebate Program, which requires all drug manufacturers to enter into rebate agreements with the U.S. Department of Health and Human Services. In exchange, state Medicaid programs must cover those manufacturers’ drugs.

“Under this program, Medicaid receives larger rebates than most other payers, including rebates based on best price received by other payers,” according to a recent report to Congress by The Medicaid and CHIP Payment and Access Commission, a nonpartisan legislative agency that provides analysis and recommendations to lawmakers.

Ohio Medicaid also receives rebates from drug manufacturers negotiated through the Sovereign States Drug Consortium, a 12-state alliance.

In addition, the state in 2017 received $100 million from the five Medicaid managed-care plans. That money was an undisclosed portion of rebates negotiated by pharmacy benefit managers hired by the plans to oversee drug benefits. How much the PBMs kept for themselves is unknown because they are not required to disclose it.

CVS Caremark, the PBM for four of Ohio’s five Medicaid managed-care plans, said in a recent court filing intended to block release of a state report detailing their pricing practices that “more than 90 percent of those rebates are passed on to Caremark’s (managed-care plans) to lower out-of-pocket costs and premiums for their members.”

But last week, CVS' DeAngelis said their attorneys referred "to our PBM business in the aggregate."

In Ohio Medicaid, he said, "CVS Caremark passes 100 percent of these supplemental rebates to our Ohio Managed Medicaid clients. In other words, we do not keep any amount of a drug manufacturer’s rebate for Medicaid prescriptions in Ohio."

Despite calls for more transparency, Medicaid officials say they have no idea how much money the PBM might be getting from manufacturers.

CVS Health, owner of CVS Caremark, reported $130.6 billion in net revenue in 2017 — nearly double that generated by Johnson & Johnson, the country’s largest pharmaceutical company. And in an earnings report released last week, CVS reported it will keep $300 million in rebates this year, or 3 percent of earnings. About 98 percent of rebates, CVS said, are returned to clients nationwide.

“This whole thing is an endless cycle of cost inflation,” said Antonio Ciaccia, a lobbyist for the Ohio Pharmacists Association. “Costs go up, payers chase discounts that aren’t 100 percent offsetting, costs go up again, and the cycle continues.”

Where rebates go

Drug rebates work exactly like a rebate that consumers are offered when they buy something at a department store and then mail the receipt to the product manufacturer.

The difference is that instead of the rebate going back to the consumer, it goes to a PBM, a government agency, your employer or an insurance company.

That is how PBMs keep everyone on the “hook,” Ciaccia said.

Employers, both public and private, receive rebates from PBMs. Employers can put those dollars back into the health plans, or not.

The size of the rebate depends on the size of the group and which medications the members use.

CEOs, spokespeople and actuaries from six pharmaceutical companies who spoke to The Dispatch on background said that PBMs also demand a supplemental rebate. Those rebates are more significant than those passed back to employers, they said. All six companies declined to give specific dollar amounts.

Those two levels of rebates demanded by PBMs force drug manufacturers to factor that cost into the list price of their brand-name drug.

A study by USC's Schaeffer Center for Health Policy & Economics released in 2017 found that for every $100 spent on prescription drugs, $41 went to middlemen in the drug supply chain.

Manufacturers have said publicly that they must pay these rebates to get their brand-name drugs on the formulary — the approved list of drugs covered by insurers — that a PBM tells the insurer it will cover.

Congressman Buddy Carter, a pharmacist and Republican from Georgia, said manufacturers “are essentially being held hostage by PBMs.”

And the fallout, he said, has been devastating at times to patients.

“I’ve seen senior citizens come to my counter and have to make the decision to buy groceries or buy their prescriptions,” he said. “And so when I know that there are these middlemen ripping off the public, I get passionate.”

CVS Caremark disputes such statements.

Spokesman DeAngelis cited the 2017 difference between drug-price growth for PBM clients and manufacturer price inflation, and added in his email: “Annual out-of-pocket costs for PBM members also declined, with three out of four members spending less than $100 out of pocket for their prescriptions, and nearly 90 percent spending less than $300.”

The EpiPen case

The closest that critics of the secrecy surrounding drug rebates say this country has ever come to learning the strategy and influence of pharmacy benefit managers came in 2016 when the pharmaceutical company Mylan Inc. was called to testify before the U.S. House Oversight & Government Reform Committee.

Lawmakers were angered by Mylan’s decision to raise by nearly 500 percent the cost of the EpiPen, an auto-injector of epinephrine used to treat severe allergic reactions. Congress had passed a law shortly before the dramatic price increase to encourage schools to stock the EpiPen to help allergic children.

For nearly four hours, they grilled Mylan CEO Heather Bresch about the $608 cost of a two-pen pack.

Bresch’s attempt to calm them was to announce that Mylan had recently announced it was offering a generic version for half the cost.

The announcement served only to incense the committee members. Lawmakers asked Bresch why the company didn't lower the cost of the brand-name EpiPen, given that it could offer a generic for half the price.

Bresch’s response hits at the heart of why drugs cost so much:

“But that (price reduction) would not be guaranteed to flow through to the patient,” she said.

Lawmakers didn’t follow up on what Bresch was saying.

Bresch also repeated that of the $608 list price for EpiPen, $274 went to Mylan.

Where did the rest go?

Almost all of it went to pay for the rebates that PBMs demand before they will place a drug on the formulary.

Bresch held up a chart during the hearing to show that $334 of the $608 cost for the EpiPen was going to cover “rebates and allowances.”

Lawmakers determined during the hearing that the reason Mylan could offer the generic version of EpiPen was because it cut out the middleman.

“I believe time has shown that EpiPen was not a window into Mylan's business model, but rather a window into a broken and opaque system,” Bresch said during a conference call last week.

“While the dialogue has evolved tremendously, actions by market participants to improve the U.S. health-care environment have been less productive.”

Carter, the congressman-pharmacist, was grilling Bresch that day and asked her exactly how much money went to PBMs.

Bresch said she didn’t know.

It has been two years since Bresch’s testimony. Pharmacists such as Carter are still asking for that information to be made public. Others, including some Ohio lawmakers, have joined that chorus.

“We need transparency. It has to happen, and I believe it will,” Carter said last week.