Lack of Transparency and Intentional Confusion: A Pharmacy Benefit Example

A recent Wall Street Journal Opinion piece touted the benefits of drug rebates and the claim that their elimination would increase prices to consumers. We examined this article and what the authors are trying to claim.

The authors’ begin with the premise “rebates are price discounts. They reduce prices based on sales volume: Drug companies charge less when more of their drugs are sold to patients”. Wouldn’t it be just as fair to say that drug companies would sell more to patients if they charged less?

Drug rebates are delivered about 9 months after a drug is purchased. PBM’s use “rebate aggregating firms”, who charge a percentage of the rebate, to obtain these rebates from the drug manufacturer. Why would a patient want to pay more at the time of purchase in order to get some percentage of the rebate back instead of paying less at the time of purchase? This is especially true considering the fact that purchasing the drug in the first place is rarely a discretionary purchase.

The authors state “the Trump administration says that because consumer payments are based on prices before rebates, patients don’t benefit from the savings. That’s only part of the story.” Interestingly, there is no denial here of the fact that “patients don’t benefit from savings” as at least part of the story. Let’s restate that to say “a part of the story is that patients don’t benefit from rebates.”

The authors also state, “Consumers also benefit directly from rebates paid to PBM’s. The Altarum Institute estimates that in 2016 PBM’s earned $11 billion in profits and passed $89 billion in rebates to health employers and health insurers. Health plans in turn have strong incentives to pass on rebate revenue to their enrollees in the form of lower premiums and better coverage. A ban on rebates would make coverage more expensive and less generous.” However, there is a huge distinction here that is not clear. That is the distinction between a “health insurer” and a “health plan”. For most, an insurer is a publicly traded entity that sells products for profit.” A “health plan” is a program of benefits offered by an employer. It is true that the motivation of a health plan is to make coverage more expensive and less generous. However, the motivation of a health insurer is to sell products for a profit. A rebate returned to an insurance company is revenue to that company and will be used for the normal things an insurance company will use revenue for. They may include lowering the cost of their product, but it will definitely include the myriad of other demands any company has for revenue that comes into its coffers. There is little chance of more than a small percentage of the rebate revenue being used to lower premiums or improve coverage.

Also note that while PBMs did pass $89 billion in rebates they did not claim to pass all rebates through. They definitely kept some portion which was included in their $11 billion in profits.

There is one other claim that does not add up. “When more than one patented drug is available for an illness, manufacturers offer rebates for preferred placement”. If consumer payments are based on prices before rebates and manufacturers compete with rebates not consumer prices, these manufacturers will increase the price to the consumer to increase their rebates. PBMs end up preferring higher priced drugs with higher rebates. Health insurers do too.

Lack of transparency is rampant in products and services used within health care plans and it continues to drive up the cost of health benefits each and every year. PBMs are a significant contributor to this problem since drugs represent a high percentage of total health plan costs. Awareness and being tenacious about full transparency will save your group health plan considerable amounts. Take some time to learn about it.

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