HHS Proposes to End Drug Rebates in Medicare, Medicaid Managed Care

HHS Secretary Alex Azar proposed Thursday to end drug rebates in Medicare Part D and in Medicaid managed care plans and treat them as kickbacks, in a move that could have implications for private plans as well. The rule was announced in the same week as hearings on Capitol Hill about drug pricing, especially the cost of insulin.

According to a fact sheet released by HHS, the proposal would pass discounts “directly to patients at the pharmacy counter and bringing much-needed transparency to a broken system.”

HHS and the Office of the Inspector General said the current system creates a “perverse incentive.” The proposed rule would create a new safe harbor for prescription drug discounts offered directly to patients, as well as fixed fee service arrangements between drug manufacturers and pharmacy benefit managers (PBMs).

The proposal would also address the most significant incentive drug manufacturers cite in raising their list prices every year, the pressure to provide larger and larger rebates. This rule provides a clear pathway for drug companies instead to compete to have the lower price and out-of-pocket cost to the patient.

HHS said the proposal complements the president’s “American Patients First” plan for lowering drug prices, including boosting biosimilar adoption. Currently, manufacturers of brand drugs and biologics can prevent generic or biosimilar adoption by blocking their entry into the the market by increasing the size of the rebates they pay for a drug or group of drugs and making the rebates a condition of keeping an exclusive spot on a plan formulary.

“Excluding rival drugs with ‘rebate walls’ or ‘bundled rebates’ distorts our free market system, discourages generic competition and biosimilar adoption, and causes patients to pay more out of pocket,” the HHS statement said.

“Every day, Americans—particularly our seniors—pay more than they need to for their prescription drugs because of a hidden system of kickbacks to middlemen. President Trump is proposing to end this era of backdoor deals in the drug industry, bring real transparency to drug markets, and deliver savings directly to patients when they walk into the pharmacy,” Azar said in a statement.

In reaction to the proposal, both the Community Oncology Alliance (COA) and PhRMA praised the move.

“Over the last three years, the COA has documented real-life horror stories from practices and physicians about patients battling cancer who have suffered at the hands of PBMs due to delayed coverage decisions, denial of needed treatments, impenetrable bureaucracies, and failure to receive medications in a timely manner,” COA said in a statement.

But Matt Eyles, president and chief executive officer of America’s Health Insurance Plans (AHIP), said the focus on rebates was a “distraction” from the issue of drug prices that are set too high to begin with. “Insurance providers are part of the solution. We believe the Administration should go back to the drawing board and start over with this proposed rule, and instead take actions that will lower drug prices and hold drugmakers accountable for the prices they set,” he said in a statement.