Alex Brill, a senior fellow at the American Enterprise Institute and CEO of Matrix Global Advisors, recently sat down with CAPD spokesperson Maura Keefe to discuss his latest report for CAPD, Understanding Drug Rebates and Their Role in Promoting Competition, and the facts behind drug pricing and how pharmacy benefit managers (PBMs) negotiate rebates.
Alex’s report refutes claims that rebates are to blame for increasing list prices for brand drugs—evidence that is further backed up by the fact that only 1 in 10 drugs has a rebate.
Here are some highlights from the conversation:
Maura: Let’s start by discussing the main findings of your report – How have the prices of prescription drugs changed over the last four years for drugs with rebates, and without them?
Alex: Thanks, Maura. My recent research looked at average price changes for rebated and non-rebated drugs from 2018 to 2021. I found that price changes were roughly the same for the two groups of drugs over these four years. Despite some claims to the contrary, there is a lack of evidence that drug rebates are the culprit behind high drug prices. If policymakers want to lower drug prices, the best way is by facilitating and encouraging robust competition among drug manufacturers.
Maura: What got you interested in exploring rebates in drug pricing?
Alex: I’ve long been interested in drug competition and the function of competition in bringing savings to consumers and the healthcare system. Rebates are one tool that can be used to bring down the net price of a brand drug. In addition to the role of generic entry in reducing drug costs, rebates can facilitate savings by lowering the effective price of brand drugs. I got interested in this because it is often less well understood but still very important for the US healthcare market.
Maura: Help make it real for people – what positive impact do rebates have for employers and/or for patients?
Alex: Health insurance companies and large employers’ contract with pharmacy benefit managers, or PBMs, to handle prescription drugs for plan members. Formularies help guide patients to appropriate, cost-effective medicines. Because formulary placement drives higher utilization of products on the formulary, PBMs can negotiate volume rebates from drug manufacturers. These rebates are then passed back to health insurers and can be used to keep health insurance premiums affordable.
Maura: So, rebates help constrain overall drug costs. Does this mean that rebated drugs are more affordable than non-rebated drugs?
Alex: Rebate savings accrue across the board; they generally lower health insurance premiums, not necessarily a patient’s out-of-pocket cost.
Maura: Rebates are usually seen as a good thing, but not in drug pricing – what’s your perspective on what’s driving that?
Alex: Some policymakers and certain stakeholders in the pharmaceutical supply chain have argued that rebates are the cause of high list prices for drugs and implied that absent these rebates, prices would be lower, not higher. It’s important to note that there is a lack of evidence to support this. In my own research, I have found that list price increases for rebated and non-rebated drugs are generally comparable.
Maura: What would you say to those proposing that rebates be eliminated? What would the impact of such a policy be?
Alex: If drug rebates were banned, as the Department of Health and Human Services has proposed in the past, health insurance premiums would rise, and drug spending and profits for drug makers would increase. The government’s own actuary estimated that banning rebates in Medicare Part D would raise premiums for beneficiaries and increase Medicare spending by nearly $200 billion over ten years.
Maura: Your report mentions anti-competitive activities by drug companies as a reason for high drug prices. Can you give some examples of these anti-competitive behaviors, and how they keep prices high?
Alex: There are a number of tactics brand drug companies use to thwart competition and keep prices high. One example is product hopping, where right before a generic competitor enters the market, the brand company will come out with a slightly different version of their product and move patients onto it. When the generic launches, it competes with an older product and the brand drug maker continues to generate profits from its newer version.
Another example is patent thickets, where brand companies amass superfluous patents that delay competitors from entering the market because battling these patents is time-consuming and often too costly or risky to pursue. Such efforts can be anticompetitive, though the federal courts have yet to adopt this view.
Maura: You recently did research for CAPD showing that just five instances of product hopping costs the health care system $4.7 billion annually. This is obviously significant… Has the cost of patent thickets been estimated?
Alex: We know that anticompetitive behavior by some brand drug manufacturers is costing patients and consumers billions of dollars per year just from some biosimilars, but there is no current estimate of the exact amount for 2022. But there should be, as putting real numbers behind an issue is an important way to demonstrate for policymakers what their constituents stand to gain in the form of lower drug prices by putting a stop to this gamesmanship.
Maura: Given your report’s findings and knowledge about rebates, what type of legislation would be most helpful to meaningfully drive down drug prices for consumers?
Alex: First, it is important to acknowledge that many of the newest drugs, those that can be quite expensive, are fantastic products and very valuable to patients. They are also very risky and expensive to develop. Thus, high prices for new and valuable medicines should be understood to be necessary and appropriate. However, the monopoly protections that are offered to new inventions and the additional protections afforded by the FDA to protect new products from competition must be time-limited, and generics and biosimilars need to be encouraged.
Maura: Based on your research, what action could Congress take that would help to drive down drug spending?
Alex: Competition is critical for constraining total spending. Congress is working to reauthorize the FDA user fees for brand and generic drugs and hopefully, this legislation will result in faster review times, more generic approvals, and more brand-to-brand drug competition. More broadly, Congress can and should evaluate the patent system for unintended consequences, namely the ability to impose patent thickets to inhibit fair and timely drug competition.
Maura: This is all great information. Thanks for joining me today, Alex!
Alex: Thanks for having me!
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