If you pay for your medicine out of pocket, you could be paying more than drugmakers are charging your insurer. That's because drugmakers negotiate rebates with insurers that never trickle down to patients. Is relief on the way? Maybe. The Trump administration proposed legislation this week that upends the existing rebate model and encourages discounts directly to patients. 

A rigged system?

Currently, drugmakers set list prices for their drugs, and then they offer big rebates to insurers or their intermediaries to secure pole position on drug formularies, a multitiered ranking system that determines how much patients pay in out-of-pocket costs.

A woman holding money in one hand and pills in the other hand.

IMAGE SOURCE: GETTY IMAGES.

Patients pay the lowest co-pay and co-insurance on drugs placed in the most favorable tier, so securing a spot in that tier by offering significant rebates is key to driving volume and boosting a drugmaker's sales.

Unfortunately, patients rarely benefit from this approach because rebates are paid directly to insurers or pharmacy benefit managers (PBMs). Co-pays, or the fixed amount a patient pays based on where a drug falls in their insurer's formulary, and co-insurance, or the percentage of a drug's prerebate price a patient pays, don't decline because of these negotiated rebates.

A new approach

The result of the current system is that it pads insurer profits rather than saving patients money. To change that, the Department of Health and Human Services (HHS) is proposing to put an end to the rebate scheme.

It wants to exclude rebates from safe-harbor protection under antikickback laws and force drugmakers and insurers to negotiate prices instead of backdoor payments. The legislation establishes new safe-harbor protections enabling patients to receive discounts on their medicine directly at the pharmacy counter.

The HHS believes encouraging point-of-sale discounts in this manner will "lower out-of-pocket costs for patients using drugs with high prices and high rebates, particularly during the deductible or coinsurance phases of their benefits."

A doctor holding a piggy bank.

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Will it work?

It remains to be seen how much savings a patient can pocket if this proposal becomes law, but rebates have historically lowered list prices by between 26% and 30% for insurers.

The savings to patients could be bigger than that, though, if the change promotes the use of lower-cost generics or biosimilars, which are inexact copies of specialty, biologic drugs that are similarly effective.

Complex medicines created in living cells, biologics are the most expensive medications in the world. Patent expirations are allowing drugmakers, including Pfizer (NYSE:PFE) and Mylan (NASDAQ:MYL), to create biosimilars to some of these medicines, but their efforts to win market share have been stymied by rebate schemes that are crimping their use.

Check out the latest Pfizer earnings call transcript.

For example, in 2017, Pfizer filed suit against Johnson & Johnson (NYSE:JNJ), claiming J&J was using anticompetitive tactics to keep insurers from favoring Pfizer's biosimilar to J&J's blockbuster autoimmune disease drug, Remicade. Pfizer said J&J was tying Remicade rebates to other J&J top sellers to make sure Remicade remained the preferred medication. In August 2018, the district court for the Eastern District of Pennsylvania denied J&J's motion to dismiss that suit, writing "Pfizer's Complaint sufficiently alleges that it has suffered an antitrust injury as the result of J&J's anticompetitive conduct."

If the new legislation proposed by the Trump administration effectively ends insurer rebates, boosts point-of-sale discounts, and levels the playing field between biosimilars and brand-name drugs, then it could represent a major step forward in the quest to reduce the hundreds of billions spent by Americans on medicine every year.