In June, Senator Amy Klobuchar (D- Minnesota) and several of her colleagues in the Senate and House, sent a letter requesting that the Government Accountability Office (GAO) examine the effects of so-called rebate traps on prescription drug prices and competitiveness in the marketplace.

The legislators asked the GAO to carry out an assessment of the prevalence of rebate traps in prescription drug markets and their effects on pricing, competition, and innovation.

According to the lawmakers, rebate traps constitute ways to “entrench the dominance of [branded] products for as long as possible by limiting the ability of alternative drugs to compete,” thereby restricting patient access to lower cost generic drugs and biosimilars, as well as other, potentially more effective branded drugs.

The premise of the inquiry is that “rebate traps” may be used by drug manufacturers to impede competition.

So, how do typical rebates work? Drug manufacturers pay rebates to pharmacy benefit managers (PBMs) and insurers in exchange for moving market share towards products for which rebates are paid post-hoc. Here, moving market share is accomplished by way of formulary positioning: Placement of products in a preferred position on the formulary relative to competitors, that is, in a lower patient cost-sharing tier with fewer conditions of reimbursement, such as prior authorization and step therapy. While a portion of rebates is retained as profit by PBMs, a larger percentage of the rebate pie is returned to payers and employers who contract with PBMs.

Thanks to Adam Fein, who coined the phrase gross-to-net bubble, it’s known that while list prices of prescription drugs have been increasing at a steady annual clip, net prices have been stagnant. The gap between gross and net sales, comprised mostly of rebates, has been widening significantly in recent years.

Drug manufacturer rebates can lead to lower net prices for preferred pharmaceuticals. Furthermore, PBMs suggest that rebates can help to keep premium increases in check. However, at the same time, rebates can be used in deleterious ways to prevent establishment of a competitive marketplace.

Insulin products and hepatitis C drugs illustrate the issue at hand, as patients continue to see rising co-insurance amounts based on list prices, while net prices remain flat.

At the same time, drug manufacturers may use their negotiating power to withhold rebates, unless a health plan, sponsor, or PBM excludes some or all competing products. Such exclusionary terms can cripple a drug’s ability to gain a competitive foothold against the established product, and limit patients’ access to lower-cost generic drugs and biosimilars.

Although sponsors and health plans may end up paying less for a particular branded drug there is a risk that even lower cost or more effective drugs will have difficulty effectively entering the market because of rebate traps.

There is bipartisan support for rebate reform. Secretary of Health and Human Services Azar has voiced criticism of rebates on a number of occasions, and exclusionary contracting in particular. Azar has also decried the lack of transparency in the pharmaceutical supply chain.

The mantra `open up the market to freer and fairer competition’ is shared by many on both sides of the aisle. The executive branch has also been vocal on this issue. A recently issued executive order on rebates is essentially a call for more transparency.

Now, Senator Klobuchar and colleagues have instructed the GAO to conduct a study on, among other things:

  • Current trends regarding the prevalence of rebate traps in the U.S. pharmaceutical market;
  • Types of rebate traps employed in the U.S. pharmaceutical market and their impact on competition;
  • Impact of rebate traps on prescription drug pricing, expenditures, and patient out-of-pocket spending;
  • Policy recommendations to address the harms caused by rebate traps.

While contracts that pass 100% of rebates to plan sponsors have been increasing in number, and this has enhanced transparency, rebate traps persist. The forthcoming GAO report may shed light on these practices and suggest policy changes to correct for harms caused by rebate traps.