"It's the Rx rebates, stupid!"

Although my last post addressed one realistic solution to an embedded problem in the U.S. healthcare system related to prescriptions of life-sustaining essentials like insulin (which isn't a NEW drug; it was discovered in 1921), the problem has never really been explained which is necessary when interacting with lawmakers about potential legislative solutions to the problem of runaway insulin prices. So, this post aims to be an explainer. 

Insulin is today a prescription medicine (it used to be OTC, and early-generations still are, but with the advent of analog insulin, the drug companies persuaded the FDA to reclassify insulin as a prescription drug rather than OTC, which was the first step towards runaway prices) and there are only a handful of manufacturers worldwide. That is the root of the problem, but not due to a lack of competition, but because of the primary way insulin makers compete on price. Instead of price transparency, they rely on secret deals and discounts are awarded through rebates offered to payers rather than reducing the prices up-front. They artificially raise the list price of insulin so they can give ever-bigger rebates to insurance companies who pay for most prescriptions.

The Rx rebates ARE the problem, and it's an enormous problem!

According to the June 29, 2020 report entitled "Diabetes Costs and Affordability in the United States" by the IQVIA Institute for Human Data Science (see https://www.iqvia.com/insights/the-iqvia-institute/reports/diabetes-costs-and-affordability-in-the-united-states for the free report if you provide an email address), invoice prices for diabetes medicines have been growing above the rate of inflation while "net" prices paid to the drug companies have been declining-to-flat for five years. Stated another way, "net" realized prices for insulin paid for by insurance companies after rebates have declined, yet patient out-of-pocket costs have increased dramatically. This dichotomy is explained by several important factors documented here.

Changes in Health Insurance Benefit Designs and High-Deductible Insurance Plans

The single most important factor behind dramatic price increases experienced by patients is changes in healthcare insurance benefit designs, most notably high-deductible insurance plans (HDIP). According to several reputable third-parties including the Commonwealth Fund, HDIP today account for more than half of all insurance benefits which Americans receive through their employers. The incidence of HDIP has increased steadily in recent years and now constitutes a majority of all healthcare plans in 2020. That explains why more Americans are acutely more sensitive to prescription drug prices than they were in the past.

Of course, the decision to charge insured patients the artificially-inflated wholesale acquisition cost (better known as a drug's "list price") for prescriptions including insulin depends on each particular insurance plan. But, when all is said and done, all of that money (and it's a LOT, noted below) is going someplace. I will map out exactly WHERE that money is going for consideration in policy changes needed for Congress. We know the amount of dollars involved, and we know where it is going. In 2018, we know that pharmaceutical manufacturers paid $166 billion in rebates and discounts. Certain essential drug categories including insulin sell at even deeper discounts. 

The image below appears to be one of the most accurate visual depictions of the U.S. insulin distribution and cash-flow published to-date. It is courtesy of the American Diabetes Association. There is, however, ONE missing component to this depiction which is critical and relevant: employers who actually play a role today. But the bottom line is that in virtually all cases, insurers (which includes entities like Medicare) control that cash-flow. 

Click on image to enlarge

http://www.diabetesforecast.org/2016/mar-apr/images/insulin-costs-infographic.gif 
http://www.diabetesforecast.org/2016/mar-apr/rising-costs-insulin.html 

So, the most obvious question is WHERE are all those Billions of Rx rebate dollars going?

On March 4, 2020, insulin maker Sanofi revealed in a Wall Street Journal article entitled "Sanofi, Fighting Back in Insulin Price Debate, Says Its Net Prices Fell 11%" (see that article at https://www.wsj.com/articles/sanofi-fighting-back-in-insulin-price-debate-says-its-net-prices-fell-11-11583340721 for more detail) the amount of those rebates. The WSJ article revealed that because of the large and ever-growing rebates necessary to secure formulary placement in the U.S., and those insulin rebates amount to approximately 70% of the artificially-inflated list price for insulin which is rebated back to payers (in this case, meaning healthcare insurance companies who either own outright or else hire third-party pharmacy benefits managers known as "PBM's") as volume-based price concessions (e.g. a higher percentage rebate for more sales volume of a given Rx drug). Rival Novo Nordisk disclosed that it pays about 71% of the bogus list price (see slides #99 and #101) as Rx rebates paid to PBM"s (most of which are OWNED by the largest insurance companies). But it doesn't mean insurance companies are keeping those dollars. 

Unfortunately, determining the destination for all that money is no small undertaking thanks to a change to ordinary net cost accounting standards typically used in financial statements. About 25 years ago, the healthcare insurance industry lobbied the Financial Accounting Standards Board (FASB) for an exemption to normal net cost accounting standards for prescription drug rebates indirectly received from pharmaceutical manufacturers. 

Today, insurance companies erroneously misclassify this money as "general revenue" and do not itemize it as a specific line-item in their financial statements. This makes following the money difficult for even forensic accountants. At the time rebates first emerged, the dollars were not large and there were hundreds of insurance plans, but thanks to relentless mergers and acquisitions, today, only a handful of national healthcare insurance plans remain and the rebates themselves have ballooned into billions of dollars. Hence, although Rx rebates began innocently enough, over time, they ballooned into a massive dollar amount. That now needs serious reform.

Following the Money

But we now KNOW where those dollars are going. According to the Commonwealth Fund https://www.commonwealthfund.org/publications/issue-briefs/2019/mar/pharmacy-benefit-managers-practices-controversies-what-lies-ahead/, pharmacy benefit managers (PBM's) "report that in many of their contracts, 90% of rebates are passed on to health plans and payers." 

Beyond that, Adam Fein of the Drug Channels Institute and Pembroke Consulting cited reporting from the Pharmacy Benefit Management Institute (PBMI). The data in their reporting (see Adam Fein's posts HERE and HERE for details) suggest that employers admit that they are 'hoarding' Rx rebates rather than sharing the savings with the employees whose prescriptions generated the rebates. He specifically cites specific data reported by Bloomberg on Humalog insulin in the second post. I think its less of a conscious move, rather than a decision to ignore where the money is coming from.

In other words, its EMPLOYERS who are receiving most of the insulin rebate dollars. That’s why the omission in the ADA flow-chart above is so notable. Employers are justifiably happy to receive any offset to rising insurance premiums, hence many do not ponder WHO is bankrolling that. And, for the insurance companies, they are able to give premium offset discounts because it's not their money in the first place. That's great for insurance companies, but it is patients who end up paying for it. Not only are patients with diabetes paying more with high-deductibles, but they are also also subsidizing premiums paid by their employers!

Insurance plans could choose to use these Rx rebates to lower the costs of the sickest patients, whose frequent purchases of expensive drugs allow manufacturers to give rebates in the first place. Instead, health plans prefer to apply the rebates to the price of average plans, hoping to compete for new business through lower premiums paid for by patients with illnesses. 

FDA to Insurers: "You're Doing It Wrong!"

This is precisely why former commissioner of the U.S. Food and Drug Administration (FDA) Dr. Scott Gottlieb made headlines at a conference organized by the health insurance industry known as the National Health Policy Conference of AHIP on March 7, 2018 when he told the attendees (see https://cnb.cx/2y51uEb for details): 

"Sick people aren't supposed to be subsidizing the healthy. That's exactly the opposite of what most people thought they were buying when they bought into the notion of having insurance." 

And yet, that is exactly what is happening today. 

Aaron Kowalski, PhD, the CEO of the JDRF, wrote in a journal submission to the American Journal of Managed Care  (see https://www.ajmc.com/journals/evidence-based-diabetes-management/2019/september-2019/jdrfs-kowalski-sees-hope-in-bipartisan-support-for-insulin-pricing-reform):

"We see the issues related to the rebate system as being the biggest challenge for us right now. In a normal capital market where you have at least 3 similar products, as we do for most types of insulin, you’d see competition driving retail prices down. The rebate system lets the 3 insulin makers chase the prices up rather than chase them down. It hurts everyone, but it is extremely painful to people who are uninsured, who are underinsured, and who have high deductibles or copays."

Insulin Price Caps Work, But Don't Fix the Underlying Rebate Problem

Insulin price-caps have been debated by the legislatures in over a dozen states from blue to red, from Illinois and Oregon to Utah and Tennessee (catch my post on that HERE). A number have passed price caps into law, and more are doing so all the time. The reason is because it impacts millions of people, and it's a solution that works, although it does not really disrupt the system as it works today and that system is so dysfunctional and badly in need of reform.

The reason legislation that caps out-of-pocket spending on insulin works is because it forces healthcare plans to give patients the benefit of their realized lower "net" costs on prescription drugs such as insulin rather than passing that savings on to employers as premium offsets, which is what happens today. This observation is consistent with the fact that an out-of-pocket insulin cap had a negligible impact on overall healthcare insurance premiums in the State of Colorado (see an article at https://coloradosun.com/2019/09/11/colorado-insulin-price-insurance/).

But capping prices at a specific dollar amount isn't the best way to do it. Prices change over time, but legislation that caps prices at specific dollar amounts won't change. Instead, it should be capped at the "net" realized price attained by healthcare insurance plans licensed in a state.

I should also note that insulin price caps solves the problem for only ONE prescription drug (insulin is one of the most-heavily rebated drugs in existence, if not THE most heavily-rebated, so it's a useful place to start to help millions of people). But other prescriptions, including blood glucose testing supplies is excluded, so the problem continues unabated. Price caps are a Band-Aid applied to massive problem of prescription drug rebate reform which lawmakers are likely to face voter complaints for failure to fix a broader problem of runaway prices for prescription drugs. But the real solution is not necessarily price caps (there will be inevitable efforts to adjust the dollar amount of the cap over time), but prescription drug rebate reform.