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Prescription: Washington

CMS Consideration of Rebate Overhaul Elicits Strong Opinions Both Pro and Con

Stephen Barlas

Fear and hope are coursing through the pharmaceutical distribution chain as the Centers for Medicare and Medicaid Services (CMS) determines how far it wants to go in forcing pharmacy benefit managers (PBMs) and Part D insurers to give consumers some of the money those two sectors retain through rebates and direct and indirect remuneration (DIR) fees.1 The CMS will probably start formal rulemaking this year, perhaps in time to mandate changes for 2019. Any changes will challenge P&T committees to reshuffle formularies to account for new manufacturer strategies on rebates, which are usually offered to convince Part D plans and their PBMs to give a drug favored formulary placement.

Rebates seem to be offered mostly on specialty, brand-name drugs and infrequently on generics. The 2017 report of the Medicare trustees said that under Medicare Part D, 79% of aggregate drug spending (about $137.4 billion) and nearly 100% of associated rebates are generated by 13% of dispensed drugs—including specialty/brand drugs such as analogue insulin. “Rebates paid by manufacturers on analogue insulin brands such as Lantus now amount to about 75% of list prices,” says the Type 1 Diabetes Defense Foundation, which represents diabetes patients. Not only do certain groups of chronically ill patients wind up with high drug costs, they in essence subsidize premiums for healthier plan members because some of the rebates and DIR fees are used to reduce premiums for all plan members.2 (A spokesman for Lantus manufacturer Sanofi -Aventis responds: “We don’t comment on the specific levels of discounts and rebates on our medicines.”)

List prices are a drug maker’s starting point, but not what it receives after all rebates are provided to the insurer and its PBM. The final tab is the net or negotiated price. When Congress created the Part D program in 2004, it was expected—but not required—that plans would pass a substantial part of any rebate to plan members at the point of sale (POS). That has not happened. List prices and rebates have increased, especially on specialty drugs, with Medicare members paying prices that perhaps are higher than fair, especially members with high deductibles and high coinsurance.

The CMS, backed by consumer, physician, and pharmacy groups, believes PBMs and insurers are pocketing money that could and should go in some unspecified percentage to consumers, lowering their prices at the pharmacy counter. That was the genesis of the CMS request for information last fall that set off an industry frenzy, with PBMs playing anxious defense and the others on offense.

Manufacturer rebates far outweigh DIR fees in total dollars. PBMs extract DIR fees from pharmacies long after pharmacies have filled and been paid for prescriptions, creating financial hardships for pharmacies that cannot plan for the delayed and sometimes significant charges. CMS provides 10-year impact estimates of a forced pass-through of 33%, 66%, 90%, and 100% of manufacturer rebates at the POS. At the lowest point of that range (33%), beneficiaries would save $19.6 billion in out-of-pocket costs. With a 100% pass-through, beneficiaries would save $56.9 billion. However, the CMS concedes that applying a 100% POS rebate could raise premiums by $28 billion and government costs by $82 billion over 10 years.1

The Pharmaceutical Care Management Association, which represents PBMs, says any CMS dictate on returning rebates to customers “would violate at least four separate provisions of the Part D statute as well as the Trade Secrets Act.”

While the rebate/DIR debate focuses on whether POS prices should be reduced, no CMS proposal will get at what some view as the real problem. “The root cause of all consumer affordability and taxpayer concerns around prescription drugs stems from a single source: the excessive list prices for drugs and excessive price increases that are set by, and that are solely and fully within the control of, drug manufacturers,” says America’s Health Insurance Plans, the trade group for insurance carriers, Part D and otherwise.

Any CMS mandate will scramble P&T committees’ considerations in setting Part D formularies. Consultant Milliman did a study for the Pharmaceutical Research and Manufacturers of America stating that if rebates are shifted to the POS, plans would likely focus more on targeting medications with the lowest POS costs. In addition, plans “may also react by narrowing their formularies or implementing more strict utilization management criteria, such as prior authorization and step therapies.”3

It will probably be years before the CMS requires changes to how rebates and DIR fees are accounted for. But it seems clear which way the agency is leaning; it is going to be more of a matter of how far it leans, and how fast.

Author bio: 
Mr. Barlas is a freelance writer in Washington, D.C., who covers issues inside the Beltway. Send ideas for topics and your comments to


  1. Centers for Medicare and Medicaid Services. Medicare program; contract year 2019 policy and technical changes to the Medicare Advantage, Medicare cost plan, Medicare fee-for-service, the Medicare prescription drug benefit programs, and the PACE program. Fed Regist 2017;82;(227):56336–56527. Available at: Accessed February 9, 2018.
  2. Type 1 Diabetes Defense Foundation. T1DF comments on Medicare Part D access to negotiated price January 17, 2018; Available at: Accessed February 9, 2018
  3. Holcomb KM, Filipek TM. Reducing Part D beneficiary costs through point-of-sale rebates Milliman, Inc.. January 16, 2018; Available at: Accessed February 9, 2018