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The Impact of Drug Rebates on Consumer Pricing and Retail Pharmacy Operations

The Federal Trade Commission (FTC) has recently shined a light on how America’s drug rebate system hinders competition and increases prices. Drug rebates foster conditions that increase costs and decrease patient choice. According to the FTC, the “rebate wall” phenomenon creates a myriad of negative outcomes.

What Are Rebate Walls?

Rebate walls are when drug manufacturers tie rebates to sales volume. Those with bigger purchasing power are able to take advantage of the rebates. The allure of these rebates allows drug manufacturers to receive preferential treatment for certain drugs. As a result, the large revenues these drug sales generate lead to even larger rebate revenues for insurers and pharmacy benefit managers (PBMs).

Specifically, PBMs are supposed to benefit patients by negotiating for better drug prices and formulate lists of drugs that specify which drugs are available for insured patients. However, PBMs exert control on the pharmaceutical market, utilizing rebate walls to their utmost advantage. Drug companies pay large sums of money in rebates to the PBMs to ensure that their drugs make the PBMs’ formulary. The rebates are generally a large percentage of the list price offered by the drug company, sometimes even reaching 50%. PBMs, as a result, are motivated to include the higher-priced drugs on the formulary, receiving a higher rebate in the process. They do not pass on those savings to the consumers.

Insurers and PBMs, reluctant to lose out on these revenues, ultimately prefer the more expensive drugs, preventing lower-cost competition from marketing their products. The higher price medicine leads burdens patients with higher costs.

How Are Pharmacies Affected?

Under the current rebate system, pharmacies, particularly independent ones, are negatively affected. PBMs amass power because of their ability to determine which pharmacies are included in a drug plan’s network, as well as the amount those pharmacies are reimbursed for dispensing the medicine. Patients end up paying more for drugs through their co-pays, with the independent pharmacy receiving less reimbursement from the PBM who is profiting from the rebate. Due to the control PBMs exert, independent pharmacies that refuse to participate may be subject to more scrutiny through audits and even termination, preventing them from servicing their patients. The rebate walls also force more expensive drugs upon patients, reducing opportunities for patients to receive the proper, lower-cost care they need.

The rebate problem might be solved through changed legislature. The FTC’s recent report on the issue has been recognized by Congress. Both parties have identified rebate walls as a major problem and a hindrance to competition and patient health. Driven by the FTC report, lawmakers in Congress may take action on the current drug rebate.

In the interim, independent pharmacies are the ones fighting for patients and these duplicitous practices. Pharmacies are forced to push back against PBMs by dealing with their audits and contract terminations; they’re also playing a large role by lobbying state legislations to remove PBM controls on the system.


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