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Abolishing Drug Rebates May Push Consumer Drug Costs Higher | Forbes

The Trump Administration has repeatedly said that controlling high drug prices is a top priority, and earlier this year it released a fifty-point plan for accomplishing this. In the last few weeks it has taken steps to fulfill one of those points, namely its pledge to curtail the role of Pharmacy Benefit Managers (PBMs) in negotiating rebates for the purchasers they serve, including employers, unions, and government programs.

President Trump has insisted that “eliminating the middlemen,” that is, the PBMs, would push drug prices lower. However, that notion is a facile non-solution: In a convoluted market in which consumers have little incentive to economize, PBMs play an important role in constraining the costs of prescription drugs, and there is no valid reason to believe that abolishing them would reduce prices.

Debates about PBMs can be confusing in large part because their role is generally not well understood, and also because the drug system is so Byzantine. Groups like Express Scripts or CVS Caremark–to name two of the demonized PBMs–negotiate with drug manufacturers to extract rebates for certain drugs in exchange for putting the manufacturer’s drug on an insurance plan’s formulary. If a PBM does not get on a plan’s formulary, the manufacturer loses sales and market share. The Data show that manufacturers need not provide much of a rebate for drugs that are still on patent and have few rivals, but they tend to give larger rebates when they have less leverage in negotiations regarding drugs with several possible substitutes–either generics or simply drugs with comparable effects.

These rebates are tantamount to discounts off the drug manufacturer’s list price. PBMs do not keep the entire rebate that they negotiate: The lion’s share goes to insurers, which allows them to keep premiums lower.

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Abolishing Drug Rebates May Push Consumer Drug Costs Higher.