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Ripple Effects, What Will They Bring? HHS' Proposed Rule to Ban Rebates

Posted By Louise Probst, Wednesday, February 6, 2019
Updated: Tuesday, February 5, 2019

After months of promising to do so, on January 31st the U.S. Department of Health and Human Services (HHS) proposed new regulations that upend the way drug companies negotiate with health plans and Pharmacy Benefit Managers (PBMs) for Part D and Medicaid programs. It is part of the Trump Administration’s commitment to reduce drug prices for patients and bring stronger competition and transparency to health care. HHS acknowledges that, while rebates can function like legitimate reductions in price, the use of rebates in the drug supply chain has brought increasingly harmful effects to market competition. Since the proposed action will occur through an update to the Part D safe harbor regulations, no congressional action is required.


Under the rule, rebates offered in exchange for formulary position would be banished. Two new safe harbors are created to enable price reductions at the point of sale and PBMs to be paid flat service fees by manufacturers. HHS believes that these actions will create strong incentives for drug manufacturers to reduce prices, as they are designed to deliver the “discounts” directly to patients at the pharmacy counter. This is what many drug companies have been calling for - a diminished role for middlemen and lower prices for patients. It could also stop bad behaviors by some pharmaceutical companies that use rebates to create barriers to competition for biosimilars, generics, and other new drugs.


Out for comment, the proposal suggests an effective date of 2020. Given the industry complexity and uncertain stakeholder response, it is hard to assess the potential impact. Like all sweeping changes, initially there will be winners and losers. Most agree Part D premiums will go up. HHS expects overall cost to patients and the government to go down and the long-term market effects to be positive.


While the rule only applies to Medicare and Medicaid plans, it would be naive to ignore the potential impact on commercially insured plans. Some expect the ripples of this action to shrink rebates in the private sector and lead to new purchasing models. Changes to the current business model seem almost certain. The focus on rebates and misaligned incentives has consumed public conversation, breeding widespread mistrust for too long. The BHC will stay informed, working to leverage stronger competition and refocus the conversation on fair pricing and achieving the best value.

Warm regards,

Louise Probst
BHC Executive Director


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