Revamping ‘rebate wall’ could save billions in drug costs

Drugs arranged on shelves at a pharmacy. (Photo: SEE_JAY, via Shutterstock)

As COVID-19 continues to devastate communities throughout the state and nation, efforts by California-based pharmaceutical companies to create new therapies and a vaccine continue at a rapid pace.

But for new therapies to truly help patients, Californians need to be able to access all of them—not just one or two. Unfortunately, there is a practice in our healthcare system that currently denies patients access to new, more effective and potentially less expensive drugs.

Rebate walls create barriers for doctors to provide the best care to their patients.

California can once again be a national leader in pushing for cost-savings reforms in the healthcare field by being the first in the nation to address the practice of rebate policies that can bring balance and competition back to the pharmaceutical marketplace, which will help drive down drug costs and improve patient care.

This policy challenge is called a rebate wall. Drug manufacturers with large market share use their dominance in the market to offer a series of rebates on a certain set of drugs or one drug for multiple indications, often ones that are older and high-volume. While, in theory, these rebate walls should provide lower costs to consumers, in practice that’s just not the case.

A 2020 study by the University of Southern California found that rebates actually contribute to higher pharmaceutical prices and higher patient costs — each $1 increase in rebates is associated with a $1.17 increase in list prices for medicines. Higher rebates also provide a powerful, often insurmountable financial incentive for insurance companies to favor older, less-effective drugs over newer, safer, cost-effective and cutting-edge treatments.

Rebate walls create barriers for doctors to provide the best care to their patients. New therapies are either not available at all through a patient’s insurance (thanks to the financial incentive) or are behind onerous “step therapy” requirements, which require patients to try less expensive medicines before “stepping” up to more expensive and potentially more effective treatments.

Rebate walls also have a huge impact on newer drugs trying to compete fairly in the market.

This hurts patients and potentially delays them from getting the best treatment in a timely manner.

Policymakers at both the state and federal level are rightly focused on high drug prices and how to rein them in. Reforming outdated rebate wall policies is an important step in this process. Lowering rebate walls could accelerate the adoption of bio-similar drugs, which are less expensive versions of costly biologic medicines. In fact, the Pacific Research Institute estimated in 2019 that if biosimilars were used as much as other generic drugs, Medi-Cal would save nearly $120 billion each year.

Rebate walls also have a huge impact on newer drugs trying to compete fairly in the market. Because rebate walls can have a huge impact on newer drugs to fairly compete in the market, pharmaceutical companies are less likely to invest in developing new drugs.

Now, as the news reports near-daily on progress of a COVID-19 vaccine and new therapies, we are seeing the critical role research and development plays in developing new life-saving treatments. Removing barriers to innovation and encouraging investment in R&D should be a national and state priority both now and into the future in order to ensure patients and providers have access to medicines that are the best at treating patients. This is certainly the lesson we need to learn from developing vaccines in this pandemic.

California has long been a leader in antitrust enforcement. Reforming rebate policies is exactly the kind of business practice that has been examined through our antitrust laws. What’s more, with a $54 billion deficit facing the Legislature upon its return in December, cost-savings like the ones that can be realized in Medi-Cal should drive the Legislature to immediately begin its own efforts address the rebate wall practice.

Editor’s Note: Rob Lapsley is president of the California Business Roundtable, a nonpartisan association of the state’s largest employers that advocates for jobs and a stronger economy.

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