Great ResignationClimate ChangeLeadershipInflationUkraine Invasion

Want to Lower Drug Costs for Patients? Start With Rebates

May 10, 2019, 3:58 PM UTC

No one should ever be forced to forgo or ration a necessary medicine. But this has become a common practice in America due to the high patient costs of prescription medications.

Our current medication system has grown into a tangle of high list prices, misaligned incentives, closed-door negotiations, and increasing out-of-pocket costs, trends that utterly ignore the needs of the patient.

This needs to change. The biopharmaceutical industry supports policy proposals to shake up the status quo, and we applaud the Trump administration for its recent proposal to reform the rebate system. Right now, insurers and pharmacy benefit managers (PBMs) get significant discounts and rebates on medicines but often don’t share those savings with patients directly. The new proposal would change this by ensuring biopharmaceutical company discounts are used to reduce Medicare Part D beneficiaries’ out-of-pocket costs at the pharmacy—a bold step toward a better system for America’s seniors.

First, let’s look at how the current system works. Even though a medicine has a list price, that price is reduced by an average of 41% due to the rebates and discounts negotiated with insurance companies, the government, PBMs, and other intermediaries in the supply chain. Those rebates and discounts totaled $166 billion in 2018 and grow every year.

Because rebates and fees are based on a percentage of a medicine’s list price, it’s no surprise that PBMs have incentives to want higher list prices. This system creates incentives for higher prices within the supply chain. Moreover, negotiated savings are not used by plans or PBMs to directly lower what patients pay for their medicines at the pharmacy counter.

Take patients who have diabetes and need to use insulin. For example, in today’s system, a vial of insulin with a $400 list price can have a rebate of 65%, which reduces the insurer’s price to $160. If a patient hasn’t yet met their deductible, however, they are charged the full price of the medicine, or $400. While the cost was only $160 to the insurer, it was $400 to the patient, because patients do not benefit from the significant discounts negotiated with manufacturers. So patients with chronic conditions—the people who rely most on medicines—end up subsidizing insurers and healthier patients. That defeats the purpose of insurance.

Under the Trump administration’s proposal, calculations by Avalere Health show that a Part D patient taking five medicines, including insulin, could save nearly $900 a year. At the same time, premiums are projected to increase by just $3 to $6 per month, driven by a new requirement that the rebates for a medicine be used solely to reduce costs for the people who need that medicine.

Another step to improve patient affordability is to delink supply chain payments from the list price of a medicine. Pharmacy benefit managers and other entities in the supply chain should not be permitted to seek payments based on the list price of a medicine and instead should be paid a flat fee based on the fair market value of the services they provide.

Policymakers, for their part, should work to remove the regulatory barriers that chill manufacturers from expanding value-based contracts with payers, so that payers and manufacturers are encouraged to base payment of a drug on health outcomes instead of list prices.

The status quo within the health care industry itself—including policies governing insurers, PBMs, and yes, biopharmaceutical companies, must change. It is time to put patients at the center of health care. Changing how the system operates won’t be easy, and our companies will have to find ways to adapt. But it is the right thing to do.

We all have a responsibility to re-center our medical system so that patients come first. Our industry is ready to be part of the solutions that will lead the way forward. The administration’s proposal to reform the rebate system is just the beginning.

Olivier Brandicourt is the CEO of Sanofi. Stephen J. Ubl is the CEO of Pharmaceutical Research and Manufacturers of America (PhRMA).

More opinion in Fortune:

—Why you should pay less attention to all those IPOs

—What it means when A.I. can read your thoughts

—The U.S. needs responsible capitalism, not socialism

—Making the case for companies to disclose their workforce policies

—Disney’s CEO deserves his $66 million pay package. Here’s why