By Kenneth E. Thorpe
March 28, 2019

Every month, drug companies offer up nearly $13 billion in rebates and other discounts. 
Patients don't see these savings at the drugstore, though. The supply chain all but ensures that discounts instead flow to insurers and the "pharmacy benefit managers" they hire to administer their drug benefits.
The Trump administration recently sent shockwaves through the healthcare industry by proposing a plan to upend this system.
If the plan takes effect -- and if it works as policy wonks hope it might -- Americans who rely on prescription drugs should see their pharmacy costs plummet. That would make it easier for them to afford the medicines they need.
The proposal takes aim at PBMs, who negotiate with drug companies on behalf of insurers.
Drug companies generally offer large discounts in exchange for preferred placement on "formularies" -- i.e., the list of drugs an insurer covers. In 2017, for example, Eli Lilly's average rebate was north of 50 percent. Rebates for insulin often exceed 70 percent. 
Number crunchers at the Department of Health and Human Services estimate that if these rebates were shared with patients at the point of sale, pharmacy bills would drop by about 30 percent. 
Today, though, patients don't benefit from these discounts. Insurers tie copays and coinsurance to the pre-discounted list prices of drugs. PBMs pass most of the money they receive from drug makers back to insurers, who use the money to lower premiums for all their customers. PBMs keep the rest. 
For PBMs, higher list prices translate into higher profits. So PBMs work hard to keep list prices high. 
Consider the fact that many insurance plans favor brand-name drugs over their cheaper, generic counterparts. This wouldn't make any sense -- except for the fact that PBMs can get bigger rebates for drugs with higher list prices. So, they place these branded drugs in "preferred tiers" on their formularies. 
When branded drugs are given priority placement, generic drugs are harder to access. Insurers either make patients pay more for generics, or refuse to cover them entirely. Less than 20 percent of generic drugs were given preferred placement on Medicare plans in 2015, according to Avalere Health. 
To maintain this status quo, PBMs lock drug companies into contracts that make it impossible to cut prices. OptumRx requires drug companies warn them 21 monthsbefore they cut a drug's price.  They also demand manufacturers offer "equivalent"rebates, even after cutting prices.  Drug companies like Eli Lilly and Gilead have begun releasing generic versions of their own drugs, just to get around these shenanigans.  
In any other industry, rebates like these would be classified as illegal kickbacks. But a special carve-out in the federal anti-kickback statute exempts PBM rebates from the normal rules. This enables what HHS Secretary Alex Azar has accurately described as "a hidden system of kickbacks to middlemen."
The Trump administration wants to eliminate that special carve out. A new rule would make it illegal for drug companies to pay rebates directly to middlemen under Medicaid and Medicare Part D. They could still offer discounts, just as long as they shared them directly with patients.
This would make a serious dent in patient out-of-pocket costs. The rule would save Medicare Part D beneficiaries up to $28 billion over a decade, according to one analysis.  A study from my organization, the Partnership to Fight Chronic Disease, found that making rebates on diabetes drugs directly available at the pharmacy counter would save each patient $791 per year. 
This rule will also empower patients to find additional savings. With rebates off the table, insurers won't have a reason to exclude certain drugs from their plans. When a patient has a wide range of drugs to choose from, they can shop around until they find the best deal. Soon, shopping for drugs could be as easy as shopping for a new phone.
The president's reform will be especially beneficial for the 133 million Americans battling at least one chronic condition. These patients spend nearly three timesmore on medicines than individuals with no chronic diseases. 
Overall healthcare costs should also drop. Of the $3.3 trillion our nation spends on health care annually, 90 percent goes to chronic disease patients.  Ensuring that patients can afford their drugs will keep their diseases in check. That eliminates the need for more expensive -- and invasive -- medical interventions down the line.
Today's drug supply chain benefits insurers, pharmacy benefit managers, and drug companies -- but doesn't benefit patients. The Trump administration's proposal is an essential first step towards straightening out this backwards system.
Kenneth E. Thorpe is a professor of health policy at Emory University and chairman of the Partnership to Fight Chronic Disease.