A little-known practice in the pharma industry is under threat, and a new memo reveals how the companies that rely on it are bracing for change (CVS, UNH)

AP Photo/Pablo Martinez Monsivais

CVS Health is asking drugmakers not to increase the net cost of their drugs should rebates go away, according to a letter obtained by Business Insider.
It’s a response to a proposed rule from the Trump administration that could end these payments. Pharmacy-benefit mangers like CVS have historically used rebates as a way to negotiate lower drug prices on behalf of health plans and employers.
"The proposed rebate rule provides a windfall to drug manufacturers, but they’ve made no commitment to keep net costs at or below what’s currently negotiated for 2020," CVS Health spokesman T.J. Crawford told Business Insider.

A little-known practice that healthcare middlemen use to negotiate drug prices might go away, and one of the biggest company’s in the space is bracing for it.

On Thursday, CVS Health, which operates the pharmacy benefit manager CVS Caremark, wrote to drugmakers asking them not to increase the total cost of their drugs, should payments they typically make to PBMs as rebates go away as part of a proposed rule from the Trump administration. Axios reported that the letter was sent to 60 companies.

"We require assurances that, regardless of the issuance of any Final Rule, you will, at a minimum, honor the financial value of your Current Offer and continue to provide to the Part D Plans the same or lower net effective drug price for calendar year 2020," the letter obtained by Business Insider read.

In the letter, CVS asked that the pharmaceutical companies sign an acknowledgement that they agree to keep prices at the net cost CVS had been anticipating for its 2020 plans.

In February, the Department of Health and Human Services (HHS) said it’s proposing a rule that would effectively ban rebates, which big pharma companies pay to middlemen known as pharmacy benefit managers, or PBMs.

Drugmakers offer those rebates to PBMs to get better insurance coverage for their prescriptions. The PBMs typically pass on most or all of those discounts to health plans and employers, but they don’t always make it to individuals who’re purchasing drugs at the pharmacy counter.

The Trump administration wants to limit rebates in order to reduce the cost of prescription drugs

Rebates have been blamed for contributing to the rising cost of prescription drugs in the US, and the Trump administration has said that limiting them would help bring down costs for patients.

But it could also benefit big drugmakers. The pharmaceutical industry, for its part, has said it supports curbing rebates. In a recent congressional hearing on drug pricing, pharmaceutical CEOs were asked about the proposed change and indicated clear support for the proposal.

The executives stopped short of saying they would actually lower the prices of their prescriptions should the proposal go through. Leaders from the big PBMs are expected to testify at their own hearing in April.

"The proposed rebate rule provides a windfall to drug manufacturers, but they’ve made no commitment to keep net costs at or below what’s currently negotiated for 2020," CVS Health spokesman T.J. Crawford told Business Insider. "What we’re asking is very simple: help minimize uncertainty for plan sponsors and lessen the financial burden on beneficiaries and tax payers by making this commitment."Courtesy Forbes

Under the rule proposed by the Trump administration, drugmakers and PBMs would be pushed to give rebates directly to patients at the pharmacy counter, at least in the government-funded Medicare Part D prescription drug program, which covers the elderly and some disabled individuals. Drugmakers currently pay out more than $100 billion in rebates annually. Rebates are a big business for PBMs such as Express Scripts, CVS Caremark, and OptumRx.

CVS is seeking a guarantee that prescription-drug prices will fall

CVS gave an example of a $100 drug on which a drugmaker had a $20 rebate. In today’s model, that would lead to an $80 net cost for the drug. CVS says that should the $20 rebate go away, the company would like to see the net cost stay at $80, instead of increasing to $100.

CVS is worried that if the proposal to curb rebates goes into effect, the price of the drug could effectively jump from $80 to $100. That could hurt the company’s bottom line.

The Trump administration is expected to issue its final rebate rule in May, about a month before Medicare plans have to submit their 2020 plan proposals to the government. It’s left plans to form two different bids: one for if the rebate rule changes, and one if it stays the same, the letter noted.

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Generally, eliminating the rebates could increase the cost of health insurance, because rebates right now are often kept by health-insurance companies and used to reduce premiums. The biggest benefit would be to people who need lots of expensive prescription medicines, particularly if they have health-insurance plans that require them to pay a fixed percentage of the cost of their drugs.

Rising tensions in the drug industry

Tensions have been growing among the pharmaceutical industry as patients grow more and more upset over the high price of prescription drugs, with few clear-cut solutions in sight.

For instance, in February, a letter sent by OptumRx to pharmaceutical companies demanded two years of advance notice from pharma companies before they lower the prices of their drugs. OptumRx, the pharmacy-benefit manager owned by UnitedHealth Group, said the goal of its letter was to make sure its costs were predictable so it could set the appropriate prices for prescription-drug insurance plans.

When it came to rebates, OptumRx demanded in the letter that drug companies keep their rebates at the same level, even if they lower the list price of a drug. That would make it difficult or impossible for drugmakers to lower their list prices, because lowering their list prices would automatically reduce their profits.

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