To lower drug costs, define ‘cost’ to mean net cost after rebates

3 min
September 07, 2021

In what could be a turning point in the prescription drug debate, President Biden has made clear that the health crisis of unaffordable medications must end. In a speech he gave in the East Room of the White House in August, the president shared how he and his siblings had to chip in to cover the cost of their mother’s prescription drugs as she got older, spending thousands of dollars per month. The Bidens’ experience is shared by millions of other American seniors and families.

Everyday Americans are making impossible choices between affording food and rent or their prescriptions. In many cases, people skip doses or forego treatment altogether. The effects of these choices are grim. An estimated 1 million or more Medicare patients will die prematurely between now and 2030 because they cannot afford their prescription drugs.

During his address, Biden called on Congress to pass legislation to reform the U.S.’s broken prescription drug market and empower Medicare to negotiate drug prices for all Americans. While Medicare negotiation is necessary, there’s something else that needs to be done: Congress must reform how the costs of medicines are calculated to protect families from economic hardship.

People covered by the Medicare Part D program currently pay 25% of a drug’s list price — the price a drug manufacturer initially sets. Yet that price doesn’t reflect the true price. Behind the scenes, pharmaceutical companies and insurers, working with third parties called pharmacy benefit managers (PBMs), arrange confidential rebates that reduce the price of the drug to insurers — called the net price — but rarely if ever do these rebates reduce the costs for the people actually buying medications.

In fact, during testimony before the House Committee on Energy and Commerce, a senior vice president of insulin maker Eli Lilly disclosed that while the average monthly list price of one of its insulin products was $600, the net price after rebates was just $135. That means someone covered by Medicare would pay $150 per month for this insulin, more than its net price. If their payment was based instead on the net price, it would be less than $35 per month.

As Congress prepares to act on drug prices, it must ensure that these rebates benefit consumers, not insurers. To do so, Congress should simply adjust the definition of “cost” to mean the net cost of a drug after rebates, not the list price. My colleagues and I at the West Health Policy Center, a nonprofit research organization dedicated to reducing drug costs, call this policy the beneficiary rebate model. We studied the effects of this change and found that, when combined with other reforms proposed by the Senate Finance Committee, Part D beneficiaries could save $29 billion on their prescription drugs between 2022 and 2029 alone. Further, this beneficiary rebate model is projected to save the Medicare program upward of $38 billion during that period.

Our beneficiary rebate model is significantly different from the Trump administration’s pharmacy benefit manager rebate rule, which attempted to extend rebates to beneficiaries by criminalizing those rebates under the federal Anti-Kickback Statute. While both approaches aim to ensure that older adults would benefit from rebates to PBMs, the Trump administration approach clashes with the complicated structure of the Medicare Part D benefit, notably the manufacturer contributions in the coverage gap phase (the so-called donut hole), resulting in higher spending and a 25% increase in Part D premiums. The Trump-era rule would also have cost the federal government nearly $200 billion in greater Medicare drug payments while increasing drug manufacturer profits by $171 billion.

We designed the beneficiary rebate model to avoid these pitfalls and reduce seniors’ drug costs without increasing manufacturers’ bottom line.

Congress is considering fully repealing the flawed Trump rebate rule as part of its budget packages. But a repeal without any meaningful action to reduce older adults’ cost-sharing would be detrimental to the 50 million Americans who rely on Part D to pay for their medications. And with record numbers of baby boomers entering Medicare, Democrats in Congress are wise to consider not the offsets and payfors in these sweeping budget packages but rather the policies that will help provide immediate savings and expand medication access for America’s seniors.

In the U.S., 9 in 10 adults believe drug pricing needs to undergo major reform. Allowing Medicare to negotiate prices is an essential step to meaningfully reduce drug prices. However, it will take time to implement and it could be several years before older adults see the full benefit in their bank accounts. Solutions that provide immediate relief, like the beneficiary rebate model, are critical to reducing drug costs within the next year and must be included as part of large-scale drug pricing reform.

The U.S. is on the cusp of drug pricing reform that has been decades in the making. An opportunity like this does not come along often, and it is incumbent upon Congress to design a comprehensive bill that will provide both immediate and long-term relief to America’s older adults who, like the president’s mother, struggle to keep pace with the unfair and unjustified costs of prescription drugs. The beneficiary rebate model should be part of that bill.


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Sean Dickson
Director, Health Policy