Want to help patients? Get rid of drug rebates, HHS chief says

Drug rebates and list prices have been on a race to the top, and patients have paid the price. One solution, according to HHS Secretary Alex Azar? Sweep the rebate system aside entirely.

"[E]verybody wins when list prices rise, except for the patients," and overhauling the pricing system to remove drug rebates would help with that problem, Azar said on Capitol Hill Tuesday.

"We may need to move toward a system without rebates, where PBMs and drug companies just negotiate fixed-price contracts," Azar said at a hearing before the Senate Committee on Health, Education, Labor and Pensions.

"Such a system's incentives, detached from these artificial list prices, would likely serve patients far better, as would a system where PBMs receive no compensation from the very pharma companies that they are supposed to be negotiating against,” he said.

Azar’s statements come amid a multiyear standoff between drugmakers and pharmacy benefit managers. PBMs say drugmakers always set starting prices and that their negotiating creates drug savings. Pharma says rebates and discounts have grown significantly in recent years, hurting their ability to realize price hikes and driving list prices higher.

Johnson & Johnson, for instance, paid out $15 billion in rebates and discounts last year, driving its portfolio-wide net price change down by 4.6%. Merck and Sanofi also reported negative net price changes. Each of the companies increased list prices at the U.S. portfolio level. Meanwhile, list prices continue to climb and average rebates to payers grew to 41% in 2017, up from 28% in 2012, according to a Wells Fargo report earlier this year.

RELATED: Johnson & Johnson's $15B in 2017 discounts lead to negative price change, but are consumers benefiting? 

Responding to Azar's remarks, PBM trade group Pharmaceutical Care Management Association said in a statement that "getting rid of rebates and other price concessions would leave patients and payers, including Medicaid and Medicare, at the mercy of drug manufacturer pricing strategies."

The group said the key to lowering drug prices is to "increase competition among drug companies so pharmacy benefit managers can negotiate even more aggressively to reduce drug costs for patients." PCMA said it favors moves by the Trump administration to reduce barriers to generic competition. 

Drug rebates are currently exempt from anti-kickbacks laws, but the administration could work to change that. In a recent speech, FDA chief Scott Gottlieb, M.D., said the government should "re-examine" whether rebates should be exempt. Gottlieb has pushed initiatives at the FDA to control drug costs, including boosting generic approvals and highlighting regulatory abuses by branded pharma that stifle generic drug development.

RELATED: FDA chief Gottlieb to pharma: Those rebates you love to hate may soon count as kickbacks 

Gottlieb said if the government stops exempting rebates from the Anti-Kickback Statute, that "could help restore some semblance of reality to the relationship between list and negotiated prices, and thereby boost affordability and competition," he said.

Amid a yearslong clash over drug prices, the Trump administration last month rolled out a much-anticipated pricing blueprint. The proposal calls for more generic competition, more Medicare pricing negotiation, incentives for lower list prices and lower out-of-pocket costs, and more. But critics said the plan doesn't go far enough to take on pharma pricing problems, and some blasted the president for backing down from a campaign promise for direct Medicare negotiations.