Ask the average drug company CEO about rebates given to pharmacy benefit managers (PBMs), and you'll get an earful about how they aren't good for the system. But companies have continued to play along because of a lack of other options.

"If we were able to remove those rebates, suddenly it would create short-term challenges, but in the long term it would be a good thing for most of the industry, really, because those create incentives that are not necessarily good for anybody in the long term. So we'll see what comes out," Pascal Soriot, CEO of Cambridge, U.K.-based Astrazeneca plc, told investors on its earnings call last month.

Lars Jorgensen, CEO of Bagsvaerd, Denmark-based Novo Nordisk A/S, gave a similar answer when asked about list prices during the diabetes specialist's earnings call earlier this month. "As long as the market is as it is, we have to compete the way we can, and that involves also, from time to time, considering what should the list price be."

Later, on the potential to remove rebates, Jorgensen added, "Like other pharmaceutical companies, we would welcome something that goes in that direction. But I also acknowledge that, that is hard to do overnight because the rebates we put into the supply chain today are used to fund, you know, various aspects of the health care system – not always in diabetes care – is used to lower pricing of insurance schemes, etc."

The speculation of potential change comes from comments by Alex Azar, U.S. Secretary of Health and Human Services, who told the Senate Health, Education, Labor and Pensions Committee in June, "We may need to move toward a system without rebates, where PBMs and drug companies just negotiate fixed-price contracts." Later he stressed the need to set up a "system where PBMs receive no compensation from the very pharma companies they're supposed to be negotiating against."

Of course, the PBMs disagree that rebates are the problem. In a report issued by Woonsocket, R.I.-based CVS Health Corp. this month, the PBM argues it's the net price that's important because when multiple clinically equivalent drugs are available, the one with the lowest net price is added to the formulary. "Drugs with lower manufacturer-set prices need smaller rebates to be competitive," the report points out.

CVS Health threw the blame back in the face of drug companies, "The simple truth is, drug manufacturers take advantage of the monopoly granted by patents whenever possible, and there is no correlation between rebates and price increases. Rebates are possible only when there are equivalent competitor medications in a class, and we can use formulary placement to drive lower costs."

Data compiled by Visante Inc. for the Pharmaceutical Care Management Association supports the idea of a lack of correlation between rebates and drug prices. "Among the top brand drugs in Medicare Part D, there is no correlation between growing prices set by drugmakers and the change in rebate levels that they negotiate with PBMs," the report concludes. "Rebates may go up or down, but manufacturer prices only go up."

Uncertain future

Azar's division is apparently considering removing the old safe harbor protection rule for rebates and creating a new one. Details are sparse, but the title of the rule change that is being reviewed by the Office of Management and Budget (OMB), "Removal Of Safe Harbor Protection for Rebates to Plans or PBMs Involving Prescription Pharmaceuticals and Creation of New Safe Harbor Protection," makes it clear that the change could result in a major overhaul to the system.

In a letter to OMB Director Mick Mulvaney earlier this month, House Energy and Commerce Committee Chairman Greg Walden and Senate Finance Committee Chairman Orrin Hatch asked that the review of the rule change include an analysis of the regulatory impact.

"Irrespective of the support, concerns, and questions that result from this proposed rule, removing safe harbor protections for rebates used to purchase prescription drugs would alter any federal, taxpayer-financed program to which it applies, changing regulations and practices that have been acceptable for decades. It likely also interacts with antitrust and other statutory provisions that have their own corresponding regulations," Walden and Hatch wrote.

In a note to clients, Evercore ISI analyst Umer Raffat took a stab at trying to figure out what a rebate-less system that was focused on a fixed-price contracts would look like, concluding that the "more we think about it, the harder it seems."

The problem, as Raffat sees it, is that there will be several fixed prices that are either negotiated by each PBM or by each purchaser, such as wholesalers and pharmacies. "The fact that several unique net prices can likely exist under such a 'fixed price' system, it really makes me wonder: how is that different than a 'rebate?' And if that's the case, is it really solving anything?" Raffat wrote.

In the mid 1990s, through a series of settlements, pharmaceutical companies ended a class-action lawsuit by retail pharmacies that claimed managed care received up-front discounts that the retail pharmacies couldn't get. As part of the settlements, manufactures agreed to not refuse discounts on the status of the buying entity.

"How would a rebate-free system exclude rebates to PBMs and yet have various net prices to other participants in the supply chain?" Raffat questioned.

Ultimately, Raffat said he doesn't see things changing much for drug companies. "The more we think about how the rebate system is about to be restructured, the more it seems like we may be heading towards more confusion (not less) and more confusion could very possibly end up meaning more of the status quo – just in a different garb," Raffat concluded.