Imagine you're a surgeon -- but terrible at your job.
Soon, your bad reputation will spread. Few patients will choose your practice. How can you boost business? You might offer local doctors a deal. If they send patients your way, you'll give them a 20 percent kickback.
Fortunately, that wouldn't just be unethical -- it'd be illegal. The federal government has long banned such kickbacks -- except in one area of health care: Prescription drugs.
When it comes to pharmaceuticals, "kickbacks-for-patient-flow" deals are the norm. Each year, drug companies offer lucrative kickbacks to insurers and vendors known as pharmacy benefit managers (PBMs). In return, insurers and PBMs steer patients towards a particular company's brand-name drug -- even if different medications are cheaper or more effective.
The Trump administration recently proposed a rule to outlaw these kickbacks. This reform would force drug companies to compete against one another to offer the best prices directly to patients.
Today, pharmaceutical companies pour billions of dollars into projects in the hopes of developing a drug. Before the company can start making sales, it must convince insurers to cover the medicine. As a result, drug companies offer significant discounts to PBMs -- the massive, secretive companies hired by insurers to decide which drugs are included and excluded from health plans.
In 2017, pharmaceutical firms dished out $150 billion in discounts and rebates. These rebates and discounts usually reduce a drug's original sticker price by 26 to 30 percent.
When insurers and PBMs decide to cover a drug depending on how large a discount the manufacturer offered -- rather than how well the drug works for patients -- it distorts the free market. Pharmaceutical companies compete based on who can offer the biggest kickbacks, not who can offer the best products.
Worse, these rebates and discounts don't even reduce patients' out-of-pocket costs at the pharmacy. Insurers and PBMs force patients to pay copays and coinsurance on the original, undiscounted price of the medicine.
This system of kickbacks explains why many patients have seen their out-of-pocket drug costs increase.
The Trump administration wants to upend this system by revising the federal anti-kickback statute -- the measure that prevents crooked deals between healthcare providers.
Under the proposed rule, it would be illegal for PBMs and insurers to accept discounts and rebates. The rule would create one exception -- the rebates would be lawful if insurers pass them to patients at the point of sale.
Patients would enjoy lower copays and coinsurance. Medicare beneficiaries could save as much as $1.4 billion next year. From 2020 to 2029, those savings could total $25 billion.
Just as important, the reform will introduce more transparency and competition into our healthcare sector. It will force drug companies to offer the best value to patients -- not to insurers and dubious middlemen.
Drew Johnson is a government waste and accountability expert who serves as a Senior Fellow at the National Center for Public Policy Research.
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