Prescription Drug “Rebate Walls”: Time for a Check-up

Rea S. Hederman Jr. Feb 22, 2021

Health care policy continues to draw significant attention in Ohio. Governor Mike DeWine’s new budget proposal confirms that health care costs remain the largest driver of ever-growing government spending—by far. The Department of Medicaid recently chose a single pharmacy benefits manager for all Medicaid plans. And the Ohio attorney general recently took action against pharmacy benefits managers, and opioid manufacturers and consultants.

Despite all of this recent attention, however, many are probably unfamiliar with a common but lesser-known practice known as “rebate walls.” This hidden tactic can raise patients’ out-of-pocket costs for prescription drugs and limit access to effective medicines.

Rebate walls work like this: your doctor tells you that either Drug A or Drug B can treat your condition, but she thinks Drug A will be more effective. Drug A has a 15 percent lower retail price and would cost you less than Drug B out-of-pocket. But Drug B’s manufacturer has offered to rebate your insurance company 25 percent per bottle if you and their other plan members purchase one million bottles of Drug B during the year. In order to realize the 10 percent per bottle rebate savings, your insurer “blocks” you from purchasing Drug A. Insurers do this by removing Drug A from their preferred coverage lists or by increasing its required co-payment. These tactics push patients to buy Drug B even though it’s likely less effective and costs them more out-of-pocket.

As Dr. Wayne Winegarden has shown, rebate walls achieve savings at the expense of sick patients. Drugs with rebate walls are typically well-established incumbents looking to discourage competition from new, similar drugs with lower list prices and that may also be more effective. Most insurance and Medicare Part D plans base members’ out-of-pocket pharmaceutical costs on the list price of the drug, not the net price after rebates, so the rebate pricing scheme benefits the manufacturer of the protected drug, insurers, and healthy people who might pay lower premiums—but not the sick patients who actually buy the drugs. More troubling is the potential for rebate walls to make it harder for the sick to become well. A Kaiser Family Foundation survey in 2019 revealed that during the previous year 29 percent of Americans did not take their medications as prescribed because of the cost, and 29 percent of those individuals reported that their health worsened as a result.

As The Buckeye Institute testified before the Ohio General Assembly, transparency and competition in the health care sector reduce costs and increase quality of care. Rebate walls are one of the murkiest, least transparent practices in health care—and perhaps it is time for a routine check-up. The attorney general’s office can help by examining rebate wall policies, potentially anti-competitive practices, and the net prices paid for prescription drugs by Ohio health insurers.

Rea S. Hederman Jr. is the executive director of the Economic Research Center at The Buckeye Institute and vice president of policy and is a nationally recognized expert in health care policy.