The White House Is Right to Target Drug Rebates

(Bloomberg Opinion) -- The Trump administration's latest idea to lower prescription drug prices is to eliminate the rebates that drug companies pay to the pharmacy benefit managers that stand between the manufacturers and their final customers. This is easily the most radical change to the American drug-pricing system that the White House has proposed.

Members of Congress have been reluctant to endorse it — and they have a point. The change wouldn't necessarily lower the exorbitant prices of U.S. drugs. In fact, in the form proposed, it might even raise costs for some consumers, by raising their premiums. (Tellingly, the pharmaceutical industry loves the idea.)

Yet Congress shouldn't simply write the plan off. PBM rebates distort prices and work against a transparent and competitive market, which would be the best way to get prices down. The rebates encourage drug makers to set prices artificially high, so that they have room to offer discounts. And the payments create a so-called rebate trap: In return for their kickbacks, PBMs give preferential treatment to brand-name drugs over generics and biosimilars. Consumers can't then choose cheaper alternatives unless they make higher copayments or pay entirely out of pocket. The net cost of this problem is unknown, because PBMs don't disclose the size of their rebates.

Health and Human Services Secretary Alex Azar proposes to remove the exemption from anti-kickback rules that these rebates have enjoyed — and give safe harbor only to rebates that go straight to the consumer at the point of sale. Rather than block the plan, lawmakers should act to strengthen it.

Congress could make Azar's proposal part of a larger effort to streamline the drug-pricing system, including other initiatives that directly press down on drug prices. Lawmakers should, for example, authorize the government to negotiate prices on behalf of all the 43 million Medicare drug-insurance beneficiaries (something Donald Trump himself championed when he was running for president), and allow Americans to import lower-priced drugs from other countries.

Ultimately, Congress and the White House should work together to move the U.S. toward a simpler system, in which prices are transparent, competition from generics and biosimilars is encouraged, and government bargaining power is used to see that the prices Americans pay reflect the true medical value of drugs.

Editorials are written by the Bloomberg Opinion editorial board.