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How Rebate Walls Lead to Higher Drug Prices

Lowering drug prices will be a long term project requiring action and commitments from legislators, antitrust regulators, and other officials. The Federal Trade Commission (FTC) could play an important role in several areas by opening antitrust investigations about the questionable practices of drug companies, and bringing enforcement actions. In a new oped, David Balto writes about questionable practices known as 'rebate walls', how they contribute to higher drug prices, and what the FTC can do to stop them.

What is a rebate wall? A rebate wall is when a drug company that has a dominant position in the market gives payers (pharmacy benefit managers, health insurers, and health care providers) conditional rebates and discounts off the list prices for a multi-product bundle of drugs. These drug companies use the bundled rebates to protect their dominant market position, and the payers take the rebates for themselves in an effort to maximize the revenue instead of passing them to consumers.

This creates a problem and a 'wall:' if the payer buys a competing drug, even if it is more affordable and effective, the payer loses its discounts on the entire bundle of drugs. So these deals trap payers, making it so they can't choose a lower-cost or more effective drug, because while they would save money on that drug, they would lose money overall because of the bundled rebate. And incumbent drug companies enter into exclusionary contracts and intentionally structure rebates among many of their products to limit competition from rival drug companies who cannot provide the same range of drugs in bundled rebates.

Essentially, many drug companies are stifling competition and penalizing payers that choose alternative branded drugs, ensuring that they can't switch to new and improved drugs because the monetary cost of the bundled rebate is too high. One example of this is when Johnson & Johnson was selling Remicade, a biosimilar drug used to treat Crohn's disease, rheumatoid arthritis, and other conditions. Johnson & Johnson bundled the rebates for Remicade with its other products. When its rival Pfizer attempted to sell Inflectra, a lower cost competing drug, it could not compete because the bundled rebates prevented insurers from reimbursing Inflectra, and preventing health care providers from buying.

Officials agree that rebate walls are anticompetitive and lead to higher drug prices and overall health care costs. No one benefits aside from a few large companies. Secretary of Health and Human Services Alex Azar told a Senate committee that "I am very much aware that these rebate walls can prevent competition and new entrants into the system...I do not like that practice."

Fortunately, antitrust regulators can take action. The Federal Trade Commission has broad power to investigate and require answers about anti-competitive practices that increase health care costs and block access to more affordable and better medicines. Rebate walls most definitely stifle competition. The FTC should investigate these practices, and determine whether bundled rebates and other actions are harming consumers and blocking competition (the evidence strongly implies they are). And when the FTC reaches that conclusion, it should file lawsuits against the offending companies to end these practices, restore competition, and ensure new affordable drugs can easily come to market.

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