FDA chief Gottlieb to pharma: Those rebates you love to hate may soon count as kickbacks

FDA Commissioner Scott Gottlieb, M.D., hasn’t been shy about allying with President Donald Trump on the subject of high drug prices. Even though pricing is not the FDA’s purview, Gottlieb has vowed to do his part to bring down drug costs by speeding up approvals of generics, for example, and cracking down on companies that try to stifle generic competitors.

But Gottlieb’s latest idea has raised some eyebrows in the pharma community because it attacks a fundamental strategy drug companies use to get their products on insurance formularies—deep discounts in the form of rebates to pharmacy benefits managers.

In a speech this week, Gottlieb suggested that the federal government should “re-examine” how rebates are treated under federal antikickback laws. Right now, those rebates don’t count as kickbacks. That gives drug companies free rein to set super-high list prices for new drugs, so they can protect their profit margins when they discount the products while wheeling and dealing with payers, Gottlieb suggested.

Revising safe-harbor rules that shield rebating from legal scrutiny “could help restore some semblance of reality to the relationship between list and negotiated prices, and thereby boost affordability and competition,” Gottlieb said.

RELATED: Drug discounting to insurers soars from 28% to 41% in 5 years, with no end in sight: report

Gottlieb’s comments were made just days before Trump is expected to lay out a strategy for taking on drug prices, more than a year after accusing pharma of “getting away with murder” with high stickers. That plan, expected in a speech Tuesday, is all but certain to include provisions related to generic competition, as well as changes to Medicare Part D, which Health and Human Services secretary Alex Azar has cited as a major contributor to high drug prices. But Gottlieb was the first to mention the possibility of turning rebates into kickbacks.

Eliminating legal protection for rebates would endanger a strategy that Big Pharma has relied on more and more as payers put the pressure on their list prices. The average sale, rebate and allowance offered by pharma companies to insurers grew from 28% to 41% in the 5 years ended in 2017, according to a January analysis released by analysts at Wells Fargo.

Eli Lilly saw the biggest increase among the large-cap players, with its average rebates and discounts jumping from 19% to 39% over that time period. But even specialty pharma companies have bowed to payer pressure. Valeant, known as a serial price-hike offender, raised its discounts from 19% to 41% in five years.

Critics say the practice is bad for patients because discounts don’t trickle down to them—co-insurance is based on list prices, and patients have to pay retail as they meet their deductibles—but rebating can hurt drug companies, too. This earnings season has been littered with reports of products that turned in disappointing sales because of discounting. Among the victims was Novartis’s psoriasis newcomer Cosentyx, which missed analysts’ expectations of $635 million in sales because the company offered payers steep rebates to stoke new prescriptions.

RELATED: Trump, Azar say a plan for drug prices is coming in ‘about a month’

The constant drum beat of drug-price complaints coming out of Washington has some analysts warning the pharma industry to brace itself for a hit on profitability. Wells Fargo followed up on its report on drug rebates with a new series of notes, launching earlier this week, titled “Pharma’s Brave New World.” Alluding to the dystopian world envisioned by Aldous Huxley in his classic novel, Wells Fargo’s David Maris advised companies to be prepared for impending changes—particularly demands that they be more transparent about their pricing practices.

“We believe the U.S. is on a longer-term arc toward price controls and lower margins, as there is an uprising that has been percolating for years against high drug prices,” the analysts wrote. “We believe that we are at a very unique time for healthcare, where the promise of groundbreaking advances has never been higher, but where calls for lower prices and greater transparency have also never been louder.”

In a simultaneous report, Wells Fargo noted that there have been price increases on 3,622 prescription drugs so far this year, and that the most popular price-increase margin ranged from 9.4% to 9.9%. The analysts surmised that drug companies “took a hint” from Allergan, which pledgedto limit annual price increases to single digits in 2016, but that they “also played very close to the double-digit edge.”

And even though drug companies only reap about half of those list-price increases—losing the rest to rebating—”we still believe drug pricing remains a risk factor for companies that have relied heavily on it in recent years,” Wells Fargo said.