The Right Rebate Act would give the U.S. Department of Health and Human Services (HHS) the ability to fine companies that knowingly misclassify drugs in the future. (Photo: Shutterstock)

Last month, Senators Chuck Grassley (R-Iowa) and Ron Wyden (D-Ore.) introduced new legislation to ensure that drug companies play by the rules of the Medicaid program. The bill is aimed at preventing drug companies from overcharging Medicaid, a practice that has been consistently costing taxpayers billions of dollars. While the legislation is an excellent indicator of future bipartisan cooperation on the issue of prescription drug affordability, much more needs to be done.

Grassley and Wyden's new bill, the Right Rebate Act, would give the U.S. Department of Health and Human Services (HHS) the ability to fine companies that knowingly misclassify drugs in the future. It would also give HHS the ability to directly adjust a drug's classification. The issue stems from drugs being misclassified by manufacturers as generic when they should be classified as brand name.

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The bill came in response to the pharmaceutical company Mylan misclassifying EpiPen as a generic drug despite repeated warnings from the CMS. The misclassification allowed Mylan to pay a smaller rebate to Medicaid for products purchased between 2011 and 2015, while charging consumers and health plans increasingly higher costs.

Under the current Medicaid rebate program, Mylan is paying Medicaid a 13 percent rebate for every Epipen it sells through the program, since it has classified the device as a generic product. According to the CMS, Mylan should be paying a rebate rate of 23.1 percent, as it's actually a brand-name drug, as well as an inflation rebate which is required whenever drugmakers raise the prices of a brand-name drug above the inflation rate.

The proposed bill would grant a wealth of new powers to HHS, including the authority to reclassify drugs, impose fines, and recover incorrect rebate payments. In addition, new oversight mechanisms would ensure that authorities remain properly informed and that processes exist transparently.

While this legislation is an excellent solution to one part of the rebate problem, a larger issue in the system remains to be addressed.

The rebate system was initially designed to generate cost savings that would ultimately be passed on to consumers, but now pharmacy benefit managers (PBMs) take advantage of asymmetric information to divert rebates and discounts towards their bottom line rather than defraying the costs for plans and patients. Drug manufacturers pay out rebates to PBMs to get preferred placements on their formularies. Higher rebates result in better placement. In other words, these PBMs are profiting billions off of what are essentially kickbacks funded by taxpayers. The top three PBMs have profited to become massive players on the Fortune 500: United Health (#6), CVS Health (#7), and Express Scripts (#25).

Meaningful reform would require three policy implementations. First, uniform definitions need to be established for terms used in mandated disclosure provisions, specifying what constitutes a rebate, a discount, a fee, etc.

Second, PBMs should be required to disclose to contracting plan sponsors and appropriate government agencies the information regarding the total amount received from a manufacturer of a drug, the percentage designated as a rebate or discount, and the amount passed back to plan sponsors.

Finally, using that information, there needs to be established minimum percentages on rebates that PBMs must pass on to plan sponsors.

Until more regulation and oversight is imposed on PBMs they will continue to engage in these unfair, deceptive practices. Pharmaceutical legislation needs to act in the interests of the patients and consumers. Grassley and Wyden's bill is an excellent first step, but there is much that remains to be done.

Read more:

• Drug rebate bubble: Will it burst?
• New proposal would remove safe-harbor protections for drug rebates
• Now comes the hard part for Cigna-Express Scripts: PBM reform

Robert W. Levin, M.D., is president of the Florida Society of Rheumatology and the Alliance for Transparent and Affordable Prescriptions, a coalition of patient and provider organizations working to lower prescription costs and make treatment more accessible.