Because rebate contracts are secret, nobody knows the full extentof the practice nor how much it costs the health system inunrealized savings. (Photo: Shutterstock)

Lisa Crook was lucky. She saved $800 last year after herinsurance company started covering a new, less expensive insulin called Basaglar that wasvirtually identical to the brand she had used for years.

The list price for Lantus, a long-acting insulin made by Sanofithat she injected once a day, had nearly quadrupled over adecade.

With Basaglar, “I've never had my insulin cost drop sosignificantly,” said Crook, a legal assistant in Dallas who hasType 1 diabetes.

But many people with diabetes can't get the deal Crook got. In apractice that policy experts say smothers competition and keepsprices high, drug companies routinely make hidden pacts withmiddlemen that effectively block patients fromgetting cheaper generic medicines.

Related: 'Cartel' of 16 companies and 300 generic drugsaccused of price fixing

Such agreements “make it difficult for generics to compete orknow what they're competing against,” said Stacie Dusetzina, anassociate professor of health policy at Vanderbilt UniversitySchool of Medicine.

Here's how it works: Makers of established brands givevolume-based rebates to insurers or intermediaries called pharmacybenefit managers. In return, those middlemen often leave competinggenerics off the menu of drugs they cover, called a formulary, orthey jack up the price for patients. The result is that many can'tget the cheaper drugs unless they shoulder a bigger copay or buythem with no help from insurance.

Brand-drug sellers “pay for position” on the formulary, saidMichael Rea, CEO of Rx Savings Solutions, which helps health plansand employers manage pharma costs. “In this country, the mostcost-effective drugs don't necessarily mean anyone will have accessto them … [Companies with] the deepest pockets win.”

This so-called rebate trap joins a long history of efforts bymakers of brand-name drugs to stifle generics, including protectingdrugs with multiple layers of dubious patents, “pay for delay”deals to keep generics off the market and withholding keyingredients needed for generic production, critics say.

Because rebate contracts are secret, nobody knows the fullextent of the practice nor how much it costs the health system inunrealized savings.

“The deals between the drug companies and the PBM middle playersare guarded as fiercely as Fort Knox,” said Robin Feldman, a lawprofessor at the University of California, Hastings College of theLaw, who studies pharma policy. “No one gets to see them.”

But new research is turning up plenty of evidence of rebatesdistorting the market, such as numerous instances of effective,less expensive generics missing from formularies or patientsburdened with higher out-of-pocket costs for generic drugs.

In unpublished research, Dusetzina found that only 17 percent ofMedicare plans for seniors covered Basaglar, the biosimilarlaunched by Eli Lilly two years ago. Nearly all of them coveredbrand-name Lantus, sold by Sanofi, as of early last year.

Her research suggests rebates from Sanofi might have inducedinsurers to leave lower-priced Basaglar off their formularies,Dusetzina said.

Sanofi works with insurers and pharmacy benefit managers “tonegotiate access for patients to our portfolio of productsincluding Lantus,” said company spokesman Jon Florio, declining todisclose specifics.

Medicare plans covering Lantus but not Basaglar include numerousofferings from Anthem, the biggest for-profit, Blue Cross and BlueShield insurer.

“After evaluating the total cost impact on consumers, taxpayersand the government, we chose to cover the brand drug, Lantus, overthe biosimilar, Basaglar,” said Anthem spokeswoman LoriMcLaughlin.

Replacement versions of complex drugs often made from livingcells are called biosimilars, not generics. Basaglar is consideredclinically equivalent to Lantus but, because of a legal wrinkle,won't technically be considered a biosimilar by regulators until2020.

Merck scrapped its own biosimilar version of Lantus last fall,despite receiving tentative approval by the Food and DrugAdministration, after “assessing … the market environment,” thecompany said.

Coverage of Lilly's Basaglar has grown, and the drug is nowincluded in formularies used by slightly more than half thepatients who have health insurance, said Eli Lilly spokesman GregKueterman.

In another forthcoming study, this one examining 2018 Medicarecoverage, researchers at Johns Hopkins Bloomberg School of PublicHealth found that “almost every plan has at least one branded drugon the formulary that's in a better place than the generic,” saidGerard Anderson, the professor leading the research.

(A grant from the Laura and John Arnold Foundation, which helpssupport Kaiser Health News, financed the Hopkins research.)

In 2015, only 19 percent of generic drugs covered by Medicarewere in the preferred formulary tiers with the lowest out-of-pocketcosts, found a study last year by consultants Avalere. In 2011, on the otherhand, 71 percent of generics had been in the best tier, which helpsdetermine what patients are prescribed.

The Association for Accessible Medicines, the generic druglobby, paid for that study. Rebate-influenced barriers to genericsare “increasingly problematic,” said AAM CEO Chip Davis.

Disputes over formulary choices have hit the courts. Pfizersued Johnson & Johnson in 2017, alleging that rebatesinduced insurers to prefer Remicade, an anti-inflammatory biologic,at the expense of Pfizer's lower-priced product.

Critics of rebate traps include top Trump administrationofficials, under pressure from a president who has promised tolower drug prices.

Because quick rebates from brands are often more attractive toPBMs and insurers than long-term savings from generics, “this is areal challenge in terms of biosimilars coming to market and gainingmarket share” Scott Gottlieb, head of the FDA, said in aninterview.

Such objections add to a crescendo of grievances against hiddenrebates. Consumers and advocates have complained for years thatrebates cut costs for PBMs and insurers but do little for patients,who are often left paying their out-of-pocket share based onsoaring list prices.

Crook's out-of-pocket costs for Lantus rose steadily over theyears to about $900 annually, she said. After switching to Basaglarlast year, her cost was less than $100.

Mark Gooley, who has Type 1 diabetes and lives in Florida, saidhe started ordering Lantus by mail from Canada after the U.S. listprice rose fourfold in a little more than a decade.

“I have a very low opinion of companies like Sanofi,” he said.“They could afford to sell it to me when it came out” at a muchlower price, he said. “Inflation has not been 400 percent.”

Because of rebates paid to PBMs, Sanofi's net price for Lantushas actually decreased over the past five years despite thelist-price increases, said company spokesman Florio.“Unfortunately, these savings are not consistently passed throughto patients,” he said.

PBMs say they respond to the terms drug companies offer andnegotiate to save billions for government, insurers and employers.“Simply put, the easiest way to lower costs would be for drugcompanies to lower their prices,” the Pharmaceutical CareManagement Association, the PBM lobby, said in an emailedstatement.

For its part, PhRMA, the branded-drug association, has said it wants to scrap the rebate system and have PBMs paidfor services provided.

Congress has done little to fix the rebate problem despitewidespread criticism, but senior legislators in both chambers havepledged to address high drug prices this year.

Last summer, the Department of Health and Human Servicesproposed changing “safe harbor” protections that shield pharmarebates from being viewed as illegal kickbacks. But the proposal,under review at the Office of Management and Budget since July, hasnever been publicly aired, leaving the industry to wonder howsubstantial it is and if it will ever take effect.

KHN's coverage of prescription drug development, costs andpricing is supported in part by the Laura and John ArnoldFoundation.

Kaiser HealthNews (KHN) is a national health policy news service. It is aneditorially independent program of the Henry J. Kaiser Family Foundation whichis not affiliated with Kaiser Permanente.

Read more:

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• Drug rebate bubble: Will itburst?
• CVS's 'net new pricing' model brings transparencyto drug rebates