Health Insurance

FDA commissioner to health insurers: You’re doing it wrong

Key Points
  • "Sick people aren't supposed to be subsidizing the healthy," Scott Gottlieb said Wednesday.
  • The FDA commissioner was speaking at the National Health Policy Conference of AHIP, the health insurer industry group.
  • In his critique, Gottlieb homed in on an increasingly popular target in the drug pricing debate: rebates.
Dr. Scott Gottlieb, commissioner of the Food and Drug Administration
Getty Images

Insurance is designed, theoretically, to protect against the catastrophic: tornadoes, floods, hurricanes — or, where our health is concerned, cancer or another devastating disease.

To make that financial protection affordable, many pay into the system: the healthy are supposed to subsidize the sick.

But at a conference Wednesday organized by the health insurance industry, FDA Commissioner Scott Gottlieb delivered a startling message: You're doing it wrong.

"Sick people aren't supposed to be subsidizing the healthy," Gottlieb told an audience at the National Health Policy Conference of AHIP, the health insurer industry group. "That's exactly the opposite of what most people thought they were buying when they bought into the notion of having insurance."

Gottlieb's remarks were focused on the health of the market for biosimilars — copycats of complex, biologic medicines — and his concerns that industry consolidation and what he called rigged payment schemes may be stifling their development.

But they rang out as a critique of the U.S. system for pricing and paying for drugs more broadly, a system in which Gottlieb said each faction of the health-care industry is complicit in thrusting prices upward — at the expense of the sickest patients.

In his critique of health insurance constructs, he homed in on an increasingly popular target in the drug pricing debate: rebates. Those are discounts on medicines negotiated by pharmacy benefit managers on behalf of insurers.

But because the rebating system is opaque, and because of consolidation among PBMs and insurers, that system can result in ever-higher drug prices and everyone from drugmakers to the middlemen to insurers taking a slice of the pie, Gottlieb said.

Moreover, he posited, there's a "perverse incentive" to spread the benefit of those rebates across plan members, rather than applying them directly to lower the costs of drugs for the sickest patients — thus, a system where the sick subsidize the healthy.

"Patients shouldn't face exorbitant out-of-pocket costs, and pay money where the primary purpose is to help subsidize rebates paid to a long list of supply chain intermediaries, or is used to buy down the premium costs for everyone else," Gottlieb said.

What reason is there, he asked, for a cancer patient to shoulder a large co-pay on their costly medicine?

"Is a patient really in a position to make an economically based decision?" he continued. "Is the co-pay going to discourage overutilization? Is someone in this situation voluntarily seeking chemo?"

The answer, of course, is no. "Yet the big co-pay or rebate on the costly drug can help offset insurers' payments to the pharmacy, and reduce average insurance premiums," Gottlieb said.

His comments were applauded by industry observers.

"Too many benefit plans operate like reverse insurance," Adam Fein, CEO of Drug Channel Institute, wrote in an email to CNBC. "The sickest people taking medicines for chronic illnesses generate the majority of manufacturer rebate payments. These funds are then used to subsidize the premiums for healthier plan members."

Others heralded Gottlieb's citation of rebates as a key deterrent to uptake for biosimilars.

"This is impressive, from the head of the FDA," tweeted Walid Gellad, director of the Center for Pharmaceutical Policy & Prescribing at the University of Pittsburgh.

Health insurers and pharmacy benefits managers, unsurprisingly, disagreed.

This is impressive, from the head of the FDA. Read the speech.

"It's unfair to blame payers — who pay 2/3 the cost of drug benefits — for seeking the lowest costs in a marketplace where they have no control over the prices drugmakers set," the Pharmaceutical Care Management Association, the PBM industry group, said in a statement. "Likewise payers — not the pharmacy benefit managers they hire to negotiate discounts — determine how rebates and other savings are allocated to reduce premiums, out-of-pocket costs and other expenses."

AHIP took issue with the idea that insurers play a role in rising drug prices.

"Health plans welcome the introduction of generic biologics, or biosimilars, as a way to give patients quicker access to more affordable medicines," the group said in a statement. And it pointed fingers back at drugmakers. "The trend among pharmaceutical companies to hike the prices of brand name biotech drugs before generic competition arrives is forcing makers of biosimilars to set their prices higher."

Some pointed out Gottlieb's position is an unusual one for an FDA commissioner to take; the agency officially doesn't take a role in drug pricing.

Gottlieb told CNBC Wednesday afternoon that ensuring biosimilars have a pathway to market is a public health concern.

"Part of my job is to worry about the effectiveness and viability of the biosimilars pathway and achieving the access and competition it was intended to create," Gottlieb said. "If ill-conceived payment arrangements serve to discourage investment in a way that forestalls that pathway from ever really taking root, that's a public health concern. And when I look at the biosimilars pipeline, I'm worried that may be happening."

The focus on rebates is spurring change: this week, UnitedHealth said it would apply drug rebates directly to lower costs for patients on their prescriptions starting next year. The company said it's part of a move to "simplify pharmacy benefits, deliver savings directly to its customers and improve their healthcare experience."

Alex Azar, newly minted secretary of the Department of Health and Human Services, praised the move, calling it a "prime example of the type of movement toward transparency and lower drug prices for millions of patients that the Trump Administration is championing."

But, as many analysts pointed out, it may mean premiums across the board go up.

"Most plan sponsors use manufacturer rebates in aggregate to subsidize the cost of beneficiary premiums, keeping the premiums artificially low," RBC Capital Markets' George Hill wrote in a Tuesday research note. "This strategy has historically been effective, but has in recent years created a disconnect where the sickest and most expensive patients have been generating the rebates used to subsidize much healthier patients."

So by reversing that trend, as Gottlieb and Azar encourage, the health insurance model may become less backwards. But it won't necessarily result in lower costs, just a redistribution of them.