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Eliminating pharmaceutical rebates, is this déjà vu?

By Andrew Parece and Matthew Majewski

Eliminating pharmacy benefit manager (PBM) rebates has been proposed to address several healthcare issues associated with pharmaceutical pricing (eg, increasing patient prescription drug costs) but such a proposal would also remove a key tool available to healthcare access decision makers when developing formularies.

PBMs are third-party administrators of prescription drug programmes for a variety of different types of health plans including Medicare Part D. Due to consolidation in the industry, most prescription drug benefits, including Medicare Part D benefits, are administered by several significant PBMs. In theory these ‘middlemen’ aggregate the prescription drug purchases of many health plans in order to gain additional negotiating leverage with pharmaceutical manufacturers.

One way they do this is by negotiating with manufacturers for rebates off list prices in return for securing a desired position on plan formularies (eg, preferred drugs with lower patient copayments and/or fewer prescribing restrictions). PBMs have historically been accused of lacking transparency in how they handle rebates and several legislative attempts at requiring additional transparency have been attempted.

In July 2020, the Trump administration announced its intention, for the second time, to prohibit rebates for Medicare Part D drugs within PBMs as one of several new Executive Orders aimed at lowering prescription drug costs. The administration had originally put forward this idea in January 2019, but after much public review, analysis and debate, the administration abandoned the proposal in August 2019. One of the administration's goals in revisiting the rebate elimination plan is to reduce the potential for unintended incentives created by the protection of rebates under the safe-harbor provisions of the Anti-Kickback Statute.

One such incentive is that PBMs may give preferential status to drugs with higher list prices but that simultaneously offer higher rebate revenues to the PBMs, as rebates are typically a percent of the list price. Keeping rebate streams high are often a tool used by PBMs to demonstrate their effectiveness at negotiating discounts with manufacturers. Therefore, if two products had similar net prices but one had a higher list price that product might be more attractive to the PBM.

A long-standing criticism of manufacturer drug rebates is that these ‘hidden’ rebates were retained by PBMs to enhance their profit, rather than used to lower patient costs. In the past, a large portion of the rebate revenue may have been retained by PBMs, but this practice has substantially evolved and the majority of these rebates are now passed through to health plans.

A 2019 report by the GAO (US Government Accountability Office) found that PBMs, or the PBM arm of integrated organisations, were retaining less than 1% of the Medicare Part D rebates they negotiated and passing on the savings to sponsoring health plans. Whereas in 2012, a survey conducted of health plans and PBM personnel found that PBMs were retaining as much as 22% of all rebates collected.

Pharmaceutical rebates are often used by health plans to offset premiums and are a key motivator in developing formularies. In fact, CMS has reported that if pharmaceutical rebates were to be removed, their Medicare spending over a ten-year period would increase by $137bn.

Another issue impacting this situation is that patient cost-sharing has been shifting from fixed patient copayments that vary by formulary tier to percentage-based coinsurance payments. Patient copayments are fixed dollar amounts, typically in the order of $10 to $125 per monthly prescription, depending on the formulary tier the PBM assigns to the product and are not otherwise related to the list price of the drug.

Coinsurance payments are based on a fixed percentage of the price of the drug and typically range from 18-34% of the drug price again depending on the formulary tier the PBM assigns to the product. Patient coinsurance payments are based on list prices, and not on the ‘net’ cost to the PBM after rebates.

The immediate removal of PBM rebates by Executive Order is likely to be a substantial shock to the healthcare system. This will be particularly difficult as rebates will still be allowed to be offered to commercial health plans for whom many large PBMs also provide Medicare Part D prescription drug benefits. Without a carefully planned transition period, PBMs and plans are likely to face significant issues as they try to readjust their premiums and formularies to a new set of rules.

In order to preserve the benefits of PBM formularies using rebates but to minimise the payments made by patients, we offer an alternative proposal that can achieve the administration's objective without fundamentally altering the existing model. We propose that the administration requires setting patient coinsurance levels based on the average sales price (ASP).

The average sales price is the average net price — the price after qualifying rebates and discounts. This proposal does not require abandoning the PBM rebate model in managing formularies. It also provides more transparency to patients and other stakeholders about the actual costs of their prescription drugs.

Manufacturers of physician administered pharmaceuticals already report average sales prices to the Centers for Medicare & Medicaid Services for Medicare Part B drugs. Extending this industry-standard mechanism to Part D drugs would ensure that patients pay coinsurance based on net costs after average rebates. This would also preserve the discretion that PBMs and insurers have in managing formularies based on non-price factors like the comparative effectiveness of medications.

One of the advantages of using ASP as the benchmark for patient cost-sharing is the improved, though less than complete, price transparency that the metric provides. The way that ASP is calculated means that manufacturer rebates are not fully incorporated into ASP until six calendar quarters after they have been paid and the rebates are only reported as an average across all eligible stakeholders.

This incomplete pricing transparency has proven to be a useful tool for manufacturers of provider-administered products and health plans that wish to negotiate and compete for better formulary status through deeper rebates than clinical alternatives.

We believe that similar benefits would accrue to Part D drugs using the same reporting mechanism, together with the ability to negotiate using rebates. Most global markets, even those with single payer systems, offer the ability to negotiate confidential rebates for this same purpose.

An alternative proposal could be to set patient coinsurance levels based on the costs that PBMs and insurers actually pay for drugs, namely the fully transparent net cost after rebates. On the surface this looks like a more equitable solution to patients; however, while setting coinsurance levels based on individual plans’ net costs would lead to more complete price transparency, it would also involve significant additional reporting requirements and administrative burden.

Further, it is not certain that the result would be lower total cost of care or improved quality of care and outcomes. It could also lead to more limited options for patients, as pharmacy decision-makers would be pressured to focus increasingly on price alone, as opposed to accounting for the comparative effectiveness of therapies, the ability of medications to offset other healthcare costs, and the value of innovative medicines.

Although the current system of rebates to PBMs has its issues, it is not clear to us that eliminating negotiated rebates, or complete transparency to net prices paid by PBMs, would be in the best interest of patients if the goal is to lower patients' total cost of care while maintaining or improving quality of care and treatment options.

Completely eliminating Medicare Part D rebates within PBMs is not essential for lowering the costs that patients pay for medications. It was an imperfect approach when it was originally proposed, and it remains so. As an alternative, setting coinsurance for high-cost specialty therapies based on their ASPs could lower patient coinsurance costs while providing greater price transparency. It is also much easier to implement than the complete removal of PBM rebates.

The views expressed here are the authors’ and not those of their employer or other organizations they are affiliated with.

Andrew Parece and Matthew Majewski are vice presidents of Charles River Associates, a global consulting firm

Andrew Parece and Matthew Majewski are vice presidents of Charles River Associates, a global consulting firm

26th October 2020

Andrew Parece and Matthew Majewski are vice presidents of Charles River Associates, a global consulting firm

26th October 2020

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