Tuesday, March 28, 2017

A Tale as Old as Time: Examining Employer-PBM Rebate Relationships for Specialty Drugs

Pharmaceutical manufacturers pay billions in rebates to pharmacy benefit managers (PBMs). These beastly rebates are the largest single component of the gap between a drug’s list price and the net price received by the manufacturer. But one question comes up every day in this little town: For specialty drugs, how much of that money do PBMs share with their plan sponsor clients?

To find out, let’s put the Pharmacy Benefit Management Institute’s (PBMI) new 2017 Trends in Specialty Drug Benefits Report to the test. (Free download after unnecessarily complicated registration process.) Drug Channels thanks Walgreens Specialty Pharmacy for having sponsored this enchanted research.

According to the PBMI’s survey data, many (but not all) employers receive a portion of manufacturer rebates for specialty drugs. Large employers are most likely to get the entire rebate amounts. Others get a share of the rebates or a flat guaranteed amount.

As more specialty drugs are launched, specialty therapeutic categories will become more crowded. Expect the value of manufacturer rebates for specialty drugs to grow and formulary exclusions to become more common. Manufacturers will face the same dilemma as our heroine Belle: Is it possible to love someone who is holding you captive?

OVERTURE

The PBMI survey collects data from employers, not PBMs. The 2017 specialty edition includes responses from 298 employer-sponsored plans that offer prescription drug benefits, accounting for an estimated 10 million covered lives. The sample population of the PBMI survey is similar to that of the Kaiser/HRET survey that I discuss in Employer Pharmacy Benefits in 2016: More Specialty Drug Cost-Shifting Means More Problems for Patients. The PBMI research goes much deeper into plan design than does the Kaiser/HRET report, but it has a much smaller sample size and fewer talking teacups.

PBMI presents the results by employer size. It defines “smaller employers” as having fewer than 5,000 covered lives (employees plus dependents). It defines “larger employers” as having more than 5,000 lives. Fans of research methodology should read the section starting on page 54 of the report.

THE BEAUTY

Rebates can reduce a third-party payer’s net prescription costs as funds flow through the channel, per this Follow the Dollar flow chart from 2017 Economic Report on U.S. Pharmacies and Pharmacy Benefit Managers. The fact that these rebates may not affect the patient’s prescription price is a major plot complication and source of controversy, per my discussion in Scott Gottlieb’s Radical Idea for Disrupting U.S. Drug Channels.

A plan sponsor can compensate a PBM for its services by permitting the PBM to retain a share of the rebates. For a more comprehensive look at PBM compensation, see sections 5.5. and 10.2.3. of our 2017 pharmacy and PBM report .

BE OUR GUEST

The PBMI data reveal that plan sponsors’ have varying preferences for how they want the value of rebates to be reflected in their pharmacy benefit spending. For 2016, 51% of smaller employers and 82% of larger employers receive rebates on specialty drugs that manufacturers provide to PBMs. (See chart below.) Both percentages are higher than the figures reported for 2015.

However, 49% of smaller employers and 18% of larger employers report having received no rebates. For these companies, the value of these rebates is presumably factored into the prescription prices charged by the PBM.

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Among employers receiving rebates, there is a great diversity in rebate agreements with PBMs. The chart below summarizes our analysis of PBMs’ rebate relationships with their employer clients in 2015 and 2016.

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For larger employers, 100% rebate pass-through is the most common rebate arrangement. It is also gaining popularity among employers. The share of larger employers that receive 100% of rebates for specialty drugs grew, from 48% in 2015 to 53% in 2016. The share of smaller employers receiving 100% of rebates for specialty drugs also grew, from 23% in 2015 to 39% in 2016.

Smaller employers are more likely to receive a percentage share of actual rebates, either with or without a guaranteed minimum. Flat guaranteed rebate amounts per script are the least common rebate arrangement.

The overall averages shown above may not reflect the experience of any individual payer. Unfortunately, the PBMI data do not reveal the average percentage share of rebates that are passed back to plan sponsors. Both CVS Health and Express Scripts have recently stated that about 90% of rebates are passed back to their clients.

AND THE BEAST

Specialty therapeutic categories are getting more crowded, which gives payers additional negotiating leverage against manufacturers. The value of specialty rebates will therefore grow. The PBMI data suggest that many employer-sponsored plans will see only a portion of these funds.

Consider formulary exclusions that block access to specific products. PBMs force manufacturers of therapeutically comparable brand-name drugs to offer bigger rebates to avoid being cut from the formulary.

The PBMI data show that more than half of the plans use formulary exclusions for specialty drugs. The classes with the greatest use of exclusions include growth deficiency, fertility, and hepatitis C. The chart below appears on page 28 of the PBMI report.

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For inflammatory conditions, note the big jump in the use of exclusions, which grew from 25% to 40% of employers. Look at how Express Scripts is trying to manage the formulary for the inflammatory conditions therapy class.
  • In 2016, Express Scripts announced its Inflammatory Conditions Care Value Program, which creates an indication-specific formulary based on seven inflammatory conditions. Such a formulary allows Express Scripts to create greater competition within the therapy class by making single-indication products compete directly with nonspecific products.
Non-interchangeable biosimilars are also prime targets for formulary management, per my comments in What Gilead’s Big Hepatitis C Discounts Mean for Biosimilar Pricing.

When manufacturers look in the magic mirror, they may find that this story does not have a fairy tale ending.

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