Wednesday, January 17, 2018

Employers Are Extracting More of Their Rebate Dollars from PBMs

The debate about drug prices and the drug channel system will continue in 2018. Let’s shed some light on one murky, little-understood corner of this world: how employer-sponsored health plans access the billions of dollars in manufacturer rebates that are negotiated by their pharmacy benefit managers (PBMs).

We turn to data from the Pharmacy Benefit Management Institute’s (PBMI) excellent 2017 Trends in Drug Benefit Design. (Free download with registration.) As far as I know, it’s the only public data source for understanding PBM-client rebate practices.

According to PBMI’s survey data, larger and smaller employers increasingly receive 100% of manufacturer rebates for traditional drugs. Many have also negotiated guaranteed rebates that shift risk to PBMs. Other employers get a share of the rebates or a flat guaranteed amount.

Below, I delve into the data and offer my observations. Tomorrow, I’ll examine what employers are doing with these rebate dollars. Spoiler alert: It’s usually not good for patients.

ASK ME

The PBMI survey collects data from employers, not PBMs. The 2017 edition includes responses from 318 employer-sponsored plans that offer prescription drug benefits, accounting for an estimated 25 million covered lives. Drug Channels again toasts Takeda Pharmaceuticals North America for having sponsored the research.

The sample population of the PBMI survey is similar to that of the Kaiser/HRET survey I discuss in Employer Pharmacy Benefits in 2017: More Cost-Shifting to Patients As Tiers and Coinsurance Expand. The PBMI research goes much deeper into plan design than does the Kaiser/HRET report, but it has a much smaller sample size.

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 53 of the report.

Just so you know, I was on the report’s advisory board, which means that I was paid a small fee to review a pre-publication version of the completed research. Final responsibility for the report’s content rests with PBMI.

FYI: PBMI will release its parallel report on specialty drug benefits in March at the PBMI 2018 Annual National Conference. I'm the keynote speaker and will present "The Outlook for Pharmacy Benefit Management: Evolution or Disruption?" Hope you can join me there!

FOLLOW THE PERIPATETIC MONEY

Rebates can reduce a third-party payer’s net prescription costs as funds flow through the drug channel, per our Follow the Dollar Math example. Manufacturers’ rebates are the biggest factor in the gross-to-net bubble—the growing spread between a manufacturer’s list price for a drug and the net price.

Different plan sponsors have varying preferences for how they want the value of rebates to be reflected in their pharmacy benefit spending. For 2017, 26% of smaller employers and 9% of larger employers received none of the rebates on traditional drugs that manufacturers provide to PBMs. Both figures are lower than the figures reported in PBMI’s 2016 survey. For these employers, the discounts provided by rebates are presumably factored into the prescription prices charged by the PBM.

Among employers receiving rebates, there is great diversity in rebate agreements with PBMs. The chart below shows employers’ responses for 2017. To highlight changes over time, we include the responses from 2014, the earliest year with comparable figures.

[Click to Enlarge]

Here are three observations about rebate arrangements in 2017:
  • More employers are receiving 100% of the rebates negotiated by their PBM. For larger employers in 2017, 100% rebate pass-through was the most common rebate arrangement: 53% received all rebates for traditional drugs. This figure has increased significantly since 2014. For 2017, smaller employers (42%) were less likely to receive 100% of the rebates, though this approach was the most common arrangement and has increased significantly over the past three years.
  • Larger employers were more likely to receive guaranteed minimum payments. Among the employers that received 100% of rebates, two-thirds (66%) of larger employers had a guaranteed minimum rebate amount, while only 36% of smaller employers did. (These figures are not shown in the chart.) For the employers that received a percentage of rebates, the figures were somewhat more comparable. Fifty-two percent of larger employers received a percentage of rebates with a guaranteed minimum, compared with 42% of smaller employers.
  • Smaller employers rely more on flat guaranteed rebate per script. Larger employers have moved away from flat dollar per-script rebate guarantees. The share of larger employers using this technique has dropped sharply, from 44% of employers in 2014 to only 14% in 2017. By contrast, 29% of smaller employers received a fixed dollar amount in 2017.
Note that the survey did not quantify the average percentage of rebates that employers received. We estimate that on average, we estimate that about 90% of the total value of manufacturer rebates are passed through PBMs to plan sponsors. For example, CVS Health has stated that more than 90% of rebates overall were passed back to its clients. The overall average may not reflect the experience of any individual payer.

PBMs also receive other payments that may or may not be shared with employers. These include:
  • Admin fees. Manufacturers pay admin fees that average 3% to 5% of the list price value of a drug. We estimate that only about half of these fees get passed on to plan sponsors.
  • Price protection. Price protection provisions establish a ceiling or cap on the amount by which manufacturers can increase the cost of a medication during the life of a rebate contract with a PBM. List price increases above the ceiling trigger additional rebate payments. About one-fourth of employer-sponsored plans included price protection in 2017. Most employers believe that these price protection payments were passed back to their plan.
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What happens to these rebate dollars? Tomorrow, we’ll examine the sad results from the PBMI survey to illuminate what employers do with the billions in rebate money they collect.

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