Buried in this document is a radical concept: Part D plans would be required to recognize the value of manufacturer rebates and pharmacy payments in retail prescription prices. These amounts are two key components of Direct and Indirect Remuneration (DIR) that are currently paid to plans. CMS is asking for feedback for future rulemaking but did not propose any specific changes. Any program modifications would not occur until at least 2020 or later.
However, it’s clear that CMS views the high-list-price/high-rebate system—what I term the gross-to-net bubble—to be a fundamental source of warped incentives and cascading problems. Before you check out for the holiday weekend, I unpack the complex structure of Medicare Part D to explain why CMS is proposing its pass-through solution. This will help you digest CMS’s proposal for disruptive change to pharmacy benefit managers’ (PBM) profit model and our current drug channel system.
A personal observation: Medicare Part D, like commercial pharmacy benefit plans, now operates like reverse insurance. The sickest seniors taking medicines for chronic, complex illnesses generate the majority of manufacturer rebate payments. These funds are then used to subsidize the premiums for healthier seniors. To me, this structure is the opposite of how insurance is supposed to function. It seems as if CMS concurs.
STUFF TO READ
The material on point-of-sale (POS) rebates appears in Section 17 of the CMS document: “Request for Information Regarding the Application of Manufacturer Rebates and Pharmacy Price Concessions to Drug Prices at the Point of Sale.”
- Section 17 starts at the bottom of page 305. Click here to go directly to this page.
The following three articles provide some non-Medicare Drug Channels context for understanding CMS’s arguments:
- DIR Fees, Rebates, Pharmacy Economics, and the Future of Medicare Part D (Our February post explained a CMS report that “lays the groundwork for changing the Medicare Part D program.”)
- New Data Show the Gross-to-Net Rebate Bubble Growing Even Bigger (Our June post foreshadowed the issues that CMS highlights in its proposal.)
- Will CVS Health’s Point-of-Sale Rebates Deflate the Gross-to-Net Bubble—and Disrupt the PBM Business? (Our June post described post-of-sale rebates in commercial plans.)
CMS IS UNHAPPY
Before the 2006 launch of the Part D program, CMS expected that rebates and other price concessions would be passed through to beneficiaries at the point of sale, i.e., when a prescription is dispensed. CMS expected that rebates would therefore be reflected in the negotiated price: the amount that a Part D plan pays to a pharmacy for having dispensed a drug to a Medicare beneficiary.
That’s not what has happened. As with many commercial payers, the negotiated price received by the pharmacy for a brand-name prescription is linked most closely to a drug’s list price, not its net price after rebates. See Section 8.2. of our 2017 Economic Report on U.S. Pharmacies and Pharmacy Benefit Managers.
Consequently, CMS now believes that Part D plan sponsors “may have distorted incentives as compared to what we intended in 2005.” (See page 307.) The harsh bottom line from CMS:
“Under current rules, therefore, Part D sponsors may have weak incentives, and, in some cases even, no incentive, to lower prices at the point of sale or to choose lower net cost alternatives to high cost-highly rebated drugs when available.”That’s a potent and harsh critique of the U.S. distribution and reimbursement system.
Understanding how CMS came to its conclusions is easier that you think. First, however, we must take a brief detour into the obscure financial mechanics behind the Medicare Part D program. Here’s my handy overview:
- Each Part D plan submits its bids annually to CMS by the first Monday in June.
- Plans receive a monthly payment for each enrollee. Plans get roughly the same amount, though the amount is adjusted based on such factors as enrollee characteristics and other modifiers.
- Plans get a direct subsidy payment, which is computed based on the adjusted national average of bids. They also get a separate reinsurance subsidy for beneficiaries who reach the catastrophic coverage limit. For an individual beneficiary, this limit is $8,071 in estimated drug costs for 2017. Medicare covers 80% of the cost in the catastrophic phase, while plans pay 15% and the beneficiary pays 5%.
- Each plan’s bid reflects a plan’s expected benefit payments after administrative costs minus reinsurance subsidies and other adjusters. For the purpose of submitting bids and computing payments, plan sponsors estimate the total manufacturer rebates, per-prescription pharmacy fees, and other price concessions that are collected after the prescription is adjudicated and dispensed. These post-point-of-sale amounts are known as Direct and Indirect Remuneration (DIR). The fact that the bids are based on estimated DIR is crucial to understanding the problems that CMS highlights.
For more complete details, check out MedPAC’s useful Part D payment system briefing.
- At the end of the coverage year, plans report to CMS all rebates and other price concessions as DIR. Note that the coverage year ends 19 months after plans submitted their bids with estimated DIR.
You may be wondering what could go wrong with such a system. CMS calls out at least four structural problems:
- Plans and their PBMs have an incentive to underforecast DIR. CMS notes that the DIR amounts that Part D sponsors and their PBMs actually received have been consistently higher than the projected amounts. As a result, CMS says: “The risk-sharing construct established under Part D by statute allows sponsors to retain as plan profit the majority of all DIR that is above the bid-projected amount.” (See page 309.)
- Plans and their PBMs prefer higher list prices. DIRs grow along with the spread between a manufacturer’s list price for a drug and the net price to a plan. Plans and their PBMs may therefore prefer drugs with higher list prices and higher rebates. Such products push more beneficiaries into the catastrophic reinsurance phase, where the plan liability is only 15% of drug cost.
CMS even makes the following accusation: “sponsors sometimes opt for higher negotiated prices in exchange for higher DIR and, in some cases, even prefer a higher net cost drug over a cheaper alternative.” (See page 309.)
- Some Medicare beneficiaries face much higher out-of-pocket costs. CMS is especially concerned that Medicare beneficiaries are not benefiting directly from rebates and other forms of DIR. As I have noted many times in Drug Channels, patients whose plans have coinsurance are stuck paying a percentage of the price negotiated between the plan and the pharmacy. That negotiated price excludes rebates and other DIR amounts. Progression through the Part D benefit tiers is based on the negotiated price, so beneficiaries reach catastrophic coverage—and its unbounded 5% out-of-pocket expense—sooner.
Beneficiaries paying copayments also have a problem. CMS points out that “Part D rules require that the copay amount be at least actuarially equivalent to the coinsurance required under the defined standard benefit design.” (See page 311.)
POINT-OF-SALE REBATES TO THE RESCUE?
- Plans may game the system. Plans that apply DIR at the point-of-sale to the negotiated price will submit a higher bid to CMS. The plan’s premium will be higher, and it will lose market share to competitors. CMS argues that plans therefore have an incentive to prefer that DIR be applied at the end of the plan year, because those amounts result in a lower estimate of net plan liability. (See page 313.)
CMS has consequently decided to solicit ideas on how it should design a policy on point-of-sale rebates. CMS is considering requiring Part D sponsors to pass-through some of the manufacturer rebates to the negotiated price at the pharmacy counter.
Such a policy will require some tough tradeoffs:
- Some beneficiaries will see lower out-of-pocket costs, but premiums for all beneficiaries will go up.
- Some plan sponsors may drop out the Part D program. As I note in my analysis of preferred pharmacy networks in the 2018 Medicare Part D plans, the total number of plans has already declined, from 1,169 in 2014 to 782 in 2018.
- The policy shouldn’t create too many political problems by raising government costs or reducing manufacturer payments.
CMS gamely tries to project the 10-year impact on beneficiaries, manufacturers, and the government for various percentages of rebates—33%, 66%, 90%, or 100%—if they were passed-through. Here’s a look at Table 10A, which appears on page 328 of the document:
[Click to Enlarge]
FYI, Table 10C shows these figures in percentages.
Here is the summary for all values of rebate pass-through:
- Medicare beneficiary cost-sharing (out-of-pocket expenses) goes down.
- Monthly premiums rise.
- Government costs increase due to higher direct subsidy (monthly premium) payments to the plans.
- Government costs decline due to lower reinsurance (catastrophic) and low-income subsidy payments.
- Manufacturer payments decrease, because fewer beneficiaries progress through to higher Part D benefit phases (coverage gap).
CMS also takes aim at the portion of DIR that pharmacies pay to plans as performance penalties or network participation fees. Click here to go directly to this discussion, which begins on page 329. Pharmacies refer to these controversial amounts as “DIR fees,” though such pharmacy payments account for a minority of total DIR.
As with manufacturer rebates, CMS suggests that these payments be recognized in the negotiated price. The impact would be directionally similar to moving manufacturer rebates to point-of-sales, though the impact is much smaller. CMS has assumed that pharmacy price concessions will be about 3% of allowable Part D costs. That’s roughly comparable to the figures reported by Diplomat Pharmacy. See Diplomat Sees Declining DIR Fee Impact—and Perhaps Readies a PBM Strategy.
Note that the CMS proposal does not eliminate “DIR Fees” or alter the financial impact of these payments on pharmacy profits. The National Community Pharmacists Association (NCPA) applauds the pass-through of pharmacy DIR, presumably because it is bad for PBMs. However, I see it as being only neutral to negative for pharmacies.
BLACK SWAN WITH ALL THE FIXINGS
At this point, CMS is simply seeking comments and feedback on the point-of-sale pass-through concept.
But if the concept moves forward, it will be a significant step toward a Black Swan event that could dramatically reshape U.S. drug channels and mark the beginning of the end for the PBMs’ traditional economic model.
In the meantime, consider this post for a possible safe topic to avoid discussing anything controversial—politics, the Eagles' inevitable 2018 Super Bowl victory, whatever—at your family’s Thanksgiving dinner.
Enjoy the holiday!