Tuesday, August 14, 2018

New Disclosures Show CVS and Express Scripts Can Survive in a World Without Rebates. Are Plan Sponsors Now the Real Barrier to Disruption?

Last week, the two largest pharmacy benefit managers (PBMs)—CVS Health and Express Scripts—both stated that rebates now account for a small part of their profits. The companies therefore strongly implied that they could survive in a world in which PBMs did not participate in the flow of funds from a brand-name manufacturer to a plan sponsor. Below, I unpack the new disclosures, which move us materially closer to a new model.

Hmm. The two biggest PBMs and at least one major manufacturer (Pfizer) have now implied a willingness to change. So what’s to stop massive drug channel disruption?

CVS Health perhaps inadvertently identified the real barrier to a system without rebates: employers and health plans. As you will see below, CVS Health disclosed for the first time the massive gross-to-net bubble within its commercial book of business. The new information confirms that plan sponsors are hoarding rebates rather than sharing the savings with the employees whose prescriptions generated the rebate funds.

If we really do migrate to a system without rebates, PBMs’ reportedly minimal profits from rebates mean they could escape drug channel disruption unscathed. The focus will now turn to the plan sponsors that are absorbing rebate dollars. Whether plan sponsors realize it or not, they are the next target.

THE GAME IS AFOOT

Here’s a rundown of last week’s unprecedented PBM disclosures.

In CVS Health’s second-quarter financial reporting, it offered a spirited defense of the PBM model. The company also disclosed—for the first time—the value of commercial rebates that CVS Health’s Caremark PBM business received along with the share of those rebates that the PBM retained.

CVS Health used the following definition of “rebates”:
“Rebate calculation includes all rebates, including price protection, and administrative fees paid by manufacturers for commercial and MAPD clients. Excludes SilverScript.”
Here’s the big news: CVS Health estimates that for 2018, it will pass through 98% of rebates to plan sponsors and retain only $300 million in commercial rebates. CVS Health disclosed that it therefore expects to negotiate $15 billion in commercial rebates from pharmaceutical manufacturers—but will retain only 2% of those rebates.

Put another way, CVS Health has positioned its business for a system without rebates. Here’s what CEO Larry Merlo said on last week’s earnings call:
“And while some have speculated that our retained rebates represent as much as $2 billion, the simple fact is that over the last number of years, we have positioned the Caremark model and its broader value proposition to the point where in 2018, we expect retained rebates to be about $300 million, or about 3% of our annual adjusted earnings per share.”
Express Scripts also disclosed that rebates account for much less of its profit than many had believed. (Click here to see the relevant slide from its SEC filing.) Express Scripts said that it retains only $400 million in rebates, which it defined to include “core PBM commercial and health plan clients but excludes value-based reimbursements and Express Scripts PDP.” Express Scripts stated that it “passes 95% of all pharmaceutical purchase discounts, price reductions and rebates back to their core PBM commercial and health plan clients and their customers.”

Sure, we could quibble about the fact that a mere two months ago, CVS Health told the Department of Health and Human Services: “We return over 95% of rebates to commercial clients and their members.” (CVS told me that the July 2018 figure was still an estimate for 2017. Um, OK.)

Or that Express Scripts’ 95% figure of August 2018 seems different from May 2018, when Express Scripts stated that it “returns on average 90% of rebates we negotiate with drug manufacturers directly to our clients.”

But as I see it, it’s less important to know that the PBMs have accurately reported all of the rebates, fees, and other monies. Despite any financial fuzziness, both companies sent the same message: we’ll be OK not handling rebate dollars. They were clearly trying to calm investors nervous about policy changes that could disrupt the drug channel.

As I see it, both PBMs are suggesting that they could thrive in A System Without Rebates: The Drug Channels Negotiated Discounts Model.

THE CURIOUS INCIDENT OF THE REBATE THAT WAS NOT RETAINED

Along with its financial results, CVS Health issued the following white paper: Current and New Approaches to Making Drugs More Affordable. It’s a dense and complex marketing document that crams a lot into its 11 pages.

The paper provides unprecedented insight into previously unknown data about rebates and drug spending by CVS Health’s plan sponsor clients. Here’s my summary of the data that appear on page 6:

[Click to Enlarge]

Observations:
  • Gross spending on brand-name drugs grew by $222 per person (+37%), from $608.90 in 2011 to $831.30 in 2017. But when we account for rebates, spending grew by only $46 per person (+9%). That’s an average growth rate of just 1% per year from 2011 to 2017.
  • Rebates grew from 13% of gross spending in 2011 to 31% in 2017. 
  • Given the growth in gross spending, average rebate dollars per commercial life more than tripled, from $78 in 2011 to $254 in 2017. That’s an average growth rate of 22% per year. The value of rebates in 2017 amounted to 44% of net drug spending.
  • The share of rebates retained by CVS Health dropped sharply, from 27% in 2011 to 6% in 2017. As we note above, the rate is projected to be 2% in 2018. The rebate dollars that CVS retained per commercial life fluctuated within a fairly narrow band: $15 to $26 throughout this period.
BUBBLE BUDDY, I PRESUME

Ladies and gentlemen, you are looking at a classic gross-to-net bubble—an ever-growing pile of money between a manufacturer’s list price for a drug and the net price after rebates.

In the CVS Health data, list prices—reflected by the gross spending figures—rose sharply. But the net prices after rebates—and, by extension, manufacturers’ revenues—increased by just 1% per year.

This is precisely the reverse insurance problem at the core of our current rebate system:
Beneficiaries taking medicines for chronic illnesses in such highly competitive therapeutic categories as asthma and diabetes generate the majority of manufacturer rebate payments.
These funds are used primarily to offset total plan costs for the employer and plan, not to offset the costs incurred by the patients whose prescription activity generates those rebates.

Beneficiaries with prescription drug deductibles and coinsurance face higher out-of-pocket costs. That’s because their coinsurance amounts and payments within the deductible phase are based on a drug’s undiscounted, pre-rebate list price.
CVS Health’s plan sponsor clients captured the additional rebate dollars and redirected those funds to offsetting plan costs or premiums. I highlighted this trend in Employers Are Getting More Rebates Than Ever—But Sharing Little With Their Employees.

In practice, rebate funds are paid long after the prescription has been dispensed, so that a big rebate check can not necessarily be attributed to the prescriptions that generated the funds. Using the data above, a plan with $100 million in brand-name prescription spending would get a rebate check for $31 million.

On last week’s earnings call, CVS Health CEO Merlo defended this practice:
“Our clients, employers and insurers use rebates to lower the costs of providing insurance for their employees and members. And typically this means investing in insurance premiums to keep growth for all members to a minimum.”
That’s cold comfort for patients who need drugs for asthma, diabetes, and other chronic diseases, but have benefit designs with deductibles, coinsurance, and copay accumulators.

ELEMENTARY, MY DEAR PATRICK

Point-of-sale rebates are one possible solution to this problem. To his credit, Merlo did say that CVS Health tells plans that “at a minimum let's apply some of those rebates at the point of sale, while people are in their deductible phase.”

Alas, plans very rarely use these benefit designs. In UnitedHealthcare’s Point-of-Sale Rebate Announcement: What’s Next?, I asked the following questions about rebates:
  1. Is it fair for an insurance company to get a rebate on a drug for which the patient paid full retail price?
  2. Where have the rebates been going before now?
  3. How much of the manufacturers’ rebates is being shared with patients?
  4. How much is retained by PBMs and plan sponsors?
  5. Why don’t more plans pass through drug discounts?
Thanks to CVS Health, we now have answers to questions 2 and 5: Nearly all of the rebate dollars flow to plan sponsors, not to the PBM. Now that the PBMs have come clean, it’s time for employers and health plans to be much more transparent about what they do with the tens of billions collected from manufacturers. Otherwise, as I suggested in March, they should pass through these rebates to patients at the point of sale.

As SpongeLock Holmes always says: When you have eliminated the impossible, whatever remains, however improbable, must be the truth.

P.S. For those who don’t know, one of SpongeBob SquarePants’ favorite pastimes is “blowing soap bubbles into elaborate shapes.” Hence, Mr. SquarePants is the honorary mascot of the gross-to-net bubble.

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