Today, we shed light on one crucial aspect of the current rebate system: how employer-sponsored health plans access the billions of dollars in manufacturer rebates that are negotiated by their pharmacy benefit managers (PBMs). For this analysis, we rely on the Pharmacy Benefit Management Institute’s (PBMI) excellent new reports.
As you will see, employers are receiving an increasing share of the rebate money collected by pharmacy benefit managers. However, employers’ rebate agreements with PBMs vary widely. Important differences also exist in rebate arrangements for traditional vs. specialty drugs.
Despite these data, we still don’t know how much of these rebates offset out-of-pocket costs for the patients whose prescriptions generated the rebate funds. As I warned last August: The focus of rebate reform will turn from PBMs to the plan sponsors that are absorbing rebate dollars.
As always, I encourage you to review the original source material for yourself. Both PBMI reports are free with registration on its site. Here are the report links:
The PBMI surveys collect data from employers, not PBMs. The 2018 drug benefits report includes responses from 273 employer-sponsored plans representing an estimated 63 million covered lives. The 2019 specialty benefits report includes responses from 306 employer-sponsored plans representing an estimated 86 million covered lives. The PBMI data provide us with the only available public information about the nature of the relationships between PBMs and their employer-based health plan clients.
Just so you know, I was on the 2018 Trends in Drug Benefit Design 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.
For more on PBMs and the rebate system, see Chapters 5 and 9 of our new 2019 Economic Report on U.S. Pharmacies and Pharmacy Benefit Managers.
A MAR-VELL OF NEGOTIATION
The PBMI data reveal that different plan sponsors have varying preferences for how the value of rebates is reflected in their pharmacy benefit spending.
Some employers choose not to have manufacturer rebates passed through by their PBM, though this option has become less common. For 2018, 17% of employers reported receiving none of the rebates on traditional drugs that manufacturers provide to PBMs. For specialty drugs, 12% of employers reported receiving no rebates in 2018.
For these employers, the discounts provided by rebates are presumably factored into the prescription prices charged by the PBM. The share of employers that do not receive rebates has declined significantly in recent years. For 2014, about one-third of employers reported receiving no rebates for traditional and specialty drugs.
HIGHER, FURTHER, FASTER
The two charts below summarize PBMs’ 2018 rebate relationships with their employer clients for traditional and specialty drugs. To highlight changes over time, we include the responses from 2014, the earliest year for which with comparable figures are available.
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Among employers receiving rebates, rebate agreements with PBMs vary considerably. Key observations:
- More employers are receiving 100% of the rebates negotiated by their PBM. For larger employers in 2018, 100% rebate pass-through (shown in the blue bars) was the most common rebate arrangement. Both figures have increased significantly since 2014. For 2018, smaller employers were less likely to receive 100% of the rebates for traditional and specialty drugs. This approach was still the most common arrangement for traditional drugs and for larger employers regarding specialty drugs.
- Larger employers were more likely to receive guaranteed minimum payments with 100% rebate pass-through. Among the employers that received 100% of rebates, 59% of larger employers had a guaranteed minimum rebate amount for traditional drugs and 47% did for specialty drugs. (These figures are not shown in the charts.) Only 49% of smaller employers had a guaranteed minimum rebate amount for traditional drugs and only 16% did for specialty drugs.
I discuss the dysfunctional consequences of rebate guarantees in the “problem 2” section of Express Scripts Launches a New Formulary for a World Without Rebates. Will Plan Sponsors and Drug Makers Play Along?
- A significant share of employers received a percentage share of rebates. Employers report receiving a percentage share of rebates—with or without a minimum guaranteed amount—to be the second most common arrangement for both traditional and specialty drugs. Note that these survey data do not quantify the average percentage of rebates that employers received. Disclosures by the major PBMs suggest that more than 95% of the dollar value of rebates gets passed back to plan sponsors.
SWALLOWED (BY GOOSE?)
- Smaller employers rely more on flat guaranteed rebate per script. Larger employers have moved away from flat dollar-per-script rebate guarantees (shown in the green bars). The share of larger employers using this technique has dropped sharply from 2014 to 2018 for both traditional and specialty drugs. Larger employers have mostly abandoned this approach for traditional drugs, with only 7% choosing flat guaranteed amounts in 2018. By contrast, 17% of smaller employers received a fixed dollar amount for traditional drugs in 2018.
Rebates can reduce a third-party payer’s net prescription costs as funds flow through the channel. Health plans and PBMs argue that “rebates lower costs for patients.” But that’s only partially accurate.
My Wall Street Journal op-ed (Don’t Blame Drug Prices on ‘Big Pharma’) emphasizes that plans may choose not to use rebates to lower the out-of-pocket costs for the patient whose prescription generated the rebates. See also my mathematical example in How Health Plans Profit—and Patients Lose—From Highly-Rebated Brand-Name Drugs.
it may be very difficult to dislodge or disrupt the existing system. One significant barrier to change is health plans and employers, both of which use ever-growing rebate dollars to offset overall plan costs. Last year, PBMI found that only 4% of employers reported that rebates were used to reduce member out-of-pocket costs at the point of sale. (See Employers Are Getting More Rebates Than Ever—But Sharing Little With Their Employees.) Unfortunately, PBMI chose not to update this insightful question for 2019.
In my @DrugChannels tweet yesterday, I highlighted PBMI data showing that employers are concerned about the gross-to-net bubble and want an alternative to rebates to manage drug costs. The battle over rebate reform is just getting started. Let’s hope it doesn’t last as long as the Kree–Skrull War.
P.S. Captain Marvel is a super fun movie. If you used the Internet in the 1990s, you will absolutely love its fantastic throwback website. Excelsior!