How PBMs will fare without rebates

The Trump administration’s recent proposal to eliminate rebates between drug manufacturers and pharmacy benefit managers (PBMs) is not a big surprise to those who have been paying attention to the rhetoric of CMS and HHS officials, but the impact of swapping rebates for direct discounts is still a big question.

The proposal takes a direct hit at a debate that has been rising as healthcare costs climb. PBMs, often referred to as the prescription drug industry’s middlemen, negotiate drug prices between manufacturers and health insurance providers. The savings, or rebates, are pocketed by PBMs or passed directly onto clients.

The opaque system has brought the ire of President Trump and other agencies that argue the practice contributes to rising drug prices. The scrutiny prompted CVS Health’s PBM business to announce a new pricing model where 100 percent of rebates will be passed to plan sponsors.

CVS executives previously stated it returned 98 percent, or $300 million of rebates to clients in 2018. Rebate concerns were also noted among industry associations objecting to the $69 billion merger between CVS Health and Aetna.

CMS’ proposed rule excludes rebates on prescription drugs paid by manufacturers to PBMs, Part D plans and Medicaid managed care organizations from safe harbor protection under the Anti-Kickback Statute, thereby encouraging manufacturers to pass those savings directly on to patients.

It has been met with sharp criticism from the PBM side of the industry, as well as associations citing concerns about costs for patients.

PBM reaction

Specifically, the proposal has put the PBM space on the defense.

Express Scripts, one of the nation’s largest PBMs, released a drug trend report following the proposal, noting it saved its client $45 billion in 2018. At the same time, it delivered a 25-year low drug trend of 0.4 percent across employer-sponsored plans. The company also pointed out that list price inflation was 7.3 percent for the most commonly used traditional brand medications in 2018, but drug costs dropped 6.5 percent for Express Scripts’ employer-sponsored plans, 5.5 percent for Medicare plans and 5.6 percent for exchange plans.

AscellaHealth, a national PBM, sees the proposed rule as a “wake-up call” to engage with policymakers, CEO and President Dea Belazi told HealthExec.

“Clearly the lobbyists for all the interested stakeholders have created mass confusion and the ‘government by tweet’ model hasn’t helped matters much,” he said.

When asked about his reaction to the proposal, Belazi said he was in “disbelief that such a policy shift would be considered to be a good idea, let alone actually reduce costs.”

“Clearly, policymakers were not as well informed as we might hope,” he told HealthExec.

Industry associations also took issue with how they are portrayed in the healthcare space. HHS Secretary Alex Azar has repeatedly cast PBMs as the middlemen in the industry, referring to rebates as a “big kickback” from drug manufacturers.

“We are not middlemen––we are your bargaining power, working hard to negotiate lower prices with drug makers to save seniors and other patients about 50 percent a year on their prescription drug and related medical costs,” Matt Eyles, president and CEO of America’s Health Insurance Plans (AHIP), said in a statement on Jan. 31. “If not for health insurance providers and PBMs, drug prices and costs would be far higher.”

Other groups agree costs could rise as a result of the proposal.

“We are concerned … that eliminating the long-standing safe harbor protection for drug manufacturer rebates to PBMs would increase drug costs and force Medicare beneficiaries to pay higher premiums and out-of-pocket expenses, unless there is a viable alternative for PBMs to negotiate on behalf of beneficiaries,” Pharmaceutical Care Management Association (PCMA) President and CEO JC Scott said in a statement.

In response to the proposed rule, which PBMs appear to be taking as an assault on business, PCMA launched a new campaign, called OnYourRxSide, to educate how PBMs effectively save on drug costs and encourage support for the industry. The campaign argues PBMs will reduce drug costs 30 percent, or $654 billion over the next 10 years.

Rising prices

The objective of the proposed rule is to lower drug prices, according to CMS. While many argue the rule, if finalized, would actually raise drug prices, the issue is somewhat complex. According to a 2018 study by Altarum, PBMs have helped patients and health insurers pay less for drug prices, lowering  both government costs and premiums. However, other evidence that drug companies raise drug prices because of rebates offsets these gains attributed to rebates.

Another recent study found that rising drug costs are partially driven by price hikes by drug makers, not new innovations in the field.

How the proposed rule will impact prices is still a debate. House Speaker Nancy Pelosi (D-CA) criticized the proposal, arguing it places too much trust in pharma companies to lower prices on their own.

“The Trump Administration’s rebate proposal puts the majority of Medicare beneficiaries at risk of higher premiums and total out-of-pocket costs, and puts the American taxpayer on the hook for hundreds of billions of dollars,” she said in a statement following the proposal. “Experience tells us that merely trusting Big Pharma to lower its drug prices for consumers is not a solution, it’s a prescription for more of the same.”

Input from lawmakers to reduce some of the impacts of the rule is one area of hope for PBMs.

“We are hopeful there is a middle ground that actually strengthens the industry and allows a platform for a dialogue,” Belazi told HealthExec. “We hope that the current legislative proposals modify the administrations ruling to allow this middle ground to really make a difference for American consumers.”

The rule also relies on drugmakers to lower prices in lieu of rebates. If they don’t change their behavior, the proposal will raise drug benefit costs for the government by $34.8 billion to $196 .1billion over 10 years and increase costs to beneficiaries, according to the proposed rule.

It could also “reduce the competitive advantage that big PBMs/PDPs have, all else equal, as they will no longer be able to subsidize premium bids with rebate dollars,” according to an analyst note from Jefferies.

Impacts

CMS has also admitted it does not know all the impacts of the rule, if finalized.

"It is difficult to predict the full extent of the transfers created by this proposed rule in the absence of information about strategic behavior changes by manufactures and Part D plan sponsors in response to this rule,” the proposal reads.

However, CMS’ Office of the Actuary and two independent actuarial firms are working with Part D plan bids to assess the potential effects on premiums and out-of-pocket costs. CMS is also seeking feedback from stakeholders.

Amid the debate about the role of PBMs, the nation’s second largest health insurer, Anthem, announced plans to launch its own PBM. Anthem announced the decision in late 2017, citing a pricing disagreement with Express Scripts, and has since pushed up the date of its launch to the second quarter of 2019.

Health insurers are also attempting to measure the impact of the rule.

“Our perspective is that, that would raise premiums for the broader populations. And that in of itself, I think, creates some disruption in the marketplace that we have to think through,” Brian Kane, chief financial officer of Humana, said during the company’s end-of-year earnings call on Feb. 6. “… And so the question of what kind of incentive that creates for PBMs to negotiate those discounts is something that I think the industry and policymakers need to think through.”

The proposal will likely have an impact financially and beyond for PBMs.

“For AscellaHealth, it really isn’t a big economic impact as much as it takes away attention from what we really believe is the big issue––how do we help patients and payers in the brave new world of drug pricing dominated by high cost specialty drugs?” Belazi told HealthExec.