Dean Erhardt

The U.S. Department of Health and Human Services’ (HHS) Office of Inspector General has proposed a rule to eliminate drug rebates and prompt direct discounts for federal beneficiaries. The rule would eliminate Anti-Kickback Statute (AKS) safe harbor protection for rebates paid by drug companies to pharmacy benefit managers (PBMs), Medicare Part D plans, and Medicaid managed care plans. The rule would create a new safe harbor for drug discounts offered to patients at the point of sale and create a new safe harbor for PBM fees.  

This proposed change continues to send shockwaves across the PBM and drug manufacturer space-and has the potential to significantly disrupt the drug supply chain. If this safe harbor protection is altered and no longer encompasses manufacturer rebates, these rebates could be completely prohibited under Medicare Part D. It’s also likely that the commercial business will face considerable pricing challenges.      

Opponents of the proposal

Critics of the proposed rule claim that rebates offered to PBMs, Part D plans, and Medicaid managed care plans work to reduce drug prices. Furthermore, the change fails to offer a workable alternative for PBMs in terms of negotiating on behalf of beneficiaries. This could ultimately lead to higher drug costs, higher premiums, and higher out-of-pocket costs for federal beneficiaries. As a result, the fear is that this might ultimately have a negative impact on access to cost-effective prescription drugs.

According to insurance executives, most rebates and discounts are passed back to patients, in the form of lower patient copay’s, thereby reducing the overall cost of medications for both patients and insurers. Without this flow of cash, drug costs for patients and insurers would likely go up, not down, with premiums rising to compensate for the $29 billion paid in rebates to PBMs and insurers.

While the proposed rule is meant to lower drug prices, many organizations do not feel that it gets to the core issues. According to public comments by organizations such as PCMA, the American Benefits Council and the Medicare Rights Center, the rule does not do enough to ensure that beneficiaries would benefit from the recommended corrections and, in fact, may lead to tacit collusion by manufacturers once the results of negotiations are made public through pharmacy transactions.

In anticipation of this, a number of healthcare leaders have voiced concern about the proposed rule: America’s Health Insurance Plans (AHIP) has accused HHS of unfairly blaming insurance providers and their PBM partners for the health system’s current high prices, while CVS blames drug makers for high drug costs. In fact, CVS credits PBMs for serving as the last line of defense for the patient.

It’s also important to understand how the rule is likely to disrupt the healthcare system.

Disrupted healthcare system

The way it works now, manufacturers are incentivized to raise drug list prices in the interest of offering ever-larger rebates to PBMs in exchange for preferred placement on formularies. The argument however is that these rebates are not always used to lower patients’ out-of-pocket drug costs and inure to the benefit of either the PBM or health insurer.

The potential exists that if the proposed rule goes into effect, health insurers will likely have to raise Part D premiums because they currently use the rebates to push premiums down. That can be problematic for Part D plans because one of the main factors they compete on are low premiums.

PBMs face even more impactful disruption because they would need to determine how to transition the revenue that they are receiving now from a percentage-of-a-rebate-type contract to a fixed-fee agreement.

Hard questions on the commercial side

It’s challenging for a new drug product to succeed even with a significant rebate offer. Simple math shows PBM/payer relationships are largely driven by the total rebates collected by the PBM and then passed through to the payer/plan sponsor.

A straightforward calculation shows that total rebates = number of units x rebate per unit. Therefore, if an established product is doing a high volume with a lower rebate, it’s difficult for a new product entrant to offset the total rebate dollars, even with a higher per unit rebate.

While stakeholders struggle to address this new market upheaval, and understand how it will impact business, let’s raise a few critical questions around new products coming in at a lower net price:

•  Will it be easy for an existing product to simply match the price in order to keep market share? Conversely, will products having the most attractive cost, in combination with measurable outcomes, become the product of choice? 

• Will this drive manufacturer/payer/PBM arrangements more quickly toward value-based contracting-already an important trend-especially for those that have been slow to adopt? 

• Will branded products go the route of generic injectables, in which, at least in some cases, the pricing has dropped so low that many manufacturers have exited the space, creating a shortage in the market.

• Will this change mean drug price stabilization, or launch a race to the bottom? 

Because a value-based approach seems inevitable, now more than ever, manufacturers, payers and channel participants should take a closer look at the benefits-and challenges-of value-based contracting (VBC).

Value-based contracting

A VBC blueprint offers strategies and guidance for successful negotiations that respond to changes resulting from regulatory and market pressures to reduce cost without compromising safety and quality. 

While value-based care with value-based contracting is touted as a solution to the challenges of affordability and sustainability in today’s marketplace, the operational complexity of implementing these types of arrangements, as well as the financial risks for manufacturers, must be carefully evaluated and navigated.

Many companies simply shy away from the opportunity and forego meaningful revenues, but the key to success lies in optimizing a strategy to show the value of a product to each health plan/payer, circumventing risk, and driving optimal reimbursement.

It’s important to understand the impact of bundled payments, accountable care, comparative effectiveness research (CER), evidence-based medicine (EBM), and payments linked to performance. Complex regulatory issues must also be addressed in order to successfully negotiate value-based payment models.

Given the paradigm shift and growing calls for innovative approaches to commercialization, pricing, and reimbursement, stakeholders should seek a commercial services partner with expertise in the legal and business details surrounding commercial or government arrangements for payers. The right partners can also guide manufacturers on how to demonstrate flexibility and communicate their understanding and appreciation of stakeholder expectations.

VBC is an opportunity waiting to happen. The proposed rule should serve as a wake-up call, prompting stakeholders to seek the knowledge, expertise, and experience they need to achieve measurable results.

Dean Erhardt, President & CEO, D2 Consulting