Posted: 14 Nov. 2018 5 min. read

In the absence of drug rebates, new alternatives are likely to emerge

By Joe Coppola, Commercial Ops Practice Leader, Life Sciences,Deloitte Consulting LLP.

The administration’s efforts to reduce prescription drug spending have put drug rebates in the spotlight. If rebates lose their safe-harbor status—as my colleague George Van Antwerp outlined in his recent blog—other models are likely to emerge to replace them. At least initially, any change to the rebate model is likely to be limited to Medicare Part D, but subsequent changes to other lines of business could follow. Eliminating the rebate model may be disruptive to stakeholders, but we think it could take at least two years to fully transition away from it in Part D. How it would be implemented in other lines of business is less certain.

Under existing rules, drug rebates are permissible because the anti-kickback statue (and related regulations) includes a legal exception, or safe harbor. Removing this protection could lead to negotiations of discounts, in place of rebates, for prescription drugs. Medicare Part D rebates, as a result, could no longer be protected under the anti-kickback safe harbors.

We do not expect to see any operational changes next year given that many 2019 contracts between pharmaceutical manufacturers and pharmacy benefit managers (PBMs) have already been finalized. For that reason, implementation of any new rules likely would not start until 2020 or later.

We would expect the elimination of safe-harbor protections and drug rebates to prompt stakeholders to consider alternatives such as point-of-sale (POS) rebates and negotiated discount price models. Here’s how those two alternatives would likely play out:

Rebate alternative #1: Point-of-sale (POS) rebates

Of the two models we see emerging, the POS rebate model would likely be easier to implement. Point-of-sale rebates are generated when the consumer fills a prescription. A portion of the negotiated rebate between the manufacturer and the PBM/health plan is used to offset the consumer’s out-of-pocket expense at the pharmacy. This could take the form of lowering the purchase price if the patient has not met the deductible, or it could be used to reduce the base price that is used to determine coinsurance amounts.

Would the POS model change the market incentives and reduce the overall growth in drug spend?

The answer may largely depends on how much of the rebate is passed on to the patient. If 100 percent of rebate dollars went to lowering a patient’s out-of-pocket spending, then the POS rebate model could help meet the administration’s policy goals. However, rebates are likely to be more than the patient’s out-of-pocket exposure, especially when the patient has exceeded a deductible, is beyond his or her out-of-pocket limit, or is in the catastrophic phase of the Part D benefit.

Rebates often exceed the patient’s maximum out-of-pocket limit during the Part D coverage and catastrophic phases. In commercial plans, patients can reach their annual out-of-pocket limit, yet continue to fill prescriptions that have a rebate linked to them.

The portion of the rebate that is not passed on to the patient will likely continue to be split between the PBM and the plan sponsor where it could be applied to reduce the consumer’s health plan premium. This dynamic could continue today’s market incentive where higher list prices translate to larger rebates to the PBM and the plan sponsor.

For this reason, we do not see the POS rebate model as a viable long-term solution, although it could provide short-term relief to patients. But if list prices continue to increase due to the remaining rebated-based market incentives, the patient’s out-of-pocket exposure could eventually return to today’s levels.

Rebate alternative #2: Negotiated discount price

Under this model, manufacturers would negotiate discount prices directly with PBMs and plan sponsors. This discounted price would then be the basis for future out-of-pocket cost calculations for patients, and future reimbursement transactions. Federal regulators would likely need to work with stakeholders to determine exactly how this model would work.

From our perspective, pharmacies would likely continue to acquire products from wholesalers and distributors using today’s list price. PBMs and plan sponsors would then pay the pharmacies based on the negotiated discount price, which would be less than their acquisition cost.

Pharmacies would need a new reimbursement model to make up the difference between what they paid and how much they receive from PBMs and plan sponsors. This model might look similar to the group purchasing organization (GPO) chargeback model that is used for physician-acquired products covered under the Part A and Part B medical benefits. Although the administration’s initial focus is on Part D, we would expect to see an industry-led effort to transition to a similar model on the commercial side if this change is enacted.

Five questions we have about how the market would work with a discount model:

  1. In the absence of rebates, what incentives would PBMs have to aggressively negotiate with manufacturers? Rebates provide PBMs with a financial incentive to aggressively negotiate lower drug net prices. Will this incentive still exist if PBMs no longer share in the negotiated savings? PBMs still provide valuable services to the industry, but how will they get paid for them?
  2. How will health plans, PBMs, and pharmacies be reimbursed? Will the negotiated price pass through from the health plan to the pharmacy, or will some form of spread pricing remain between the entities? Today, health plans pay the PBMs slightly more than the PBMs pay the pharmacies. A pass-through reimbursement model could mean lower revenue for PBMs.
  3. Will a new form of refund or “chargeback” transaction emerge from this model? The supply chain between the manufacturer and the pharmacy will likely continue to be based on a common list price (i.e., WAC). If so, pharmacies could be paid less than what they paid for the product. If this happened, the pharmacy might need to ask for a refund from the manufacturer for every prescription.
  4. What role will the government play in developing the new model? If the government expects the industry to develop the new models, this could take some time. If the administration takes on a proactive role in defining the rules of the road, and in designating a third party as the central processing utility, the changes could be implemented more quickly.
  5. What is the impact on value-based contracting? Removing drug rebates and transitioning to a new model could accelerate the use of value-based contracts for prescription drugs if new safe harbors address some of today’s legal and regulatory hurdles. Future value-based contracts might need to take a different form since most have been designed in the context of today’s rebate programs.

To effectively manage the increased transaction volume, and to operate in a negotiated discount price model, pharmaceutical manufacturers, PBMs, and pharmacies will likely need to invest in technology, processes, and organizational capacity. Fully transitioning to a new model might take years given that the government and industry would need to align on business requirements and process standards for Part D. Until commercial entities catch up with Part D, stakeholders might have to run two different business models, depending on the payer.

Change is coming

There will likely be more models that emerge, but the two models we discussed represent a tradeoff between (1) the level of alignment to the government’s objectives, and (2) the feasibility of implementing a new model. The POS rebate model does not fully address the government’s objectives, however, we see it as being significantly less disruptive than the negotiated discount price model. The POS rebate model could be seen as an easy political win and could provide temporary financial relief for some patients at the pharmacy. We are already seeing some PBMs and health plans offer POS-rebate pharmacy plans to their commercial and Part D members.

Regardless of the model that ultimately emerges, we believe that change is coming, and that it will have a significant impact on today’s market dynamics. Changes to pharmaceutical pricing, contracting, and reimbursement models could alter market incentives that now influence decision making among health plans, providers, and manufacturers. Removing the existing rebate model will likely require new approaches to optimize patient access to innovative therapies.


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