Posted: 16 Apr. 2019 5 min. read

Eliminating drug rebates: How might access and pricing be affected?

By Greg Reh, vice chairman, US and Global Life Sciences leader, Deloitte LLP

Pharmaceutical manufacturers—and the prices they charge for their products—are under the microscope, and changes to the existing business model could mean manufacturers will need to reconsider their market access and pricing strategies.

Last week, the Senate Finance Committee held its third hearing devoted to curbing prescription drug prices. On April 9, executives from five large pharmacy benefit managers (PBMs) were asked to explain their relationships with drug makers and their roles in negotiating prices. Witnesses suggested increased competition among drug manufacturers could help to reduce drug costs. In February, however, a group of biopharmaceutical executives told the committee that eliminating drug rebates and shifting toward a value-based drug-pricing system might be the key to reducing drug costs (see the March 5, 2019 Health Care Current).

This is a topic we’ve been tracking closely. On February 6, the US Office of Inspector General (OIG) released a proposed rule that would prevent drug manufacturers from offering rebates to PBMs under Medicare Part D and Medicaid managed care plans. The proposed rule would amend the existing safe-harbor rule that protects such discounts from anti-kickback rules. Such a change could have a significant impact on how Part D sponsors negotiate with manufacturers and on the bids they submit to the US Centers for Medicare and Medicaid Services (CMS). A final rule is expected in May and would take effect on January 1, 2020. The Part D bid submission deadline is June 3.

This change in policy could provide manufacturers with a financial incentive to reduce list prices for their products and replace rebates with point of sale discounts. Some private health plans are already establishing strategies to reduce the influence of rebates on market access by passing on rebates at the point of sale or creating new formulary types.

We don’t yet know exactly what the final rule will look like, but CMS is offering a demonstration to Part D plan sponsors that could allow them to mitigate the risk but would also require that they forego possible rewards stemming from the changes. Sometime after Part D plans submit their bids to CMS this spring, they should decide whether they’re better off under the standard risk corridors or the demonstration, which is a two-year commitment. They won’t have to make that decision until the details of the final rule are known (see news item below). Lawmakers in Congress have introduced legislation that would expand the proposed changes to the commercial insurance space.

What role do rebates play in drug pricing?

Under existing rules, drug rebates are permissible because the Anti-Kickback Statute (and related regulations) includes a legal exception, or safe harbor. Drug manufacturers that offer lower net prices through rebates often get preferential formulary positioning from the PBMs.

The Deloitte Center for Health Solutions recently released a paper that looks into how recent and expected changes could impact market access. As my colleague George van Antwerp noted in a blog last fall, the impact that the rebate model has on drug prices is open for interpretation. Are drug prices artificially high because of the rebate system, or are rebates an effective tool for keeping drug prices lower?

Four strategies for helping ensure market access in a post-rebate world

In a rebate-less world, companies could be forced to compete more directly on value. This might require a shift in strategy toward more robust evidence generation, the development of support services, and greater competition in value-based contracts (VBCs). Here are a few ideas drug manufacturers might consider as this existing model begins to evolve:

  1. Use real-world evidence (RWE) to highlight clinical outcomes. Drug manufacturers might want to evaluate additional outcomes to demonstrate superiority in class, improvements in standard of care, or efficacy within specific patient sub-populations. As value-based care contracts become more common, manufacturers should demonstrate the value of new products or product classes. Such contracts might also help to mitigate the clinical uncertainty of a high-cost treatment.
  2. Differentiate products based on patient preference Patient convenience, or strategies that help boost adherence, might help drug manufacturers differentiate their products.
  3. Expand patient-support services Most (if not all) companies offer some type of patient support. But they should consider making information available to patients to help them understand their illnesses, manage their medications, and navigate prior authorization requirements (particularly in specialty areas).
  4. Consider using targeted therapeutics. Manufacturers might try to reduce the impact on health plans and other payers by identifying target populations that receive the maximum benefit from a therapy.

Regulatory changes could accelerate use of value-based contracts

Over the past few years, we have seen an uptick in VBCs in several therapeutic categories. However, some barriers appear to be holding back widespread adoption. Some contracts have been abandoned before completion due to the amount of work required to design and execute them. While VBCs haven’t fully yet taken root, we expect the evolving regulatory environment could change that. The Deloitte Center for Health Solutions recently analyzed branded portfolios of the 19 largest biopharma companies (by revenue). From that list, we found 16 drugs that are (or were) included in a VBC.1

To explore VBC challenges, we assembled 30 leaders from health plans, health systems, pharmaceutical manufacturers, and patient organizations. They all agreed that these contracts would be more likely to gain widespread adoption if all participants had more of a financial stake in the failures and successes of the arrangements. These respondents also said that many organizations lack the necessary infrastructure and resources to efficiently collect, link, and analyze the necessary patient data to support VBCs. This hurdle can make the implementation of such contracts too labor-intensive or lead to contract designs that are based on what can be measured, rather than what should be measured.

To achieve the necessary infrastructure needed to overcome industry-wide data challenges, stakeholders from across the health care industry should work together to develop a shared utility-like platform that can drive the necessary efficiencies and economies of scale to support VBCs. The advances in cloud-based technology, automation, analytics, and security make it possible to create a trusted, secure environment to design and implement VBCs. It can also bring transparency and objectivity into the programs and help break through barriers that exist today—especially around managing and analyzing complex real-world data sources.

There is little doubt that drug pricing will continue to be a key focus for Congress as it advances policies outlined in the Blueprint to Lower Drug Prices and Reduce Out-of-Pocket Costs (see the January 8, 2019 My Take). Manufacturers and PBMs will likely need to adjust their business models…and they might have little time to do it.

1. PhRMA, VALUE-BASED CONTRACTS: 2009–Q1 2018, April 5, 2018


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Greg Reh

Greg Reh

Deloitte Global Life Sciences & Health Care Leader

Greg serves as the Deloitte Global Life Sciences & Health Care Industry Leader. In this role, he advises life sciences and health care clients and practice leaders within Deloitte’s global network; and is responsible for the overall industry group that conducts research and provides consulting, advisory, tax and audit services to clients in the industry. The global life sciences and health care industry group is comprised of over 20,000 colleagues in more than 90 countries that work with pharmaceutical, biotech, medtech, payer, provider and government clients. Greg also leads Deloitte’s relationship with one the world’s largest healthcare companies, which entails enabling and coordinating client teams around the world. Prior to his current roles, he served as the US life sciences leader; and as the global life sciences leader. Greg has more than 25 years of experience which includes working with multinational pharmaceutical, biotechnology, and chemical manufacturing organizations where he led consulting engagements in support of regulatory, clinical, commercial and manufacturing operations. His engagements focused on technology strategy and solution development; business-technology enabled transformation and the management of change. Prior to his consulting career Greg held positions at a government research lab, where he led teams in the design and development of life support devices; and was a lecturer at the University of Pennsylvania. Greg holds an MS from the University of Pennsylvania, and a BSME from Drexel University.