Posted: 17 Apr. 2019 7 min. read

With drug rebates on the chopping block, stakeholders should prepare for change

By George Van Antwerp, managing director, Deloitte Consulting LLP

Early this year, the US Department of Health and Human Services (HHS) proposed eliminating safe-harbor protections for the rebates drug manufacturers pay to pharmacy benefit managers (PBMs), Medicare Part D plans, and Medicaid managed care organizations. At the same time, HHS proposed two new safe-harbor protections for some point-of-sale (POS) price reductions on prescription drugs and certain PBM service fees.

The proposed rules, which are slated to go into effect on January 1, 2020, would not affect commercial health plans…at least not yet. On February 1, HHS Secretary Alex Azar urged Congress to pass its proposal “immediately” and to draft legislation that would extend it to the commercial drug market. In March, Sen. Mike Braun (R-Ind.) introduced the Drug Price Transparency Act (S. 657), which would extend the rebate prohibition to the commercial market.

With the rule prohibiting rebates in Part D still under review, and more than 25,000 comments submitted, Part D plans have to create their bids for CY2020, which are due in June. On April 4th, the US Centers for Medicare and Medicaid Services (CMS) announced it would let Part D plans test a new payment model that would reduce the risk of large gains or losses through risk corridors under a two-year demonstration. Additionally, CMS provided clarity that Part D plans should submit bids “in a form and manner that is consistent with the Anti-Kickback Statute law and regulations in effect as of the bid submission deadline, including, for the purposes of bid development, the treatment of manufacturer rebates per our existing rules and guidance related to Direct and Indirect Remuneration.” At the same time, during an April 9 hearing before the Senate Finance Committee, executives representing six large PBMs warned that eliminating rebates could lead to higher drug prices for seniors and argued that changing the business model by January 1, 2020, was not realistic.

While we have been tracking this issue closely over the past several months, it continues to evolve. In my October blog, The future of drug rebates: Are they to be or not to be?, I explained how pharmaceutical manufacturers use rebates when establishing list prices for their products. In November, my colleague Joe Coppola outlined some of the alternative models that could emerge if safe-harbor protections are eliminated. This third installment of our drug-rebate blog series examines how the proposed changes could affect various stakeholders.

At the heart of the debate is whether drug prices are artificially high because of the rebate system, or whether this system helps to bring drug prices down. Critics argue that rebates are to blame for high drug prices, while PBMs and health plans contend that rebates are an important tool in keeping rising drug costs in check. Others note that the rebate system existed and worked when plan designs were based on flat-dollar copayments. However, now that health plans often tie patient out-of-pocket costs (e.g., deductibles, coinsurance) to list prices for drugs, this might no longer be a practical solution.

Here’s what we know…

Regardless of how rebate reform rolls out, most stakeholders will be affected. At this point, there are many questions and few detailed answers. If HHS’s proposed rule is finalized and survives any legal challenges that arise, we can make several reasonable assumptions:

  • Changes to the rebate model will begin with Medicare Part D and Medicaid managed care. Legislation, if enacted, could extend the changes to the commercial market.
  • Rebates will likely transition to upfront POS discounts for consumers that take place at the pharmacy.
  • Premiums are likely to increase for all affected lines of business.
  • Pharmaceutical manufacturers could face market pressure to reduce list prices to reflect current net prices.
  • Patients who take multiple brand and/or specialty drugs could see lower out-of-pocket costs.
  • PBMs will likely be affected but will survive.

Here’s what we don’t know…

A big question surrounding HHS’s proposal is whether it will help achieve the administration’s goal of reducing list prices for prescription drugs…and at what cost? Here are a few questions we can’t answer until we have more information:

  • How quickly will changes in Medicare and Medicaid spill over into the commercial markets?
  • Will pharmaceutical manufacturers and/or other entities have to maintain multiple price lists? If so, how will they be managed? And, how will this reimbursement be managed and paid at the POS?
  • Will changing the rebate model change the focus on value-based or outcome-based contracting around pharmaceuticals?
  • How much are premiums likely to increase?
  • Could the proposed changes really go into effect as soon as January 1, 2020 (as proposed by HHS)?
  • Will net prices be lower, and how will transparency influence future drug pricing?

Stakeholders will likely have to prepare for change in different ways.

Here is how we think various stakeholders could be affected by the elimination of the drug-rebate model:

  • Pharmaceutical manufacturers: Drug makers could face new operational challenges if they need to maintain a rebate-pricing strategy in the commercial market while developing a net-pricing strategy for Medicare and Medicaid. Pharmaceutical manufacturers will likely need to determine how much to change list pricing without rebates and/or whether to launch authorized generics. They might also have to build new connectivity with whichever third-party is responsible for paying the POS discounts (if not the PBMs). We would also expect to see an increased focus on competitive transparency and pricing analysis and greater emphasis on the value and efficacy of new therapies. This should also drive more focus on the comparative effectiveness of therapies.
  • PBMs: The transition away from rebates as a source of revenue will accelerate if the HHS proposal is finalized, and PBMs might need to redefine the services they offer. As brand prices are adjusted, PBMs will likely experience a drop in topline revenue and could see plan sponsors shift plan designs back to flat dollar copays. They will also likely need to re-contract with plan sponsors, especially around rebate guarantees, and might need to adjust the service fees they now charge pharmaceutical manufacturers.
  • Retail pharmacies: Retailers are likely to see a drop in topline revenue as brand prices are adjusted. Pharmacists might also need to spend more time explaining the new pricing model to consumers, and there could be changes to direct and indirect remuneration (DIR) from PBMs as rebates are replaced by POS discounts. Ultimately, the biggest impact will likely be the establishment of new payment mechanisms so that discounts can be received at the POS from a potentially new third-party.
  • Medicare and Medicaid plans: Retrospective rebates would likely be replaced by POS discounts. Given that copayments are already low in Medicaid, we anticipate supplemental rebates will be eliminated. By contrast, Medicare beneficiaries could see higher premiums as POS discounts show up as lower cost sharing instead of lower premiums. A more transparent model with the elimination (or reduction) of rebates and DIR fees will change PBM pricing and require new contracts especially around rebate guarantees.
  • Commercial health plans: We probably won’t see any immediate impact unless legislation is enacted to expand the rebate change to the commercial sector. However, we do expect health plans will start to use more POS rebates in anticipation of a future change. As with Medicare and Medicaid plans, commercial health plans also could see higher PBM fees and need to re-contract especially around rebate guarantees.
  • Self-funded employers: Self-funded employers won’t experience much of an impact if changes are limited to Medicare and Medicaid. However, we would expect employers to move to POS rebates so that they are prepared if Congress acts to eliminate rebates in the commercial sector. Self-funded employers could be asked to pay higher PBMs fees under a more transparent PBM model, and PBMs would need to re-contract with employers especially around rebate guarantees.
  • Consumers: People covered by Medicare Advantage and Medicare Part D are likely to see increased premiums. However, high-utilizers of heavily rebated brand or specialty prescription drugs, could wind up with lower total out-of-pocket expenses. The majority of consumers who fill generic drugs will not see any reduction in their out-of-pocket spending. With these changes, consumers are also likely to see increased transparency around drug prices.

Regardless of the shape the final rule takes, and the timing of the implementation, we are already seeing various stakeholders distancing themselves from drug rebates. In a letter to Office of Management and Budget Director Mick Mulvaney last fall, former House Energy and Commerce Committee Chairman Greg Walden (R-Ore.), and former Senate Finance Committee Chairman Orrin Hatch (R-Utah) noted that possible changes to the existing rebate model “could ripple across the health care sector, altering a major sector of the US economy that Americans depend upon for their health and well-being.” Depending on where you sit, this is either worrisome, long overdue, or the natural evolution of the market.


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