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

Health Care Current | April 16, 2019

This weekly series explores breaking news and developments in the US health care industry, examines key issues facing life sciences and health care companies, and provides updates and insights on policy, regulatory, and legislative changes.

My Take

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.

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


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In the News

Senate Finance Committee discusses rebates, drug prices with PBMs

On April 9, the Senate Finance Committee held the third in a series of hearings about high prescription drug costs. Committee Chair Charles Grassley (R-Iowa) said that consumers have little understanding of how PBMs work.

A key area of discussion was the rationale for high drug prices. Witnesses at the hearing, all of whom represented PBMs, described what manufacturers do to maintain exclusivity by extending their patents to stave off competition from generic products and called out high prices for specialty drugs, arguing that competition among manufacturers can lower drug prices. On the question of rebates, the witnesses said they apply to about 8 percent of prescriptions and that PBMs pass most of them to payers. They added that they want to offer more of those rebates directly to patients at the point of sale and that they are open to greater transparency if the information is not made public.

Ranking Member Ron Wyden (D-Ore.) stated that he sees a lack of transparency in PBM negotiations. Wyden told the witnesses that he and Grassley had asked the US Department of Health and Human Services (HHS) to investigate “spread pricing.” This occurs when PBMs charge Medicare and Medicaid plans a certain amount for a drug, reimburse pharmacies at a lower rate, and then keep the difference. When asked if they would oppose efforts to ban spread pricing in Medicare and Medicaid, most witnesses said they would not.

During the hearing, Sen. Sherrod Brown (D-Ohio) discussed the proposed rule to exclude PBM rebates from safe-harbor protections under the Anti-Kickback Statute and expressed concern that this rule would not require manufacturers to lower drug prices, specifically for insulin, because “PBMs do not set drug prices” (see the February 5, 2019 Health Care Current).

At an earlier hearing, a witness panel comprised of drug manufacturers expressed support for eliminating drug rebates for PBMs (see the March 5, 2019 Health Care Current).

House Energy and Commerce Committee discusses insulin prices during hearing

During an April 10 hearing before the House Energy and Commerce Committee, Democratic and Republican lawmakers heard from executives from insulin-manufacturing drug companies and PBMs. This hearing followed a November report from Rep. Diana DeGette (D-Colo.), chair of the Oversight and Investigations Subcommittee, and her co-chair of the Congressional Diabetes Caucus, Rep. Tom Reed (D-N.Y.), which outlined reforms for insulin list prices.

During the hearing, Committee Chair Frank Pallone (D-N.J.) said his constituents want Congress to set list prices. The PBM witnesses defended the rebate system and argued that consumer discounts do not impact list prices. The executives also expressed concern that health insurance premiums would increase if they no longer received rebates. The president of a drug company added that his company’s position in PBM formularies would be compromised if it reduced list prices. He also disagreed with Pallone’s suggestion to eliminate PBMs. Another pharmaceutical executive expressed concern that reducing list prices would limit consumers’ access to drugs.

An executive from one drug manufacturer noted that market competition is high and drug prices have fallen. He added that his company recently released generic insulin, available at half the price of brand-name products. Efforts to address the high cost of insulin have seen bipartisan support in the House and Senate. In February, a bipartisan group of Senate Finance Committee members launched an investigation into rising prices (see the March 5, 2019 Health Care Current). On April 9, the House Ways and Means Committee unanimously approved a bill requiring manufacturers to publicly justify price spikes for existing drugs and high costs for new products.

CMS announces optional demonstration for Medicare Part D plans

In an April 5 memorandum, CMS Administrator Seema Verma announced CMS would create an optional two-year demonstration for Medicare Part D plans to ease the transition if HHS finalizes the proposed elimination of rebate safe-harbors for Part D plans. The demonstration would start on January 1, 2020, and—for Part D plans choosing to participate—would give them access to narrow risk-corridors to limit any losses or potential gains that might arise from a change in law.

Under the demonstration, if Part D plans set their bids too low and the premiums they collect do not cover their costs, the government would cover 95 percent of their losses after plans cover the first 0.5 percent. Demonstration participants would be required to sign up for both 2020 and 2021, but CMS did not say whether it would change the risk-corridors in the second year. This announcement comes after HHS proposed to eliminate safe-harbor protections for the rebates drug manufacturers pay to PBMs, Medicare Part D plans, and Medicaid managed care organizations, effective January 1, 2020 (see the February 5, 2019 Health Care Current).

(Source: CMS, Guidance Regarding Part D Bids, April 5, 2019)

CMMI considering bundled payments for post-acute care

The Center for Medicare and Medicaid Innovation (CMMI) is considering a bundled-payment model for post-acute care services, according to CMMI Director Adam Boehler. The prospective model—an alternative payment model (APM) that groups multiple services into a single episode of care—is an opportunity to improve quality and save money in post-acute care, according to Boehler. The agency has requested information and feedback from industry stakeholders on the prospective model.

Related: On April 9, CMS outlined a plan for its hospice benefit, as part of the expanded Value-Based Insurance Design (VBID) demonstration, which allows Medicare Advantage (MA) beneficiaries to opt-into palliative care and support services. This demonstration is expected to go into effect in 2021.

MedPAC proposes restructuring Medicare Part D

During its April 5 meeting, the Medicare Payment Advisory Committee (MedPAC) discussed how Congress could change the Medicare Part D benefit, specifically the catastrophic coverage gap. According to MedPAC’s analysis, this modification would prepare the system for an impending influx of high-cost specialty drugs by giving Part D plans greater liability in the coverage-gap phase and increase manufacturer discounts for high-cost drugs. The proposal would also expand benefits for enrollees who get low-income subsidies, which would further increase plans’ shares of costs for the coverage gap. MedPAC members recommend that plans pay 75 percent of drug costs for the coverage gap, with enrollees paying the rest.

According to MedPAC, if Part D plans were to take on greater risk, they would have more incentive to negotiate higher rebates for drugs that have strong market competition. However, plans that take on greater risk might increase premiums, and they might not have as much negotiating power for less-competitive drugs.

State news roundup

  • Idaho governor approves Medicaid expansion
    Idaho Governor Brad Little (R) signed a bill expanding the state’s Medicaid program to nearly 90,000 residents beginning on April 9. The voter-approved expansion extends Medicaid coverage to individuals who have incomes between 100 and 138 percent of the federal poverty level (FPL). The new law also puts a work requirement of 80 hours per month onto individuals who gained coverage through the expansion.
  • Kansas House approves Farm Bureau coverage
    The Kansas House approved a bill allowing the state Farm Bureau to offer non-Affordable Care Act (ACA)-compliant coverage. The bill includes provisions that would exempt the Farm Bureau coverage from state insurance regulations. The Farm Bureau estimates that nearly 42,000 people will enroll in coverage if the bill is signed by Governor Laura Kelly (D).
  • Maryland lawmakers pass prescription drug affordability review board
    Maryland lawmakers passed a bill creating a prescription drug affordability review board on April 8. If approved by Governor Larry Hogan (R), the board has authority to review prescription drug affordability in the state and set government payment ceilings for certain costly drugs. Several other states are pursuing similar prescription drug-affordability review boards.

Breaking Boundaries

Is food the next breakthrough drug?

Access to healthy foods has long been associated with improved health outcomes. We know that diets high in fruits and vegetables and low in saturated fats, sugar, and processed foods can help in the fight against heart disease, diabetes, and cancer. But physicians often don’t have the time (or experience) to counsel patients on maintaining healthy diets. They typically wait until a patient manifests risk factors, such as high blood pressure or high cholesterol, and then intervene with prescription medication.

Changing one’s diet is challenging. Simply encouraging patients to maintain a healthy diet is often not enough to overcome barriers like the prevalence of cheap and unhealthy food, or other hurdles such as the time needed to grocery shop and prepare healthy meals. Food insecurity—defined as a household-level economic and social condition of limited or uncertain access to adequate food—affected 40 million Americans in 2017. Food insecurity can be a better predictor of chronic illness than income, according to some studies. Food insecurity has also been associated with increased use of emergency department (ED) services, readmissions, and other health-related costs.

Recognizing the correlation between diet and health, some health care stakeholders are looking to improve access to healthy food. Some are even writing prescriptions for healthy foods or providing patients with vouchers or coupons to local food banks. Around the country, hospitals are partnering with food banks to help increase access to healthy foods in communities. The results of a large study, published in the March issue of the Journal of Nutrition Education and Behavior, showed that 72 percent of low-income families increased their food security after participating in a pediatric fruit/vegetable prescription program for several months.

One East Coast hospital’s food pantry allows clinicians to write “prescriptions” for supplemental healthy foods. In 2017, this pantry provided food to 83,288 patients and their households. California is testing a program to deliver nutritious meals to Medicaid beneficiaries who have chronic illnesses. Researchers are studying whether a healthier diet and nutrition education affects hospital readmissions and long-term care referrals among patients with congestive heart failure or Type 2 diabetes.

RELATED: To learn what Medicaid managed care organizations (MCOs) and Medicare Advantage (MA) plans are doing to address social needs (including food insecurity) among their enrollees, the Deloitte Center for Government Insights and the Deloitte Center for Health Solutions interviewed executives and leaders from 14 MCO and MA plans for the report, Addressing the social determinants of health in Medicare and Medicaid enrollees. We also interviewed officials from four states to learn how they are directly addressing the social determinants of health (SDoH) and to find out how they support the efforts among health plans operating in their states.

Our interviews revealed some promising strategies that health plans are using to address social needs among their Medicare and Medicaid enrollees. These include identifying social needs, connecting members to services through one-on-one support, establishing strong partnerships through formal contracts and value-based-care arrangements, and exploring better ways to monitor and evaluate interventions. Looking ahead, many health plans are also investing in the social needs of communities by donating money to organizations that address issues such as housing and food insecurity, funding programs and evaluations, and assessing gaps in community resources. Some health plans are considering technologies such as mobile apps and virtual care, while maintaining one-on-one support programs for high-need and high-risk members. Many health plans are also interested in adopting data platforms to share data and evaluate interventions more easily, but say they need to overcome significant technological and operational challenges before they can do so.

(Source: Sachin H. Jain, Sometimes food is the best medicine, Forbes, April 7, 2019)

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