Clients often ask about the future of rebates, which have been used by pharmacy benefits managers, health plans and plan sponsors to partially offset the cost of prescription drugs. In the past, rebates were viewed as a desirable financial component of the PBM pricing equation. Recently, however, rebates are viewed as a necessary evil.
Rebates are retrospective discounts off the list price of drugs that PBMs negotiate directly with drug manufacturers. PBM’s leverage their aggregate book of business and essentially threaten to move market share away from one manufacturer to a competitor in an effort to lower drug prices.
Recently, formulary drug exclusions embody this process and manufacturers are at risk of being totally excluded from coverage if they cannot get their product’s price low enough. In the early 2000s, rebates were less than 6% of drug spend versus 25% of drug spend today. Did drug manufacturers simply dip into their pockets by 20% accepting much lower net prices today than in years past? Of course not. Critics argue that manufacturer list price increases are in part driven by PBMs demand for larger rebates.
This is a large part of the gross to net conundrum, which is largely driving the pressure to eliminate rebates. Adam Fein, CEO of Drug Channels Institute perfectly described this as “the ever-growing pile of money between a manufacturer’s list price for a drug and the net price after rebates and other reductions.”
Data supports that between 2013-2015 net prices (prices paid by PBMs/Plan Sponsors) trended at 3-5% while gross price (price paid by members) trended at 11-15%. Further, IQVIA pegs the gross to net value at a staggering $153 billion for 2017. Bottom line, drug manufacturers are passing on huge list price increases to consumers and in turn paying rebates sometimes as high or greater than 50% of the list price to PBMs which may or may not be passed on to Plan Sponsors. Members in high deductible health plans pay the list price of a drug, however, that price has zero correlation with the true net cost of the drug after rebates (which may not even be passed on to the employer). The confluence of significant list price increases, the growth of HDHP’s and lightning bolt stories such as the 500% price increase for the EpiPen are a tremendous amount of pressure on the rebating system.
Recently, Secretary of Health and Human Services Alex Azar suggested moving away from rebates. “Such a system’s incentives, detached from these artificial list prices would likely serve patients far better,” he said. Even Pfizer’s CEO Ian Reed agreed, saying “we are going to go to a marketplace where we don’t have rebates.” That’s a lot of firepower behind the anti-rebate message.
A system without rebates would require significant fundamental change to the foundational economics of the drug ecosystem that just about all stakeholders rely on. Such a dramatic change would take years to implement and impact PBM pricing as we know it today.
Here’s a little-known fact: employers can choose to have their PBM administer a plan which has rebates applied at the point of sale to lower the drugs cost for the member. It‘s important to note that the PBM will likely seek additional fees as it loses the time value of money on the rebate dollars. If accounted for correctly, point of sale rebates can successfully align member incentives with plan incentives.
Looking ahead, there are potential scenarios that may evolve over time in a rebate free market. But one thing is certain: it’s hard to believe that PBMs will happily swap rebating for a transparent pricing structure.
Some potential options may include: dramatically deeper discounts that would vary by formulary and essentially replace rebates, (however, technology to administer this is not currently available), incremental drug/plan specific discounts beyond the typical PBM pricing (the delivery of such discounts is challenging), some type of at risk or risk sharing contracts (although PBMs traditionally don’t like taking on risk) or pay for performance where payments to PBMs increase if certain predefined metrics are hit (which will likely create less options for employers as PBMs would likely mandate certain coverage rules).
Those most at risk are health plans, third party administrators or other intermediaries that rely on rebates paid by PBM’s as a significant source of revenue. While the rebate bubble will eventually pop, the reality is that when it does it will be a seismic shift in PBM pricing that will take years to implement.