Many policymakers think there is a drug rebate crisis, and consultants who should know better have led them astray by perpetuating a worn trope that payers are addicted to rebates. While umbrellas and rain are correlated, umbrellas do not cause rain. Yes, there are high-profile instances of payers preferring mega brands that offer large rebates, but rebates are only a means to an end. And sometimes payer preferences seem hard to explain. It is time to unpack the issues.
Net cost, not rebate
Payers will tell you that they focus on efficacy, safety, and cost. But when they say cost, they are not talking about the list price; they are typically talking about their net cost after discounts and rebates. Enter discounting problems with rebates — discounting the problems and problems with discounting.
Currently, back-end rebates are a common means to a lower net cost. They are common because that’s what manufacturers often offer and that’s what payers often accept. But they are not the only path to lower net cost. Discounts on the front end, for instance, are also used to reduce the net cost. And between the two, all else being equal, payers prefer the immediacy of the discount over the delay of the rebate.
And then there is the Walmart “everyday low price” path to lower net cost. Payers are quick to praise examples in which manufacturers offered a competitive price without discounts or rebates. Payers’ apparent enthusiasm for products with a lower wholesale acquisition cost with little to no rebate flies in the face of overly simplistic notions that payers are “addicted” to rebates.
Price protection is yet another path to lower costs. Locking in a price or slowing the rate of its inflation can also lead to a lower net cost over time. The associated savings can exceed the savings associated with a discount or rebate for a product whose price jumps substantially during the life of a contract.
Share considerations
Those who come to terms with payers’ focus on net cost can still be confused when a payer opts to stick with a contract for a dominant brand with a higher net cost. Often, a brand with dominant market share will use rebates and/or discounts to maintain dominance, and its dominance affords the manufacturer the ability to offer rich price concessions. In these reinforcing loops, payers help successful brands succeed — not because they are addicted to rebate checks but because they can’t walk away from the savings these contracts afford them. Breaking a contract with an 800-pound-gorilla product would result in far greater losses than could be offset by switching to a small-footprint product with what appears at first blush to offer a lower acquisition cost.
Payers have a financial incentive to stay the course and prefer dominant brands that are approaching loss of exclusivity. When less-costly multisource generics become available, payers can easily shift utilization to achieve vast savings. The smaller short-term savings achievable by prematurely switching to brands with a lower net cost can erode these much larger future savings. The first-mover advantage is alive and well, and late entrant me-too products with no share at launch may find it difficult to achieve a foothold even with a lower net cost — a case in point of the importance of share.
Portfolio considerations
Some casual observers are flummoxed when payers prefer a small brand with a comparable net cost and no significant clinical advantages. This happens when manufacturers with larger portfolios sweeten the deal by offering portfolio contracts that benefit their smaller brands. Such portfolio offers will resonate with payers only if one or more dominant brands are in the mix. So, aggregate utilization is once again the underlying driver.
Dr. Theodore Woodward, the Nobel prize nominee, would apparently say to interns, “When you hear hoofbeats, think of horses, not zebras.” In other words, look for a common explanation rather than a low-probability cause. When you see payers make difficult-to-explain access decisions, think of portfolio contracting — especially when the manufacturer that benefits from it is large.
Expensive savings
The bottom line is that payers are looking for opportunities to lower their costs. If a payer prefers a product with a rebate, it is not because it needs or wants the rebate; it is because that’s simply a way to a lower net cost. If you give a payer an alternative path with less resistance or greater return, the payer will take it. And while some access decisions may seem perplexing to some, they are, in fact, quite rational.
Manufacturers are sometimes confused when payers reject their seemingly lower-cost products and say, “I can’t afford your savings.” When this happens, they are unaware of the payer’s actual costs and the market share and/or portfolio considerations likely at play.
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