Sometimes you have to take a step back to see the big picture — the forest for the trees. Sometimes the opposite is true: You have to break the whole into the tiniest pieces to understand how things work. For example, atom smashers have found every particle and antiparticle predicted by physics theory. It’s time to take a much closer look at rebates and rebate guarantees and smash the myth that PBMs are addicted to rebates.
A small part of the story
Just because PBMs negotiate rebates with manufacturers is not proof that PBMs are addicted to rebates. It cannot be repeated too often: Correlation does not imply causation. Sure, there are market scenarios in which it can be quite rational to give preference to an incumbent, higher-priced brand with a commanding market share when it offers a rebate. The loss of rebate savings coupled with uncertain shifts in market share often make breaking these contracts a risky proposition. Contracting in the autoimmune space and the slow uptake of biosimilars are good examples of these dynamics at play. But this is only a small part of the story.
PBMs largely do what payers want them to do, and the continued success of PBMs is evidence that payers think they add value. As economic theory would predict, PBMs supply what plan sponsors demand. So, we need to look upstream for the source of any addiction to rebates.
Busted!
Fact: Plan sponsors typically buy PBM formularies that guarantee a rebate per brand claim and, in turn, PBMs need rebates from manufacturers to offset these guarantees. Is that because PBMs are addicted to rebates and that’s all they want to sell? Well, no. It’s because that’s what plan sponsors want, and results from a natural experiment prove the direction of this relationship.
Express Scripts introduced its National Preferred Flex Formulary in 2019. The Flex Formulary attempts to achieve a lower net cost through products with lower list prices. This formulary prefers authorized generics (e.g., those for Harvoni, Epclusa, and Humalog) and products that were priced well below competitors, either at launch (e.g., Mavyret) or after launch (e.g., Repatha). This formulary offers larger up-front savings and is a departure from the traditional formulary approach that relies on back-end rebates.
To date, uptake among Express Scripts customers has been slow, with fewer than 1 million covered lives in aggregate. That would not be the case if plan sponsors and the consultants whispering in their ears thought this were a better alternative. Proof positive that the plan sponsors are addicted to rebates, not PBMs. Bam!
Breaking it down
Okay, now that we know that most plan sponsors are addicted to rebates, let’s break down a few likely reasons for their dependence on rebate guarantees.
Desiring insurance
Loss-aversion bias is powerful. Rebate guarantees may seem like protection against losses, and the rebate check may even feel like a gain.
Plan sponsors that prefer a rebate guarantee, however, may fail to realize that the PBM won’t guarantee any deal that’s a money loser. The PBM’s fees and the products it prefers must yield a combination of excess revenue and savings that, in aggregate, more than covers the guaranteed rebates. Think casinos, where the house always wins. Similarly, the PBM always wins and the plan sponsor always loses.
Wanting assurance
From a marketing perspective, a PBM that guarantees a rebate signals the quality of its services. Perhaps plan sponsors hear the reassuring Allstate slogan “You’re in good hands” when selecting a PBM making such promises.
Plan sponsors and consultants responsive to such signaling lack self-efficacy in their ability to evaluate the quality of PBM services. Plan sponsors need to measure and manage the quality of PBM services in ways that demonstrate a tangible impact, such as whether they boost adherence or support medical-cost offsets. Plan sponsors and consultants that are not responsive to such signaling are likely the more effective and enlightened purchasers.
Ensuring accountability
Plan sponsors turn to PBMs for a number of functions, one of which is contract negotiations with drug manufacturers. Rebate guarantees give PBMs a powerful incentive to negotiate effectively on behalf of plan sponsors — an enticement to pull out all the stops and a deterrent to cutting corners.
While rebate guarantees ensure rebates, they do not ensure that this is the right approach for optimizing savings.
Taking the path of least resistance
Plan sponsors do not want to do the hard math required to predict savings. Take, for example, a lower-priced product with differential unit pricing. Imagine the complexity of calculating the savings when the number of units vary across patient populations. By contrast, a flat dollar-per-brand claim guarantee is much easier to calculate.
Plan sponsors should consider the extent to which they are paying for convenience. They may or may not conclude that greater auditing or oversight ease is worth a higher price.
Breaking the habit
There are a number of reasons manufacturers raise prices, but one reason relevant to this story is that doing so enables them to increase the size of the rebates they offer to sustain rebate guarantees. In essence, they feed an insatiable beast to avoid the risk that PBMs will break contracts with their product and give a competing product preferred access.
When breaking an addiction, the first stage is awareness of a problem. Most plan sponsors need to acknowledge that they are addicted to rebates and understand how this behavior has an inflationary impact on drug prices. The road to recovery may not be easy. But those that choose formularies that prefer lower-priced products and up-front discounts will likely benefit within a few years.
For plan sponsors hooked on rebate guarantees, there will soon come a point when they can no longer afford their addiction.
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