Someone once said something like, “When one door closes, another opens; but we often look so long and so regretfully upon the closed door that we do not see the one which has opened for us.” While variations of this quote predate both Alexander Graham Bell and Hellen Keller — to whom many attribute it — the underlying wisdom has been in circulation for at least 400 years.
CAR-T and gene therapies are opening the door for treating the untreatable and curing the uncurable. So, which door is closing? The American formulary. Increasingly, coverage of high-cost breakthroughs is partially driving the exclusion of other products.
Closing open formularies
As employers seek solutions to rising health care and drug costs, commercial lives are rapidly shifting from open formularies to managed or closed formularies. And the number of excluded products on managed formularies is growing. Why? That’s simple — because doing so significantly lowers plan sponsors’ costs. Closing an open formulary can save plan sponsors several dollars per member per month. Those savings will be needed to fund the high-cost breakthroughs coming to market over the next few years.
Health plans and PBMs are aware of the rising demand for lower-cost drug benefits, and this impacts the quotes they submit to plan sponsors. And when a grid in the health sponsor’s RFP permits only one plan design, health plans and PBMs often hedge their bets and bid the lowest-cost option — the closed formulary. This dynamic only fuels the closing of the American formulary. Together, plan sponsors pull and health plans and PBMs push the door shut.
Unless patients are “grandfathered” because of prior use of a blocked product, excluded products are available only through medical exception and appeal processes. These exceptions give payers cover from any fallout. Payers are quick to note that excluded products are still available. While that’s true, access is limited. And a brand strategy relying on such back-door access is typically not sustainable.
While the number of lives covered under open formularies will continue to shrink, these formularies will remain open for business. Wealthy employers (e.g., Google) can afford rich benefits to attract and retain top talent. And some of the remaining labor unions will attempt to retain these rich benefits through collective bargaining with employers, including public employers that increasingly can’t afford the rising costs.
At-risk brands
Nonpreferred or disadvantaged brands in competitive markets are at greater risk of being excluded. Therapeutic areas previously not managed, such as HIV, oncology, and rare diseases, are increasingly being managed and others are at risk for greater management in the future. This risk of being excluded is far more threatening than the more familiar open-formulary risks of being placed on a nonpreferred tier or disadvantaged by step requirements and/or prior authorization criteria that are more restrictive than the label.
New brands entering crowded markets will be disadvantaged at best — and excluded at worst. These brands won’t have real-world evidence of clinical superiority, so they will have to offer payers a lower net cost to be able to open the door. Manufacturers bringing new products to market that payers view as being poorly differentiated me-toos should factor the risk of exclusion and how access may erode over time into their forecasts.
This growing threat to brands will give payers more leverage during contract negotiations. Payers that extract larger rebates and discounts will gain even greater leverage. For some brands, this may require a revolving door of concessions.
For nonpreferred or disadvantaged brands in what payers consider to be “commodity” markets, the time to act is now. Aggressively lower the net cost through contracting and, if possible, provide real-world evidence of clinical superiority. Holding back may be like closing the barn door after the horse has bolted. And when payers exclude your product, they won’t care if the door hits you on the way out.
At-risk manufacturers
The closing of formularies does not threaten smaller biotech firms bringing high-cost breakthroughs to market. These firms are unencumbered by broad portfolios containing nonpreferred and disadvantaged products. While the need for value-based contracts and financing arrangements may initially hinder commercialization of ultra-expensive products, exclusion from managed and closed formularies is not likely.
By contrast, larger manufacturers with at-risk brands will likely experience a loss in profits. And large manufacturers that bring high-cost breakthroughs to market will, in essence, cannibalize their own profits by pushing their nonpreferred and disadvantaged products out the door. Large manufacturers typically have brand teams that operate in silos and view only competing products — not their own — as threats. But a full accounting of these breakthrough opportunities would consider both the gains and the losses.
There’s no doubt what these large manufacturers will do if an opportunity to bring a high-cost breakthrough to market comes knocking at their door. Following Bell’s or Keller’s or someone’s advice, manufacturers will focus on the newly opened doors rather than focus on those that have closed. Payers pay for innovation and would prefer high-cost breakthroughs over products they view to be me-toos and patent extension plays. Large manufacturers focused on innovation may increasingly divest or not license products that are nonpreferred or disadvantaged.
Reframing the doorways
Opening and closing doors are a useful metaphor when thinking about opportunities and threats. Payers and manufacturers alike are continuously thinking about the products they welcome in and those shown the door. But as the American formulary closes, trade-off analyses will become more prevalent. Those lamenting the loss of access and choice should celebrate the breakthroughs coming to market. So, is the door half opened or half closed?
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