Will Biosimilars Benefit From PBMs’ Attempts to Evolve Beyond Rebates?

Pharmacy benefit managers (PBMs) have been under the microscope recently, with increasing attention paid to whether they add value to the health system. Payers, providers, and the federal government have been scrutinizing the industry, mostly because of drug price transparency concerns.

The problem was highlighted byPfizer’s lawsuit against Janssen involving its inability to gain infliximab marketshare with its biosimilar—Janssen increased its rebates to shut Pfizer out of the market. This was a factor in FDA Commissioner Scott Gottlieb’s efforts to improve access to biosimilars and the Biosimilar Action Plan overall.

This raises the important question: Will biosimilars gain an advantage in a world less focused on rebates? This is not so simple…

WHAT IS PHYSICS?…

In a memorable episode of “The Big Bang Theory,” Penny asked Sheldon what her physicist boyfriend Leonard was working on. Sheldon insisted that to answer that question, they had to revisit ancient Greece, where it all started, and ask ourselves, “What is physics?”  

Let’s not travel back in time to understand how we arrived at this point, but a previous post summarized the basis for gross versus net pricing, considering wholesale acquisition cost (WAC) and average sales price (ASP). The full WAC price is usually not paid by anyone in the private sector (except for patients with high drug deductibles or no drug coverage) and public sector (except in the part D coverage gap).  

As far as payers, PBMs, and employers are concerned, the actual or net price that a pharma company charges for their drug is the real number of interest. And that net price may be different (for the same drug) for any given payer. Some may pay a discount off the WAC price, for example, but the main variable is the rebate—a contracted amount, expressed as a percent of the WAC, that a particular PBM or payer will receive in return from the drug maker. The rebate can be anywhere between 5% and 70%, for instance, and can depend on several factors:

• Lower rebates tend to be given just so pharmacompanies can be listed on formulary (i.e., in a nonpreferred position)
• Highly competitive rebates may be given to ensure a branded product is placed in a preferred position (e.g., tier 2 in a 3- or 4-tier formulary)
• Even greater rebates may be required by PBMs or other payers to be the exclusive, preferred product (that is, 1 of 1, not 1 of 2 or 3 preferred agents on tier 2)
• Additional incentive rebates may apply, where the drug maker entices the payer to encourage a move to their product. This is generally an incremental percentage on top of the base rebate
• Typically, generic drugs in highly commoditized categories will offer the greatest rebates, to entice a PBM to lock out other competitors.

What makes the rebate contract so attractive? To the PBM and payer, it can be “free”money, direct to their profit lines. The PBM may share a portion of the rebates with their health plan or employer clients, which then allows them to also gain millions in rebate revenues—monies that they earn effortlessly. It has an addictive effect, especially to the payer’s chief financial officer. Health plans have said that these rebate revenues help offset rising premium pressures and fund other member-related activities. Hence, the “rebate trap” comes into play. Loss of this line of revenue will impact the bottom line and member costs, they say.

CAN PBMS ADAPT?

The heavy scrutiny over drug price transparency has called into question the very value of the PBM. Their most important function, say their clients, including plan sponsors, is to leverage their size in negotiating pharmaceutical contracts. When drug prices are raised by the pharma industry, payers are not exposed to this immediately, because the contract always guarantees their net price during the contracting period. Once the contract expires, however, the health plan will now have to renegotiate based on the higher WAC. In this case, the PBM may require the drug maker to increase the rebate, to yield something closer to the net cost of the last contract. This results in higher costs to other parts of the health system, and the PBM gains greater rebate revenue. Patients who have cost sharing based on percentage coinsurance also pay more, because this percent is calculated based on the higher price, not the plan’s net costs. Those with significant drug deductibles bear the greater WAC. 

Many payers have told me in the course of market research projects that they would prefer lower list prices compared with greater rebates. The PBMs generally do not pass on the entire rebate, and they still have no idea what their competitors are paying for the same drug.

Recognizing that it had a public relations and a serious strategic business problem on its hands, the PBM industry sought the initiative. Both Express Scripts Inc (ESI) and CVS Health announced new products to quell the rebate protests. In the case of ESI, it announced the introduction in 2019 of a “National Preferred Flex Formulary.” Placement on this formulary, which is being built on a foundation of discounted pricing, not rebates, will require drug manufacturers to essentially create authorized generic forms of their brands. These could be packaged differently and given different National Drug Codes (NDCs) than the original drugs. In a press release, ESI stated that it wants to “create a competitive dynamic more similar to a generic coming to market. Cash-paying patients can have immediate access to the lower-priced medication. Meanwhile, employers and health plans can choose which product to cover that is best for their plan and their members: the lower-priced option or the original brand, which may have a rebate.”

CVS Health has taken a different approach. It has decided to adopt a model for its CVS Caremark PBM that guarantees “100%pass-through” of any discounts or rebates it receives. In this case, it will still utilize rebate strategies, but it will allow their clients to be the sole beneficiary of them. “Under the new model, 100% of rebates are passed through to plan sponsors, while the PBM takes accountability for impact of drug price inflation and shifts in drug mix,” according to CVS Health. “We see a real opportunity to offer clients a simpler economic model that leverages proven PBM cost-management strategies to provide predictable drug costs,”said Derica Rice, President, CVS Caremark.” As a result, CVS Health is introducing a straightforward, more holistic approach that enables plan sponsors to clearly see the net cost of their pharmacy benefit and select their PBM provider based on that criteria.” CVS will calculate expected plan utilization of a drug, the expected rebate to be received, and also estimate expected price increases. The resulting figure will be the so-called “Guaranteed Net Cost.”

Furthermore, use of pharmacy benefit tools to manage drug utilization or steer patients to lower-cost options may also be considered in the cost calculation. This is also slated to be implemented in 2019.

Earlier this year, OptumRx, the PBM unit of UnitedHealth Group, announced that it will provide patients discounts on drugs at the point of dispensing, which will represent a percentage of the rebate it receives from the manufacturer. To be operational on January 1, 2019, this program will affect 7 million people enrolled in UnitedHealthcare’s fully insured commercial group benefit plans.

CAN BIOSIMILARS BENEFIT FROM PRICE COMPETITION ALONE?

Where does that leave biosimilars? Biosimilars are not akin to authorized generics, although licensing deals that are prevalent in the industry might make one wonder. Yet, if they are able to compete on price alone, the reference manufacturer may have one less tool available to them (i.e., the rebate trap) to minimize access. If the rebate is 33%, that is only of value if a significant number of members are using the product. When a biosimilar is first launched, a 33% rebate on zero utilization is of no value.

Biologics are generally reimbursed on a percentage of ASP, which considers the WAC minus discounts and rebates. Biosimilars entering the market are reimbursed based on WAC for the first year, as there is no rebate or discounting history to enter into the calculation. That would seem to be a disadvantage for the first year.  

There is nothing preventing a reference drug manufacturer from slashing the price of its biologic—witness Abbvie’s all-out discounting efforts in Europe in an attempt to retain marketshare for Humira^®. Are they in any better position to lower prices than the biosimilar manufacturer? No. This in itself represents the latter’s opportunity. It also signals the biosimilar maker’s challenge: rapid pricing cutting that could result in the dreaded “race to the bottom” in pricing.

Many factors will play into this scenario, including the number of accessible biosimilars in any one category, the availability of follow-on products or “biobetters,” and ultimately the federal government’s ability to effectively remove pharmaceutical rebate contracting as a safe harbor.