Is It About the Rebates, Net Costs, or Both?

It sounds a bit absurd, but we shouldn’t be surprised at this point: Health plans may not be satisfied if pharma companies simply dropped their drugs’ retail prices. They still want their drug rebates on top of this, says one well-known industry analyst. The pharmaceutical industry is stunned, because its members believed that the net price was the only thing that really mattered (or so they were told). It seems that payers’ addiction to rebates is even tougher to kick than originally thought.

Drug rebates
Ronny Gal

Ronny Gal, an analyst from Sanford Bernstein, told Fierce Pharma  on February 11 that UnitedHealthcare will be seeking “equivalent” rebates on medications, regardless of whether a company drops its price. According to the article, UHC executives confirmed the statement. Their logic isn’t completely crazy, but it is problematic. The rebates, plans have argued, help minimize consumer premium increases.

Let’s assume that this is the case: larger plans would lose millions of dollars in revenue if their 20% rebate, for example, were exchanged for simply a 20% decrease in wholesale acquisition cost (WAC). If the plan is truly using this revenue to subsidize higher medical costs, then members’ premiums would have to rise a commensurate amount.

Well, that just puts the pharmaceutical companies (and even biosimilar makers) in a difficult position. If drug A costs $600 per month, and to comply with the federal government’s efforts (and those of some pharmacy benefit managers [PBMs]) to lower medication prices, they drop their price to $400 per month. Don’t scoff, the makers of the PCSK9 hypercholesterolemia drugs just cut their WAC by 60%. Similarly, makers of hepatitis C virus treatments whacked their WACs by significant amounts in 2018. Assume the manufacturer of drug A was giving the PBM a 20% (or $120 per month per prescription) rebate to maintain co-preferred position, and the PBM shared half that rebate with the health plan ($60 per month per prescription). Now, let’s also assume that the pharmaceutical company refuses to add a rebate on top of this amount. Who will make up the difference, if the health plan insists upon it? The PBM? Don’t bet on it.

For biosimilar manufacturers, this lower price plus rebate scenario can be very discouraging. If you agree that a biosimilar maker can only gain access if it maintains a 25%+ discount to the reference drug manufacturer’s WAC, then the prospect of an additional rebate puts further price reduction pressure on their profitability. That could bolster the argument that pharma should steer clear of the biosimilar marketplace.

We always understood that from a payer standpoint, net cost was the primary objective. We were told many times that although it didn’t matter as much how the number was arrived at, the health plans preferred lower WAC as opposed to higher rebates. Now, we’re not so sure whether the rebate trap hasn’t ensnared those health plan executives.