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.

Secretary Azar Announces Plan to Remove Safe Harbor Protection for Drug Rebates

One of the more challenging lines of attack on high pharmaceutical pricing has been solving the “rebate trap.” Although not a singular item in the Trump administration’s Biosimilar Action Plan, Secretary of Health and Human Services (HHS) Alex Azar had begun the process of reviewing how to begin the offensive against the current system of pharmaceutical rebating last summer. On January 31, HHS announced that they have a plan. An open question is how that plan will affect biosimilar access.  

Health and Human Services Secretary Alex Azar

“We are taking action to encourage the industry to shift away from the opaque rebate system and provide true discounts to patients at the point of sale,” Secretary Azar told the New York Times.

What Is Known to Date

In releasing its proposed rule, HHS will seek to strip pharmaceutical rebates from the existing safe harbor legislation pertaining to public plans, such as Medicaid, Medicare Advantage, and part D providers. The rule “proposes to amend the safe harbor regulation concerning discounts, which are defined as certain conduct that is protected from liability under the Federal anti-kickback statute, section 1128B(b) of the Social Security Act (the Act),” according to the announcement. “The amendment would revise the discount safe harbor to explicitly exclude from the definition of a discount eligible for safe harbor protection certain reductions in price or other remuneration from a manufacturer of prescription pharmaceutical products to plan sponsors under Medicare part D, Medicaid managed care organizations as defined under section 1903(m) of the Act (Medicaid MCOs), or pharmacy benefit managers (PBMs) under contract with them.” The expectation is that, although the rule would apply to federal health benefits, it would trickle down to private payers.

At the same time, HHS is proposing to establish two new safe harbors. To encourage the passing of rebates or other discounts directly to patients at the pharmacy counter, the first safe harbor “would protect certain point-of-sale reductions in price on prescription pharmaceutical products.” A second proposed move would protect “certain PBM service fees” under a safe harbor. This alludes to the use of contracts between a PBM and manufacturer in which the PBM receives a fixed fee in return for services that assist manufacturers (in other words, not for services provided to payers).

The pharmaceutical rebating safe harbor would be eliminated in January 2020, if the rule is enacted as written. The public comment period began immediately and will end on March 31. It will take far less time before the stakeholders publicize their views. According to the Pharmaceutical Care Management Association (a trade association representing the PBM industry), the elimination of the current safe harbor protection could create access problems. ““While we are reviewing the proposed rule, we stand ready to work with the Administration to achieve our shared goal to reduce high drug costs. Pharmacy benefit managers (PBMs) are part of the solution to high cost prescription drugs. Drug makers alone set and raise prices,” stated JC Scott, President and CEO of the Association.

The trade association for pharmaceutical manufacturers stated that the proposal would benefit patient access, by lowering the cost of medications like insulin.

Leveling the Playing Field for Biosimilars

The move away from drug rebates may actually create problems for health plans, which had professed that the portion of the rebates passed through to them from PBMs had enabled plans to subsidize care costs. Therefore, the removal of the rebates may result in premium increases for Medicare beneficiaries. On the other hand, HHS believes that removal of the safe harbor could result in lower out-of-pocket costs for Medicare patients. Mr. Azar believes these lower costs could exceed 30% for not only insulin but for drugs to treat other chronic diseases.

As written on these pages many times in the past, the rebate trap significantly disadvantages biosimilar manufacturers who continually fight a battle for market access. It is at the heart of Pfizer’s lawsuit against Janssen Biotech for the infliximab business. Stripping away the safe harbor does not automatically improve access to biosimilars, as the manufacturers for reference products can simply compensate by lowering their retail prices or increasing discounts. However, it does take away the impetus for payers to favor reference manufacturers because of the rebate revenue they receive. In the long run, this would level the playing field for biosimilar manufacturers, and the effect would be amplified if these rebating practices also withered for private payers. We do know that many actions by those with the best intentions can be subverted by unintended consequences. As an expert in the pharmacy field once told me, if rebates are disallowed, “the PBMs will still find a way to make their money.” Health plan premiums may rise as PBM fees increase to compensate, and this could result in greater numbers of uninsured overall. At least in this case, it may be more difficult to see a potential downside for biosimilar makers.

Pfizer’s Anticompetitive Suit: A Slippery Slope to Competitive Bidding?

When Pfizer first announced its lawsuit against Janssen’s parent Johnson & Johnson in September 2017, it pointed to exclusionary contracting, “anticompetitive” behavior of Remicade®’s maker as the reason for its very limited market access.

The lawsuit claimed that Janssen has withheld or threatened to withhold rebates if payers do not keep Remicade in an exclusive preferred position. The degree to which health plans knuckled under to these demands may only be inferred from the 3% marketshare Pfizer’s Inflectra® now holds. For these drugs, which are still typically covered under the medical benefit, “nonpreferred positioning” usually means no coverage. For drugs covered under the pharmacy benefit, this is not the case.

In August, the Eastern Court of Pennsylvania ruled against J&J in its request that the lawsuit be dismissed. While discovery in the case may be ongoing, we could not find mention of a resolution date for the suit.exclusionary contracting

For the sake of argument, let’s say that the Eastern Court of Pennsylvania rules in favor of Janssen. In other words, exclusionary contracting was not an anticompetitive behavior. That means the status quo is intact, but some factors may affect this situation going forward. These include the Center for Medicare and Medicaid Services’ desire to move part B drugs (the medical benefit) to part D (the pharmacy benefit) for Medicare beneficiaries.

The scrutiny on rebate contracting coming from several sectors, and lack of transparency, may also independently influence future use of these pharmaceutical company tactics. I helped conduct a market research project recently on a nonspecialty drug. As part of these interviews, we were asked by the client to inquire about the range of rebates they were receiving from competitor manufacturers. Their responses were requested as a range (e.g., 20% to 30%), not specific contract details, and we had no intention of providing reports of individual payer deals, only anonymous, aggregate information. We expected little to no response to that query, and that is exclusionary contractingexactly what we received.

Let’s discuss the other potential outcome, in which the Court rules in favor of Pfizer. That implies that this exclusionary contracting practice is indeed anticompetitive. If this is the case, we may be on a very slippery slope. What is the difference between payers and pharma companies engaging in a “1 of 1” contract when there are multiple potential products and a “1 of 2” contract? In both cases, drug makers are committing payers to anticompetitive behavior (as perhaps defined by the Court’s new precedent).

The preferred drug tier (whether preferred generics, preferred brands or whatever) is supposed to be for products with proven clinical, patient care, or economic advantages. Truthfully, payers rarely place medications in the preferred tier for reasons other than net costs or rebate contracting, which is based on marketshare.

Now add in the potential effects of the Administration’s desired shift to part D, where pharmacy benefit rules can be applied. That exposes injectable products that were shielded under Medicare part B to commonly applied formulary placement practices.

To be complete, Janssen’s strategy was not solely based on Remicade. It may be found to have bundled Remicade with other agents in deals to exclude Pfizer’s products. The Court may also react specifically to Janssen’s contract stipulation that threatens to withhold rebates connected to future use of the product, to increase its leverage.

However, if the Court determines that 1 of 1 or exclusionary contracting with rebates are the root of the anticompetitive behavior, why should 1 of 2 or even 1 of 3 contracts in a drug category with 5 similar agents be less so? This is the slippery slope that could undo rebate contracting, and push us towards a system that more resembles a competitive bidding process like in Europe. Alternatively, it could accelerate the move towards outcomes- and value-based contracting. The result could be a system-wide revamping of the drug formulary and the pharmacy–drug maker relationship.

In other biosimilar news…Sandoz has signed a licensing agreement with Abbvie, allowing it to market its biosimilar version of Humira in 2023. The agreement, as with Abbvie’s settlements with other biosimilar makers, halts all patent litigation with Sandoz in exchange for a licensing royalty paid to Abbvie.

Biosimilars and Drug Rebates: A Foot in the Door to Access?

At the September 5–7, 2018 GRx+Biosims meeting, I had the opportunity to moderate a session with three highly experienced biosimilar industry executives. They included Gary Deeb, Senior Vice President, Global Licensing and Business Development, Lupin Pharmaceuticals; Chrys Kokino, MBA, Head Global Biologics— Commercial, Mylan; and Mike Woolcock, MBA, Senior Vice President, Commercial Operations, Apobiologix. In the hour-long session, we covered a range of sticky topics. This post sums up some of the information gained on one aspect—the question of price transparency, recent FDA action to address drug rebates, and whether deemphasizing drug rebates will help biosimilars gain access.

One issue that is getting an awful lot of attention lately is the question of price transparency. This has been highlighted by the difficulties that Pfizer has had in gaining traction for its infliximab biosimilar, resulting in claims of exclusionary contracting by Janssen to protect the latter’s marketshare. One of the principal tools used by the reference biologic manufacturer is its power to rebate. When a drug has the lion’s share of utilization, rebates become very potent inducements to payers to provide or maintain preferred or exclusionary status on formulary. Therefore, the issue of biosimilars and reference drug rebates can be an important one for the industry.

biosimilars and rebatesIn response to the challenges of biosimilars gaining uptake in the US, Health and Human Services Secretary Alex Azar has been investigating whether safe harbor laws that currently protect drug rebates from anticompetitive lawsuits can be changed. This move can affect revenues for both pharmacy benefit managers (PBMs) and payers who share in the rebate monies. It raises a related question, however: Would biosimilar manufacturers be better off competing on list pricing (i.e., wholesale acquisition cost) alone? And does the issue of biosimlars and rebates really matter?

In the backstage green room, this topic generated much discussion among our panelists. And quite frankly, the answer to this question is not yet in.

In previous market research and access projects performed for pharma and their agencies, it has been clear that health plan medical directors and pharmacy directors would prefer competition based on discounted WAC, whereas PBMs prefer to retain their rebate revenue. However, the plans do share in drug rebate revenue to varying extents, which they are quick to point out are helpful in holding down premium increases or funding other projects beneficial to members and patient care. Hence, they are stuck in the rebate trap as well. They are not generally eager to add a new preferred drug even if the manufacturer is offering powerful discount WAC plus competitive rebate; they realize that the rebate revenue is based mostly on how much marketshare the drug maker can gain (and how quickly it can amass marketshare).

The biosimilar industry representatives at our panel discussion were similarly reticent. Does it represent an opportunity to break the exclusionary contracting hold of companies like Janssen? Without high rebates to cement a reference drug’s place as a preferred or the only covered biologic, other manufacturers can get their foot in the door and compete for marketshare based on price alone. This does not mean that prices would necessarily be more transparent, however. One would expect that discounted prices negotiated (from one plan to another or one PBM to another) would differ and remain confidential in nature. In other words, Kaiser Permanente Southern California could still only guess what Blue Shield of California was paying for infliximab and vice versa.

If the average sales price (ASP) methodology were unchanged, one would expect the ASP, which reflects discounts and rebates, to be closer to the WAC price by the amount no longer rebated. But the wild card in this scenario would be the pharmaceutical and PBM industries’ reaction. Is there a way to reclassify rebates as some other payment, like “administrative fees”? Our panelists believe that the PBMs, for example, will not easily forfeit a revenue line representing pure profit, regardless of its size. One would need to anticipate some attempt to retain this revenue.

The issue of biosimilars and drug rebates may only be shifted, in the end. Payers would still want to see the lowest net cost for any product. In 2018, they don’t care too greatly about how this is achieved, through rebates, discounts, portfolio contracts, or other means. If pharmaceutical rebates were deemphasized, my own guess is that at least biosimilar manufacturers would not be disadvantaged once approved, simply because they don’t have any existing marketshare. And it would also test a payer’s fortitude in foregoing its own drug rebate revenue.

FDA’s Gottlieb to Health Plans: Move Away From Short-Term Rebates on Reference Drugs to Enhance Long-Term Biosimilar Savings

According to Food and Drug Commissioner Scott Gottlieb, MD, the managed care sector’s willingness to accept larger rebates from manufacturers of originator biologics to preserve formulary coverage may seriously hinder the long-term success of the biosimilar industry. And more importantly, the ability to control biologic costs through competition.

FDA Commissioner Scott Gottlieb, MDIn remarks made to a national meeting of America’s Health Insurance Plans’ (AHIP) in Washington, DC, Dr. Gottlieb worried that biosimilar manufacturers may start to believe that “the system is rigged against them.”

In terms of patent litigation, that certainly may seem true. However, Pfizer’s complaint that Janssen is undercutting its discounts by providing plans and insurers additional rebates would seem to be a practice that big pharma has used for years (Pfizer included). Therefore, Dr. Gottlieb is asking payers to turn aside those rebate offers and instead cover the biosimilars, at least for new patients.

He stated that the FDA is “invested in making sure that the new biosimilar pathway works, and that we can help facilitate a robust market for these products. So, we take note when we see market practices that can reduce the incentive for sponsors to invest in the development of biosimilars in the first place.”

Dr. Gottlieb put it to health plans succinctly: “Payors are going to have to decide what they want: The short-term profit goose that comes with the rebates, or in the long run, a system that functions better for patients, providers, and those who pay for care…Do they want to continue to benefit from monopoly rents today, or help generate a vibrant biosimilar market that can help reset biologic pricing—and drug pricing more generally— through competition.”

He suggested that payers help increase biosimilar uptake by lowering or waiving copays for biosimilars or removing prior authorization requirements when biosimilars can be prescribed. “FDA has a strong interest in seeing the biosimilar market grow,” he reiterated, “but some of that is going to be up to the choices you all make.”

Is There an Escape From the Rebate Trap?

The rebates given to pharmacy benefit managers to secure a drug’s place on the formulary have become a difficult barrier to coverage for new products. The rebate income for these PBMs is sometimes passed on to health plans, insurers, and employer purchasers, but more often it is not.

A big issue is that managed care organizations tend to become addicted to millions of dollars in rebate “income,” and this mindset prevents serious consideration of new medications at competitive costs. The health plans don’t see the benefit of incurring the administrative costs of moving masses of patients from the preferred product to a new one, or seeing this revenue stream interrupted, without an overall further improvement in net costs.

Managed care plans have long said that discounts of 25% or more will be necessary to release the rebate stranglehold of preferred products. In the case of infliximab, this has not yet occurred, based on recent minor inroads made by Merck’s Renflexis® biosimilar, despite larger discounts. Until greater competition is available, which drives down the WAC prices (and then average sales prices [ASPs]), barriers to accessing new medications will remain. In fact, when competition does increase, makers of the originator products, like Janssen, can simply ratchet up their rebates to maintain a hold on sales (and a billion-dollar plus profit).

Perhaps the best way around this is to force a change in the marketbasket. This can be accomplished in a couple of ways. The first, by instituting separate tiers for biosimilars and reference agents, takes the biosimilars out of the 1 of 2 preferred drug contracting restrictions, and allows patients to access biosimilars as well as preferred brands.

A second way is to reconsider biologic agents according to indication-based contracts or mechanism-of-action (MOA) based differences. Therefore, the marketbasket is modified to consider anti-TNFs separate from interleukins, allowing preferred agents in each separate category. This would allow, for instance, for more effective psoriasis agents to be well covered, and maintain the preferred position of Humira® and Enbrel® for appropriate patients.

A third way is to work out some innovative value-based contract, in which the manufacturer and health plan/insurer reaches an agreement on (usually) the expected outcomes of drug use and additional rebates or performance guarantees if the medication fails to deliver on this performance. The most important consideration in this agreement is the practicality of measuring an outcome of interest or ensuring adherence.

The rebate trap seems to be ensnaring more manufacturers of new biologics and biosimilars. Without greater consideration of the overall good, this trap can cause systematic problems for the pharmaceutical industry and discourage drug innovation and accessibility.

Biosimilars and Generics: Are the Drug Companies Using Similar Tactics?

The rebate game seems to be overrunning patient affordability and common sense, according to an article in the New York Times. This has been a problem for biosimilars and other high-cost specialty brands, but now it seems to be extending to generics as well, with patients on the losing end of the deal.

Pharmaceutical manufacturers offer rebates to health plans and pharmacy benefit managerLee 2s to offset a drug’s higher wholesale acquisition costs (WAC) and entice these payers to cover their drug, often at preferred tiers. The result is that new products can be locked out of the formulary or placed on nonpreferred tiers, because the contract requires exclusivity. This has been called the “rebate trap.” The rebate trap was never really a problem for generics in the past, because they were far less expensive than the brands, and with generics made by several companies, the price and rebating competition was too fierce for branded manufacturers to compete.

The New York Times article cited the case of Adderall XR for people with attention deficit hyperactivity disorder (ADHD). The drug has been available as a generic for some time. However, Adderall’s manufacturer, Shire Laboratories, has aggressively rebated their product to compete with the generic, providing a net cost to the health plans and PBMs that is less than the generic. Shire wants to retain some revenues on their products rather than leave the battle to the generic manufacturers. There is nothing wrong with that, and it results in lower net costs—but not for many patients.

First, if the plan has a substantial copayment difference for generics and preferred products, this can mean the average patient will have to pay the higher amount (unless the plan makes adjustments and allows the patient to purchase the brand at the generic copayment level). Second, the rising number of people with high deductible plans (including pharmacy deductibles) will have to pay the higher full price of the branded drug than the generic (according to the Times’ sources, this is about $50/mo). Thus, until they have paid their deductible, these patients are disadvantaged by this rebate arrangement. Consider also that the rebate savings to the payer are rarely, if ever, passed on to the patient.

Here’s the kicker: The pharmacist may be required by the plan to go back to the doctor to ask that they redo their prescription, by checking off the box that requires it be dispensed as written (for the branded product only). This is after generations of pharmacists have been trained on automatic substitution of generics for brands and patients have been persuaded to accept it.

Although the problem is very evident with ADHD, the lack of multisource generics means less competition for other drug classes as well. This is not limited to one payer either. The article mentioned Humana specifically, but it is likely that other payers (national and regional) are also party to these contracts.

This scenario can also hurt competition for biosimilars. Before the entry of Merck’s Renflexis®, Janssen had only contended in the infliximab marketplace with Pfizer’s Inflectra®. Janssen has been willing to cut deals with payers to keep Inflectra off the formulary. However, this could also affect some patients, even though infliximab, an infusible product given in the doctor’s office is usually paid through the medical not pharmacy benefit. If these drugs were covered with a fixed copayment (e.g., $100), patients would not be harmed economically by using any particular product. However, if the patient pays a fixed coinsurance (e.g., 10%), that person may then pay more for the originator drug, because the co-insurance is often calculated according to the WAC (which does not include the rebate) instead of the average sales price ASP (which does).

The problem of rebate traps and the lack of transparency of the system is not new. It may be a different situation if the manufacturer–payer transaction was based solely on simple WAC discounts. There is simply too much rebate money up for grabs for plans and PBMs that the system can be changed easily.