How Can Health Plans and PBMs Escape 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.

For biosimilars, Pfizer and Merck have had a difficult time dislodging Janssen, maker of Remicade®, from its preferred formulary position, despite lower prices based on wholesale acquisition cost (WAC). Janssen has simply matched the net cost (through increasing rebates), while keeping its WAC costs high—tempting plans with ever-increasing rebate revenue. 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.

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How Economic Value Became a Big Part of a P&T Committee’s Considerations Today

Years ago, the undeclared rule of law was that a Pharmacy and Therapeutics (P&T) Committee’s deliberations must be free of cost concerns. This rule is increasingly being overturned.

The P&T Committee, as a formulary decision-making body, was supposed to decide a new agent’s fate based only on the clinical evidence for efficacy and safety. According to the standard protocol, once the P&T Committee’s decided to add a product to formulary, it was then the pharmacy contracting executives’ responsibility to simply get it for the best price available. This created a handy shield to prevent public complaint that a health plan or insurer was really making decisions based treatment cost.

The preeminence of 2 trends has caused payers to rethink this firewall. First, over the course of 25 years, multitiered copayment designs have become the standard. The very idea of a 3-tier plan, for instance, is to prefer products that medical and pharmacy executives believe patients should be incentivized to use, based on some facet of value. In practical terms, if tier 1 is for generics only, what is the difference between tier 2 (preferred brands) and tier 3 (nonpreferred brands)? The clinical difference between a preferred drug and, say, “me-too” agents on tier 3 is often insignificant. Most often, it comes down to which offers the best net price. Medicaid and exchange plans seem to be reverting to 2 tier plans (generic and covered brands), but these, too, are based on perceived value.

The second trend is the movement towards value-based benefit design (VBBD). At its simplified core, VBBD tries to determine whether certain drugs have more value (in terms of proof of clinical effectiveness, safety, or cost) compared with others. As a result, formulary decision makers are increasingly seeking comparative-effectiveness information or head-to-head study results to help determine the value of a new treatments. This information is added to P&T Committee discussions (sometimes included, if available, in drug information monographs). The result of which is a determination of whether prior authorization or step edits may be warranted to access the drug and what those criteria might be. P&T Committee members will have a hand in those decisions as well.

It only then makes sense to integrate the discussion of a drug’s cost into that of its clinical merits at the P&T Committee level, rather than to keep the greater value picture separate from formulary decisions.

The double-digit growth of specialty pharmacy spending has injected new urgency into the conversation about value for payers. The P&T Committee is (still) the arbiter of value for the pharmacy benefit and for specialty pharmaceuticals. That is why at least two-thirds of P&T Committees are now fully invested in cost considerations. The old firewall has been breached.

SM Health Communications provides writing, consulting, and market research services for the long-term care and payer markets. Its proprietary P&T Insight™ virtual P&T Committee program is the leading mock P&T Committee product in the field. For more information, please visit or contact Stanton R. Mehr, President, at

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Controversy Over the Cost to Bring New Drugs to Market

This is one of the prickliest topics in the health care industry, and it has been as long as I can remember. One of the publications I worked with was called Product Management Today. Long defunct, this periodical followed the pharmaceutical industry quite closely. As a result, we were familiar with Tufts University’s Center for the Study of Drug Development. This was the first organization to publish what was considered credible figures as to what it cost to bring a drug to market.

In the early 1990s, that number was published in the Journal of Medical Economics to be about $231 million. Remember, these were generally small molecules, and the drug industry consisted of dozens of big manufacturers identifying their molecular targets, characterizing them, and cultivating them through the clinical trial process. In 2003, this number was revised upward to somewhere north of $800 million. In 2016, the Tufts team recalculated the numbers, and it found essentially a 10-fold difference (not accounting for the inflationary change in the value of the dollar between 1991 and 2016). They indicated that it costs $2.7 billion to bring a product to the market today, which also considers the cost of failed drug development. In other words, they added the opportunity cost to a pharma company for a drug that was withdrawn or failed clinical trials (any stage). In their 2016 analysis, they took as their drug sample, 106 investigational drugs, 87 being small-molecule compounds and the remaining 19 biologics. I’m guessing that if biologics represented more than 18% of the sample, the total average estimate could have been even greater.

The cost to produce a biosimilar is considerably less. This is partly the result of the lesser clinical trial requirements compared with new chemical entities. Although this figure has not been convincingly calculated, I’ve heard it cited to be anywhere up to $250 million. This seems to be reasonable, based on the development requirements. Unfortunately, several biosimilar manufacturers have to wait to market their agents because of patent litigation, and that in itself represents a cost.

Today, the results of another study was released, which offers a very different number. Published in JAMA Internal Medicineauthors from Oregon Health and Sciences University and Memorial Sloan Kettering Medical Center found that the cost to produce 10 cancer medications was really $648 million (range, $204 million to $2.602 billion)—add another $110 million or so for opportunity costs. This included 5 drugs that received fast-track approval. Not only did the researchers use US Securities and Exchange filings that cited manufacturer-reported costs, but they limited the analysis to only manufacturers without a previous approved drug on the market. The drugs evaluated included several monoclonal antibodies, so it was reflective of complex molecule development.

I’d like to point out another question that perhaps skews the calculation. Rarely these days does “big pharma” get involved with new drug identification and characterization. True, they are often involved in the expensive clinical trial phase, but do we read in the paper weekly that a drug discovery company has licensed or sold the product to a big pharma entity (or even sold the company itself)? And what is the guarantee that they are not overpaying for the price of the drug or the company?

The upshot of this is that the 10 companies evaluated in the more recent study had cumulative revenues resulting from their new agents of $67 billion from the time of approval (until December 2016 or the time it sold or licensed the product to another company). The range per product was ranged from $204.1 million to $22.3 billion. It sounds overall, that they were good buys for the big pharma companies but not necessarily for the health care system.

In other words, whether it cost $648 million, $800 million, or $2.7 billion, the research and development costs for these new agents are made back in a year or less. It is hard for us to listen seriously to pharma companies who use the cost to develop the agents, or their having to eat the cost of failed agents, as credible justification for the prices being charged.

A Merger and a Turning Point for Pharmacy Practice?

The federal government agreed on October 10 that the Aetna and CVS Health merger can be consummated. That deal came with the caveat that the sale of Aetna’s Medicare part D business to WellCare is finalized.

Internal relationships between managed care plans and pharmacy benefits managers are not new. In fact, United Healthcare spawned Diversified Pharmaceutical Services, one of the first PBMs some 40 years ago. That PBM was eventually bought by Express Scripts. Today, OptumRx is United’s PBM. Today, CIGNA is closing its deal to purchase Express Scripts. Other regional or national health plans have established relationships with PBMs, for at least one valuable service: negotiating drug pricing with manufacturers. However, over the course of time, they have also taken advantage of several of the available services the PBM provided, like pharmacy network development, mail-order pharmacy, specialty pharmacy, and claims administration. This side of the Aetna and CVS Health merger is less inspiring.

One of more interesting aspects of the arrangement is not the PBM side of CVS but rather Aetna’s opportunity to leverage the community-based health clinics that CVS drugstores offer nationally.

Most people realize that flu and Herpes zoster vaccinations are available through community pharmacies. Generally, the drugstore has a partitioned area in which patrons can receive their flu shots. Like other large drugstore chains, CVS has built such a network—its Minute Clinic® within select locations. (These facilities may vary in terms of services offered or personnel on site. For example, according to CVS Health’s website, my local CVS pharmacy is supposed to offer Minute Clinic services, but it has no private area nor have I ever seen nurse practitioners or physician assistants onsite.)

The idea behind CVS Health’s strategy is largely embraced today. People need alternatives to the long appointment waits for routine care that may be evident through primary care practices. Urgent care clinics somewhat fill this gap, but the convenience of local drugstores cannot be topped (outside of access to full telemedicine services, which is years away).

Furthermore, the overhead associated with pharmacy-based clinics may be lower than facilities, particularly considering the menu of services they offer. In this model, access to pharmacy services is as good as in a hospital or integrated delivery network setting.

The only problem with this strategy is a familiar one—the limited workforce of healthcare providers. CVS Health states that its Minute Clinics are staffed with nurse practitioners and physician assistants.

The idea of using clinical pharmacists to collaborate with prescribers in the course of providing basic medical care has been around for decades. Beyond their utility in medication therapy management, a practice that has experienced slow growth since the early 1990s, clinical pharmacists can be a very useful resource in limited care settings. A major barrier to expansion of these services has been a lack of reimbursement from payers. Organizations like the Academy of Managed Care Pharmacy, American Pharmacists Association, and the American Society of Health-System Pharmacists have supported the expanded use of clinical pharmacy.

However, Aetna is a major payer. If Aetna is considering more fully integrating the community pharmacy–based clinic model into its provider networks, it may also be wise to plan for wider use of clinical pharmacy services. These services may be cost effective, help improve patient access to care, and result in high patient/member satisfaction. To achieve these outcomes, Aetna will have to align reimbursement for these services.

As fascinating as the scenario offered by Aetna and CVS Health merger seems, there may also be a more tantalizing opportunity: Beyond significantly growing the use of medication therapy management services, might this also serve as an initial step towards pharmacist-provided direct patient care supported by a national payer?