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Are PBM Rebates The Driving Ingredient In The Recipe To Lower Drug Costs?

When sending out an RFP (request for proposal), rebates can become a hot topic in a decision as to which PBM to select and/or whether to make a change.  Before we tackle this complex topic, let's review roles and their interaction with rebates.

Plan Sponsors hire Pharmacy Benefit Managers or PBMs to manage claims, set up networks of pharmacies, manage drug formularies, and negotiate discounts and rebates with drug makers.  PBMs manage the drug benefits for over ninety percent of Americans with prescription drug coverage.

Drug makers pay PBMs in the form of rebates to help drug makers keep medications on a preferred status on PBM formularies.  A formulary is a list of preferred drugs for different medical conditions for which a plan will provide coverage to entice the purchase of certain drugs.  Rebates are refunds that are paid to the PBM by drug makers after the drug is sold.  In turn, PBMs offer a patient a lower out of pocket for these drugs by placing them on a lower copay tier.  Patients typically pay the most out of pocket for drugs on a higher copay tier.   Plan sponsors often will use rebate payments to reduce plan participants premiums and out of pocket costs.

Rebates continue to increase and can reach 50% or more of a drug makers list price.  A drug makers net price in their drug list is the list price minus any rebates and other discounts offered to PBMs.  Drug makers are pressured by PBMs to increase list prices to satisfy PBMs’ demands for higher rebates.  Because rebates are paid retrospectively, the savings rarely make it to the patient.  

PBMs are a conduit between drug makers, pharmacies, and drug plans and the ultimate plan sponsor and its plan participants.  This relationship is feared to create significant conflicts of interest and lead to higher drug prices for patients.  Because the rebates paid to PBMs are typically a percentage of a drug’s list price, PBMs have an incentive to select more expensive drugs for formulary status. PBMs are not incentivized to discourage drug list-price increases.  This impacts patients in the deductible phase of their drug plan.  

Now that we have explained rebates and the impact on increasing drug prices, why are plan sponsors still attracted to selecting PBMs offering higher rebates?  Why are PBMs guarded in an RFP when asked to disclose rebateable drug types?  And why are some PBMs contract language often ambiguous on what drugs are included or excluded from rebates?  

To answer the question as to why plan sponsors are attracted to selecting PBMs offering higher rebates, a couple of factors impact plan sponsor decisions:

1.      Many brokers and consultants (or plan sponsors if they handle their own RFP) do not understand complex PBM pricing and contracts.  The easy decision is to go with what you understand and what looks good on a spreadsheet.  For example, a retail brand rebate for claims with 1-83 days’ supply of $175.00 looks and calculates out better than a rebate for $150.00. This is easy to understand or explain to the plan sponsor.

2.      Many brokers and consultants (or plan sponsors if they handle their own RFP) struggle with how to send out an RFP that gets to the heart of which PBM truly offers the lowest net cost.  Net cost includes ingredient cost, dispensing fees, admin fees, minus rebates.  It is understandable that it then becomes difficult presenting findings with confidence to the plan sponsor’s decision maker.

To answer the question of why PBMs may be guarded during an RFP when asked to disclose the true drug types eligible for rebates, a couple of factors impact the PBMs RFP response.

1.      A PBM may be reluctant to disclose the true list of drug types that are included or excluded for rebate payments.  Drug types are considered drugs of the same type, such as multisource brands, vaccines, OTC (over the counter), etc.  A PBM offering rebates with the fewest exclusions in drug types may be valued as a greater deal.  So, lets contrast two hypothetical PBMs.  PBM A on a retail brand pays a rebate of $175 for claims with 1-83 days’ supply but excludes multisource brands, vaccines,and OTC drugs.  PBM B pays a rebate of$150.00 but includes these drug types and could be the better deal depending on a specific plan sponsors drug utilization and a plan’s drug coverage. This can create a lot of work and require a high degree of familiarity with the topic to figure out!  Broker and consultants often do not have the experience or time allotted that’s necessary to do a thorough bid analysis. PBMs often quote high numbers to look good on spreadsheets and deal later with the detail.

2.      Another issue is that PBMs typically are not provided with detailed plan design information included with an RFP.  Basic plan copays for retail, mail, and specialty are all that is provided.  If PBMs are provided with more detailed plan design information that includes plan design inclusions and exclusions, formulary exclusions, and clinical program details, PBMs would be able to offer a more detailed rebate bid response.  

Now the last question of why are some PBMs contract language often ambiguous on what drugs are included or excluded from rebates.  We see a lot of contracts during audits that list out a few drug types that are excluded, but then have the following ambiguous statements:

‘…and other claims not eligible for rebates.’; Or  

‘Client shall not be owed a rebate for any drug which PBM does not receive a rebate.’  

I believe a few factors impact PBMs rebate contract language for drug types included and excluded:

1.      One issue is that during contract negotiations, this area is often glazed over by the broker and consultant (or plan sponsor if they handle their own contract negotiations) as they are not familiar with how specific the rebate contract language should be.  PBMs will take advantage if not challenged on sections of the contract.

2.      Ambiguous or vague rebate contract language on what drug type is included or excluded for rebates, always favors the PBM.   For example, if the PBM contract does not list drug types like multisource brands or vaccines as either included or excluded,the PBM can do what they want when paying rebates.  When auditing rebate payments, a PBM will always refer to a clause like what is shown above that allows them to excuse why some drug types are not rebateable yet not disclosed as excluded from rebates in the contract.  

3.      A PBM might list a drug type like vaccines as included or excluded from discount guarantees, but omit listing vaccines as included or excluded from rebates.   Using our example of vaccines, if they are listed as ‘excluded’ from discount guarantees, one might assume they are ‘included’ for rebates if there is no mention of being excluded for rebates in the contract.    You might think: if vaccines were important enough to list as excluded from discounts, why did the PBM not list them as excluded from rebates?  When doing audit reports, we make recommendations on how to improve their PBMs contract language, so their PBM contract will not allow the PBM flexibility due to ambiguous and vague contract language when paying out rebates.

So, are rebates akin to salt in a recipe?  Can too much ruin the outcome.  Just like any recipe, each ingredient in the mix should be measured and used in the right way or the outcome may not be what you desire.  The recipe for lower drug costs require more detail and understanding when negotiating a PBMs contract terms regarding rebates.  

For questions or assistance, you can email Ginger Campbell at ginger@cobaltrx.comor call me at 225-927-1941.  For more information about CobaltRx, go to www.cobaltrx.com.