The Trump Administration issued the final rebate rule on Friday, November 20, 2020. For information about the implications and possible future scenarios, and some guidance on immediate next steps, read the paper below we published on the topic last year. Contact us at info@pharosity.com for more info.
A Time of Change:
Drug Pricing, Strategy and Operations
No More Rebates
Abstract
A
s a result of legislative action at the State and Federal levels, the publication of the Trump Administration’s American Patients First blueprint, and the proposed rule to remove the safe harbor protection for rebates in Medicare Part D and
Managed Medicaid, the industry finds itself at a tipping point of major change. This paper focuses on the potential impacts to and opportunities for manufacturers in light of the proposed rule eliminating rebates.
Should the rule be finalized, it will set in motion the creation of a new model that will establish new relationships between manufacturers, PBMs, third-party payers, distributors and pharmacies. Industry changes will need to be dealt with at the strategic level and the direction manufacturers take here will ripple into their operations. All aspects of Policy, Process, Organization and Automation will be affected. In short, manufacturers should now be:
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Critically assessing discounting and pricing strategies and understanding the implications of pharmacy chargebacks in the context of the new potential industry models
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Conducting modeling exercises to determine financial impacts resulting from the new industry models
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Assessing the potential implications to Government Pricing of the new transactions and redirected flows of existing transactions
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Conducting an initial process and organizational assessment to identify where internal change will be required and how resourcing will be affected
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Performing a preliminary systems assessment to identify functional and data gaps
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Planning for upgrades, modifications and possibly custom workarounds while solution vendors catch up
Those manufacturers that are actively engaged in understanding the impacts of a no-rebate world will be best positioned to adapt. Read on for a detailed look at our perspective and reach out to us at info@pharosity.com for more information on how we can help you and your organization prepare.
Introduction
W
ith no fewer than 26 legislative actions underway at the Federal level[1], the Administration’s American Patients First: The Trump Administration Blueprint to Lower Drug Prices and Reduce Out-of-Pocket Costs, a large number of State
initiatives in progress or already in place, and countless other debates happening inside pharma, the industry has reached a tipping point where significant changes are imminent. Here, we take a deep dive on the Administration’s proposed rule that removes the safe harbor protection for rebates in the Medicare Part D and Managed Medicaid businesses.
The U.S. drug delivery system is a complex web of entities. When a patient receives the drug associated with their prescription, two primary types of entities have worked to make this happen: Prescription Fulfillers and Prescription Facilitators.
Prescription Fulfillers are those entities that are involved in the physical movement of a drug from the manufacturer to the patient. In general, they include distributors, pharmacies, and all sites of care.
Prescription Facilitators are those entities that are involved in the economics of a prescription and do not physically move the drug from the manufacturer to the patient. Examples of these types of entities include payers, PBMs, GPOs, and HUBs and other patient services providers.
A simple example of the flow of a prescription to a retail patient is shown in the following diagram:
The details of each step are as follows:
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The manufacturer sells the drug to a wholesaler at WAC less a prompt payment discount. Usually at the end of the following month or quarter, the manufacturer will remit a DSA fee to the wholesaler for services rendered. This value is a percent of WAC.
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The wholesaler sells the drug to a retail pharmacy at a discount off WAC.
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The retail pharmacy dispenses the drug to a patient, who pays a copay or coinsurance for the drug according to their drug benefit.
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The PBM reimburses the pharmacy an ingredient cost (a percentage of AWP) and a dispensing fee, which is offset by the patient’s obligation.
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At some time after the patient receives the drug from the pharmacy, usually about a quarter, the manufacturer remits a base rebate, an admin fee and if applicable, a price protection rebate to the PBM. These amounts are a percentage of WAC.
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The PBM is then reimbursed by the payer an amount discounted from AWP plus an administrative fee. This reimbursement rate is reduced by a portion of the rebate collected from the manufacturer.
The table below provides an illustration of the economics of this model using a drug with a $100 WAC price. In some cases where noted, evidence-based data are not available, values are assumed from marketing materials and/or public statements by the relevant entities.
* Reimbursement is negotiated between the Pharmacy and the PBM. For the purposes of illustration, AWP – 16% is assumed[2]
** Exact figures are not available for rebate retention by PBMs. Based on publicly available statements, CVS Caremark and Express Scripts “…keep just 2 percent and 5 percent of rebates respectively…”[3]
*** Beneficiary premium payments are excluded
**** Reimbursement is negotiated between the Payer and the PBM. For the purposes of illustration, AWP – 15% is assumed[4]
***** Negotiated between the Payer and the PBM. For the purposes of illustration, $2 is assumed[5]
THE PROPOSED RULE
Department of Health and Human Services (HHS) Office of Inspector General
n February 6, 2019 the Department of Health and Human Services (HHS) Office of Inspector General published a proposed rule in the Federal Register that would remove the safe harbor protection for rebates that pharmacy benefit managers
(PBMs) receive from drug makers, replacing it with a new safe harbor protection for price reductions at the point of sale.[5] It would also add a new safe harbor protection for fixed fee payments that cover the services rendered by a PBM for a manufacturer.
O
Specifically, the proposed rule:
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“…would no longer protect price reductions from manufacturers to plan sponsors under Medicare Part D or Medicaid MCOs, either directly or through PBMs acting under contract with plan sponsors under Medicare Part D or Medicaid MCOs, in connection with the sale or purchase of prescription pharmaceutical products, unless the reduction in price is required by law.”[6]
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Creates “…a new safe harbor (Point-of-Sale Reductions in Price for Prescription Pharmaceutical Products) that would protect point-of-sale price reductions offered by manufacturers on certain prescription pharmaceutical products that are payable under Medicare Part D or by Medicaid MCOs that meet certain criteria."[7]
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“…the reduction in price would have to be set in advance with the plan sponsor under Medicare Part D, a Medicaid MCO, or a PBM.”[8]
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“…the reduction in price could not involve a rebate, as defined in 42 CFR 1001.952(h), unless the full value of the reduction in price is provided to the dispensing pharmacy through a chargeback or a series of chargebacks, or the rebate is required by law.”[9]
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“…the reduction in price must be completely reflected in the price the pharmacy charges to the beneficiary at the point of sale.”[10]
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Creates “…a new safe harbor (PBM Service Fees) that would protect fixed fees that manufacturers pay to PBMs for services rendered to the manufacturers that meet specified criteria.”[11]
In short, common clauses found in agreements currently such as base or access rebates, price protection rebates, market share rebates and administrative fees based on the price of the product will be prohibited under this rule should it become final.
Coupled with the Administration’s proposed rule is draft legislation that would apply the same structural changes on the commercial market. Senator Mike Braun (R-IN) has introduced bill S.657 which states:
A group health plan or a health insurance issuer offering group or individual health insurance coverage shall not, and shall ensure that any entity that provides pharmacy benefits management services under a contract with any such health plan or health insurance coverage does not, receive from a drug manufacturer a reduction in price or other remuneration with respect to any prescription drug received by an enrollee in the plan or coverage and covered by the plan or coverage, unless—
(1) any such reduction in price is reflected at the point of sale to the enrollee; and
(2) any such other remuneration is a flat fee-based service fee that a manufacturer of prescription drugs pays to a pharmacy benefit manager for services rendered to the manufacturer that relate to arrangements by the pharmacy benefit manager to provide pharmacy benefit management services to a health plan or health insurance issuer, if certain conditions established by the Secretary are met, including requirements that the fees are transparent to the health plan or health insurance issuer. [12]
These changes, both the proposed rule and the introduced legislation, if finalized and passed are to go into effect on January 1, 2020.
HOW DID WE GET HERE?
A brief history of drug pricing conversations
D
rug pricing has been a topic of discussion for decades. In 1959 and 1960 Senator Estes Kefauver (D-TN) held a series of hearings representing the first congressional inquiry into drug prices. While these hearings did not lead to
legislative action on prices, the topic was firmly planted into the national conversation about pharmaceuticals. Indeed, “[e]very decade since the Kefauver hearings has seen at least one set of congressional hearings into the increasing prices of prescription drugs”[13] according to Dr. Jeremy Greene of Johns Hopkins University. But the discussions have always predominantly focused on list price even with estimates available pointing to the net price of a drug.
In the intervening years, the debate has continued. Several manufacturers have pledged to contain price increases at certain levels. A handful of manufacturers are now producing price transparency reports showing the difference between list price and net price; emphasizing the impact of rebates, fees and price concessions to intermediaries on revenue; and the slower growth of net prices relative to list prices. But the spotlight is still on and getting brighter, especially as patients bear increased out of pocket costs due to factors like high deductible plans and the link of coinsurance rates to list price.
When the Trump administration took office in January 2017, 6 in 10 Americans indicated that “Lowering the cost of prescription drugs”[14] should be a top priority. The momentum continued over the course of the next two years with the publication of American Patients First: The Trump Administration Blueprint to Lower Drug Prices and Reduce Out-of-Pocket Costs in May 2018 and then in early 2019 with the publication of the proposed rule to eliminate the safe harbor for many of the rebates currently embedded in the pricing structure for Part D and Managed Medicaid.
OVERALL IMPACTS
How will the industry model evolve?
Manufacturer Strategy
E
liminating rebates within these channels would require one of the most dramatic changes to pharmaceutical market access and contract strategy since the inception of the Medicaid Drug Rebate Program. The dramatic nature of the
impact stems from the potential need for manufacturers to:
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Enter into new types of contracts
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Develop and implement new types of financial transactions
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Amend existing contracts with payers
As these areas of impact imply, manufacturers would need to change their strategy in equally dramatic ways, in part out of necessity, and in part to realize opportunity. Among the more pressing areas for strategic analysis are:
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In the event the proposed rule is finalized but S.657 does not become law, the sustainability of having upfront discount contracts and rebate contracts coexisting across channels
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If S.657 becomes law, the impact of eliminating rebates in the commercial side of payer contracting
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Optimal intermediaries with which to contract on upfront discounts
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Optimal intermediaries with which execute new pharmacy chargeback transactions
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The possible ways that a patient’s obligation at the pharmacy counter will be determined relative to their benefit design based on the requirement that “…the reduction in price must be completely reflected in the price the pharmacy charges to the beneficiary at the point of sale.”[15]
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The viability and manageability of value-based agreements where typically, the determination of milestones achieved and payments due occurs well after the point-of-sale
Patient Obligation at the Point of Sale
As manufacturers analyze the point of sale transaction, it will be important to consider the difference between the price charged by the pharmacy to the beneficiary vs. the payment obligations of the beneficiary and/or the insurer.
Much of the industry dialog on this topic currently seems to assume that the full discount for a drug must go to the beneficiary and only the beneficiary. However, it is possible that the amount the beneficiary pays will continue to be entirely based on the benefit design provided by their insurer; in that the price charged by the pharmacy can reflect the complete discount offered by the manufacturer without impacting payment obligations.
Market Infrastructure
Eliminating the back-end rebates to plan sponsors strikes at the heart of the current business model and the transfer of value between stakeholders. As the rule states, point-of-sale discounts need to be “…set in advance with the plan sponsor,”[16] may be “…provided to the dispensing pharmacy through a chargeback or series of chargebacks”[17] and “…must be completely reflected in the price the pharmacy charges to the beneficiary at the point of sale.”[18] These requirements have some similarities to the structure of GPO contracts. However, the information required and means of execution will be different for the pharmacy chargeback model. Consider the following comparison:
The largest gap in the current infrastructure surrounds the chargeback process between the dispenser and the manufacturer. We see three distinct possibilities to resolve this as described in the following sections.
The PBM as GPO
PBMs are well positioned to adjudicate these new chargeback transactions. Their existing services (plan design, formulary management, utilization management, claims processing, etc.) will remain a critical component of the ecosystem; they will possess all required information to process the chargeback; and they have the infrastructure in place on both the manufacturer and pharmacy sides of the transaction. Below is a discussion of the key elements of this approach based on the model in the table above.
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Relationship: Today, PBMs have contracts with manufacturers for discounts on products eligible to specific plans representing the pool of covered lives, and networks of pharmacies where patients may fill their prescriptions. All this information is necessary to establish a discount “…in advance with the plan sponsor.”[19]
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Point-of-Sale: When a pharmacy claim is adjudicated, the patient’s financial obligation is made available. This process should be adaptable to include the associated discount established for the drug for it to “…be completely reflected in the price the pharmacy charges to the beneficiary at the point of sale.”[20]
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Chargeback Claim: The current reimbursement infrastructure between pharmacies and PBMs and the rebating infrastructure between PBMs and manufacturers both enable the transfer of value between entities. It is conceivable that this same infrastructure may be used to process pharmacy chargebacks. This leads to some critical questions that need be addressed:
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How will chargeback claims from pharmacies be issued, processed and paid? NCPDP has indicated[24] that in the PBM-based model, there are two options, both of which are executed as part of the existing reimbursement process:
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The chargeback amount is visible to the pharmacy: Supported after a modification to the existing NCPDP standard through the addition of code values, with an estimated standards approval time of 10 – 12 months.
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The chargeback amount is not visible to the pharmacy: In this model, the full amount due to the pharmacy, including the chargeback amount, is bundled into the payment value in the claim response and subsequent remittance advice. No updates to the existing standards are required and implementation is possible immediately
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What data will be available in a chargeback claim? Manufacturers will most certainly be interested in as rich a data set as possible. Data could allow for better monitoring of compliance and adherence if, for example, a HIPAA-compliant patient identifier is included. Gaps in available downstream inventory data could be filled in, strengthening channel management, demand planning and gross-to-net forecasting. Coverage Gap liability forecasting could be improved if deductible and out-of-pocket data is included. This will also create the need for better management of plan data, including identifiers and additional plan metadata.
The following illustrates how this structure might work:
The steps in the process are as follows:
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The manufacturer sells the drug to a wholesaler at WAC less a prompt payment discount. Usually at the end of the following month or quarter, the manufacturer will remit a DSA fee to the wholesaler for services rendered. This value is a percent of WAC.
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The wholesaler sells the drug to a retail pharmacy at a discount off WAC.
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Prior to dispensing the drug, the pharmacy confirms the patient’s benefit and any available discount. The pharmacy then dispenses the drug to the patient at a price reflective of the discount offered by the manufacturer and collects a payment determined by the patient’s benefit design.
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The PBM reimburses the pharmacy an ingredient cost, a dispensing fee and the chargeback amount.
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The manufacturer remits to the PBM a service fee payment and the chargeback amount.
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The PBM is then reimbursed by the payer.
The Semi-Direct Relationship
A variation on the previous model would involve a direct relationship between the manufacturer and the dispensing pharmacy for the purposes of chargebacks. This closer relationship with the pharmacy also brings the patient closer to the manufacturer. This could help manufacturers to better address issues such as compliance and adherence while gaining better visibility to demand. But this comes at a cost of an increase in overall complexity, along with the potential for significantly higher administrative burdens for manufacturers and pharmacies.
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Relationship: Like The PBM as GPO model, a manufacturer and PBM would be party to a contract that includes discounts eligible to specific plans representing the pool of covered lives.
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Point-of-Sale: There is no change from The PBM as GPO model for discounts to “…be completely reflected in the price the pharmacy charges to the beneficiary at the point of sale.”[21]
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Chargeback Claim: This is where the model diverges and envisions a system where pharmacies submit chargeback claims directly to a manufacturer, raising a different set of questions:
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How will pharmacies manage relationships with manufacturers? Only the largest pharmacies likely have the scale and capacity necessary to manage many direct relationships with many manufacturers. How will smaller independents come online? Will there be a need for a new type of player in the market acting as an independent TPA, aggregating claims and dispersing payments?
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How will manufacturers scale their accounts payable systems and processes, and account management functions? Direct relationships with pharmacies will require significantly more resources. This will be especially challenging for smaller manufacturers. Like the issues for pharmacies, will manufacturers prefer to work with a TPA of some kind that can aggregate claims and payments, perhaps like the Part D Coverage Gap program?
These questions aside, below is a hypothetical model for the semi-direct relationship:
The steps in the process are as follows:
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The manufacturer sells the drug to a wholesaler at WAC less a prompt payment discount. Usually at the end of the following month or quarter, the manufacturer will remit a DSA fee to the wholesaler for services rendered. This value is a percent of WAC.
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The wholesaler sells the drug to a retail pharmacy at a discount off WAC.
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Prior to dispensing the drug, the pharmacy confirms the patient’s benefit and any available discount. The pharmacy then dispenses the drug to the patient at a price reflective of the discount offered by the manufacturer and collects a payment determined by the patient’s benefit design.
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The pharmacy submits a chargeback claim to the manufacturer.
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The manufacturer remits the chargeback amount to the pharmacy.
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The manufacturer remits a service fee to the PBM for its services managing the prescription and reimbursement.
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The PBM reimburses the pharmacy an ingredient cost and a dispensing fee.
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The PBM is then reimbursed by the payer.
Pharmacy Chargebacks Through the Wholesaler
A third option is that the wholesalers will handle the chargeback process for reimbursing pharmacies. Much has been written on how this model will function by Adam Fein at Drug Channels, and we encourage readers to review that material. This model introduces similar challenges posed by The Semi-Direct Relationship:
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Relationship: Like The PBM as GPO model, a manufacturer and PBM would be party to a contract that includes discounts eligible to specific plans representing the pool of covered lives.
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Point-of-Sale: There is no change from The PBM as GPO model for discounts to “…be completely reflected in the price the pharmacy charges to the beneficiary at the point of sale.”[22]
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Chargeback Claim: A variation on The Semi-Direct Relationship, pharmacies submit chargeback claims to wholesalers for reimbursement, who in turn submit chargebacks to the manufacturer. Some considerations for this model:
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How will the discount be verified between the pharmacy, the wholesaler and the manufacturer? Wholesalers will need the discount information negotiated between the manufacturer and the PBM to be able to verify and process a pharmacy chargeback. How will this change the nature of the relationship between manufacturers and wholesalers? Between manufacturers and PBMs? Will manufacturers be comfortable with an unrelated third-party gaining visibility to these discounts?
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What kind of data sharing and standardization will be necessary to facilitate this process? Four distinct parties will need to agree on a common set of information to adjudicate the chargeback (manufacturers, PBMs, wholesalers and pharmacies). Arguably the most critical element in this data set is the plan identifier, for which no single common standard exists.
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How will disputes be handled? What recourse will the pharmacy have to resolve disputes when a chargeback is rejected? Who will facilitate the resolution process? In the case of a rejection, what then becomes of the amount paid by the patient?
Hybrid
It is almost certain that all three models presented above will start to develop in the marketplace in one form or another. Both PBMs and wholesalers will be motivated to offer services to manufacturers to facilitate pharmacy chargebacks, and some manufacturers will decide that direct pharmacy relationships are best for their goals. These models will not develop at the same speed and each will have strengths and weaknesses. Manufacturers will need to consider their strategic objectives and which model (or models) will serve their products and patients most effectively.
MANUFACTURER OPERATIONS
How to prepare for the potential changes?
I
n order to understand the potential impacts to a manufacturer’s operations, it is helpful to consider Pharosity Consulting’s Four Pillars™ - Policy, Process, Organization and Automation.
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Policy – The elimination of the current rebate structure from the value chain affects virtually all aspect of policies that govern manufacturer operations. Manufacturers should be considering the impacts to both commercial and government pricing policies.
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Process – Manufacturer processes will need to adapt as the ways in which stakeholders are engaged evolves. Much of the process change will be dependent on the model that ultimately forms as a result of the rebate rule. Regardless of the model, there are several fundamental considerations for manufacturers.
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Organization – Manufacturer organizations will need to adapt in order to implement the policies and execute the processes in support of pharmacy chargebacks.
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Automation – The proposed rule’s change to the current rebating structure will affect almost all means of automation currently enabling manufacturer operations. As with the process changes, the specifics of what must happen will depend on the model(s) that results from the rule.
The following sections discuss the implications in the context of the Four Pillars™ on various facets of the commercial and government sides of manufacturer operations.
Commercial Contracting
Policy
Commercial policies establish the guardrails for the implementation of manufacturer strategies and the partnerships with Prescription Fulfillers and Prescription Facilitators. They set the governance mechanism for pricing and contracting, establish parameters for pricing modifiers and qualifiers, define which parties in the value chain may receive which types of offers, and establish the protocols for exception handling and issue escalation. With the introduction of point-of-sale discounts and their supporting transactions, manufacturer commercial policies will need to address several new questions, some of which include:
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What types of discounts and under what circumstances will these discounts be offered? How will the discount be manifested in the amount owed by the patient at the point-of-sale?
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Who has the authority in the organization to approve offers? Who can approve exceptions?
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What partners are acceptable to support the pharmacy chargeback process?
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What is required of the pharmacy, the chargeback administrator and the PBM for chargebacks to be considered valid and payable?
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How will disputed chargebacks be handled? Who within the organization has the authority to accept or reject a dispute resolution proposal? What are the approval thresholds within the organization?
Process
Pre-Deal and Post-Deal Analysis
Pre- and Post-Deal organizations will need to shift their focus from a contract-centric view to a gross-to-net (GTN) oriented view where multiple agreements must be considered for a single discounting strategy. Today, contracts are typically viewed as single entities for the purposes of pre-deal analysis, with considerations given to the Medicaid and PHS channels when one deal might set a new Best Price and/or to Part B when there is a significant impact on ASP-based reimbursement. Rarely do pre-deals incorporate tangential liabilities such as distribution fees related to a given deal’s projected volume. But consider the scenario that a manufacturer enters an agreement with a PBM for a discount, but the pharmacy chargeback is processed by a distributor. In this scenario, accounting for the discount and the PBM service fee is not enough; the distributor service fee for processing the chargeback must also factor into the equation. Alternatively, if the PBM handles all facets of the discount and the resulting chargeback, then the agreement with the PBM is the only relevant component.
Manufacturers that shift towards a GTN-oriented process will be positioned to handle either or both industry models.
Contract Operations
New business process activities to adjudicate pharmacy chargebacks must be defined, developed, documented and trained. These activities will involve different types of transactions, validation rules, dispute management processes and analytical processes while potentially needing to accommodate a quicker adjudication turnaround time.
Gross-to-Net Forecasting
GTN analysis and forecasting processes will largely remain consistent when analyzing liability and volume. Historically, utilization trends, covered lives and adherence all factor into the analysis of GTN for third-party payer contracts. These factors will still be important in determining the liability amounts for the pharmacy chargebacks and fees for service.
The process for forecasting channel inventory levels and adjustments will have additional data points to consider, therefore improving confidence and precision. Manufacturers should benefit from the data made available through pharmacy chargebacks.
Organization
Pre-Deal Analysis
As described above, manufacturers will need to shift their focus from a contract-centric view to a GTN oriented view. This will require resources to consider multiple agreements with different parties thereby increasing the workload for a single “deal.” Manufacturers will need to manage the additional workload with additional resources and improved automation. There will also need to be tighter collaboration between groups separately managing relationships with PBMs, pharmacies and distributors.
Contract Operations
The introduction of pharmacy chargebacks to the Contract Operations teams will require additional resources to manage. Even though PBM rebates are being eliminated through the rule and (possibly) legislation, they will be replaced by the need to process and pay service fees to PBMs. As a result, the potential for efficiency gains through the elimination of rebates is somewhat reduced. Teams will then need to manage and process the newly generated pharmacy chargebacks. Given the likely parties involved in the chargeback transaction (see Market Infrastructure above), contract operations resources will need to align around groups of pharmacies. This allows manufacturers to get closer to the patient and enables a better understanding of true out-of-pocket costs. These individuals will also need to collaborate closely with PBMs and distributors who will be an integral part of enabling the pharmacy chargeback process.
Manufacturers must also be considering the very possible scenario that only the rebate rule affecting Part D and Medicaid Managed Care channels is finalized, leaving the commercial side of the market to operate under the status quo. In this circumstance, no efficiency gains are readily available. Teams will be required to process the new pharmacy chargeback transactions and the service fees associated with them all while still processing commercial managed care rebates as is done today. Expect this scenario to require a significant increase in resources and deeper collaboration across teams.
Lastly, any manufacturer engaged with an outsourcing partner will need to work closely with that partner to accommodate the changes. Outsourcing vendors will be significantly impacted across all their operations and customers. Manufacturers will benefit from engaging additional resources with the partner during the change period to ensure a smooth transition and that the unique aspects of a manufacturer’s contracting and discounting strategy are implemented effectively.
Gross-to-Net Forecasting
The organizational impact of the rule and legislation will likely affect smaller manufacturers with lower staff levels the most. These organizations often have only a few resources conducting GTN analysis. The introduction of a different type of discounting strategy to Medicare Part D and Managed Medicaid without the passage of S.657 would eliminate any process efficiencies available with the commercial channels. As a result, additional work effort and possibly headcount will be necessary to handle the increased complexity.
For larger manufacturers with additional staff, resources are often aligned with a group of accounts and analysis is performed across the commercial, Medicare Part D and Managed Medicaid channels. If the rule is finalized but the legislation does not pass, resources may need to be realigned by channel to optimize their work efforts.
Automation
Contract Operations
Modern revenue management systems are highly specialized and tightly aligned to the current business model and rebating structures. Existing functionality will need to be adapted to facilitate new types of agreements, data and payments in two key areas:
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Contract Modeling
Current approaches to modeling contracts should be able to support the concept of a pharmacy chargeback. Today, managed care contracts include eligible plans, discounts as a percent of WAC, administrative fees, price protection, fixed net pricing, fixed discounts, etc. Some of the new discount strategies can be modeled using these constructs. What’s missing is the ability to manage discount eligibility and amounts based on a patient’s status in their annual benefit and discounts based on indication, which may be a requirement of future strategies.
A pain point for many organizations when modeling contracts is the ability to reliably manage plan-level data. This will become a necessity as the eligibility for a given discount will be aligned with a plan (unless an alternative such as a global PBM discount is established). Detailed plan metadata will be critical for the adjudication of the pharmacy chargeback claims.
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Pharmacy Chargeback Adjudication
Manufacturers need to consider what functional areas of their revenue management systems they will utilize to process pharmacy chargebacks. They should also familiarize themselves with the information that will be received in order to adjudicate the transaction.
These new transactions may pose similar scalability and performance challenges seen in managed care rebating today. Manufacturers that currently perform script-level rebate processing often use a pre-processor to scrub and aggregate data to the plan level for processing and payment to both alleviate performance challenges and to perform more thorough validation. Those manufacturers that utilize these pre-processing systems will require updates here as well in order to adjudicate pharmacy chargebacks.
Gross-to-Net Forecasting
The need for and the extent of GTN forecasting system changes will depend on the timing of the enactment of the proposed rule and S.657. If they are not passed at the same time, GTN system complexity will increase so long as the elimination of plan sponsor rebates are applicable to just Medicare Part D and Managed Medicaid, as manufacturer systems will be required to maintain support for existing commercial discounting structures and strategies. This complexity will be reduced if and when S.657 is enacted and places the same restrictions on commercial entities.
In all situations, GTN applications, data feeds, business logic and forecasting functionality must be adjusted. New GTN components will be required to capture pharmacy chargebacks, and fees-for-service paid to PBMs and/or third-party chargeback administrators. Interfaces to and from the GTN system will require updates to accommodate the new contract structures and provide the level of data granularity necessary. And reporting and analytical tools that summarize data by GTN component must be configured to recognize and provide access to the new components. All these changes will require thorough review and testing.
Analytics
The impact to analytics platforms will vary depending on how manufacturers are currently conducting their analyses. Summarizing rebate data down to books of business or tiers may not be enough, as questions remain about whether a patient’s benefit design and status in the benefit will influence discount strategies. At a minimum, more data will be necessary to gain visibility to the new chargeback and service fee transactions. More master data at the plan level will be generated in support of managing discount eligibility. These changes all necessitate updates to interfaces, dashboards and reports followed by supplemental training to ensure users can review and interpret new information accurately and in the right contexts.
Considerations for Manufacturers Partnered with Outsourcing Vendors
Many manufacturers partner with outsourcing vendors for some or all their Automation needs. This section discusses system impacts in general and is applicable to these vendors as well. As described in the Recommended Actions section below, proactively engaging with outsourcing vendor partners now to understand functional, personnel and cost implications will be critical for manufacturers.
Government Pricing
Policy
Government Pricing policies, the role of which is to clearly articulate a manufacturer’s interpretation of statutory and regulatory guidelines for GP calculations, are tightly coupled with commercial policies. All manufacturer commercial activities are accounted for in these documents. Updates needed to a manufacturer’s commercial policies necessitate similar changes to GP policies.
The application of a chargeback to a transaction originating at the pharmacy creates many compliance-related questions. New data will be created to handle the remittance of the pharmacy chargeback and the service fee(s) charged by PBMs and/or entities facilitating the chargeback process. Manufacturers, where they may not have needed to previously, must consider the patient and the limited statutory and regulatory language around patient discounts. They will also need to consider the implications of passing discounts through whatever intermediary is established as the clearinghouse for pharmacy chargebacks. Each of these interpretations will need thorough legal review.
Process
Processes currently defined for Government Pricing will remain consistent under the new model. Resources will still gather and reconcile data; and calculate, review and submit pricing values. The analysis of transactions, special cases, data anomalies and other issues that regularly appear during a calculation period will still occur but will incorporate the new data sets created by the pharmacy chargebacks.
Organization
Government Pricing organizations should see relatively little impact from a resource management standpoint. As mentioned above, activities required of Government Pricing personnel should remain consistent. Analyzing anomalies, special cases and other issues may require more time to complete as data volumes are expected to increase, and manufacturers will need to assess their resource capacity to handle this volume.
Automation
GP systems are tightly coupled to Revenue Management systems since the GP system evaluates all revenue management data when performing calculations. There will be two significant impacts on GP applications: data and methodology.
The data impacts will be driven from the consumption of new transaction types for pharmacy chargebacks and the associated service fees. Along with the transactions there will be new data attributes for customers, products and contracts that will need to be accounted for and interpreted in the calculations.
Methodology impacts will be more significant than the need to adapt to new data elements. Until an industry model (or models) evolves to adjudicate the pharmacy chargebacks and interpretations of updated statutes and regulations are established, the most likely impacts to systems will be felt around inclusions and exclusions, smoothing and discount stacking. Of these three, smoothing and discount stacking processes are the most difficult to update. Expect significant enhancement time dedicated to software changes and most importantly, testing and verification.
RECOMMENDED ACTIONS
Steps to Prepare for Change
U
ncertainty rules in the current environment around drug pricing and the potential for the elimination of rebates. But there are concrete actions manufacturers should be taking now to assess the potential impacts of this monumental market
shift and to prepare for action.
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Critically Assess Pricing and Discounting Strategies
Manufacturers should review their approach to discounting to third-party payers in Part D, Managed Medicaid and the Commercial markets and the relationship to pricing. With the emphasis on patient costs, manufacturers need to determine the best way to establish their product’s value proposition. Will discounting still be the best approach? Will overall price decreases be a better option? Which model(s) is(are) best suited to enable the relationship with the pharmacy? These are just some of the important questions to be examined, with more developing as the industry models take shape.
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Conduct Modeling Exercises
Manufacturers will not be able to make informed decisions or understand the impacts to their strategies without financial modeling. A comprehensive Gross-to-Net view of different scenarios is critical to gain the needed insights. Models must incorporate different discounting strategies, fees paid to the relevant parties based on the assumed industry model(s), different WAC pricing approaches, and the impacts to Government Pricing.
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Assess the Potential Government Pricing Implications
Manufacturers should review their Government Pricing policies and make preliminary interpretations of how pharmacy chargebacks and service fees to third parties will be handled. It will also be beneficial to gain an understanding from legal and compliance on the new interpretations so that a more informed GP systems assessment can be performed.
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Conduct an Initial Process and Organizational Assessment
The models that the industry will adapt to accommodate point-of-sale discounts and pharmacy chargebacks resulting from the elimination of rebates will cause strategic, process and organizational changes. Manufacturers should review their existing activities to determine whether a significant realignment or addition of resources is necessary, and how the processes executed today will need to evolve. Align this assessment with a systems readiness assessment to understand the full impact of the change necessary to enable the future model(s).
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Perform a Preliminary Systems Assessment
Given the potential for significant system changes, manufacturers should initiate preliminary systems readiness planning for Revenue Management, Government Pricing, Pre- and Post-Deal, Gross-to-Net and Analytics. Engage in discussions now with the relevant software providers and outsourcing partners to understand their perspective of potential impacts their systems, what changes may be required, any anticipated upgrades and whether costs will be associated with enabling the market models. Compare the expected changes against current processes to identify potential gaps.
For those with custom-built in-house solutions, begin a gap analysis to identify what changes may be necessary to support the new discount structures and data components resulting from updated contract strategies and agreements. Once the assessments are compiled, develop a high-level plan for implementation.
SUMMARY
T
he proposed rule and draft legislation in Congress that carries the rule’s directives to the commercial market currently create more questions than answers. Regardless, stakeholders have begun to publicly articulate their positions on
these proposals seeking some influence on the final direction. And while the outcome itself remains uncertain; it is becoming clear that change is coming. Those organizations that are assessing their options now will be in the best position to navigate the change towards opportunity.
For information about how Pharosity Consulting can help you prepare for a no-rebate world, please contact us at info@pharosity.com.
References
# | Source | URL |
|---|---|---|
1 | Pharmaceutical Commerce. (2019, March 5). Healthcare and drug policy take center stage in Washington. | https://pharmaceuticalcommerce.com/legal-regulatory/healthcare-and-drug-policy-take-center-stage-in-washington/?utm_source=Email_marketing&utm_campaign=ValueChain_March_6_2019&cmp=1&utm_medium=HTMLEmail |
2 | Academy of Managed Care Pharmacy. (2016, February). Drug Payment Methodologies. | http://www.amcp.org/WorkArea/DownloadAsset.aspx?id=20943 |
3 | Merlo, L. J. (2018, October 3). As a PBM and an Employer, We Know Rebates and Innovation Lower Drug Costs. Morning Consult. | https://morningconsult.com/opinions/as-a-pbm-and-an-employer-we-know-rebates-and-innovation-lower-drug-costs/ |
4 | PhRMA. (2017, November). Follow the Dollar: Understanding How the Pharmaceutical Distribution and Payment System Shapes the Prices of Brand Medicines. | http://phrma-docs.phrma.org/files/dmfile/Follow-the-Dollar-Report.pdf |
5 | Edgewood Partners Insurance Center. (2013, February 14). How Your Pharmacy Benefit Manager Makes Money. | http://cdn.sparkart.net/edgewoodins/content/pdfs/Pharmacy.pdf |
6 | 84 Federal Register 2340. (2019, February 6). Removal of Safe Harbor Protection for Rebates Involving Prescription Pharmaceuticals. | https://www.federalregister.gov/d/2019-01026 |
7 | 84 Federal Register 2347. (2019, February 6). Removal of Safe Harbor Protection for Rebates Involving Prescription Pharmaceuticals. | https://www.federalregister.gov/d/2019-01026/p-135 |
8 | 84 Federal Register 2348. (2019, February 6). Removal of Safe Harbor Protection for Rebates Involving Prescription Pharmaceuticals. | https://www.federalregister.gov/d/2019-01026/p-146 |
9 | 84 Federal Register 2349. (2019, February 6). Removal of Safe Harbor Protection for Rebates Involving Prescription Pharmaceuticals. | https://www.federalregister.gov/d/2019-01026/p-150 |
10 | ibid. | |
11 | ibid. | |
12 | 116th Congress. (2019). S. 657. | https://www.congress.gov/bill/116th-congress/senate-bill/657/text |
13 | Hancock, J. (2019, February 22). Talk About Déjà Vu: Senators Set To Re-Enact Drug Price Hearing Of 60 Years Ago. | https://khn.org/news/talk-about-deja-vu-senators-set-to-re-enact-drug-price-hearing-of-60-years-ago/ |
14 | 84 Federal Register 2349. (2019, February 6). Removal of Safe Harbor Protection for Rebates Involving Prescription Pharmaceuticals. | https://www.federalregister.gov/d/2019-01026/p-150 |
15 | Kirzinger, A., Wu, B., & Brodie, M. (2017, January 6). Kaiser Health Tracking Poll: Health Care Priorities for 2017. | https://www.kff.org/health-costs/poll-finding/kaiser-health-tracking-poll-health-care-priorities-for-2017/ |
16 | 84 Federal Register 2347. (2019, February 6). Removal of Safe Harbor Protection for Rebates Involving Prescription Pharmaceuticals. | https://www.federalregister.gov/d/2019-01026/p-135 |
17 | 84 Federal Register 2349. (2019, February 6). Removal of Safe Harbor Protection for Rebates Involving Prescription Pharmaceuticals. | https://www.federalregister.gov/d/2019-01026/p-150 |
18 | ibid. | |
19 | 84 Federal Register 2347. (2019, February 6). Removal of Safe Harbor Protection for Rebates Involving Prescription Pharmaceuticals. | https://www.federalregister.gov/d/2019-01026/p-135 |
20 | ibid. | |
21 | National Council for Prescription Drug Programs (NCPDP). (2019, April 8). Comments Regarding OIG-0936-P | https://www.regulations.gov/document?D=HHSIG-2019-0001-19807 |
22 | 84 Federal Register 2347. (2019, February 6). Removal of Safe Harbor Protection for Rebates Involving Prescription Pharmaceuticals. | https://www.federalregister.gov/d/2019-01026/p-135 |
23 | ibid. |