This new formulary signals that Express Scripts is trying to prepare its plan sponsor clients for a world without rebates. The formulary also provides a way for Express Scripts to prepare itself for such a world.
As I explain below, many plan sponsors embrace the warped incentives of the gross-to-net bubble—the ever-growing pile of money between a manufacturer’s list price for a drug and the net price after rebates and other reductions. I outline two crucial payer and PBM factors that make it difficult for manufacturers to cut list prices and pop the gross-to-net bubble.
Express Scripts’ new formulary challenges plan sponsors that are addicted to rebate dollars. Let’s see how many plan sponsors will prefer a low list-price over a high-list/high-rebate product—and how many more manufacturers will respond with lower list prices.
POPPING BUBBLES
Here on Drug Channels, I have been highlighting the challenges generated by these funds. For example, under many common pharmacy benefit designs, the bubble creates substantial patient affordability problem, as I explain in Drug Prices After the Midterms: Five Crucial Implications of Pharmacy Benefit Design.
In 2018, some manufacturers have tried to pop the bubble for their heavily rebated products. Two notable moves:
- Gilead Sciences has started a subsidiary to launch authorized generics of its two high-list-price hepatitis C virus (HCV) treatments. The list prices will reflect the actual, post-rebate net prices of these therapies. See my comments here.
- Amgen will cut the wholesale acquisition cost (WAC) list price of its Repatha product by 60%. The new list price will reflect the post-rebate net cost of this therapy. Amgen is launching a new National Drug Code (NDC) for the lower-list-price version and will retire the NDC for the high-list/high-rebate version. See my comments here.
The manufacturers’ pricing moves come with significant risks. That’s because the economics of PBMs and plan sponsors can encourage the use of high-list/high-rebate drugs over alternatives with lower list prices.
Here are two of the warped incentives that Express Scripts is trying to overcome with its new formulary option.
Problem 1: Many plan sponsors are addicted to rebates.
Rebates are pricing concessions paid by manufacturers to third-party payers. These payments, almost exclusively related to brand-name drugs, are made after other transactions occur in the drug channel. Rebate funds are paid long after the prescription has been dispensed.
Some plan sponsors prefer to capture the rebate dollars and use those funds to offset overall plan costs or reduce premiums. The sponsors believe that rebate money belongs to the plan, not to the patients whose prescriptions generated the rebates. Given the time lag, plan sponsors can’t (or choose not to) match rebates to specific prescriptions or beneficiaries. As I noted in January: Employers Are Getting More Rebates Than Ever—But Sharing Little With Their Employees.
Express Scripts even told me that some of its clients are “addicted to rebate checks.” It’s not hard to imagine that some plan sponsors and their benefit consultants develop formularies that emphasize high-list/high-rebate products. Manufacturers have therefore been leery of dropping prices, because they risk losing market access if a competitor’s product doesn’t also cut its list price.
This reality is not fully understood by many analysts and nearly all politicians. That’s why I asked: New Disclosures Show CVS and Express Scripts Can Survive in a World Without Rebates. Are Plan Sponsors Now the Real Barrier to Disruption?
The new Express Scripts formulary addresses this problem by asking plan sponsors to choose a formulary comprising products with lower net prices over high-list/high-rebate products.
Some plan sponsors prefer to capture the rebate dollars and use those funds to offset overall plan costs or reduce premiums. The sponsors believe that rebate money belongs to the plan, not to the patients whose prescriptions generated the rebates. Given the time lag, plan sponsors can’t (or choose not to) match rebates to specific prescriptions or beneficiaries. As I noted in January: Employers Are Getting More Rebates Than Ever—But Sharing Little With Their Employees.
Express Scripts even told me that some of its clients are “addicted to rebate checks.” It’s not hard to imagine that some plan sponsors and their benefit consultants develop formularies that emphasize high-list/high-rebate products. Manufacturers have therefore been leery of dropping prices, because they risk losing market access if a competitor’s product doesn’t also cut its list price.
This reality is not fully understood by many analysts and nearly all politicians. That’s why I asked: New Disclosures Show CVS and Express Scripts Can Survive in a World Without Rebates. Are Plan Sponsors Now the Real Barrier to Disruption?
The new Express Scripts formulary addresses this problem by asking plan sponsors to choose a formulary comprising products with lower net prices over high-list/high-rebate products.
Problem 2: PBMs have rebate guarantees with their plan sponsor clients.
Some plan sponsors have contracts in which their PBM guarantees the total dollar value of rebates that get passed back to the sponsor. When list prices rise quickly and the gross-to-net bubble inflates, a PBM can readily agree to such a guarantee.
But these guarantees dissolve when a manufacturer cuts its list price to be closer to that of the drug’s net price. The removal of rebate dollars creates a contract dilemma. A PBM no longer has rebate funds to pay out, yet their customers still expect the guaranteed payments.
Consider a manufacturer that sells a drug with an annual list of price of $1,000 and a rebate equal to $600. A PBM that passes through 100% of the rebate could guarantee the $600 rebate payment to its plan sponsor client.
Imagine that the manufacturer cuts the drug’s list price to equal the net price of $400. The PBM can no longer maintain its rebate guarantee of $600. The PBM may keep the low list price product off the formulary to avoid a substantial financial loss.
This economic reality is another reason a manufacturer can’t simply cut the list price of a heavily rebated product. Activists who tell drug makers to “just offer lower list prices” are being insincere and misleading about U.S. drug channel realities.
To address this issue, the new Express Scripts Flex formulary creates a contracting infrastructure by which the PBM and plan sponsor agree to alter the rebate guarantees. This enables the lower list price products to replace the high-list/high-rebate version without significant disruption to the PBM’s economics.
But these guarantees dissolve when a manufacturer cuts its list price to be closer to that of the drug’s net price. The removal of rebate dollars creates a contract dilemma. A PBM no longer has rebate funds to pay out, yet their customers still expect the guaranteed payments.
Consider a manufacturer that sells a drug with an annual list of price of $1,000 and a rebate equal to $600. A PBM that passes through 100% of the rebate could guarantee the $600 rebate payment to its plan sponsor client.
Imagine that the manufacturer cuts the drug’s list price to equal the net price of $400. The PBM can no longer maintain its rebate guarantee of $600. The PBM may keep the low list price product off the formulary to avoid a substantial financial loss.
This economic reality is another reason a manufacturer can’t simply cut the list price of a heavily rebated product. Activists who tell drug makers to “just offer lower list prices” are being insincere and misleading about U.S. drug channel realities.
To address this issue, the new Express Scripts Flex formulary creates a contracting infrastructure by which the PBM and plan sponsor agree to alter the rebate guarantees. This enables the lower list price products to replace the high-list/high-rebate version without significant disruption to the PBM’s economics.
BUBBLE PARTY?
I was highly critical of Express Scripts’ decision about 2019 preferred formulary exclusions for HCV therapies. Express Scripts excluded AbbVie’s Mavyret, the market share leader with a low list price, and thereby forced at least one in four HCV patients to use products with high list prices and high rebates. See 2019 Express Scripts Formulary Exclusions: Hepatitis C Changes Show Why the Drug Channel Must Change, Too.
With its Flex formulary, Express Scripts is at least showing that it’s aware of the issues and is proposing a solution. Recall that it is also piloting new contracts that delink its compensation from drug list prices. (See PBM Pricing Overhaul: Express Scripts Prepares for a World Without Rebates—But Employers May Not Change.) As Express Scripts correctly notes in its press release, its new formulary will also benefit patients who face coinsurance and deductibles.
It remains to be seen how many more manufacturers will follow Gilead and Amgen by lowering list prices—and whether plan sponsors will adopt new formularies that will support these low list price products.
P.S. For those who don’t know, one of SpongeBob SquarePants’ favorite pastimes is “blowing soap bubbles into elaborate shapes.” Hence, Mr. SquarePants is the honorary mascot of the gross-to-net bubble. Bonus points to Express Scripts for using our term in its press release!
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