Understanding the Role of Rebates in Prescription Drug Pricing

Please note: This is an unedited transcript. Note: This is an unedited transcript. For direct quotes, please see video at http://allh.us/TkPcm 


SARAH DASH:  Good afternoon everybody. Hope everyone’s enjoying your lunch. Hello. I am Sarah Dash; President of the Alliance for Health Policy and I’d like to welcome all of you to today’s briefing. We’ve all been waiting with bated breath, sorry for the pun. This briefing is on rebates in the prescription drug supply chain and without further ado, I just want to introduce Erica Socker. She is Director of Health Policy for the Laura and John Arnold Foundation, which is supporting today’s briefing. She’s going to make some brief opening remarks and then we’re going to kick off our panel. Erica.


ERICA SOCKER:  Thank you, Sarah. So, as Sarah noted, my name is Erica Socker and I’m with the Arnold Foundation. I just wanted to start by thanking the Alliance for hosting today’s event on prescription drug pricing, and wanted to thank all of you for attending and for showing interest in this topic. How we deal with rising prescription drug costs is one of the key challenges we face. Prescription drug spending accounts for a significant share, 17 percent about, of our total healthcare spending, and prescription drug prices have risen really dramatically over the past decade.


These skyrocketing costs put budgetary pressure on Medicare and Medicaid and they matter a great deal to patients who are having trouble affording the medications that they need. The overall objective of the Foundation’s healthcare portfolio is cost containment, and we’re really interested in that because we want to improve affordability of care for governments, for employers, and for families. Prescription drug prices are a big part of this for all the reasons I laid out and it’s a key focus of the Foundation’s work.


As part of our efforts to lower drug prices, we’re supporting research to help better understand the drivers of prescription drug prices, and we’re also supporting work to develop effective policy solutions and to build support for these solutions. Reducing high and rising drug costs will require addressing the issue from multiple different angles, and our strategy reflects that. We tend to have four objectives in our work. The first is fostering greater price competition in the pharmaceutical market; improving the way Medicare, Medicaid, and other payers pay for drugs; exploring alternative ways to fund and reward innovation beyond the existing patent system; and, the topic of today’s conversation: creating more aligned incentives along the entire supply chain. We are currently supporting projects across all of those areas.


Today we’ll hear more on the last topic, including how the rebate system fits into the larger supply chain debate, some of the distortions that it may have created in the market, and hopefully some ideas about what can be done to improve it. And with that, I’ll turn it back over to Sarah. Thank you.


SARAH DASH:  Thanks, Erica. Thanks. Well, as Erica said, today we are going to focus on just one aspect of the overall drug pricing supply chain, and that’s prescription drug rebates. We are going to focus primarily on Medicare Part D and the commercial system. There is a completely different system in Medicaid, so just to kind of put that out front in case anyone was looking for that information.


So I’m going to go ahead and introduce our panelists. Each of them has a wealth of expertise on this topic and is going to explain different vantage points about the rebate system. Joining us today, and we’re going to go down the line here, joining us today, all the way to my right, is Lance Grady. Lance is the Vice President and Team Lead at Avalere Health. At Avalere, he devises commercialization strategies focused on value, access, and reimbursement with a focus on oncology, and over 20 years of experience in policy access, reimbursement strategy, and execution, and point of care. He’s passionate about providing practical and meaningful solutions that are viable to all healthcare stakeholders. Thanks for joining us, Lance.


We will next hear from Ross Margulies. Ross is an associate at Foley Hoag. He helps innovative healthcare and life sciences companies to advance their strategic business goals in a heavily regulated industry undergoing rapid change and disruption. His clients include community health centers, healthcare startups by pharmaceutical manufacturers, long-term care providers, pharmaceutical benefit managers, pharmacies, large healthcare systems, insurers, and technology companies.


Next, we are very pleased to hear from Lida Etemad. Lida is Vice President of Pharmacy Management Strategies for UnitedHealthcare’s employer and individual and community and state divisions. In this role, she’s accountable for identification and development of programs and products that enhance the value of their pharmacy benefits.


Next, we’ll hear from Jack Hoadley. Jack is the Research Professor Emeritus at Georgetown University’s Health Policy Institute. He retired in 2017 but continues to conduct research on a part-time basis. Dr. Hoagley’s completed six years as a commissioner on the Medicare Payment Advisory Commission, MedPAC, he holds a PhD in political science and, prior to arriving at Georgetown in 2002, helped staff positions at the Department of Health and Human Services, MedPAC, the Physician Payment Review Commission, and the National Health Policy Forum.


And, finally, we’ll hear from Gerard Anderson who is Professor of Health Policy and Management, and director of the Johns Hopkins Center for Hospital Finance and Management. Prior to coming to Johns Hopkins in 1983, he worked in the Office of the Secretary of the Department of Health and Human Services for a number of years.


So, with that, I will turn it over to Lance to kick things off.


LANCE GRADY:  Great. Good afternoon. It’s a pleasure to be here. I will take the lead-off position here in the batting lineup and talk a little bit about how prescription drugs leave the door from the manufacturer and the interface on the supply side from a manufacturer’s perspective, both with the wholesaler through the pharmacy and then, also, from the perspective of how rebates may impact pricing and how rebates may impact access primarily in Medicare Part D.


So we’ll spend a little bit of time on drug benefit categories very briefly. We’ll do a little bit of alphabet soup on drug payment methodologies. Some of this may be back-of-the-hand knowledge for some of you, others it might be a foreign language. We’ll talk about key stakeholders in the drug distribution and reimbursement system, and we’ll give a really detailed flow, but it is an illustrative flow, with an artificial price of a prescription of a WAC, or a Wholesale Acquisition Cost, WAC, of $1,000 and we’ll talk a little bit about how drug and payment flow moves through the pharmacy benefit to illustrate the impact of discounting and/or rebates when linked to list price.


Alright, so let’s get into it. I think one of the first things to understand is that all drugs are not covered under the pharmacy benefit and all drugs that are covered under the pharmacy benefit aren’t exclusively covered under the pharmacy benefit. But a rather simple flow of looking at this, and one of the ways in which HHS looks at this, is to determine route of administration or if a product is self-administered. And, as you know, all orals or most orals are self-administered, and since the inception of the Part D plan and Part D drug benefit, most orals, not all, are covered now under the Part D benefit.


There are also products that are physician-administered, and not all physician-administered products are covered incident to physician or under Part B in the Part B drug benefit. It could depend upon on who purchased the drug and so you may also hear about injectables and also infusion drugs that, while they are administered by a healthcare professional, they may be procured through a pharmacy benefit, or Part D benefit.


There is also, on the commercial side, sort of an in-between step down this far right-hand aspect of the medical benefit. And, in fact, some instances, while not necessarily in fee-for-service Medicare at present, a provider or a patient or a member or a beneficiary may engage in care in an infusion in which the pharmacy actually acquires the drug but yet the physician simply bills or administers that. Now, we’re not going to talk about that for today’s purposes, but if you’ve heard of CAP, or if you’ve heard of the Drug Value Program, or if you’ve heard of the IPI proposal, this, in essence, introduces a middle step, if you will, down this right side in terms of who purchases the drug, when that drug might be traditionally physician-administered. But for our purposes, we’re going to be talking today about the pharmacy benefit.


Now there are various pricing methodologies that are used in drug reimbursement, and if you look at some of the terminology here, WAC, or Wholesale Acquisition Cost, is one of the drug-pricing types that are defined in regulations. ASP is also defined, AMP is also defined as well. WAC is very common and is commonly defined in which it’s – this is the price that it leaves the manufacturer to the wholesaler and so the purchase is typically at WAC, or it could be at a discount off of WAC, and what is getting a lot of press is the fact that some of these discounts on the supply side could be percentage-based, or could be attributable to a product’s wholesale acquisition cost or launch price or unit price. And so, as price goes up, if there is a percentage discount off of that increased price, then that could benefit the supply side as well.


WAC is also a determining factor when we look at rebates, and many of the negotiations for rebates for formulary access are based upon a product’s WAC, or a prospective WAC, or a potential average annual WAC for a patient or a member throughout that benefit year. And so, Wholesale Acquisition Cost, a price set by manufacturers, is also a determinant or a variable in many of the price concessions, both on the supply side and on the access negotiation side.


In the middle you see ASP, which is the Average Sales Price, and at present, ASP is rarely used in adjudicating a pharmacy benefit. Most pharmacy benefit payments are either WAC-based or AWP-based. But ASP, to some degree, does account for rebates and discounts. Not rebates and discounts that are supplied to government entities, disproportionate-share hospitals, Medicaid, things of that nature, but rebates and discounts that are supplied on the commercial side. And so, if you provide a rebate or a concession in average sales price, that has a dampening effect on a product’s Average Sales Price. What has an increase or heightened effect on a product’s Average Sales Price is a price increase, or volume, and so you see fluctuations in ASP and, in fact, CMS publishes quarterly the Average Sales Price for physician-administered drugs on a quarterly basis. It is this average sales price plus 6 percent that determines the physician revenue when they are providing physician-administered services.


Average Wholesale Price, it’s kind of a fossil that’s sort of leftover in today’s world. It’s an arbitrary sort of number that was meant to sort of be intended to be what some people call a WAMP, or a Widely Accepted Market Price. It has very little application in terms of the manufacturer establishing it, but you could arrive at an AWP relative to a list price, or WAC. AWP still exists in some traditional reimbursement models, in particular AWP minus percentage points, and AWP can increase as well, in particular, when a product takes on a price increase.


That was a lot to digest there, and it is very complicated. And when you think about how this is depicted in the flow of a product and how a patient or a pharmacy or a health plan or a PBM or a wholesaler interfaces with one another today in the U.S. market, it can be quite complicated, and so this next slide is attempting to somewhat simplify that. And this is a challenging slide, and we went back and forth on this and should we do animation or should we do a bill, but if you start at sort of 12 o’clock, at Step 1, and we move clockwise, the product will leave the drug manufacturer, and we’re assuming in this example, a WAC of $1,000. And for simplification purposes, let’s just say that this is a one-dose oral product. And so the wholesaler is going to purchase at WAC. There could be a net minus off of that WAC. Now, that net minus might be at point of purchase, but it’s most likely at point of chargeback because the wholesaler is trying to incentivize pharmacies to participate in their network so that they can sell to those pharmacies as well.


The pharmacy is somewhat the end-purchaser here, but maybe not. The pharmacy is also going to be negotiating in Step 2 through a PBM to a health plan on a reimbursement rate for fulfilling this prescription, and this pharmacy reimbursement is AWP-based. At the point of care between the pharmacy and the patient, you have the patient’s out-of-pocket benefit. Now we know 20 percent co-insurance is just an example here, but in this instance, a patient’s co-insurance is not based upon any negotiated payment rate by any upstream stakeholder at present, and particularly in the Part D benefit. There are some examples in which a rebate or a discount pass-through does exist to patients in commercial books of business, but those are small. In the Part D benefit, that patient’s co-insurance is going to be based upon that patient’s standard benefit design, and in this instance 20 percent, times that WAC. And so that patient, at point of care, is responsible for $200. And, of course, this is the typical non-LIS patient. If you are a Low-Income Subsidy Part D patient, or if you have a different benefit design you will, of course, have ranges of deductibles, ranges of co-pay or co-insurance against this sort of arbitrary example of a $1,000 WAC.


Behind the scenes, and possibly chronologically in terms of how this flows as it relates to the process of data, but certainly not chronologically in the flow of a calendar and, in fact, prior to this formulary year, or bid year, negotiations between the drug manufacturer and the PBM and/or the drug manufacturer and the health plan have already occurred. And in this hypothetical example, there is a 30 percent rebate negotiation in which that manufacturer will receive formulary access, either at parity or preferred, relative to other competitive products in its market basket. And so, in this instance, that rebate is negotiated on the front end and then is applied retrospectively on the back end.


Now most rebates today are tied to formulary access, and I know Lida will go into this in detail from the plans’ perspective, there are other rebates that are in play in the market, including potentially protected price, including potentially rebate pass-through. Some of those, and especially rebate pass-through to the beneficiary, is what is sort of under the microscope today as we contemplate potential rebate reform in the Medicare Part D drug benefit.


I’ve got four esteemed panelists with me who can speak to some of the legal, more practical, and other aspects of how this impacts the marketplace. My job was to get the prescription out the door and to move it through this sort of convoluted clock in a very short 10-minute time, and in one slide. So happy to take other questions on how pricing methodologies and how the flow of product on the supply side and the access side are interlinked in today’s market when we get to the Q&A.


ROSS MARGULIES:  Thank you, Lance. First of all, that was very helpful. I think that’s necessary to help to try to understand the rest of this conversation which is both what are some of the proposals the administration is considering in terms of drug pricing reform generally and rebate reform specifically, but also in understanding how the drug supply chain works from top to bottom. I’ll also say I am tickled pink that it is standing room only at a session on rebates, which I think, a few years ago would not have happened or maybe even a year ago. And that’s really why we’re here today, which is this administration has focused heavily on drug pricing reform and, in particular, in May of this year, as many of you know, the administration released a blueprint called: America’s Patients First Blueprint for Drug Pricing Reform, that, among other questions – it really was in the form of a request for information – asked whether or not rebates, as Lance explained them, lead to either higher list prices in the marketplace or, and/or, higher prices paid by consumers.


Now, the other panelists here I think will get a little bit more into what the data shows with regard to rebates. My goal here is to talk about what we think the administration is proposing, but in order to do that, we need to get a little nerdy with anti-trust law, the Anti-Kickback Statute, and a few other things. So bear with me here. I will do my best in this short time to make this make sense. So, next slide, please.


Rebates and discounts and chargebacks, and what is the difference? So, for purposes of my individual presentation, when I’m talking about rebates, I am talking about discounts that happen after the fact. So instead of a Black Friday sale on a drug where the drug is 20 percent off, when I say rebate what I mean is, you buy the drug at $100, which is its list price, and then you mail in a rebate and you get $20 back in your hand. So, one happens up front and one happens at the back end.


So rebate agreements, discount agreements have been happening between manufacturers and plans and pharmacies for decades, but there was a lawsuit that I want to briefly touch on because it is important for understanding some of the implications of the current administration’s policy proposal, what happened with that lawsuit. So that lawsuit happened in the mid-1990s, and what happened was manufacturers were offering deeper discounts, in many cases, to payers and managed care organizations than they were to pharmacies. So they would offer payers $80 for a $100 drug and only $90 to the pharmacies. And the pharmacies looked to anti-trust law, and in particular, looked to two different laws: the Sherman Act and the one I cite here, the Robinson-Patman Act, which is an often-criticized anti-trust law, but one that is still on the books that makes it a violation for a seller of a product to offer that product on different pricing terms to equally situated distributors. So the pharmacies in that case argued, hey, manufacturer, you are offering a deeper discount, different pricing terms, to those health plans. That is a violation of the Robinson-Patman Act. Next slide, please.


The case was ultimately settled. It was not decided in court, and the settlement agreement has actually expired, but the law behind that, the Robinson-Patman Act and the Sherman Act still stand, and the settlement agreement, in addition to a monetary penalty, led to an increase and a change in behavior. So the manufacturer said, no, pharmacies, we’re not going to just offer you that same price that the payers get, but we will offer all of you the same price if you can show that you can move a certain amount of market share. So if you are able – so if you can buy, let’s say we have a drug that’s $1,000, if you can sell 1,000 units of this drug, then we’ll give you that $80 price. Now the only way to reflect that is doing the discount, or what we’ll call here now a rebate, after the fact, because I won’t know if you can sell those 1,000 units of drug until after the fact. And so, although rebates, i.e., backend discounts existed prior to this 1996 settlement, it really became the predominant method and what has underlined the idea of a backend rebate over the last 20 years.


So now, in 2018, federal policymakers are suggesting that we make changes to this post-settlement rebate structure. And so I want to talk a little bit about both: 1) what exactly is the administration proposing; and, 2) what might this litigation from the 1990s tell us about potential hiccups in that arrangement. Next slide, please.


So why are we talking about the Anti-Kickback Statute, which is a federal healthcare fraud and abuse law? The administration has its arms tied a little bit in how it can address rebates and drug pricing generally, and that is because the Part D statute, because it was designed by Congress to be a market-based program, has a very important clause in it called the Non-Interference Clause. And that non-interference clause says – this is very broadly – government, stay out of the negotiations between manufacturers, payers, PBMs, pharmacies. And so, the administration cannot actually go in and say stop doing rebates in Part D. So, instead, they have come up with an interesting idea which is well, a rebate – and this is why we’re talking about the Anti-Kickback Statute – a rebate, itself, is actually a violation of the Anti-Kickback Statute in many cases and right now we protect it with certain safe harbors, but if we remove those safe harbors, perhaps we could get rid of rebates entirely.


Now, the Anti-Kickback Statute, and this is hard to do a primer on this in 8, 10 minutes, but the Anti-Kickback Statute is a criminal law. It is a federal law that makes it a crime to a payer to receive anything of value as an incentive or an inducement to use a healthcare service that is reimbursable by a federal healthcare program. What does that mean? It means that when a rebate is paid to encourage a Medicare Advantage or a Part D plan to favor a particular product that is, on its face, a violation or at least implicates the Anti-Kickback Statute. So, put more simply, when a manufacturer says: we will rebate or discount this drug by $20, that itself does implicate the Anti-Kickback Statute because they are offering something of value to induce the referral of that item.


Now, a couple very important points about the Anti-Kickback Statute. When Congress created it, Congress also created statutory exceptions. One of note I would point you to is a statutory exception for discounts or other reductions in prices. Now that, again, is in statute, not in regulation, and so one immediate question for the administration is they consider potentially subjecting rebates to Anti-Kickback Statute scrutiny is: do we need to change federal law, because that statutory exception still exists. So, we’ll get back to that in a second. Next slide, please.


So, let’s break this down. That was a lot. So let’s say there are two equally effective products on the market treating a particular medical condition, each is a covered Part D drug, so they can be provided to a beneficiary; let’s say they’re heart disease drugs. Manufacturer A, in this case, provides a rebate of, let’s say, $50 on the drug with the WAC price of $50, so it is a $50 net-price drug, and Manufacturer B only offers a $20 rebate. So, Part D plans would generally favor the drug that’s net price is $50. The Anti-Kickback Statute is implicated here, because the manufacturer offering that drug for $50 is paying something of value; i.e., that $50 rebate, as an inducement to use its product. But, in this case, arguably the statutory exception for discounts or other reductions in price may protect this arrangement. Next slide.


There are also regulatory safe harbors. The Department of Health and Human Services and the Department of the Office of the Inspector General inside the Department of Health and Human Services, over the last 20 years has adopted about 28 various safe harbors. One question is, why do we have so many safe harbors and statutory exceptions? Because the language of the Anti-Kickback Statute, in and of itself, is quite broad. Without these exceptions, or safe harbors, much of what happens in healthcare, particularly today, given how much value-based care and integrated care we provide, would not be allowed. And so, over the years, the agency, HHS, continues to adopt safe harbors. There are regulatory safe harbors that also, arguably, protect rebates. There is a discount safe harbor, there is a safe harbor for GPOs, so manufacturers’ plans may rely on both the statutory exception to the Anti-Kickback Statute as well as these safe harbors.


My point here at the bottom is one question that policymakers must consider at this point is, given the existing statutory exception for discounts or other reductions in price, would Congress need to do something in order to subject rebates to Anti-Kickback scrutiny? Next slide, please.


Okay. I talked about this already. This is why many of us are here today. There is a rule; we do not know what is in the rule, but it has a very revealing title, and that rule has been at OMB since July. The title I should have included here is something along the lines of – oh, I did include it: Removal of Safe Harbor Protection for Rebates to Plans or PBMs Involving Prescription Pharmaceuticals and Creation of a New Safe Harbor Protection.


Again, the rule is under review at OMB. My understanding is the rule is still alive and we expect it to be released at some point in the near future. Just one other point I’ll make on the slide which is, you may have heard about a rule that came out on Monday. That rule is also on Medicare Advantage and Part D. Many thought it might address rebates; it did not, it addressed pharmacy price concessions as well as a couple of other things including protected classes. Pharmacy price concessions, although also an interesting piece of the drug supply chain, are far beyond the scope of what we’re doing today. Next slide.


So, what is in this proposed rule, and I realize I’m out of time, so I’m being very quick. We don’t know what’s in the rule, but here are four possibilities of what the administration might be considering: one, could they eliminate the regulatory safe harbor, notwithstanding arguments that the statutory exception exists, and subject all rebates to Anti-Kickback scrutiny thereby essentially forcing manufacturers, plans, to move back to a pre-rebate system where all drugs are discounted on the front end. Alternatively there are various scenarios that look like that, so instead of completely getting rid of rebates and subjecting them all to Anti-Kickback scrutiny we could, for example, provide protection only for rebate arrangements where 100 percent or some high percentage of rebates are passed through to the consumer at the point of sale.


Here are a couple of other possibilities; I won’t go through them all. Let me conclude with some key questions, which I will also not go through but I want to point to two because I want to connect a couple points I made throughout the presentation. The first is, as the administration and OIG consider ways in which they may subject rebates to scrutiny, so in some way restrict the use of rebates, it is important for them to consider the historical context in which rebates came to be and, in particular, whether or not, in a system where up-front discounts are the only way in which a drug can be discounted, will those discounts be as deep as the rebates are currently today because of the Robinson-Patman Act? So, if, in fact, a manufacturer, when offering up-front discounts, has to offer the same price to all equally situated purchasers, might that mean the pharmacies come back to the table, for example, and say: give us the same price. And instead of offering them that lower price, might it be possible that they just raise the price overall, or offer less discount than they do through the rebating system?


The other question I will make, and is one I brought up a couple times, which is – this is the first one – how could the OIG completely eliminate the discount safe harbor, since that safe harbor is protected in the statute? So, lots of questions to consider. You know, my hope to hear here is sort of what the data shows with regard to rebates and how they work more. So, Lida.


LIDA ETEMAD:  Good afternoon. As Sarah mentioned, I work for UnitedHealthcare, so I’m going to be representing the health plan view, but I also work very closely with our PBM, so I’ll be talking a little bit about their perspective as well. As everyone has mentioned, we’re only given 10 minutes, so I’m going to talk fast and I’m going to jump right in. So first, today is your day for graphics and charts, I guess. I’d like to level set on how commercial payers view rebates.


Rebates, as we’ve been talking about, are essentially discounts that are negotiated with pharmaceutical manufacturers and, at a very high level, payers are able to obtain these discounts due to two factors. The first is size, and the second is level of control. The more you have of either of these things, the deeper the discount that you’re able to obtain. So, as it relates to size, I think that’s something that’s fairly familiar to everybody, the more prescriptions you pay for, as Ross mentioned, the greater the volume you have. The level of control is something I’m guessing most of us don’t go around thinking about every day so that’s something I want to spend just a minute digging into a little bit deeper.


Level of control essentially means how much influence a payer has on either drug selection or drug use. When there are limited options to treat a specific disease state, payers have little ability to influence whether or not that drug gets used. An example of this would be Tibsovo, which is a new medication that has recently been approved for a certain type of cancer called AML. This drug is used in patients who either aren’t responding to current therapy or their disease or their cancers continue to progress, despite being on current therapy. For these patients today, there really are no other options for them other than this medication.


The medication is priced at $26,000 a month, or $300,000 a year. Because there is no competition and, as insurers were required to pay for this medication, that pharmaceutical company was able to set the price at the level that they choose and we, essentially, have very little to no ability to leverage an additional discount.


Now, on the flipside, let’s take the class of medication where all the products in the class are very similar to one another clinically. As payers, we have the ability to incent the use of one product over another through programs like step therapy, or through decreasing co-payments for members. An example of this would be the growth hormone class of medication. These medications are very similar to one another and often can be substituted for one another. Because of this, we’re able to influence the product that is being chosen when treating somebody with growth hormones, and due to that, we’re able to leverage much deeper discounts on these products.


I want to spend just a quick minute talking about how payers view rebates. When a new product enters the market, what matters most to payers is the net cost of that product, not the amount of rebate that’s associated with it. So if a new product comes to market and, say, it has a $500 list price with $150 rebate attached to it, or that product was to come to market with a $300 list price, from a cost perspective, those two situations would be viewed the same from a payer. Next slide, please.


So how do rebates work from a PBM perspective? I know we had a very detailed graphic, so I’m going to try to break this down just a little bit. Most of us are used to getting a prescription, most of us are used to taking a medication to our local CVS or Walgreens, and we know how that medication gets to us, but I don’t know if people are very familiar with how that claim gets paid behind the scenes.


When you take in your prescription, the pharmacy will take that information from your prescription, plus they take the information from your insurance and they put it all into their pharmacy computer system. They then electronically submit that claim to the PBM and, in a matter of milliseconds, that PBM is able to do a couple of different things. The first thing they do is look at your information and say, yup, this is a member that’s covered by one of our health plans. And then, the second thing they’re able to do, is take your information and match it up against the benefit design that you or your employer chose, and say this is what that member’s cost share is for that medication. They then electronically send that information back to the pharmacy and, as I mentioned, this happens in the course of literally less than a second.


The pharmacy, then, takes that information and says, okay, I need to collect the cost share from the member, so it might be $25 if it’s a co-pay, if it’s co-insurance, it would be a percentage of the drug, if it’s a deductible it might be the entire list cost of that drug, but they’ll collect your cost share from you, and then they collect the rest of the cost of that medication from the PBM.


The PBM then, at a later date, will send an invoice to the pharmaceutical manufacturer if there are any rebates that apply. The manufacturer will submit payment back to the PBM and then the PBM distributes those rebates to their customers, either health plans or employers. In some instances, the PBM may keep a portion of those rebates to pay for other services that they’re offering or, in other instances, the PBM may pass back 100 percent of those rebates, but then charge separately for the other services that they’re offering. It really just depends on what the customer’s goals are and how they want to use those rebates.


So, speaking of that, next slide, how do health plans or employers utilize rebates? Well, there are a number of different ways, and here I’ve just listed an example of a few of them. Rebates can be reinvested back into premiums for all beneficiaries of that health benefit. In this instance, rebates are really counted toward the bottom line of the health plan net costs, and with more overall healthcare costs, then you can achieve lower premiums. This essentially spreads out the value of those rebates across all beneficiaries. Rebates can also be used to lower members’ cost shares. Members who are utilizing a rebated medication who have a co-payment design, those rebates can be passed back, the value of those rebates can be passed back to the member through a lower co-payment on that rebated drug. For members with co-insurance or deductible designs, employers can choose to pass back the value of those rebates through a point-of-sell discount program or a point-of-sale rebate program, and I’ll talk a little more about that in just a minute.


Employers can also reinvest those rebate dollars into other programs, such as wellness programs or member engagement programs. Examples of a wellness program would include putting additional dollars into an employee’s HSA if they complete educational programs on things like weight loss or on smoking cessation, and then member engagement programs can include things like offering a lower co-payment or cost share if members refill their medication on time or if they choose the highest value or most cost-effective product.


The last two slides I have provide more details on a couple of the programs I talked about on the previous slide. And the first is our point-of-sale discount program. The point-of-sale discount program provides members who are utilizing medication with a rebate a discount at the point of sale that is funded by those rebates. The tape on the bottom of this slide explains how that works, so when I say point-of-sale discounts or point-of-sale rebates, what does this mean from a practical purpose? We’ve laid that out pretty clearly here with a couple of different examples. For this example, we have a prescription drug that has a $400 list price or a WAC price, as Lance explained. It has $150 discount associated with it, funded by those rebates. So if a member has a deductible program without a point-of-sale discount program, they would pay that full list price or that $400. With a point-of-sale discount program in place, they would pay that discounted price, or $250. If they have co-insurance, that co-insurance would key off of that list price without the program, so if it’s a 20 percent co-insurance, they would pay $80; with the program in place, it would key off the discounted price, or it would be $50. If they have a co-payment, well, they’re unlikely to experience a change at all. That $35 co-payment would be less than they’re paying today, and that $35 would still be less than the discounted price, so that’s what they would pay.


The last example we have on the slide here is really for illustrative purposes only. This is not going to happen, but just to show you how the program works, if they have a $300 co-payment, today they’d pay that $300, but with this type of program in place, they would pay $250 because that net price, net discounted price, is less than the co-payment.


And then, the last slide I’m going to talk about depicts one of our newest programs called My ScriptRewards. This is an example of a member engagement program. Under this program, members who, in consultation with their doctor, choose the most cost-effective medication will receive additional benefits. The first benefit that they’ll receive is a zero-dollar cost share for medications that are included in that program, and the second is up to two $250 medical debit cards annually. Those medical debit cards can be used for other medical expenses like physician office visit co-payments, they can be used for lab tests, or even other prescription medications if they happen to be on them. They’ll continue to receive these $250 debit cards every six months, as long as they continue on a medication that’s included in the program. So that provides another example of how rebates can be reinvested back to the member.


That concludes my prepared remarks, and at this time, I’ll turn it over to Jack.


JACK HOADLEY:  Thank you. So I applaud you all for sticking with us. There’s a lot of material that you’re being given. I feel like this is an advanced graduate student seminar, because it’s complicated. I mean, this is a complicated world, and I’m going to give you another little piece of it, which is basically how the Part D program sort of overlays on what we’re doing here.


So first thing I’m going to show you is the Part D benefit design, which is, in and of itself, a complicated design and it’s one that’s changed. I’m not going to go into all the details of this, but the main points to take away here are that the amount the beneficiary pays changes as you move through the benefits, so when you’re in a deductible, if your plan has a deductible, you’re paying 100 percent of the cost. In the initial coverage period, you’re paying 25 percent of the cost, although that may come in the form of co-pays or coinsurance, depending on the design of your particular plan. When you’re in what’s then called the donut hole or the coverage gap, which is now mostly phased out, you’re paying a percentage of the cost that, for 2019, will be 25 percent for brands and 37 percent for generics and, in 2020, it’ll be 25 percent across the board. And finally, in catastrophic coverage, you’re paying just 5 percent, but again, it’s a percentage co-insurance, so all these issues of percentage of what price will enter in.


Another point to be made on this slide is that the plan exposure varies as well. The plan is picking up 75 percent of the tab in that initial coverage period, but it’s picking up much less in the coverage gap because of the manufactured discount program that was put in as part of closing the donut hole and then, in the catastrophic phase, the government reinsures the largest share of the payments so the plan’s exposure is less. So, again, these all complicate how we look at this sort of accounting of rebates.


So next is sort of what magnitude do rebates look like? And this is based on the Medicare Trustees Report, the most recent one in 2018, which shows the overall average rebate is a percentage of all drug costs calculated across both the drugs that actually have rebates and those that do not have rebates. So this is sort of a net average cost. One thing that’s interesting, if you looked at the Trustees Report just three years ago, you see now that we’re projected to get up to the 27 percent level of overall rebates, and right now we’re at about 25 percent, but the projection just three years ago only topped off at about 17 percent. So that illustrates how rebates have gotten larger in recent years, and there’s a lot behind that, which I won’t try to go into.


The next slide gives a little bit of a sense, and this is 2010 data from CBO, and I don’t have a more recent version of this, but this sort of helps to break out that total rebate on the left, which, back in 2010, was 11 percent from that Trustees Report, but if you looked at the share of rebates for brand drugs, it would be higher, the average rebate would be 15 percent and the average rebate for drug-spend in certain top classes would be a little higher than that. The point is that rebates can bury, and in some cases, can be up in this higher range of 33 percent that I show on the left, all these numbers would look higher today because the overall level of rebate has changed. And if you go on to the next slide, you see, from one estimate that comes out of Milliman and was done for the health plan industry, and this is something we, as researchers, can’t verify because we can’t look at these individual rebates, but they give you a sense of how the rebate percentage varies in different kinds of situations. So where you have direct brand-to-brand competition in a drug class, you get the highest rebates over there on the left; when there are direct generic substitutes, you know, maybe the rebates on the brand drugs are a little bit lower, but they’re higher when there are more competitors than when there are fewer competitors.


When you have no direct brand competition, or generic substitutes, you get the lowest of the rebates at 23 percent in this estimate, or even lower in the protected classes where the plans don’t have the same tools to negotiate because there’s less flexibility on what they can do with drugs. A protected class in Medicare Part D are certain classes like antidepressants or antipsychotics or cancer drugs or HIV drugs where all drugs in the class must be listed on formulary and where you can’t use all of the normal tools that you might use in other classes, and so, the argument here is that rebate discounts are less in that class.


So on the next slide I’m going to take a minute on – and this goes back to something CMS put out. When they did a request for information in November of last year, starting really some of the discussion on what should we do with rebates, and the concept that had been going around, and you’ve heard some talk about today, is are there ways to reflect the rebate at the point of sale? And Lida showed you some examples and some of their products where they do that. In general, those are not done in Medicare, and so the administration put out this request for information to say: we think it may make sense to reflect rebate discounts at the point of sale because, remember, I showed you in that first slide, a lot of the cost sharing is based on the percentage and the percentages of the list price, or at least of the negotiated price on the invoice that may be a little bit less than the list price, but it’s not on the post-rebate price.


And so the argument has been, by a number of people, including this administration, that maybe the co-insurance amounts that people pay in those various phases of the benefit, should be based on a post-rebate price. And so they asked stakeholders, they asked the general public to say: if we wanted to do that, what should this look like? And they put a particular idea out and the scores here are based on their accounting for how money might move around given a particular example of how they might do it. And I pulled out two examples of where about one-third of the rebate is passed along to the consumer at the point of sale, and another example where 90 percent is passed along. And I won’t go through all these numbers here, but there are some things that are important to point out.


Beneficiaries are estimated to have savings in net, but as you see in the second or the third line of this table, there is a net savings on cost-sharing, so that means when an individual is buying one of those higher-priced drugs and is paying a 25 percent co-insurance on it, they’re going to pay 25 percent at a lower cost so they’re going to save money. But, and a couple of people have pointed out, some of that savings is also going to show up in taking away the overall value of those rebates in calculating the total costs. And Lida talked about that. The premiums, then, would go up so you could debate, and I’ll show you in a minute on the next slide when I get there, but there is a tradeoff between savings to those beneficiaries who use the particularly expensive drugs, and they’re going to save those dollars on that second line, but the average beneficiary in a Part D plan is going to spend some more on premium. And we can have a policy discussion over what’s the right balance there; how should those tradeoffs be made?


There is some net cost to the government and, again, it’s broken down of some costs and some savings for different elements. Partly, it’s the government has to pay the cost-sharing and the premiums for the people who are eligible for the low-income subsidy, so some of the government’s costs and savings are really what would have been beneficiary savings but are picked up by the government for lower-income beneficiaries. Others of these factors, including the manufacturer gap discount where there’s an additional savings on the bottom of this, have to do with where people fall in those different parts of the benefit.


Remember I showed you in that first slide, people’s cost-sharing and who pays the cost varies as you work your way through total cost, you work your way through the different phases of the benefit. Your speed at going through those phases is going to vary if we start calculating the cost of the drug based on a post-rebate price as opposed to a pre-rebate price. So these are some of the complexities that come in to how we do the accounting and, again, this was just a general estimate by CMS on one particular model for doing it. Go on to the next slide.


So I’ve talked about some of these points. The exact numbers here rely on a whole lot of assumptions so I’ll talk some more about those on the next slide. But, in general, we’ve got a situation, as I’ve said, where we’re going to lower the out-of-pocket costs for those beneficiaries who fall into high co-insurance tiers because they’re using an expensive specialty drug, because they’re finding themselves up in the coverage gap phase, and they’re just generally going to have a higher share of their costs and so figuring those percentages off reflecting rebates will create some savings for them. But, in turn, there’ll be an increase in the cost for all Part D enrollees on their premiums.


It also would do some changes in some of the incentives for plan bidding, and there’s some gaming that’s possible now on bidding because what a plan has to do when they submit their bit to CMS each year, is estimate what amount of their revenue is going to come back in rebates, and how is that going to be divided up, and how much of the benefit is going to be in those different phases of the benefit, and how much reinsurance will they get from the government? So there is some ability for some gaming on that and so one potential change is it might change how bids are formed. If you’ll go to the last slide.


So again, what would change to make some of these things play in different ways? And you’ve heard references to a number of these points as we’ve gone on. One of the questions is: what are the incentives for manufacturers, PBMs, and Part D plans to change their use of rebates? When we estimate numbers, like CMS did, it’s based on pretty much a static estimate of what things look like the way the game is played today. And the question is: will the game be played the same way if the rules change? So if rebates are more visible, if rebates are being passed through at the point of sale and therefore it just works differently, will rebates in net be higher or lower? We don’t know. Will there be a different distribution of rebate dollars? Will more of the rebates go to one class of drugs versus another based on how those rebates play out at point of sale, and that’s going to change people’s behavior in terms of what drugs they’re willing to pay for and how they use them, and it may change other things.


The impact of the transparency of this partial transparency of rebates, most of these schemes assume that there would be some averaging going on that we wouldn’t be revealing the exact rebate for each drug for each manufacturer, but it might be averaged at some class level. But even some transparency, some economists would argue, that will threaten the rebates. That will mean you won’t give as deep a discount if everybody knows what it gives. That’s like if you were sitting on the airplane and you knew what price everybody paid for their seat, well, you’d say, why didn’t I get that price? And it would change that negotiating dynamic. We don’t know how that would play out.


Other federal policy changes – there are proposals out there from MedPAC, from the administration, on changing that share of federal reinsurance, that 80 percent I showed you on the first slide. If that were reduced and plans had to pay a higher share of the cost, again, that changes the dynamics of the whole system. If we change the out-of-pocket costs for beneficiaries, and there are proposals out there to eliminate the beneficiary cost in that catastrophic phase, again, it would change the dynamics, could change the rebates and all those dollar estimates could change.


Finally, we could change plans designs, the way you use co-insurance and co-pays could end up changing under some of these different situations. So any time you look at a cost estimate of how much would this matter, how would this affect the cost to the beneficiary, to the program, to the federal government you’ve got to think about well, here’s a set of numbers, and we can all sit down and estimate numbers, but the behavioral changes made by players in the system would change how that works. And with that, I’ll turn it to Gerard.


GERARD ANDERSON:  Thanks. I tend to pick a tie that’s related to my talk. And today, the tie, and most of you can’t see it, is a Leonardo DaVinci’s writing. If you remember, he wrote backwards, left-handed, in Latin, so that no one could understand it. And I’m not sure — I think our group has done a great job of explaining the possibilities, but I’m sure many of you are confused. So what I’m going to talk about is showing me the rebates — and the savings from rebates. We can move on.


So again, I think we’ve done a great job of trying to explain it. The rebate system is only a small portion of what we’re talking about here, so what I want to take a look at is sort of the overall performance of the pharmaceutical industry and the healthcare industry quickly, and then talk about the role that rebates play. So some of you who are a little bit older remember an article that I wrote with [name] Reinhardt and some others called “It’s Price is Stupid” where we looked at how the prices in the United States affect how much we spend in the United States. And we saw that prices are higher for drugs, but also for hospitals and physicians or whatever. And we have an update of that, that’s about to come out in Health Affairs, which after 15 years, essentially shows the same thing. It’s price is stupid, that’s why we’re so expensive.


Moving right along. Pharmaceuticals are not all that different. We are number one in terms of pharmaceutical spending, compared to all industrialized countries. But the question is, are these because we have more expensive drugs that we utilize? Do we use more drugs? Or are the prices for the drugs that we have, substantially higher? So we took a look at the 79 drugs that have been on the market for at least two or three years, that are the biggest selling drugs in Medicare Part D. And we compared those prices to the prices in Ontario, Canada, the UK, and in Japan. And essentially what we said is, you know, what’s going on? How much more are we spending for these drugs? Next slide. And this is what the average price looks like: In the United States, $383 for the same set of drugs — same set of drugs, $111, $68 and $137. So all of this discussion about rebates and everything else, we are still paying three times more than what other countries are paying for essentially the identical drugs that have been around for a long time.


Next slide. So is this for all drugs? No. Basically what we see is, if it’s a generic drug, which is about 90% of the drugs that are sold in the United States, if there is competition out there, we are paying as — or lower prices than most other countries. It’s only where the prices — where there is very little competition in the generic space that we pay substantially more, and that’s where a lot of the policy attention has come in Washington. We all remember Martin Scrolly, he was our favorite guy. And then, but if we look at the branded drugs, what we’re seeing — and this is what we’ve been talking about mostly today, the prices that we pay in some cases were twice, and in some cases, fifteen times bigger than what’s going on. And this is after all the rebates, all the concessions, all the different discussions that we’re essentially having. Now, one of the arguments that you here is, well, other countries should pay more. And we’ve heard that from the council of economic advisors in the United States just this year. Other countries aren’t going to pay higher prices. They essentially have set the prices that they are willing to pay. So the United States is going to have to find ways to lower prices. What we know is, the longer the drugs is on the market in the United States — this is for branded drugs — the higher the price relative to other industrialized countries. All the other industrialized countries, the price goes down post-launch. In the United States, the price goes up, and you saw just recently, Pfizer raising the price of 41 drugs starting January 1st. So it’s a very different system that we have in the United States visa vie everybody else.


Next slide. How to rebates fit in? Well, basically they are the difference between the list price and the sales price. That’s a little simplified, but pretty much it is. So rebates increase when the list price increases, even if the sales prices remains the same. So very simply, who benefits and who loses when the list price increases? So branded drug companies, they are the ones who set the list price. They are not raising their prices because they want to raise their prices, they are doing it because it’s economically valuable to them. Having a higher list price means that they get more favorable placement on the formularies. They get to meet with Lida and they get a better deal. PBMs benefit from rebates because basically pharmaceutical companies give the money for the difference, for the rebates. And so that’s a substantial amount. And we looked at, and we have a paper that came out recently that showed the PBMs profits went from four billion to 12 billion dollars over a ten year period. Not all of it, but a lot of it attributable to rebates.


Who are the losers? Well, basically, companies that sell insure. Patients that pay greater cost sharing, and Medicare beneficiaries who get inappropriate formulas. So let’s talk about each one of those. So the PBMs are hired by the large employers, and what we see over time is that the large employers don’t understand how the PBMs operate, and what they see is they are not getting a large portion of the rebates that they are receiving back from the PBMs who are receiving. And we saw even large groups like Anthem Blue Cross terminating their agreement with the PBM, because Anthem Blue Cross could not understand the rebate system that exists in that. So we’re working with one of a large group, called Pacific Business Group on Health, to try to figure out how to eliminate the rebates from their system, and they are scared, they are — the large corporations don’t know how to do it. They don’t — they can’t find a lot of drugs that they want to deal with at the beginning, but they are starting to do those kinds of things, and what they call them are “waste free” formularies.


Next slide? Medicare beneficiaries. So we looked at the 250 PDPs out there, and what we saw in the PDPs, and the Medicare beneficiaries, is that there’s a number of examples of where there’s both a generic and a branded drug on the formulary. And the branded drug gets a better placement than the generic drug on the formulary. Now, branded drugs are always more expensive to the beneficiary than generic drugs, and yet we see that the branded drug gets a better placement. And that could be less cost sharing, that could be a longer period of time where you can buy the drug 30 days versus 60 days. It could be less prior authorization. It could be a whole variety of different things, but we see that happening. And essentially, when that happens, Medicare beneficiaries pay more out-of-pocket for this.


Next slide. So what can we do? Well, we’ve heard about Safe Harbor. I mean, I think to a large extent that will eliminate some of the incentives. The piece of it that we’re most interested in, is how can you essentially make it so that there’s not an incentive to raise the list price for the Medicare beneficiary or for all of us, because that’s where the cost essentially is. We are interested in waste free formularies because there’s a lot of times when the branded is more expensive than the generic. We are interested in, why are we paying two to five, 15 times more than other countries for exactly the same product? It just does not make sense to me, and I’m not sure it makes sense to most Americans that we should be subsidizing to the level we are, the pharmaceutical industry, and there’s a quick solution to all of this. What I want to do — think about — is changing the structure of who’s buying the drug? Essentially what we now have is drugs being bought separately from everything else that we do. So we have bundled payments in most things, but the one entity that’s outside of the whole issue of bundled payments, almost every single case, except for end stage renal disease, are pharmaceuticals. And if I want somebody to decide how much a drug should cost, and whether I should get the less expensive drug, for me it’s my doctor. And that’s for me, putting it in the hands of the private provider, the doctor, and to do bundled payments makes the most sense.


SARAH DASH:  Okay, well, thank you to our panel for — we were really mean, and we only gave them ten minutes, but we wanted to make sure there was time for questions. So you’ve heard a lot of information. We now have an opportunity for some audience Q&A. you have a few ways that you can ask your questions. You should all have some green cards on your tables, if you want to write your question down, someone will come along and collect it and bring it up. You’ve got two mic’s, they are a little hard to see, but they are on either side and you can ask your question in person. Or if you are, I guess, following along on Twitter, you can tweet a question and one of our staff will pick it up and share it. And that is the handle #allhealthlive.


So while everyone is getting their thoughts together, let me ask kind of clarifying question here, because I think we’ve heard threads of it. So when we talk about rebates, and Lida, you kind of alluded to this in terms of the — the point you made about like, the locus of control, or the level of control you have. Are we talking about kind of all drugs, or are we talking about mostly — you know, are most rebates applied to, you know, brand name, generic? Can you give a sense of the scope of kind of where these are applied in terms of the different types of drugs?


LIDA ETERNAD:   Sure, I can take that question. When we are talking about rebates, we are talking about branded medications, and by and large, I think Jack’s graphic told it all. They mostly occur when you have increased competition in the ability to influence whether or not a certain drug is used. So we are talking about branded drugs, and we are talking about drugs that are in classes with increased competition.


SARAH DASH:  Anyone else want to comment on that?


ROSS MARGULIES:  I’ll just add. I think it’s interesting, there’s a — I don’t want to call it schizophrenia, but there is an interesting back and forth going on at the agency where on the one hand, I think rebates are underneath scrutiny, because potential incentives to increase list price, and also the potential for beneficiaries to pay more out-of-pocket. At the same time, there are proposals coming out of the administration, out of the agency, that would actually increase the use of rebates. So for example, one of the graphs that was shown was showing how little rebates played a role in protected classes. Without going into protected class policy, there was a proposal on Monday that would allow plan at PBMs to actually use — to essentially introduce competition and that you’ll see — because of that policy, you will actually see — you should see rebates go up in that column. So it’s an interesting time where on the one hand I think plan tools are recognized as effective to lower drug prices, and rebates are recognized as a tool. On the other hand, there is also recognition that there might be a problem.


SARAH DASH:  I mean, I do want to just follow up on that, because people might be — I know it’s not the central focus of this briefing, but it is related, and people might be kind of curious about what was in the rule, or the implications around the protected classes. So I think we’ve seen some data from Jack about sort of competition versus level of rebates. I mean, is there a trade-off here between kind of broad access to every single drug in the class that is protected, compared to perhaps, with the price to the consumer might be? Is that kind of the central trade-off here? Can you all comment on that?


JACK HEADLEY:   There is a lot of debate on this point, clearly. But the whole notion of the protected classes in the first place was drugs where maybe there’s less flexibility from a clinical perspective. So it’s mental health drugs, it’s HIV drugs, it’s cancer drugs. Classes where clinicians are more likely to want to have access to the full array of choices that the formulary shouldn’t be restricted. The counter argument has been that because of that protection, just as you were talking about, there is not the same ability — and Lida was talking about — not the same ability to put those drugs at odds with each other and say, “I’m going to put one drug in a preferred position than another.” Now, the plans do have some tools even today, because they can put some drugs on a preferred tier, some drugs on a non-preferred tier, but they can’t leave a drug off the formulary. What the administration’s proposal would do, and it’s only been out for less than 48 hours, so I don’t think we’ve all completely absorbed it, but the idea would be, continue the current protected classes, but allow drugs that have gone up a lot in price to be candidates to be left uncovered, left off formulary. Drugs that are reformulations of an existing drug. And so certain kinds of situations, which would give the plans a little more flexibility to negotiate, and then potentially get more of a discount. Whether that plays out in practice, I think is harder to say.


LANCE GRADY:  Yeah, I’ll just add, to be mindful, that while this was proposed for plan year 2020, it was also proposed and in the proposed rule, there was reference to the Safe Harbor rule as well, and for us to not look at this in a vacuum. Because if you invite a plan to managed protected classes, and you incentivize rebates that tie to that list price in those protected classes, and those protected classes are, in the example of the ALM example, that is a protected class with a significant list price. You are then encouraging, or — not necessarily encouraging, but you are not eliminating the incentive of list price, and rebate tied to list price. So in management tools towards protected classes, or in indication based pricing, or indication based formulary, where you could disproportionately cover a product based upon its efficacy or its clinical determination for one use, as opposed to all uses, these are complimentary puzzle pieces, so to speak, to an anticipation of perhaps this Safe Harbor rule. And I think, thinking about these in a vacuum, if you are going to try to get to the end game of lowering that price, or lowering negotiated price for a beneficiary, I think you have to think about these as complimentary.


GERARD ANDERSON: I’m totally in favor of lowering prices, but just think about things like the protected classes, and choose, for example, anti-psychotics. People respond to different drugs in the anti-psychotic class. And you know, from a clinical point of view, maybe they are all the same, but for people, they have attachment to a particular drug, and that one particularly works for them. And for the PBM, or somebody to not include that one, would be devastating for certain people. And so that’s why you have these protected classes. And you have to recognize that. And so yes,  you’re making a trade-off between higher costs and less ability to negotiate, and greater access to certain people.


LIDA ETERNAD:  I think it’s important to find out, however, that in the design of prescription drug lists, or formularies, there is always a clinical input process. We have pharmacy and therapeutics committees that are staffed by outside clinicians, physicians, clinical pharmacist experts, who provide input into the role and the place and therapy that each drug brings. And so if you have instances where there are drugs that you need to require access to, just by allowing greater competition and by allowing more use of the PBM management tools, that does not necessarily equate to less coverage in those instances where it’s clinically important to have that coverage.


SARAH DASH:   Thanks, that’s a really important point. Okay, we have a question at the mic. If you could introduce yourself and ask your question. Go ahead, and sir, you can be next, and you can be on the hand mic. Go ahead.


AUDIENCE MEMBER:  Mike Miller, I’m a health policy consultant/physician, and I’m a senior policy [inaudible] for healthy women. I want to ask sort of encompassing question that I ask a lot of people that I work with, that makes me either popular, or very unpopular, so let’s see. The overarching framework question I want to ask is: With all of this history going back to the ‘90s, existing situation, a lot of different proposals, OMB rule that is still several months hiding at the War Building; what are seeking to accomplish? By “we”, I mean, Congress, the administration, and putting it into Jack’s context of the graduate’s seminar class, I will make it a little easier and give you multiple choices: Is it to save Medicare money? To save private payer’s money? To save patient’s money? To improve the quality of care and better outcomes? Something else? Or a combination of those? There’s a lot of things going on here, that trying to put a framework around it, why are we doing any of these things, or which of these things would make more sense or not.


GERALD ANDERSON: So for me, the one word would be affordability, which isn’t one of the words that you gave, but that’s the word that I would use that so many of the drugs that we have available to us are just not affordable, both from a — if you talk from a public health point of view, there is a number of drugs like Epi-pen, like Hepatitis C drugs that are not available to the public health agencies. There is a lot of drugs that are so expensive that because of cost sharing, we can’t afford. And it’s just an increasing amount, especially in the catastrophic side for the Medicare program. So for me, the one word is affordability.


JACK HEADLEY:  And I would second that. I mean, I think, in the way you framed the choices, sort of savings to the beneficiary is — would be my first goal. You know, there will be — some of those other things would potentially happen, or some cases there’s trade-off, some cases they can happen in tandem. Obviously the way you get there depends a lot. But the challenge of some of these expensive drugs, the word on the street suggests that for example in the Hepatitis C drugs, the rebates are somewhere upwards of 50%, and yet somebody is paying a co-insurance based on that full price. And half of that price is eventually being paid back in the system. And yes, that savings may come back in the side of premiums, but I want to encourage that person who needs that drug to be able to afford it, to be able to get it, and if we didn’t have a co-insurance system for so many of our drugs, that would be another way to have a lot more things on flat co-pays, to avoid this issue. But given the way at least in Medicare, much of the drug spending is based on co-insurance, then figuring out a way to reduce the list prices that co-insurance is based on, seems valuable as a means of savings for the beneficiary.


SARAH DASH:   Okay, thank you. By the way, we have about 15 minutes left. I know there’s folks raising your hands, a lot of interest, that’s great. I’m going to try to get to all of your questions. A reminder, if you  have a question on a card, someone will pick it up. Yes, sir, go ahead. If you could introduce yourself and state your question.


AUDIENCE MEMBER:  My name is Phil [name], I’m executive director and co-founder of a non-profit, pro-bono group called Physicians Against Drug Shortages. We are 140 plus members, plus we have a coalition which includes other groups representing thousands of physicians in the United States. We were founded basically to address the real root cause of drug shortages, which was why I’m in Washington from New York, at my own expense. There was an FDA meeting yesterday on drug shortages, which was supposed to be the root cause of drug shortages, but it was frankly more of the same.


SARAH DASH:  Sir, if you could just state your question.


AUDIENCE MEMBER:  I will state my question. You invited me. So at the meeting yesterday it was — reminds me of one comment of our group who said that “complexity is the mother of corruption”. Basically what we’re trying to do here is to repeal the anti-kickback, Safe Harbor, that began with the Safe Harbor for group purchasing organizations. This is basically a “get out of jail free” card, where Congress exempted GPOs from criminal prosecution for taking kickbacks, bribes, rebates from vendors, and this gave rise to a pay to play system, where the GPOs, instead of saving money for hospitals, they sell market share to vendors. In 2003 —


SARAH DASH:   Sir, I’m sorry to interrupt, but we only have 10 minutes, and we have a bunch of people with questions, so can you ask your question?


AUDIENCE MEMBER:  This is very important, you haven’t covered this, none of these people have covered this. In 2003, and we were the first to reveal this and we took it to HHS and the White House.  The fact that in 2003, the Inspector General of HHS slipped in an administrative change in a document in April of 2003 that extended the Safe Harbor for GPOs to PBMs. It was done in an administrative bulletin, okay? Nobody knew about this. I discovered it about a year and a half ago and that’s why HHS is proposing an administrative repeal of that rebate. This is the solution to the problem. 2005, Former Senator Kohl [name] drafted a bill to repeal the Safe Harbor, and it was killed by the hospital association and the GPO lobby. Senator Kohl did not take campaign contributions, he’s Kohl Department Stores.




AUDIENCE MEMBER:  I’m up here to meet with members of Congress today to demand repeal of the Safe Harbors —


SARAH DASH:  Thank you, sir. Thank you. I’m going to ask Ross — do you have a comment on —


ROSS MARGULIES:  Yeah, I thought — for one, I agree with you. I think one of the points I had made that I think their — with regard to the anti-kickback statute, I think there may need to be a congressional solution. And to your point, I think one of the difficult things here is managing different incentives. One of the things that the anti-kickback statute does do, is as I mentioned, in increasing age of integration and consolidation and trying to promote value-based care. It also acts as an appropriate — a tool to allow that to happen. So I think it’s — I think — I recognize the concern, I think it is a balancing act, and I think policymakers have a lot to think about. I thank you for your comment.


SARAH DASH:  Thank you, okay, we have a question at the mic, and then there were several other people who had questions. Go ahead. Go ahead at the mic. Thanks.


AUDIENCE MEMBER:  Thank you all for sharing your thoughts and taking questions. My name is Carl Robert, I work over on the less fancy side of the Capitol for Congressman Lipinski from Illinois. I am wondering if you had any thoughts as to why more payers have not turned to pass through style PBMs, where they tend to be more transparent about the rebates they get, and then charge a flat fee or percentage. Are there any sort of barriers to market entry for those types of PBMs? Or is there another reason?


GERALD ANDERSON:   We’ve been working with Pacific Business Group on Health on exactly this particular issue. And you know, what you have is, they don’t want to necessarily change the drug formularies that they’ve got, because that — people are very sensitive to the drug formulary, so trying to figure out a way to negotiate with the PBMs to not change the formularies, but to eliminate the rebates, is turning out to be quite a difficult challenge. But I will be glad to talk to you later about what we are doing, and how we are doing it.


SARAH DASH:  Thanks. Lida, do you have a –?


LIDA ETERNAD:  Yeah, I can add to that. I think that as you mentioned, they are available, right? Whether it’s with some of the smaller PBMs that are marketing themselves as transparent PBMs, or even the larger PBMs have the ability to structure arrangements with either employers or with the health plans to have that type of pass through arrangement. And that’s what I talked about in one of my slides. I think it depends on the goal of the employer or the health plan. There’s many different ways that you can utilize those rebates, as I went through, and since we’ve launched point of sale discounts, or point of sale rebates, we have had several employers come to us and say, “We want to have more transparency, we want to have this pass through model.” We’ve had other employers come to us and say, “This is something we’re interested in, but we need to think through how this is going to change our overall financials.” So I think it really depends on what the goals of the employers are, but those opportunities do exist today, as you point out.


SARAH DASH:   Thank you. Okay, we have a question back there with the mic, and then we will get to you, ma’am. Thank you.


AUDIENCE MEMBER:   Charles Fournier with the Type 1 Diabetes Defense Foundation. Now the question from me, [unintelligible], I will ask my question to professor Headley. Professor Headley, you provided a very detailed description of the cost impact of rebate [unintelligible] but not a description of the medical impact of cost sharing. Can you explain the relationship between inflated cost sharing and medical, especially in relation to therapy adherence and complications for people, for example, who need insulin to stay alive? Thank you.


JACK HEADLEY:  So it’s a good question. You know, one of the challenges — and Lida has talked some about this, is coming up with a way to figure out whether a formulary is all about finding the best financial deal, and to what extent the formulary is also about the clinical considerations. And most organizations that design formularies do have, as Lida mentioned, a pharmacy and therapeutic committee, and the general idea is that you are really looking for those situations where the drugs in the class are clinically interchangeable, clinically equivalent, and it doesn’t make a difference. And then you can negotiate for the best deal within that class. Now in a lot of classes, and certainly in some of the diabetes drug classes, it gets more complicated than that. There is different products, there are subclasses maybe where you have some equivalencies, other sub classes where you don’t. I’m not a clinician, so I’m always on dangerous ground, getting too deep into the clinical side. But you know, the goal is to try to bring both of those factors together and get that nice mix of price and clinical considerations and the challenge is doing that well. And some organizations probably do it better than others. Medicare does do an overall review of formularies to make sure that there is no discriminatory intent, so that if drugs are — if there is skimpy coverage for drugs to treat a particular illness, the idea is that you don’t want that to be allowed, because that would encourage people with that illness to avoid a certain plan, or be attracted to a certain plan. CMS would also review formularies for their overall sort of clinical completeness. There are certain rules about minimum numbers of drugs per class. But it’s an ongoing battle, and I guess one point I would make is, we haven’t really brought these words up, but the needs for good exceptions and appeals processes, and that’s something that we don’t think works as well as it could in the Medicare Part D system today, and people that need to go off formulary for a clinical reason, ought to have a clean and smooth way to get there.


SARAH DASH:  Thank you. Okay, we have time for one more question from the audience; up front here.


AUDIENCE MEMBER:  Thank you very much, Sarah. [name] from Johns Hopkins. Now we observe more and more manufacturers that pay a larger amount of service fees instead of rebates to PBMs. In many cases, these payments are rebates in disguise. So I was wondering. If those payments are subject to the Safe Harbor provision, and also if a self-insured employer, or the PDP, how [unintelligible] the contracting with PBM to optimize my outcome. Thank you very much.


ROSS MARGULIES:   Sure, I will go, and then I think Lance will go. So it’s an interesting question and there was also some discussion of whether — in the rule that came out Monday, whether or not — when fees are considered price concessions versus administrative fees, and in the Part D benefit that gets particularly important, because there’s lots of different fields in the DIR tables you fill out. But in general, I think the question would really be whether or not the fees correspond to a fair market value for a particular service that’s provided. And to the extent that they are, then I don’t think they would be covered by the anti-kickback statute to the extent that they may not represent a fair market value for a service that’s provided at [unintelligible] then they may be.


LANCE GRADY:  I was going to speak to fair market value. It’s fine.


SARAH DASH:  Great, okay, well we are just about out of time, so I’m going to ask each of you on the panel, if there is one thing we haven’t brought up that you wish our audience knew, based on the discussion, if you could briefly share that, and then what I will ask our audience is, as you are thinking about moving to the next part of your day, please don’t forget to fill out your blue evaluation form, it really does help us to formulate our future programming at the Alliance.


One thing we haven’t brought up that you wish the audience knew — in a nutshell. Do you want to start, Lance?


LANCE GRADY:  We haven’t talked much about MAPDP plans, and I think one of the potential solutions — and I’m not necessarily advocating for single payer or single third party administration across the entire benefit, but in an MAPDP book of business where you have both the pharmacy and medical risk, there is further incentive to look at net cost. There is further incentive to look at medical cost off-set. There is further incentive to look at the sort of totality of care for Medicare beneficiaries. And so I would like to see us advance that conversation a little bit more as it relates to the role of MAPDP and the appropriate assessment, say compared to just a PD plan, plus Part A/Part B fee-for-service.


ROSS MARGULIES:   I think one area where there is going to be increasing dissuasion particularly in this upcoming Congress, as well as at the administration, is on value-based care, and in particular how to pay for these new wave of gene therapies and particularly expensive drugs. And I am curious to see how existing formulary management tools may or may not be helpful in grappling with those costs, and what sort of arrangements, whether it’s outcomes based contracting, Or other types of you know, “value-based” arrangements, and how do we define that, will help us tackle both those high-priced therapies, but also may service tools for the issues we are talking about today.


LIDA ETERNAD: So Ross stole mine. I would agree, I think as we look to the future, and we look at the increased prices of drugs that are coming to market, value-based payment, outcomes based payment, is a very important part to drive in the overall affordability and the value that we get from medications. And so the one thing I — or two things I’d like the audience to take away from this is the — there are a number of policies in place today, of regulations in place today, that impede our ability to get to value-based or outcomes based methodology. A couple of those would be how ASP is determined ,and then how Medicaid best price is determined. So if there is something that we can think about, and look to on how to make it more accessible to do value-based payment, that’s something that I would encourage this group to think about and bring back to their daily jobs.


JACK HEADLEY:  So I’m also thinking about those increasingly high priced drugs that are entering the market, and this discussion of rebates. Rebates really require a competitive market.  And as we move into some of these new kinds of drugs that are entering the market, a lot of them are going to enter without direct competitors, and some of the more personalized kind of drugs may never have direct competitors because of just the nature of the science. And so it’s one thing to talk about the role of rebates around drug classes where there’s good competition and there’s something to trade-off — I’m getting a rebate because I’m getting a preferred position over my competitor. We really have to think about other tools when we are thinking about single source drugs and drugs that really lack competition. And whether there’s a role in those cases for government negotiation or some other mechanism — value-based pricing could be part of the solution on that. But just remember that the whole rebate discussion requires there be a competitive market in a particular drug class, and when you get to single source, that’s not where we are.


GERALD ANDERSON:  So bigger bundles are better. And so essentially what we have is we’ve talked about the pharmaceutical industry outside of the rest of medical care, and that’s the way it’s been for a long time. And we need to bring pharmaceuticals in, because sometimes pharmaceuticals are big savers, and keep you out of the hospital, keep you out of the doctor’s office, have a lot of value. In other cases, they have very little value, but if they are paid separately, nobody has that incentive to make the tradeoff between pharmaceuticals and other medical services.


SARAH DASH:   Sounds like, Gerry, you and Lance might have kind of started and ended on the same theme, which is kind of looking at total cost of care, and the role of medicines in that. So with that, my wish for the audience that you take away from this is I hope we’ve shed some light on some of the complexities of the topic today. Again, fill out your evaluation form. If there is something else you need to know. And finally, we have one more briefing left in the 2018 calendar year at the Alliance for Health Policy, it will be next Friday on a totally different topic, we are going to be looking at aging in homes and communities. So join us on December 7th, and please join me in thanking our panel today.