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Deloitte's Life Sciences & Health Care Blog

Drug rebates will remain… but so will pressure to reduce drug prices and demonstrate value

On July 10, the White House abandoned efforts to eliminate safe-harbor protections for drug rebates in Medicare Part D and Medicaid managed care due to concerns that the change would lead to higher premiums for beneficiaries. (For background on this issue, see our previous blogs.) While the rebate issue is now off the table, pressure to reduce prescription drug costs is not. But rather than waiting for the next round of regulations, we believe the pharmaceutical industry should consider developing its own business models that address drug prices and demonstrate value.

Recall in January, the US Department of Health and Human Services (HHS) proposed eliminating safe-harbor protections for rebates beginning on January 1, 2020. The Congressional Budget Office (CBO) estimated the proposal would have increased Medicare spending by $170 billion and Medicaid spending by $7 billion over the next decade (see the May 7, 2019 Health Care Current). It also would have increased the premiums that Medicare beneficiaries would pay under Part D.

Who’s to blame for rising drug costs?

The Pharmaceutical Research and Manufacturers of America (PhRMA) said the decision not to eliminate safe-harbor protections for rebates was “a blow to seniors who could have paid less” for prescription drugs. America’s Health Insurance Plans (AHIP), however, said that drug manufacturers are solely responsible for setting drug prices and determining price increases, and could decide to reduce prices. In February, a group of biopharmaceutical executives told a Senate committee that eliminating safe-harbor protections—and shifting toward a value-based drug-pricing system—might be the key to reducing drug costs (see the March 5, 2019 Health Care Current). However, at a subsequent hearing, executives from five large PBMs suggested that increased competition among drug manufacturers could help to reduce drug costs.

At the heart of the debate is whether drug prices are artificially high because of the rebate system, or whether this system helps to bring drug prices down. In 2017, rebates and discounts offered by brand-name drug manufacturers reduced list prices by an average of 44 percent.1 Several PBMs have said they keep 5 percent or less of the rebates,2 which means the vast majority of rebate dollars are transferred to health plans, self-insured employers, and Part D plans to help reduce premiums. While some PBMs say they send 100 percent of rebate revenue to clients, they usually charge administrative fees to plan sponsors.

Four strategies for helping ensure market access

The average older American takes 4.5 prescription drugs, often to treat a chronic illness.3 Between 2012 and 2017, the average annual cost of four widely used prescription drugs increased about 58 percent, according to AARP. Even with the rebate proposal off the table, pressure to rein in price increases is likely to increase, which could push pharmaceutical companies to compete more directly on value. This might require a shift in strategy toward more robust evidence generation, the continued use and expansion of support services, and greater competition in value-based contracts. As we have suggested in previous posts, here are a few ideas pharmaceutical companies might consider:

  1. Use real-world evidence (RWE) to highlight clinical and economic outcomes: Pharmaceutical companies might want to evaluate clinical outcomes to demonstrate superiority in class, improvements in standard of care, or efficacy within specific patient sub-populations. As value-based contracts become more common, manufacturers should demonstrate the value of new products or product classes. Such contracts might also help to mitigate the clinical uncertainty of a high-cost treatment.
  2. Differentiate products based on patient preference. Patient convenience, or strategies that help boost adherence, might help pharmaceutical companies make their products more appealing.
  3. Expand patient-support services: Most (if not all) pharmaceutical companies offer some type of patient support. But they should consider making information available directly to patients to help them understand their illnesses, manage their medications, and navigate prior-authorization requirements (particularly in specialty areas).
  4. Consider using targeted therapeutics: Manufacturers might try to reduce the impact on health plans and other payers by identifying target populations that are likely to receive the maximum benefit from a therapy.

Regulatory changes could accelerate use of value-based contracts

Over the past few years, we have seen an uptick in value-based contracts in several therapeutic categories. However, some barriers appear to be holding back widespread adoption. Some contracts have been abandoned before completion due to the amount of work required to operationalize them. While these contracts haven’t fully yet taken root, we expect the evolving regulatory environment could change that. The Deloitte Center for Health Solutions recently analyzed branded portfolios of the 19 largest biopharma companies (by revenue). From that list, we found 16 drugs that are (or were) included in a VBC.

While the rebate idea has been shelved, prescription drug costs will remain a top issue for the administration, Congress, and regulators as they advance policies outlined in the Blueprint to Lower Drug Prices and Reduce Out-of-Pocket Costs (see the January 8, 2019 My Take). Moreover, value-based contracting will continue to alter existing business models. The status quo is unlikely to remain and pharmaceutical companies and PBMs should prepare for change now rather than waiting for change to be mandated.


1 Adam J. Fein, Ph.D., Drug Channels Institute, April 24, 2018 (https://www.drugchannels.net/2018/04/the-gross-to-net-rebate-bubble-topped.html)
2 As a PBM and an Employer, We Know Rebates and Innovation Lower Drug Costs, Morning Consult, October 3, 2018 (https://morningconsult.com/opinions/as-a-pbm-and-an-employer-we-know-rebates-and-innovation-lower-drug-costs/)
3 Press release, April 4 2019, AARP (https://press.aarp.org/2019-4-4-Rx-Price-Watch-Report-Generic-Prescription-Drugs

Author bio

George Van Antwerp is a managing director within the Strategy & Operations practice of Deloitte Consulting LLP. He focuses on pharmacy strategy and the convergence of specialty pharmacy across payers, providers, and life sciences.

Joe is a Managing Director in Deloitte Consulting LLP’s National Life Sciences practice. He is the leader of the Commercial and Market Access practice. He has over 30 years of operational and technology strategy consulting experience; 25 of them serving Biopharma and MedTech companies in the Life Sciences industry; primarily in their commercial, market access, pricing, contracting, distribution, and general council functions. Areas of experience and thought leadership are in Commercial Performance Analytics, Managed Markets Analytics, Value-based Contracting, and Enterprise Contracts Management Operational Excellence.