The Centers for Medicare & Medicaid Services (CMS) is about to publish a proposed rule that – according to the Health and Human Services Department (HHS) – would lower prescription drug prices and out-of-pocket costs for patients and increase pricing transparency. The HHS proposal would eliminate a safe harbor for prescription drug rebates that drug manufacturers pay to pharmacy benefit managers (PBMs), Medicare Part D plan sponsors and Medicaid managed care organizations. The proposal would create a new safe harbor for prescription drug rebates offered directly to patients at the point of sale and stipulate fixed-fee service arrangements between drug manufacturers and PBMs.

The HHS said the move would provide “a historic new level of transparency” to the healthcare system. While we’ll leave that judgment to history, we agree that increased price transparency in the healthcare industry is a positive measure. According to the Pharmaceutical Research and Manufacturers of America, drug rebates are estimated to be worth $150 billion. CMS has determined amounts like these may be adding to healthcare costs and hurting quality of care.

Avoiding Unhealthy Consequences

In a 2017 report, CMS explained that the intent of allowing PBMs and Part D plans to share manufacturer rebates with patients at the point of sale was to create more competition. However, the agency noted that via “distorted” incentives under current rules, “Part D sponsors may have weak incentives, and, in some cases even, no incentive, to lower prices at the point of sale or to choose lower net cost alternatives to high cost-highly rebated drugs when [they are] available.”

Further, rebates are typically based on a drug’s full list price, not on a negotiated price or the net cost after the rebate is applied. Yet Medicare recipients’ copays are typically still calculated on a drug’s list price, increasing these patients’ out-of-pocket spend and disproportionately penalizing the sickest populations most in need of these life-saving medications. 

Members or patients are also paying coinsurance based on gross cost. This accelerates the moment when their spend crosses Medicare’s catastrophic care dollar threshold, where CMS must cover the majority of costs. In addition, as the CMS report points out, higher cost-sharing can prevent Medicare beneficiaries from getting the medications they need, leading to poorer outcomes and still higher medical care costs. 

Incentives Misaligned with Patient Needs

In another complexity, the annual bids that Part D sponsors and their PBMs submit to Medicare include “direct and indirect remuneration” (DIR) estimates, which include rebates. The current rule enables plans to share in the rewards when they deliver care at a cost less than that of their bid – and applying rebate payments reduces the total cost.

Further, past a certain threshold, plans may apply shared savings directly to their bottom line instead of to reduced premiums. CMS’s own analysis again points to distorted incentives in this cycle, with plan sponsors sometimes opting for “higher negotiated prices in exchange for higher DIR and, in some cases, even prefer a higher net cost drug over a cheaper alternative.”

Further, PBMs and Part D plans aren’t required to report rebate amounts in ways that might enable consumers with chronic conditions and expensive medications to understand their list-price-based payments. Rebates have created an opaque system in which the sickest patients are effectively subsidizing lower premiums for healthier members of the Medicare population. 

Time to Plot a New Course

Restructuring rebates will remove layers of complexity and cost from the industry. Tracking, paying and reconciling rebates is an administrative cost center that has spawned intermediaries that do little but help PBMs and manufacturers manage rebates – and bloat U.S. healthcare costs. Pushing rebates to the point of care should also reduce drug prices for consumers, offsetting any premium increases when plans no longer receive rebates.

Leading PBMs understand that shuttering the rebate safe harbor is just one sign of growing demand from healthcare consumers for greater price transparency and better value. This recognition must be matched by business model change. To remain relevant in a consumer-to-business (C2B) healthcare industry, PBMs will need to increase their focus on comparative drug performance and improving outcomes more broadly.

Here are key steps PBMs can take to develop new roles:

  • Leverage vast data assets. PBMs have a wealth of highly descriptive pharmacy claims data that’s essential to delivering personalized precision healthcare. PBMs must explore how to use this data to help consumers better manage their care.
  • Expand their sphere of influence and secure value. PBMs and health plans are already collaborating. Now they must go beyond filling prescriptions to creating solutions. These product-plus-service offerings should leverage members’ sticky pharmacy relationships and drive better outcomes and satisfaction.
  • Provide digitally driven engagement and services. Healthcare is becoming more personalized, omnichannel and on-demand. PBMs and plans need to leverage their touchpoints to offer consumer-oriented, Uber-like solutions, incorporating digital technologies that leverage their unique data and pharmacy expertise.
  • Transform infrastructure and processes. Creating on-demand solutions requires PBMs to adopt next-generation cloud infrastructure and digitally powered platforms. Doing so will enable PBMs to operate more efficiently to improve margins and deliver the customer-centric service and transparency necessary to increase net promoter scores and remain competitive.

Finding New Value in a C2B Landscape

By delivering on a new value proposition that’s not dependent on rebates, PBMs and plans will be prepared to compete with new industry entrants like Amazon-Berkshire-Chase, which almost certainly will drive price transparency for their self-insured populations, as well as innovative means of incorporating pharma into their overall health management. 

HHS Secretary Alex Azar expects commercial plans will also give up rebates, choosing to streamline on a single system. The industry will follow where CMS leads. The agency is on a path toward clearer, lower pricing. While taking that initial heading, PBMs may also plot their course toward helping plans and consumers integrate pharmacy with medical care to help achieve better outcomes at lower costs.

Jodie Thellin Skyberg

Jodie Thellin Skyberg

Jodie Thellin Skyberg is the PBM and Pharmacy Practice Leader for Cognizant Consulting Healthcare Practice.  She has over 20 years of experience... Read more