“[Getting] rebate dollars to the patient … [has] led to … the greatest financial land rush … in the pharmacy supply chain—quite possibly could become one of the greatest financial windfalls for whomever claims control of this process.” — AJ Loiacono, CEO of Capital Rx
Stacey Richter interviewed AJ Loiacono, CEO of Capital Rx and an expert on the pharmacy supply chain, in a recent podcast episode of Relentless Health Value.
Determining How to Implement the HHS Rebate Proposal
The proposed rule eliminates the current discount safe harbor that enables PBMs to negotiate rebates from pharma manufacturers on behalf of government plans; this takes effect on January 1, 2020.
What’s at stake now is how to implement it. This is an inarguably tremendous moment in pharmacy supply chain history because whoever ultimately chairs the adjudication process will earn fees on the payout of an estimated >$150 billion in charge-backs.
This matters for many reasons, but one of them is the impact it will have on pharmacy retailers. They will see a nontrivial impact on cash flow because it may take 30 to 90 days to receive reimbursement for the charge-back amount that was adjudicated at the point of sale with the patient.
According to Loiacono, the charge-back paradigm is almost certain to spill over into the commercial sector because the US payment system simply can’t deal with different Medicare and commercial models. The required investment in charge-back administration setup is too high not to apply it across the board.
Who Could Control the Charge-back Process?
There are 5 most likely contenders in competition for control of the charge-back process:
- “Transaction switch” firms (eg, Relay Health)
- Banking industry
- Government contractors
Health and Human Services (HHS) will likely take the lead in selecting the entities who will control this process. Although it’s still up in the air which of these parties will triumph and take charge of the new adjudication system, let’s focus on the chances and impact if the “big 3” PBMs retain their dominance over the process. We’ll also assume for the sake of argument that the changes spill over into the commercial market.
PBMs Can Make a Strong Argument to Fill This Role
The big 3 PBMs could manage to hold on to their status quo control by adopting a “wholesaler” model. The big 3 PBMs include CVS Health, Express Scripts, and OptumRx of UnitedHealth Group.
Pharma Can Be Influential, but Only if It Assumes a Leadership Role
Pharma would still need to work with the big 3 but could take a leadership role by shifting away from “pay to play” and exploring opportunities with newer PBM models that offer more transparency and open-ended contracts. Rebates as they currently stand might be off the table, but whoever has access to the customer still has leverage. Because the large PBMs still hold the majority of pharmacy contracts with employers, these mammoth and very smart entities will certainly endeavor to continue to extract revenue from Pharma—their shareholders will demand it.
Employers Can Be Influential, but Only if They Demand Transparency and Accountability
Traditionally, employers don’t see data about abandonment or other nonadherence as a factor in overall health costs, even though they may see the siloed drug spend go down. Employers would be well served to understand that employee nonadherence could lead to higher drug costs and more absenteeism in the future as an employee’s health condition worsens. Employers should also ask for more transparency to the fee structure and to what services actually cost.
There is no such thing as a “free” service. Whether they realize it or not, employers pay via spread pricing. Spread pricing dominates the PBM industry and constitutes billions of dollars, but employers don’t have visibility into the spread, which is highly variable and highly profitable for PBMs. It is employers who pay for that profitability.
Call to Action to Employers
The charge-back ruling reflects noble intentions by HHS but may not result in fundamental changes to the system unless employers push back hard on securing a role in the process. New PBM models help expose waste, inefficiencies, and self-interest in the system by acting as a “clearinghouse” and showing all the transactions in the workflow. Employers need to identify which of the following they want to solve: better plan design, improved health outcomes, better access to care, better service, lower net costs.
Most PBM requests for proposals do not involve any direct dialogue with the employer; the broker just provides a rate sheet. Only about 1 in 60 employers even bothers to change its plan designs each year. According to Loiacono, “Employers purchase office supplies more effectively than pharmacy benefits.”
Payroll costs are typically 50 to 60 times the cost of an employer’s pharmacy benefit. So, investing a little more in the pharmacy benefit to gain improvements in workforce health and absenteeism can be very cost effective.
Making a difference in patient care by helping patients, providers, and payers collaborate on shared priorities
The views and opinions expressed are those of the author and do not imply endorsement by Aventria Health Group.