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For Big Pharma recently, the cost of achieving high-quality formulary access for branded products has increased dramatically.
Factors driving the spiral include the growing ability of managed care organizations to exercise market power in curtailing
product choices for patients, which manufacturers fear can lead ultimately to a loss of market share. Managing—and ultimately
reversing—this trend is a key strategic challenge for the "C suite." The burning question to tackle: How can manufacturers
do a better job of quantifying payer control in order to secure more consistent returns from their access investments?
"Voluntary" rebates, those paid by manufacturers for preferred access on commercial and Part D formularies, have become the
single-largest expense for promoting branded products in the US market. By our estimates, and those of investment analyst
Richard Evans, ethical pharmaceutical companies will write checks back to pharmacy benefit managers (PBMs) and insurers for
almost $30 billion in 2011. This is almost three times the amount that the federal Office of Management and Budget (OMB) estimated
it had spent on sales forces in the US in 2010.*
What is even more striking is how fast this expense has grown in the last 10 years. Access to data that we have reviewed,
deconstruction of PBM and pharmaceutical financial statements, and the federal Office of Inspector General (OIG) reconciliation
of Medicare Part D plan performance and "risk corridors" lead us to estimate that the price of preferred quality access is
going one way: up. Over the past five years, charges for rebates and other methods of obtaining preferred tier access have
risen from around 10 percent of gross US branded sales to almost 15 percent. For brands in the highly competitive classes,
averages grew from 25 percent in 2005 to 40 percent in 2010. For comparison, rebates even for highly competitive products
in the mid 1990s might have been at most between 10 percent and 15 percent. And in the extreme there are mature and clinically
undifferentiated brands where Medicaid "best price" concerns are overcome, and where manufacturers shave as much as 70 percent-plus
off list price on each prescription back to the payers.
There are still a few therapeutic classes such as Oncology and HIV, and a handful of truly unique products that largely pay
nominal or even zero rebates for preferred formulary access. Overall, however, the growth of rebate spending and the growing
gap between gross and net sales are keeping a lot of US general managers awake at night.
The Stimuli
How did the price of preferred access go up so rapidly? The short answer is that the plans have demonstrated greater power
to control market share in many therapeutic classes, and the manufacturers have been more than willing to pay to be on the
good side of that control, or to ensure that it wouldn't be used against them.
Three factors have given the plans more market power: consolidation, Part D, and the ability and willingness to use step edits
and prior authorizations (PAs) to manage access.
The continued consolidation of PBMs and insurers gave each of them more volume under their control and better intelligence
for their negotiations. More lives under management provided more leverage. However, it was newly gained information that
had the greatest impact. When United Healthcare Group acquired Pacificare/Prescription Solutions and CVS merged with Caremark,
one of the first actions each took was to compare the rebate contracts between their two previously independent organizations.
Within only a few months, each combined entity called manufacturers back to the table and demanded that they now get "most
favored nation status" for whichever of their entities had a less-rich contract. For many large and visible brands, this led
to renegotiation of contracts and five percentage points from gross sales in additional expense.
The introduction of Part D in 2006 only served to raise the value of preferred access and increase the potential cost of non-preferred
status. By 2007, Part D plan sponsors began to see that substantive copay differentials were insufficient to drive utilization
from Tier 3 to Tier 2 brands. In many plans, the lion's share of the volume for brands was originating from the Low-Income
Subsidy (LIS) enrollment, which paid the same "out-of-pocket" for preferred and non-preferred brands and only $2 more than
generics. PBMs and insurers quickly began to employ "generic first" step edits and PAs for non-contracted brands and have
continued to punish those who will not "pay to play." Today, as a result, rebates in Part D can be considerably higher than
in commercial contracts.
Unlike commercial drug beneficiaries, Part D patients can't turn to their employer with concerns about utilization management.
Nor can they use copay offset programs to get their out-of-pocket down to the preferred (Tier 2) copay, as these programs
are currently considered an illegal inducement by the Centers for Medicare and Medicaid Services (CMS). A Part D patient's
only recourse is to wait until the new plan year and then find a plan sponsor who has their drug of choice in a preferred
position. However, there is little evidence that this kind of switching is taking place. Rather than switching plans, Part
D members appear to be switching brands.
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