Government and Commercial Payers Support High Prescription Prices...

ABSTRACT

There are many factors contributing to the explosive price of brand prescription drugs in the USA. Among them are: the development of innovative patient specific pharmaceuticals; increased access to and utilization's of pharmaceuticals; fragmented delivery systems; development of competitive advantages through legislation and increased leverage resulting from industry consolidation of PBMs, insurers, and pharmaceutical manufacturers. The evolution of multiple pricing benchmarks and the influence of pharmaceutical manufacturer rebates are two additional factors driving brand drug price increases and obscuring actual net prices.

Medications represent approximately 9.2% of the total healthcare expenditures in the USA in 2018 according to the recent Health Care Spending Report by CMS. (*1) and, yet, they are the primary center of attention in the health care debate. Primary factors for this attention are out of control increases in patient out of pocket costs, and unpredictable annual cost for employers and government funded prescription programs. Muddling the debates are powerful stakeholders (providers, employers, health plans, government entities, consultants, drug manufacturers, PBMs, wholesale and retail pharmacies) who have the wherewithal to protect their individual interests in the price systems.

The desire to change and modify our current system is awash in new legislative and commercial proposals that, once again, will “tinker” with current, disjointed price systems. Real, long term, market-based solutions cannot be developed unless stakeholders and interested parties fully comprehend the current pricing system controlled by government and commercial interests.

This document will explain the many price benchmarks and rebate leverage that rewards certain stakeholders; not patients. Simply reading about the benchmarks and rebates demonstrates that transparency is absent and that it is impossible to define the net price of a pharmaceutical. 

This review, based on reliable sources all of which are cited, provides insight into government pharmaceutical procurement systems that impact the prices of brand drugs. Additionally, it reviews the world of mandated and negotiated rebates and discounts and their subsequent impact on brand prices.  

In summary current pricing mechanisms have resulted in the annual payment of more than $110 billion in rebates and discounts to various stakeholders yielding gross brand drug prices that are, at the very, least 25% higher than necessary. (*2)

This White Paper concludes with some simple, practical ideas that could lead to a long-term solution to our nations exorbitant brand prescription prices.

INTRODUCTION

Government and commercial payers prevent price transparency through a murky system of rebates, discounts and pricing benchmarks that ultimately inflate brand prescription prices. 

The pricing of prescription drugs in the USA has never been more controversial than it is today even though it has been debated for more than 50 years. We have experienced many new government regulations (legislation) during this time in an attempt to control and reduce prescription prices. At the same time commercial payers such as Prescription Benefit Managers (PBMs) and insurers have leveraged their market share size in order to demand bountiful pharmaceutical rebates in exchange for drug formulary access and/or preferential drug listing. Some regulations have mandated pharmaceutical rebates and discounts resulting in the utilizations of more expensive medications and lining the pockets of insurers, prescription benefit managers (PBMs), and other payers at the expense of higher out of pocket costs for patients or abandonment of prescription treatments by patients. Some of these rebates have become “profit centers” for insurers, PBMs, health plans and government entities due to the size of the rebates - tens of billions of dollars paid by pharmaceutical manufacturers to these entities annually.

Drug Channels Institute reported that in 2018, brand-name drug manufacturers paid $110.67B in rebates to commercial and government sponsored payers (Medicare Part D and Medicaid). The Veterans Administration, Department of Defense and 340B Drug Pricing Program received additional rebates and discounts valued at billions of dollars per year. (*2) (*3)  

In addition to the rebate program numerous statutory laws, subsequent regulations and confidentiality clauses has led to the establishment of numerous price benchmarks used within government sponsored prescription programs as well as private sector programs. Each benchmark has a different price basis for the same drug. Commercial sector prescription benefit plans have followed many of these price initiatives especially when resulting in lower acquisition drug costs. There are many powerful stakeholders who have a stake in this complex environment of laws, regulations, and confidential agreements that exert immense political and private sector pressure on any attempts to change the status quo unless their specific segments are safeguarded. Hence the opportunity for meaningful debate is limited.

The primary objective of this paper is to provide information about the current drug pricing benchmarks utilized for brand drugs (Part I); and the size and influence of manufacturer rebates and discounts on the market (Part II); and the resulting quagmire. The paper defines the basics of drug identifications; describes key price benchmarks; reviews mandated manufacturer rebates and discounts; and identifies other factors that impact our entire prescription drug price system. Part III summarizes the key findings and provides some solutions for consideration.

PART I: DRUG PRICING BENCHMARKS

The most common benchmarks (or price types) for drugs are: Average Wholesale Price (AWP); Wholesaler Acquisition Price (WAC); Average Sales Price (ASP); Average Manufacturer Price (AMP); 340B Ceiling Price (340B) and Best Price. 

There are two other price benchmarks: The Average Acquisition Cost (AAC) and the National Average Drug Acquisition Cost (NADAC). 

These benchmarks have evolved over many years, particularly since the early 1990s when a series of federal laws were enacted to secure rebates and discounts for government prescription purchases.

Prescription pricing data described in this article is most often protected by confidentiality clauses in agreements between governments, commercial entities and pharmaceutical companies. However, in recent years there have been numerous government and private sector documents published that have shed new light on this topic. When utilized in this document, they are properly annotated.

Each of the benchmarks represent a unique program and has a different price for the exact same drug entity, each of which are defined by a National Drug Code (NDC) numeric code. All branded and generic prescription drugs are assigned a unique NDC number which identifies the manufacturer, the drug name, strength and package size.

Brand drugs are innovator drugs, often referred to as single source or multi-source brands, and are protected by patent laws. Once the patent expires these products can be manufactured by other qualified companies following FDA approval. Such products are referred to as generics and they typically sell at significant discounts to brands.

Specialty drugs are a unique category within the branded or innovator segment. In recent years they have become a primary driver of prescription spending. They are often referred to as “high tech” complex drug molecules which may cost thousands of dollars for single treatment courses and, in some cases, represent a significant portion of drug rebate dollars. Specialty drugs are another complex topic and not the focus of this paper.

BRAND DRUG BENCHMARK DEFINITIONS:

AVERAGE WHOLESALE PRICE (AWP)

The AWP is calculated by a formula presented in Table I and published in national compendia (Wolters Kluver-Medi-Span, Elesevier, etc.). It is a reference price only. It is not the net purchase price paid by wholesalers, pharmacies or other providers. Nor is it the price paid by payers. AWPs, subject to a discount, are often used to calculate the reimbursement to pharmacies for the cost and dispensing of drugs to patients. Discounts of AWP-16% to -21% are common thereby resulting in WAC based reimbursements. Discounted prices are referred to as ingredient costs.

WHOLESALE ACQUISITION PRICE (WAC)

The WAC, also known as the manufacturer list price or gross price, of a brand prescription drug is the invoice price to wholesalers or direct purchasers. The WAC does not include discounts, rebates, prompt pay allowances or other reductions in price which may be earned by the purchaser. Such discounts and other fees are defined in purchase agreements between the entities.

Retail pharmacies, mail order pharmacies and other providers purchase pharmaceuticals at WAC plus or minus a discount. Large volume purchasers earn a discount from WAC based on volumes, product mix, payment terms, statutory mandates and other criteria. 

WACs may also be utilized to define the reimbursement price paid to pharmacies and other medical providers. WAC prices are available to the public through industry compendia. WACs are used by wholesalers, pharmacies, health plans, PBMs, insurance companies, physicians, government entities and others. 

The two most talked about benchmarks are the Average Wholesaler Price (AWP) and the Wholesaler Acquisition Price (WAC). Neither represent the actual net price of a prescription drug. However, they are often quoted to enhance political discussions or mislead the public debates. AWPs and WACs are price reference points and there is a specific mathematical relationship between AWP and WAC for brand drugs. Manufacturers establish brand WACs and are changed from time to time in conjunction with price changes. There is not a specific mathematical relationship between WACs and AWPs for generic drugs. In fact, generic acquisition costs are based on complex purchasing agreements between purchasing entities such as pharmacies, generic manufacturers and distributors. Table I defines the mathematical relationship between AWP and WAC.

AVERAGE MANUFACTURER PRICE (AMP)

In general, the AMP is defined as the AVERAGE price paid to the manufacturer for a drug in the United States by (1) wholesalers for drugs distributed to retail pharmacies and (2) retail pharmacies that purchase drugs directly from the manufacturer, net of any prompt pay discounts. In addition, if manufacturers provide a lower price to purchasers (aka: Best Price), this lower price supersedes the calculated average price. Manufacturers must provide CMS with the Best Price of the brand drug each quarter. (*4), (*5). Best Price is defined later in this document.

In exchange for these discounts, states are required to include the manufacturers’ drugs in their Medicaid programs. (*5)

The AMP calculation also excludes payments from and rebates to PBMs, HMOs, mail order pharmacies, insurers, hospitals and clinics. If the drug is inhaled, infused, instilled, implanted or injected (aka: 5 iAMP) and NOT generally dispensed by a retail pharmacy, the AMP includes payments from and rebates to these entities. (*6).

The AMP is reported monthly and quarterly to the Centers for Medicare and Medicaid Services (CMS) by manufacturers and is used to calculate Medicaid rebates to state and federal governments. In some cases, the Best Price is used to calculate rebates. Such rebate amounts are not included in the AMP. AMP prices are not available to the public and according to HHS Office of Inspector General many government agencies do not have access to AMP data. (*7), (*4).

Sales by manufacturers to other government agencies are also exempt from this calculation including the Department of Defense, Veterans Administration, 340B entities, Indian Health Service, and other federal supply programs.                                              

AMPs are always in a state of change due to market factors such as changes in the terms of procurement contracts; industry consolidations; increases or decreases in cost of goods; payer procurement modifications; brand to generic conversions; and utilization of group purchasing organizations. As AMPs change, the rebates change and thus the pricing benchmarks change.

Due to the fact that AMPs are confidential and not available for public use, I have calculated an estimated value for brand AMPs in Table III of this document.

AVERAGE SALES PRICE (ASP)

Recognizing flaws in the Average Wholesale Price benchmark, the Medicare Prescription Drug Improvement Act of 2003 changed the basis of Medicare Part B drug reimbursements from AWP to ASP. (*37) The law established Average Sales Price (ASP) as a statutorily defined price calculated from actual sales transactions. 

Medicare Part B covered drugs are primarily injectable or infused products which are administered in physician offices or hospital outpatient clinics for the treatment of various conditions including cancer, end stage renal disease, transplant drug therapy, rheumatoid arthritis, and ophthalmic conditions. Vaccinations are also covered. Part B covers approximately 600 drugs with total expenditures exceeding $33B in 2018. (*1)

The ASP is the price that manufacturers receive from the sale of a drug net of ANY price discounts including prompt pay. (*5). CMS consolidates this pricing data into a weighted average for the 2 previous quarters and publishes the prices on its web site for use by authorized Part B providers. 

Part B providers participate in Group Purchasing Organizations (GPOs) to obtain costs lower than reported ASPs. (*6). Some Part B providers, particularly certain qualified hospital-based outpatient clinics (referred to as “Covered Entities”), purchase drugs under the 340B program. Medicare Part B reimburses providers a uniform payment amount based on ASPs plus a markup.   

ASPs are monitored by the Secretary of HHS who is directed to substitute ASP prices when the Average Manufacturer Price (AMP) exceeds ASP by 5% in 2 previous quarters. (*8).  If the ASP exceeds the AMP by this measure then the Secretary is directed to substitute the ASP with the lower calculated value.

In 2015 the OIG of HHS compared ASP prices to AMP prices using 2011 claim data and determined that ASPs were generally lower than AMPs by 3.0%, at median. A 3% differential compares to standard prompt pay discounts which are not included in AMP calculations. MedPAC does not have access to AMP pricing data so they used each drug’s ASP as a proxy for AMP. (*6). 

The Trump Administration and Department of HHS considered changes to Part B pricing methods to encourage price competition for Part B drugs.

Manufacturer discounts and rebates are included in the determination of ASP pricing.

BEST PRICE

Federal government agreements with pharmaceutical manufacturers ensure that the government will always benefit from the lowest price negotiated between pharmaceutical manufacturers and other customers. This term is referred to as Best Price (BP).

Manufacturers provide the BP data to CMS, quarterly, for each Single Source (SS) and multi-source (MS) brand drug. BP is the lowest price available from manufacturers during the rebate period to any wholesaler, retailer, provider, health maintenance organization, nonprofit entity, or governmental entity within the United States, excluding certain government payers such as the Indian Health Service, Department of Veterans Affairs, Department of Defense, Public Health Service, 340B, Federal Supply Schedule and Medicare Part D plans. Best Price includes cash discounts, free goods, volume discounts and rebates. Some exceptions apply, such as Medicare Part D rebates, and are excluded from BP calculations. Best Price data is confidential. (*9).

Manufacturers of non-innovator (multi-source generics) are not required to provide Best Prices to CMS. (*10).

340B DRUG PRICES (CEILING PRICES)

The 340B Drug Discount Program was created in 1992 as a component of the Veterans Health Act. It established the Health Resources and Services Administration (HRSA) which is administered by the U.S. Department of HHS. The Act requires drug manufacturers to sell outpatient drugs at a discount to “Covered Entities” (C.E.). In turn they are charged with the mission to provide quality health care to low income and rural patients. Today there approximately 12,000 C.E. which include certain hospital-based outpatient clinics and federal grantees such as: disproportionate share hospitals, children’s hospitals, critical access hospitals, federally qualified health centers, family planning clinics, Ryan White AIDS program, tuberculous grantees, and many others. 

Manufacturer participation in the 340B program is a requirement for participation in Medicaid, the U.S. Department of Defense and VA prescription contracting programs. By extension hospital outpatient clinics and physicians have access to 340B drugs used to treat patients eligible under Medicare Part B.

HRSA calculates a 340B Ceiling Price (C.P.) for each C.E. outpatient drug utilizing AMPs and Best Prices.  The C.P. is the maximum price a manufacturer can charge a C.E.   The statute defines the 340B C.P. as the AMP less the established Medicaid basic rebate of 23.1% for branded drugs, 17.1 % for pediatric and blood clotting factor medications, and 13.0 % for multi-source generics. C.P.’ are on a unit basis minus the Unit Rebate Amount (URA)or Best Price. See page 20. (*11)

Most Covered Entities pay even lower prices by participating in the Prime Vender Program, currently administered by Apexus. HRSA contracts with Apexus to manage the Prime Vendor Program and to negotiate prices below ceiling price for many, not all, of the 7000 drugs under contract.  The estimated average savings are, at least, an additional 10% below C.P. (*6). 

Ceiling Prices are proprietary and are not disclosed. As a result, it is not possible to compare their actual prices with other benchmarks. HRSA maintains a secure web-based site hosting a database of 340B ceiling drug prices for C.E. and manufacturers.

Industry and government analysts utilize various methodologies to predict 340B prices. 

Following are the results of three studies:

·        In May 2015 a MedPAC review of claims estimated 340B ceiling prices at ASP-22.5 % for single source and multi-source brands. (*6).  

·        The Moran Company calculated the 340B drug cost at ASP-22.5%. (*12).

·        The OIG of Health and Human Services analyzed Medicare Part B payments (2013) to 340B hospital based C.E. and concluded that in aggregate provider reimbursement payments at ASP + 6% exceed C.P. by 58% or 52% above C.P. This equates to ASP-48%. (*13).

In 2018 Alex Azar II, Secretary of the Department of Health and Human Services, commented in the American Patients First blueprint to lower prescription prices document that HRSA estimates that covered entities saved approximately $6B on approximately $12B in discounted purchases in Calendar Year 2015 by participating in the 340B program. (*14). Ninety percent (90%) of 340B drugs are brand drugs.    

Drug Channels Institute estimates that the 340B program purchased $24.3B in pharmaceuticals in 2018; representing a discount from an estimated invoice (WAC) cost of $39.2B which represents a discount of 38.01%. (*15).

NATIONAL AVERAGE DRUG ACQUISITION COST (NADAC)

The Centers for Medicare and Medicaid Services (CMS) surveys independent and chain retail pharmacies to determine a national average of drug acquisition cost (NADAC) for brand and generic drugs. Myers & Stauffer are contracted by CMS to perform the monthly surveys. CMS selects 2500 retail pharmacies per month and approximately 450-600 voluntarily respond and provide drug pricing data. The data represents invoice prices only; rebates and other off invoice price concessions are excluded. Mail order and Specialty pharmacies are also excluded from the survey. NADACs metrics are published monthly and quarterly by the Centers for Medicare & Medicaid Services and are intended to be utilized for analyzing and monitoring the NADAC pricing relationship to Average Wholesale Prices and Wholesaler Acquisition Cost prices. Results from the NADAC survey are compared to WAC and AWP values for equivalent drugs for essentially all brand and generic drugs. In 2018 NADACs were utilized by 33 state Medicaid programs and the District of Columbia for evaluating their respective pharmacy outpatient reimbursements. Other industry stakeholders utilize this data source for price trending, WAC and AWP price comparisons, and estimating net cost of pharmaceuticals in the retail channel. NADACs may offer an alternative to current price benchmarks for traditional brand and generic drugs. (*35)

Different entities utilize different benchmarks. For example, drug wholesalers primarily utilize WACs; retail pharmacies, prescription benefits mangers (PBMs) and health plans utilize the AWPs and WACs; Federally Qualified Health Plans (340B) utilize AMPs and Best Price benchmarks; Medicaid utilizes AWPs, WACs, NADAC, and 340B prices; Medicare Part B uses ASP and 340B; Medicare Part D plans and Medicare Advantage plans with prescription drug benefits (MA-PDs) use AWPs, WACs, ASPs. Manufacturers publish and report WACs, AMPs, and ASPs to CMS and selected stakeholders on a regular basis, usually quarterly. AMPs are not available for public sector provider usage.

SPECIAL NOTATIONS

Manufacturers must calculate and report AMPs and BPs. To do so they must determine which sales are included or excluded in their calculation. Various interpretations of the federal regulations have led to some confusion among reporting entities. In addition, CMS permits manufacturers to make “reasonable” assumptions in determining which sales are included in their calculation. Controversaries are present and new clarification and/or regulations are imminent.

AMPs are considered the benchmark for calculating manufacturer rebates for the Medicaid Drug program and hence the ASP drug prices and 340B Ceiling prices. There is a 60 to 90-day gap between the manufacturer price reports, CMS evaluations of these prices and the Best Price determinations. Also, CMS must determine if manufacturers have exceeded the 5% inflation thresholds which results in price adjustments and/or penalties. These price adjustments impact the determination of the final AMP price as well as the reimbursement prices for providers in Medicare Part B.

Numerous federal agencies have studied the price benchmarks identified in this document. The most prolific analysts are the Office of Inspector General for the Department of Health and Human Services, and the Government Accountability Office (GAO). Comparisons reports between AWP, WAC, AMP, 340B, Best Price and pharmacy invoice prices abound. In an October, 2012 OIG report (A-06-11-00002) an analysis comparing AWPs, WACs, and AMPs to invoice prices concluded that “Although based on actual sales transactions, the AMP was the least consistent benchmark”. Any wonder why?

As mentioned above manufacturer rebates are calculated based on percentages of a drug’s AMP. Private sector entities and some government agencies also calculate rebates as a percentage of WAC.

AMP values are lower than WACs. As a result, the rebate calculated as a percent from an AMP will be lower than calculated from WAC.

PART II: MANUFACTURER REBATES, DISCOUNTS AND OTHER PRICE REDUCTIONS

Purchase discounts and performance rebates are common business practices utilized to gain access to markets for a company’s products and services.  Similar business strategies are utilized by the pharmaceutical industry for access to federal and state government prescription drug programs. 

Since the creation of the Medicaid Drug Rebate Program in 1990, the federal government has mandated that pharmaceutical manufacturers pay rebates or offer purchase discounts to various government agencies in exchange for participation rights in federally sponsored prescription programs such as Medicaid and Medicare. The federal government is now the largest purchaser of pharmaceuticals in the USA. IQVIA 2019 Medicines and Spend Report provides data supporting the fact that 43% of the entire pharmaceutical market is procured by our government. (*2). 

Over 600 pharmaceutical manufacturers pay rebates to the federal government. (*8)

Most rebates are for brands and the amounts vary based on many factors including: the availability of competitive drugs that are therapeutically equivalent; formulary status of the drugs; patient payment participation levels; the benefit design, market shares; and other competitive factors. Rebates are not paid on all drugs. Branded drugs that do not have comparable brand competition or generic equivalents have little reason to pay rebates except as a requirement for listing on a plan formulary. In addition, they must provide discounts for patients’ out of pocket costs when they are in Medicare Part D coverage gap. As a point of clarification, generic manufacturers pay rebates to Medicaid programs as well.

Manufacturers pay other fees to PBMs and health insurers, often referred to as MAFs, or manufacturer administrative fees. MAFs are for formulary placements, utilization reporting, collection and allocation of rebates and other considerations. Such fees are not considered rebates.

Manufacturer rebates, discounts and fees are protected with confidentiality clauses in agreements with private sector payers and by government regulations. Some aggregate information is available from government and private entities but it is difficult to dissect the various components. In recent years, pharmaceutical manufacturers have disclosed significant amounts of rebates and discount information thereby permitting some analysis of their impact on the marketplace. 

Pharmaceutical prices are not obvious. In fact, there are simply too many different prices for brand and generic drugs. Part I reviews the important price points for brands and highlights the convoluted pricing system. 

In most cases rebates are calculated from AMPs. Manufacturers have some leeway into what drug prices are included in this calculation. For example, some brand manufacturers also produce and market “authorized generics” which are priced lower than the equivalent brands. They are used to protect brand pricing methods prior to the introduction of generic equivalents. Authorized generic prices are not included in the calculation of a drugs AMP; resulting in lower AMPs and lower rebate payments. Some entities receive rebates based on a percentage of WAC prices instead of AMP. Obviously, the percentages are not the same when the higher WAC price benchmark is utilized and have resulted in additional market confusion when rebates are debated.

Incorrect classification of drugs has also proven to be an occasional problem. For example, a few years ago EpiPen was classified as a generic when in fact it was a brand. When a drug is classified as a generic, its rebate payments are significantly reduced.

In order to discuss pharmaceutical rebates and discounts it is imperative to use price points that are clear, transparent and definable.  Key industry leaders such as Drug Channels Institute, IQVIA Institute, pharmaceutical manufacturers and others have settled on two important terms: “Gross prices” and “Net prices”. Gross prices for branded pharmaceuticals are the same as WAC or List prices. Invoice prices may be the same as list prices but this is not a reliable source due to invoicing variations between distributors, wholesalers and purchasers. 

Net prices are the amounts received by drug manufacturers as a result of negotiations with other supply customers and payers after rebates, discounts, and other price reductions. Other reductions include wholesaler distribution fees, product returns, discounts to patients needing financial assistance for the purchasing drugs, and sampling. Drug manufacturer customers include government entities, insurers, PBMs, employers, physicians, wholesalers, retailers and hospitals.

Following is a review of rebates and discounts.

MEDICAID REBATES

Rebates are defined by the Medicaid Drug Rebate Program (MDRP) which requires manufacturers to have a national rebate agreement with HHS for their products to be covered by Medicaid. The law requires manufacturers to pay a basic rebate of 23.1% of AMP (or, if greater, the difference between AMP and Best Price) on all brand drugs and 13.0% of AMP on all generic drugs purchased under the Medicaid program. The rebate for pediatric medication and certain clotting factors is 17.1% of AMP. (*18)

Medicaid rebates increased with the passage of The Accountable Care Act of 2010. Brand drugs rebates increased from 15% of AMP to 23.1%. Generic rebates increased from 11% of AMP to 13%. 

In addition, participating manufacturers pay penalties if their prices increase at a rate greater than the inflation index (inflation index rebate). Rebates are shared between state and federal governments and they are calculated on a unit of use basis referred to as the unit rebate amount (URA).

Rebates apply whether the state pays for prescription drugs via a fee-for-service program or through capitated arrangements with managed care organizations (managed Medicaid).

Most state governments have negotiated supplemental rebate contracts with manufacturers for product inclusion in the formulary as a preferred drug. Supplemental rebates, usually for an additional 10%, are paid to the states and shared with the federal government.

These statutory and supplemental rebates totaled $34.9B in 2017 which represented 54.5% of the total (brand and generic) drug spend of $64B. (*20 MedPac). Drug Channels reported, in its April 3, 2019 edition, that Medicaid programs received a 21% reduction from WAC prices for branded drugs in 2017. (*3). 

MEDICARE PART B REBATES

The 2017 Medicare Part B drug program is estimated at $32B according to the MedPac data book, June 2019.

Manufacturers discounts and rebates are included in determination of ASP pricing which is defined in Part I. The Medicare Part B program does not have inflation-indexed rebate structures.

MEDICARE PART D REBATES AND DISCOUNTS

The Medicare Part D program is administered by “plan sponsors” who are entities that bid for and, if selected, operate the designated plans. Plan sponsors negotiate rebates with brand manufacturers for drugs utilized under their Part D Plan. The rebate terms and amounts are confidential. After the close of each plan year (calendar) CMS prepares an aggregated report on all rebate and discount amounts. Such rebates and discounts are referred to as Direct and Indirect Remunerations (DIRs).    

The discounts referred to in the preceding paragraph are federally mandated and paid by drug manufacturers. The law requires that brand manufacturers fund 70% (as of 2019) of a patient’s brand drug cost once the patient enters the “coverage gap” or “donut hole” portion of the Part D drug benefit. This is known as the “coverage gap discount program” or CGDP and it is not a component of plan sponsor rebates or any other federally mandated rebates. During the coverage gap phase patients pay 25% of the drug cost, Part D sponsors pay 5% and manufacturers pay the remainder. (*36).  An estimated 4.3 million Medicare patients entered the coverage gap in 2016 but the amount of these discounts is not available. (*22)

Milliman, on behalf of America’s Health Insurance Plans, published an analysis of Medicare Part D rebates for 2016 which concluded that manufacturer rebates averaged 30% off WAC (list) price. (*23).   

In 2019, the Medicare Board of Trustees annual report disclosed that in 2017 manufacturer and pharmacy rebates represented 21.8% of the total drug costs.   The report states that the rebates include manufacturer rebates and concessions paid by pharmacies at the point of sale (aka: pharmacy DIR fees). (*24) 

340B REBATES AND DISCOUNTS

340B drug prices, known as “Ceiling Prices” are believed to be the lowest prices for brand drugs except for the Veterans Affairs contract prices. They are calculated as the AMP minus statutorily defined Medicaid rebates or the difference between “Best Price” and AMP, whichever is lower. As previously stated, a 2015 MedPac review calculated 340B prices at ASP-22.5% and the Moran Company found the same results for brand drugs. ASP brand prices are 3% less than AMP, on average. 

340B entities receive an additional 10 % discount by contracting through Apexus, a group purchasing organization (GPO) for “covered entities”. Apexus has approximately 7000 drugs under contract. (*6). See Table II.A for an estimated comparison of benchmark prices.

VETERANS ADMINISTRATION AND DEPARTMENT OF DEFENSE AND FEDERAL SUPPLY SCHEDULE (FSS)

FSS awards multi-year federal contracts to pharmaceutical companies for use by other federal government agencies. 

The Department of Veterans Affairs contracts with manufacturers and are guaranteed minimum rebates/discounts for prescription drugs. The VA, by law, receives a 24% discount from the non-federal average manufacturer price (AMP) or the Best Price, if lower. The VA may negotiate additional rebates through the utilization of its closed formularies. All prices are confidential. (*25). See Table I  a summary of benchmark prices and Tables II.A and II.B for benchmark price comparisons. 

COMMERCIAL REBATES

Manufacturer rebates are earned by both government sponsored and private sector payers. The public information that is available does not separate, in most cases, the rebates and discounts paid to these two types of payers. However, the available information from all payers is useful to gain insight and a comprehensive understanding of the depth and scope of rebates and discounts.

Pharmaceutical rebates and discounts are negotiated by PBMs, health insurers, and other private sectors payers. Rebates are statutorily mandated in government sponsored programs.   

In recent years industry stakeholders have begun to publish information about pharmaceutical rebates. Some hired outside firms to objectively analyze and report the enormity of rebates in an effort to open the dialogue on the topic.   

Recent public documents estimate rebates paid to government and private/commercial payers range from 30% to over 50% of WAC price for brand drugs. Following are some specific examples:

·        In 2017 Janssen Pharmaceutical US reported $15B in discounts and rebates on their medicines or a discount rate of 42% from WAC price that was paid to Medicaid, Department of VA, 340B Drug Discount program, Medicare Part D sponsors and program administrators. (*26). In 2018 Janssen reported $21B in discounts and rebates equaling a discount of 47% from WAC prices. (*22). 

·        In 2018 Eli Lilly and Co. provided discounts and rebates (USA) at an average of 54% discount from WAC price. (*28).

·        Merck & Co. reported an average annual discount rate from WAC price was 40.9 % in 2016, 45.1% in 2017, 44.3% in 2018. Reductions were the result of rebates, discounts and returns. (*29)

·        Novartis reported US rebates and discounts of 49.8% of gross sales in 2018. These rebates and discounts were for brands and generics. (*30)

·        Novo Nordisk disclosed in their 2018 annual report that rebates and discounts given to private and public payers totaled 68.0 % of gross sales (WAC) across their entire portfolio. Note that exchange rates apply DKK vs $US. (*31)

·        Sanofi reported 55% of gross sales (WAC prices) were given back to payers, as rebates, including $4.5B in mandatory rebates to government payers and $7.3B in discretionary rebates in 2018. (*32) (*33)

The absence of complete transparency eliminates the opportunity to disclose and calculate the actual total amounts of rebates, discounts and other price reductions. However, two entities have developed systems that approximate the total value of these reductions yielding a value for net prices.

·        IQVIA Institute’s “Medicines Use and Spending in the USA” 2019 reports that, on average, manufacturers realized 43% of WAC prices after all price reductions in 2018. (*2, *22) 

·        Drug Channels Institute reported in its April 3, 2019 edition that manufacturers paid $153B in rebates, discounts and other reductions for brand drugs in 2017. Sixty-seven percent (67%) of this amount ($102.5B) was paid in rebates to Medicare Part D, Medicaid, and commercial payers. 

·        They also reported that gross to net reductions totaled $166B in 2018, of which $110.67B are rebates. Drug Channels coined the term “gross to net” to describe these reductions. (*3)

PHARMACY DIRECT AND INDIRECT REMUNERATION (DIR) FEES

In 2010 CMS permitted Part D plan sponsors to establish preferred pharmacy networks where Medicare beneficiaries pay lower out of pocket amounts (co-payments, etc.,) when utilizing the “preferred” pharmacies. Preferred pharmacies pay a defined per prescription fee to plan sponsors (or their PBMs) for each prescription dispensed. The fee, referred to as a Pharmacy DIR fee, is calculated after the prescription is dispensed. Pharmacies then pay the DIRs to plan sponsors.  Pharmacy DIRs are reported to CMS after the close of each plan year. (*24) 

Pharmacy DIR fees do not directly decrease the charges to the patient at the point of sale because they are paid by pharmacies to plan sponsors or PBMs after the patient received their medication. CMS and plan sponsors maintain that Pharmacy DIR Fees fund the patient co-payment reductions available at preferred network pharmacies. However, clear, transparent accountability is absent regarding the use of these fees.

According to the July 2019 GAO Report on Medicare Part D drug expenditures, pharmacy DIR fees paid to plan sponsors increased 295% from 2014 through 2016, from $538 million to $2.1 billion. (*34) Drug Channels reported in their December 2, 2018 blog that in 2017 Pharmacy DIR fees totaled $4B. 

In conformance with CMS confidentiality policies, the amounts are not further defined nor is there any transparent accountability from CMS or plan sponsors regarding the utilizations of these fees.

See Table III for a summary of rebates, discounts and fees.

PART III: DISCUSSION AND COMMENTS

In 2018 pharmaceutical rebates totaled more than $110 billion representing, at a minimum, 25% of the total amount of $450B spent on prescription drugs. (*2). One hundred and ten billion dollars ($110B) shrouded in protected agreements, and utilized for non-transparent purposes. The result: excessively high drug prices; tens of billions of dollars in drug discounts provided to various federal programs including 340B, Veterans Administration and Medicare Part B and D; and tens of billions of dollars provided to commercial entities like PBMs, health plans, insurers and some employers.

Confidentiality clauses prohibit the disclosure of rebates, discounts and the excessively low drug prices realized by government programs like 340B and the VA. Certainly, this is the epitome of non-transparency. 

From a business perspective, it is not unreasonable to protect the terms and conditions of business transactions. Discounts and rebates are sensitive information but not to the extent reviewed in this document. The brand pricing systems in the USA have evolved to a point of outrageousness which 

·        Harms patients by driving up out of pocket costs

·        Misleads the marketplace with meaningless pricing propaganda

·        Creates the opportunity for billions of dollars to be shielded from the payers and consumers and utilized for undisclosed purposes.

·        Protects some stakeholders. Some experts state that our system protects the manufacturers; some state it protects the PBMs and insurers; others state that it’s the government.

Over many years, manufacturers have responded to increasing demands for rebates and discounts from government payers and commercial payers by developing pricing strategies to recoup the costs of these reductions thereby leading to price increases. Most likely, pharmaceutical manufacturers’ business plans include “cost shifting” strategies where rebate and discount demands from one client are balanced by increasing prices to other clients, nationally and internationally. In fact, the manufacturer pricing strategies are often implemented prior to the effective date of new legislative mandated discounts and rebates. 

A review of drug price increases before and after implementation of the Accountable Care Act of 2010 is an example. The ACA was implemented on January 1, 2014. From 2013 through 2016 outpatient prescription drug prices spiked from near 0% in 2012 to over 12.0% in 2014; and plus 8.0% in 2015. (*16). In other words, increasing prices generate the dollars needed to cover the costs of new rebates (Medicaid rebate percentages were increased) and discounts (Part D coverage gap subsidies were increased) mandated by government legislation.

Adding to the complexity of drug prices is the use of multiple pricing benchmarks for the exact same drug entity. Our government leadership is primarily responsible for establishing these benchmarks while they “tinkered” with drug purchase and pricing rules through legislative actions. 

A simple pricing example demonstrates the unexplainable disparity in our current pricing systems. Imagine a brand drug with a monthly cost of $300.00 at AWP.

    Its WAC or list price is          $250

    Its estimated AMP range           $216 to $231

    Its estimated ASP is             $207 to $222

    Its estimated 340B price is       $145-$172

    The Veterans Administration price unknown

See Tables I, II.A, and II.B for a summary description and comparison of these benchmarks. 

Too many benchmarks and non-transparent rebates and discounts have added to the opacity of drug prices which translates into confusion, lack of trust, misunderstandings, and even political gamesmanship and marketing propaganda.   Confusion plays to the advantage of some stakeholders because it clouds the issue and prevents a clear understanding of drug pricing mechanisms. When single entity drugs have multiple prices, no one really knows the exact price. Rebates calculated with more than one price benchmark, such as AMP, or ASP, or WAC, adds additional murkiness to prices.

So, what is the price of a brand drug in the USA? It is impossible to determine based on our current system. Most payers and patients want to know how close is their price to the “best price” available? Unfortunately, our pricing system is structured to prevent the disclosure of this information. 

A transparent pricing system would benefit payers and patients. It would disclose “how” billions of dollars of rebates and discounts are used:

·        It would define how rebates benefit patients

·        It would describe precisely how insurers and PBMs utilize rebates or discounts within their benefit programs. 

·        It would stop political gamesmanship that incentivizes political leaders to change a pricing system that they clearly do not understand. 

·        It would benefit patients by clear, transparent descriptions of how premiums and other out of pocket costs are determined. 

Clearly, the billions of dollars paid in rebates to federal and state governments and private insurers do not reduce the cost of prescription drugs for patients. Every year patient out of pocket prices (premiums, deductibles, and co-payments) increase. Never do they decrease even as rebate and discount dollars go up.

The absence of a single, consistent, comparable common benchmark for all brand drugs eliminates the opportunity to define the actual price of a drug. From a single common price benchmark, reimbursement schedules could be negotiated and structured for the various pharmaceutical providers based on their individual levels of dispensing, administration, patient management initiatives, patient outcome evaluations, drug effectiveness and more. One benchmark would permit accurate, comparable business evaluations of drug prices, cost of outcomes and treatments.   

Once a common net price benchmark was determined then a meaningful discussion could be opened to compare U.S.A. prices to other nations such as Japan, UK, France, Canada, Australia and others.  

In summary, hundreds of billions of dollars are paid by pharmaceutical manufacturers to government and commercial payers in various forms of discounts, fees, and rebates. The payment amounts have grown exponentially and now represent a significant portion of a drugs’ WAC price.

Is there any wonder why no one can comprehend all the components of our pharmaceutical pricing system? One riddled with various rebates calculated from different pricing benchmarks, mandated discounts, penalties, best price guarantees, confidentiality regulations, and disjointed reporting systems. In other words: a pharmaceutical pricing quagmire.   

CONCLUSION

Identifying a solution to this disparate system of pricing will be difficult, primarily due to the number and size of the various competing entities/stakeholders. If the primary focus of a solution is to minimize patient out of pocket costs (co-payments, co-insurance, deductibles, premiums) as much as possible and to not reward primary payers such as insurance companies, PBMs, government officials, and employers then a reasonable solution can be found. At the same time a solution should not favor pharmaceutical manufacturing entities with corporate gratuities at the expense of innovation and competitive advantage brought on by market forces. 

The first step must be a political willingness to make meaningful changes.  This will not be easy because there are numerous laws and regulations in place plus an entrenched bureaucratic infrastructure that may not be willing to disrupt the status quo. 

A cost-effective prescription price reform system, incentivized toward patients, will entail many elements, including:

·        Motivating HHS and CMS and other powerful federal bureaucratic entities to implement any proposed changes

without delay. This is monumental when one recognizes that it may take years for our bureaucracy to change rules following changes in legislation.

·        A willingness to resist the tsunami of lobbying from the many powerful stakeholders who will defend their component’s value and profitability.

·        An open debate from all representatives of the pharmaceutical industry.

·        The selection of a single pricing benchmark for all federal/state prescription programs. A single benchmark provides the opportunity for a consistent, comparable mechanism for data and cost analysis.

·        A requirement that all pharmaceutical rebates and discounts be earmarked toward the reduction of patient costs; premiums, deductibles, and other out of pocket costs. This will require full disclosure by all stakeholders.

·        Support for patent protection regulations that promote pharmaceutical innovation but close current loopholes that favor patent manipulations (e.g.: Authorized Generics) that extend patent protection beyond original protections.

·        The establishment of new “insurance based” programs for costly, individualized medication and gene therapy treatments.

Disclosure. This is an independent research project written without any outside input other than the resources indicated. The writer did not interview, nor seek information from any industry stakeholder including manufacturers, PBMs, insurers, employers, payers, or anyone in the retail and pharmaceutical industry. The writer’s personal experiences as a Pharmacist, pharmaceutical buyer, third party (payer) contract negotiator, PBM administrator, Medicare Part D plan advisor, and other related business enterprises are included.

APPENDIX

Table I: Summary of Cost/Price Benchmarks

Table II.A. Drug Price Comparison by Benchmark to estimated AMP prices. Calculations based on AWP = $300.00.

Table II.B.: Determination of an estimated AMP for brand Drugs.

Table II.A is a comparison of brand drug price benchmarks to AWPs recognizing that AMP values are not readily available and that AMP values change. AMPs are in a constant state of change due to many reasons including changes in manufacturer-client purchase agreements; brand price increases; Best Price overrides; government-imposed inflation penalties; addition of new equivalent drug entities; in arrears reporting methodologies; brand to generic conversions, authorized generics and others. AMPs is the benchmark utilized to calculate the majority of manufacturer rebates.

Table II is prepared to demonstrate the large disparity in brand pharmaceutical pricing benchmarks described in this document. It is not a definitive comparison but a demonstration. The methodology for ESTIMATING the AMPs stated is based on many government agencies studies, including the analysis by the Office of Inspector General (HHS)of brand drugs (*7,13,38) and the MedPac May 2015 review (*6). The results are incorporated into the Table II.A comparisons.

Table III:  Summary of rebates, discounts and fee descriptions paid by brand manufacturers and pharmacies.

Sources/Citations

1. CMS 2018 National Health Expenditures, www.kff.org January 2019.

2. IQVIA Institute “Medicines Use and Spending in USA: A Review of 2018 & Outlook to 2023”, May 2019.

3. Drug Channels Institute, published on www.DrugChannels.net on April 3, 2019.

4. Office of Inspector General, Department of Health and Human Services, 2018 Report #OEI-12-17-00130.

5. The Council of Economic Advisers. “Reforming Biopharmaceutical Pricing at Home and Abroad”, February 2018.

6. MedPac Report to Congress. “Overview of 340B Drug Pricing Program”, May 2015.

7. Office of Inspector General, U.S. Department of Health and Human Services, 2005. Medicaid drug price comparison, average manufacturer price to published prices. Report No. OEI-05-06-00240. Washington, D.C. Pages 11,12,14.

8. Office of Inspector General, Department of Health and Human Services, August 2017. Report #OEI-05-16-00590, Medicare Part B ASP Monitor. 

9. Social Security Act of 1935, Section 1927. “Payment for Covered Outpatient Drugs”, 42 U.S.C. 1390r-8.

10. “MedPac Medicaid Payments for Outpatient Prescription Drugs”, September 2015.

11. Baer, C.J. 20: A Proposal to Revise the 340B Drug Pricing Program”. William & Mary Law Review 57 (2): 63771.

12. Moran Company “Hospital charges and reimbursements for drugs,” October 2017. Pages V.2, 11.

13. Office of Inspector General, Department of HHS, “Part B Payments for 340B Prescription Drugs”, November 2015. Report #OEI-12-14-0030.

14. American Patients First, 2019. Secretary HHS. “The Trump Administration Blueprint to Lower Drug Prices and Reduce Out of Pocket Costs”, May 2018.

15. Drug Channels Institute, published on www.drugChannels.net on May 14, 2019.

16. Drug Channels Institute published on www.drugchannels.net December 10, 2019.

17. www.medicaid.gov/prescriptiondrugs/pharmacypricing.

18. www.medicaid.gov/medicaiddrugrebateprogram

19. Drug Channels, April 3, 2019. See “Gross to Net Bubble” at www.GrossToNetBubble.com.

20. “MedPac Medicaid Drug Spend Trends”, February 2019 and Kaiser Foundation “Medicaid Prescription Drug Benefits”, May 2019.

21. Medicare Part D Coverage Gap. www.medicare.gov/drugcoveragepartd/costsformedicaredrugcoverage.gov.

22. Kaiser Family Foundation, “10 Essential Facts About Medicare and Prescription Drug Spending”, January 29,2019. www.kff.org

23. Milliman “Prescription Drug Rebates and Medicare, Part D Costs”, July 2018. www.milliman.com

24. Board of Trustees of the Federal Hospital Insurance and Federal Supplementary Medical Insurance Trust Funds, April 22, 2019. https://www.cms.gov/Research-Statistics-Data-and-Systems/Statistics-Trends-and-reports/ReportsTrustFunds/index.html.

25. Veterans Health Affairs, Prescription Drug Pricing #8, August 10, 2017. www.healthaffairs.org/do/10.1377/hpd20171008.000174/ful/

26. Janssen Transparency Report 2017, page 22.

27. Janssen Annual Transparency Report 2018. www.transparencyreport.janssen.com/us/us-pharmaceuticaltransparency-report

28. Eli Lilly & Co Annual Report at: www.lilly.com/2018-annual-report

29. Merck & Co. “2018 U.S. Pricing Transparency Report” at: www.msdresponsibility.com.

30. Novartis in Society, 2018 US Reports at: www.novartis.com/publications

31. Novo-Nordisk Annual Report at: www.novonordisk.com/annual-report-html.

32. Sanofi 2019 “Prescription Medicines Pricing, Our Principles and Perspectives” at: www.sanofi.com/media.

33. Drug Channels Institute, published on www.drugchannels.net on February 28, 2019.

34. US Accountability Office Medicare Part D “Use of Pharmacy Benefit Managers and Efforts to Manage Drug Expenditures and Utilization” Report #GAO-19-498.

35. Milliman White Paper, November 2018. “NADAC-plus: An emerging paradigm in pharmacy pricing?”

36. Milliman White Paper, February 2018. “How will the Bipartisan Budget Act of 2018 Impact Part D in 2019 and beyond”.

37. Medicare Improvement & Modernization Act, 2003. “Definition of WAC”, Public Law 108-173.

38. Office of Inspector General, U.S. Department of Health and Human Services, Medicaid Drug Price Comparison Average Sales Price to Average Wholesaler Price, June 2005. Report #OEI-03-05-00200, pages 4 and 15.

39. Drug Channels Institute published on www.drugChannels.net on January 15, 2019.