AH032 - Prescription Rebates: Agreements, Guarantees, and More, with NPC's John O'Brien, PharmD, MPH, and Julie Patterson, PharmD, PhD

Transcript

Lightly edited for clarity.

AJMC Study (7/19/24): Prescription Rebate Guarantees: Employer Insights

[00:28] Justin Venneri: Hello and thank you for listening to this episode of the Astonishing Healthcare podcast. I'm Justin Venneri, your host and Director of Communications at Capital Rx, and I think we have a treat for you all this week.  

With me in the studio are John O'Brien, President and CEO of the National Pharmaceutical Council (NPC), Capital Rx co-founder and CEO AJ Loiacono, and Julie Patterson, Senior Director of Research at NPC, and the topic of discussion is rebates, and rebate guarantees, and their role in PBM selection. The catalyst for this episode is a survey that NPC ran of over 100 employers, which was published in the American Journal of Managed Care in July. We'll link that in the show notes along with some other relevant content on rebates, but let's just get right into it.  

So, John and AJ, rebates are always at the center of the discussion when it comes to drug prices, the gross to net bubble spread pricing, etc. You've both talked about the revenue associated with filling or dispensing medication publicly for years. So, can you each take a quick turn, provide a little more about your background beyond your current roles and titles that I just went over? And then we can frame the discussion about why taking a look at rebates and rebate guarantees now is extremely important.

[01:35] AJ Loiacono: John's the guest. I'm going to give him a first go.

[01:39] John O'Brien: Awesome. Well, thanks AJ. It's great to be with everyone. I'm the President and CEO of the National Pharmaceutical Council, and more importantly, friend to AJ's. If you don't know NPC, we're a 70-year-old health policy research organization and we conduct policy-relevant research. I'm a pharmacist and an academic. I've worked all over healthcare for drug companies, at the largest health plan in the mid-Atlantic, and a couple tours of duty in government for both Republicans and Democrats. And today I get to draw on all that experience and work with a really dedicated team of researchers. They ask really important questions about how we can help patients get access to medicines and use them to get well, stay healthy, and lower total health care costs.  

We do that in a really hostile and dynamic policy environment that unfortunately seems on perpetuating, an opaque and shadowy system for the majority of my career. We've seen increasing attention on high drug prices, but it's only been recently that we begin to see a focus on middlemen and their role.  

Now, putting my politics hat on. I know when I'm looking at polling data, voters and patients and I, people like my mom, who's both, when they talk about their concern about high drug prices, they mean the price that they're being charged at the pharmacy counter, which is more about the insurance card that's in their wallet than anything else. And if you're asking an employer about their concern about high drug prices, they mean the price that their insurer is charging them. Now, the more policymakers have begun to look into this, the more they've discovered that we have a really complicated system that actually causes drug prices to increase, and that more than fifty cents of every health care dollar, what we call drug spending in the United States, is going to someone other than the company that makes the medicine.

So, the more they look into this, the more they find evidence that says that PBMs are preferring higher priced drugs with higher rebates. And that's how they make money. But what not many people know is that they keep this system going by guaranteeing large rebate checks to the employers who hire them. And there's this little-known entity called the employer benefits consultant who may actually be preventing employers from seeing better options.  

Now, Doctor Patterson will talk about our latest research on this topic, as you said at the top. But the research underscores what we've heard from leaders like AJ, Mark Cuban, Greg Baker, Adam Fine, lawyers like John Levitt, and fellow wonks like Antonio Ciacci. But the bottom line is that employers should learn more about how this system works and not let rebate guarantees cause bad choices for their employees.

Pharmaceutical Rebate-Related Content

• Pharmacy Benefits 101: Pharmaceutical Rebates
• AH002 - A Former Pharmacy Program Director's View on Controlling Pharmacy Costs
• Our Single-Ledger Model™ - Pharma Revenue Explained

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[04:12] AJ Loiacono: I couldn't agree more with John. My current role, I'm the CEO of Capital Rx. I've spent 24 years and counting in the pharmaceutical supply chain. I guess what makes me unique is I've always been in software development, and I started in pharmaceutical manufacturing on the plant side doing really dry supply chain install work. But I had a first-rate education in supply chain logistics and drug pricing that still works for me to this day.  

But it was during, you know, those years, and then moving over to the payer side, I was very quietly I say, writing this 18-year thesis on where do the drug prices go? And it's this level of opacity and what I would say, intentional confusion delivered through artificial price variability that was designed to create intentional profitability by the middlemen, or as we know them, as pharmacy benefit managers -- traditional pharmacy benefit managers.  

And I always say, we didn't start here. You know, if you go back to the early '90s, PBMs charged a flat administrative fee. They were very software as a service or business process, outsourcing, where they would charge a flat administrative fee. And they really weren't involved in benefiting from drug spend. They didn't make money on drug spend.  

In the turn of the century, what happened was PBMS discovered, hey, what if I were to charge zero administrative fee -- what a brilliant marketing ploy -- but just keep a little bit of the drug spend? And that little bit obviously increased considerably with the appetites for the PBMs. But also, I do make note of, as these companies became publicly traded entities, their primary fiduciary responsibility is to the shareholder. And that puts them in a really conflicted position, because if your job is to make more and more money off of the same group of people, when you run out of, obviously, growth, which the industry did, you're taking away money from patients and payers. And at the core of my thesis has always been, if you're going to be an administrator, administrative. Charge a flat administrative fee, but you can't own any GPO, manufacturing, repacking, pharmacy, wholesaler, any type of fulfillment, or what I would call purchasing, service that makes money on drug spend. Because the inherent conflict of interest is the moment you make money on drug spend as an administrator is the more expensive the drug, the more money you make. The more fulfillment or over fulfillment or waste, the more money you make. Your selection or reclassification of drugs -- and we'll get into this in a moment with Julie's and John's study -- is the fact that you're suddenly put into a situation where, by mistake, I chose the brand innovator instead of the generic offering that's been off patent for twelve years, because I'm able to get a rebate, charge more money, and, back to what John said, is the fallback to the consultant and the broker is I gave you a 22% discount off of AWP. I gave you a $2,000 to $4,000 rebate, whatever it may be, on the specialty product, but in reality, they should have just charged $200 for a generic.  

And this goes back to the disadvantage of the patient and the payer. And again, I think the root cause is conflict of interest. And we'll talk about this more.

[07:43] Justin Venneri: Got it. Thanks, AJ. And before we go on too much longer, Julie, thanks for hanging with us. It would be great to hear a little bit about your background and then we'll get into the spreadsheet and a couple of other topics before we dive into the survey.

[07:57] Julie Patterson: Great. Well, thank you for having me. I am a pharmacist. I am a PhD researcher in pharmacoeconomics. I worked in the pharmaceutical industry and then spent a while in academia. So, I have taught the pharmaceutical supply chain to students at all levels, and I have seen their faces as they try to process these incentives and the opaqueness. And so now I do research at NPC that we hope can inform and impact these important policy conversations.

[08:25] Justin Venneri: And so, AJ, if we can dig in a little bit on what you and John set up here and talk about drug mix, importance of appropriate controls for the benefit of plan sponsors and members and the spreadsheet, which is kind of what shows what we're talking about here to the employers during that request for proposal process.

[08:46] AJ Loiacono: Yeah, I don't think we have enough time to cover all of the points that we could uncover here, but why don't we go with the ones that just come to mind and I'm sure we can all throw in some great examples.  

So, first thing that comes to mind when we talk about rebates is this conversation that always comes up where people say, oh, we're, you know, the PBM is saying, I'm giving 100% of available rebate dollars. And if anyone has ever seen an employer agreement of the same vintage with the same PBM, the numbers are all different. Now someone's going to be like, well that's drug mix. I go, well let's go to the NDC 9 or the NDC 11 on the drug, if you can get it. Why are there different numbers? You know, and so if someone has literally the value that's half of someone else, another employer group, where's that money going?  

And each year, the stair step of inflation and rate change, there's always a drag from inflation or price increase. There's always some sort of drag through artificial variability. So, my first point all the time is I think sometimes Congress is asking the wrong question when they have testimony. Because instead of saying, I, the PBM, what they should be saying is I, the parent organization does not keep any drug revenue from rebates. Because the PBM subdivision could be like, well we don't keep anything, but one of my 400 LLCs may and roll that up to the parent org.  

So anyone who ever tells me that PBMs over the span of my career on the payer side don't keep rebates I'm like, you don't know what you're talking about. I just want to go straight to that point. The second one is the game of rebates that comes to mind. And remember, we compete in RFPs all the time with traditional broker consultants. Some are very good. Some are very bad. Some are unbiased. Some are very conflicted with their compensation schedules. And so, there's a variety. But the biggest problem we find time and time again is if you're coming from or going to -- and what I'm going to talk about a traditional PBM data set -- and so let's just give an example.  

I have to do a repricing exercise on an employer group and I'm given all of these drugs to reprice. I have no way of changing these drugs. So, if I find wasteful medications, I still have to reprice them. I would never use these drugs. I would never in a million years allow someone to use a drug that's been off patent five, six, seven years. And the innovator drug is, oh look, popping up again and again.

[11:33] Justin Venneri: Right, right.

[11:34] AJ Loiacono: Sometimes it's not even in the question of rebate dollars. Rebate is a game of traditional PBMs because if you can make 10%, 20%, 30% on rebate dollars, you want as much branded product as possible.  

Back to my earlier point, administrators should just administrate. They should have no avenue or method to make money on drug spend. It creates a horrible conflict of interest. But that's the first point. So even when we come from an existing employer group, anyone who's transparent, who's unbiased, who wants to actually reduce drug trend and obviously focus on better outcomes, better service, you're already unfortunately starting from a bad footing because the economics and the methodology do not favor you.  

The second part is, let's say, lo and behold, someone, let's just say, comes from a transparent PBM. You know what's going to happen is in the repricing exercise, the traditional PBMs go, "Aha, I can take all of these generic products and put them in the most expensive brand innovators possible. I can take things at any time and move them.” So you're going to see normal rebate value for a peer group, let's just say, is 32%. And then the traditional PBM is going to be like, no, I'm going to give you 45% rebates. Now what happens is, remember, repricing on the base of the NDC 11s, which in my second example, example includes lots of generic drugs, but they're saying oh, I'll reprice the generics, but I know my value on rebates is going up. And because the contract is rebate driven on a rebatable script or category level, they know they're going to meet the guarantee. But who does it hurt? Back to John's statement, the patient and the plan. Time and time again. I mean, we could spend days, but this is that the core of it all.

[13:25] Justin Venneri: John, anything you'd like to add to that? Then we can jump right back to Julie to get into the survey results. Yeah.

[13:31] John O'Brien: First, let the record reflect that this is the first podcast that I've ever participated in that talked about NDC 11s, and it just tells me that I'm in the right place. But look, we're living in a golden age of biopharmaceutical innovation. We have pills that treat breast cancer at home. We have long acting prep to prevent HIV, and we treat it today like a chronic disease. The medicines that we have today would have been considered science fiction when I was in pharmacy school. But we're still trying to pay for these innovations, including durable therapies, curative drugs, with a antiquated payment system that was built for statins and blood pressure medicines. And as AJ pointed out, that system views medicines as an arbitrage opportunity that's more interested in extracting margin from drug spend than health benefit for patients.  

And I hope we get invited back to spend that day to talk about things like parent orgs, GPOs, the money in specialty pharmacy, and how all of that really involves taking money from the left pocket and putting in the right pocket. But we did this study because most policy discussions don't fully grasp how this works. And people who don't follow this as closely as your listeners do, might think that employers are choosing a PBM based on the lowest cost they can get on the medicines that their employees use or want to use most, like x dollars for this drug, y dollars for that drug.  

In reality, I'm laughing because AJ actually used the word spreadsheet -- nobody knows what the spreadsheet is. They don't know that employers are likely to choose from three or four competing options on a spreadsheet that their employer benefits consultant gives them, and that simply shows the guaranteed rebate a PBM will pay and how much that will grow at the end of the year and over the life of the contract.  

And since only the wonkiest know the term spreadsheeting, and the literature doesn't contain anything about how all this works, we did this study to shed light on how important rebates were when choosing benefits for employers and who's advising them on these choices.

[15:30] Justin Venneri: Makes sense. So, Julie, back to you. John just teed it up. Tell us the thesis, maybe jump into the study design a little bit. And how did you go about pulling this data together?

[15:40] Julie Patterson: Absolutely. Well, let's start with the bottom line. Employers who are addicted to rebates may not be hiring PBMs that get their employees the lowest drug costs. Two findings from the study that I'll highlight.  

First, employers working with a benefits consultant were more likely to be in a rebate guarantee arrangement. And as Mark Cuban tweeted, this emphasizes the opportunity employers have to better understand the benefit options being offered. And these decisions have important consequences. They impact access to medicines for their employees and their overall health care costs.  

Secondly, the research illustrates the significant role that consultants and brokers play in selecting PBMs. Nearly 60% of employers indicated that these were the most influential individuals or groups in their rebate strategy while they were selecting their PBM.  

How did we go about this? We sent a survey out to employers to better understand these and related issues. It was the first peer reviewed analysis into how employers might value rebate dollars when comparing proposals and into the role of benefits consultants. I see these findings as continuing the conversation that nontraditional PBMs, well-meaning benefits brokers, and groups like the National Alliance of Healthcare Purchasers have been having for some time. I would love to see this study spawn more research into the area.

[17:10] Justin Venneri: Okay, Julie or John, what are the implications for the market and stakeholders? What's next? What would you suggest or what else are you working on as it relates to this? What should we expect as a follow on?

[17:23] Julie Patterson: I can kick off with a few implications. There are several important implications for employers. We know these employers are concerned about the rising cost of health care. We know they make a lot of important decisions about the benefits their employees have. And this study is part of the growing evidence that they are farming out a lot of these decisions. And when it comes to PBM contracts, our research is an important contribution in examining what they say they value, which may not always be best access and lowest cost for medicines for their employees.  

And it turns out this is a timely question. We're starting to see more and more lawsuits where employees are suing their employer for choosing PBMs that cause them to pay higher out of pocket costs on their medicine.

[18:14] Justin Venneri: John, anything you’d add?

[18:15] John O'Brien: Let me zoom back out. I mean, first we conduct policy relevant research, and hopefully this research helps policymakers ask good questions as they focus on the middlemen.  

Secondly, as Julie pointed out, if this work helps employers ask better questions and ask for better input from those they work with during the next RFP process, we’ve made a difference.  

I almost jumped in when Julie was describing her background because we added a line to her bio, which is the first recipient of the NPC “Mark Cuban tweeted my research” award. He’s an example of someone who's been out there talking about this, and we were pleasantly surprised to see him tweet this study out suggesting that business leaders should help your CEO out and share this work with them.

[19:01] Justin Venneri: Trey, I find it interesting the level of megaphone is different across the industry. Maybe AJ, can you talk a little bit about the most challenging thing in explaining this to employers over the last six, seven years?

[19:12] AJ Loiacono: I think we've all touched upon it, which is, at first, nobody cared. And why do people not care? Because their trusted advisor, the broker consultant, is saying, “Nothing to see here. All is well.”

So, I mean, I think that's the first friction point, which is, is there a problem? And I'm telling people there is one, but I'm one voice against tens of thousands of people. I mean, Justin, you've heard me say this when I speak in front of other folks or even our own company is, I felt like the loneliest person in the world because I've been in this industry on the payer side, I guess, 15 years almost and counting, and you could see this on day one. The system is rotten to the core. And I'm like, this isn't Nobel Prize winning work. You just have to look at your first claim data set and you're like, why does it look like drug prices are changing every hour of every day in every pharmacy for every drug?  

And if you come from the pharmaceutical supply chain, you know this is a total lie. And I'm like, why am I the only one asking this question back in 2009? And everyone's just like, it's fine. It's totally cool. AJ, you need to relax. And I'm like, the longer I stayed in the industry on the payer side, the more depressed I became -- the more angry, the more invigorated I became -- to create Capital Rx because I couldn't fix it as an auditor or procurement group. The only way to fix the problem, I discovered, was you have to become the problem, become the PBM, but take it back to its roots of being a pure administrator.  

And I respect the role. I want to make this very clear of a consultant or a broker. We buy benefits for 1,200, 1,300 lives in our own plan. And I am responsible ultimately with my head of people, Marcel, signing off on this program, but we rely upon a consultant to give us advice on our medical, pharmacy, dentistry, etc., all of the categories that make up health care. And I want to be fair, I'm busy. Marcel is running around doing 100 things with employee compensation, hiring, training, etc. You know, it's very difficult to keep track of everything. We just happen to be healthcare experts. You know, he comes from Humana. I've spent my lifetime in healthcare, so we're very articulate when it comes to our benefit programs. But how often do you have the head of people coming from one of the largest healthcare entities and someone who's dedicated their life to healthcare?  

And so, I always want to make this clear, is, most heads of people are forced to make this decision, and what they want to do is to show up to their CFO or COO with a spreadsheet that says, tada! We had a comparison, and this is the winner. Thats why nothing has changed for seven, eight years. Now fast forward to Julie's point, back to 2021, we update through the Consolidated Appropriations act. We update ERISA section 408(b)(2), which now has disclosure around all healthcare compensation. And part of the wording that I think is that's triggering this lawsuit. Is it fair, is it reasonable? And the fiduciary’s responsibility to enforce the rights of the membership.  

And so suddenly people are saying back to me, looking at a set of claims data for the first time in 2009, I am like, this looks like a stock market ticker. Why are drugs like popcorn going all over the place? Why is something like Atorvastatin still, to this day, has a price range from $9 to $99 for something that should be as common as getting a bottle of Tylenol in your local pharmacy. That's insanity to me. And the higher the price tag, the crazier the numbers become.  

And this is what I think everyone has missed until, thankfully, I think a combination of legislative work, Department of Labor oversight, some CMS oversight, policy research, is now helping people say, well, wait a second, drug spend has been compounding at 7% roughly over the last 20 years. How can anyone think that's a good job of keeping drug prices low?

[23:33] Justin Venneri: And to your point, what Julie mentioned earlier, this sort of conflicting nature of the results, what rebate guarantees are, what they represent, how they influence the choice of vendor, and the overall importance that respondents seem to highlight of controlling total cost. Right. Can you expand on that a little bit, Julie? If you want to go first, then over to John?

[23:55] Julie Patterson: Yeah. So when we do a survey, we are getting at what employers say that they value. And I think that that complexity that you're referring to in terms of relying on these rebate agreements, but also oftentimes caring very deeply about the cost of care, as they should, is illustrating for us that how they're behaving may not be in line with what they value.  

So, I think that's where we talk about wanting future research. You know, we don't have access to these confidential agreements right now. What we can do is ask employers how they're thinking about this, and I think that tees us up to really continue this conversation.

[24:34] Justin Venneri: That makes sense And, John, in policy circles, what's the receptivity been like?

[24:39] John O'Brien: It's been eye opening. It's led to people asking more questions. I think the people who are working on this topic care a lot about the patient experience at the pharmacy counter. And every time they kick over a rock, they find something new. So, we're happy to help continue shed light on this shadowy and opaque system with research.

[25:03] Justin Venneri: Got it. Okay. Thank you both, John and Julie, for spending the time with us, and, of course, AJ. Thank you. I'm just going to go right after it. The most astonishing thing that you've seen either in your data, Julie or John, in the survey results, or that you can share safely relating to rebates.  

Julie, how about you go first?

[25:20] Julie Patterson: Sure. So, when we saw PBM executives on Capitol Hill in July, they all said, we design the benefits our clients – employers, health plans -- ask for. And, AJ, you actually teed up what I think was most surprising in the results, that you rely on benefits consultant to give you good information, and you gave us good reasons why employers out there in the real world need this information as they navigate the complexity of their benefit selection.  

But as it turns out, in our data, we found that many responding employers who use benefits consultants and find them to be influential weren't presented alternatives to a focus on rebates, even when they asked for them.

[26:01] AJ Loiacono: I couldn't agree more with Julie's statement, because, remember, we must reply to 600 RFPs a year around here, and I'm going to say 594 of them are literally old school, rebate driven, same model that you could literally find from 2004, let alone 2020. Nothing has changed in the modeling; nothing has changed in the process.  

And to my earlier point, it punishes anyone who wants to come in and actually help the plan understand their options, manage to lower costs, better outcomes. I mean, we don't even have an option to speak to the customer in an RFP. Think about that. The first question I would ask to Julie or John or Justin, if you were an employer benefit plan, what am I solving for? I mean, because I want to be fair. I do have very wealthy customers, corporations where their pharmacy benefit is just a nice option that they provide their people, but it's not going to hold them back financially. If I was a wealthy employer group and I want what's best for my people, I'd be like, I want the highest level of adherence. I want the best patient access. I want to make sure that obviously people are using the right medication, we're treating people, we're trying to focus on better outcomes, maybe total cost of care. I'd like to take a more global look at both medical cost and time and attendance. I want a very productive workforce because to be fair, a lot of companies that are on the wealthier side are very efficient, very productive, and every member helps to accrue that value for that organization going forward. And so that is what we miss is I can't even ask that question.  

And then the other extreme, let's just say I have a municipality on a fixed budget, they have a low tax base, they don't have a growing economy, and so they still want to provide an affordable, great benefit for their membership. But we need to talk them through some of these options because what they’ve been taught by the vast majority of consultants in America is rebate, rebate, rebate. But what I often say for every $5 of rebate you're being presented is if you would just move that to a lower cost alternative, you could easily cut that number in half. And what I'm just saying is, yes, I got $5, but it should have only cost you $2.50 roughly. And I'm just, this is just a very broad estimate of what I call the two to one game. Every time I could flip something to a wasteful drug, a high-cost ingredient in a therapeutic category, or the biggest sin of it all, using the innovator, even though it's off patent forever, it's a two to one game in favor of the PBM because they're giving themselves a raise in a traditional PBM model. And I cant even have this discussion with people.  

And so, you have to navigate this labyrinth and try and find a way to actually connect and bring the business in. And even though the model is stacked against us considerably, we still find a way to connect with the people that are being thoughtful, the actual payers that are asking the right questions. And what I do believe is we're seeing the beginning of a new chapter where the study that was presented and others, like from Julie and other people, is opening the doorway to the conversation that should have happened two decades ago, to be frank.

[29:28] Justin Venneri: So John, I'd love anything else you think listeners we should be thinking about. And then on the way out, how can people learn more or get in touch with you and Julie and find out more about what work NPC is doing?

[29:40] John O'Brien: I think one of the most frustrating things I heard during my time in government was from a veteran drug developer that said, “John, I've tried to offer the most effective, lowest cost drug to the marketplace and nobody was interested in it.” And I think one of the most frustrating things I've heard since leaving government is from a PBM exec who's told me that they've tried to offer either a higher touch, higher value or a lower cost formulary to the marketplace, but they lose the business because the employer instead prefers the big rebate check which they may use to keep everybody's premium low. But it doesn't lower drug costs for the people who actually use the medicine.  

And it's really cool for me to be on here because I've been inspired by AJ on stage talking about how he's swum upstream and actually gotten in front of employers despite this process and actually won the business. So, thanks so much for having us. I would love to help people learn more and stay in touch. I think either connect with us or reach out to us via LinkedIn. You can search for me, John O'Brien, Julie Patterson, or the National Pharmaceutical Council. We put all of our content out there. We love to engage in the dialogue and really enjoy feedback from people who digest the research, particularly the folks that I know are listening to this podcast.

[31:03] Julie Patterson: Great and would love to connect with you on LinkedIn, as John mentioned. Would also love for you to subscribe to our weekly newsletter. I believe that's going to be posted in the show notes. You can also find it on the homepage of our website. That's npcnow.org. That comes out on Tuesdays, and it gets you up to speed on research and policy conversations that impact the future of medicines and access.

[31:28] Justin Venneri: Amazing. Thank you, John. Thank you, Julie. And thank you AJ for joining us today for a discussion about rebates, benefits consultants and brokers and their role in this process and furthering the research on what will help employers figure out how to best impact their net cost for their plans.

[31:44] AJ Loiacono: I want to say thank you to Julie and John, and I just signed up at npcnow.org dot. So I am also part of the newsletter, although the company was already part of it. Now I can just get it faster rather than fit into Justin's distribution list.  

[32:00] John O'Brien: Awesome. Thanks so much. I really look forward to staying in touch and thanks again for having us.

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Contact Information

• Sign up for the NPC This Week Newsletter: https://www.npcnow.org/subscribe-updates
• Check out the National Pharmaceutical Council on  LinkedIn
• Connect with John O’Brien, PharmD, MPH on LinkedIn
• Connect with Julie Patterson, PharmD, PhD on LinkedIn

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