Going Beyond Rebates to Real Value

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Confidio VP Thatcher Sloan described how applying formulary and utilization management effectiveness calculations to drug costs managed by PBMs may paint a truer picture of their economic value to their clients.

When PBMs focus too much on chasing rebates, they may miss out on the critical elements that provide true economic value to healthcare organizations and employers, Thatcher Sloan, vice president, practice leader, at Confidio, said during his presentation at the 2021 Pharmacy Benefit Management Institute® Annual National Conference.

Sloan told attendees of the hybrid conference (virtual and in person) on Tuesday about Confidio’s net economic value assessment of PBMs that that factors in how effective their formularies are in driving prescription to the most cost-effectiveness choices and the rigor of their utilization management. Applying formulary effectiveness and utilization management effectiveness to a PBM can paint a truer picture of how well it is managing drug costs, said Sloan.

Sloan walked through a real-world example of how applying formulary and utilization effectiveness could alter a comparison between two PBMs. Before applying formulary and utilization effectiveness, the projected annual drug costs, including rebates, with “PBM A” were about $127 million and $132 million with “PBM B.” But once formulary and utilization effectiveness were factored, the PBMs traded places, and drug costs were lower with PBM B ($116 million) than with PBM A ($134 million).

Sloan said Confidio developed this analysis of PBMs partly because of the difficulties of comparing pass-through PBMs to traditional one. Another inspiration was when a PBM CEO complained that the conventional way that consultants evaluated PBM performance created an incentive to “chase rebates” and to ignore other ways PBMs could manage drug costs for their clients.The PBM executive said that we want to the right thing, according to Sloan, “but the consulting community, in general, they are putting value on rebate — they are incentivizing us to do the wrong thing.” Sloan said “that was when a huge lightbulb went off” about finding ways to evaluate PBMs differently.

Sloan said the approach was developed recently and that only a handful of clients have taken advantage of it so far. He said the overall purpose was to “accurately represent value to clients when they are making a PBM decision.” One byproduct might be a decreasing the PBM industry's emphasis on rebates.

PBMs, he said, are often evaluated by health plans and employers almost solely on the network discounts and rebates they can get from manufacturers. “In this way, they can show bigger rebates on their spreadsheet, which makes their deal look better than other PBMs,” Sloan said.
“But that’s not real value.”

Sloan also noted that PBMs are often evaluated using past drug utilization as well as network discounts and rebates. “The big assumption is historical utilization is going to remain constant into the future,” Sloan said. “That assumption is just not true.”

Rebates do provide value by bringing competition to the pricing and negotiating process, Sloan said. “For some products, the rebate negotiation is the only time throughout the whole supply chain where there’s any competition based on price. It may be the only time where that market factor comes in and is able to provide a lower price.”

"We want (PBMs) to maximize rebates when appropriate but we don't want to chase them," he said.

Although competition is appropriate in the market, just chasing rebates on some products can lead to disincentives for creating value across the formulary. “The rebate game has gotten way out of control,” Sloan said. “PBMs and pharmaceutical companies are driving higher rebates on some drugs. But what’s happening is the manufacturer, in order to pay for those rebates, is raising their prices up front. Their list costs go up so that they can fund that rebate on the back end.”

An unintended consequence of the pricing-rebate dynamic, Sloan said, is that PBMs may include on formulary some therapeutics that they wouldn’t have covered without the rebate, especially if a branded drug that includes a rebate may end up costing less than a generic product.

Confidio also tracks in real time drug price inflation of average wholesale prices weighted based on utilization volume. For example, as of July 2021, overall inflation for 2021 compared with 2020 was 1.6%, but inflation for branded products was 4.1% and inflation for specialty products was 4% for the same time period. Inflation for generic products showed a downward trend.

Just as important as rebates, and what ultimately drives value, Sloan said, are the drug mix, member population and the conditions they have. “The makeup of any given population will change as companies hire or people leave, or companies acquire other businesses, and that will change the overall drug mix over time.”

Utilization management efforts, such as step therapy and prior authorizations, can also affect use and drug mix. “Members can still get access to the right drugs, but these efforts are a way to drive some of that waste out of the system,” Sloan said.