CMS Flinches, and Industry Breathes Sigh of Relief

CMS announced its final rule on drug pricing transparency with regard to direct and indirect remuneration (DIR) fees on May 16.

For those who do not own a pharmacy, that is the clawback payment to the pharmacy benefit manager (PBM) from a pharmacy many months later, after a behind-the-curtain “true up” calculation. Very few people in the country know or have access to how exactly these DIR clawbacks are calculated and upon which drugs different calculations are based, although pharmacies and their corporate headquarters or pharmacy services administration organizations do their best to figure them out prospectively.

WHY WAS A DIR CONCEPT CREATED?

CMS created DIR fees in an effort to recoup rebates and other incentives that did not show up at the point of sale. The problem? Those incentives made up a good part of the PBM profit margin, as any previously unreported fees due back to the government in plans such as Part D but kept by the PBM were pure profit, prior to the implementation of DIR regulations.

Although the DIR rules were reasonably conceived and essentially an attempt to create transparency for the purchaser—in this case, the federal government—DIR fees have most certainly gone off the rails and can be permanently placed in the annals of “It looked good on paper.”

Like any economic system, squeezing the balloon on one end means it has to get larger on another part or else it will pop. In most systems, that ballooning effect occurs downstream through the passing of that burden to the end user. (Note the effect of tariffs on downstream consumers in the news lately.) Except in the instance of DIR fees, they have not passed down from the manufacturer to the PBM to the pharmacy to the consumer. Fees are stopped at the pharmacy level and are not allowed to be passed on to the consumer. What’s more, the pharmacy does not know what the fees are and cannot effectively report them or associate them with transactions.

The PBM’s trade association, the Pharmaceutical Care Management Association, issued a statement regarding CMS’ turnabout, saying, “These competitive negotiations between PBMs and pharmacies generate significant savings for the federal government and beneficiaries, while incentivizing pharmacies to meet quality standards, such as generic dispensing rates.”¹

This statement brings up 2 key questions: (1) What do PBM negotiations with themselves look like? (PBMs own and operate the largest pharmacies in our health care system.) (2) Although the rebate game is better understood with branded drugs, why would PBMs be opposed to point-of-sale transparency on generic drugs?

THE TRANSPARENCY WARS: PROTECTING REBATES IS PARAMOUNT

Manufacturer resistance to DIR transparency is directly tied to avoiding transparency with rebates. Once all “discounts, chargebacks or rebates, cash discounts, free goods contingent on a purchase agreement, up-front payments, coupons, goods in kind, free or reduced-price services, grants, or other price concessions or similar benefits from manufacturers, pharmacies or similar entity”² have been calculated, a true up occurs for Part D Plans. Except that a true up, if disclosed at the point of sale, would create an opening to full transparency into the actual ingredient costs after the gazillion types of concessions are applied. If that occurs, manufacturers lose one of their key tools that ensure profitability: price discrimination.

REBATES MAKE PRICE DISCRIMINATION POSSIBLE

Hearing the term “price discrimination” may bring to mind deviancy or illegal activity. However, pricing discrimination is a legitimate economic concept and is more often applied than we might realize, usually quite legally.

Pricing discrimination is the preferred go-to market strategy for products with large up-front investments and relatively small incremental costs to produce. Pharmaceuticals are a classic example where a company may invest billions to bring a product to market and then spend mere cents to produce each pill. Most of us learned in Economics 101 about supply and demand, wherein the price of a product increases as the supply gets smaller and/or demand grows higher. There is an optimal point on the curve where the price should be set where supply and demand meet, say $100 for a 30-day supply of drug A. However, large portions of the patient population using health savings accounts or government purchasers may refuse to buy at $100, so the manufacturer would lose all those customers. This is a lost opportunity for the manufacturers, because each 30-day supply cost so little to produce. The solution? Charge different customers different prices based on their ability and willingness to pay. Medicaid program administrators are given a best price rebate system. Group plans get another more expensive version with fewer rebates.

AN UNEASY MARRIAGE

Manufacturers invented the rebate system to maximize area under the curve and charge what the customer will bear instead of what the market will bear. We all tacitly agreed to this arrangement for many years and were generally happy, until the patent cliff descended upon PBMs. Once that occurred, the ability to shave off profits as the middleman were greatly reduced and new types of rebates had to be invented to hit quarterly earnings goals. DIRs are one of those rebate schemes only possible with lack of transparency. Although at odds often, manufacturers and PBMs alike need to maintain a lack of transparency to maintain profits. If one loses the transparency battle, so does the other.

PAYMENT REFORM: BECOMING GROUNDHOG DAY

It seems a bit like Groundhog Day with respect to a populist support of transparency and a lobbying class in love with anything but transparency. It is hard to argue against transparency on the surface and in the public square, so the battle must be fought with technocrats implementing policy and in the shadows on Capitol Hill. Transparency will inevitably win. But how long will it take? And will community pharmacies be around to see the day?

A VALUE PROPOSITION UNLIKE ANY OTHER

Remarkably, manufacturers have the upper hand; they just are not using it. Consider this: A person with type 1 diabetes is on a deserted island and has a choice of 1 item or person to have with them. The choices: (1) insulin, (2) a pharmacist, (3) a physician, or (4) a volleyball. My guess is that most people would choose the insulin because it does the actual lifesaving. The rest of us are just accomplices. Manufacturers are holding the cards with respect to curing, lifesaving products. At some point, they will need to take on the risk that comes with the level of rewards they reap. Our system just has not yet figured out how to package that value proposition in our insurance marketplace.

WHAT NEXT?

A joint statement from the National Association of Chain Drug Stores and the National Community Pharmacists Association hinted at not waiting around for CMS to make point-of-sale transparency a final rule in the future, saying “Pharmacies are in a tenuous situation, and our organizations are exploring all options to accomplish desperately needed reforms to pharmacy DIR.”³ Stay tuned. This saga is far from over.

Troy Trygstad, PharmD, PhD, MBA, is vice president of pharmacy programs for Community Care of North Carolina. He also serves on the board of the American Pharmacists Association Foundation and the Pharmacy Quality Alliance.

REFERENCES

• PCMA statement on the administration’s Medicate Part D rule [news release]. Washington, DC: Pharmaceutical Care Management Association; May 16, 2019. pcmanet.org/pcma-statement-on-the-administrations-medicare-part-d-ru/. Accessed May 23, 2019.
• 42 CFR §423.308
• NCPA, NACDS statement on drug pricing rule’s failure to reform pharmacy DIR [news release]. Washington DC: NACDS; May 16, 2019. nacds.org/news/ncpa-nacdsstatement-on-drug-pricing-rules-failure-to-reform-pharmacy-dir/. Accessed May 24, 2019.