Special Report - Bringing Transparency and Accountability to Drug Pricing

Introductory leer ................................................ 3

Glossary ................................................................ 4

Intro ...................................................................... 4

What are rebates? ................................................ 5

What we heard ..................................................... 6

1. Rebates can do some good … ...................... 6

2. … But they raise drug list prices ................ 10

Recommendaons .............................................. 12

Table of contents

ou could be paying too much for your

medicaons and losing access to lower-cost

drugs because of complex, behind-the-

scenes rebate deals that take place every

me you ll a prescripon.

You probably know that a rebate is a repayment

designed to reduce the cost of something you have

purchased, and you most likely have redeemed some

retail rebates in your life.

When it comes to your prescripon drug plan, the

standard denion of “rebate” sll loosely applies: It

is the return of part of a payment. But instead of

returning money to you, the paent, the rebate

process is a behind-the-scenes exchange among a

drug manufacturer, your insurer and your pharmacy

benet manager, or PBM.

As I explained in my December 2018 special

report, “Bringing Accountability and Transparency to

Prescripon Drug Pricing,” PBMs are the middlemen

who administer your prescripon drug benets. Ever

been told you need a prior authorizaon to take a

newly prescribed drug? Or that you may not get a

medicaon lled because it’s not on your insurer’s

preferred drug list? Then you’ve encountered your

PBM.

PBMs today serve a variety of funcons within the

pharmacy industry. Some argue that they exert

undue inuence on the prescripon drug

marketplace, aecng paents’ wallets and,

ulmately, their health; others say they fulll a

crical need for claims administraon and, at the end

of the day, save taxpayers money. Among the roles

PBMs ll is negoang with drug manufacturers to

secure rebates for prescripon drugs.

I have serious concerns about whether rebates

should be used at all, as they may arcially inate

drug prices for everyone. Since they are used,

though, this special report focuses solely on that

rebate process and how it aects you as a paent

and as a Pennsylvania taxpayer.

Dear fellow Pennsylvanians,

Here’s what my review found:

 Because of federal oversight, rebates are

generally working the way they should for

Medicaid: by returning about $1.8 billion per

year to state coffers, thereby offsetting the

amount taxpayers pitch in to help Medicaid

recipients afford their medications.

 However, drug manufacturers say, a lack of

federal or state oversight of PBMs for those

with private health insurance has led to higher

drug prices and higher health care premiums.

If this issue strikes a chord with you, contact

your state and federal legislators and let them

know you want them to advocate for not only the

three recommendaons I make in this special

report, but also the recommendaons I made in

my December 2018 special report. It’s me to rein

in the companies that are raking in tens of billions

of dollars in prot each year as millions of hard-

working people struggle to aord their

medicaons.

Thank you for the opportunity to serve you.

Eugene A. DePasquale

Intro

Why should you care about a complex

rebate transacon that takes place behind

the scenes of many prescripons you have

lled?

The main queson here is why does it

maer?

Because rebates and other discounts

actually drive up the price of your

prescripon drugs by as much as 30 percent

— meaning your brand-name heart

medicaon, for instance, may be almost a

third more expensive than it needs to be.

And because, without federally mandated

rebates, you as a taxpayer could be spending

nearly twice as much to help Pennsylvania’s

2.8 million Medicaid clients get their

medicaons.

Currently, neither you, as the paent, nor

your pharmacist directly receives money to

pocket from these behind-the-scenes

exchanges.

Glossary

PBMs: Pharmacy benet managers

Medicaid: Pennsylvania’s medical assistance

program

Third-party payer: The enty responsible for

paying the drug manufacturer for a prescripon

medicaon; oen either the state Oce of Medical

Assistance Programs (Medicaid oce) or a private

health insurer

Rebate: The repayment of a poron of the cost of

a prescripon medicaon from the drug

manufacturer to the third-party payer

Minimum required rebate: The percentage drug

manufacturers are statutorily required to pay back

to states for Medicaid prescripons. For brand-

name drugs, it’s 23.1 percent.

Consumer Price Index (CPI) penalty rebate: The

percentage above the rate of inaon that drug

manufacturers must pay back to states for all

Medicaid-paid prescripon medicaons whose

prices have risen faster than the rate of inaon

Supplemental rebate: Any rebate oered to a

state beyond the minimum required rebate and the

CPI penalty rebate, up to 99 percent of a drug’s cost

Best price: Medicare and Medicaid programs must

statutorily be charged the lowest possible price that

a drug manufacturer can charge for all prescripon

drugs

What are rebates?

Let’s start with the basics: The ulmate purpose of rebates is to lower the cost of prescripon drugs.

But rebates are not paid directly to you, the consumer. Instead, rebates are paid to your health insurer

— whether that’s the government, through Medicaid, or your health insurance provider — to help lower

your health care costs.

Rebates are also not paid to your independent community or retail pharmacy, which dispenses your

medicaons to you. They do not receive a cut of the rebate, nor should they, necessarily.

Rebates are paid from a drug manufacturer either directly to government-funded programs, such as

Pennsylvania’s Medicaid program, or through pharmacy benet managers (PBMs) to third-party payers

such as Pennsylvania’s Medicaid program or private insurers.

It looks like this:

The exact route a rebate payment takes is based on a variety of factors, including what kind of rebate is

being applied (there are mulple denions of the word “rebate” in the pharmacy industry).

Let’s take a more in-depth look at this in the next secon.

What We Heard 1:

Rebates can do some good ...

Because of federal oversight, the rebate process for prescripon drugs lled through

Pennsylvania’s Medicaid program is funconing largely as it should.

Federal regulaon mandates that states must always get the lowest price available on prescripon

drugs. This means that, for each Medicaid prescripon lled, the state must chose which of these two

formulas gets it the lowest price:

 The drug manufacturer’s “best price” oer, or

 A specied poron of the cost being returned to the state (a “rebate”). For brand-name drugs, it’s

23.1 percent.

If the rebate choice is the lowest amount, then the formula for each prescripon is as follows:

42 U.S. Code § 1396r–8 (related to Payment for covered outpaent drugs), Title XIX of the Social Security Act, Secon 1927

Note that supplemental rebates are any rebate amount that a PBM negoates above and beyond the federally mandated 23.1

percent and CPI penalty rebate. For ease of understanding, this report does not delve into supplemental rebates.

All of that rebate money ows directly between the drug manufacturer and the state.

To understand how this process works, let’s use a hypothecal example.

Sarah is a Pennsylvania Medicaid recipient whose doctor has prescribed for her a brand-name

cholesterol medicaon for which there is no generic equivalent. Sarah pays the pharmacist a $3 Medicaid

co-pay

and goes on with her day.

Behind the scenes, let’s say the list price of the drug is $150 and the lowest price the manufacturer can

oer the state for that drug is $100.

By federal statute, Pennsylvania must pay the

lesser of the lowest price oered (the $100) or the

list price ($150) minus 23.1 percent

and any

inaon penalty.

For this example, let's say that the drug price has

not risen faster than the rate of inaon for the last

year, so no CPI penalty rebate applies.

Pennsylvania could pay either $100 (the lowest

price oered) or $115 ($150 minus the federally

required 23.1 percent).

Since the $100 best price is less than $115,

Pennsylvania pays $100 to the drug manufacturer for

Sarah’s cholesterol medicaon.

Now, imagine that transacon must be determined for every single Medicaid prescripon lled for

every single Medicaid recipient in Pennsylvania for every quarter of every year — and manufacturers have

fewer than 40 days to do the math and decide if they agree with every transacon the state bills them for.

(There is an appeals process, which isn’t necessary to understand for this discussion.)

Overwhelmed? You’re not alone. Even some drug manufacturers’ Medicaid rebate experts have told us

it’s a jumble for them to gure out.

States work directly with drug manufacturers to receive rebates in Medicaid, so no rebate transacon passes through PBMs.

To understand how the pharmacist gets paid, please see the 2018 “Bringing Greater Transparency and Accountability to Drug

Pricing” special report.

The 23.1 percent rebate is actually split between the federal government and Pennsylvania through a pre-determined Federal

Medical Assistance Percentage (FMAP) formula, but for this discussion that delineaon is not imperave.

Why does it maer?

Because Americans

spent $333.4 billion

on prescripon

drug costs alone

in 2017.

Each quarter, Pennsylvania is repaid roughly $450 million in rebates from drug manufacturers. Here is a

look at how much Pennsylvania has been paid in rebates for each of the last 8 quarters:

The money collected through rebates is placed back into the state’s Medicaid coers, according to the

Department of Human Services, which oversees the Oce of Medical Assistance Programs.

Pennsylvania paid almost $3.5 billion for outpaent Medicaid prescripons in 2017, and it received just

over $2 billion back from drug manufacturers for rebates, according to the Department of Human Services.

That equals a total spend of about $1.5 billion on Medicaid prescripon drugs in the 2017 calendar year —

and it shows that Pennsylvania taxpayers would spend at least 50 percent more on Medicaid recipients’

medicaons without the rebates.

Pennsylvania paid almost

$3.5 billion for outpaent

Medicaid prescripons in 2017

and received just over $2 billion

back through rebates.

Let’s get back to the main queson: Why does all this maer?

Drug manufacturers told us they know they’ll have to pay these rebates, so somemes they raise the

inial cost of a medicaon (remember the $150?) to maintain their prot. Manufacturers know that they’ll

be paying at least 23.1 percent of the cost of a drug back to the government, so they increase the “best

price” they oer the government for each medicaon — which means that, ulmately, it costs you, the

taxpayer, more behind the scenes for Sarah’s cholesterol prescripon.

Note that the rebate process does not aect how much Pennsylvania Medicaid recipients themselves

pay for their medicaons; that means Sarah always pays either $1 or $3 per prescripon regardless of the

behind-the-scenes rebate transacon.

But for people not covered by Medicaid, the rebate process does aect how much paents might pay for

their own prescripons.

Without a state or federal mandate for PBMs to return at least of poron of rebates to other health

insurers, PBMs can claim whatever rebate percentage they can negoate with health insurers.

This means there is no required 23.1 percent that must be paid from the drug manufacturer back to

paents’ health insurance companies. Manufacturers and PBMs can negoate any kind of rebate they

want, in any amount, and the PBM can take whatever cut of the rebate it works out during the contracng

process.

For the record, ocials with CVS Health — which owns CVS Caremark, one of the three largest PBMs in

the naon — said their company keeps only 2 percent of all rebates, with the rest being passed along to

third-party payers. The Pharmaceucal Care Management Associaon, which represents PBMs, said that,

on average, PBMs keep about 10 percent of the rebates they help negoate (which means they pass along

90 percent to insurance companies).

However, because the process lacks transparency, there is no way to independently verify that

informaon.

Let’s look at Sarah’s hypothecal friend Janice, who has private health insurance for the same doctor-

prescribed, brand-name cholesterol medicaon.

Janice takes the new prescripon to her pharmacy, which checks with her PBM to make sure the drug is

covered by her plan’s formulary (its list of covered drugs). It is covered, and the pharmacy lls the 30-day

prescripon for her.

Behind the scenes, the drug manufacturer has said the list price of that medicaon is $200, which is the

amount, minus a small discount, that the wholesaler would pay the manufacturer. However, Janice’s PBM

has worked out a deal with the drug manufacturer to include the medicaon on her insurance company’s

formulary — a rebate — for 50 percent of the drug cost.

So the wholesaler buys it for just under $200, then sells it to a pharmacy with a small mark-up. When

Janice picks up the prescripon, she pays $40 (20 percent co-insurance of the $200 list price), and the

pharmacy bills the PBM for the balance of what it paid for the drug, plus a small markup and any fees. Let's

say the PBM is billed $160.

Remember that the PBM has negoated a 50 percent rebate, so it collects $100 from the manufacturer.

What happens next is completely controlled by the PBM.

Because of a lack of state or federal oversight of PBMs, the rebate process is not working to

lower costs for paents not covered by Medicaid.

What We Heard 2:

… But they raise drug list prices

The PBM can deduct the $100 rebate from the bill they send to Janice's insurer, which would bring the

amount they owe down to $60. Or they could keep the rebate and send the insurer a bill for $160.

Today, we have no idea what happens. PBMs say they pass on about 90 percent of the rebate, but the

percentage probably depends on the sophiscaon of the insurer or employer contracng with them. It

also depends on the contract language and how “rebate”

is actually dened.

Under this system, the manufacturer earns just under

$100 on the prescripon, and the remaining dierence

goes primarily to the PBM.

And the person who loses the most is Janice.

Remember, she paid 20 percent of the list price.

However, at a minimum that price was actually $100 lower

because of the rebate. Therefore, she should not have

paid more than $20 (20 percent of $100). Instead, she paid

$40 – or 100 percent more than she should have.

Note that, in the rst example using Sarah’s

prescripon via Medicaid, the drug manufacturer made

$100 on the Medicaid prescripon, but a PBM did not

prot.

However, note that, in the second example using

Janice’s prescripon, the manufacturer made $100 and

the PBM potenally pocketed up to $100 that would otherwise be returned to the health insurer.

Here’s where it twists even more.

PBMs should, of course, be entled to a share of the rebates they help negoate — but instead of

geng a at fee per prescripon, they get a percentage of the total cost of the drug. This means that the

more expensive the medicaon, the more prot the PBM gets to keep. This is called a “perverse incenve,”

because the PBM benets by placing more-expensive medicaons instead of lower-cost alternaves on

formularies.

This “perverse incenve” means that, instead of rewarding the PBM for including lower-cost

medicaons on a preferred drug list, the system monetarily rewards the PBM for placing higher-priced

medicaons on formularies.

The system

monetarily

rewards PBMs

for placing

higher-priced

medicaons on

formularies.

For example, a drug that’s been proven to cure Hepas C cost about $84,000 per treatment regimen

when it was released in 2013.

When another version of the drug became available for only about $24,000

per treatment regimen,

the manufacturer struggled to have it placed on preferred drug lists because, drug

manufacturers say, PBMs didn’t want to lose their hey percentage rebates on the brand-name drug — even

though it was a cheaper drug that can cure paents suering from Hepas C.

Again, let’s get back to the main queson: Why does this transacon maer?

It maers because Americans spent $333.4 billion on prescripon drug costs in 2017 alone.

Without re-

bates, the list price of all drugs would drop by about 30 percent, drug manufacturers told us, because they

would no longer have to build the cost of rebates into their prices.

Alternavely, if PBMs gave 100 percent of rebates back to third-party payers (the private insurance com-

panies), then many people might see a decrease in their health insurance premiums.

The eect of this pracce is that paents with private health insurance have diculty predicng what

they’ll pay at the pharmacy counter because of the complex nature of co-insurance and deducbles.

Kli, Sarah. Vox. “Each of these Hepas C pills cost $1,000. That’s actually a great deal.”

hps://www.vox.com/2014/7/16/5902271/hepas-c-drug-sovaldi-price. Accessed Feb. 11, 2019.

Ryan, Benjamin. Hep Magazine. “Gilead to Release Authorized Generics of Hep C Drugs Epclusa and Harvoni.”

hps://www.hepmag.com/arcle/gilead-release-authorized-generics-hep-c-drugs-epclusa-harvoni. Accessed Feb. 11, 2019.

U.S. Centers for Medicare & Medicaid Services. “Naonal Health Expenditures 2017 Highlights.” hps://www.cms.gov/Research-

Stascs-Data-and-Systems/Stascs-Trends-and-Reports/NaonalHealthExpendData/downloads/highlights.pdf. Accessed Feb. 6,

2019.

Recommendaons on rebates

The Pennsylvania General Assembly should mandate that pharmacy benet managers receive a at

fee for service for providing administraon of each prescripon drug claim, regardless of the drug

price, rather than being paid a percentage of the drug price as a rebate.

Congress should mandate that 100 percent of all rebates should go back to the third-party payer,

whether that is a government program such as Medicaid or a private health insurer, and mandate

that health insurers pass along the savings to paents.

Congress should consider revising the Social Security Act aer determining whether the rebate

percentages required for all medicaons should be altered or increased because the last mandated

increase went into eect 10 years ago, in 2009.

1. The General Assembly should immediately pass legislaon banning all “gag rules” and allow pharmacists to tell all

paents if they could be paying less for a medicaon.

2. To ensure taxpayer dollars are being handled eecvely and eciently, the General Assembly should immediately pass

legislaon allowing the state to perform a full-scale annual review or audit of subcontracts with pharmacy benet

managers.

3. To beer control costs, Pennsylvania should consider directly managing its Medicaid prescripon drug benets instead of

contracng with managed care organizaons to do so.

4. The General Assembly should pass legislaon that increases transparency into PBM pricing pracces.

5. The General Assembly should pass legislaon to use the federal Centers for Medicare & Medicaid Services’ Naonal

Average Drug Acquision Cost (NADAC) for pricing prescripon drugs lled through Medicaid.

6. The General Assembly should grant state oversight of contracts signed between PBMs and pharmacies or pharmacy

services administraon organizaons, which are currently shielded from oversight because they are subcontracts.

7. So the state pays only for services PBMs render, the General Assembly should pass legislaon requiring a at-fee pricing

model for compensang PBMs.

8. Pennsylvania’s Department of Human Services should use Texas’ Vendor Drug Program as a model to create

Pennsylvania’s own universal preferred drug list for Medicaid clients.

9. Pennsylvania’s Department of Human Services should add “good steward” language to all Medicaid-related contracts.

10. The Federal Trade Commission should invesgate whether separaon truly exists between the PBM and pharmacy

acquision segments of major companies that operate both.

 If the FTC does not invesgate, then the General Assembly should consider legislaon that prevents managed care

organizaons from using a PBM for Medicaid if the PBM is part of a larger company that also owns retail pharmacies.

Recommendaons from the 2018 report on pharmacy benet managers

www.PaAuditor.gov

3 QUESTIONS YOU SHOULD ASK

To help consumers take an acve role in geng the best price possible for their prescripons,

Auditor General DePasquale released a short informaonal video with

three quesons everyone should ask their pharmacist.

Watch online here.