Episode Setup
[00:00:00] Stacey Richter: Episode 517 Pharma/PBM Contracting. This is the 401 Level Contracting Reasons Cash Pay Became a Thing.
[00:00:30] Stacey Richter: Hello, Relentless Health Value Tribe. Welcome to it.
So yeah, last week I had a great conversation with Ophelia Johnson, that is a companion show, I would say to this one. So listen to that one first. Listen to this one first. You do you.
Why Cash Pay Exists
[00:00:48] Stacey Richter: But this week I wanted to dig in more deeply into some very often not talked about nuances, and I'm gonna call 'em perverse incentives, that can erupt in pharma manufacturer and PBM/GPO contracting endeavors.
You're stuck with only me today. I was sick last week and traveling and just had kind of limited time to find a guest who knows this stuff deeply and is also willing to say it out loud and on the air.
Okay, so as I said just now and also last week in the episode with Ophelia Johnson, today, we are going to dig deeper and a little harder into how the cash pay market makes sense if you are a pharma manufacturer banging up against PBM contracting. And yeah, I'd also say that it is a little bit of a wild west right now, so call nothing I say here, some kind of hard and fast rule.
Okay, so let's do this thing. This show covers how a PBM or maybe a GPO contract with a pharma manufacturer might look, why they may or may not be so inclined to consider a direct to employer, direct to consumer strategy, direct to patient strategy.
And I wanna talk about why it is so eminently possible, also mixed up in this, for a lower priced med or a generic, or maybe even a better medication with better efficacy to inexplicably wind up either not on formulary at any given PBM, or prior authed with a higher copay or co-insurance, right? So you've got a lower priced med somehow with a higher copay.
All these things are of a piece, by the way, the root cause being largely the same exact contracting machinations.
Brand Two Case Study
[00:03:22] Stacey Richter: Okay, here is a case study, and sure it is one example, but it is also a lot of examples. Imagine you are running a brand, so you work for a pharma company and you are running a brand, and let's call this brand Brand Number 2. Your brand is Brand Number 2.
And maybe your Brand Number 2 here is a branded pharmaceutical med still under patent. Maybe your brand is a biosimilar or maybe it is a generic. It's actually not a brand. It doesn't matter if your brand is less expensive, more expensive, better, worse, it makes no difference. But here's the thing that needs to be true in this case study.
Whatever your Brand Number 2 is, it is sitting in a therapeutic category where the big PBM/GPOs have already picked out their Number 1 brand Darlings. And that Number 1 brand Darling is not your brand.
Rebates Drive Formularies
[00:04:20] Stacey Richter: Now, why would a PBM pick a Darling? Which for the purposes of this case study, we're gonna call Brand Darling.
Well, here's why they would pick a Brand Darling. Brand Darling is a huge brand. It might have billions of dollars in sales with major market share. Now, what those billions mean for the PBM is huge aggregated rebates.
Right, consider the unit rebate and multiply that by the huge number of prescriptions being written for this Brand Darling. And this becomes a big, big aggregate rebate number that that PBM is pulling in.
[[One more thing, and I forgot to mention this, but cut me a little break because I was getting over a sinus infection when I recorded this last week.
All right. Here's the thing, if you are on a PBM sales team, right? And you're selling to your clients who are self-insured employers or other plan sponsors. You as a big PBM salesperson here, you are going to be battering your colleagues at the PBM who are on that pharma contract negotiations team because you need them. You want them to drive more rebate dollars, however they do it.
You say double down on Brand Darling if you must, because the more rebates that you get out of pharma, the higher the aggregate rebates. And keep in mind here, Brand Darling is a huge brand, and that's a big point because big brand means very large aggregate rebates, so doubling down on Brand Darling, therefore, it means that the PBM sales team can be more aggressive when they are promising rebate guarantees to their self-insured employer plan sponsor clients.
Because that is what many at this point plan sponsor clients buy on these days. They buy on rebate guarantees.
Now, here's another point that I did not make strongly enough. In hindsight, in certain circumstances, for example, when co-insurance is involved for patients, it might be the case that the higher the rebates, the higher the patient out of pocket is, because high rebates kind of require high list prices, and co-insurance is -- don't forget -- off of list. Just wanted to stick that in your head for further reflection.]]
That Brand Darling is a cash cow for the PBM/GPO, and maybe if those rebates are going to plan sponsors who are using them to buy down premiums, it also could be a lot of money for plan sponsors as well.
But also keep in mind big status quo PBMs are probably taking a piece off the top. It might not be considered part of the rebate anymore, right? So that any given PBM who wants to say that they pass on a hundred percent of the rebates can do so. But it's an easy semantic solve, right? Like anything the PBM/GPO wants to keep, just call the dollars that they're getting back from pharma something else besides a rebate -- call it a data fee, a service fee, an admin fee.
But yeah, Brand Darling is making the PBM a lot of money is the bottom line, either in terms of rebates that they may or may not be passing along or in these other fees. Robyn Tikia wrote a post about this the other day. I will link to it in the show notes if you wanna see this all written out.
Rebate Cliff Exclusion
[00:07:45] Stacey Richter: Okay, here's another relevant detail: over the years, the Brand Darling and the PBM/GPO start to negotiate preferred status or exclusivity. And a lot of times this is actually driven by the PBM/GPO.
Because any additional dollars they can get out of Brand Darling, especially if it's a per unit kind of thing, and any additional volume they can get out of Brand Darling, right? Like it is a gift that keeps on giving -- they can get more money by promising a number one spot on the formulary, whatever that might look like.
And pretty much no matter how it goes down, this creates what is called a rebate cliff for any other new entrance into that same therapeutic category, right? Think about this. You're a new brand on the scene, Brand Number 2. You give a 99% rebate. You raise your list price as high as the sky and give a 99% rebate. The PBM is gonna laugh in your face. How is your tiny little brand -- with four patients on the med, or 4,000 or 10,000 patients -- how are you going to compete against Brand Darling with millions of patients?
No PBM/GPO with any fiduciary responsibility to its shareholders or its board is gonna be like, oh, sure, we'll let this little brand onto our formulary and forgo the exclusivity or the preferred kicker dollars that we're currently pulling in from Brand Darling.
It doesn't matter how good Brand Number 2 is, it doesn't matter how cheap it is, it doesn't matter how much better it is for some patient population. The math doesn't math if you are a fiduciary and you have shareholders, or you have a board that is entrusted in margining it up.
So in this particular case study, Brand Number 2 gets pushed to a nonpreferred tier. It gets stuck behind step edits. You know, try Brand Darling first. It gets hit with prior auths.
[[And to be clear about a point that is already pretty clear, but stating the obvious is one of my special skills.
Prior Auth As Leverage
[00:09:50] Stacey Richter: This formulary decision making to either not let Brand 2 get on formulary or to put it on formulary in a very nonpreferred way. This all has a patient in the middle. Does this patient need the drug? Maybe. Maybe not. Who knows?
Did some P&T committee at the PBM determine this drug is all that and a bag of chips? Maybe. Maybe not.
But if I'm thinking like a PBM answerable to shareholders, my decision making whether to prior auth a drug or put it in a preferred slot, talking about at least the primary decision making factor here, the one that a PBM shareholders are interested in, this is going to be putting the prior auth in place. Not to determine if the patient really needs the drug or if there is comparative effectiveness research or ICER says that this drug is of great value, not so much a lot of times.
Instead, a status quo PBM serving plan sponsors looking for rebate guarantees will serve their clients or their brokers RFP criteria by putting the PA in place as a negotiating lever and a financial calculation to get more out of, for example, Brand Darling by throttling Brand 2 with restrictions or exclusions, right?
The PBM may be putting that prior auth in place as either retribution for some pharma team not paying a big enough rebate themselves, or because the PBM wants to get a bigger kicker out of Brand Darling.
[00:11:27] Stacey Richter: And look, the negotiators and the sales teams at any given status quo PBM have personal incentives to drive financial performance for the PBM and getting the big rebate guarantees that drive sales to self-insured employers or other plan sponsors. I doubt anyone in that mix has a comp package that includes better patient outcomes for plan members.
Prove me wrong, honestly, I beg you on that point.]]
Rebate Game Economics
[00:11:55] Stacey Richter: Let's just say you go through a hypothetical negotiation here. Say the PBM/GPO says to you, "If you want clean access, Brand Number 2, if you don't want to be step edited, Brand Number 2, what are you willing to pay in rebates?"
So you, Brand Number 2, you sharpen your pencil, you hand over richer and richer rebates. And then you look up and you realize a couple of things.
Number 1, the rebate game is eating your economics. On paper maybe your list price looks fantastic. You're very happy with yourself for going to market with such a high list. But in reality, and Ophelia Johnson really talked about this last week, she called attention to what the pharma company would call "revenue leakage".
Because as that pharma manufacturer, you're paying the big rebates to the PBM/GPOs potentially. You're giving 340B discounts. You may be handing out copay cards on top of that.
By the time everyone has taken their slice in this particular Brand Number 2 case, the net price might be a fraction. If someone on the contracting team is good at doing all this math, they'll realize this.
And maybe even after all of that, you still can't get clean access for Brand Number 2. Even after you pay all this, some plans are gonna still leave you on the nonpreferred, and we are pretending we are a pharma manufacturer today, so we don't want to give our margin to some contract pharmacy or PBM. Of course, we want to keep it and have as many patients as possible pay a commercial rate or even a MedD or P to P rate, right.
Regulation Breaks Math
[00:13:31] Stacey Richter: On top of this again, and Ophelia Johnson talked about this last week too, regulation is starting to blow up the old math. You know, you've got stuff like the IRA, the Inflation Reduction Act. You're facing pressures to cut list prices on certain products. Lower list prices can collapse the rebate spread that is used to justify the game in the first place.
Also, plans and PBMs lose some of the dollars that they used to use to buy down premiums. So they then come back asking, you know, for you to make it up somewhere else.
So, you are paying heavily to stay in a system that may under-deliver on volume, right? Like that's why you've got a PBM to begin with and you're willing to pay these rebates because they say that they have this many -- hundreds of millions, whatever -- lives under management. So you contract with them so that you can get volume. But if you're not getting volume anyway, question mark.
At some point, somebody inside the company -- you know, Brand Number 2’s company -- asks the obvious, and at this point still slightly heretical question. They will say, "Why are we chasing formulary position, because it is costing us a lot of money and we might not be making it up in volume." I'm, right now, thinking about that Steve Martin movie -- that Steve Martin quote. He was losing money; he had started a business or something, and he was losing money per unit, and he told someone that he'd make it up in volume.
But anyway, if Brand Number 2, somebody at that company does the math, that's where a cash pay strategy might start to look rational, especially again for these brands that are being excluded from a formulary -- implicitly, explicitly, it doesn't matter. Or if there's like a maximizer or accumulator that makes the drug subject to a really high deductible.
Which is gonna put the list price of the drug onto the patient's shoulders, or a percentage of it. I mean, depending on the med, even if a patient does manage to get coverage, the amount of hoops to be jumped through, the potential for the patient to be subject to the list price anyway due to, you know, for example, deductibles or just really high co-insurance based on what might be that artificially high list price before rebate.
Additionally, you've got the delay a patient might face due to all of this, or restrictions, which extends the so-called "time to therapy". All of these are -- let's call them tactical considerations on a good day.
So yeah, in this particular case study, the status quo traditional system -- not so good. It's not like there's some kind of great baseline here, right?
Cash Pay Tradeoffs
[00:16:14] Stacey Richter: With cash pay, a pharma manufacturer -- Brand Number 2 -- might net something similar, actually, than if they went through a traditional channel. And patients net something similar. It might be the same price, maybe even it's a little bit less, but patients don't have to worry about prior auths or steps.
Doc writes it if the patient can afford it, and that's with an underline. If the patient can afford it, the patient gets the med.
It's a very interesting thought here. Cash pay makes the only barrier to care a financial one -- and look, not underestimating that. One of the biggest reasons why meds are abandoned at the pharmacy counter is in fact patient cost. But sometimes you have meds in the traditional system both costing the patient a lot and they have major prior auths, and any copay card is sucked into an accumulator maximizer.
Lots of higher math here, which you better do right if you're a pharma manufacturer, because do it wrong and you're leaking revenue all over the place. But yeah.
In my day job, I just saw a pharma manufacturer just deciding to forgo plan coverage on one of the big PBMs. So hundreds of millions of lives that, in a normal world, no one would have ever thought to be okay not to be on formulary.
There was another manufacturer I know who recently just said no to 340B and Medicaid in its entirety. And it's just offering their own PAP program -- their own patient assistance program themselves. Which, depending on how it's done, could actually wind up being a direct-to-consumer or direct-to-patient channel in its own right.
There are many points to ponder here, but going cash, or doing your own patient assistance program, or offering your own discount coupon or copay cards to patients not using their insurance -- I mean, it is kind of a way to control your own destiny here. Here's the price. Here's what you're gonna pay, and if you can pay, you can get the med right now. No hoops. Hmm.
Is this easy? No. The manufacturer is giving up, Number 1, as I just said, access to big blocks of traditional insured lives.
Number 2, the -- I don't know -- is it called the comfort of being slotted into big PBM formularies, even if it's a bad slot.
Number 3, the pharma manufacturer will need, I don't know, some kind of new processes, new people on the scene, maybe a whole new department to support all of this. This is a whole new thing. And those involved in PBM contracts already have a day job.
But if you are a brand like Brand Number 2, that has been relegated to the margins of the formulary and is watching these regulatory changes make the old rebate-heavy model less stable -- huh, a cash pay direct channel can start to look a lot more of a controllable bet.
I'm gonna read for you a direct quote from someone I spoke to about this who works actually at a manufacturer, and here's the direct quote.
"I'd rather sell fewer prescriptions at a transparent, sustainable price that I can control than more prescriptions at a phantom list price where everyone gets paid but me, and patients get stuck with co-insurance on a number that isn't ever real."
PBM Reaction to Direct
[00:19:46] Stacey Richter: So look, if Brand 2 -- going back to the beginning here -- if Brand 2 decides to go direct, it depends a little bit on the brand, but in many cases the PBM/GPO is thrilled about this strategy, right? They are thrilled if any Brand Number 2 decides to go it by themselves, direct to patient.
Why? They keep all of the money from the Brand Darling. And they can tell Brand Darling that they are exclusive, or whatever -- they have an exclusive on the formulary, they’re a single, you know, in the therapeutic category, or whatever. And anyone who gets that other brand is paying cash now. So the PBM and/or their plan sponsor client perhaps has zero out of pocket.
GoodRx Reverse Auction
[00:20:38] Stacey Richter: Okay, now I want to get into a few operational details that we glossed over last week. So call this an extreme deep dive into massive wonkery for the nerds amongst us, but maybe some of you are gonna hang with me through this. Okay, before I start, here's the big level set.
Brand Number 2 shows up on coupon sites such as GoodRx because PBM contracts allow an entity such as GoodRx to publish a lower cash price, right?
[[And why is this allowed? Because GoodRx -- how they get the cash price -- is by holding what amounts to a reverse auction for PBMs, and then selecting the PBM who is willing to offer the lowest net cash price for any given pharmacy the patient may wander into.
So PBM contracts allow this because for all intents and purposes, what GoodRx, as just one example, is doing is being like the sales arm for, in many cases, the same PBMs who have the contracts with the pharma manufacturers prohibiting the pharma manufacturer from contracting with anyone who's not a PBM or doesn't meet certain other criteria.
See what they did there. It's pretty smart. GoodRx. Also, I'll explain this again in a couple of minutes in case you want to hear this explanation one more time.
[[The pharma manufacturer's role here is mostly upstream. They set the list price, rebates, fees, and discounts. So let's break that down, if that was really confusing -- because it kind of was.
Number 1. Discount coupons such as GoodRx are showing cash prices from the PBMs. Not some, like often. And again, like every day is a new day here. So there’s many different ways to do this, and I am confident that some brands are figuring out a bunch of different things that are not what I'm about to say. But at least historically, and at least some brands are doing it this way.
Again, discount coupons such as GoodRx -- what they're actually showing is the cash price from the PBMs. It is not some like official transparent price which is dictated by the pharmaceutical manufacturer.
The coupon vendor pulls discounted cash prices from one or more of the PBM networks that it partners with, right? So like how GoodRx makes money. Listen to the show with Ge Bai, which is entitled something like "How GoodRx Makes Money." It's from a while ago, but it's roughly the same, let's just say.
So what GoodRx does, and what they've always done, is they've gone around to all the different PBMs and said -- you know, it's like an auction. Who's gonna give me the best price? Reverse auction. Who's gonna give me the best price for this particular drug and your network of pharmacies, right? Like, that's the price.
[00:23:23] Stacey Richter: So those PBMs have their own cash-pay contracts with the pharmacies for Brand Number 2. When you look up Brand Number 2 on one of those discount card sites, what you're seeing is: if you use this coupon code at the pharmacy X, here's the price -- and that price is going to be the best PBM number in the reverse auction that GoodRx was able to get.
Okay? So that's one thing to think about.
Coupon Sites Monetization
[[00:23:50] Stacey Richter: To clarify a couple of points -- keep in mind here, GoodRx runs a high-traffic consumer health site and app. They've got drug pages, condition content, etc, so they can get paid by manufacturers and telehealth vendors -- nothing for nothing -- to promote certain branded drugs in search results with sponsored or preferred placement. And then also, of course, to run copay card integration savings programs or adherence/education campaigns, right? Also, they can sell data.
There may be an incentive from GoodRx to pharmacies to potentially dispense these noncovered brands, right? That incentive is of course funded by manufacturer discounts and the admin fees that are flowing through GoodRx.
So GoodRx keeps the money, but then they also may pay a pharmacy -- maybe a bigger dispense fee than they normally would get from the PBM.
[00:24:49] Stacey Richter: So look, in sum, this is effectively advertising and patient acquisition spend from pharma manufacturers that is being routed through GoodRx on top of the fees that they're gonna collect for finding the lowest price PBM.
You know what? This is actually a whole topic unto itself, so stay tuned -- and if we get our act together this summer, maybe we'll run another show on all of this. But the bottom line point I'm making here is: if a pharma brand finds itself in the circumstances of Brand 2, or Brand 7, nothing for nothing, there are environmental factors and also very much contracting machinations between PBMs and pharma manufacturers that start to make cash pay look pretty attractive.
But at this point, especially with the very large vendors, cash pay still involves the status quo PBMs, and probably another vendor more than likely. So it might be a better model, and it might be a better way of doing business for patients and plan sponsors. Who knows -- certainly not me. It might be better for pharma with any Brand 2s, but at this point it's often not some kind of alternative universe because the usual suspects still are very often the usual suspects.
I just wanted to say that all out loud.]]
Here's another thing to think about. Brand Number 2 thing.
Copay Card Tie-In
[00:26:21] Stacey Richter: Discount coupons again, such as GoodRx, may also surface manufacturer savings options, right?
So let's just say that Brand Number 2 has historically offered a copay savings card for commercially insured patients. You know, like pay as little as X dollars per fill, up to some max benefit, right? What GoodRx does is they go and they find the lowest PBM rate that they can get, and then they automatically tie the copay card from the manufacturer to that number. You see what I mean? Right. Okay. So that's Number 2 -- point to ponder.
Wrap Up And Credits
[00:26:55] Stacey Richter: I know that was a lot. I hope it was worth your time. My name is Stacey Richter. This podcast is sponsored by Aventria Health Group.