EP353: What You Need to Know About Specialty Pharmacy Formularies and Rebating, With Pramod John, PhD

This episode is probably a 400-level class in specialty pharmacy rebating. If you want a 45-minute conversation on rebates in all their glory, go back and listen to the conversation with Chris Sloan (Encore! EP216). 

But if you’re still with me, what’s gonna follow is about an eight-minute overview of pharmaceutical rebating, just to make sure we’re all on the same page before we get into the show itself. So, if you know all there is to know about pharmaceutical rebating, you can jump ahead about eight minutes and get to the part where I talk with Pramod John.

OK, so the pharmaceutical rebate short version is this. Well, before I actually get into the rebate short version, let’s just go through a few background points to keep us all on the same page.

OK, pharmaceutical benefit managers (PBMs) talk long and loud and often about how they put drugs on formulary, on their formularies, based on their clinical attributes and—who knows?—I’d assume that there’s probably meetings about clinical outcomes. But that said, it’s kinda funny how the top drugs on most formularies are the ones where the PBM makes the most money. Could be coincidence. Who am I to say? Go ahead and listen to PBM quarterly earnings calls. They are a revelation.

So, this has to do with the crazy rebate thing that we’ve got going on in this country. How it works is as such: Let’s say a drug costs $100. PBM says to pharma company, “Well, if we put you on our formulary, then sure … fine. We’ll buy it for $100 (this drug), but you, pharma company, will then give us a $20 rebate. You’re gonna give us $20 back in a rebate for every drug, for every unit that goes through our PBM. That’s one of your options, pharma company. And if you give us this rebate, then you’ll be one of however many on our formulary in your therapeutic category. So, paying this will ensure that we will limit the number of options that are available to patients so your volume can go up—your market share can go up.”

Or, here’s another option that the PBM sometimes offers Pharma, and maybe it’s the only option that they offer Pharma in some cases: PBM says, “Give us a $30 rebate and then we’ll give you an exclusive. There will, we promise, be no other drugs on our formulary in your same therapeutic category. You will be the only drug that we allow for whatever condition or that we’ll pay for for whatever condition. You’ll get all of our business—except unless somebody does an arduous appeal. All of the patients for all of the plan sponsors we serve will get your drug when appropriate.”

PBM loves this. They get $30 a pop for all the scripts written, of course.

And everybody wonders why some generic isn’t on formulary at a PBM while an expensive brand is. I mean, think about this and the reason isn’t a mystery. The PBM makes a lot of money in rebates off of these expensive drugs. Thirty bucks? Pah! Honestly, some of these drugs cost tens or hundreds of thousands of dollars. You can imagine how much those rebates are.

Also consider the so-called “rebate walls.” If we’re talking about problems here, rebate walls prevent new good or less expensive drugs from entering the market without a ton of difficulty. Say you’re a manufacturer and you have a new product that’s kinda inexpensive. You go to the PBM to try to get on formulary because that’s pretty much the only way to get patients on your drug at scale nationally in this country. Most patients have insurance, and they tend to use it. And most are on one of the big three PBMs.

So, if you’re a little Pharma and you approach the PBM, the PBM says, “Ha ha ha. Even if you, little Pharma, give us a 40% rebate, you have no script volume. You could give us an 80% rebate. You’ve got no scripts. We have this other drug with an exclusive with however many thousands or hundreds of thousands of patients taking it, because … exclusive. And also, it’s been on the market for however many years. Why would we upset that Brinks armored apple cart and not take the extra points from that first drug that they’re paying for the exclusive in order to let your little drug on our formulary?” (There’s a huge opportunity cost here for the PBM, as you might be able to see.)

Now, keep in mind the patient with 20% coinsurance will pay 20% of $100, which was that original list price that we talked about before the rebate. They’re not paying 20% of $80 or whatever the price was after the rebate. So, yeah, the PBM certainly making a couple bucks off the patient there.

I keep talking about the PBM role here, but self-insured employers and Part D plans are not totally innocent. They get some or all of those PBM rebates back from the PBMs, and I’ve heard more than once how rebates are the opiates of health insurance.

Plans take those rebate dollars, and they use them to lower premiums. It’s like the opposite of normal insurance if you think about it. In normal insurance, the healthy or the people whose homes didn’t burn down subsidize the sick people or the people who had a fire. In the parallel universe of drug coverage, the sick subsidize the well. Rebates on the drugs sick people are taking and paying at the pharmacy counter for, those rebates are used to lower everybody’s monthly payments. So, the plans are addicted to this money—because plans have a couple of strategic reasons why they want to keep premiums down.

But here’s the thing, plan sponsors: You could also just pay a fair price for the drugs to begin with. You could also just make sure that the right people are taking the right drugs. You could contemplate the total cost of care in your negotiations or the value of the drug like they do in every other developed country. I keep seeing over and over again case studies where plans save literally 30% or more on their drug spend by forgoing this whole rebate fandango and going with a PBM that “don’t play those reindeer games.” And patients do better because they’re on the right medications.

My guest in this healthcare podcast, Pramod John, is the founder and CEO over at VIVIO Health. VIVIO contracts with self-insured employers and helps employers/members/patients get the right drug. They actually expand access, and the employer saves money.

Last week’s show (EP352) was also with Pramod John, and we talk about how not all drugs work for all people who take them. In fact, most drugs don’t work for people who take them. And there’s side effects that might be more common than the drug actually working. You don’t have to listen to these two shows in order, so feel free to proceed no matter what. I’d just recommend going back and listening to episode 352 as well because the info there really brings home the points that you’ll hear today.

I will mention one thing from the other show, though. Pramod and I had kind of a riff about how, if you tell patients that a drug only works in 2% of patients, most will assume that they’ll be one of those 2 special patients out of the 100 that the drug will work for. But, if you tell most patients that 2 patients out of 100 will die as a result of taking those drugs, those same patients will assume that they will not be the 2 that that drug kills. So, there’s this weird psychology going on here that gets even weirder when you realize that some of the drugs the FDA approved on accelerated approval, it turns out, don’t work at all—for nobody. They do still have horrible side effects, however—that’s a sure thing—but there’s no chance that the drug will improve, for example, survival time based on all of the data while the drug is on market. And you’ll still get patients and doctors writing that drug. Is it conflict of interest? Is it this whole “we want to give people/patients hope” thing? Is it the placebo effect? More on this topic in my interview with Bishal Gyawali, MD, PhD (EP289) and also Vincent Rajkumar, MD (EP296). 

You can learn more at viviohealth.com or by emailing Pramod at pramod@viviohealth.com.

Pramod John, PhD, is the team leader of VIVIO, a public benefit corporation whose mission is to ensure that drugs work in the real world for the people on them and that their costs reflect the value provided. VIVIO’s model has improved health outcomes and generated 35% to 40% savings on drug acquisition costs. It accomplishes this by answering three simple questions: (1) Is this the right drug? (2) Is it a fair price? and (3) Is it working for the patient?

Before VIVIO, Pramod was founder of Oration PBC (acquired by PokitDok), which gave consumers control over their drug purchasing by capturing the prescription in the physician’s office and providing real-time pricing options and automatic routing capabilities. Pramod was also vice president of strategy and innovation at McKesson, the world’s largest healthcare company. At McKesson, Pramod helped develop solutions that leveraged advanced technologies and business process improvements to optimize healthcare delivery systems, infrastructure, and supply chains.

Earlier, Pramod founded and served as CEO of PacketMotion, Inc, a venture-funded startup in the enterprise network information and policy management industry. VMware later acquired the company. In addition, Pramod founded netExaminer.com, a managed-vulnerability assessment company acquired by SonicWALL.

Pramod earned his PhD in electrical engineering from the University of Illinois at Urbana-Champaign. He serves on the board of Wycliffe USA. He also serves on the advisory board of Folia Water and as a mentor at StartX.

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