Pass-Through Rebate Models Must Demonstrate Value to Catch On

With the Trump administration’s rebate rule delayed and possibly slated for repeal by Democrats in Congress, major changes in how the PBM industry distributes rebate revenue will have to come from the private sector. While a notable minority of PBMs has adopted alternative rebate models, experts say that plan sponsors’ demand for such models is muted, as they still must demonstrate that they generate more value than traditional models.

The Biden administration will suspend implementation until 2023 of the so-called “rebate rule,” a Trump administration regulation that would have revamped the Medicare prescription drug rebate system, and DC insiders expect the regulation will be repealed by Congress before then. Meanwhile, a growing number of PBMs that deal in the commercial market have pitched plan sponsors on a 100% pass-through rebate structure, in which the PBM collects its compensation through a fee or surcharges rather than diverting a share of rebate revenue.

Jeff Levin-Scherz, M.D., national co-leader of the health management practice at Willis Towers Watson, says that passed-through rebates can flow in two directions after they are in employers’ hands.

“Employers have been moving to pass-through rebates where the PBM will give 100% of the rebate to the employer,” which the employer can then spend on its larger medical benefit, lowering premiums, Levin-Scherz says. “Point of care or point of sale rebates are different, where the rebate is essentially put into the purchase price [of a drug].”

Levin-Scherz observes that distributing rebates across the entire plan is burdensome to patients who need high-cost therapies.

“The person who’s buying a very expensive drug is essentially providing a subsidy to everybody else. The rebate is going back into general pool rather than being directed to the person paying it,” Levin-Scherz explains. “So it’s somewhat of an anti-Robin Hood approach. I think many people would like to see the effective lower price that comes from a rebate go to the people who are actually getting these medicines. Many of these are brand-new medicines where there’s just not a good alternative. Obviously, if somebody could be on a generic that would be better in terms of cost for everybody, both the plan sponsor and the member.”

Pass-Throughs Align Incentives

Ge Bai, Ph.D., an associate professor at Johns Hopkins University’s Carey Business School and Bloomberg School of Public Health, says that passing through rebates better aligns the incentives of a PBM and a plan sponsor.

“I think for the large, self-funded employers, the issue is more about product selection,” Bai says. “And the employers are frustrated by some inefficient product selection choices made by the PBMs on the formulary….it’s one reason why employers want the rebate pass-through — it will reduce the PBM’s incentive to make money from high-price, high-rebate drugs.”

However, Bai also says that explains why some employers opt for a traditional rebate model: for firms that don’t expect to have high levels of drug spending by members, the lower premium offered by the traditional rebate model may be more appealing. Moreover, Bai says that traditional PBMs likely have greater bargaining power with manufacturers and relationships with national pharmacy networks. Also, she points out a traditional PBM’s more robust suite of services and vertical integration with the medical benefit is much more streamlined than a carved-out pharmacy benefit.

Like Bai, Daniel Nam, Pharm.D., associate principal for pharmacy policy at Avalere Health, says that prices and premiums will ultimately decide which approach becomes dominant in the marketplace.

“I think it really depends on the bottom-line price that the PBM is willing to offer to the employer or the health plan,” he says.

According to Bai, employers are waiting to see how much of a difference the pass-through PBMs can actually make on cost. “I’ve heard anecdotally that the turnover rate is very low for employers to switch their carriers or PBMs,” Bai says. “So have we already reached the tipping point for the employers to start a revolution? Probably not yet.”

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