Welcome back to our Market Access 101 blog series, which began with the basics of market access and covered how to improve formulary placement and secure coverage under the medical benefit. In this post, we’ll dive deeper into the medical benefit, explaining how payer/PBM contracting works—and why it’s increasingly necessary.
Essentially, all pharma companies want to know which of their competitors is contracting, but nobody wants to be the first to take the plunge. After all, once manufacturers begin payer/PBM contracting within an indication, it’s almost impossible to stop. Determining when payer contracting is necessary to maintain a product’s existing coverage—or to improve it—is the million-dollar question for manufacturers of medical benefit products.
Why is GPO contracting relevant?
Before we talk about contracting with payers, we must first talk about GPO contracting. Healthcare group purchasing organizations, or GPOs, negotiate discounts for drugs and products by buying in bulk from manufacturers and medical supply distributors. In certain therapeutic areas—most notably oncology, rheumatology and dermatology—almost all large specialty practices belong to at least one GPO.
Given their size and distribution network, large GPOs commonly negotiate a 3% to 6% discount from manufacturers, who in turn benefit from the potential for a larger sales volume. Group purchasing also saves manufacturers the time and effort of contract negotiation with hundreds of hospitals and specialty practices. While many hospitals and practices can purchase drugs either directly from manufacturers or from multiple GPOs, others are bound by exclusivity contracts, which either award providers for single-source contracts or directly prohibit their membership in competing GPOs.
GPO contracts are highly competitive, especially in therapeutic areas inundated with multiple agents with similar profiles and efficacy data. As physicians want to be able to choose which drug to prescribe, hospitals and specialty practices tend to prefer at least three options for treating any given indication. For agents in a crowded class—such as breast cancer, multiple myeloma, or follicular lymphoma—GPO contracts for largely interchangeable therapies historically resulted in steep discounts, some as high as 50% or more.
In 2005, as part of the Medicare Prescription Drug, Improvement, and Modernization Act of 2003, CMS began calculating the average selling price (ASP) for each drug, which indicates the average price of a drug’s sales to all purchasers, including commercial payers. Medicare now uses the market-based ASP plus a 6% add-on fee to set reimbursement rates for providers. As providers are reimbursed based upon the ASP, it is imperative that hospitals and specialty practices purchase drugs at a lower price in order to make any profit. While discounts are not nearly as high as they were in the past, GPO contracting remains quite competitive in some classes.
What’s driving the shift toward increased payer contracting for specialty products?
Given that manufacturers are already contracting with GPOs, many actively avoid contracting with payers and PBMs for their medical benefit products. Ten years ago, payer/PBM contracting in the medical benefit space was quite rare, as payers were not practicing utilization management for these products; as a result, patient access was not an issue for manufacturers.
In the past few years, treatment options have grown significantly. In some therapeutic areas, especially oncology and rare disease, a host of pharmacy benefit drugs have been introduced to what was previously a medical benefit-only space. When treatment options include oral and self-injectable drugs on the pharmacy benefit side, the restrictions commonly used to manage formulary drugs tend to bleed over to an indication’s medical benefit counterparts.
While in-office GPO contracting is still much more prevalent than payer contracting, MMIT data reveals that payer contracting for agents under the medical benefit is already robust. In an MMIT Index survey of large national and regional MCOs and PBMs, payers representing 51% of commercial lives reported contracting is in place for at least some medical benefit products, while payers representing 28% of lives said that most of their covered medical benefit products have contracting.
MMIT data shows that payer contracting will likely increase within the year for almost all indications, with the largest shifts seen within oncology and rare disease (see the graphic). In the next few years, increased payer/PBM consolidation will likely drive additional contracting, as we’ve seen with the mergers of Aetna/CVS and Cigna/Express Scripts. As PBMs’ utilization management practices have proven quite effective at reducing costs, we’re likely to see them spread into the medical benefit space.
How are traditional payer contracts structured?
Manufacturer/payer contracts run the gamut from traditional rebate agreements, which offer rebates based on the contractual terms, to more creative value-based contracts, which may use outcomes-based metrics to assess a drug’s performance.
One of the factors that has historically driven heavy manufacturer/payer contracting for pharmacy benefit products is that it is relatively easy to track formulary placement. If a payer places the drug on tier two as their manufacturer contract requires, then the manufacturer pays them a rebate; if the payer keeps the drug on tier three, then they don’t receive a rebate.
For medical benefit products, manufacturers are more often focused on easing providers’ administrative burden, as prior authorizations for these products are both more frequent and more complex than those for pharmacy benefit drugs. For example, when the first PCSK9 inhibitor drugs came out to reduce low-density lipoprotein cholesterol, prior authorizations required physicians to answer a list of 45 questions and include a copy of their chart notes. Manufacturers of both Repatha and Praluent offered rebates to payers who agreed to remove the requirement for extra documentation, as it places an unnecessary burden on providers.
In a traditional contracting scenario, a payer or PBM will pay the full WAC for the drug, and then receive a percentage of that cost back once they meet their contractual requirements. So, what are those requirements?
Along with reducing the administrative burden, manufacturers might also negotiate with the payer or PBM to grant their product preferred status. Even though there is no formulary placement for products under the medical benefit, a payer’s medical policies can indicate that a drug is considered the first line of treatment, which must be tried and failed before the patient tries other competitor drugs.
Payers/PBMs might also signify a drug’s preferred status by reimbursing it at a higher rate over the ASP relative to its competitors, thereby nudging providers to prescribe it. Less commonly, a manufacturer might be able to negotiate for the removal of prior authorization restrictions.
Contracts can also include graduated rebate scales, which can specify a higher or lower rebate given the degree of product preference. For example, removing all step requirements for only the selected drug might warrant the highest rebate percentage, while removing step requirements for both the selected drug and a competitor’s might reduce that rebate percentage.
How are value-based payer contracts structured?
According to the MMIT Index survey, payers representing 56% of commercial lives report occasional use of value-based contracts for medical benefit products, a percentage which is expected to climb. The use of value-based agreements varies significantly by therapeutic area; currently, rare diseases and hematological, neurological, and respiratory disorders are the most likely to be associated with such a contract.
Typically, a value-based agreement uses measurable clinical outcomes to assess the efficacy of treatment. Payers and manufacturers must agree upon an expected outcome, as well as the reimbursement or rebate terms if the product fails to produce that outcome. For example, a patient getting an infusion to treat urothelial cancer might be assessed based on four comorbidities. If the cancer metastasizes in another part of the body, or if the patient ultimately loses a kidney, the manufacturer might be required to pay for the patient’s past infusions, because they were not beneficial.
Less common examples of value-based agreements include a differentiated rebate structure based on the patient’s indication or diagnosis, or capping the cost of a curative drug that is only used for a definitive period. In cost-cap scenarios, a payer might agree to prefer a product as long as the manufacturer agrees to reimburse them if the payer exceeds a specific per-patient total expense.
When should manufacturers begin thinking about contracting?
As we said at the beginning, this is the million-dollar question! Despite widespread reluctance on manufacturers’ part, medical benefit contracts are already happening at scale, primarily in indications where there are multiple therapies available for the same patient.
A good rule of thumb to frame this question is the rule of three. If a manufacturer’s ideal patient population has three available therapeutic options, the fourth entry into this space is likely going to need to contract with payers/PBMs. When there are only one or two drugs available for a given patient, access is generally not controlled.
With the advent of three or more therapies designed for the exact same patient population, however, payers and PBMs will undoubtedly create utilization management restrictions to guide providers and reduce costs. Once the first manufacturer in an indication negotiates a payer/PBM contract for improved access to their drug, the rest of the manufacturers in that space will eventually follow suit—or lose access and market share.
Of course, tracking whether a payer has met the requirements set forth in a manufacturer’s contract is much more difficult for medical benefit drugs than it is for pharmacy benefit drugs. Manufacturers who enter into contractual agreements must assume the administrative burden of determining payer compliance, which typically requires hundreds of hours of manual verification.
As a result, most manufacturers lose millions of dollars every year in rebate leakage, because the rebate payment process is neither transparent nor easily monitored. MMIT’s Contract Validation platform automates that verification process, crosschecking a manufacturer’s contractual formulary and medical benefit requirements against MMIT coverage data to confirm compliance.
In any case, as payers and PBMs continue to merge and rely more extensively on GPOs, the prevalence of medical benefit utilization management is going to force more manufacturers to contract. Despite years of manufacturer/payer contracting for pharmacy benefit drugs, we still do not know whether this model ultimately benefits patients.
With the evolution of medical benefit contracting, manufacturers will continually need to revisit this question: will patients have increased access to more therapies, or will their options be limited by their insurance coverage? By keeping a patient-centric mission at the heart of their market access and reimbursement strategy, manufacturers will hopefully navigate this new horizon with a strategic focus on improving patient access.
Stay tuned for the final post in our Market Access 101 series, “Understanding the Medical and Formulary Exception Processes.”