Why the Time is Right for a New Pricing Model

As Market Trends Evolve, Payors Need an Adaptable Approach

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BRIEFING
March 19, 2019
Executive Vice President, CVS Health and President, CVS Caremark
Executive Summary PDF cover

Guaranteed Net Cost

A Pharmacy Benefit Pricing Model Focused on Net Drug Cost

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Prescription drug prices in the U.S. rose steadily, even rapidly, for more than a decade. Inflation, especially for brand-name drugs, was in the double digits — even higher for drugs with no competition from other brands or generic alternatives. In order to help control costs during a time of rising prices, pharmacy benefit managers (PBMs) like CVS Caremark, used strategies such as formulary placement to negotiate higher discounts and rebates from manufacturers on behalf of payors.

The pharmacy benefit market is going through one of the most dynamic periods in history, and new trends are emerging that require ongoing innovation in, and evolution of, cost management strategies. At no time has that been more obvious than in the last 12–24 months during which we saw increasing strategic use of authorized generics and selective list price reductions. At the same time, legislation and regulation has been proposed to drive competition and lower list prices, as well as eliminate rebates negotiated by PBMs on behalf of payors. Some manufacturers have chosen to launch an alternative version of the brand product at a lower cost under a different National Drug Code (NDC), which enables them to continue marketing the brand at a higher price.

In December we introduced Guaranteed Net Cost, a new approach to PBM pricing focusing on net plan drug costs.

As part of our ongoing focus on developing innovative solutions, in December we introduced Guaranteed Net Cost, a new approach to PBM pricing that focuses on a simple concept — net plan drug costs — to help clients stay ahead of market developments. Before we selected what we considered the best new model we evaluated several approaches including an acquisition cost model, a fixed-price-per-drug price, and a cost-plus model. Each had limitations. We believe this is the right time for a new approach to PBM pricing. But it was also clear that any new model must answer “Yes” to some key questions:

Checkmark Does it best align with payor objectives?
Checkmark Can it adapt to evolving market trends and is it sustainable over the long term?

Changing Market Trends

After years of double-digit list price inflations, as public outcry grew, manufacturers began to adopt new strategies either to maintain market share, or simply avoid having to drop drug list prices outright to a sustainable level. At the end of 2016, under intense media and political pressure, the manufacturer of EpiPen introduced an authorized generic at a lower price, but did not drop the price of the original brand drug. The manufacturer of the expensive hepatitis C drug, Harvoni, followed suit in 2018. Makers of PCSK-9 inhibitor therapies, which are used to lower cholesterol among certain groups of patients chose to introduce a lower-cost alternative under a different NDC, enabling them to keep their brand price high. Other opportunities for cost savings came in the form of two new generics for Advair Diskus launching in February — an authorized generic by the maker of the brand drug and another one by a different manufacturer.

However, the complexity of current pricing models can make it difficult to take advantage of such opportunities because they were not designed to adapt to such trends.

Helping Ensure Lowest Net Cost for Clients

So far, we have been able to use our proven cost management strategies and negotiated with manufacturers to help ensure plan members had access to appropriate therapies while clients could focus on controlling plan costs. Through discounts, rebates, and price protection, we helped clients mitigate the impact of EpiPen price increases. Through formulary tools such as preferred placement, we blunted the impact of insulin cost increases for clients. Further, for members in high-deductible health plans, who may be exposed to the higher prices especially during the deductible phase, we introduced solutions such as $0 copay preventive drug lists and point-of-sale rebates, which help provide members visibility into true drug cost and also lower their out-of-pocket cost during the deductible phase.

The discounts we negotiated on behalf of clients for Advair Diskus mean that, even with the lower-cost alternative, the brand drug is still the most cost-effective option for clients. To help ensure members could also benefit, once the generic was introduced we launched a tier 1 approach for the brand Advair Diskus. This means that the brand drug would be adjudicated at a tier 1 copay or coinsurance — typically the tier that includes low-cost generic alternatives — and thus lower out-of-pocket costs.

But such solutions have been on a case-by-case basis and a scalable solution, which adapts to such market trend is needed for the future.

Rethinking the Status Quo

What’s more, payors and consultants have been asking for this. Current PBM pricing models are complex and involve up to 14 different components to the net cost. Increasingly, clients want a model that is simple, and enables a clear, easy comparison among PBMs to determine who can deliver the most value. And one that more closely aligns PBM incentives to payor objectives. Based on market trends, and what we heard from clients, we determined that the time is right for a new approach.

Nearly all employers believe the current pricing model needs to changehttps://www.businessgrouphealth.org/news/nbgh-news/press-releases/press-release-details/?ID=348, accessed February 18, 2019.

49%
believe the model needs to be simplified
35%
believe rebates need to be reduced
14%
believe it needs to be more transparent
49%
believe the model needs to be simplified
35%
believe rebates need to be reduced
14%
believe it needs to be more transparent

The Right Solution: Guaranteed Net Cost

In evaluating new approaches, we took into consideration all the essential elements:

  • Changing market trends and the need to adapt to them
  • The need to help ensure clients and their plan members can benefit from the introduction of lower-cost alternatives
  • Offering a solution that aligns with their objectives of low net plan cost

Net cost is an all-in measurement which:

Checkmark Aligns to payors’ most important objective — low net cost
Checkmark Offers a consistent pricing metric after all discounts are taken into consideration
Checkmark Provides a clear comparison of different PBMs’ cost management strategies
Checkmark Is sustainable regardless of whether rebates are maintained, eliminated, or replaced with a different discount mechanism

The Guaranteed Net Cost model guarantees average net spend per prescription after discounts and rebates, for each distribution channel. The PBM takes accountability for average wholesale price inflation, shifts in drug mix, and incorporates the total value of rebates. Such an approach helps ensure that we can move quickly to take advantage of market trends, whether it be the introduction of lower-cost generics or NDC alternatives, or a drop in drug list prices.

The Guaranteed Net Cost approach reinforces the alignment of payors’ objectives with PBM incentives. It is the right approach for the future of PBM pricing.

A Guaranteed Net Cost Model is about:

  • Simplicity
  • Drug cost predictability
  • Continued transparency
The Guaranteed Net Cost approach reinforces the alignment of payors’ objectives with PBM incentives. It is the right approach for the future of PBM pricing.

A Guaranteed Net Cost Model is about:

  • Simplicity
  • Drug cost predictability
  • Continued transparency

Want to learn how you can stay ahead of evolving market trends with a Guaranteed Net Cost model? Ask Us
BRIEFING
March 19, 2019
Executive Vice President, CVS Health and President, CVS Caremark

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This document contains references to brand-name prescription drugs that are trademarks or registered trademarks of pharmaceutical manufacturers not affiliated with CVS Health.

Image source: Licensed from Getty Images, 2019.