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The Pulse of the Pharmaceutical Industry

Payer Response to Medicare Rebate Policy Changes

Written by: | | Dated: Friday, December 7th, 2018


A white paper by Health Strategies Group, an Eversana company. Eversana is the leading independent provider of global services to the life sciences industry.


Health and Human Services has proposed to rescind the anti-kickback safe harbors in Medicare

In July, HHS submitted a proposed rule called “Removal of Safe Harbor Protection for Rebates to Plans or PBMs Involving Prescription Pharmaceuticals and Creation of New Safe Harbor Protection” to the Office of Management of Budget for review. The proposal would upend the Part D drug access negotiations between biopharmaceutical companies and Medicare payers and intermediaries. Language from the proposal has not been made public and review time for OMB is undefined.

The proposal to eliminate Medicare rebates will likely face numerous obstacles including questions of regulatory and legal authority to enact the proposed changes, stakeholder concerns, and possible lengthy litigation of any final rule. While general attention is currently focused on the complex process this policy change faces, pharmaceutical companies should be focusing on leveraging the opportunities and mitigating the risks this change could create. It is vitally important for companies to understand the potential impact on MA-PD and PDP payers as well as Medicare beneficiaries.

Despite the uncertainty of final policy details, one thing is clear: this administration is committed to making significant changes to the Medicare program with consequences that will impact relationships among all Part D stakeholders.

Potential Medicare Rebate Outcomes

While predicting the future is difficult, the current policy discussion can help us anticipate responses from key stakeholders and examine implications for the biopharmaceutical industry. There are three consistent themes in the current debate that suggest possible outcomes:

• Improve cost transparency to create price competition
• Eliminate intermediaries and their impact on cost
• Increase consumer participation in decision making

Building on these three themes, several distinct scenarios describe the future marketplace and allow the industry to assess the impact on primary stakeholders: MA-PD, PDPs, and Medicare participants. While most Medicare payers expect insurmountable barriers to prevent a wholesale elimination of rebates, they do anticipate changes to how Medicare pricing and access are determined. With any of these proposals, however, payers and intermediaries will need to redefine the roles they play in formulary negotiations.

Potential Impact on Medicare Payers

Currently, there is lack of cohesive response from PDPs and MA-PDs. An unclear picture of the specific replacement creates significant uncertainty. Regardless of preparation, PDPs in particular bear the greatest exposure to negative outcomes with many of the changes, while MA-PDs can adjust. The key risks/opportunities that payers face in any scenario are:

• Increased financial risk exposure with loss of rebates
• Change in the business model and shift in role to a transactional manager and need to create new value proposition
• Engagement with Healthcare providers will evolve to support patients and create new models to manage product selection
• Value message conveyed to Medicare beneficiaries will move to outcomes and engagement for payers to retain a strong role

1. The greatest adjustment for Medicare payers will involve the impact of lost rebates on their financial risk management strategy. Without rebates and with no control over net cost, they will be forced to rapidly adopt aggressive management solutions. Likely tools will include:

• Limited formularies based upon list price
• Increased use of administrative restrictions such as step therapy, prior authorization, or more aggressive cost share designs
• Relationships with pharma and healthcare providers that share risk or provide incentives to drive cost and outcomes

2. PDPs could see their business model change radically, particularly with the elimination of rebates or the shift to discounts directly credited to the patient at point-of-sale. In this model the PDP will become merely a transactional adjudicator and will be forced to create inventive value propositions or face rapid commoditization. Potential alternatives include growth in value or outcomes-based population programs, enhanced patient engagement, or the addition of ancillary services for patients, like disease management. This model opens opportunities to new entrants into the market, such as Amazon, who are not required to build complex rebate and risk management solutions while providing a wide array of ancillary services.

3. For both PDP and MA-PD businesses, the immediate response to managing increased risk will be to engage providers. Engagement may range from improved decision-making tools with real-time benefit and cost solutions at point of prescribing, to incentives to encourage preferred drug use, to risk-sharing arrangements. Currently, however, HCPs are not equipped to apply these advanced models. While there are some sophisticate IDNs that have the infrastructure necessary to participate, the cost to these systems will likely exceed the financial opportunity. PDPs in particular will be challenged to build risk models because the potential for pharmacy-related losses in the outpatient setting can escalate quickly without proper design.

As the Trump administration exerts more oversight over the healthcare industry, Medicare is a primary target. Already, CMS has begun to make incremental Part B and D benefit design changes and bigger, more impactful modifications are on the horizon.

Seniors Response to Rebates Changes Could Affect Terms

Seniors are notoriously resistant to changes in the Medicare benefits they currently receive. Confusion about the potential effects of such change may cause seniors to mobilize politically to ensure the benefits they experience are not altered. Medicare stakeholders should be prepared to provide support to seniors to allay their fears. Seniors could experience varied changes based on which rebate outcomes are achieved, and their expressions of frustration will pressure to CMS to rapidly invest in outreach and education.
There are several areas where seniors could seek support from Medicare stakeholders:

Implications to the Biopharmaceutical Industry

With all three of these proposals, the biopharmaceutical industry will be forced to rethink its overall drug pricing strategies. Multiple companies competitively bidding on price could create a zero-sum game of price reductions in highly competitive categories. Even if rebates remain, transparency would force more scrutiny over drug list price.

With this in mind, pharmaceutical companies should consider several courses of action:

1. Define a strategy for Medicare access that moves beyond price discounts. In crowded classes, brands will see aggressive pricing that could result in significantly lower net prices. To create and maintain brand loyalty, companies will need to build strategies to engage consumers, providers, and other stakeholders.

2. Selectively build value-based contracting arrangements to establish a competitive edge where possible. A shift toward these types of relationships is inevitable in the Medicare program, and identifying new arrangements early can move negotiations beyond pricing in areas where value is important, such as CV, oncology, and other high cost areas.

3. Develop value-add programs for access, like population health management tools, in order to share in the new additional risk Medicare payers are taking on. This provides an opportunity for payers and pharmaceutical companies to build relationships with consumers and a reliance on long-term treatment.

4. Assess implications for physicians and offer potential support as payers begin to contemplate additional risk-sharing relationships with HCPs who are unprepared for new tools. POS benefit verification, in particular, would allow physicians to verify benefits and net cost before they write the script. This approach aligns with value-based outcomes models and supports population health efforts.

5. Rapidly scale claims adjudication and point-of-sale capabilities. Direct discounting to consumers, while ensuring full coverage of insured benefits, will be a complex process that will require advanced claims management capabilities.

6. Work with newly developing third parties who are thinking about healthcare delivery in multiple new ways. Formulary support tools, for example, can help seniors navigate new benefits and understand costs at point of service. Embracing these tools can allow innovative companies to reach out to consumers in a new way with new technologies and advancements.


About Health Strategies Group

Health Strategies Group offers a dedicated team of research leaders committed to dissecting trends, identifying customer needs, and pinpointing the barriers and opportunities for pharma within the evolving healthcare environment. For more information, visit the company’s website at


Editor’s note:
To download the “Payer Response to Medicare Rebate Policy Changes” white paper, please visit

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