Episode 44 – Pharmacy Benefit Rebate Credit

Released July 1, 2024

Mike Stull (0:00)   

Hi everyone and welcome. Thanks for joining us on HR Benecast, your source for expert commentary and insights on current health benefits related news and strategies. This is your host, Mike Stull. 

I can’t believe it, we’re halfway through the year. We still have plenty of webinars in the coming months to keep your team informed on industry trends along with our inaugural in-person Women’s Health and Wellness Forum, October 24th in Columbus, Ohio. You can head over to employershealthco.com forward slash events to see a full list of upcoming events and sign up to be notified when registration is open for the Women’s Health and Wellness Forum. 

With that, let’s get started. Today’s guest is my esteemed colleague, Zach Hostetler. Zach is the chief operating officer here at Employers Health and oversees our clinical and client solutions teams and has responsibility for client retention and satisfaction and the annual market check. 

Welcome, Zach. We’re happy to have you back as a repeat guest on the podcast. And to kick things off, maybe remind the audience a little bit about yourself and your background. 

 Zach Hostetler (1:40) 

Thanks, Mike. It’s good to be back. It’s been a couple of years. I was starting to worry that my last one must not have been rated very highly if I wasn’t getting invited back on. But yeah, Zach Hostetler, been with the company for just over 10 years now, started out right in law school as the legal intern, worked on the legal team for a few years, handled some of our internal HR functions at that time and then had an opportunity to start working with our client solutions team or our account management team and work more closely with our clients and some of the consultants that they work with. And then most recently had an opportunity to start overseeing some of the other client facing activities, as Mike mentioned, the clinical team and our annual market check. 

Mike Stull (2:32)   

Excellent. Well, happy to have you with us. One of the big topics for this episode is rebate credits. And we know with the distribution of first quarter rebates, rebate credit is probably going to be a question that most consultants and clients have in terms of understanding their rebate payments. So, maybe to start off at a high level, what is a rebate credit and why does it exist? 

Zach Hostetler (3:09) 

So, I’ll start by answering, I’ll flip the order of those. So, rebate credits exist as a result of the American Rescue Plan Act that part of it went into effect on 1/1 of this year. 

So, what that did is it impacted the rebates that the federal government can get via Medicaid. And it eliminated a cap that previously existed on those rebates for certain drugs that experience high inflation. So, the components of the rebates that are paid for Medicaid dispensed drugs are a percentage of the average manufacturer price. And there was an inflationary component. So, prior to the start of this year, that rebate was capped at 100% of that average manufacturer price. After 1/1, the inflationary component was no longer capped and pharmaceutical manufacturers could actually be forced to pay more in rebates than what they were actually charging for the drug.  

So that’s where the term AMCAP comes from. So, if you’ve heard people talk about AMCAP products or AMCAP insulins, that’s what they’re referring to. It’s that average manufacturer price cap that previously existed. 

So, what is a rebate credit? A rebate credit is a mechanism for the PBM to prefer lower list price drugs that were impacted by the American Rescue Plan, but still avoid adjusting the rebate guarantees despite receiving lower collections for rebates on those drugs. So, it sounds like it’s being marketed as more of a positive thing because everybody likes getting credit for something. But in reality, it’s going to be the PBM giving itself credit for rebates that it would have otherwise underwritten into the value of the deal but did not want to adjust rebate guarantees. 

So, they will just adjust the rebate paid based on the rebate credit and how it’s defined in the individual contract.  

Mike Stull (5:31) 

 Yeah, that’s a good explanation. So, as it relates to the average manufacturer price credits, it sounds like there were manufacturers who had drugs that had been around for a long time and had taken a lot of price increases over the years where they had capped out. 

So, they were basically selling drugs to Medicaid for zero. And the removal of the cap would have actually forced them to pay Medicaid to dispense their medications. And so, they had a choice, which was, do you pay Medicaid hundreds of millions of dollars to dispense your drugs, or do you lower the price? And it seemed like a pretty easy answer, which was just lower the price. So, I think the last part of what you said about calculating rebate credits gets into more of the details. How are PBMs calculating rebate credit? 

Zach Hosteler (6:51)  

So, before I answer that, I do want to go back because some of the things that I’ve read recently are speculating that pharma is actually making more on the drugs now through this change and how they’re pricing the drugs than what they even were before at the higher cost. So just a little conspiracy theory for you. And then I’ll now talk about how it’s- Yeah. 

Mike Stull (7:14)

Well, it was always funny to read. People say, oh, pharma in their benevolence is lowering drug prices, or all the political pressure has finally made pharma awaken to the struggles of the everyday person and they’ve lowered drug prices. And we know that this was a financial decision first and foremost.  

Zach Hostelter (7:42) 

Absolutely. So, with respect to how the rebate credit is calculated, as I alluded to previously, it really comes down to how an individual contract defines rebate credit. 

So, the PBM that you’re working with is really only limited by the language that’s in the contract that dictates what can be counted, how it can be counted and the process to determine whether a claim is rebate credit eligible. So, what I see most is kind of a two-component aspect. So, there’s one, which claims are eligible for rebate credit. 

So, whether it’s a biosimilar, whether it’s a product that’s impacted by this AMCAP or new drugs that are coming out with a reduced WAC, all of those can be part of that. But then it really comes down to kind of a lesser of logic in the contract. So, the difference in the WAC price or the wholesale acquisition cost, pre and post list price reduction, or the difference in the rebates that the PBM actually receives. 

So, with respect to the first part, that’s something that’s pretty easy to calculate. It’s easy to look back and see what the WAC price was on January 31st of 2023, and then compare that to the WAC price on the date that it’s dispensed. And that’ll give you what that value is. 

That’s in most instances going to be the larger amount or kind of the ceiling of what it could possibly be. And then the lower amount is more likely going to be the difference in the rebates that are received by the PBM. That part is the part that we really don’t have direct insight to. So, what we’re able to do is look and ensure that the amount is lower than that WAC price difference and ensure that it’s accurate based on that. And we can talk a little bit later more about what Employers Health is doing to validate it. But at the highest level, that’s how it’s being calculated today. 

Mike Stull (10:00)  

Thanks for that explanation. And I think for those out there, you know, you might have to listen to that a couple times. I know that for me, I have to read it multiple times.  

And it seems that every time someone asks me a question about rebate credit, I have to go back and reread what I’ve seen both in our contracts and in other ones out in the marketplace. So, rebate credit, we’ve laid out what it is and how it’s calculated. I guess we want to move into when does it apply. So, are there formularies that exist that do not have rebate credit?  

Zach Hostetler (10:52) 

Sort of, yes. On the CVS side, in particular, CVS rolled out late last summer its choice formulary, which was designed to keep rebate values high and prefer higher list price drugs in order to still achieve those same rebate values and not have a rebate credit implicated. So, the reason I say sort of is there’s always the potential that rebate credit could impact one of those formularies. 

So right now, it should not. So if you’re in the choice formulary today, you will not see any rebate credits right now. The reason I’m hesitating and saying, oh, you’ll never see a rebate credit in that formulary is because there’s the potential that maybe a future inhaler reduces its WAC price and maybe there’s not an alternative for it. 

So, CVS doesn’t have the ability to shift to a higher cost inhaler that will allow it to keep those same rebate values. So, it’s possible, but probably not probable that you could see rebate credit on that. So, for the most part, there is one overall not very highly utilized within our book of business. Right now, I want to say of our 300 or so clients in the CVS program, I think we have like six maybe that are utilizing that. So not very highly adopted at the current time.  

Mike Stull (12:46) 

Yeah you’ve led into the next topic kind of inferred. Should we expect to see rebate credits in 2025 and beyond?  

Zach Hostetler (12:48) 

Absolutely. It’s something that will definitely continue in 2025. I think that it’s still so new. I mean, the end of this month, so it’s June 13th right now. And at the end of this month will be the first rebate payment that we’re issuing to our clients that have rebate credit. 

So, this will be the first exposure to what that actually looks like on an individual payment perspective. So, I think that a lot of people are still wrapping their heads around it. Consultants are still figuring out how to model it and which way clients and the market generally wants to see this or not see this moving forward. 

So, there’s a lot of different perspectives on it currently. And I think that as time goes forward, we’ll probably see more alignment, but the short answer is yes. We’ll continue to see them in 2025.  

Mike Stull (13:53) 

Yeah, certainly. I find rebate credit, the mechanism allows, particularly the large PBMs, but really all PBMs that have rebate guarantees out in the marketplace over a period of three years and want to adopt biosimilars, for example, into their formulary, it gives them a mechanism to do that. 

And so, I’ve seen some negative press about rebate credits and how it’s just another scheme by the big three PBMs. And as someone helping to manage plans, I couldn’t disagree more with that sentiment because it has allowed us, particularly in the case of our CVS arrangement, to get to the biosimilar much more quickly than we otherwise would have without going in and re-contracting for 350 of our clients. And obviously across CVS or any of the other large PBMs, the administrative lift of going in and re-contracting would have been absolutely enormous. 

So, I think that rebate credits have so far at least taken us in a direction that we want to go and the devil’s always in the details. And we’ll see how this all plays out on the back end. But so far, so good. 

One question that folks do have when you start digging into the numbers is you’re taking a lower price on the front end, you’re getting the rebate credit on the back end or less rebates on the back end. So, at the end of the day, is it just a wash? Meaning again, that what you pay up front or what the lesser amount that you pay up front is taken away in rebates. So net net, you’re at zero. 

Zach Hostetler (16:14) 

It’s possible. That’s kind of a worst-case scenario though. So, as I described the calculation earlier, it’s either the list price reduction is kind of the worst-case scenario, or it’s the amount of rebates actually received, which is going to be in most instances a lower amount. 

So realistically our groups should see an improvement by contracting this way versus the higher list price and the higher rebates that they were receiving before. And you mentioned some of the feedback from the market on rebate credits. And it was interesting last year when we made the decision to go forward with rebate credits for all, a lot of questions came as a result of that decision and a lot of conversations occurred. 

And we had to explain ourselves of why we chose to go that route versus the other option of like a rebate decrement that would apply uniformly across the book of business. And the idea was that doing the rebate credit applies the value on an individual group basis versus underwriting a decrement across the entire book of business. 

And then you’re going to have some winners and some losers in that scenario where you’re still experiencing the same decrement, but perhaps you don’t have very much utilization of these impacted products. So, you’re just losing in that situation. Now, if you see a higher credit, it’s because you achieved more savings on the front end. So, across the board, this is the better way to do this for our groups. 

I reached out to our rebate team just this morning to get an update on what the amount actually looks like for the book of business. And it varies some, again, based on how much utilization an individual group has of these products. But realistically, upwards of 5%. And I think like a book of business average of just south of 4% is kind of what we’re seeing. So again, those are averages. So, some are going to be higher, some are going to be lower, but that’s what we’re seeing. And it really wasn’t that far off of what some of our early projections looked like for that.  

Mike Stull (18:53) 

So, when we talk about our projections, and we talked a little bit about the administrative task of reconciling all this on the back end, how is Employers Health looking to validate that the values of rebate credits is appropriate?  

Zach Hosteler (19:12) 

So, in advance of a rebate payment, we are watching on a monthly basis, the amount of claims that are coming through for these rebate eligible claims. And determining the wholesale acquisition cost difference based on the 12/31 price, and then the price on the day that the drug was dispensed. 

And that’s once again, giving us our ceiling. So, the maximum amount that the PBM is able to take in rebate credit for that claim. And then when we actually receive the rebate payment and receive the credit that the PBM wants to take for that subset of claims, we’re able to compare the numbers and ensure that it’s not higher than that amount. 

So, while that only gets us close, that’s the best that we can do on a quarterly, monthly basis throughout the year. We determined last year as a result of the new rebate credit dynamic, that it will now become necessary to start doing an annual rebate audit. We have done rebate audits in the past, but a little bit sporadically just to ensure that the contract is continuing to perform as it’s expected to. 

Now that will be an integral part to our annual audit, the same way we do the claims audit on an annual basis. We’ll be doing a rebate audit as well that will include the rebate credit component so that we are ensuring on the front end that it’s not more than what it possibly should be. And then on the back end, that it’s actually in line with the contracted rates and that the PBM is not taking more in rebate credit than what it’s receiving in rebates. 

Mike Stull (21:11) 

Excellent. So, I think we’ve covered all the key topics that we wanted to inform our audience about on the topic of rebate credit. Zach, anything else that we left out?  

Zach Hostetler (21:28) 

I guess I would just mention that this first wave is all related to the insolence. So, we’re about to pay some Q1 rebates and that’s all related to the reduced price of insulin products. CVS on April 1st started to prefer the biosimilar for Humira. So later on this year, we’ll see the first impact of that and I’m sure that one will get folks excited. 

Mike Stull (22:00) 

Absolutely. Yeah, it’ll be much bigger impact and I think it’ll get some people in some deals, not employer self-deals, but other deals out in the marketplace really excited because we’ve seen contractual language where the PBM excludes biosimilars from the rebate guarantee or excludes new-to-market drugs from the rebate guarantee, which the biosimilars are considered new-to-market in almost every PBM that I’ve seen. So, when you exclude those claims from the rebate guarantee, it really blows up the math in terms of you don’t count them in the rebate guarantee, but you do take rebate credit on them. 

It really has a big impact in the amount of rebate dollars that you’re going to get. And I would say that most consultants and most clients were not expecting that to occur when they originally penned those deals and budgeted for rebates. So, we’ll see if that prediction comes true, but it’s looking pretty likely that that’s going to happen And so we’ll see what the response is.  

All right. Thank you, Zach. Always great to hear from you. We’ll try to make the next episode in a more timely manner and have you back again. So thank you.  

Zach Hostetler (23:39) 

Thanks for having me. 

Mike Stull (23:41) 

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