Brands Over Generics: Some Formularies Break The Golden Rule

Consumers are feeling the brunt of the pricing war at the pharmacy because they are in the dark about the real price for medications. Adding to the already complex health care system are the pharmacy benefit managers (PBMs) working on insurers behalf to negotiate rebates and discounts.

Recently, the New York Times and ProPublica did a patient perspective article on insurer formularies that push patients toward high cost brand name drugs over less expensive generics. According to the article, pharmaceutical companies are trying to “squeeze the last profits from products that are facing cheaper generic competition” by cutting deals out of the public view, a practice that is happening more often. The article cited Zetia, Aggrenox, and Adderall XL as some examples of recent drugs that some insurers and PBMs have insisted patients forgo the generic for the brand name drug.

To look at the payer perspective, First Report Managed Care contacted industry stakeholders for their thoughts on this issue, potential ramifications if the practice continues, and solutions to reign in pharma pricing practices.

Why Is It Happening?

“The increasing trend of PBMs preferring a brand name drug when a generic is available is driven mainly by minimally competitive pricing in the generic market for some products. The trend when a generic becomes available was a drastic decrease in price within 6 to 12 months of the generic launch. Although this still happens quite often, there are a number of drugs that have not seen such a drastic drop,” S Russell Spjut, PharmD, formulary management pharmacist, MagellanRx Management said in an interview. He noted that this may be due to a high cost to manufacturer the product or limited competition in the number of generic manufacturers.

A pharmacist, who spoke with First Report Managed Care on the condition of anonymity, agreed that pharmaceutical companies are vying to hold on to market share by using rebates to promote brands in generic space for business reasons.

“Generally, this works for payers as long as the net cost of the brand is the same or lower than the generic,” he said. “And historically, it wouldn’t matter to the member as long as the brand was placed in the generic tier. However, benefits are changing/have changed with a move to higher deductibles, coinsurance, etc. Under these designs, the member has to pay more for the brand even though it might cost the payer less than the generic.”

Norm Smith, president, Viewpoint Consulting, Inc, said different tactics on the part the manufacturer may be responsible. He noted that sometimes this practice is the result of PBMs negotiating deals with drugmakers that bundle branded products with some of the drugmakers other products—resulting in a better net deal for the payer.

“First, prior to loss of exclusivity, [manufacturers] may have lowered the net price before it actually went off patent,” he said. “[Also, manufacturers] may have bundled the branded product with other products and given the payer a better overall deal.”

However, Art Shinn, PharmD, FASCP, president, Managed Pharmacy Consultants, LLC, said this practice has not been a prevalent issue with his clients, which include managed care organizations and self-insured employers. Instead, they are seeing an increase in generic utilization that he attributes to financial performance criteria embedded in his company’s contracts with PBMs.

CVS Caremark told First Report Managed Care that its practice is to optimize formularies in order to deliver the best outcomes with available generics.

“We are always focused on helping our clients manage the rising cost of drugs for the plan and their members, while also working to help improve health outcomes for patients,” Christine Cramer, a spokesperson for CVS Caremark, said when asked at about the PBM’s position on formulary development. “This includes our strategic formulary approach that optimizes the use of generics and clinically equivalent alternatives to branded drugs.”

However, she explained that are specific cases when generic drugs are not the lowest cost option for Medicare Part D members/patients.

“The price for the single source generic drug at launch is more comparable to the price of the brand drug until additional generic manufacturers enter the market,” she said. “In these specific situations, we offer our clients the option to maintain the brand drug on formulary either at its current tier or at a lower tier, and we do not add the generic to the formulary during the time when it is only offered by one source and the price is more comparable to the brand.”

The Rebate Game

Who benefits from the drug rebates? Are payers negotiating a better in-house PBM discount on the brand drug and not passing those savings on to their members buying the medications? In early days, PBMs (1985-2000) wanted to keep these rebated dollars, according to Mr Smith.

“As employers got wiser, they learned to push for a bigger share of the rebates, some push for 100% of rebated dollars minus an administrative fee,” he said. “That changed the business model for PBMs quite a bit, and led to a contraction of the PBM industry. Any savings are being passed onto the end payer, not the member.”

Dr Spjut countered that scrutiny given to this issue is driving practice change.

“The PBMs I have worked for have taken member cost into account whenever making the decision to prefer the brand name product to ensure that the member is realizing a similar discount on the drug as their plan,” he said, such as a manufacturer’s discount card. “This can end up in a win-win situation where the member continues to get the brand product they are used to taking at a cost similar to the generic product while their plan is saving money on the back end.”

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Consequences for Payers and Patients

Payers and patients face potential ramifications if the practice of preferring a brand name drug over its generic or biosimilar continues. Dr Spjut predicted this practice will continue in the near future, particularly in the biosimilar space where discounts have so far been underwhelming.

“The modest discounts seen on biosimilars has left plenty of opportunity for the brand name manufacturer to compete on price with rebates,” he said. “In order to minimize disruption, PBMs will continue to prefer the brand name product as long as the manufacturer’s discount makes financial sense, hopefully for both the plan and the member. I appreciate the attention this practice is receiving as it provides PBMs with the needed push to share the savings with the member when a brand name is preferred. I hope that this will provide incentive of generic and biosimilar products to offer more aggressive discounts earlier on in their release to provide the financial incentive to continue to prefer generics.”

A QuintilesIMS Institute report, Understanding the Drivers of Drug Expenditures in the US, recently demonstrated that the biosimilar impact is “expected to be highly variable and each molecule will present different challenges and opportunities to payers, providers, patients, originators, and biosimilar manufacturers.”

Solutions Needed

It is clear that solutions are needed to help reign pharma pricing practices. “The key to making it better for all stakeholders is transparency,” said Mr Smith.

“Payers could require value-based pricing—but it is difficult without a single payer system that is enforceable—and requires employers to accept closed formularies,” said the pharmacist who requested anonymity.

Dr Spjut noted that reigning in questionable pharma practices has been a challenge “as the end user [member] has been insulated from the price of the medication they are taking. As the user is insulated from the price of treatment, there has been a lack of incentive for the member to make cost-effective decisions. This has allowed some pharma companies to overprice their product and still have utilization.”

He added that he has been a strong supporter of the move to toward coinsurance instead of a fixed copay.

“If coinsurance is combined with solid formulary design and a large enough differential in the coinsurance between preferred and nonpreferred tiers, it helps members to choose the most cost-effective medications and avoid those drugs that have been priced too high compared to their alternatives,” he concluded.