3122_SafeHarborTale_Blog-1Howard Deutsch and Kyle Harpole co-wrote this blog post, which previously published on The Active Ingredient.

The U.S. Department of Health and Human Services has proposed a new rule for safe harbor protection of drug discounts, effective Jan. 1, 2020. While the rule hasn’t been finalized, it has received more than 25,000 public comments, indicating that the current rebate model likely will be swept out to sea in favor of a model that aims to more directly address beneficiaries’ concerns about rising out-of-pocket costs. The percentage of patients whose out-of-pocket spending exceeds $2,000 nearly doubled between 2011 and 2015. The proposed regulation focuses on curtailing these costs by establishing, among other things, point-of-sale discounts for beneficiaries. We recently wrote about how pharma can prepare for the shifting seas of a new access and reimbursement landscape. In this post, we’ll compare two common Medicare Part D, non-LIS patient populations, diabetes and rheumatoid arthritis, to demonstrate how individual patients’ payment contributions would change under the proposed regulation.

To illustrate the variances, we’ll track two fictitious patients (let’s call the diabetes patient Dan and the RA patient Ruby) as they move through different coverage phases throughout the year. To simplify our analysis, let’s assume that polypharmacy (the concurrent use of multiple medications) is not an issue for either patient, and that the prices and upfront discounts mirror what we might expect today for both therapy areas. As anticipated, the proposed regulation would significantly shift financial liability across patient, payer, manufacturer and Medicare for a given patient. Even more intriguing is how this shift differentially impacts the fictitious patients and the associated stakeholders, as seen in the figure below (here is the full list of assumptions).

 WITH COLON - Blog Medicare Safe Harbor Tale of Two Patients - Figure no assumptions (002)-1


For Dan and his diabetes medication, we see a clear decrease in his out-of-pocket costs, which is precisely the vision that HHS outlines in its proposed regulation. There’s also a shift in liability between manufacturers and payers, with pharma’s overall liability decreasing substantially. Payers likely will take notice and pressure manufacturers to provide additional discounts, leading to the potential lowering of net prices. With lower out-of-pocket costs, Dan is more likely to adhere to his medication, which will benefit his health. Medicare may see no direct financial benefit from the policy change for Dan, but his improved adherence will likely reduce the risk of an expensive hospitalization.

What about Ruby? Because her specialty medication is significantly more expensive than Dan’s diabetes medication, the dynamics are entirely different. In therapy areas like RA, payers have substantially benefited from WAC-based manufacturer rebates that offset the high cost of these drugs in the initial coverage phase before the relatively quick transition through the doughnut hole and into the catastrophic coverage phase. Given the rapid churn of patients into catastrophic coverage, overall Medicare spending has been substantial for such specialty therapies. The proposed regulation now shifts some of this burden back to payers. However, in contrast to the previous example, the impact to pharma is net neutral, so payers will have difficulty seeking an increase in point-of-sale discounts to offset their added costs. They may try to extract additional value from their pharmacy contracts or potentially raise patient premiums. The latter would, of course, offset the intended financial benefits to patients. To potentially prevent such a move, CMS recently discussed its plans to impose a voluntary, two-year risk-sharing demonstration that would allow the government to bear or retain 95% of any unforeseen losses or gains beyond the first 0.5% due to the changes in the proposed regulation. Payers surely will explore this option and others to avoid increased financial liability.

Meanwhile, Ruby will spend less on her medication, but only about 10% less. Dan, in contrast, will save almost 30% on his lower-priced diabetes medication. However, the savings from a dollar perspective are quite similar (Dan saves $260 annually while Ruby saves $360), but it’s curious that Ruby sees only $100 more in savings for a drug that’s priced more than seven times higher than Dan’s. This isn’t just a function of different point-of-sale discounts being passed to patients (50% vs. 20% for diabetes and RA, respectively). When beneficiaries receive discounts upfront that lower their out-of-pocket expenses, it takes them longer to qualify for catastrophic coverage. It also widens the coverage gap period and hampers patient savings even when discounts are passed through to the beneficiary at the point of sale. At the same time, the shifting financial liability of who “foots the bill” will be highly disruptive to stakeholders in the value chain.

While our analysis presents an interesting observation with real-world implications, the reality of the impact will be much more complex. Regardless, it’s clear that the proposed change to safe harbor protection won’t affect all patients equivalently. For those on lower cost therapies, the shift of the financial burden from pharma to payers almost certainly will be offset by a demand for higher point-of-sale discounts in exchange for access. For higher-cost therapies, payers may struggle to extract the additional value from manufacturers as they seek to remain cost-neutral and will experience a level of net price transparency not previously seen. These dynamics will lead to notable changes in how payers manage certain therapy areas. They can no longer rely on the safety net of “old-world rebates” to drive down costs. Pharma companies, in turn, should explore how the economics of their products will change. While net price discounts will more directly benefit patients, the world of “discounting for access” won’t go away, and where pharma reaps the benefits of the proposed regulation, payers may insist that they share the wealth.

Ultimately, patients should be the key beneficiaries of the proposed rule. While point-of-sale discounts do decrease beneficiary drug spending due to the nuances of the Part D coverage structure, they will generally provide a larger percentage of savings for Part D beneficiaries with lower overall drug spending. At the same time, it’s difficult to predict how the players in the pharmaceutical value chain will respond. When finalized, the proposed regulation certainly will make waves, which means that all stakeholders in the value chain should prepare for the inevitable net impact of a brave, new world without “old-world rebates.”


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Topics: regulations, pharma drug pricing, Medicare drug price proposal, drug rebates, safe harbor protection, point of sale discounts