Episode Details

One of my mentors often said price is irrelevant. He said he would sell anything for any price as long as he could define the terms of the deal. During this conversation today with Scott Haas about PBMs, that quote was playing in my head like an earworm.

I'm henceforth gonna struggle with the term rebate to define dollars that the PBM gets back from Pharma, because, according to my guest in this healthcare podcast Scott Haas, it turns out "rebates" comprise only about 40% of those back-end dollars that some PBMs manage to score from pharma manufacturers. I don't have any insight really into this, but Scott Haas certainly does—and this is the average that he has seen in his work and that we're going to dig into today. But in sum … wow! Let me just repeat that a mere 40 cents on the dollar of the gross amount that PBMs take in "rebates" from Pharma these days winds up going back to plan sponsors, even plan sponsors who are getting "100% of the rebates."

If you didn't understand what I just said, no worries. I'm gonna explain it right now. If you did and you know the why behind all of this also, you could probably skip ahead about five minutes.

Here's the backstory on this whole rebate fandango. Let's start with part one of what is a two-part transaction.

So, part one: the deal between pharma manufacturers and PBMs. In general, a pharma manufacturer signs a deal with a PBM to give back whatever percentage of their gross sales revenue to the PBM at the end of the year, say. It's along the same lines as a cash-back coupon for the PBM.

Why would a pharma company be up for giving cash back like this? Well, to get on a PBM's formulary, giving cash back is like the price of admission. PBMs have a lot of leverage, after all—at least the big ones. They control access to millions and millions of patient lives. So, if Pharma wants their drug to be accessible to those millions and millions of lives, they have to play the cash-back game, otherwise known as the rebate game. They have to agree to give back to the PBM a certain amount of cash on the back end.

So, PBM pays Pharma's list price up front—that's the gross amount paid, based on the list price of the drug—and then after all the cash back gets toted up at the end of the year, there'll be a net price. List price or gross price minus the cash back equals net price. It's this net price that's the true kind of final price which the pharma company gets paid per script by said PBM at the end of the day.

These days, most everybody pretty much knows that PBMs are getting these so-called rebates—this cash back from pharma companies that I just explained. And it's pretty common knowledge the so-called gross-to-net bubble (the gross-to-net dollar amount) is pretty huge, meaning the rebate or cash-back amount is pretty huge. And many have also noticed that the gross-to-net dollar amounts seem to be growing bigger and bigger every year. I mean, for one insulin manufacturer, consider this: Their list price, their gross price, is $350 per script. And their net price after cash back/rebates was $52 this past year. Wait ... what? After all the cash back to the PBM, the insulin manufacturer got paid 86% less than their list price—$350 went down to $52 per prescription. The PBM vacuumed up 86% of the dough for every script written for this particular brand of insulin.

OK … so, say Pharma gives $100 back to the PBM based on the terms of their deal. Call that part one of this example transaction.

Here's part two: the deal between PBMs and health plans or self-insured employers. Health plans and self-insured employers are customers of the PBM. They hire PBMs to manage the pharmacy benefits for their members or employees.

So, because everybody knows this whole rebate thing is going on, as part