Featured Story March 27, 2008, AIS

If Generics Are Always a Cheaper Option, Why Do Some PBMs and Health Plans Push Brands?

Reprinted from DRUG BENEFIT NEWS, biweekly news, data and business strategies for health plans, PBMs and pharmaceutical companies.

By Neal Learner, Managing Editor, (nlearner@aispub.com)

It's a given in the pharmacy benefit world that generic drugs are the lowest-cost option, often pennies on the dollar of their branded counterparts. Yet some health plans and PBMs continue to favor brand drugs over generics based on the steep rebate agreements and other financial deals they forge with pharmaceutical manufacturers.

One community pharmacist, in fact, claims that he is seeing an increasing number of generic drugs being denied coverage based on the assertion that the brand versions are cheaper. And pharmacy benefit executives tell DBN that some industry players tacitly -— if not overtly — push brands as a means to get rebates.

"There are some branded drugs out there that make it difficult to consider the generic before a brand," Jake Cedergreen, senior director of market intelligence at Express Scripts, Inc., told an AIS audioconference on drug-mix strategies last month.

"These rebates create conflicting incentives, which are difficult to ignore, especially when consultants and employers emphasize rebates as a competitive price point," he said. "While it's important to negotiate the best rebates possible, it's not necessarily good to have the highest rebates. Because even the net costs of brands with the highest rebates don't even compare to the low costs of most generic alternatives."

The temptation to align Rx utilization incentives around brand manufacturer rebates and other pricing strategies could intensify this year as roughly $12 billion worth of brand drugs are set to go generic.

Brand manufacturers in the past have offered steep pricing discounts in an attempt to maintain market share in the face of generic competition, especially in the first six months following a generic launch when generic prices are only slightly below the price of the brand. Alternative brands in the same therapeutic category, meanwhile, may see an opportunity to pick up some market share of their own by offering too-good-to-ignore rebates when a competing product goes generic.

Observers say health plans could see a repeat of what happened when Merck & Co.'s $4.4 billion per year cholesterol buster Zocor (simvastatin) went generic in June 2006. Merck cut deals with several health plans, including UnitedHealth Group and WellPoint, Inc., to offer Zocor at prices below the generics, a move that health plan executives acknowledged complicated their message about the value of using generic drugs.

Under the arrangement, for example, WellPoint, Inc. offered generic Zocor through its mail-order pharmacy at a generic copayment. UnitedHealth placed Zocor on its cheapest formulary tier, while generic simvastatin was placed on the third, most expensive tier. At that time, Timothy Heady, CEO of UnitedHealth Pharmaceutical Solutions, said UnitedHealth would consider moves similar to its arrangement with Merck in the future, if the branded drug could be made available more cheaply than the generic version.

"Our view is that we don't think that our customers should ever pay a premium for a generic," he told DBN sister publication Health Plan Week. "When a generic hits the right price point and it's truly achieving health care savings, then we will treat it like a generic," Heady added.

One drug class that could face a similar situation is the proton pump inhibitor category, a competitive class with many therapeutic alternatives, says Cedergreen. "That's where rebates get very competitive," he tells DBN. "There are a lot of different drugs, and different manufacturers that are employing different pricing strategies."

Generic Pricing Initially Can Be High

During the six-month period following the launch of a generic — when only one or two generic manufacturers have exclusive marketing rights — the price of the generic usually is only slightly less than that of the brand. Health plans may find themselves in a revenue-losing situation in which their members have a $5 copayment for the costly generic, whereas the members would normally pay $40 on the brand.

"It's going to create an upside-down situation for the client to actually push them to the generic," says Cedergreen. "That's a very, very short-term focus from a plan sponsor and PBM perspective. What we should be focusing on is long term. We know that after six months, we've got those patients on that generic medication [and] that price is going to plummet, and we're going to be positioned better for the future."

Indeed, when multiple generic manufacturers entered the simvastatin market after the six-month exclusivity period expired, the price of simvastatin dropped significantly. WellPoint, UnitedHealth and other health plans now cover simvastatin on the least expensive tier and have placed brand Zocor on the most expensive one.

But brand Zocor, along with several other brand drugs, remains the first coverage option under the South Carolina Medicaid program, according to pharmacist David Shirley, Pharm.D., pharmacy manager of an independent drugstore in Charleston, S.C. Shirley says he is baffled by this decision. Today, a 90-tablet bottle of 10-mg brand Zocor costs $240.97 on drugstore.com, while the same bottle of simvastatin costs $49.97.

Shirley recalls calling a South Carolina Medicaid official asking about the state's pricing policy. "I asked, 'Why on earth are you covering the brand-name product over the generic when it is so much cheaper.' And he basically said, 'The company has given us a huge rebate; it's saving the taxpayers money.' My question is, if they're able to discount it so much, why aren't they passing that on to the wholesalers and independent pharmacies or chain pharmacies? It seems ridiculous that you can undercut it that much."

Brand discounts, in fact, are generating more and more prior authorizations on generic products, claims Shirley. Health plans and PBMs say they haven't come across generic prior authorizations in the commercial marketplace, but they acknowledge the pressures to promote brands.

"As far as margin goes, there are many circumstances where a PBM will make more money on a brand than a generic," says Helen Sherman, Pharm.D., director of pharmacy services at RegenceRx, the PBM of The Regence Group, which operates Blue Cross and Blue Shield plans in the Northwest. "That's a different issue than going as far as putting a prior authorization on the generic to promote the brand."

Pressure to promote a particular brand is usually product specific, Sherman tells DBN. "On the for-profit side…there are always pressures and considerations on is it better to promote the generic or the brand. And there are pockets in the industry where the higher-cost brands are promoted over lower-cost generics." Sherman stresses that there are no instances in which Regence would promote a brand over a generic. But she acknowledges that theoretically it could make sense if a brand is found to have better efficacy or safety than does the generic.

Aligning Formulary, Pricing Incentives

Cedergreen also says he hasn't seen a lot of evidence that PBMs and health plans are directly preferring rebated brand drugs over generics. "But instead they don't always push to that lowest net cost," he adds. What they're usually pushing is the formulary brand as opposed to always pushing the generic first, he says, pointing out that Express Scripts always pushes generics first through its mandatory step-therapy programs.

There are two key things that PBM clients can do to make sure incentives are aligned to the lowest-cost drugs, Cedergreen says, and both of these should occur during the PBM evaluation process. The first thing is to make sure some form of lowest net-cost performance measure is included in the pricing evaluation. This usually translates to a generic fill rate (GFR) guarantee. "If you require a generic fill rate guarantee in the PBM bidding process, you can clearly evaluate the difference between PBM A, B and C, and how competitive they're going to be from a GFR" standpoint, he says.

The second is to require rebate guarantees to be based on a per-brand fill Rx standard, rather than on "total scripts," Cedergreen asserts.

"If I'm filling a drug, and am going to be moving from a brand drug to a generic drug, I know that I'm not going to have a rebate anymore," he says as an example. "But if I'm still liable to reimburse you a guarantee based on every Rx I fill, then all of a sudden I've got this conflicting incentive in front of me that says, 'If I don't continue to fill this formulary brand that's giving me this rebate, I've just created this hole to fill with other brand drugs to make that rebate guarantee possible.'"

By focusing instead on paying rebates based on per-brand prescriptions, "if I fill a generic, then I'm not liable for that rebate anymore," he says. "It elevates some of that conflict of interest from those rebates."