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Understanding Rebate Credit Values:  When a Rebate isn’t a Rebate

Two fairly significant changes took place over the past 12 months that created a shift in how pharmacy contracts and formularies should be evaluated by consultants.  The first was the reduction in insulin prices due to the American Rescue Plan Act of 2021.  The second was the patent expiration for Humira and the launch of biosimilars onto PBM formularies.  What binds these two changes is the fact that both the insulins impacted by the ARPA adjustments and the Humira claims had high list prices with high rebates attached.  As PBMs adjust to the decrease in list prices and the decrease in rebates associated with them, they face a dilemma.  PBMs have contractual guarantees set forth to meet particular per claim rebate guarantees in their contracts.  As the rebates from these two classes of medications disappear – they will be unable to meet their contractual obligations.  More challenging still, is that the PBMs are keenly aware that many consultants are evaluating their contracts based on guarantees and not giving any consideration to formulary adjustments.  To solve this dilemma, the PBMs created “Rebate Credit Values”.

What is a Rebate Credit Value

A rebate credit value is a way for a PBM to capture formulary value for switching from a high cost, high rebate drug to a low cost, low rebate drug.  It is financially accurate in evaluating net cost from a traditional repricing model.  For example, a PBM may offer a $3,500 per specialty claim rebate guarantee.  If that rebate guarantee allows for Rebate Credit Value – then the PBM will consider their financial obligation met if either of the following situations occur:

  1. A claim that is ineligible for rebate credit values is filled and the PBM pays a $3,500 rebate payment to the client or;
  2. A claim is filled that is not the originator product and the difference in the wholesale acquisition cost for the low-cost product vs. the originator brand product is $3,500.

Here’s a real life example.  CVS prefers Hyrimoz over Humira.  The WAC for a Humira claim is ~$6,645.  The WAC for  Hyrimoz claim is $1,248.  The difference of $5,397 is considered a rebate credit value.  The PBM will offset whatever contractual guarantee it has by $5,397 for every Hyrimoz claim that is filled.

What is Good About Rebate Credit Values

A rebate credit value is a creative way for a PBM to take credit for formulary value that they are creating without requiring as many complex calculations for the consulting community.  In reality, if every PBM included rebate credit values in their methodology – we may actually have a more realistic estimation of the combined value of pricing and formulary.

What is Not Good About Rebate Credit Values

First, it’s not like PBM’s are proactively discussing this with all of their clients.  Certainly these programs are disclosed to key partners but the onus for uncovering and accurately modeling these programs is largely left to the consulting community – which I dare say is largely ill-equipped to handle basic contract comparisons let alone complex ones.

Second, rebate credit values can work in a comparison only if all of the vendors are including rebate credit values in their contract.  Many are unfamiliar with the practice, particularly the smaller – boutique PBM’s.  

Finally, rebate credit values could create a distortion in client budgets.  That’s because in most analyses the amount allocated to rebates will be inaccurately large while the drug cost projections will be overstated.  Since we are giving formulary credit (drug cost impact) in a rebate column it will inaccurately overestimate a clients drug costs while also overstating a clients rebate projections.  

What Should Consultants Do About Rebate Credit Values?

I am of the opinion that consultants should request all of their bids be with or without rebate credit values.  Given that many PBM’s do not or cannot account for rebate credit values in their modeling – my personal preference is for all bids to be without rebate credit values.

One good thing to note is that we are starting to see even coalition contracts offer both a with and without – or wit or without for my Philadelphia friends.

In the interim – it’s imperative for budgeting purposes that consultants ask and know which of their contracts have rebate credit values so that they are accurately comparing offers when going to market.

In addition, not all rebate credit value programs are considered equal.  While I’ve highlighted Humira and insulins like Novolog and Humalog, some PBM’s will push the envelope and include as many multi-source generics as possible – expanding into the world of Lantus, Advair and other multi-source products.  This is all the more reason that the best practice for a consultant is to request all bids be without rebate credit values.

What If I Have to Entertain a Bid With A Rebate Credit Value?

In some instances you may be facing a client who does not want to make a change and a PBM that will not offer a contract without rebate credit values.  There are two different steps to consider:

  1. Constrain the Rebate Credit Values:  A consultant MUST have a specific list of drugs where rebate credit values will be offered.  As mentioned earlier – a PBM may start to expand this list to the point where it can almost become a retention of all rebates because they are taking credit for generic utilization.  This should be at a minimum constrained to insulins Novolog and/or Humalog and Humira.
  2. Run a Standard Analysis:  When you’ve constrained the PBM to the select medications you can run a normal comparison of rebates and drug costs.  
  3. Adjust to a Single Methodology:  Once you’ve run your analysis you need to adjust all of the offers to a “with” RCV adjustment.  For offers that were made without rebate credit values you should calculate the drug cost impact of their formulary.  Ringmaster can provide a table that can assist you with this.  If a PBM is preferring Yusimry, Hyrimoz, Adalimumab-Adaz, Amjevita or whichever alternative medication you should adjust your ingredient cost downwards to account for this shift.  For PBM’s that are using a rebate credit value you should make the same ingredient cost shift downwards however and an offsetting decrease in the rebate calculation should be made as well.

What Does The Future Hold?

With the impending patent expiration of Stelara, the challenges presented to consulting firms on how to account for and manage rebate credit values will likely only be expanded.  Collaborating with your PBM partners to understand how they are representing their rebate guarantees and what is included in them is going to be critical to managing your clients’ drug spend.  

Written by Jason Wenzke

President, Ringmaster Rx

Ringmaster Technologies