December 12, 2018

Monitoring authorized alternatives in the PBM market

Specialty drugs may account for up to 40% of employer spend by 2020. Will authorized alternatives disrupt the trend?

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Specialty drugs, including those that treat conditions such as cancer and multiple sclerosis, account for a growing portion of employer benefit spend each year. Ongoing management requires expertise in both clinical outcomes and financial optimization: some experts predict that specialty drugs will account for approximately 40 percent of a health plan’s drug spend by 2020.

That’s why the introduction of chemically equivalent, less expensive drugs by manufacturers is attracting attention. These authorized alternatives are interchangeable with their brand-name counterparts, but can carry up to a 60 percent lower list price.

Employers and consultants can stay current on how the introduction of authorized alternatives will affect drug pricing and PBM contracts with insight from Healthgram’s vice president of pharmacy benefits Bryan Klazinga:


Three ways manufacturers reduce prices for “authorized alternatives”

Typically, manufacturers offer rebates to the PBM to drive utilization of specific drugs. In place of offering rebates on these alternative drugs, manufacturers are reducing the price of the name-brand specialty drugs in three ways:

  • The first is simply reducing the price of the drug using the same national drug codes and brand name. One example: Merck recently reduced the list price of hepatitis C therapy Zepatier by 60%.
  • The second is adding different national codes with the same brand name, allowing manufacturers to distinguish between prescriptions filled with the rebate-eligible brand versus the non-rebate-eligible brand.
  • The third method, employed by Gilead for their Hep-C medications, is the introduction of the lower priced medication under a new brand name.


Employer and consumer impact

The introduction of authorized alternatives is an encouraging step towards making drugs more affordable and bringing clarity to an obscure system. However, self-funded employers and consultants should continue to monitor developments and ensure their PBM protects their pharmacy benefit investment.

Manufacturers deploying the first method of simply reducing drug price using the same national drug codes and brand name offer the most promise. It’s a straight forward approach where everyone benefits: the plan sponsor has a lower price at the point of service and does not have to wait six to nine months for a rebate. The patient on a high deductible plan will also benefit through lower out-of-pocket costs.

The second and third methods raise a number of concerns.  If the PBM includes these medications on their formulary, what will happen to the rebate guarantee for all other drugs? An employer may not have any authorized alternative filled, yet see a lower rebate check.

Copay assistance is another consideration: if it’s removed, members may see significant out-of-pocket cost increases with the authorized alternative.


Considerations moving forward

Rebates are a significant consideration in current PBM contracts, and making changes to these arrangements to accommodate a small number of products that may or may not be filled can leave employers with more questions than answers.

As manufacturers begin to introduce authorized alternatives, employers should encourage their PBM to lobby manufacturers to lower the cost of their existing specialty medication drug codes by either eliminating or drastically reducing rebates. If your PBM wants you to include authorized alternatives on your formulary, understand the impact to your members and require complete disclosure of the financial impact for their business and for the PBM, specifically regarding rebates guarantees.

Careful oversight can ensure the introduction of these drugs remains a positive step forward in reducing unnecessary employer spending.


For more best practices for employers, view recent insights or contact our team directly.