International Reference Pricing: What About Part D Plan Sponsors?

Over the past two days, I have written about the potential impact of international reference pricing on manufacturers. Today I wanted to look at the potential impact on Part D plan sponsors. The Part D benefit is administered by private plan sponsors (for brevity’s sake, “plan sponsors” will include both the sponsors and their pharmacy benefit managers or PBMs), following guidelines established by the federal government. Plan sponsors compete against one another on a variety of metrics: cost (premiums and cost-sharing), breadth of coverage, pharmacy networks, and customer service, among others. Medicare subsidizes beneficiaries’ monthly premiums (approximately 75%) and offers reinsurance for high-cost drugs or higher-than-expected overall spending. For more details on how the Part D program works, see this explainer from the Medicare Payment Advisory Commission, or MedPAC.

The benefit, which has been operational since 2006, has generally been considered a success. Program costs have remained below projections (though some of that is because fewer beneficiaries have signed up for the voluntary benefit than expected). Beneficiaries are generally happy. Participation among plan sponsors remains robust, an indication that the companies find this a worthwhile venture (read: profitable, or at least worth the risk).

Why would the Trump Administration risk including the program in the international reference pricing Executive Order (EO)? After all, Part D hinges mostly on the willingness of private plan sponsors to participate in the program itself. Manufacturer concerns are almost secondary if there is no one willing to administer (and take on the risk of administering) the program.

What does a plan sponsor (and their contracted pharmacy benefit manager, or PBM) stand to gain or lose under a theoretical world where the price of drugs is set not necessarily by the sponsor but by the government? The big risk would be potential loss of rebates, the mysterious agreements between manufacturers and PBMs where manufacturers are willing to trade price (rebates) for volume (preferential formulary placement) (see this 2019 report from the Government Accountability Office for more information on rebates in Part D). According to the PBMs, the vast majority (99%) of these dollars are passed through to plan sponsors, who then use the money to lower premiums and overall cost-sharing.

Let’s game this out: say in today’s world, a PBM has negotiated a 25% rebate on a drug with a wholesale acquisition cost (WAC) of $1,000. For simplicity’s sake, we will assume this is a particularly generous PBM that passes through 100% of the rebate ($250) to the plan sponsor, bringing the net cost of the drug down to $750. The plan sponsor spends $750 on the drug and uses the $250 towards making their premiums more competitive and gaining market share in their respective prescription drug plan (PDP) regions.

Now let’s say the international reference price has come into effect. Once that is taken into account, the $1,000 drug’s cost is now $700. Because of this, the manufacturer is not willing to negotiate additional rebates with the PBM. The net cost to the plan sponsor is $700 – a savings of $50! Except the plan sponsor also loses out on the rebate revenue. In exchange for a modest (6.6%) reduction in net cost, the plan sponsor loses out on $250 (33%) in rebate revenue. Is the reduction in overall spending enough to finance the lower premiums that the rebates were carrying previously?

But maybe I am in the pocket of BIG PHARMA you say! I probably picked an example that conveniently proved my point. I mean, maybe the international reference price would be way lower – say $500! In that case, the plan sponsor’s overall costs drop from $750 to $500, wiping out the loss in rebate revenue and making everyone happy (except for manufacturers…)!

The problem is, I don’t know, and neither do you (unless you work in contracting for a manufacturer or PBM). We can calculate an international reference price relatively easy. And it is easy to see what Medicare pays for drugs under Part B, because those prices are public. But we don’t have insight into the rebates that PBMs negotiate today, so we don’t know how much better foreign countries are at negotiating than the PBMs. And truth be told, the PBMs would probably be fine taking advantage of situations in which the international reference price beat their negotiations.

But the whole thing only works when the savings generated outweigh the loss in rebate revenue. Otherwise, premiums go up, or cost-sharing gets more expensive, or coverage gets less generous. It only makes sense when you presume that the international prices are significantly lower than whatever rebates the PBMs are negotiating today. And I’m not convinced that’s the case across the board.

So I think there is a potential upside from a Medicare spending point-of-view to implement international reference pricing in Part B: we can clearly see the differences in U.S. and ex-U.S. prices, all other things holding constant (such as manufacturer pricing decisions and their approach to negotiations with ex-U.S. countries). It’s not as clear to me that there is a potential to reduce costs for Part D by implementing international reference pricing, and there is a risk that you lose plan sponsors or otherwise undermine the benefit as it stands today.