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CLSA in InsideHealthPolicy: CVS Rejects Pharma Notion That High Rebates Drive Price Hikes

By John Wilkerson | InsideHealthPolicy
August 10, 2018

CVS Health President and CEO Larry Merlo flatly rejected drug makers’ argument that they increase drug list prices to make up for the rebates they pay pharmacy benefit managers, telling investors that CVS data show list prices increase faster for drugs with small rebates than for those with substantial rebates.

“If list prices were the result of a manufacturer’s need to address rebates, then you would expect rebates and list prices to be highly correlated,” Merlo said on a CVS earnings call Wednesday (Aug. 8).

Merlo told investors it makes “intuitive sense” that list prices grow faster for drugs with lower rebates. “[T]he products with small rebates are more likely to be in uncompetitive drug classes, where there is less incentive for manufacturers to compete on price. Rebates are maximized only when there are therapeutically equivalent competitor products in a drug class. And it’s that dynamic that allows for formulary placement that drives lower costs,” he said.

The CVS president also discounted pharma’s view that PBMs are largely pocketing the rebates, saying rebates account for only 3 percent of CVS Health’s annual adjusted earnings per share.

“And while some have speculated that our retained rebates represent as much as $2 billion, the simple fact is that over the last number of years, we have positioned the Caremark model and its broader value proposition to the point where in 2018, we expect retained rebates to be about $300 million, or about 3% of our annual adjusted earnings per share,” he said.

Merlo credited competition among PBMs for the trend toward plans securing an increasing share of rebates that PBMs negotiate. “This is a good thing. It demonstrates that the market techniques used by PBMs do in fact work.”

However, others say PBMs are merely calling rebates by other names to make it look like a larger share of rebates are being returned to plans. Brett Johnson, California Life Sciences Association’s senior director of policy and regulatory affairs, said there might be good reason to rename rebates in contracts if those fees cover the administrative cost of formulas, but it is disingenuous to say PBMs are passing an increasing share of rebates back to plans just because they’re calling rebates something else.

Merlo said CVS also offers rebates at the point of sale as an alternative for all clients. This is particularly helpful for members in high-deductible plans, he said, adding that about 10 million of CVS’ commercial members choose the point-of-sale rebate option.

PBMs will still play a key role even if rebates go away, Merlo told investors who had the president’s drug-pricing blueprint on their minds. “And no matter what may happen to the ability to rebate, PBMs will still be needed to drive discounts and cost savings for their clients and members. And the PBM model will continue to evolve as a result.” — Donna Haseley (dhaseley@iwpnews.com)

John Wilkerson editor/reporter, Inside CMS www.InsideHealthPolicy.com 703-562-8789 desk 301-801-8543 mobile