Co-written by Catherine Trentini, Senior Consultant, Pricing, Contracting & Market Access
As the healthcare industry is in a state of rapid change, the pharmaceutical supply chain and how consumers receive prescription drugs, is also facing pressure to evolve. With proposed rules, such as Safe Harbor, the supply chain is finding the need for new distribution channels. The relationship between manufacturers and Pharmacy Benefit Managers (PBMs) in negotiating steep discounts through rebates and prescription drug list price can increase out-of-pocket costs for consumers. Therefore, the supply chain adds to this additional cost to consumers.
RETAIL DRUG PRICE INCREASE
Since 2006, there have been substantial increases in drug prices resulting in additional costs to insurance companies and consumers. A 2018 Rx Price Watch Report from AARP found that the “average annual retail prices for brand name prescriptions increased by double-digit percentages every year from 2012 through 2016.”1 These increases effect the consumer’s ability to maintain adherences to prescription drugs, specifically, with brand name (high-cost) drugs that don’t have a generic alternative readily available.
Additionally, the Kaiser Family Foundation posted a report in February 2019, on trends on drug costs which concluded that “most people taking Rx drugs say they can afford their treatment, but about 1 in 4 have a difficult time affording their medicine.”2 The reality surrounding the controversial increase on drug prices leaves the consumer hanging in the balance waiting for a saving grace.
PHARMACEUTICAL SUPPLY CHAIN
The graphic below shows the pharmaceutical supply chain. It displays the high-level flow of relationships between pharmaceutical manufacturers, distributors, pharmacies, PBMs, and insurance companies. There is another communication channel involved that is often overlooked and integrated in the interactions between the consumer, pharmacy and PBM; an entity known as the switch operator, switch vendor, or clearinghouse.
SWITCH OPERATOR’S ROLE
The switch operator’s role affects the interactions between manufacturers, PBMs, pharmacies, insurance companies and the consumer/beneficiary. A switch operator is a third-party software vendor used by pharmacists to transmit claims from the pharmacy to the PBMs (further communicated to the insurance companies).
The two largest switch operators in the United States merged in 2019. RelayHealth and Change Healthcare are now solely referred to as Change Healthcare. Other notable switch operators are eRx Network, FDS Inc., Net-Rx, and Omnisys. The unique additional services, offers, and fees defines the separation from one switch operator to the next. Depending on the pharmacy’s size, accessible resources, and level of engagement; the pharmacy can choose switch operator that best suits their needs.
Switch operators make a profit by charging the pharmacy 5 to 7 cents per claim transaction, or (not as common) a monthly flat rate fee. Further Fees are added if the pharmacy wants to participate in additional services, such as (but not limited to):
- Improve claim submission workflow
- Copay assistance programs (manufacturer coupons)
- Monitor claims to prevent audits
- Automating new prescriptions and refill requests/responses
- Data solutions for retail pharmacy operation, 340B management, remittance reconciliation, compounding, specialty, pharma, plus custom reporting and analytics
- Determine eligibility for Medicare and Medicaid programs
- Reduce denials and maximize reimbursement
Pharmaceutical manufacturers created electronic coupons for drugs, specifically targeting brand name drugs, to offset high-costs and influence the consumer on their purchasing decisions. Manufacturers further collaborated with switch operators to create vouchers, copay coupons, and various payment programs designed to benefit the consumer.
Manufacturer coupons vary in availability depending on factors such as market price, competing generic at the point of purchase, and performance of their drugs. Consumers can obtain coupons from websites or apps such as GoodRx, WellRx, NeedyMeds, Help.Rx, etc. Coupons can conveniently be directly applied during claims or beneficiary information transmission by the switch operator.
DRUG DISPENSING LIFECYCLE
The copay coupon process targets the pharmaceutical drug during the dispensing lifecycle. The switch operator’s involvement begins when the pharmacy receives the request to fill a prescription.
Before the prescription is filled, (1) the pharmacist enters the beneficiary’s information into their system, which the switch operator sends to identify the appropriate PBM. The PBM receives the information from the switch operator and (2) sends data back through the same channel outlining the beneficiary’s detailed plan coverage (including copay or coinsurance requirement) for a prescription. (3) The pharmacist fills the prescription and informs the consumer of the copay, (4) which the consumer pays. When the transaction is complete, (5) the pharmacist sends the information to inform the PBM that the consumer completed the transaction for the out-of-pocket expense through the switch operator.
MANUFACTURER COUPON LIFECYCLE
The electronic coupon acknowledges when (2) the PBM sends the information to the switch operator that a branded drug results in a higher copay than its’ generic. When the beneficiary’s information is sent back to the pharmacist, (3) the systems flags the branded copay, triggering a message that there is a copay coupon which the beneficiary can use at their discretion.
If a beneficiary’s health plan identifies a branded drug to have a $100 copay, and the generic is $15, the copay coupon triggers and applies the value of $85, reducing the cost of the branded drug copay to $15. This process allows the branded drug to come into competition with the generics’ lower cost copay.
Manufacturers take advantage of the switch operator’s involvement by using their channel to stimulate their payment assistance programs. If the price of the branded drug is the same as that of a generic, the consumer is more inclined to purchase the brand drug based on marketing exposure and inclination that the branded drug performs better than the generic.
In October 2016, a paper published by the National Bureau of Economic Research and based on IMS Health (now IQVIA) data from 2007 and 2010 that focuses on the affect copay coupons have on utilization of generic drugs. It found that “coupons increase branded sales by +60%.”3 It also proved an estimation “that coupons increase total spending by $30 to $120 million per drug, or $700 million to $2.7 billion.”3 Based on the statistics, it is apparent that copay coupons influence consumers purchase decisions when a brand name drug has a comparable copay cost to that of a generic.
SWITCH OPERATORS’ BENEFIT
Since there are a series of switch operators available that a pharmacy can choose, it can make it difficult for the pharmacy to select one over the other. However, the agreement of payment programs between switch operators and manufacturers can give a specific switch operator a competitive advantage. With unique payment programs, the pharmacy has the ability to attract more consumers thus the pharmacy is more inclined to purchase that switch operator’s services.
CONSUMER, BENEFICIARY IMPACT
When using coupons, it’s a short-term financial benefit to the consumer. Copay coupons are beneficial for consumers when there aren’t any generic options available. However, information shows that copay coupons can increase healthcare spending when consumers willingly choose the brand name drug over the insured and available generic drug. Eventually, the insurance companies pass the extra costs on as high premiums, which affect employers and enrollees. Therefore, brand name drug costs make their way to the consumer as incremental increases with or without knowledge that it correlates to their brand name drug spending over generics.
PBM, INSURANCE COMPANIES IMPACT
The controversial role in which switch operator’s play is that the PBM isn’t always informed that a copay coupon was applied when dispensing the drug. This is often due to the communication channel of the switch operator from the PBM to pharmacy triggering the notification to apply a coupon after the PBM sends the beneficiary’s information to the pharmacist. The switch operator doesn’t have an obligation to notify the PBM or insurance company that a coupon was used at point of purchase, only that the point of sale was completed.
The delay in communication can affect the relationship with the PBM and insurance company associated with the beneficiary which increased the cost to the insurer. This may also result in the beneficiary not complying with fulfilling their required copay amount identified in their health plan; thus, perceived as a ‘breach of contract’ in the insurer’s eyes. Ultimately, undocumented coupon financials contribute to inaccurate annual reporting of the beneficiaries’ out-of-pocket costs posted by the PBM.
Insurance companies started to push back against copay coupons in 2018 with the release of copay accumulators and copay maximizer programs. These programs shift the costs back to the consumer rather than employers and other payers. John S. Linehan from Managed Care Magazine describes the programs as:
- Copay Accumulator Program: “The plan prevents the coupon from counting against the beneficiary’s deductible or out-of-pocket maximum. Upon exhaustion of the coupon’s value, the beneficiary must pay the entire amount of his or her deductible before plan benefits kick in.”4
- Copay Maximizer Program: “(also called a variable copay program), the plan increases the copay amount for a drug so that it approximates the copay coupon’s monthly value. The total value of the coupon is applied evenly throughout the benefit year but does not count against the beneficiary’s cost-sharing obligations.”4
STATE, LEGISLATIVE IMPACT
California5 and Massachusetts6 acted and prohibit the use of copay coupons when generic options are available (California code, Massachusetts law). On the contrary, other states are favoring the beneficiary due to patient groups plea for compromise. “The group Patients Rising Now is also pushing for state measures, saying in a release earlier this year that the accumulators are “a discriminatory practice that limits access to needed medicines.” 7
Patient groups are frustrated with the insurance copay accumulator and maximizer programs as they are suffering financially from the burden and the programs appear deceitful, since the language is embedded beneath the insurance plan details. The hidden language makes it almost impossible for the beneficiary to be cognizant that they are unable to use any coupon programs and that their premiums are increasing if they do.
In 2019, States listened and are stepping in on behalf of the patient groups. “Virginia and West Virginia became the first states to ban an insurer practice that prevents drug manufacturer coupons and copay assistance from counting against a plan’s deductible or out-of-pocket limit, and patient advocates believe more states are going to follow suit.”7 In efforts to protect the beneficiaries, eight other states are following Virginia and West Virginia in banning the insurance programs. Now that individual States are acting and determining their own boundaries for coupons and insurance controls, legislation is also getting involved via Safe Harbor.
MANUFACTURER COUPON RESULTS
The functional aspects in which coupon programs operate result in the following:
- Allows competition between high-cost drugs (brand name) and generics regardless of formulary placement.
- Decreases beneficiary’s high-cost drug copay at time of purchase.
- Increases the rate that beneficiaries will hit their out-of-pocket limit.
- Copay coupons can mask increases in high-cost drugs.
- Coupons mask the true list price of drugs.
- Bottom line increases on health plan premiums.
- Increases the consumers likelihood of continuing adherence with brand name drugs.
- PBM and Insurance company inaccurately reporting beneficiary out-of-pocket costs.
- Insurance companies creating programs to push back on coupon utilization.
- States creating laws supporting either the Insurance Company or the beneficiary.
It is inferred that the manufacturer coupon is an alternative for the manufacturer to address the high payout demands of rebates made to the PBM. With Safe Harbor in question, the manufacturer’s continuation of coupons can reside in staying in competition in formulary with generic’s high placement, which initially lowers the cost to the consumer. Safe Harbor can provide rulings to allow a transparent, upfront price for drugs which could restructure the entire manufacturer coupon lifecycle or force removal of it all together.
There have also been discussions that the switch operator could take the responsibility for managing chargebacks if the final ruling ultimately results in a point of sale discount. The outcome of Safe Harbor and its implications could change the dynamics in which coupons are used and how switch operators’ function in the pharmaceutical industry.
- Stephen W. Schondelmeyer and Leigh Purvis. 2017. “Trends in Retail Prices of Brand Name Prescription Drugs Widely Used by Older Americans: 2017 Year-End Update” AARP: Public Policy Institute.
- Rabah Kamal, Cynthia Cox and Daniel McDermott. 2019. “What are the recent and forecasted trends in prescription drug spending?” Kaiser Family Foundation.
- Dafny, Leemore, Christopher Ody, and Matt Schmitt. 2017. “When Discounts Raise Costs: The Effect of Copay Coupons on Generic Utilization.” American Economic Journal: Economic Policy, 9 (2): 91-123.
- Linehan, JD, J. S. (2019, February 14). Assessing the Legal and Practical Implications of Copay Accumulator and Maximizer Programs. Retrieved from https://www.managedcaremag.com/archives/2019/2/assessing-legal-and-practical-implications-copay-accumulator-and-maximizer-programs
- California Health & Safety Code §132000 et seq.
- Massachusetts General Laws, ch. 17.5H, §3(b)(2).
- King, Robert. (2019, March 29). Virginia and West Virginia are first states to ban copay accumulators. Retrieved from https://www.modernhealthcare.com/insurance/virginia-and-west-virginia-are-first-states-ban-copay-accumulators