Trends in Price Protection

In today’s world of increasing price pressure on pharmaceutical manufacturers, Payers and Pharmacy Benefit Managers (PBMs), it is important for every stakeholder to stay competitive. To promote sales, pharmaceutical manufacturers execute contracts with PBMs or Managed Care Organizations (MCOs) to provide rebates for branded drugs.

From the manufacturer’s perspective, these contracts contain negotiated discount strategies designed to avoid barriers to patient access and improve market share via formulary placement requirements. For MCO/PBMs, these contracts also contain rebate strategies and additional fees to keep the drug prices down or constant and provide incentives for formulary management services. One of these strategies is called Price Protection.

This blog will focus on Price Protection and how it has evolved over the recent decade. First, it is important to understand that “Price Protection” is the term used for the negotiated limits to Wholesale Acquisition Cost (WAC) price increases of the formulary brand drugs. In the Managed Care segment, Price Protection discounts pay the PBM as a rebate.

For context, rebates are grouped into categories, such as:

  • Flat/Access –
    • Rebates for formulary status, position relative to competitors and/or levels of restrictions (i.e., prior authorization, step-edits)
  • Value-Based/Outcomes-Based –
    • Rebates offer incentives for efficacy, adherence or cost-sharing
  • Performance –
    • Rebates offer incentives to grow sales, most typically for market share
  • Price Protection Rebates
    • Rebates to cover when the manufacturer increases the WAC over an agreed upon increase for the time-period
      • Price Protection rebates disincentivize manufacturer price increases by dictating a limit on the allowed increase relative to a baseline price (WAC on a specific date) over a defined timeframe. Rebates pay only when the price increase percentage or dollar value exceeds the allowed price for that specific period. These rebates largely benefit PBMs and their member plans – not the manufacturer and can effectively discourage multiple price increases or large percentage jumps in a year.

Some of the most common Price Protection strategies used by pharmaceutical companies:

Types of price protection

Price Protection Type

 

Definition

Baseline Date Allowed Net Effective Price (NEP) Price Protection Rebate (PPR) Contract Language
Cumulative No Compounding Establish the allowed increase in WAC at the beginning of the contract (Baseline Date) and are fixed for rest of contract period Remains constant through contract period Established on Baseline Date for the first year and does not change PPR is same for all years Look for maximum price that stays constant for all years
Cumulative with Compounding The max allowed WAC increases, year after year, by the price protection threshold percentage Remains constant through contract period Established on Baseline Date for the first year and compounds on the previous period PPR compounds every year or compounding defined in the contract terms Look for allowed net effective price to compound on the previous period allowed net effective  price
Resetting The allowed WAC increase calculates using WAC on a Baseline Date that changes every year Changes every year Established on Baseline Date for each year Remains same for all years Look for different Baseline Dates each year
Fixed Price A contract price  remains constant unless an increase is allowed Remains constant through contract period, but may allow a set increase %/year N/A Rebate is calculated as difference between current WAC & Fixed Price Look for terms for Fixed Price

Larger manufacturers will use revenue management applications to calculate the appropriate rebates for the Price Protection types above, however, the need for manual calculations will occur when there are variations.

Price Protection has become one of the important and inevitable parts of contracting strategies and negotiations. Historically being available to only a few of the large PBMs, Price Protection is now part of almost every PBM/Manufacturer Rebate Agreement.

Price Protection strategies have evolved over the past decade, including these trends:

Trends in Price Protection Strategies

When Managed Care/Commercial contracts introduced Price Protection more than a decade ago, only a few PBMS and products negotiations occurred.

The initial Price Protection terms were nominal and allowed the manufacturer to increase the drug prices annually. The strategies used were simply based on WAC and operationally easier, but manual calculations to process.

Recently, PBMs have Price Protection, irrespective of its size, and offered on most contracted products. Price Protection has become a complex system and difficult to manage operationally. Current contract terms may include multiple Price Protection strategies varying by therapeutic classes and influenced by the negotiating power of the PBM. Let us take a brief look at some of the newer strategies being introduced and discussed in detail below.

  • Net WAC & Net Allowed WAC to WAC & Allowed WAC
  • Fixed Contract Prices
  • Different Baseline WAC Dates for Cumulative Price Protection
  • Combination of Cumulative and Reset
  • Cap on Annual Cost of Therapy
  • Tiered Price Protection

WAC Price Protection

A recent trend in Price Protection strategy is that the PBMs are moving away from Net WAC for Price Protection calculations. This may seem easier operationally for the manufacturers, however they end up paying a higher rebate using the WAC and Allowed WAC as shown in the example below:

PP Based on Net WAC 2016 2017 2018
WAC $  100.00 $  103.00 $       110.00
Rebate 20% 20% 20%
Price Protection Rebate PPR 4% 4% 4%
Net WAC $    80.00 $    82.40 $         88.00
Allowed Net WAC $    83.20 $    83.20 $         83.20
Price Protection Rebate PPR N/A N/A $            4.80

 

PP Based on WAC 2016 2017 2018
WAC $  100.00 $  103.00 $       110.00
Rebate 20% 20% 20%
PPR 4% 4% 4%
Allowed WAC $  104.00 $  104.00 $       104.00
PPR N/A N/A $            6.00
Extra Rebate per Unit $            1.20

Fixed Contract Price:

Fixed contract price freezes the WAC price of the product and then there is another cap on the product’s price increase. In this type of strategy, the manufacturers can increase the WAC only up to the ‘Maximum Allowable Fixed Net Price’ for the term of the agreement.

Different Baseline Date:

Different Baseline Date is one of the most complex price protection strategies. A product may contract for the period, however the baseline date for the Price Protection goes back to the product’s introduction date. This not only increases the complexity of the Price Protection calculation, but also leaves little room for a price increase.

Combination of Cumulative and Reset:

As in the cumulative type of Price Protection year-over-year, the maximum allowable price increases by the price protection threshold percentage. In the resetting iteration, the maximum allowable price calculated on a yearly basis and is reset every year based on the price changes. In this new type of Price Protection, the Maximum Allowable Price is reset every year based on the price change, however the Price Protection amount from the previous year continues to be paid.

Cap on Annual Cost of Therapy:

In addition to the Price Protection strategies stated above, this type of Price Protection applies to the total cost of therapy. At the end of the year, calculate the cost of therapy for each patient and cap at a specific amount.

Tiered Price Protection:

Adding to the complication of Price Protection calculations, some of the PBMs are using this new Tiered Price Protection. In this type manufacturers can increase the WAC to a certain level and then pay Price Protection based on the percent increase in the tiers.

For example,

Tier 1: 0% – 5%, No PP

Tier 2: 6% – 10%, PP = 10% of percentage increase above 5%. For example, price increased 7%, PP = 2% x 10% = 0.2%

Tier 3: > 10%, PP = 70% of percentage increase above 10%. Example, Price increased 12%, PP = 2% x 70% = 1.40%

Additional variations

Other than the different trends of Price Protection strategies stated earlier, there are other variations of these strategies used by PBMs and manufacturers. Each customization represents its challenges in understanding, effectiveness, and execution.

Price Protection strategies benefit the PBM to manage their business more effectively. As Price Protection strategies are more widely implemented, in many cases manufacturers have been able to negotiate fair price increases. The complexity hits both parties in the administration of these rebates. Both parties should consider the additional effort needed to support these strategies.