Unraveling the Complexities of Low Net Cost Formularies in Drug Pricing

By Ralph Pisano, RPh. and Scott Wert

In the complex web of healthcare pricing and prescription drugs, the idea of a low-net-cost formulary has reemerged as a critical player. Low net cost formularies often incorporate drugs with higher and lower list prices, and use discounts or rebates to reduce the total cost. It's important to consider various factors such as the drug's release date, its popularity, its overall effectiveness, and how frequently it's used compared to its competitors to determine the lowest net cost. Essentially, it's about finding a balance between cost and the potential to benefit the greatest number of patients. This means that the lowest net cost drug isn't always the least expensive option for payors. The concept highlights several challenges in the current healthcare landscape, notably around the dynamics between pharmacy benefit managers (PBMs) and rebate contracting. 

A Case Study: Humira 

To provide a context for this discussion, consider the use of Humira, a popular but expensive drug, and its implications on drug costs. Despite there being several lower-cost, equivalent drugs in terms of clinical efficacy, Humira remains the top-selling drug in in the United States. Given its high efficacy and popularity among physicians, Humira has become a preferred choice even though more economical options like adalimumab biosimilars now exist in the market. If patients and doctors opted for these less costly yet equally effective alternatives, we could see substantial savings in healthcare spending. 

The Profit Dilemma 

It's not as straightforward as merely switching drugs. Two major stakeholders' differing motives add layers to this puzzle: PBMs that profit from rebates and plan sponsors that strive to spend wisely. PBMs, integral to the prescription drug distribution chain, often benefit most from drug rebates and/or other discounts that are not part of the rebate share model. This motivates PBMs to push drugs that provide larger rebates and other discounts, even if they aren't the most cost-effective choice for payors.  

A Journey Towards Transparency 

It's almost impossible for plan sponsors to figure out the actual net cost of drugs due to complex pricing mechanisms and rebates. When rebate guarantee contracts are employed, it will be the case for some drugs, that guaranteed rebate dollars per claim exceed the cost of the drug, and it can falsely appear as if certain drugs are cost-free or even profitable, thereby incentivizing their inclusion on the formulary. Because the rebate guarantee is a dollar figure that is the same for all claims within retail, mail, and specialty categories, the actual rebate dollars garnered by any one drug will be higher or lower than the rebate guarantee. Often, rebate guarantees are paid on drug claims for which no actual rebate money was earned to support the rebate guarantee. In these cases, the net costs of these drugs are falsely lowered.  Conversely, many drugs are paid large rebates, higher than the rebate guarantee, that subsidize other drugs with lower or no rebates. So, this complexity is created by design, creating a smoke and mirror effect, leaving most groups unaware if they are getting the full rebates owed to them, or if alternative options would lower costs. 

It's clear that transitioning to a low-net-cost formulary poses challenges. A key solution lies in embracing transparency and fostering awareness. Despite the complexities, the lowest net cost formulary stands as an important step in the right direction to realize potential savings, prioritize patient needs and introduce a fresh approach to drug pricing. 

How to Get Started 

1. The Power of Strategic Contracting  

Negotiating a contract with a PBM is a complex task. The first tip to future-proof your relationship with your PBM is understanding the mechanics of your contract. Scrutinize every clause and ensure your interests are covered, especially in areas like definitions of generic drugs, biosimilars, drug price updates, exclusions, and off-invoice discounts. Remember, every clause can have an impact on your bottom line. 

2. Transitioning to a True Lowest-Net-Cost Formulary 

When seeking the lowest-net-cost drugs, align your strategy with the quest for significant contractual discounts, but also consider the comprehensive net cost of your formulary. Even though the term "lowest-net-cost" usually refers to the actual price after rebates have been applied, lowest-net-cost formularies sometimes overlook cheaper alternatives to popular drugs due to fear of patient disruption or the lack of awareness. While the initial transition might be a bit disruptive, moving to a true lowest-net-cost formulary can save your organization substantial amounts of money. This approach replaces popular, higher-priced drugs with clinically sound, chemically identical alternatives like generics or lower-priced brands, which can lead to significant savings. 

3. Consider building your own formulary 

If the transition to lowest-net-cost drugs seems daunting, remember that health plans have the option to create their own formulary when the PBM declines to make necessary changes. Also, demanding your PBM to share more of the rebate dollars from your lowest-net-cost formulary or provide analyses of your lowest net cost, can be other approaches to realizing savings. 

Future-proofing your pharmacy benefits—and your relationship with your PBM requires a shift in thinking. It involves partnering with people that understand the nuances of drug distribution and contracting environments.  It's essential to debunk the complexities of the pharmaceutical world, expose the gross-to-net bubble, and ensure that cost-saving benefits trickle down to the patient, the real end-user. A true low-net-cost approach coupled with transparency can aid in making healthcare more accessible and affordable for all. Transparency, vigilance and a willingness to disrupt the status quo for the sake of your business—and your people—are critical.