Co-Pay Accumulators: Who’s Most at Risk (ABBV, GILD, UCBJY, ALIOY, AMGN); Manufacturers’ Options for Limiting Their Effect

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SEE END OF THIS REPORT FOR IMPORTANT DISCLOSURES

Richard Evans / Scott Hinds

203.901.1631 /.1632

revans@ / shinds@ssrllc.com

@SSRHealth

April 17, 2018

Co-Pay Accumulators: Who’s Most at Risk (ABBV, GILD, UCBJY, ALIOY, AMGN); Manufacturers’ Options for Limiting Their Effect

  • Co-pay accumulators are an effort on the part of formulary managers to eliminate manufacturers’ co-pay cards. When an accumulator ‘sees’ a co-pay card being used, it raises the patient’s out-of-pocket (OOP) obligation to a level that maximizes extraction of credits from the co-pay card, but applies these to plan costs rather than to the patient’s true ‘pre-accumulator’ OOP obligation
  • Because co-pay cards generally offer more credits than are used, by extracting the maximum credit offered by the co-pay card accumulators have the effect of raising average manufacturer discounts, sometimes dramatically. And, because accumulators don’t allow application of the co-pay card credit to patient OOP obligations, patients’ effective OOP costs rise. From the perspective of the manufacturer, the effect is higher average discounts and lower utilization
  • Because formulary managers only know a co-pay card is used if the pharmacy tells them, accumulators currently are limited to settings directly controlled by the formulary manager … essentially captive specialty pharmacies. The scope of accumulators may grow as more plan sponsors agree to the tactic, as formulary managers require network pharmacies to report co-pay card use, and/or if formulary managers are successful in their efforts to modify prescription benefit processing in a manner that would notify them, immediately, of co-pay cards at the point of sale
  • Companies most at risk from accumulators are those for whom co-pay card supported specialty sales account for a large percentage of total corporate sales, particularly in the case of companies whose products are costlier per patient. We believe ABBV, GILD, UCBJY, ALIOY, and AMGN are most exposed
  • In the short-term manufacturers can lower co-pay card maximums as a stop-gap; lowered maximums would provide enough credit for most patients but would lessen cards’ usefulness for patients who are most reliant on them. In the mid- to longer-term, manufacturers should be able to escape accumulators by modifying the design of their patient-support programs; however, the resulting programs are likely to be less well-calibrated to patients’ specific needs, and more subject to fraud

 

Co-pay accumulators: what they are …

A co-pay accumulator program is a payor-initiated technique that extracts the maximum credit available from a manufacturer’s co-pay card, and applies the manufacturer credits to plan costs rather than to patients’ out of pocket (OOP) costs

When a payor determines that a manufacturer co-pay card is being applied to a prescription purchase, the payor raises the patient’s OOP obligation to a level that maximizes the credit provided by the co-pay card. Once the credit available from the co-pay card is exhausted, the patient’s copayment is reset to its original level, and the patient remains responsible for their full deductible and co-pay amounts. The net effects are that: ‘accumulated’ co-pay cards provide their full limit of credit; practically all co-pay card credits work to reduce plan costs rather than patient costs; and, once the co-pay card is exhausted patients are responsible for their full deductible and co-pay / co-insurance amounts with no manufacturer support. The market effect is that aggregate manufacturer discounts rise (all cards pay out their max credit), but unit demand falls (patients’ net OOP costs are significantly increased)

Exhibit 1a reflects a year of transactions for a retail drug that costs $1,000 monthly, dispensed to a patient with a $500 deductible and $100 co-pay. The patient uses a co-pay card to cover part of the deductible and co-pay, reducing OOP costs to $20 each month. In Exhibit 1b, the payor reacts to the presence of the co-pay card by raising the patient’s OOP obligation to the maximum monthly credit provided by the card (in this example $1,000) and continues this until the maximum annual credit from the co-pay card ($5,000) has been exhausted. After this point the patient still must meet their deductible ($500) and monthly co-pay ($100), but without the benefit of the manufacturer co-pay card. In this stylized example, the accumulator lowers the plan’s costs (from $10,400 to $5,900), increases the effective manufacturer subsidy (from $1,360 to $5,000), and increases the patient’s total OOP paid (from $240 to $1,100) vis-à-vis use of a co-pay card in the absence of an accumulator

What drugs, and companies, are most affected

At least for the time being, unless a patient or pharmacy discloses the presence of a co-pay card in a prescription sale, the payor has no means of knowing that a co-pay card is being used. As such the immediate scope of co-pay accumulators is limited to ‘captive’ specialty and/or mail-order pharmacies controlled by the payor

We began by identifying all brand prescription products with 2017 US net sales ≥ $250M that also have non-Medicaid gross-to-net discounts of > 8%. We looked at gross-to-net on a non-Medicaid basis by removing the effect of the Medicaid base rebate (23.1%), and the Medicaid pricing rebate[1], from sales weighted estimates of total product gross-to-net discount. The resulting ‘non-Medicaid’ gross-to-net discount reflects a combination of standard ‘housekeeping’ discounts, plus commercial concessions made in the form of rebates, direct patient support such as co-pay cards, or most commonly both. ‘Housekeeping’ discounts are standard concessions such as prompt-pay discounts to wholesalers, wholesale and/or retail fees, and provisions for returned goods. Based on analyses of products that do not offer rebates or co-pay cards, we believe a typical housekeeping concession totals roughly 8%. As such, any product with a non-Medicaid gross-to-net discount above 8% is likely to be offering some form of commercial concession, which is likely to include some type of patient co-pay support. In other words, products with non-Medicaid gross-to-net discount percentages over 8% are potential targets for co-pay accumulators

Logically, accumulators are more likely to target products with higher per-patient costs, so we calculated the net cost of a typical regimen or year of therapy for each product. And finally, we limited our definition of ‘sales at risk’ to retail sales; e.g. if a $500M product with a non-Medicaid gross-to-net percentage of 25% has a 60/40 retail/institutional split, we assumed that only $300M of this product’s net sales are ‘at risk’ of being captured by a co-pay accumulator

To identify companies’ relative levels of exposure to co-pay accumulators, we simply divided total sales at risk (US retail net sales of a product with ≥ $250M net and a non-Medicaid gross-to-net discount of > 8%) by the company’s global net sales. Exhibits 2a and 2b provide the results. In Exhibit 2a, calculations assume that sales to Medicare / Medicaid are ‘in range’ of co-pay accumulators; in Exhibit 2b we assume that sales to Medicare/Medicaid are not in range of co-pay accumulators. Co-pay cards issued by manufacturers cannot be used by Medicare/Medicaid beneficiaries; however, co-pay cards issued by (often manufacturer-supported) foundations can be and often are used by Medicare/Medicaid beneficiaries. We’re not at all sure whether accumulators routinely will target the cards issued by foundations to Medicare/Medicaid beneficiaries, so we just ran the analysis both ways. The percent of sales at risk obviously is higher in Exhibit 2a; however, the rank of companies (in both exhibits companies are ranked by percent of global sales at risk) is similar across the two scenarios

We chose to rank companies in these exhibits according to percent of global sales at risk of capture by a US co-pay card accumulator simply because we believe this is the most important single variable. We don’t think it’s necessarily important to rank by non-Medicaid gross-to-net discount percentage, since all we’re really doing with this variable is identifying products that are likely to have significant co-pay card programs. We do believe that average net cost of a year or course of treatment is highly relevant to companies’ relative levels of exposure, simply because captive specialty pharmacies are more likely to capture prescriptions for therapies that are more expensive, and because each claim has a much higher average dollar value. In each exhibit, we’ve bolded companies with ≥ 10% of sales ‘at risk’ and with average net cost of a year or course of therapy that exceeds $12,000. Excluding Medicare/Medicaid sales only ABBV, GILD, UCBJY, ALIOY and AMGN cross these thresholds (Exhibit 2b); including Medicare/Medicaid sales PFE, AZN, TEVA, ALPMY, BMY and JNJ also cross these thresholds (Exhibit 2a). Product-level detail behind Exhibits 2a/2b is provided as Appendix 1

Scope creep … how accumulator programs might grow beyond captive specialty pharmacy

Absent any countermeasures, the scope and impact of co-pay accumulators is likely to grow for any or a combination of 3 key reasons:

1) If co-pay accumulators meaningfully reduce plan costs, more plan sponsors are likely to support benefit designs that require use of captive pharmacies, placing more prescriptions ‘in range’ of co-pay accumulators

2) As formulary managers increasingly narrow their retail pharmacy networks, they gain power over the remaining in-network pharmacies. It’s reasonable to believe that formulary managers eventually will require in-network retail pharmacies to identify prescriptions that are filled with a co-pay card

3) Payors are actively working within NCPDP[2], the standards-setting body for pharmacy claims management, to alter the claims processing standard so that primary payors are routinely informed when costs not covered by the primary payor are then covered by a secondary payor, i.e. to notify formulary managers when manufacturer-sponsored co-pay cards are used[3]. This would make formulary managers’ awareness of the co-pay card automatic, without any separate action (such as mandatory disclosure as an in-network pharmacy) being necessary

What manufacturers can do to limit the impact of co-pay accumulators

Short of ending their programs, manufacturers can reduce the impact of co-pay accumulators by providing patient-level credits in formats other than those that can be captured by the accumulators; and/or by placing dollar and/or outlet-type restrictions on their patient support programs

Option 1: Step off the switch

Manufacturers’ co-pay card programs commonly are adjudicated through the same NCPDP ‘switch’ used to adjudicate pharmacy claims submitted to primary payors. Processing co-pay cards this way allows manufacturers to scale their co-pay assistance to the specific OOP obligation of each specific beneficiary, since the NCPDP data interface ‘knows’ these facts about the patient from the swipe of the patient’s primary benefit card, before the co-pay card (secondary payor) is swiped. Co-pay accumulator programs make use of the NCPDP switch a potential liability for manufacturers, since: 1) payors might require network pharmacies to disclose their NCPDP switch data as proof that they’re complying with co-pay card restrictions; and/or 2) if payors succeed in their efforts to modify the NCPDP data standard[4],[5], processing co-pay cards on the NCPDP switch would make them immediately visible to formulary managers

Manufacturers can avoid the NCPDP switch by reverting to the use of more traditional ‘coupons’, which work like basic grocery store coupons. The downsides are that unlike co-pay cards adjudicated on the NCPDP ‘switch’, coupons are difficult or impossible to calibrate to patients’ specific OOP obligations, and may be easier to defraud. Like the NCPDP switch, coupons require involvement of the pharmacy; however non-captive retailers’ acceptance of manufacturer coupons would not be reflected in NCPDP data. In-network retailers may ultimately have to pledge to report manufacturer co-pay programs (including coupons). It’s unlikely that national chain pharmacies could follow a national policy of accepting manufacturer coupons without this becoming evident to the formulary manager; however, it is reasonably likely that independent pharmacies might be able to accept manufacturer coupons even if this violated the letter of their network agreements

There may be potential for a hybrid system of NCPDP data and manufacturer credits applied through wholesalers. The idea is that rather than collecting from a patient the OOP payment specified by the patients’ primary insurer (e.g. $50) pharmacies would collect only the ‘net’ OOP payment (e.g. $20) that the manufacturer is targeting for the patient after application of a manufacturer credit (e.g. $30). Instead of the manufacturer credit being adjudicated / applied for on the NCPDP switch, the retailer would simply have been told that patients meeting certain criteria (e.g. commercially insured, drug covered) are eligible for a manufacturer credit sufficient to lower the patient OOP to no lower than $20, provided the manufacturer credit doesn’t exceed a maximum value. Then rather than receiving a credit from a co-pay card manager acting as a secondary payor (as the result of submitting a claim to the co-pay card manager on the NCPDP switch), the retailer would receive a credit on its subsequent purchases of the manufacturer’s product from its wholesaler (without having to transmit a secondary payer claim via NCPDP). This hybrid gets the NCPDP-based adjudication of the patients’ primary payor claim into the workstream, allowing calibration of the manufacturer credit to the patient’s specific insurance status and OOP obligation; however, this system avoids the creation of a secondary payor claim within the NCPDP framework, instead running the credit for this claim through the retailer’s wholesaler. This hybrid obviously would require participation of the pharmacy, who by participating might be violating its terms as a member of the formulary manager’s network; however, the application of credits would occur within systems (retailers’ accounting and inventory) that the formulary manager cannot track (but that wholesalers routinely interface with). As a downside, because this model does not require the patient to present a co-pay card or coupon, presumably all patients would receive the manufacturer credit, whether they would have applied for it or not

Manufacturers might also revert to reimbursing patients for a portion of their OOP costs, a fall back method that manufacturers currently use for patients whose pharmacies won’t process co-pay cards. As compared to coupons, reimbursing OOP costs has the advantages that manufacturer subsidies can be scaled to consumers’ specific OOP costs (but not necessarily to their insurance status), and that pharmacies can be removed from the transaction (other than providing a standard register receipt, which is standard practice anyway); offset by the disadvantages that manufacturer credits are delivered after rather than at the point of sale, by the requirement placed on patients to transmit transaction information to the co-pay card processor, and by greater potential for fraud

Damage control …

Manufacturers have the option of reducing the monthly and/or annual dollar limits on their co-pay programs. Accumulators take advantage of the fact that most patients use less than the total value of a co-pay card. Co-pay cards generally have relatively high limits in place so that cards can be useful to patients with much higher than average deductibles, copayments, and/or coinsurance rates. Before accumulators, adjudicating co-pay cards on the NCPDP switch allowed manufacturers to titrate the co-pay credit to the patient’s actual OOP obligation. With accumulators now more common, manufacturers run the risk that an accumulator will alter the patient’s OOP obligation to take the full credit from the manufacturer’s co-pay card

Lowering the monthly and/or annual limits is an obvious response, but this comes at the cost of eliminating meaningful co-pay card support for patients with much higher OOP obligations. To give a sense of the OOP landscape, about 37% of employer-sponsored beneficiaries with have a prescription benefit deductible[6]; the average deductible is $395 for individual coverage and $1,068 for family, though deductibles range as high as $3,600 / $10,300 for individual / family (Exhibit 3). Once deductibles are met, specialty (Exhibit 4a) copayments average $79.75, and coinsurance averages 32% of drug cost, subject to an average minimum of $51, and average maximum of $807. Exhibit 4b provides average copayment and coinsurance values for employer-sponsored beneficiaries according to the annual Kaiser/HRET survey; tier 4 in this exhibit is roughly comparable to specialty tier. These data make clear that manufacturers can cover most patients with lower co-pay card limits, but that patients with outlier OOP levels (who rely on co-pay cards the most) would essentially be left without meaningful assistance

 

  1. In addition to the base rebate, products must pay rebates that offset any effect of price inflation in excess of CPI. Because most products have raised list prices more rapidly than CPI, these pricing rebates can be quite large. If products offer commercial rebates that are lower than 23.1%, they must offer this lower rebate to Medicaid as well. As of yet we have no means of precisely identifying when commercial discounts are greater than this base amount, so we make no provision for additional best price rebates. Products may also pay negotiated supplemental rebates to states in an effort to gain preferred position on Medicaid formularies; because these are not publicly disclosed we make no provision for these supplemental rebates
  2. National Council for Prescription Drug Programs
  3. See the “Upstream Reporting of Co-Pay Assistance Task Group,” at: https://www.ncpdp.org/NCPDP/media/PDF/Task_Groups_List.pdf
  4. Ibid 3
  5. For an example of how pharmacy information systems interact with NCPDP data, specifically in the context of a patient with both primary and secondary (e.g. co-pay card) coverage, see: http://www.bestrx.com/help/bestrx/split_billing_explanation.htm
  6. Pharmacy Benefit Management Institute 2017 Trends in Drug Benefit Design Report

©2018, SSR, LLC, 225 High Ridge Rd, 2nd Floor, Stamford, CT 06905. All rights reserved. The information contained in this report has been obtained from sources believed to be reliable, and its accuracy and completeness is not guaranteed. No representation or warranty, express or implied, is made as to the fairness, accuracy, completeness or correctness of the information and opinions contained herein. The views and other information provided are subject to change without notice. This report is issued without regard to the specific investment objectives, financial situation or particular needs of any specific recipient and is not construed as a solicitation or an offer to buy or sell any securities or related financial instruments. Past performance is not necessarily a guide to future results. In the past 12 months, through a wholly-owned subsidiary SSR Health LLC has provided paid advisory services to BioPharmX (BPMX), Pfizer Inc (PFE), Gilead Sciences (GILD), Bristol-Myers Squibb (BMY) and Sanofi (SNY) on both securities-related and non-securities-related topics. One or more of SSR Health’s analysts owns long positions in the following stocks: ACOR, AGEN, AGIO, AKAO, ALKS, ALNY, ANAB, ARRY, BMY, CPRX, DERM, DPLO, DVA, ESALY, ESRX, FOLD, GWPH, INCY, INSM, IONS, ITCI, KALA, LOXO, LXRX, MDCO, NSTG, PFSCF, PGNX, PRTK, PTLA, RHHBY, SRPT, STML, TBPH, TRVN, TSRO, TTPH, TXMD, VRTX, VSTM

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