Post by me on Feb 3, 2016 19:38:23 GMT -5
I've read on this board, forever now, many complaints about the high cost of Afrezza and how slashing the price could [may] get us better tiering on formularies. I think it's important for those of you who wish to discuss "pricing" of Afrezza, to understand two very important aspects of drug "pricing" and tier placement.
Tier placement decisions are based primarily (though not exclusively, as safety and efficacy have some influence) on the net cost [but in reality, the net benefit] to the intermediary, after passing on the gross cost to the end user. The successful model is not:
SNY sells Afrezza to Pharmacies at $3000 per year; pharmacies sell Afrezza to insured members for $3400, split between the member's OOP costs (say $600, if they can even get through PAs and ST) and their insurance company (say $2800); the insurance company "sells" Afrezza to its clients by passing on these claim costs of $2800+ (and yes, I understand that insurance companies want to be competitive, so they want to keep these costs down, but please read to the end). In this model, you may believe (naively I would propose) that slashing the price might get the insurance company to open their eyes, especially when they give a little more weight to the safety and efficacy of Afrezza. Alas, this is not how incentives in the pharma distribution chain work. Yet, this is exactly the approach that SNY took. That's one of the major reasons they "failed." In this approach, it doesn't matter whether my price was $3000 or $4000 (or, believe it or not, $1500!), I'd never sell enough to make it worthwhile.
But, there are two key components that are rarely addressed here in pricing discussions: PBMs and rebates. SNY knows this and understands this very well and could have done the following had they chosen to do so:
SNY negotiates with PBMs (not insurance companies) for Preferred placement on their standard formularies. In exchange, SNY pays the PBMs a $100 rebate for each 30-day supply sold, or $1200 per year (SNY would still be netting $1800 per year vs $1000 or less for other RAAs). The PBMs turn around and sell the tier placement recommendation/decision to their clients (mostly insurance companies) as their "vetted" formulary (yet always allowing modifications). And to add a little juice to encourage their clients to continue with the preferred tier placement, the PBMs pay the insurance companies a slice of the rebates. In this case, so we can use round numbers, let's say that's $40 of the $100.
Now, what does this scenario look like with regard to numbers?
Because Afrezza is preferred and SNY does a bang-up job on advertising (think current Toujeo commercials), all diabetics want it and ask their endos and GPs for prescriptions. Instead of $600 per year (when they can even get it), it now costs $240 to $360 per year.
The insurance company now has their diabetic members on a therapy that in the long run will benefit their bottom lines (although I'd be willing to wager Afrezza's therapeutic effects are not on the radar of any insurance company). And what does it cost the insurance company? Funny you should ask! Remember the $3400 cost coming from the pharmacies? Well ~$300 is paid for by the member, with $3100 "paid" by the insurance company. The insurance company then passes on this $3100+ to their clients. But what about the insurance company's $40 x 12 rebate? Yep, that stays in their pocket. That means instead of making a 3% to 7% profit on their net cost of $2800 in the original example, the insurance company now makes a 3% to 7% profit on their net cost of $3100 plus an additional $480. They just increased their profit 4.5 times for each annual prescription of Afrezza.
You might ask why the insurance company would be willing to take the risk of being less competitive since Afrezza in this scenario is more costly than RAAs. The reason is that Afrezza is only one drug among many on that preferred list and their clients typically do not have the expertise to build and maintain their own formulary. So, they accept the insurance company's formulary, who accepted the PBM's formulary. The higher cost is pushed off onto clients, while the pharma, the PBM, the insurance company and even the member all benefit! And while the end payer has a higher cost versus RAAs, I would propose that their diabetic population using Afrezza would have an overall net positive impact on their medical costs.
There are various permutations to this model, but the gist of it is, it ain't insurance companies and the pricing they pay that is important...it's the PBMs and paying them off with rebates that drives a drug's success. This is how some of the least effective drugs compared to OTC medications have commanded such a high price and sold huge volumes in the past. Ultimately, it's not the price, but the rebate offered. And that was something that was 100% under SNY's control during this launch.
And if you're skeptical of the above as being reality, I'd encourage you to select 8 to 10 formularies from different carriers. Lay them side by side, and for each therapeutic category (not just diabetes), compare which drugs are in which tier by insurance carrier. Now, ask yourself that if P&T committees are making decisions based upon cost effectiveness and efficacy, how is it that the preferred drugs in each therapeutic category are not the same across different insurance company's formularies? After all, there are only a handful of drugs that are clearly head and shoulders more cost effective and efficacious than other drugs in their therapeutic category.
Further, instead of listing the drugs' names, list them by PBM! Pretty soon, you'll see that formulary listings are generally consistent across insurance companies using the same PBM, and much less so between insurance companies using different PBMs. This is because, while pharmas pay rebates on their brand name drugs to all PBMs, they target certain PBMs with their juiciest rebates hoping for prime tier placement.
Taking a political line from the '90s: "It's the rebates, Stupid!"
Tier placement decisions are based primarily (though not exclusively, as safety and efficacy have some influence) on the net cost [but in reality, the net benefit] to the intermediary, after passing on the gross cost to the end user. The successful model is not:
SNY sells Afrezza to Pharmacies at $3000 per year; pharmacies sell Afrezza to insured members for $3400, split between the member's OOP costs (say $600, if they can even get through PAs and ST) and their insurance company (say $2800); the insurance company "sells" Afrezza to its clients by passing on these claim costs of $2800+ (and yes, I understand that insurance companies want to be competitive, so they want to keep these costs down, but please read to the end). In this model, you may believe (naively I would propose) that slashing the price might get the insurance company to open their eyes, especially when they give a little more weight to the safety and efficacy of Afrezza. Alas, this is not how incentives in the pharma distribution chain work. Yet, this is exactly the approach that SNY took. That's one of the major reasons they "failed." In this approach, it doesn't matter whether my price was $3000 or $4000 (or, believe it or not, $1500!), I'd never sell enough to make it worthwhile.
But, there are two key components that are rarely addressed here in pricing discussions: PBMs and rebates. SNY knows this and understands this very well and could have done the following had they chosen to do so:
SNY negotiates with PBMs (not insurance companies) for Preferred placement on their standard formularies. In exchange, SNY pays the PBMs a $100 rebate for each 30-day supply sold, or $1200 per year (SNY would still be netting $1800 per year vs $1000 or less for other RAAs). The PBMs turn around and sell the tier placement recommendation/decision to their clients (mostly insurance companies) as their "vetted" formulary (yet always allowing modifications). And to add a little juice to encourage their clients to continue with the preferred tier placement, the PBMs pay the insurance companies a slice of the rebates. In this case, so we can use round numbers, let's say that's $40 of the $100.
Now, what does this scenario look like with regard to numbers?
Because Afrezza is preferred and SNY does a bang-up job on advertising (think current Toujeo commercials), all diabetics want it and ask their endos and GPs for prescriptions. Instead of $600 per year (when they can even get it), it now costs $240 to $360 per year.
The insurance company now has their diabetic members on a therapy that in the long run will benefit their bottom lines (although I'd be willing to wager Afrezza's therapeutic effects are not on the radar of any insurance company). And what does it cost the insurance company? Funny you should ask! Remember the $3400 cost coming from the pharmacies? Well ~$300 is paid for by the member, with $3100 "paid" by the insurance company. The insurance company then passes on this $3100+ to their clients. But what about the insurance company's $40 x 12 rebate? Yep, that stays in their pocket. That means instead of making a 3% to 7% profit on their net cost of $2800 in the original example, the insurance company now makes a 3% to 7% profit on their net cost of $3100 plus an additional $480. They just increased their profit 4.5 times for each annual prescription of Afrezza.
You might ask why the insurance company would be willing to take the risk of being less competitive since Afrezza in this scenario is more costly than RAAs. The reason is that Afrezza is only one drug among many on that preferred list and their clients typically do not have the expertise to build and maintain their own formulary. So, they accept the insurance company's formulary, who accepted the PBM's formulary. The higher cost is pushed off onto clients, while the pharma, the PBM, the insurance company and even the member all benefit! And while the end payer has a higher cost versus RAAs, I would propose that their diabetic population using Afrezza would have an overall net positive impact on their medical costs.
There are various permutations to this model, but the gist of it is, it ain't insurance companies and the pricing they pay that is important...it's the PBMs and paying them off with rebates that drives a drug's success. This is how some of the least effective drugs compared to OTC medications have commanded such a high price and sold huge volumes in the past. Ultimately, it's not the price, but the rebate offered. And that was something that was 100% under SNY's control during this launch.
And if you're skeptical of the above as being reality, I'd encourage you to select 8 to 10 formularies from different carriers. Lay them side by side, and for each therapeutic category (not just diabetes), compare which drugs are in which tier by insurance carrier. Now, ask yourself that if P&T committees are making decisions based upon cost effectiveness and efficacy, how is it that the preferred drugs in each therapeutic category are not the same across different insurance company's formularies? After all, there are only a handful of drugs that are clearly head and shoulders more cost effective and efficacious than other drugs in their therapeutic category.
Further, instead of listing the drugs' names, list them by PBM! Pretty soon, you'll see that formulary listings are generally consistent across insurance companies using the same PBM, and much less so between insurance companies using different PBMs. This is because, while pharmas pay rebates on their brand name drugs to all PBMs, they target certain PBMs with their juiciest rebates hoping for prime tier placement.
Taking a political line from the '90s: "It's the rebates, Stupid!"
