Express Scripts’ ‘Flex Formulary’ straddles the drug-rebate dilemma

Here’s an attempt at a straightforward description of Express Scripts’ new formulary offering: Express Scripts’ basic business is to sell a pharmacy benefit management service that includes a formulary—the list of drugs for which a plan sponsor (payer) will allow patients to receive, at a pre-set price. Because some manufacturers are now lowering their drug price, or allowing authorized generics on the market, Express Scripts is allowing plan sponsors (its customers) to choose a formulary “with lower net prices over high-list/high rebate products.”

The weirdness in all this begins with realizing that plan sponsors, and PBMs themselves, have been benefiting from the rebates that PBMs negotiate with manufacturers for their products. For roughly the past two years (ever since Mylan’s CEO gave testimony before Congress claiming that its net revenue had changed very little even as the price of its EpiPen product zoomed, because of larger rebates), rebating practices are being questioned as something of an underhanded (because they are not publicly disclosed) payoff, and a cause of escalating drug prices.

Express Scripts’ Flex Formulary now brings something new into clearer focus: the extent to which payers benefit from rebates as well. “Immediate list price decreases for products already on the market can pose challenges for employers and health plans that already have underwritten plan offerings and benefit designs for upcoming years based on existing economics,” said the company in its announcement. Those “existing economics” include getting some or all of the rebate when a drug is prescribed—revenue that offsets the costs of health plans that plan sponsors offer. Thus, a plan sponsor could justify preferring a more expensive drug, because the rebate is larger than a less expensive one.

Manufacturers are somewhat on the sidelines in this--except that rebating offers a mechanism to be placed preferentially on formularies (then again, so would a lower drug price). Rebates and pricing decisions have numerous aftereffects in federally funded programs, some net-positive for the manufacturer, and some net-negative; these could change as well with different pricing schemes.

Real money is at play in all this: various industry estimates put the size of the “gross to net bubble” (i.e., the difference between list pricing and net pricing that manufacturers receive after rebates) at $150 billion—roughly a third of nominal US drug spending. Some drugs have more than half of their list price going to rebates. There is a general trend that the murky rebating process is going to change, if not go away, in the next few years, and thus Express Scripts is taking the first steps toward a rebate-free market. "Our new National Preferred Flex Formulary demonstrates our flexibility to keep clients ahead of industry trends, so that they can fully leverage new opportunities to lower their prescription drug costs," stated Steve Miller, chief medical officer at the PBM; it will also keep the company (now becoming a combined PBM/insurer, through the merger with Cigna) in the PBM game.