Co-Pay Cards and the Stalling of Drug Rebate Growth

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For the first time, because of growth in both rebate percentages and brand drug prices, rebates paid for preferred formulary status now appear to roughly equal the spread in non-preferred (e.g. tier 3) and preferred (e.g. tier 2) co-pays

Co-pay cards, wherein manufacturers subsidize consumers’ co-pay costs, have become widespread; we find that about half of the 100 top-selling drugs offer co-pay support programs.  For manufacturers, these cards are an alternative to paying rebates larger than non-preferred v. preferred co-pay spreads

Because higher co-pays are demonstrably linked to under-consumption of necessary medications, formulary managers cannot simply raise co-pays and co-pay spreads as a competitive response to more widespread use of co-pay cards by manufacturers

Rapid absolute dollar rebate growth until now has been fueled by both rising drug prices and rising rebate percentages; now that the full economic value of the non-preferred and preferred status is fully rebated, rebate growth is constrained by the (much slower) rate of growth in co-pays and co-pay spreads

Coming patent expiries shift brand mix further toward specialty, where formulary managers’ negotiating leverage is lower; as a general rule (with notable exceptions) formulary managers cannot exclude or substitute specialty products nearly as efficiently as traditional / non-specialty products.  Thus not only are ‘maximum achievable’ rebates newly constrained by co-pay spreads, formulary managers are less able to capture the full value of co-pays spreads in a market dominated by less substitutable specialty brands

These findings are bearish for formulary managers generally, especially PBMs (MHS, ESRX, CVS).  Brand drug manufacturers, particularly those that have been paying growing rebates on heavily substitutable US brands, benefit by being able to more fully capture real price increases as rebate growth slows, though we expect this advantage is late in coming, as the pace of US real price growth is very likely to fall as primaries heat up in advance of 2012 general elections

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