Back at It Again: unraveling the mysteries of drug pricing and reimbursement!

The New England Journal of Medicine (NJEM) recently published an article highlighting variations in drug markups across 340b, non-340b, and community physician entities for commercially insured patients. The article sheds light on our complex and fragmented healthcare ecosystem and the various incentives across payers, providers, and pharmaceutical drug manufacturers. These economic incentives, or “markups” as the kids call ‘em, have wide disparity.  Markups are often the result of commonly misunderstood pharmaceutical and provider contracting mechanisms. As we were reading NJEM’s article, it occurred to us that these mechanisms may be rarely understood at all.

Let’s fix that. In this blog, we’re focused on understanding provider sensitivity to drug contracting mechanisms and how markups influence reimbursement.

But first, a recap of Net Cost Recovery (NCR)

In our last blog, we delved into the nuances of pricing and reimbursement for buy-and-bill drugs. And how price transparency data can illuminate drug cost, reimbursement, and charge to understand net cost recovery (NCR). You may recall that we said, “Many complexities can drive drug reimbursement discrepancies for the same drug.” Markups are one of those complexities. As a reminder, NCR represents three different prices from three different perspectives of the transaction:

  • Cost is the acquisition cost to the healthcare provider
  • Charge is the list or marked-up price a healthcare provider sets for a particular drug
  • Reimbursement is the contracted reimbursement rate between the payer and the healthcare provider

To understand markups we also need to look at the reimbursement incentives at work from those same perspectives.

Variation in methodologies can have significant implications on reimbursement

To begin to understand how reimbursement influences NCR, we must first understand how various providers can be sensitive to drug reimbursement. Let’s use the following example from a friend of Turquoise, ZS Associates, analyzing two drugs commonly infused by a healthcare provider using a sample of Turquoise Health price transparency data.

Figure 1: ZS Associates analysis of sample Turquoise Health price transparency data

In this example, we can see that hospital-based infusions for Remicade and Inflectra (biosimilar) exhibit multi-modal reimbursement structures, indicating that there are likely underlying mechanisms influencing reimbursement.

Specifically, when we look at the Average Sale Price (ASP) for both Inflectra and Remicade, we see they exhibit their first concentrated peak at approximately ASP + 33% (Remicade) and ASP + 85% (Inflectra) across clinics, hospitals, and other sites of care. Clinic rates are more concentrated at the peak, which suggests they are more sensitive to ASP changes than hospitals and other provider types.

A second curve occurs for both drugs near Wholesale Acquisition Cost (WAC). However, the non-clinic and other provider types are more concentrated compared to hospitals, suggesting hospitals and other sites of care are more sensitive to WAC-based pricing and reimbursement dynamics. These reimbursement methodologies can have significant implications for reimbursement dollars by setting of care.

So what are the possible types of mechanisms at play?

Provider contracting methodologies can further illustrate the underlying contracting mechanisms that drive reimbursement by site of care.

Figure 2: Data adapted from EMD Serono 2018 specialty digest on reimbursement methods by site of care.

Looking at Figure 2, EMD survey data suggests that 51% of hospital outpatient drugs leverage a percent of billed charges mechanism, meaning the payer and provider have contractually agreed that a select group of drugs (typically high-cost infusions), will be reimbursed at some percent of the billed charges set forth by a provider.

In an office setting; however, 49% of drugs are reimbursed based on some markup of ASP, marking these non-hospital entities far more sensitive to discounts, rebates, and concessions traditionally offered by the pharma manufacturer.

The takeaway? It is the contracts, and more importantly, the reimbursement structure of each entity, that leads to disparate markups.

The infamous ASP death spiral

While hospital outpatient reimbursement is more likely to be tied to billed charges, (providing more immunity from an ASP decline), physician's offices can be highly sensitive to ASP reductions.  In highly competitive markets with multiple therapy alternatives or increased generic availability, ASP declines can lead providers to make some tough economic tradeoffs.

Managing a reimbursement strategy leveraging discounts and concessions becomes a highly impactful decision for pharmaceutical manufacturers.  Incentivizing one segment of providers with discounts may then indirectly be penalizing another.  Mismanagement of these economic incentives can lead some pharmaceutical teams feeling like they’re playing the world's worst game of whack a mole, further contributing to our already fragmented healthcare ecosystem.

Leveraging Turquoise price transparency data to inform an account management strategy

This tenuous balance between discounts, mark-ups, ASP, WAC, and the resulting reimbursement is often misunderstood because there was no consistent way to preemptively determine NCR across provider accounts. We do enjoy a challenge though, so to help mitigate the confusion we’ve amassed the largest database of commercial insurance rates for over 700 buy-and-bill drugs across every setting of care including hospitals, provider groups, ASCs, laboratories, DME vendors, and more. Using Turquoise data, payers, providers, and drug manufacturers can drill down on a specific drug and its payer and provider contracted rate to preemptively determine if a provider account is above water or at risk of having a negative NCR.

Unveiling these dynamics is how we turn the former black box market of healthcare into a transparent, healthy economy.