In the classic political film, “The Candidate,” Robert Redford’s character, fresh off his victory, turns to his election strategist and asks, “What do we do now?” And the movie ends right there. The pharmaceutical industry now is facing a similar moment. After years of advocating for more transparent pricing and criticizing the rebate-for-access model for its perverse pricing incentives, pharma is on the cusp of partly getting its wish. But our movie doesn’t end there, so we must answer that question: What do we do now?



On Feb. 6, 2019, the U.S. Department of Health and Human Services published its long-awaited proposed rule eliminating safe harbor protection for rebates paid by pharmaceutical manufacturers to private payers and pharmacy benefit managers to secure preferred formulary access in government-sponsored insurance plans. In its place, HHS is proposing a new rule for safe harbor protection of drug discounts adjudicated at the point of sale, effective Jan. 1, 2020. Simply put, the government has determined that the longstanding rebate model represents an illegal kickback to payers and PBMs operating in Medicare and Medicaid managed-care markets.


The planned shift from rebates to point-of-sale discounts will have far-reaching consequences. While many of the details of the rule remain to be finalized, we believe that these are the key themes:

  • Patients’ out-of-pocket costs will go down in some situations, leading to higher rates of fulfillment and therapy adherence.
  • There will be significantly higher levels of price transparency. Payers will gain greater insight into the prices that their peers are paying, and manufacturers will have more visibility into the discounts that their competitors are offering.
  • The pace at which Medicare patients move through their deductible and coverage gap phases will change as discounts reduce their out-of-pocket spending. A brand’s discount rates and its liability for 70% of coverage gap spending will have significant interaction, creating new modeling complexity.
  • While there has been significant speculation about the long-range viability of rebates in the commercial portion of the business, the pace of its potential demise will lag compared with the government sector. Manufacturers and others in the ecosystem likely will be living in both a rebate and non-rebate world for at least some time.
  • Pharmacies will replace payers and PBMs as the entities that float capital. This will pose challenges for independents and small chains, and may affect supply availability for Medicare patients.


As pharma prepares for this new world, there remains much that we don’t know. The public comment period runs until April 8, 2019, and HHS will finalize a ruling sometime afterward. There’s a lot of speculation about matters such as the implementation timeframe, specifics of continued protection for value-based arrangements, and the true level of price transparency, to name just a few. In this uncertain environment, there’s no time to waste in putting a plan together to thrive, no matter what the final rule details are. We believe that there are five critical activities that pharma must undertake to succeed:

  1. Define the potential states of play. What are the major environmental possibilities, both in 2020 and beyond? To what extent will commercial contracts persist in their current state? How might payer benefit designs and utilization management in Medicare evolve? What will the level and pace of transparency look like? Manufacturers should define a range of possible one- to three-year scenarios to enable comprehensive planning. Those scenarios can be refined post-April 8 as we get better visibility into the public comments that different stakeholders have made about the proposed rule.
  2. Develop access and pricing strategies for each scenario. Manufacturers should evaluate their competitive access strategies under these different scenarios. How will differently situated competitors respond when they have different levels of visibility into pricing? Will offering different rates to different payers for the same level of access on paper remain viable? How would potential safe harbor protection for some value-based arrangements alter strategies? Should companies develop separate National Drug Codes for their commercial and non-commercial businesses? The range of strategic options is broad and complex, giving manufacturers an opportunity to gain the edge by starting to play them out thoughtfully before bids are due.
  3. Revamp the contracting business process. In a more transparent world, individual contracting decisions will need to be developed and negotiated differently. If Humana will see Aetna’s discounts, for example, the Aetna account executive can no longer negotiate that rate in a vacuum. Manufacturers will need to update their pricing guidelines and supporting rationale, and be prepared to communicate these details more broadly if needed. Manufacturers also will need to rethink who is handling the negotiations. Perhaps more manufacturers will move contract negotiations away from field-based account executives and into headquarters. Contract operations also will need to evolve to handle the chargeback process in lieu of rebates.
  4. Focus on patient support services and related communications. Changes to the pricing model will likely lead to a significant increase in annual member churn among Medicare Part D plans, thereby increasing therapy disruptions for patients and healthcare professionals. In analyzing the current market, we’ve seen that payer rejections tend to increase 10 to 20% around the start of the year under normal churn conditions. By ensuring an adequate level of effort and focus on support services during a heavier period of need, pharma companies can help patients and HCPs navigate new-year challenges around coverage disruption and tighter payer controls. Companies will also need to keep an eye on pharmacy stocking to minimize therapy disruptions, especially if the newly established chargeback process is either too slow or not fully functional by the time the policy goes live.
  5. Prepare with the right analytics. The shift to point-of-sale discounts will present multiple analytical difficulties. Forecasting coverage gap liability has been a challenge for much of the industry, and it will only get more complicated with Medicare discounts affecting how patients flow through different portions of their Part D benefit. Addressing this will reduce the risk of insufficient accrual for this spending. The payer’s own economics around dynamics such as low-income subsidy patients and the coverage gap period will also change, so manufacturers need a revised understanding of how their negotiating counterparts will perceive a bid. The creation of a chargeback system also will generate a new data source for pharma companies to mine in looking to understand issues like local market performance and patients’ cost sensitivity.

Changes to the pricing model are upon us, and it will take significant effort to plan for this new world. However, with the potential patient disruptions and the tens of billions of dollars in rebates on the cusp of disruption, the stakes are far too high to proceed without comprehensively rethinking how we make pricing and access decisions. With the right approach, pharma companies can move on from “what to do now” to “what to do next.”