Imagining A Rebate-Free World with Cigna

Speaker 1:
Welcome to TD Cowen Insights, a space that brings leading thinkers together to share insights and ideas shaping the world around us. Join us as we converse with the top minds who are influencing our global sectors.
Charles Rhyee:
Hi, my name is Charles Rhyee, TD Cowen's healthcare technology and distribution analyst, and welcome to the TD Cowen FutureHealth Podcast. And today, we're live from TD Cowen's 46th annual healthcare conference in Boston. And today's podcast is part of our ongoing series that continues TD Cowen's efforts to bring together thought leaders, innovators, and investors to discuss how the convergence of healthcare, technology, consumerism, and policy is changing the way we look at health, healthcare, and the healthcare system.
And in this episode, we're discussing the world of drug reimbursement. And to discuss the topic, I'm joined by Adam Kautzner, president of Express Scripts and Evernorth Care Management, which is part of Cigna. Adam, thanks for joining us today.
Adam Kautzner:
Thanks for having me. Happy to be here.
Charles Rhyee:
Maybe to start, could you talk a little bit about your role at Express Scripts and Cigna, and then what you're responsible for?
Adam Kautzner:
Yes, happy to. So as president of our pharmacy benefit services business, I'm responsible for the core operations of the business. We service a hundred million Americans in servicing on their pharmacy benefits. We process over two billion prescriptions a year. So we focus on access, affordability, and ultimately the health of the consumers that we have within our book of business. We have over 2,000 clients. Many of those are employers, labor unions, health plans, or different types of government entities. We're honored to be servicing the Department of Defense, so the men and women that keep our country safe and their families as well, and have for a very long time.
With those services, we negotiate with drug manufacturers and with pharmacies to keep those costs in line. We leverage our drug formularies to be able to create additional competition in the market to keep all of those costs in check. And then I'm also responsible for driving change and innovation within the pharmaceutical space. And so we have a new model. I know we're going to talk about that today where we're going to be moving away from rebates into a new rebate free model that focuses on the consumer, simplifying the experience for the consumer, and lowering the out-of-pocket costs, ultimately, again, to help them be able to make better, more informed decisions.
And ultimately, for our clients, to ensure that we're able to deliver a more predictable type of experience and pharmacy benefit that long-term, we expect to be very durable and predictable for us as well.
Charles Rhyee:
Great. And yeah, we're going to jump into all of that here in a second. So maybe then to start. So last October, Cigna made the announcement that it was introducing a new model for drug reimbursement that would be rebate-free, which I think for those familiar with drug reimbursement, sounds revolutionary. But for those unfamiliar with how drugs are typically paid for, could you maybe quickly explain the role that rebates play in the reimbursement of drugs today?
Adam Kautzner:
So today, about nine out of every 10 prescriptions are generic in America, but 10% of the drugs are branded products. And those 10% of drugs account for about 88% of the total spend on pharmaceuticals. So it's an astounding number. If we take that 10% of products though, many of those products are in competitive classes. They have other drugs that do effectively the same thing. In those spaces, with rebates today, we're able to bring down net costs predominantly for our employers. And we focus on driving down the net cost in those competitive classes.
Rebates serve a purpose today. They provide that lower net cost. In many cases, employers utilize those rebates to then keep premiums as low as they possibly can. However, rebates recently have become a bit more unpredictable. If we look at changes that have happened on the government side of Most Favored Nation, Inflation Reduction Act, or things that are happening in the industry, like biosimilars coming to market, those are all the types of changes that are now making rebates a bit more unpredictable.
And then you look at the changes in benefits as well. As more and more employers are moving towards high deductibles and to co-insurance plans where you pay a percentage on the drugs, all of those types of changes are causing the member now or the consumer to bear more of that cost. And so they're seeing what the list prices of those drugs are, and that's causing some additional member satisfaction in the market.
Charles Rhyee:
Right. And so when we think about rebates, it's really a discount, right? But it's calculated after the fact. And what's interesting, I think, for a lot of folks, the term rebates, and certainly maybe how folks in Washington have viewed it, holds a somewhat negative connotation a little bit, at least the way it's applied in the reimbursement process. Maybe just to talk about that a little bit, what are the concerns that some people have about rebates? Why does it generate this negative sentiment from folks?
Adam Kautzner:
Well, rebates today predominantly go back to the employer. And keep in mind, employers today, in many cases, spend about 90% of the total cost of healthcare for an employee and their families. But those rebates are going back to the employer in most cases, and they're not shared with the employees. Some employers do use point of sale rebates. But in those cases even, it's an estimate. It's usually a smaller percentage. Sometimes, it can be retroactive and there's reconciliation involved. And so it's a much more complicated and opaque process, but it's been the process that we've had.
From a lawmaker perspective, there certainly is a view that rebates themselves today, more of that value needs to be passed through to the consumer, and that consumers should benefit from those discounts because they're paying their deductible or their co-insurance based off the list price of the drug, not the actual net cost of that product. If you're able to pass through additional discounts, it lowers the cost for the American at the pharmacy counter. And so that's where a lot of the negativity has been around rebates today. They're not shared, in most cases, with the consumer. It's hard to even estimate what they are. And it's caused challenges in the market. And our new model aims to address those types of problems.
Charles Rhyee:
So maybe let's jump into that. How does Cigna's rebate-free model work, and how do you see that addressing the concerns that you just outlined?
Adam Kautzner:
I'm glad you asked. So this new model is... Being rebate-free means we are going to be contracting with drug manufacturers in a whole new way. And this new manner is an upfront discount with full benefit to the consumer. So the consumer will know before they go to the pharmacy counter, through their digital app or online, that discount. On average, those discounts for those products that have rebates today is going to be about 30% to the consumer if you're in your deductible phase or you have that co-insurance. So it's significant lower out-of-pocket cost to the consumer upfront.
We're also going to go out through our price assure functionality, which essentially, we'll go out and connect to direct to consumer, cash cards or within our benefit. And it's going to find the lowest price. So we can guarantee to the member, they're going to get the lowest price, they're going to get the 18,000 safety, quality and benefit checks we do on every prescription, and anything they spend is going to be applied to their deductible because it stays within the benefit. So they have assurances not only of the quality and the safety, but also the lowest price, and our ability then to be able to provide to our employer clients full transparency of what's happening. So you end up with a happier member who's spending less and an employer who's seen that full transparency of all the pieces, and all of that's going to be done with us charging a simple administrative fee.
So we're not going to be reimbursed based off of the cost of the drug or the discounts we negotiate. Instead, our reimbursement is going to be on a per member per month fee or a per prescription fee. So that's an upfront, simple way that we are reestablishing these benefits. We're going to be doing the same thing with pharmacies as well. We're recontracting with community pharmacies. We're going to reimburse them more closely to what they can purchase the drug at, and provide them with quality bonus payments based on the health of the patients that they're serving. So all the way around, it's a big win, and we're thrilled to be able to bring this to the market.
Charles Rhyee:
Can you talk a little bit mechanically how does that process going to work when you have to renegotiate with pharma, recontract with pharmacies, maybe give a little bit more insight in the mechanics of what this new model looks like compared to the model today?
Adam Kautzner:
Yes. And at first, we'll say we are doing really well in negotiating both with drug manufacturers and negotiating with pharmacies. Those are the primary components of how we keep affordability in check within the prescription benefits. In terms of pharmacies first, pharmacies will be reimbursed at essentially more closely to what they can purchase the product at with a dispense fee. So their economics essentially then are much more around the services that they're providing and less based off of the cost of the drug. For many of them, that's actually a really good news, and they want to get reimbursed to be able to do more at the pharmacy counter to help patients, especially in different communities where access to care can be a challenge.
As a pharmacist myself, growing up in rural America, I understand that a pharmacy can be much more than just putting pills in the bottle. Many of the pharmacies that we talk to, they want to do those things and we want to reimburse them for those services with different solutions. On the pharma side, drug manufacturers want what we want. They want to lower the cost for patients at the pharmacy counter. So we are, through this new rebate model, going to be able to do that. Those conversations are continuing to progress really well, especially for the largest drug manufacturers that we're starting to talk to right now about this brand new way of contracting.
Where we also see benefit and opportunity is, today, many drug manufacturers offer copay discount cards. If you're in the deductible, they're going to help buy that down. In the future state, there's going to be less of that to need to buy down because we're going to already be negotiating discounts upfront. So we're going to go and contract as part of these discounts, those additional copay discounts into the existing discount for the rebate-free model, so additional benefit to help to offset the premiums. Also, about 10% of prescriptions today at the pharmacy counter aren't picked up. Many of those are because of cost and affordability. We're going to reduce those things.
So more patients are going to have access to the medications they need. They can refill them when they need to. That's also good for drug manufacturers. So it's a win all the way around for manufacturers as well. For those things, we are going to negotiate aggressively so that we have market leading rates in our rebate-free model. But Charles, we're also going to continue to support, for a period of time, our rebate model.
Charles Rhyee:
Your largest competitors talk about how they pass through 100% of rebates to the member or to employers. Why isn't that the same thing if both methods should seemingly get you to lowest net cost?
Adam Kautzner:
So the rebates today, they're estimated. Many times, there's reconciliation that has to be done after the fact. What qualifies? Certain claims that qualify. It's a complicated and a bit convoluted system. We all make it work in some way, but it takes time. What we're talking about here is something that's immediate. It provides full clarity and transparency, both to our clients, our employers, but also to the patient and its full pass through of the value. So it's a simplified experience that's going to be much better for the member. They're going to know well ahead of time before they walk up to the pharmacy counter. Our analytics are going to be able to provide them with those pieces. And it provides them with full assurances without the need for reconciliation, potentials to have to pull back dollars or ask for more dollars after the fact, all of those types of things. Those are complexity pieces of today, which we will be correcting with what we're doing with our new model.
Charles Rhyee:
One of the big pieces of rebates has been the use of formularies. Right? So pharma companies have historically given more rebates, have more attractive positioning on the formulary. What's the role of formularies though in a rebate-free model?
Adam Kautzner:
Formularies will function in much the same way in the new model versus how they function today. We will continue to have a hyper focus on lowest net cost of those products. We will still take a clinical first approach on all of the deliberations and decision making. Once that clinical first approach has been applied without any cost, that's when we move into the formulary making process. But lowest net costs will still be important. The supplemental discount that we're going to be contracting, that's going to be the function of getting you to the lowest net cost instead of a rebate in this brand new model.
So those components will all be essentially the same. So I don't anticipate major changes happening other than it's going to now be a new type of discount with other pieces that we've talked about incorporated, whether it's a copay discount card component, additional adherence pieces that make it more valuable to the manufacturer, and it will also make it more valuable then to the employer and patient by us garnering larger discounts overall.
Charles Rhyee:
You touched on maybe a little bit before, but I think the company has talked about targeting about 50% of clients to shift to the new model starting in 2028. When you're going to employers? How is this model better for employers? Particularly because I think you mentioned earlier that historically, employers have used rebates to pay down maybe cost of other benefits or just overall... They can use it for whatever, really. In this new model, if it's all upfront, maybe talk about what is the benefits for employers to adopt?
Adam Kautzner:
So for employers, one, if we look at the backdrop of the unpredictability of rebates and just the environment that we're in right now and the drastic changes that happen on pricing, that part of the market has made what was a very predictable piece, which traditionally was a rebate guarantee, now very unpredictable. And so from an employer perspective, that's a part that they don't like. And so in this new model, the predictability is going to be there.
Additionally, we're going to be able to provide enhanced levels of transparency for the employer, specifically around the supplemental discount that's coming in. They're going to get the full value of that supplemental discount. We're going to be, as I said, pulling in additional discounts as well to help offset those premiums. Lastly, they get the benefit of happier members, happier employees, likely more productive, and families. So there's a better experience for their members, which employers want and we will be able to deliver. When we designed this new model, we started with the consumer first and what are the issues the consumer deals with, and then built it back from there. So everything starts with the consumer, and that is resonating really well with our employers.
Charles Rhyee:
How is this better for patients then in the end?
Adam Kautzner:
Patients get the best of all worlds with this type of model. They're going to get improved access overall, especially from pharmacies that are now going to be incented and focused on providing them with better overall care, and they're going to be less focused on what the cost is of that drug, from where they're buying it, because we're going to reimburse them closer to that cost. They're going to have lower out-of-pocket costs for especially branded medications in the most tough periods of being in the deductible phase or in a co-insurance environment.
And then they're going to have access to additional information. So going to the pharmacy, they're going to know upfront. It's a simplified model. So we expect this to be heavily with high NPS scores around the consumer with this type of new model and new experience that they're going to have.
Charles Rhyee:
All right. Well, there's a lot to look forward to. Adam, thank you very much for being here today.
Adam Kautzner:
Thanks for having me.
Speaker 1:
Thanks for joining us. Stay tuned for the next episode of TD Cowen Insights.