What is Price Protection?

Price Protection Blog.jpg

Special thanks to co-writer Heenal Patel, Manager Pricing & Contracting. 

In United States' managed care contract administration, price protection is a strategy frequently used on executed contracts.

In simple terms, price protection calculates a ceiling price, safeguarding a price point as price increases occur. As drug prices rise, a rebate is issued for anything above the maximum price threshold. Typically, price protection strategies are negotiated between Pharmacy Benefit Managers (PBMs) and manufacturers, with the PBMs receiving the most favorable rates. These rebates are paid as a percentage in addition to access, market share, or admin fee rebates and are based on utilization submitted either quarterly or monthly to the manufacturer as part of the regular rebate cycle. Over the past decade, the trend has been moving towards a steep increase in price protection rebates across the industry.

Price protection assures that price increases are capped. If product price increases beyond this cap, then an additional rebate (Price Protection) is paid to make up for the higher price. The further a price gets away from the maximum allowable price, the deeper the discount. In some cases, price protection rates may vary by NDC-11 within a Product Family, further increasing the complexity of the calculations required to administer the rebate program.

For example, a contract may provide price protection for a customer if the price increases past a threshold of 5% for a drug in a given year.

 

1/1/2016

3/1/2016

12/1/2016

Drug Cost (List Price)

$100.00

$105.00

$115.00

Maximum Allowable Price (5%)

$105.00

$105.00

$105.00

Price Protection Rebate

$0.00

$0.00

$10.00

If the drug increases to $115 and the dispense date is 12/1/2016, the price protection rebate issued would be $10.00 per unit using the following calculation:

New Price - Max Allowable Price ($100 + threshold of 5%) = Price Protection Rebate

$115.00 - $105 = $10.00

Price protection strategies can become quite complex.  Aside from the standard price protection described above, there are also other variations including Cumulative, Resetting, and Net Basis Pricing.

Cumulative

In the cumulative iteration, year by year, the max allowable price increases by the price protection threshold percentage. Sticking with the example we’ve used, assuming the price protection threshold is 5%, the max allowable price would be $100 plus 5% or $105 for the first year. The second year would be the first year’s max allowable price of $105 plus 5%.

 

1/1/2016

3/1/2016

12/1/2016

1/1/2017

Drug Cost (List Price)

$100.00

$105.00

$115.00

$120.00

Maximum Allowable Price

$105.00

$105.00

$105.00

$105 + 5% = $110.25

Price Protection Rebate

$0.00

$0.00

$10.00

$9.75

If the drug cost increases to $120 and the invoice date is 1/1/2017, the price protection rebate issued would be $9.75 per unit due to the change in the maximum allowable price.

Resetting

In the resetting iteration, the Maximum Allowable Price is calculated by multiplying the current drug cost by the price protection threshold. The Maximum Allowable Price is calculated on a yearly basis, thus resetting the value year by year as drug costs change.

For example, assuming the price protection threshold is 5%, the Maximum Allowable Price for 2016 would be calculated by multiplying the Drug Cost, $100, by the price protection threshold, resulting in $105.00 for the first year. For 2017, the Maximum Allowable price would reset, multiplying the new drug cost of $120 by the 5% price protection threshold, resulting in a Maximum Allowable Price of $126, with no rebate paid.  

 

1/1/2016

3/1/2016

12/1/2016

1/1/2017

Drug Cost (List Price)

$100.00

$105.00

$115.00

$120.00

Maximum Allowable Price

$105.00

$105.00

$105.00

$120 + 5% = $126

Price Protection Rebate

$0.00

$0.00

$10.00

$0.00


Net Basis Pricing

In this type of price protection, the contract calls for an agreed upon price negotiated between the PBM and manufacturer. The price protection will kick in once the actual price surpasses the negotiated price. The rebate will be in the form of the difference between the negotiated price and the actual price. This could possibly be paid as a per-unit or per-package dollar amount.

For example, if the negotiated price is $100 and Wholesaler Acquisition Cost (WAC) moves to $115, then a rebate of $15 would be earned.

 

 

1/1/2016

3/1/2016

12/1/2016

1/1/2017

Drug Cost (List Price)

$100.00

$105.00

$115.00

$120.00

Negotiated Price

$100.00

$100.00

$100.00

$100.00

Price Protection Rebate

$0.00

$5.00

$15.00

$20.00

 

Mechanically, this is very similar to the other price protection rebates described here; however, with Net Basis, the idea is to make the customer whole by rebating the dollar amount specially paid above the negotiated price. It is not a percentage price increase that the strategy is working off of, but instead an explicit pricing agreement. Additionally, the agreement is not typically subject to cumulative, resetting, or evergreen considerations, but is simply an agreed upon price point to run the length of the agreement. The agreement may contain a schedule for set increases in Negotiated Pricing.

Looking beyond these different types of price protection, there are other proprietary and customized variations of price protection across the industry. With each variation comes new considerations in design, development, setup, and reconciliation procedures. Additionally, for each variation, there should be careful consideration of testing and end-user training. Incorporating modeling activities to confirm functionality is crucial in administering any price protection rebate. It is also crucial to consider downstream effects of these strategies to reporting capability. With successful implementation of all these considerations, price protection can be handled completely within the system of choice.

Co-written by Heenal Patel, Manager Pricing & Contracting.

Heenal is a Manager within the Pricing, Contracting & Market Access practice at HighPoint Solutions, focused on designing Commercial Business Operations and technology solutions for Pharmaceutical and Medical Device Companies. Heenal has over 5 years of Life Sciences industry experience with expertise in the commercial contracting space. Heenal’s experience includes Contract Lifecycle Management, Purchase Based and Managed Care Rebates, Strategy and Process Improvement, Ad hoc Reporting, and Master Data Management within large Pharmaceutical Corporations.


 

Tags: Life Sciences, pcma

   

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