Key Insights on Drug Prices and Manufacturer Rebates from the New 2015 IMS Report (rerun)

This week, I’m rerunning some popular posts, so I can finish the forthcoming 2016-17 Economic Report on Pharmaceutical Wholesalers and Specialty Distributors. Click here to see the original post and comments from April 2016. 

It's a timely rerun given the controversy and confusion about EpiPen and PBM rebates. Check out the great discussion in the comments below Thursday’s post. See also my $0.02 in The New York Times: Mylan Tries Again to Quell Pricing Outrage by Offering Generic EpiPen.

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Last week, IMS Health’s IMS Institute for Healthcare Informatics released Medicines Use and Spending in the U.S.–A Review of 2015 and Outlook to 2020. (Free download with registration.)

For the first time, IMS has reported net spending after rebates and discounts, which totaled more than $115 billion in 2015. List prices for brand-name drugs grew by 12.4% while net prices grew by a mere 2.8%. Kudos to IMS for having published these new data, which I hope will advance our national dialogue on drug spending.

Below, I highlight the report’s two most significant charts. Both make me wonder how much longer the industry’s gross-to-net status quo will last.

DRUG DISAMBIGUATION DETAILS

IMS introduces three new and potentially confusing terms in its 2015 report:

• ”Spending on medicines” and “invoice price spending” both refer to the amounts paid to distributors by their pharmacy or hospital customers.

• “Net price spending” is an estimate of the net revenues received by pharmaceutical manufacturers. It therefore reflects estimated rebates, off-invoice discounts, chargebacks, cash discounts, and other price concessions made by manufacturers to distributors, health plans and intermediaries.

None of these terms, however, directly correspond to pharmacy revenues, a plan sponsor’s drug costs, and national healthcare expenditures. For example:

• Pharmacy revenues, for example, roughly equate to IMS’s “spending on medicines” for outpatient dispensing channels minus off-invoice discounts and rebates provided by wholesalers (but not manufacturers) to pharmacies plus channel margins earned by pharmacies.
  
  Thus, exhibit 20 of The 2016 Economic Report on Retail, Mail, and Specialty Pharmacies provides our estimates of 2015 prescription revenues by dispensing format. Our figures do not correspond to IMS's “non-discounted spending” (a fourth term found on page 44 of the IMS report), because we adjust for channel margins and wholesaler discounts. We also (1) estimate the split between “Chain drug stores” and “Mass merchants with pharmacies,” while IMS includes both formats in its “Chain stores” category, and (2) reclassify certain franchise operations into the “Independent pharmacies.”

• Plan sponsors’ costs are roughly equal to: pharmacy revenues minus the share of the manufacturer’s rebates passed through to the plan sponsor (per this article) minus the patient’s cost share (copayment or coinsurance) plus any spreads or administrative fees earned by a pharmacy benefit manager (PBM).
  
  In Exhibit 101 (page 150) of our 2016 report, I provide a mathematical example that illustrates a plan sponsor's net costs for a typical 30-day brand-name prescription dispensed by a retail pharmacy.

If there is enough interest in these nerdtastic details, I may write a more extensive article explaining how the IMS figures relate to—and differ from—other commonly-used data series.

THE DISCOUNT DIFFERENCE

IMS reports that for 2015, gross spending on pharmaceuticals (a.k.a., purchases by pharmacies and providers) was $424.8 billion. IMS estimates, however, that off-invoice discounts and rebates were $115.3 billion. This means that net spending was only $309.5 billion. Alternatively, spending based on invoice prices rose by $46.2 billion, up by 12.2%. Manufacturers’ sales rose by only $24.3 billion, or 8.5%.

The chart below, from the new report, updates the chart that I reviewed in Drug Prices, Manufacturer Rebates, and the Risk to Channel Economics. The growing gross-to-net discount—which IMS calls the “Invoice to Net Spending Difference” and is represented in orange on the chart’s bars—indicates that manufacturers are retaining a smaller share of their price increases.

[Click to Enlarge]

As I explain in Four Takeaways on Drug Spending Realities from the New 2015 Express Scripts Drug Trend Report, a change in spending has two components: changes in unit costs and changes in utilization.

The IMS data can’t be neatly divided into those categories. The new report does, however, provide further evidence that net drug prices are increasing much more slowly than are gross prices. The chart below shows gross (invoice) and net price changes for “protected brands.” IMS defines them products that are more than two years old and have not yet faced generic competition. In 2015, list prices grew by 12.4%, but net prices grew by a mere 2.8%.

[Click to Enlarge]

While these new IMS data are incredibly informative, I wonder whether the growing divergence between invoice and net prices is sustainable. Politicians continue to excoriate drug makers for their list prices. Meanwhile, channel intermediaries—PBMs, wholesalers, pharmacies, and hospitals—base their economic models on list prices. Mind the gap.