PBMs’ negotiating leverage against pharmaceutical manufacturers has been a key factor inflating the gross-to-net bubble—the ever-growing dollar gap between sales at brand-name drugs’ list prices and their sales at net prices after rebates, discounts, and other reductions.
For 2023, DCI estimates that the total value of manufacturers’ gross-to-net reductions for all brand-name drugs was $334 billion. (As we describe below, our latest estimates make a crucial change in the presentation of these figures compared with previous editions.)
Multiple forces are poised to pop the gross-to-net bubble for high-list/high-rebate products. This will force PBMs to further evolve their business models, while challenging plan sponsors and the FTC to follow the dollars.
Alas, patients remain caught in the drug channel's murky waters. I still can’t predict when SpongeBob SquarePants departs from Drug Channels—although I wish him a happy 25th birthday!
Portions of today’s post are adapted from Sections 9.2. and 12.5.2. of DCI’s 2024 Economic Report on U.S. Pharmacies and Pharmacy Benefit Managers.
BUBBLICIOUS DRUG PRICING FAQs
Here are some frequently asked questions to help you better understand brand-name drug pricing in the United States.
1. What are gross and net drug prices?
The manufacturer of a drug establishes the drug’s list price, called the Wholesale Acquisition Cost (WAC). A pharmacy’s revenues for a brand-name drug prescription approximate the list price, due to the typical formulas used to compute ingredient cost reimbursement.
A drug’s net price equals the actual revenues that a manufacturer earns from a drug. The net price equals its list price minus rebates and such other reductions as distribution fees, product returns, discounts to hospitals, price reductions from the 340B Drug Pricing Program, and other purchase discounts. Negotiated and statutory rebates, however, are the largest and most significant components of gross-to-net price differences.
Consequently, brand-name drug manufacturers earn substantially less revenue than drug list prices imply, due to the gross-to-net difference between a manufacturer’s list and net prices. That’s also why net drug prices are declining even as list prices grow. See Tales of the Unsurprised: U.S. Brand-Name Drug Prices Fell for an Unprecedented Sixth Consecutive Year (And Will Fall Further in 2024). We’ll update the 2023 manufacturer-specific data in an upcoming post.
Drug channel participants—pharmacies, PBMs, wholesalers, plan sponsors, et al.—do not have access to the net prices that manufacturers earn.
A drug’s net price equals the actual revenues that a manufacturer earns from a drug. The net price equals its list price minus rebates and such other reductions as distribution fees, product returns, discounts to hospitals, price reductions from the 340B Drug Pricing Program, and other purchase discounts. Negotiated and statutory rebates, however, are the largest and most significant components of gross-to-net price differences.
Consequently, brand-name drug manufacturers earn substantially less revenue than drug list prices imply, due to the gross-to-net difference between a manufacturer’s list and net prices. That’s also why net drug prices are declining even as list prices grow. See Tales of the Unsurprised: U.S. Brand-Name Drug Prices Fell for an Unprecedented Sixth Consecutive Year (And Will Fall Further in 2024). We’ll update the 2023 manufacturer-specific data in an upcoming post.
Drug channel participants—pharmacies, PBMs, wholesalers, plan sponsors, et al.—do not have access to the net prices that manufacturers earn.
2. What is the gross-to-net bubble?
A manufacturer’s gross revenues equal its revenues from sales at a brand-name drug’s WAC list price. Net revenues equal its revenues from sales at a drug’s net price, i.e., the actual revenues received and reported by the manufacturer after rebates, discounts, and other reductions.
Drug Channels Institute coined the term gross-to-net bubble to describe the dollar gap between gross sales and net sales. We use “bubble” to characterize the speed and size of growth in the total dollar value of manufacturers’ gross-to-net reductions.
Our terminology has been embraced by industry participants, the government, academic researchers, and others who cover the industry. Click here to read all Drug Channels articles on the bubble.
3. What does this have to do with SpongeBob SquarePants?
One of SpongeBob’s favorite pastimes is “blowing soap bubbles into elaborate shapes.” Hence, Mr. SquarePants is the honorary mascot of the gross-to-net bubble and appears on Drug Channels whenever we discuss the topic. He also graces the set of the Drug Channels Video studio.
Today's article coincides with SpongeBob 25, the international celebration of the 25th anniversary of SpongeBob SquarePants.
Today's article coincides with SpongeBob 25, the international celebration of the 25th anniversary of SpongeBob SquarePants.
OUR BUBBLE BUDDY
Through the compounding effect of gross-to-net pricing differences, the total value of manufacturers’ off-invoice discounts, rebates, and other price concessions for patent-protected brand-name drugs continues to expand. We estimate that in 2023, the total value of gross-to-net reductions for all brand-name drugs was $334 billion.
[Click to Enlarge]
Note that figures in the chart above include brand-name drugs that have lost patent protection and face competition from generic equivalents. Our previous analyses have included only patent-protected brand-name drugs. We have also updated the data based on new disclosures and updates to underlying data sources. The biggest discrepancies compared with previous editions relate to updated estimates for the value of Medicaid rebates, manufacturers’ Medicare Part D coverage gap discount obligations, and 340B Drug Pricing Program discounts. For clarity, we have also restated the historical figures back to 2019.
As the list price of a manufacturer’s product rises, the dollar value of the manufacturer’s rebates and discounts also grows as the manufacturer offers larger rebates to offset the increase in list prices. Hence, the total value of the brand-name drug gross-to-net bubble expanded by about $30 billion (+10%) in 2023, despite the slow growth in list prices and negative growth rates for net prices.
FOLLOW THE DOLLARS
Exhibit 203 in DCI’s 2024 pharmacy/PBM report summarizes our estimates of the major components of the gross-to-net bubble for all brand-name drugs in 2023.
More than half of the $334 billion total gross-to-net reductions for these products come from rebates and fees that manufacturers pay to PBMs and other third-party payers. Most—but not all—of these payments get passed-through to plan sponsors. Discounts under the skyrocketing 340B Drug Pricing Program and Medicaid rebates account for a further one-third of total gross-to-net reductions.
As we show in Exhibit 104 of DCI’s pharmacy/PBM report, the three largest pharmacy benefit managers now process 80% of all equivalent prescription claims. Bigger PBMs can drive a harder bargain for larger rebates to achieve formulary position. The aggregation of PBM rebate negotiations via group purchasing organizations has heightened this concentration.
Section IV of last week’s FTC report highlighted PBMs’ bargaining power against manufacturers.
PBM compensation models continue to evolve, due to increased scrutiny by payers, regulators, and politicians. See Section 11.2.3. of DCI’s pharmacy/PBM report.
SOAPY WATERS
As longtime readers know, Drug Channels has long delved into the gross-to-net bubble’s significant impact on patients.
Pharmaceuticals are the only part of the U.S. healthcare system in which the difference between list and net prices is monetized as rebates and redistributed via intermediaries to payers. The bubble reflects—and drives—patients’ affordability problems, intermediaries' warped incentives, politicians’ misunderstandings of U.S. drug prices, and the media's frequent misinterpretations of pharmaceutical economics. Section 9.3.3. of DCI’s 2024 pharmacy/PBM report reviews nine specific effects of the gross-to-net bubble.
The biggest issue: Patients are still fully or partially exposed to the undiscounted list price of their prescriptions.
Many people now pay a coinsurance percentage of the price negotiated between the pharmacy and the plan or PBM—or even the entire list price when they are within a deductible. Follow the dollars in How Health Plans Profit—and Patients Lose—From Highly Rebated Brand-Name Drugs.
Patients also pay a greater share of net price than is apparent from their coinsurance amount, because plans compute the coinsurance percentage based on a prescription’s undiscounted, pre-rebate list price. As a result, plans often end up shifting out-of-pocket costs to patients with chronic conditions who utilize highly rebated prescriptions. Antonio Ciaccia of 46Brooklyn aptly refers to this phenomenon as Money From Sick People.
CLOSING THE GAP
Multiple factors will contribute to the popping of the gross-to-net bubble for many high-list/high-rebate products:
The bubble will pop—or at least inflate more slowly—as these factors combine to bring list prices closer to net prices. Despite his many years of Drug Channels fame, I suspect Mr. SquarePants is ready for a major shake-up to the current rebate and market access system.
Patients also pay a greater share of net price than is apparent from their coinsurance amount, because plans compute the coinsurance percentage based on a prescription’s undiscounted, pre-rebate list price. As a result, plans often end up shifting out-of-pocket costs to patients with chronic conditions who utilize highly rebated prescriptions. Antonio Ciaccia of 46Brooklyn aptly refers to this phenomenon as Money From Sick People.
CLOSING THE GAP
Multiple factors will contribute to the popping of the gross-to-net bubble for many high-list/high-rebate products:
- Uncapping of Medicaid rebate limits, which has incentivized drugmakers to avoid having to pay the government for the use of their products.
- Novel formulary access strategies, such as launching pharmacy-benefit products with low-list/low-rebate versions.
- Lowering brand-name prescription reimbursement in Medicare to a “maximum fair price” under the Inflation Reduction Act of 2022 (IRA), which will reduce pharmacy and provider reimbursement to a price at or below the current net price. Medicare patients' out-of-pocket coinsurance for these products will be based on the MFP, not the list price.
- The IRA's focus on gross spending for identifying "negotiation eligible" drugs, which will encourage manufacturers to narrow large gross-to-net gaps so as to bypass a drug's selection by CMS.
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