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Payer & Supply Chain Economics Favor Higher Cost Drugs

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In recent years there has been increased recognition that the structure of the reimbursement and supply chain plays an important role in keeping drug prices high.

Several key stakeholders generate larger rebates, fees and transaction spreads from higher-priced drugs, as these are typically calculated as a percent of a drug’s list price. These forces create incentives for PBMs, payers, wholesalers/distributors and pharmacies that are at odds with efforts to lower out-of-pocket drug costs for patients. In fact, despite the introduction of lower-cost authorized generics and biosimilars in large categories such as diabetes, immunology and cancer, there has been a surprisingly muted effect on costs to patients and the health system. Authorized generics aren’t used much and biosimilar drugs aren’t discounted very deeply relative to reference products.

According to a recent analysis by Adam Fein, the differential between gross and net revenues reached $175 billion in 2019, with approximately two-thirds of this amount comprised of rebates to third-party payers. Rebates are so important to the payer and profits from spread pricing so lucrative for providers that there is strong systemic resistance to recent efforts at reform.

Beyond rebates, another major contributor to the differential is the statutory discount that manufacturers give providers through the 340B program. As a result of the significant spread between these hospitals’ and clinics’ acquisition and reimbursement price, there is a tremendous incentive to prescribe the most expensive products. Finally, other participants in the pharmaceutical supply chain earn fees and spread pricing based on the list price of the drugs they handle or administer.

Key Facts & Figures

$175 Bn

The differential between gross and net revenues reached $175 bn in 2019, with approximately two-thirds of this amount comprised of rebates to third-party payers.

25%

The differential between the WAC and net price for the 20 top-selling drugs in the U.S. is 25%, with the four largest drugs exceeding 50% discounts.

43%

The average gross-to-net spread for the companies in our universe is 43%, with the difference reflecting the portion of revenues captured by payers (including government), PBMs, pharmacies and distributors.

Payers routinely receive rebates approaching 50% or more off the list price of drugs, though patients’ out of pocket costs are not reduced.

The entrenched system through which pharmaceutical companies rebate a significant percentage of the reimbursed drug price back to the payer is a structural problem that leads to host of inefficiencies and distorted incentives throughout the supply chain.

The average gross-to-net spread for the companies in our universe is 43%, with the difference reflecting the portion of revenues captured by payers (including the government), PBMs, pharmacies and distributors.
Although rebates remain the largest component, 340B discounts are a growing factor for certain companies, e.g. Merck, Lilly and Sanofi are near the top due to dominance of insulins in their portfolios.
The differential between the WAC and net price for the 20 largest drugs is 25%, with the 4 largest drugs exceeding 50% discounts.

Unfortunately, patients and Part D beneficiaries typically do not share in these large rebates and steep discounts to the list prices. Coinsurance and cost-sharing in commerical and Part D plans are based on percentages of the pharmacy prices that generally exclude rebates. Moreover, hospitals and contract pharmacies often retain the large 340B spread rather than passing these savings on to patients.

Research & Insights

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Reports

Impact of President's Budget and Point of Sale Rebate Proposal…

Milliman analyzes the impact of the proposed rule to implement point of sale rebates in Medicare Part D.

Drug Pricing Lab 03/08/2019

Academic Literature

List Price, Net Price, and the Rebate Caught in the…

Pharmacy benefit managers (PBMs), such as Express Scripts, CVS Caremark, and Optum Rx, are some of the larger companies that administer the Medicare Part D prescription drug benefit.

JAMA Viewpoint 03/06/2019

Academic Literature

Association of Rebates in Part D with Patient OOP and…

The way Medicare Part D's benefit design shows that rebates actually increase patients' out-of-pocket costs while shifting spending from plan sponsors and manufacturers to Medicare.