Today, much of the public debate surrounding the cost of biopharmaceuticals is focused on the list price of an individual drug or treatment regimen.

However, the list price is not what a manufacturer generally makes on the drug, and it typically has little to do with what a patient has to pay for his or her medicine. To help put this debate into context, here is a new educational video that helps explain how prescription drug costs are really determined and where the pharmaceutical dollar actually goes.

The short video, Understanding Your Drug Costs: Follow the Pill, begins with a typical transaction at your local pharmacy. It then traces that purchase back through a series of complex transactions that occur throughout the pharmaceutical distribution and insurance chain. The video breaks down the differences between the list price and the net price of a medicine, explains how the various actors (e.g., pharmacy benefit managers (PBMs), wholesalers, insurance companies, etc.) in the health care ecosystem operate to deliver medicines to patients and at what cost, and demonstrates why it is that a biopharmaceutical company has very little power to determine what a patient ultimately pays for his or her medicine.  

The Difference between List Price and Net Price?

As mentioned above, most stories about drug pricing focus on the list price of a drug—the price a drug manufacturer initially sets. But the reality is very few people actually pay the list price, and the amount of money actually received by the drug company – the net price – is typically much lower.

That is because drug manufacturers annually provide billions of dollars in rebates and discounts on their innovative therapies to federal, state and private payers, in addition to offering direct financial assistance to patients to help cover their out of pocket costs not covered by their insurers.

These rebates and discounts occur in a number of ways. In the commercial insurance market, rebates and discounts are the result of market-based negotiations among manufacturers, insurers and pharmacy benefit managers. These discounts vary, but can result in significant discounts of as much as 50%i or greater depending on the program. When the government is the payer, the vast majority of purchases have mandated rebates and discounts of significant amounts.

Whether mandated, negotiated or voluntarily offered to patients, discounts are widely achieved in the majority of all drug sales in the United States. As a result, focusing on the list price of a biopharmaceutical doesn’t reflect the realities of the healthcare market; it is like focusing on the MSRP when buying a new car—it is the starting point for a complex series of negotiations and discounts that ultimately lower the actual price significantly.

 

Additional Reading & Resources

Medicaid Rebates

As a condition of Medicaid funding of their products, drug companies are required to provide at least a 23% rebate on innovator drugs and biologics used by Medicaid beneficiaries.ii In fact, these rebate requirements expanded under the Affordable Care Act. Additionally, within the Medicaid program, states often negotiate supplemental rebate agreements with drug companies that can result in further discounts on top of federal requirements. Other federal programs, such as those for active duty military and veterans and many hospitals and other facilities that serve uninsured or under-insured populations, also receive significant, mandated discounts off the list price of biopharmaceuticals.

Medicare Discounts

In the Medicare program, discounted prescription drug prices are reflected in two ways. First, in the traditional, fee-for-service Medicare Part B program, the federal government reimburses providers for prescription drugs based on a formula that takes into account all of the rebates and discounts available in the commercial marketplace. In this way, the Medicare program is benefitting from the savings brought about by market-based contracting by sophisticated commercial payers.

Second, in the case of Medicare Part D and Medicare Advantage (i.e., Medicare Part C), private insurers—which are responsible for administering these programs—negotiate rebates and discounts with drug companies in much the same way as in the commercial insurance market. The discounts resulting from these negotiations benefit the Medicare program in the form of lower annual plan bids, which Medicare uses to determine how much it will reimburse these insurers for covering participating Medicare beneficiaries (i.e., lower plan bids result in lower Medicare expenditures for these programs). Patients also receive further direct assistance from manufacturers through the Medicare Part D Coverage Gap Discount Program.

Kaiser Health News and USA Today; Pipeline to Profits: How Drug Middlemen Make Their Money

Berkley Research Group; The Pharmaceutical Supply Chain: Gross Drug Expenditures Realized by Stakeholders

References

  1. King, S. 2014 (May 11). Which companies pay the highest US rebates and which companies are most dependent on US drug price increases? FirstWorld Pharma, available at: http://www.firstwordpharma.com/node/1209473?tsid=17#axzz3nHJUZr5s
  2. PWC. 2013. A Look at Exchanges and What They Mean for Pharma, available at: https://www.pwc.com/us/en/health-industries/health-research