Tuesday, August 04, 2020

The Gross-to-Net Bubble Hit $175 Billion in 2019: Why Patients Need Rebate Reform

Last Friday’s Executive Orders revived the government’s effort to reform rebates in federal programs. Whether that effort succeeds, today's update reminds us what's still at stake in reforming rebates within the U.S. drug channel.

For 2019, Drug Channels Institute estimates that the gross-to-net bubble—the dollar gap between sales at brand-name drugs' list prices and their sales at net prices after rebates and other reductions—reached $175 billion.

The bubble reflects—and drives—many of patients’ problems and misunderstandings of U.S. drug prices.

However, the political and practical challenges to rebate reform remain daunting. Few people grasp the complex economic interplay of patient out-of-pocket spending, cost-shifting, premiums, and payer incentives.

Despite the pandemic, I remain hopeful that we can help this bubble pop.


Here are some frequently asked questions to help you better understand pricing and its implications.

1. What are gross and net drug prices?

The manufacturer of a drug establishes the drug’s list (gross) price, which is called the Wholesale Acquisition Cost (WAC). A drug’s net price equals its list price minus all rebates, discounts, and fees.

The major components of these gross-to-net price differences for brand-name drugs include:
  • Rebates to commercial payers
  • Rebates to Medicare Part D plans
  • Rebates to the Medicaid program
  • Discounts to healthcare providers under the 340B Drug Pricing Program
  • Manufacturers’ payments to drug channel participants:
    • Admin fees to PBMs
    • Fees and discounts to drug channel participants
    • Fees and discounts to pharmacies
  • Patient assistance and copayment support payments
Consequently, brand-name 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 Surprise! Brand-Name Drug Prices Fell in 2019. I’ll update the available manufacturer-specific data in an upcoming post.

2. What is the gross-to-net bubble?

Drug Channels Institute coined the term gross-to-net bubble to describe the speed and size of growth in the total dollar value of manufacturers’ gross-to-net reductions.

A manufacturer’s gross revenues equal its revenues from sales at a 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 listed above. Negotiated and statutory rebates to third-party payers are the largest and most significant components of gross-to-net differences.

Our terminology has been embraced by industry participants, the government, and others who cover the industry. In fact, the Medicare Payment Advisory Commission (MedPAC) used the term in its June 2019 Report to Congress.

Click here to read all Drug Channels articles on the bubble.

We also own the super cool domain name www.GrossToNetBubble.com, which redirects to our most recent article on the bubble’s size.

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.


The compounding effect of gross-to-net pricing differences means that the total value of manufacturers’ off-invoice discounts, rebates, and other price concessions for brand-name drugs keep expanding. We estimate that in 2019, the total value of gross-to-net reductions for brand-name drugs was $175 billion. We first published the 2019 figure in our 2020 Economic Report on U.S. Pharmacies and Pharmacy Benefit Managers, released last March.

[Click to Enlarge]

As the list price of a manufacturer’s products rises, the dollar value of the manufacturer’s rebates and discounts grows. The manufacturer also offers larger rebates to offset the increase in list prices. Hence, the total value of the gross-to-net bubble expanded by about $9 billion (+6%) in 2019, despite the slowing growth in list prices and the negative growth rates for net prices. However, the total value of rebates and discounts grew at the slowest rate in recent years.

Exhibit 160 of our 2020 pharmacy/PBM report summarizes our estimates of the major components of the gross-to-net bubble for brand-name drugs in 2019. We estimate that about two-thirds of total gross-to-net reductions comes from rebates paid to third-party payers.


As longtime readers know, Drug Channels has often delved into the gross-to-net bubble’s significant impact on patients.

Here are two of the most pernicious problems:
  • Seniors with Part D coverage pay more than they should. A patient’s progression through the Part D benefit tiers is based on the prescription price negotiated between the plan and the pharmacy. That negotiated price excludes rebates, so beneficiaries reach catastrophic coverage—and its unbounded 5% out-of-pocket expense—sooner when using products with higher list prices.

    Payers and PBMs have incentives to select higher-priced, heavily rebated drugs instead of lower-cost alternatives. That’s one reason Part D plans require enrollees to use products with higher list prices over equivalent drugs with lower list prices. (See Why Part D Plans Prefer High List Price Drugs That Raise Costs for Seniors.) Manufacturers are not permitted to provide copayment support to beneficiaries of federal healthcare programs. Therefore, the burden of using a higher-price product is borne entirely by the patient.

    This dynamic explains why it’s so hard to implement rebate reform in Part D. Stand-alone Part D plans have limited flexibility to absorb the removal of rebates. In other words, the premiums for a majority of Part D beneficiaries are artificially reduced by asking about one-third of the sickest seniors to pay inflated out-of-pocket costs.
Let’s hope we can have honest, fact-based conversations to address these issues. Perhaps a phased-in and targeted approach could jumpstart the system’s evolution, as I suggest in my analysis of Trump’s Executive Orders.

As Mr. SquarePants would say: I’m (still) ready.

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