Tuesday, April 04, 2023

Four Trends That Will Pop the $250 Billion Gross-to-Net Bubble—and Transform PBMs, Market Access, and Benefit Design

Time for Drug Channels Institute’s annual update on 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 and other reductions.

We estimate that the gross-to-net bubble reached $223 billion for patent-protected brand-name drugs in 2022. If we include brand-name drugs that have lost patent protection and face competition from generic equivalents, the bubble was even higher, at $256 billion. Our latest data appear below.

Four crucial trends will deflate the gross-to-net bubble—thereby disrupting market access strategies, altering pharmacy benefit manager (PBM) profit models, and changing plan sponsor benefit designs. Perhaps it’s time to get ready for the day when SpongeBob SquarePants will depart from Drug Channels.

Today’s post is adapted from Sections 9.2. and 12.5.2. of our just-released 2023 Economic Report on U.S. Pharmacies and Pharmacy Benefit Managers.


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

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. Below, we outline the major components of these gross-to-net price differences for brand-name drugs.

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 Brand-Name Drug Prices Fell for the Fifth Consecutive Year—And Plummeted After Adjusting for Inflation. I’ll update the 2022 manufacturer-specific data in an upcoming post.

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, and others who cover the industry. 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.


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 2022, the total value of gross-to-net reductions for patent-protected brand-name drugs was $223 billion.

[Click to Enlarge]

As the list price of a manufacturer’s product 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 $15 billion (+7%) in 2022, despite the slowing growth in list prices and negative growth rates for net prices.

Exhibit 189 in our 2023 pharmacy/PBM report summarizes our estimates of the major components of the gross-to-net bubble for all brand-name drugs in 2022. We estimate that a majority of the $256 billion total gross-to-net reductions for these products come from rebates paid to third-party payers and discounts under the skyrocketing 340B Drug Pricing Program. Note that the total value of gross-to-net reductions exceeds the figure above, due to the inclusion of brand-name drugs that have lost patent protection and face competition from generic equivalents.


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.

In the coming years, there are at least four major trends that could significantly deflate the gross-to-net bubble:

1. Uncapping Medicaid rebates

The Medicaid Drug Rebate Program (MDRP) generously (!) caps a drug’s rebate at 100% of its average manufacturer price (AMP). Changes in AMP approximate changes in the WAC list price, because AMP excludes commercial PBM rebates and certain other discounts. Consequently, drugs with multiple years of list price increases have hit this limit—and Medicaid pays nothing for these drugs. (Products that have hit this limit also have discounted prices in the 340B Drug Pricing Program of $0.01.)

However, the American Rescue Plan Act of 2021 eliminates the rebate cap at the end of 2023, which means that rebates could exceed 100% starting in 2024. In other words, some companies with high-list/high-rebate products may have to pay Medicaid to use their products, i.e., negative prices.

The Congressional Budget Office (CBO) projected that making companies pay more than 100% in rebates would reduce the federal deficit by $17.3 billion. (See row 205 of the “Title 9” tab of the Detailed Tables workbook.) It would also provide additional Medicaid rebates to the states, so the full impact is even bigger.

But as I noted in the March 2023 news roundup, manufacturers may instead rationally respond to this incentive with lower list prices. That’s one factor behind the list price drops for older insulins—and the likely actions for other older high-list/high-rebate products.

2. The Inflation Reduction Act of 2022 (IRA)

The IRA makes high-list / high-rebate products much less attractive to Medicare Part D plans.

Today, Part D plans often require enrollees to use products with higher list prices over equivalent drugs with lower list prices. (For example, see my 2020 analysis of market share for products that treat hepatitis C.) That’s consistent with plans’ incentives to progress Part D beneficiaries towards the catastrophic coverage phase, where plans’ currently have no liability. This progression is based on pre-rebate prescription prices. Over time, Part D plans have become at risk for a significantly lower share of Part D spending, while the government’s reinsurance liability has increased substantially. (See Exhibit 241 of our 2023 pharmacy/PBM report.)

The IRA significantly alters these legacy incentives. Beginning in 2025, a plan’s liability will be 65% of costs for spending between $480 and $2,000, and 60% above $2,000. Therefore, plans will begin to shift formularies to favor products with lower list prices over those with higher list prices. Beneficiaries with coinsurance will also prefer these products while their spending is below the $2,000 threshold.

The IRA also makes manufacturers responsible for paying rebates on certain Medicare brand-name Part B and Part D drugs whose AMP increases more quickly than the rate of inflation. This will further discourage manufacturers from increasing list prices, especially for products with significant Medicare utilization. (Note that list prices have been growing more slowly than inflation for the past couple of years.)

3. Novel formulary market access strategies

As I discuss in Section 12.1.1. of our 2023 pharmacy/PBM report, a few major manufacturers have reduced the list prices of brand-name, patent-protected products by launching alternate versions of the products with lower list prices. We’ve already seen examples in such therapeutic classes as PCSK9 inhibitors, hepatitis C treatments, and insulin.

Multiple pharmacy benefit biosimilars are now launching with low-list/low-rebate versions, as I discuss in The Warped Incentives Behind Amgen’s Humira Biosimilar Pricing–And What We Can Learn from Semglee and Repatha.

4. Unprecedented pharmacy economics for Part D prescriptions

Implementation of the IRA will result in a growing number of single-source Part D drugs and biologics having a Maximum Fair Price (MFP). The MFP will likely be lower than the drug’s current net Part D price.

Under the IRA, the Part D negotiated price—the amount that a Part D plan pays to a pharmacy for having dispensed a drug to a Medicare beneficiary—will be equal to the MFP. Consequently, a pharmacy’s reimbursement from a Part D plan for a brand-name drug will also be significantly below the product’s list price. What’s more, Medicare beneficiaries will pay no more than the MFP at the point of dispensing or administration.

For products that already have significant Part D rebates, this change will be akin to popping the gross-to-net bubble for high-list/high-rebate products. For example, insulin could be reimbursed at an amount that would be at or below its current net price, compared with current pharmacy reimbursements that approximate the list price.

CMS has indicated that drugs will get on the negotiation list based on gross, pre-rebate Part D spending. This provides another incentive to bring list prices closer to the lower net prices.

Mr. SquarePants is ready for a major shake-up to the current rebate and market access system. Is your organization ready?

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