Friday, April 05, 2024

Tales of the Unsurprised: U.S. Brand-Name Drug Prices Fell for an Unprecedented Sixth Consecutive Year—And Will Fall Further in 2024 (rerun)

This week, I’m rerunning some popular posts while I prepare for today’s live video webinar: Drug Channel Implications of the Inflation Reduction Act.

One important update: In the article below, I suggested that the IRA will make high-list/high-rebate products less attractive to Medicare plans. But this appears not be accurate, as I explain in Surprise! Thanks to the IRA, Part D Plans Will Prefer High-List, High-Rebate Drugs.

Click here to see the original post from January 2024.

It's time for Drug Channels’ annual reality check on U.S. drug pricing.

For 2023, brand-name drugs’ list prices again grew at mid-single-digit rates. However, net prices dropped for an unprecedented sixth consecutive year. What’s more, after adjusting for overall inflation, brand-name drug net prices plunged by more than 7%. Details below.

Employers, health plans, and PBMs determine whether patients share in this ongoing deflation. Meanwhile, these data challenge drug pricing flat earthers (#DPFE) who remain committed to a false narrative of “skyrocketing” drug prices.

As I discuss below, manufacturers will face ongoing pressure on net prices from both commercial and government payers. They will also have new incentives to limit growth in list prices—and will even reduce list prices on certain drugs (as some are already doing).

Perhaps these factors will finally start to deflate the gross-to-bubble and reduce its negative effect on patients and public policy discussions. Hope has to triumph over experience eventually, doesn’t it?


To examine drug pricing, we again rely on data from SSR Health, an independent organization that collects and reports data on pharmaceutical prices. SSR Health is widely regarded as the leading provider of these data. In a testament to SSR Health’s influence, the Institute for Clinical and Economic Review (ICER) relies on these net price data in its cost-effectiveness evaluations. Click here to learn more about SSR Health and its US Brand Rx Net Pricing Tool.

SSR Health’s list and estimated net pricing figures are based on approximately 1,000 brand-name drugs with disclosed U.S. product-level sales from approximately 100 currently or previously publicly traded firms. The products and companies in the SSR Health numbers account for more than 90% of U.S. branded prescription net sales. SSR Health updates these figures quarterly, and its historical figures date from the first quarter of 2007. SSR Health computes sales-weighted averages, so the figures below reflect an appropriate market-level price index. (By contrast, the "Harvard Method" computes prices indices using simple mathematical averages that wildly overstate average prices.)

Here’s DCI's quick refresher on drug pricing terminology:
  • The manufacturer of a drug establishes the drug’s list (gross) price, called the Wholesale Acquisition Cost (WAC). A manufacturer’s gross revenues equal its revenues from sales at a drug’s WAC list price.
  • A drug’s net price equals the actual revenues that a manufacturer earns from a drug after rebates, discounts, and other reductions. A drug’s net revenues equal its revenues from sales at the drug’s net price.
The major components of gross-to-net price differences for brand-name drugs include:
  • Rebates, discounts, and fees to commercial payers and plans
  • Rebates and coverage gap discounts in Medicare Part D
  • Rebates to the Medicaid program
  • Discounts under the 340B Drug Pricing Program
  • Manufacturers’ payments to drug channel participants, including administrative and other fees to PBMs as well as fees and discounts to pharmacies, wholesalers, and other purchasers
  • Patient assistance and copayment support funds
Negotiated and statutory rebates to third-party payers are the largest and most significant components of gross-to-net differences. For more details, see Chapter 9 of our Economic Report on U.S. Pharmacies and Pharmacy Benefit Managers.

Drug Channels Institute coined the term gross-to-net bubble to describe the ever-inflating dollar gap between manufacturers’ gross and their net revenues. We use “bubble” to characterize the speed and size of growth in the total dollar value of manufacturers’ gross-to-net reductions. We have also anointed SpongeBob SquarePants as the honorary mascot of the bubble.

For 2022, the gross-to-net bubble for brand-name drugs was about $300 billion. Rebates and discounts reduced the selling prices of brand-name drugs at the biggest drugmakers to less than half of their list prices.


The chart below summarizes the list and net price changes for a broad set of brand-name drugs over the past 10 years:

[Click to Enlarge]

Consistent with our previous analyses, these data show significant gaps between list and net price changes:
  • List-price growth remains in the mid-single digits. From 2010 to 2015, growth in list prices was increasing by 10% to 15%. Growth has slowed sharply, from 13.5% in 2014 to 5.4% through the first three quarters of 2023. Average list price increases have been about 5% for the past five years. Based on initial data for 2024, typical list price growth appears comparable to recent trends. As I discuss below, there are some notable exceptions. (46Brooklyn provides a handy website for tracking list price changes.),
  • Net prices for brand-name drug prices dropped for the sixth year. Through the first three quarters of 2023, net prices declined by -3.0%. The gross-to-net gap in prices was therefore -8.4% (= -3.0% minus 5.4%). These industry data are consistent with the manufacturer-specific disclosures about changes in list and net drug prices that I discussed in Gross-to-Net Bubble Update: 2022 Pricing Realities at 10 Top Drugmakers .
  • Net prices plummeted after adjusting for overall inflation. The consumer price index rose by 4.4% during the first three quarters of 2023—the time period shown in the chart above. Consequently, real, inflation-adjusted net prices fell by -7.4%.
  • The gross-to-net bubble keeps inflating. Through the compounding effect of gross-to-net pricing differences, the bubble continues to inflate. Consider a brand-name product launched in 2013 with a list price of $100 and no discounts or rebates. Its list and net prices would be equal, at $100.00. Using the average industry growth figures shown above, this product’s list price would have grown to $206.40 by 2023, while its net price would have been only $102.60.

    The difference of $103.80 (-50%) reflects the rebates and discounts that the manufacturer paid. These figures represent a lower bound, because newly launched brands always offer some rebates and discounts.

In the years ahead, manufacturers will face growing gross-to-net pricing pressures:
  • Brand-name drug list prices will continue to increase slowly. The Inflation Reduction Act of 2022 (IRA) will discourage manufacturers from increasing list prices on both patient- and provider-administered brand-name drugs with significant Medicare utilization. That's because manufacturers will be responsible for paying rebates on certain Medicare drugs whose prices increase more quickly than the rate of inflation. See The Inflation Reduction Act: 10 Predictions About Market Access and Drug Channels.
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. Unfortunately, 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.

However, there are some factors that will cause the gross-to-net bubble to deflate—or at least inflate more slowly. Consider four trends that could pop the gross-to-net bubble:
  • The IRA will make high-list/high-rebate products less attractive to Medicare plans.
  • In 2026, 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 Maximum Fair Price (MFP) under the IRA.
I recognize that relying on “facts” has become unfashionable in today’s society. But for new readers, I’ll remind you of Drug Channels editorial philosophy, courtesy of the late senator Daniel Patrick Moynihan: "Everyone is entitled to his own opinion, but not his own facts."

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