The bad news? The IRA is also one of the five key forces deflating the gross-to-net bubble.
That’s why any IRA-related pharmacy profits will vanish if manufacturers lower list prices to be closer to net prices. At least 13 brand-name drugs—five of which have MFPs—reportedly plan to reduce list prices within the next two months.
As I show below, retail pharmacies risk becoming collateral damage from significant deflation in the gross-to-net bubble for drugs subject to an MFP. Welcome to our bonkers healthcare system—where everyone wants lower prices, until they actually get them.
What’s more, list price cuts will reduce profits from 340B contract pharmacy operations, while weakening covered entities’ main objections to a 340B rebate model. Get ready for a 340B slowdown.
For more on the intended and unintended consequences of the IRA—and its interplay with 340B—join me for my live video webinar, Drug Channels Outlook 2026, on December 12, 2025, from 12:00 p.m. to 1:30 p.m. ET.
PHARMECON 101
Here’s a quick refresher on pharmacy economics to help explain how the IRA’s MFPs will reshape the system.
Today, a pharmacy’s gross profit from a Medicare Part D prescription comes primarily from dispensing spread, defined as:
Gross profit per prescription = Estimated Acquisition Cost (EAC) reimbursement
– Net acquisition cost
– Net acquisition cost
As detailed in Chapter 8 of our 2025 Economic Report on U.S. Pharmacies and Pharmacy Benefit Managers, EAC for brand-name drugs is typically based on a discount from the average wholesale price (AWP) benchmark. For instance, a PBM might pay 80% of AWP, i.e., “AWP minus 20%,” as the EAC.
Despite its name, the AWP does not reflect actual transaction prices and does not accurately measure average prices from wholesalers to pharmacies. Instead, AWP equals 120% of the wholesale acquisition cost (WAC), which is statutorily defined to be the pharmaceutical manufacturer’s list price.
Mathematically, WAC equals 83.3% of AWP, i.e., 1.20 ÷ 1.00. Thus, a pharmacy reimbursed at AWP–20% is being paid below list price (WAC).
That doesn’t mean that the pharmacy is paid below its acquisition cost. That’s because pharmacies usually purchase brand-name drugs from wholesalers at a negotiated discount from WAC. For instance, a pharmacy might pay 95% of WAC, i.e., “WAC minus 5%,” to its wholesaler.
In fact, according to CMS, the national average drug acquisition cost (NADAC) averages 5.1% below WAC for brand-name drugs. See Chapter 4 of our 2025-26 Economic Report on Pharmaceutical Wholesalers and Specialty Distributors for further details.
FOLLOW THE MFP MONEY
Consider this simplified version of DCI’s well-known “follow the dollar” chart model. For ease of presentation, we exclude dispensing fees from payers and service and data fees from a manufacturer.
[Click to Enlarge]
For drugs not subject to an MFP, the pharmacy’s gross profit equals its reimbursement minus the acquisition cost. Using the terminology above:
Gross profit per prescription (non-MFP) = [AWP – X%] – [WAC – Y%]
Today, pharmacies purchase bulk quantities of a prescription drug from wholesalers for a single price, but can receive varying reimbursement amounts from different first- and third-party payers.
The IRA implementation changes the pharmacy’s reimbursement for drugs subject to an MFP and dispensed to a Medicare Part D beneficiary to be “no greater” than the maximum fair price.
That means a pharmacy’s reimbursement would be well below its list price. For instance, Jardiance’s MFP is 66% lower than its current WAC, or AWP minus 71.3%.
CMS guidance allows manufacturers to reimburse pharmacies for the difference between a product’s MFP and its WAC. Hence, for MFP drugs:
Gross profit per prescription (MFP) = [MFP + (WAC – MFP) ]– [WAC – Y%]
A bit of algebra reveals the following:
- A pharmacy’s gross profit for an MFP product depends entirely on its negotiated WAC discount from a wholesaler (Y%). In the equation above, the WAC and MFP factors cancel out, leaving only the WAC minus discount from the wholesaler.
- Pharmacies will profit from dispensing MFP products when their prior reimbursement was below WAC (AWP-16.7%). Assuming no other changes to drug prices or reimbursement, a pharmacy that had been reimbursed at WAC or less will make more money by dispensing an MFP product.
- If manufacturers cut brand-name drug list prices to align more closely with MFPs, pharmacy profits will fall. List price reductions reduce the amount that a manufacturer would have to reimburse to a pharmacy, because the gap between the MFP and the new WAC will be smaller. This reduction translates into fewer gross profit dollars for the pharmacy. For example, a pharmacy earning $30 on a drug with a $600 WAC would earn only $10 if WAC dropped to $200, assuming no other changes to its wholesaler agreement.
340BUST
List price reductions will also squeeze 340B contract pharmacy profits and dismantle hospitals’ objections to rebate models.
Roughly 32,000 pharmacy locations—nearly 60% of all U.S. pharmacies—serve as contract pharmacies for the hospitals and federal grantees that participate in the 340B program. (See The 340B Contract Pharmacy Market in 2025: Big Chains and PBMs Tighten Their Grip.)
List-price reductions will have a direct effect on the 340B contract pharmacy market:
- 340B contract pharmacies’ fees will fall. Contract pharmacies often earn gross profits that are three to four times larger than a pharmacy’s typical gross profits. For example, CVS Health’s specialty pharmacy earns 13% of commercial reimbursement for 340B prescriptions, while its retail pharmacies receive fees of $35 to $85 per prescription. (See Follow the 340B Dollar: Senator Cassidy Exposes How CVS Health and Walgreens Profit as 340B Contract Pharmacies.)
Percentage-based fees will drop as WAC declines. Current fixed fees will also fall as the spread between reimbursement and the 340B acquisition cost drops, because covered entities will have fewer dollars to share with pharmacies.
- List price reductions undercut hospitals’ main objection against 340B rebates. For 2026, HRSA’s 340B Rebate Model Pilot Program will apply to products subject to MFPs. As I have been predicting for some time, the IRA is forcing transparency into the opaque 340B program.
Hospitals have been loudly complaining that a rebate model will require them to “float millions of dollars to pharmaceutical companies,” create expensive new administrative burdens, and “threaten hospital payroll and financing abilities.” (source).
But once list prices drop, rebate amounts and the associated financing burdens will shrink dramatically, because the gap between the WAC and the 340B price will shrink. Problem solved!
- Fewer Part D prescriptions will qualify for 340B pricing. The IRA’s non-duplication provision prevents manufacturers from providing both a 340B discount and an MFP on the same claim. Transparency will flush out a lot of prescriptions.
CMS estimates that its claims-based methodology for handling duplicate discounts will make 10% to 35% of Part D claims ineligible for 340B discounts. This figure is consistent with a 2023 IQVIA study. A separate analysis estimated that for five of the drugs with an MFP for 2026, covered entities received 340B pricing discounts of 50% or more on Medicare Part D prescriptions paid at full reimbursement rates by plans. (source).
WELCOME TO THE NET PRICING WORLD
The IRA will create substantial administrative complexity. Pharmacies will need to reconcile Part D reimbursements and manufacturers’ IRA true-ups, while also making any adjustments for 340B-eligible prescriptions.
Notably, Walgreens recently announced that it will temporarily stop processing 340B contract pharmacy claims for drugs included in the 340B rebate pilot. Others will surely follow.
The IRA’s MFP framework may temporarily pad pharmacy margins, but list price cuts will deflate those gains by shrinking both dispensing spreads and 340B profits.
Put another way: the gross-to-net bubble was fun while it lasted, although it turns out the bubble was inflated with deferred pain.
Join me next week for my Drug Channels Outlook 2026, when I explore what will happen as the U.S. drug channel transitions to a net pricing world.
No comments:
Post a Comment