Net price growth of just 0.3% in the US pharmaceutical market may not be enough to avert tougher price controls

In May 2018, the Trump administration published its much-vaunted blueprint to lower drug prices and reduce out-of-pocket costs for patients. The document identified four strategies for curbing costs: boosting competition, enhancing negotiation, creating incentives for lower list prices and bringing down out-of-pocket costs. A year on, the administration has begun to introduce legislation in pursuit of this agenda:

• In October 2018, the Centers for Medicare & Medicaid Services (CMS) published a proposal for a five-year trial, beginning in spring 2020, of international reference pricing in Medicare Part B.
• In January 2019, the administration unveiled a proposal to ban drug manufacturer rebates in Medicare and Medicaid; instead, pharmaceutical companies would be encouraged to offer drug discounts directly to patients, or to negotiate fixed-fee service arrangements with pharmacy benefit management companies (PBMs). CMS and the Congressional Budget Office (CBO) have forecast that, whilst patients’ out-of-pocket contributions for drugs would decline, health insurance premiums and federal expenditure on Medicare and Medicaid would increase. The two agencies also assume that manufacturers would retain around 15% of the savings from abolishing rebates. CMS foresees some reduction in list prices, whereas the CBO believes list prices would not change.
• In May 2019, the administration announced plans to require direct-to-consumer television advertisements for drugs covered by Medicare or Medicaid to include the list price—the Wholesale Acquisition Cost—if that price is $35 or more for a month’s supply or the usual course of therapy.

Given their relatively limited scope, these measures are likely to have a fairly modest impact on drug pricing in the United States. However, recently published data from IQVIA suggest that the market may already be taking steps to rein in prices.

Moderation of net prices

IQVIA reports that total spending on prescription drugs on an invoice basis in the United States grew from $290 billion in 2009 to $479 billion in 2018, an increase of 57% in nine years. Over the same period, however, net expenditure grew from $252 billion to $344 billion, an increase of just 36%. Real net per capita spending increased by only $44, from $1,000 in 2009 to $1,044 in 2018—a consequence of the growing use of generics and (since 2013) biosimilars.

The difference between invoiced and net expenditure reflects the impact of discounts, rebates and other price concessions. In 2018, these measures reduced expenditure by $135 billion (28%). However, patients may have to pay the list price for a medicine if they have not yet exhausted their annual deductible or if the drug is not included in their health plan’s formulary.

The US market is unusual in the degree of freedom it allows pharmaceutical companies to increase prescription drug prices. In recent years, manufacturers have moderated both invoice and net price increases for patent-protected brands. Figure 1 shows the annual increases in these prices relative to the Consumer Price Index (CPI) from 2013 through 2018. Notably, average net price growth in 2018 was just 0.3%—substantially less than the CPI of 1.9%. According to IQVIA, increasing competition in therapeutic areas such as diabetes, asthma/COPD, viral hepatitis and autoimmune diseases has driven the recent slowdown in net price growth.

Figure 2 shows the cumulative increase in each of these measures, using values in 2012 as a baseline (100%). Brand invoice prices increased by an average of 72.5% in six years. By comparison, net prices grew by 16.9%. That figure is admittedly almost double the CPI growth, but is much less shocking than the list price growth that has prompted widespread criticism of the pharmaceutical industry in the United States.

Payers’ concerns about discounts and rebates

According to the Pharmacy Benefit Management Institute (PBMI), in 2018, discounts on the average wholesale price (AWP) of branded drugs averaged 20% for 30-day prescriptions filled in retail pharmacies, 22% for 90-day prescriptions filled in retail pharmacies and 25% for prescriptions filled by mail-order pharmacies. The PBMI’s annual survey of employers, unions and health plans found that 83% of respondents received rebates from PBMs. Fifty-eight per cent of respondents who indicated that their organisations received rebates reported that the rebates were passed on to them in full. Thirty-one per cent of respondents said that they have price protection or inflation cap provisions in their PBM contracts.

In a separate survey on specialty pharmacy benefits, the PBMI found that 90% of respondents were very, quite or somewhat concerned about the so-called “gross-to-net bubble” (i.e., the difference between list and net prices). Moreover, 84% of respondents were very, quite or somewhat interested in alternatives to rebate-driven approaches to managing specialty pharmacy costs.

An executive from one large employer told the PBMI: “I don’t like rebates and see them as a pricing distortion. I would prefer rebates to be eliminated and the price accurately reflect the true cost of the product. Anything that further increases this distortion bothers me, because the company benefits on the back of participants' cost sharing.” A representative of one large health plan commented: “I would like to see government price controls or simply removal of any and all rebates given that it’s clear manufacturers will not control prices on their own.” A respondent from a smaller employer remarked that the pharmaceutical industry “does not have a definition of a ‘reasonable’ or ‘equitable’ level of profitability beyond what price the market will bear. When dealing with lifesaving drugs, economic logic and mathematics do not apply, so the market bears any price. This needs regulation as well.”

These comments elucidate the challenges that the pharmaceutical industry faces in relation to drug pricing. Drug manufacturers and PBMs have blamed each other for the level of US prices. Politicians on both sides of the aisle are growing increasingly impatient: besides the Trump blueprint, the Democrats are eager to take advantage of their newly-gained control of the House of Representatives to curb pharmaceutical prices. The cost of prescription medicines is also likely to be a major issue in the 2020 presidential election.

Drug manufacturers will need to continue their recent strategy of moderating net prices. Faced with so much opposition, however, the industry might be well advised to put forward serious proposals of its own for radical pricing reform in the United States.