Myths regarding pricing

Discussion about the cost of innovative therapies that focuses solely or mainly on the list price belies the realities of the health care system today.

Manufacturers provide billions of dollars in rebates and discounts on their innovative therapies annually to federal, state and private payors, in addition to offering direct assistance through patient assistance programs. These rebates and discounts occur in a number of ways. In the commercial insurance market, rebates and discounts are the result of market-based negotiations between manufacturers, insurers and pharmacy benefit managers. These discounts vary but can result in significant discounts of as much as 50 percent or greater depending on the program.

When the government is the payor, the vast majority of purchases have mandated rebates and discounts. For example, to participate in the Medicaid program, manufacturers are required to provide a federal rebate on branded drugs and biologicals used by Medicaid beneficiaries. These rebate requirements expanded under the Affordable Care Act such that manufacturers now must provide a discount of a least 23.1%. Additionally, within the Medicaid program, states negotiate supplemental rebate agreements with manufacturers that result in further discounts on top of federal requirements. Other federal programs, such as those for active-duty military and veterans or certain safety net providers, also require manufacturers to extend significant discounts off the list price of their biopharmaceuticals. Further, these programs capture additional discounts when the price of a branded biopharmaceutical increases more than the rate of inflation.

In the Medicare program, discounted prescription drug prices are reflected in two ways. First, in the traditional fee-for-service Medicare Part B program, the federal government reimburses providers for prescription drugs based on a formula that takes into account most of the rebates and discounts available in the commercial marketplace. In this way, the Medicare program also is able to benefit from the savings brought about by market-based contracting.

Second, in the case of Medicare Part D and Medicare Advantage (i.e., Medicare Part C), private insurers – which are responsible for administering these programs – negotiate rebates and discounts with manufacturers in much the same way as happens in the commercial insurance market.

The discounts resulting from these negotiations benefit the Medicare program in the form of lower annual plan bids, which Medicare uses to determine how much it will reimburse these insurers for covering participating Medicare beneficiaries (i.e., lower plan bids result in lower Medicare expenditures for these programs).

Patients also receive further direct assistance from manufacturers through the statutory Medicare Part D Coverage Gap Discount Program.

Whether mandated, negotiated or voluntarily offered to patients, discounts are often achieved in the majority of all drug sales in the United States. As a result, focusing on the list price of a biopharmaceutical ignores the realities of the health care market; it is like focusing on the MSRP when buying a new car – it is the starting point for a complex series of negotiations and discounts that ultimately lower the actual price significantly.

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