Discussion about the cost of innovative therapies that focuses solely or mainly on the list price belies the realities of the healthcare system today.
Manufacturers provide billions of dollars in rebates and discounts on their innovative therapies annually to federal, state and private payers, in addition to offering direct assistance through patient assistance programs.
These rebates occur in a number of ways. In the commercial insurance market, rebates and discounts are the result of market-based negotiations among manufacturers, insurers and pharmacy benefit managers. These discounts vary, but can result in significant discounts of as much as 50 percent1 or greater depending on the program. When the government is the payer, the vast majority of purchases have mandated rebates and discounts.
For example, as a condition of Medicaid funding of their products, manufacturers are required to provide at least a 23% rebate on innovator drugs and biologics used by Medicaid beneficiaries.2 In fact, these rebate requirements expanded under the Affordable Care Act. Additionally, within the Medicaid program, states often negotiate supplemental rebate agreements with manufacturers that can 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 receive significant discounts off the list price of biopharmaceuticals.
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 all 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—that 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 Medicare Part D Coverage Gap Discount Program.
Whether mandated, negotiated or voluntarily offered to patients, discounts are widely 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 healthcare 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.
In 2015, drugs represented 10-14% of American healthcare costs, a figure that has remained remarkably steady over the years.3
That's in part due to how the market works for biopharmaceuticals. Unlike companies in many other industries, pharmaceutical and biopharmaceutical companies only get a limited period of exclusivity for their innovative products. Once that time is up, generic companies can copy and sell that medication at a steep discount for decades to come.
As The New York Times notes, “The vast majority of drugs dispensed in the United States — more than 80 percent — are generics, which are low-cost alternatives to brand name drugs. If your doctor writes you a prescription, there is a very good chance it will cost you $10 or less.”4