Drug Pricing: PhRMA Report Aims To Shift Focus To Supply Chain

More than one-third of gross sales for brands is eaten up by rebates, discounts and fees, a study finds, raising questions about whether price concessions provided to payers are ‘flowing to patients,’ PhRMA President Stephen Ubl says.

A new report commissioned by the Pharmaceutical Research and Manufacturers of America could help change the conversation on drug pricing by showing how sales are increasingly being absorbed by the supply chain.

Conducted by the Berkeley Research Group, the report entitled, “The Pharmaceutical Supply Chain: Gross Drug Expenditures Realized By Stakeholders,” seeks to “bring clarity to the drug distribution and payment process and to estimate the share of spending realized by manufacturers and other entities along the supply chain.” It was released Jan. 19.

The effort to bring some additional transparency to the complicated system of drug sales could take some heat off manufacturers by pointing out that a significant portion of pricing goes to other entities. Biopharma has been trying to draw attention to the role that payers play in increasing drug costs for patients in response to criticism over its drug pricing practices. (Also see "Drug Cost Blame Game: Payers’ Contribution To Prices Getting More Attention" - Pink Sheet, 6 Oct, 2016.)

“The study begs an important question: Are we doing enough to ensure the growing amounts of rebates and discounts flow to the patient?” PhRMA President Stephen Ubl said in a release.

He pointed out that “unlike care received at an in-network hospital or physician’s office, a patient’s cost-sharing for medicines, including payments for care received prior to meeting a deductible or from a co-insurance, is typically based on the list price of a medicine, not the net prices after rebates and discounts are factored in.”

However, calls for more transparency on how PBMs and plans use rebates can be a tricky proposition for manufacturers because that might lead to demands for transparency into private contracting arrangements. Mylan Pharmaceuticals Inc. CEO Heather Bresch found that her efforts to explain to Congress how price increases for EpiPen were absorbed by the supply chain only led to confusion and more questions. (Also see "How Many Pricing Hearings Add Up To Action On Pricing Transparency?" - Scrip, 22 Sep, 2016.)

The analysis found that more than one-third of gross sales for brands is eaten up by rebates, discounts and fees.

Still, given President-elect Donald Trump's apparent commitment to reducing drug prices as part of healthcare reform, pharma companies (and all the other players in the space) are anxious to find another segment that’s really responsible for high prices and thus should be the target in any legislation. (Also see "Trump, Congress And The Search For Common Ground On Drug Pricing" - Pink Sheet, 18 Jan, 2017.)

PhRMA’s analysis found that more than one-third of gross sales for brands is eaten up by rebates, discounts and fees to pharmacy benefit managers, health plans, wholesalers, pharmacies and in government programs.

“In 2015, brand manufacturers realized $219bn of the $349bn in total initial gross expenditures for brand medicines or 63% of the gross amount,” according to the report. That 63% share is down from 67% in 2013. Net spending for brands and generics combined totaled $469 billion in 2015, the report found.

Rebates negotiated to secure market access were the leading factor driving the decreased percentage of gross branded sales in 2015. “Gross expenditures for brand medicines were reduced by $58bn in negotiated discounts and rebates … provided to health plans and PBMs to secure preferential formulary placement of the medicine,” according to the report.

The share of gross drug expenditures for all drugs (brand and generic) realized by brand manufacturers declined from 41% to 39% between 2013 and 2015, the study found. Meanwhile, the share of gross expenditures for all drugs realized by non-manufacturer entities increased from 38% in 2013 to 42% in 2015 (see chart).

SHARE OF INITIAL GROSS DRUG EXPENDITURES BY ENTITY TYPE, 2013-2015

The BRG report begins by calculating “initial gross drug expenditures,” which is defined as the sum of payments for prescription drugs made by patients and their health plans at the point of sale (e.g., pharmacy, outpatient hospital) prior to any rebate, discount, or fee provided by manufacturers.

“By using this starting point, the analysis makes it possible to measure prescription drug spending by consumers, health plans, government payers, and employers, and the portion thereof realized by manufacturer and non-manufacturer stakeholders,” the authors explain.

The exercise is not new. A report released by Bain & Co. in April 2016 found that rebating as a percentage of gross sales increased from 19% in 2007 to 33% in 2014. (Also see "Industry’s Rebate Arms Race: Securing Market Access At A Cost" - Pink Sheet, 18 Apr, 2016.)

Similarly, an IMS report also released in April 2016 found manufacturer discounts, rebates and other price concessions to payers offset price increases for branded drugs still protected by patents by approximately 77%-81% in 2015. (Also see "Price Concessions By Manufacturers To Payers Rose Sharply In 2015" - Pink Sheet, 14 Apr, 2016.)

But the BRG researchers try to take a more comprehensive view, and finds that middlemen are doing increasingly well. (See sidebar for Scrip story.)

The report “is the first to show what happens when the list price of a medicine meets the forces of private market negotiation, costs associated with a complex supply chain and mandated government discounts in Medicaid, the VA and the 340B program,” PhRMA’s Ubl said.

The report evaluates the entire drug market, retail and non-retail products, and a wide range of expenses and fees that reduce gross sales, including both statutory and market access-based rebates and fees, as well as wholesaler, pharmacy and group purchasing organization fees. (See chart.)

Gross Brand Drug Expenditures By Component (In Billions)
Type of Component	Component			2013		2014		2015
Initial Gross Drug Expenditures^1				$244.9		$306.3		$349.1
Statutory Rebates and Fees	Medicaid Drug Rebate Program^2			$19.1		$23.0		$28.3
	Part D Coverage Gap Discounts			$4.2		$5.1		$5.8
	TRICARE Rebates & Federal Supply Schedule Discounts			$3.5		$4.6		$4.7
	Excise Fee^3			$2.8		$3.0		$3.0
Market Access Rebates and Discounts	Negotiated Health Plan and PBM Rebates and Fees^4			$33.2		$43.5		$57.7
	Patient Cost Sharing Assistance			$4.2		$5.4		$6.9
Supply Chain Entities	Pharmacy/Provider Margin^5			$17.5		$18.5		$20.4
	Wholesaler Margin^6			$2.3		$2.7		$3.1
	GPO Administrative Fees			$0.6		$0.6		$0.7
Net Amount Realized by Brand Manufacturer ($)				$177.5		$199.9		$218.6
New Amount Realized by Brand Manufacturer (%)				67.0%		65.3%		62.6%
[1] Components may not sum to total due to rounding. [2] Component includes statutory rebates, supplemental rebates negotiated by states and managed care plans, and 340B margin. [3] Component represents annual fee paid by brand manufacturers as stipulated in the AffordableCare Act (ACA). [4] Component includes the portion of gross drug expenditures that may be retained by health plans and PBMs through their role in the pharmaceutical payment process. This may not be inclusive of all health plan or PBM revenue streams (e.g., claims administration fees, utilization management service fees, etc.). [5] Component represents the difference between what a pharmacy or non-retail provider is paid for the drugs it dispenses and the price at which those drugs were acquired. Includes rebates paid by manufacturers to long-term care pharmacies. [6] Component represents the difference between what a drug wholesaler is paid by pharmacies for drugs and what the wholesaler paid to acquire those drugs from the manufacturer, inclusive of prompt-pay discounts and stocking fees.
Source: BRG’s The Pharmaceutical Supply Chain: Gross Drug Expenditures Realized By Stakeholders