The $250 Billion Gross-to-Net Bubble: What It Is and Why It Exists

Photo by Artem Podrez

Whether you’re a health insurance provider, physician or patient, you’ve probably noticed an increase in drug list prices over the last few years or more. However, as you may or may not know, the increase in these drug list prices only tells part of the story. Between a drug manufacturer and a patient, multiple opportunities for rebates and discounts contribute to a widening gap between how much manufacturers price their drugs and how much they make in net profit when all is said and done.

 To fully understand the complex dynamics of the pharmaceutical industry in 2024, it’s imperative to understand how this gap impacts everyone, from drug manufacturers to payers and patients, what contributes to its growth, and how we might close it.

What is the Gross-to-Net Bubble?

The gross-to-net bubble is a term coined by the Drug Channels Institute and widely adopted in the discourse around drug pricing to describe the widening gap between gross and net sales for drug manufacturers. Drug manufacturers set a list price when a drug goes to market. These list prices do not account for any discounts or rebates.

Net revenue is what the manufacturer receives after discounts and rebates are considered. There has been a well-documented, growing gap between gross revenue and net revenue for pharmaceutical manufacturers.

A retrospective JAMA study that looked at drug prices from 2007 to 2018 found that average prices rose 159%, while discounts also rose to mitigate approximately 62% of drug list prices. This data could indicate manufacturers increased prices to maintain revenue despite rising discounts.

However, there are other takeaways. Other studies showed an average net price decline of 6.8% in 2018, and a 2019 Sanofi report indicated that rising insulin prices are misleading, given that net prices continue to fall.

In a nutshell, the gross-to-net bubble is a phenomenon in which list prices rise while net revenue declines, creating a $250 billion gap between drug retail prices and manufacturer revenue.

“Brand-name drug manufacturers earn substantially less revenue than drug list prices imply, due to the gross-to-net difference between a manufacturer’s list and net prices. That’s also why net drug prices are declining even as list prices grow.” – Dr. Adam Fein

Terms to Know

These terms often come up in the discourse around drug costs and the gross-to-net bubble. AMP and WAC are most used in the discourse, but it doesn’t hurt to be familiar with other pricing terminology you may encounter. Not all of these terms are applicable in every scenario. For example, AMP is used in Medicaid price calculations, while ASP is used in Medicare Part B price calculations.

Average Manufacturer Price (AMP)

The Average Manufacturer Price (AMP) of a drug is the average price paid to manufacturers by wholesalers for drugs distributed to retail pharmacies. It includes all cash discounts, volume discounts, rebates, and other price concessions. AMP is calculated every quarter and is used in conjunction with the Best Price of a drug to help determine the rebate amount pharmaceutical manufacturers must pay to state Medicaid programs.

Wholesale Acquisition Cost (WAC)

Wholesale Acquisition Cost (WAC) is the list price manufacturers set for their drugs. It’s used as a reference point during payer negotiations and rebate calculations.

Average Sales Price (ASP)

The Average Sales Price(ASP) is the average price purchasers pay manufacturers after deducting discounts, rebates, and other price concessions for drugs sold during a specific period (usually a quarter). ASP calculations include all sales to purchasers for drugs covered under Medicare Part B and only these drugs. This calculation determines reimbursement rates for drugs administered to Medicare beneficiaries by healthcare providers. Providers are reimbursed based on ASP plus a 6% markup to cover acquisition and administration costs.

Best Price

The Best Price is the lowest price a manufacturer offers to a purchaser for any brand-name drug. Best Price determines the minimum rebate manufacturers must provide to state Medicaid programs under the Medicaid Drug Rebate Program (MDRP). Medicaid rebate amounts are the difference between a drug’s AMP and Best Price.

Causes & Contributing Factors

The driving forces behind the growth of the gross-to-net bubble are the numerous rebates and discounts manufacturers have to pay for. The rebate system is complex, with manufacturers often required to grant rebates due to specific federal regulations. Then, manufacturers may be required to negotiate rebates with pharmacy benefit managers and health insurers, bringing the cost of a drug down even further. By the time the drug is sold, many manufacturers find that they’re selling at less than half of their list price. Let’s learn more about some rebates and discounts contributing to the gross-to-net bubble.

340B Discounts

The 340B Drug Pricing Program requires manufacturers to discount certain drugs to hospitals and healthcare centers serving low-income populations. The manufacturer is required to discount generic drugs by 13% and brand-name drugs by 23%.

It’s worth noting that the number of care centers participating in the 340B program has expanded rapidly since its inception of the 340B program in 1992 at a higher cost to manufacturers and that for many manufacturers, the 340B discounts are just the first of several rebates or discounts they are either required to offer or negotiate.

Commercial Discounts

Commercial discounts are price reductions negotiated between pharmaceutical manufacturers and commercial entities such as pharmacy benefit managers (PBMs), health insurers, employer-sponsored health plans, and directly with pharmacies based on the volume of purchases, formulary placement, market competition, and the bargaining power of the parties involved.

Manufacturers may set high list prices for their drugs but then offer substantial discounts to PBMs and health insurers to secure formulary placement and increase market share. These discounts further decrease the net price the drug sells at.

Medicaid Rebates

Pharmaceutical manufacturers are required by law to provide rebates to state Medicaid programs for covered outpatient drugs. These rebates are mandated under the Medicaid Drug Rebate Program (MDRP) to ensure that Medicaid receives discounts like those provided to other large purchasers.

The rebate percentage varies depending on whether the drug is brand-name or generic, with brand-name drugs having higher rebate percentages. Medicaid rebate requirements can interact with other pricing factors, such as commercial discount negotiations, to cause rebate accumulation that influences pharmaceutical manufacturers’ overall net revenue.

Impact & Mitigation of the Gross-to-Net Bubble

The impacts of the gross-to-net bubble for pharmaceutical manufacturers are felt in pricing strategies and managing relationships with stakeholders. With discounts, rebates, and money needed for investment in future R&D to consider, many pharmaceutical manufacturers have to increase list prices to stay profitable.

However, this has led to increased scrutiny from the public around pharmaceutical pricing and a discrepancy between the factors that go into pharmaceutical pricing and the discourse around it.

Full pricing transparency, stakeholder education, and more substantial negotiating power can help pharmaceutical manufacturers mitigate the gross-to-net bubble and advocate for policy reforms that would close the gross-to-net bubble.

It’s also worth considering how the gross-to-net bubble impacts patients. Declining net prices are not necessarily coupled with declining out-of-pocket costs for patients. Products with high rebates or discounts, like insulin, may still base what costs the patient must cover on the WAC. While payers see a price decline, patients may not see the same thing, contributing to a lack of access and affordability barriers that may stop patients from finishing treatments.

As Scott & Sabot point out, manufacturers recognize this as unfair. They suggest open and transparent negotiations between manufacturers and payers for patient-centered pricing, aiming to shrink the gross-to-net bubble.

Narrowing the Gross-to-Net Bubble

So, where do we go from here? One of the best ways to decrease the gross-to-net bubble is to make patient-centered policy reforms that add value to patients and empower manufacturers to continue producing cutting-edge interventions. Here are some recent policy changes that could do just that.

  • The Medicaid Drug Rebate Program ended rebate caps in 2023, leading some manufacturers to lower their list prices to avoid a high-list, high-rebate scenario. This has already been seen in some versions of insulin, and the trend may continue.
  • The Inflation Reduction Act made significant changes to Medicare Part D, which will take effect in 2025. These changes will make low-list-price drugs much more attractive and logically drive manufacturers to lower list prices.
  • The Inflation Reduction Act is also expected to implement a Maximum Fair Price for many Medicare Part D drugs, expected to be lower than the current net price. This shift is expected to drive list prices lower.

Other ways to “pop the bubble” include pricing transparency, rebate reforms, value-based pricing, and patient assistance programs, which many manufacturers already participate in.

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