When you buy a car, there is a sticker price and what you actually pay after haggling with the dealer. For pharmaceuticals, the media often reports a sticker price similar to the “sticker price” of a car. What really matters, though, is the net price, or the price after the rebate. A key question is how well Medicare Part D plans are doing at negotiating prices below list price.
a dissertation Hippolito and Levi (2023) To answer this question using 2007-2019 drug price and rebate data from SSR Health and drug use data from the Medical Expenditure Panel Survey (MEPS).
They used this data to compare the relative size of rebates for brand-name drugs based on the share of patients using drugs covered by Medicare Part D. The authors found that:
Negative correlation between net price and listing price ratio [Medicare market shares] MMS in the later years of our sample. In 2019, MMS growth of 10% was associated with a remarkable 4.6% [95% CI: 2.1%, 7.1%] Net listing ratio declined. The difference shows that the ratio of net price to listing price has decreased for drugs above the MMS median relative to drugs below the MMS median. By 2019, we observed an absolute reduction of -0.2 [95% CI: −0.29, −0.11]This is a 28% decrease from the 2010 average rate.
Physician-administered medications and medications that were prescribed infrequently (ie, <200,000 prescriptions) were excluded from the study.
The study found that this relationship was stronger in later years, and hypothesized that changes in the design of Part D benefits in the Affordable Care Act and the 2018 bipartisan budget bill were an important reason for these additional discounts. The authors describe the specific policy changes as follows:
In 2011, the Affordable Care Act gradually closed the coverage gap by requiring manufacturers to offer a 50% discount off the list price of brand-name drugs in this portion of the benefit. In addition to lowering the enrollee’s payout, these discounts are seen as the enrollee actually spending the money to determine the beneficiary’s place in the benefit design. The bipartisan budget bill for 2018 increased these discounts to 70 percent, reducing the program responsibility for this phase to just 5 percent.
Is this a good thing? From a partial equilibrium perspective, the answer is yes. Lower net prices are good for Medicare’s bottom line. However, increased manufacturer rebates and discounts could lead to higher list prices—thus keeping net prices constant—or a decline in R&D investment and the number of new drugs brought to market as drug reimbursement becomes less generous. As with anything in health economics, there are always trade-offs.
