When you buy a car, there is a price on the sticker and what you actually paid after haggling with the dealer for discounts. For pharmaceuticals, the media usually reports list prices, which are similar to “fixed prices” for cars. However, what really matters is the net price, which is the price after discounts and rebates. One of the key questions is how well Medicare Part D plans negotiate price cuts from list price.
Article Ippolito and Levi (2023) aims to answer this question using drug price and rebate data from SSR Health for 2007-2019, and drug use data from the Medical Expenditure Survey (MEPS).
Using this data, they compare the relative discounts for brand-name drugs based on the proportion of patients using the drug who are covered by Medicare Part D. The authors conclude that:
The net price to list price ratio was negatively correlated with [Medicare market shares] MMS in later years of our sample. In 2019, a 10% increase in MMS was associated with a significant increase of 4.6%. [95% CI: 2.1%, 7.1%] decreasing net-to-sheet ratio. The difference in difference showed that the ratio of net to list prices for medicines with above-average MMS decreased compared to medicines with below-average MMS. By 2019 we are seeing an absolute decrease of -0.2 [95% CI: −0.29, −0.11]which is 28% less than the 2010 average.
The study does not include physician-prescribed drugs and drugs that are rarely prescribed (ie,
The study shows that this relationship becomes stronger in subsequent years and hypothesizes that changes in the structure of Part D benefits in the Affordable Care Act and the 2018 Bipartisan Budget Act were a strong reason for these additional discounts. The authors describe the specific policy change as follows:
In 2011, the Affordable Care Act narrowed the coverage gap by requiring manufacturers to offer a 50 percent discount off the list price of brand-name drugs in that part of the benefit. In addition to reducing participants’ costs, these discounts were treated as if the participants had actually spent the money to determine where the recipient ranks in the benefit scheme. The Bipartisan Budget Act of 2018 increased those rebates to 70 percent, bringing down plan commitments at this stage to just 5 percent.
Is this good? In the sense of partial equilibrium, the answer is yes. Lower net prices are good for Medicare’s net profit. However, increased rebates and rebates by manufacturers are likely to either raise list prices so that net prices remain unchanged, or fall in investment in R&D and new medicines entering the market as drug cost recovery becomes less generous. Like everything in healthcare economics, there are always trade-offs.