Discussions about the rising price of prescription drugs often overlook the importance of manufacturer rebates and out-of-pocket prices.
“We found that although retail pharmacy prices increased 9.1% annually, negotiated prices grew by a mere 4.3%, highlighting the importance of rebates in price measurement,” according to a new study reported in HealthAffairs.
“Surprisingly, consumer out-of-pocket prices diverged from negotiated prices after 2016, growing 5.8% annually while negotiated prices remained flat. The concern over drug price inflation is more reflective of the rapid increase in consumer out-of-pocket expenses than the stagnated inflation of negotiated prices paid by insurers after 2016.”
Rebates granted by pharmaceutical manufacturers to insurers reduce the actual prices paid by insurers, causing the true prices of prescriptions to diverge from official statistics. Researchers combined claims data on branded retail prescription drugs with rebate estimates to provide new price index measures based on pharmacy prices, negotiated prices after rebates and out-of-pocket prices for the commercially insured population from 2007 to 2020.
Between 2016 and 2020, out-of-pocket prices have grown faster than prices faced by insurers, after accounting for commercial rebates. Concerns about price growth align more closely with the persistent increase in out-of-pocket prices than the recently stagnating growth in negotiated prices. The divergence in prices after 2016 raises concerns about the disconnect between external estimates of negotiated prices and the actual costs borne by consumers.
New drugs, which comprise the majority of the market for branded drugs, have high list prices and high rebates that continue to grow over time. Consumers operate in an innovative and expanding pharmaceutical market where they spend more on new drugs and face growing out-of-pocket expenses based on less-transparent prices as rebates swell.
“Understanding the dynamics of pharmaceutical pricing requires controlling for the role of rebates and considering both negotiated prices paid by insurers and out-of-pocket prices paid by consumers,” the study report concluded.
“Overall, the findings emphasize the importance of accurate measurement to inform policy discussions regarding prices in prescription drug markets. Statistical agencies such as the Bureau of Economic Analysis and the Bureau of Labor Statistics have been working on this issue. However, rebates have not been accounted for in official inflation measures. Given the data limitations, more work is needed to provide a complete and accurate picture of how pharmaceutical prices are changing in this sector of growing economic importance.”