If you squeeze a balloon in one spot, the trapped air shifts and the balloon will expand where there is less resistance. Like balloons, drug manufacturers react to pressure — whether from competitors, consumers, PBMs, or regulators — by adjusting their strategies. When manufacturers feel squeezed on one end to offer a rebate or discount, they might generate evidence, expand indications or pursue other strategies to increase utilization, lower costs or increase the list price to offset losses.
Many wrongly claim that drug manufacturers have to increase list prices in response to rebates and discounts, as though they have no alternatives. This narrative helps to shift blame away from manufacturers and vilify PBMs. It also ignores the strategic options manufacturers have and often exercise when responding to a market dominated by rebates and discounts.
Pushing back
PBMs may demand rebates and/or discounts and use nonpreferred tier placement, restrictions, and exclusions as threats, but manufacturers can and often do push back — they can just say no or agree to smaller price concessions. Pushing back is a strategic option. That said, manufacturers typically have less leverage and exert less pushback when:
- Competition is high and strong alternatives exist
- Their product lacks differentiation or clear clinical superiority
- The unmet need is low
- Public or political pressure for coverage is weak
Manufacturers of truly innovative and medically necessary products typically refuse to offer rebates and discounts on these products. Their pushback inhibits the inflationary cycle of price hikes to offset price concessions. And they can often continue to resist until competitive pressures become too great.
Lowering costs
Rather than inflating list prices to offset rebates and discounts, drug manufacturers can preserve margins by lowering costs. They can do so in many ways: make clinical trials and health economics and outcomes research (HEOR) more efficient; streamline manufacturing processes; optimize supply chains and distribution; improve the cost-effectiveness of marketing and market-access initiatives; and reduce corporate overhead, to name a few.
Generating evidence
Drug manufacturers can help to increase utilization by generating new evidence demonstrating the value of their products. Clinical trials and HEOR can be costly and time-consuming, with the risk of unfavorable results. However, new and compelling evidence — especially studies demonstrating superior efficacy, safety, or cost-effectiveness — can increase utilization and revenue by boosting provider and consumer demand and improving market access. Strong evidence may help manufacturers push back against rebate and discount demands and, in some cases, justify premium pricing.
Head-to-head (H2H) trials often provide the strongest evidence that can be used to differentiate a product from competitors. Manufacturers in competitive markets may be incentivized to conduct H2H trials post launch. For example: Eli Lilly’s SURMOUNT-5 trial compared its obesity drug Zepbound (tirzepatide) against Novo Nordisk’s Wegovy (semaglutide). This trial, initiated postlaunch, aimed to prove that Zepbound is better than Wegovy at reducing body mass in people with obesity or who are overweight. And it did just that. Zepbound led to a superior average weight loss of 20.2% compared to 13.7% with Wegovy. Importantly, as with this case, strong real-world evidence is what payers really, really want.
Expanding indications
Drug manufacturers can leverage new evidence to expand indications, which can increase utilization and revenue without raising list prices. If the product is subject to rebates, increased utilization raises total rebate dollars, enhancing the product’s value to PBMs and plan sponsors.
The relationship between evidence generation and indication expansion creates a virtuous cycle: new evidence can support indication expansion, which in turn provides opportunities for additional evidence generation in new populations.
Increasing utilization
Rather than relying on price hikes, drug manufacturers can increase utilization, and they have multiple levers for doing so. These include provider engagement through disease-state or product education, and consumer engagement through advertising and help with out-of-pocket costs (e.g., patient-assistance programs and copay cards).
Inflating list prices
Unfortunately, drug manufacturers may choose to inflate list prices to offset previously negotiated rebates or discounts to preserve their margins. In response, PBMs and plan sponsors may then demand equivalent rebates on the inflated list price. The list price increase fuels the inflationary cycle, not the rebate or discount.
Consider a drug with a list price of $100 per month (without a price concession, the list price and net price are the same). A PBM negotiates a 20% rebate, lowering the net price to $80. To offset this reduction in net price, the manufacturer raises the list price to $120 — a 20% price increase that erases the rebate’s intended impact. Now, the PBM seeks to maintain its rebate dollars ($20 per unit). To achieve this, it could negotiate a rebate of 16.666% (with its infinite number of decimal places — perhaps the devil is in the details after all) on the new $120 list price, which would keep the rebate at $20 per unit and maintain the original net price of $100. But suppose the 20% rebate was kept in place. That would yield a rebate of $24, increasing the PBM’s rebate revenue by $4. In response, the drug manufacturer may raise the list price to $124 — a 3.333% increase — to neutralize the second price concession. And on it goes.
A manufacturer’s unwillingness to accept a durable price concession arguably drives list-price inflation. Instead of absorbing the rebate as a real price reduction, the manufacturer chooses to offset it by raising the list price. This inflationary response harms patients — especially the uninsured and those with coinsurance or high-deductible plans — by increasing their out-of-pocket costs.
Manufacturers of truly innovative products and that focus on value do not rely on list-price increases as a substitute for options that can help to grow revenue and profit. The claim that drug manufacturers must increase list prices in response to rebates is not only misleading — it’s insulting to those that resist the easy fix and, instead, take the high road by pursuing costly, time-consuming, and potentially risky options: generating evidence, expanding indications, and working to increase utilization.
Inflating list prices is a strategic choice among many and is only one that manufacturers can make. Rebates and discounts are inflationary only if drug manufacturers choose to raise list prices to offset any losses. Raising list prices in response to price concessions is never a necessity — it is always a choice.
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