Working Paper: NBER ID: w26846
Authors: Pragya Kakani; Michael Chernew; Amitabh Chandra
Abstract: Rising list prices are often used to illustrate the burden of prescription drug spending, but payers routinely negotiate rebates from manufacturers that generate differences between list and net prices. List prices are easily available and affect patient cost-sharing, but net prices are confidential and affect innovation incentives. We use novel data on medicines sold in a retail setting to quantify rebate growth, the sensitivity of pharmaceutical price indices to list versus net prices, and contribution of net price growth to revenue growth. From 2012 to 2017, we find average rebates increased from 32% to 48%, owing entirely to growth in rebate-levels over a product lifetime rather than shifts towards high rebate products. Annual inflation of list prices was 12% while that of net prices was 3%, implying that financial rewards to manufacturers per unit sold have not grown proportionally to list prices. This pattern is mirrored in 19 of the 20 top drug classes by revenue including insulins, where list and net price inflation were 16% and 2% annually respectively. Finally, we find price growth explains 76% of revenue growth when measured by list prices but 31% of revenue growth when measured by net prices. Moreover, new product entry is the most important factor affecting pharmaceutical revenue growth. These findings provide a cautionary note on using list prices for policy analysis.
Keywords: No keywords provided
JEL Codes: I11
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| average rebate increase from 32% to 48% (L42) | growth in rebate levels over a product's lifetime (D25) |
| annual inflation rate for list prices of 12% (E31) | divergence with net prices increase of 3% (F62) |
| price growth explains 76% of revenue growth (list prices) (E30) | revenue growth (O49) |
| price growth explains 31% of revenue growth (net prices) (D49) | revenue growth (O49) |
| new product entry (L17) | pharmaceutical revenue growth (L65) |