Nearly every published drug spending figure is gross. Rebates can be a large share of the price, and which number you use decides which decision looks right.
Almost every drug spending number in public circulation is a gross figure, before rebates. Almost every decision that matters depends on the net figure. The gap between them is large and it is not published.
How large
KFF’s Medicaid GLP-1 analysis is explicit that “gross spending and spending per prescription numbers do not account for rebates,” noting that states receive “substantial rebates on brand drugs.” One manufacturer reported that “rebates and other fees (across all payers) accounted for about 40% of the cost” of its GLP-1 products.
A cost figure that omits 40 percent of the answer is not a small imprecision. It is the difference between two entirely different conclusions.
Why the gap exists
List prices are set by manufacturers. Rebates are negotiated confidentially between manufacturers and PBMs or plans, and are typically larger for drugs facing therapeutic competition. A rebated brand can therefore carry a high list price and a low net price simultaneously, and the FTC’s findings in Module 1 documented how much of the supply chain’s economics runs through these arrangements.
The consequences ripple in specific ways:
| Who sees which number | Consequence |
|---|---|
| The patient, paying coinsurance | Often pays a percentage of a price nobody actually receives |
| The prescriber | Sees neither, and has no reliable way to know cost |
| The accountable organization measured on gross | Rewarded for switching away from rebated brands, even if net cost rises |
| The plan or PBM holding the rebate | Sees the true net and does not share it |
The third row is the trap for anyone in a risk arrangement.
What to do about it
- Establish which number your contract uses. As Module 2 covered, this lives in a contract exhibit, and it determines whether your formulary strategy makes sense.
- Treat published spending figures as gross unless stated otherwise, including the ones in this course. The GLP-1 figures in the next module are gross, and they are labeled that way for this reason.
- Be cautious comparing across payers. Medicaid’s statutory rebates, Medicare’s negotiated prices, and commercial rebates are different mechanisms, so gross comparisons across them are close to meaningless.
- Do not assume a lower list price is a lower cost, and do not assume the reverse either. It has to be checked.
Worth remembering: the rebate system is the reason so much drug pricing discourse talks past itself. Manufacturers point to net prices and say their revenue has grown slowly. PBMs point to the discounts they negotiated. Patients point to what they paid at the counter, which is often based on list. Pharmacies point to what they were reimbursed. Every one of those parties can be describing the same drug accurately and reaching a different conclusion, because they are each looking at a different number in a chain that is confidential by design. Knowing which number is in front of you is the entire skill here, and it is more useful than any position on who is to blame.
Key takeaways
- Published drug spending figures are almost always gross, before rebates.
- One manufacturer reported rebates and fees at about 40 percent of the cost of its GLP-1 products.
- An organization measured on gross cost can be rewarded for switching away from a rebated brand even when net cost rises.
- Gross comparisons across Medicaid, Medicare, and commercial are not meaningful because the rebate mechanisms differ.
Sources
Check your understanding
Why can switching from a rebated brand to a cheaper generic increase net cost to a payer?
This is why an organization must know whether it is measured on gross or net cost before designing a formulary strategy. The two can point in opposite directions.