We understand that patients and other stakeholders want information about how medicines are priced. We know they are concerned about their ability to access and afford the medicines they need within our current health care system. We share this concern.
We maintain a responsible approach to pricing our medicines. In this section, we explain how we set prices for new medicines and how we support access to our medicines by negotiating with insurers and pharmacy benefit managers as well as by participating in government programs. We discuss how patient out-of pocket costs are set and what we are doing to improve the way we pay for medicines in the U.S. And we disclose the change in net price of our medicines in 2017 as well as the monetary value of the discounts and rebates we provided to payers, providers, and the government.
Our Pricing Approach
When we set an initial list price for our medicines following FDA approval, we balance the following considerations:
Value to patients, the health care system, and society.
We consider how the medicine will improve patient health. We also assess the medicine’s potential to reduce other costs — surgeries, hospital stays, or long-term care, for example — and the improvement the medicine represents over the existing standard of care. (For more about our Value Assessment Principles, please see the “Value” section.)
The importance of maintaining affordable access to medicines for people who need them.
We consider not just the list price, but also the discounts and rebates we provide insurers, pharmacy benefit managers, governments, hospitals, physicians, and other providers of care to support broad access to our medicines.
The importance of preserving our ability to develop future groundbreaking cures and treatments.
We have an obligation to ensure that the sale of our medicines provides us with the resources necessary to invest in future research and development to address serious, unmet medical needs.
When determining an initial list price, we go through a lengthy process to gather the information necessary to assess the medicine on the basis of these principles. We review clinical data; we use health economic research to assess how our medicines may affect other health care costs arising from things like hospitalizations or long-term care; and we analyze existing therapies, current standards of care, and potential future therapies. We use this information to determine the value of our medicine compared to what is or will be available to treat the same condition — be it other medicines, surgery, or other forms of health care — and price accordingly. We also seek input on our pricing approach from external experts who provide feedback to help us make sure the price we set is appropriate.
List vs. Net Price
The list price for medicines is a starting point and is ultimately reduced by the discounts and rebates we provide to insurance companies, pharmacy benefit managers (PBMs), hospitals, clinics, the government, and others. We also pay fees to pharmaceutical wholesalers to distribute our medicines. Here is more information about how these discounts, rebates, and fees work:
Commercial health insurance companies and PBMs manage the purchase of medicines for those with private insurance coverage. They determine what medicines will be included on their formulary (the list of products they cover) and the out-of-pocket amounts patients will pay for those medicines. Formulary determinations are based in part on payers’ negotiations with pharmaceutical companies. These negotiations result in rebates from the pharmaceutical company to the payer.
We are required to give substantial discounts to government insurers such as state Medicaid departments and the U.S. Department of Veterans Affairs. The government requires that pharmaceutical companies provide specific mandatory discounts on medicines in order to participate in these programs. In addition, we provide discounts and rebates through negotiations with the private health insurance companies and pharmacy benefit managers who administer benefits for Medicaid and Medicare. (See “Discounts and Rebates in Federal Health Programs” and “Negotiations in Medicare Part D” for more information.)
Hospitals and Clinics:
We provide discounts on our products to hospitals and clinics for inclusion on their formularies. Also, under a federal program known as the 340B Drug Discount Program, we are required to provide significant discounts on certain medicines purchased by specific categories of hospitals, clinics, and health centers that meet federal eligibility requirements.
Wholesalers and Distributors:
We pay fees to pharmaceutical wholesalers and distributors — companies that buy medicines in bulk and distribute them to pharmacies and other health care providers.
Why do we negotiate with private payers? For many conditions multiple treatment options exist, so payers create competition among pharmaceutical companies, who are all vying for favorable positions on their formularies. (See “What Is a Formulary?”) Payers designate certain medicines as “preferred” and place them on lower formulary tiers that require smaller patient out-of-pocket payments. “Non-preferred” treatment options get placed on higher tiers or are excluded altogether. Usually, the lower the medicine’s tier, the lower the patient’s out-of-pocket cost.
In contract negotiations, we give payers information they can use to evaluate the overall value of our medicine, and we offer discounts and rebates on our medicines in an attempt to gain favorable formulary placement. We are competitive in these negotiations because we want patients who need our medicines to have affordable access to them.
The payers that administer Part D benefits represent as many as 40 million covered lives,54 meaning they are powerful negotiators with leverage to secure large discounts and rebates on behalf of Part D plans.
Our 2017 Pricing Disclosures
-4.6%69, while the total rate of U.S. medical inflation rose by
In 2017, we provided approximately $15 billion in discounts and rebates on our medicines — or a discount rate of 42 percent. As in past years, we limited our annual aggregate list price increase to single-digit percentages.57 Despite this modest increase in list price, today’s vigorously competitive marketplace drives deep discounts and rebates to payers and providers. In fact, the discounts and rebates we provided outweighed our increase in list price. As a result, the aggregate net impact of price on our business was -4.6 percent.58 Our business remained strong because of increased use of our medicines, demonstrating the value of our innovations to patients and health care providers. In the chart to the right, you will see list and net price changes of our medicine portfolio for the past five years.
Our 2017 decrease in net price contrasts with the total rate of medical inflation (the average price increase of medical care services and goods to consumers), which rose by 1.8 percent in the U.S. in 2017.71
In 2017, REMICADE® (infliximab), our largest-selling product in recent years, faced increased marketplace competition and corresponding downward pricing pressure. However, even excluding REMICADE®, our 2017 net price change for our portfolio of medicines was negative.
Pricing & Patient Access
In 2017, the average aggregate net price of our medicines decreased, and total prescription drug spending rose by just 1.3 percent.72 Across the entire industry, in four years alone, total discounts, rebates, and fees provided by pharmaceutical companies grew from an estimated $59 billion in 2012 to $127 billion in 2016,73 while average net prices for branded medicine grew just 3.5 percent in 2016.74
Meanwhile, patient out-of-pocket costs for medicines are rising. According to a recent study by QuintilesIMS (now IQVia), out-of-pocket costs for branded medicines increased 48 percent from 2013 to 2016.75
One reason patients may feel that prices for their medicines are increasing is changes in how their health insurance is designed and, specifically, how their pharmaceutical benefits are managed. The number of commercially insured patients under the age of 65 who are enrolled in high deductible health plans, which require greater initial out-of-pocket costs before coverage begins, has increased in recent years.76 So too has the use of coinsurance, where patients are charged a percentage of a medicine’s list price, as opposed to a fixed dollar amount or copayment.77 For example, the average percentage of covered medicines with coinsurance among Medicare Part D plans rose from 35 percent in 2014 to 58 percent in 2016.78
lowers total health spendingfor chronically ill patients.80
Payers — insurers, pharmacy benefit managers, and the government — ultimately determine which medicines will be included on formularies and what patients will pay for them, often referred to as their share of costs. These decisions are based on many factors including negotiated price. Patient cost sharing may not reflect the discounts and rebates provided by pharmaceutical companies. In fact, a recent study found that many patients' share of a medicine's cost is based on list — not net — price, particularly when patients pay for prescriptions in their deductible period or when their medicines are subject to coinsurance. More than half of all patient out-of-pocket spending on branded medicines is a result of prescription medicines filled in the deductible period or in the form of coinsurance.81
Research shows that when patients pay a greater share for their medicines, patient health can suffer, and health system costs don’t necessarily go down.82 For example, when diabetes patients’ out-of-pocket costs rise, they are less likely to adhere to their medicines, meaning they are less likely to take them as directed.83 Patients with rheumatoid arthritis who are facing higher out-of-pocket costs may also forego filling their prescriptions or abandon their disease-modifying treatments altogether.84 Such decisions may reduce payer and health system pharmacy costs in the short term, but, over the long term, lack of adherence results in poorer health outcomes and higher overall system costs.85 According to one study, the U.S. could save $213 billion annually if medicines were used appropriately,86 and the Congressional Budget Office has estimated that for every 1 percent increase in the number of prescriptions filled by Medicare beneficiaries, spending on medical services decreases by about 0.2 percent.87
A Better Way to Pay for Health Care
Like many others, we are concerned about the rising costs of health care in the U.S. and are committed to working with others throughout the health care system to find ways to lower costs while improving care.
Our fragmented and complex health care system is fraught with wasteful spending. In 2012 alone, U.S. expenditures related to failures of care coordination, administrative complexity, and fraud and abuse were an estimated $1 trillion.88 By some estimates, system waste accounts for more than 20 percent of the total cost of health care.89 Meanwhile, many still cannot afford the care they need.
We strongly believe that addressing our health care system’s inefficiencies while ensuring every American has access to affordable health care, including medicines, means making changes to the way we cover and pay for medical care. Our country needs a new approach that prioritizes health care interventions — whether medicines, surgeries, in-office visits, or other forms of care — that deliver the best results at the best value. Instead of paying for volume, we should be paying for the value that the health care intervention delivers. Everyone who plays a role in the health care system should be held accountable for the results or outcomes they deliver, including pharmaceutical companies.
As discussed in the "Value" section, we are working to more clearly define and measure the value of our medicines. And we are taking steps to advance a more results-based approach in three distinct ways: through the establishment of innovative contracting models, also known as value-based contracts; through partnerships that explore value-based care models; and through population health research that seeks to address quality and cost challenges in today’s health care system.
Innovative Contracting Models
Innovative contracting models can allow the insurer and pharmaceutical company to share risk, with the goal of providing better outcomes for patients at a lower overall cost of care. These arrangements can be structured in a variety of ways, including:
Contracts tied to measurable medical outcomes:
In this type of contract, the pharmaceutical company and payer agree on a measurable medical outcome that both parties are trying to achieve. The contract is based on achieving this shared goal, which would result in beneficial outcomes for the payer’s patient population and reduced health care costs overall. If the medicine doesn’t meet the goal — or in other words, doesn’t work as expected — the pharmaceutical company will pay a rebate to the insurer.
Contracts to help insurers better predict costs:
Pharmaceutical companies might cover unexpected costs of providing a medicine to a patient. For example, if a patient needs a higher dose of a medicine than the average patient, the pharmaceutical company might agree to cover part of the cost of the additional medication. This type of arrangement allows insurers to better anticipate costs and manage risk over a large population of patients and, as a result, enables them to provide better access to that medicine.
Contracts tied to offsets of other health care expenditures:
The insurer provides better access to a medicine with the expectation the medicine will reduce the need for other costly health care interventions, such as surgeries, physician visits, and hospital stays. If such health care expenditures are reduced, the pharmaceutical company is paid more; if they increase, the pharmaceutical company agrees to provide more rebates.
We are enthusiastic about the potential of innovative value-based contracting models, but there are a number of technological and policy barriers that can make these agreements challenging to implement. To address policy barriers, we support the following measures: establishing safe harbors to better enable manufacturers to partner with payors and share risk; clarifying Medicare and Medicaid pricing treatment; and making comparative formulary and cost-sharing information readily available to give patients what they need to make better decisions. To address technological barriers, we advocate modernizing our health care data system to make it easier to track patient outcomes.
Oncology:We have partnered with public and private payers on novel contracts for patients with prostate cancer. In one contract, we have agreed to provide additional rebates to the insurer for plan members who meet eligibility criteria and whose treatment duration is shorter than a predetermined period of time. If the patient stops treatment, most likely because the treatment isn’t working as expected, we rebate a portion of the cost of that treatment to the payer. In this case, treatment duration is being used as a proxy for an outcomes-based measure of efficacy.
Type 2 Diabetes:We have partnered with a leading payer on a contract under which we are paid more if data show our medicine that treats adults with type 2 diabetes contributed to lowering other identified health care costs, such as the use of additional medicines. If those costs increase, we pay additional rebates. We have also partnered with several payers on results-based contracts tied to clinical outcomes for that medicine. Under such agreements, we provide additional rebates if the agreed-upon health outcome is not achieved.
We continue to participate in partnerships to explore value-based care models. We were the first health care manufacturer to join the Health Care Payment Learning and Action Network (LAN), an initiative of the U.S. Department of Health and Human Services, Centers for Medicare and Medicaid Services. The LAN, which brings together the private, public, and nonprofit sectors, is focused on accelerating our health care system’s transition to alternative payment models that reward value — the difference a treatment makes for patients — rather than volume. We are also pleased to support a multi-stakeholder effort established by Value Based Insurance Design (VBID) Health that is working to identify, measure, and eliminate low-value health care services.
Population Health Research
We are working to advance results-based health care at the population level. In an effort to contribute to the "Triple Aim" goals of improving patient care and population health while reducing the per capita cost of health care,90 our pioneering Population Health Research team is engaged in a number of unique research partnerships with a variety of health care stakeholders to find evidence-based solutions to population health challenges. Here are some examples:
Hospital readmissions are a significant health system cost driver.
We collaborated with Sharp Healthcare to use real-world data to better understand the impact of behavioral health factors on predicting rehospitalizations within 30 days and how to proactively identify patients at higher risk for readmissions for any cause.91
Type 2 diabetes is a chronic and progressive disease.
Patients with type 2 diabetes often do not reach recommended HbA1c targets, a measure of diabetes control. In partnership with researchers at the University of Utah and SelectHealth, the insurance division of Intermountain Healthcare, we identified a broad set of patient-level factors associated with failure to achieve HbA1c goals. This analysis of real-world data will enable better identification of high-risk patients and help guide patient- and physician-targeted interventions.92
We are engaged in these efforts because we believe a more value-based health care system has tremendous potential to improve patient health, increase access to care, and curb the increase in health care spending. The transition to this value-based approach will require pharmaceutical companies, payers, providers, and policy makers to work together, and we will continue to look for ways to help lead in this effort.