Is 2024 the start of a brave new world in drug pricing?

Welcome to the future

As we bid farewell to 2023 and embrace the fresh canvas of a new year, the time-honored tradition of New Year's resolutions beckons us. These personal commitments serve as guideposts for self-improvement and transformative milestones in the coming months. Yet, as we embark on this journey into 2024, the global healthcare landscape grapples with a persistent challenge: the intricate dance of pricing and payment for groundbreaking pharmaceuticals that continually redefine the limits of scientific achievement.

Looking back, 2023 stands as a remarkable chapter in the realm of prescription drugs. From the advent of impressive weight-loss medications to the introduction of first-time generics and biosimilars challenging the historically high list prices of drugs like Humira, the year marked significant strides in drug development and access. More breakthroughs are likely on the horizon with other 2023 newsworthy drug events such as promising early clinical trials for a potential skin cancer vaccine and revolutionary gene therapy potentially poised to transform sickle cell treatment, underscore the impressive trajectory of drug development as we anticipate what’s coming in 2024 and beyond.

Contemplating our personal wished-for resolutions for drug pricing in 2024 ( i.e., the death of fake, artificially inflated prices), our reflections on the achievements of 2023 naturally intertwine with our mission at 46brooklyn. Engaged in our annual ritual of data analysis and deciphering the nuanced trends in drug pricing, we find ourselves on the brink of completing our time-honored tradition at the start of every year (seeing what drug prices changed from December to January). However, before delving into our drug pricing resolutions for 2024, it is only fitting to acknowledge some of the spectacular strides made in sanitizing drug prices – and in some instances, making drug pricing more complicated – in the United States throughout the past year.

2023 in review

In retrospect, 2023 emerged as an exceptionally compelling chapter in the narrative of drug prices, marking a key milestone in our journey of documenting drug pricing trends here at 46brooklyn and through our team’s consulting work at 3 Axis Advisors. From new reports that gave us greater insights into how drugs are priced, to huge swings in list prices for popular drugs (i.e., insulin), to policy changes that will shape drug prices in 2024 and beyond, 2023 had a lot to say in regards to drug prices. For those who weren’t paying attention or simply forgot, let’s do a lightning round to review some of the highlights from 2023 before we dive into what 2024 is already telling us. Of course, there are many other events worth highlighting, but these bits are arguably the best fits for our discussion and analysis for today:

  • At the start of 2023, our annual focus to track brand name drug list price changes highlighted that 2022 was a big year for price increases. At the end of 2022, there were over 1,400 brand list price increases tracked within our dashboard which far exceeded the 2021 figure of just over 1,100. At the same time, early signs were that 2023 was going to follow in 2022’s footsteps. At the beginning of the year, there were more list price increases in January of 2023 than there were in January of 2022, which, all things told, suggested 2023 would be more of the same in regards to the drug pricing story in the United States. Of course, those were just the list prices, and as Drug Channels demonstrated at the start of the year, much more was happening below the surface of those sticker prices (i.e. declining net prices).

  • However, the narrative of drug price increases took a rather dramatic turn by the time March rolled around when Eli Lilly announced it was cutting the cost of their insulin therapies by 70%. Although this price adjustment was slated for 2024, it marked a transformative revelation after a decade-long discourse on insulin pricing, challenging the belief that manufacturers were bound to escalate prices indefinitely. In their announcement, Lilly, in their own words, said they were, “taking these actions to make it easier to access Lilly insulin and help Americans who may have difficulty navigating a complex healthcare system that may keep them from getting affordable insulin.“ Nevertheless, there was speculation that the price decreases were actually a response to changes in federal policy that led to the price changes. Specifically, the removal of the average manufacturer price (AMP) cap on Medicaid rebates. Regardless of their reason(s), their competitors Novo Nordisk and Sanofi would announce similar insulin price decreases in 2023.

  • As list price focus dissipated after the first part of the year, our 46brooklyn report on arbitrary pharmacy benefit manager (PBM) specialty drug definitions was released, highlighting the role that entities outside of drug manufacturers play in helping shape drug costs. What one company may call a generic and sell at a deep discount, someone else may call special and charge a premium to patients to access that drug. This report would not be the last released in 2023 that would highlight the important role that details play in determining drug costs.

  • In June, Merck filed a lawsuit that seeks to stop Medicare drug price negotiation. That was really just the beginning, as now a number of lawsuits have been filed seeking to strike down the measures imposed on drug makers through the Inflation Reduction Act (IRA).

  • In July, reports on mid-year price increases would highlight how 2023 was on pace to meet or exceed 2022 brand list price changes, arguably highlighting the resiliency of the status quo regarding brand pricing behavior. This was despite the changes of the IRA, which seemed to suggest that manufacturer changes might be tempered with potential Medicare rebates, but at least early on, that was not the case.

  • In August, the Department of Health and Human Services (HHS) announced the first ten drugs that would be selected for the Medicare negotiations that were enabled by the signing of the IRA. While many of the drugs selected were predicted in advance, there were a few surprises. Arguably, those surprises highlight the importance of real data when seeking insights into drug and drug prices – without a good data set, you may just get the wrong answers.

  • In September, after months of working with the Wall Street Journal on an investigative analysis on specialty drugs, they released the piece titled “Generic Drugs Should be Cheap, but Insurers are Charging Thousands of Dollars for Them.” The report from WSJ’s Joe Walker highlighted how Mark Cuban Cost Plus Drug Company was able to offer certain generic drugs for fractions of the costs that major health insurers and PBMs were offering within Medicare plans. Senators Elizabeth Warren and Mike Braun would later call for an HHS Office of Inspector General investigation into the scheme.

  • This WSJ specialty drug report – combined with the 3 Axis report “Unravelling the Drug Pricing Blame Game“, which showed a number of drug pricing irregularities at the pharmacy counter, including how the same PBM charged five different prices for the same drug, dispensed at the same pharmacy, on the same day – helped to demonstrate that to understand drug prices, we need a lot more context than just the manufacturers’ list price.

  • Case in point, in November, Express Scripts would be the first of the big 3 PBMs to announce cost-plus-ish pricing with the launch of its ClearNetwork model. Somehow, even though the big 3 PBMs have said for years that manufacturers, and manufacturers alone set drug prices, Express Scripts was launching a new “cost-plus” model for pricing drugs. The new model would heavily rely upon a newer drug pricing benchmark – Predictive Acquisition Cost (PAC) – to pay for drugs. Note, PAC is not the manufacturers’ list price point, which, if you think about it, is kind of an admission that what the PBM-lobby has been saying for years was maybe not true? (Make your own judgements). CVS would follow suit by announcing a hilariously hollow “cost-plus” model in December, though it is unclear what, if any, pricing benchmark they’re relying upon for paying for drugs (i.e., it’s cost plus – just don’t ask what cost is or what plus is). As independent cost-plus pharmacies and Mark Cuban Cost Plus Drugs continue to put pressure on the absurd pricing within legacy pharmacy benefits programs, you can expect many more iterations of “cost-plus kayfabe” in the future.

  • And before the close of the year, the public got to see inside the ugly guts of the drug supply chain, as the lifting of the AMP cap that influenced the price drops on the major insulins also resulted in GlaxoSmithKline pulling their popular asthma inhaler Flovent HFA from the market and leaving an authorized generic version in its place. By moving to an authorized generic, GSK would avoid the steep penalties that would have to be paid through the Medicaid Drug Rebate Program and purchasers would have a lower list priced version available in its place. Sounds like a win for patients and plan sponsors, right? Ha ha. As Joe Walker at Wall Street Journal showed, the authorized generic was essentially rejected by large PBMs in favor of other products. While you may think that lowering the price of a medicine would attract coverage instead of the opposite, then we’d respectfully say that you don’t know much about how health insurance works in the U.S.

As we reflect on these pivotal events (and let’s be honest, there’s a lot more worth highlighting), it becomes evident that 2023 was arguably a revolutionary year for drug pricing. With eager anticipation, we now turn our attention to the unfolding developments in 2024, commencing with a detailed exploration of January brand price changes per our time-honored tradition of examining new year changes on brand drug list prices.

Let’s make it a dry January, folks

Before we get to the numbers, let’s start with the necessary caveats and nuance. Tracking drug prices is an exercise fraught with complication due to the fact that pricing is more of a range of experiences (see price discrimination) rather than something that is a consistent, transparent, shared experience among purchasers. And even with something as surface level as tracking list prices, there are many ways to view and contextualize what’s happening from an overall system impact perspective. We have tried our best to provide as much list-price-based context as possible within our Brand Drug List Price Change Box Score. This dashboard, which we launched in 2021, has a lot happening in it, and we’ve made a few tweaks even since its initial launch in an effort to improve its usability. With that said, if you are new to the tool and our brand drug list price analyses, we highly recommend reading our initial 2021 dashboard companion report and/or our dashboard FAQs that explain the tool, its functionality, its limitations, and the approaches taken in each of the tool’s different stat boxes. Don’t worry, there’s a ton of Star Wars references to help get you through it.

This background and context is important, because jumping to sweeping conclusions about the market impact of list price changes is a quick path to the dark side. So don’t jump in without the necessary sobriety when using the tool.

This year has proven to be relatively similar to past years, except for a few unique events that we’ll get to later. As should be expected, brand drug manufacturers big and small took list price increases (as measured by Wholesale Acquisition Cost, or WAC) at the start of the year. Technically, most brand prescription drug list price increases occur in either January or July each year, but the greatest number take place in January (and thus, January gets all the attention). By our counts, since 2018, more than 60% of all brand drug list price increases that occur throughout the course of each year are implemented in the month of January.

In turn, we anxiously await the publication of those price changes at the start of the year so we can keep with our tradition of informing you all about them, as they represent an important layer of the broader drug pricing onion. Thankfully, over the years, the work of unlocking the data of drug pricing behavior has become easier for us thanks to our friends at Elsevier and our Brand Drug List Price Change Box Score visualization.

Bear in mind that in our Box Score, in this analysis, and in all research that relies on list prices for medicines, it’s important to remember that list prices are just one part of the drug pricing puzzle. As we’ve stated before, you can think of list prices as the border pieces of an actual puzzle. They are the starting point that generally frames the broader picture, but there many more pieces to the puzzle that are needed to decipher exactly what’s happening within the frame – or in this case, what’s happening underneath the list price.

As was pointed out last week by fellow drug pricing Jedi Adam Fein over at Drug Channels, while many of these list prices are increasing, when looking below the surface of the list prices of these drugs, the actual net prices of many of those medicines are actually in a state of decline. This means that while list prices may be rising, the financial fruits that are borne out of those increases are increasingly being harvested by drug supply chain intermediaries and more importantly, the full value of the concessions made off of list prices may not be getting passed along to plan sponsors and patients. (Though depending upon who you ask, they are – see, context is everything).

We offer this caveat emptor (so to speak) in an attempt to properly introduce the data we discuss below and contextualize some of its limitations as others seek to better understand that the fumes emanating from the odorous U.S. drug pricing onion arise from the entire onion and not just its outer shell. For more on the drug pricing fundamentals, don’t forget to check out our 46brooklyn Drug Pricing 101 podcast series. It’s even more nerdy than you may think it is, but it’s not nearly as boring as you may think it is. If 46brooklyn ever goes belly up, you have permission to put that on our metaphorical tombstone.

So with that said, be sure to check out our Box Score today and throughout the month as we continue to update the latest brand drug list price changes. Now let’s dig into what we saw in 2023 and what we’re seeing during the earliest days of 2024.

Forget everything you know about drug prices

We begin were we always do, with a simple tally of the brand price increases. We finished 2023 with just over 1,400 brand list price increases (about equal to the 2022 number). Whether this number is meaningful is largely a matter of perspective. Based upon what we were writing about last year, we think this number matches our early expectations. We observed in January 2023 that price increases were on pace to meet or exceed 2022 levels – and basically kept that belief into our midyear price increase check-in. To end the year right around the 2022 tally leads us to say this number was as expected (Figure 1).

Figure 1
Source: Elsevier Gold Standard Drug Database, 46brooklyn Research

So, looking to 2024, it turns out that we rung in the New Year with 453 brand price increases on January 1st, which is actually almost perfectly aligned with the number of increases observed in 2023 (which was 452 increases on January 1). And while that may sound like a lot – and it could be argued that it’s a lot – it is not as much as we saw in 2022 (540) or 2021 (602). If this sounds like déjà vu, it kind of is. This is the exact point we made last year, so we’re not going to rehash it because what we think is really interesting this year is that we have already had 24 brand list price decreases on January 1, 2024. That number is nearly unprecedented. In our dashboard – which tracks price change activity back to 2012 – no day has ever had that many brand list price decreases (let alone the first day of the year – a time we typically associate with increases). Plus when you add in the seven price decreases that snuck in at the end of 2023 (December 30), you have a total of nearly 30 brand products taking list price decreases which is truly remarkable from a historical perspective. If we roll over these end-of-2023 price decrease into a 2024 categorization, we can track the total number of brand price decreases on January 1st in our entire dashboard below (Figure 2):

Figure 2
Source: Elsevier Gold Standard Drug Database, 46brooklyn Research

Now before you go and say we cheated and put the seven end of the year decreases in 2023 to make it look more impactful, we’d note that the 2020 activity of decreases was almost exclusively Pfizer (all but three of the decreases in 2020 were Pfizer; activity likely part of Pfizer preparing to spin up Viatris). But regardless of whether we include or exclude the December 30, 2023 decreases in 2024, it is pretty clear that something more unique is going on with the January price decreases than the increases.

Now, many readers are likely questioning why on Earth we’d be making such a big deal out of ~30 brand list price decreases when there were 452 price increases. If 452 was maybe not all that big of a number (fully contextualized over the course of years), why focus so heavily on a number less than a tenth of that. And that, dear reader, is the right kind of question, particularly as we move on to analyze what we next do, which is what percentage price change behavior we are seeing. For the last five years, brand drug list prices have collectively tracked in the aggregate very close to 5% (+/- 0.2%). For the start of 2024, the typical brand product appears to be taking a price change in the 4.5% range. This is slightly less than the 5% we’ve observed the last couple years as observed in Stat Box #3 (Figure 3):

Figure 3
Source: Elsevier Gold Standard Drug Database, 46brooklyn Research

For those who forget, and don’t want to review the ‘how to’ on the Brand Box Score visualization, Stat Box #3 displays the median WAC price increase on brand name drugs, by year, over the last decade. This chart only displays the median across the population of drugs with a price change – in other words, it does not consider drugs without a price change to have a 0% change (which would impact the measure of median). We use median because we feel it more accurately reflects the behavior of a group of brand products, as an average price increase does not mean a lot without averaging based upon utilization. Said differently, imagine there were only three brand drugs that changed price in 2024, and these drugs took a 2% increase, a 3% increase, and a 50% increase respectively. If we were to display the average price change for these products per year in Stat Box #3, we’d say that there was an 18.3% average price change, which is arguably disingenuous to the behavior of most of the brand products in our example (at least that is our perspective). Rather, if we say the median value was 3%, at least we’re more closely reflecting the behavior of most of the brand products in 2023. The problem with averages – particularly unweighted averages – is that outlier values can so dramatically impact the results (i.e., 18.3% vs. 3%). That said, there is value in tracking average price changes, but we want to do so in reference to their utilization (not just the underlying product counts). Which is why we have Stat Box #4 (more on that shortly).

Arguably part of the reason for the decrease observed in Stat Box #3 (5% in 2023 to 4.5% at the start of 2024) is the number of drugs that are taking a decrease. Again, for the first time ever, we had a pretty large number of decreases on January 1st. Ordinally, these will be put on the bottom of the list when ranking all price change behavior from least to greatest. That is going to pull down the measure of median, particularly when we have more of those occurring early in January 2024 than we’ve ever had before (again, we have almost the same number of increases as we’ve had before, the difference is the decreases, which pulls the number down). However, we feel the real story is found in Stat Box #4, which tracks the weighted average impact of price changes based on Medicaid drug utilization trends (it’s the only granular public-facing utilization data available). For the entirety of the dashboard’s history, Stat Box #3 and Stat Box #4 have tracked relatively close together. For example, in 2023, the median WAC price change reported in 2023 was 5% in Stat Box #3 compared to a weighted average of 5.3% (drugs with a price change) or 4.2% (all drugs) as reported in Stat Box #4. Figure 4 shows the comparison for all years we have data for in the dashboard (i.e., 2012 - 2024)

In the landscape of drug pricing, the year 2024 presents a noteworthy departure from the norm, marking a significant shift in the statistical trends. Breaking with convention, Stat Box #4 introduces a novel dynamic — instead of the expected increase, the weighted average Wholesale Acquisition Cost (WAC) displays a remarkable decrease of 1.5% for drugs with a price change, and a 0.7% decrease for all drugs in 2024. It's essential to recognize that Stat Box #4 differs from Stat Box #3 due to the influence of weighting, offering insights into the average percent change based on Medicaid's utilization.

As a quick aside, for those interested in the details, the divergence between the orange line and the grey line in Figure 4 above warrants attention. This discrepancy arises from the orange line, which calculates the total inflationary impact of the subset of drugs with a price change, divided by spending on that specific group. In contrast, the grey line divides the total inflationary impact of changes by spending on all drugs, introducing complexities in interpretation, especially early in the year. Notably, the grey line may appear artificially depressed when viewing all drugmakers in the dashboard until other major players report their increases.

An additional layer of intricacy stems from the reliance on 2022 Medicaid State Drug Utilization Data (SDUD) for both 2023 and 2024 weightings, given the absence of Medicaid's 2023 drug utilization data. Consequently, the primary variable for comparing 2023 and 2024 behavior becomes the product mix, as certain products witnessed list price changes in 2023 that have not yet materialized in 2024.

Despite these nuances, Stat Box #4 underscores the significance of the approximately 30 drugs that experienced a price decrease. Their collective impact surpasses the cumulative value of all other brand price increases. In practical terms, reducing the prices of these 30 drugs holds more significance for Medicaid savings than the combined effect of price increases observed in 452 products on January 1st or the 629 products that have shown price increases as of January 5, 2024. This phenomenon is particularly noteworthy due to the nature of the drugs that underwent decreases, primarily comprising historically high-utilization products such as insulins, asthma/COPD inhalers, and central nervous system (CNS) drugs. To offer a better perspective, Figure 5 provides a comparative snapshot of the total value associated with products taking increases versus those taking decreases at the outset of 2024.

Compiling the data within Stat Box #4 of our dashboard provides a more comprehensive understanding of the dynamics at play. The $33.4 billion in Medicaid gross expenditures associated with the 627 products that experienced list price increases, factoring in Medicaid utilization (with two products excluded due to them lacking Medicaid utilization in 2022 [This is why we’re talking about 627 vs. the 629 in Stat Box #1]), unveils a nuanced picture. Each brand product in this category, on average, contributes $53 million in gross Medicaid expenditures annually, anticipating a list price change of approximately 5%. Assuming brands are generally reimbursed close to their WAC, the average prescription for these products in Medicaid is poised for a gross price increase of around $64.25, translating to roughly $1.7 billion annually in added gross costs through these collective increases (you can check our math with the table above).

On the flip side, the 26 products linked to a price decrease are associated with $3.7 billion in gross Medicaid expenditures. These products, on average, represent $144 million in gross Medicaid expenditures per year — double the average for the pool of drugs increasing their list price at the start of the year. The significance of these drugs lies in their higher average spending per product, and the scale of projected decreases for these products far exceeds the increases, with an average behavioral pattern indicating a 50% decline. This equates to an anticipated gross savings per script of $280.53, four times the savings per script relative to the price increases. Overall, these drugs are expected to become approximately $2 billion cheaper for Medicaid gross expenditures moving forward, suggesting that the observed brand drug list price changes at the beginning of the year signify savings rather than increases ($2 billion cheaper is a bigger number than $1.7 billion increase).

What makes this scenario unprecedented is the historic nature of these drug price change events. Over the 12 years that our dashboard has tracked brand list price changes, never before have we witnessed a landscape where Medicaid anticipates savings solely based on the list price changes of brand products — without factoring in rebates or other forms of price concessions (which are significant in the Medicaid and 340B programs). The emergence of this brave new world in drug price behavior raises intriguing questions about the future landscape. While it remains uncertain, there is a suspicion that these list price decreases may lead to lower rebate collections for these drugs, especially for Medicaid. Medicaid collects rebates as a percentage of the drug's list price (Average Manufacturer Price or AMP; not WAC), and these list price decreases are likely to significantly decrease the amount of rebates being harvested through the Medicaid Drug Rebate Program and 340B program. However, the same may not hold true for other payers, as reports indicate that PBMs are adjusting contract terms to accommodate these changes.

It is important to note that these decreases are likely to be a one-time event. This is because of the belief that the behavior is primarily driven by the change to the AMP cap penalty in the American Rescue Plan Act of 2021, which essentially means that Medicaid rebate penalties for drugmakers could bring a number of drugs to the point where manufacturers would have to pay money to Medicaid programs beyond offering their drugs for free — a policy that was projected to save the feds $17.3 billion over 10 years. In a classic example of “don’t count your chickens before they hatch,” these recent price decreases and product eliminations (see Flovent HFA example above) indicate that any previous savings projections may not actually materialize. As we told USA Today last week, "It's one thing for a drug manufacturer to offer something for free. It's another thing to literally pay for the privilege of doing so."

To be clear, this doesn’t necessarily mean that Medicaid or the federal government is harmed from these list price changes — collecting lower rebates but paying less for drugs to providers can be net neutral — the issue is that the government maybe thought that manufacturers would pay penalties which they may be avoiding through these list price decreases (ergo, savings will not be realized to the feds).

Because of the unique nature of this first-of-the-year policy change for 2024, manufacturers may not be similarly motivated to change prices for the remainder of 2024 and beyond in the same manner observed here. Nevertheless, the observed behavior raises intriguing possibilities about the ability of manufacturers to lower their list prices under specific circumstances. As we ponder the marginal utility of continued brand manufacturer changes in pricing policy, it becomes evident that the evolving landscape holds potential for reshaping the dynamics of drug pricing in unforeseen ways.

Putting a bow on 2023 drug prices

Based upon the early indications from 2024, we want to finish this report with a quick analysis on what 2023 meant in terms of list price changes based upon the various ways with which prices might be contextualized, specifically AWP, WAC, and NADAC (remember, here at 46brooklyn, AWP — the historical backbone of PBM contract guarantees with payers — stands for “always what’s profitable”). Such an analysis seems appropriate, given the potential changes to PBM pricing contracts with new drug reference prices (fingers crossed that this is the last year we need to talk about AWP outside of history lessons). As we reviewed earlier, at the end of 2023, two of the big three PBMs have announced “cost-plus” options coming to the market (whether they’ll be broadly adopted is a different story), implying that they will be instituting major changes to the way the price medicines in the marketplace by relying on new pricing benchmarks. So to help people get a sense for the value of the various drug pricing benchmarks, we figured a good old fashion head-to-head seemed like the best way to start.

In the figures below, we evaluate the number of national drug codes (NDCs) whose prices changed across the various benchmarks based upon their list price value on December 31, 2022, compared to their list price value on December 31, 2023, (ergo, any change would represent the pricing behavior of the drug for the 2023 calendar year). Note that we are not counting zeroes in any of these figures and our bands have exclusive handling of the lower value and inclusive handling of the upper value of the band (i.e., 10-20% increase measures all drugs whose list price percentage change from December 31, 2022 to December 31, 2023 was greater than [but not equal to] +10% but was not more than +20% (i.e., <=20%).

Figure 6
Source: Elsevier Gold Standard Drug Database, 46brooklyn Research

Figure 7
Source: Elsevier Gold Standard Drug Database, 46brooklyn Research

Figure 8
Source: Elsevier Gold Standard Drug Database, 46brooklyn Research

In reviewing Figures 6, 7, & 8, we can see that if you were rolling a many sided dice that had all possible NDCs on it, your best rolls to land a NDC with a list price decrease are likely with NADAC, although AWP/WAC might be your most consistent result (a slight increase, in the >0 but <=10% range). However, the above can’t really be compared one to the other because they don’t all cover the same subset of drugs (see the various y-axis counts). There are some drugs that have an AWP but don’t have a NADAC and vice versa. In order to get a perhaps better comparison, we made Figure 9 below, which only compares NDCs that have data points in all three pricing benchmarks in 2022 and 2023 for comparison. Again, the figure does not count zeroes.

Figure 9
Source: Elsevier Gold Standard Drug Database, 46brooklyn Research

Examining Figure 9 reinforces our earlier notion that measuring drug pricing changes gives us the most consistent results when we use the metaphorical AWP/WAC dice. As can be seen above, there is less pricing movement with those pricing benchmarks than with NADAC — which has far taller columns (i.e., greater count of NDCs moving price). However, Figure 9 also reinforces the idea that NADAC is more likely to capture instances of price deflation with medicines than any of the other benchmarks.

However, while that is potentially demonstrative of the roll of the dice of what medical condition may befall us as individuals (which drug do we get as patients), it doesn’t really tell us anything regarding the actual expenses. Said differently, if we’re a payer (health plan, Medicaid, Medicare, whomever), which benchmark impacts our spending the most (based upon adding up all those various NDC purchases that covered beneficiaries are actually receiving)? And so, for our final analysis for this report, we took all of these NDCs that experienced price changes in 2023, and the Medicaid expenditures for those same drugs in 2022, and simply multiplied the amount Medicaid spent on an NDC-basis by the percentage change of each of the various pricing benchmarks. So if we had a hypothetical drug with gross Medicaid expenditures of $1 million that had an AWP price increase of 10%, a WAC price increase of 5%, and a NADAC price increase of 7%, we’d end up with expenditures of $1.1 million on an AWP-basis, $1.05 million on a WAC basis and $1.07 million on a NADAC basis (for our hypothetical). We did this for all NDCs in Figure 9 and compared total expenditures on the AWP, WAC, and NADAC paradigm relative to the underlying gross Medicaid expenditures, and we were honestly surprised by the results (Figure 10).

We’re not mad, we’re just disappointed

In reviewing Figure 10, loyal readers of 46brooklyn probably reacted the same way we did, given our historical disdain for list prices and our general affection for NADAC, which aims to better approximate actual pharmacy marketplace conditions … simply put, what gives? Honestly, the results above were not what we were expecting and so as we unpack it, let’s remind ourselves what Figure 10 is and is not measuring. First, Figure 10 does not show us which pricing benchmark is cheapest. NADAC produces lower prices than AWP or WAC for effectively all drugs that have comparable options (Mark Cuban’s albendazole offering and similar low WAC generics not withstanding). Rather, Figure 10 is showing what would happen to underlying gross Medicaid expenditures if they changed based upon the change in the underlying price delta. In this way, a change in 1% in AWP is worth the same as a change in 1% for NADAC. That is what the figure above is actually measuring. Which, in a world where U.S. drug pricing is not based upon any real numbers anywhere in the supply chain, perhaps gives us our best insights into how things might directionally move up or down (just perhaps not the scale of movement). Said differently, Figure 10 represents the likely movement of our drug expenses based upon which underlying benchmark we prefer. Nevertheless, we still expected market-based NADAC to produce more competitive prices such that the year-over-year percent change would be more significantly different than what we’re seeing in Figure 10 (i.e., we thought that NADAC changes would look in the aggregate a lot different than AWP/WAC changes) — so let’s explore what is going on underneath the aggregate, because that will help us try to make sense of this analysis.

To start, let’s first acknowledge that AWP and WAC are not representative prices for the vast majority of drugs (i.e., generics, which make up nearly 90% of all pharmacy transactions). Of the total NDCs with price change experiences for 2022 and 2023 across all pricing benchmarks, more than 25,000 had 0% price changes from 2022 to 2023 (almost all of them were generics). At the same time, only 7,823 NDCs had no price changes from 2022 to 2023 as measured by NADAC (many of those were brands — whose AWP and WAC also didn’t change). Look back at Figures 6, 7, & 8. Both AWP and WAC are counting thousands of brand list price changes but hundreds of list price changes for generics. At the same time, NADAC is counting multiple thousands of price changes for both (a little more than AWP and WAC for brands and a lot more than AWP and WAC for generics). We offer this as evidence that AWP/WAC are not measuring reality — how can they (AWP/WAC) stay so fixed in price when pharmacy provider purchases (as demonstrated by NADAC changes) are varying so much?

So a benchmark based upon surveys of retail drug purchases tell us that drug pricing is far more volatile than what AWP/WAC would have us believe (for both brands and generics). This is a point that we perhaps don’t focus enough on. It is further proof that prices beyond manufacturer-set prices are influencing drug prices in the U.S. As stated, there are brand prices whose NADAC is changing but the AWP/WAC behavior is not. Brand manufacturers publish WACs, but pharmacies buy based upon the price made available to them by their wholesaler (i.e. McKesson, Cardinal Health, Cencora/AmerisourceBergen). As already stated, WAC does not equal NADAC, which means sometimes pharmacies may be getting a better price from their wholesaler (more of a discount to WAC) whereas other times that discount isn’t there (hence NADAC changing for a brand when WAC [and by extension, AWP] are not changing). Figure 10 is, in some way, measuring that behavior. Maybe Figure 10 is highlighting some of the roles that wholesalers play in managing a basket of goods for their profits than we’ve previously delved into?

To better understand the point we’re making, consider the following. Remember that the methods for NADAC are such that its pricing does not update in real-time. As previously indicated in this report, on December 30th, 2023, seven brand products (i.e., insulin) took list price decreases of approximately 70%+. If you look on your calendar, you’ll notice that the 30th was a Saturday. NADAC prices are only published once a week (at best, most updates only occur once a month based upon the survey) — that day being Wednesday. Guess what, Figure 10 is giving AWP/WAC credit for decreasing the Medicaid expenditure experience by 70% for these eleventh hour decreases, whereas NADAC has those drug prices either flat (0% change) or with a slight increase (i.e., +0.1%). As we explained when reviewing Stat Box #4, there are massive swings for the Medicaid program based upon the activity of just a few drugs (so long as those drugs are associated with billions of dollars in annual drug spending). To give a perspective on the matter, we calculated the assumed cost difference between AWP and NADAC for Medicaid based upon our percentage change calculation we’re performing in Figure 10. What we saw was that the seven December 30th brand decreases gave favorable performance to AWP (i.e., hundreds of millions of dollars) such that it took the opposite end of the spectrum (where NADAC was saving money on a percent change basis relative to AWP) of over a 100 NDCs to match those the value of just those few deflating brands. Said differently, given the size and scale of just those seven drugs that experienced a decrease, it’s not really a fair fight between the two.

Which brings us to the final point of today’s report, which if you’ve made it this far, kudos. You’re likely wondering how you came here to see what’s happening with the list prices of medicines only to be lured down a nerdy rabbit hole comparing drug pricing benchmarks to one another and learning about how pharmacies buy medicines. We do this because our experience in studying the drug supply chain tells us that what’s happening on the surface matters, but arguably, the underlying details can often matter even more. As policymakers and payers lament the rising prices of medicines and seek to find solutions to better control prescription drug costs, we are reminded that attempts to create better affordability must account for the fact that cost is not always a function of price. And since the actual costs of medicines are what matter far more than the notional list prices, this is necessary context for evaluating any analysis or policy centered on “drug pricing.”

We often shout at the clouds: “What is drug pricing even supposed to accomplish?” Are we reimbursing drugs based upon the time purchases are made (i.e., to stock inventory on the shelf when we need it) or to replenish inventory as it’s used (i.e., to buy the next product after the one on the shelf has been sold)? We do not believe there is any consensus on this matter, which means pharmacy providers are often left between the rock and the hard place as it relates to inconsistent and arguably irrational approaches to drug pricing.

What do we mean by this? Consider what a December 30, 2023, price decrease for insulin means. If you are a pharmacy who manages your inventory well (i.e., keeps just enough stock to meet business demands but not too much that you cause cash flow problems from holding too much inventory) what decision do you make regarding your insulin purchases on December 29? If you order insulin from your wholesaler on the 29th, it’s very possible you may not actually receive that product until January 2 (because of the holidays). And while the time delay is a little longer than normal, the bigger issue is that you’ll have bought the insulin at a WAC 70%+ higher than your reimbursement from PBMs will be for that insulin will be come January 2nd (since in pharmacy, you are often paid based on the prevailing rate of the day of dispensing; not based on the prevailing rate at the day of original purchase). If you wait to order until after the New Years holiday, well you might not have insulin for patients until January 3 or 4 (and even then, your wholesaler might not sell you the cheaper WAC insulin - see panel to the right).

The asymmetry of system incentives is not lost on us. The collective public desire is for lower prices for prescription drugs. But when the costs of medicines do fall, it can create great financial opportunities for all intermediaries in the drug channel to withhold savings from the marketplace for the sake of lining their pockets. While pharmacies and wholesalers can benefit from this, we are reminded of how Ohio Attorney General Dave Yost put it during the Ohio PBM spread pricing saga from a few years ago. Here, he describes the then-allegations against OptumRx of price manipulation and spread pricing in the state Bureau of Workers’ Compensation program:

“In other words, if the price of a drug goes down, they're supposed to lower their price to the bureau of workers' comp … What we found is that they played the float and that they would wait a month or two or even longer before they would pass the savings on according to the contract.” - Dave Yost

While OptumRx eventually moved past the suit in a settlement with Ohio with no admission of wrongdoing, the concept of “playing the float” remains as a good characterization of the opportunities available to drug channel intermediaries when price drops occur. Hell, this concept was literally what we highlighted in our very first report at 46brooklyn. Regardless of all the list price changes, the prices charged by drug channel often remain floating in the clouds, insulating purchasers from the savings yielded by lower costs but often quick to expose them to the pain from when costs go up.

Because of our lack of a common language for what the real price of a medicine is, it leaves drug channel participants to strive to define price for their own purposes, which can often leave smaller drug channel participants drawing the short straw in the marketplace, but more importantly, often work against the interests of the end payer (i.e. plan sponsors and patients), who just want more affordable medicines.

So as 2024 brings more policy changes to the drug pricing world, and as PBMs contort their pricing models in an attempt to demonstrate better approaches to their business models, it is important to consider the fact that while the prices that govern the marketplace may change, the end experience may not.

Maybe the brave new world of drug pricing in 2024 may not actually be so different at all.

Ben LinkWAC, AWP, PBM, Brand drugs, Generic drugs, NADAC, CVS, Express Scripts, Medicaid, Mark Cuban, Insulin, Flovent, Price increases, List prices, Rebates, American Rescue Plan, Inflation Reduction Act, AMP