For years, international reference pricing (IRP) has been a core pillar of pricing strategy across Europe and much of the rest of the world. Through this benchmarking process, countries reference the prices of a drug in a “basket” of other countries and then set their own price accordingly. Because the strategy relies on known baskets, modeling price changes and their ramifications is predictable and feasible with software.
With the introduction of the Most Favored Nation (MFN) policy, the U.S. is now using IRP to implement a price-guarantee clause. Instead of having the discretion to set their own prices, pharmaceutical manufacturers must ensure that Medicare and Medicaid receive the lowest price offered to any comparable party or face penalties.
While the GLOBE, GUARD, and GENEROUS models of MFN are legally linked to Medicare and Medicaid, the ramifications will extend beyond government-only payers. Pharma pricing is an interconnected ecosystem; a shift in one sector inevitably forces a recalibration across all other insurances.
Gone are the days of treating the U.S. as an isolated, “high-priced” island. Pharma manufacturers must now consider how negotiating a single, low-price offer in a small market could trigger a massive, mandatory price reduction in Medicare and Medicaid revenue streams. So, what should manufacturers do to prepare for this new era of pricing management?
Understanding the net versus list trap
Typically, through IRP, manufacturers develop their pricing formulas with publicly available wholesale acquisition costs (or list costs). Manufacturers could raise their prices on paper, then offer larger discounts or rebates to increase sales volumes or maintain a preferred formulary position.
The manufacturer’s net prices, the actual revenue realized after all rebates are accounted for, were highly confidential. Under MFN’s GENEROUS and GLOBE models, manufacturers should be required to report their net prices to the government.
MFN should look beyond the list price to determine the lowest price. If a net price is considerably lower than the list price in one of the basket countries, the resulting MFN price would equate to that low net price. Additionally, penalties could be levied on manufacturers with a disparity between their list and net prices.
Thus, it’s important for manufacturers to realize that a discount given to one party is no longer isolated. A government-mandated price becomes the new “market rate” for everyone, whether that be another country or another insurer. This reality is the single biggest risk to manufacturers’ long-term gross-to-net stability.
Establishing the global corridor
As the industry shifts from a series of local negotiations to a single, interconnected global ecosystem, the global corridor will be the primary driver of gross-to-net stability. By establishing this strategic pricing zone, manufacturers can preserve margin and maintain formulary access, without triggering penalties or undermining higher-paying markets.
Historically, a “bad” price in a small market like Greece only affected the manufacturer’s revenue in Greece. But through MFN, this same price can trigger a mandatory rebate in the U.S. Medicare market, which likely represents up to 50% of the company’s profits.
Through the global corridor, manufacturers can:
- Ensure they are no longer managing for local volume, but rather to protect their U.S. margins.
- Determine if it makes sense not to launch in a low-price country to avoid dragging down the global benchmark.
- Prevent commercial net revenue from reaching the lowest global floor.
The key to establishing and maintaining the global corridor is data. Manufacturers need a single source of truth that tracks rebates and pricing across countries in real time. They also need the ability to simulate “what if” scenarios to understand how a price change in one country will impact others and when it will ultimately hit the U.S. MFN benchmark.
Spreadsheets simply cannot keep up with this level of granular, always-changing data.
Taking a proactive, automated approach
Reactively managing IRP can cause irreparable damage through portfolio misalignment and margin volatility:
- Launching a drug in a low-price reference market to hit a short-term volume goal may result in a massively discounted U.S. Medicare price in the long term.
- Accepting a low price for a narrow indication in one country means that price becomes the benchmark for all indications in the U.S. under MFN rules.
- Delayed reporting cycles could cause a price concession issued to one country to trigger a retroactive, multimillion-dollar rebate liability to the Centers for Medicare and Medicaid Services (CMS) six months later.
- Changes to Purchasing Power Parity and exchange rates could suddenly make U.S. prices look unfavorably high to auditors, triggering an automatic price reset and blindsiding pricing teams.
- As pharmacy benefit managers and commercial insurers embrace TrumpRx and MFN benchmarks as their guide, drops in government pricing could lead to unforecasted margin erosion as private payers demand parity.
With an automated pricing management system, like Model N Global Pricing Management, manufacturers can shift from treating pricing as a local task to a global governance discipline — one that protects margins and market access and ensures gross-to-net stability.
Model N Global Pricing Management is a world-class solution that European manufacturers have relied on for predictive modeling and IRP management for years. This Salesforce-based IRP solution reduces risk by:
- Ensuring audit readiness through automated, real-time GDP-adjusted benchmarking across all SKUs
- Forecasting global revenue impacts with what-if scenario modeling of launch sequencing and pricing changes
- Actively maintaining and monitoring prices and price actions to identify potential leakage into commercial contracts
- Automating reporting
What should manufacturers do today?
These changes will require a strategic mind shift in pharma pricing. The companies that act now and prepare early will protect their global revenue and avoid significant revenue leakage. Those who wait may face a dire fate. Model N is here to help you navigate this new global pricing ecosystem. Contact Model N to discuss your options.
