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What Will Change in the Pharma Industry Look Like?

by Michael Grosberg, Model N March 29, 2024

Exploring how current and future legislation may impact the role of pharmacy benefit managers (PBMs).

michael-grosbergThe pharmaceutical industry is rapidly approaching a breaking point with its current pharmacy benefit manager (PBM) model. Drug list prices keep rising, and so do required and negotiated rebates. The result is a significant gross-to-net bubble, which reportedly reached $256 billion in 2022.1 Patients continue paying more for drugs, while pharma manufacturers receive low or negative net price increases.

Some might argue that this cost trajectory is unsustainable. While the ideal resolution is murky, one thing is clear: Something must change. Several factors may influence future industry pricing practices.

The state of the PBM model

PBMs deliver value to the healthcare system through medication price and access management. They negotiate with pharmaceutical manufacturers to secure discounts and rebates in exchange for including a manufacturer’s drugs on their formularies. These negotiations influence which drugs insurance plans cover, how much patients pay for medications, and the overall cost-effectiveness of prescription drug benefits.

However, the current model drives payers to cover more expensive drugs because it’s more economical for them. For example, Humira still dominates the market despite less costly biosimilars being available.2 In 2023, the drug only lost 2% of its market share.

PBMs prefer drugs with bigger rebates (i.e., the higher-priced ones) because the discounts make them cheaper than the alternative lower-price drugs, providing the lowest net cost to the plan sponsor. For example, if the rebates and discounts on a $275 brand-name drug add up to $255, the total price for the payer is $20 compared to the unbranded drug’s $25. As a result of this preference, manufacturers say they must keep offering the higher-priced versions to gain a favorable spot on the formulary. That’s how we’ve ended up with the current gross-to-net bubble.

The PBM model also squeezes small pharmacies’ revenue. While patient copays are tied to drug list prices, pharmacy profits are tied to drug acquisition costs. Rebates reduce the acquisition totals, meaning the retailers earn less. This formula is particularly burdensome for independent and hospital-run pharmacies operating on small economies of scale.

Ripple effects from the IRA

The Inflation Reduction Act (IRA) is already shaking up the industry and may create unintended consequences, but we won’t know the full impact for a few years.

As part of the IRA,3 drugmakers and the Centers for Medicare and Medicaid Services (CMS) are currently negotiating Medicare Part D prices for 10 selected drugs. These discussions will result in a maximum fair price for Medicare prescriptions. At this moment, it’s unclear how CMS will determine this number.

Negotiations could influence commercial drugs as well. Many people are focused on big-picture consequences, such as the price’s impact on capital availability for new drug development, but there are other questions that need answers, too, such as:

  • How would manufacturers technically deliver the IRA-mandated discount directly from the company to the pharmacy counter?
  • When the Part D benefit is restructured to reduce the out-of-pocket maximum, what will the PBMs and plans do to maintain profitability? Might they demand higher rebates from the manufacturers?
  • How will commercial payers react to the Medicare reimbursement landscape?

There are also many IRA regulations that CMS has yet to release. This uncertainty creates many challenges for manufacturers, and we’re already seeing them pivot strategies in anticipation of changes. Some are delaying launches due to the IRA cycle and adapting their commercial approaches. Experts are concerned the law will reduce investments in post-approval research for new indications,4 resulting in less patient outcome data and fewer treatment options. How will this affect PBMs? Only time will tell.

Other legislative action

Congress has taken notice of PBMs’ role in drug prices. Last year, the US Senate introduced the Better Mental Health Care, Lower-Cost Drugs, and Extenders Act,5 one of at least three bills designed to reform PBM practices. While Congress won’t pass any of these proposals this session, the industry is closely monitoring future developments.

Pharma is also awaiting the Supreme Court’s ruling on a case challenging the Chevron doctrine.6 The Chevron decision stated that courts should defer to a government agency’s reasonable interpretation of an ambiguous law. If the justices overturn the Chevron ruling, it will significantly reduce the government’s ability to regulate, introducing more uncertainty into the business environment and making an already highly complex pharmaceutical pricing process open to technical litigation.

Price transparency models

CVS Caremark launched its CostVantage and TrueCost programs last year with the goal of bringing more transparency and clarity to prescription drug pricing.

CostVantage is unlikely to lower consumer costs. Commercially insured patients would have to be savvy enough to ask pharmacies to provide different pricing options—something pharmacists are reluctant to do and consumers don’t know to ask for. Uninsured patients may see cost changes, but it remains unclear if those prices will increase or decrease across different therapies. These changes won’t impact government-insured patients (those on Medicare or Medicaid) for several years.

While the CVS TrueCost model offers some direct discounts on commonly used generic drugs at the pharmacy counter, it likely won’t have a significant real-world impact. The core premise relies on employers adopting new “rebate-less” PBM plans. By forgoing rebates, these new plans will likely be more expensive. At this time, widespread adoption seems unlikely.

Preparing for change

As manufacturers navigate the impending changes, they must optimize their revenue management processes. With today’s rebate and pricing complexities, manual workflows are subject to mistakes and oversights, which can prove costly. According to Model N research, manufacturers can lose between $25 million and $75 million in overpayments due to improper rebate management.7

Companies must invest in automated tools to enable revenue optimization. Real-time data and analytics support demand forecasting, pricing strategies, rebate calculations, and long-term business planning.

About the Author

Michael Grosberg is the VP of Product Management at Model N.


1. Fein, A.J. Four Trends That Will Pop the $250 Billion Gross-to-Net Bubble—and Transform PBMs, Market Access, and Benefit Design. Drug Channels. April 4, 2023.

2. Manalac, T. AbbVie’s Humira Maintains Market Dominance Amid Biosimilar Launches: Report. BioSpace. January 18, 2024.’s%20blockbuster%20antibody%20Humira,Bioepis’%204th%20Biosimilar%20Market%20Report

3. Inflation Reduction Act and Medicare. Centers for Medicare & Medicaid Services.

4. New Analysis Shows IRA May Lead to Delayed Launches, Fewer Subsequent Indications, and Less Evidence Generation. National Pharmaceutical Council. March 11, 2023.

5. Tong, N. Senate Votes to Reform PBMs Again, Atop $16B in Hospital Cuts. Fierce Healthcare. November 8, 2023.

6. Howe, A. Supreme Court Likely to Discard Chevron. SCOTUS blog. January 17, 2024.

7. Greenberg, C. Formulary Frustrations: Overpayments Plague Pharma Manufacturers. Model N. December 16, 2023.

This article was originally published on Pharmaceutical Commerce.

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