The Coverage Gap Double Dip: An Unexpected Incentive to Reduce Drug Prices
It is no secret that biopharmaceutical manufacturers are under public and political pressure to reduce prices. While the net prices of many drugs (the amount manufacturers receive, net of discounts and rebates they provide) have been declining for years, list prices – publicly available sticker prices that many reference when assessing price trends – have continued to rise(1). As we will explore in future posts, surprising incentives can push manufacturers to maintain high list prices for their products. But there are also situations in which manufacturers have an economic incentive to lower the list prices of their products.
This post will focus on:
Providing a deep dive into one incentive related to Medicare Part D coverage design – a dynamic known as the “Coverage Gap Double Dip”
Creating a framework to help manufacturers identify which of their brands have a high exposure to the coverage gap double dip and therefore may benefit from a reduction in list price
A Potential Incentive to Lowering List Price: The Coverage Gap Double Dip
While a brand may have multiple reasons to consider reducing its list price, one reason lies in how cost-sharing responsibilities (i.e., who pays, how much, and for what) are divided for patients enrolled in Medicare Part D. Under the current Medicare Part D benefit design, cost-sharing responsibilities for prescription medications change throughout the year, with manufacturers, patients, payers and the government contributing different amounts for a product over time. Our focus in this post will be on manufacturers, who make payments as follows:
Figure 1: Manufacturer Payment Responsibility for Medicare Part D Standard Eligible Patient (2021)(2)
As illustrated above, manufacturers shoulder responsibility for the majority of drug spend for patients who are in the coverage gap, which they enter upon reaching $4,130 in total drug spend (shared by the patient and the insurer) within a year. While in the coverage gap, patients remain responsible for 25% of their medication’s cost, while 5% is paid for by the plan and the remaining 70% by the manufacturer.
Importantly, these percentages are all based on a drug’s list price. Because the manufacturer pays 70% of the list price in the coverage gap, any contracted rebate of 30% or more results in a negative margin on claims filled in the coverage gap. These compounding manufacturer discounts are known as the “Coverage Gap Double-Dip” because contracted rebates are paid in addition to the manufacturer’s 70% coverage gap payments.
Why This Creates an Incentive to Lower List Prices
For brands whose Medicare business is highly contracted and whose patients often end the year in the coverage gap (often those with list prices of $400 - $1,200), lowering list price can help to improve the brand’s profitability by decreasing coverage gap liabilities.
Consider a brand with a $600 list price that pays a 40% rebate to payers for access. For a patient filling 10 prescriptions over the course of the year, the manufacturer’s margin net of rebates and coverage gap payments is as follows:
Figure 2: Manufacturer Net Margin by Patient Fill ($600 List Price, 40% Rebates)
In this case, the patient hits the coverage gap on the 7th fill, after which the brand earns a -10% margin for fills in the coverage gap.
Next, consider a situation in which the brand is able to reduce its list price while renegotiating rebates with payers to maintain the same net price. In the example below, the brand reduces its list price from $600 to $500 and its rebates from 40% to 28%. This keeps the net price to the payer identical at $360, but the reduced rebate allows the manufacturer to earn a small margin (2%) in the coverage gap instead of a negative one (-10%).
Figure 3: Illustrative Gross to Net Margins in the Coverage Gap
Taken together, this reduction in both list price and rebates leads to improved profitability for Part D patients, as shown below:
Figure 4: Manufacturer Net Margin by Patient Fill ($500 List Price, 28% Rebates)
Compared with the $600 list price / 40% rebate scenario, the manufacturer’s margin improves by $700 (30%) by lowering its list price and maintaining its net price through reduced rebates. The drivers of this improved margin are twofold:
1. Increased amount of time to reach the coverage gap: Because the patient hits the coverage gap after incurring $4,130 in total spend (based on list price), reducing list price from $600 to $500 lengthens the amount of time before the patient hits the coverage gap, where the manufacturer’s margin is reduced.
2. Improved margin in the coverage gap: Lowering list price allows the brand to provide the payer with the same net price with a lower rebate, improving the brand’s profitability in the coverage gap (as demonstrated above).
Importantly, brands whose patients move quickly through the coverage gap to catastrophic coverage due to high list prices do not achieve savings through this strategy.
Who is Vulnerable?
The dynamics we have described above are most relevant for brands that:
Figure 5: Key Considerations for Understanding Whether a List-Price Reduction Should be Explored
For brands that meet these criteria (or expect to meet these criteria), it is likely worth assessing whether lowering list price could boost net sales. One important consideration is the impact that this strategy would have a brand’s non-Medicare business. While reducing list price can help to improve net sales in Medicare, it is critical to consider the impact across the brand’s entire business. It is also important to assess the feasibility of implementing this strategy given current contract structures with payers. Lowering list price alone without the re-negotiation of rebates will only put further pressure on a brand’s margin (a lower list price with an identical rebate % will equate to lower net sales) – thus, the ability for a brand to maintain its net price with payers is critical.
For brands that retain the flexibility to do so, specifying net price in contracts with payers instead of a percentage rebate can provide them with valuable optionality to explore this strategy in the future.
Special thanks to Max Tabb and Andres Hoffman for their work on this blog.
Hayden Consulting Group
HaydenCG is the life sciences industry's premier Market Access and Commercialization strategic consultancy. Our focus is to deliver game-changing strategic guidance and analytical vision to transform the commercial trajectory of therapies, portfolios, and entire companies. Our services are designed to create competitive advantages, establish strong analytical foundations, build growth plans, and address Life Science industry's most pressing Access, Reimbursement, Policy, and Commercialization challenges. Follow us on LinkedIn.
1. Fein, Adam. “Surprise! Brand-Name Drug Prices Fell (Again) in 2020”, 5 Jan. 2021, https://www.drugchannels.net/2021/01/surprise-brand-name-drug-prices-fell.html (analysis based on SSR Health data)
2. “Medicare Part D Cost-Sharing Chart”. National Council on Aging, 28 Aug. 2020, https://www.ncoa.org/article/medicare-part-d-cost-sharing-chart