It’s That Time of Year Again – 2020 Budget Planning: Determine whether a price increase will do more harm than good
At the start of each new year many drug manufacturers will consider raising prices to offset higher business costs. Analysts are busy trying to determine whether to raise prices and by how much. While a higher price may help a brand offset its rising costs, an increase can have a negative effect on profit margins, public perception, and relationships with commercial businesses (insurers) and the government.
Any pharma company looking to raise prices must consider the consequences on net revenue, rebate liabilities, government price reporting requirements and more. Prior to any price increase, weigh these factors against any potential change in sales revenue.
Seven Financial Factors to Consider
1. Cost of Goods
Are rising cost of goods driving the need for your price increase? Is your cost of goods tied to your sales or drug costs? Does your pharmaceutical company have a profit share/percentage of revenue arrangement with suppliers? It’s critical that you have a clear understanding of how your drug prices and cost of goods are related.
2. Distribution Fees
Wholesalers who distribute pharmaceuticals have their own distribution fees to consider. Typically, they charge a service fee of approximately 10 percent of WAC (Wholesaler Acquisition Cost). As such, their fees will increase proportionally to prices.
3. Customary Prompt-Pay Discounts
Wholesalers offer a prompt-pay discount (typically two or three percent off WAC) that companies should factor into their decision.
4. Governmental Effects
A drug price increase can trigger several changes at the governmental level that drug manufacturers must take into account. The government limits price increases that drug manufacturers can take without incurring a penalty.
- Medicaid Rebates
Is your drug’s price increase, as a percentage, higher than the rate of inflation? Changes to your pricing that result in an increase to AMP that are higher than the rate of inflation will incur an inflationary penalty, resulting in rebate charges in addition to the standard calculated 13% or 23.1% x AMP owed to Medicaid.
- Best Price
Higher rebates due to price protection penalties can result in lower Best Prices, which can dramatically impact your Medicaid Rebate liability.
- Medicaid Supplemental Rebates
Manufacturers who have supplemental rebate agreements in place with states should carefully review their supplemental rebate agreements as prices to those states are typically locked in. Drug manufacturers’ net prices on that business may not increase. If anything, net prices may decrease due to the higher cost of goods, distribution fees and Customary Prompt-Pay discounts.
- PHS Rebates
Price protection penalties and changes in Best Price can result in lower prices offered to PHS entities for purchase.
- Medicare Part D Coverage Gap Rebates
When brands increase prices, patient costs can be expected to increase, triggering higher reimbursement amounts owed for patients in the Medicare Part D Coverage Gap.
- VA Price (Federal Ceiling Price)
- Medicaid Rebates
Most Favored Customer
Price increases can result in changes to the Most Favored customer, which may affect the price offered to VA entities.
Price increases can result in changes to tracking customers, potentially affecting the price offered to VA entities.
Pharma companies that increase their NFAMP (calculated based on price) faster than the rate of allowable inflation might incur penalties owed to the VA.
5. Commercial Contracts
Determine whether your commercial contracts have price protection penalties. Usually, commercial customers penalize drug manufacturers for increases over a certain percentage on an annual basis. An increase over that set percentage often results in the brand paying it back via an additional rebate. Know what effect a drug price increase will have on your contracted rebate amount. Once you trigger a price protection penalty, the penalty may never go away.
Additionally, determine how your new price affects liabilities to the government. A best price to a commercial customer can change your Medicaid and PHS rebates. If that price is lower than the government’s net price, you will owe an additional rebate to meet the government’s requirement for receiving your best price.
6. Savings Offer/Coupon Programs
Are patients using a Savings Offer or Coupon program sponsored by your company? If so, have you considered how your reimbursement may change? If you are limiting patient payment amounts through these programs, your savings offer program may cost you more money.
7. Utilization Shifts
Could increasing your price affect your utilization or formulary placements? Will the increase change the demand for your product? If yes, do you know what that might mean for your bottom line? These types of questions underscore the challenges brands face when deciding whether to raise prices and by how much.
Two Non-Financial Factors to Consider
1. Mandatory Price Increase Reporting
Drug pricing transparency legislation is growing, and more proposed bills are becoming law. A price increase can create additional reporting requirements for your company, and more work for staff. Be prepared.
At all times, drug manufacturers should follow a consistent standard operating procedure to ensure compliance with reporting requirements. Lack of planning can result in costly fines and penalties that can mitigate the effect of a price increase.
2. Public Perception and Patient Costs
Drug pricing has been subject to extreme scrutiny as of late. Carefully consider your company’s need for a price change, how that changes patient costs and ability to use your products, and whether that price change increases your risk of a costly public relations nightmare.
Once you’ve assessed all factors influencing the ultimate result of any price increase, you can be more confident about where you stand. You will clearly recognize your point of diminished return and can act accordingly.
BY MARK PATTON