Back to Basics: What are List and Net Price?

Patient access. Affordability. Research and discovery. Who knew that so many unique factors contribute to how new medicines are discovered, manufactured, distributed and ultimately, priced.

There are also a number of smaller, less visible concepts that are often lost in the complexity of the health care system. One of those is the difference between list price and net price. So let’s start with some basic definitions:

List price is the price a manufacturer establishes for a product. In most basic terms, this is the original selling price before discounts and rebates are applied.

Net price, on the other hand, is the actual amount that the manufacturer recoups from selling their product, once fees to various stakeholders – including wholesalers, payers, Pharmacy Benefit Managers (PBMs) – are taken out.

Consider this example: have you ever noticed that on the back of many hotel room doors, there’s a price listed? Next time you travel, take a moment to compare the price on the door to the price on your receipt. It’s likely that they’re not the same or similar. In fact, the price on the door is generally higher than the price you paid while using a travel-booking service. This system is not too unlike how drug pricing happens. The “list price” is most often referenced and scrutinized as a part of media rhetoric, but rarely is that the amount people actually pay.

But why does this occur? Well, in the U.S. health care system, there are a number of factors at play.

We have a regulated distributed system. This means that parts of the system are run by government, commercial entities, and even by individuals themselves. In each of these systems, the price of the same product looks different – for example, Medicaid is a state-run program whose rules dictate that its recipients receive some of our medicines for free. On the flip side, we’ve seen tremendous commercial consolidation over the years. Today, there are about six major health care provider groups, and as a result of their consolidations they’ve acquired tremendous buying power and ability to set pricing standards.

Additionally, the health care distribution chain is larger than for the typical consumer good; in addition to wholesalers, distributors and retailers, there are also others in the care and delivery chain – Pharmacy Benefit Managers (PBMs) and insurance companies.

PBMs act as an intermediary between pharmaceutical companies and insurance companies and are a critical decision maker in determining when and how patients access their medicines. Pharmaceutical companies negotiate with PBMs to ensure that a medicine “stays on formulary” – an approved list of medicines that will be covered by a patient’s insurance company for a specific illness in a cost-effective way. To keep help patients access their medicines by keeping them on formulary, pharmaceutical companies negotiate rebates with the PBMs. In a perfect world, the vast majority of these rebates would go from the PBM to the insurance company to the patient. Unfortunately, as we continue hear from you, we know that patients in high-deductible health plans don’t always benefit from the rebates as is their intent.

Today, some patients, especially those in high-deductible health plans, are paying something that looks and feels more like a list price than a net price. I recognize that if you’re picking up a prescription, whether for a cold, for your child with type 1 diabetes, or just about anything else, the last thing you want to or should worry about is the price tag, but I hope this explains a bit more about the layers that affect your final price tag.