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Value and Pricing

At Janssen, we have maintained a responsible approach to pricing our medicines. At the same time, we recognize that patients and other stakeholders are seeking more transparency around how our medicines are priced.

That is why this section of our U.S. Transparency Report provides context about pharmaceutical pricing and our business as well as additional information about our price increases.

In this section, we detail the complex pharmaceutical purchasing and payment system in the U.S. We talk about the difference between a “list price” and a “net price” — and how much Janssen’s total portfolio of medicines changed in price over the last five years.

The data presented in this section demonstrate that the net price of Janssen’s medicines increased 3.5 percent over the past year. To put this in context, the medical care inflation rate — or the average price increase of medical care services and goods to consumers — was 4.1 percent in 2016.1

 

Our Pricing Principles

When we price a new medicine, we take into account:

  1. Its value to patients and society. We consider not just health and productivity benefits to patients, but also the medicine’s potential to reduce other costs — like surgeries, hospital stays, or long-term care — and the improvement it represents to the existing standard of care.

  2. The importance of maintaining affordable access to medicines for people who need them. We consider not just the list price, but also the negotiated discounts and rebates we will provide to insurers and governments to support broad access to our products.

  3. The importance of preserving our ability to develop future groundbreaking cures and treatments. We have an obligation to ensure that the sale of our medicines provides us with the resources to continue to invest in tomorrow’s cures through research and development.

Drug Pricing in the U.S.

The list price for medicines is a starting point and is ultimately reduced by discounts and rebates. We provide these discounts and rebates to insurance companies, pharmacy benefit managers, hospitals, clinics and others. We also pay fees to pharmaceutical wholesalers to distribute our medicines. However, these discounts, rebates and fees are often not visible to patients.

In fact, while the list price set by pharmaceutical manufacturers plays a role, patients’ out-of-pocket costs for medicines are ultimately determined by payers, including insurers, pharmacy benefit managers and the government. Here is more information about how these discounts, rebates and fees work:

  • Private Insurance: Commercial health insurance companies and pharmacy benefit managers (PBMs) manage the purchase of medicines for those with private insurance coverage. They determine what medicines will be included on their formulary (the list of products they cover) and the out-of-pocket amounts patients will pay for those medicines. Formulary determinations are based in part on payers’ negotiations with pharmaceutical companies. These negotiations result in rebates from the pharmaceutical company to the payer.

  • Public Programs: We are also required to give substantial discounts to government insurers such as state Medicaid departments and the U.S. Department of Veterans Affairs. The government requires that pharmaceutical companies provide specific minimum mandatory discounts on medicines in order to participate in these programs. For example, companies are required to provide a discount of at least 23.1 percent8 off list price for medicines provided to people in traditional Medicaid programs. On top of that, many state Medicaid programs receive additional discounts for specific medicines either directly or by contracting with private insurers. Discounts and rebates are also paid in the drug coverage programs for seniors under Medicare Part D or Managed Medicare (Part C and Part D).

  • Hospitals and Clinics: We provide discounts on our products to hospitals and clinics for inclusion in their formularies and utilization of our medicines. In addition, under a federal program known as the 340B Drug Discount Program, we provide significant discounts for medicines purchased by certain kinds of hospitals, particularly those that provide care for low-income patients.

  • Wholesalers and Distributors: We pay fees to pharmaceutical wholesalers and distributors, which are companies that buy medicines in bulk and distribute them to pharmacies and other health care providers.

NEGOTIATIONS IN MEDICARE PART D

Pharmaceutical companies negotiate rebates on medicines purchased by Medicare through the Part D benefit and through Medicare Advantage plans. These negotiations occur with the private health insurance companies and pharmacy benefit managers who administer benefits through these public programs.

The payers that administer Part D benefits represent as many as 40 million covered lives,9 meaning they are powerful negotiators with leverage to secure large discounts and rebates on behalf of Part D plans.

Why do all these negotiations, rebates and discounts exist? There are often many medicine options available for a particular condition, so insurers and pharmacy benefit managers create competition among pharmaceutical companies for more favorable placement on their formulary. They do this by placing one or two medicines for a particular condition on lower formulary tiers that require a lower patient out-of-pocket payment, while placing other treatment options on higher tiers or excluding them altogether. Companies offer discounts and rebates on their products in order to gain favorable formulary placement and ensure more patients are able to access their medicines.

AN EXAMPLE OF THE PHARMACEUTICAL SUPPLY CHAIN*

 

LEARN MORE

For more detailed information about the pharmaceutical supply chain, click here to watch the Biotechnology Innovation Organization video, “Understanding Your Drug Costs: Follow the Pill."

Patient Out-Of-Pocket Costs

For someone with health insurance, the cost of a medicine is set by his or her payer (commercial insurance company, pharmacy benefit manager or the government), who determines the out-of-pocket payment for the medicine. After the patient meets his or her deductible, the patient pays either a co-pay or co-insurance for medicines.

Patients pay on average about 20 percent out-of-pocket for medicines, compared to just five percent for doctor visits or hospital stays.10 One reason patients may feel that prices for their medicines are increasing is due to changes in how their insurance is designed and, specifically, how their pharmaceutical benefits are managed.

For example, according to a recent study by IMS Health, the average patient's out-of-pocket cost rose more than 25 percent, to $44 per prescription, between 2010 and 2015.11 In addition, the use of co-insurance rather than a flat co-pay amount is increasing. Among Medicare Part D plans, the percentage of medicines requiring co-insurance as opposed to co-pays increased from 35 percent in 2014 to 45 percent in 2015.12

Like many, we recognize that increasing out-of-pocket costs can be a burden to patients. To help make sure high out-of-pocket costs do not prevent patients from getting the medicines they need, Janssen offers a variety of cost support options through our Janssen CarePath program. In addition, uninsured patients are often eligible for patient assistance to help with out-of-pocket costs. (For more information, see the “Access” section.)

The Net Price

When the rebates, discounts and fees provided to insurers, pharmacy benefit managers and others described previously are taken into account, we arrive at what is known as the net price. This is the best measure to assess the rate at which pharmaceutical prices are increasing.

Janssen's Price Increases

At Janssen, we generally limit our annual aggregate list price increase to single digit percentages, below those of our competitive set.13 After accounting for discounts and rebates, we generally realize low- to mid-single digit percentages from our list price increases. The past five years reflected these trends.

As the chart below shows, in 2016, after taking into account discounts and rebates to insurers, pharmacy benefit managers and others — a total of approximately $11 billion in the U.S., or a discount rate of 35.2 percent — the aggregate net impact of price on our U.S. business was 3.5 percent. This is lower than the total rate of medical inflation in the U.S. in 2016, which was 4.1 percent.18

OUR LEADERS DISCUSS
Blasine Penkowski, Chief Strategic Customer Officer for Janssen North America, discusses our company’s approach to pricing medicines and how patient cost is determined.

Section References:

1. “Consumer Price Index - December 2016,” news rel., U.S. Bureau of Labor Statistics, January 18, 2017, ,https://www.bls.gov/news.release/archives/cpi_01182017.htm.
2. “A 10-Year Projection of the Prescription Drug Share of National Health Expenditures Including Nonretail,” Altarum Institute, published October 2014 and addendum added August 2015, http://altarum.org/sites/default/files/uploaded-publication-files/Non-Re....
3. Ibid.
4. Samuel A. Bozzette, M.D., Ph.D., et al., (2001). “Expenditures for the Care of HIV-Infected Patients in the Era of Highly Active Antiretroviral Therapy,”. New England Journal of Medicine, 344(11), (2001): 817-823, doi:10.1056/nejm200103153441107.
5. Rebecca Siegel et al. “Cancer Statistics, 2016.” CA: A Cancer Journal for Clinicians 66(2016): 7–30.
6. “Price Declines after Branded Medicines Lose Exclusivity in the U.S.,” IMS Institute for Healthcare Informatics, January 2016, https://www.imshealth.com/files/web/IMSH%20Institute/Healthcare%20Briefs....
7. “Generic Drug Savings in the U.S. Seventh Annual Edition: 2015,” Generic Pharmaceutical Association, (2016), http://www.gphaonline.org/media/wysiwyg/PDF/GPhA_Savings_Report_2015.pdf.
8. Manufacturers must provide a discount of either 23.1 percent or the lowest price they offer the drug to others in the marketplace (known as best price).
9. “The Medicare Part D Prescription Drug Benefit,” The Henry J. Kaiser Family Foundation, September 26, 2016, http://kff.org/medicare/fact-sheet/ the-medicare-prescription-drug-benefit-fact-sheet/.
10. “Prescription Medicines: Costs in Context,” chart, PhRMA analysis based on Medical Expenditure Panel Survey (MEPS),http://www.phrma.org/sites/default/files/pdf/prescription-medicines-cost....
11. “Medicines Use and Spending in the U.S. – A Review of 2015 and Outlook to 2020,” IMS Health, April 2016 http://www.imshealth.com/en/thought-leadership/quintilesims-institute/re....
12. “Majority of Drugs Now Subject to Coinsurance in Medicare Part D Plans,” Avalere, March 10, 2016, http://avalere.com/expertise/managed-care/insights/majority-of-drugs-now....
13. Based on internal calculations using Janssen financial data and data from Analysource, IMS. We compare our aggregate list price increase against aggregate key competitor price increase for branded products in those therapeutic areas in which we market our products.
14. U.S. Product Portfolio includes pharmaceutical products marketed by the company. Products are primarily in the areas of Immunology, Oncology, Cardiovascular Metabolics, Infectious Diseases and Central Nervous System.
15. Annual percent change vs. prior year calculated at product level and weighted across company’s U.S. Product Portfolio.
16. Represents the year-over-year change in the average list price, or wholesale acquisition cost (WAC).
17. Represents the year-over-year change in the average net price, which is WAC less rebates, discounts and returns. The data presented are based upon our internal analysis of product rebates and discounts. The analysis may be different from the methodologies used by other companies. The data have not been audited and should not be read in conjunction with our filings with the Securities and Exchange Commission.
18. “Consumer Price Index - December 2016,” news rel., U.S. Bureau of Labor Statistics, https://www.bls.gov/news.release/archives/cpi_01182017.htm.