MFN Cuts Manufacturer Prices, But Savings Still Face A Longer Journey

By Paul Pruitt

The federal government is putting more pressure on pharmaceutical manufacturers to lower U.S. drug prices. In August, nine additional pharmaceutical companies agreed to offer selected drugs to state Medicaid programs at Most-Favored-Nation (MFN) prices, bringing the administration’s total to 26 participating drugmakers. By September, the White House said the agreements covered hundreds of medications across therapeutic areas including oncology, diabetes, and asthma.

The administration estimates the broader initiative could generate $64.3 billion in federal and state savings over 10 years. But how much of those savings will ultimately reach the people and organizations paying for treatment?

Lower manufacturer prices are progress. But pharmaceutical and biotechnology leaders should be asking what happens to that lower price after it leaves the manufacturer.

A prescription passes through a complicated financial system before an employer, health plan, government program, or patient pays the final bill. Rebates, pharmacy benefit manager (PBM) compensation, formulary arrangements, administrative fees, pharmacy reimbursement, and dispensing channels can all influence the economics along the way. Lowering the manufacturer’s price doesn’t automatically mean the employer, health plan, or patient sees the same savings.

MFN Changes One Part Of The Drug Cost Equation

The Medicaid MFN agreements use manufacturer rebates intended to bring Medicaid net prices closer to those paid in selected foreign markets. The Centers for Medicare & Medicaid Services describes its GENEROUS model as using supplemental manufacturer rebates to align Medicaid net prices with international benchmarks.

Medicaid already receives substantial statutory discounts, which has raised questions about how much additional savings the agreements will produce. That will become clearer as the model develops.

For life sciences executives, there is a broader business question. Medicaid and commercial pharmacy benefits operate differently, and MFN does not directly address the PBM contracts, pharmacy reimbursement arrangements, or benefit structures used in the commercial market. Most employers will continue operating within that separate pharmacy ecosystem, regardless of the attention MFN receives. Yet manufacturers operate across all of those channels. That means the industry needs to understand more than what happens to the manufacturer price. It needs visibility into how pricing changes affect the economics that follow.

In commercial benefits, PBMs can negotiate manufacturer rebates and other concessions, manage formulary placement, charge administrative or service fees, reimburse pharmacies, and operate affiliated pharmacies or other businesses. These arrangements influence the final net cost to employers and health plans, which may differ substantially from a drug’s list price or the size of its rebate. A lower manufacturer price or larger rebate does not necessarily guarantee a lower net cost once fees, reimbursements, and other financial arrangements are accounted for. The question for the next phase of drug pricing reform is simple: Where does the savings go?

PBM Customers Are Already Questioning The Model

A recent Pharmaceutical Strategies Group survey found that 69% of benefits leaders included at least one PBM outside the three largest providers in their most recent request for proposal. If they were procuring PBM services today, 82% said they would be at least moderately interested in considering a non-Big Three provider. The same research found that 20% described their PBM as “not at all transparent” about its sources of revenue. These findings suggest that purchasers are looking beyond provider choice to gain better visibility into what they are paying and where their pharmacy dollars are going.

That should matter to pharmaceutical leaders. If PBM customers are reconsidering how pharmacy benefits are purchased, manufacturers may increasingly operate in a market where contracting, formulary access, specialty distribution, and rebate strategies look different from the traditional model.

PBMs negotiate discounts, administer pharmacy benefits, and manage rebate arrangements on behalf of health plans and employers. While these arrangements are intended to control prescription spending, their effectiveness depends on whether they deliver measurable savings to purchasers. Rebates were originally designed to reduce costs, but a larger rebate does not necessarily translate into a lower net cost for employers. The concern is whether purchasers have enough information to verify what they ultimately pay and determine which arrangements deliver the greatest value.

A bigger rebate does not necessarily mean a lower overall cost. An employer may know its rebate guarantee without having a complete picture of the PBM’s total compensation, what an affiliated pharmacy earns, or how the final net cost compares with another purchasing arrangement. Without that visibility, employers cannot easily determine whether the discounts they receive translate into the lowest net cost.

Manufacturers Need To Follow The Price Beyond Their Contract

For life sciences leaders, MFN should prompt a broader review of what happens to pricing throughout the channel.

• Evaluate how pricing changes affect market access and net costs. A lower manufacturer price may change rebate economics, formulary positioning, and contracting strategies. Market-access teams should model those effects across Medicaid, Medicare, employer-sponsored coverage, and direct purchasing arrangements, accounting for differences in how each channel operates. Manufacturers should also provide greater clarity around their own prices, rebates, and concessions so purchasers can better understand the economics behind pricing decisions.
• Examine costs beyond the manufacturer transaction. Pharmacy reimbursement, PBM compensation, and affiliated pharmacy arrangements can influence what purchasers ultimately pay. The Federal Trade Commission found that pharmacies affiliated with the three largest PBMs generated more than $7.3 billion in dispensing revenue above estimated acquisition costs on the specialty generic drugs it examined from 2017 through 2022. FTC staff separately estimated $1.4 billion in spread-pricing income on those drugs. These findings are specific to the drugs, companies, and period studied, but reinforce the importance of examining downstream costs when evaluating overall savings.
• Verify that savings reach employers and patients. Lower manufacturer prices and larger rebates should ultimately translate into measurable financial relief. Manufacturers should examine how pricing and contracting decisions affect the final net cost to health plans and employers, as well as patients’ out-of-pocket expenses. The goal should be to demonstrate that savings reached those paying for treatment, rather than simply documenting a discount earlier in the supply chain.

Transparency Will Test The Value Of Pricing Reform

Regulators are increasingly asking similar questions. A Department of Labor proposal would require PBMs serving self-insured employer plans to disclose manufacturer rebates and other payments. It would also require reporting compensation earned from differences between what a plan pays and what a pharmacy receives, giving plan fiduciaries greater visibility into PBM revenue and compensation arrangements.

The Federal Trade Commission has also reached major PBM settlements this year. According to the agency, its February settlement with Express Scripts could reduce patient costs by up to $7 billion over 10 years. The FTC also estimates that its July settlement with Caremark could generate up to $8.5 billion in savings, with an additional $4.5 billion through point-of-sale rebates.

These developments are happening alongside MFN, not separately from the larger drug pricing conversation. Manufacturers are being asked to lower prices while purchasers and regulators are asking for greater visibility into what happens elsewhere in the pharmaceutical supply chain. Life sciences leaders should pay attention to both.

MFN is testing how significantly manufacturer pricing can move when government and industry apply pressure. The harder test comes afterward: whether the industry can trace how those changes affect health plans, employers, pharmacies, and patients.

Lowering the manufacturer price is a meaningful starting point. The real measure of success is being able to demonstrate where the savings went and who ultimately benefited.

About The Author:

Paul Pruitt is the Co-founder and Chief Growth Officer of SHARx and a key driver of the company’s rapid expansion. With experience across operations, finance, and benefits consulting, he began his career as COO and CFO at a boutique employee benefits firm and later specialized in self-funded health plans for a bank-owned agency. Paul’s mission is shaped by personal experience: two of his children were diagnosed with a rare orphan disease, giving him a dual perspective as an industry expert and parent navigating high-cost therapies. This fuels his commitment to fair prescription pricing and high-touch member support.