Inside Pharma's Revenue Engine: The Gross-to-Net Reckoning

[MUSIC] Welcome to the launch of our new pharmaceutical executive podcast series on pricing and policy in pharma with model and strategy experts Michael Grossberg and Jesse Mendelssohn. On my crystal group managing editor at M.J.H. Life Sciences. For our kickoff episode, I'm joined by Michael in studio to discuss one of the most consequential and often misunderstood areas of life science business revenue management. Michael is a vice president of product management at model end. It is more than 15 years of farm and Michael spanned roles in public policy, analytics, systems of implementation and change management. He is also one of the team members behind model ends annual state of the revenue report, which surveys more than 400 life sciences leaders responsible for pricing, contracts, finance, and revenue operations. Michael, thanks for joining us. We're excited to launch a series with you and Jesse. Thanks Michael. I appreciate the opportunity to be here. Sure, great to have you. Perhaps a start off will jump into one of the prevailing takeaways from your new 2026 survey. The issue of Gross-Tonette in today's drug pricing and access landscape. Pharma has always dealt with drug rebates and pricing programs. What feels fundamentally different about GTN complexity today compared to maybe 5-10 years ago? I think that's a great question and I think you're absolutely right that it is an area of pharmaceutical drug access that is perhaps the least understood by those outside the industry. So it's a great opportunity for me to be part of this podcast series so that we can at least begin to educate your listeners and the general public. I think that the Gross-Tonette bubble to borrow the phrase from Adam Fein of the drug channels is an area that is only increasing in complexity because it is the result of both the commercial drivers in the relationships between pharmaceutical manufacturers, insurance companies, plan benefit managers, and other players in the distribution channel, compounded by the government regulations. We see that come across clearly in the state of an revenue report this year. I think this year is the best and most educational. So I'm really excited to talk about those findings. And one kind of stats kind of a resident with me. The report shows 99% of leaders believe that GTN has become more complex. So what do you think are the most obvious forces behind that? Some two-thirds of the pharmaceutical executives we surveyed think that the complexity is driven by their relationships with PBMs. And the extending that is their perspective that the PBM rebates that the pharmaceutical manufacturers have always dealt with. Represent of far greater area of revenue leakage. In other words, an area where the pharmaceutical manufacturers are overpaying. The manufacturers want to pay those rebates, right? They see rebates as a measure of access. It's a way to get the drugs to the patients that need them. But every manufacturer in good faith wants to make sure that they are paying for access. And they get the access that they want, that they're paying for. And unfortunately not all rebates are short. Rebates are duplicated, and there's a lot of places where manufacturers don't get the access to. So there's still that gap there with the rebates. The gap remains and the gap is becoming more complex because the duplication and the opportunities for mistakes are compounding with the different programs that are being. Does that just contribute to the overall risk? Or is there some other element? Is there something maybe leaders are underestimating? And when it comes to GTN risk? I think the GTN risk translates directly to the manufacturer's operating capital. And it translates directly to manufacturer's profitability. So as an executive in the pharmaceutical manufacturer, as a finance leader in the pharmaceutical manufacturer, it is our responsibility to ensure that we are paying rebates accurately. And in many cases it's a legal responsibility to pay rebates accurate. And we're not always doing that. There continues to be an accuracy. And you're saying a lot of that's caused by the PBM? Some of it is caused by lack of transparency. With the pharmacy benefit managers, it's caused by disconnected data across the systems. The 340B program, the MFP negotiations with Medicare. And now with the launch of Trump R.A.X. And the expansion of direct to consumer. We're anticipating an even problem to be even worse than further comes. That's interesting. That's another wrinkle to that whole area, which we might cover in a bit. Maybe shifting to the Medicaid sort of element of this. One of the most striking findings in the report is that more than a third of farmer companies say they're seriously considering withdrawing from Medicaid. What's driving that conversation, do you think? It's the regulatory complexity. I think that is one of the most striking findings of this report. We know anecdotally, we've heard conversations, we've had conversations with manufacturers who've considered exiting Medicaid. And industry leaders like John Shackoff, Kingons Paulting and others have talked about sort of a breaking point where a. The participation in Medicaid is no longer the requirements that the government puts on manufacturers in order to be able to participate in Medicaid. It becomes so onerous that they outweigh the benefits of Medicaid participation. And to see in black and white that more than a third of manufacturers have seriously taken a look at. Exiting Medicaid is striking because the rebates that are mandated through the Medicaid program aren't just the Medicaid rebates. They're also the rebates and there are rebates in tricare and other government programs. So a manufacturer who withdraws from Medicaid no longer pays any of those rebates. And it creates a very different commercial strategy for the manufacturer. Manufacturers who have withdrawn from Medicaid have taken the stands that they can provide patient assistance in other ways besides Medicaid. The government is pushing these private companies so far beyond reason that they're considering not doing business with the government. It's a lot of big companies too right? It's public that Bosch, Bosch and Loan has withdrawn from Medicaid. So this is an example of. there's other manufacturers, smaller manufacturers who've done that. But to see that a third, more than a third, have seriously considered it. It's out of scare people. And you're saying some of that is also because of the administrative complexity and the compliance complexities? 100%. Participation in Medicaid is highly onerous. It's driving a lot of compliance requirements. It drives a lot of government reporting requirements. And then it of course drives the financial obligations of the Medicaid state Medicaid rebates. It's a supplemental rebate. You'd be pricing. And at some point those obligations start to outweigh the ability to access that Medicaid covered population. Do you guys see this as a real shift in mindset or just reflection of the current system? I think that I don't think that we are at a point yet where manufacturers will start exiting Medicaid and mass. I think that would be premature to say that. But I do think that we are. we're not that far away from it. I think that director consumer may actually accelerate that. So I think we are going to, if you want to ask me to look at my crystal ball from next 12 to 18 months, I do really think that we will see some one or two other big manufacturers take the same stuff. You can see it's excellent. It may shift impact to rebates at the same time. Say multiple payers are involved, Medicaid and a commercial plan are both involved. How well does the system coordinate rebate eligibility today? Where do you see the biggest opportunity for manufacturers? I think we are doing a really poor job today. The term that manufacturers often use this coordination of benefits. It's actually a pretty straightforward exercise. If you have ever had it been unfortunate enough to have any kind of a physical injury, and you went to a doctor or a chiropractor, the first question they probably ask you is, were you in a car accident? They ask you that because if you had been unfortunately in a car accident, then that was the cause of your injury, chances are the car insurance, not your health insurance, is supposed to pay for your treatment. This is the same kind of situation here. You have a depending on which insurance which plan covers your prescription, that is the entity that is entitled to the manufacturer rebate. We've always had this situation where the commercial plan and Medicaid might, for one reason or another, request a rebate for the same prescription. When it was just the commercial plans and Medicaid, we were able to figure this out. Most commercial plans would allow manufacturers to claw back the rebates that they paid if it became known that a Medicaid asked for it. It was still complicated because we had to go and collect all the Medicaid data from all the companies. all 500 state program combinations and do that kind of de-duplication work. But it was possible. This is becoming exponentially more difficult because this coordination of benefits problem is compounded not only between commercial and Medicaid, but now with MFP. It is also a 340B program because the de-duplication is explicitly prohibited by law, especially when you're talking about drugs subject to the MFP, the Medicare negotiated rebate, versus the 340B program. We are, it is going to get even more complicated yet with direct consumers. I know you want to talk about that at the end. I'll bring that up. I'll bring this issue up for sure when we talk about Trump. Are we maybe reaching a point where technology and automation become essential just to kind of keep up with the contracting ecosystem? I don't think you can do it in any way without technology. I think about it this way. The de-duplication, the coordination of benefits problem, the easiest way to solve it is if all of the prescriptions that were filled for your drug were sitting in one bucket, in one database, in one system, then you can holistically look at that data. Then you can decide these are the valid rebate requests. These are not valid rebate requests. These are the rebate requests. I'm going to pay these the rebate requests. I'm not going to pay. Then you can make management decisions based on that. As a farmer manufacturer, if you don't have all of that data in the same spot, then you're really trying to reach for something that no technology can solve. Data access is something that you absolutely have to negotiate for. Even in our state of revenue report, we asked this, what's the manufacturer's perspective on being able to connect. 28% said that they had visibility to the entire growth unit, and that's because not all of this data is sitting in the same spot. Data access is key. What about your opinion on factoring in the IRA, Medicare drug, price negotiations? Your report, actually, I think notes that nearly half of leaders worry that those negotiations could negatively affect their business. You hear different things. Those still being executed, implemented. I know we have around one, and there's going to be there's around two. Those still on the table to be executed? Absolutely. Absolutely. The first round, the 10 manufacturers involved in the first round, that colloquially known as IPA 2026, they're now factuating those prices and rebates since January, so we're in the third month. Manufacturers are being complied as far as I know, every manufacturer that was required to comply is compliant. There is some statistics floating around about how well the reporting is going. There's been, I think, the first three or four weeks took some shaking out in adjustments for all the connections, and for all the data to be flowing through directly. I think manufacturers are now having two months under their belt or starting to look at the duplication, the coordination of benefits business that we talked about, and really trying to assess the impact. And yeah, I think everybody's worried that these quote unquote negotiated prices will then have, will then have downstream impact and also create more opportunities for revenue leakage, especially when we look at maybe an commercial duplication of rebates for those prescriptions. I will say that we didn't ask this question explicitly in the state of revenue report, so one of the things that is inevitably going to come out of the IRA Medicare drug price negotiation is the sort of a knock on effect, the flow down from other entities saying, well, if this is what Medicare is paying, I want to be paying the same price. And we're already seeing that in Virginia. So in Virginia, just like Colorado, they have a really advanced stage prescription drug affordability board. And those state agencies are known by different names in different states. In Colorado, they picked one drug and they pegged its price to the MFN negotiated price. In Virginia, that state agency is saying that every drug that the federal government has selected for MFP is going to be, they're going to apply those MFP prices to all sales in Virginia, including sales to patients of state covered by state plans, as well as commercial. Extending MFP pricing to commercial plans is being done on a state by state level. I'm sure there's going to be litigation. It's here. That would be a good thing, right? Because for commercial employee, right? If they're applying MFN, they're going to pay less. So, like, I'd laugh because we're not comparing apples to apples. Who is paying less? The rebates that manufacturers pay to PBMs are setting aside the debate about profiteering, like I'm even setting that aside. The PBM rebates, just like Medicaid rebates, are used to subsidize health insurance in this country. So, without rebates, the cost of our plans goes up. And it goes up. It's the cost of our plans to our employers. It's the cost of plans that we pay, our cost sharing is patients. At the end of the day, affordability of medicines isn't about rebates or the complexities of the back and forth that we have. It's about what I pay when I, at the pharmacy, my mom pays when, you know, doesn't care patient. When she goes to the pharmacy counter to pick up the prescription, and I think that when we are faced with the complexity of MFP negotiation at the IRA, I don't see how that trickles down to the patients. You touched on some of these launch strategies to get it impacted with the pricing. Like, how do you see it impacting launch and maybe lifecycle management sort of stuff? Yeah, I think that's a great question. I think I'm speculating a little bit or making an educated assessment of where the market is going. We do see, you know, even in the response of the state of revenue report, manufacturers trending more conservative in terms of regulatory compliance and risk. When it comes to international reference pricing and sort of launch sequencing, we already see manufacturers asking us for support in including the US in their launch sequencing plans. Before launch sequencing, figuring out if you're going to launch in Germany first and France second or in Greece first or like how do you, and that factors into your pricing and access volumes. In the past, the US was completely independent and we did not have to factor the US launch sequencing into many of the discussions outside of the US. We see manufacturers asking us to do that. We encourage manufacturers to consider how they would go about the launch process, including the US, even if it's not quite here yet, but we are encouraging every manufacturer to start developing those processes and interconnecting the data. Do you see a similar level of conservative approach in their actual pricing strategies? Like they're setting pricing and they're contracting decisions as well. I think those are yet to be realized. I don't think that we're seeing quite that knock on effect this quickly. I think maybe we're in another year away from being able to assess those trends. Do you think it's going to contribute a little bit more focus on compliance, some more compliance oversight at all? I think the first place it's going to contribute is we're seeing announcements about price decreases. What's interesting is that the club of 17 agreements that have been signed, they're very confidential. So I'm only going to speak to what's been absolutely publicly available. And also we are seeing manufacturers announce price decreases. What's instructive is those manufacturers are public companies. A public company must inform their shareholders of a material event impacting their potentially impacting their revenues. Must be disclosed in the SEC filing. It's like securities in exchange commission rules, well, it's the basic principle. If you have to see any substantive disclosures by any of those manufacturers, even in the latest SEC filings that speak to those agreements, we saw some discussion about their duration and the status of those agreement negotiations, but we did not see at least I didn't see any mention that having entered into those agreements or having announced lower list prices for some of the manufacturers are now saying, well, this is going to have a material impact on my revenues and profitability. So I think that's very instructive because that means that in part, maybe those revenues are able to be offset by some reduction of expenses somewhere. But really what it is likely, the case is the deflation. of Adam Finne as Adam Finne was angerous and above all. And so we are going to see downward pressure on rebate, which means upward pressure on cost of revenue. Yeah, it's interesting that you kind of, you want there because I was going to ask you about that, that development recently, you know, there's some Senate Democrats that had sent letters to somebody that, you know, I think 12 big farmers, looking for clarity, you know, were evidence that these MFN deals that they've signed, that they've entered into, I guess just looking for more information on, you know, will they result in tangible savings in Medicaid? But do the companies even have evidence yet of the translated savings? Probably not. So if you listen to the investor call with the CEO of Pfizer, he was asked by the investors shortly after the Pfizer agreement, was, what's the thing? He was asked by the, by the investor, by analysts or the investors, institutional investors, who participated in the investor call, to share information about the agreement that Pfizer signed with the Trump administration. And his answer was basically that on advice of government lawyers, they're not going to disclose that. So he shared very little about the content of the agreement. So I don't know if the, if manufacturers are going, are even in the position to disclose. This is way beyond my, you know, my sort of area of expertise. And what I will say is there is not a guarantee, and even if manufacturers, even if manufacturers are doing revenue modeling, I don't know that they're going to be able to or be willing to disclose. And then it gets into everything else, we're talking about that all ties together with the pricing transparency. Yeah, your research shows a very few companies actually have real-time visibility into their pricing, and the revenue data. You might have touched on that, but what do you think is driving that disconnect between, you know, is it the technology? Is it all these things wrapped up? I mean, what, where is it that's connected? It's access to data. And I think manufacturers absolutely must do everything they can to collect and aggregate as much information about their distribution chain as possible, at the lowest level of granularity in a single data source. And that's what, that's the advice that we try to give to every manufacturer that asks us how to do their revenue management better. All too often, the departments that manage different aspects of the distribution chain, Medicaid, government pricing, commercial contracting, commercial contractor adjudication, commercial contract strategy. But they're all very disconnected. And as a result, the data that they have access to and the data that they collect ends up being disconnected and bringing this data together, not only for analytics and real-time visibility to who not pricing, but also for validation. Is going to, is, should be absolutely the priority of every pharmaceutical manufacturer. Yeah, and from this stat, it seems like you get some honest feedback, because your report notes it only about 1% of companies report real-time visibility into the revenue management data. So, I mean, is it an obligation for them to, to have that available, or is it just saying, are they saying it's not necessary necessary? Like, 1% saying that they don't even, only 1% actually report it. Yeah. I think it's, it's not an obligation so much as, I think it's a management necessity. I think being able to have that data when you need it to be able to make decisions based on the most up-to-date data available and to also do it globally, I think is really what manufacturers need now to stay competitive and to be able to make informed decisions. Okay. You mentioned AI. Where do you see AI delivering the most tangible value in this area? It means it's analytics. It's maybe forecasting, rebate validation, anything, I think, particularly, you think? So, it's, I think, another interesting finding that we have from the report is that some 99% of the pharmaceutical manufacturer leaders said that they use AI already, or they see greater use of AI in revenue management. And look, AI is the big bet, right? So, this is how we accelerate things. We've always had this conund, this duopoly, that, or this sort of bipolar view of the world, where our pharmaceutical manufacturer, colleagues in research and development, are super advanced. They are on the bleeding edge of every science in the world. And they've gotten, they've wrapped their hands around AI in drug discovery, in clinical trials, and in manufacturing. And it's really accelerating. We on the back end, in the back office, of finance and market access and revenue management, need to catch up. We really need to, yes, we maybe use chat GPD or Google Gemini, but we really need to make use of it for more than just writing emails or summarizing PowerPoint presentations. We need to stop doing things manually like entity resolution. Our data is not clean. Every manufacturer deals with the same wholesalers, the same providers, the same PBMs, the same healthcare practitioners. But everybody maintains their own customer master, customer list. And our training partners aren't always very good at identifying themselves, and they don't always have, they identify on every transaction. And we, as an industry, spend a tremendous amount of time just figuring out if this is the children's hospital of Philadelphia, or the children's hospital of Pittsburgh. We can't afford to do that anymore. So these are the kinds of areas where AI really needs to help us. We do class of trade assignment. Class of trade drives government pricing. Class of trade drives rebates. Class of trade is everybody has their own opinion about how to do class of trade. But that's something where AI can help you. And it is, I'm not saying that AI will take over. I'm saying that all of your research should be done by AI, and AI should serve you the two or three recommendations and you pick from it. And it should learn from them. That's reasonable. That's well within the capabilities of AI today. Those are the kinds of things we should be aggressively introducing in our business process. We're about like, you guys evolved in tapping insights from health records and things of that nature, claims data, does that help sort of your forecast and all that? Sure. I think that AI driven forecasting and sort of speak to your data interact with your data is also a very important advancement of analytics. We should be moving past dashboards. We should be moving past fixed reports. So analytics is definitely an area where manufacturers should invest in AI. But it's important to have a purpose. An AI bot that interacts with your data is not any good if you don't know what questions to have. And so it has to be plugged into the right place. And we have to continue to teach emerging leaders in the industry to understand the data that we have. And that we can use AI to help them do some of that work. But at the end of the day is the human and the loop that is going to make those management decisions. I appreciate you pivoting around a lot here because I know there's a lot of different angles. But I wanted to get your thoughts, you know, the new commercial models, but specifically DTC. And as you mentioned, Trump, Rx and these things. What's the real impact of these kinds of channels do you think for consumers? And then maybe you can also touch on how seriously you do see in your work, do you see farming companies? Actually, they're really evaluating them. I think every manufacturer is looking for an opportunity to create a director consumer channel. I think only manufacturers that have maybe physician and ministry products or a very specialized portfolio. They're the only ones who are not seriously looking at it. Everyone else is. Director, I think director consumer is great. I think anything that expands access is great. We've invested, we have a society invested very heavily in developing really innovative medicines. They should get to the patients that need them in the least resistant approach possible. And if it's director consumer, it's director consumer. The reality though of our society is that director consumer helps very few people. Director consumer medicines that are available today, especially those that are available through Trump or Rx, still cost hundreds of dollars a month for maintenance medications. And then you have cheaper alternatives that are generic or accessible through other retail programs. And those and the ones that aren't accessible that way are still cost prohibitive to individuals who don't have insurance. So Trump or Rx or any other director consumer channel is really great for GLP ones where there is a significant market of consumers for whom it may not be covered by insurance but who have the means, the financial opportunities to afford those medications at several hundred dollars. And the kind of other medication that treats common conditions like diabetes or cholesterol or take a pick, chances are those individuals who desperately need it who can't get it through insurance don't aren't in the financial opportunities. position to just pay for it out of pocket. So we still have a very large access gap that doesn't get solved with. More practically though, for a manufacturer, and this is my advice to break your listeners who work in this industry. This is yet another opportunity where coordination of benefits business can fail us, because director consumer is intended to be paid for by the consumer without insurance coverage. We are going to see an onslaught and influx of what we're referring to as ghost claim, which is a situation where a through, hopefully only administrative errors and not ill well, but we will see we will see pbms trying to claim rebates for prescriptions filled via the director consumer channels. There is going to be confusion in those systems. There's going to be confusion in the pharmaceuticals. And we will see claims for prescriptions that were not covered by insurance where the consumer paid directly and we'll see pbms claiming those rebates. Is it going to be a big problem or is it going to be manageable? I don't have foresight in it, but we need to be prepared for addressing that. So why would the pbms try to claim rebates in those? They would claim it an error, right? Okay. I think most pbms, especially most large pbms, try to in good faith claim rebates that they need to, but their systems are not set up to really do the kind of scrubbing that weeds out in eligible claims. Otherwise, we wouldn't have the rest of them. So I anticipate this to be a problem and we should be prepared for that. Yeah, I was going to ask you that the models like these, do they actually simplify revenue management or you're saying, you know, they actually are introducing new complexities, right? I wish Jesse, my colleague, Jesse Mendelsohn was here when the inflation reduction act was passed with much unfair, our then C.L. Model N Jason lesson came to Jesse and asked, well, Jesse, this is great. And there are all of these new regulations, but what are they replaced? Which part of government racing? Which part of our software is no longer needed? Which part of our business processes are no longer required? Jesse looked at him and he said, what are you talking about? This is an addition to so every, every program that we talked about today is in addition to every other program that we did not talk about today. There is no system to provide. Yeah, well, I see one interesting trend. I see a couple of manufacturers and this is really driven by GLP ones and other drugs that are mass market, but not covered. And I see some pharmaceutical manufacturers engaging directly with large, with large employers that have self-funded health plans. And these manufacturers are saying offering to negotiate bypass the PBMs and offering to negotiate directly with those employers and creating a secondary, formulary market that bypasses the PBMs and the PBMGPOs. I think that is an interesting development because what that allows the manufacturer to do is to offer that direct to consumer price directly to the employer and design a custom cost sharing model between the employer and the employee for people who are covered by commercial insurance. Again, this probably reduces or increases access or reduces cost sharing for some employees, for some people who are covered by employer plans, for some drugs. We have a systemic problem with unaffordable medicines and such. And we're trying to solve it one drug, one population at a time. Yeah, and maybe in closing, but what do you see as the biggest structural threat to the farmer revenue model that you've touched on? Is it the continued policies, pressure stuff, you know, payer dynamics, tech disruption, or something else? Mentally, what do you see as the major disruptor or threat? I think there are three disruptors on the horizon. Two negative and one positive. And I'll start with the negative. I'll close our conversation out with the positive. I think that the policy disruptions that we're experiencing today probably will not materially affect our revenues in the short term, but they are affecting the investment in basic science. And the investment in basic science takes one to two innovation cycles to percolate into medicines. So looking seven or seven to fifteen years out, I worry that we're not going to have the innovative medicines that we have today because we haven't invested in basic research science. I think that manufacturers are making investment decisions today, for example, disinvestment in vaccines. And because of the policy discourse, deep playing out on the national stage, I think that more in the short term, I worry that the system that we've engineered ourselves into is becoming so complicated that it's going to topple over of its own weight. Already we're seeing, right, manufacturers considering exiting Medicaid. Manufacturers considering not launching drugs in certain countries because of pricing price pressures. We're talking about, yes, we're talking about how drugs will be more affordable here in the US, maybe, but we are definitely talking about drugs being more expensive in other countries. And so all of these are, all of these are, I think, headwinds that we are facing as the industry. I do think that the positive that we can hang our hat on is the technological evolution. I do think that AI is going to shift our work in a way that no other technology disruption has in recent history. And I think that we are going to be able to move past some of these challenges because of the power that artificial intelligence widened, how it can accelerate the pace of discovery, the pace of insights, and just the pace of decision making. So I think that's positive, and I'm generally thinking that as quickly as it evolves, if we embrace it, we can stay ahead of some of those headwinds. I really look forward to diving into more of these topics through the year, you know, in this new series with you and Jesse, I really appreciate your insights today, and thanks so much for joining us. I'm Mike Rostella. We hope you enjoyed this first episode in our new FarmExec series exploring how leaders are navigating pricing and policy fluctuations in a rapidly changing industry. Thanks everyone for listening. We'll see you next time.