U.S. Markets closed

The world's biggest drugmaker just pulled back the curtain on drug pricing

Lydia Ramsey
Alex Gorsky

(Jonathan Ernst/Reuters)
The world's largest drugmaker just gave us a better idea of how drug price hikes impact its business. 

Johnson & Johnson published a report on Monday detailing its average list price compared to its average net price after rebates and discounts. The companies' drugs had an average list price increase of 8.5% in 2016 while its net price increase was just 3.5%. To recap, the list price is the amount a drugmaker sets, and it's often the most publicly available number, while a net price is the amount it actually receives in return for the drug after factoring in any rebates or discounts. J&J said the report is now going to be annual.

Since 2012, the average yearly list price (that's accounting for all of the products in J&J's Janssen pharmaceutical unit) has increased between 7.6% to 9.7%, while the net price after rebates and discounts ended up increasing between 2.5% and 5.2%. 

"Every part of the health care system, including pharmaceutical companies like Janssen, should be held accountable for the value it delivers," Janssen executives wrote in a letter.

In January, Merck published a similar report that outlined the company's average list and net price increases for its products. Merck's average net prices increased 5.5% in 2016

The reports are part of an effort to diffuse criticism faced by the entire industry that drug prices are out of control. While it has been a hotly covered topic for several years, President Donald Trump has been raising the stakes, saying that drug companies are "getting away with murder," and that the pricing has been "astronomical."

Pharmaceutical companies have been criticized for their routine list price increases. But, as those companies have argued, the list price doesn't tell the whole story. There are other players in the system that each take a piece, which means that what a drugmaker actually receives could be lower even as the list price rises.

But there's a lack of transparency about the portions each player gets. That's why reports like Merck's and J&J's are based on the average list and net price, rather than individual drugs. It's something lawmakers have started going after, especially as the number of people on high deductible plans facing near-list prices for drugs continues to rise.

NOW WATCH: JEFF SACHS: Here are the fiscal policies we need to implement so robots don't take our jobs



More From Business Insider