Issue Brief #1: Prescription Drug Pricing
Do drugs in the United States cost more than their foreign counterparts? Why are they expensive? How can we make them cheaper?
The Basics
If you came this page and you're confused, it's ok. Prescription drug pricing is one of the most complicated subjects out there — in fact, some people dedicate their entire lives to studying it! Fortunately for you, Healtix is here to break down information into an easy-to-understand form to help you in your daily life.
Frequent Question: What is a prescription pharmaceutical?
A prescription pharmaceutical is a drug or medication that needs to be prescribed by a physician in order for you (the patient — to receive it. This fact is in contrast with over-the-counter pharmaceuticals — drugs you can buy directly from the pharmacy, even without a doctor's approval. Some common prescription pharmaceuticals include Lipitor and Metformin.
Frequent Question: What is a brand-name drug?
A brand-name drug is a drug sold by a manufacturer with a patent. Brand-name drugs are the first drugs brought to market by a drug company, and due to their patents, no other drugs for the same condition and with the same active ingredient can be sold. As a result, the brand-name drug faces no competition. However, patents expire, and when they do, unbranded, or generic medications, can be sold to compete with the drug.
Short answer: yes. Long answer: yes — but primarily for branded drugs. According to a recent report, drug prices in the United States are approximately 2.5 times higher than their international counterparts, and for branded drugs, the price is almost 3.5 times higher! Yet, it's important to note that for generic medications, the prices in the United States are slightly lower than in other countries. You might thus be asking: why are brand-name drugs so much more expensive in the United States when generic drugs are cheaper?
The answer has to do with patents and exclusivity. As described above, brand-name drugs have patents which means these drugs are the only ones that can be legally sold — in essence, they have exclusivity, ensuring they have no competitors. As a result, the brand-name drug's manufacturer gets to set the price without the fear that a competitor drug will appear at a lower price. Naturally, this causes high prices for brand-name drugs.
But when the patents expire, the brand-name drug loses exclusivity. As a result, generic medications, or competitors to the brand-name drug, can now be sold. These generics are often priced at lower prices than the brand-name drugs, and so they force the brand-name drug's price to go down to compete with the generics, or else everyone will just buy the generic instead of the brand-name drug.
But, this picture is how it's supposed to work. As you'll soon see, there are problems in the process that have kept prices high in the United States.
Big Idea: Are Prices Higher in the United States than in Other Comparable Countries?
Understanding high prices
Reading the explanation above, you probably have a couple questions in mind. Don't worry, Healtix is, as always, happy to help!
Frequent Question: Why do drug manufacturers set the price of brand-name drugs so high?
Understanding why drug manufacturers set high prices is an important and complex topic. It's important to note that drug development is expensive — according to some studies, it can take nearly $1 billion dollars to bring a new drug to market, not to mentions several years of research, clinical trials, and more. If prices are too low, manufacturers won't make money off new drugs, and as a result, there would be little incentive for them to innovate for new products if they cannot profit. Thus, manufacturers often say that high prices are needed for continued research into new, important drugs — many of which have saved millions of lives and revolutionized modern healthcare.
However, many opponents argue that drug prices are higher than what's needed by companies for research alone. Some researchers have found that drug companies already sell enough to ensure innovative research continues while also making drugs more affordable to average Americans. Many of these authors argue that high prices may be due to excess spending by companies on other expenses, such as drug marketing and more. Therefore, one sees the dilemma — how to lower drug prices to make medications more affordable while also ensuring companies have the money to continue research and drug discovery efforts.
Frequent Question: Why don't generic drugs also get high prices?
Generic medications do not see the same high prices as many see with brand-name drugs because, unlike brand-name drugs, generic drugs have competitors. When generic medications are released, several companies release many different generic medications, in addition to the original brand-name drug against which the generics compete. As a result, many competitors mean that companies "race to the bottom" — lowering prices to try to compete against their rivals. This process results in lower generic drug prices.
However, this process does not apply to the issue of "price spikes" faced by generic medications. Price spikes are sudden, drastic changes that elevate the price of a drug. Many price spikes occur when a generic medication of one of the few options on the market, so as a result, manufacturers are willing to raise prices knowing that patients have few other options from which to choose.
Frequent Question: What is insurance? What is pharmacy insurance?
For those who don't know, an insurance company is a company from whom you can buy insurance. Insurance is a contract between an individual a company, in which an individual pays a certain amount of money per month (called a premium), and in exchange, if the individual has an emergency, the insurance companies will pay for expenses associated with that emergency. For example, for drugs, if you have pharmacy insurance and pay your monthly premiums, if you need a medication in a time of emergency, your insurer will step and pay for the cost of the drug. You may have to pay some portion of that drug's cost (which is called a copayment, or copay), but it is far less than the overall price of the drug, which is covered by your insurer.
In understanding drug prices, as a consumer, it is very important to recognize that there is a fundamental difference between the types of drug prices available. If you google the price of a drug from a manufacturer, for example, you are likely to find a price listed on their website. Yet, if you go to the store and try to buy that drug, you pay a different amount. Why?
The answer has to do with what we call net and list prices. List prices are the prices listed by a pharmaceutical manufacturer as the price of a product. These prices are very high most of the time, but they rarely actually reflect the true price paid for a drug. Rather, each drug's price changes due to a complex pricing process between drug manufacturers, pharmacies, pharmacy benefit managers (PBMs), and insurance companies.
For a drug to reach the consumer, it goes through one of two possible distribution streams. First, the drug manufacturer might sell the drug to a wholesaler, a special type of company that buys large quantities of drugs and sells them to pharmacies, hospitals, and doctors. While you might know the name of drug manufacturers like Pfizer or Moderna, the name of wholesalers like Amerisource Bergen may not be known. Wholesalers buy the drug from drug manufacturers before marking up the price and then selling it to pharmacies, hospitals, and more. The pharmacy marks up the drug price one more time before selling it to consumers. Hospitals, pharmacies, and other groups, however, may negotiate discounts with drug companies, which may also lower drug prices as well.
Alternatively, for individuals who have pharmacy insurance, the pricing process becomes slightly more complex. If you are covered, then an insurance company will cover the price of the drug. To determine which drugs the insurer will "cover" or pay for when needed, an insurer hires a pharmacy-benefit manager or PBM. A PBM is a company that works with drug companies to determine the price that an insurer will pay a drug company for a product. Insurers, naturally, want to pay the lowest price possible, while drug manufacturers want to pay higher prices — a conflict resolved by PBMs through a key tool: the formulary. Formularies are lists of drugs set by the PBM that insurers will cover or reimburse. For a drug to reach patients, it likely must make this list, so drug manufacturers will offer usually offer rebates or other payments to PBMs and insurers. A rebate is a portion of the money made by the drug manufacturer on a certain product which the manufacturer will give back to the PBM or insurers in exchange for the drug remaining on the formulary list. Since they are given these rebates, insurers are thus able to cover more of the drug's costs, and as a result, the price of the drug to consumers goes down.
Similarly, because they control the key formulary list, PBMs can also negotiate drug prices on behalf of the insurers they serve. PBMs often use these negotiations to elicit significant discounts or alternative rebates on a drug's price, which helps lower it substantially for patients. After a series of other smaller changes to the price, the result is the final net price, the amount of money paid by most patients for the drug.
Big Idea: Net Prices, List Prices, and PBMs
The Government Exception
At first glance, you might think this complex insurance system applies to all drugs. However, much of what has been described only applies to those covered by private insurers. For those covered by public plans, however, this situation can be a bit more complex.
Approximately 35% of the US population is insured through one of two distinct government programs — Medicaid for low-income individuals and Medicare for seniors. Both insurance programs provide a level of coverage for pharmaceutical products, but each program has several unique policies that complicate the pricing process.
For Medicaid, prescription drug prices are determined through a program known as the Medicaid Drug Price Rebate (MDRB) program. Under the terms of the MDRB, the federal government mandates that all drug manufacturers provide a rebate in exchange for Medicaid covering a drug for its patient. The rebate generates revenue for the federal government, which allows them to then cover pharmaceuticals more effectively. While Medicaid does not cover all products, however, the terms of the MDRB enable them to provide successful coverage on a large range of products, and as a result, there has been little controversy over this program in the past.
For Medicare, however, the situation is slightly more complicated. Medicare, which is for seniors, is composed of various "Parts," including Part B, or general medical services, and Part D, which is for prescription drug coverage. While Part B covers some drugs, the vast majority of products are covered under Part D. Each plan or specific insurance policy from Medicare comes with its own formulary, which is a list of products covered by Medicare, including both brand-name and generic products. In the formulary, drugs are sorted by tiers, based on the type of drugs, and each tier determines what copayment or copay you will pay for the drug:
Tier 1 involves drugs that tend to be generics and thus have low copayments.
Tier 2 involves drugs that include most brand-name prescription drugs and thus has a medium copayment.
Tier 3 involves more specialized brand-name drugs with a higher copayment.
The last one — the Speciality Tier — has the highest copayment with a very high price, specialized prescription drugs, often for rare conditions.
However, it is important to note that since copayments depend on the original drug's cost (since a copayment is a portion of the drug's price you pay), the higher the price, the higher the copayment. Therefore, like Medicaid, Medicare also uses rebates to lower the prices of prescription drugs. However, it is important to note Medicare, by-law, cannot negotiate prescription drugs like any other private insurer. This limitation creates a huge issue, as while rebates can help lower some prices, the negotiation ban effectively prevents Medicare from using its power as a large insurer to lower drug prices. As a result, Medicare patients end up paying prices lower than possible otherwise.
You might think that everyone pays the lower net prices for products. Unfortunately, the situation is more complex than that.
Frequent Question: Who pays the list price?
List prices for drug products are very, very high, and as a result, paying them can be a significant burden for many people. Unfortunately, those who pay the list price can often be the groups most unable to afford the drug. Individuals without health insurance, for example, or individuals who cannot pay their insurance copayment, are required to pay list prices. Another group is individuals on Medicare, the government-run insurance plan for seniors. Medicare plans have a hole called the “coverage gap,” so some drugs must be paid for entirely by patients.
Frequent Question: Who pays the net price?
The net price for a drug product is often lower than its list price. Individuals with insurance, membership in government insurance programs, like Medicare for the elderly and Medicaid for low-income populations, also pay net prices for most drug prices. It is important to note that even though net prices are lower than list prices, the net prices of American drugs are still substantially higher than their international counterparts, which can pose a significant problem for families, insurers, and more.
Big Idea: Who Pays the List Price? Who Pays the Net Price?
Why Do High Drug Prices Matter?
We often hear that high drug prices are bad, but many ads are often light on specifics. Never fear, Healtix is here to help illustrate the issue first-hand.
Frequent Question: Why should I care about high drug prices?
There is a simple reason you should care about high drug prices: tradeoffs. Each dollar you spend on highly expensive medications is a dollar not spent on other essential services in your life. Education, home-buying, investments, even your favorite foods — every dollar spent on a high price drug can limit your ability to have those services, depriving you of their benefits to your life.
In fact, for many low-income families, these tradeoffs can be damning. In fact, nearly two-thirds of people who declare bankruptcy in the United States — or run out of money — attribute medical bills to be a key cause of their eventual bankruptcy. In turn, these bankruptcies can fuel poverty throughout the United States, not to mention also destroying the economic opportunity for many low-income families throughout the United States.
But even beyond this first reason, there is a second key reason you should care about drug prices: life. High drug prices, especially in low-income populations, can often result in not only financial suffering but it can also cause many individuals to stop taking life-saving medications for horribly debilitating diseases like cancer. These actions are life-threatening for anyone, and therefore it is vital to take steps to ensure drug prices are fair for manufacturers and affordable for consumers.
It should be obvious by now that high drug prices are a significant problem for many consumers. But you are probably asking: so what can we do to fix the system?
There are a number of different steps that can be taken to help lower drug prices. If you are a consumer reading this page, there are a couple of things you should do to help lower prices on your end. For example, you could use GoodRx or another program like it. GoodRx is a website and application which allows consumers to track drug prices. Uniquely, however, GoodRx can help you find coupons you can use to lower the price of many medications. If you take a brand-name medication, you can also work with your doctor to see if you can get more affordable generic medications instead of costly brand-name products.
But these solutions don't work in all cases — after all, many drugs are still exclusive brand-name products, without generics, and not all drugs have coupons. Therefore, these facts have pushed many to argue for strong government action to help lower drug prices, and several reforms have gained prominence in recent years as theoretical solutions to these problems. One possible reform, for example, is allowing Medicare — the government-run insurance program for seniors — the power to negotiate prescription drug prices. Given that Medicare covers a significant number of patients in the United States, the result of this stuff would allow government negotiators to lower drug prices for a vast segment of the American population and potentially even help bring down prices across the board.
Alternatively, another possible solution would be to focus more on patent reform. One of the primary drivers of the high price of brand-name medications is their patents — as they give these drugs market exclusivity, preventing cheaper competitor generic drugs from entering the market. Eventually, patents expire, however, which would eventually allow for other drug manufacturers to make cheaper generics that can compete with the brand-name product. But in recent years, drug companies have engaged in lawsuits against generic companies or filed small secondary patents on various parts of a drug, hoping to protect their market exclusivity for as long as possible, which keeps drug prices much higher for a longer period of time. To combat this problem, Congress could attempt to introduce patent reform, such as by reforming the United States Patent and Trademark Office (PTO) to better scrutinize patents with improving funding and resources.
There are a wide variety of other possible solutions as well, ranging from efforts to tie drug prices to the value of a drug to patients to efforts to introduce controls on the prices of rare drugs. Healtix, as a non-partisan nonprofit, does not endorse one particular solution, but we support efforts to provide accurate information about healthcare reform in the United States. Thus, we encourage you to read more about each solution to help you see which ideas you believe could best help serve America in the years to come.