What Drives High Prescription Drug Costs and What You Can Do, Part 1

prescription drug costs
pharmacist walking through pharmacy aisles

There is always a lot of talk during Medicare open enrollment season about high prescription drug costs and why those prescription drug costs seem to get higher each year. It seems the cost of certain medications goes up overnight or suddenly some prescription drugs aren’t covered at all. For example, you may be doing great on one brand of insulin but then, one day, your plan no longer covers it. You have little choice in the matter. So, I wanted to talk about why this happens and if there is anything you, the consumer, can do.

Drug Research

The U. S. performs the majority of the world’s drug research. High prescription drug costs fund this research. It takes roughly 10-15 years to develop a new drug and get it on the shelf. Out of dozens of drugs tested, only a few make it through clinical trials and end up in front of the consumer. This means that the millions of dollars spent to discover and develop one drug that fails is passed on and added to the development of the next drug and so on.

You may wonder why the process would cost so much to begin with and that’s a fair question. Research dollars pay for the development, clinical trials, copyrighting, and the list goes on. Then the marketing begins.

Pharmaceutical reps are at every hospital, clinic, and doctor’s office pushing the latest and greatest “treatment”. Representatives are traveling the world negotiating sales with other countries. And, you guessed correctly if you guessed that those countries pay less for the same drug. To be fair, countries around the world are contributing to the research dollars but at a smaller degree. By the time it’s over, the estimated price tag of one drug treatment that makes it to the consumer is well over a billion dollars.

Pharmacy Benefit Managers

Next, we should talk about PBMs (Pharmacy Benefit Managers). These PBMs are middlemen, contracted by insurance companies to handle prescription drug benefits on behalf of those insurers. Among other things, PBMs negotiate pricing of drugs between the drug manufacturer and the insurance company, as well as the dispensing pharmacy. They, also, negotiate the actual pharmacy networks an insurance plan uses and what co-pay the consumer will have.

Insurance plans have formularies, which are lists of drugs covered under the plan. These formularies often vary by plan. Within a formulary are drug tiers. The lower the tier, the lower the drug cost; the higher the tier, the higher the drug cost. Which drugs are in which tiers is determined by insurers and PBMs.

Drug manufacturers compete for placement on formularies to the exclusion of other drugs. Remember that insulin I mentioned earlier? Pharmacies compete to be included, as preferred pharmacies, for insurers. Since being “preferred” can increase sales volume, they may negotiate compensation for drugs based on potential sales volume.

In theory, PBMs should help bring down the cost of drugs since all this competition is going on but that doesn’t occur because they aren’t in the business to lower prescription drug costs. They are in the business to manage benefits.

Again, in theory, this should bring down the prescription drug costs since they are negotiating your co-pays but PBMs make some of their money by taking rebates between what the insurer, the pharmacy and the consumer pay for a drug. So why doesn’t the insurer just handle its own negotiations, cut out the middle man and handle negotiations themselves? The insurers need help managing the number of drugs, pricing and reimbursements.

How You Are Affected

Think about all this for a minute and you’ll begin to see why, depending on what drug plan you have, you may pay a lower, or higher, price for a medication at certain pharmacies and why your plan may change which brand drug is covered for your condition from year to year. This is a broad explanation of what is going on but it gives some perspective on why the costs are so high.

In a future post, I’ll discuss possible ways to lower your prescription drug costs.


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