Ever gone to the pharmacy to fill your prescription and suffered a little sticker shock? We can all relate to the cost of prescription drugs, some of us more than others. From January 2022 to January 2023 more than 4200 drugs had price increases and 46% were higher than the rate of inflation. During that timeframe, the average drug increase was 15.2%, which equates to about $590 per drug product. If you think about it globally, the US accounts for less than 5% of the world’s population but nearly one third of the world’s gross drug spending. The US also takes the prize for the largest pharmaceutical market in the world, with an estimated value over $600 billion in 2024.
So why do prescription medications cost so much? Developing a new medication is not an easy or inexpensive journey. To bring a new medication to market, it takes years of research, clinical trials, regulatory review and financial investment. It’s that financial investment that contributes to the cost of medications. But how much, you ask? It’s estimated that the entire process from drug development to bring it to market ranges from $314 million to $4.46 billion. As a principal investigator in clinical trials, I get to experience the process firsthand. What might surprise you is despite the investment; many drugs do not even make it to market. This adds additional cost to medication development that companies need to recoup.
Another cost factor at play is branded versus generic medications. Generic drugs can be mass produced and most of the competition between manufacturers is to see who can sell the drug for the lowest price. Brand-name medications are protected by patents, which limits some competition. Competition will typically drive prices down, but as we all know, there are several branded medications within the same class and overall costs don’t often decrease significantly.
Now we just talked about some of the factors that impact pricing but the real question you should be asking is—Who sets the pricing? The pricing system for prescription drugs is complex. Insurance companies, rebates, deductibles and pharmacy benefit managers (PBMs) all impact what we pay at the pharmacy counter. For most private payers, prices are negotiated by PBMs. When those prices are set, most government programs like Medicaid or Medicare, pay prices that follow the commercial price.
Founded back in the 1960s, PBMs were created to keep prescription costs down. They are considered the “middleman” for negotiations of drug prices between the manufacturer and the insurance company. However, PBMs have become more controversial over time because they can decrease competition. Currently, just three PBMs control about 80% of the US prescription drug market. Without competition there are several consequences surrounding PMBs such as higher insurance premiums, higher costs paid by insurers for PBM services, incomplete rebate pass-through (rebates may not be passed on to consumers) and lower reimbursement to pharmacies.
The real kicker is now insurers and PBMs may be vertically integrated–meaning that a health insurance company acquires a PBM or they are both owned by the same healthcare conglomerate. This is where things get uncomfortable. PBMs don’t just negotiate right now—they have become directly involved in pharmacy operations and have an intimate relationship with insurance companies. Can you say conflict of interest? Take CVS Health for example. CVS Health owns one of the largest retail pharmacies in the US, and they own CVS Caremark, a major PBM. CVS Health also owns a few Group Purchasing Organizations (GPOs), which is like a Costco for buying medications. In addition, CVS acquired Aetna, a major health insurance provider and also owns specialty and mail-order pharmacies, like CVS Specialty. As a result, CVS can preference its own pharmacies and services within health plans. While I applaud the business drive of CVS, the real question is with their ownership covering so many aspects of our healthcare, whose best interest is at heart? Many of us would argue that it’s not the patient.
I’m an entrepreneur so I can appreciate how CVS has capitalized on opportunity and grown its empire. However, the impact needs to be examined because when we are dealing with healthcare, the merging of these services under one entity alters the market dynamics and negatively impacts competition, pricing and access to services. Now there is a demand for PBM reform to provide transparency, reduce abusive Medicare drug rebate practices and improve enforcement against anticompetitive practices.
Trotter’s Take:Prescription medications have the power to improve patient’s lives but affordability remains a major challenge across healthcare and PBM reform is needed to mitigate cost.
Want to understand obstacles to prescription medications? Then listen to Dr. Kristi Hawley as we tackle PBMs and the role they play in medication access.
