Financial Advice for Retirement, Social Security, IRAs and Estate Planning

Why Some Prescription Drug Prices Are So High

September 14, 2018

This article discusses prescription drug pricing in great depth. It explains why pharmaceutical companies can and do raise prices significantly even for generic drugs. But it also says the situation isn’t as simple as many people make it out to be. It discusses how other countries address the problem and offers some solutions. But it doesn’t mention changing the FDA’s drug approval process. For example, a company that wants to produce a generic drug has to go through essentially the same testing process as it would for a new drug. That reduces the incentive to compete in generic drugs.

A key to cutting through the rhetorical froth here is the difference between list prices, which are indeed growing rapidly, and net prices, which are rising far more slowly. Pharmaceutical companies will typically offer significant rebates from the list price, with the rebates varying according to the market power of the buyer. They will make concessions to pharmacy benefit managers in exchange for preferred placement on a formulary (the first-line drugs covered by an insurance policy). In some cases, the rebates may be required by law, as with Medicaid and programs administered by the Department of Veterans Affairs.

Therefore, the list price isn’t the “real” price, in the sense that a patient’s insurer will often pay less than list. But it’s also simply not true that, as one pharmaceutical executive put it, “nobody pays the list price.” Some patients are indeed paying the full freight, and they’re being exposed to high — and escalating — prices that force them to think again before seeking treatment.

 

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