What Does a Drug Really Cost?Â
While other countries have a central agency that negotiates a price, in the U.S., pricing terms are restricted by the list price and access agreements. The system is piecemeal, with each of the country’s thousands of health insurers negotiating drug prices with manufacturers and some larger insurance plans are able to negotiate a better price because of the number of patients enrolled in the plan.
However, Medicare, which covers more than 55 million Americans aged 65 years and older, is legally prohibited from negotiating certain drug prices or deciding which drugs to cover. The insurance program must cover all drugs that are approved by the FDA at the price set by the manufacturer.
Of course, the actual cost or net price of the drug ends up looking much different from the list price, thanks to the bevy of intermediaries who handle the drug as it makes its way from the manufacturer to the patient. The complicated supply chain also is why CMS often quotes an “average sales price†for a drug – which is defined as a manufacturer’s sales of a drug during a calendar quarter divided by the total number of units of the drug sold by the manufacturer in that same quarter.6
After a drug receives marketing approval, the pharmaceutical manufacturer sets the list price. Typically, the first step along the drug supply chain is the wholesale distributor. Wholesalers (companies like McKesson and Cardinal Health) serve as the bridge between manufacturers and pharmacies, and purchase prescription medicines from the manufacture at the wholesale acquisition cost or average manufacturer price – before any discounts, rebates, or other price reductions are applied. Ultimately, wholesalers play a relatively minor role in drug pricing, according to Darius Lakdawalla, PhD, a health economist and health policy expert at the University of Southern California’s School of Pharmacy.
In return for the wholesalers’ distribution services, manufacturers pay them a distribution service fee based on a percentage of the WAC. These fees, discounts, and rebates are negotiated individually and can vary with each manufacturer and wholesaler.7
So, when a wholesaler purchases a drug with a list price of $100 per pill, it can collect a 4.5-percent distribution fee, or $4.50 per pill, bringing their actual cost per pill down to $95.50.
Pharmacies then purchase drugs from wholesalers at a discount to the WAC. Again, this discount varies based on the size and purchasing power of the individual pharmacy. Using the previous example, when the wholesaler sells that $100 pill to pharmacies for a discounted price of $96, it retains $0.50 on each pill sold.
When an insured patient purchases that prescription drug from the pharmacy, he or she pays an amount outlined by his or her insurance plan. The amount of this cost-sharing is determined by the pharmacy benefit of his or her health insurance plan, which is itself determined by the insurers’ negotiations with pharmacy benefit managers (PBMs).
Insurers hire PBMs to negotiate rebates for Medicare Part D drugs (or those that are dispensed through a pharmacy and not in outpatient clinics or in the hospital) on their behalf. These PBMs – which are dominated by Express Scripts, CVS Caremark, and OptumRx – work with the manufacturer to help negotiate the insurance benefit for that drug.7
“The role of the PBM is like that of a sports agent,†explained Dr. Lakdawalla. “They represent the interest of their insurance company or employer clients and are trying to secure the best prices from drug companies on their client’s behalf.â€
So, if a PBM purchases that $100 pill at a 25-percent discount for its insurer client, it passes that savings on to its insurer client. The insurer then reimburses the PBM at a privately negotiated rate. The PBM also receives rebates and discounts from the manufacturer and the dispensing pharmacy, which it retains.
The difference between what the PBM charges a health plan and what the PBM pays to the pharmacy that dispenses a drug is known as “spread pricing†and is partly how PBMs make a profit. If the amount paid by the plan to the PBM for a drug is greater than the amount paid by the PBM to the pharmacy, the PBM retains that difference.
PBMs also often coordinate a network of pharmacies that distribute the drug, adding another layer of complexity. Pharmacies earn most of their revenue from fees from insurance companies to dispense the drugs and a smaller portion from rebate payments from drug manufacturers.
The pharmacy does “play a role in pricing, sometimes direct and sometimes indirect,†said Dr. Lakdawalla. “The pharmacy wants a piece of the ‘price pie’ and puts upward pressure to get the pie to be as large as possible.†Meanwhile, the insurance companies and employers who purchase insurance plans want the lowest price possible, he added. PBMs, though, can benefit both from higher list prices and by bringing them down.
“No one quite knows what kind of rebates PBMs receive, so it’s difficult to determine whether PBMs are actually helping to lower drug prices,†Dr. Lakdawalla said.