Author: Isaac Oommen
Graphics: Nathan Nyaung
America’s prescription drug pricing crisis stems from a deliberately opaque system of middlemen who inflate costs while adding little value to patients.
When you pick up medication at the drugstore, intuitively you might think that the cost of the drug is what you’re paying for. But you are not merely paying for the R&D and manufacturing costs; there is a complex system of middlemen that hike up the price of virtually every drug in the US market. Out of pocket spending on prescription drugs cost Americans $61 billion in 2024. These prices are unaffordable to the average American, which raises the question: how are these prices set, and how can we lower them? A common argument is that high R&D costs account for the skyrocketing prices of drugs. However, a study published in JAMA Network Open found no association between R&D costs and drug pricing for 60 drugs approved by the FDA.
Middlemen
Pharmaceuticals go through a chain of middlemen during their path from manufacturer to consumer. Manufacturers begin by developing and pricing drugs for an initial list price called the Wholesale Acquisition Cost. Manufacturers then sell the drugs to distributors like Cardinal Health who manage inventory and take legal ownership of the pharmaceuticals. These distributors then sell the drug to your local pharmacies. However, there is a middleman in pharma that does not exist in other industries called Pharmacy Benefit Managers (PBMs).
Pharmacy Benefit Managers (PBMs)
Three of the largest PBMs (CVS Caremark, Express Scripts, and OptumRx) control around 80% of the US prescription market. PBMs negotiate drug prices with pharmacies on behalf of health insurers to decide how much of a drug’s cost is covered by insurance as well as the out of pocket price. PBMs take a cut of total spending on a drug, which incentivizes them to negotiate higher drug prices at the expense of the patient. In return for the negotiated price, PBMs give manufacturers favorable placement on their formulary. A formulary is a list of approved medications that PBMs create to show which drugs can be covered by insurance. Formulary placement determines how accessible and affordable a drug is with lower tier drugs generally being more affordable. Each PBM has their own formulary. Doctors don’t have the bandwidth to memorize which insurance plans cover each drug, so if a manufacturer wants doctors to prescribe their drug they have to make sure that it appears on the formularies of every major PBM. This gives PBMs even more leverage as formulary placement greatly affects a drug company’s revenue.
Health Plans and Insurance
Health-plan coverage also significantly affects what patients pay for their medications. High-deductible health plans require lower monthly premiums but higher out-of-pocket payments when you need care. They are a good option for younger people who are generally healthy and rarely need to see the doctor. Patients with high-deductible health plans often pay the full price of medications as their price usually falls under the deductible — or the price you need to pay out of pocket until insurance coverage starts. Another hurdle that people seeking medication face is restriction from their health plans. Some medications require prior authorization or “step therapy,” meaning patients must try lower-cost alternatives before accessing certain drugs, regardless of what their doctor initially prescribed. This process has been criticized for preventing patients from accessing the correct prescription for the sake of maximizing insurance companies profits.
Some Americans have found that healthcare costs increase when their insurance coverage kicks in. One father saw that his ambulance bill more than doubled after he shared his insurance information. This paradox is also seen when buying omeprazole and sodium bicarbonate (which are used to treat heartburn), Medicare Part D pays $28.75 per capsule, while the OTC price is $0.80.
Case Study
To see how this works in practice, consider a medication like Ozempic (semaglutide) from Novo Nordisk, a popular drug for diabetes and weight management. Novo Nordisk manufactures the drug and sets a Wholesale Acquisition Cost (WAC) for Ozempic (around $900-$1200 monthly). Then PBMs negotiate discounts with Novo Nordisk in exchange for a favorable placement on their formularies. After this, the PBM pays pharmacists the negotiated rate and collects rebates from the manufacturer. When you go to fill your prescription, you are charged a copay which is determined by your health insurance and the drugs formulary tier. For patients without insurance coverage, the out-of-pocket cost can approach the WAC, which is unaffordable for the average American. The range for those with insurance differs drastically, with some paying as little as $25 for a one month supply depending on their health plan and deductible status.
Responses to High Drug Prices
In response to high drug prices, several companies have developed alternative models to provide consumers with medication. For example, GoodRX offers discount coupons at select pharmacies to provide prices lower than the price insurance can cover. Mark Cuban’s Cost Plus Drugs is able to offer medication at the cost of manufacturing plus a fixed margin because of its direct to consumer model that bypasses the traditional supply chain by negotiating directly with manufacturers.
The American prescription drug system is designed to be confusing. While middlemen each take their cut of profits, patients ultimately bear the cost. Understanding how this system works is the first step to finding more affordable options as the price of prescription drugs continues to rise.
Take-Home Points
- Prescription prices in the US market are inflated by middle men that each take a portion of the profits.
- PBMs create formularies and negotiate rebates with manufacturers while passing the extra cost to patients.
- Insurance coverage and authorization impacts medication costs with high-deductible plans and “step therapy” creating barriers to receiving prescriptions.
- Alternative supply chains like Cost Plus Drugs show how a direct to consumer model can lower prices for the consumer.