Editor’s note: In order to give our readers the best information from which to make health care decisions, the Dayton Daily News is digging into what drives prescription drug prices with a multi-part series. The full investigation will run in Sunday and Monday’s papers and look for more from this investigation online this week.
One of the most aggravating aspects of the prescription system for consumers is the mystery of why some drugs cost so much.
For every generic drug that costs next to nothing, there’s a Yervoy. The treatment for skin cancer costs more than $92,000 per user annually, or more than $250 a day.
The world of drug pricing is shrouded in layers of complexity that often confound the principles of basic economics. For example, despite increased competition for the most common drugs on the market , prescription drug prices continue to rise faster than all other types of health care services, according to the Centers for Medicare and Medicaid Services.
The American public spent $324 billion on prescription drugs in 2015, a 168 percent increase since 2000. While insurance masks some of these increases, the cost to the consumer comes in a variety of ways, from higher insurance premiums, higher deductibles and more cost-sharing.
Critics say drug makers are taking advantage of the public’s ignorance about pricing.
“The American people should not be forced to choose between filling a prescription or making their monthly mortgage payment,” Sen. John McCain said in a statement last year announcing the bipartisan FAIR Drug Pricing Act, which would require drug makers to publicly disclose information on planned price increases.
“Transparency leads to accountability, and it is past time that mantra applied to the skyrocketing cost of prescription medication.”
Here are the basics of the drug supply chain and how prices get set. The video above gives a more detailed look at who makes money in this supply chain:
1. The pharmaceutical company sets the list price for the drug, based on how much it needs to recoup for research and development — it costs an average of $2.6 billion to develop a new drug and get it through the FDA approval process — plus the production cost and whatever profit is built into the pricing structure.
2. Manufacturers sell drugs to wholesalers at a negotiated discount.
3. The wholesaler distributes the drug to pharmacies and hospitals at a slightly smaller discount and keeps the difference as profit.
4. At the pharmacy counter, how much you and your health plan sponsor pay is dependent on your plan. In most cases, consumers pay a set co-pay amount and the pharmacy bills the health plan through a pharmacy benefit manager for the rest, plus a small fee for profit.
5. Pharmacy benefit managers are companies that run prescription benefits for health plans. They use the millions of patients they represent as leverage, offering preferred coverage status to a drug in exchange for bigger rebates from the manufacturer.
6. The rebate the pharmacy benefit manager has negotiated with the manufacturer gets paid to them after the main drug transaction. The pharmacy benefit manager then passes all, some or none of that rebate amount along to the health plan sponsor depending on their contract.
Critics argue that the rebates don’t actually lower drug prices because manufacturers build the cost into their pricing structure.