Why Are Medications So Expensive in the US?

If you watch television, you may have noticed a class of drug-related advertisements interspersed among the blizzard of geriatric pharmaceuticals that sponsor news and weather. The basic scenario involves a financially stressed customer (e.g., a harried young mother with a sick infant in her arms and a tired toddler in tow) standing in front of a pharmacy counter. Having just been presented with the bankrupting cost of a desperately needed medication (perhaps for her ill infant), she is on the verge of panic when another customer (or celebrity) waiting in line introduces her to the magic of a drug discount card (e.g., GoodRx, SingleCare). A few taps on her phone and the previously impassive, but now suddenly friendly pharmacist is complimenting the mother on finding a “good price.” Other versions of these drug discount card ads stress the mind-blowing fact that the price for the same drug may differ as much as 10-fold between two pharmacies – or even within the same pharmacy depending on the patient’s health insurance.

Why Are Medications More Expensive in the US Compared With Other Nations?

In general, Americans are well aware that their prescription medications cost at least twice what they typically cost in Western Europe and Canada. They are also aware that prices for the same medication vary dramatically across pharmacies. What is more difficult to understand is why this is so.

A number of reasons are typically offered as to why medications are so much more expensive in the U.S. including: 1) no central negotiating authority but rather hundreds of state and commercial health insurance plans each with little individual bargaining power; 2) there are no price controls; 3) there are systemic incentives for physicians to prescribe higher-priced medications; 4) loopholes in the drug patent system are exploited to create temporary monopolies; and 5) drug companies will simply charge as much as the market will bear.

What Is a Pharmacy Benefit Manager?

A major mechanism driving excessive drug costs is the little-understood (but very powerful) entities known as “Pharmacy Benefit Managers” (PBMs). PBMs date from the late 1950s, when they were created to manage medication reimbursements that were becoming part of medical insurance policies. Over time, PBMs repositioned themselves as critical middlemen between drug manufacturers and pharmacies and, thus patients. Currently, PBMs create the formularies that insurance companies use to determine which medications are covered by a given insurance plan. PBMs also provide “utilization management”, i.e., enforcing the stepwise gauntlet that patients must run and fail before they qualify for the next higher level of medication. Finally, PBMs negotiate prices with drug manufacturers on “behalf” of insurance companies and institutions.

In addition to these multiple “middleman” roles, PBMs are “vertically integrated” in most healthcare systems. That is, PBMs own or are owned by the very same major pharmacy chains that they are negotiating with. This leads to “market concentration” such that the top 3 PBMs account for 75% of all U.S. prescriptions. The top 6 PBMs account for 96% of all U.S. drug prescriptions filled.

How Do PBMs Make Money?

In addition to the administrative fees that PBMs charge insurance companies and institutions to manage their formularies and provide utilization management, PBMs generate substantial (perhaps the majority of their) revenue through 2 poorly documented processes: rebates and spread. In the former, drug manufacturers pay “rebates” to PBMs for favorable placement of their drugs on an insurance company’s formulary. In many industries, such “rebates” for product placement would be called “kickbacks” and are usually illegal under anti-monopoly regulations. PBM rebates, however, are specifically exempt from Medicaid and Medicare kickback regulations. In one study, manufacturer rebates to PBMs accounted for 47% of Medicaid drug expenditures.

“Spread” is the difference between the price paid to a pharmacy by the customer and the price charged by the insurer, which, again, is set by the PBM. Investigators note that “It is perfectly legal for a PBM to charge a spread of any size.”[1] There are a number of other ways to generate “spread”, which are beyond the scope of this blog.

It is clear that PBMs have multiple opportunities to tap the complex, interconnected administrative and financial transactions by which the costs of medications are passed from manufacturers to pharmacies and patients. Researchers uniformly report finding it exceedingly difficult to dissect this web of transactions — making it, thus, difficult to find where intervention or regulation would be most effective in lowering consumer costs. Many researchers indicate that they believe that PBM accounting practices are deliberately made opaque to impede scrutiny and regulation.

The same is true for consumers attempting to understand their rights and options. Indeed, until 2018 it was illegal for a pharmacist to volunteer any information about cheaper alternatives — although they were allowed to provide that information if explicitly asked. This gag clause has since been tempered but remains part of the reason why the TV ads have other “customers,” rather than the initially stone-faced pharmacist, first inform our harried mother about drug discount cards. But, even here, PBMs get a cut of the action, typically receiving a percentage of the discounted price.

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What Is Being Done About All of This?

It is not as if PBMs have escaped notice. There are plenty of government and health foundation-sponsored studies. These show that most of the excessive profits generated in the larger drug payment system are retained by PBMs. Regulations have been imposed at federal and state levels, but PBMs have proven remarkably adept at evolving their business model to shift profit-taking to other parts of the system. Virtually all researchers call for much greater transparency in PBM accounting practices. There are between 8 and 26 PBM-related bills, depending on definition, in various stages in Congress — some of which could have significant impacts on PBM practices and consumer prices. Major internet marketers are also aggressively getting into the mail-order pharmacy business and will likely push PBMs in new directions. So, it is a dynamically shifting landscape.

Perhaps, the most effective thing that most of us can do for the moment is to remain alert to the behind-the-scenes influences of PBMs on one’s medication-related transactions. Remember, your pharmacist is allowed to answer your questions — but you have to ask first.

Per usual, we welcome constructive comments, criticisms, and suggestions.