Published by Forbes
Prescription drug costs are a hot political issue, not as much because of the share of the U.S. health care dollar they consume but because consumers pay a larger share of their drug costs out of pocket than they do for other health care.
The lack of price transparency for prescription drugs is a large part of the problem, and making pricing more transparent throughout the process could help in finding viable solutions.
About 10% of overall health spending in the U.S. goes to prescription drugs, dwarfed by the 32% spent on hospitals and 26% on physician, dental, and other clinical services, according to National Health Expenditure data.
But more of the costs for prescription drugs are shifted to consumers than for other health costs.
Under a typical plan, consumers pay a $20-$30 copayment for physician visits and $250 for a hospital stay. But the complex charges for prescription drugs often range from co-payments of $15 – $100 for “preferred” drugs to 45% or more of the cost of specialty or non-preferred drugs.
Consumers therefore experience more out-of-pocket costs for medicines while a greater share of other, likely more-expensive, medical expenditures is run through insurance.
A huge system of drug rebates and discountshappens behind the scenes in the pharmaceutical supply chain, further distorting the market and confusing consumers about the actual price of a drug. Only a trickle of these discounts and rebates actually reaches the consumer.
Even though rebates paid by biopharmaceutical companies can substantially reduce the prices insurers and pharmacy benefit managers (PBMs) pay for brand medicines, insurers use list prices—rather than discounted prices—to determine how much to charge patients when they pay their share, further increasing what consumers pay.
A survey by the National Community Pharmacists Association taken in early June looked at these behind-the-scenes pricing deals. “One pharmacist told surveyors that a major PBM required the pharmacy to collect a $35 copay for a generic allergy spray [from the consumer], then took $30 back from the pharmacy. Another said a PBM charged a $15 copay for insomnia drug Zolpidem, then took back $13.05.”
In another example, the pharmacy received only a few dollars in net payments “while patients were charged $30 above the cash price for a generic cholesterol medication,” according to a report on CNN.
In many cases, a consumer pays more to fill a prescription than the PBM paid to purchase the drug, even though consumers “assume what they are paying is the cost of the drug,” said Susan Pilch, vice president for policy and regulatory affairs with the pharmacists’ group.
The percentage of people paying more than $1,000 out-of-pocket a year for medicines also is on the rise: From 2004 to 2014, the portion of people spending more than $1,000 outside of their insurance coverage nearly tripled, from 1% to 2.8%, according to the Kaiser Family Foundation. Kaiser also reported that 8% of adults report foregoing prescriptions because they can’t afford them.
There also is a built-in incentive in the health care industry, including the pharmaceutical sector, to set their prices artificially high. Private insurers, PBMs, and others demand the discounts in exchange for their business. Government entities also demand kickbacks from drug companies: States require them to pay “rebates”—basically a tax for the privilege of participating in Medicaid.
Because of these discounts and rebates to volume purchasers of their products, manufacturers of innovator drugs realized 39% of gross drug expenditures in 2015, according to a study by the Berkeley Research Group. Other players received 42% of total drug spending, with the largest share going to the various rebates, discounts, and fees that manufacturers pay to PBMs, health plans, government entities, and patients. The total value of pharmaceutical manufacturers’ price concessions was $127 billion in 2016, according to a separate report by the Quintiles IMS Institute.
Consumers, therefore, are impacted in at least two ways. Few of these discounts actually reach them directly, and many are required to pay their share of their prescription drug bills based upon the retail price of the drug.
Insurance companies generally create complex “drug formularies” in which their insured patients pay less for “preferred” drugs, especially generics, but can pay much more for expensive brand and specialty drugs. Consumers may be required to pay a percentage of the cost—called co-insurance. Others may pay a flat co-payment…