Why Are Meds so Expensive in the US?

This video by the Wall Street Journal deals with why prescription medicines in the US cost so much more than in other parts of the world—even in neighboring countries like Canada and Mexico.

The reason appears to have everything to do with rebates and negotiations for money making along a very long supply chain. Even with the explanation in this clip, one is left somewhat mystified because the role players are tight-lipped about the details of the process which they view as a protected information.

Complex system of drug pricing

In usual trade, the manufacturer sets the price they charge the retailer. The retailer then determines the amount the customer will pay. There might be some bulk discounts along the way, but in essence, all customers will pay the same price at the counter of a particular retailer.

With medicines, it’s not as simple. The drug manufacturer sets its list price for their new product. This is then open to rebates which are negotiated with the pharmaceutical company by pharmacy benefit managers (PBM’s). The PBM’s negotiate rebates on behalf of health insurance companies, government agencies, and employers so that these prescription drugs cost them less. The PBM also takes a cut of the rebate.

Watch the video to understand how drug prices work.

Benefits and costs of drug rebates

The benefit of rebates for the pharmaceutical company is that the bigger the rebates on a particular product, the higher up it moves in the formulary of preferred medicines covered by the health insurers. The higher up in the formulary a drug is, the bigger the portion of the cost covered by the insurance company and the less the patient’s co-payment is. Obviously, this increases sales.

Pharmaceutical companies say that the rebate system is a big reason why they keep raising the price of drugs—they have to protect their profits. In turn, the PBM’s claim that they help to ensure the lowest possible cost to the end-user. In the end, the patient probably pays what the list price would have been and those that don’t have insurance pay the entire inflated price.

WHO calls for transparency in drug pricing

Many who commented on the WSJ video liken the current secretive system of drug pricing in the US to corruption—although it’s perfectly legal.

At the 72nd meeting of the World Health Assembly, a resolution was adopted that public sharing of information on health products should be increased. There should be greater transparency in what determines the pricing of pharmaceuticals, from the lab to the patient, to improve the affordability of health care.