Understanding the Costs of Your Rx

Who Determines What You Pay for Prescription Medicines?

When you visit your pharmacy counter to pick up a prescription, do you know who determines the final cost you pay? Many people think it’s one company, the drug manufacturer. It turns out the company that researches, develops and brings innovative drugs to market is just one player in a complex system.

How Do Drug Manufacturers Determine Prices?

The value of your prescription at the pharmacy reflects years of research, development and clinical trials. It takes 10-12 years to design, develop and secure the approval of a medication. Just one successful drug costs up to $2.6 billion to bring to market.

This commitment to innovation involves a lot of trial and error. Few medicines make it to market successfully. In fact, 90% of drug development programs fail, and 90% of biopharmaceutical companies never make a profit.

What Impacts Your Out of Pocket Drug Prices?

Drug prices mostly reflect decisions made by middlemen. These players include wholesalers, who mark up a drug’s list price, your insurance company and the pharmacy benefit manager (PBM).

Your insurer hires the PBM to negotiate discounts and rebates from the drug manufacturer. These rebates may not come back to you or your employer. In many cases, the PBM keeps the rebates as part of its profit. Across the industry, pharmaceutical company discounts, rebates and fees increased from an estimated $59 billion in 2012 to $127 bilion in 2016, while average net prices for branded medicine grew just 3.5% in 2016.

The bottom line: Insurance companies and PBMs maintain the most control over prices, increasingly shifting the cost of medicines to you, the patient. 

For a closer look, watch the video: “Follow the Pill”

Did You Know?

  • A drug’s list price is often cited in news stories about prescription drug prices.
  • After negotiation and rebates, the net price is 30 to 40% less than the list price.
  • It also does not represent what you or any other consumer in the health care system pays.
  • Most of the control over the final cost you pay rests with your insurance company, your employer and the PBM.
  • After rebates and negotiated pricing, the increases are much lower than reported by the media.

Current price transparency bills under consideration by the Colorado state legislature make it sound like there’s a simple fix. The fix isn’t simple.

Singling out one stakeholder won’t bring down drug prices. Instead, examining the system as a whole will result in real changes for patients like you.


Go Back