Who Really Controls Drug Prices?


Everyone in America believes drug prices are too high. The real question is who is really responsible for these high prices?

President Trump ran on a platform of lowering drug prices. In his unique way of identifying with the real issues that concern Americans, Trump told Time magazine in an interview, “I’m going to bring down drug prices. I don’t like what has happened with drug prices.”

Trump has been trying to fulfill that promise with recent proposals. Two recent posts of mine have discussed this issue (Trump’s Radical Plan to Lower Medicare Drug Prices ) (A Second Opinion on Trump’s Drug Proposal). But these proposals only concern Medicare Part B drugs given in a doctor’s office. What about the vast majority of drugs we fill at our local pharmacy?

Avik Roy, writing in Forbes, says pharmaceutical companies are laying the blame on “middlemen” for the high price of drugs. They say these greedy middlemen drive up the prices to take a cut before the consumer pays at the counter. But Roy says middlemen aren’t to blame.

The process of determining the price the consumer pays at the counter is a long and complicated one when it comes to drug prices. Terms are used that are confusing and some explanation of these terms is needed:

  • List price – this is like the sticker price on a car which nobody pays.
  • Wholesale distributor – they purchase bulk quantities of drugs from manufacturers at discounts off the list price (ave. 16%). This lowers prices to the consumer.
  • Invoice price – the post-wholesale distributor price
  • Tiered formularies – developed by insurers who charge different co-pays on the cost-effectiveness of the drug.
  • Utilization management – the process of leading consumers toward lower cost but effective drugs first.


Here’s how this process works:

You have high cholesterol so your doctor prescribes a cholesterol-lowering drug. He can prescribe a low-cost generic drug like Atorvastatin (formerly Pfizer’s Lipitor), which costs about $250 a year, and your co-pay may be $5 or even $0. Alternatively, he could prescribe an expensive brand drug like Repatha, which costs $15,600 per year and your co-pay will probably be $30 or more. Utilization management steers you toward the cheaper drug. This lowers the net price to consumers (see below).


Pharmacy Benefit Managers (PBMs) are middlemen who are hired by insurers to steer you to lower cost drugs. They have taken over the task of utilization management for insurers. By keeping drug costs down they keep health insurance premiums down, which benefits consumers, and increases profits for insurers.

What about rebates?

Rebates are kickbacks to PBMs in exchange for reducing the co-pay that the insurer charges the patient for the drugs. Rebates are paid by manufacturers to encourage promotion of their higher-priced drugs.

This lowers the price to the consumer of a more expensive drug. However, it increases overall costs by encouraging the use of more expensive drugs when cheaper ones are just as good. The net impact is higher overall insurance premiums and higher healthcare costs for taxpayers. So drug manufacturers increase drug costs and healthcare insurance premiums by the use of rebates – because they increase their profits.

Co-pay Assistance

Roy says another way in which drug companies artificially drive up utilization of their costly medicines is through co-pay assistance. If the drug company making Repatha wants to promote its drug, it may fund a “co-pay assistance program” for lower-income individuals, where the consumer will pay the same co-pay as the cheaper drug Atorvastatin. This gets the individual on their more-expensive drug, which may seem good in the short-run but leads to higher overall insurance premiums and higher healthcare costs for taxpayers, again.

So the real culprits in keeping drug costs and insurance premiums higher are rebates and copay assistance programs – which are both promoted by drug manufacturers.

The Trump administration is seeking to end this game by ending PBM rebates. On July 18, 2018, the Department of Health and Human Services (HHS) submitted to the White House a proposal entitled “Removal of Safe Harbor Protection for Rebates to Plan or PBMs Involving Prescription Pharmaceuticals and Creation of New Safe Harbor Protection.” This proposal is intended to remove the “safe harbor” PBMs currently enjoy that protects them from federal anti-trust rules.

To be sure, PBMs add value to consumers by lowering prices through utilization management. But this value is adversely affected when the same PBMs are offered rebates and co-pay assistance programs that steer consumers to more expensive drugs. The Trump administration is looking out for consumers by proposing to remove these conflicts of interest. This change could lower overall healthcare costs for everyone.

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