Public Health

How are prescription drug prices determined?

The U.S. spends nearly $330 billion a year on prescription drugs. In 1990, the share the nation spent for pharmaceuticals accounted for 5.6 percent of total health care spending, but grew to nearly 10 percent in 2016.

Prescription drug price increases can lead some patients to not be able to afford critical medicine, causing them to skip doses of their medications or split pills, or force them to abandon treatment altogether. Physicians and patients are often left in the dark about how and why prices fluctuate year after year when ingredients stay the same.

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More sunlight sought on spiking drug prices

To expose the opaque process that pharmaceutical companies, pharmacy benefit managers and health insurers engage in when pricing prescription drugs, the AMA launched the TruthinRx campaign in 2016. This grassroots campaign provides opportunities for patients and physicians to share their experiences with prescription drug price and cost challenges and rallies grassroots support to call on lawmakers to demand drug price transparency.

Prescription drug price negotiations often happen behind closed doors, leaving patients and physicians out of the negotiating room despite the impact drug pricing has on the health and treatments of patients. To improve prescription drug price transparency, the TruthinRx campaign is focusing on three major market players who significantly impact drug prices:  

Pharmaceutical companies. Pharmaceutical companies make and sell drugs, but don’t explain pricing or why costs can greatly exceed research-and-development (R&D) expenses. Some even buy existing drugs, spend nothing on R&D, and still raise prices.

Pharmacy benefit managers (PBMs). Working on behalf of health insurance companies or employers, PBMs negotiate upfront discounts on the prices of prescription drugs with pharmaceutical companies, as well as rebates, which reward favorable coverage of a particular drug (and the resulting increase in utilization by a health plan’s patients).. These prescription drug agreements are kept secret, so it is unknown if savings ever reach the patients.

Health insurance companies. Health insurance companies approve treatments, set co-pays, and price out with PBMs how much patients pay for drugs. Often, they decide coverage options based on what maximizes company profits.