Having to take prescription medication on a regular basis can be a costly venture these days. As we all know, U.S. prescription drug prices just keep climbing. They are completely out of hand for some drugs. Who’s to blame? Big Pharma – i.e., drug manufacturers – are part of the problem. But they are not alone. Pharmacy benefit managers (PBMs) and retail pharmacies also share some of the blame.
If you are not familiar with how the system works, a PBM is an organization that administers prescription drug programs. They negotiate prices between manufacturers, distributors, and retail pharmacies. They also negotiate prices between insurance plans and pharmacies. They get paid by way of manufacturer rebates.
We generally assume that a prescription costing thousands of dollars is priced extremely high because its manufacturer is trying to gouge customers. That may or may not be true. But don’t forget how the supply chain works. Every participant in that chain marks up the price in order to make a profit. Consumers ultimately pay the entire bill.
Retail Pricing Differs Dramatically
If you want to see just how crazy our system is, call around to five different pharmacies and ask the retail price for a one-month supply of your prescription. You will likely see quite a variety. One pharmacy will be at the extreme high end, another at the extreme low end, and the rest somewhere in between. Then go online and look at the price offered by Canada Pharmacy.
In all likelihood, Canada Pharmacy will have the lowest price. Note that Canada wois an online pharmacy based in Canada and shipping to U.S. customers. With all that said, let us talk about why the price disparities are so dramatic.
The cash prices you got by calling around to local pharmacies are known in the industry as usual and customary (U&C) prices. They are the standard retail prices for those drugs at those pharmacies. How are the prices set? They are set based on what prescription drug plans are willing to pay.
The Highest Possible Price
Prescription drug plans will not pay pharmacies any more than their listed U&C price. In almost every case, they actually pay less. So pharmacies determine the highest price insurance plans are willing to pay for a given drug, then set a higher U&C price, knowing that insurance plan reimbursements will be lower. It is a lot like selling a house. You set the price higher than you really want because you know you are going to have to negotiate with buyers who come in lower.
The root of this entire scam is the PBM. A PBM will negotiate set prices for prescription drugs among pharmacies that want to participate in their programs. A pharmacy choosing not to participate loses access to all of the patients whose health insurance utilizes the programs. Pharmacies aren’t about to do that. Instead, they accept PBMs prices. Then they turn around and jack up U&C prices to make up the difference.
Who ultimately pays? Customers without health insurance or prescription drug plans. Remember that the U&C price is a pharmacy’s retail cash price. If you don’t have insurance, you pay more in order to subsidize insurance companies relying on PBMs to negotiate lower prices.
For the record, this is why Canadian drug prices are so much lower. Canadian pharmacies aren’t dealing with a convoluted insurance system that encourages retail pharmacies to inflate their prices. This is not to say that single payer is the way to go. It is simply to say that we need to fix the way we pay for drugs.