The Mystery of Prescription Drug Prices

Published February 1, 2016

How can it be that the same exact prescription drug can have such markedly different prices?

Recently, my patients with commercial insurance were paying $15 out of pocket per vial for analogue rapid-acting insulin. A Medicare patient was paying $40 per vial for the same insulin until she entered the “donut hole,” at which point her price went to $102 per vial.

To investigate further, I went to my local pharmacy and found the price to be $270.49 for one vial of the same insulin when purchased without insurance. Are pens cheaper? Checking online, I found that a patient here in Phoenix without insurance could purchase five pens of this same insulin for anywhere from $437.77 at a Kroger Pharmacy to $511.00 online at Why the great variation in prices?

Free market economics

We live in a world of scarcity and high demand for resources. Therefore, we must make choices. Prices help us do so. A price is a ratio of subjective valuations: I prefer this over that and am therefore willing to pay more for this than that.

Prices are how we communicate our preferences in the marketplace. In a free market, exchange is voluntary and mutually beneficial. Determining the true price of something is a discovery process in which competition among sellers and buyers establishes the price of a good or service and its relation to other goods and services. The true price occurs at the intersection of the supply and demand curves. It is at this point that all willing buyers will have a willing seller and all willing sellers will have a willing buyer.

Prices, thus, relay critical information about consumer preferences and by so doing help producers determine the cheapest and most efficient way to assemble resources and create goods consumers want. It is a dynamic process, with price changes occurring in response to changing market conditions. The prices generated are not only public, but are often advertised for the world to see. Competitors see one another’s prices and try to beat them, which benefits the consumer.

Health care regulation, pricing

Health care is a highly regulated sector of the U.S. economy, especially for pharmaceuticals. State and federal governments purchase 60% of the prescription drugs sold in the country. Instead of using a market approach for the sale and distribution of prescription drugs, the government has developed a political one. This directly affects the price of drugs.

For example, via the political process, the government has divided the entire health care market into multiple segments, with each segment having unique rules and regulations to contend with. These include Medicare, Medicaid, Tricare, the Veterans Administration and the 340 B Program. Other segments include managed care and standard commercial payers.

The manner in which prices are set in each of these segments is often complex and opaque. For example, by law, Medicaid guarantees a rebate from the manufacturer of at least 23.1%, but that is only a ceiling. The price is pushed down further by discounts and charge-backs. Similarly, the VA is entitled to at least a 24% rebate, but often the price is even less than this. The actual prices in these two programs are further affected by extremely complex formulas generated by law and data derived from the commercial side. Thus, the drug prices from all of the different segments are linked to each other, and a change in one price affects the others.

All of this intervention restricts what manufacturers are able to do on the commercial side because those actions could reduce their revenue on the government side. The extent of the forced discounts, rebates and charge-backs can be very large and result in a substantial decrease in revenues. For example, Credit Suisse estimates Eli Lilly and Company in 2014 gave rebates for Humalog (insulin lispro recombinant) averaging 56% of its list price, according toThe Wall Street Journal.

[Originally published at Endocrine Today]