Ask an Expert: Drug Pricing in the United States with Courtney Yarbrough
By Ellie Pourbohloul
The cost of prescription drugs in the United States is high—nearly 2.78 times as high as prices in other countries. And most Americans agree that health care access and affordability is a top priority. Policymakers are currently discussing how to protect consumers from inflated prescription drug costs.
Courtney Yarbrough, PhD, assistant professor of health policy and management at the Rollins School of Public Health, studies the effects of public policies on drug prices and use. She sat down with us to share insights on how drug pricing works in the United States, proposed legislative measures to reduce costs, and what’s next in the drug pricing landscape.
How are drug prices set in the United States?
The thing to understand about the publicly available prices of a prescription drugs is that they are much like the sticker prices on a car. Almost everyone is paying some percentage less than the stated amount, and the actual price paid is going to be higher or lower for different purchasers, depending on how successfully they can negotiate for discounts. In the case of prescription drugs, insurers are negotiating these discounts or rebates on behalf of individual patients enrolled in their plans.
Decades ago, insurers started outsourcing this price negotiation role to pharmacy benefit managers (PBMs) as more advanced pharmaceuticals came to market and drug costs became a larger part of overall health care spending. PBMs negotiate to get a discount off the sticker price of a drug, with bigger discounts based on the size of the insurance company they're negotiating for. More people covered under a big company means they have more negotiating power with pharmaceutical companies. They also negotiate bigger discounts by offering more favorable cost-sharing requirements for specific medications.
How have PBMs contributed to rising drug costs?
Ten years ago, people had a more favorable opinion of PBMs because they were perceived to be acting on behalf of insurers to negotiate lower drug prices. These middlemen prevented drug companies from charging whatever the market would bear and were seen as the last resistance against high drug prices. That perception has changed in recent years, in part because pharmaceutical companies have successfully shifted some of the blame of high drug prices to PBMs.
One big problem with PBMs is that their negotiated rebates with drug companies are very opaque. There is no transparency on how much they have pocketed when negotiating a discount on the sticker price of a drug. Even the insurance companies that they are negotiating for don't know what they're keeping. This keeps drug prices high because some amount of the discount they have negotiated is not going back to consumers—it's going to the PBM industry.
There are concerns about the fair amount that they should be keeping from this transaction. Some would argue that PBMs are better at negotiating drug prices than insurance companies, so that patients ultimately benefit. Others would say PBM profits are too high relative to the benefits patient actually receive, as well as their low level of risk in the high-risk industry of pharmaceuticals.
What happened next?
PBMs started merging with other adjacent industries, particularly large health insurers. PBMs also started acquiring their own mail-order pharmacies, specialty pharmacies, minute clinics, and primary care providers. This led to concerns about conflicts of interest. Due to this, in some cases, the PBM, insurer, pharmacy, and prescriber are all one company. At this point, just three PBMs—each owned by large insurers—manage around 80% of prescription transactions in the U.S.
There are concerns that PBMs could be structuring formularies (a list of drugs covered by an insurance plan) in a way that drives people to higher cost medicines, because it is more profitable for them. There are also concerns that PBMs work with larger, more established pharmacies which may not offer the best price for a consumer, and are pushing more independent local pharmacies out of business by reimbursing them at lower rates.
What else drives high drug costs?
In addition to the issue of PBMs, pharmaceutical companies want to charge as much as they can for drugs. Their pricing strategy is more straightforward—they charge as much as they think the market will bear. Insurers want costs to be lower because they are reimbursing for pharmaceuticals used, as do consumers who are paying part of those costs. But as a country, we've largely left it up to the market to determine how much pharmaceutical companies can charge for drugs.
The U.S. has a fragmented system of insurers that do not act as one to push prices downward. Other countries whose governments directly negotiate with companies may have lower prices, but patients in these countries also may go without certain medications for a period. We in the U.S. are less willing to say no to pharmaceutical companies' high prices, and value having new drugs quickly. We've also allowed patent protection frameworks that allow drug companies to profit off their innovation because we believe higher drug prices incentivize more investment in research and development and better medicines in the future. While criticizing high drug prices is consistently a bipartisan activity, there hasn't been sufficient interest among policymakers to fundamentally change this model.
How does the federal government affect drug prices?
The U.S. government has taken a very hands-off role for setting drug prices relative to other countries. The inflation reduction act allowed the federal government to negotiate lower drug prices directly with drug companies in Medicare's prescription drug coverage program (Part D) for the first time. The effects of this policy will grow over time. Each year, there will be more and more drugs subject to these negotiations, which will be beneficial to Medicare beneficiaries as well as privately insured consumers. Once drug prices are made public, there's a baseline for stronger negotiation from PBMs—they will be able to use those Medicare prices as a basis for negotiating rebates for private insurance plans.
What's next for drug pricing?
You can find leaders on both sides of the aisle in Congress who are down on PBMs and think there needs to be more accountability. There has been proposed legislation that requires PBMs to divest from pharmacies and break the conflict of interest, as well as other proposals to cap the amount PBMs can profit off of rebates. There have also been calls for transparency on how much they charge health plans and pharmacies for drugs.
Market-driven pressures may also push changes alongside policy reforms. Employers and insurers that believe large PBMs are not serving their interests have started looking for alternative models. Smaller PBMs have emerged that are structured differently, with more transparent contracts with insurers and fewer conflicts of interest. If these PBMs continue to grow, it will ultimately create more economic pressure on the big three PBMs to adapt their own practices. We'll see whether any of these proposed solutions will fundamentally change the PBM industry, increase choice, or reduce drug costs.
How could cuts to National Institutes of Health (NIH) funding impact drug prices?
It will be pharmaceutical companies and ultimately patients who will bear the downstream costs. Drug companies have long relied on bench science and preclinical findings from NIH-funded research to provide the initial evidence for new therapies, which ultimately become FDA-approved drugs. If these funds dry up, we can expect a slower pace for new drug development, meaning fewer new treatments to benefit patients.
