Is the Current Drug Pricing Model Beneficial to Society?

?The pricing of drugs is a multi-modal endeavor that includes multiple inputs and multiple parties.? It all starts with the pharmaceutical company who discovered the drug.? The process of discovering a new drug is a high-risk endeavor that is very expensive and has far more failures than successes.? The drug company spends this money to discover a drug and when they have discovered something that can be marketed, they get a patent for exclusive rights to produce and market the drug exclusively.? At this point, the pharmaceutical company is going to price the drug in order to cover R&D costs, marketing costs, production costs, recoupment of other failed R&D projects, and a profit margin above all of that.? Once this has occurred, PBM negotiate with the drug company for rebates from the drug company that essentially allows the insurance company to purchase the drug at a discount overall in exchange for a spot on the insurance companies formulary.? This allows the insurance companies to set a price for a drug that will ensure profitability for the insurance company who is paying for the medication from the drug company and selling to the patient.? However, it may not end there.? The wholesaler will sell the drug to the pharmacy with a certain profit margin, then the pharmacy itself will sell the drug with a certain margin that will dictate the final “retail price.”? However, the insurance company only reimburses at a prespecified amount, so this may make the mark-up by the wholesaler and pharmacy a moot point.

?

The mechanism is not ideal from a societal perspective for multiple reasons.? First, the pharmaceutical company is not required to be transparent about their drug pricing which gives an avenue for the drug company to price something with a much more significant profit margin.? This often results in drug companies pricing drugs at a multiple of what their manufacturing, advertising, and R&D costs were to produce the drug.? Next, the PBM who negotiates on behalf of the insurance companies are incentivized to get rebates off the drug price, not negotiate to lower the actual drug price which does not disincentivize the drug company to continually charge higher prices.? Also, the process the PBM uses to get these rates as well as the actual rebate amount are not transparent meaning there is another avenue for fraud and abuse to occur.? Next, the insurance company allows for the ever increasing cost of the drug and has mechanisms to mask that increase in cost to the patient, which allows the pharmaceutical companies to raise their costs in perpetuity.? ??

?

With so many layers involved taking a cut of the action and increasing the cost for the next guy to ensure their profitability, this results in a very bloated cost that is more designed to enrich the pharma company, PBM, and insurance company rather than make the medication affordable for the general population.? Also, the lack of transparency in cost justification from the beginning with the pharmaceutical company to the end when the insurance charges a patient a copay results in high potential for those companies to abuse the consumer further increasing their profitability.? Greater transparency and fewer middlemen would decrease the inefficiency of the system and allow for market forces to have a large impact on prices.???