The Crazy Math Behind Drug Prices

Issue 07-16-17   |   Reviewer:   Eric Cardella


Despite the fact that technology continues to improve and that the price of many consumer goods and services has been falling, the opposite is true for prescription drug prices. For example, the price of insulin—a workhorse drug that many people with diabetes rely on—has risen more than 270 percent over the last decade. Many people attribute the rising cost of drugs to the arrangements between big drug companies and pharmacy benefit managers (PBMs), who act as the middle man to the insurance companies.

In fact, there are several ongoing lawsuits alleging a conspiracy of anti-competitive behavior between PBMs and the primary makers of insulin, which has resulted in rising insulin prices. One of the main functions of PBMs is to negotiate rebates from drug makers, a fraction of which is kept by the PBMs while the rest is transferred back to the insurance companies. This, in effect, creates two prices for most drugs: a list price paid by the uninsured and those with high deductible plans and a net price that people with insurance coverage pay. What often happens is that drug companies are resigned to raising the list price to compensate for the rebates they provide back to the PBMs. Many believe this process has led to the typical pattern of lock-step price increase by the big drug companies.   

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