Who pays for your medication?

The notion of pharmaceutical pricing has consumed media coverage and American lives over the past two Presidential elections. Well over 40 States have introduced (or have considered) pricing-legislation in 2020 alone. So, how does drug pricing actually work in America?

This 2018 diagram via Business Insider illustrates the U.S. cost and rebate structure of an imaginary drug with a list price of $100 - on a commercial plan covering all but a $20 co-pay.

Manufacturers start with charging a mark-up to wholesalers, who in turn charge a mark-up to the pharmacy. The consumer picking up the prescription ends up paying $20 on a $130 retail cost (including the pharmacy mark-up).

The PBM managing the prescription pays the pharmacy the remaining $110 yet bills back $140 to the insurer. This additional $30 is called “spread pricing”. It's one route PBM use to make money off prescriptions. The other revenue stream is rebates.

As gatekeepers to formularies, PBMs control drug companies’ access to the U.S. commercial market. The top-3 PBMs in America manage the drug benefits for approximately 80-90% of the U.S. population.

The only way for drugmakers to curry their favour is to give bigger rebates – but that also means raising list-prices.

How Drug Pricing Really Works in America