Who decides how much your medications cost?

The following is presented for informational purposes only.

Would it surprise you to know that prescription medications account for 17 percent of all health care costs in the United States? That works out to about $370 billion per year, more than any other country. Depending on your health insurance and the type of medication your doctor prescribes, your out-of-pocket costs could be a big line item on your budget.

Many Americans with serious illnesses like cancer or heart conditions can expect to pay $1,000 a month or more out of pocket every month for necessary drugs. In the current landscape, bad health is often good business for pharmaceutical companies.

So, who decides how much your medications cost and how do they make that determination? The process is not as simple as you may think.

Medication price factors

When you purchase prescription medications, it’s not as clear cut as you or me picking up groceries. When you go grocery shopping, you make the decisions about what you want to buy, you look for specials, and maybe even buy store brands. You may even shop a variety of stores to get the best prices. With prescriptions, you rarely get to make the decision about what you want and how much you want to pay. The price is set by the pharmaceutical company and the doctor makes the decision about what you will purchase when they write your prescription. Then, your insurance company will pay a portion of the cost and you’ll be left with the rest, your copay.

Manufacturing

When the pharmaceutical company sets a price for a drug there are a lot of factors that go into the decision, but there is no set formula. Of course, the cost of manufacturing the drug is calculated into the price, but that’s just the beginning. They also take the clinical value into account, meaning they consider if the drug helps people live longer and better. If it does, well, they can charge more because people will pay it.

Competition

They also look at their competitors. Does any other company offer the same or similar drug? If similar, is their drug better or worse than the competition? And how much does their competition charge for it?

They also consider whether or not patients can afford the copay. They look at the average copay for that drug and other similar drugs. And they look at how much they’ll have to give in government-mandated discounts like Medicaid.

Demand

Pharmaceutical companies also look at how many people will need this drug. For instance, a drug that will be used by hundreds of thousands of people, like a blood pressure medication, will be priced less than a drug that is for a rare condition that only a few thousand people need. And the cost is not just because they know that those few people really need the drug. It comes in part because the cost for manufacturing a more common medication is the same or less than a drug for a rare condition – meaning they charge more to make up for the lower demand.

Once the price is set, insurance companies, doctors, pharmacists, and lawmakers may provide some pushback and encourage the manufacturer to lower the price, especially if the insurance company has set a budget for prescription medication spending and the copay for the patient would be too high. This can certainly help in extreme cases, but is somewhat rare.

Unfortunately, in the end, pharmaceutical prices are often so high not because they must be, but simply because they can be. If the cost of your prescription medications is too high, talk to your doctor about a less expensive alternative or ask your doctor or insurance company to contact the pharmaceutical company on your behalf. Review our guide to finding the most inexpensive medications for more ways to keep up with your prescriptions on a limited budget.