How Does Drug Pricing Work in the U.S.?
Key takeaways:
The U.S. has the highest prescription drug prices in the world. It also spends the most per person on medications. But people in the U.S. take about the same amount of medication as residents of other countries.
Prescription drugs are produced by their manufacturer. From there, they’re sold to a distributor. They then arrive at the pharmacy before being dispensed. Each step plays a role in a medication’s final price.
Medications are billed at the pharmacy and the claims go to the payer, which is usually an insurance company or pharmacy benefits manager (PBM). PBMs also play a role in the final drug price.
People in the U.S. take about the same amount of medicine as residents of other developed countries. But its drug prices are much higher. That’s why the U.S. has the highest prescription drug spending per person in the world.
A widely cited 2021 report found that U.S. drug prices were more than 2.5 times higher than prices in 32 other countries, including France, Australia, and Japan. Branded medications were almost 3.5 times as expensive.
Why a drug costs what it does can be hard for both patients and healthcare professionals to understand. The U.S. system is complicated, and most of the time drug prices are negotiated behind closed doors — away from public opinion.
Instant Rx savings for insured and uninsured patients
GoodRx for HCPs has savings that can beat insurance copays and reduce your need to complete prior authorizations.
GoodRx is NOT insurance. GoodRx Health information and resources are reviewed by our editorial staff with medical and healthcare policy and pricing experience. See our editorial policy for more detail. We also provide access to services offered by GoodRx and our partners when we think these services might be useful to our visitors. We may receive compensation when a user decides to leverage these services, but making them available does not influence the medical content our editorial staff provides.
A medication’s price in the marketplace hinges on several different companies involved in its development, shipping, and filling process. Below, we’ll follow the path of a prescription drug from the manufacturer to the patient. This will help explain why drug prices can be so different at every pharmacy.
Do drug pricing laws affect how much medications cost?
Yes. Most countries regulate the price a drug company can sell their medications for. The U.S. generally does not.
However, there are a few exceptions:
Medicare: The Inflation Reduction Act, passed into law in 2022, requires the federal government to negotiate prices for some drugs covered under Medicare Part B and Medicare Part D. Negotiated prices for the initial set of medications should start to become effective in 2026. Eliquis (apixaban), Jardiance (empagliflozin), and NovoLog (insulin aspart) are three medications that will be included in the first round of negotiations.
Medicaid: Drug companies are required to sell their drugs to Medicaid — and a few other federal programs — at lower prices (compared to what they charge drug distributors).
Federal Ceiling Price: There is a mandatory maximum price for drugs paid for by the Department of Veterans Affairs, the Department of Defense, the Public Health Service, and the U.S. Coast Guard.
The lack of drug pricing regulation tends to lead to high prices for brand-name drugs. But it can also lead to lower prices for generic drugs. While this is usually a good thing, low generic prices have been blamed for drug shortages, including the widespread shortages caused by the bankruptcy of generic manufacturer Akorn Pharmaceuticals in 2023.
Following the drug supply chain: How does each step impact medication prices?
Let’s look more closely at how drug pricing can change after each step of the drug supply chain.
1. Manufacturer to the distributor
A manufacturer, or drug company, is an organization that produces a medication. They can sell their medication to a drug distributor, which then sells it to the pharmacy.
The manufacturer sets a sticker price. But that’s not the price most drug distributors pay for it. That’s because distributors are able to negotiate lower prices and receive rebates and other incentives. A rebate can be paid by the manufacturer to the distributor as part of their final negotiated price. For example, the manufacturer may offer the distributor a discount for buying a large quantity of their medication, or for paying them quickly.
The actual revenue the manufacturer receives from a distributor or pharmacy — after rebates and discounts — helps determine the average manufacturer price (AMP). The AMP is a price that’s used by drug makers, distributors, and pharmacies. It’s not directly relevant for patients.
2. Distributor to the pharmacy
After a distributor buys the medication, it sells and delivers it to the pharmacy. At this point, the pharmacy negotiates the price with the distributor. It almost never pays the distributor’s full sticker price.
Because prices are negotiated, some pharmacies pay different prices for the same drug. This is part of why medications may cost different between Walmart, Walgreens, and CVS, for example.
Good to know: The price the pharmacy pays is usually estimated with the average wholesale price (AWP). The AWP is often reported by the manufacturer and isn’t standardized across the country.
3. The pharmacy to the patient
At this point, the medication has traveled from the manufacturer, to a distributor, and finally to the pharmacy’s shelf. The next step is for the pharmacist to fill and dispense the medication to you. Let’s look at the price you pay at the pharmacy counter.
Pharmacy cash price: Purchasing a medication without insurance or any discounts
Pharmacies set their prices based on a mathematical formula. This formula is commonly based on the AWP, plus a dispensing fee. Specific formulas vary by pharmacy.
Example: Average wholesale price + 20% + $5 dispensing fee.
The pharmacy then sells the drug at that price. If you don’t have insurance or access to another savings opportunity, this is the price you’ll pay.
Reimbursed price: Purchasing a medication after it’s covered by insurance
If you have insurance, the pharmacy will ask your plan to pay for your medication. They’ll submit a claim to either your insurance company or their pharmacy benefits manager (PBM). PBMs contract on behalf of insurance companies to handle pharmacy claims.
Insurance companies and PBMs rarely pay the pharmacy’s full asking price. They reimburse the pharmacy based on their contract with them. And this amount varies widely. For example, Humana will pay a different amount than UnitedHealthcare or Aetna.
However, this payment process has some additional layers. Reimbursement is usually based on the lowest of the following:
Usual and customary fee: The pharmacy’s cash price. This price reflects what's most commonly charged when a consumer at the retail level is not using insurance.
Contracted rate: This price is usually used for brand-name medications. It’s calculated using a formula, often based on the AWP. But because of large differences between the AWP and the price pharmacies actually pay, some payers have moved away from using the AWP to calculate reimbursement.
Maximum allowable cost: This price is usually used for generic medications. It’s the maximum reimbursement cost allowed for any particular medication.
If a pharmacy’s usual and customary price is lower than the contracted rate or the maximum allowable cost, then the insurance will pay the pharmacy’s cash price. So pharmacies never want to set their cash prices too low, or they will get paid less for the medications they dispense. Because of this, pharmacies set their cash prices high to be sure their price is never the lowest. That’s one reason cash prices at pharmacies can be so high.
Separately, your out-of-pocket cost may be different depending on the pharmacy you get your prescription filled at. That’s because your insurance company may have a preferred pharmacy network. Your final out-of-pocket cost will depend on the pharmacy you choose as well as the copay or coinsurance required by your plan.
Other ways of paying: Purchasing a medication through a copay or discount card, including GoodRx
If you don’t have insurance or your plan won’t cover your medication, you may be able to use a copay card, a free trial card, or a discount card.
With a manufacturer copay card, the drug company pays part of your copay for you. Copay cards help people pay for their brand-name medications. They encourage the use of branded medications, but they may increase drug costs for insurers at the same time. And manufacturer copay cards are generally only an option for people with private (non-government) insurance plans.
A free trial card is similar to a copay card. They’re both discounts that are provided by a drug’s manufacturer. But instead of paying your copay for you, the drug company will give you a limited supply of medication at no cost. For example, with a free trial card, you may get 30 days of the medication for free.
A discount card is an alternative to using insurance or paying the medication’s full cash price. When you use a discount card, you will pay a contracted price for your drug rather than its full price. Most discount card companies work with PBMs to negotiate prices with pharmacies.
Discount cards offer lower prescription drug prices to consumers and help improve medication access. GoodRx offers a free discount card, among other savings opportunities, that can help you save money at the pharmacy.
Why are there so many differences in drug prices?
There are a lot of reasons why prescription drug prices can vary by pharmacy. Top factors include:
Lack of price regulation
Private price negotiations at different steps of the drug supply chain
Complicated pricing and reimbursement systems
Numerous ways of paying, including cash, insurance, and discount cards
As long as the medication and the pharmacy you choose are covered under your health insurance plan, the price you pay will usually be the same at different pharmacies. But if you’re paying cash or using a discount card, it may pay to shop around. GoodRx can help you compare medication prices at different pharmacies in your local area.
The bottom line
Prescription drug pricing in the U.S. can be confusing — even for experienced healthcare professionals. Knowing how a drug’s price changes throughout the drug supply chain can help you better understand why the prices you pay are different depending on where you get your prescription filled. The price you’ll pay for a medication will also depend on if you’re paying the pharmacy’s cash price, filling it through insurance, or using a discount card.
Why trust our experts?
References
Allen, S. (2017). Prescription drug coupons actually increase healthcare spending by billions. Kellogg Insight.
Beaton, T. (2017). Improving price transparency around generic drugs for payers. TechTarget, Inc.
Commonwealth Fund. (2019). Pharmacy benefit managers and their role in drug spending.
Congressional Budget Office. (2021). A comparison of brand-name drug prices among selected federal programs.
Cornell Law School Legal Information Institute. (n.d.). 42 CFR § 447.504 - Determination of average manufacturer price.
Cubanski, J., et al. (2023). Explaining the prescription drug provisions in the Inflation Reduction Act. Kaiser Family Foundation.
Department of Health and Human Services, Office of Inspector General. (2009). Comparing pharmacy reimbursement: Medicare Part D to Medicaid.
Herald & Review. (2023). Read it: Akorn layoff letter to employees.
Hong, M., et al. (2020). Comparison of discounted and undiscounted cash prices for cardiovascular medications by type of US community pharmacy. Journal of General Internal Medicine.
Medicaid.gov. (2022). Medicaid Drug Rebate Program (MDRP). Centers for Medicare and Medicaid Services.
Mulcahy, A. W., et al. (2021). International prescription drug price comparisons. RAND Corporation.
Munigala, S., et al. (2019). Drug discount cards in an era of higher prescription drug prices: A retrospective population-based study. Journal of the American Pharmacists Association.
Murry, L., et al. (2018).Third-party reimbursement for generic prescription drugs: The prevalence of below-cost reimbursement in an environment of maximum allowable cost-based reimbursement. Journal of the American Pharmacists Association.
Sarnak, D. O., et al. (2017). Paying for prescription drugs around the world: Why is the U.S. an outlier? The Commonwealth Fund.
Stomberg, C. (2021). The role of rebates in the pharmaceutical industry. American health law Association.
Twenter, P. (2023). Akorn: From financial troubles to a shutdown and intensifying drug shortages. Becker’s Hospital Review.
U.S. Department of Health and Human Services. (2023). HHS selects the first drugs for Medicare drug price negotiation.
