How Does Drug Pricing Work?

Doug Hirsch
Written by Doug Hirsch
Published on January 15, 2015

One of the biggest challenges we face at GoodRx is trying to explain to Americans how the odd, confusing world of drug pricing works.

A calculator surrounded by colorful pills.
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Imagine if your grocery store acted like a pharmacy. Milk can only be found behind a counter, and you have no idea how much it costs until checkout. At checkout, you find that this particular brand of milk is $105, which has no relationship to the quality of the milk, but you can’t really price check it against the other brands. The weirdest part? There’s another company you’ve probably never heard of that can get you the milk for $5, but who they are and what they do is a mystery.

Welcome to the wild world of prescription drug pricing.

Over the past three years, GoodRx employees have spent countless hours working to give you accurate prices and discounts for every prescription drug in America. But WHY drug prices are so different remains unclear for most of us.

Let’s try to shed a little light on how drug pricing really works.

What’s a PBM and why should I care?

It’s hard to talk about the cost of prescriptions without understanding Pharmacy Benefit Managers (PBMs). What PBMs are and what they do is a long story, but basically, PBMs help manage drug benefits for Americans with (and sometimes without) insurance or Medicare. Your health insurance provider almost always contracts with a PBM to provide your benefits, whether you see their name on your insurance card or not.

PBMs cut deals with pharmacies to give the customers of PBMs (Americans with insurance) a discount off the “sticker price” of a drug. This discount can be huge—a drug with a retail price of $150 can be reduced to a $10 co-pay. PBMs also decide (with your employer) what drugs will be covered and how much of that cost you’ll be responsible for, and they set rules to discourage waste, ensure patient safety, and encourage compliance with the doctor’s prescription.

Some PBMs also contract with these same pharmacies to offer discounts for consumers without insurance (on GoodRx we call these either “coupons” or “discounts”). If you’ve ever received a prescription savings card in the mail, that’s what these are. One catch: the discounts these cards offer can vary wildly, and you’ll want to do your research to maximize your savings (that’s one of GoodRx’s key features).

Brand-name drugs: Where does the money go?

For brand-name drugs, it’s pretty simple. Brand-name drugs are typically expensive for the pharmacy to acquire, and most of the cash you pay at the pharmacy goes to the manufacturer with a pretty slim pharmacy mark-up. PBMs negotiate a discount (maybe 15%) for their insured customers; you’ll either pay that contracted amount or a co-pay if your plan covers that drug. (There are also rebates that are often paid back to the PBM, but let’s ignore that for now.)

For example: Right now, a 30-day supply of the most popular dosage and quantity of brand-name Lipitor can be purchased by most pharmacies from the manufacturer (through a wholesaler) for about $230. Cash-paying consumers will pay about $300. Using GoodRx you’ll find discounted prices of about $250 – 280 depending on the discount you use and the pharmacy where you fill. If you have insurance coverage and they cover this drug (most won’t by the way—see the following paragraph for more on this), you and your insurer will pay a combined $240 – 250. You’ll pay a co-pay; your PBM pays the remainder.

If you have insurance, remember that PBMs really don’t want you to fill a brand drug when a generic alternative exists or another similar, cheaper drug will work for that condition. If you insist on the brand, you’ll find that either a) the drug simply isn’t covered and you’re responsible for the entire cost (in which case you should definitely see if GoodRx has cheaper prices), or b) the PBM has restricted their coverage by requiring a prior authorization, step therapy, or other way to make you pay a larger share.

Generic drugs: Where does the money go?

Generic drug prices are where things get a bit crazy (and, just for clarity, about 85% of the drugs filled in the US are generics). Because there are often many manufacturers for each generic, the cost for pharmacies to buy the drug is much lower, and the price you pay varies much more between pharmacies.

For example: Actos, a popular diabetes drug, is now available as generic pioglitazone. It costs the pharmacy around $6 – 7 to purchase a 30-day supply from the manufacturer. If you have insurance, you and your insurer will pay around $15. If you walk in without insurance and pay cash, you will likely pay the pharmacy $210 – 300. (No, that’s not a typo.) If you use GoodRx, you’ll find discounted prices ranging from $15 – 140, depending on the discount and pharmacy you visit.

It gets more confusing from here. Some pharmacies simply offer low cash prices (and some even give away certain drugs for free!), some have memberships which entitle consumers to low prices without insurance, and there are all sorts of fees, rebates and other things in the mix.

How can I use this information to save?

The good news in this big mess of pricing is that there are significant opportunities to save. Here are just a few tips:

  • Always comparison shop. Now that you know know how pharmacies construct their prices, you can see that prices will vary from pharmacy to pharmacy.

  • Take advantage of discounts. There are many ways to save if you know where to look. GoodRx brings a variety of discounts and coupons together so you can find the best discount.

  • Insurance isn’t always the best price. Insurance is great, but it’s always worth double-checking your co-pay against other available discounts, especially if your drug isn’t covered, you haven’t satisfied a deductible or you have a high-deductible plan.

If you’ve stuck with us to the end, congratulations! You are now a true pharmacy pricing expert.

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