My Prescription Costs . . . How Much??

Medicare Set-Aside Blog, Rx/Pharmacy on December 2, 2019
Posted by Leah King, PharmD, JD, Independent Pharmacy Consultant

In recent years, a great deal of attention has been paid to the topic of drug prices and more specifically, how to control them. On a personal note, it’s likely that most of us have gone to the pharmacy to pick up a prescription and been surprised by the cost. On a professional note, in the areas of Workers’ Compensation Medicare Set-Asides, it is likely that most of us have seen at least a few set-asides where the majority of the allocation is attributable to prescription drug costs rather than to medical costs. The topic of drug pricing is a complicated one. There are many factors and variables which ultimately determine how much an individual will pay for his or her medication. In this blog, we’ll review a few of these factors generally and discuss the influence that each play in how much our medications cost.

  • Supply and Demand. The age-old principles of supply and demand apply in the world of pharmaceuticals, just as they do in the economics of other goods and services. When there are many drugs available to treat the same medical condition and those drugs have similar efficacy, the competition for market share will tend to drive the price of those drugs down. In contrast, the availability of a single drug to treat a particular condition tends to generate a high price for that drug. There may also be a situation where there are only two drugs available to treat a particular medical condition and one of those drugs becomes unavailable for one reason or another. Perhaps there is a shortage of a raw material or a work stoppage at the manufacturing site. In this situation, the price of both drugs (the drug in short supply and the other drug) will likely increase. A study conducted in 2018 showed that drug prices are expected to increase by about 20% for drugs in short supply, as compared to expected increases of about 8% for drugs that are not in short supply[1].  
  • Exclusivity. The FDA grants marketing exclusivity to drug manufacturers in a variety of circumstances. In fact, we’ve highlighted grants of exclusivity in previous blog articles. Exclusivity is granted in cases of a new molecular entity, which is essentially a new drug that’s introduced to the market. This leads to a situation where a brand name drug does not have a generic equivalent for a period of years. There is also a three-year award of market exclusivity for the first manufacturer to secure approval of an Rx to OTC application, or “switch application.” There are also grants of exclusivity for the approval of new dosage forms (ex: extended-release formulations of drugs which were previously available only as immediate release formulations), new dosage regimens (ex: Fosamax 70mg tablet taken once weekly as an alternative to Fosamax 10mg tablets which are taken on a daily basis) and for the approval of a pediatric indication.  We saw an example of a drug where marketing exclusivity was extended following pediatric approval when Lyrica was approved as adjunctive therapy for partial onset seizures in children. This occurred last December, and generally delayed the availability of generic Lyrica. If you missed this blog when it was originally posted, you can read about it here. During periods of exclusivity where competition is lacking, drug prices tend to be high and remain high
  • Research & Development Costs. We would be remiss if we didn’t mention the cost of bringing a drug to market, which certainly factors into the cost of a medication following its release. The Tufts Center for the Study of Drug Development recently published a study, which estimated the cost of bringing a new drug to market to be $2.6 billion, up from $802 million in 2003.[2]Additionally, the ultimate FDA approval rate for drugs entering the clinical testing phase is around 12%.[3] The tremendous costs associated with research and development prior to FDA approval are recouped by manufacturers post-approval, and that’s another reason why brand name drugs are so expensive. This is understandably why pharmaceutical manufacturers fiercely protect the patents they hold on these drugs, i.e. to recoup as much revenue as they can for as long as they can. And finally, this also helps to explain why generic drugs are so much less expensive than brand name drugs. Generic drugs are approved through a different regulatory mechanism than brand name drugs. Brand name drugs are approved by way of a new drug application (NDA). When submitting an NDA to the FDA, the brand name manufacturer must submit data from clinical trials to demonstrate the safety and efficacy of the drug. It is the clinical trial data which is so costly to procure, and encompasses a significant portion of the cost associated with developing a new drug. On the other hand, generic drugs are approved by way of an abbreviated new drug application (ANDA). The ANDA does not require clinical trial data; rather, a generic drug manufacturer simply needs to establish that its drug is bioequivalent to the brand name reference drug. Bioequivalence is a term used to express the idea that the two drugs exert the same actions within the body. Bioequivalence data is, on the whole, much less expensive to procure than clinical trial safety and efficacy data.
  • Negotiated Volume-Based Discounts and Ownership. As with other goods and services, the price of drugs varies based on where you buy, how you buy and how much you buy. Large retail pharmacy chains may be able to offer better prices on drugs because typically, they buy the drugs at lower prices compared to smaller, independent pharmacies. Mail order pharmacies also generate high prescription volume and command low prices when buying drugs. In addition, many mail order pharmacies are owned by pharmacy benefit managers (PBMs), who can negotiate significant rebates on certain drugs from drug manufacturers. PBMs often use drug rebate revenue to subsidize a portion of the drug cost, which allows them to pass some savings onto the consumer. And of course, buying in bulk will tend to produce a lower cost per tablet or capsule. A 90-day refill is often a better value than a 30-day refill.

This is by no means an exhaustive list of factors that influence drug prices; rather, these are just a few of the considerations that will determine the cost of a medication. As you can see, there is not a single culprit for the skyrocketing prices of drugs. Regulatory pathways, pharmaceutical manufacturers, PBMs, wholesalers and insurance companies all play a role. In this extremely complicated prescription drug pricing scheme, we think it is fair to say that a multi-faceted approach will be needed to truly make drugs more affordable.


[1] https://www.webmd.com/health-insurance/news/20180918/does-pharma-hike-prices-during-med-shortages#1

[2] https://www.policymed.com/2014/12/a-tough-road-cost-to-develop-one-new-drug-is-26-billion-approval-rate-for-drugs-entering-clinical-de.html.

[3] Ibid.