Eli5 How are drug prices settled in the US?
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Healthcare is inelastic demand. This means regardless of the supply, the price can be whatever the companies want. Why? Because if you had cancer and the pill to extend your life costed 5 million, you’ll still buy it
What this means is technically the pharmaceuticals can set any price they want, the insurance companies just have to be okay with it. Since insurance companies compete with each other, this means they don’t want to miss out on a cool new drug that another insurance company might get instead. So they compete upwards in price, so essentially
Pharma can charge whatever they want on price, whatever the insurance companies are willing to pay at least (which is still a lot)
I can’t speak for other insurance companies, but mine recently just dropped a whole ton of pharmacies. My insurance company is large enough where they don’t negotiate with pharmacies. They tell the pharmacy this is what we’re willing to pay and you’re either going to take it or you’re not. And if you’re not then we won’t cover you.
As far as new medications coming onto the market, unless they are considered formulary medications, the copay for them is rather steep. I think the last time I looked at the copay, non-formulary medications were $63. If there is a medical necessity for the medication then you can work with the insurance company to bring down the price to formulary prices.
“Settled” is not a thing when it comes to drug prices.
Most drugs are generics. For example, your doctor will prescribe you Lipitor, which is made by Pfizer, but unless you have a special circumstance and/or are willing to pay the retail price in cash, the pharmacy will give you a pill with the active ingredient atorvastatin, which they have purchased from a manufacturer (like Ranbaxy, Sandoz, Accord, Teva, etc.) All of these pills look a little different and, like Coke vs. Pepsi vs. store-brand cola, don’t all hit exactly the same… but that part’s another post. (It factors in, sort of, because the way your body processes a given pill might mean you need a different dosage or formula, which means a different cost, even though it’s supposedly all the same.)
Anyway, so both the brand and the generic manufacturers, they sell to the pharmacies. This is not a case where the bottle is printed “$15.99” and that’s the price – it’s all a negotiation. The manufacturer will sell at a lower price to a customer that buys more product, so a smaller pharmacy chain is going to pay more, but will get a better deal if they buy a larger number of medications from the same manufacturer instead of trying to find the best price for each individual type. So those prices are kind of imaginary except in aggregate.
Once those pills hit the pharmacy, you can look at GoodRx and get a rundown of two more prices: the retail/cash price and the discount they offer folks.
40mgx30days of atorvastatin near me has a cash price of $106 at Rite Aid, $45 at Safeway, $128 at Walgreens, and $28 at Costco. These are made-up numbers based on the mostly-imaginary cost from the manufacturer and the chain’s standard markup calculation modified by the near-zero possibility that someone will actually pay that amount. However, if you use GoodRx, ALL OF THOSE PRICES become $2.50, despite the $100 range in cash prices.
HOWEVER, if you did not look at GoodRx, you would probably just hand the pharmacist your insurance card and assume that would get you the best price. But most prescription insurance has a minimum copay of $5 or $10, so you would actually pay more.
In short: the only “set” price of a medication is when the same quantity of the same dosage from the same manufacturer out of the same bottle is purchased at the same location of the same pharmacy using the same insurance; otherwise, someone at some point in the process is paying a different amount.
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