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Why are prescription costs going up?

The rising cost of prescription medications is a common concern in the health care world, both to companies providing insurance coverage to their employees and to the patients themselves. Companies have seen rising costs across the board for several years, seemingly with no end in sight. Patients are feeling it at the pharmacy counter with higher deductibles, higher copays, and stricter formularies. But why is this happening? The answer unfortunately is a complicated one, but you wouldn’t expect it to be simple would you?

Buy Low, Sell High

This old adage is how businesses stay in business, but somehow the script has been flipped in the pharmacy world. Pharmacies typically don’t have much control over their “sell” prices. Retail pharmacies, on average, have 83% of their prescriptions paid for by a third party such as a private insurance, Medicare, or Medicaid1. These companies dictate reimbursement rates to pharmacies using pricing formulas that take any say over the price away from the pharmacy.

That leaves only one side of the coin for pharmacies to work with – buy low. If you have ever wondered why your pharmacy has a different generic every few months, this is why. Pharmacies have to buy the least expensive brand of a medication in order to stay in business.

The Middle Men

Say for example you work for Company XYZ that takes great pride in providing its employees with quality health care coverage. Company XYZ isn’t in the insurance business…they sell widgets. So instead of spending valuable resources learning about insurance to make good decisions, they hire an outside company to find them the best option.

When it comes to the prescription side of insurance there are companies that create formularies, manage prescription costs, and process the claims between the payer (Company XYZ) and the pharmacy. These companies are called Pharmacy Benefit Managers or PBMs. The 3 largest PBMs are Express Scripts, Caremark, and OptumRx.

These PBMs are the middle men in the pharmacy world and create the pricing formulas that determine the amount paid to pharmacies for prescription medications.

Prescription Pricing Formulas

I won’t spend a lot of time on this section, because honestly the whole thing is a convoluted mess that goes way beyond the scope of this article. However, a basic explanation is warranted to help you understand the key question, which is, “Why do your copays keep going up?”

There are 2 terms that are important to understand: AWP (Average Wholesale Price) and MAC (Maximum Allowable Cost). All medications are assigned an AWP from the manufacturer when they are packaged for sale to pharmacies. The contracts that pharmacies have with the PBMs have reimbursement rates based on this AWP number.

For example, Drug A has an assigned AWP of $75 for a bottle of 100 tablets. The pricing formula from the PBM says that they will pay AWP minus 15% to the pharmacy. That means for a one month prescription for 30 tablets, the pharmacy will be paid:

$75 ÷ 100 tablets = $0.75 per tablet

$0.75 × 30 tablets = $22.50

$22.50 – 15% = $19.13

The difference between what the pharmacy can buy Drug A for and the $19.13 that they will be paid determines the profit amount for the pharmacy. (Side note: This reimbursement amount does not include the average cost of filling a prescription, which averages at $7.50 per prescription)

The MAC (maximum allowable cost) price is different in that it is not tied to the AWP of the medication. The MAC price is typically used for generic medications and is found on a list maintained by the PBMs. These prices are typically determined by the least expensive option on the market at a given time. This is why pharmacies have to switch to a different generic brand of a medication; in order to not be reimbursed below their cost of the medication, pharmacies must go with the least expensive option.

Medication Cost Increases

Medication costs have been steadily increasing and even more rapidly increasing over the last few years. These costs have been even more dramatic for generic medications, some of which have risen over 100% within a few months.2 The reasons for these dramatic increases are long and complicated (I’m beginning to see a pattern here).

Consolidation of some generic manufacturers into fewer companies, has reduced the amount of competition in the marketplace. Where there used to be 5 or 6 companies making some generic drugs, all competing for sales by reducing costs, there may now only be 2 or 3 companies making the same drug. This reduced competition among manufacturers has reduced the pressure to lower prices to remain competitive.3

Another reason is for price increases come with the cost of doing business for the manufacturers. The FDA has stepped up their regulatory requirements and consequently some manufacturers must discontinue producing products until they can show compliance with these regulations. This often leads the drug shortages that then lead to higher prices because the demand exceeds the supply.3

Why are my copays going up?

Remember the PBMs I mentioned earlier? Well, part of their duties are to help companies (like Company XYZ) control costs on prescription medications.

In response to the increasing costs of medications, the PBMs often must restructure the copay tier system in order to prevent expenses from getting out of hand. That means a generic medication that you have taken for years and have always paid a $10 copay per month, now is suddenly $15 or $20.

Some insurance plans have also gone to using a coinsurance model of coverage instead of a copayment model. That’s just a fancy way of saying that the amount you pay at the pharmacy counter is tied to a percentage of the cost instead of a flat copay. You may pay 10% or 15% of the medication’s cost instead of a $15 copay. This model will typically include more regular increases due to it being directly tied to the cost of the medication. Also, because these medication price changes can be sudden and severe, your out-of-pocket cost changes can also be sudden and severe.

So what can I do about my drug cost increases?

I believe the key to better outcomes is being informed. Talk to your pharmacist about your medications. Ask if there are less expensive alternatives to some of them. Pharmacists are the drug experts in the health care team, so take advantage of our knowledge and accessibility.

Pay attention to those letters you get from your insurance company (actually from the PBM) that describe changes to your coverage. If you have trouble figuring out what they’re talking about, bring the letter to us and let us help you navigate through it.

An informed patient takes control of their health care and will have the best information to make the best decisions.

1 http://healthblog.ncpa.org/third-parties-control-83-percent-of-prescription-drug-spending-up-from-52-percent-in-1993/

2 http://www.pharmacytimes.com/publications/issue/2014/february2014/rising-generic-acquisition-costs-prompt-congressional-hearing-request

3 http://www.forbes.com/sites/greatspeculations/2015/02/27/why-are-generic-drug-prices-shooting-up/