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Pricing & Transparency in Prescription Drug Costs

January 7, 2022
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WRITTEN BY Dr. Ramon Martinez III

Executive Summary 

Over the last several years, prescription medication costs have risen to make up between 10-40% of total health care costs in the United States. Private insurers, drug manufacturers, and several other intermediaries negotiate prices among themselves, which  then determines prescription costs for consumers. Changes are currently being proposed at both the state and federal level to regulate transparency in price reporting, pharmacy benefit manager (PBM) operation, and manufacturer pricing. 

Highlights 

  • Drug prices are often higher in the U.S. than in similarly developed countries, due to multiple factors such as rising brand-name drug costs and lack of generic competition.
    • Direct price comparisons can be hard to make since rebates that occur at multiple stages in the price-setting process are not often reported.
  • Private and government-sponsored public insurance options for prescription coverage have structured methods to increase negotiation power, which can decrease drug costs for consumers.
  • Both the Federal government and nearly every state have passed regulatory measures that aim to increase price transparency or control costs through a variety of mechanisms. 

Limitations 

  • Efforts to lower drug prices might reduce innovation incentive structures for pharmaceutical companies and manufacturers may exit certain marketplaces to avoid losses in revenue.
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