Multiple factors are involved in the pricing of pharmaceuticals. Research costs, marketing costs, production costs, shipping costs, regulatory costs, and profit all contribute to a drug’s price. Insurance companies pay for the drug because an extensive formulary is mandated by regulations. Federal law and regulations require Medicare Part D pharmacy and therapeutics committees to make prescription drug coverage decisions based on scientific evidence and standards of practice, and also to prevent discrimination in a patient’s drug therapy. Because these companies are publicly owned, the shareholders exert a strong influence to maximize profits. While the cost to make the drug may be 20% (or less) of the wholesale price, the aforementioned costs contribute to the cost of the drug to the pharmacist or physician. Greed and the excessive influence of shareholder funds (as opposed to the interests of consumers) add another component of cost and have sometimes resulted in startling increases in the price of long-established drugs (which have no current development costs) as well as newer ones. In the case of pyrimethamine, a simple and long-established drug used for toxoplasmosis, the US price increased from approximately $13/tablet to $750/tablet in 2015 when a new company acquired the rights to this drug. In 2016, the price of the formulation of epinephrine most commonly used for anaphylaxis (Epi-Pen) increased from $50 to $300 per single dose, even though no changes were made in the drug, the vehicle, or the injection unit.
A more complex situation applies to the pricing of new, complex molecules that, unlike the above examples, required massive research, development, and manufacturing investment, eg, the new agents used for hepatitis B and C. These agents are extremely expensive in the USA ($75,000–$120,000 for one course of treatment), but the manufacturers justify the cost as being less than the alternative (which is often a liver transplant). In fact, these “specialty drugs” represent one third of the drug spending in the USA.
Because the US Congress currently prohibits price negotiations by the largest purchaser of drugs (Medicare), the public has no protection from excessive pricing by manufacturers. Currently, only the Veteran’s Administration and the largest private pharmacy benefits manager (PBM) agencies are able to negotiate prices, and as a result, drug expenses constitute a large and growing burden to patients, Medicare, and private health insurers.
Generic drug dispensing represents 10% of the total US drug expense but 90% of the drugs dispensed. Prescribing by generic name offers the pharmacist flexibility in selecting the particular drug product to fill the order and offers the patient a potential savings when there is price competition. For example, the brand name of a popular sedative is Valium. The generic (public non-proprietary) name of the same chemical substance adopted by United States Adopted Names (USAN) and approved by the FDA is diazepam. All diazepam drug products in the USA meet the pharmaceutical standards expressed in the United States Pharmacopeia (USP). However, there are several manufacturers, and prices vary. For drugs in common use, the difference in cost between the trade-named product and generic products varies from less than twofold to more than 100-fold. For drugs with a limited market (eg, pyrimethamine, Epi-Pen), the incentive for generic manufacturing and marketing is very low, so only one or two generics (or none) may be available, and price competition is low or absent.