A $300K Med? The Skinny on Prescription Drug Pricing

Alden Wicker

The War of the Coupons and Co-Pays

Generics have always been a cheap and safe alternative, and in the past year, their price has even dropped 22%. (Here’s a helpful tip: Costco almost always has the lowest generic drug prices.) But even when generics are plentiful, pharma companies have another trick to get you to buy brand-name drugs: coupons.

Let’s say that you need a prescription to treat cholesterol. Your doctor gives you two choices: Drug Brand Name or Drug Generic. They do the same thing, but Drug Brand Name costs more–$500 versus $100. The insurance company, which is covering most of the cost, obviously wants you to get the cheaper version. So it will charge you a co-pay of $50 for Drug Brand Name, and a co-pay of $10 for Drug Generic. You pick Drug Generic, the insurance company pays less and everyone is happy–except for Drug Brand Name’s maker.

In response, pharmaceutical companies have started providing consumers with co-payment cards and coupons that bring the price of the brand name drug’s co-pay below that of the generic version. So now there’s no reason not to get Drug Brand Name. The pharmaceutical company picks up the $40 difference, and the insurance company gets stuck paying the remaining $450 for your designer drug.

According to IMS Health, an information company that tracks the pharmaceutical industry, use of co-payment cards, coupons and other discounts has more than tripled since mid-2006. As you can imagine, health insurers and consumer groups say this is one big reason why insurers have been raising rates. (People on Medicare don’t get coupons because it’s considered an illegal kickback.)

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A 2011 study by the Pharmaceutical Care Management Association, which represents companies that administer pharmacy benefits, estimated that discount cards and coupons will increase prescription drug costs nationally by $32 billion over the next decade. The Pharmaceutical Care Management Association has argued that each one percentage point decrease in the “generic drug dispensing rate raises the amount that employers, unions, state governments and consumers spend on prescription drugs by $3 billion annually.” So consumers do eventually get the bill for these pricier versions–and then blame insurers and the government for it.

Defenders of coupons say, in some cases, generic alternatives aren’t exactly the same or aren’t available at all (like in the case of the $295,000 Gattex), and patients may do better on the brand name version. If they can’t afford a higher co-pay, they might scrimp on doses or not take the medication.

Because of these arguments, Massachusetts–the only state banning drug coupons–lifted its ban last summer. Over the next two years, the state will analyze whether health care costs rise after the lifting of the coupon ban, whether patients are more faithful about taking their medications and whether there are changes in the use of generic versus brand-name drugs. Depending on what they find, they will decide whether to reinstate the ban.

One solution that some insurers have employed is step therapy, which requires patients to try the most cost-effective and safe methods before moving on to more expensive or risky options.

The Future of Pharmaceutical Pricing

Things aren’t looking rosy for consumers or drug companies.

In 2011, industry executives at the Reuters Health Summit said that some drug prices have sharply increased because too few new drugs are being approved–pharmaceutical companies are having trouble coming up with those next blockbuster drugs–and patents on others are expiring. Essentially, they know their revenue is about to plummet, so they’ve jacked up prices to bring in as much money as they can before current patents expire.

Drug companies also blame rising prices on a 10-year, $80 billion excise tax on brand pharmaceutical companies under the Affordable Care Act. (This is one of several taxes meant to raise revenue to implement the legislation.) Obamacare did save seniors money on prescription drugs through coverage, but it hasn’t done anything to bring down drug prices.

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If the Supreme Court strikes down the practice of paying to keep generics off the market, it could let loose a lot of overdue generics on the market, saving consumers money. (Although others might just get locked up in expensive legal battles among drug manufacturers.) However, it doesn’t look like high prices for brand name drugs are going anywhere anytime soon.

All we can say? Give the generic a try.