The misunderstood world of drug prices

If you’re one of the 131 million Americans who take medications prescribed by a doctor, you probably already know that drug prices can feel astronomical. And it’s not an illusion. Costs here are significantly higher than elsewhere. For example, the diabetes drug Victoza 3-Pak costs an average of $766 here, while in similar countries it costs an average of $472. So how exactly are these prices set? And who or what determines that number?

Here’s what you need to know about how drug prices are set in the United States and how to save.

How drugs are priced in the United States

Drug manufacturers are the first tier where drug prices are determined. They typically decide how much to charge distributors for each dose based on a combination of factors such as research and development costs. And the more complex the process, the higher the cost.

But the drug company’s rates are definitely not the price you will pay. This is because the distributors who obtain the medicine set the pharmacy price. The pharmacy benefit manager (PBM) can then negotiate prices on behalf of the insurance company or employer. And finally, the PBM charges the patient the negotiated price at the register.

Of course, if you have health insurance, your insurance company will cover a portion of those costs, depending on the plan you choose. This is how you end up paying for each drug you take.

Why drugs cost more here than in comparable countries

It’s easy to point to insurance companies as the cause of high drug prices in the U.S., but they’re not the only culprit. In fact, both public (84%) and private insurers (85%) here have costs similar to those in other countries, according to the Peterson-KFF Health System Tracker.

The problem actually arises from the fact that drug costs in the United States start out higher before they reach insurance companies. In fact, the United States pays about $1,000 more per person for prescription drugs than other countries. This compares to an average cost of $554 in countries such as Switzerland, the United Kingdom and Canada.

So why the distinct difference?

That is, government regulation. Many other developed countries have systems in place to further curb drug costs by regulating them across the board. (But that doesn’t mean they can’t raise prices every year.) Meanwhile, drug prices are generally unregulated in the United States. And if states try to enact guardrails, they face lawsuits from the pharmaceutical industry. And only recently was Medicaid given the authority to negotiate drug prices. This could potentially help individuals save on 10 specific medications, but these price changes won’t take effect until 2026.

How to save money on medications

Just because your insurance charges a certain amount for your drugs doesn’t mean you can’t find ways to save.

For example, it is usually always cheaper to use a generic version of a drug whenever possible. It contains the same active ingredients as the name brand product and is therefore just as effective. However, since there is no brand name attached, the price is not very expensive.

You may also ask your doctor about taking a larger dose of the medicine and then taking the medicine in smaller doses. Check the professional label insert or patient package insert ahead of time to ensure the medication can be safely divided. In some cases, your insurance may bill you at a lower rate than you would pay for the same amount of the drug you are currently receiving.

Mail order or online pharmacies may also offer cheaper options for purchasing medications. For example, if you get a 90-day supply, your insurance may charge a lower deductible for that option, and you won’t have to pay for transportation to the pharmacy every time you need a refill.

Finally, some drug manufacturers will offer patient assistance programs for their drugs. Typically, eligibility for these programs is determined by your income. You can also receive support in the form of a discount card or get medicine for free at a lower cost. You can find this information through websites such as NeedyMeds and RxAssist.

Drugs go through several tiers of pricing that can affect the size of your credit card tab at your local pharmacy. However, if you take the time to research your options and talk to your doctor about finding ways to save, you may be able to purchase your medications cheaper and more easily.

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