About 10 percent of all health care spending is on prescription drugs, and the spending is growing at a rapid rate. This has prompted calls for government intervention to regulate drug prices or otherwise control their rapid increase. But any intervention should be predicated on a clear understanding of the economic forces that drive price increases, and the parties responsible for them.
Much attention has focused on the average wholesale or “list” price set by manufacturers prior to discounts. These prices have been increasing — the average list price of branded drugs rose 12.4 percent in 2015, and has increased 10 percent or more annually since 2012. Yet list prices rarely represent what manufacturers are paid for drugs, as they are routinely discounted and rebates paid to various parties in the distribution system.
Net prices—which include all discounts and rebates—have also risen, albeit more slowly — 2.8 percent in 2015. Yet even the net price that manufacturers receive does not fully represent what patients pay, with the difference being allocated among other stakeholders in the drug distribution chain, including insurers, pharmacy benefit managers (PBMs), pharmacies, and wholesalers. Contracts among these players govern the exchange of goods (drugs) or services (such as logistics or claims administration) for various fees, discounts, rebates, and chargebacks. Such arrangements are typically privately negotiated and undisclosed, making it difficult to determine precisely how large these payments are, and how they are distributed.