A Peek Behind the Curtain of Prescription Drug Markups 

Updated on December 3, 2019

Drug pricing markups have been on the map for a while, and patients are waking up to the fact that they are paying more for less. 

While markup ensures the seller receives a profit, where does that leave everyone else?  Read on to learn more about prescription markups, and why they happen. 

Fees for Service and Managed Care programs

Thorough charts have been done to study the data using average markup on prescriptions as a point of reference. A bubble formula system demonstrates how markups progressively get higher.

The bigger the bubble, the bigger the markup.

An increase in managed care in comparison to the fee for service is evident. The data collected might vary on the model used, but they all tell a story of manipulation and greed.

All with the intention to explore variability in the markup between prescription drugs.

Contracts: PBM and Their Ability to Set Prices 

It is no secret that the markup prices in prescription drugs can be disturbing. Most patients look for options outside the country to sustain their prescription at a more cost-effective range.

Results from visualization exercises in research show that there is too large of a difference in prescription markups across generic drugs in managed care programs.

It is not uncommon to see in the results markups as high as $3,220 per prescription for a generic drug brand.

A markup will be split by the sellers, i.e. pharmacy and maker, and any supplier in between. This is where another argument shows up.

People want to get paid accordingly to their effort. The argument being that the suppliers want to get compensated a higher percentage for delivering the same prescription drug.

There is much more at the center of this argument. Fair prices are debated all across the board in the pharmaceutical industry, resulting in the patient being the one that pays for it.

The price factors, like generic vs designed or expensive conditions vs. inexpensive conditions, and the difference in markup between equivalent prescription drugs in the same description are not always easy to defend.

It is not uncommon to see the statin supply chain receive nearly 4.5 times more margin between one commonly dispensed prescription drug over another. This also means the state is getting charged 4.5 times more.

Why It’s Allowed

How is this possible? The service is the same. How can the same product make more profit than the other? 

It is all about the contract between the managed care organization, the payer, and its pharmacy benefit manager (PBM).

In the case of “spread” contracts, the pharmacy benefit manager is the one who sets the price for individual drugs.

Complex? Let’s simplify. Imagine your bank starts setting the price for the products you buy and then adds a profit between the same pair of jeans, according to the brand. 

The power we give to money has everyone accepting that pricing decisions and pricing power fueled supply and demand.

So why is it that supply chains are being allowed to change the rules? Some would argue this is not the case, and those drug companies set prices without other’s input. 

Pharmacies defend themselves by saying that they, as the middlemen, are not responsible for increasing U.S. drug prices.

The reality is that everyone uses supply chains to bring their prescription drugs to the market, that drugmakers set prices for their products, and that some have been responsible for raising prices as high as 40% at once.

Because spread contracts are usually confidential, it is hard to prove that the pharmacy benefit managers are the ones setting the premium margins.

Drug Markups 

There are no clear rules. Whether the prescription drug is priced following the Average Wholesale Price (AWP), or set at leisure by the subjective maximum allowable cost (MAC), will usually depend on the type of contract between the maker and the provider/pharmacy.

Yes, it is all about money, and this is a big danger because it awakens people’s ambition and they start to forget why they do what they do.

The wrong incentives to make more money selling medicine arose all over the industry, and as a result, the patients paid for it.

This does not only affect the patient, whose treatment is valued by the PBM at less than half the margin that your pharmacy needs to cover operational costs. It is also not fair to the drug makers whose competitive value in the market is not being determined by the quality of their product, but by a system that is flawed.

Do You See Why Some People Think It’s Wrong?

Prescription drugs exist to help people when they need physical care. When markups dominate the system, thousands are unable to receive the care they deserve. 

Whether a doctor, pharmacists, or a retailer—when you decide to recommend a prescription drug to a potential buyer, may you, whoever you are in the supply chain, encourage the same level of service from others, regardless. 

Solutions such as fee-for-service programs, which intend to eliminate this problem, and policy changes on state health services, invite the use of more objective drug pricing, fair AAC, and realistic dispensing fees.

Many are also turning to online resources to find the prescriptions they are looking for at a better price. You can find more information on this here.

Remember, your greatest tool is to be informed, so check out our blog regularly for more information to keep you in the know. 

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