How do drug companies determine prices?
By: Colorado BioScience Association Date: 03/26/2018
The Value of Innovation
When you stop in to the pharmacy to pick up a prescription, you may wonder how manufacturers determine the price you pay.
You may think the drug maker maintains full control over what you spend.
The reality is much more complex. Development times that run more than a decade, billions of dollars invested in research and development and a complex health care system all contribute to the costs of prescription drugs.
How Much Does it Cost to Develop One Drug?
Drug prices reflect years of research, development and clinical trials. It takes 10-12 years to design, develop and secure approval of one medication. The long road from initial idea to approval comes with significant investment and risk.
Investment: One successful drug costs up to $2.6 billion to bring to market.
Risk: 90% of drug development programs fail, and 90% of biopharmaceutical companies do not make a profit.
Drug manufacturers create medicines to improve and even save lives. Just like any business that makes investments and takes chances in order to grow, manufactures subsidize the cost of drugs that never make it to market with successful drugs.
These successful medicines lead to fewer physician visits, hospitalizations, surgeries and other preventable procedures, lowering health care costs for everyone.
How Do Manufacturers Set the Price Patients Pay at the Pharmacy Counter?
When a drug finally makes it to market, drug manufacturers set the drug’s list price based on a number of factors. However, this is not the price you pay.
Your employer, insurance company and their pharmacy benefit manager (PBM) all play an important role in the final cost of your prescriptions. What you pay may vary significantly depending on what kind of insurance you have, or if you’re paying cash.
Insurance companies and PBMs maintain the most control over prices, increasingly shifting the cost of medicines to you, the patient.
Video: Follow the Pill
How Do U.S. Drug Costs Compare to Other Countries?
Drugs are not the primary driver of health care spending in the U.S.
- For every $1 spent on health care in the U.S., just $.14 is spent on prescription drugs.
- In 2016, drug spending grew more slowly than other areas of health care. Spending on retail prescriptions increased by 1.3% while overall health care spending grew by 4.35.
- U.S. spending on prescription drugs as a share of total healthcare dollars is on par with other western countries:
- Canada – 14%
- France – 13%
- Germany – 13%
- U.S. – 12%
Learn more about prescription drug costs.
CBSA continues to advocate against House Bill 1260, Prescription Drug Price Transparency . The billdoesn’t consider the complex health care system and the influential role insurers, pharmacy benefit managers (PBMs) and others play in deciding how much money patients pay for medicines.
Read our recap of the recent hearing on the bill and CBSA’s testimony.
We need your help to oppose this legislation. Please use this form to contact your legislator and ask for a NO vote.