The Complexity of Pharmaceutical Prices: An Economic Analysis

Abstract

This article examines the complexity of pharmaceutical pricing. Specifically, list prices are often considerably higher than net prices. PBMs have considerable market power to obtain substantial discounts (rebates) from pharmaceutical companies which encourages higher list prices. In general the generic market work well. At issue is how much of the discounts are passed on to other stakeholders. High prices during market exclusivity or patent protection encourages R&D. Pharmaceuticals spend a large percentage of revenues on R&D, earn large profits which are somewhat overstated and take substantial risk. Many firms never make a profit. Drugs provide great value and increase the quality of life of patients. Since subscribers often change insurance companies, insurers have a shorter time horizon than pharmaceutical firms, which could lead to coverage issues. Policies to mitigate high drug prices include changes to PBM rebate practices, stricter patent approvals and reduction of barriers for generics and biosimilars.