BEHIND THE PRICE TAG: AN EXPLAINER

By Dabin Im, Pharmaceutical Analyst 

Have you ever wondered why one vial of insulin costs over $300, but the insulin vial next to it costs $73? What could possibly justify the quadrupled price? After all, insulin is still insulin, and it all works the same way. Well, it’s a little more complicated than you may think. First off, the “brand-name” medication is generally much more expensive. Since it is the first of its kind, it gets a patent that usually lasts for 20 years. Generic medications are the “replicas”, but to be approved, they must be of the same quality, strength, and purity as the brand-name medications. Therefore, they are just as effective. It’s just like comparing a Gucci belt and a belt from Target. They both work to hold up clothing, but the Gucci logo stands out and has a Gucci reputation due to the brand history. 

In addition to brand vs. generic, another big factor that increases medication prices is convenience. For example, diltiazem is a medication usually taken three to four times daily to lower blood pressure. It also comes in a “sustained-release (SR)” form, which means that the drug is released slowly for a longer period. Therefore, diltiazem SR can be taken just one to two times daily, making it more convenient for the patient. However, this convenience comes with a higher price tag. Each tablet of the regular, generic diltiazem costs $0.22, while each SR tablet costs $2.50 on average. The health insurer has to determine if this “convenience” is worth the drastic price difference. It’s like choosing between $1 local diner coffee and $5 Starbucks coffee. They’re both still coffee with the same amount of caffeine, but Starbucks has the convenient drive-through option.

Honestly, health plans do not have any reason to pay more for patients to have the same effect. Therefore, they will only cover the more expensive medication under very specific conditions. For example, you must have had tried a cheaper generic medication first. If you did not see any improvements or experienced serious side effects, then you may move onto the more expensive medication. But you must get approval from your doctor to do so, which is known as a prior authorization. 

If you have health insurance, your drug cost is determined by a formulary, which is a list of medications. It consists of the rates at which medications are covered for specific conditions. There are five different tiers to a formulary. Tier 1 has the most coverage and the lowest out-of-pocket costs for patients, whereas tier 5 is the most expensive. Therefore, tier 1 usually includes generic drugs, and tier 5 includes new, non-preferred specialty drugs for complex chronic conditions, such as cancer and HIV. Each health plan has its own formulary, which is why you and your friend may pay a different price for the same medication at a pharmacy. 

The real question is, how do health plans determine which medications go into tiers 1 through 5? There is a lot of controversy regarding how PBMs (pharmacy benefit managers) get rebates from the drug manufacturers. Pharma companies pay rebates to PBMs as an incentive to get their drugs on the PBMs’ formulary. Some may call it bribery, but PBMs claim to pass on these “earnings” to patients. Tier 1 placement on the formulary will inevitably lead to more usage of the drug, meaning more profit for that manufacturer. For example, let’s say that Pfizer and Moderna have new medications that are very similar in safety and efficacy indicated for the same condition. In a hypothetical scenario, Pfizer could pay PBMs to place its medication instead of Moderna’s on the formulary. Pfizer will even offer a bulk discount like they do at Costco because there’s a lot of patients that need it. Pfizer’s sales will increase, and PBMs will get rebates from Pfizer, leading to a win-win business situation. Unfortunately, there’s a lack of transparency in drug prices because these transactions are considered proprietary information and kept confidential. 

Besides rebates, there are certain conditions that the PBMs and insurance companies refuse to cover. Most of these conditions are either too expensive to treat or may not necessarily lead to better health. Health plans also do not cover any cosmetic procedures and medications unless medically necessary. But what about the medications that have cosmetic implications but can also help prevent serious medical conditions? A prime example is weight loss treatment. 

Obesity is the second leading preventable cause of death in the U.S. with cigarette smoking as the first. An important difference between these two is the trend of prevalence. Smoking decreased by 66% from 1965 and 2018, while obesity increased from 30.5% in 2000 to 42.4% in 2018. The annual medical cost of obesity is estimated to be $147 billion. Unfortunately, obesity is a big risk factor for diseases such as heart disease, stroke, and type 2 diabetes. So it is no surprise that diseases related to obesity cost $190.2 billion in America, which is 21% of total annual healthcare spending. People need to focus on the root of the problem by tackling obesity rather than treating diseases caused by it. For example, heart disease and stroke cost $1 billion in the U.S. daily. Unless you really disinfect a wound, putting a Band-Aid on it won’t help heal an infection. 

One of the main problems is that obesity is such an opaque term. Even though there are BMI cutoffs, two people with the same BMI may be in drastically different shape. Other factors that need to be taken into consideration are muscle density, genetics, sleep, diet, and exercise. Some insurance companies help pay for gym memberships and even provide discounts on healthy food. These incentives promote healthy lifestyles, but are they really enough? The answer leans towards no because most people value convenience. They want the easy way out, and you can’t really blame them. If exercising for a total of 100 hours has the same effect on weight loss as just one pill or one shot, then most people would choose to get the medication. 

FDA has approved five medications for chronic weight management in adults. The medication with the highest average reduction in body weight is Novo Nordisk’s Wegovy, which was approved by the FDA on June 4, 2021. Unlike other medications that must be injected or taken orally 1-3 times a day, Wegovy can be injected every week, making it extremely convenient. However, it does not come with the most convenient price tag. Before insurance, it costs around $1627 , per month. Unfortunately most health plans, including Medicare, do not cover weight loss medications. Therefore, people have to pay for them on their own, but not many people have $1627 to spare every month. One of the main reasons why people gain weight is because unhealthy processed food is cheaper than fresh healthy food. With cost being a major barrier, people have no choice but to repeat this ironic cycle of eating processed food to save money and paying high medical costs due declining health.

So what’s the fine  line between not covering weight loss medications due to their cosmetic implications and investing in them to prevent further complications? There is a lot of work that goes behind polishing a formulary. Trying to make an objective formulary for people from diverse socioeconomic backgrounds is very challenging. Some people are not willing to spend an extra dollar for convenience, but others are willing to spend an extra $1000. Factors, such as risk vs benefit, are hard to put a price on. That’s why health plans have a Pharmacy & Therapeutics (P&T) committee, where they implement value-based pricing and analyze cost-effectiveness. 

For most Americans, the process behind pharmaceutical pricing remains shrouded in mystery. But as they say, “knowledge is power.”  If you seek to educate yourself about formularies, pharmacy benefits managers, and insurance, you will soon become a powerful shopper. There is a “method to the madness.”  The sooner you understand the method, the sooner you can reduce the madness.