Coupons and Other Marketing Schemes Obscure the Retail Prices of Drugs in the U.S., Which Are Vastly Higher than Prices Paid in Other Nations

Among all the world’s nations, the U.S. is in a unique and painfully costly conundrum regarding the retail prices paid for drugs. American universities and corporations discover, test and produce a vast supply of innovative drugs each year. However, while U.S. taxpayers and patients support much of this vital research (through R&D tax credits, cash donations to encourage research and hundreds of billions of dollars in yearly drug purchases), much of the financial benefit (in terms of extremely low drug prices) is passed along to patients everywhere in the world outside of America. Meanwhile patients and payers in the U.S. bear astonishingly high prices, often 10-times the price paid in other nations.

Historically, the U.S. government has not been active in regulating drug prices. This is in sharp contrast to the rest of the world, as most other highly developed nations very tightly control drug prices. Another major difference, however, is that America operates a massive private health insurance industry (typically sponsored by employers), as well providing federal government-sponsored health coverage for certain parts of the population, including Medicare for people aged 65+ and Medicaid for people who meet certain low-income criteria.

Although Medicare’s Part D, which provides prescription drug coverage, went into effect in 2006, Medicare has always been restricted from negotiating drug prices. This restriction has been in place despite the fact that Medicare spends vast sums on drugs each year (roughly $200 million annually), and despite the fact that Americans pay significantly more for a given drug than prices paid by patients in other nations. Medicare also covers certain drugs under its separate Part B insurance, when the drugs are delivered directly in physicians’ offices or clinics.

The “Inflation Reduction Act” passed by the U.S. Congress in August 2022 will have a significant effect on the government’s ability to negotiate and control prices. However, the government will be very limited in this regard. In addition, it revamps Medicare Part D coverage (including greatly reducing each covered patient’s maximum out-of-pocket drug expense).

Medicare’s drug price negotiation will be limited to drugs that a) represent top levels of expenditures for Medicare, and b) are available only from a single source—that is, there is no competing generic drug on the market. The government can only negotiate the price of 10 top drugs, starting in 2026, growing by 15 to 20 additional drugs in subsequent years. The total may be capped at 250 major drugs. An analysis by the Kaiser Family Foundation estimates that this could eventually cover 7% of all Part D-covered drugs, which accounted for about 60% of recent Part D spending. These drugs are for widespread conditions like cancer, diabetes and arthritis. In certain circumstances where manufacturers raise prices on their drugs at a rate exceeding the annual rate of general inflation, the drug companies may be required to pay substantial rebates.

Other restrictions apply to the negotiation process, with the goal of bypassing drugs that have not yet been on the market long enough for their manufacturers to recoup their research and development costs. Many observers and drug industry leaders are concerned that this new price control process will stifle the very high level of drug research, development and innovation that the U.S. pharmaceuticals sector has historically achieved.

In Germany, pricing rules came into effect in 2010 under which any new drug must prove that it has greater efficacy or more benefits than rival medications in order to be priced at a higher level than the rival. In 2014, Germany went even further, announcing plans to publish the discounts agreed to by drug makers. This transparency might be used by payers outside of Germany to drive down prices in other countries.

Norway, which sets maximum drug prices that can be charged within its borders, uses a QALY gauge which describes a drug’s cost per quality-adjusted life year. The same system has been adopted by other government health systems to set thresholds for determining coverage, including the National Institute for Health and Care Excellence (NICE) in Great Britain. Should a drug company refuse to lower prices to what Norway deems acceptable, then Norway refuses to cover the drug at all. A number of drug companies have been willing to cut prices in order to market their products in Norway and other countries with government-controlled health care systems.

While retail prices for many non-generic drugs have become astronomical in America (prices of $300,000+ yearly for new cancer drugs are becoming common), the final pricing has become convoluted and confusing as many drug makers attempt to encourage drug purchases using non-traditional methods such as coupons. The high prices may not only boost drug firms’ profits, but also generate larger fees for pharmacy benefits management firms. These are companies that negotiate with drug companies over prices, acting as agents for private health care insurers that are clients. The benefits management companies earn gross fees based on a percentage of the retail drug price, then pass any discount on to the insurance companies after deducting their fees. The higher the retail price, the higher the managers’ fees. Patients do not always see benefits from these discounts. For example, a patient who has not yet met his yearly insurance deductible threshold may end up paying a full drug retail price out-of-pocket, while the discount nonetheless gets passed along to the insurer. Another issue is the lists (called formularies) of drugs that are approved by various insurers. In many cases, a doctor will prescribe a drug with recent innovations and advantages, although there may be lower-cost alternatives on the market. The insurer refuses to cover the newer drug, so if the patient desires the drug he or she must pay full retail out-of-pocket.

Drug makers are attempting to help circumvent high deductibles or high co-pays by offering discount coupons to the patient. The coupons are often available online and in magazines. They are also handed out by doctors in an effort to ease patients’ financial pain, even though the doctors may strongly disapprove of the drug makers’ pricing and marketing schemes. Such schemes may work well in eliminating the effect of the co-pay for privately insured patients. However, coupons may not be used by patients in any federal or state-funded plan, including Medicare, Medicaid, VA/TriCare, or “if the patient’s insurance plan is paying the entire cost of this prescription.” In other words, if the money can be pried out of the government or an insurer, then the discount doesn’t apply. Worse still, it doesn’t work at all for uninsured patients. Total yearly drug expenditures have been soaring. The total cost will get much worse as more and more Baby Boomers hit their senior years. There can be little change without government action.

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