Could Generic Drugs Be Even Cheaper Without The Middle Man?

The WSJ Health Blog says that pharmacy benefit managers are marking up the amount they charge your insurance company for generic drugs and keeping the difference. Often the mark-up isn’t too severe, but the WSJ has one example where the difference was over a hundred dollars.

Here’s how it works: Many health insurers contract with PBMs to administer their drug plans. Among other functions, the PBMs negotiate lower drug prices with pharmacies. But some PBMs, under a practice allowed by Medicare, then charge a higher price to health insurers and, ultimately, both the government and patients. Though the opaque practice is common in the private insurance market, Medicare currently has a proposal to curb it, because the agency is worried the tactic, by inflating patients’ drug costs, is speeding their pace toward the “doughnut hole” coverage gap.

The differences between what the PBMs pay pharmacies and what they charge the plans can range from a few dollars to well over $100. In one case, a Medicare patient filled a prescription for a 90-day supply, or 270 pills, of the generic antinausea medication prochlorperazine. The difference between what the PBM, Express Scripts, paid the pharmacy and the price that showed up on the patient’s explanation of benefits was $146.53.

Well, that seems high. The PBM told the WSJ that mark-ups over $100 are rare, and that the money is used to help ” fund programs that drive patients away from branded drugs and toward generics that ultimately still cost less.”

Generics Are Cheap, but They Could Be Cheaper [WSJ Health Blog]
(Photo: Daquella Manera )


Edit Your Comment

  1. blong81 says:

    Just imagine how cheap drugs would be if they didn’t have to go through the FDA’s 17+ year multi-million dollar process and could be approved and certified by a private unbiased certification company that doesn’t get it’s money from theft and actually spends its money wisely since it relies on customer service and satisfaction to make money instead of nothing.

  2. superlayne says:

    @blong81: Just think of how many years it takes for long term effects to show up in testing!

  3. parad0x360 says:

    I think once a drug company has broken even and made as much profits as there was cost in development the drug should be open to be made by another company for generics.

    I know the drug companies are for profit and I have no problem with that but some drugs cost so much its mind boggling. You know there is no way a single pill could cost $10-20 to make yet thats what they charge your insurance company for it.

  4. NitrousO says:

    @blong81: A private, unbiased company is an oxymoron. How about they just fix up the FDA?

  5. Crymson_77 says:

    @parad0x360: Actually, $10 to $20 per pill is cheap for a newly minted and approved drug. Keep in mind that the initial investment by the drug company ranges between $50 MM and $1 B per new drug brought to market. This includes R and D, testing, and the certification process. It is a nasty, death dealing cycle that the FDA still screws up consistently…

  6. sean77 says:

    That’s why our insurance requires us to use CareMark for any long-term medication. To cut out the pharmacy middle-man.

  7. CaptZ says:

    And how again does Walmart and others get drugs down to $4.00 for a 30 day supply when they are still overpriced at other pharmacies?

    For example:


    Walmart: $4 for 30 days
    Walgreens: $280 for 30 days

    And Walmart is still making a profit off the drug. It’s all about who is bigger…..prescription drugs should be consistently priced or closely priced just as everything else is (food, cigs, gas) everywhere in my opinion.

  8. bohemian says:

    @sean77: Yea but Caremark usually forces people to get their drugs mail order from Medco and Medco sucks.
    At least if the local pharmacist screws something up and almost kills me I can discuss this with them face to face. Medco you get to talk to some underpaid phone rep with an attitude that knows nothing about pharmacy.

  9. blong81 says:

    @superlayne: If an effect pops up a year after you’ve been completely off a medication, it wasn’t because of the medication. Also, the risk of side effects is something that the person that takes medication should be aware of and accept. YOU DONT HAVE TO TAKE PERSCRIPTION DRUGS. Were there all of these medications 150 years ago? NO. Was everyone fucked up? NO.

    @NitrousO: That’s not true. The reason why they seem so few and far between is because goventment involvement disincentivises companies. It’s been proven time after time that goverment agencies are slower, spend less wisely, produce an inferior product or service, and just suck. (not to mention they get all their money from stealing it from you) They don’t have any accountability, just look at how the FDA has hurt the tomato industry, no accountability. Look at just food in general. The market place give you many chioces, many stores to choose from, etc. Look what happens when the gov’t gets in charge of food: you get bread lines.

    I’d rather a drug company build in the [small] cost of submitting their drugs through another private firm to be tested and certified by that firm. If people would then purchase those products, they’d want facts and everything would be out in the open if it were a private company because then if it wasn’t, people could choose to do business with a different company. THERE WOULD BE COMPETITION You have no choice who you do business with when it’s the government, it’s business at gunpiont. Until you understand that, you’ll never see it.

    Now before someone says “well if you don’t like it then you can get out” the governments founding articles (which they dont give a shit about anymore) said that the government is only by the consent of the governed and that’s where it gets any power it has. I don’t consent. Neither did the founding fathers when they came over here and established the “country” that we live in today.

  10. superlayne says:

    @blong81: You remember how in the 60s they had all kinds of hormore therapy for ladies, and then latter a lot of those women developed breast cancer?

    Granted, the life expectancy 150 years ago was about 30-40 years. If that’s not fucked up, then fine, I agree with you. I just don’t want a drug fresh out of testing that with long term usage will give me cancer or an autoimmune disorder.

  11. blong81 says:

    @superlayne: I understand and agree. But I’m only 20 and have only had a little bit of time to absorb some history. So there are many things that I am unaware of.

    Thanks for that information though.

  12. basket548 says:

    Gotta say I tend to agree with you. Publicly owned companies exist to make money, not to advance a goal (for the most part). Why shouldn’t drug companies and pharmacies charge what they want? If it’s that great of a product, someone else will develop it too.

  13. mdhatucb says:

    @blong81: The concern is really that the adverse event occurs while still taking the medication – not that it appears post-treatment. And for the sake of the many Americans with chronic conditions who must – yes must – take prescription medication (a number which is rapidly growing) this should be a serious concern.

    The clinical trials undertaken pre-market are almost exclusively conducted and paid for by the pharmaceutical manufacturer. It is not the case that they “pay” FDA to do testing. Even post-market, Stage 4, surveillance is not done exclusively by private firms. So there really is no precedent for the system you’re proposing for drugs. One would need to look to other industries for examples – organic certification might be one. But the, still, one must ask who certifies the accreditation agencies?

    Finally, re: consent. The dominant strain of democratic theory would hold that you give it to your elected representatives to act on your behalf. When they act contrary to your interests you’re at liberty to advocate for a different person. Which isn’t to suggest that this is the best mechanism (or even the only one – FDA solicits public input all the time) available, but it is, nevertheless, available.

  14. catastrophegirl chooses not to fly says:

    disclaimer – i work for a pharmaceutical company

    one of the drugs my company makes has been out over a decade but only started making a profit 2 years ago. development is expensive. the drug patent expired years ago but no one wants to make a generic of it because it really IS expensive just to produce.

    i can’t imagine some of the wasted time in FDA process. part of my job is taking reports of ‘adverse events’ so they can review them. and i don’t get to decide whether something is a side effect. ANY medical incident needs to be reported. so the other day i filed a report ‘tripped over dog and slipped on wet floor in the rain resulting in falling and breaking toe.’ yeah, that’s not a side effect and we all know it, but we get thousands of those a year that the FDA has to read and compile and sort. seems like a colossal waste

  15. catastrophegirl chooses not to fly says:

    @blong81: i HAVE to take prescription drugs to live. 100 years ago, diabetics like me died pretty fast. there is no herbal substitute for insulin.

    i agree that there are plenty of medications out there that are worse than the disease itself but i like the option to have medicines available

  16. unravel says:

    @catastrophegirl: that SHOULD be a side effect, just because it’d make watching drug commercials that more interesting. “A small number of side effects have been reported, including: drowsiness; nausea; dry eye; cramping; and… tripping over dog on wet floor in the rain and breaking a toe”.

  17. Norcross says:

    i wouldn’t mind the mark up and all, but considering most research and testing is done at the university and government level, they can kiss my ass. the average drug company’s marketing budget is 3 or 4 times more than the research. makes sense how?

  18. hoot550 says:

    The term in the industry for this is “spread.”

  19. Coelacanth says:

    @parad0x360: You probably have no concept of chemical engineering.

  20. Coelacanth says:

    @blong81: Catastrophegirl has it right on the nose. Then there’re other drugs that people I must take unless they don’t mind being blind 5-10 years down the line.

  21. hoot550 says:

    I hit submit too soon. Pharmacies don’t make much money on brand name drugs. Most of the profits are in the generics. A lot of peole think because the newest brand name drugs are so expensive that the pharmacy is getting rich. The truth is the pharmacy doesn’t get much of that profit, a few dollars per prescription if they’re lucky.

    I’ve been on both sides of that industry – in pharmacy pricing side struggling to keep margins and on the PBM side struggling to take it from the pharmacy for us. I finally decided my soul was worth more and got out of that world, hopefully never to return.

    I will tell you this, though. Once the clients of these PBMs find out they’re paying more than the pharmacy is being paid, it usually stops. Contracts are renegotiated almost immediately. The world of pharmacy pricing and managed care is ruthless.

  22. cf27 says:

    Thank third-party payers for this. I went back to school a few years ago and had very minimum prescription coverage. Before we filled a prescription, we called around to several to get their prices. For the two drugs, Costco was cheapest. (And, you can go to the Costco pharmacy without being a member!)

    When somebody else pays, the person choosing where to buy has no incentive to choose the least expensive option. That’s one of the reasons that drug stores are often built adjacent to housing developments — they’re competing on convenience.

    The problem is even worse in medicine — try calling a hospital and asking what their price is for, say, a vaginal childbirth. Even though they may do a thousand of these every year, they can’t give you a price.

  23. Phexerian says:

    OOKKKK, Here we go….

    @blong81: Without the process of the FDA to review medications, any company would pump out any drug and give it to you and not care if it hurts you. A drug company will do it solely to make money and not care about the outcome if you did not regulate them. Also blong, please refer to my part towards Nitrous regarding your response to him about how you would rather have a private company regulate big pharma.

    @parad0x360: Some socialized medicine countries are close to this. Canada for example, tells a drug company, you are gonna market your drug X in this country for Y price, for the life of its patent (According to canadian patent laws), OR the other option, you the drug company, can market and sell your drug X and whatever price you want to, but only for 2 years, and after that you lose all patent rights. Gotta love it. Canadian government dictates what the drug company makes pretty much. I’m not sure what happens in England, France, and Germany.

    @NitrousO: It would be difficult to use a private company to regulate big pharma. I suppose it could be done, but one would have to make that company an instrument of the government; much like The Federal Reserve. The other problem with that concept, would be that for them to get paid, they would need to be paid by the drug company to look at X product. In doing so, the drug company is funding the “agent” that regulates them. How does a company regulate someone who funds their profits? There is a problem with this right now regarding the FDA when the government passed The Prescription Drug User Fee Act of 1992 which states that the FDA collects fees from Drug manufacturers for them to look at, approve, and regulate their product. Conflict of Interest? I think so.

    @Crymson_77: Last figure I saw was right about 980 million, so we shall just call it an even billion now. Thats the price to research and develop a new drug, and let me remind you, that is the price before it gets to the FDA.

    @CaptZ: Walmart buys in MASS BULK, and gets drugs pretty cheap. However, some drugs like Lamisil which is quite expensive to a pharmacy, they are either breaking even or most likely losing money on selling that drug. Why? It’s a loss leader. They just want to get you into the store, and they know that once you are in the store, you will buy something. This loss leader strategy has worked well for them. As a matter of fact, the 4 dollar framework that they created has the possibility to change the insurance reimbursement structure to pharmacies in the future. All the insurance companies may finally catch on and say, “hey, why are we paying all this money when walmart can make money with 4 dollar generics?” Well, they can because they have a HUGE financial backing and can afford to lose money in the pharmacy to boost sales in its retail department. Ever wonder why if you go to a drug store like CVS or Walgreens, the pharmacy is in the back? It is to make you walk through the store hoping something will catch your eye so you buy it.

    @mdhatucb: “It is not the case that they “pay” FDA to do testing.”

    Big pharma pays the FDA to do some testing on their drug as well as approve it. It is known as The Prescription User Drug Fee Act of 1992. Look it up on Wikipedia.

    @catastrophegirl: “i can’t imagine some of the wasted time in FDA process.” Yeah it takes about 14 months to get a drug approved once its submitted to the FDA. Part of the reason that it is slow, is that the FDA is underfunded and needs more people to get it working more efficiently and faster. However, also realize that drug companies want the approval process done faster so they can market their drug more before their patent runs out. Just one day faster would mean extra thousands and thousands of dollars for them.

    Now for the real topic…before I forget what the post was about…

    “The WSJ Health Blog says that pharmacy benefit managers are marking up the amount they charge your insurance company for generic drugs and keeping the difference.”

    I am not surprised. They make money on just about everything they do. They even charge the pharmacy. Every time a pharmacy sends a connection to the PBM to get a drug covered by the insurance company, they charge the pharmacy about 15 cents.

    Also, I want to make clear, pharmacys do not get reimbursed much by PBMs, ESPECIALLY if it is a brand name drug. For example, lets say a patient gets seroquel XR 400 mg. Cost is about lets say, 700 dollars for 30 pills for the pharmacy. We send the transmission to the PBM, who in turn, tells us the drug is covered and how much they are gonna pay us for it. Some drugs, they do what is called MACing out, which means they will only give the minimum average cost if I remember correctly. So if that MAC is 670 dollars, your pharmacy just lost 30 dollars. But how can this be?


    Now not to bash republicans, I am not. But ever since George Bush Sr. passed a law that made insurance companies / PBMs immune from anti trust law and unfair trade practice law, pharmacies can not sue them in court for this and win. They do this legally. This is why you do not see any mom and pop pharmacies anymore, or very very few at the least. They can’t make any money because they can’t buy drugs in mass and a huge discount to keep up with their profits being dictates. Mom and Pop pharmacies get dictated what they are gonna make in profit as well.

    In any other industry, if you were to tell another company what they can and cant do because they are buying your product, you would be sued for unfair trade practice. Visa was sued for that same thing and lost a few times. Why not insurance and PBMs?

    So while the PBM is doing this, they are charging the insurance company 800 dollars. PBM makes 130 bucks plus some for other fees as well. Insurance has their methods for making money and they make money off of it. The pharmacy gets screwed.

    This is the main reason why generics cost more money than you think. Generics are the only way pharmacies can make money (other than selling candy, sodas, other retail items). That bottle of 1000 fluoxetine 20mg (generic prozac)? Costs the pharmacy about 20 bucks. Each bottle of 30 pills we sell to the patient goes for 14 bucks. If it goes through insurance, we will make about 9-10 bucks.

    There are more complex equations that go into this for deciding who gets how much money, but typing all that out is just pointless to well…make my point.

    I won’t even get into insurance audits in the pharmacy. That shit is ridiculous.

    End of Rant. Soapbox put away.

    “is speeding their pace toward the “doughnut hole” coverage gap.”

    Yes they are speeding up the pace patients go towards the donut hole. They don’t care about the patient, they care about money.

    “Well, that seems high. The PBM told the WSJ that mark-ups over $100 are rare, and that the money is used to help ” fund programs that drive patients away from branded drugs and toward generics that ultimately still cost less.””

    I doubt that are as rare as people thinks but I cannot prove that. If that was solely true, then why don’t insurance companies cover all cheap generics? Because they don’t. I’m sure they would still prefer generics though because that is less money out of their pocket.

    Also, In my past 3½ years in pharmacy and in pharmacy school, I have never, ever, ever, heard or even seen a program by a PBM to push for generic drugs. And I am not one to be out of the loop either.

    -3rd Year PharmD / MBA Candidate

    P.S. I will be out of town till 7/28 with no access to a computer for a time. I can’t argue or answer questions about what I said till then. I will try and get back to them Monday if there are any.

  24. gibbersome says:

    Phexerian, well met!

  25. ninabi says:

    One drug my son takes costs $850 a month. The generic came out in November of 2007 and it’s half the price. We have insurance and it mandates that we must take the generic.

    In November, my son began having headaches. Daily, miserable headaches that he’d never had on the brand drug.

    I checked on the manufacturer. The brand name drug was made in the US. The generic is made in the north of India.

    The FDA has only enough money to check 300 hundred of the 3000 drug manufacturing facilities it approves outside of the US. 1/10th of the plants.

    Quality control? Plant conditions? What about the quality of the raw materials?

    I don’t know. Problem is, not to many people in charge do either.

    I am sure that of the $400 a month it costs to buy the generic, much is profit. But a headache every day- not an added bonus. Who the hell is making it? And what is in it?

  26. catastrophegirl chooses not to fly says:

    @Phexerian: i just meant the colossal waste of time they spend reviewing adverse event reports that are blatantly not related to the product. if a person taking our medicine standing still on a street corner gets hit by a drunk driver who veers onto the sidewalk – as long as our company hears about it, it gets reported.

    it makes sense if they ran out into the road – some medicines have been known to cause aberrant behavior [what’s the restless leg syndrome medicine that can cause compulsive gambling?] but probably half the reports i file are in the category of completely unrelated. it just makes me wonder how much time and money the FDA spends reviewing those documents. it has to contribute to the staffing/funding shortage somehow

  27. I have always wondered why the pharmaceutical industry doesn’t simply take the Dell approach to drugs.

    Not necessarily in a made-to-order sense where antibiotics are concerned given the immediacy required, but in a direct-to-you sense.

    One model: direct to doctors who give it to you (no pharmacies). Another: direct to you by order of your doctor (e.g. for maintenance drugs).

    The sad thing, of course, is that anyone knowledgeable about the industry will give me 5,000 reasons why this is not feasible–just like they did to Michael Dell–but what I’m interested in is the people who see the possibility.

    For the most part naysayers do that and only that well.

    Also, I do admit that Dell serves only as a strong example then, but sure as hell not now.

  28. lukobe says:

    @blong81: Yes, listen to Catastrophegirl and COELACANTH. Me, I wouldn’t be dead without prescription drugs, but I’d have a whole host of not-quite-crippling but rather painful and debilitating issues…

    You are quite lucky never to have needed prescription medicine!

  29. papahoth says:

    @blong81: You know of such an organization somewhere in the world that is like that and works? Please inform us and stop with the smarmy comments.

    @sean77: Caremark is a middleman. Isn’t CVS buying them anyway?

    @bohemian: I use Medco, they have been better than any local pharmacist. Please enlighten us as to the problems that you have had with them so we can avoid them.

    @basket548: We have patents. Someone else just goes out and makes it and they get sued and loose. Companies may exist to make money, but then so did MCI, Enron, Countrywide, Eastern Airlines, Grant Department Stores, Sears, etc. Competition does not assure only good things and it can take a long time to root out garbage. Verizon is not going anywhere soon.

    @blong81: Its been proven where? Before you start piling out the right wing junk, why don’t you back it up with some facts, not propaganda statements. Should we contract out the entire military then? The Secret Service? Simple statements from the right again I see. Organizations like the FDA, FEMA, etc., have been set up to fail by an administration that puts in charge incompetent cronies that can help them prove that government does not work. You live in a fantasy world as your patronizing statements about “until we understand these things.” Do you think their should be just a Congress to pass bills that just spend money on corporations? The EPA once worked until Bush came along. Maybe we can contract out our sub force to the Russians since they have so many unemployed submariners now? Surely no university taught you this nonsense, what is your source of this nonsense? And finally, what does “Neither did the founding fathers when they came over here and established the “country” that we live in today” suppose to mean? Perhaps a complete sentence would have helped.

    @catastrophegirl: Do you work for one of the companies that has paid off generic drug manufacturers not o produce generic versions of their patent expired drugs?

    @hoot550: Ah, so all those golden parachutes of huge amounts of money in the industry must be coming from charities and the FDA since they don’t make huge amounts of money?

    @ninabi: Perhaps that is the reason or perhaps he is now having a side effect. Until you switch back to the brand name, its just a guess. I would be more worried about China than India.

  30. MorrisseyTheCat says:

    I love our local pharmacist. The other day I picked up insulin for my cat, and he said there was some kind of new discount prescription card that could also be used for pet meds, and he applied it. Saved me $23.

  31. mike says:

    Some insurance companies are going toward a teired system. I have UnitedHealth, which has this system. Basically, the cost is based on the type of medication, instead of the medication itself. I take anti-anxiety meds which costs $50, branded or generic.

    My problem with this system is that it does not encourage me to buy generic. So I tell my pharmacy to give me brand name drugs.

    Now, I realize that there is no chemical difference; but if the insurance company isn’t going to encourage the use of generic, why should I help the company out?

  32. basket548 says:

    It has nothing to do with whether a company makes money or not, or whether it is a good force or not. The company exists to make money, period (even if it’s not good at that).

    If you’re arguing that lifesaving products should be available at a certain (affordable) price, then either the govt or charities should step in to make that happen.

  33. The_Gas_Man says:

    As a libertarian, I’d like to agree with you. But as it stands now, I have to say that I feel the government may have a responsibility to protect its citizens from companies that would release a drug without sufficient testing and inadvertently kill thousands of people. We can’t wait until thousands die before we act on that.

    Now when you say the government has no accountability, that’s true, and that needs to be corrected. But if the government isn’t there to hold pharmaceutical companies accountable, who will? I really don’t believe that it’s feasible for a private association to hold a private pharmaceutical company accountable for anything; there wouldn’t be any enforcement. Rule of law is the only enforcement.

    The solution here is to fix the government, not put thousands of unsuspecting citizens at risk.

  34. NotATool says:

    @parad0x360: We pay more for our drugs here, in part, because they’re sold much cheaper in other countries. We are subsidizing Canadian healthcare.

  35. catastrophegirl chooses not to fly says:

    @papahoth: nah, we don’t make enough money to pay anyone off. the company i work for makes biological products so it’s not a matter of mixing up chemicals. they are grown in vats.
    and no, i’m not going to tell you which one

  36. mjd0210 says:

    Hey! That’s the CVS right by my apartment in DC. Cool!

    But seriously, for anyone who’s interested NPR had a really interesting story this morning comparing prices & real-life costs of medical treatment in the UK and the US.

    Cliff Notes version: The US system of prescriptions ends up costing the patient a lot more than just money.

  37. pal003 says:

    Many of these Pharmacy Benefits middle men companies are owned or in partnership with Insurance companies.

    Example: Prescription Insurance benefits that medication can only be filled for 30 day at 40mg = $30.00. But pharmacy offers 20 mg = $10.00 but insurance company won’t allow me to get (2) orders or 60-day supply of 20 mg = $20.00

    That saves both me and Insurance company $10! Not allowed. So I save myself $$ but get punished by Insurance company.

    It’s like a mafia racket. Can’t we use RICO to get these guys in jail too!

  38. JiminyChristmas says:

    Yep, that private third-party verification is pure gold.

    Just ask all of the former Enron employees and shareholders. All of that “auditing” by Arthur Anderson made sure that Enron had a squeaky clean set of books.

    Or you could just ask all of the investors currently holding formerly AAA-rated mortgage-backed securities that have lost 20% of their value, are impossible to sell, or both. Moody’s and Standard & Poor’s third-party verification worked wonders for the market that time.

    Seriously, you don’t have to look too hard to find out what a maximal capitalism and minimal regulation economy looks like: Sounds like China, doesn’t it? On the plus side, they have economic growth around 8%. On the down side, they can claim 16 of the 20 most polluted cities on Earth. And don’t be surprised when you find antifreeze in your toothpaste or cough syrup.

  39. papahoth says:

    @catastrophegirl: I know two in the Boston area :-)

  40. LogicalOne says:

    @blong81: I think you have a misunderstanding of how the FDA works. It does no testing itself, it merely reviews the testing results, which are done by the drug companies themselves.

    If you think that a for-profit certification company is going to sign a multimillion dollar contract to test and certify a drug, perform the tests and then disapprove it, you’re mistaken. No company is going to bite the hand that feeds it. The drug company would then take the drug to another certification house and never do business with that first company again. There aren’t that many drug companies in the first place and the word would soon get out to avoid it like the proverbial plague. Real quick, it would be out of business.

  41. cortana says:

    @CaptZ: How it works. Walmart / Costco work on the basis of cost. They mark the prescriptions up a flat percentage, and in the case of walmart, eat a bit of cost to get it down to $4 when possible, as a loss-leader.

    Walgreens/CVS/every other major drug chain work on the basis of the cost of the name brand drug. They mark it down a flat percentage.

    So if your medication costs $200/30days name brand, and $2.50/30days generic:

    Walmart/costco: $2.68 (cost + 7.5%)
    CVS/Walgreens: $185 (name brand – 7.5%)

  42. catastrophegirl chooses not to fly says:

    @papahoth: well I’M not in boston, but i’ll bet you’re thinking of the right one.