A Guide to Understanding and Reducing Prescription Medication Costs


February 10, 2021

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By Abbi Corbett, BSPS student

Prescription medications are an important part of most Americans’ daily lives, with 86% of adults over the age of 65 being prescribed at least one medication in the last 12 months. Many adults take multiple medications to manage their health, and the associated costs can prove to be a burden. The percentage of people over 65 that are unable to afford their medications has doubled since 2006. Being unable to afford medication could lead to the worsening of chronic conditions like diabetes or high blood pressure, which could lead to severe health complications.

Why are drug costs so high in the United States, especially compared to other countries around the world? The process behind the creation of a new medicine and its journey to being filled as a prescription in a pharmacy is complex. Understanding the process by which medication costs are determined as well as ways to navigate the system is a key part of making more informed decisions, and can help in identifying opportunities to have greater access to medications.

 Brand Name Medications vs Generic Medications

The process begins with the invention of a new medication. Drug companies invest money into research leading to new molecules that can be used to treat different conditions. Once they have gotten their medication approved by demonstrating that it is both safe and effective for treating that condition, they are able to sell it to the public.

In the US market, exclusivity is given to all new medications that are approved. For a period of time –  usually around five years – the company that invented the medication is the only entity allowed to sell it to pharmacies and hospitals. The company has full control over the market, which allows them to set the price at whatever value they choose. This can cause prices for medications that treat very rare or previously untreatable conditions to skyrocket. It is meant to allow research companies to earn back all of the money that they spent trying to develop the medication, which can cost billions of dollars. As a result, the burden of this cost can often fall on the patient.

After the exclusivity period is over, other manufacturers are allowed to create their own versions of the medication. These generic medications have the same active ingredient as the brand name versions and the same effects, but they are produced by a different company. The increased competition helps to drive down the price significantly.

Brand name medications are the primary driving force of the increasing costs of medications. People with insurance may not always notice how expensive name brand medications can be, especially if their insurance covers the medication. However, for people without insurance or whose insurance does not cover certain brand name drugs, the price can prove to be unaffordable.

 What Goes Into the Cost of A Prescription

When patients pick up medications at the pharmacy, the price will vary based on a number of factors. How does the pharmacy determine what to charge for medications? Once the manufacturer has produced the medication, they sell it to a wholesaler. Wholesalers then sell the medications to pharmacies and hospitals. At each step, the price is marked up so that a profit can be made.

Most people have insurance that pays for some or all of their medication costs. In these cases, the pharmacy bills the insurance when they receive a prescription, and the insurance decides what to charge based on the person’s plan, as well as the formulary (a list of medications that are covered by an insurance company). Many insurance companies have preferred medications, meaning that they charge less for some types of medications for a certain condition than others. Each insurance company and each plan is different, so it’s best to reach out to the insurance provider directly to determine what medications are covered and what medications are not.

Sometimes patients have to deal with a process called ‘prior authorization’ when they are getting a prescription filled. In these cases, an insurance company wants to receive paperwork from a patient’s doctor before deciding if they will cover a medication or not.

Patients without insurance must pay the cash price of a medication, unless they are able to reduce the cost using coupons or discount programs. In most cases, the cash price of a prescription is much greater than the price of a medication with insurance. These significantly higher prices mean that many people without insurance cannot afford their medications, especially if they have multiple prescriptions or are prescribed brand name medicines. This can limit patient access to medications that they may need.

drug pricing process

Common Insurance Terminology

About half of Americans have health insurance through their place of work. Many people above the age of 65 qualify for Medicare. But having insurance does not always mean that there is no cost associated with the care and medications people receive.

There are a lot of specific terms that are used in insurance to describe who is paying for what, and it can be confusing to sort out exactly what each term means. Every month, individuals with insurance make a payment towards the insurance company called a premium. Some plans have higher premiums, while others have lower premiums. Higher premiums tend to result in lower deductibles. A deductible refers to how much a patient pays themselves for health-related costs until the insurance starts contributing.

Once the deductible has been met, the insurance begins assisting with cost via copays or coinsurance. At this point, the insurance pays for a fixed amount of the total cost, while the patient pays for the rest of it. The only difference is that copays are a fixed amount that patients spend, for example $10 for every prescription, while coinsurance refers to a fixed percentage. Patients continue to make partial payments on health care needs until they hit their out-of-pocket maximum. Once this amount is reached, the insurance will cover all health-related expenditures. If a patient takes numerous medications, then a plan with a higher premium and a lower deductible may make more sense. If a patient doesn’t take many medications, then it may make more sense to choose a plan with a higher deductible.

Table showing definitions of terms

For Medicare plans, some patients encounter a coverage gap, which is commonly referred to as the “donut hole.” This coverage gap occurs when a patient and their insurance plan spend a designated amount on prescription drugs within a calendar year. This amount varies from year to year. For example, in 2020 the limit was set at $4,020. So once a patient spends $4,020 on prescription drugs, the patient then pays 25% of the total cost of the medication until they reach the maximum amount and enter catastrophic coverage. Once this point is reached, Medicare starts paying again and insurance rates are reduced for the rest of the year. Understanding what the donut hole is and when patients will likely enter it is vitally important to allow patients the chance to plan financially for potentially higher costs.

What Can Patients Do?

So what can you do if you are paying too much for your prescriptions? There are a few strategies that can help reduce prescription costs. The most common recommendation is to have a discussion with your physician or pharmacist about whether or not there are any lower-cost alternatives to your medication. Sometimes, expensive brand name medications have comparable generic alternatives that have similar effects but cost much less.

There are also websites that allow patients to search for discount cards to pay for prescriptions. However, patients should be cautioned that these websites are not insurance, so if you are trying to meet your deductible, then you may want to pay the cost with insurance instead. Prescriptions filled with discount cards instead of insurance do not count towards that deductible payment. Another caution in using discount cards is that they tend to encourage patients to fill their prescriptions at multiple pharmacies, which can make things confusing for both the patient and the pharmacist. It is ideal for patients to keep their medications at one pharmacy to reduce the chance of medication errors.

Patients over the age of 65 who qualify can enroll in Medicare prescription drug plans, also known as Part D. Each year, these patients will have the option to stay with the same plan or enroll in a new one. The open enrollment period is from October 15 to December 7. Medicare Part D is primarily responsible for prescription medication coverage. Choosing the correct Part D plan is an important aspect of making sure that you can afford your medications. The best Part D plan will vary depending on needs and lifestyle, so it’s important to explore your options and determine what will be the best fit for you.


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