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The world of prescription drug pricing can be bewildering — intentionally so, some critics of the industry claim. 

Whether that’s true or not, several reports this year show that the supply chain’s alchemy of list prices, rebates and net prices hurts consumers. And a U.S. Senate report says drugmakers and middlemen share the blame.

The media often breathlessly report increases in list prices of more-expensive, brand-name drugs. “Big drugmakers just raised their prices on 500 prescription drugs,” read the headline of a January story by CBS News, for example.

But the story didn’t mention that government payers, insurance companies and the middlemen they hire usually pay far less than the list price. As Johnson & Johnson owner Janssen Pharmaceuticals reported, the net cost of its branded drugs actually fell by 14.4% since 2016.

That’s because big payers hire middlemen known as pharmacy benefit managers to handle drug transactions. Among their functions, they determine which drugs are covered and which of those will require low copayments from consumers or even no copayment at all. This, of course, gives consumers an incentive to ask doctors to prescribe those products.

Branded drugs are usually under patent, so it’s important for manufacturers to sell them at a premium while the drugs still have exclusivity so their makers can recoup research costs and turn a profit. In exchange for preferred insurance treatment, drugmakers offer pharmacy benefit managers steep rebates and other discounts off of their products.

And it’s not just Janssen that’s doing so, Adam Fein wrote last month in his influential publication, Drug Channels. Eli Lilly, GlaxoSmithKline, Novartis and Sanofi all saw drops in their net prices in 2020, Fein wrote. A sixth large manufacturer, Merck, saw an increase of less than 1%.

Without understanding how drug pricing works, it just seems logical to blame drug manufacturers for what seem like increasing costs. But that’s not the case, and Fein criticized those who should know better for not embracing the complexity of how prices are ultimately determined. Read more