(TIME) — Why does medicine cost so much? Here’s how drug prices are set.
Confused by drug pricing? Here's a guide to the complex variables that determine what you pay for medication at the pharmacy counter.
The amount you pay for a brand-name drug will depend on your insurance plan; the plan’s formulary, or list of drugs it prefers and covers; the size of your deductible; and the deal your insurance company has worked out with the drug’s manufacturer, among dozens of other variables. How such discounts are negotiated is proprietary, carefully guarded by the system’s various players.
There’s a lot of finger-pointing over who is to blame for rising prices, particularly between drug companies and PBMs, or the middlemen that negotiate rebates and discounts for health plans.
It all starts with the manufacturers: companies that develop new treatments and conduct clinical trials. There are essentially no regulations governing how drugs are priced. Instead, pharmaceutical companies select a price based on a drug’s estimated value, which typically translates into what they “believe the market will bear,” said Dr. Aaron Kesselheim, an associate professor of medicine at Harvard Medical School. Blockbuster first-in-class treatments, therefore, command stratospheric prices. When Gilead Sciences received Food and Drug Administration (FDA) approval for its hepatitis medication Sovaldi in 2013, the company priced it at $1,000 a pill, or $84,000 for the full course of treatment. The price was possible because the drug worked and, for a time, was the most convenient and effective treatment on the market.