The Economic Forces That Drive Prescription Drug Prices

Roughly 90 percent of prescriptions are generic, but over 80 percent of spending is on branded drugs. So, when we talk about affordability and spending, the branded pharmaceuticals are more of a concern.

My research focuses on branded pharmaceuticals, and those have also been the focus of the Trump administration’s negotiations these last months.

HMNews: Are there big differences in the way markets for branded pharmaceuticals work in the United States and the rest of the world?

Maini: In most of our peer countries, national governments negotiate prices directly with the manufacturers. In many countries the national health service is also the main purchaser of prescription medications.

The first topic that I studied was European nations’ use of external reference pricing, which is directly related to the “Most Favored Nation” clause that the Trump administration wants to implement in the United States. The administration wants the pharmaceutical companies to guarantee that the United States gets their best price. The impact of these kinds of national-level price negotiations became the central part of my thesis as a PhD student in economics in the Harvard Kenneth C. Griffin Graduate School of Arts and Sciences.

HMNews: How have prices been set in the United States up until now?

Maini: Prices for most private payers — that’s mostly commercial insurance companies and big employers who self-insure — are negotiated by the three big pharmacy benefit managers, companies that set prices for the majority of prescription drug payers.

Once those prices are set, most large government programs that cover prescription drugs pay prices that are tied to commercial prices. For example, Medicaid receives the best price for pharmaceuticals that any commercial U.S. payer receives. This is called “Most Favored Customer” status.

This is something else that I’ve written about — we found that as a result of the Medicaid best price clause, the prices that commercial payers pay are a little bit higher than they should be. Basically, since the pharma companies know that they’ll have to match the best price they give to a commercial payer for the huge segment of the market that Medicaid represents, they can’t afford to lower their prices while they’re negotiating with the pharmacy benefit managers.

HMNews: Does your research give you any insight into what’s happening with the White House’s proposed tariffs and negotiations with pharmaceutical companies?

Maini: It almost looks like the U.S. government is using tariffs to negotiate drug prices, just like every other country.

From what I’ve been able to surmise, the model for President Trump’s deals with pharma companies is quite similar to the national negotiations that take place in Europe.

One difference is that instead of managing the negotiations through a detailed regulatory framework with clearly defined parameters, the United States seems to be negotiating separately with each manufacturer on what appears to be an ad hoc basis.

HMNews: What’s happened so far in the course of these negotiations?

Maini: We don’t know for sure because the details of the agreements have not been made public, but apparently several companies have agreed to provide some or all of their branded drugs to Medicaid at discounted prices, which they say are lower than what is currently being paid.

These new prices are said to be on par with the lowest price offered to a basket of other wealthy countries. But we don’t know which countries are in the basket. We also don’t know exactly how much lower these prices are than the price Medicaid is currently paying, because we don’t know the prices Medicaid pays — those are protected trade secrets.

HMNews: Aren’t there some changes beyond the commitments to cut prices for Medicaid?

Maini: Companies have also made commitments to add U.S. manufacturing and research capacity, and some have agreed to participate in the administration’s proposed TrumpRx platform or through the companies’ own websites to sell prescription drugs directly to patients at discounted prices.

There’s very little detail available so it’s hard to predict what will come of any of this.

HMNews: How might these changes impact overall spending or consumers’ out-of-pocket expenses?

Maini: It seems likely that overall, the Medicaid system will save some money, but patients’ out-of-pocket costs probably will not be affected. Cost sharing in Medicaid is already very, very limited so I doubt these lower prices will trickle down to patients. Obviously, easing the pressure on the Medicaid budget is also very important and may help states alleviate some of the non-financial restrictions they place on drugs. For example, many states restricted the use of valuable hepatitis C drugs like Sovaldi when they first arrived on the market because they did not have enough money to pay for everyone’s treatment.

It’s too soon to say what the direct-to-consumer drug sales could mean — it all depends on which drugs are available, what the prices are, and how the platform is implemented. I would also point out that many manufacturers already offer direct-to-consumer sales.

HMNews: It sounds like there are still a lot of unknowns about these deals.

Maini: Right. Even for the deals that have been signed, we don’t know much about the details, and there are many companies that haven’t agreed to any deal yet.

But the general assessment by industry analysts is that these agreements are better than the massive tariffs on the pharmaceutical industry that were proposed, so more deals are likely to be signed.

One other thing that’s not clear is how these negotiations will impact the prices that Medicare and insurance companies will have to pay and what that will mean for premiums and out-of-pocket costs for people with Medicare or private insurance.

HMNews: What are some of the other pressing questions that need to be answered?

Maini: How will all the changes impact any given patient’s access to existing medicines or new medicines that come to market in the next few years? How will changes in markets, building new pharma capacity in the United States, and changes in support for research and education impact the development of new pharmaceuticals?

HMNews: What do we need to answer these questions?

Maini: The answers to all these questions depend on a complex, interconnected matrix of factors. You can’t see the big picture without understanding the little details.

It’s important to have transparency, access to clear information, and support for health policy and economic research to make sure that policy changes are making health care more accessible and more affordable.

This interview was edited for length and clarity.