Economics of Big Pharma: Why Are Medications So Expensive?
Written by Elli Jin (W ‘27); Edited by Valeri Guevarra (W’26)
It’s no secret that prescription drugs are expensive. In 2022, the average American spent around $1400 per year on prescription drugs, but many do spend a lot more, especially when faced with emergencies and illnesses. For comparison, the average person in the European Union spends just under $500 USD. However, the ‘why’ is not as commonly known.
The answer lies in the complexity of the pharmaceutical supply chain from drug manufacturer to pharmacy. When observing the pharma supply chain, the line from the drug manufacturer list price to the price patients pay is not straight—involving several intermediaries, leading to high prices. Some drugs that cost pennies on the dollar to make cost hundreds at the pharmacy. To get medication to a consumer, the supply chain starts from drug manufacturers to wholesalers and then through middlemen like insurers and Pharmacy Benefit Managers (PBMs) before getting to the pharmacy. All of these parties add their markups. Specifically regarding PBMs, they negotiate prices with manufacturers and pharmacies, manage prescription drug benefits for health insurers and large employers, and use their purchasing power to negotiate rebates/discounts from drug manufacturers. For example, they’ll ask a manufacturer like AstraZeneca for a 15% rebate or reimbursement as a discount on a blood pressure medication (because all of the PBM’s clients will be covered and therefore, use this medication for blood pressure). However, they notably don’t always pass savings to consumers, leading to high medication prices. These are the two main reasons that prescription drug prices are so high: middlemen markups and PBMs not passing along savings to customers [for clarity on the main two reasons]. Other factors include limited government regulation on prices as well as annual price increases.
It may seem like an unwinnable battle in a broken system—patents that allow for pharmaceutical companies to have monopoly power of new drugs and limited government regulation on how companies price drugs. This leaves patients suffering the consequences. However, post-COVID-19 pandemic where many recognize the importance of access and affordable healthcare, some are trying to disrupt the industry and move to more affordable medications. Enter Mark Cuban’s Cost Plus Drug Company. The Shark Tank judge founded Cost Plus Drugs because he believes that “Everyone should have safe, affordable medicines with transparent prices.” Cost Plus Drugs runs a digital, cash (no insurance accepted) pharmacy that works directly with drug manufacturers to get medications to patients—-bypassing all middlemen. This leads to huge savings on medications. For example, for a leukemia medication (Imatinib), the retail pharmacy price is $2502.50 while through Cost Plus, the medication costs $13.40. All of the medications available through Cost Plus are sold at a 15% markup price from the manufacturer, a $5 pharmacy service fee, and a $5 shipping fee— a price fully disclosed across the company’s website. Cuban isn’t alone as Amazon is also taking on Big Pharma by applying its signature subscription model to prescription medications via AmazonRxPass.
These new industry disruptors reflect a growing movement toward transparency and affordability in American healthcare—and a much-needed shift in an aging population and world where more and more are living paycheck to paycheck. While the problem of high drug prices won’t be solved overnight, these initiatives offer a glimmer of hope for a more equitable future in medication pricing.