High drug prices — especially for life-saving or life-enhancing specialty drugs continue to attract media attention in the U.S. prescription drug market. News outlets often highlight patients lacking adequate prescription drug coverage who have been financially crippled by the cost of their prescriptions. In an attempt to justify these high prices, PhRMA continues its mantra of "high cost and high risk of research" rationale.

The reality is that drug companies spend a lot of time and money trying to figure out where best to price their drugs. Some of the factors include:

  • the product profile relative to competitive products and alternative treatment options
  • chronic vs. acute use
  • size and age of the anticipated patient population
  • who (government, private insurer, patient) will actually pay
  • the payer's ability and leverage to negotiate price

It can be incredibly analytical and quantitative, involving a multitude of pricing models and studies. Not unlike other businesses, the goal is to find an acceptable price point that delivers the most revenue and profit.

But drug companies have a couple of unique factors that allow them to charge higher prices than they might otherwise get away with in a typical end-user customer-driven market where the customer can decide not to buy based on price. Patients who might decide not to take their drugs due to the high cost of their prescriptions risk seriously detrimental or even fatal consequences. Refusing to take your prescription drugs because of price isn't and shouldn't be a viable option for many patients.

Also, unlike other businesses, comprehensive layers of patents combined with an extraordinary and lengthy development and regulatory approval process provides a nearly insurmountable barrier to entry for follow-on competitive products. More importantly, the end users (patients) and even prescribing physicians rarely see, know or directly pay the actual price drug companies charge. This is due to a series of pricing filters that blind patients and physicians to the actual prices.

Insurance companies and government programs (i.e. Medicare, state healthcare programs, or Veteran's Administration) dilute the impact of drug company pricing seen by the patient. These filters include everything from negotiated prices and rebates to partial or full subsidies, making the actual drug company pricing invisible to the prescribing physician and the patient.

The only day-to-day exposure to high drug prices patients might feel is when their subsidized coverage (i.e., co-pay or formulary exclusion) or cumulative expense (across several prescriptions) reaches a cost that approaches or exceeds the patients' affordability.

Elderly patients in the doughnut hole, patients taking high co-pay prescription drugs (an insurance company tactic to make patients pay more for high-priced drugs), uninsured or underinsured hospital patients, and patients requiring specialty drugs will all feel the brunt of high drug prices.

The overwhelming majority of patients, however, never see or know the real price of their drugs. And in most cases they don't care because they don't directly feel the financial pain of paying full price. This provides drug companies a unique pricing opportunity.

These pricing filters combine with another interesting factor to provide drug companies another hidden opportunity to set a high price for their drugs.

Healthcare plans and insurance companies want to (or are obligated to) provide their participants with the drugs they need. And the Centers for Medicare and Medicaid Services have a requirement to essentially make all prescribed FDA-approved drugs available under Medicare Part D by law drug company prices are non-negotiable.

Unlike typical end-user pricing where customers can decide not to buy a product that appears to be too high-priced, drug companies can take advantage of patients' needing to take their prescription drugs and the healthcare market's reluctance to deny prescribed drugs regardless of the cost.

Healthcare institutions may employ tactics to control the use and abuse of high-priced drugs. But, if the drug is deemed medically necessary, patients in most situations will be given the opportunity to take the drug even if it means they will have to pay all or a large portion of the cost (as with high co-pays).

Sometimes these types of control tactics and the anticipated high rebate and price concessions actually encourage drug company marketers to pursue higher price strategies. This is especially true for drugs that have demonstrated clinically meaningful benefits. The mindset goes as follows:

"My product deserves a high price, and I'm going to premium price my product. So, if I am going to have to derive more profit from lower prices and fewer patients because of your restrictions and constraints, I might as well charge an even higher price to start with than I might have otherwise considered without your pricing hurdles."

In the end, with all the complexity and analysis involved in determining a price, drug companies will err on the high side as they push for the highest possible price (reasonable or not) and will market the drug as aggressively as needed to secure and maintain that price in the market place.

After all, despite the potential restrictions, constraints and public outrage, there are few real barriers to getting the price they set. If you don't believe me, just look at the ever-increasing and seemingly outrageous prices for some generic drugs that have been around for decades.