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Who Pays What, and Why?

December 30, 2021

From R&D to PBMs, a look at the U.S. approach to drug pricing 

When it comes to setting drug prices, the U.S. is singular in its approach. The U.S. is the only nation in the developed world that does not regulate or negotiate prices of newly approved drugs as they come to market.

Other countries, including most European nations, have dedicated agencies that communicate with pharmaceutical companies. These organizations scrutinize clinical data about a new drug's efficacy and risks, then run comparative-effectiveness and cost-effectiveness analyses to score it against available therapies. Depending on the results of these analyses, the agencies issue a decision about a drug's reimbursement and negotiate a set price with the drug's manufacturer. And, for certain geographies and drugs, regional organizations and hospitals also may be allowed to negotiate drug pricing.

"The bottom line is that this country differs from all other developed countries in not having a process through which the federal government evaluates a new drug's comparative effectiveness and weaves that into the funding and pricing of new drugs," said Steven Pearson, MD, MSc, a physician, bioethicist, and the founder and president of the Institute for Clinical and Economic Review (ICER), a nonprofit health policy and comparative-effectiveness research organization based in Boston.

"In the U.S., this has meant that drug prices tend to go higher, due to a mix of factors," Dr. Pearson added. Curbing skyrocketing price hikes, therefore, will require a multifaced approach. For example, one solution that receives a lot of attention is bringing more generics to market, but the complexities of the U.S. drug-pricing system mean that may have little effect. "Because there is no federal process for negotiating prices and because there is so much innovation, it is difficult to have generics by themselves moderate overall spending."

ASH Clinical News spoke with Dr. Pearson and other health economists about who decides how much drugs cost, why they cost so much in the U.S., and how regulators, clinicians, and insurers are trying to rein in prices.

Starting High 

A newly approved cancer treatment doesn't always offer a drastic improvement in patient outcomes, which is one reason why regulatory agencies in other countries decide not to cover certain new medications: A marginal improvement from available options can't justify a substantially higher cost. One oft-cited case is that of aflibercept, which the U.S. Food and Drug Administration (FDA) approved to treat metastatic colorectal cancer in 2012. The drug's manufacturer, Sanofi, initially priced the drug at about $11,000 per month of treatment. Then, physicians at the Memorial Sloan Kettering Cancer Center (MSKCC) in New York penned an editorial stating that their center would not use the drug, which fared no better in comparative studies than already-available, less expensive therapies.1

One month later, Sanofi responded that aflibercept's list price would not change, but the company offered a 50-percent discount on the price paid by doctors and hospitals.2

Aflibercept isn't the only extremely high-priced cancer treatment to gain national attention. A 2017 analysis found that the costs of injectable cancer drugs in the U.S., including older, on-patent drugs, are increasing at rates higher than inflation.3 Of the 24 injectable cancer drugs approved between 1996 and 2012, costs increased by an average of 25 percent. That dipped slightly to 18 percent after adjustment for inflation, or an average increase of about 6 percent per year. The inflation rate, however, averaged 1 percent per year.

Oral drugs that are dispensed through pharmacies directly to patients (rather than being administered by physicians) also are not immune to price hikes, according to Anna Kaltenboeck, a senior health economist and program director at the Drug Pricing Lab at MSKCC. "Inflation among drugs administered by physicians generally is more bounded than it is for drugs dispensed through the pharmacy."

For example, Novartis's imatinib, used for the treatment of chronic myeloid leukemia, cost $26,000 per year when it was initially approved in 2001 – a high price at the time. In 2013, even though its patent expired and generic imatinib was made available, branded imatinib cost more than $120,000 per year. In 2016, that figure again jumped to $146,000 per year.4

It appears that drug prices start out high and only get higher. The eventual list price is something drug manufacturers begin thinking about years before the drug is likely to come to market, while it is still in the early stages of development.

"One reason cancer drugs demand high prices is that some of them have no competition – they are the only game in town," Ms. Kaltenboeck said. "Cancer drugs also fall into a protected class, under Medicare Part D, which means that plans have to cover all or a substantial number of these drugs, which also means that health plans lose negotiating leverage on these products."

Some researchers have suggested that pharmaceutical companies defend their high drug prices based on the high costs of drug development. A 2016 analysis from the Tufts Center for the Study of Drug Development estimated that the cost of bringing a medicine from the laboratory to the pharmacy is $2.7 billion.5 Companies may set their prices to cover those costs.

However, Ms. Kaltenboeck, who has consulted for pharmaceutical manufacturers in the past, rejects that claim. "The diligence to gauge a drug's pricing and revenue potential starts before clinical development to make sure it's worth the investment. By the time a price is determined, which happens much later, it's just not a part of the conversation."

What Does a Drug Really Cost? 

While other countries have a central agency that negotiates a price, in the U.S., pricing terms are restricted by the list price and access agreements. The system is piecemeal, with each of the country's thousands of health insurers negotiating drug prices with manufacturers and some larger insurance plans are able to negotiate a better price because of the number of patients enrolled in the plan.

However, Medicare, which covers more than 55 million Americans aged 65 years and older, is legally prohibited from negotiating certain drug prices or deciding which drugs to cover. The insurance program must cover all drugs that are approved by the FDA at the price set by the manufacturer.

Of course, the actual cost or net price of the drug ends up looking much different from the list price, thanks to the bevy of intermediaries who handle the drug as it makes its way from the manufacturer to the patient. The complicated supply chain also is why CMS often quotes an "average sales price" for a drug – which is defined as a manufacturer's sales of a drug during a calendar quarter divided by the total number of units of the drug sold by the manufacturer in that same quarter.6

After a drug receives marketing approval, the pharmaceutical manufacturer sets the list price. Typically, the first step along the drug supply chain is the wholesale distributor. Wholesalers (companies like McKesson and Cardinal Health) serve as the bridge between manufacturers and pharmacies, and purchase prescription medicines from the manufacture at the wholesale acquisition cost or average manufacturer price – before any discounts, rebates, or other price reductions are applied. Ultimately, wholesalers play a relatively minor role in drug pricing, according to Darius Lakdawalla, PhD, a health economist and health policy expert at the University of Southern California's School of Pharmacy.

In return for the wholesalers' distribution services, manufacturers pay them a distribution service fee based on a percentage of the WAC. These fees, discounts, and rebates are negotiated individually and can vary with each manufacturer and wholesaler.7

So, when a wholesaler purchases a drug with a list price of $100 per pill, it can collect a 4.5-percent distribution fee, or $4.50 per pill, bringing their actual cost per pill down to $95.50.

Pharmacies then purchase drugs from wholesalers at a discount to the WAC. Again, this discount varies based on the size and purchasing power of the individual pharmacy. Using the previous example, when the wholesaler sells that $100 pill to pharmacies for a discounted price of $96, it retains $0.50 on each pill sold.

When an insured patient purchases that prescription drug from the pharmacy, he or she pays an amount outlined by his or her insurance plan. The amount of this cost-sharing is determined by the pharmacy benefit of his or her health insurance plan, which is itself determined by the insurers' negotiations with pharmacy benefit managers (PBMs).

Insurers hire PBMs to negotiate rebates for Medicare Part D drugs (or those that are dispensed through a pharmacy and not in outpatient clinics or in the hospital) on their behalf. These PBMs – which are dominated by Express Scripts, CVS Caremark, and OptumRx – work with the manufacturer to help negotiate the insurance benefit for that drug.7

"The role of the PBM is like that of a sports agent," explained Dr. Lakdawalla. "They represent the interest of their insurance company or employer clients and are trying to secure the best prices from drug companies on their client's behalf."

So, if a PBM purchases that $100 pill at a 25-percent discount for its insurer client, it passes that savings on to its insurer client. The insurer then reimburses the PBM at a privately negotiated rate. The PBM also receives rebates and discounts from the manufacturer and the dispensing pharmacy, which it retains.

The difference between what the PBM charges a health plan and what the PBM pays to the pharmacy that dispenses a drug is known as "spread pricing" and is partly how PBMs make a profit. If the amount paid by the plan to the PBM for a drug is greater than the amount paid by the PBM to the pharmacy, the PBM retains that difference.

PBMs also often coordinate a network of pharmacies that distribute the drug, adding another layer of complexity. Pharmacies earn most of their revenue from fees from insurance companies to dispense the drugs and a smaller portion from rebate payments from drug manufacturers.

The pharmacy does "play a role in pricing, sometimes direct and sometimes indirect," said Dr. Lakdawalla. "The pharmacy wants a piece of the ‘price pie' and puts upward pressure to get the pie to be as large as possible." Meanwhile, the insurance companies and employers who purchase insurance plans want the lowest price possible, he added. PBMs, though, can benefit both from higher list prices and by bringing them down.

"No one quite knows what kind of rebates PBMs receive, so it's difficult to determine whether PBMs are actually helping to lower drug prices," Dr. Lakdawalla said.

Negotiation Tactics 

During discussions between the drug maker and the PBMs (and, in turn, the insurance companies), the drug maker frequently negotiates for its pharmacy-dispensed drug to be placed on the insurance plan's preferred drug list, making it more likely to be used by patients. But, these negotiating tactics work best for competitive classes of drugs, like insulin products for diabetes, Ms. Kaltenboeck explained. Rebates in hematology and oncology remain relatively low.

Within the health-care market, how much an insurance company pays for a drug varies substantially, with some companies getting a better deal than others, according to a study by Dr. Lakdawalla and colleagues.8 "What really struck me when we looked at how much pharmacies were being paid by an insurance company for the same drug was the phenomenal variation in the amount reimbursed by insurance companies, even at the same pharmacy," he said.

Surprisingly, most of the variation in prices paid to pharmacies by insurance companies was seen with generic drugs, rather than branded drugs. "It appears that pharmacies are making the bulk of their money from generic drugs by negotiating handsome reimbursement from them," Dr. Lakdawalla reported.

The pricing and rebate schemes differ for Medicare Part B drugs, like chimeric antigen receptor (CAR) T-cell therapies and other intravenously administered drugs that are given in a hospital, rather than picked up by patients at a pharmacy. For Part B drugs, the rebates and the net price are publicly available.

"In some sense, the list price is set to provide a ceiling, but the drug company never actually gets that price, for either Part B or Part D drugs," Dr. Lakdawalla said. "They offer rebates to the middlemen and swallow the costs of those rebates."

The Case of CARs 

The pricing algorithms in other countries are more transparent than those in the U.S. because of the role that government agencies play. For example, in the U.K., the National Institute for Health and Care Excellence (NICE), a public health authority, is charged with reviewing a drug's efficacy and safety and performing cost-effectiveness analyses. Based on that evaluation, NICE decides whether or not the drug should be covered by the U.K.'s publicly funded health-care system, the National Health Service (NHS).

Just this August and September, NICE rejected Gilead's CAR T-cell therapy axicabtagene ciloleucel for use in the NHS, calling the therapy too expensive.9 The U.K. agency made its decision just one day after the European Commission approved this CAR T-cell therapy for the treatment of patients with non-Hodgkin lymphoma (NHL) in the European Union, as well as a second CAR T-cell therapy, tisagenlecleucel for both the NHL indication and for pediatric patients with acute lymphocytic leukemia (ALL).10,11 Then, in September, Gilead and the NHS reached a deal: Gilead will provide a confidential discount on axicabtagene ciloleucel's £300,000 full list price, providing partial access of the therapy through NHS's Cancer Drugs Fund.12

For the U.K., and other countries including Canada and Australia, the decision to regulate drug prices centers on making sure that medical treatments are affordable for all citizens of that country, regardless of income. U.S. approval is blind to pricing, and while that means certain high-priced drugs are approved in the U.S. that aren't approved in the U.K. or other countries, some U.S. patients will still have limited access to these drugs because of affordability.

The FDA approved axicabtagene ciloleucel for the same indication in October 2017. Gilead, the drug's manufacturer, set a list price of $373,000 – not including the costs of hospitalization, medications to treat potentially life-threatening complications that can accompany the therapy, or supportive care and clinician visits. By some estimates, these services could drive the total cost of treatment with axicabtagene ciloleucel to more than $1 million per patient.13

Following the approval, the Centers for Medicare and Medicaid Services (CMS) announced that the agency would reimburse hospitals the list price plus 6 percent, approximately $400,000 for the therapy, which is covered under Medicare Part B.14 Although outpatients typically have a 20-percent copayment for Medicare Part B services (approximately $79,000 for this therapy), CMS said that patient costs will be capped at $1,340 (the inpatient deductible for 2018).

Revolutionary Therapies, Revolutionary Prices 

While the U.S. does not have the health-care watchdog agencies present in other developed countries, the U.S. does have the ICER. The institute evaluates the cost-effectiveness and value of new drugs entering the market but does not have a direct say in drug prices set by manufacturers. ICER's reports also estimate a drug's potential long-term value for patients and its effects on the health-care system's budget.

In its final 2018 evaluation of both tisagenlecleucel (for its approved NHL and pediatric acute lymphocytic leukemia [ALL] indications) and axicabtagene ciloleucel (the other FDA-approved CAR T-cell therapy for the treatment of ALL), ICER found that both therapies, despite their high prices, were cost-effective.15

"We noted in our report that, because of the large number of patients with NHL, the therapy could create a substantial short-term financial impact that would put a strain on many insurance system budgets," said Dr. Pearson. "That strain is something that needs to be discussed because, if not managed well, it can lead to real problems for patients accessing the drug and possible rapid increases in insurance premiums."

Most hospitals are expected to purchase the CAR T-cell therapy for a patient, but it is still unclear who will pay for the accompanying clinical services. "How we should be paying for CAR T-cell therapies is still an open question," Ms. Kaltenboeck said. "How can we pay for them in a way that doesn't bankrupt patients or put hospitals and payers at risk?"

Dr. Pearson agreed that the U.S. needs better cost-management for therapies like axicabtagene ciloleucel and tisagenlecleucel, which may provide long-term value for patients but have high prices that drive up health-care costs in the short term.

With its reports, ICER hopes to publicize these questions and develop policy recommendations for health-care stakeholders. In the case of CAR T-cell therapies, the agency suggested that pharmaceutical manufacturers, insurers, and providers meet prior to FDA approval to discuss a drug's potential role in therapy and payment arrangements. This partnership would "reduce unnecessary delays in delivering care to patients by addressing financial uncertainties for insurers and providers."15

"Without federal government negotiations over drug prices, we have to be honest and more responsible when talking about drug prices and how they relate to the value of the drug because we want to create incentives that reward companies for creating drugs that help patients," Dr. Pearson said. "Yet we can't continue to have increasing drug prices and just assume that the system can absorb them. That is not going to work."

Innovative Drug-Pricing Schemes 

When Novartis first launched tisagenlecleucel for pediatric ALL with a $475,000 price tag, the drug company also announced an "outcomes-based" payment model: CMS would not pay for tisagenlecleucel unless the patient responds to the treatment within 30 days of administration.16 Yet, one year later, CMS backed out of the outcomes-based payment deal without a public explanation.

This value-based pricing model that prices a drug based on its direct benefit to a patient is one solution to relieve the everincreasing anxiety about drug prices in the U.S. "The beauty of value-based pricing is that, if the drug is priced in accordance with value and the benefit it confers to a patient, then everyone should be able to have access to it," Ms. Kaltenboeck said.

She would like to see more manufacturers engage in value-based pricing, particularly for anticancer drugs. "We should know how much a patient and the health-care system are paying and how much benefit a patient experiences. In our system, drugs are continually priced up, and, tragically, patients get priced out."

Ms. Kaltenboeck is seeing more health-care stakeholders exploring valuebased pricing but acknowledged that this kind of innovation will likely come in small, incremental steps. Companies such as Regeneron and Novartis have priced several of their new drugs in line with ICER's recommendations. Novartis, after receiving a second FDA approval for tisagenlecleucel for the treatment of adults with large B-cell lymphoma, priced the therapy at $373,000 – lower than the $475,000 price tag for the pediatric ALL indication – because the efficacy gains are not as pronounced for the adult population. This pricing scheme is the first example of a type of value-based pricing called indication-based pricing.

Still, both manufacturers and insurance companies are hesitant to engage in value-based pricing. "Drug companies typically have not been very excited about this scheme because of the risk of not getting paid; payers typically just want drug companies to lower their prices because they don't want to deal with the complexities of tracking patients' outcomes," said Dr. Lakdawalla.

A Call for Transparency 

A central issue in the drug-pricing debate is transparency – which is lacking in the U.S.

"Drug and insurance companies want rules that apply to everyone equally and that are transparent and will sustain an innovative health-care system," said Dr. Pearson, but that's not likely to happen. "With no regulation by the government, the U.S. has created a bit of a monster: It's not a system that truly rewards drug value. The consequence is that patients are the ones who suffer from high prices that trickle down to them."

Dr. Lakdawalla agreed. "The issue is figuring out how to align price with value. Prices are completely unmoored from value and the first step is to create a more transparent pricing system."

The argument for maintaining confidential rebates is that "not everyone in the system can receive the rebate, and publicizing it would create a situation where everyone would want to receive the same discount, which drug companies wouldn't be able to provide," Dr. Lakdawalla explained.

Unfortunately, the U.S. drug-pricing system has become opaque, he noted. "With so little transparency, it is difficult for employers buying health care to make decisions about how much to pay for drugs because they have no idea how much individual drugs cost."

"And, as consumers, we deserve to understand the actual prices of drugs that we are paying for," he added.

For Dr. Lakdawalla, pricing and rebate transparency would be a crucial first step to improving the U.S.' decentralized, non–government-controlled health-care system. "Pricing transparency is not sufficient to fix the system, but I think it's a necessary step for the simple reason that we can't have so many players making good, clinically rational decisions if they don't know the most basic facts, like the actual cost of the drug." —By Anna Azvolinsky


  1. The New York Times. In cancer are, cost matters. Accessed October 2, 2018, from
  2. The New York Times. Sanofi halves price of cancer drug Zaltrap after Sloan-Kettering rejection." Accessed October 2, 2018, from
  3. Gordon N, Stemmer SM, Greenberg D, Goldstein DA. Trajectories of injectable cancer drug costs after launch in the United States. J Clin Onc. 2017;36:319-25.
  4. Gorkin L, Kantarjian H. Targeted therapy: generic imatinib — impact on frontline and salvage therapy for CML. Nat Rev Clin Oncol. 2016;13:270-2.
  5. DiMasi JA, Grabowski HG, Hansen RW. Innovation in the pharmaceutical industry: new estimates of R&D costs. J Health Econ. 2016;47:20-33.
  6. Department of Health and Human Services. "Average sales prices: Manufacturer reporting and CMS oversight." Accessed October 2, 2018, from
  7. PhRMA. Follow the dollar: understanding how the pharmaceutical distribution and payment system shapes the prices of brand medicines." Accessed October 2, 2018, from
  8. Lakdawalla D, Yin W. Insurer bargaining and negotiated drug prices in Medicare Part D. Rev Econ Stat. 2015;97:314-31.
  9. National Institute for Health and Care Excellence. "Appraisal consultation document: Axicabtagene ciloleucel for treating diffuse large B-cell lymphoma and primary mediastinal B-cell lymphoma after 2 or more systemic therapies." Accessed October 2, 2018, from
  10. Gilead press release. "Yescarta® (axicabtagene ciloleucel) receives European marketing authorization for the treatment of relapsed or refractory DLBCL and PMBCL, after two or more lines of systemic therapy." Accessed October 2, 2018, from
  11. Novartis press release. "Novartis receives European Commission approval of its CAR-T cell therapy, Kymriah® (tisagenlecleucel)." Accessed October 10, 2018 from
  12. NHS press release. "NHS England strikes deal for ground breaking cancer treatment in a new European first." Accessed October 10, 2018 from
  13. Kaiser Health News. "Cascade of costs could push new gene therapy above $1 million per patient." Accessed October 2, 2018, from
  14. Reuters. "U.S. Medicare sets outpatient rate for Yescarta reimbursement." Accessed October 2, 2018, from
  15. Institute for Economic and Clinical Review. "Chimeric antigen receptor T-cell therapy for B-cell cancers: effectiveness and value." Accessed October 2, 2018, from
  16. Centers for Medicare and Medicaid Services. "CMS: Innovative treatments call for innovative payment models and arrangements." Accessed October 2, 2018, from

The American Society of Hematology (ASH) is continuing to advocate for reasonable drug prices and supporting policies that would expand access to treatments for people with hematologic conditions.

Advocating for New Payment Models

When the revolutionary chimeric antigen receptor (CAR) T-cell therapies for treating hematologic malignancies gained regulatory approval in the U.S., the costs reached unprecedented levels. More gene therapies are on the horizon, as are questions about who is going to pay for these expensive treatments.

In June 2018, ASH submitted comments on the Centers for Medicare and Medicaid Services' (CMS') "CY 2019 Hospital Inpatient Prospective Payment System" proposed rule. As the CMS was working on finalizing its payment policy for CAR T-cell therapies, the Society urged CMS "to develop an innovative payment solution to protect patient access."1

ASH proposed an alternative reimbursement model in which CMS would pay for CAR T-cell products separately as a "pass-through" at actual acquisition or invoice cost, rather than covering it with a New Technology Add-on Payment, or NTAP. ASH's proposal would have the "added benefit of being site-neutral, eliminating financial incentives to treat patients in settings that may not be medically appropriate," the Society explained.

Ultimately CMS granted NTAPs to the two approved CAR T-cell products, but the Society will continue to explore alternative, sustainable models for bringing these innovative, expensive therapies to patients.

Stepping Up Against Step Therapy

Earlier this year, CMS issued guidance allowing Medicare Advantage plans to implement "step therapy" for physicianadministered and other Part B drugs.2 Step therapy stipulates that patients must start (and fail) a less expensive (and often less effective) treatment option before being prescribed a more expensive, and frequently more effective, option.

CMS intends the new policy to "encourage patients to choose high-value medications," but members of the medical community pushed back against this "fail-first" approach.3 In a letter to CMS Administrator Seema Verma, MPH, ASH joined more than 90 medical organizations in calling on CMS to retain a 2012 policy that prohibits these plans from using step therapy on Part B benefits.4

The dissenting organizations argued that, rather than giving Medicare an opportunity to negotiate better discounts for patients (as CMS claimed it would), the policy would erect more barriers between patients and needed therapies.

"For cancer patients, selecting the proper personalized treatment as quickly as possible can be critical to survival," the organizations wrote in the letter. "Delays in getting appropriate treatments can mean prolonged symptomatic periods and irreversible damage, making a ‘fail first' approach to treatment inappropriate."

The proposed policy is effective beginning January 2019, though details about its implementation are limited.


  1. American Society of Hematology, "Letter to Ms. Seema Verma, RE: CMS-1694-P; Hospital Inpatient Prospective Payment Systems for Acute Care Hospitals and the Long-Term Care Hospital Prospective Payment System and Proposed Policy Changes and Fiscal Year 2019 Rates," June 25, 2018.
  2., "Medicare Advantage Prior Authorization and Step Therapy for Part B Drugs." Accessed October 11, 2018, from https://www. and-step-therapy-part-b-drugs.
  3., "Speech: Remarks by Administrator Seema Verma at the Financial Times Pharma Pricing and Value Summit." Accessed October 11, 2018, from speech-remarks-administrator-seema-verma-financial-timespharma- pricing-and-value-summit.
  4. FierceHealthcare, "AMA leads nearly 100 medical groups calling on CMS to rethink step therapy for Part B drugs." Accessed October 11, 2018, from association-cms-step-therapy-part-b-drug-prices.

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