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When Martin Shkreli’s Turing Pharmaceuticals hiked the price of its anti-parasitic drug to $750 a pill, there was public outcry. So Turing and its backers resorted to a talking point employed across the drug industry: That was the list price. Nobody actually pays that.

Forgive the confusion. Even for people whose job requires them to know this stuff, drug pricing is hopelessly complex. That helps explain why, for all the debate over drug costs these days, there’s surprisingly little detail about what anybody actually is paying for prescription medicines.


“We have list prices, wholesale prices, average wholesale prices, rebates, supplemental rebates, mark-ups, outpatient vs. inpatient, formularies, patent expirations,” Andy Slavitt, acting administrator at the federal Centers for Medicare and Medicaid Services, said at a forum in Washington last month. “Most of that information is not available or well understood by the public.”

This all raises the question: Just what the heck is the point of the list price anyway?

The short answer is that the list price is a drug company’s opening bid in negotiations with the insurance plans, government programs, and health care providers that purchase its medicines.


“The list price helps establish that initial starting point,” said Pratap Khedkar, a top executive at ZS Associates, a consulting firm that advises drug companies. “If you’ll never let me increase the price in the future, I’ll start high and I’ll drop as much as I need to.”

In other words, the list price is not dissimilar from sticker prices on new cars, as another expert put it to STAT.

The actual price is driven down as health plans and pharmacy-benefits managers negotiate with drug makers. Government programs like Medicare and Medicaid also have built-in discounts that pharma companies must honor if they want those customers.

Despite all of that, the list price is what usually drives headlines.

“I think there’s oftentimes a perception issue when it’s looked at just as list-price increases,” Lori Reilly, a top official at the Pharmaceutical Research and Manufacturers of America, the pharmaceutical industry’s Washington lobby, told STAT earlier this year. “The perception and reality aren’t necessarily aligned on some of these issues.”

But the reality of drug prices can be almost impossible to understand.

For starters, the negotiations between health plans and pharmacy-benefits managers or health plans that take a list price down to its actual cost are totally hidden from public view. Even their outcome, the final price paid, often isn’t known.

“It emerges in a completely different form, and most of us can’t see what’s happening inside this black hole,” said Dr. Walid Gellad, a University of Pittsburgh professor who studies drug prescribing. “It’s impossible to understand what people are really paying.”

That means that a drug’s real cost — the elusive lower price that drug makers love to cite as proof that list prices are misleading — is not typically public.

Some aggregate estimates have been made to understand the difference between list prices and net prices. An IMS Health analysis released last month estimated that while list prices increased on average by 13.5 percent in 2014, the net price increase was 5.5 percent.

That would seem to back up the drug industry’s position — but that analysis was based in part on proprietary information not available to the public. And even so, according to a new Bloomberg analysis, the United States still pays more for drugs than other countries once those discounts are accounted for.

Equally frustrating for those who track the issue is that it’s hard to know exactly how a drug maker goes about setting a list price in the first place.

“Right now, it’s a black box,” said Dan Ollendorf, chief review officer at the Institute for Clinical and Economic Review. “There’s really no inkling to the general public about what the ingredients of that soup that make up the price that’s set.”

Read more: Anger over drug prices driving support for Democrats’ ideas

The exact equation is unknown, but some of the variables are obvious, said Khedkar, the consulting executive.

The big one: competition. Drug makers consider other drugs that are already on the market or coming soon. Then they look at the market control of the various payers they’re working with. Medicaid is a not-for-profit venture; health insurance plans are. They require different approaches.

Lastly, what are the long-term projections for the drug? A medicine usually starts with a limited number of uses, but over time, its so-called “off-label” indications expand. So down the road, the price might go down, but if the drug is going to be prescribed to more people for more purposes, that is another factor a drug maker may take into account.

A recent investigation by the Senate Finance Committee into the pricing of Gilead’s hepatitis C drug, Solvaldi, is one of the few times that a drug company’s thinking behind a list price has been documented in such detail.

Gilead executives weighed whether the expanding Medicaid population under the Affordable Care Act and more baby boomers joining Medicare should factor into its pricing strategy because the required discounts for the government programs tend to drive actual prices paid down.

They also looked at the discounts previously given to private payers for prior hepatitis C treatments and considered what the Solvaldi price would mean for future medicines. A second-wave drug, Harvoni, was in the works, and Gilead knew that the Solvadi price would determine what the company could charge for its follow-up.

Gilead also considered whether to contract with health plans, and a big part of that equation was the plans’ market share. Plans with large control of their markets were the ones who could block Solvaldi because of its high price. In its final round of pricing discussions, the report said, the company sought the maximum price it could set without risking that a substantial number of payers or physicians would not take to the drug.

“This presentation shows that Gilead set a price as high as it thought acceptable before significant access restrictions would be imposed,” the report said.

The final price? $84,000.