Brand and Generic drug prices show different pricing behaviors. In brand drugs, we see the effects of the 20 years of monopoly protection accorded to the first patent holder. However, the 20 years starts when the drug is invented, not when the FDA authorizes it for public use.

Usually brand drugs are affordable despite noticeably high prices. Some drugs newly authorized by the FDA are priced at nosebleed levels. The high prices reflect the industry’s need to recover the costs of research, development and trials through initially high prices in the patent protection period. Cost recovery is sometimes geared to “value” pricing (such as dollars per estimated health benefit). Throughout that 20-year patent-protection period, prices tend to drop gradually.

In generic drugs, we usually see steady, modest prices and several competing manufacturers. For generics, there are some departures from the norm, such as incentives associated with producing drugs for “orphan diseases.” There are also price spikes due to profiteering, but generally generics are much cheap — accounting for 89% of prescriptions filled but only 26% of costs.

For both brand drugs and generics, a cluster of parties perform specialized roles and extract payments from the principals (patient, employer, insurer, government) and other parties in the supply chain.

The pharmaceutical supply chain includes the manufacturers (e.g. Merck, AstraZeneca), the wholesalers (e.g. AmerisourceBergen, McKesson), Pharmacy Benefit Managers (e.g. Express Scripts, Optum) and the retail pharmacies (e.g. Walgreen, Walmart).

Pharmacy benefit managers (PBMs) are third-party prescription plan administrators who work for the payors (insurer or the patient’s employer). PBMs set the formulary (the drugs that can be “covered” for a patient), and for each drug, a PBM sets the price or co-payment that the pharmacy should charge the patient.

Upon filling of a retail prescription, the pharmacist collects the PBM-prescribed co-pay from the patient, and if the patient has insurance coverage, some payment is collected from the patient’s insurer. The PBM may also earn a fee from the manufacturer for including its drug in the formulary. The pharmaceutical manufacturer receives payment from the wholesaler who is paid by the pharmacy.

While much of a pharmacy’s retail sales are based on insured prescriptions, some prescriptions are paid entirely by the walk-in patient. Walk-ins face no “formulary” that limits which drugs they can have and there is no PBM price that the pharmacist must charge the walk-in.

Pharmacies may set walk-in prices at significant discounts if they want to attract new customers. The walk-in patient price for drugs is sometimes even lower than the PBM-prescribed co-pay price. In those cases, walk-ins and insured patients are better off avoiding the “insured co-payment” and instead choosing to pay the walk-in price. But that works only if they are aware of the walk-in price.

Unfortunately, some patients do not ask for a lower price, some pharmacists do not volunteer how much the savings may be, and in most states, pharmacists are even forbidden from telling insured patients about the lower walk-in price!

A research letter filed with the Journal of the American Medical Association probed the frequency and amount of overpayments that patients endured when the walk-in price was less than the co-pay price. The researchers found that among 9.5 million prescriptions, 2.2 million involved overpayments due to the walk-in versus co-pay price disparity. Aggregate overpayments totaled $135 million for 2013 or $10.51 per covered member. Overpayment occurred in 28% of generic drug prescriptions and in 6% of brand drugs.

These overpayments are referred to as clawbacks.

The key to reducing the 2.2 million overpayments is to inform the patient on the price options they are entitled to choose from. Pharmacists should be obligated to inform the patient of the walk-in and the co-payment price options. In most states, laws need to be passed to allow the pharmacists to work with the patients to find lower costs generics, if they are available.

PBMs and insurers may object, because patients will rightly question why they can save money by refusing the “insurance coverage” that they paid hefty premiums to obtain. PBMs will be exposed for the outsized portion of payments they capture.

Wherever a state law prevents informing the patient of prospective prescription cost options, that law needs to be removed and replaced by a law that obligates pharmacies to disclose walk-in prices to all patients.