Key takeaways

Many different parties are involved in setting drug prices. The drug manufacturers primarily choose the list price for a medication, but this price is then negotiated with insurers, pharmacies, and other contributors.
Drug prices can go up and down with time. Manufacturing and research costs can cause increases, but generic competition can reduce drug prices.
There are many ways to save on drug costs. You can try prescription discount cards and coupons or look into manufacturer savings programs.

Overview

Medication pricing is a complex process influenced by various factors, including research and manufacturing costs, profit margins, and the overall market. It’s not just manufacturers that set the prices for their medications — individual pharmacies, insurers, and even government agencies can have a say in what a drug costs.

What’s more, the list price for a drug is unlikely to be the final price paid by a consumer. There are also many ways to save on your drug costs to be aware of.

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Who sets drug prices?

A person paying for their medications at a pharmacy. — Ekaterina Goncharova/Getty Images

Drug pricing is influenced by various stakeholders, each playing a specific role in the final pricing of a specific medication, including:

drug manufacturers
pharmacy benefit managers (PBMs)
insurers
governments
individual pharmacies
lawmakers

Drug manufacturers

The company that makes the drug usually sets the initial list price for the medication. The list price is the price suggested by the manufacturer before any discounts are applied. This price is the starting point for any negotiations with PBMs or insurers, and it’s typically higher than the price you’ll eventually pay.

Drugmakers set prices with several considerations in mind:

Research and development costs: It can be very costly to develop a new medication, so manufacturers typically aim to recover some of those costs when the drug hits the market.
Manufacturing costs: Drugmakers will also aim to recover the costs of manufacturing, including the costs of materials and labor to make the medication.
Market landscape: Manufacturers will likely look at the overall market, including similar drugs, to ensure their medication is priced competitively related to demand.
Profit margins: Manufacturers will typically seek to make a profit on their medications to fund future research endeavours.

PBMs

Pharmacy benefit managers (PBMs) act as middlemen between drug manufacturers, insurers, Medicare Part D plans, and pharmacies. They negotiate with drugmakers for rebates and discounts off the list price.

PBMs also work with insurers to create formularies — the list of medications covered by insurance. These are usually split into tiers, with lower tiers being lower cost to patients and more likely to be used. Manufacturers can negotiate with PBMs to secure placement on a preferred tier by offering rebates and discounts on the drugs.

Insurers

Insurers negotiate with manufacturers and PBMs to determine which medications will be covered, which tier they will be placed on, and how much of the costs will be reimbursed to a patient.

Insurers will also set copayments, coinsurance, and deductible rates that you may need to pay out-of-pocket before a drug is covered by insurance.

Government agencies

Starting in 2026, government agencies like Medicare can negotiate directly with drug manufacturers to set a maximum fair price (MFP) for certain high cost, brand-name medications. The negotiated prices are at least 38% lower than the list prices in 2023.

Currently, only 10 medications are eligible for this negotiation, but more are expected to be added in the coming years.

Individual pharmacies

You may notice that individual pharmacies charge different amounts for the same medications. This is because each pharmacy may set its own dispensing fees. They may also have negotiated fees and reimbursement rates with manufacturers, PBMs, or insurers, meaning they can charge different rates.

Legislators

Lawmakers and new policies can impact drug pricing overall in several ways:

introducing price caps
enforcing cost transparency
approving generic alternatives
allowing the importation of competitor drugs
reforming patent laws, reducing exclusivity periods for manufacturers

Factors that can affect drug prices

Drug prices aren’t static — in fact, they can go up and down through the years. Projections for 2025 etimated that drug spending could increase by up to 11%. The following factors can cause drug prices to increase:

Manufacturing costs: Inflation is the rate at which prices increase with time. This means the cost of materials and manufacturing can increase, so drug costs need to increase in line with this.
Research costs: It can be very costly to develop and research new medications. Many drugmakers price their medications highly in order to fund future research and development.
Supply chain disruptions: If the supply chain of a medication is disrupted for any reason, this can cause drug shortages. When this happens, demand will increase, which can raise prices.
Market exclusivity: When a new drug is first approved, a brand-name version is granted a period of exclusivity to sell the medication without competition from generic alternatives, meaning prices tend to be higher.
Competition: A drug’s price will tend to be higher if there is no other competition on the market, such as if no other medication exists to treat a given condition.

The following factors can cause drug prices to decrease:

Government negotiation: In some cases, governments can implement drug caps or negotiate maximum prices for medications, which is the case with the Inflation Reduction Act of 2022.
Generic alternatives: When a brand-name drug’s exclusivity period ends, cheaper generics can enter the market, which can drive down overall costs due to increased competition. In fact, some research suggests that generic competition can lead to up to 80% lower drug costs.

Ways to save on medication costs

Americans currently pay the highest prices in the world for prescription medications, and despite negotiations, drug prices are likely to continue to increase. However, there are several ways that you can save on your medication costs:

Try prescription discount cards: Prescription discount cards and coupons, such as the Optum Perks Discount Card, can help you save up to 80% on prescription drugs. You can present these cards at a pharmacy to receive discounts automatically. These are not used alongside insurance.
Consider generics: Generic medications are generally significantly cheaper than branded alternatives, and they’re equally safe and effective. You can ask a doctor or pharmacist whether a branded drug is available as a generic.
Check your insurance: If you have health insurance, you can check your drug formulary to see what medications are covered. This can help you and your doctor decide which medications to prescribe.
Check for manufacturer savings programs: Many manufacturers offer savings programs or promotional prices on their medications. You can look up the manufacturer’s website to see if they offer any savings.

If you need help covering the cost of medications, the free Optum Perks Discount Card could help you save up to 80% on prescription drugs. Plus, you can now get them delivered to your home in as little as 3 days. Search for your medication here.

Summary

Drug pricing is a complex process affected by several different stakeholders. The primary contributor to drug costs is the manufacturer, who can choose the initial list price for their medication. Other involved parties include insurers, PBMs, and legislators.

Many factors can affect drug prices, including inflation, the overall market, and supply chain disruptions. However, there are many ways you can save on drug costs.

Download the free Optum Perks Discount Card to save up to 80% on many prescription medications. Plus, you can now get them delivered to your home in as little as 3 days. Search for your medication here.

Disclaimer: While Optum Perks strives for factual, comprehensive, and current information, this article is not a substitute for a licensed healthcare professional’s expertise. Always consult a doctor before taking or discontinuing any medication. Drug information is subject to change and may not cover all uses, directions, precautions, warnings, interactions, reactions, or adverse effects. The lack of a warning does not guarantee a drug’s safety, effectiveness, or appropriateness for all patients or specific uses.