Drug stores and hospitals make good money selling you medicines but prefer to lay low in the pricing debate. They do it by cloaking their charges in private contracts and convoluted billing.

Let’s look at retail pharmacies first. Even when you think you’re ahead, you could be leaving money on the drug store counter.

The enduring misnomer of the retail drug business is that most medicines are very expensive. “It’s a poisonous myth,” says California-based physician David Belk. Belk has spent the last seven years on an odyssey digging deep into the bedrock costing of medicines — and the rest of the US healthcare system.

Eighty-five percent of medicines prescribed are generic, according to Statista. And a vast majority of them are inexpensive. Many cost pennies a pill. For example, 20 mg tablets of the blood pressure medication benazepril HCL cost retail pharmacies just 4.9 cents each on average, according to Belk.  


Pharmacies buy their medications directly from manufacturers or wholesalers and receive a volume discount on prices. If it were as simple as turning around and selling those medicines directly to consumers, this leg of the drug supply chain would be vastly simpler to grasp.

But, of course, it’s not.

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Retail pharmacies must first negotiate with pharmacy benefit managers, the powerful and profitable middlemen in the drug supply chain, that control which meds insurance companies will cover. The PBMs hold the leverage because drug stores, small independent ones especially, need to be included in PBM retail pharmacy networks to stay in business.

“The PBMs say: ‘Play by our rules and if you don’t, you don’t get our customers,’” explains Belk.

The essential tool of that relationship is the copay, which often enables you get your meds without emptying your wallet. Think of the number of times you’ve happily paid a few bucks for what seemed to be an expensive medication, glad your insurance covered it.

What you might not know is that in the case of generics, the copay regularly covers more than the price of the drug.

The result: Many medicines will cost you less if you buy them outside your insurance for the cash price.  

Gags and Claw Backs

That would be a nice thing to know at the drug store counter, but PBMs often require a “gag clause” that keeps pharmacists from informing you of the cheaper option. Why wouldn’t a PBM want you to know about the cash price? Because they regularly “claw back” a chunk of each copay from the drug store and keep it for themselves.  (Pharmacies are generally paid a straight dispensing fee by PBMs for name-brand drugs.)

Pharmaceutical Care Management Association spokesman Greg Lopes did not directly address the claw-back issue in an email saying, “We support the patient always paying the lowest cost at the pharmacy counter, whether it’s the cash price or the copay.” The trade group represents PBMs in Washington.

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He added the industry opposes contracts that include gag clauses: “Fortunately, to the degree this issue was ever rooted in more than anecdotal information, it has been addressed in the marketplace.”

Pharmacists beg to differ. A 2016 poll conducted by the National Community Pharmacists Association found that 58 percent of member pharmacies had experienced the gag clause between 10 and more than 50 times in the previous month.

“Most often community pharmacists are forced to sign take-it-or-leave-it contracts from PBMs with these provisions,” says Scott Brunner, senior vice president of communications and government affairs for NCPA.  “Why do they sign? Because they can’t fill prescriptions for that plan sponsor’s patients if they don’t.”

Since 2016, 21 states have outlawed gag clauses, including Arizona, Arkansas, Connecticut, Florida, Georgia, Indiana, Virginia and West Virginia. In Washington, two bi-partisan Senate bills were introduced this year to address the issue: Know the Lowest Price Act and the Patient Right to Know Drug Prices Act. Both bills are currently in committee.

If you’re contemplating despair, check out GoodRx, a company that has built a business around steering consumers to pharmacies that offer the lowest cash prices. For example, thirty 10mg tablets of the generic anti-depressant escitalopram (Lexapro) costs $10.50 with a coupon at Costco. Prices can vary tremendously.  The cash price of the same drug at Rite Aid with a coupon? $48.38. 

To understand how hospitals get the drugs they need for patients, you need to know yet another acronym: GPO, which stands for group purchasing organization. Hospitals buy medicines through GPOs such as Viziant and Premier. GPOs do not stock medicines. Instead, they aggregate the purchasing of multiple hospitals to negotiate lower rates from manufacturers. The wholesalers then sell pharmaceuticals to the hospitals based on the pre-agreed rates.

The Healthcare Supply Chain Association, which represents GPOs, projects that the sector will save up to $864 billion in healthcare costs over ten years. But GPOs, like PBMs, take an unknown cut of the action.

Inpatient vs. Outpatient

When a hospital provides a medication to you it is billed differently depending on whether you are admitted or receiving services as an outpatient. For inpatients, Medicare and Medicaid bundle the payments to a hospital so the drugs administered are part of the overall service.

“They pay by a flat fee for the whole service,” says Rick Gundling, senior vice president with the Healthcare Financial Management Association. “If your drug costs go up, [the hospitals] have to absorb it.”

About 60 percent of hospital patients are covered by government insurance, says Gundling. The rest are commercial or uninsured. The American Hospital Association maintains that Medicaid and Medicare reimburse below hospitals’ cost. In 2016, according to the AHA, that shortfall came to $69 billion.

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Hospitals make up for it, though, by charging private payers, including insurance companies, self-insured employers and uninsured people, more.

On the outpatient side, drug pricing is pre-negotiated with insurers. Here the hospital can often make up the difference if a medicine’s price is going up. But Grundling says there is evidence that some private payers are beginning to push back more against the cost shifting.

“The willingness of the commercial side to absorb the costs is shrinking,” says Gundling.

A special government program allows 2,500 safety-net hospitals to make a much bigger margin by purchasing outpatient meds for an average of 34 percent less than other providers. While drug companies hate the 340B program, the hospitals insist it is essential to paying for indigent care.

It’s about here that you tumble deeper into the rabbit hole of hospital charges. There are three essential parts of the bill: the “charge,” “price” and “amount.”

The charge is the astronomical fee stated by the hospital for the service rendered. If you haven’t already had a heart attack you might be contemplating one as you view this figure. But it’s a straw number originally created to give hospitals a better bargaining position with insurers.

“Over time, the charges get disconnected from prices,” explains Gundling. “It gets distorted.”

The price is the negotiated rate paid by your health insurer, if you have one. It is always significantly lower than the original charge. This amount is regularly renegotiated between providers and insurers under a system dubbed “reasonable and customary.” The insurer pays all or part of the price, depending on your deductibles and copay.

Any part of the bill left over is the amount you owe. If you are uninsured and indigent, some hospitals might try to get you enrolled in Medicaid or Medicare — or cover the amount due as part of their charity care.

If you just happen to be low on money, hospitals take a dim view and often aggressively seek payment. Medical debt, especially money owed to a hospital, is a big reason many Americans are forced into bankruptcy every year.