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The high cost of prescription drugs has become a significant issue for many Americans. According to a 2019 survey, nearly one in four Americans reported difficulty in affording their medicines. The problem has been exacerbated by the fact that some drugmakers have been using a pricing model known as “cost-plus” to set their drug prices.
What is Cost Plus Pricing?
Cost plus pricing is a pricing model where a company adds a markup to the cost of producing a product or providing a service. The markup is usually expressed as a percentage and represents the company’s profit. The goal is to calculate the total cost of production, add a markup, and set the selling price.
In the case of prescription drugs, the cost-plus pricing model calculates the cost of production, which includes research and development, manufacturing, and marketing costs, and then adds a markup to determine the selling price.
Why Cost Plus Pricing Model is Used in the Pharmaceutical Industry?
The pharmaceutical industry is unique in that it requires significant research and development expenses to produce new drugs. The cost of developing a new drug can range from $1 billion to $2.6 billion. This high cost of development is one of the reasons why the drug pricing model is so complex.
The cost-plus pricing model was originally used by the government to set prices for certain products and services, such as construction or military contracts. In the pharmaceutical industry, it was first used in the 1980s in response to government pressure to control drug prices.
The cost-plus pricing model allows drug companies to take into account the cost of developing and manufacturing drugs. This model ensures that the company is adequately compensated for its investment and provides additional funds for research and development of new drugs.
Criticism of Cost Plus Pricing Model
Critics of the cost-plus pricing model assert that it leads to inflated drug prices. The pricing model does not take into account the value of the drug to the patient or the healthcare system. This results in drug prices that are unaffordable for many patients, particularly those without insurance or with high-deductible health plans.
Critics also point out that the cost of research and development has been inflated by drug companies to justify the high price of drugs. However, drug companies argue that the cost of research and development is high and that the pricing model is needed to recoup these costs.
What are the Alternatives to Cost Plus Pricing?
One alternative to the cost-plus pricing model is value-based pricing. This pricing strategy takes into account the value that the drug provides to the patient and the healthcare system. Under this model, the price of the drug is set based on its clinical effectiveness, safety, and impact on overall healthcare costs.
Value-based pricing has been successfully implemented in other countries, such as Australia and Germany. However, the adoption of this model in the U.S. has been limited due to the complexity of the healthcare system.
Conclusion
The use of the cost-plus pricing model has been a source of controversy in the pharmaceutical industry. While it allows drug companies to recoup their investment in research and development, it has also led to inflated drug prices that are unaffordable for many patients. As the debate on drug pricing continues, finding a pricing model that balances affordability and innovation will be a challenge that requires the cooperation of all stakeholders, including the government, drug companies, and healthcare providers.
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