Health Insurance Medicaid/Medicare Pharmaceuticals

Reference Pricing

What percentage of your prescription drug costs should your insurance company cover?  You may say “100%, of course!”  However, if health insurance cover all pharmaceutical costs this will drive up premiums.  

One solution to this problem is reference pricing.  If generics are available for $10 and name brand drugs are available for $100, the insurance company only covers $10 for drugs in this category.  Why would anyone want a $100 drug when a $10 one is available?  The Health Care Blog gives 4 reasons why physicians don’t prescribe more generics:

  1. Many drugs are better known by their often simpler brand names and so physicians routinely write the brand name on the prescription, even if they do not mean that the brand has to be filled.
  2. Physicians do not have any idea what drugs actually cost their patients, because we are “too busy” and because prescription drug pricing transparency might wake us up.
  3. Some physicians believe, against the evidence in double-blind trials, that generics are inferior or less pure than the brand name version.
  4. Some patients are convinced, also against the evidence in double-blind trials, that they do better with the brand than with the generic version and request that their physician specify the brand.

Yet the Wall Street Journal reports that CMS may ban reference pricing.  Authors Dr. Rick Peters and Dr. Karl Luber claim that reference pricing does much good and should not be banned.

I tend to agree with them.  If low cost, safe generics are available, then insurance should only cover the cost of generics.  This will lower costs and convince more people to take generics.  

There is a down-side to reference pricing, however.  By giving less money to the pharmaceutical companies who manufacture the name brand drugs, this may stifle innovation of these drugs in the long run.  However, incentives to innovate could be generated through extending patent lengths or giving prizes to pharmaceutical companies who develop new drugs.  

Reference pricing is a fair way to steer patients and physicians towards more cost-effective use of pharmaceuticals.


  1. Generics are the very reason so many pharmaceutical companies are laying off employees, especially salespeople, right now. The big pharma companies face even tougher times in the years to come when many of their “blockbuster” drugs’ patents will expire (between 2010 and 2013), allowing more generic drugs to enter the market. It will be interesting to see what moves these companies make between now and then.

  2. Quality of generics provided to double-blind trials may indicate equivalent quality with major-pharma product but in reality, there is little ability for a patient or doctor to track which generic company is filling a script. Each company’s QA and manufacturing consistency is different. Sometimes doctor’s want the consistency.

    Add to that the big drugstore chains and Wal-Mart are going to go with the absolute lowest cost supplier, coming over on non-climate controlled ocean shipping, and you start to see major quality differences.

    Also they can make more profit on some generics than their respective name brands. $10 generic script can give $8 profit while a $100 non-generic could yield $6, CVS will always push the generic to make them money not save you (or your insurance company) any.

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