Report to the President: Prescription Drug Coverage, Spending, Utilization, and Prices.. Chapter 3: Prescription Drug Prices

04/01/2000

In today's market for prescription drugs, most insurers obtain significant discounts on behalf of their insured beneficiaries. Individuals without coverage thus face not only the burden of paying for the entire cost of the drugs they need out of pocket, but they may also face higher prices for a given drug than do insurers and other large purchasers. Sorting out the differences in prices paid by those with and without coverage is not simple. The process by which prescription drug prices are determined is highly complex, involving numerous interactions and arrangements among manufacturers, wholesalers, retailers, insurers, pharmacy benefit managers (PBMs), and consumers.

In order to explain the complexity of this market, Chapter 3 begins with a description of the distribution channels for prescription drugs and how prices are established for different purchasers. It then offers an empirical analysis of whether prices paid for drugs at the retail level differ between cash customers and those with insurance coverage, using data from two sources: the Medical Expenditure Panel Survey (MEPS) and a widely used private sector data source on drug prices, IMS Health. A key limitation on the analysis of drug prices in this study, however, is our inability to incorporate the effect of rebates provided by manufacturers to insurers and PBMs. Given the greater market leverage of third party payers relative to individual consumers, it might be expected that cash customers will pay more than insurers for the same drugs at the retail pharmacy. Results from both sources, despite the absence of rebate data, support this hypothesis.

Key findings include:

  • At the retail pharmacy level:

Individuals without drug coverage pay a higher price at the retail pharmacy than the total price paid on behalf of those with drug coverage (based on analysis of MEPS data that do not include rebates but look across all drug purchases holding drug type, form, strength, and quantity constant). The differences generally held up when examining the Medicare and non-Medicare populations.

Cash customers (including those without coverage and those with indemnity coverage) pay more for a given drug than those with third party payments at the point of sale (based on IMS Health data for over 90 percent of the most commonly prescribed drugs). In 1999, excluding the effect of rebates, the typical cash customer paid nearly 15 percent more than the customer with third party coverage. For a quarter of the most common drugs, the price difference between cash and third parties was even higher - over 20 percent. For the most commonly prescribed drugs, the price difference between cash customers and those with third party coverage grew substantially larger between 1996 and 1999.

The pattern of differences in the price paid by cash customers and those with third party payments is different for generic and brand name drugs (based on both MEPS and IMS Health data). Percentage differences in the price paid are often smaller for brand name drugs, but absolute differences may be larger because average prices for brand name drugs are considerably higher.

  • Data on manufacturer rebates, if available, would reduce the total amount paid by the insurer or PBM on behalf of insured customers, increasing the difference in the total net price. Data on rebate arrangements, however, are confidential and unavailable to this study. In some instances, the amount of the rebate may be significantly more than the price differences observed at the retail pharmacy level. In other cases, the rebates may add only modestly to the observed differences.
  • Various sources produce estimates of rebates ranging from 2 percent to 35 percent of drug sales prices. These rebates are not reflected in retail prices, but are instead paid directly to insurers and other organizations that manage drug benefits after they have already reimbursed the pharmacy.

This study presents a detailed examination of multiple factors relating to coverage, utilization, and spending for prescription drugs, particularly by the Medicare population. It also raises a variety of issues that are ripe for further investigation. Suggestive relationships between demographic factors, insurance status, and prescription drug use were revealed. However, we were unable to examine the more complex interrelationships among these factors. Future multivariate analyses will allow us to come to a more nuanced understanding of these relationships. Future research should explore what can be learned from using more sophisticated definitions of drug coverage status and severity of illness than were available for this study. In addition, if more data were available on elements of manufacturer pricing, such as rebates, further research could probe more fully the differences in prices paid by different customers. Finally, ongoing analyses will allow us to continue to use the most recent data - rapid change in the pharmaceutical market requires that analyses be refreshed and updated on a continuing basis. Some possible avenues for future research are explored at the conclusion of this report.

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