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

04/01/2000

One of the charges of this study was to examine the differences in drug prices paid by people with and without prescription drug coverage. Prices and price differentials are important measures for understanding the market for pharmaceuticals in the United States. Analyses of pharmaceutical pricing, however, are complicated by the intricacies of this market: the process by which 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 the market for pharmaceuticals, this chapter begins with a description of the distribution channels for prescription drugs and how prices are established for different purchasers. The chapter then explores the question of whether prices paid for drugs at the point of purchase differ between cash customers and insurers, using data from the Medical Expenditure Panel Survey (MEPS) and from a widely used private sector data source, IMS Health.

A key limitation on the analysis of prescription drug prices in this study is our inability to incorporate the effect of rebates provided by manufacturers to insurers or PBMs. In many instances, a manufacturer will provide a cash rebate to an insurer or PBM if the manufacturer's drugs are used by the insurer's or PBM's enrollee. Unfortunately, information about the relative size, prevalence and characteristics of these rebate arrangements is quite limited - these are confidential, private arrangements negotiated between manufacturers and insurers or PBMs. Information from industry sources and the available literature indicate that rebate amounts vary considerably by type of arrangement and by drug. They are quite considerable in some instances and relatively modest in others. Because these rebates primarily affect the ultimate price paid for prescriptions of insured individuals, failure to account accurately for the value of such rebates tends to understate the price differences facing uninsured and insured individuals.

Although we were unable to obtain information on rebates, we were able to obtain specific data from two sources, MEPS and IMS Health, that enable us to examine differences in the prices paid by consumers at the retail pharmacy point of sale. These data compare the amount paid to the pharmacy by uninsured customers to the reimbursement received by the pharmacy for insured customers (i.e., reimbursement from an insurer or PBM plus the customer's cost sharing). Given the greater market leverage of third-party payers relative to individual consumers, it might be expected that uninsured customers will pay more than insurers for the same drugs at the retail pharmacy level. Our results from both MEPS and IMS Health 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.

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