Report to the President: Prescription Drug Coverage, Spending, Utilization, and Prices.. Distribution and Pricing of Prescription Drugs

04/01/2000

Most noninstitutionalized people, regardless of their coverage status, obtain prescription drugs through some form of retail pharmacy, including independent pharmacies, chains, pharmacies in supermarkets or mass merchandisers, and mail-order pharmacies. In 1998, sales through retail outlets accounted for 90 percent of total outpatient prescription drug sales (excluding sales to hospitals and long-term care facilities or agencies).1

The following description of this system will begin with the simplest series of transactions, those that culminate in a retail purchase by a consumer who pays for a prescription in full at the point of sale. Some of these customers, referred to as cash customers in this chapter, may file a claim with their insurer for reimbursement after the transaction. This description will be followed by a summary of how prices are established for private insurers and PBMs, along with a review of the special pricing systems for Medicaid, the VA, and certain other favored purchasers.

The prices paid by these various types of customers are illustrated in Table 3-1, which portrays illustrative pricing for brand name drugs. The prices in the table are based on a composite of commonly prescribed brand name drugs and reflect documented relationships among the prices for different transactions.2 Ranges of prices are included where more precise information, particularly on drug rebates, cannot be documented. Actual price relationships vary substantially by drug, and are quite different for generic drugs. Generic drugs, for example, have much lower prices on average and the fixed costs for the pharmacy of dispensing the prescription represent a much higher proportion of the final retail price. Furthermore, approaches to pricing generic drugs in the industry are different.

Table 3-1. Illustrative Example of Pricing for Brand Name Prescription Drugs
  Cash Customers (No 3rd Party Payment at Point of Sale) Insurers and PBMs HMO ** Medicaid Federal Supply Schedule
List price (AWP) $50
Manufacturer's price (manufacturer to wholesaler or other entity) $40
(AWP-20%)
$40*
(AWP-20%)
$34
(AWP-33%)
$40* $24
(AWP-52%)
Acquisition price (wholesaler to pharmacy) $41 $41 n/a $41 n/a
Retail price at pharmacy (total of amounts paid by customer and reimbursed by 3rd party payer) $52
(AWP+ 4%)
$46*
(AWP-13% +$2.50)
$41 +$2.50
Retail price, less typical manufacturer rebate n/a $30 to $44
(5% to 35% rebate)
$30 to $37
(15.1% to 30% rebate)
Ultimate (net) amount paid by final purchaser and/or consumer $52 $30 to $44 $34 (avg.) $30 to $37
$34 (avg.)
$24

n/a = not applicable

* without rebate

** This column refers only to HMOs that buy directly from manufacturers.

Notes:

(1) Prices are based on a composite of several commonly prescribed brand-name drugs for a typical quantity of pills. For some cells in the table, the relative relationships have been calculated based on relationships reported in How Increased Competition from Generic Drugs Has Affected Prices and Returns in the Pharmaceutical Industry ( CBO, 1998) study and on other relationships widely reported by industry sources.
(2) These prices are used for illustrative purposes only and do not represent any type of overall average.
(3) Prices reported in this table include both amounts paid by third-party payers and amounts paid by the consumer as cost sharing.

 

The share of purchasers who pay in full at the time of the transaction (referred to as cash customers) has been steadily decreasing in recent years. This category includes both those with no insurance coverage for drugs and those with indemnity coverage who file claims after the retail transaction is complete. In 1990, 63 percent of retail prescriptions involved cash customers, while 37 percent involved billing by the pharmacy to third-party payers or Medicaid (Figure 3-1). By 1998, only 25 percent of prescriptions were paid for by cash customers.3


Figure 3-1. Payment Sources for Prescription Drug Purchases, 1990-1998

Source: IMS Health Retail Method-of-Payment ReportTM, 1999.


This trend does not represent a growth of coverage as much as it represents a shift in how drug coverage works. During the 1990s, the common approach has shifted from indemnity coverage to coverage that is managed at the point of sale.

With indemnity insurance, a customer typically pays cash for the full cost of the prescription at the pharmacy and then files a claim for reimbursement from the insurer. As noted in Chapter 1, most people with private group coverage for prescription drugs have some form of managed drug benefit, administered by a PBM or sometimes directly by an HMO or other insurer. Under PBM administration, point of sale transactions are now the norm. Under such a transaction, the pharmacist uses a computer system to determine the deductible, copayment, or coinsurance, which the customer pays at the retail counter.

Management of drug benefits has become the norm for group coverage. For nongroup coverage, including Medigap, it is much less common. In the case of Medigap, for example, the insurer's liability is limited to half of total spending between a deductible and a cap; insurers generally have not seen enough potential for savings to invest in benefit management.

As noted previously, the ultimate prices paid for prescription drugs by or on behalf of consumers are established through an intricate system involving pharmaceutical manufacturers, wholesalers, retailers, and insurers or other managers of drug benefits. Accordingly, the descriptions below, despite the apparent level of detail provided, are necessarily simplified in order to convey the key characteristics of this system.

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