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

04/01/2000

Given the national nature of many of the major players in the prescription drug market—drugs are produced by national manufacturers, distributed through mostly national PBMs and in many cases through national pharmacy chains—we might not expect to see large price differences by region. We would expect to see small differences based on local price variations. But in fact, we see a fairly substantial price variation across the country.

The key research question for Chapter 3 was the extent and direction of retail price differences between cash customers and those with third party coverage. Here we focus again on that distinction and we find some striking state and regional differences. As in Chapter 3, this analysis considers only differences between retail prices and does not consider manufacturer rebates that PBMs typically receive. Because rebate information is proprietary, no information is available on whether rebate amounts vary by region or state. Retail price differences also do not capture discounts that other large volume direct purchasers may receive. If these rebates and other discounts were included in this analysis, the differences observed would be larger.

Table C-3 shows the median price differential between cash customers and third party payers across states and regions based on IMS Health data for the 25 drugs described above. As in Chapter 3, the term cash customer refers to those paying in full for their prescriptions at the retail counter and includes those with indemnity insurance coverage who file claims at a later time. Median retail price differences for the 25 listed drugs are nearly twice as large in the Northeast and West as in the Midwest or South. The District of Columbia (21.6%) and New York (17.7%) had the highest median retail price difference (excluding rebates) among the states. Nebraska (-0.9%) was the only state where the retail price for third party payers was typically lower than that for cash payers. Wisconsin (0.3%), New Mexico (0.7%), and Florida (1.3%) were the next lowest states. Table C-3 also shows the number of drugs that fall into four ranges of price differentials: less than 0 (third party greater than cash), 0 to 9.9 percent, 10 to 19.9 percent and 20 percent or above. Looking at the differences in numbers of drugs falling in the four ranges shows substantial variation in price differentials within states as well as across states.2

The reasons for the substantial geographic variations have not been determined. Analysis of systematic sources of variation based on simple measures of managed care penetration and other variables showed no obvious relationships. In addition, the relationship between the share of the retail market attributable to cash customers (discussed below) and price differences is not clear. One hint may come in limited evidence that there is greater state variation in the prices charged to cash customers than in the prices charged to third party payers (data not shown). Further study of these differences, however, will be needed to understand state and regional variations.

MEPS data comparing average percent over benchmark price across all drug purchases in 1996 for those with and without drug coverage are shown by region in Figure C-1.3 The difference in average percent over benchmark price appears to be lowest in the Northeast where the average percent over benchmark price for those without coverage is 39 percent compared to 31 percent for those with coverage. The difference in prices relative to the benchmark price is much greater in the other three regions. This contrasts with the IMS results where the data show larger differences in the Northeast. Interestingly, the average percent over benchmark price is similar for Medicaid recipients and those with other non-Medicaid coverage in the Northeast and West, but in the Midwest and South average percent over benchmark price for Medicaid recipients is much closer to the higher levels shown for those without coverage (Medicaid data not shown). As discussed in Chapter 3, rebates from manufacturers to the states are not included in these data.


Figure C-1. Average Percent Over Benchmark Price, By Region

Figure C-1. Average Percent Over Benchmark Price, By Region

Note: (1) Percent over benchmark price equals the ratio of the average retail unit price (ARUP) to the benchmark unit price (BUP) minus one, multiplied by 100: Percent over benchmark = ((ARUP/BUP- 1)*100.
(2) Data exclude the effect of rebates for those with drug coverage.

Source: Center for Cost and Financing Studies, Agency for Healthcare Research and Quality: Medical Expenditure Panel Survey Household Component, 1996.

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