Report to the President: Prescription Drug Coverage, Spending, Utilization, and Prices.. Pricing for Favored Private Purchasers (HMOs and Hospitals)

04/01/2000

Not all drugs dispensed by pharmacies are purchased from wholesalers. Institutions that operate their own outpatient pharmacies, such as hospitals and clinics, may deal directly with manufacturers, either individually or through buying groups. They typically save the wholesaler markup. In addition, they may receive a price lower than that offered by the manufacturer to wholesalers. Table 3-2 shows estimates by the Congressional Budget Office, based on IMS data, of the discounts received by these purchasers, which represent a total of about 14 percent of the market. These discounts are reported relative to the average acquisition price paid by retail pharmacies, excluding mail order, in 1994.

Table 3-2. Average Invoice Price Paid for 100 Top-Selling Brand Name Drugs, 1994
  Percent of average invoice price to retail pharmacies
Retail pharmacies 100%
Hospitals 91%
Long-term care facilities 95%
Health maintenance organizations 82%
Federal facilities* 58%
Clinics 91%

* Federal facilities include the Department of Veterans Affairs, the Defense Department, the Indian Health Service, and the Public Health Service. Similar prices are available to state pharmaceutical assistance programs.

Source: Congressional Budget Office, How Increased Competition from Generic Drugs Has Affected Prices and Returns in the Pharmaceutical Industry, Washington, July 1998.

Rebates and other discounts that do not appear on an invoice are not included in the price relationships reported in this analysis. Because of their direct purchasing relationship with manufacturers, however, these entities are less dependent on rebates based on the amount of a particular drug dispensed. It appears that rebates play a smaller role for these purchasers than for PBMs that do not purchase drugs directly. More complete pricing data are unavailable.

The estimate for HMOs in Table 3-2 reflects discounts to the relatively few HMOs, such as some of the Kaiser Permanente plans and other staff or group-model HMOs, that operate their own pharmacies and buy drugs directly from manufacturers. This is not an estimate of the size of rebates that are received by the majority of HMOs, which manage drug costs and utilization through PBMs and whose enrollees obtain their prescriptions through retail outlets.

In Table 3-1, the HMO price is $34, based on the relationship reported by CBO (Table 3-2) and confirmed by other information obtained from industry sources. There is evidence that some HMOs obtain at least some drugs at prices substantially below the price in this illustration. Recently, the HHS Inspector General reported on two HMOs that were able to purchase a drug at prices considerably below the reported best price for that drug.14

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