As described in the previous section, both the processes by which prices are determined and the ultimate price paid for drugs by various purchasers varies considerably. Other factors also lead to wide differences, such as different pricing strategies between generic and brand name drugs and between single-source and multiple-source drugs. In the remainder of the chapter, the focus is primarily on one facet of pricing - the variation in prices faced by different types of consumers at the retail pharmacy. For reasons of data availability, rebates cannot be incorporated into the prices discussed below.
Price data reported in this chapter are derived from the Agency for Healthcare Research and Quality's Medical Expenditure Panel Survey (MEPS) pharmacy component for 1996 and from IMS Health pharmacy audits for 1996 through 1999. The MEPS data include prices for all drugs furnished to participants on an outpatient basis, including prescriptions filled by retail pharmacies, mail-order pharmacies, and pharmacies within outpatient facilities (such as hospitals, some HMOs, and VA facilities). The IMS data used for this report include prices only for prescriptions filled by retail pharmacies. The two data sets complement each other because MEPS allows for comparisons by more precise definitions of coverage status and collects prescription price information across a broader array of pharmacy outlets, while the IMS Health sample size allows more direct drug by drug comparisons of prices paid by cash versus third-party payers. In addition, the 1996 MEPS data are newly released (December, 1999) and have not yet been widely used. The IMS data are a commonly accepted data source on prices, are widely used by industry, and are the most recent data available.
For the purpose of the discussion below, the price of a prescription drug is the total amount paid by all payers to the pharmacy that filled the prescription. For example, if the pharmacy received a $15.00 payment from a third-party payer and a $5.00 copayment from the consumer, the price of the drug is $20.00. Because rebates from manufacturers to PBMs, insurers, or Medicaid programs do not directly affect the amount paid by the third party to the retail pharmacy, the price measured at the retail pharmacy level is often not the true "price" paid by third-party payers. In most cases, the true price is less than the amount paid in the pharmacy transaction. Finally, for the purposes of price comparisons in this chapter, variants of the same drug sold by different manufacturers are each considered as distinct drugs.
Because this analysis focuses on retail price differences and is unable to incorporate rebates, our approach is different from that of the studies by the Minority Staff of the House Committee on Government Reform (Prescription Drug Pricing in the United States: Drug Companies Profit at the Expense of Older Americans, November 9, 1999). The Committee study focused on the difference between best prices obtained in the market by third-party payers and the higher retail prices paid by cash customers. By contrast, our analysis of MEPS and IMS Health data focuses on differences in retail prices at the retail pharmacy level faced by customers with and without access to the discounts negotiated by third-party payers. Data on manufacturer rebates, if available to this study, would have allowed a more complete analysis of price variation within the market.22 Without access to that information, our analysis tends to understate the ultimate price differences for insured and uninsured customers. Rebates paid by manufacturers to insurers or PBMs increase the difference between the total net price ultimately paid for drugs on behalf of those with some type of third-party drug coverage and the price paid by those who pay totally out of pocket at the retail point of sale.
The 1996 MEPS includes a pharmacy survey to validate prescription drug utilization reported by respondents, and to obtain direct measures of retail prices paid for drugs. For each prescription drug "event" reported by respondents MEPS endeavors to ascertain the price through the pharmacy survey. The pharmacy data, in combination with the comprehensive respondent data, enables pricing analyses with detailed definitions of coverage status.
However, information was collected from pharmacies in only about half the instances in which a household survey participant mentioned using a specific pharmacy. Overall, of the drug events used to estimate utilization and spending in Chapter 2, about 40 percent have data derived directly from a household/pharmacy match for the same person. Prices were imputed for 60 percent of the remaining events using statistically matched pharmacy events for comparable individuals. To avoid introducing measurement error that could bias comparisons, only non-imputed price data - cases in which there was a direct match of information from a household and a pharmacy - are used in this chapter.23 However, sensitivity analyses (not shown) using the imputed data are very consistent with the data reported here.24
One consequence of this exclusion is that, for any single drug (defined by name, manufacturer, form, and strength), the available sample from MEPS is too small to allow reliable comparison of prices paid by different purchasers. Price comparisons for specific drugs will be made using the IMS data, which have a much larger sample size.25
IMS Health Data
IMS data used in this chapter are drawn from the IMS Health Retail Method-of-Payment Report ™ and Price Trak Report™. IMS collects data from a panel of 34,000 retail pharmacies, including independents, chains, and pharmacies within food stores or mass merchandisers. The IMS sample for these products accounts for over 60 percent of retail outlets and over 70 percent of prescriptions filled in the US, but it omits mail-order pharmacies and pharmacies within facilities, such as outpatient hospital pharmacies, VA pharmacies, and those operated by the few HMOs that have their own pharmacies. Through a variety of electronic media, IMS collects acquisition cost, retail price, and payment source for every new and refilled prescription. Three payment sources are identified: cash, Medicaid, and other third party (essentially private insurance). Note that the IMS data would class an individual who paid cash and was later reimbursed by an indemnity policy in the cash category.26
For this study, 1996 and 1999 price data were obtained for 39 Uniform System of Classification (USC) categories of drugs that together included the 100 most commonly prescribed individual drugs in 1996.27 These categories also included 177 of the 200 most commonly prescribed drugs in 1998. These drugs represent a substantial portion of the total market for pharmaceuticals: the 200 most commonly prescribed drugs in 1998 made up 57 percent of the total prescriptions filled at retail pharmacies, and also 57 percent of the total dollar volume of prescriptions in 1998.28 Not all of these drugs were on the market in 1996; price data for that year were obtained for 166 drugs. Nineteen of the 20 drugs most frequently received by Medicare beneficiaries in 1996 are also included.29 We chose to use the most commonly prescribed drugs instead of those drugs with the highest dollar volume. This decision allowed us to focus our analysis on the drugs most used by consumers instead of the highest-cost drugs.
IMS provides data on price for each specific drug name, form (e.g., tablet or capsule), and strength (e.g., 500 milligrams) from each manufacturer. This study uses the most common form and strength in 1999 for each drug name and manufacturer, which is generally representative of the aggregate results across all forms and strength for a given drug.30
The next section presents results from both of these data sources that explore the question of whether individuals without prescription drug insurance coverage and individuals paying cash for prescription drugs pay more for the same drugs than insurers buying drugs on behalf of covered individuals. In general, we use the IMS Health data to compare directly the prices paid on a drug-by-drug basis, which cannot be done with the MEPS data. We use the MEPS data to compare prices paid by Medicare enrollees with and without coverage, and to aggregate across all drugs, neither of which can be done easily with the IMS data.
Unless otherwise noted, all results reported based on MEPS data are statistically significant (at the 0.05 level, based on a two-tailed test). The unique nature of the way IMS collects and reports its data does not allow for statistical testing of results from these audits. However, given the large sample sizes used by IMS (over 70 percent of US prescriptions filled at retail pharmacies), all results reported based on IMS data are highly likely to be statistically significant. See the Introduction of this report for details.