Today's Wall Street Journal reports that manufacturer list prices for many top drugs keep rising. Coincidentally, the U.S. Government Accountability Office (GAO) just released its latest analysis of prescription drug prices: Trends in Usual and Customary Prices for Commonly Used Drugs (GAO-11-306R).Here’s a surprise buried in the GAO report: Retail pharmacies raised the prices of brand-name drugs to cash-pay consumers faster than manufacturers raised the list prices of those same drugs. (See the chart below.)
As Chief O'Hara would say: Mother McGillicutty!!
Before you scribe a nasty comment about how I hate pharmacies (which I don’t), please take a wee moment to look at the GAO's data sources and my observations below.
A POT O' GOLDEN DATA
I’m focusing on what the GAO describes as their “first basket” of drugs. This group included 100 commonly used drugs in which the brand-name and generic versions are distinct drugs with distinct levels of utilization. For example, “Zocor/10mg/oral/tablet” and “simvastatin/10mg/oral/tablet” were considered to be two separate drugs. See my comment below for the more meaningful “fourth basket.”
Let’s look the price indexes that the GAO computed using the following two sets of prices:
- Usual and Customary (U&C) prices: “actual retail prices that pharmacies charged to cash-paying consumers for prescription drugs.” The data come from Pennsylvania’s Pharmaceutical Assistance Contract for the Elderly (PACE) program.
- Average Wholesale Price (AWP): “’list prices’ reported by manufacturers—from Red Book.”
As you can see, the U&C prices grew more quickly than the AWP prices in three of the four periods studied. The overall average for the U&C index also exceeds the AWP index. The fourth time period included the infamous AWP rollback, but the report does not mention how, if at all, this affected the results.Some observations:
- So, how are U&C prices set? You’ll need the luck o’ the Irish to figure that one out. U&C prices seem to vary based on the whim of an individual pharmacy, which is why prices can vary by 100% or more between different pharmacies in a single area. See The Problem with Pharmacy Prices for data on this phenomenon.
- Our health care system still has an unfortunate “soak the poor” model that can provide pharmacies with higher profits from cash-paying consumers who lack insurance coverage. See Pharmacy Profits and the Uninsured. Looks like things are worse than I thought.
- Note that the U&C data come from my home state of Pennsylvania. Ironically, Pennsylvania is where pharmacy owners are pushing anti-competitive legislation that would favor pharmacies over payers and consumers, as I discuss in The Crazy Battle to Outlaw Mail Pharmacies.
As an aside, the GAO also developed a basket of drugs that accounted for the shift in utilization from brand-name to generic versions of drugs. For example, utilization of Zocor dropped and utilization of simvastatin increased after 2006.
The U&C price index increased about 2.6 percent per year, a much lower rate than the 6.6 percent annual increase observed when shifts in utilization were not included.
The statistical wizards at the University of Minnesota’s PRIME Institute and the AARP, which publish a widely-publicized drug price report every year, have never been willing or able to perform this same computation. See Myths and Facts about Drug Prices for more on this flaw.
I’d offer to buy them an abacus, but tuition and fees at the University of Minnesota have grown by healthy 9.6% per year (source), so I presume they can afford a few new calculators.
AND BEFORE YOU ASK…
The picture accompanying today's post is not what I looked like when I was younger.
Actually, I was taller.
Happy St. Patrick’s Day!
