Tuesday, February 19, 2008

The Price Might Be Right

I just read an interesting new report about drug price comparison web sites run by 10 U.S. states. But the wide variations in pharmacy prices for a common, high volume generic make me wonder about the efficiency of the pharmacy market and the value of apparent transparency.


The Center for Studying Health System Change just released a study called State Prescription Drug Price Web Sites: How Useful to Consumers? I’m not familiar with the organization, but I found the report to be very useful.

Consumers in 10 states can compare the price of selected prescription drugs at different pharmacies. These sites provide the retail pharmacy price, which is usually measured as the “usual and customary price” charged to Medicaid. In theory, these prices could help uninsured or underinsured consumers shop around for lower prices.

Unfortunately, the data provided by these sites are apparently not always usable. The report documents some predictable problems, including:

  • Infrequent and incomplete updates of price data
  • Few reporting pharmacies
  • Small number of drugs reported
  • Inconsistent use of modern web search tools

Florida has a one of the better sites and is highlighted in the new report.

Just for fun (!), I compared the pharmacy prices listed on the Florida site (http://www.myfloridarx.com/) for simvastatin (generic version of Zocor) 40 MG tablet. I searched pharmacies in Hialeah, FL, which is an urban market included in the new report.

Prescription price data was available for 40 out of 70 pharmacies:
Average = $115.54
Range: $9.70 to $221.43

Since I’m a wild and crazy guy, I also dug up Florida’s Maximum Allowable Cost (MAC) data, which tells me the maximum ingredient cost reimbursement to a retail pharmacy for filling a Medicaid script. MAC data for Florida’s Medicaid program are also available online here, although not in a consumer friendly format. (I love the Internet!)

There are 40 NDCs on the Florida MAC list for simvastation 40 mg. Price per tablet is $1.8995 per tablet, so a 30-day script is $56.99. Florida’s Medicaid dispensing fee was $4.23, making total pharmacy reimbursement $61.22 for this script.

Now here is something interesting: the cash price at three chains is *below* the MAC reimbursement from Medicaid. The Hialeah list included 8 Walgreens (WAG) pharmacies ($59.99), 3 CVS pharmacies ($54.59), and 1 Wal-Mart (WMT) pharmacy ($54.54). In other words, Medicaid pays more than a cash pay customer.

Correction (2/20/08): Medicaid does not pay more than a cash customer at a given pharmacy because the pharmacy can not be reimbursed by Medicaid for more than its Usual & Customary charge. However, an uninsured cash-pay customer buying at Walgreens would pay less than Medicaid would pay to a pharmacy with a U&C above the Medicaid reimbursement rate. Thanks to Marc for the clarification. See the comments below for more details.


While Florida’s site does a reasonable (but incomplete) job in comparing retail prices, a payer or consumer would still not have a clue about the allocation of revenue and profits associated with a simvastatin prescription.

The retail pharmacy price from an individual script gets divided between the manufacturer, the wholesaler, the pharmacy, a health plan, and/or the third-party managers who oversee the whole process. It’s almost impossible to know how various rebates, discounts, and reimbursement structures have influenced the drug’s cost to an individual pharmacy. Publication of Average Manufacturer Price (AMP) data, which would provide one data point for actual acquisition cost, is off the table for now. (Granted, this mystery and complexity allows people like me to earn a living by understanding the inner workings of this system.)

Healthy competition is one factor that can allow a free market to provide the benefits of transparency. For example, consumer involvement in Medicare Part D is lowering costs and changing behavior. (See Part D and Generics.) However, the wide and apparently persistent variations in pharmacy prices for a common, high volume generic make me wonder whether consumers are getting the true benefits of market competition among pharmacies.


  1. Agree that consumers are not benefiting from market competition among pharmacies. A survey done by the City Council of NY in Oct-06 showed Metformin (long genericised) prices at pharmacies varied from US$10 to US$64, with an average of US$34.
    Worse, they are not benefiting as much as they should from the competition among manufacturers! After genericisation prices fall by 98%-plus for manufacturers, but by much less for the consumers.

  2. The public does not benefit from market competition because the health care industry is the most non market driven sector in our whole economy.

    As long as the insurance companies promote flat copays this is what we will get. If insurance companies instead set copays at, lets say %20 of ingredient cost, then we will see prices come down for all. Right now there is no real reason to offer cheap cash prices since this is such a small market and it will affect you U&C of third party Rxs.

    This will not happen however, since drug companies rely on people paying a flat $20 copay for a drug that costs several hundred dollars. If the consumer had to pay %20 of that, or $60 dollars, the consumer may look for a cheaper alternative. People pay for these expensive drugs by way of higher premiums, but the consumer doesn't care since this cost is not upfront.

  3. Just checked my cash price for 30 simvastatin 40mg--$19.90. Price report (Jan 2008) I get for my neck of the woods tells me that chain store median is $50.79 (range $50.79-129.99) mass marketer median is $11.74 (range $3.45-$35.69) and independent median is $17.25 (range $8.00 to $123.95).

    The Maryland price finder doesn't include simvastatin, so I checked Pravastatin and found that the posted price for us was over $100.00 too high.

    Beats me how they're collecting data. I've always told patients without coverage to take a list of all their meds to the pharmacies they're interested in and get a price for the whole "shopping cart." Then, get everything at the pharmacy with the best overall price. That way their records are all at one pharmacy and they can develop a relationship with that pharmacy. I thought these websites would save the patients some legwork, but I guess I was wrong.

    Although the copay is almost always still determined by the PBM, I'm still a fan of percentage based copays because they prompt the patient to look for less expensive, but still effective alternatives. And the growing use of Flexible Spending Accounts and other MSA programs will further that trend, leading (I hope) to patients with a more vested interest in managing the financial side of their healthcare, instead of just expecting first-dollar first-class health care for free.

    Tom Connelly, RPh
    Sun Pharmacy
    Rising Sun, MD

  4. Adam,
    In response to your comparison of the Hialeah list for simvastatin, Medicaid should not be paying more than a cash customer. Reason being that most pharmacy contracts include "lesser of U&C or {insert AWP/MAC formula} or MAC" in the reimbursement portion of the contract. Therefore, Medicaid should not be charged more than the published U&C charge. If they are, then I believe those pharmacies doing so are committing fraud.

    i.e. WalMart U&C=$54.54 or MAC+disp. fee=61.22 in your example, the charge to Medicaid should only be $54.54.

    Sorry to burst your bubble on that one.

    Also, I agree with going to 20% copay structure. Perhaps if people had a real grasp of how much some of this crap really costs, they might be a little more prudent about going with the high dollar stuff for first line therapy.

    I still think you are quite biased in your outlook on the system, but appreciate the opportunity to participate.

    Pharmacy Owner in Illinois

  5. Marc,

    You are correct about "lowest in the group" reimbursement models. However, my point is that a cash-pay customer would pay less to a pharmacy than Medicaid. To be honest, I don't understand how Florida computes U&C given the wide variation shown on the FL Rx web site. Regardless, an individual consumer probably has no idea about U&C, WAC, etc.


  6. Adam,

    U&C in pharmacy contracts is what the cash price would be at that particular pharmacy. It is not a "computed" figure implemented by the insurance company or medicaid.

    If the pharmacy charges $4.00 for a cash transaction, they cannot charge medicaid more than $4.00 even if the MAC/AWP figure would be higher.

    For instance, WalMart et al , on their $4 rx programs. They cannot charge more than $4 to the insurance or medicaid even if contract might reimburse $50 based on MAC/AWP figure.

    I believe you are applying generally accepted practices in insurance/medicare billing for medical procedures to pharmacy practice which is an incorrect assumption.

    Therefore the only way a cash payer would pay less than medicaid is if the medicaid contract does not include the lesser of terminology.

  7. Marc,

    You are correct.

    I checked the Florida Medicaid manual for Prescribed Drug Services, which states (page 3-2):

    "Reimbursement for covered drugs dispensed by a licensed pharmacy, approved as a Medicaid provider, or an enrolled dispensing physician filling his own prescriptions, shall not exceed the lower of: The estimated acquisition cost, defined as the lower of Average Wholesale Price (AWP) – 15.4%, or Wholesaler Acquisition Cost (WAC) + 5.75%; the Federal Upper Limit (FUL) established by CMS; or the State Maximum Allowable Cost (SMAC), each plus a dispensing fee; or the providers Usual and Customary Charge (U&C)."

    If SMAC was the lowest among the list above, then I believe it is accurate to say that an uninsured, cash-pay customer buying at Walgreens pays less to the pharmacy than Medicaid would pay to a pharmacy with a U&C above the Medicaid reimbursement rate.

    I will add a clarification note to the blog post.


  8. Again, your assumption is incorrect! If SMAC was the lowest price, medicaid pays SMAC, cash customer pays U&C which is higher than SMAC. Medicaid always should pay the lowest of the contract rates.

    If U&C is lowest, then that is the price both clients will pay. If SMAC+disp fee is lowest, Medicaid pays SMAC+disp fee, cash customer pays higher U&C price. As unfortunate as it may seem, the cash customer (a dying breed) is the one who suffers most.

    ie SMAC+fee=$25.00
    U&C = $30.00

    cash customer pays $30.00
    medicaid pays $25.00

    If you're going to criticize a particular system, I suggest you clearly understand that system before making your comments.

    Thank you again for the forum:

    Pharmacy Owner

    BTW, if drug manufacturers are in such dire financial straits(as alluded to by the manufacturers themselves in various media), how can they afford to pay such extravagant corporate salaries and bonuses and give away drugs via samples, coupons and the like.

  9. Marc,

    My revised statement is correct, although perhaps a bit confusing. However, I think we are saying the same thing.

    For simvastatin 40 mg in Hialeah, FL:

    SMAC = $61.22 (w/disp. fee)
    Walgreens U&C = $59.99
    K-Mart U&C = $156.97

    A) Medicaid would pay Walgreens $59.99 because Walgreens U&C < SMAC
    B) Medicaid would pay K-Mart $61.22 because K-Mart U&C > SMAC

    The twist is that the Medicaid SMAC payment of $61.22 to K-Mart is greater than the cash-pay customer payment of $59.99 to Walgreens.

    I agree that the cash pay customer typically fares the worst. However, the emerging trend is that cash pay at one pharmacy can be below Medicaid's SMAC at another pharmacy. (Some of Wal-Marts $4 generics fall into this category.) IMHO, pharmacists should be concerned about this trend.

    BTW, I'm not criticizing Medicaid here. I'm just pointing out a quirk in the system.


  10. Thanks for clarifying, but yes, your statement is very confusing b/c you jump from pricing at 1 store to another.

    This debate of drug pricing goes much deeper than just the price of medication. Service and quality of care and information are certainly factors which most people should base a decision on which pharmacy to use. The use of prescription medication is not anything similar to the purchase of gasoline or groceries.

    I wish you would criticize Medicaid as it is an
    antiquated(sp?) system and needs a major overhaul. Clients on the "system" recieve the best care at little or no direct cost to themselves while the working class pays premiums, deductibles and copays for, in most cases, a lower standard of care.

    Sorry, off topic there.

    Do you have any comment regarding the "plight" of pharma manufacturers that I referred to in previous post?

    My apologies for the rants, but I have to vent on someone. Might as well be you.


  11. Marc,

    Thanks again for taking the time to comment on the blog. I appreciate your corrections and clarifications.

    The drug pricing issue is quite complex and not well-suited to comment #11 on my post. (Does anyone even read this far down the comments?) For instance, AstraZeneca's lawyer today stated today that "a big judgment against AstraZeneca that forces lower prices would make it financially impossible for pharmacists to fill prescriptions for Medicaid patients." (Source: Ala. Wins $215M Verdict From AstraZeneca)


  12. Adam,

    A little data from North Carolina. Currently taking simvastatin 20mg #30, here is the information:

    Target using Caremark benefit $68.00
    Target paying cash price $55.00

    I was fortunate to see an advertisement by a local pharmacy (affiliated with a hospital system) offering 1 YEAR of my med for $99. I took the ad to Target and then matched the price...$8.17 for #30 ...AMAZING.

    Here is an equally interesting twist...a friend of mine works for a drug repackager...the same medication costs $3.20 from them and they are buying if from the same place the pharmacies are.

    Clearly there is some significant margin out there.

    Consumer in NC