Thursday, April 16, 2009

The Problem with Pharmacy Prices

I want to mash together two apparently unrelated stories for you so that I can highlight problems for consumers and drug makers from the complex world of pharmacy drug pricing. My unanswered questions are at the bottom -- I'd love to get your thoughts, too.

Story #1: Yesterday's Wall Street Journal reported that many drug makers have raised list prices by 10% to 15% over the past year. See Drug Makers, Hospitals Raise Prices.

Those of us with insurance will probably not feel the full effect of these increases thanks to the bargaining power of our third-party payers. Unfortunately, the mysterious world of pharmacy price-setting will magnify these increases and expose uninsured and underinsured consumers to ever bigger increases in out-of-pocket costs for their drugs.

Story # 2: Price shopping for the best deals at a pharmacy remains difficult, as shown in a new report (link below) about ongoing problems with New York state's prescription drug price comparison site. Judging by this report, uninsured and underinsured consumers need to pay extra close attention when shopping to fill their prescriptions. There are eye-popping variations in pharmacies' U&C prices for the same product in the same area.


The Prescription Drug Prices in New York State website allows consumers in New York to compare the retail price of the 150 most frequently prescribed drugs at different pharmacies. The price is measured as the "usual and customary" (U&C) price reported to Medicaid by a pharmacy. In theory, this site could help uninsured or underinsured consumers shop around for lower prices.

Not so fast.

The NY PIRG just released an excessively-titled report called The Price is Not Right: The Failure of New York State's Rx Disclosure Law to Offer Consumers Easy Access to Prescription Drug Prices

Here's a small sample of variation in average prices and the min/max range for Lipitor (10 MG tab) around New York state. Even within the same area, pharmacy list prices for a common drug can vary by 200% to 300%.

  • Bronx (NYC) = $106.64 (Range: $80.00 to $216.99)

  • Central NY = $101.08 (Range: $86.93 to $125.00)

  • Finger Lakes = $101.72 (Range: $51.12 to $136.78)

  • Western NY = $102.54 (Range: $79.40 to $156.60)

Gluttons for data can enjoy many more pages of price info in the full report.


What explains these huge disparities? Well, sometimes the data on the New York web site are often incomplete, outdated, or just plain wrong.

For instance, one pharmacy reports selling Ambien for $860,603!! Oddly, 5 of top 20 big pricing errors are Ambien-related. (See page 12) I guess someone is asleep over there.

The NY PIRG study reminds me of another article that I wrote last year called The Price Might Be Right, which looked at a report criticizing the pharmacy price web sites in 10 states (including New York). That study identified four key problems with the state sites:

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

Apparently, New York has not fixed these problems in the intervening 14 months.

The latest report also uncovered the fact that few pharmacies support the state's price comparison web site. Only 7 pharmacies in a sample of 55 pharmacies displayed the drug price website address, which is required by New York law. Surprised? No, me either.


A few questions that I'm pondering:

  • How many uninsured or underinsured consumers overpay at the pharmacy by not shopping around? As I show in Pharmacy Profits and Wal-Mart, independent pharmacies earned 42% gross margins from cash pay scripts – more than twice the margin from third-party scripts. I'm not aware of any studies of consumer shopping behavior related to pharmacy prices.

  • How easy is it for consumers to compare pharmacy prices? According to the report, New York pharmacies are only encouraged (but not required) to provide prescription prices to consumers over the phone.
  • How much do drug manufacturers understand about the factors that determine a pharmacy's "usual and customary" price? Effective channel management starts with an understanding of true economics, including the way that 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.

I'm curious to know what Drug Channels readers think about this pharmacy price issue.


  1. Western NY = $79.40 (Range: $79.40 to $156.60)

    How does an average price = the lowest end of the range?

    BTW, a good post despite the math glitch

  2. Oops. Data corrected in post above - thanks!


  3. scripkillaApril 16, 2009

    "independent pharmacies earned 42% gross margins from cash pay scripts..." Does this take into account PBM MACs on the U&C? My U&C may be $35.00, but the third party decides they are paying $6.00. That would account for at least some of this scenario and make it look like a price hike for cash payers. Maintaining drug pricing is a very dynamic task in pharmacy as many of us know well. Pharmacy software apps have multiple price tables that define the basis and markup of a drug. The basis, like third parties, is typically AWP - x% + disp fee = U&C. If the AWP is WAY higher than the cost, a larger discount off AWP rule is created (aka, another price table) the U&C is not rediculously higher the cost. I believe this is where the differences happen - when some owners are more diligent than others in monitoring these tables. When AWPs go either up or down from FDB or whomever, these table formulas adjust the U&C the pharmacy submits. When one pharmacy catches a change and makes a price table adjustment (either up or down in discount) it widens the gap between them and the person down the street that didn't change there formula (or update their AWP!). Other owners may create tables on a cost + model. This again could lead to huge swings in pricing when others mark down from AWP vs. mark up from cost. AWP - is more risk averse due to the current reimbursement model most PBMs use.

  4. In New York, we are required to keep a price list of those meds and give it to anyone that requests it. Why those prices don't match what's on the Medicaid site is another story altogether. I believe that they are taking the data from Medicaid claims, so if a pharmacy is not participating, it is probably due to the fact that they have not billed Medicaid for that particular med in that particular quantity.

    As far as pricing is concerned, one of the biggest issues is keeping up with each and every 3rd party contract. I may have multiple contracts with a PBM for different employers and health plans. For example I have contract with the PBM itself and another with a health plan that uses the PBM for Rx processing. These contracts reimburse at different rates (AWP - AB versus AWP - XY) but are billed in the same manner. If, in my pharmacy system, I setup this 3rd party to bill at AWP - AB, it will be billing incorrectly if the claim is for a patient under the AWP - XY contract and vice versa. Due to the contract in place, I can bill at whatever I want, the 3rd party is going to reimburse at the contracted rate for that particular patient (groups are coded at the patient level). For this reason, the system is set to bill 3rd parties at the reimbursement benchmark (AWP in this case) and at the point of adjudication the 3rd party returns the contracted rate. Bear in mind that most generics have MACs anyway and there is no way that I can keep up with each 3rd party's MAC list. Also, by billing at AWP, I prevent myself from potentially making a very costly mistake with a brand name drug as even though I am contracted at a certain rate, there is wording in the contract that says if I submit a request for a less, less I shall get. I could go through my system and attempt to setup each of the plans to bill at the contracted rate but with PBMs that manage more than one health plan, it is easier said than done, especially given the MAC variations. If they would release the MACs in an electronic format that I could import into my system, it would be another story. I believe many pharmacies bill in the same manner for these reasons.

    As far as the NY website is concerned, my U&C's are set for 90 day supplies of most of the meds on that list. As we only get one U&C per medication (software limitation), I could redo them for 30 days, but that would make life more difficult as most cash paying customers want 90 days of maintenance meds. I would rather have my system price correctly for the patient standing in front of me than someone on a website. That means that on the NYS site, it appears that I am selling 30 atenolol at AWP. If someone has a cash prescription for atenolol though, we inform them of both our minimum price and our 90 day price. Is it really worth the time for a pharmacy filling 97% of its prescriptions under insurance to worry about a website like this? That being said, if there were a web portal that I could go to and input prices for both 30 and 90 day supplies… But it’s New York, and we tend to make everything harder than it has to be.

    As for margins, those on cash scripts are going to be higher in because people are paying cash for low cost generics. If something costs me $2 and I charge $4 my margin looks great. I’ll leave the profit after overhead discussion for another time.

    As an aside, manufacturer pricing has gotten to the point where at least as independents, we don’t see volume discounts for brands. I used to buy fast moving brands in large bottles because I would save money. It is now at a point where a bottle of 1000 has the same unit cost to me as a 10 bottles of 100. The kicker is that the bottle of 1000 has a lower AWP because someone else is getting a better deal (they are probably buying it for repacking purposes, but that’s another post too). If I were to buy and dispense from the bulk bottle, I get reimbursed less based upon the lower AWP.

  5. A very good discussion. I offer one comment on your statement, "Those of us with insurance will probably not feel the full effect of these increases thanks to the bargaining power of our third-party payers."

    Higher manufacturer prices mean increases in AWP. Most employers, health plans and health insurance companies are charged by PBMs for brand drugs based on a discount from AWP. Therefore, these payers' costs will increase, and ultimately, health insurance premiums will increase.

  6. Adam,

    As I've mentioned to you previously, I've never seen one of these state sites with good data across the board.

    One of the keys to saving money for cash-paying consumers is to constantly check the prices of surrounding pharmacies. The vast majority of pharmacies will freely give out prescription prices over the phone. However, most consumers don't even realize that pharmacy prices can vary so much. In fact, I just wrote an article about generic Prilosec pricing where the price for an identical prescription varied from $18.72 to $241.99! If more consumers were aware of the variation in pharmacy prices, then prices of course wouldn't vary so much!

    Also, regarding the WSJ article, pretty much all brand-name drugs continually increases in price--sometimes multiple times a year.

  7. Fascinating post - but issues mentioned in the comments far outweigh data collection failures.

    Pharmacy Management Systems / Dispensing Software are notoriously not user friendly. Once an error or oversight enters the system, it stays there forever. The systems lack reports which could assist a pharmacy in finding errors. Most reports are simply a "data dump" - and it is left up to the user to make something of it. Pharmacy analysis is usually via the “save file” option and presumes the report is properly formatted so it will import into a spreadsheet without error - rather a king size assumption in my experience.

    As noted in the comments, these systems have tables upon tables, no overview, no synopsis, no tools to manage. Today's pharmacist owner needs a degree in computer science to understand the geeky terminology.

    One could suggest the high prices on those lists are merely a greedy pharmacy. The truth is much more likely to be the pharmacy is not aware of the discrepancy. They must post a list - the list gets dumped out of the system and posted. Odds are, no one has asked the question “Are we sure this is right?” And the errors are not only on the high side.

    A recent example: a pharmacy chain was buying Drug X in 1000 count bottles. The wholesaler – not the manufacturer – discontinued the 1000 count container. In the ensuing two years time multiple stores continued to dispense and under-bill for the drug. How did it happen? The NDC is (nearly) the same; the pharmacist checks the script, the label, the container. Every pharmacist knows the last two digits are package size, so a pill is a pill and this is the right pill, no? Since the 1000 count package was not made obsolete by the manufacturer, the NDC is still legitimate – passes all NDC checks/tests in adjudication, billing and payment.

    This one single error resulted in a revenue shortage on the order of seven figures per year. First, the same generic drug in a 100 count container is more expensive; second after being discontinued by the wholesaler no further price updating was provided, third there are no tools available to the pharmacy to spot such errors. Every script dispensed was invoiced far below actual cost – to self-pay and PBMs alike – a dead loss on purchase cost plus zilch dispensing fee plus negative zero margin. Not many PBMs call the pharmacy to question why they are under-billing and very few patients raise the question “Why is this $100 and not $200 like the other pharmacy?”

    We created a report that shows the Rx cost as calculated by the pharmacy system, what the Rx was billed at, what the reimbursement was, and what the Rx cost per current independent vendor specific price files. There was a lot of sticker shock – and that is an understatement. The amount of error in pharmacy system pricing is staggering – and not much of the error works in the pharmacy’s favor (actual acquisition costs keep going up, rarely down.)

    In the specific case of Ambien, generic pricing ranges from (rounded values) 2 cents to 11 cents per tablet, with the brand costing $4.30+ per tablet. If the pharmacy is buying an inappropriate generic, that produces a 550+% difference and of course if they are reporting a no-sub/brand Rx, that could be almost 2200% difference. It is unlikely that Medicare/Medicad will establish fixed pricing with a 550% range.

    This is not to say there are no data errors; I have logged hundreds of man-hours correcting interesting wholesaler interpretations of “package size.”

    The typical pharmacy dispenses – at a generic level – between 2,000 and 2,500 drug items. Using two major wholesalers (primary / secondary) that translates to examining and price shopping (how frequently?) 17,000+ items. It just does not happen, with two results: the patient pays more (either self-pay or eventually higher premiums) and the pharmacy loses potential margin.

    Undetected errors/omission in the pharmacy dispensing/management systems will continue to impact all pharmacies in an extremely negative fashion.

    Regardless, “nine of out ten managing pharmacists surveyed” insist they are okay with price shopping and need no assistance. These folks are fooling themselves; it is not possible to manually and routinely check for optimized purchasing. The end result is the pharmacy pays more, the patients pay more, and ultimately the regulators moves in with a pricing structure that could put the hometown pharmacy out of business. As is evident in the 2 cent:11 cent Zolpidem ratio, buying a ‘generic’ may not be sufficient; the pharmacy needs to identify the best alternative considering both price and package size.

    T. Tallardy
    disclaimer: astitiRx is a for profit entity providing service to the independent pharmacy.

  8. I'd like to see real Rx price data for my area. I can look up my cost at the PBM's website, but I get mad when I fill a generic Rx and a) the price has no relation to reality in that it costs almost as much as the brand or b) I get to pay "the copay" and the PBM pays nothing.

    There are just too many variations on the "negotiated rate" theme. When will we collectively say 'we're mad as hell and we're not going to put up with the BS anymore'?

  9. I took a quick look at the APPENDIX: County-by-county listing of prices for the 10 most frequently prescribed drugs in the Department of Health database... in the report and it appears that the 10 most prescribed drugs were all Brand name without a Generic available. Were generic drugs filtered out? IMS had a report out a couple of weeks ago that had the top 15 drugs dispensed and all were generic except for Lipitor I believe. Just curious? The brand industry always looks at Total Prescriptions vs New Prescriptions and this appears to be NRX.

  10. Wow you turn an article about price increases by MANUFACTURES into a problem with retail pharmacy pricing.

    Price increases by manufactures are nothing new, 10% a year. Pharmacy pays 142.83 for a bottle of 0.625mg premarin, know what the cost was from the 1998 manufactures catalog? 40.67 (you do the math for 11 years).

    Many pharmacies price off of AWP, which works for brands, but does not for generics. A retail pharmacy never wants to set its U&C below the rate they would get by a third party plan, its throwing away money.

    Maybe you should be asking different questions if your concern is for the consumer (not just the cash paying consumer but the insured consumer as well)

    1)do pbm's really help?
    I wonder if they really do. With most brand medications losing patents in the next two years, pbms have turned to generic price spreading (billing health plans more than they reimburse the pharmacy) I'm covered under a self-insured health plan that contracts out to a major pbm to process claims. The pharmacy gets reimbursed about 30.00 for the medication I take, but the pbm bills the plan 180.00, thats right a retail pharmacy buys the drug, fills the prescription and the pbm make 150.00 for electronic processing.

    Single sourcing for generics is another problem. Remember when ambien went generic, a bottle of 100 generic was close to 300.00, that same bottle when it went multi-source dropped in price to 3.50 in one day.

    Generic pricing (to the pharmacy) can be very dynamic when supply problem arise.

    Sorry for the rant, but I get frustrated when you target retail pharmacy, when the true solution to the problems are with the Manufactures and Pbm's.

  11. Wow! This is the most retoric I've seen in on The Drug Channels. Lots of words, but the answer is really quite simple.

    The pricing of Rx drugs in the non-4 buck retail drug stores wreaks of antitrust! As mentioned by someone earlier in this blog, there is clearly a pricing FLOOR which we simply cannot fall below......or we drive ourself out of business.

    And yes, it's even difficult to simply match a price without lots of repercussions.

    So heck, we have our PBM pricing floor (which is rarely ever discussed) and there you have it....U&C.

  12. I have developed a reimbursement verification solution for retail pharmacies to track and associate the contract to the paid transactions. All plan sponsors, plans and groups are entered, MAC lists can be uploaded as associated to any level or multiple levels within a client\plan\group hierarchy, as well as preferred and drug exclusions lists. The contracts and price terms are then created and associated to the client or plan or group. Additionally, you define how SSB, MSB, GENERICS AND NON-DRUG Items are defined by a plan and what source of AWP they are using. Additionally, multiple price terms can be associated to a contract for MFN or lesser of terms. The system also allows for claim "edits" to be created "on the fly" with a simple user interface, so all the special rules are captured. For example, for plan xyz, NDC 99999-9999-XX, and DAW = 8, then use Brand price term.

    We handle the networks by grouping all claims at the lowest level and then look at the associated reimbursements. The claims are marked as compliant or non-compliant and reason codes (s) are assigned for easy resolution.
    We are concerned with
    1. Drugs misclassified as generics and you are MAC'ed without reason
    2. Reimbursements that are not compliant with the contract (Cost =or-% incorrect, ingredient costs and dispense fees underpaid
    3. Old MAC lists, AWP or other price lists are outdated and therefore cause underpayments
    4. Claims paid for under incorrect network
    5. much more.......
    6. Zero balance claims – where copayment > U&C

    We also build a claims data warehouse for you. We can include as much data as needed for reporting, performance trends, contract modeling (BID/MAC) changes effect on business, tracking generic utilization, therapeutic interchange opportunities, etc...

    I am currently looking for a small, medium sized group of pharmacies to test.
    My goal is to give the pharmacists the same tools and systems used by the PBM’s to stay competitive

    Carl 727-474-1300

  13. Adam,
    Perhaps the role and subsequent reimbursement model of pharmacists in the healthcare system needs evaluation. You have highly educated professionals not being properly utilized.

    The key may be to increase their responsibilities and reimburse for those services. As opposed to arbitraging prices and pumping out scripts to remain whole. This, in turn, could reduce trips to the Dr. offices and ER's. Insurance models would need to be adjusted to support this.

  14. Lets get one thing clear, community pharmacy has no role in setting drug prices. I have owned a very successful pharmacy for 25 years, I have 95% of my scripts paid by 3rd party and I take what they give me. No negotiation, take it or leave it. Don't get me wrong, I am not complaining about my business model, pharmacy has been very good to me. The remaining 5% are either uninsured, or drugs not covered by insurance. I price at a fair price, probably too low. Enlighten me as to where the money goes, when last month I got $800 for topamax, my profit was $31, this month I got $43 for generic, MAC the first fill and I made $26... great increase in gross margin, not so much in gross profit, but again I am not complaining, did the company reap the savings, did the pbm reap the savings, lets have some real data here.

  15. I'm a psychiatrist in Maine,and got interested in cash generic retail prices after I noted the overpricing in Medicare D that was putting people into the donut hole. Then looking around I saw the enormous price variance for a lot of generic psychotropics. I see a good deal of uninsured and high deductibel folks too, so knowing where they can get generics helps me get treatment started, otherwise the just bring the scrips back because htey couldn't afford them. So with the help of a couple of nonprofit clinics, I made a spreadsheet showing cash prices for several dozen psychiatric generics across a dozen venues, the local chains, the big boxes, and a few mail/internet retailers and PAP's. The PAP's like Xubex and RxOutreach are not retail, I don't know what you would call them, but they seem willing to sell to just about anyone. It takes some work to keep the spreadsheet updated, but what I am trying to show to people is not so much the exact retail prices as the degree of variance, to inspire them to ask around. At this point in time, it seems like developing this info for consumers needs to be done locally. National pricing sheets do not always reflect local prices, like my local Walmart sells sertraline and methyphenidate for $4 but these are not officially on the list. I agree the state websites leave a lot to be desired, and in small states they are too much work to even attempt, it seems. Doing local spreadsheets is possible, and it is kind of a fun project, that various volunteers can help with.

    Ben Crocker, MD
    Portland Maine

  16. Let't think about who is really getting hosed in this whole deal. I used to work for one of the big manufacturers and can say with a high degree of certainty that only 5-10% of the cost to the pharmacy is the result of the manufacturing cost of the bulk powder. Another chunk goes to the finishing (making tablets or capsules) and then a still larger chunk goes to advertising and sales reps peddling the product. The largest factor however is the amount that goes to fight legal battles, where only the class action lawyers win and the "victims" are hosed.

    As it common in this country, the rich get richer, the poor get it for free and the middle class pay and pay and pay.

  17. First, this article was obviously written by a person that has little if any understanding of the drug pricing, reimbursement and distribution system. U&C has little relevance to the cost of drugs when over 90% of drugs are NOT in the cash payment (U&C) system but in the reimbursement system. It is the reimbursement system that drives the lunacy in U&C prices. But, more importantly, it is the government involvement in drug access and pricing in the ever growing government healthcare programs that creates and exacerbates the problem. Get the government out of healthcare and you get back to free-market principles that would increase competition and lower prices. The spillover of relentless government actions to regulate and control access and pricing has a tremendous negative spillover impact driving the actions of private entities (PBMs, HMOs, and doctors, pharmacies and hospital, etc.). The solution is to remove artificial barriers that actually drive pricing higher (the existence of restrictive PBM and HMO formularies) and put the drug and price decision at the point of sale with the doctor and patient (removing all other middlemen that make decisions against the best interests of the patient). Any drug should be openly accessible (no formulary) with the cost decision made by the patient, not a third-party. That would create the free-market economic environment in drug pricing that would drive prices lower through open competition. This would ultimately allow the best drugs to win at the lowest cost.

  18. Traderron2,

    I'll let the blog speak for itself regarding my knowledge of drug pricing, reimbursement, and distribution. At a minimum, you should read the comments section of the original post from last year (The Price Might Be Right).

    If you understand the concept of risk transfer and the principles of insurance, then you'll realize that a free market would create a prescription drug insurance industry if none existed. It's a moot point, given the industry's evolution over the past 40 years. (See Who Will Pay for Prescription Drugs?.)


  19. Adam,

    You're an economist. Let's scrap the whole system and go back to pre 1965. Before the plastic card. This will empower consumers to shop around for the lowest price. This will also be a true supply and demand economic model. Independents have the lowest average rx cost against the rest of the industry. Who do you think will prosper in an environment like this? I believe the independent would. All the mail-order business would flow back to the retail sector. The manufacturer's would be forced to price their product to sell or not bring the product to market.