Thursday, March 17, 2011

Pharmacies Raise Prices Faster Than Manufacturers: GAO Report

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.


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.”
Here are the results as reported in Figure 7 (page 22) of the GAO report, reformatted for your viewing pleasure:

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.


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!


  1. I do not think Red Book rolled back AWP's. This may explain the absence of a AWP dip in 2009.

  2. Adam, a little off base today I'm afraid. We'll let the comments speak for themselves.

    Now again, what percent of all Rx's are priced using U&C logic as a minimum/floor price?

    At your traditional drugstore (non 4 buck player) that is level is 5%. Five pct INCLUDES the cash customers who have no PBM/INS, no Medicare, No Medicaid, and no discount cards, aka "soaking the poor". Wow...sounds like we work for a big hospital chain now.

    And this 5% figure (at a traditional drugstore pricing model) also includes those few third party Rx's in which U&C falls BELOW the PBM allowable.

    I'm no economist, but I can sure tell you that when the bulk of one's volume is driven by an outside payer source who allows "X", then I sure wouldn't be pricing my product at "X less". Yep, I'd agree this almost wreaks of a pricing floor, which very few folks want to fall below!

    Sure the mass merchants/grocers/other 4 buck players have affect on everyone, but we've created a niche in where there hopefully the loyalty and service override price.

    Lastly, our U&C is rarely touched. Like most pharmacies (traditional chain and indy), it's based off a basic formula which is tied to the FDB/MediSpan pricing services out there. It's only the AWP that's changing.

    Now, don't slay the messenger.

    Why doesn't Rolling Rock make a green ale for the season?

  3. Correct,

    Red Book has always used a 1.20 markup factor on top of the industry supplied WAC.

    What is the real relevance of U&C charges when the cash customer base is so small? Kind of a waste of time since the vast majority of payments are determined by third party payers.

  4. To "a little off base today I'm afraid":

    Thanks for your comment.

    I am quite aware that U&Cs do not reflect the prices that most (90%+) of consumers ever see or a pharmacy ever receives. AWP doesn't reflect a transactional price either, but that doesn't stop pharma industry critics from highlighting the data in reports and congressional testimony.

    I also recognize that the *level* of U&C will always be above the AWP floor. But if U&C is mathematically tied to a benchmark such as AWP, then the change in U&C should be increasing at exactly the same rate as the change in AWP.

    But as the GAO data show, U&C has been going up more quickly. So, why is that?


    P.S. I'm partial to Guinness over Rolling Rock...

  5. Dunno Doc. Maybe flawed data? Or a calculator or slide rule error?

    Possibly since the U&C data was only take from PA, then maybe somethings up in the Keystone state...besides U&C.

    There actually could be a chance that some 4 buck players are altering their list, allowing certain generic drugs to up to "normal" pricing.

    I honestly have never seen U&C fluctuate like that. You present a good Q and maybe another reader will have the answer.

  6. Actually, the $4 programs would have the opposite effect, i.e., U&C should have grown more slowly than AWP.

    For instance, Walmart's discount generic program sets its U&C to be $4, which was below what some third-party payers would have been willing to pay and below the U&C at most pharmacies.


  7. Lets not forget to take into consideration that the PBMs can change their MACs at their whim, and that some of these levels do not pay for the actual overhead involved in filling rx's. So the good ol' 'cost-shifting' practice occurs to make up the difference. Yes, cash customers pay up the ying-yang, but how else would pharmacies stay in business if they have no say or control over what they are paid from the PBMs AND WHEN?????

    It all goes back to the PBMs have no one overseeing them and no penalties for misbehaving (aka ripping everyone off for their ongoing multi-gazillion dollar benefit)....

  8. The PACE data would not have included the prescription 'club' prices offered by many chain pharmacies. Under the 'club' setup, pharmacies can charge patients a small annual enrollment fee and then offer discounts to cash paying customers -- these club prices are not considered U&C and would not be submitted to PACE. Is it possible that the big chain drug stores increased their U&Cs (so they could submit higher rates to third parties) while simulateously creating cash discount club programs?
    Also, the PACE data would not have included prices from stores like Costco that do not generally participate in public programs.

  9. Good point. The club programs create a firewall around the discount generic prices. thus, Walmart did change its U&C, but CVS and WAG did not. You may recall that this situation got CVS into some trouble last year in Connecticut.

    And the previous comment suggests that reduced third-party reimbursements have led pharmacies to cost-shift to the uninsured patient. Anyone else see a problem with this "solution"?


  10. Adam, would love to get your take on NCPA's logic on these findings...

  11. There are so many false or misleading statements in NCPA's blog post that it's hard to know where to begin...

  12. Adam- I work with many independent pharmacies and can tell you that they are under pressure to keep that U&C price high enough that when the AWP increase comes down the pike they are sure that they don't lose money based on the contract language with the PBMs. While the PBMs routinely take 2 weeks to update the AWPs in their systems (thus leaving it up to the pharmacy to reprocess each and every fill during those two weeks to obtain their contracted reimbursement), the pharmacies are not afforded the same luxury of fixing things retroactively. So if, two weeks after the effective date of an AWP increase the PBM starts paying properly, the pharmacy that did not increase their U&C immediately, will lose money on all those claims reimbursed incorrectly by the PBM. Except in the case of Express Scripts, who will not even allow backdating to correct their errors. I can certainly tell you that the number one motivator for U&C pricing is not cash customers, but avoiding the floor for PBMs, who allow the pharmacy's no leeway, while they have built in safety's for themselves (at the pharmacy's expense) everywhere. For someone who continually has to state he is not anti-indy pharmacy, you sure do devote a lot of time to blog posts that do not give the benefit of the doubt to the pharmacists. I know for a fact that if they could, community pharmacists would charge those needy, cash-paying customer less, but it is the PBMs that insist they won't reimburse more than a cash-paying customer, thereby forcing the pharmacies to ensure they are charging a high enough U&C. It is the PBMs that drive this behavior by the pharmacies!

  13. Bravo...quote of the year!

    Adam, as a seasoned economist, you really oughta do a topic simply on floor pricing. We've brought it up before, and I'm with this guy from the above post who would never risk getting hit with a false claim by helping out a cash customer who has no insurance or is in b/w jobs.

    Many PBM's and Medicaids specifically state that U&C is defined as not what is usual, nor what is customary, but actually what is the lowest cash price of the day.

    With that in mind, I smell floor pricing everyday at work. Don't fall below it or you're toast.

    The guy's quote from above......

    "I know for a fact that if they could, community pharmacists would charge those needy, cash-paying customer less, but it is the PBMs that insist they won't reimburse more than a cash-paying customer, thereby forcing the pharmacies to ensure they are charging a high enough U&C. It is the PBMs that drive this behavior by the pharmacies!"

  14. Hello Adam, I wanted to comment on the updating of drug pricing for Independent Pharmacies. There are obstacles in determining the lowest pharmacy rate for generics, one is pricing set by private third party payers may be updated multiple times within a day, and a pharmacy may not know the contracted price until billed for that drug.

    Providers should refer to their third party contracts to calculate their lowest rate. The majority of the pharmacy software programs in the market will auto-update the AWP sourcing the updates from Medi-Span and the drug wholesaler catalogs are also frequently uploaded into their systems. (But, not daily) There are other much more dynamic tools in the market which present great data intelligence to the Independents.

    One unique tool is a deeper dive perspective into a pharmacy’s business through proactive pricing updates from insurance provider data – real-time. This particular solution is software as a service (SaaS) applications which offers the unique ability to collect and combine data sources which will save the business owner / manager time and money while providing significant insight and transparency into the community pharmacy marketplace. As unique as one independent pharmacy is to another – is the same with these pharmacy software systems.

    There’s no industry common-practice among the pharmacy software systems. However – there are solutions but the independent pharmacy that doesn’t search out for these solutions will never obtain the advantages presented by the technology.

    Lack of PROACTIVE innovation in pharmacy software & technology has caused a disadvantage for the independents. For more information on data-analytics and pricing data tools feel free to contact the Pharmacy Technology Resource.

  15. Todd (from PTR):

    Thanks for confirming my suspicion that the AWP updating issue is irrelevant. It sounds like a savvy pharmacy owner can merely invest in some technology to fix the problem. If not, then Shame on the Luddite owner (not a PBM) for not keeping up with the times.


  16. Todd (from PTR):

    Thanks for confirming my suspicion that the AWP updating issue is irrelevant. It sounds like a savvy pharmacy owner can merely invest in some technology to fix the problem. If not, then Shame on the Luddite owner (not a PBM) for not keeping up with the times.