Prescription Drugs: Price Trends for Frequently Used Brand and Generic Drugs from 2000 through 2004
Published: 2005-08-15T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: Prescription drug spending has been the fastest growing segment of national health expenditures. As the federal government assumes greater financial responsibility for prescription drug expenditures with the introduction of Medicare part D, federal policymakers are increasingly concerned about prescription drug prices. GAO was asked to examine the change in retail prices and other pricing benchmarks for drugs frequently used by Medicare beneficiaries and other individuals with health insurance from 2000 through 2004. To examine the change in retail prices from 2000 through 2004, we obtained usual and customary (U&C) prices from two state pharmacy assistance programs for drugs frequently used by Medicare beneficiaries and non-Medicare enrollees in the 2003 Blue Cross and Blue Shield (BCBS) Federal Employee Program (FEP). The U&C price is the price an individual without prescription drug coverage would pay at a retail pharmacy. Additionally, we compared the change in U&C prices for brand drugs from 2000 through 2004 to the change in two pricing benchmarks: average manufacturer price (AMP), which is the average of prices paid to manufacturers by wholesalers for drugs distributed to the retail pharmacy class of trade, and average wholesale price (AWP), which represents the average of list prices that a manufacturer suggests wholesalers charge pharmacies.
section_title: What GAO Found
paragraphs: We found the average U&C prices at retail pharmacies reported by two state pharmacy assistance programs for a 30-day supply of 96 drugs frequently used by BCBS FEP Medicare and non-Medicare enrollees increased 24.5 percent from January 2000 through December 2004. Of the 96 drugs: Twenty drugs accounted for nearly two-thirds of the increase in the U&C price index; the increase in average U&C prices for 75 prescription drugs frequently used by Medicare beneficiaries was similar to the increase for 76 prescription drugs frequently used by non-Medicare enrollees; and the average U&C prices for 50 frequently used brand prescription drugs increased three times as much as the average for 46 generic frequently used prescription drugs. AWPs increased at a faster rate than AMPs and U&C prices for the 50 frequently used brand drugs from first quarter 2000 through fourth quarter 2004. Ten drugs in each index accounted for almost 50 percent of the increase for AMP, AWP, and U&C prices. Eight of these 10 drugs were consistent across the three price indexes. The Centers for Medicare & Medicaid Services (CMS), two state pharmacy assistance programs, and BCBS FEP reviewed a draft of this report. While CMS noted that U&C and AWP do not reflect discounts in a drug's price, this report's focus was to examine price trends rather than price levels. Technical comments were incorporated as appropriate.

section_title: Letter
paragraphs: Prescription drug spending as a share of national health expenditures  increased from 5.8 percent in 1993 to 10.7 percent in 2003 and was the  fastest growing segment of health care expenditures. In addition to  increasing utilization and the introduction of newer drugs, rising  prescription drug prices are a key component of increasing drug  expenditures. Increasing drug prices can affect consumers, employers, and  federal and state governments. Policymakers are increasingly concerned  about drug prices as the federal government will assume greater financial  responsibility for prescription drug expenditures with the introduction of a  prescription drug benefit to Medicare beneficiaries in January 2006,  known as Medicare part D. Medicare beneficiaries also will continue to be  responsible for a large share of drug costs under Medicare part D.
Tracking prescription drug prices can be complicated by the different  prices that different purchasers, such as consumers, insurers and other  third-party payers, and wholesalers, pay for the same drug. Several price  benchmarks represent these differing amounts paid by different  purchasers. For example, individuals without prescription drug coverage,  including Medicare beneficiaries who do not currently have drug coverage,  may pay the full retail price at the pharmacy, known as the usual and  customary (U&C) price. Insurers and other third-party payers, including  state Medicaid programs, typically pay negotiated prices with retail  pharmacies, often receiving discounts from the average wholesale price  (AWP), commonly referred to as a list price. Retail pharmacies may obtain  drugs directly from pharmaceutical manufacturers or through wholesalers.  The average manufacturer price (AMP) represents the average of prices  paid to manufacturers by wholesalers for drugs distributed to the retail  pharmacy class of trade, and is used by the Centers for Medicare &  Medicaid Services (CMS) to determine rebates due by law to Medicaid  programs. Prices also substantially vary depending on whether drugs are  marketed as brand or generic, with some third-party payers encouraging  the use of less expensive generic drugs through lower cost sharing for  consumers and other strategies.
To provide a baseline of prescription drug prices before the  implementation of the Medicare part D drug benefit, you asked GAO to  review drug price changes from 2000 through 2004, including drugs  frequently used by seniors. Specifically, we examined the following  questions.  1.  How have retail prices for prescription drugs frequently used by  Medicare beneficiaries and other individuals with health insurance  changed from 2000 through 2004?  2.  How does the change in retail prices for brand drugs frequently used  by Medicare beneficiaries and other individuals compare to other drug  pricing benchmarks from 2000 through 2004?
To examine the change in retail prices for prescription drugs frequently  used by Medicare beneficiaries and other individuals with health  insurance, we selected the 100 most frequently dispensed retail  prescriptions in 2003 for Medicare beneficiaries and for non-Medicare  enrollees in the Blue Cross and Blue Shield (BCBS) Federal Employee  Program (FEP). Combined, these two lists of 100 frequently used drugs  represented a total of 133 unique drugs. Of these 133 drugs, we analyzed 96  drugs (50 brand and 46 generic) for which we were able to obtain U&C  prices at retail pharmacies for every month from January 2000 through  December 2004. These 96 drugs included 75 drugs that were frequently  used by BCBS FEP Medicare enrollees and 76 drugs that were frequently  used by BCBS FEP non-Medicare enrollees, with 55 of these drugs  overlapping the Medicare and non-Medicare frequently used lists. To  calculate a price index, we weighted each drug using the number of  prescriptions dispensed to BCBS FEP enrollees in 2003. We collected the  average monthly U&C prices for a typical 30-day supply from two large  state programs that assist low-income Medicare beneficiaries in  purchasing prescription drugs: Pennsylvania’s Pharmaceutical Assistance  Contract for the Elderly (PACE) program from January 2000 through  December 2004, and New York’s Elderly Pharmaceutical Insurance  Coverage (EPIC) program from August 2000 through December 2004.
To compare the change in U&C prices at retail pharmacies with other  drug-pricing benchmarks, we examined changes in the AMP and AWP for  the 50 brand drugs frequently used by BCBS FEP enrollees. We calculated  a quarterly AMP index for a 30-day supply for the 50 brand drugs based on  data we collected from CMS from the first quarter of 2000 through the  fourth quarter of 2004. We calculated a quarterly AWP index for a 30-day  supply for the same 50 brand drugs based on data we collected from First  DataBank for the same period. We determined that the data from BCBS  FEP, PACE, EPIC, CMS, and First DataBank were sufficiently reliable for  our purposes. Our analyses are limited to drugs most frequently used by  Medicare beneficiaries and non-Medicare enrollees in the 2003 BCBS FEP,  and our analyses using U&C prices are limited to prices reported by retail  pharmacies in Pennsylvania to the PACE program and by retail  pharmacies in New York to the EPIC program. See appendix I for more  information about our selected drugs and detailed information on our  methodology. We performed our work from April 2004 through July 2005  in accordance with generally accepted government auditing standards.
subsections: section_title: Background
paragraphs: Several measures of price are commonly used within the health care  sector to measure the price of prescription drugs. These varying price  measures are due to the different prices that drug manufacturers and retail  pharmacies charge different purchasers, and drug prices can vary  substantially depending on the purchaser. (See fig. 1.)
The U&C price, the retail price for a drug, is the price an individual  without prescription drug coverage would pay at a retail pharmacy. The  U&C price includes the acquisition cost of the drug paid by the retail  pharmacy and a markup charged by the pharmacy.
AWP is the average of the list prices or sticker price that a manufacturer of  a drug suggests wholesalers charge pharmacies. AWP is typically less than  the U&C price, which includes the pharmacy’s own markup. AWP is not  the actual price that large purchasers normally pay. Nevertheless, AWP is  part of the formula used by many state Medicaid programs and private  third-party payers to reimburse retail pharmacies.
AMP is the average of prices paid to a manufacturer by wholesalers for a  drug distributed to the retail pharmacy class of trade, after subtracting any  account cash discounts or other price reductions. CMS uses AMP in  determining rebates drug manufacturers must provide, as required by the  Omnibus Budget Reconciliation Act of 1990, to state Medicaid programs as  a condition for the federal contribution to Medicaid spending for the  manufacturers’ outpatient prescription drugs. For brand drugs, the  minimum rebate amount is the number of units of the drug multiplied by  15.1 percent of the AMP.
section_title: Retail Prices Increased from 2000 through 2004, with Larger Increases for Brand Than Generic Drugs
paragraphs: From January 2000 through December 2004, the average U&C prices for a  typical 30-day supply of 96 prescription drugs frequently used by BCBS  FEP Medicare and non-Medicare enrollees increased 24.5 percent. The  average U&C prices for 75 prescription drugs frequently used by Medicare  beneficiaries and for 76 prescription drugs frequently used by non- Medicare enrollees increased at similar rates. The average U&C prices for  50 frequently used brand drugs increased three times faster than the  average U&C prices for 46 frequently used generic drugs.
subsections: section_title: U&C Prices for Frequently Used Drugs Increased 24.5 Percent
paragraphs: From January 2000 through December 2004, the average U&C price  collected from retail pharmacies by PACE and EPIC for a 30-day supply  for 96 prescription drugs frequently used by BCBS FEP Medicare  beneficiaries and non-Medicare enrollees increased 24.5 percent, a   4.6 percent average annual rate of increase. (See fig. 2.) During the same  period, using nationwide data from the Bureau of Labor Statistics (BLS),  prices for prescription drugs and medical supplies for all urban consumers  increased 21.3 percent, a 4.0 percent average annual rate of increase.  Additionally, using BLS data, prices for all consumer items for all urban  consumers—the Consumer Price Index—increased 12.7 percent, a   2.5 percent average annual rate of increase from January 2000 through  December 2004.
While U&C prices increased each year from 2000 through 2004, the  greatest annual rate of increase—6.1 percent—occurred from January  2002 to January 2003. (See fig. 3.) Since then, annual rates of increase have  been less, increasing 5.2 percent from January 2003 to January 2004 and  4.2 percent from January 2004 to December 2004.
Twenty drugs, representing 33 percent of BCBS FEP prescriptions for the  96 drugs we reviewed, accounted for 64 percent of the total increase in the  U&C price index from January 2000 through December 2004. The drug  with the largest effect on the price index was Lipitor 10mg, which  accounted for 6.6 percent of the total increase. Nineteen of the 20 drugs  were brand drugs and 1 was a generic drug, Hydrocodone/Acetaminophen  5/500mg. The twenty drugs accounting for the largest changes in the U&C  price index are listed below.
section_title: U&C Prices for Drugs Frequently Used by Medicare Beneficiaries and by Non-Medicare Enrollees Increased at Similar Rates
paragraphs: From January 2000 through December 2004, the average U&C prices  collected by PACE and EPIC for 75 prescription drugs frequently used by  BCBS FEP Medicare beneficiaries increased at a similar rate as the  average U&C prices for 76 prescription drugs frequently used by BCBS  FEP non-Medicare enrollees. (See fig. 4.) The prices of 75 Medicare drugs  increased 24.0 percent, a 4.5 percent average annual rate of increase. The  prices of 76 non-Medicare drugs increased 24.8 percent, a 4.6 percent  average annual rate of increase.
section_title: U&C Prices Increased Three Times Faster for Brand Drugs Than for Generic Drugs
paragraphs: From January 2000 through December 2004, the average U&C price (based  on PACE and EPIC data) for 50 frequently used brand drugs rose three  times faster than the average U&C price for 46 frequently used generic  drugs. (See fig. 5.) Specifically, the average U&C price for brand drugs  increased 28.9 percent, a 5.3 percent average annual rate of increase,  whereas U&C prices for generic drugs increased 9.4 percent, a 1.8 percent  average annual rate of increase.
section_title: AWPs Increased at a Faster Rate Than AMPs and U&C Prices for 50 Brand Drugs from 2000 through 2004
paragraphs: From the first quarter of 2000 through the fourth quarter of 2004, AMPs  and U&C prices for the 50 brand drugs increased at similar rates, but  AWPs increased at a faster rate. The quarterly AWPs for 50 brand  prescription drugs increased 31.6 percent, a 6.0 percent average annual  rate of increase. For these same 50 drugs, the quarterly AMPs increased  28.2 percent, a 5.4 percent average annual rate of increase, while the  average quarterly U&C prices increased 27.5 percent, a 5.2 percent average  annual rate of increase. Over the entire period, the AWP index increased  about 3 to 4 percentage points more than the AMP or U&C price indexes.  (See fig. 6.)
The difference between the levels of AWP and U&C prices for brand drugs  narrowed slightly during the time period we analyzed. Whereas in the first  quarter of 2000 AWP was on average about 91 percent of the U&C price for  the same drug, by the fourth quarter of 2004 AWP was on average about   94 percent of the U&C price. In contrast, AMP stayed a similar portion of  U&C in first quarter 2000 and fourth quarter 2004, with the AMP on  average about 72 percent of the U&C price.
Ten brand drugs in each index, representing one-third or more of the  prescriptions for the 50 brand drugs, accounted for almost 50 percent of  the increase for the quarterly AMP, AWP, and U&C price indexes. Eight of  these 10 drugs were the same across all three price indexes. The drug  accounting for the largest portion of the change in the AMP and AWP  indexes was Celebrex 200mg, accounting for 8.6 percent of the increase  for AMP and 7.5 percent for AWP. Lipitor 10mg was the drug accounting  for the largest portion of the change in the quarterly U&C price index and  accounted for 7.2 percent of the increase for the 50 brand drugs. (See fig.  7.)
section_title: Concluding Observations
paragraphs: From 2000 through 2004, retail prices for drugs frequently used by  Medicare beneficiaries increased 24.0 percent—an average rate of   4.5 percent per year. In general, higher drug prices mean higher spending  by consumers and health insurance sponsors, including employers and  federal and state governments. With brand drug prices increasing three  times as fast as generic drug prices, public and private health insurance  sponsors will likely continue to focus on strategies to encourage increased  use of generic drugs when available. Starting in 2006, with the introduction  of the Medicare prescription drug benefit, Medicare will be paying claims  for a wider array of drugs and, as a result, the federal government will be  affected more than previously by rising drug prices.
We found that from 2000 through 2004, on average the AWPs for 50  frequently used brand drugs rose 0.8 percent per year faster than the retail  prices for these same drugs. A continuation of this difference between  AWP and retail prices increases could affect many Medicaid programs and  private third-party payers that base their reimbursement of drug claims on  AWPs.
section_title: Agency and Other External Comments
paragraphs: We provided a draft of this report to CMS, PACE, EPIC, and BCBS FEP. In  commenting on this report, CMS highlighted the discounts and price  information tools that will be available under the Medicare drug benefit.  CMS also stated that neither the U&C price nor AWP reflect discounts,  such as manufacturers’ discount programs, or other price concessions  affecting a drug’s price. We noted in the report that U&C represents the  retail pharmacy price paid by consumers without insurance. The U&C  does not reflect prices available from other sources, such as mail order  pharmacies. We also noted that AWP is a list price that is not the actual  price paid by large purchasers. We agree that consumers may be able to  obtain lower prices than reflected by the U&C and AWP. However, the  focus of our analysis was to examine price trends rather than price levels,  and U&C and AWP are consistent measures used to assess price trends.  Further, increases in the published AWP may increase what many public  or private third-party purchasers pay for prescription drugs because AWP  is often included in the formula to calculate payments to pharmacies.
Additionally, CMS suggested that we examine the effect on prices when  generic alternatives are introduced. We agree that the introduction of  generic drugs can reduce consumer payments for drugs. Examining  changes in consumer spending for drugs, which are also affected by  changes in utilization and the introduction of new drug alternatives, would  be useful, but was beyond the scope of this report in examining price  trends for frequently-used brand and generic drugs.
PACE and BCBS provided technical comments that we incorporated as  appropriate; EPIC stated that it did not have any comments.
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If you or your staffs have any questions about this report, please call me at  (202) 512-7114 or kanofm@gao.gov. Contact points for our Offices of  Congressional Relations and Public Affairs may be found on the last page  of this report. GAO staff who made major contributions to this report are  listed in appendix III.
section_title: Appendix I: Scope and Methodology
paragraphs: To examine the change in retail prices for prescription drugs frequently  used by Medicare beneficiaries and other individuals with health  insurance, we used data from the Blue Cross and Blue Shield (BCBS)  Federal Employee Program (FEP) to select the 100 prescription drugs  most frequently dispensed through retail pharmacies in 2003 for BCBS  FEP Medicare enrollees and the 100 most frequently dispensed for BCBS  FEP non-Medicare enrollees. Combined, these two lists included 133  unique drugs.
We obtained average monthly usual and customary (U&C) prices reported  by retail pharmacies to Pennsylvania’s Pharmaceutical Assistance  Contract for the Elderly (PACE) program from January 2000 through  December 2004 and New York’s Elderly Pharmaceutical Insurance  Coverage (EPIC) program from August 2000 through December 2004. We  collected prices based on a specific strength, dosage form, and common  number of units (such as pills), typically for a 30-day supply. Based on  combined PACE and EPIC data, 96 of the 133 drugs we selected had prices  reported for every month from January 2000 through December 2004. We  analyzed price trends on a monthly basis from January 2000 through  December 2004 for these 96 drugs.
Of the 96 drugs, 75 were among those most frequently used by BCBS FEP  Medicare enrollees, and 76 were among those most frequently used by  BCBS FEP non-Medicare enrollees. Fifty-five of the 96 drugs were  frequently used by both BCBS Medicare enrollees and non-Medicare  enrollees. We first determined the total number of prescriptions in 2003  for the drugs we selected dispensed to BCBS FEP Medicare enrollees and  the total number of prescriptions dispensed to BCBS FEP non-Medicare  enrollees. Separately for drugs frequently used by Medicare and by non- Medicare enrollees, we calculated the share of the total number of BCBS  FEP prescriptions attributed to each drug. The price of each drug was then  weighted by its relative share of total Medicare or total non-Medicare  prescriptions in 2003 to calculate the average price for frequently used  Medicare drugs and the average price for frequently used non-Medicare  drugs for each month from January 2000 through December 2004. We  standardized these averages to create a Medicare price index and a non- Medicare price index, each with a value of 100 as of January 2000.
We also separately analyzed monthly trends in U&C prices for brand and  generic drugs frequently used by BCBS FEP enrollees. Of the 96 drugs, 50  were brand drugs and 46 were generic drugs. Similar to our calculation of  Medicare and non-Medicare price indexes, we calculated indexes for  brand drugs and generic drugs based on each drug’s share of the total  number of brand or generic prescriptions dispensed to BCBS FEP  enrollees in 2003.
To examine the change in retail prices for frequently used drugs compared  to other drug price benchmarks, we compared an index based on the U&C  prices reported by PACE and EPIC for 50 brand drugs to indexes based on  the average manufacturer prices (AMP) and average wholesale prices  (AWP) for these 50 drugs on a quarterly basis from the first quarter of 2000  through the fourth quarter of 2004. The Centers for Medicare & Medicaid  Services (CMS) requires manufacturers to report AMP within 30 days of  the end of each calendar quarter. Manufacturers submit AWPs on a  periodic basis to publishers of drug-pricing data, such as First DataBank.  Using the National Drug Codes (NDC) reported by PACE and EPIC for  the U&C prices for the 50 brand drugs, we obtained per unit AMPs from  CMS and per unit AWPs from First DataBank associated with each NDC.  For each drug, we calculated a quarterly AMP and a quarterly AWP by  multiplying the per unit price by the most common number of units for a  30-day supply. We created an AMP and AWP index by weighting the 50  brand drugs by the number of prescriptions in 2003 from BCBS FEP.
Similarly, we recalculated the U&C price for the 50 brand drugs on a  quarterly basis to make comparisons to AMP and AWP.
We also determined how much each drug’s change in price contributed to  the overall change in price for the 50 brand drugs for AMPs, AWPs, and  U&C prices. We measured the share each drug contributed to the overall  index by comparing the ratio of (1) each drug’s price change from January  2000 through December 2004 multiplied by its weight based on BCBS FEP  prescriptions, to (2) the sum of all drugs price changes multiplied by their  associated weights.
Our analyses are limited to drugs most frequently used by Medicare  beneficiaries and by non-Medicare enrollees in the 2003 BCBS FEP.  Additionally, our analyses using U&C prices are limited to prices reported  by retail pharmacies in Pennsylvania to the PACE program and by retail  pharmacies in New York to the EPIC program. We reviewed the reliability  of data from BCBS FEP, CMS, First DataBank, EPIC, and PACE, including  screening for outlier prices in the PACE and EPIC data and ensuring that  the price trends and frequently used drugs were consistent with other data  sources. We determined that these data were sufficiently reliable for our  purposes. We performed our work from April 2004 through July 2005 in  accordance with generally accepted government auditing standards.
section_title: Appendix II: Drugs Included in Analyses
paragraphs: Table 1 lists the 96 drugs used in constructing monthly U&C price indexes  from January 2000 through December 2004. Fifty of the 96 drugs are brand  drugs and were also used in examining price changes in AMP, AWP, and  U&C on a quarterly basis from first quarter 2000 through fourth quarter  2004. Of the 96 drugs, 75 were frequently used by Medicare beneficiaries  and 76 were frequently used by non-Medicare enrollees, with 55 of these  drugs frequently used by both Medicare beneficiaries and non-Medicare  enrollees.
section_title: Appendix III: GAO Contact and Staff Acknowledgments
subsections: section_title: GAO Contact
section_title: Acknowledgments
paragraphs: In addition to the contact named above, John E. Dicken, Director; Rashmi  Agarwal; Jessica L. Cobert; Martha Kelly, Matthew L. Puglisi; and Daniel S.  Ries made key contributions to this report.