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. 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. 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. 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. 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. 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.) 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. 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. As agreed with your offices, unless you publicly announce the contents earlier, we plan no further distribution of this report until 30 days after its date. We will then send copies of this report to the Administrator of CMS and other interested parties. We will also provide copies to others upon request. In addition, the report will be available at no charge on the GAO Web site at http://www.gao.gov. 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. 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. 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. 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.

Summary: 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. 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.