The assertion that individuals without drug coverage pay a higher price at the retail pharmacy than the total price paid by those with drug coverage is not supported by the evidence. The explanation we offer is that a patient’s price-shopping efforts may have price-reducing effects similar to those of insurance companies with concentrated purchasing power. We find that for most of the drugs considered, the relationship between cost sharing and final price paid is negative.

Further, the negative relationship is more significant for more heavily prescribed and more expensive drugs. This is consistent with the predictions of a standard search model: prices for repeatedly purchased prescriptions exhibit significant reductions in spatial dispersion due to competition.15 Also, the impact of cost sharing between more and less expensive drugs appears to be insignificant when percentage differences are considered, but is significant when the total effect is considered.

Finally, the data used here is limited to Medicare beneficiaries (the elderly and the disabled). It is not clear whether studies of non-Medicare populations — among whom prescription drug use is less pronounced — would yield similar results. Given that seniors generally use more drugs and face lower opportunity costs for searching, they are more likely to benefit from searching for the lowest price.

NOTE: Nothing written here should be construed as necessarily reflecting the views of the National Center for Policy Analysis or as an attempt to aid or hinder the passage of any bill before Congress.