Who Pays Higher Prices for Prescription Drugs?

Policy Reports | Health

No. 265
Monday, November 17, 2003
by Andrew J. Rettenmaier & Zijun Wang

Executive Summary

Who pays the lowest prices for prescription drugs? In the debate over adding a prescription drug benefit to Medicare, a key argument is that large insurers obtain significant price discounts not available to individual patients. However, we have found that patients' price-shopping is just as effective as the leverage exerted by large insurers. Patients who pay for drugs themselves have an incentive to shop for the lowest price, whereas those patients whose drugs are paid for by third parties have less incentive to shop.

To compare the effects of bargaining power to patient shopping, we performed statistical tests using nearly 70,000 records of drug purchases by representative Medicare beneficiaries. We found that of the 39 most commonly prescribed drugs for Medicare patients:

  • For almost 60 percent of the drugs, there was no significant difference between the price paid when patients were the primary payer and the price paid when an insurer was the primary payer.
  • When there was a significant difference, individual patients paid lower prices twice as often (23.1 percent of the drugs) as private insurers (10.3 percent of the drugs).

Similarly, for an expanded set of 229 drugs, we found:

  • For close to three-quarters of the drugs, the unit price paid by people spending their own money was not significantly different from the price paid by people with insurance.
  • Among the 62 drugs for which price differences were significant, individuals paid lower prices twice as often as third-party payers.

Finally, we used statistical regression analysis to examine the relationship between the price and the share of price paid out of pocket by patients. We found:

  • Of the 39 individual drugs prescribed most frequently, the price per unit fell as the share paid out of pocket increased for 27 of them; thus higher cost sharing was associated with lower unit costs for 70 percent of the drugs.
  • For only 15 percent of the drugs was the unit price higher when patients paid a larger out of pocket share.

In general, the relationship between cost sharing and lower costs was greatest for more heavily used drugs and for more expensive drugs. These results are consistent with economic theory. Individuals should search more aggressively for lower-cost alternatives when the amount of money at stake is higher and when there is more frequent use of the drug.

How are individuals able to meet and in some cases beat the discounts large purchasers are able to obtain? They may do so by using shopping techniques that are common in other markets - including comparison shopping among pharmacies both within and outside their local markets and, more recently, on the Internet. Buying in larger quantities can lower the unit cost, although we did not find that higher out of pocket spending was statistically related to this practice. In some cases, consumers can buy higher-dose pills and split them, achieving a lower unit cost. However, we infer that this practice is as likely among patients with insurance as among patients paying out of pocket.

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