Who Pays Higher Prices for Prescription Drugs?
Introduction
For decades, medical expenditures have grown faster than the gross domestic product. Moreover, spending for prescription drugs is the fastest-rising component of health care spending. Nominal health care expenditures rose from $861 billion in 1994 to $1,236.4 billion in 2001, an increase of more than 43 percent. Over the same period, spending on prescription drugs rose from $54.6 to $140.6 billion, a jump of more than 157 percent. Prescription drugs make up more than one of every ten dollars of health care spending by individuals; the elderly spend about one in every six of those dollars.
"Some argue that insurers pay lower for prices for drugs than patients spending their own money."
There is some evidence that health insurance generally has shifted away from cost sharing toward managed care in recent years,1 and cost sharing is falling for prescription drugs. In 2001, about 31 percent of prescription drug spending was out of pocket, down from 48 percent in 1994.2 Medicare beneficiaries with insurance coverage pay out of pocket for about one-third of their total spending on prescription drugs. Year 2000 figures from the Department of Health and Human Services (HHS) show that the average out-of-pocket share of spending varies from 58 percent for those with Medigap coverage to 20 percent for those with Medicaid. The continuous increase in prescription drug expenditures has stimulated an intense debate on whether the federal government should act more aggressively to provide direct help for the elderly by, for example, adding prescription drug benefits to Medicare, a program that already faces serious long-term solvency problems.
A key argument some have used to justify changes in Medicare is that large insurers obtain significant price discounts not available to individual patients.3 The HHS Office of the Assistant Secretary for Planning and Evaluation made this argument in evaluating a previous House of Representatives prescription drug bill:
A substantial share of beneficiary savings from H.R. 2473 arises from drug discounts, made possible by letting Medicare beneficiaries aggregate their purchasing power for the first time. It's common sense: the first step toward lower prescription drug costs for seniors is to give them the same means to get lower drug prices that are widely used for those under 65.4
In our analysis, however, we did not find significant or systematic differences between retail drug prices for patients who pay primarily out of pocket and those who rely heavily on third-party payers. We did find that, in general, as the out-of-pocket share of a prescription's cost increases, the unit price declines. The explanation we offer is that while third-party payers may have greater market leverage than individual consumers, cost sharing induces patients to price-shop aggressively. Which group pays more for drugs depends on the net effect of these two competing factors.5