NCPA - National Center for Policy Analysis

Consumer Information And Retail Prices For Prescription Drugs

October 5, 2000

Even within competitive markets, prices for the same prescription drug may vary widely, say economists.

Using data collected from individual retail pharmacies in upstate New York, economist Alan Sorensen found that cash prices for equivalent prescriptions differ substantially -- even among pharmacies in the same small town.

  • On average, Sorensen found, the highest posted price for a given prescription was more than 50 percent above the lowest available price.
  • The potential dollar savings from finding the lowest-cost pharmacy -- as measured by the price range across pharmacies -- exceeded $10 for more than half of the prescriptions in the sample.
  • At most, one-third of the price variation could be explained by differences in the service characteristics of the pharmacies -- such as hours of operation -- or their geographic location.

But the most important factor was whether the drug was frequently purchased -- such as drugs used to treat chronic conditions -- or might be purchased only one time by a particular patient.

  • The range of prices for one-time prescriptions were estimated to be 34 percent larger than for prescriptions purchased monthly, other things being equal.
  • And one-time prescriptions had markups from the average wholesale price 41 percent higher than prescriptions purchased monthly.

The reason for the greater variability is that consumers have less information about prices, and less incentive to price-shop for the lowest drug price if they are filling a one-time prescription rather than a prescription they will refill monthly.

If retailers advertised their prices, it would lower consumers' "search costs." But price advertising by pharmacies is often prohibited by law, notes Sorensen, and thus prices may be higher and vary more than they would otherwise.

Source: Alan T. Sorensen, " Equilibrium Price Dispersion in Retail Markets for Prescription Drugs," Journal of Political Economy, August 2000.


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