CONGRESS OF THE UNITED STATES
`CONGRESSIONAL BUDGET OFFICE
`
`A
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`CBO
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`P A P E R
`
`JANUARY 2007
`
`Prescription Drug
`Pricing in the
`Private Sector
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`Exhibit 1069
`IPR2017-00807
`ARGENTUM
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`Pub. No. 2703
`Pub. No. 2703
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`A
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`CBO
`
`P A P E R
`
`Prescription Drug Pricing in the
`Private Sector
`
`January 2007
`
`The Congress of the United States O Congressional Budget Office
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` Note
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`The numbers in the text, tables, and figures of this paper may not add up to totals because of
`rounding.
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`Preface
`
`A s prescription drugs move from manufacturers to consumers, a complex set of mar-
`
`ket transactions involving prices, discounts, and rebates occurs along the supply chain.
`Although the drugs themselves move in a relatively straightforward way, the flow of payments
`and the process by which they are determined are much more complex.
`
`This Congressional Budget Office (CBO) paper, prepared at the request of Senate Majority
`Leader Frist, explains the supply chain, the flow of payments, and the process by which pay-
`ments are determined and provides estimates of the relative prices that retail pharmacies and
`nonretail providers pay for prescription drugs. In keeping with CBO’s mandate to provide
`objective, nonpartisan analysis, this paper makes no recommendations.
`
`Julie Somers and Anna Cook prepared the paper under the supervision of Joseph Kile, David
`Moore, Bruce Vavrichek, and James Baumgardner. Alshadye Yemane and Susan Labovich
`assisted with the data analysis, and Peter Richmond assisted with the figures. Allison Percy
`served as CBO’s internal reviewer. Information and data were provided by the Centers for
`Medicare & Medicaid Services as well as by IMS Health. Tom Bradley, Philip Ellis, Arlene
`Holen, Amy Petz, Shinobu Suzuki, and Tom Woodward provided useful comments on drafts.
`Outside of CBO, Terry Latanich and Judy Wagner, both private consultants, did the same.
`(The assistance of external reviewers implies no responsibility for the final product, which
`rests solely with CBO.)
`
`John Skeen edited the paper, and Kate Kelly proofread it. Maureen Costantino took the
`photograph for the cover and prepared the paper for publication. Lenny Skutnik produced
`the printed copies, and Linda Schimmel handled the distribution.
`
`January 2007
`
`Donald B. Marron
`Acting Director
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`Contents
`
`Summary
`The Supply Chain
`Price Measures
`Single-Source Brand-Name Drugs
`Multiple-Source Drugs
`
`The Supply Chain
`
`Pricing Strategies and Measures
`Pricing Strategies
`Price Measures
`
`The Roles of Pharmacy Benefit Managers and Pharmacies
`Pharmacy Benefit Managers
`Pharmacies
`
`Single-Source Brand-Name Drugs
`Prices Paid by Retail Pharmacies
`Prices Paid by Nonretail Providers
`A Hypothetical Example
`Cash Customers
`
`Multiple-Source Drugs
`Estimating the Amount Retained by Wholesalers and
` Discounts to Pharmacies
`List Prices as Predictors of Transaction Prices
`PBMs’ Payments to Pharmacies
`
`Appendix: Data and Methodology Used in This Analysis
`
`Glossary
`
`Tables
`
`1.
`
`2.
`
`Average Prices for Single-Source Brand-Name Drugs
`Relative to the Average Wholesale Price
`
`Different Purchasers’ Reliance on Wholesalers for
`Prescription Drugs
`
`1
`1
`3
`3
`4
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`4
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`6
`6
`8
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`10
`10
`12
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`13
`13
`15
`15
`17
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`17
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`19
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`21
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`25
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`VI
`
`PRESCRIPTION DRUG PRICING IN THE PRIVATE SECTOR
`
`Tables (Continued)
`3.
`U.S. Sales of Prescription Drugs and Sellers’ Market
`Shares, 1999 and 2005
`
`4.
`
`5.
`
`6.
`
`Average Prices for Single-Source Brand-Name Drugs
`Relative to the Average Wholesale Price, at Different
`Points in the Supply Chain
`
`The Average Manufacturer Price as a Percentage of the
`Average Price Paid by Independent Pharmacies
`
`The Average Manufacturer Price and the Average Price
`Paid by Independent Pharmacies as a Percentage of the
`Average Wholesale Price
`
`Figures
`
`1.
`
`2.
`
`3.
`
`4.
`
`5.
`
`Boxes
`
`1.
`
`2.
`
`The Supply Chain Through Which Drugs Are Delivered to
`Consumers
`
`Manufacturers’ Shipments of Drugs Through the Supply Chain
`
`Measures of Prices in the Retail Pharmacy Market
`
`Flow of Funds for Single-Source Brand-Name Drugs
`Purchased at a Retail Pharmacy and Managed by a
`Pharmacy Benefit Manager for an Employer’s
`Health Plan
`
`Hypothetical Example of Payment for a Single-Source
`Prescription
`
`The Average Manufacturer Price Is to Be Made Publicly
`Available
`
`Medicaid’s Rebate Program
`
`7
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`14
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`18
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`20
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`2
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`5
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`8
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`11
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`17
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`Prescription Drug Pricing in the Private Sector
`
`Summary
`As prescription drugs move from manufacturers to con-
`sumers, a complex set of market transactions involving
`prices, discounts, and rebates occurs along the supply
`chain. Although the drugs themselves move in a relatively
`straightforward way from manufacturers to wholesalers to
`retail pharmacies or nonretail providers (such as hospitals
`and clinics) to final consumers, the flow of payments that
`occurs is more complicated. This Congressional Budget
`Office (CBO) paper explains the supply chain, the flow
`of payments, and the process by which payments are
`determined and provides estimates of the relative prices
`that retail pharmacies and nonretail providers pay for pre-
`scription drugs. Limitations in the available data preclude
`quantitative estimates of what consumers and health
`plans ultimately pay for prescription drugs, but this paper
`describes those participants’ bargaining positions.
`
`The prices that purchasers pay depend upon the degree of
`competition in a marketplace and on purchasers’ bargain-
`ing power. In the pharmaceutical marketplace, competi-
`tion depends on whether a brand-name drug has patent
`protection or whether brand-name and generic versions
`of the drug are both available. In addition, even brand-
`name drugs under patent protection can face competition
`from other brand-name drugs that are considered to be
`therapeutic substitutes.
`
`A purchaser’s bargaining power depends on both the vol-
`ume purchased and the purchaser’s ability to choose
`which drug to purchase from a set of competing drugs.
`For example, for brand-name drugs under patent protec-
`tion, chain pharmacies and health plans may have differ-
`ent levels of success in negotiating lower prices from
`manufacturers even though they both may purchase a
`large volume of drugs. A chain pharmacy usually dis-
`penses prescriptions as written by the physician for
`brand-name drugs under patent protection; so even
`though a chain pharmacy may buy a large volume of
`
`brand-name drugs under patent protection, it generally
`cannot negotiate prices for them that are low compared
`with the prices negotiated by purchasers with more
`choice. In contrast, a health plan can choose to cover only
`one or two brand-name drugs from a set of drugs that are
`considered to be therapeutic substitutes; therefore, a
`health plan can negotiate lower prices from manufactur-
`ers (in the form of rebates) by buying a large volume of
`the brand-name drugs of the plan’s choice.
`
`In contrast, for generic drugs, the chain pharmacy, rather
`than the health plan, has greater negotiating leverage.
`The chain pharmacy can choose which of several generic
`drugs to stock, and it purchases large volumes of those
`drugs. Therefore, the chain pharmacy can negotiate lower
`prices from manufacturers for generic drugs. The health
`plan does not choose which generic drugs to dispense.
`Instead, the health plan’s beneficiaries go to their pharma-
`cies to fill prescriptions, and the pharmacies dispense the
`generic drugs that they have chosen to stock. Therefore,
`manufacturers have no incentive to negotiate price terms
`with a health plan for generic drugs even if the health
`plan buys a large volume of them.
`
`The Supply Chain
`Consumers obtain about three-quarters of their prescrip-
`tion drugs from retail pharmacies and the remainder
`from nonretail providers. Retail pharmacies include con-
`ventional outlets—chain pharmacies, independent phar-
`macies, and food stores with pharmacies—as well as the
`operationally different category of mail-order pharmacies
`(see Figure 1). Nonretail providers include hospitals,
`health maintenance organizations (HMOs), clinics,
`home health care providers, nursing homes, and federal
`facilities. The majority of drugs purchased by retail phar-
`macies and nonretail providers are purchased through
`wholesalers. Purchasing drugs from the pharmaceutical
`manufacturers, wholesalers decrease the number of trans-
`actions that would otherwise occur if the many retail
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`2
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`PRESCRIPTION DRUG PRICING IN THE PRIVATE SECTOR
`
`Figure 1.
`The Supply Chain Through Which Drugs Are Delivered to Consumers
`
`Manufacturers
`
`Wholesalers
`
`Retail Pharmacies
`
`Chain Pharmacies and
`Food Stores with
`Pharmacies
`
`Independent
`Pharmacies
`
`Mail-Order
`Pharmacies
`
`Nonretail Providers
`
`Hospitals, HMOs, Clinics,
`Home Health Care Providers,
`Nursing Homes, and
`Federal Facilities
`
`Consumers
`
`Consumers Paying for
`Purchases Out of Pocket
`
`Consumers Who Have Some or All Purchases
`Paid for by a Third Party (Including health plans, Medicaid,
`Medicare, and the Departments of Veterans Affairs and Defense)
`
`Source: Congressional Budget Office.
`Note: HMO = health maintenance organization.
`
`pharmacies and nonretail providers independently
`ordered from hundreds of manufacturers. Direct sales
`of drugs from manufacturers to retail pharmacies or non-
`retail providers generally involve purchasers large enough
`to internalize the wholesale function, like large chain
`pharmacies and food stores with pharmacies. Neverthe-
`less, even large chain pharmacies and food stores with
`pharmacies purchase a substantial portion of their drugs
`from wholesalers.
`
`Retail pharmacies and nonretail providers negotiate drug
`prices with wholesalers or pharmaceutical manufacturers.
`In the retail pharmacy market, there are two additional
`negotiations: one between health plans or self-insured
`employers and the manufacturers and the other between
`health plans or self-insured employers and the retail phar-
`
`macies. The health plans or self-insured employers often
`contract out those two additional negotiations to phar-
`macy benefit managers (PBMs). PBMs that organize a
`large number of patients under a formulary (a list of pre-
`ferred drugs) obtain discounted prices on many brand-
`name drugs in the form of rebates from manufacturers,
`which are in turn shared with health plans or self-insured
`employers. In 2004, nearly half of drug spending in the
`retail pharmacy market was covered by private health
`plans.1
`
`1. See Centers for Medicare & Medicaid Services, National
`Health Expenditures by Type of Service and Source of
`Funds, 1960 to 2004, available at www.cms.hhs.gov/
`NationalHealthExpendData/02_NationalHealthAccounts
`Historical.asp#TopOfPage.
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`PRESCRIPTION DRUG PRICING IN THE PRIVATE SECTOR
`
`3
`
`Price Measures
`There are three price measures that are important in
`understanding the payment system for prescription drugs
`in the retail pharmacy market: the average manufacturer
`price (AMP), the wholesale acquisition cost (WAC), and
`the average wholesale price (AWP). The AMP is an aver-
`age of actual transaction prices. In contrast, the WAC and
`the AWP are list prices, like a sticker price in the automo-
`bile industry.
`
`The AMP is the average price paid by wholesalers to
`manufacturers or by retail pharmacies that buy directly
`from manufacturers for drugs distributed through retail
`pharmacies. It reflects all rebates paid by manufacturers
`to wholesalers and to retail pharmacies. It does not
`include rebates paid by manufacturers to PBMs,
`Medicaid, or to other third-party payers. Manufacturers
`are required to report the AMP to the Department of
`Health and Human Services’ Centers for Medicare &
`Medicaid Services (CMS), which uses it to calculate the
`rebates that manufacturers are required to pay state Med-
`icaid programs for sales to Medicaid beneficiaries. For
`manufacturers, such rebates are a cost of participating in
`the Medicaid market.
`
`The WAC represents manufacturers’ published catalog,
`or list, price for sales of a drug (brand-name or generic) to
`wholesalers. However, in practice, the WAC is not what
`wholesalers pay for drugs. To the extent that the WAC is
`meaningful in conveying information about actual trans-
`action costs, the utility is limited to single-source drugs
`(that is, brand-name drugs still under patent protection).
`For those drugs, the WAC often approximates the prices
`that retail pharmacies pay to wholesalers.
`
`The AWP is a published list price for a drug sold by
`wholesalers to retail pharmacies and nonretail providers.
`However, in practice, the AWP is not what retail pharma-
`cies and nonretail providers pay for drugs but, instead, is
`often used as a basis for payment to retail pharmacies by,
`for example, the Medicaid program, PBMs, and health
`plans. Those organizations often pay pharmacies a price
`discounted off of the AWP.
`
`Single-Source Brand-Name Drugs
`Using a sample of single-source prescription drugs in oral
`solid forms (that is, tablets and capsules) that accounted
`for over 40 percent of all U.S. drug sales in 2003, CBO
`analyzed the average prices that retail pharmacies and
`nonretail providers paid. Those price data—which CBO
`
`purchased from IMS Health—do not reflect all of the
`discounts given by pharmaceutical manufacturers and so
`must be interpreted with caution. In particular, rebate
`payments from manufacturers are not captured in those
`prices.
`
`Other prices analyzed in this paper do reflect rebate pay-
`ments, but those prices cannot be attributed to a particu-
`lar type of purchaser. An example is the “best price”
`reported to CMS under the Medicaid program. Manu-
`facturers that choose to participate in the program must
`report the lowest price that any private-sector purchaser
`paid for a drug, including all discounts and rebates.
`Although CBO has analyzed those reported best prices,
`the purchasers who receive them are unknown.
`
`According to CBO’s analysis of the estimated average
`prices in the data from IMS Health, conventional retail
`pharmacies pay more for single-source brand-name drugs
`than do mail-order pharmacies and nonretail providers.
`That finding is not surprising because conventional phar-
`macies generally do not promote substitution among
`those drugs.2 Rather, it is the other types of purchasers
`(mail-order pharmacies working on behalf of PBMs or
`health plans, and nonretail providers) who receive dis-
`counts by encouraging the substitution of one single-
`source brand-name drug for another.3
`
`Mail-order pharmacies pay less for single-source brand-
`name drugs than do other retail pharmacies. When
`working on behalf of PBMs or health plans, mail-order
`pharmacies may have a greater ability to affect drugs’
`market shares for a large number of consumers—particu-
`larly for drugs that treat chronic conditions––compared
`with conventional pharmacies. The physician’s permis-
`sion is needed to switch from a more expensive brand-
`name drug to a therapeutically similar but less expensive
`drug. In a mail-order setting, pharmacists have additional
`time to contact physicians and attempt to obtain the
`needed permission. And because most of the prescrip-
`tions filled by mail-order pharmacies are for drugs that
`
`2. When a pharmacy does contact a doctor to switch a prescription,
`it may be on behalf of a PBM or health plan using a formulary to
`manage the drug spending by its patients. The rebate would then
`go to the PBM or health plan, rather than to the pharmacy.
`
`3. However, because limitations of the data kept CBO from estimat-
`ing how much final purchasers paid retail pharmacies and non-
`retail providers, the agency also could not calculate the net
`amount that pharmacies and nonretail providers retained.
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`4
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`PRESCRIPTION DRUG PRICING IN THE PRIVATE SECTOR
`
`Table 1.
`Average Prices for Single-Source Brand-Name Drugs Relative to the Average
`Wholesale Price
`
`Are Rebates That Are Not
`Reflected in the Price Shown Likely?
`
`Average Price as a
`Percentage of AWP
`
`Conventional Retail Pharmaciesa
`Mail-Order Pharmaciesb
`Federal Facilities
`Nonretail Providers, Excluding Federal Facilitiesd
`Best Price
`
`No
`Yes
`No
`Yes
`No
`
`83
`No More Than 78
`42c
`No More Than 74
`64
`
`Source: Congressional Budget Office (CBO) based on data from IMS Health for the fourth quarter of 2003.
`Notes: AWP = average wholesale price.
`Mail-order pharmacies and nonretail providers can receive rebates from manufacturers on the basis of their ability to affect a drug’s
`market share for a large number of consumers. The estimates of average prices for mail-order pharmacies and nonretail providers do
`not account for rebates. Federal facilities and purchasers who pay the best price also can receive rebates, but the estimates of average
`prices for federal facilities and best price do account for rebates.
`a. Conventional retail pharmacies include independent pharmacies, chain pharmacies, and food stores with pharmacies.
`b.
`IMS Health’s data on mail-order pharmacies included information on federal mail-order facilities, which, according to the company,
`accounted for about 15 percent of mail-order sales. For its estimate of the average prices that mail-order pharmacies pay, CBO backed out
`federal facilities’ purchases, assuming that those facilities obtained the same price, on average, as other federal facilities did (that is, 42
`percent of the AWP).
`c. The price paid by federal facilities is based on the lowest price offered to private buyers, discounts required by federal law, and formular-
`ies. As described in Box 2 and in Congressional Budget Office, Prices for Brand-Name Drugs Under Selected Federal Programs (June
`2005), expanding the scope of buyers who have access to the lowest price offered to private buyers would probably cause it to rise.
`d. Nonretail providers include hospitals, health maintenance organizations, clinics, home health care providers, and nursing homes.
`
`treat chronic conditions, such substitution is more profit-
`able.
`
`In particular, CBO estimates, conventional pharmacies
`paid about 83 percent of the AWP for single-source drugs
`(see Table 1). Mail-order pharmacies paid no more than
`78 percent, and nonretail providers paid no more than
`74 percent––figures that are stated as upper bounds
`because the prices that CBO analyzed did not reflect all
`of the discounts and rebates that those providers received
`from manufacturers. Federal facilities paid the lowest
`prices, 42 percent of the AWP. By law, federal facilities
`have access to the lowest prices that manufacturers charge
`their most favored customers, and federal facilities often
`use formularies to negotiate additional discounts with
`manufacturers.
`
`Multiple-Source Drugs
`Once a brand-name drug loses its patent protection and
`generic versions become available, it is referred to as a
`multiple-source drug. When several different manufac-
`
`turers have entered the market, pharmacies are in a strong
`negotiating position. In that circumstance, pharmacies,
`rather than PBMs, negotiate for discounted prices
`because they can choose which manufacturers’ generic
`drugs to stock and, in some cases, whether to dispense the
`brand-name versions or the generic versions.
`
`Although list prices such as the WAC and the AWP tend
`to have a consistent relationship with average transaction
`prices for single-source drugs and the amounts that phar-
`macies pay for those drugs, for generic drugs, list prices
`are not good predictors of pharmacies’ acquisition costs.
`Consequently, third parties (such as health plans) making
`payments to pharmacies for those drugs have generally
`faced informational hurdles in setting payment rates that
`accurately reflect the pharmacies’ acquisition costs. That
`situation will change when the AMP for drugs is made
`publicly available, as required by the Deficit Reduction
`Act of 2005. Publishing the AMP will provide greater
`price transparency in the retail pharmacy market.
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`PRESCRIPTION DRUG PRICING IN THE PRIVATE SECTOR
`
`5
`
`Figure 2.
`Manufacturers’ Shipments of Drugs Through the Supply Chain
`(Percentage of dollar sales)
`
`30%
`
`Manufacturers
`
`2%
`
`3%
`
`64%a
`
`Wholesalers
`
`Retail Pharmacies
`
`Chain Pharmacies and
`Food Stores with
`Pharmacies
`
`Independent
`Pharmacies
`
`Mail-Order
`Pharmacies
`
`Nonretail Providers
`
`Hospitals, HMOs, Clinics,
`Home Health Care Providers,
`Nursing Homes, and
`Federal Facilities
`
`43%
`
`14%
`
`15%
`
`28%
`
`Consumers
`
`Consumers Paying for
`Purchases Out of Pocket
`
`Consumers Who Have Some or All Purchases
`Paid for by a Third Party (Including health plans, Medicaid,
`Medicare, and the Departments of Veterans Affairs and Defense)
`
`Source: Congressional Budget Office based on data from IMS Health for 2005.
`Notes: HMO = health maintenance organization.
`Pharmacy benefit managers (PBMs), with the exception of their mail-order pharmacies, do not take physical possession of drugs. The
`role of the PBMs in the payment process is shown in Figure 4.
`a. Of the 64 percent of manufacturers’ shipments provided to wholesalers, the wholesalers distribute 13 percentage points’ worth to chain
`pharmacies and food stores with pharmacies, 13 percentage points to independent pharmacies, 13 percentage points to mail-order
`pharmacies, and 25 percentage points to nonretail providers.
`
`The Supply Chain
`Although manufacturers sell some drugs directly to retail
`pharmacies and nonretail providers, most are sold to
`wholesalers (see Figure 2). Wholesalers decrease the num-
`ber of transactions that would otherwise occur if the
`many retail pharmacies and nonretail providers indepen-
`dently ordered from hundreds of manufacturers. Retail
`pharmacies and nonretail providers purchase most of
`their products from wholesalers, but chain pharmacies
`and food stores with pharmacies purchase a large portion
`
`of their drugs directly from manufacturers, as they are
`apparently large enough to efficiently internalize aspects
`of the wholesale function. Nevertheless, chain pharmacies
`still purchase about one-quarter of their drugs (measured
`in dollar sales) from wholesalers, and food stores with
`pharmacies purchase about one-half of theirs from whole-
`salers (see Table 2). At the other extreme, independent
`pharmacies purchase 98 percent of their drugs from
`wholesalers.
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`6
`
`PRESCRIPTION DRUG PRICING IN THE PRIVATE SECTOR
`
`Table 2.
`Different Purchasers’ Reliance on
`Wholesalers for Prescription Drugs
`(Percentage of dollar sales)
`
`Purchaser
`
`Chain Pharmacies
`Food Stores with Pharmacies
`Independent Pharmacies
`Mail-Order Pharmacies
`Nonretail Providersa
`
`Purchases
`from Wholesalers
`
`25
`53
`98
`85
`90
`
`Source: Congressional Budget Office based on data from IMS
`Health.
`a. Nonretail providers include hospitals, health maintenance
`organizations, clinics, home health care providers, nursing
`homes, and federal facilities.
`
`Retail pharmacies of all types serve about three-quarters
`of the consumer market for prescription drugs (see
`Table 3). Chain pharmacies have about half of the retail
`pharmacy market, and just over one-third of the entire
`market for prescription drugs. In recent years, the market
`share of mail-order pharmacies has grown—from almost
`10 percent of the market in 1999 to almost 15 percent in
`2005—perhaps because of the increased convenience and
`lower prices offered by many such facilities for drugs that
`treat chronic illnesses.4 Also, employer-based plans are
`increasingly mandating mail order for prescription drugs
`that treat chronic illnesses or strongly encouraging its use
`through cost-sharing incentives.5 The market share of
`independent pharmacies has declined— from almost
`18 percent of the market in 1999 to about 14 percent
`in 2005.
`
`Nonretail providers—consisting of hospitals, HMOs,
`clinics, home health care providers, nursing homes, and
`federal facilities—deliver the remaining one-fourth of
`prescription drugs.6
`
`4. See Federal Trade Commission, Pharmacy Benefit Managers: Own-
`ership of Mail-Order Pharmacies (August 2005), p. 18.
`
`5. See Federal Trade Commission, Pharmacy Benefit Managers, p. 17.
`Also, as a result of the new Medicare Part D benefit, the size of the
`insured population that uses mail-order pharmacies for drugs that
`treat chronic conditions is likely to increase.
`
`Pricing Strategies and Measures
`The prices paid to manufacturers for prescription drugs
`depend both on the competitive conditions in the market
`as well as on the bargaining power of purchasers. There
`are three price measures that are important in under-
`standing the payment system for prescription drugs in the
`retail pharmacy market: the average manufacturer price,
`the wholesale acquisition cost, and the average wholesale
`price. Generally, in the retail pharmacy market for single-
`source drugs, the AMP is the price paid to manufacturers,
`the WAC approximates the price paid to wholesalers, and
`the price paid to pharmacies is often based on the AWP.
`
`Pricing Strategies
`The structure of competition differs dramatically for
`single-source drugs and generic drugs. The manufacturer
`of a single-source drug usually faces limited competition
`from therapeutically similar brand-name drugs on the
`market. By contrast, the producer of a generic drug usu-
`ally faces several competitors offering what are nearly
`identical products.7
`
`Single-Source Drugs. Manufacturers of single-source
`drugs charge different purchasers different prices based
`on both the volume purchased and the purchaser’s ability
`to choose which drug to purchase from a set of therapeu-
`tically similar drugs. Nonretail providers and mail-order
`pharmacies (managing drug benefits on behalf of PBMs
`or health plans) have the ability to systematically favor
`one brand-name drug over another and therefore tend to
`pay lower prices for brand-name drugs than conventional
`pharmacies do. Conventional pharmacies tend to fill pre-
`scriptions for single-source drugs as written by the doctor
`and therefore lack the ability to favor one single-source
`drug over another. When pharmacies do contact doctors
`to change prescriptions, they may be acting on behalf of
`PBMs or health plans using formularies to manage drug
`spending, in which case, any rebates would go to the
`PBMs or the health plans and not the pharmacies.
`
`Nonretail providers and mail-order pharmacies that buy
`directly from manufacturers can simply negotiate lower
`prices for choosing the manufacturers’ drugs over com-
`peting drugs. However, as mentioned, about two-thirds
`of manufacturers’ sales are directed through wholesalers.
`But that arrangement does not prevent purchasers from
`
`6. Drugs administered in a physician’s office are included under the
`category of clinics.
`
`7. Most generic drugs are rated by the Food and Drug Administra-
`tion as bioequivalent to the brand-name product.
`
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`

`PRESCRIPTION DRUG PRICING IN THE PRIVATE SECTOR
`
`7
`
`Table 3.
`U.S. Sales of Prescription Drugs and Sellers’ Market Shares, 1999 and 2005
`1999
`2005
`
`Sales
`(Billions of dollars)
`
`Market Share
`(Percent)
`
`Sales
`(Billions of dollars)
`
`Market Share
`(Percent)
`
`Chain Pharmacies
`Mail-Order Pharmacies
`Independent Pharmacies
`Food Stores with Pharmacies
`Subtotal, Retail
`
`Nonfederal Hospitals
`Clinics
`Nursing Homes
`Federal Facilities
`Home Health Care Providers
`HMOs
`Miscellaneous Facilities
`Subtotal, Nonretail
`
`Total U.S. Market
`
`53.6
`13.2
`24.4
`12.7
`_____
`103.8
`
`15.3
`8.7
`3.9
`2.2
`1.5
`1.6
`0.6
`____
`33.8
`
`137.7
`
`Retail
`
`Nonretail
`
`38.9
`9.6
`17.7
`9.2
`____
`75.4
`
`11.1
`6.3
`2.8
`1.6
`1.1
`1.2
`0.4
`____
`24.6
`
`88.2
`36.9
`34.4
`21.3
`_____
`180.8
`
`26.0
`24.8
`12.0
`3.6
`2.4
`1.5
`0.8
`____
`71.1
`
`35.0
`14.7
`13.6
`8.5
`____
`71.8
`
`10.3
`9.9
`4.8
`1.4
`0.9
`0.6
`0.3
`____
`28.2
`
`100.0
`
`251.8
`
`100.0
`
`Source: Congressional Budget office based on data from IMS Health for 1999 and 2005 (the most recent data available); see
`www.imshealth.com/ims/portal/front/articleC/0,2777,6599_73915261_77141536,00.html.
`Note: HMO= health maintenance organization.
`
`obtaining lower net prices. Manufacturers frequently pay
`rebates directly to purchasers on the basis of the volume
`of drugs they purchase over a period of time. A demon-
`strated ability to switch patients to a particular company’s
`drug, evidenced by an increase in the volume sold to a
`purchaser’s customers, may be rewarded with a higher
`rebate. In that case, the purchaser’s net price is the
`amount paid to the wholesaler minus the rebate. The
`rebate is an “off-invoice” pricing adjustment; that is, it is
`not reflected in the wholesaler’s invoice price, having
`been negotiated privately between the manufacturer and
`the purchaser. Obtaining information about the size of
`such rebates and which purchasers get them is usually not
`possible, so most of the prices analyzed by CBO in this
`paper do not include them.8
`
`Manufacturers also pay rebates to PBMs working on
`behalf of health plans. PBMs determine which drugs are
`therapeutically similar.9 Then, for such brand-name
`drugs with several close substitutes, PBMs negotiate with
`manufacturers for rebates in return for placing the manu-
`facturers’ drugs on their formularies or giving the drugs
`
`preferential placement on their formularies. PBMs can
`give preferential treatment to manufacturers’ drugs by, for
`example, charging a lower copayment for the preferred
`drugs than for other (nonpreferred) drugs that are thera-
`peutically similar. The health plans’ patients may then
`have access to only the identified drugs (in what is known
`as a closed formulary) or may have access to nearly all
`prescription drugs but at different levels of cost sharing
`(in what is known as an open formulary).
`
`Generic Drugs. With generic drugs, conventional phar-
`macies and wholesalers, in addition to nonretail providers
`
`8. For further discussion of pricing in the pharmaceutical industry,
`see Congressional Budget Office, How Increased Competition from
`Generic Drugs Has Affected Prices and Returns in the Pharmaceutical
`Industry (July 1998), Chapter 3; and Richard G. Frank, “Prescrip-
`tion Drug Prices: Why Do Some Pay More Than Others Do?”
`Health Affairs, vol. 20, no. 2 (2001), pp. 115–128.
`
`9. A pharmacy and therapeutics committee, made up of physicians
`and pharmacists, usually determines which drugs within the same
`therapeutic class are close substitutes.
`
`000015
`
`

`

`8
`
`PRESCRIPTION DRUG PRICING IN THE PRIVATE SECTOR
`
`Figure 3.
`Measures of Prices in the Retail Pharmacy Market
`
`AMP
`
`Manufacturers
`
`AMP
`
`Wholesalers
`
`WACa
`
`Retail Pharmacies
`
`Chain Pharmacies and
`Food Stores with
`Pharmacies
`
`Independent
`Pharmacies
`
`Mail-Order
`Pharmacies
`
`AMP
`
`Payment Based on AWP (for single-source drugs);
`sometimes, the WAC is also used
`
`Consumers
`
`Consumers Paying for
`Purchases Out of Pocket
`
`Consumers Who Have Some or All Purchases
`Paid for by a Third Party (Including health plans, Medicaid
`Medicare, and the Department of Defense)
`
`Source: Congressional Budget Office.
`Notes: AMP = average manufacturer price; WAC = wholesale acquisition cost; AWP = average wholesale price.
`The AMP is an average of actual transaction prices. In contrast, the WAC and the AWP are list prices, like a sticker price in the automo-
`bile industry.
`The role of the pharmacy benefit managers in the payment process is shown in Figure 4.
`a. The WAC approximates what conventional retail pharmacies pay wholesalers for single-source brand-name drugs. It does not
`approximate what retail pharmacies pay wholesalers for multiple-source drugs.
`
`and mail-order pharmacies, choose which versions to
`stock. Consequently, those purchasers are able to negoti-
`ate lower prices from manufacturers. Chain pharmacies
`that purchase large volumes of generic drugs may negoti-
`ate lower prices than other purchasers of smaller volumes.
`PBMs, working on behalf of health plans, do not choose
`which generic drugs to dispense and so are not in a posi-
`tion to negotiate lower prices with manufacturers.10
`
`Price Measures
`Of the three pricing measures that are important in
`understanding the payment system for prescription drugs
`in the retail pharmacy market, only one is an average of
`actual transaction prices: the average manufacturer price.
`The other two prices are list prices that are something like
`the sticker price on a car: the wholesale acquisition cost
`and the average wholesale price. (See Figure 3.)
`
`10. An exception would be a mail-order pharmacy owned by a PBM.
`
`000016
`
`

`

`PRESCRIPTION DRUG PRICING IN THE PRIVATE SECTOR
`
`9
`
`Box 1.
`The Average Manufacturer Price Is to Be Made Publicly Available
`Currently, the average manufacturer price (AMP) for
`AMPs do not reflect all pharmacies’ acquisition costs
`prescription drugs is not publicly available. That situ-
`because they do not include wholesa