Prescription Drugs: Price Trends for Frequently Used Brand and	 
Generic Drugs from 2000 through 2004 (15-AUG-05, GAO-05-779).	 
                                                                 
Prescription drug spending has been the fastest growing segment  
of national health expenditures. As the federal government	 
assumes greater financial responsibility for prescription drug	 
expenditures with the introduction of Medicare part D, federal	 
policymakers are increasingly concerned about prescription drug  
prices. GAO was asked to examine the change in retail prices and 
other pricing benchmarks for drugs frequently used by Medicare	 
beneficiaries and other individuals with health insurance from	 
2000 through 2004. To examine the change in retail prices from	 
2000 through 2004, we obtained usual and customary (U&C) prices  
from two state pharmacy assistance programs for drugs frequently 
used by Medicare beneficiaries and non-Medicare enrollees in the 
2003 Blue Cross and Blue Shield (BCBS) Federal Employee Program  
(FEP). The U&C price is the price an individual without 	 
prescription drug coverage would pay at a retail pharmacy.	 
Additionally, we compared the change in U&C prices for brand	 
drugs from 2000 through 2004 to the change in two pricing	 
benchmarks: average manufacturer price (AMP), which is the	 
average of prices paid to manufacturers by wholesalers for drugs 
distributed to the retail pharmacy class of trade, and average	 
wholesale price (AWP), which represents the average of list	 
prices that a manufacturer suggests wholesalers charge		 
pharmacies.							 
-------------------------Indexing Terms------------------------- 
REPORTNUM:   GAO-05-779 					        
    ACCNO:   A32979						        
  TITLE:     Prescription Drugs: Price Trends for Frequently Used     
Brand and Generic Drugs from 2000 through 2004			 
     DATE:   08/15/2005 
  SUBJECT:   Cost analysis					 
	     Data collection					 
	     Drugs						 
	     Medicaid						 
	     Medicare						 
	     Pharmaceutical industry				 
	     Price indexes					 
	     Prices and pricing 				 
	     Statistical data					 
	     Pharmaceutical Assistance Contract for		 
	     the Elderly					 
                                                                 
	     Blue Cross and Blue Shield Federal 		 
	     Employee Program					 
                                                                 
	     Elderly Pharmaceutical Insurance			 
	     Coverage Program					 
                                                                 

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GAO-05-779

United States Government Accountability Office

GAO

                       Report to Congressional Requesters

August 2005

PRESCRIPTION DRUGS

Price Trends for Frequently Used Brand and Generic Drugs from 2000 through 2004

GAO-05-779

[IMG]

August 2005

PRESCRIPTION DRUGS

Price Trends for Frequently Used Brand and Generic Drugs from 2000 through 2004

                                 What GAO Found

We found the average U&C prices at retail pharmacies reported by two state
pharmacy assistance programs for a 30-day supply of 96 drugs frequently
used by BCBS FEP Medicare and non-Medicare enrollees increased 24.5
percent from January 2000 through December 2004. Of the 96 drugs:

o  	Twenty drugs accounted for nearly two-thirds of the increase in the
U&C price index.

o  	The increase in average U&C prices for 75 prescription drugs
frequently used by Medicare beneficiaries was similar to the increase for
76 prescription drugs frequently used by non-Medicare enrollees.

o  	The average U&C prices for 50 frequently used brand prescription drugs
increased three times as much as the average for 46 generic frequently
used prescription drugs.

AWPs increased at a faster rate than AMPs and U&C prices for the 50
frequently used brand drugs from first quarter 2000 through fourth quarter
2004. Ten drugs in each index accounted for almost 50 percent of the
increase for AMP, AWP, and U&C prices. Eight of these 10 drugs were
consistent across the three price indexes.

The Centers for Medicare & Medicaid Services (CMS), two state pharmacy
assistance programs, and BCBS FEP reviewed a draft of this report. While
CMS noted that U&C and AWP do not reflect discounts in a drug's price,
this report's focus was to examine price trends rather than price levels.
Technical comments were incorporated as appropriate.

Average Annual Percentage Change of AMP, AWP, and U&C Price Indexes for 50
Brand Drugs Frequently Used by Enrollees in BCBS FEP, from First Quarter
2000 through Last Quarter 2004

Percentage change

6.0

6

5

4

3

2 1 0

AMP AWP U&C

Source: GAO analysis of data from CMS, First DataBank, New York's Elderly
Pharmaceutical Insurance Coverage program, Pennsylvania's Pharmaceutical
Assistance Contract for the Elderly program, and BCBS FEP.

United States Government Accountability Office

Contents

Letter

Results in Brief
Background
Retail Prices Increased from 2000 through 2004, with Larger

Increases for Brand Than Generic Drugs AWPs Increased at a Faster Rate
Than AMPs and U&C Prices for

50 Brand Drugs from 2000 through 2004 Concluding Observations Agency and
Other External Comments

                                       1

                                      4 5

                                       6

11 13 14

Appendix I Scope and Methodology

Appendix II Drugs Included in Analyses

Appendix III GAO Contact and Staff Acknowledgments

Table

Table 1: Ninety-Six Drugs Included in U&C Price Indexes, by Month, January
2000 through December 2004

Figures

Figure 1: Drug Prices for Different Buyers and Sellers 6

Figure 2: Index of Average U&C Prices for 96 Drugs Frequently Used by BCBS
FEP Enrollees, by Month, 2000 through 2004 7

Figure 3: Annual Change in U&C Price Index for 96 Drugs Frequently Used by
BCBS FEP Enrollees, 2000 through 2004 8

Figure 4: Indexes of Average U&C Prices for Drugs Frequently Used by BCBS
FEP Medicare and Non-Medicare Enrollees, by Month, 2000 through 2004 10

Figure 5: Indexes of Average U&C Prices for 50 Brand and 46 Generic Drugs
Frequently Used by BCBS FEP Enrollees, by Month, 2000 through 2004 11

Figure 6: Indexes of AMPs, AWPs, and Average U&C Prices for 50 Brand Drugs
Frequently Used by BCBS FEP Enrollees, by Quarter, 2000 through 2004 12

Figure 7: Comparison of 10 Drugs Accounting for the Largest Portions of
Changes in AMP, AWP, and U&C Price Indexes for 50 Brand Drugs Frequently
Used by BCBS FEP Enrollees, by Quarter, 2000 through 2004 13

Abbreviations

AMP average manufacturer price
AWP average wholesale price
BCBS Blue Cross and Blue Shield
BLS Bureau of Labor Statistics
CMS Centers for Medicare & Medicaid Services
EPIC Elderly Pharmaceutical Insurance Coverage
FEP Federal Employee Program
NDC National Drug Code
PACE Pharmaceutical Assistance Contract for the Elderly
U&C usual and customary

This is a work of the U.S. government and is not subject to copyright
protection in the United States. It may be reproduced and distributed in
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separately.

United States Government Accountability Office Washington, DC 20548

August 15, 2005

The Honorable Olympia J. Snowe
Chair
Committee on Small Business and Entrepreneurship
United States Senate

The Honorable Ron Wyden
United States Senate

Prescription drug spending as a share of national health expenditures
increased from 5.8 percent in 1993 to 10.7 percent in 2003 and was the
fastest growing segment of health care expenditures.1 In addition to
increasing utilization and the introduction of newer drugs, rising
prescription drug prices are a key component of increasing drug
expenditures. Increasing drug prices can affect consumers, employers, and
federal and state governments. Policymakers are increasingly concerned
about drug prices as the federal government will assume greater financial
responsibility for prescription drug expenditures with the introduction of
a
prescription drug benefit to Medicare beneficiaries in January 2006,
known as Medicare part D. Medicare beneficiaries also will continue to be
responsible for a large share of drug costs under Medicare part D.

Tracking prescription drug prices can be complicated by the different
prices that different purchasers, such as consumers, insurers and other
third-party payers, and wholesalers, pay for the same drug. Several price
benchmarks represent these differing amounts paid by different
purchasers. For example, individuals without prescription drug coverage,
including Medicare beneficiaries who do not currently have drug coverage,
may pay the full retail price at the pharmacy, known as the usual and
customary (U&C) price. Insurers and other third-party payers, including
state Medicaid programs, typically pay negotiated prices with retail
pharmacies, often receiving discounts from the average wholesale price
(AWP), commonly referred to as a list price.2 Retail pharmacies may obtain

1Our calculations are based on data from the national health accounts
prepared by the Centers for Medicare & Medicaid Services, Office of the
Actuary, National Health Statistics Group.

2The AWP is the average of the list prices that a manufacturer suggests
wholesalers charge pharmacies.

drugs directly from pharmaceutical manufacturers or through wholesalers.
The average manufacturer price (AMP) represents the average of prices paid
to manufacturers by wholesalers for drugs distributed to the retail
pharmacy class of trade, and is used by the Centers for Medicare &
Medicaid Services (CMS) to determine rebates due by law to Medicaid
programs. Prices also substantially vary depending on whether drugs are
marketed as brand or generic, with some third-party payers encouraging the
use of less expensive generic drugs through lower cost sharing for
consumers and other strategies.

To provide a baseline of prescription drug prices before the
implementation of the Medicare part D drug benefit, you asked GAO to
review drug price changes from 2000 through 2004, including drugs
frequently used by seniors. Specifically, we examined the following
questions.

1. 	How have retail prices for prescription drugs frequently used by
Medicare beneficiaries and other individuals with health insurance changed
from 2000 through 2004?

2. 	How does the change in retail prices for brand drugs frequently used
by Medicare beneficiaries and other individuals compare to other drug
pricing benchmarks from 2000 through 2004?

To examine the change in retail prices for prescription drugs frequently
used by Medicare beneficiaries and other individuals with health
insurance, we selected the 100 most frequently dispensed retail
prescriptions in 2003 for Medicare beneficiaries and for non-Medicare
enrollees in the Blue Cross and Blue Shield (BCBS) Federal Employee
Program (FEP).3 Combined, these two lists of 100 frequently used drugs
represented a total of 133 unique drugs. Of these 133 drugs, we analyzed
96 drugs (50 brand and 46 generic) for which we were able to obtain U&C
prices at retail pharmacies for every month from January 2000 through

3We used data of frequently dispensed prescriptions from BCBS FEP because
they represent a large number of retail prescriptions dispensed and could
provide data for drugs used by FEP enrollees who were Medicare
beneficiaries and those who were not Medicare eligible. Of the nearly 55
million retail prescriptions dispensed to BCBS FEP enrollees in 2003, 21
million were for FEP enrollees who were also Medicare beneficiaries.

December 2004.4 These 96 drugs included 75 drugs that were frequently used
by BCBS FEP Medicare enrollees and 76 drugs that were frequently used by
BCBS FEP non-Medicare enrollees, with 55 of these drugs overlapping the
Medicare and non-Medicare frequently used lists. To calculate a price
index, we weighted each drug using the number of prescriptions dispensed
to BCBS FEP enrollees in 2003. We collected the average monthly U&C prices
for a typical 30-day supply from two large state programs that assist
low-income Medicare beneficiaries in purchasing prescription drugs:
Pennsylvania's Pharmaceutical Assistance Contract for the Elderly (PACE)
program from January 2000 through December 2004, and New York's Elderly
Pharmaceutical Insurance Coverage (EPIC) program from August 2000 through
December 2004.5

To compare the change in U&C prices at retail pharmacies with other
drug-pricing benchmarks, we examined changes in the AMP and AWP for the 50
brand drugs frequently used by BCBS FEP enrollees. We calculated a
quarterly AMP index for a 30-day supply for the 50 brand drugs based on
data we collected from CMS from the first quarter of 2000 through the
fourth quarter of 2004. We calculated a quarterly AWP index for a 30-day
supply for the same 50 brand drugs based on data we collected from First
DataBank for the same period. We determined that the data from BCBS FEP,
PACE, EPIC, CMS, and First DataBank were sufficiently reliable for our
purposes. Our analyses are limited to drugs most frequently used by
Medicare beneficiaries and non-Medicare enrollees in the 2003 BCBS FEP,
and our analyses using U&C prices are limited to prices reported by retail
pharmacies in Pennsylvania to the PACE program and by retail pharmacies in
New York to the EPIC program. See appendix I for more information about
our selected drugs and detailed information on our

4For the purpose of this report, we refer to single-source and multisource
drugs that are marketed under a proprietary, trademark-protected name as
brand drugs. Single-source drugs include those brand drugs that have no
generic equivalent on the market and are generally available from only one
manufacturer. Brand multisource drugs include those brand drugs that have
generic equivalents available from multiple manufacturers and are marketed
under their brand name. Generic drugs include multisource drugs that are
chemically identical to their branded counterparts and are generally
marketed by multiple manufacturers under a non-proprietary name.

5We used data from PACE and EPIC because they were two of the largest
state pharmaceutical assistance programs, collected data from pharmacies
on U&C prices for drugs, and had historical price data available from
2000.

Results in Brief

methodology. We performed our work from April 2004 through July 2005 in
accordance with generally accepted government auditing standards.6

From January 2000 through December 2004, based on our analysis of data
from PACE and EPIC, the average monthly U&C prices for a 30-day supply of
96 prescription drugs frequently used by BCBS FEP Medicare and
non-Medicare enrollees increased 24.5 percent. Twenty of the 96 drugs
accounted for nearly two-thirds of the increase in the U&C price index.
The average U&C prices for 75 prescription drugs frequently used by BCBS
FEP Medicare beneficiaries and the average U&C prices for 76 prescription
drugs frequently used by BCBP FEP non-Medicare enrollees increased at
similar rates of 24.0 percent and 24.8 percent, respectively. The average
U&C prices for 50 brand prescription drugs increased 28.9 percent, three
times as much as the average U&C price increase of 9.4 percent for 46
generic prescription drugs.

The AWP index increased by 31.6 percent for the 50 frequently used brand
drugs from the first quarter of 2000 through the fourth quarter of 2004-
about 3 to 4 percentage points more rapidly than the AMP and U&C price
indexes. Ten drugs in each index accounted for nearly 50 percent of the
increase for the AMP, AWP, and U&C indexes, with 8 of these top 10 drugs
consistent for all three prices. As a result of AWP's faster rate of
increase, AWP as a percentage of U&C price increased from an average of
about 91 percent in the first quarter of 2000 to about 94 percent in the
last quarter of 2004. AMP stayed about 72 percent of the U&C price during
this period.

We provided a draft of this report to CMS, PACE, EPIC, and BCBS FEP. CMS
noted that U&C and AWP do not reflect discounts in a drug's price. While
our analysis does not reflect these discounts, our focus was to examine
price trends rather than price levels and U&C and AWP are consistent
measures used to examine price trends. CMS also suggested that we examine
the effect on prices when generic alternatives are introduced, but such an
analysis was beyond the scope of this report.

6We also reported on trends in U&C prices for 99 drugs from January 2000
through June 2004 in GAO, Prescription Drugs: Trends in Usual and
Customary Prices for Drugs Frequently Used by Medicare and Non-Medicare
Enrollees, GAO-05-104R (Washington, D.C.: Oct. 6, 2004). This report
includes 3 fewer drugs than our earlier analysis because pricing data were
not available for these 3 drugs through December 2004.

PACE and BCBS provided technical comments that we incorporated as
appropriate; EPIC stated that it did not have any comments.

                                   Background

Several measures of price are commonly used within the health care sector
to measure the price of prescription drugs. These varying price measures
are due to the different prices that drug manufacturers and retail
pharmacies charge different purchasers, and drug prices can vary
substantially depending on the purchaser. (See fig. 1.)

o  	The U&C price, the retail price for a drug, is the price an individual
without prescription drug coverage would pay at a retail pharmacy. The U&C
price includes the acquisition cost of the drug paid by the retail
pharmacy and a markup charged by the pharmacy.

o  	AWP is the average of the list prices or sticker price that a
manufacturer of a drug suggests wholesalers charge pharmacies. AWP is
typically less than the U&C price, which includes the pharmacy's own
markup. AWP is not the actual price that large purchasers normally pay.
Nevertheless, AWP is part of the formula used by many state Medicaid
programs and private third-party payers to reimburse retail pharmacies.7

o  	AMP is the average of prices paid to a manufacturer by wholesalers for
a drug distributed to the retail pharmacy class of trade, after
subtracting any account cash discounts or other price reductions.8 CMS
uses AMP in

determining rebates drug manufacturers must provide, as required by the
Omnibus Budget Reconciliation Act of 1990, to state Medicaid programs as a
condition for the federal contribution to Medicaid spending for the
manufacturers' outpatient prescription drugs.9 For brand drugs, the

7Before 2005, Medicare reimbursement for prescription drugs covered under
Medicare part B was based on AWP. The average sales price generally
replaced AWP as the basis for outpatient drug reimbursement under Medicare
part B beginning in 2005. The average sales price is defined for each drug
as a manufacturer's sales to all purchasers in a given quarter, net of
discounts and rebates and excluding certain government and other
purchasers, divided by the number of units of the drug sold by the
manufacturer in that quarter. Medicare Prescription Drug, Improvement, and
Modernization Act of 2003, Pub. L. No. 108173, S: 303(c), 117 Stat. 2066,
2239-2245 (to be codified at 42 U.S.C. S: 1395w-3a).

8AMP does not include prices to government purchasers based on the Federal
Supply Schedule, which are prices for prescription drugs negotiated with
manufacturers by the Department of Veterans Affairs. AMP also does not
include prices from direct sales to health maintenance organizations and
hospitals or prices to wholesalers when they relabel drugs they purchase
under their own label.

9Pub. L. No. 101-508, S: 4401, 104 Stat. 1388, 1388-156 (codified as
amended at 42 U.S.C. S: 1396r-8(k) (2000)).

minimum rebate amount is the number of units of the drug multiplied by
15.1 percent of the AMP.

             Figure 1: Drug Prices for Different Buyers and Sellers

Source: GAO.

aU&C is the price an individual without prescription drug coverage would
pay at a retail pharmacy.

bWhen an insured consumer purchases a drug at a retail pharmacy, the
pharmacy collects from the insured consumer the appropriate cost-sharing
amount and then submits a claim to the third-party payer for
reimbursement.

cThird-party payers often negotiate a discount off AWP, the average of the
list prices that a manufacturer suggests wholesalers charge pharmacies.
However, third-party payers may pay other negotiated rates not based on
AWP.

dRetail pharmacies can also purchase prescription drugs directly from
manufacturers.

eAMP represents the average of prices paid to manufacturers by wholesalers
for drugs distributed to the retail pharmacy class of trade.

From January 2000 through December 2004, the average U&C prices for a
typical 30-day supply of 96 prescription drugs frequently used by BCBS FEP
Medicare and non-Medicare enrollees increased 24.5 percent. The average
U&C prices for 75 prescription drugs frequently used by Medicare
beneficiaries and for 76 prescription drugs frequently used by
non-Medicare enrollees increased at similar rates. The average U&C prices
for 50 frequently used brand drugs increased three times faster than the
average U&C prices for 46 frequently used generic drugs.

Retail Prices Increased from 2000 through 2004, with Larger Increases for
Brand Than Generic Drugs

U&C Prices for Frequently Used Drugs Increased 24.5 Percent

From January 2000 through December 2004, the average U&C price collected
from retail pharmacies by PACE and EPIC for a 30-day supply for 96
prescription drugs frequently used by BCBS FEP Medicare beneficiaries and
non-Medicare enrollees increased 24.5 percent, a 4.6 percent average
annual rate of increase. (See fig. 2.) During the same period, using
nationwide data from the Bureau of Labor Statistics (BLS), prices for
prescription drugs and medical supplies for all urban consumers increased
21.3 percent, a 4.0 percent average annual rate of increase. Additionally,
using BLS data, prices for all consumer items for all urban consumers-the
Consumer Price Index-increased 12.7 percent, a 2.5 percent average annual
rate of increase from January 2000 through December 2004.

Figure 2: Index of Average U&C Prices for 96 Drugs Frequently Used by BCBS
FEP Enrollees, by Month, 2000 through 2004

Index (Base = January 2000)

130

125

120

115

110

105

100

0 1/2000 1/2001 1/2002 1/2003 1/2004

U&C Source: GAO analysis of data from BCBS FEP, EPIC, and PACE.

While U&C prices increased each year from 2000 through 2004, the greatest
annual rate of increase-6.1 percent-occurred from January 2002 to January
2003. (See fig. 3.) Since then, annual rates of increase have

been less, increasing 5.2 percent from January 2003 to January 2004 and
4.2 percent from January 2004 to December 2004.10

Figure 3: Annual Change in U&C Price Index for 96 Drugs Frequently Used by
BCBS FEP Enrollees, 2000 through 2004

                               Percentage change

                                      6.1

1/20001/2001

1/20011/2002

1/20021/2003

1/20031/2004 1/200412/2004

          Source: GAO analysis of data from BCBS FEP, EPIC, and PACE.

Note: The change in average U&C prices from January 2004 through December
2004 is expressed as an annual percentage change.

Twenty drugs, representing 33 percent of BCBS FEP prescriptions for the 96
drugs we reviewed, accounted for 64 percent of the total increase in the
U&C price index from January 2000 through December 2004.11 The drug with
the largest effect on the price index was Lipitor 10mg, which accounted
for 6.6 percent of the total increase. Nineteen of the 20 drugs were brand
drugs and 1 was a generic drug, Hydrocodone/Acetaminophen 5/500mg. The
twenty drugs accounting for the largest changes in the U&C price index are
listed below.

10The change in average U&C prices from January 2004 through December 2004
is expressed as an annual percentage change.

11We measured the share each drug contributed to the overall index by
comparing the ratio of (1) each drug's price change from January 2000
through December 2004 multiplied by its weight based on BCBS FEP
prescriptions, to (2) the sum of all drugs' price changes multiplied by
their associated weights.

o  Lipitor 10mg

o  Celebrex 200mg

o  Plavix 75mg

o  Prevacid 30mg

o  Lipitor 20mg

o  Ambien 10mg

o  Zocor 20mg

o  Levaquin 500mg

o  Hydrocodone/Acetaminophen 5/500mg

o  Flonase 0.05mg

o  Zithromax 250mg

o  Wellbutrin SR 150mg

o  Singular 10mg

o  Premarin 0.625mg

o  Celexa 20mg

o  Zoloft 50mg

o  Evista 60mg

o  Norvasc 5mg

o  Neurontin 300mg

o  Aciphex 20mg

U&C Prices for Drugs Frequently Used by Medicare Beneficiaries and by
Non-Medicare Enrollees Increased at Similar Rates

From January 2000 through December 2004, the average U&C prices collected
by PACE and EPIC for 75 prescription drugs frequently used by BCBS FEP
Medicare beneficiaries increased at a similar rate as the average U&C
prices for 76 prescription drugs frequently used by BCBS FEP non-Medicare
enrollees.12 (See fig. 4.) The prices of 75 Medicare drugs increased 24.0
percent, a 4.5 percent average annual rate of increase. The prices of 76
non-Medicare drugs increased 24.8 percent, a 4.6 percent average annual
rate of increase.13

12While 55 drugs were used in calculating both the Medicare and
non-Medicare U&C price indexes, each drug had a different weight in each
index depending on the frequency of prescriptions dispensed to BCBS FEP
Medicare enrollees or BCBS FEP non-Medicare enrollees.

13We found the non-Medicare index rose slightly faster than the Medicare
index, in part because drugs that treat depression were present to a
larger extent in the non-Medicare index. The U&C prices for the eight
drugs that treat depression increased at an average rate of 31.1 percent
from January 2000 through December 2004. Excluding the eight drugs that
treat depression from our analysis resulted in a 24.0 percent rate of
increase for both the Medicare and non-Medicare index.

Figure 4: Indexes of Average U&C Prices for Drugs Frequently Used by BCBS
FEP Medicare and Non-Medicare Enrollees, by Month, 2000 through 2004

                        Index (base = January 2000) 125

                                      120

                                      115

                                      110

                                      105

                                     100 0

1/2000 1/2001 1/2002 1/2003 1/2004

Medicare Non-Medicare

          Source: GAO analysis of data from BCBS FEP, EPIC, and PACE.

U&C Prices Increased From January 2000 through December 2004, the average
U&C price (based Three Times Faster for on PACE and EPIC data) for 50
frequently used brand drugs rose three Brand Drugs Than for times faster
than the average U&C price for 46 frequently used generic

drugs. (See fig. 5.) Specifically, the average U&C price for brand drugs

Generic Drugs 	increased 28.9 percent, a 5.3 percent average annual rate
of increase, whereas U&C prices for generic drugs increased 9.4 percent, a
1.8 percent average annual rate of increase.

Figure 5: Indexes of Average U&C Prices for 50 Brand and 46 Generic Drugs
Frequently Used by BCBS FEP Enrollees, by Month, 2000 through 2004

Index (base = January 2000)

135

130 128.9

125

120

115

110

105

100

95

0 1/2000 1/2001 1/2002 1/2003 1/2004

                                   Brand name

                                    Generic

Source: GAO analysis of data from BCBS FEP, EPIC, and PACE.

From the first quarter of 2000 through the fourth quarter of 2004, AMPs
and U&C prices for the 50 brand drugs increased at similar rates, but AWPs
increased at a faster rate. The quarterly AWPs for 50 brand prescription
drugs increased 31.6 percent, a 6.0 percent average annual rate of
increase. For these same 50 drugs, the quarterly AMPs increased 28.2
percent, a 5.4 percent average annual rate of increase, while the average
quarterly U&C prices increased 27.5 percent, a 5.2 percent average annual
rate of increase.14 Over the entire period, the AWP index increased about
3 to 4 percentage points more than the AMP or U&C price indexes. (See fig.
6.)

AWPs Increased at a Faster Rate Than AMPs and U&C Prices for 50 Brand
Drugs from 2000 through 2004

14The quarterly U&C price index increased at a slightly lower rate of
increase than the monthly U&C price index because the base and end periods
differ. Whereas the base period for the monthly U&C index is January 2000,
the base period for the quarterly index is January through March 2000.
Similarly, the end period for the monthly index is December 2004 and for
the quarterly index is October through December 2004.

Figure 6: Indexes of AMPs, AWPs, and Average U&C Prices for 50 Brand Drugs
Frequently Used by BCBS FEP Enrollees, by Quarter, 2000 through 2004

Index (base = 1st Quarter 2000)

135

131.6

130

125

120

115

110

105

100

0 Q1/2000 Q1/2001 Q1/2002 Q1/2003 Q1/2004

U&C

AMP

AWP

Source: GAO analysis of data from CMS, First DataBank, EPIC, PACE, and
BCBS FEP.

The difference between the levels of AWP and U&C prices for brand drugs
narrowed slightly during the time period we analyzed. Whereas in the first
quarter of 2000 AWP was on average about 91 percent of the U&C price for
the same drug, by the fourth quarter of 2004 AWP was on average about 94
percent of the U&C price. In contrast, AMP stayed a similar portion of U&C
in first quarter 2000 and fourth quarter 2004, with the AMP on average
about 72 percent of the U&C price.

Ten brand drugs in each index, representing one-third or more of the
prescriptions for the 50 brand drugs, accounted for almost 50 percent of
the increase for the quarterly AMP, AWP, and U&C price indexes. Eight of
these 10 drugs were the same across all three price indexes. The drug
accounting for the largest portion of the change in the AMP and AWP
indexes was Celebrex 200mg, accounting for 8.6 percent of the increase for
AMP and 7.5 percent for AWP. Lipitor 10mg was the drug accounting for the
largest portion of the change in the quarterly U&C price index and

accounted for 7.2 percent of the increase for the 50 brand drugs. (See
fig. 7.)

Figure 7: Comparison of 10 Drugs Accounting for the Largest Portions of
Changes in AMP, AWP, and U&C Price Indexes for 50 Brand Drugs Frequently
Used by BCBS FEP Enrollees, by Quarter, 2000 through 2004

Source: GAO analysis of data from CMS, First DataBank, EPIC, PACE, and
BCBS FEP.

Concluding Observations

From 2000 through 2004, retail prices for drugs frequently used by
Medicare beneficiaries increased 24.0 percent-an average rate of 4.5
percent per year. In general, higher drug prices mean higher spending by
consumers and health insurance sponsors, including employers and federal
and state governments. With brand drug prices increasing three times as
fast as generic drug prices, public and private health insurance sponsors
will likely continue to focus on strategies to encourage increased use of
generic drugs when available. Starting in 2006, with the introduction of
the Medicare prescription drug benefit, Medicare will be paying claims for
a wider array of drugs and, as a result, the federal government will be
affected more than previously by rising drug prices.

We found that from 2000 through 2004, on average the AWPs for 50
frequently used brand drugs rose 0.8 percent per year faster than the
retail prices for these same drugs. A continuation of this difference
between AWP and retail prices increases could affect many Medicaid
programs and private third-party payers that base their reimbursement of
drug claims on AWPs.

Agency and Other External Comments

We provided a draft of this report to CMS, PACE, EPIC, and BCBS FEP. In
commenting on this report, CMS highlighted the discounts and price
information tools that will be available under the Medicare drug benefit.
CMS also stated that neither the U&C price nor AWP reflect discounts, such
as manufacturers' discount programs, or other price concessions affecting
a drug's price. We noted in the report that U&C represents the retail
pharmacy price paid by consumers without insurance. The U&C does not
reflect prices available from other sources, such as mail order
pharmacies. We also noted that AWP is a list price that is not the actual
price paid by large purchasers. We agree that consumers may be able to
obtain lower prices than reflected by the U&C and AWP. However, the focus
of our analysis was to examine price trends rather than price levels, and
U&C and AWP are consistent measures used to assess price trends. Further,
increases in the published AWP may increase what many public or private
third-party purchasers pay for prescription drugs because AWP is often
included in the formula to calculate payments to pharmacies.

Additionally, CMS suggested that we examine the effect on prices when
generic alternatives are introduced. We agree that the introduction of
generic drugs can reduce consumer payments for drugs. Examining changes in
consumer spending for drugs, which are also affected by changes in
utilization and the introduction of new drug alternatives, would be
useful, but was beyond the scope of this report in examining price trends
for frequently-used brand and generic drugs.

PACE and BCBS provided technical comments that we incorporated as
appropriate; EPIC stated that it did not have any comments.

As agreed with your offices, unless you publicly announce the contents
earlier, we plan no further distribution of this report until 30 days
after its date. We will then send copies of this report to the
Administrator of CMS and other interested parties. We will also provide
copies to others upon request. In addition, the report will be available
at no charge on the GAO Web site at http://www.gao.gov.

If you or your staffs have any questions about this report, please call me
at
(202) 512-7114 or [email protected]. Contact points for our Offices of
Congressional Relations and Public Affairs may be found on the last page
of this report. GAO staff who made major contributions to this report are
listed in appendix III.

Marjorie Kanof
Managing Director, Health Care

                       Appendix I: Scope and Methodology

To examine the change in retail prices for prescription drugs frequently
used by Medicare beneficiaries and other individuals with health
insurance, we used data from the Blue Cross and Blue Shield (BCBS) Federal
Employee Program (FEP) to select the 100 prescription drugs most
frequently dispensed through retail pharmacies in 2003 for BCBS FEP
Medicare enrollees and the 100 most frequently dispensed for BCBS FEP
non-Medicare enrollees.1 Combined, these two lists included 133 unique
drugs.2

We obtained average monthly usual and customary (U&C) prices reported by
retail pharmacies to Pennsylvania's Pharmaceutical Assistance Contract for
the Elderly (PACE) program from January 2000 through December 2004 and New
York's Elderly Pharmaceutical Insurance Coverage (EPIC) program from
August 2000 through December 2004.3,4 We collected prices based on a
specific strength, dosage form, and common number of units (such as
pills), typically for a 30-day supply.5 Based on combined PACE and EPIC
data, 96 of the 133 drugs we selected had prices reported for every month
from January 2000 through December 2004. We

1BCBS FEP covered nearly 55 million prescriptions dispensed to enrolled
federal employees, retirees, and their dependents at retail pharmacies in
2003, including 21 million prescriptions for FEP enrollees who were also
Medicare beneficiaries. The 96 drugs that we included in our analyses
represented about 32 percent of total prescriptions dispensed to BCBS FEP
enrollees in 2003. Of these 96 drugs, 50 were brand drugs and represented
about 17 percent of total prescriptions dispensed to BCBS FEP enrollees in
2003.

2Drugs with the same name but with different forms (such as capsules or
tablets) or number of units dispensed were counted separately as unique
drugs.

3PACE covered more than 9 million prescriptions and EPIC covered nearly 10
million prescriptions dispensed to mostly low-income seniors in 2003. As
of June 2005, PACE officials reported that approximately 2,800 retail
pharmacies-95 percent of pharmacies in Pennsylvania-participated in PACE,
while EPIC officials reported approximately 4,150 retail pharmacies-87
percent of pharmacies in New York-participated in EPIC.

4We merged price data from PACE and EPIC for August 2000 through December
2004, but report price data from PACE alone for January 2000 through July
2000. Because the average of the U&C prices reported by PACE and by EPIC
were nearly identical, we do not believe that including the EPIC data
beginning in August 2000 notably affected the price trend.

5The Department of Veterans Affairs Pharmacy Benefits Management Strategic
Healthcare Group provided the most common number of units for a retail
prescription for a 30-day supply.

Appendix I: Scope and Methodology

analyzed price trends on a monthly basis from January 2000 through
December 2004 for these 96 drugs.6

Of the 96 drugs, 75 were among those most frequently used by BCBS FEP
Medicare enrollees, and 76 were among those most frequently used by BCBS
FEP non-Medicare enrollees. Fifty-five of the 96 drugs were frequently
used by both BCBS Medicare enrollees and non-Medicare enrollees.7 We first
determined the total number of prescriptions in 2003 for the drugs we
selected dispensed to BCBS FEP Medicare enrollees and the total number of
prescriptions dispensed to BCBS FEP non-Medicare enrollees. Separately for
drugs frequently used by Medicare and by non-Medicare enrollees, we
calculated the share of the total number of BCBS FEP prescriptions
attributed to each drug. The price of each drug was then weighted by its
relative share of total Medicare or total non-Medicare prescriptions in
2003 to calculate the average price for frequently used Medicare drugs and
the average price for frequently used non-Medicare drugs for each month
from January 2000 through December 2004.8,9 We standardized these averages
to create a Medicare price index and a non-Medicare price index, each with
a value of 100 as of January 2000.

We also separately analyzed monthly trends in U&C prices for brand and
generic drugs frequently used by BCBS FEP enrollees. Of the 96 drugs, 50
were brand drugs and 46 were generic drugs. Similar to our calculation of

6We also analyzed price trends for 117 drugs that had prices reported for
every month from January 2002 through December 2004, which had an average
annual rate of increase of 5.2 percent. For the 96 drugs that had reported
prices for every month from January 2000 through December 2004, the
average annual rate of increase from January 2002 through December 2004
was also 5.2 percent.

7While these 55 drugs were used in calculating both the Medicare and
non-Medicare U&C price indexes, they had different weights in each index
depending on the frequency of prescriptions dispensed to BCBS FEP
enrollees who were either Medicare beneficiaries or not Medicare eligible.

8BCBS FEP retail prescriptions represent various days supply (such as
34-or 90-day supply), while PACE and EPIC price data we obtained are
limited only to retail prescriptions for a typical 30-day supply. Over
half of BCBS FEP retail prescriptions are for a 30-day supply.

9The 2003 BCBS FEP retail prescription drug weights applied to PACE and
EPIC retail prices for 96 drugs from January 2000 through December 2004
were held constant throughout the entire period of the analysis. We also
obtained 2004 BCBS FEP retail prescription data for 89 of the 96 drugs and
found almost no difference in the change in the U&C price index for the 89
drugs using constant 2003 or 2004 BCBS FEP drug weights throughout the
period of analysis.

Appendix I: Scope and Methodology

Medicare and non-Medicare price indexes, we calculated indexes for brand
drugs and generic drugs based on each drug's share of the total number of
brand or generic prescriptions dispensed to BCBS FEP enrollees in 2003.

To examine the change in retail prices for frequently used drugs compared
to other drug price benchmarks, we compared an index based on the U&C
prices reported by PACE and EPIC for 50 brand drugs to indexes based on
the average manufacturer prices (AMP) and average wholesale prices (AWP)
for these 50 drugs on a quarterly basis from the first quarter of 2000
through the fourth quarter of 2004.10 The Centers for Medicare & Medicaid
Services (CMS) requires manufacturers to report AMP within 30 days of the
end of each calendar quarter. Manufacturers submit AWPs on a periodic
basis to publishers of drug-pricing data, such as First DataBank. Using
the National Drug Codes (NDC)11 reported by PACE and EPIC for the U&C
prices for the 50 brand drugs, we obtained per unit AMPs from CMS and per
unit AWPs from First DataBank associated with each NDC.12 For each drug,
we calculated a quarterly AMP and a quarterly AWP by multiplying the per
unit price by the most common number of units for a 30-day supply.13 We
created an AMP and AWP index by weighting the 50 brand drugs by the number
of prescriptions in 2003 from BCBS FEP.

10These 50 brand drugs were frequently used by Medicare beneficiaries and
non-Medicare enrollees in the BCBS FEP in 2003 and had reported U&C prices
to PACE and EPIC for every month from January 2000 through December 2004.

11NDCs are three segment numbers that are the universal product
identifiers for drugs for human use; the U.S. Food and Drug Administration
assigns the first segment of the NDC, which identifies the firm that
manufacturers, repackages, or distributes a drug. The second segment
identifies a specific strength, dosage form, and formulation for a
particular firm and the third segment identifies package size. A single
drug can have multiple NDCs associated with it. For example, a drug made
by one manufacturer, in one form or strength, but in three package sizes
would have three NDCs.

12We obtained quarterly AMPs from CMS for each two-segment NDC,
represented by 9 digits (not accounting for package size), associated with
the 50 brand drugs from the first quarter of 2000 through the fourth
quarter of 2004. Similarly, we obtained monthly AWPs from First DataBank
for each three-segment NDC, represented by 11 digits, associated with the
50 brand drugs from first quarter 2000 through fourth quarter 2004.
Specifically, we obtained the AWP effective on the last day of each month
for each 11-digit NDC.

13For brand drugs with multiple 9-digit NDCs, we calculated an average
quarterly AMP for the drug weighted by the number of PACE and EPIC
prescriptions for each 9-digit NDC during that quarter. For brand drugs
with multiple 11-digit NDCs, we calculated an average monthly AWP for the
drug weighted by the number of PACE and EPIC prescriptions during that
month. We created a quarterly AWP by taking a simple average of the three
monthly prices in each quarter.

Appendix I: Scope and Methodology

Similarly, we recalculated the U&C price for the 50 brand drugs on a
quarterly basis to make comparisons to AMP and AWP.

We also determined how much each drug's change in price contributed to the
overall change in price for the 50 brand drugs for AMPs, AWPs, and U&C
prices. We measured the share each drug contributed to the overall index
by comparing the ratio of (1) each drug's price change from January 2000
through December 2004 multiplied by its weight based on BCBS FEP
prescriptions, to (2) the sum of all drugs price changes multiplied by
their associated weights.

Our analyses are limited to drugs most frequently used by Medicare
beneficiaries and by non-Medicare enrollees in the 2003 BCBS FEP.
Additionally, our analyses using U&C prices are limited to prices reported
by retail pharmacies in Pennsylvania to the PACE program and by retail
pharmacies in New York to the EPIC program. We reviewed the reliability of
data from BCBS FEP, CMS, First DataBank, EPIC, and PACE, including
screening for outlier prices in the PACE and EPIC data and ensuring that
the price trends and frequently used drugs were consistent with other data
sources. We determined that these data were sufficiently reliable for our
purposes. We performed our work from April 2004 through July 2005 in
accordance with generally accepted government auditing standards.

                    Appendix II: Drugs Included in Analyses

Table 1 lists the 96 drugs used in constructing monthly U&C price indexes
from January 2000 through December 2004. Fifty of the 96 drugs are brand
drugs and were also used in examining price changes in AMP, AWP, and U&C
on a quarterly basis from first quarter 2000 through fourth quarter 2004.
Of the 96 drugs, 75 were frequently used by Medicare beneficiaries and 76
were frequently used by non-Medicare enrollees, with 55 of these drugs
frequently used by both Medicare beneficiaries and non-Medicare enrollees.

Table 1: Ninety-Six Drugs Included in U&C Price Indexes, by Month, January 2000
                             through December 2004

                                   Units dispensed           
                                         and                 
                                  dosage form for a Brand or Medicare or non- 
                                            typical          
       Drug name and strength       30-day supply   generic      Medicare     
Acetaminophen/Codeine 30/300mg    60 tablets     Generic        Both       
            Aciphex 20mg             30 tablets      Brand         Both       
                                   delayed release           
          Albuterol 90mcg           17gm aerosol    Generic        Both       
        Allegra-D 60-120 mg          60 tablets      Brand     Non-Medicare   
                                  extended release           
         Allopurinol 300mg           30 tablets     Generic      Medicare     
         Alprazolam 0.25mg           60 tablets     Generic        Both       
          Alprazolam 0.5mg           60 tablets     Generic        Both       
             Ambien 5mg              30 tablets      Brand       Medicare     
            Ambien 10mg              30 tablets      Brand         Both       
         Amoxicillin 500mg           21 capsules    Generic        Both       
            Aricept 10mg             30 tablets      Brand       Medicare     
           Atenolol 25mg             30 tablets     Generic        Both       
           Atenolol 50mg             30 tablets     Generic        Both       
         Carisoprodol 350mg          90 tablets     Generic    Non-Medicare   
           Celebrex 200mg            60 capsules     Brand         Both       
            Celexa 20mg              30 tablets      Brand         Both       
          Cephalexin 500mg           30 capsules    Generic        Both       
            Cipro 500mg              20 tablets      Brand     Non-Medicare   
          Clonazepam 0.5mg           60 tablets     Generic    Non-Medicare   
        Combivent 103-18mcg        14.7gm aerosol    Brand       Medicare     
           Cosopt 2-0.5%            5mL solution     Brand       Medicare     
            Coumadin 5mg             30 tablets      Brand       Medicare     
             Cozaar 5mg              30 tablets      Brand       Medicare     
      Cyclobenzaprine HCl 10mg       60 tablets     Generic    Non-Medicare   

                    Appendix II: Drugs Included in Analyses

                                    Units dispensed          
                                          and                
                                    dosage form for Brand or Medicare or non- 
                                          a typical          
        Drug name and strength       30-day supply  generic      Medicare     
      Doxycycline Hyclate 100mg       30 capsules   Generic    Non-Medicare   
           Effexor XR 75mg            30 capsules    Brand     Non-Medicare   
                                       extended              
                                        release              
           Effexor XR 150mg           30 capsules    Brand     Non-Medicare   
                                       extended              
                                        release              
             Evista 60mg              30 tablets     Brand         Both       
             Flomax 0.4mg             30 capsules    Brand         Both       
            Flonase 0.05mg            16gm spray     Brand         Both       
            Folic Acid 1mg            30 tablets    Generic        Both       
           Furosemide 20mg            60 tablets    Generic        Both       
           Furosemide 40mg            60 tablets    Generic        Both       
       Hydrochlorothiazide 25mg       30 tablets    Generic        Both       
      Hydrocodone/Acetaminophen       90 tablets    Generic        Both       
               5/500mg                                       
      Hydrocodone/Acetaminophen       90 tablets    Generic        Both       
              7.5/500mg                                      
      Hydrocodone/Acetaminophen       90 tablets    Generic    Non-Medicare   
              7.5/750mg                                      
           Ibuprofen 800mg            90 tablets    Generic    Non-Medicare   
     Isosorbide Mononitrate 30mg      30 tablets    Generic      Medicare     
                                       extended              
                                        release              
     Isosorbide Mononitrate 60mg      30 tablets    Generic      Medicare     
                                       extended              
                                        release              
          Klor-Con 10 10mEq           30 tablets    Generic      Medicare     
                                       extended              
                                        release              
            Lanoxin 125mcg            30 tablets     Brand       Medicare     
            Lanoxin 250mcg            30 tablets     Brand       Medicare     
            Levaquin 500mg            10 tablets     Brand         Both       
             Lipitor 10mg             30 tablets     Brand         Both       
             Lipitor 20mg             30 tablets     Brand         Both       
             Lipitor 40mg             30 tablets     Brand     Non-Medicare   
           Lorazepam 0.5mg            60 tablets    Generic        Both       
            Lorazepam 1mg             60 tablets    Generic        Both       
         Meclizine HCl 125mg          90 tablets    Generic      Medicare     
        Methylprednisolone 4mg        30 tablets    Generic    Non-Medicare   
       Metoprolol Tartrate 50mg       60 tablets    Generic        Both       
             Miralax 17gm            255gm powder    Brand       Medicare     
            Naproxen 500mg            60 tablets    Generic    Non-Medicare   
          Nasacort AQ 55mcg          16.5gm spray    Brand     Non-Medicare   
            Nasonex 50mcg             17gm spray     Brand     Non-Medicare   

                    Appendix II: Drugs Included in Analyses

                                             Units              
                                         dispensed and          
                                         dosage form   Brand or   Medicare or 
                                         for a typical                   non- 
          Drug name and strength         30-day supply generic    Medicare    
              Neurontin 300mg             90 capsules   Brand       Both      
                Norvasc 5mg               30 tablets    Brand       Both      
               Norvasc 10mg               30 tablets    Brand       Both      
      Oxycodone/Acetaminophen 5/325mg     90 tablets   Generic  Non-Medicare  
                Paxil 20mg                30 tablets    Brand       Both      
       Penicillin V Potassium 500mg       30 tablets   Generic  Non-Medicare  
                Plavix 75mg               30 tablets    Brand       Both      
         Potassium Chloride 10mEq         60 capsules  Generic    Medicare    
                                           extended             
                                            release             
         Potassium Chloride 10mEq         30 tablets   Generic    Medicare    
                                           extended             
                                            release             
              Pravachol 20mg              30 tablets    Brand     Medicare    
              Pravachol 40mg              30 tablets    Brand       Both      
              Prednisone 5mg              30 tablets   Generic    Medicare    
              Prednisone 10mg             35 tablets   Generic      Both      
              Prednisone 20mg             30 tablets   Generic  Non-Medicare  
             Premarin 0.625mg             30 tablets    Brand       Both      
               Prevacid 30mg              30 capsules   Brand       Both      
                                            delayed             
                                            release             
           Promethazine HCl 25mg          60 tablets   Generic  Non-Medicare  
Propoxyphene Napsylate/Acetaminophen   90 tablets   Generic      Both      
                 100/650mg                                      
           Ranitidine HCl 150mg           60 tablets   Generic      Both      
              Singulair 10mg              30 tablets    Brand       Both      
            Spironolactone 25mg           30 tablets   Generic    Medicare    
       Sulfamethoxazole/Trimethoprim      20 tablets   Generic      Both      
                 800/160mg                                      
              Synthroid 50mcg             30 tablets    Brand       Both      
              Synthroid 75mcg             30 tablets    Brand       Both      
             Synthroid 100mcg             30 tablets    Brand       Both      
              Toprol XL 50mg              30 tablets    Brand       Both      
                                           extended             
                                            release             
              Toprol XL 100mg             30 tablets    Brand       Both      
                                           extended             
                                            release             
            Trazodone HCl 50mg            90 tablets   Generic      Both      
      Triamterene/Hydrochlorothiazide     30 capsules  Generic      Both      
                 37.5/25mg                                      
      Triamterene/Hydrochlorothiazide     30 tablets   Generic      Both      
                 37.5/25mg                                      
            Warfarin Sodium 5mg           30 tablets   Generic    Medicare    
            Wellbutrin SR 150mg           60 tablets    Brand   Non-Medicare  

                                extended release

Appendix II: Drugs Included in Analyses

                                Units dispensed and          
                          dosage form for a typical Brand or Medicare or non- 
Drug name and strength       30-day supply       generic      Medicare     
       Xalatan 0.005%          2.5mL solution        Brand         Both       
    Zithromax 200mg/5mL         30 suspension        Brand     Non-Medicare   
      Zithromax 250mg             6 tablets          Brand         Both       
         Zocor 20mg              30 tablets          Brand         Both       
         Zocor 40mg              30 tablets          Brand         Both       
        Zoloft 50mg              30 tablets          Brand         Both       
        Zoloft 100mg             30 tablets          Brand         Both       
        Zyrtec 10mg              30 tablets          Brand         Both       

          Source: GAO analysis of data from BCBS FEP, EPIC, and PACE.

Appendix III: GAO Contact and Staff Acknowledgments

GAO Contact Marjorie Kanof (202) 512-7114 or [email protected]

Acknowledgments 	In addition to the contact named above, John E. Dicken,
Director; Rashmi Agarwal; Jessica L. Cobert; Martha Kelly, Matthew L.
Puglisi; and Daniel S. Ries made key contributions to this report.

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