Prescription Drugs: Trends in Usual and Customary Prices for	 
Drugs Frequently Used by Medicare and Non-Medicare Health	 
Insurance Enrollees (07-SEP-07, GAO-07-1201R).			 
                                                                 
Prescription drug spending as a share of national health	 
expenditures increased from 8.9 percent in 2000 to 10.1 percent  
in 2005--among the fastest growing segments of health care	 
expenditures--and prescription drug prices outpaced inflation	 
during the same period. Rising prescription drug prices can	 
affect consumers, employers, and federal and state governments.  
Federal policymakers are particularly concerned about rising drug
prices as the federal government has assumed greater financial	 
responsibility for prescription drug expenditures with the	 
introduction of a prescription drug benefit to Medicare enrollees
in January 2006, known as Medicare Part D. Medicare enrollees are
also responsible for a share of drug costs under the Medicare	 
Part D program. As an update to our 2005 report, this report	 
responds to the request from Congress for information on trends  
in retail prices--known as usual and customary prices--for	 
prescription drugs frequently used by Medicare enrollees and	 
non-Medicare health insurance enrollees. This report focuses on  
(1) usual and customary price trends from January 2004 through	 
January 2007, and (2) usual and customary price trends from	 
January 2000 through January 2007 for the subset of drugs that	 
were included in both our 2005 report and the current report.	 
-------------------------Indexing Terms------------------------- 
REPORTNUM:   GAO-07-1201R					        
    ACCNO:   A75928						        
  TITLE:     Prescription Drugs: Trends in Usual and Customary Prices 
for Drugs Frequently Used by Medicare and Non-Medicare Health	 
Insurance Enrollees						 
     DATE:   09/07/2007 
  SUBJECT:   Drugs						 
	     Elderly persons					 
	     Health care programs				 
	     Medicare						 
	     Pharmaceutical industry				 
	     Prescription drugs 				 
	     Price indexes					 
	     Prices and pricing 				 
	     Program evaluation 				 
	     Medicare Part D					 

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GAO-07-1201R

   

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September 7, 2007

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

The Honorable Ron Wyden
United States Senate

Subject: Prescription Drugs: Trends in Usual and Customary Prices for
Drugs Frequently Used by Medicare and Non-Medicare Health Insurance
Enrollees

Prescription drug spending as a share of national health expenditures
increased from 8.9 percent in 2000 to 10.1 percent in 2005--among the
fastest growing segments of health care expenditures^1--and prescription
drug prices outpaced inflation during the same period. Rising prescription
drug prices can affect consumers, employers, and federal and state
governments. Federal policymakers are particularly concerned about rising
drug prices as the federal government has assumed greater financial
responsibility for prescription drug expenditures with the introduction of
a prescription drug benefit to Medicare enrollees in January 2006, known
as Medicare Part D. Medicare enrollees are also responsible for a share of
drug costs under the Medicare Part D program.

As an update to our 2005 report,^2 this report responds to your request
for information on trends in retail prices--known as usual and customary
prices^3--for prescription drugs frequently used by Medicare enrollees and
non-Medicare health insurance enrollees. This report focuses on (1) usual
and customary price trends from January 2004 through January 2007, and (2)
usual and customary price trends from January 2000 through January 2007
for the subset of drugs that were included in both our 2005 report and the
current report.

To report usual and customary price trends from January 2004 through
January 2007, we obtained prices as reported by retail pharmacies to state
pharmaceutical assistance programs for the elderly in New York and
Pennsylvania. We used data from New York's Elderly Pharmaceutical
Insurance Coverage (EPIC) and Pennsylvania's Pharmaceutical Assistance
Contract for the Elderly (PACE) programs because we did not identify a
reliable national source of usual and customary price data.^4 In order to
track usual and customary price trends, we created price indexes that
measure the average change in prices over time for a basket of drugs. We
created indexes to track price changes for the following five baskets of
drugs:

           o 122 of the drugs most frequently used by Medicare or
           non-Medicare enrollees in the Blue Cross Blue Shield (BCBS)
           Federal Employee Program (FEP),

           o 96 of the drugs most frequently used by BCBS FEP Medicare
           enrollees,

           o 91 of the drugs most frequently used by BCBS FEP non-Medicare
           enrollees,

           o 65 of the brand drugs most frequently used by BCBS FEP Medicare
           and non-Medicare enrollees, and

           o 57 of the generic drugs most frequently used by BCBS FEP
           Medicare and non-Medicare enrollees.

^1Percentages are based on national health expenditure data prepared by
the Centers for Medicare & Medicaid Services, Office of the Actuary,
National Health Statistics Group.

^2See GAO, Prescription Drugs: Price Trends for Frequently Used Brand and
Generic Drugs from 2000 through 2004, GAO-05-779 (Washington, D.C.: Aug.
15, 2005).

^3The usual and customary price is the price an individual without
prescription drug coverage would pay at a retail pharmacy.

To report usual and customary price trends from January 2000 through
January 2007, we tracked average monthly prices for the 44 brand and 43
generic drugs frequently used by BCBS FEP Medicare and BCBS FEP
non-Medicare health insurance enrollees that were included in both the
2005 report and current report. We created an index for the brand and an
index for the generic drugs.

Our analyses are limited to the usual and customary prices reported by
retail pharmacies in New York to the EPIC program and in Pennsylvania to
the PACE program by retail pharmacies for drugs frequently used by BCBS
FEP Medicare enrollees or non-Medicare enrollees. Our findings cannot be
generalized to all usual and customary prices nationally for all drugs. We
reviewed all data for reasonableness and consistency and determined that
the data were sufficiently reliable for our purposes. We performed our
work from November 2006 through August 2007 in accordance with generally
accepted government auditing standards. (See enc. I for a description of
our scope and methodology.)

In summary, we found that the average monthly usual and customary prices
reported by the two state pharmacy assistance programs increased 13.6
percent from January 2004 through January 2007 for a typical 30-day supply
of the 122 prescription drugs frequently used by BCBS FEP Medicare or
non-Medicare enrollees. This represents a 4.3 percent average annual rate
of increase. (See encs. II and III.) Prices increased at similar rates for
the 96 drugs frequently used by BCBS FEP Medicare enrollees and the 91
drugs frequently used by BCBS FEP non-Medicare enrollees. (See enc. IV.)
We also found that the average monthly usual and customary prices
decreased for the 57 generic drugs and increased for the 65 brand drugs
from January 2004 through January 2007. Specifically, the generic drug
prices decreased 12.8 percent, a 4.5 percent average annual rate of
decrease,^5 while the brand drug prices increased 21.2 percent, a 6.6
percent average annual rate of increase. (See enc. V.) During the same
period, based on nationwide data from the Bureau of Labor Statistics,
prices for all consumer items for all urban consumers--the Consumer Price
Index (CPI)--increased 9.3 percent, a 3.0 percent average annual rate of
increase.

^4The EPIC and PACE programs are among the largest and longest-running
state pharmaceutical assistance programs and they collected data from
thousands of retail pharmacies on usual and customary prices for drugs in
these two states.

^5Two drugs alone accounted for about 8.6 percentage points of the 12.8
percentage point decline in the prices for generic drugs. The antibiotic
Ciprofloxacin HCl 500 mg dropped 54.0 percent in price, and the
antidepressant Fluoxetine 20 mg dropped 25.7 percent in price.

We also found that from January 2000 through January 2007, average monthly
usual and customary prices increased at a faster rate for the 44 brand
drugs than for the 43 generic drugs. Specifically, prices for the brand
drugs increased 48.6 percent, a 5.8 percent average annual rate of
increase, while prices for the generic drugs increased 7.1 percent, a 1.0
percent average annual rate of increase. (See encs. VI and VII.) During
this same period the CPI increased 19.9 percent, a 2.6 percent average
annual rate of increase.

We did not obtain external comments on a draft of this report because we
did not evaluate the programs of the organizations that provided us data
they had collected.

                                   - - - - -

As agreed with your offices, unless you publicly announce its contents
earlier, we plan no further distribution of this report until 30 days from
its date. At that time, we will send copies of this report to relevant
congressional committees and other interested members. The report will
also be available at no charge on GAO's Web site at http://www.gao.gov.

If you or your staffs have any questions regarding this report, please
contact 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. Randy Dirosa, Assistant Director; Rashmi
Agarwal; Martha R. W. Kelly; Daniel Ries; and Stephen Ulrich were major
contributors to this report.

John E. Dicken
Director, Health Care Issues

Enclosures - 7

                       Enclosure 1:  Scope and Methodology

To examine the change in average monthly usual and customary prices for
prescription drugs frequently used by Medicare enrollees and other
non-Medicare health insurance enrollees from January 2004 through January
2007, we used data from several sources. To identify 122 of the most
frequently used drugs for which we examined usual and customary price
trends, we first identified the 100 prescription drugs most frequently
dispensed through retail pharmacies in 2004 to Blue Cross Blue Shield
(BCBS) Federal Employee Program (FEP) Medicare enrollees and the 100 drugs
most frequently dispensed to BCBS FEP non-Medicare enrollees.^6 Combined,
these two lists included 133 unique drugs.^7 We obtained usual and
customary prices for drugs as reported by retail pharmacies to New York's
Elderly Pharmaceutical Insurance Coverage (EPIC) program and
Pennsylvania's Pharmaceutical Assistance Contract for the Elderly (PACE)
program from January 2004 through January 2007.^8 We collected prices
based on National Drug Codes (NDC)^9 and a common number of units (such as
tablets), typically for a 30-day supply. Based on combined EPIC and PACE
program data, we analyzed data for 122 of the 133 drugs that had prices
reported for every month from January 2004 through January 2007.

We created price indexes to measure the average change in prices for these
122 drugs from January 2004 through January 2007.^10 To determine the
average price of a basket of all or a subset of these 122 drugs for each
month, we weighted the average monthly price of each drug in the basket
based on the number of prescriptions dispensed in 2004 to BCBS FEP
Medicare and non-Medicare enrollees.^11,12 We standardized the average
monthly price for each
basket with a value of 100 as of January 2004. We created indexes to track
price changes for the following five baskets of drugs:

           o 122 of the drugs most frequently used by BCBS FEP Medicare or
           non-Medicare enrollees,

           o 96 of the drugs most frequently used by BCBS FEP Medicare
           enrollees,

           o 91 of the drugs most frequently used by BCBS FEP non-Medicare
           enrollees,^13

           o 65 of the brand drugs most frequently used by BCBS FEP Medicare
           and non-Medicare enrollees, and

           o 57 of the generic drugs most frequently used by BCBS FEP
           Medicare and non-Medicare enrollees.

^6BCBS FEP covered more than 70 million prescriptions dispensed to
enrolled federal employees, retirees, and their dependents in 2004. Retail
prescriptions for the 122 drugs that we included in our analyses
represented about 32 percent of total prescriptions dispensed to BCBS FEP
enrollees in 2004.

^7Drugs with the same name but with different strengths or dosage forms
(such as capsules or tablets) were counted separately as unique drugs.

^8The EPIC program covered more than 10 million prescriptions dispensed
mostly to low-income seniors in 2004, and the PACE program covered more
than 9 million such prescriptions.

^9NDCs are three-segment numbers that are the universal product
identifiers for drugs for human use. The Food and Drug Administration
assigns the first segment of the NDC, which identifies the firm that
manufactures, repackages, or distributes a drug. The second segment
identifies a specific strength, dosage form, and formulation for a
particular firm. The third segment identifies the package size and type. A
drug can have multiple NDCs associated with it. For example, a drug made
by one manufacturer, in one strength or dosage form, but in three package
sizes would have three NDCs.

^10To improve data reliability, we removed as outliers any claims for
which the reported usual and customary price was more than two standard
deviations from the mean price for each drug in each month.

^11The 2004 BCBS FEP retail prescription drug utilization weights applied
to the EPIC and PACE program retail prices were held constant throughout
the period of analysis to isolate the effects of changes in prices from
the effect of changes in utilization, such as the substitution of lower
priced generic drugs for higher priced brand drugs.

^12BCBS FEP retail prescriptions represent various days supply (such as
34- or 90-day supplies), while EPIC and PACE program price data are
limited only to retail prescriptions for a 30-day supply.

To examine the change in usual and customary drug prices from January 2000
through January 2007, we analyzed average monthly usual and customary
price trends for the 44 brand and 43 generic drugs that were included in
both this report and our 2005 report.^14 We calculated indexes from
January 2000 through January 2007 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 Medicare and non-Medicare enrollees in 2004. We
similarly assigned each index a value of 100 as of January 2000.

For all price trend indexes we report, we identified the drugs with
exceptionally large changes in price from the beginning to the end of the
period, which we defined as two or more standard deviations from the
average price change for all drugs in the index. We then determined how
these drugs affected the reported price change in the index. In most
cases, these drugs did not affect the overall index change by more than 3
percentage points. However, in one instance such drugs accounted for about
two-thirds of the index change, and in this instance we reported the drugs
by name and noted their influence on the index.

Our analyses are limited to drugs frequently used by Medicare enrollees
and by non-Medicare enrollees in the 2004 BCBS FEP. In addition, our
analyses are limited to prices reported by retail pharmacies in New York
to the EPIC program and by retail pharmacies in Pennsylvania to the PACE
program. Our findings cannot be generalized to all usual and customary
prices nationally for all drugs. We reviewed all data from the BCBS FEP
and the EPIC and PACE programs for reasonableness and consistency,
including screening for outlier prices and
ensuring that the price trends and frequently used drugs were generally
consistent with other data sources. We determined that these data were
sufficiently reliable for our purposes. We performed our work from
November 2006 through August 2007 in accordance with generally accepted
government auditing standards.

^13Sixty-five of the 122 drugs were frequently used by both the Medicare
and non-Medicare enrollees. While these 65 drugs were used in calculating
both the Medicare and non-Medicare usual and customary price indexes, the
drugs had different weights in each index depending on the frequency of
prescriptions dispensed to Medicare enrollees or non-Medicare enrollees.

^14See GAO, Prescription Drugs: Price Trends for Frequently Used Brand and
Generic Drugs from 2000 through 2004, GAO-05-779 (Washington, D.C.: Aug.
15, 2005). For the 2005 report, EPIC and PACE program officials removed
outlier prices by removing any claims where the usual and customary price
exceeded 15 times the state's reimbursed price before providing us with
the data. For the current report, we received all prices and removed the
claims for which the price was more than two standard deviations from the
mean for each drug for each month. To ensure a valid comparison of prices
across the periods of both studies, we removed outliers from the data
collected for the current report following the approach used by EPIC and
PACE program officials for the 2005 report.

Enclosure II:  Index of Average Usual and Customary Prices for 122 Drugs
Frequently Used by BCBS FEP Medicare and Non-Medicare Enrollees, by Month, 

Note: The index value of 113.6 indicates a 13.6 percent increase in
average usual and customary prices during the period.

Enclosure III:  Annual Change in Usual and Customary Prices for 122 Drugs
Frequently Used by BCBS FEP Medicare and Non-Medicare Enrollees, January 2004
through January 2007

Enclosure IV: Indexes of Average Usual and Customary Prices for 96 Drugs
Frequently Used by Medicare Enrollees and 91 Drugs Frequently Used by
Non-Medicare Enrollees in the BCBS FEP, by Month, January 2004 through
January 2007

Note: The index values of 113.8 and 113.4 indicate an increase in average
usual and customary prices of 13.8 and 13.4 percent for Medicare and
non-Medicare enrollees, respectively, during the period.

Enclosure V:  Indexes of Average Usual and Customary Prices for 65 Brand
and 57 Generic Drugs Frequently Used by BCBS FEP Medicare and Non-Medicare
Enrollees, by Month, January 2004 through January 2007

Notes: The index value of 121.2 indicates a 21.2 percent increase in
average usual and customary prices for brand drugs during the specified
period. The index value of 87.2 indicates a 12.8 percent decrease in
average usual and customary prices for generic drugs during the period.

Two drugs alone accounted for about 8.6 percentage points of the 12.8
percent decrease in the prices for generic drugs. The antibiotic
Ciprofloxacin HCl 500 mg dropped 54.0 percent in price and the
antidepressant Fluoxetine 20 mg dropped 25.7 percent in price.

Enclosure VI:  Indexes of Average Usual and Customary Prices for 44 Brand
and 43 Generic Drugs Frequently Used by BCBS FEP Medicare and Non-Medicare
Enrollees, by Month, January 2000 through January 2007

Note: The index values of 148.6 and 107.1 indicate increases in the
average usual and customary prices of 48.6 and 7.1 percent for brand and
generic drugs, respectively, during the period.

Enclosure VII:  Annual Change in Usual and Customary Prices for 44 Brand
and 43 Generic Drugs Frequently Used by BCBS FEP Medicare and Non-Medicare
Enrollees, January 2000 through January 2007

(290654)

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