Prescription Drug Pricing: Implications for Retail Pharmacies (Testimony,
09/19/96, GAO/T-HEHS-96-216).

GAO discussed the implications of prescription drug pricing for retail
pharmacies, focusing on the: (1) changes in the process of getting
prescription drugs from manufacturers to patients; and (2) consequences
for and response of retail pharmacies to these changes. GAO noted that:
(1) health insurers have used their consolidated buying power to obtain
drug discounts not available to retail pharmacies; (2) health insurers
and pharmacy benefit managers (PBM) use the size of their member
populations as leverage to help reduce the amounts that they reimburse
pharmacies for prescriptions dispensed to those populations; (3) retail
pharmacies have been facing increased competition from mail order
pharmacies; and (4) retail pharmacies have responded to the changes in
pharmaceutical pricing by waging lawsuits against leading drug
manufacturers and wholesalers, developing more competitive strategies
for gaining business, and campaigning for legislative action.

--------------------------- Indexing Terms -----------------------------

 REPORTNUM:  T-HEHS-96-216
     TITLE:  Prescription Drug Pricing: Implications for Retail 
             Pharmacies
      DATE:  09/19/96
   SUBJECT:  Pharmaceutical industry
             Drugs
             Price regulation
             Price adjustments
             Customer service
             Health care cost control
             Managed health care
             Health maintenance organizations
             Health insurance cost control
IDENTIFIER:  Medicaid Program
             
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Cover
================================================================ COVER


Before the Subcommittee on Oversight and Investigations
Committee on Commerce, House of Representatives

For Release on Delivery
Expected at 10:00 a.m.
Thursday, September 19, 1996

PRESCRIPTION DRUG PRICING -
IMPLICATIONS FOR RETAIL PHARMACIES

Statement of Sarah F.  Jaggar, Director
Health Services Quality and Public Health
Health, Education, and Human Services Division

GAO/T-HEHS-96-216

GAO/HEHS-96-216t


973808


Abbreviations
=============================================================== ABBREV


============================================================ Chapter 0

Mr.  Chairman and Members of the Subcommittee: 

It is a pleasure to be here this morning to discuss for the
Subcommittee the results of our work on prescription drug pricing, a
subject that has been the focus of congressional interest for the
past decade. 

In the late 1980s, congressional hearings highlighted the fact that
the prices that consumers paid for prescription drugs were increasing
at a rate more than two and one half times the general rate of
inflation.  In 1990, the Congress attempted to control expenditures
for prescription drugs by significantly changing the way Medicaid
pays for outpatient drugs.  Then, in 1994, attention shifted toward
vertical integration in the pharmaceutical market, particularly the
mergers between large pharmaceutical manufacturers and companies that
manage prescription drug benefits for health plans, called pharmacy
benefit managers (PBMs). 

My statement today will address three questions that relate to the
recent concerns of retail pharmacies about drug pricing: 

  -- How and why has the process by which drugs get from
     manufacturers to patients changed? 

  -- What have been the consequences for retail pharmacies of changes
     in this process? 

  -- What general strategies are retail pharmacies undertaking or
     proposing to respond to an increasingly competitive environment? 

Our information is based on a review of the literature on drug
pricing, interviews with representatives of the groups involved, and
several GAO reports related to drug pricing.\1 These reports examine
the effect of the Medicaid drug rebate law on prices, the role of
PBMs in the health care industry, and efforts to control drug costs
by the largest federal employee health plan. 

In summary, the actions taken by health insurers to contain
prescription drug costs have had important implications for retail
pharmacies.\2 Specifically, the insurers' consolidation of purchasing
power and ability to increase market share for manufacturers' drugs
has allowed them and their representatives to often obtain drug
discounts beyond those available to retail pharmacies.  Further, in
instances in which insurers and PBMs contract with pharmacies to
provide drugs and services to plan members, the plans have been able
to control reimbursement rates to pharmacies for those drugs and
services. 

While these developments have helped health insurers control their
pharmacy benefit costs, they have also created an anxious environment
for retail pharmacists.  In response, the pharmacists have adopted a
number of steps to become more competitive and have taken legal and
legislative action to try to ensure that they can obtain the same
discounts as managed care plans and other large purchasers.  Our
analysis of federal legislation directed at reducing Medicaid drug
costs, the Omnibus Budget Reconciliation Act of 1990 (OBRA 1990),
indicates that the law's effect may well have resulted in higher
outpatient drug costs to many large purchasers.  In an era of great
concern over health care costs, the potential of any legislation to
increase costs must be considered. 


--------------------
\1 See the attached list of related GAO products. 

\2 The term "health insurers" is used to refer to all entities who
pay for health care, including health maintenance organizations, self
insuring employers, and traditional third party payers. 


   CHANGES IN HOW DRUGS GET TO
   PATIENTS
---------------------------------------------------------- Chapter 0:1

In an earlier era, when there was less concern over the costs of
health care, the process by which drugs reached patients was
relatively simple.  The patient went to a doctor, who, if convinced
that the malady could be helped with medication, would prescribe a
drug that the patient could obtain at the local pharmacy.  If the
patient's health insurance had a prescription drug benefit, the
patient would be reimbursed for the purchase; if not, the patient
would cover the costs out-of-pocket.  The decisions regarding which
drug would be prescribed were often left to physicians, while those
regarding drug cost typically involved manufacturers and retail
pharmacies.  Further, the health insurer was usually not centrally
involved in either decision. 

Today, the ways in which drugs are prescribed and paid for are
considerably more complex.  To a great extent, this complexity has
been introduced in direct response to concerns with the rapid growth
in health care expenditures.  Just as with hospital and physician
services in an earlier day, insurers have recently begun to take
concrete steps to control the costs of pharmacy benefits.  Some steps
require patients to bear a larger share of the costs of drugs through
increased copayments, while others reduce the utilization of drugs
and rely more on less-costly types of drugs.  The most important
steps, however, are directed at minimizing both how much insurers pay
manufacturers for drugs and how much they pay pharmacies for their
services. 

Insurers take steps to reduce the acquisition costs of drugs by
negotiating for discounts or rebates from drug manufacturers.  A
powerful tool in these negotiations is the formulary that the insurer
or the PBM maintains.\3 A formulary is a list of prescription drugs
that are preferred by the insurer or the PBM.  Drugs are included on
formularies not only for reasons of medical effectiveness but also
because of price.  Because formularies can affect the utilization
rates for drugs, it is in the interest of a drug manufacturer to have
its products included.  This is especially true when the insurer or
PBM is successful in obtaining high rates of physician compliance
with the formulary and when the insurer has a large number of
enrollees.  In these cases, the potential effect that placement on a
formulary has on the sales and market share of a drug is so great
that insurers can use such placement as a means of securing discounts
or rebates from drug manufacturers. 

Insurers and PBMs also negotiate for discounts directly with
pharmacies to try to control how much they reimburse for services. 
In these negotiations, the position of insurers is strengthened not
by formularies but by their ability to influence which pharmacies
their enrollees use.  As with the negotiations with manufacturers,
the position of the insurer or the PBM is related to the number of
enrollees represented by the plan. 

The extent to which negotiated rebates and discounts with drug
manufacturers and pharmacies have controlled costs can be
substantial.  For example, in our most recent examination of these
strategies, a large insurer estimated that the combined savings that
resulted from manufacturer rebates and pharmacy discounts exceeded
$300 million.\4 Many retail pharmacists believe that the means used
to achieve these savings have placed them at a comparative
disadvantage in the rapidly changing health care environment. 


--------------------
\3 The emergence of PBMs is perhaps the most symbolic evidence of how
the pharmaceutical delivery sector of health care has changed.  The
number of PBMs, whose primary function is to manage drug benefits for
insurers, has mushroomed in recent years.  As of 1993, they managed
drug benefits for approximately 40 percent of the U.S.  population. 

\4 U.S.  General Accounting Office, Blue Cross and Blue Shield: 
Change in Pharmacy Benefits Affects Federal Enrollees,
GAO/T-HEHS-96-206 (Washington, D.C.:  Sept.  5, 1996). 


   CONSEQUENCES FOR RETAIL
   PHARMACISTS OF A CHANGING
   HEALTH CARE ENVIRONMENT
---------------------------------------------------------- Chapter 0:2

The current environment is viewed with anxiety by many retail
pharmacists.  The success of insurers and other institutional buyers
in using their consolidated buying power to reduce the price they pay
for drugs has not been shared by retail pharmacists.  As a
consequence, retail pharmacies are sometimes charged more for similar
products than are health insurers such as health maintenance
organizations, self insured health plans, and other institutional
buyers.  The best evidence we were able to obtain that differential
pricing existed comes from a recent study of drug pricing in
Wisconsin.\5 Table 1 summarizes the results from that study. 



                                Table 1
                
                     Drug Price Differences Between
                    Institutional Buyers and Retail
                        Pharmacies in Wisconsin



                                No. of
                                 drugs
Type of drug                  in class     No.       %     No.       %
--------------------------  ----------  ------  ------  ------  ------
Single-source brand name            31       9      29       5      16
Multi-source brand name             24      12      50       8      33
Generic                             21       6      29       3      14
----------------------------------------------------------------------
As can be seen from the table, differences in prices of greater than
10 percent were found for more than one third of all products (27 out
of 76 drugs), and in more than one half of those cases (21 percent of
all cases), the differences could not be justified by volume of
purchase.  In placing these findings in a larger perspective, it is
important to note that Wisconsin has what is often referred to as a
"unitary pricing" law that "requires sellers to offer drugs .  .  . 
to every purchaser under the same terms and conditions afforded to
the most favored purchaser."

The data from Wisconsin support the conclusion of many that
differential pricing exists.\6 The differences in prices may well
reflect the relative abilities of insurers and retail pharmacies to
influence market share.  That is, some purchasers of drugs, primarily
those who can influence the specific drugs that are prescribed for
large numbers of patients, may pay less for drugs because of that
ability. 

The increasing concern among insurers with controlling costs and the
consequent reliance on their consolidated purchasing power also have
affected how much pharmacies are reimbursed for the drugs they sell
to customers.  As health insurers and the PBMs that represent them
cover more people, they use the size of their member populations as
leverage to help reduce the amounts that they reimburse pharmacies
for prescriptions dispensed to those populations.  Although a
pharmacy can refuse to participate in an insurer's network of
pharmacies willing to provide prescription discounts, it is difficult
for the pharmacy to face the possibility of losing the business.  For
example, each of the two largest PBMs represents more than 40 million
people nationwide.  As we were told by one independent retail
pharmacist, "either I agreed to the new reimbursement schedule, or I
lose 40 percent of my patients."

In addition to the pressures of how much retail pharmacists pay for
drugs and how much they can charge for their services, they have been
facing pressure from new sources of competition.  The expansion of
supermarkets into the pharmaceutical area has been under way for some
time, but the more immediate threat to the viability of retail
pharmacies may be posed by the reliance of insurers on mail order
pharmacies.  Mail order firms have made significant inroads into the
market in recent years, especially in providing drugs for the
chronically ill.  In an effort to promote the use of mail order
pharmacies, some insurers provide enrollees with considerable
financial incentives.  For example, the largest plan under the
federal employee health benefits program provides enrollees drugs
free of charge if they obtain them through the mail order program yet
requires a 20-percent copayment from most enrollees for drugs
purchased at retail pharmacies.\7

All these pressures on retail pharmacies have had a considerable
effect.  For example, in the case described above, a change in
pharmacy benefits that affected many of the plan's enrollees reduced
payments to retail pharmacies.  During the first 5 months of 1996,
the total amount that retail pharmacies were paid for the
prescriptions they dispensed to enrollees affected by the benefit
change decreased by about 36 percent, or about $95 million, from the
amount paid during the same period in 1995.\8


--------------------
\5 Wisconsin Department of Agriculture, Trade and Consumer
Protection, Wholesale Pricing of Prescription Drugs in Wisconsin
(Madison:  July 28, 1995). 

\6 See, for example, Congressional Budget Office, How the Medicaid
Rebate on Prescription Drugs Affects Pricing in the Pharmaceutical
Industry (Washington, D.C.:  Jan.  1996). 

\7 U.S.  General Accounting Office, Sept.  5, 1996. 

\8 U.S.  General Accounting Office, Sept.  5, 1996. 


   RESPONSES OF RETAIL PHARMACISTS
---------------------------------------------------------- Chapter 0:3

Retail pharmacists have resorted to three different types of action
in response to the changes in pharmaceutical pricing:  litigation,
adoption of competitive strategies, and calls for legislation. 

A large lawsuit regarding drug pricing was recently settled, at least
in part.  The suit was a class action by tens of thousands of
independent and chain pharmacies against virtually all the leading
manufacturers and wholesalers of brand-name prescription drugs.  The
pharmacies argued that the manufacturers and wholesalers, by granting
discounts to managed care organizations that were not available to
the pharmacies, were engaged in a price-fixing conspiracy in
violation of federal antitrust law. 

The court rejected an initial settlement but approved a modified
settlement with most of the manufacturer-defendants on June 21,
1996.\9 (The wholesalers are not parties to this settlement because
the court earlier granted summary judgment in their favor.\10 ) The
litigation is not entirely over because not all parties have agreed
to the settlement, and a number of issues remain on appeal in the
Court of Appeals for the 7th Circuit. 

The modified settlement satisfied the concerns about future pricing
conduct that led the court to reject the initial proposal. 
Specifically, the current settlement provides that (1) the
manufacturers will not refuse discounts solely on the basis that the
buyer is a retailer and (2) retail pharmacies and buying groups that
are able to demonstrate an ability to affect market share will be
entitled to discounts based on that ability, to the same extent that
managed care organizations would get such discounts. 

In addition to pursuing legal remedies, retail pharmacies are
beginning to adopt some strategies designed specifically to become
more competitive in the new environment.  Some pharmacies are
offering services not traditionally found in them (such as food
products and optical care), while some are trying to follow the lead
of institutional drug purchasers.  For example, some retailers are
creating buying groups, and others are considering ways to influence
the choice of drugs by contacting patients directly and informing
them of the relative merits of the different drugs that might be
available.  If contacting patients directly is successful, it will
provide retail pharmacies with the commodity that makes institutional
buyers so powerful--namely, the ability to influence market share. 
Although we cannot predict how successful any of these strategies
will be, the large chain pharmacies are more likely to succeed as
they try to compete with managed care organizations and mail order
pharmacies than are the smaller, independent retail pharmacies. 

Finally, retail pharmacists and their representatives have been
strong proponents for legislative solutions.  Depending on
ideological affiliation, these are alternatively referred to as
"unitary pricing" or "equal access to discount" laws, and they have
been considered in one form or another by the majority of state
legislatures.  Although it is difficult to predict all the
consequences of legislation in such a complex area as drug pricing,
we can look to the last instance in which the federal government
attempted a legislative solution to a problem involving drug costs: 
the Medicaid rebate on prescription drugs.  In OBRA 1990, the
Congress tried to reduce Medicaid's prescription drug costs by
requiring that drug manufacturers give state Medicaid programs
rebates for outpatient drugs.  The rebates were based on the lowest
of "best" prices that drug manufacturers charged other purchasers,
such as health maintenance organizations and hospitals. 

In our study of this legislation, we found that the average best
price for outpatient drugs paid by large purchasers increased.\11 In
its evaluation, the Congressional Budget Office concluded that the
program had reduced Medicaid spending on prescription drug benefits
by almost $2 billion.  However, at the same time, the budget office
study's conclusion was consistent with ours in that "spending on
prescription drugs by non-Medicaid patients may have increased as a
result of the Medicaid rebate program." Although the issues involved
with the differential pricing between institutional and retail
pharmacies are likely to be distinct from those the Congress
confronted in the Medicaid prescription drug benefit, the lessons of
OBRA 1990 cannot be ignored at a time when controlling health care
costs is of such critical importance. 


--------------------
\9 In re:  Brand Name Prescription Drugs Antitrust Litigation, 94 C
897, MDL 997, 1996 U.S.  Dist.  LEXIS 4335 (D.  Ill.  April 4, 1996);
id., at LEXIS 8817, June 21, 1996. 

\10 Id.  at LEXIS 6754, April 4, 1996. 

\11 Medicaid:  Changes in Best Price for Outpatient Drugs Purchased
by HMOs and Hospitals (GAO/HEHS-94-194FS, Aug.  5, 1994). 


-------------------------------------------------------- Chapter 0:3.1

Mr.  Chairman, this concludes my statement.  I would be happy to
answer any questions that the Subcommittee might have. 

For more information about this testimony, please call George
Silberman, Assistant Director, at 202-512-5885.  Other major
contributors include David G.  Bernet, Joel A.  Hamilton, and John C. 
Hansen. 


RELATED GAO PRODUCTS
============================================================ Chapter 1

Blue Cross FEHB Pharmacy Benefits (GAO/HEHS-96-182R, July 19, 1996). 

Pharmacy Benefit Managers:  Early Results on Ventures with Drug
Manufacturers (GAO/HEHS-96-45, Nov.  9, 1995). 

Medicaid:  Changes in Best Price for Outpatient Drugs Purchased by
HMOs and Hospitals (GAO/HEHS-94-194FS, Aug.  5, 1994). 

Prescription Drugs and the Elderly:  Many Still Receive Potentially
Harmful Drugs Despite Recent Improvements (GAO/HEHS-95-152, July 24,
1995). 

Prescription Drug Prices:  Official Index Overstates Producer Price
Inflation (GAO/HEHS-95-90, Apr.  28, 1995). 

Prescription Drugs:  Spending Controls in Four European Countries
(GAO/HEHS-94-30, May 17, 1994). 

Prescription Drugs:  Companies Typically Charge More in the United
States Than in the United Kingdom (GAO/HEHS-94-29, Jan.  12, 1994). 

Medicaid:  Outpatient Drug Costs and Reimbursements for Selected
Pharmacies in Illinois and Maryland (GAO/HRD-93-55FS, Mar.  18,
1993). 

Prescription Drug Prices:  Analysis of Canada's Patented Medicine
Prices Review Board (GAO/HRD-93-51, Feb.  17, 1993). 

Medicaid:  Changes in Drug Prices Paid by HMOs and Hospitals Since
Enactment of Rebate Provisions (GAO/HRD-93-43, Jan.  15, 1993). 

Prescription Drugs:  Companies Typically Charge More in the United
States Than in Canada (GAO/HRD-92-110, Sept.  30, 1992). 

Prescription Drugs:  Changes in Prices for Selected Drugs
(GAO/HRD-92-128, Aug.  24, 1992). 

Medicaid:  Changes in Drug Prices Paid by VA and DOD Since Enactment
of Rebate Provisions (GAO/HRD-91-139, Sept.  18, 1991). 

*** End of document. ***