Category Archives: drug pricing

Should the government regulate prescription prices: it works where it’s tried

The last two blog posts provided background for a discussion of whether the U.S. government should negotiate or regulate prescription drug prices and discussed why the market might not do such a good job of setting prices for prescription drugs.  This post looks at prices in programs that regulate them.

Comparison of U.S. Prices to Those of Other Countries

The United States is unique among high income nations in that it does not regulate prescription drug prices.  Most other high income nations have some mechanism in place to do so.  A 2010 study compared brand-name drug prices in the U.S. with those in other high income nations.  The results, shown below, indicated that prescription drug prices are higher in the U.S. than in any of the comparison countries.  The difference ranged from U.S. prices being twice those in the U.K. to U.S. prices being about 15% higher than those in Switzerland.  The comparison nations represented a range of types of negotiation and financing of prescription drugs.  Continue reading

Should the government regulate prescription prices: the market doesn’t do it well

For most goods – like cars or shoes or groceries – the market does a good job of determining how much  producers should supply and at what price to sell it.  It does this by matching the quantity that consumers are willing to buy at a given price to the quantity that suppliers are willing to sell at that price.  The market – through the interaction of supply and demand – then arrives at a price at which the quantities consumers are willing to buy is equal to the quantity suppliers are willing to provide.  The figure below illustrates this. In this example, producers will supply 45 units and consumers are willing to buy 45 units at a price of $45.  At a higher price, say $50, producers would supply 50 units, but consumers would only be willing to buy 40.  At a lower price, say $30, consumers would be willing to buy 60 units, but producers would only 30 units.

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But the market may not do such a great job at determining optimal prices and quantities for pharmaceuticals.  There are at least two reasons for this: the effect of insurance and prescribers’ awareness of drug prices.

The insurance effect

Insurance impairs the ability of the market to match the quantity that producers will supply at a given price to the quantity that consumers would buy at that price.  This occurs because insurance pays part of the price.  As a result, the price the consumer actually pays, and the price on which she makes her decision, is less than the price the supplier receives (the insurer makes up the difference).   The figure below illustrates this.  The solid line is a demand curve.  It shows the quantity that consumers would be willing to purchase across a range of prices.  Let’s say a drug is priced at $74.  The demand curve indicates that consumers would be willing to buy 38 units of the drug at this price.  Let’s also assume that consumers have insurance for prescription drugs and that their copay for this drug is $25.  At the price consumers have to pay – $25 – they would be willing to buy 82 units of the drug.  This is far more than they would purchase if they had to pay full price.

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The physician effect

In most markets, the consumer has the primary, if not the sole, role in deciding whether she will buy a product.  This is not true in the pharma market.  Here, consumers, insurers, and prescribers share this role.  Insurers decide whether or not they will pay for a particular product and how much they will require the patient to pay.  Prescribers decide whether a product will be prescribed and which particular product is prescribed.  Only after the prescriber has decided to prescribe a product and the insurer has decided to pay for it does the consumer’s choice matter.  (This assumes consumers will not purchase drugs the insurer will not pay for.) Without a prescription, a consumer cannot get a prescription drug.  Unfortunately, prescribers do not know much about drug prices.  A review of the subject indicates “Doctors consistently overestimated the cost of inexpensive products and underestimated the cost of expensive ones.”  Price is a lot less effective in determining the optimal quantity of drugs sold when the primary decision makers don’t know what the prices are.

 So should government set prices?

In the pharmaceutical market, insurance and prescribers’ lack of awareness of drug prices distorts the normal relationship between price and quantity.  A reasonable conclusion might be that because the market does not do a particularly good job at setting prices and levels of use (quantities consumed), it might make sense for the government to regulate or negotiate prices. This is what actually occurs in many countries.

However, there are a couple of additional factors to consider.  First, prices set the quantities consumed and produced based on what consumers are willing to pay.  These are not necessarily the quantities that are best for their health.  Consumers are not always willing to pay for things that are good for them. Consumers never considered seat belts to be important enough to pay for even though they were proven to save lives.  And consumers are willing to pay for things that aren’t good for them – like cigarettes and lottery tickets.  So the fact that insurance results in consumers using more prescription medicines than they would be willing to pay for is probably healthy.

Second, there is the price elasticity of demand.  This is a measure of how sensitive consumers are to the price of a product.  If consumers are very sensitive to prices then changes in price will lead to proportionately larger changes in the quantities consumers buy.   Price elasticity is higher for products that are luxuries (rather than necessities), for products that have many good substitutes, and when consumers’ incomes decrease.  Price elasticity is lower for products that are necessities, those that have few or no good substitutes, and when incomes increase.  Prescription drugs fall into the latter category.  Research estimates that a 10% increase in the price of prescription drugs will result in a decrease in use of between 0.2 and 5.6%.  This suggests that the extent to which insurance increases drug use is small.

Effects differ across pharma markets

The effects of insurance and physician unawareness of drug prices vary by prescription market.  In the last blog, I suggested that there were three pharmaceutical markets: one for generics, one for brand-name drugs with therapeutic substitutes, and one for brand-name drugs with no substitutes.

Insurance probably has little effect on the quantity of generic drugs consumers use.  These drugs are, for the most part, inexpensive.  Quintiles IMS reports that the prices of 29% of generic prescriptions are less than the consumer’s copay and the prices for another 70% are less than $50.

Insurance probably has a stronger effect in the market for brand-name drugs with therapeutic substitutes.  However, even this effect is blunted by PBMs’ use of formularies to switch consumers to therapeutic substitutes on which they receive large rebates.  I would expect the largest insurance effect in the market for brand-name drugs without substitutes.  Here the insurance effect is large because insurance brings down the cost of drugs to consumers from astronomical levels (e.g., $750,000 per year for the new therapy for Spinraza) to levels that are much more affordable.  The problem here is that insurance also allows pharma to charge prices that consumers could otherwise not afford.

This analysis suggests that there’s little need for government regulation or negotiation of prices for generics or brand-name drugs with therapeutic substitutes.  The analysis also suggests that there might be a need for government regulation or negotiation for very expensive brand-name drugs with no substitutes.  But there’s more to the story.

Should the Government Regulate Prescription Prices, Part 1

Consider these recent headlines:

The cost of Biogen’s new drug: $750,000 per patient

Gilead’s New Hepatitis C Drug Approved by FDA, Priced at $74,760

Hospitals Furious at Cancer-Drug Price Hikes

Got Insurance? You Still May Pay A Steep Price For Prescriptions

There is quite a bit of unhappiness about drug prices these days.  One of the proposed solutions to the problem of high drug prices is to have the federal government negotiate or regulate prices.  In the next few blog posts, I’ll examine various arguments that support government regulation of prescription drug prices and some that oppose it.  But first, in this post, I’ll provide some basic background on the prescription drug market that I think is useful in understanding the arguments for and against government regulation of prescription prices. Continue reading

Thought provoking blog on high priced new drugs

I just read a thought provoking blog on high priced new drugs. The author, a hospital pharmacist, is faced with the issue of how her institution can afford to treat patients with a new drug that promises profound increases in quality of life, but at astronomical prices.

The blog is available at:

(Note – I am not personally endorsing or failing to endorse the Campaign for Sustainable Rx Pricing that Dr. Duty mentions in her blog.  I don’t know enough about the organization to have an opinion one way or the other.)



What are DIRs?

Prescription drug pricing and reimbursement are complicated and confusing as it is.  DIRs have only made them more so.  And much more painful for community pharmacies.

What are DIRs?

DIR stands for Direct and Indirect Remuneration.  The term was initially used by the Centers for Medicare and Medicaid Services (CMS) to refer to all price concessions which PBMs and plan sponsors (insurance companies, HMOs, chains and PBMs offering Medicare Part D plans) receive for Part D prescription drugs that were not included in the point of sale transaction (i.e., when the drug was dispensed to the patient and the charge sent to the plan sponsor or PBM).  CMS reconciles payments to plan sponsors at the end of each year and one of the reconciliation involves reducing plan reimbursements by the amount of the DIRs received by plan sponsors.

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What’s a Specialty Drug?

The fastest growing segment of the prescription drug market is specialty drugs.  The 2014 Express Scripts Drug Trend Report states that specialty drugs account for 1% of prescriptions, but 32% of prescription drug spending.  But what are specialty drugs?  As it turns out, there is no one widely accepted definition.  This may be because the definition of specialty drug has changed over time.

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What’s the average price of a prescription?

For most of my career, it’s been pretty simple to find good estimates of the average price of a prescription.  But for the last several years it has not been.  You would think that simply Googling “average prescription price” would provide links to several sites that would provide this information.  You would be wrong.  The closest estimate I could find online was a study commissioned by Prime Therapeutics that found the average net ingredient costs from Prime compared with its competitors.

Using “mean prescription price” doesn’t work either.  This is all the more surprising given that many PBMs – Express Scripts, CVS/Caremark, Catamaran, and Prime Therapeutics – publish annual drug trend reports.

I’m frequently asked about the average prescription price, so I did what a good PhD advisor should do and asked my graduate students to find it.  Specifically, I asked three graduate students – Anisha Patel, Batul Electricwala, and Della Varghese – to calculate the average prescription price for all prescriptions and for selected therapeutic categories from the latest data available from the Medical Expenditure Panel Survey (MEPS).

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New drugs for Hepatitis-C – Cost-effective but too costly?

Until a few years ago, people infected with the Hepatitis-C virus (HCV) were in a bad way.  Treatments were available, but they included interferon which had nasty side effects.  Most patients experienced fatigue, headache, and muscle aches. A third or more had nausea, fever, depression, irritability and insomnia.  Even worse, cure rates averaged under 60%.

But then there was a major clinical breakthrough.  Gilead Sciences introduced a new drug –Sovaldi (sofosbuvir) – that provided cure rates of 95%.  While most patients had to take Sovaldi with interferon, many could be treated with an interferon-free regimen that avoided most side effects.  A year or so later Gilead introduced an improved product – Harvoni – that consisted of sofosbuvir and ledipasvir.  With Harvoni almost all HCV could be cured by a single 12-week, interferon-free regimen.  What a drug – ultra-high cure rates and minimal side effects.

But, as with most things in life, there was a down side.  The drugs are expensive.  The list price for the recommended 12-week treatment is $84,000 for Sovaldi or $94,500 for Harvoni.

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How do retail pharmacies make money?

Retail pharmacies, despite the fact that they face high competition, low reimbursement rates, and limited-to-no control over their pricing, continue to be profitable.  Census data  quoted in the Drug Channels blog indicate that gross margins in retail pharmacies have actually increased over the last few years.  Data from the NCPA Digest indicates that most independent pharmacies continue to be profitable. But how do they do it?  My calculations, using publicly available sources, indicate that pharmacies are probably taking a loss on most prescriptions that they dispense.

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DrugAbacus – a tool for estimating the value of cancer drugs

Do cancer drugs provide good value or are they overpriced?  Last week’s post discussed the value framework introduced by ASCO for evaluating the value of cancer drugs.  This week we will look at another approach to estimating  the value of cancer drugs – the DrugAbacus interactive tool  developed by Sloan Memorial Kettering Cancer Center.    According to a recent Wall Street Journal article, Dr. Peter Bach developed DrugAbacus “to get drug makers, insurers, doctors and patients talking about the factors that should determine price” and to develop “a value-driven system for pricing cancer drugs”.  A screenshot of the tool is shown below.

drugabacus screenshot


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