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HHS Report Confirms Existence of Prescription Drug Price Discrimination

April 10, 2000

Prepared by Minority Staff
Special Investigations Division
Committee on Government Reform
U.S. House of Representatives

At the request of the President, the Department of Health and Human Services conducted a study of prescription drug costs and trends for Medicare beneficiaries. This study finds that senior citizens without prescription drug coverage are forced to pay the highest prices for prescription drugs. When representative manufacturer rebates and discounts are taken into account, senior citizens without prescription drug coverage can pay over 70% to 100% more for common brand-name prescription drugs than favored customers, such as some insurance companies and pharmacy benefit managers (PBMs) and the federal government.

Retail-Level Price Differences. The HHS report focuses on differences at the retail level between the prices paid by uninsured consumers and those paid by insured consumers. The report finds that uninsured consumers pay on average 15% more than insured consumers, not taking into account rebates and other forms of discounts commonly received by insurance companies, PBMs, and the federal government.

Manufacturer-Level Price Discrimination. The HHS report recognizes that drug manufacturers offer rebates and other discounts to favored customers, such as insurance companies, PBMs, and the federal government. These special rebates and discounts are a form of manufacturer-level "price discrimination" since they are not available to the uninsured customer. According to the HHS report, the rebates drug manufacturers give insurers and PBMs can be 35% of the retail price of a drug, which is equivalent to a 40% discount from the manufacturer's initial price. The discounts that manufacturers offer to the federal government can exceed 50%.

Combined Effect of Retail-Level Price Differences and Manufacturer-Level Price Discrimination. The HHS report does not contain drug-specific estimates of the rebates and discounts that drug manufacturers provide their favored customers. For this reason, the report does not calculate the combined effect of retail-level price differences and manufacturer-level price discrimination for specific drugs. The report does, however, provide an "illustrative example" of the combined effect of these two forms of price differences in table 3-1. The table is based on "a composite of commonly prescribed brand name drugs and reflect documented relationships among the prices for different transactions."

According to this illustrative example, uninsured consumers must pay over 70% more for common brand-name drugs than some private-sector purchasers, such as some insurers and PBMs, and over 100% more for these drugs than the federal government.

Relationship to Congressional Price Discrimination Reports. According to the HHS report, the HHS report is different from the congressional reports on prescription drug pricing prepared by the minority staff of the House Government Reform Committee because the HHS analysis "focuses on retail price differences and is unable to incorporate rebates." For this reason, the HHS report explicitly recognizes that its findings "should not be interpreted as inconsistent" with the findings of the congressional reports.

True Extent of Price Discrimination. The greatest price differences reported in the HHS study are the differences between the prices that uninsured consumers pay and the prices paid by the federal government under the Federal Supply Schedule (FSS), which can exceed 100%. But the report suggests that the true extent of price discrimination may be even greater than this. According to the HHS report, there are probably "cases where ... third parties achieved prices below this FSS price." If so, this would indicate that the actual level of drug manufacturer price discrimination could be larger than reported by HHS.

In addition, the study notes that PBMs may receive cash rebates not tied to specific drugs or receive noncash benefits from manufacturers. According to the report, "industry analysts believe that the value of these other considerations may exceed the amount of cash rebates." The exclusion of these rebates and benefits would also lead to underestimating the price difference between uninsured consumers and other purchasers.

Endnotes

1. Department of Health and Human Services, Report to the President: Prescription Drug Coverage, Spending, Utilization, and Prices, 96 (Apr. 2000).

2. Id. at 98 (table 3-1). According to table 3-1, a 35% rebate from the retail price reduces the cost of the drug for some insurers and PBMs by $16, from $46 to $30. The initial manufacturer-level price is $40. After paying the $16 rebate, the manufacturer ends up with $24, which is a 40% discount from the initial manufacturer-level price.

3. Id.

4. Id. at 97.

5. Id. at 98 (table 3-1). The price for uninsured consumers is $52, which is 73% more than the $30 price for some insurers and PBMs and 117% more than the $24 price for the federal government under the Federal Supply Schedule.

6. Id. at 111, fn. 22.

7. Id. at 108.

8. Id. at 106.

Link to Full Text of HHS Report on Prescription Drug Coverage, Spending, Utilization and Prices

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