GAO Report Finds Rising Drug Prices; NCPA: To Reduce Costs Look to Pharmacists, Generic Utilization and Greater Transparency from Pharmacy Benefit Managers (PBMs)

A recent report by the Government Accountability Office (GAO) found prescription drug costs continue to rise faster than overall health care inflation – renewing lingering questions about the return public and private payers are getting for the billions of dollars they pay to major pharmacy benefit managers (PBMs) to lower drug costs.

GAO surveyed the “usual and customary” price of 100 commonly used prescription drugs between 2006 through the first quarter of 2010. They found that their cost increased at an average rate of 6.6 percent per year. That’s nearly twice the 3.8 percent annual medical consumer price index (CPI) for the same period.

Of that 100 drug sample, 55 were brand-name medications and 45 were generics. GAO found that the price of these brands increased 8.3 percent annually – more than double the medical CPI. By contrast, the cost of generics DECREASED by 2.6 percent on average each year.

“These soaring price increases seem to defy explanation,” U.S. Rep. Henry Waxman, D-Calif., Ranking Member of the Energy and Commerce Committee, said in response.  Waxman also called for an investigation into rising prescription drug prices and a hearing on options for reducing costs.

For lawmakers and others seeking drug cost savings, a great place to start is with the billion-dollar middlemen known as pharmacy benefit managers, or PBMs. Most employers, government entities and other health plan sponsors hire PBMs to administer their plan’s drug benefit and usually with the assumption that they will lower drug costs. The new GAO report, coupled with several industry realities, suggest at least three ways in which the opposite is true:

  1. PBMs favor brand name drugs over generics. The appropriate use of generic drugs saves money, the GAO report affirms.  Indeed, the agency found that, when consumer shifts in medication use (e.g., from brand to equivalent generic) were taken into account, the average annual cost increase was reduced to 2.6 percent. Community pharmacists consistently dispense generics more often than PBM-owned mail order pharmacies, possibly due to PBM pursuit of brand manufacturer rebates.  In fact, the areas where costs are rising the fastest are also the categories in which PBMs exert the greatest control over plan design (brand name drugs and specialty drugs).
  2. PBMs face an inherent conflict of interest. The major PBMs, such as CVS Caremark, Express Scripts and Medco, also operate proprietary mail order pharmacies, and resist assuming a fiduciary responsibility to put the interests of clients (health plan sponsors) above profits. This can also lead PBMs to favor mail order and advocate restricting patients’ access to community pharmacies when better, less disruptive cost-savings strategies exist.
  3. Drug costs and PBM profits are both on the rise in lockstep. Over the previous decade, GAO found that drug prices consistently increased faster than the price of inflation. During much of the same period, some major PBMs enjoyed a five-fold increase in profits. By contrast, and to the surprise of many health plan sponsors, reimbursement rates for community pharmacists have been in decline for decades.

Increasingly, public and private payers are realizing improved savings through greater PBM transparency. Community pharmacists can also work with plan sponsors to increase the appropriate use of generic drugs. In terms of volume of drugs dispensed, retail pharmacies dispense low-cost generic drugs at a rate that is 10 percentage points higher than mail pharmacies. IMS Health found that for every 1% increase in generics utilization, health plans can realize 2.5% in savings.

4 Responses to “GAO Report Finds Rising Drug Prices; NCPA: To Reduce Costs Look to Pharmacists, Generic Utilization and Greater Transparency from Pharmacy Benefit Managers (PBMs)”

  1. 1 Adam J. Fein March 21, 2011 at 10:01 pm

    I’d be interested to learn the NCPA’s view on why retail pharmacies raised the prices of brand-name drugs to cash-pay consumers faster than manufacturers raised the list prices of those same drugs.

    According to the GAO, the U&C prices cited above represent “actual retail prices that pharmacies charged to cash-paying consumers for prescription drugs,” whereas AWP are “‘list prices’ reported by manufacturers—from Red Book.”

    But as I point out on Drug Channels (, the U&C prices grew more quickly than the manufacturers’ AWP list prices in three of the four periods studied by the GAO. The overall growth rate of the U&C index also exceeded the AWP index.

    I’m puzzled by these data because they implies that pharmacies have been cost-shifting to the uninsured. Perhaps there is another explanation?


  2. 2 Dushan March 22, 2011 at 5:10 pm

    Adam- I work with many independent pharmacies and can tell you that they are under pressure to keep that U&C price high enough that when the AWP increase comes down the pike they are sure that they don’t lose money based on the contract language with the PBMs. While the PBMs routinely take 2 weeks to update the AWPs in their systems (thus leaving it up to the pharmacy to reprocess each and every fill during those two weeks to obtain their contracted reimbursement), the pharmacies are not afforded the same luxury of fixing things retroactively. So if, two weeks after the effective date of an AWP increase the PBM starts paying properly, the pharmacy that did not increase their U&C immediately, will lose money on all those claims reimbursed incorrectly by the PBM. Except in the case of Express Scripts, who will not even allow backdating to correct their errors. I can certainly tell you that the number one motivator for U&C pricing is not cash customers, but avoiding the floor for PBMs, who allow the pharmacy’s no leeway, while they have built in safety’s for themselves (at the pharmacy’s expense) everywhere. For someone who continually has to state he is not anti-indy pharmacy, you sure do devote a lot of time to blog posts that do not give the benefit of the doubt to the pharmacists. I know for a fact that if they could, community pharmacists would charge those needy, cash-paying customer less, but it is the PBMs that insist they won’t reimburse more than a cash-paying customer, thereby forcing the pharmacies to ensure they are charging a high enough U&C. It is the PBMs that drive this behavior by the pharmacies!

  3. 3 Ken March 22, 2011 at 6:55 pm

    A bigger question concerning PBM behavior is WHY they can price the same exact drug 10 different ways depending on who is dispensing. Why should a community pharmacy be strong armed into providing a commonly used generic medication at a loss when the same medication is reimbursed at a ten fold difference if the PBM owned mail order service dispenses it?? PBMs have a long standing history of manipulation, greed and outright corruption. Pharmacy needs a reimbursement model that is fair, transparent and EQUAL for all who dispense. It is time for federal legislation to address the long standing PBM corruption problem. PBMs are the problem and not the answer with their smoke and mirrors.

    • 4 Adam J. Fein March 22, 2011 at 7:39 pm


      Your response to my comment about U&C is a classic example of Ignoratio elenchi. Well done!


Leave a Reply

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out /  Change )

Google+ photo

You are commenting using your Google+ account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )


Connecting to %s

Search by Categories

%d bloggers like this: