You wanted to know why the retail price for a prescription drug could differ greatly from one pharmacy to another.

Copies of several reports are attached.

SUMMARY

We identified two reports stating that there is a wide variance in the prices charged to self-paying consumers for prescription drugs. One was written by Trinity College student who conducted a telephone survey of 45 Connecticut pharmacies of the prices for nine different drugs. He found a difference of over $ 360 between the highest and lowest prices charged by pharmacies for Zyprexa. A consumer reporter for the Boston Globe also found significantly different retail prices.

In an economics paper, Professor Alan Sorenson found that there are significant price differences charged for the same prescription drug and, despite this, consumers rarely shop for the best price.

The federal Food and Drug Administration's website acknowledges that prescription drug prices are a problem for many, but states that the FDA has no legal authority to investigate or control the prices charged for drugs sold in the free market.

The process of setting prescription drug prices is described in a study conducted by the federal Department of Health and Human Services. It describes the process as highly complex, involving numerous interactions and arrangements. At every level, from manufacturer through wholesaler to retailer, the price charged for a particular drug depends on who is buying. Some wholesale buyers can command discounts because they buy large volumes or pay promptly. Even at the retail level, a consumer covered by insurance pays less than a consumer who is paying for his own medicine.

REPORTS COMPARING PRESCRIPTION DRUG PRICES AT PHARMACIES FOR THE SELF-PAYING CONSUMER

We found two reports concerning the prices paid by consumers for prescription drugs, one by a Trinity College student and one published by the Boston Globe. The Trinity College student called 45 Connecticut pharmacies and asked for their prices for nine different drugs. He found that there are significant price differences. For example, the lowest price for Zyprexa was $ 460. 47 and the highest price was $ 821. 15, a difference of $ 360. 68 ("Cost Overdose: Price Discrimination of Prescription Drugs for Seniors and People with Disabilities in Connecticut," Popat, May 2002).

In the Boston Globe article, consumer reporter Bruce Mohl surveyed nine pharmacies in Brookline, Massachusetts and on the Internet for the prices of four drugs. He found that the nine Brookline pharmacies charged an average of $ 824 for the four drugs while Costco charged $ 622 for the same drugs. The article advises self-paying consumers to shop for the best price ("Prescription Drug Prices Vary from Store to Store," Mohl, Boston Globe).

STUDY OF CONSUMER BEHAVIOR WHEN PURCHASING PRESCRIPTION DRUGS

In an economics paper, Professor Alan Sorenson studied how consumers purchase prescription drugs. He found that prescription drug prices should cause consumers to shop for the best prices because there are significant price differences in the amount charged to the self-paying consumer. Prices vary from store to store and stores' price rankings are inconsistent from drug to drug. In other words, one store may have the best price for one drug and another store may have the best price on another drug.

Despite this, consumers rarely shop for the best price. If consumers price shop at all, they will shop for maintenance medications (Price Dispersion and Heterogeneous Consumer Search for Retail Prescription Drugs, Sorenson, January 2001).

FEDERAL FOOD AND DRUG ADMINISTRATION

The federal Food and Drug Administration's website includes a question-and-answer essay about its activities. It poses the question, "What can the FDA do about the cost of drugs?" It states that the

"FDA has no legal authority to investigate or control the prices charged for marketed drugs. Manufacturers, distributors, and retailers establish these prices. FDA recognizes that other factors beyond its purview, including insurance coverage and drug pricing, can determine patient access to drugs" (www. fda. gov/cder/about/faq).

The website provides advice about where consumers can turn for help paying for prescription drugs and advises consumers who have concerns about the prices of their drugs to turn to the Federal Trade Commission. The commission seeks to ensure that markets function competitively. The FTC website includes a form for reporting a complaint (http: //www. ftc. gov/).

FEDERAL STUDY

President Clinton required the Department of Health and Human Services to study several issues relating to prescription drugs, including their price. The study, Prescription Drug Coverage, Spending, Utilization, and Prices, includes a chapter on prescription drug prices (Department of Health and Human Services, April 2000). It reported that most insurers obtain significant discounts on behalf of their insured beneficiaries. Individuals without coverage face the burden of paying for the cost of the drugs they need and pay higher prices than do insurers and other large purchasers. Further, the study reports that

"the process by which prescription drug prices are determined is highly complex, involving numerous interactions and arrangements among manufacturers, wholesalers, retailers, insurers, pharmacy benefit managers (PBMs), and consumers. "

The study found that individuals without drug coverage pay a higher price at the retail pharmacy than do people covered by insurance, and this difference might be as large as 35%. Although the study did not examine the differences paid by cash customers at different retail outlets, it did describe the complex process of setting prescription drug prices for cash customers. Some of the factors mentioned here might have a bearing on the price difference discovered by your constituent.

Prices are set by a series of transactions from manufacturer to wholesaler to retail pharmacy to consumer. In the first, the manufacturer sells to a wholesaler. The price will vary by form and strength of the product. It will also vary by packaging; a larger container may have a lower per dose cost. Some wholesalers receive discounts. The amount of the discount will vary based on volume and prompt payment. There may also be promotional discounts. The report states that the manufacturer's stated price is only a guideline.

In the second transaction, the wholesaler sells to the retailer. Its price reflects its cost to acquire the drug plus a markup. Many studies refer to the Average Wholesale Price (AWP). The AWP functions like a manufacturer's list price; it is a suggested price and rarely is the actual price. Wholesalers may offer all retailers the same discount from the AWP or may grant a discount only to certain pharmacies.

In the third transaction, the retailer sells to the consumer. Like the wholesaler, its price reflects its acquisition cost plus a markup. A part of the markup is related to the pharmacy's operating costs. This may vary from pharmacy to pharmacy. Because of economies of scale, a large chain pharmacy may have lower costs than a small independent pharmacy. A part of the markup is related to the particular drug. A pharmacy may set a lower markup for maintenance medications. Some pharmacies may offer discounts to different classes of customers. For example, some offer discounts to senior citizens.

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