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PHARMACY PROFITS KEPT PACE WITH INFLATION DURING 1980s WHEN MEASURED IN DOLLARS, THOUGH FALLING AS PERCENTAGE OF TOTAL RETAIL DRUG PRICE -- HHS STUDY

Executive Summary

Pharmacy profit levels held steady between between 1981 and 1988 when measured in dollar terms, according to a study recently completed for HHS. "In 1981 constant dollars, pharmacies' dollar margins increased $0.33 in real dollar terms," the report says. Drug ingredient costs rose $4.56 over the same period. Average pharmacy margins on prescriptions fell from 35% in 1981 to 26% in 1988, the study concludes. The figures are based on the 104 outpatient prescription drugs that accounted for 80% of drug spending by the elderly during 1984. Prepared by Purdue University professor Steven Schondelmeyer, PharmD/PhD, the study uses data from IMS America's National Disease and Therapeutic Index, National Prescription Audit, and U.S. Drugstores Audit. The report was initially undertaken to examine the Medicare elderly population. However, it may be applied to the ongoing discussion of drug spending under Medicaid. Schondelmeyer is scheduled to appear at the Senate Finance/Health for Families and the Uninsured Subcommittee's Sept. 17 hearing on Medicaid savings proposals. The report may provide fodder for HHS to argue against increasing pharmacy reimbursement levels. Sen. Pryor's (D-Ark.) revised Medicaid drug discount bill -- "Pryor II" -- would provide that a portion of rebates from manufacturers be set aside to increase reimbursement levels to pharmacies. Pryor's original bill, S 2605, would have built some margins into most pharmacy charges by set pharmacy reimbursement at actual marketplace charges capped at the 90th percentile. That approach appeared too generous to pharmacy for the Bush Administration. According to the report, retail pharmacies' percentage net profits decreased "because pharmacies' charges or margin did not increase enough to offset increases in drug product cost and operating expenses." Pryor may look closely at another part of the study that addresses cost increases for multi-source drugs. The report found that "manufacturers prices for originator multiple source drugs experienced greater annual change in prices (10.8%) than did non-originator multiple source drugs (2.7%) or single source drugs (8.6%)." However, "non-originator multiple source products' dollar share of the multiple source market increased from 14.2% in 1981 to 31% in 1988....[These] products' dollar share of the total market increased slightly from 11.3% in 1981 of 15.3% in 1988." Pryor II would require that for both single source and innovator multi-source products, manufacturers give Medicaid their "best price" offered to other buyers. For generic products, manufacturers would have to rebate 10% of aggregate Medicaid purchases as a condition of program coverage. S 2605 focuses on single source products. Among other findings, the Schondelmeyer report states that the 104 drugs that account for 80% of spending by the elderly also represent about 11% of all outpatient prescription products. The report calculates that the elderly accounted for one-third of retail drug spending in 1988. Manufacturers prices rose by an average of 9.1% per year and retail prices by 7.2% when looking only at the mix of drugs marketed in 1984. When changes in the mix of products most often used are reflected, manufacturers prices rose by an average of 6.8% per year, while retail prices rose by 6.6%. * Health Care Financing Adminstration Chief Wilensky also is scheduled to appear at the Senate hearing. The current budget target for Medicaid drug savings in 1991 is $250 mil. Wilensky will present the Administration's approach for Medicaid drug savings but is not expected to present a formal legislative measure. Other witnesses for the Sept. 17 hearing will include: Reps. Wyden (D-Ore.) and Cooper (D-Tenn.), sponsors of a House Medicaid drug savings bill; Sen. Hatch (R-Utah); Office of Technology Assessment Senior Associate Judith Wagner; and state legislators from Texas and Louisiana. Also scheduled to appear are: representatives of the American Medical Association and Pharmaceutical Manufacturers Association; Merck, Pfizer, Glaxo and Upjohn; and the American Pharmaceutical Association.
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