How are Generic Drugs Priced?
At the highest level, there are only 2 ways to lower the costs of medicines—use a lower amount of medicines and lower the price of medicines. This sounds pretty basic on the surface until you realize that taking fewer medicines is a lot tougher without hurting your health. The people and organizations that set drug prices do not want to show how they come up with the prices they do. Lowering prices also can be difficult because haggling is not in the vocabulary of patients who find themselves in the vulnerable position of being instructed by their doctor to use a specific medicine to treat a condition.
Depending on your age and types of medical conditions you have, some people take an average of 10 different medicines in a day. This doesn’t even take into account vitamins, herbals and other remedies being used. The word used to describe taking many types of drugs is called polypharmacy. Many usually means more than 5 drugs in most healthcare professional’s mind.
Let’s take the time to breakdown the cost of a prescription drug so that you can better understand the reason why some of the cost-cutting suggestions work so well. I will use the word pill to generally mean a single unit of the drug. Remember, some drugs come in tablets, capsules, liquids, sprays, lotions. The unit of some medicines is not measured by the number of pills because liquids are measured in terms of metric volume
What are the prices of Brand Name Drugs?
The two big areas of savings are the price per pill and the number of pills you pick up at the pharmacy. There can be many different prices for the same pill depending on where in the supply chain it is purchased. A person without insurance is the last person in the supply chain (they are the consumer of the product) and will pay the highest price for a pill because everyone who handled that pill pulled some profit for themselves. Right now, almost everyone uses the Average Wholesale Price (AWP) of a pill as the starting point for that drug’s price. The average wholesale price is an estimate of what a wholesaler will charge a pharmacy for that pill. The average wholesale prices of drugs are published and available as a subscription. All insurance companies and drug benefit managers have the average wholesale prices for pills and also what the drug maker reports the price used to sell to the wholesaler (the Wholesale Acquisition Cost).
How are Generic Drugs Priced?
It is important to also talk about one more price a pill can have before trying to show you how to use this information to your advantage. Generic drugs do have an average wholesale price. But this price is not always the reflective of the real price of a generic drug compared to the brand name drug. Nearly every time a new generic version of a brand name drug is released onto the market, the average wholesale price is the accurate price. The FDA gives the first company to make a generic version 6 months of time to sell their version before other generic drug makers are allowed to sell theirs. By tradition, that first company usually sets the generic drug’s average wholesale price in the range of 8 to 12% lower than the brand drugs average wholesale price. Competition goes up when 3 or more generic drug companies start selling their generic versions. This competition results in the actual sales price to be a lot lower than the average wholesale price.
These lower prices show up on lists called Maximum Allowable Cost (MAC). The prices of these generic drugs on these lists are often more than 50% lower than the average wholesale price for the same drug by the same drug maker. Some MAC prices can even be as high as 80% lower than the generic versions average wholesale price and the brand equivalent’s average wholesale price. Remember, not all generic drugs will be included on a MAC list.
These MAC lists are created by and maintained by state Medicaid programs and private insurers. These price lists are programmed into their computer systems and are the basis of what the insurers ultimately reimburse pharmacies for the drug. Unfortunately, the person without drug insurance doesn’t know about these lower prices that insurance companies pay for drugs. As a result, the pharmacy can charge uninsured person pretty much any price they want for that generic drug.
Pharmacies set-up what is called their Usual and Customary prices. These are the prices that would get charge to someone without insurance. This programmed price includes the pharmacy’s mark-up.
Some pharmacies set their usual and customary prices at a reasonably fair level. However, other pharmacies continue to keep their usual and customary prices set high even though the generic drug is listed on MAC lists. I personally haven’t heard of a situation where a pharmacy will charge a person the same amount as what would have been paid by an insurance company. Consider this fact, over 40 million people in the United States are without health insurance. More people could have medical insurance without drug insurance. Yes, the two can be separated. Every pharmacy will have people fill prescriptions and pay the full price for their drugs. This vulnerable population serves to indirectly increase the profit margin of pharmacies and wholesalers.
The usual and customary charge is one of the pieces of information a pharmacy sends electronically to the insurer. So, any organization either private or public has each and every pharmacy’s usual and customary price for every drug every time it is dispensed to a patient. The State of Minnesota built an online program that reveals what the usual and customary prices are for drugs dispensed to Minnesota Medicaid recipients. I provide an example for the generic version a high cholesterol drug called, simvastatin.
All of this pricing information may sound confusing when talked about in the abstract. Let’s apply this in an example of an actual drug.
Real Example of the Differences in Drug Pricing
The drug I am going to use in this example is a medicine used to treat high cholesterol. The name of the drug is Zocor whose active ingredient is Simvastatin. Back in July 2006, Zocor’s patent expired and other drug companies began to make generic versions of Zocor that all have the same active ingredient called simvastatin. Listed below as of April 24, 2009 are the average wholesale prices of Zocor and generic simvastatin compared against each other.
Hopefully, you see an interesting trend in the AWP price comparison table. The prices of the 20mg and 40mg are the same for the generic versions and within the brand version. We use the term “flat-pricing” when this happens. Tablet splitting strategies rely on this pricing feature. This site has information about tablet splitting and which medicines are good tablet splitting candidates. Before we go further as to how you can take advantage of situations like this, let’s compare these average wholesale prices with the maximum allowable cost prices for the same drug, simvastatin.
Taking and Using this Pricing Information
Before you leave the doctors office with your prescription, ask your doctor if a generic version of your medicine is available. Your doctor may or may not know. Ask your doctor to write on the prescription “Please Dispense Generic Version if Available”. Or print out the Go Generics Pledge Card, fill it out and ask your doctor to include it in your medical record.
For those of you without drug insurance, shop around at different pharmacies by calling them up and asking what their price would be for your medicine. Remember to consider places like Walmart and Target pharmacies to see whether the drug your doctor prescribed is on their discount program.
