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GAO Update on Drug Prices

By March 22, 2011Commentary

The General Accounting Office has frequently been asked to look into drug pricing, particularly in the wake of major legislation like the “reform” act.  It recently issued an updated trend report.   (GAO Report) Drug spending in 2009 was $250 billion and the federal government paid about $78 billion of that, not an insignificant amount of money.  To measure the price trends, GAO created four baskets of drugs, one a mix of commonly used generics and brand, the second brand only, the third generic only and the fourth like the first but weighted to reflect shifts from brand to generic over time.

The price measures were actual retail prices for cash-paying customers, average wholesale price, average manufacturer price and Medicare Part D actual negotiated prices.  Using actual retail prices, the first basket showed an increase of 6.6% on an annual basis from 2006 to the first quarter of 2010.  Medical CPI was 3.8% in this period and of course general inflation was quite low.  The brand name basket had an annual increase of 8.3%, while the generic basket actually had a 2.6% annual decrease.  The basket weighted to reflect brand to generic shifts had a 2.6% annual increase.

Using AWP, there was a 6.0% increase in basket one, using AMP it was 5.3% and the Part D negotiated increase was 6.8%.  The most surprising item is the inability of Part D plans to obtain lower increases, but the report may not fully account for all rebates and discounts those plans receive and the plans have a limited ability to force competition between branded drugs in a similar category.  It is also apparent that no one has figured out how to control the manufacturers continued reckless price increases on brand medications, price increases that represent pure profit.

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