"In drug price hearing, Congress tries to answer some basic questions" - dateline June 2017 CNBC.

I order a brand name prescription that has no generic, that is still under patent protection, that is not an orphan drug from a large mail order pharmacy. I have been getting this same prescription for six years. The mail order firm buys direct from the manufaturer, adding their overhead and profit to the price and then is paid by (1) my direct payment and (2) payment from my drug prescription insurer.

Over the past two years (in particular) the sum of payments (from 1 and 2 above) to the mail order pharmacy has varied substantially, and inconsistently (eg. increases and decreases) from a low of \$1400 to a high of \$2600 for the same 90 day order.

To be more specific in my question, why would a manufacturer price for a drug fluctuate as I describe.

One area That I've not been able to research is if Insurances companies negotiate pricing with the manufacturer -- but if that is the significant factor -- it suggests that the negotiated pricing only holds for 90 days or so.

Any insight would be helpful.

If their is a better place to ask this question, please suggest.

  • 2
    $\begingroup$ Short answer: because in the US, it's purely market based. In many single-payer countries, the single payer says what the price is. $\endgroup$ – blip Sep 19 '17 at 20:42
  • $\begingroup$ I won't try to defend asking this question in politics, except to say that pricing of drugs is very much a element in the total healthcare reform debate in US Congress. Understanding how and why drug pricing occurs is pertinent to formulation of prescription drug pricing reforms. I will post to health SE $\endgroup$ – BobE Sep 20 '17 at 0:19
  • $\begingroup$ @ Drunk Cynic see: cnbc.com/2017/06/13/…. "throwaway line"?? actually being discussed in Congressional hearings -- sounds like government issues $\endgroup$ – BobE Sep 20 '17 at 2:09
  • $\begingroup$ The drug manufacturer, the insurance company, and the pharmacy benefit manager huddle (secretly) to negotiate the actual price the insurance company will pay. This amount will generally be much lower than the "list price" that the insurance company bases your copay on, and it can change at random times as new deals are struck or old ones expire. $\endgroup$ – Hot Licks Sep 21 '17 at 22:33

Prescription drug prices, like those of most other retail products, fail to satisfy the law of one price routinely. The most obvious observation is that prices differ across pharmacies at a given point in time (http://www.nber.org/papers/w8548.pdf) but just like supermarkets give discounts, so do pharmacies. If you always buy from the same shop, you are bound to end up paying different amounts.

The reasons for this are manifold. Different consumers have different abilities or willingness to store and buy large chunks when it is cheap and stochastic prices allows for price discrimination (see Sobel 84 for an early reference). The idea is simple. Myopic consumers arrive in each period and buy if $p<V$, then leave the market. Otherwise, they die. Strategic consumers have a valuation of $v<V$ but can wait if the price is above $v$. Firms compete in prices. In equilibrium, firms charge often $p=V$ to extract rents from myopic consumers but every now and then they offer $p<v$ to attract all strategic consumers looking for prices.

Competition between stores may also result in random prices in a standard consumer search framework. Finally, retail prices may change because manufacturers prices are also random as a way to discipline pharmacies by encouraging consumers to shop.

  • $\begingroup$ "stochastic prices allows for price discrimination" Could you please elaborate on this? $\endgroup$ – Giskard Sep 20 '17 at 8:51
  • $\begingroup$ The model utilized by the NBR paper is not really applicable b/c Mail Order Pharmacies (eg Optum, Express Scripts) who service millions of "captured end-use consumers" is not the equivalent of the neighborhood pharmacy where end-use consumers have the freedom to shop for a better price. By 'strategic consumer" I assume that you are referring to the a type of end-use consumer, to that I would submit that there are no strategic consumers, they don't have the luxury to wait for pricing, those customers have to consume the medication on a schedule that does not acknowledge V or v $\endgroup$ – BobE Sep 20 '17 at 13:36
  • $\begingroup$ I am not so familiar with the industry of Mail Order Pharmacy, but what matters is that some fraction of consumers have some ability to search across firms and/or adjust their purchases over time to minimize expenditure. If every consumer is fully captive, then the only possible outcome is monopoly pricing in every period. But this is surely not the case. $\endgroup$ – Fato Sep 20 '17 at 13:59
  • $\begingroup$ Often confused Mail Order (MOP) and Online pharmacies differ in that MOP's generally are benefit managers for a specific health insurer. Consequently end-use consumers cannot switch their MOP without dropping their health insurance. Since most consumers contract on a yearly basis for health insurance, they are "stuck" with the MOP until they change insurer.... that is why I called them "captive". MOP is a big business, accounting for about 25% of the all pharmacy revenue. $\endgroup$ – BobE Sep 20 '17 at 18:47
  • $\begingroup$ businessinsider.de/… If this is the kind of MOP you are dealing with, it has very perverse incentives that have nothing to do with the manufacturer. I suggest you change the question "why would a manufacturer price for a drug fluctuate as I describe?" $\endgroup$ – Fato Sep 21 '17 at 7:04

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