Cost of Prescription Drugs for the Uninsured Elderly and Legislative Approaches

Publication Date: January 2001

Publisher: Library of Congress. Congressional Research Service

Author(s):

Research Area: Health

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Abstract:

The relatively high prices of prescription drugs was a major issue for the 106th Congress and will likely remain an issue during the 107th Congress. In particular, legislative discussion of the issue has focused on the uninsured elderly. High prescription drug prices can impose significant financial hardship on low-income seniors who do not have insurance coverage for prescription drugs. Medicare, which provides health insurance for most of the Nation's elderly, does not cover most outpatient prescription drugs.

Various factors play a role in prescription drug pricing, such as the policy of patenting innovative drugs and the degree to which therapeutically equivalent drugs are available. Discussions of prescription drug pricing tend to emphasize the ability of many third party buyers (e.g. health maintenance organizations, hospitals, and pharmacy benefit managers) to obtain discounted prices for pharmaceuticals. Other buyers (e.g. many retail pharmacies and uninsured consumers) do not tend to receive such discounts. The net effect of such discounts is that buyers such as retail pharmacies and uninsured consumers usually pay the highest prices for drugs while third-party buyers usually pay lower prices for drugs. Third-party buyers are able to receive discounts at both the manufacturing level and at the retail pharmacy level, although third-party payers who do not use a formulary to manage outpatient drug benefits also pay higher prices for drugs.

Economic analysis of the pharmaceutical market provides some insight into the reasons third-party buyers are able to obtain lower prices while other buyers are not. Third-party buyers negotiate prices and can exclude high-priced sellers (essentially manufacturers) from their portion of the pharmaceutical market. Conversely, other buyers (including uninsured consumers) do not negotiate over prices and are therefore unable to exclude sellers from the market. It is the ability to exclude sellers that tends to determine who pays the lowest prices for prescription drugs.

Critics of this differential pricing in the pharmaceutical market have raised a number of issues, including fairness, equity and access to drugs, and how to end the price discrimination that the elderly face when they must pay for their own prescription medicines. Congress has been exploring several options for easing the financial burden that high prescription drug prices can impose on the elderly. One approach would be to create a drug benefit for the Medicare population. Another approach is to require pharmaceutical manufacturers to offer discounts on drugs sold to the uninsured elderly. A third approach is to facilitate the importation of prescription drugs from countries where prices are lower. This report will be updated as warranted.