Price Discrimination and Prescription Drugs

A few days ago Stephen Dubner wrote about the the price discrimination that goes on with prescription drugs. Namely he noted that for a specific drug, 90 tablets of generic Prozac, prices are substantially different across stores.

  • Walgreens: $117
  • Eckerd: $115
  • CVS: $115
  • Sam’s Club: $15
  • Costco: $12

That is quite a distribution of prices. However, one of the commenters pointed out the reason for this. Most people who get their health care benefits through their employer get a prescription drug benefit. Hence all they pay is the co-pay which is likely the same everywhere you go. So if your Co-pay is $10 you pay $10 whether you go to Walgreens vs. Costco. There is no incentive to shop around and look for the best deal.

So for Walgreens sure, by charging $117 for 90 tablets they might lose customers who have to pay out of pocket expenses, but my guess is that those losses are more than made up for with customers who have only a $10 co-pay. As for Costco, it is their policy to bring good quality products to their customers for low prices.

The final comment (as I write this at least) is also interesting.

I just wanted to chime in with my two-cents. I am on a birth control that my health insurance does not cover. I always assumed that generic drugs cost the same regardless of where you go. I went to a local CVS and paid about $70. A few months later I had been given a Walmart gift certificate and as much as I hate Walmart I hated the idea of them getting free money… but I digress. When I went to fill a prescription while I was there I found out it was going to cost me $35. That was the first time I had encountered major price differences in my prescriptions because I have never had to fill a drug on a regular basis until now. This was for a common birth control shot that was generic. So you can talk about “extreme” examples but I think that this is a pretty average example where a common prescription costs double at one place to the next.

This, I think, demostrates perfectly the nonsensical way in which people view the Wal-Mart is Evil issue. They see the fact that Wal-Mart may not be the most generous employer and see only the bad. They completely ignore the benefits that Wal-Mart may provide by lowering prices. Lower prices are welfare enhancing just as lower wages are welfare reducing. The net effect? Well, there are probably alot more people enjoying the lower prices than who are working for Wal-Mart. Using a utilitarian framework, Wal-Mart and their lower prices are a good thing.

FILED UNDER: Economics and Business, Health,
Steve Verdon
About Steve Verdon
Steve has a B.A. in Economics from the University of California, Los Angeles and attended graduate school at The George Washington University, leaving school shortly before staring work on his dissertation when his first child was born. He works in the energy industry and prior to that worked at the Bureau of Labor Statistics in the Division of Price Index and Number Research. He joined the staff at OTB in November 2004.

Comments

  1. Anderson says:

    Thanks very much, Steve. I am going to call Sam’s and Wal-Mart and try to find out how much Nexium and Singulair are at their prices. (We in the Southland do not seem to have Costco.)

  2. And my in box has daily offers for just about any pharmaceutical that can be mailed. One ad had 180 Prozac (generic I am sure) for $45.99 of the 20 mg pills. And they don’t seem to concerned about the status of your prescription.

  3. Tano says:

    But why must we be content with only the most general-level evaluation?

    Fine, WalMart is good – overall. One can analogize it to capitalism itself. Thats good too, overall. But there are problems, and the problems should rightly be criticized.

    Actually, the analogy works for the problems too. At the heart of the problems of capitalism is the fact that human beings fit into the ideology as mere factors – their wages and benefits to be squeezed just as one tries to reduce any other operating expense, with no, or little accounting for their humanity. Thats why labor unions were so essential to saving capitalism from itself – only a strong and focused demand that workers be treated in a manner that accounts for their humanity has allowed capitalism to work as an economic system that actually does improve the life of everyone.

    Given the efficiency and scope of WalMart’s operation, I wonder what the effect on the prices that they charge would be if they were to double the wages they pay to their lower level employees (just to make an extreme example). I am betting it wouldnt really be a very dramatic effect.

  4. davod says:

    Tano:

    Walmart does not pay low wages for the type of jobs. There benefits are probably reflective of the industry in general.

    I shopped around for prescription drugs because my co-pay was high. Walmart was the lowest price. The difference was well worth the extra 10 miles I had to drive to get there.

  5. Anderson says:

    Ah, when I’m screwed, I’m screwed: Nexium $144 at Sam’s, Singulair $95.

    “They” say Prilosec is just as good as Nexium, but not for me, it ain’t.

  6. Steve Verdon says:

    Fine, WalMart is good – overall. One can analogize it to capitalism itself. Thats good too, overall. But there are problems, and the problems should rightly be criticized.

    Fine, but these problems don’t make Wal-Mart or capitalism evil. And this goes for any system of allocating resources, they all have problems. Ideally and somewhat simplisticly lets pick the one with the fewest/smallest problems.

    Actually, the analogy works for the problems too. At the heart of the problems of capitalism is the fact that human beings fit into the ideology as mere factors – their wages and benefits to be squeezed just as one tries to reduce any other operating expense, with no, or little accounting for their humanity.

    I suggest you stop reading Marx and adhering to this sort of stuff. My pay has been doing anything but rising over the years. Sure, in aggregate wages have fallen, but statistically it is possible for wages to fall, but for everyone’s wage to rise and/or not decline in real terms.

    Ah, when I’m screwed, I’m screwed: Nexium $144 at Sam’s, Singulair $95.

    “They” say Prilosec is just as good as Nexium, but not for me, it ain’t.

    Sorry to hear that Anderson. Have you looked into Costco? From what I’ve read you can fill quite a few prescriptions online and you don’t have to be a member. Try finding an 800 number and give them a call. At the very least you’ll be no worse off save for some lost time (admittedly not free, but you might luck out).

  7. Anderson says:

    Costco’s the same, their website says. The mfr’s are just charging a lot.

    I don’t see how Pfizer can afford to keep doing that with Nexium – when CMS declared it would pay only for Prilosec, the insurance companies did the same (or at least, moved it to “nonpreferred,” so that BCBS pays about 5% of the cost). So there can’t be very many people buying it any more, you would think.

  8. Tano says:

    Steve,

    So sorry that I didnt say that WalMart or capitalism is “evil”. Clearly that is the argument you want to have. Maybe you should post on some site where you can engage on that level?

    “Ideally and somewhat simplisticly lets pick the one with the fewest/smallest problems.”

    Simplistic yes. Ideal, no. There really isnt much of an argument about what system we will choose. We have a modified capitalistic system and there really isnt anyone arguing against that. The ideal solution is to allow markets to function freely in those areas where it leads to beneficial results, to police or regulate markets where that is necessary to avoid unjust results, and to intervene with non-market solutions in situations where markets dont work. Almost all of the disputes in current Western politics, on the subject of economics, are questions about which siutations are or are not problematical and what, if any, solution should be implemented.

    I suggest you retire the little Marxist boogyman namecalling from your rhetorical toolbox, and stop telling others what they should “adhere” to.

  9. Dave Schuler says:

    The ideal solution is to allow markets to function freely in those areas where it leads to beneficial results, to police or regulate markets where that is necessary to avoid unjust results, and to intervene with non-market solutions in situations where markets dont work.

    Is anybody really arguing otherwise, Tano? The way I see it much of the argument is between maxi/min and mini/max strategists. Some want to maximize the total amount of healthcare available. Others want to set a floor on the minimum level of services available to any given individual. You can’t do both at the same time.

    The elephant in the drawing room in healthcare is that we’re not going to get much of anywhere unless we relax the barriers to entry into providing healthcare services.

  10. floyd says:

    “”They see the fact that Wal-Mart may not be the most generous employer and see only the bad.””
    ,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,

    It seems that Walmart’s agressive “chineze only” policy is the primary cause of their ill repute.

  11. M1EK says:

    Ironic the lionizing of Costco is – since they match far better the single-payer model (they essentially sell objects at cost and make their profit on membership fees).

  12. Steve Verdon says:

    Simplistic yes. Ideal, no. There really isnt much of an argument about what system we will choose. We have a modified capitalistic system and there really isnt anyone arguing against that.

    Sure there are. Most libertarian would get rid of a large part of what the government would do. Granted, they aren’t a majority, but there are still a good number of them.

    The ideal solution is to allow markets to function freely in those areas where it leads to beneficial results, to police or regulate markets where that is necessary to avoid unjust results, and to intervene with non-market solutions in situations where markets dont work.

    This too is simplistic. Sometimes intervening or even policing can be more costly/detrimental than doing nothing. Now that isn’t true in all cases, but still that should be an option even when the outcome is unjust/undesirable.

    Almost all of the disputes in current Western politics, on the subject of economics, are questions about which siutations are or are not problematical and what, if any, solution should be implemented.

    And part of the problem is that too many people seem to hold the view that the government can solve a wide array of problems when it seems pretty clear the government mucks things quite often too. For example, the Great Depression probably could have been avoided with better monetary policy as well as skipping implementation of protectionist tariffs.

    I suggest you retire the little Marxist boogyman namecalling from your rhetorical toolbox, and stop telling others what they should “adhere” to.

    Tano, you were the one who invoked the Marxist rhetoric about squeezing wages, not me. If you don’t like people pointing out the similarities with your rhetoric and that of Marx, then don’t use it. Especially considering that Marx’s view of eocnomics has been shown to be completely inadequate.

    Ironic the lionizing of Costco is – since they match far better the single-payer model (they essentially sell objects at cost and make their profit on membership fees).

    Yes, and if we gave Costco monopoly power?

    The elephant in the drawing room in healthcare is that we’re not going to get much of anywhere unless we relax the barriers to entry into providing healthcare services.

    Can’t disagree with that.

  13. phreshone says:

    Wal-Mart drove the cost of generics down about 18 months ago when it announced $4.00 pricing for one month (30 pills) of most generics. Subsequently, both Target and Costco matched this pricing.

    The serice at my local Target’s pharmacy is so good, I’ll never go back to CVS or Walgreens.

    Having paid for my own health care expenses for the last 20 months, it’s unbelievable what a poor set of incentives is created by a third-party payment heathcare system. A government mandated heathcare system would be societal suicide.

  14. Tano says:

    “Tano, you were the one who invoked the Marxist rhetoric about squeezing wages,”

    Its not Marxist rhetoric Steve, its from “How to run a business 101”. Are you denying that businesses attempt to get as much work as possible from their workers while paying them as little as possible? Is this some inconvenient fact that you wish no one would mention, such that you call it “marxist” in some silly attempt to scare people off from raising the issue, lest they be dismissed as commies? Do you think that pointing out a similarity that some idea has to something that Marx once said is a rational argument against the idea?

  15. Ravi says:

    Where are the health insurance companies in this? Surely they know that the different chains have such widely varying drug charges. Maybe mail-order pharmacies are one reaction to this, but it really seems like they have a lot of incentive to negotiate things like this with the pharmacies directly. Why wouldn’t an insurer set up a “preferred pharmacy list” where the price was appropriate and the copay was only $10, and charge a 50% copay or the like with pharmacies that didn’t play ball? I would think even the threat of something like that would tighten up a lot of price discrimination in a hurry…

  16. floyd says:

    Tano; “Marxist rhetoric” or not, the “American capitalist” views All wages as theft of profit.
    It’s just a simple fact of life. How long must we hear that huge profits mean a “good economy” while a penny wage increase is a “threat of inflation”.

  17. Charlie says:

    Similarly, I found that a generic prescription for me for a mild anti-hypertensive drug costs me less to buy directly than would the co-pay, were I to use my drug plan.

  18. Ravi says:

    Charlie, are you saying your drug plan wouldn’t give you the lower price? Mine will charge me the lower of the copay or actual price of the drug, which makes things easier.