Comparison of Spending on Common Generic Drugs by Medicare vs Costco Members
Research Letter
Efforts to control drug prices have highlighted the role of the pharmaceutical supply chain. Rather than driving efficiencies, this complex web of highly concentrated intermediaries with proprietary contracts may instead raise prices.1
Much attention has focused on brand name drugs, although recent reports show that intermediaries can capture significant profits in the generic market as well.2 With 88% of Medicare Part D prescriptions dispensed for generic medications in 2018,3 excess profits retained by intermediaries in the generic supply chain could be substantial. This analysis compared the amount Medicare pays for common generic prescriptions in Part D with prices available to patients without insurance at Costco.
This cross-sectional study identified the 200 most common generic products prescribed in 2017 Medicare Part D claims, by drug name, strength, and dosage form and matched them to their member prices, including all fees and taxes, at Costco pharmacies nationwide. A membership warehouse chain with 80 million US members, Costco has more than 500 US stores and a mail-order business, making these prices available to virtually any US resident with a prescription, without insurance.
Using the “days supplied” variable in Medicare claims, we eliminated 16 products that were not commonly prescribed in 30-day or 90-day quantities, resulting in a final sample of 184 products. The University of Southern California Institutional Review Board determined that the study met the criteria for coded private information or biological specimens and thus was exempt from informed consent requirements.
Using Medicare claims data, we calculated the total spending, including beneficiary out-of-pocket (OOP) payments and payments from all other sources, for all 30-day and 90-day claims for these products in 2017 and 2018. We labeled the difference between the “counterfactual” cost of these prescriptions if purchased at the member price available at the time and the total amount spent as “overspending” under Medicare. Data analysis was performed using SAS Enterprise Guide software, version 7.15 (SAS Institute Inc).
Across more than 1.4 billion Medicare Part D claims for 184 products, the mean (SD) total prices were $12.02 ($18.47) and $24.32 ($41.07) for 30-day and 90-day prescription fills, respectively. Medicare overspent by 13.2% in 2017 and 20.6% in 2018 compared with Costco member prices for these prescriptions (Table 1). Total overspending increased from $1.7 billion in 2017 to $2.6 billion in 2018.
In 2018, overspending was much lower on 30-day prescription fills (7.3%) than 90-day fills (29.4%) (Table 1), which accounted for 69.7% of the total days supplied for these 184 products. Medicare overspent relative to the Costco member price on 43.2% of all 30-day and 90-day prescription fills for these products, with overspending more common on 90-day fills (52.9%) (Table 2). The member price fell below the patient’s OOP payment on 11.0% of prescription fills, and below $20 on 82.4% of fills. In all, 98.8% of these prescription fills had a member price below $50 (Table 2). Results for 2017 were similar.
Among 2018 stand-alone Part D plans, median cost sharing was $1 for preferred generic medications and $6 for nonpreferred generic medications.4 Furthermore, approximately 30% of beneficiaries received low-income subsidies and paid little to no cost sharing.4 These low OOP costs mask the fact that Medicare overpaid on 43.2% of prescriptions for the most common generic medicines that year. In comparison, Costco’s streamlined distribution system could have saved $2.6 billion on these 184 drugs. With generic medications accounting for 22% of Part D spending,3 eliminating generic overspending could significantly reduce beneficiary premiums and federal spending.
This analysis was limited to generic drugs, because generic manufacturers do not pay (unobserved) rebates to pharmacy benefit managers or plans.5 Brand name drugs may exhibit different patterns. We did not incorporate Costco’s annual membership fee into member prices. However, membership fees account for only 2.2% of Costco’s annual revenues,6 so it is unlikely that such fees are materially subsidizing product prices.
While Medicare coverage of generic drugs likely improves patient adherence and reduces other health care utilization, our analysis highlighted the inefficiencies that the current system introduces through its complex and opaque system of intermediaries, which Costco largely bypasses.
Accepted for Publication: May 12, 2021.
Published Online: July 6, 2021. doi:10.1001/jamainternmed.2021.3366
Corresponding Author: Erin Trish, PhD, USC Schaeffer Center for Health Policy and Economics, 635 Downey Way, VPD 412D, Los Angeles, CA 90089-3333 (etrish@healthpolicy.usc.edu).
Author Contributions: Ms Gascue had full access to all of the data in the study and takes responsibility for the integrity of the data and the accuracy of the data analysis.
Concept and design: Trish, Gascue, Van Nuys, Joyce.
Acquisition, analysis, or interpretation of data: All authors.
Drafting of the manuscript: Joyce.
Critical revision of the manuscript for important intellectual content: All authors.
Statistical analysis: Trish, Gascue, Ribero, Joyce.
Obtained funding: Van Nuys, Joyce.
Administrative, technical, or material support: Joyce.
Supervision: Trish, Van Nuys, Joyce.
Conflict of Interest Disclosures: The Leonard D. Schaeffer Center for Health Policy & Economics is supported by a wide variety of public and private entities and donors, including health insurers and pharmaceutical manufacturers. More information on the Center's funding sources is available at https://healthpolicy.usc.edu/wp-content/uploads/2021/03/Schaeffer-Center-2020-Annual-Report.pdf. Dr Trish reported receiving grant support from Arnold Ventures and the Commonwealth Fund and personal fees from the Blue Cross Blue Shield Association, Cedars Sinai Health System, Cornerstone Research, Multiplan, Premera, and Varian Medical Systems, outside the submitted work.
Disclaimer: The content of this article is solely the responsibility of the authors and does not necessarily represent the official views of the Leonard D. Schaeffer Center for Health Policy & Economics.
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