Homework answers / question archive / What do American Airlines, GlaxoSmithKline, Staples, Stanford University, AT&T, the Mayo Clinic, and Safeway have in common? They all price discriminate, says Scott Woolley (1998)

What do American Airlines, GlaxoSmithKline, Staples, Stanford University, AT&T, the Mayo Clinic, and Safeway have in common? They all price discriminate, says Scott Woolley (1998)

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What do American Airlines, GlaxoSmithKline, Staples, Stanford University, AT&T, the Mayo Clinic, and Safeway have in common? They all price discriminate, says Scott Woolley (1998). They charge different customers different amounts for the same product. Pharmaceutical discounts are the clearest examples of healthcare price discrimination, because the products are identical. Only the prices differ. A cash customer (e.g., someone without insurance coverage) would pay the highest price, the list price. In pharmaceutical jargon, list price is called average wholesale price or AWP. Most customers pay much less than AWP. Pharmacy benefit managers negotiate discounts with manufacturers and pharmacies. These discounts are typically about 20 percent (von Oehsen, Ashe, and Duke 2003). Some hospitals and HMOs have their own pharmacies and can negotiate even better deals with manufacturers. These organizations often pay as little as 60 percent of AWP. The federal government has five discount programs. The largest is the Medicaid rebate program, which requires manufacturers to pay a rebate equal to 15.1 percent of their “best” price. The Medicaid price is usually about 60 percent of AWP after the rebate is subtracted. Many federally funded clinics and hospitals are eligible for the Medicaid discount. However, these agencies can often negotiate better deals because they can buy wholesale and because they can choose drugs for their formularies. These agencies typically pay 50 percent of AWP. Tribal and territorial governments can use the prices on the Federal Supply Schedule, which federal agencies use to buy common supplies and services. Most of these prices are also about 50 percent of AWP. The Department of Defense, the Department of Veterans Affairs, the Public Health Service, and the Coast Guard may get prices that are slightly lower than the Federal Supply Schedule because of a provision called the federal ceiling price. This caps the price using a formula based on private-sector transactions. Finally, these agencies can try to negotiate prices below the federal ceiling price. The Department of Veterans Affairs (VA), which uses a national formulary, has used its bargaining power to get substantially better prices. In some cases the VA pays 35 percent of AWP. Discussion questions:

• Why do drug firms give discounts voluntarily?

• Do other healthcare providers routinely give discounts to some customers?

• Why do the uninsured typically pay the highest prices?

• Why would a hospital usually get a better price for a drug than an insurance company?

• Why does the VA get such low prices?

• Suppose a law was enacted that required drug manufacturers to give state Medicaid agencies the same price they negotiated with the Department of Veterans affairs. How would Medicaid and VA prices change?