Comparison of Spending on Common Generic Drugs by Medicare vs Costco Members

Abstract

This cross-sectional study uses 2017 and 2018 Medicare Part D clams to compare the amount Medicare pays for common generic prescriptions in Part D with prices available to patients without insurance at Costco.

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.

Methods

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).

Results

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.

Table 1. Total Spending Under Medicare Insurance and “Counterfactual” Spending Under Costco Member Price for 184 Most Common Generic Products^a.

Year	Days of medication supplied	No. of prescriptions, in thousands	Total spent from all sources, $ in thousandsb	Total patient out-of-pocket, $ in thousandsc	Counterfactual total spent under Costco member price, $ in thousands	Overspending, $ in thousands	Overspending, %
2017	30	456 315	5 464 919	1 648 818	5 627 128	(162 209)	−3.0
	90	283 643	7 100 577	2 242 143	5 273 699	1 826 878	25.7
	30 + 90	739 957	12 565 496	3 890 961	10 900 827	1 664 669	13.2
2018	30	418 609	5 048 873	1 532 653	4 681 877	366 996	7.3
	90	320 349	7 589 382	2 431 508	5 358 668	2 230 714	29.4
	30 + 90	738 959	12 638 255	3 964 161	10 040 545	2 597 710	20.6

^aMedicare data were accessed through the Centers for Medicare & Medicaid Services Virtual Research Data Center (https://resdac.org/cms-virtual-research-data-center-vrdc). Costco pharmacy member prices were obtained directly from Costco.

^bMedicare cost was based on the price paid for the drug at the point of sale and includes ingredient cost, dispensing fee, and sales tax (if any).

^cPatient out-of-pocket cost under Medicare insurance reflects only the amount actually paid out-of-pocket and does not include low-income cost-sharing subsidies paid by Medicare.

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.

Table 2. Share of 30-Day and 90-Day Prescriptions Costing Less Under the Costco Member Price Than Various Benchmarks for 184 Most Common Generic Products^a.

Year	Days of medication supplied	Share of prescriptions costing less under Costco member price, %
		Compared with total expenditure under Medicare insuranceb	Compared with patient OOP cost under Medicare insurancec	<$20 Per prescription	<$50 Per prescription	<$100 Per prescription
2017	30	31.1	6.3	88.7	99.5	99.8
	90	50.6	13.2	68.1	96.2	99.4
	30 + 90	38.6	9.0	80.8	98.2	99.6
2018	30	35.7	7.9	89.8	99.7	100.0
	90	52.9	15.2	72.7	97.5	99.8
	30 + 90	43.2	11.0	82.4	98.8	99.9

Abbreviation: OOP, out-of-pocket.

^aMedicare data were accessed through the Centers for Medicare & Medicaid Services Virtual Research Data Center (https://resdac.org/cms-virtual-research-data-center-vrdc). Costco pharmacy member prices were obtained directly from Costco.

^bMedicare cost is based on the price paid for the drug at the point of sale and includes ingredient cost, dispensing fee, and sales tax (if any).

^cPatient OOP cost under Medicare insurance reflects only the amount actually paid OOP and does not include low-income cost-sharing subsidies paid by Medicare. When restricted only to beneficiaries who do not receive low-income subsidies, the equivalent estimates of the share of prescriptions costing less under the Costco member price than the patient OOP cost under Medicare insurance were 12.2%, 17.0%, and 14.5% for 30-day, 90-day and 30 + 90-day supply, respectively, in 2017, and 15.4%, 19.9%, and 17.8% for the same categories in 2018.

Discussion

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.