Pharmacy Price Variation

Posted by & filed under CGR Staff, Rochester Business Journal.

Need drugs? The legal kind, I mean? I think you’ll agree that there is no shortage of sources. I did a quick check of the phone book and found ten places to buy prescription drugs within a two mile radius of my house (3 Eckerds and 2 Wegmans plus Tops, Rite Aid, CVS, Kmart, Walmart and Medicine Shoppe). And there are more planned—Target & Walgreens will be in the radius by the end of the year.

Doesn’t this seem rather odd? Let’s put aside the places that do drugs as part of a one-stop-shopping model, such as the grocery and department store chains. It is the stand-alone pharmacies that puzzle me. How can Eckerds make money with three stores in my backyard? I can’t remember a time when these places were particularly busy. Waiting at the check-out is a rare event. Offhand, this doesn’t look like an efficient model. So either they are ready to go bankrupt (Ah, that must be why Walgreens is entering our market—they want to share in the losses!) or the margin between the price they pay and the price we pay is pretty rich.

That’s where competition is supposed to come in. We consumers pay attention to prices and respond accordingly. That’s why we walk out of Eckerd when the clerk says, “Your 90 day prescription for Lipitor is going to be $394” and head over to Walmart where we know we can get the same brand name drug for only $335. Or we turn on our heels in CVS at the $313 price for a 90 day supply of Zoloft and head back to Eckerd where we noticed the price was a mere $262 (that’s nearly 20%). Or we look to the web for our salvation and shop drugstore.com, finding Lipitor for $300 and Zoloft for $222. (OK, CanadaPharmacy.com charges $195 and $205, respectively, but that’s a different column.)

Out of curiosity I priced a 90 day supply of a common dosage of three of the most prescribed drugs in America—Lipitor, Synthroid and Zoloft—at Wegmans, Eckerd, Walmart, Rite Aid and CVS. Then I checked the same drugs at drugstore.com and CanadaPharmacy.com. This is hardly comprehensive or scientific. But the total price varied by a quarter—from $608 at Walmart to $767 at CVS. As you might expect, the “standalone” pharmacies charged the most—ranked, the rest of the “prescription-bottle” scores are Rite Aid ($720), Eckerd ($690), and Wegmans ($683).

What? You don’t ask the price of prescription drugs? Oh, excuse me. You have prescription drug coverage on your health plan. And the copay is the same no matter where you shop. So much for competition policing the prices charged to consumers. That’s not to say that the folks who are really paying the bills (the insurers) aren’t putting pressure on retailers. But they can only do so much. I don’t know what leverage Excellus or MVP Health Care have over CVS, the nation’s largest pharmacy chain with over 5,400 locations. But you can understand why many insurers require their enrollees to use a single supplier.

Here’s what I think is going on. Margins on prescription drugs are higher than on many other products. Grocery margins are famously thin—a 2-3% return on sales is considered “healthy,” says Inc magazine (John Case, “Food for Thought,” September 2001). So there is a lot of money to be made on capturing more of the market. And the way to grow market share when price doesn’t matter is to compete on convenience. Prescription drugs are hardly “impulse” purchases, so more places to buy doesn’t change the total volume of sales (although part of the stand-alone pharmacy business model is to charge you high prices on those other things you buy when in the store). Whoever has the largest share of the population within a 5 minute drive of a store wins. Ultimately, this drives up cost and will drive down profits. At the end of the day we’ll have a pharmacy on every corner and the big chains will have competed away the big profits by hiring more pharmacists, cashiers, stock clerks and more security services. And we pay for all of it.

Just to complicate matters, CVS bought Eckerd from JC Penney in 2004. The plan is to convert all of them to CVS—and this has happened already in many markets. And Drugstore.com is owned by Rite Aid.

And one final thought: As more and more people buy their prescriptions through some kind of drug plan (e.g. Medicare Part D), what happens to the people who are left? Pricing in the health care industry for people who are uninsured is very odd indeed. And demonstrably unfair.

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