Prescription Drug Prices

During the 1980s and 1990s, the prices of prescription drugs rose on average at triple the rate of inflation, according to U.S. government statistics. As Congress debated whether to curb drug price increases, research questioning the accuracy of the price statistics--especially the producer price index for prescription drugs published by the Bureau of Labor Statistics--was in its early stages. Today, a body of research urges the reexamination of the accuracy of the producer price index for prescription drugs. This report (1) reviews the accuracy of the producer price index for prescription drugs as a measure of drug price inflation, (2) describes whether the index could be changed to more accurately measure changes in the cost of buying drugs, and (3) provides guidance on appropriate uses and common misuses of price indexes.

GAO found that: (1) PPI has overstated drug prices substantially since 1984 because of weaknesses in drug sampling; (2) the index does not account for the lower cost of generic substitutes, or separate pure price changes from price changes that reflect different product characteristics; (3) the Bureau of Labor Statistics (BLS) has initiated more frequent and comprehensive sampling of prescription drugs to reduce the overstatement of inflation in PPI; (4) BLS has not acted on evidence that switching to substitute drugs overstates drug prices, since it disagrees with proposed criteria for identifying substitutes for brand-name drugs; (5) BLS and researchers agree that the methods for adjusting drug price changes for different product characteristics are not refined enough to be implemented; and (6) PPI users should be aware that PPI cannot determine whether drug prices are excessive, wholesale or retail markets are more competitive, or introductory prices for new drugs are higher now than in the past, or incorporate prices of potential alternative products that may have similar uses but belong to another industry.