The Law of One Price in economics says that in the absence of transaction costs, similar goods will have the same price. If the price of a Tesla truck is $100,000 in Omaha and $200,000 in Des Moines, some enterprising arbitrager will buy a few in Omaha for $100,000, and sell them for slightly less than the going price in Des Moines. As the arbitrager arbitrages, the price of the truck in Omaha will converge with that in Des Moines, a close-enough confirmation of the Law of One Price. If this does NOT happen then either transaction costs are very high or we are not dealing with a free market. As the article quoted below shows, prices of medical drugs vary widely and persistently. Medical drugs are NOT sold in a free market. Arbitrage is NOT allowed. Who can sell to whom is highly regulated. To blame the free market for high and chaotic drug prices is an outrageous bum rap.
(p. A1) The cost of prescription drugs in the U.S. isn’t like the tabs for other products. The price for a single medicine can range by thousands of dollars depending on the drug plan.
It is a symptom of America’s complicated—and costly—system for paying for medicines.
Medicare is paying wildly different prices for the same drug, even for people insured under the same plan.
. . .
Take commonly used generic versions of prostate-cancer treatment Zytiga. They have more than 2,200 prices in Medicare drug plans. The generics ring in at roughly $815 a month in northern Michigan, about half of what they cost in suburban Detroit, while jumping to $3,356 in a county along Lake Michigan, according to a recent analysis of Medicare data.
The same is true with other popular medicines such as psoriasis treatment Otezla, blood thinner Xarelto and generic versions of the cancer drug Tykerb, known as lapatinib, which has 460 prices, according to the analysis by 46brooklyn Research, a nonprofit drug-pricing analytics group.
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(p. A2) The reason for the huge price differences: America’s complicated drug-reimbursement system, which uses middlemen to negotiate prices.
. . .
Not only is it confusing and costly for seniors, the wide range of drug prices costs Medicare. The program, which farms out drug-price negotiations to the firms, pays tens of millions of dollars extra for prescriptions.
“It’s a broken system. It’s really confusing for seniors. It’s really confusing for providers. It’s costing the government way too much,” said Dared Price, who owns eight pharmacies in the Wichita, Kan., area, and complains the stores are underpaid.
The middlemen [are] known as pharmacy benefit managers or PBMs, . . .
. . .
“The inconsistent and disconnected way that PBMs arrive at drug prices makes Medicare look less like a trustworthy marketplace intended to yield low, sober prices and more like a casino,” said 46brooklyn Chief Executive Antonio Ciaccia.
. . .
To find out the prices that the big three and other PBMs negotiated, 46brooklyn looked at what standalone Part D and Medicare Advantage plans say they will reimburse pharmacies on behalf of Medicare for branded and generic drugs during the second quarter. They reported the prices that Medicare would pay.
Some 61 drugs had monthly prices that diverged by at least $30,000, including a $223,037 range for a drug, called nitisinone and sold under the brand name Orfadin, treating a rare metabolic disorder. About 300 medicines had more than 1,000 monthly prices when the difference between the lowest price and the highest was more than $1,000.
It didn’t matter that the same PBM was negotiating the prices. Prices varied widely among health plans, even if a plan used the same PBM.
The 30 mg dose of Otezla had among the most different prices among branded medicines. It had 633 different prices across health plans that used Express Scripts, while Optum Rx carried 569 different prices and Caremark had 431.
The largest PBMs notched some of the biggest number of different prices for lower-priced copies of Zytiga, which is sold as a generic under the drug’s chemical name abiraterone acetate.
Caremark has logged 643 different prices for Zytiga generics, while Express Scripts has 500 and Optum Rx carries 445. By comparison, Capital Rx, a PBM with fewer beneficiaries than the three largest firms, had two prices.
Capital Rx had few prices—either $106 or $117—because it pegged them to the benchmark that the U.S. government uses to calculate drug costs, called the National Average Drug Acquisition Cost, which is based on a survey of retail pharmacy prices, said Chief Executive Anthony Loiacono. Capital Rx’s prices were much less than the sums that many other health plans reported.
“We don’t make money on drug spend, and I do not set prices. I use what CMS gives us as the starting point,” Loiacono said.
(Note: the online version of the story has the date November 26, 2024, and has the title “Same Drug, 2,200 Different Prices.” Where there is a slight difference in wording between the print and online versions, the passages I quote above follow the online version.)
