The prices of generic drugs vs. brand-name drugs has gathered a lot of attention lately. But buying in bulk and purchasing practices can have as much of an effect on prices as drug patents do.  That’s what the Government Accountability Office (GAO) found when it compared Rx prices paid in prescription drug benefit programs in the Department of Defense (DoD) and the Department of Veterans Affairs (VA).

DoD, VA Among Largest Government Drug Purchasers:

The federal government pays for more than a third of prescription drug costs in America. The biggest purchasers are Medicare Part D and the Medicaid drug benefit.

But the DoD and the VA were major purchasers, too. TRICARE, the Veterans Health Administration (VHA), and the Military Health System provide prescription drug coverage for 18.5 million military service men and women, their dependents, military retirees, and veterans. Together, the programs accounted for more than 10 percent – about $11 billion – of all federal prescription drug spending in 2011.

DoD Pays Less for Brand-Name Drugs, VA Pays Less for Generics:

In a recent report, the GAO compared a sample of prices for 83 drugs that had high usage rates and expenditures at both the DoD and the VA. Roughly half of the drugs were generic drugs and the other half were brand-name pharmaceuticals. The VA purchased mostly generic drugs, whereas the DoD purchased mostly brand-name drugs.

GAO’s main takeaway for this report was that buying in bulk allowed the agencies to negotiate significantly lower prices, even when buying brand-name drugs. In the GAO’s words:

“Substantially higher prices paid by one agency were correlated with substantially lower utilization by that agency… DoD officials told GAO that in certain circumstances they are able to obtain competitive prices for brand-name drugs – even below the prices for generic equivalents – and therefore will often preferentially purchase brand-name drugs.”

Here are a few details and highlights from the report:

  • generic drugs accounted for 83 percent of VA’s utilization of the sample drugs
  • brand-name drugs accounted for 54 percent of DoD’s utilization of the sample drugs
  • DoD paid an average of $0.11 per unit more than VA across the entire sample of 83 drugs and an average of $0.04 per unit more than VA for the generic drugs in the sample
  • VA paid an average of $1.01 per unit more  than DoD for the brand-name drugs

If DoD and VA had each been able to obtain the lowest of DoD’s or VA’s average unit price for each of the 83 drugs in the sample, the maximum potential savings for DoD would have been about $19.1 million (7.5 percent of DoD’s spending for the drugs in the sample) in the first quarter of 2012 and the maximum potential savings for VA would have been about $13.9 million (5.1 percent of VA’s spending on the drugs in the sample).

It is unlikely that this magnitude of savings could be achieved in practice because of the complexity of the prescription drug market and factors that affect the prices DoD and VA are able to obtain for drugs.

Some of the difference in drug prices between the DoD and VA has to do with their respective prescription drug formularies, which are lists of covered drugs. The VHA is essentially a large network of health care providers, so it has a lot of control over which drugs are prescribed and covered. Read the VA drug formulary here.

TRICARE, on the other hand, is similar to most other health plans in that it allows beneficiaries to visit physicians and hospitals who are not part of the Military Health System. As a result, the TRICARE drug formulary must be more broad to allow different providers to prescribe a wider range of medicines.

Read a summary of the GAO’s report here, and the full report here.