Insurance-Free Pharmacies Lower Consumers’ Drug Costs

Published February 1, 2005

Health care reform is, of course, one of the most significant public policy issues facing the United States. The debate, however, tends to focus on government policy and programs, often to the exclusion of private-sector initiatives. In this article, the first of an occasional series, Sean Parnell reports and comments on how individual citizens, associations, and companies are solving a major health care problem using markets and voluntary action rather than government. –The Editors

The cost of prescription drugs has been a major topic of debate in the United States for years. Based on largely anecdotal claims that prescription drug prices have been forcing the elderly to choose between paying for medication and paying for such other vital needs as food and heat, Congress in December 2003 enacted legislation adding a prescription drug benefit to Medicare, the government health care program for the elderly.

The Medicare prescription drug benefit did not, however, make the drug price issue go away. Many people still claim drug prices are too high and are looking for a way to reduce drug costs for citizens not covered under Medicare.

One proposal offered by some to make prescription drugs more affordable is government-imposed price controls. Besides having the government directly and explicitly set prices on prescription drugs, price controls also can be imposed by allowing drugs to be imported from other countries that have price controls, such as Canada, or by having the government use monopsony buying power (similar to the monopoly power of a seller, except in this case there is a single powerful buyer who can force down prices) to buy drugs directly from pharmaceutical companies at government-set prices.

However, most health policy experts, and nearly every economist familiar with the subject, reject price controls as a way to make prescription drugs more affordable. Price controls reduce or eliminate profits on new and innovative drugs, thus discouraging research and development of new lifesaving drugs.

If not government-imposed price controls, what, then, is the answer?

Pharmacists Take Control

Several enterprising pharmacists seem to have found one solution that lowers drug prices without jeopardizing the future development of lifesaving drugs. They have learned that by declining to accept insurance reimbursements and focusing on generic drugs, they are able to lower their costs dramatically and provide consumers with significantly reduced prices on prescription drugs.

These pharmacies are able to offer significantly lower prices by accepting only full payment at the time of sale, just as grocery stores and other retail stores operate. Because they don’t accept insurance payments, these pharmacies don’t have the expenses associated with processing insurance claims or determining eligibility for benefits.

Prices are also lower because these pharmacies focus on selling generic drugs rather than more expensive, name-brand versions. According to a March 12, 2004 article in the Minneapolis-St. Paul Business Journal, most pharmacies typically make little or no profit on sales of name-brand drugs that are reimbursed by insurance companies.

Pharmacies compensate for this by hiking prices on generic drugs sold to cash-paying customers. Those markups are sometimes as high as 500 percent, according to the Business Journal.

Since pharmacies that opt out of insurance payment for drugs don’t have to recover lost revenue from sales of name-brand drugs, they don’t need to mark up their generic prices nearly so much, giving consumers a much better price.

Price savings for patients can be substantial. In a December 11, 2004 Duluth News Tribune article, it was reported that MedSave, an insurance-free pharmacy, charges $7 for inhalers filled with the asthma medication Albuterol. Pharmacies that accept insurance typically charge $20 or more for the same item.

Generic substitutes are not available for all drugs, of course, particularly newer drugs. Moreover, wholesale substitution of generics for name-brand drugs would lead to less investment in new drugs over time. But for some patients with some medical conditions, generic drugs are as effective as their name-brand counterparts, and substantially less expensive.

Less Expensive than Canada

Drug prices at insurance-free pharmacies even compare favorably to those of programs that import drugs from Canada. Dan Lannon, founder of FairCare Rx in the Minneapolis-St. Paul area, revealed in a May 20, 2004 interview with Minnesota Public Radio (MPR) the significant price savings his pharmacies offer compared to name-brand drugs, traditional pharmacies, and Canadian import programs.

“Say you’re on Lipitor, 20mg, for cholesterol,” he said. “If you go to Governor [Tim] Pawlenty’s Web site [which offers price-controlled drugs from Canada], they’ll say you can save 40 percent on your Lipitor. … If you switch to Mevacor, which is another statin drug, it does the exact same thing. You can switch to that and save 40 percent off the Canadian price, and then walk into FairCare Rx and save another 40 percent off what the chains are charging.”

According to the MPR report, Pawlenty’s Web site lists the price for Lipitor in Canada at $190 for 100 pills, and the Canadian price for Mevacor at $94. The price at FairCare Rx for 100 pills of Mevacor was only $65.

Idea Is Spreading

Minnesota has several of these low-price, insurance-free pharmacies. FairCare Rx operates five locations in the Minneapolis-St. Paul area, and MedSave operates stores in Duluth and New Hope and has plans to open more.

Although insurance-free pharmacies seem to be starting up most rapidly in Minnesota, pharmacist Mike Hebert of Louisiana is credited with developing the concept. After a dispute with an insurance company a few years ago, Hebert realized he could offer better service and lower prices by cutting out insurance altogether.

In a December 11, 2004 Duluth News Tribune interview, Hebert said he decided he would “be the cheapest place in town to buy drugs.” He cites not only the elimination of insurance paperwork as a way to cut costs, but also the long waits for reimbursement. He opened a second insurance-free pharmacy six months after the first and is currently looking to open a third store. Insurance-free pharmacies also exist or are being considered in Georgia, Michigan, New York, South Carolina, and Texas.

These pharmacies typically market themselves to patients with no prescription drug coverage or high co-pays, and to those with insurance coverage who don’t want to deal with the restrictions and bureaucracy of their insurance companies.

By eliminating costs associated with insurance paperwork and by focusing on generic drugs instead of more expensive name-brand drugs, pharmacies like MedSave and FairCare Rx in Minnesota and Michael’s Discount Pharmacy in Louisiana are showing how private enterprise can make drug prices more affordable.

Sean Parnell ([email protected]) is vice president – external affairs for The Heartland Institute.