Prescription Drug Prices:

Official Index Overstates Producer Price Inflation

HEHS-95-90: Published: Apr 28, 1995. Publicly Released: May 30, 1995.

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Pursuant to a congressional request, GAO reviewed the producer price index (PPI) for prescription drugs, focusing on: (1) the accuracy of PPI as a measure of drug price inflation; (2) whether PPI could more accurately measure changes in the cost of purchasing drugs; and (3) common misuses of PPI.

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.

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