Factors affecting bargaining outcomes between pharmacies and insurers.

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OBJECTIVE: To model the bargaining power of pharmacies and insurers in price negotiations and test whether it varies with characteristics of the pharmacy, insurer, and pharmacy market. DATA SOURCES/STUDY SETTING: Data from four sources. Pharmacy/insurer transactions were taken from Medstat's universe of 6.8 million pharmacy claims in their 1994 Marketscan database. Sources Informatics, Inc. supplied a three-digit zip code-level summary database containing pharmacy payments and self-reported costs for retail (cash-paying) customers for the top 200 pharmaceutical products by prescription size in 1994. The National Council of Prescription Drug Programs supplied their 1994 pharmacy database. Zip code-level socioeconomic and commercial information was taken from Bureau of the Census' 1990 Summary Tape File 3B and 1994 Zip Code Business Patterns database. STUDY DESIGN: The provider/insurer bargaining model first employed in Brooks, Dor, and Wong (1997, 1998) was adapted to the circumstances surrounding pharmacy and insurer bargaining. DATA COLLECTION/EXTRACTION METHODS: The units of observation in this study were single Medstat claims for each unique insurer/pharmacy combination in the database for selected pharmaceutical products. The four products selected varied in the conditions they treat, whether they are used to treat chronic or acute conditions, and by their sales volume. Used in the analysis were 9,758 Zantac, 2,681 Humulin, 3,437 Mevacor, and 1,860 Dilantin observations. PRINCIPAL FINDINGS: We find statistically significant variation in pharmacy bargaining power. Pharmacy bargaining power varies significantly across markets, insurers, and pharmacy types. With respect to market structure, pharmacy bargaining power is negatively related to pharmacies per capita and pharmacies per employer and positively related to pharmacy concentration at higher concentration levels. In addition, the higher the percentage of independent pharmacies in an area, the lower the pharmacy bargaining power. With respect to socioeconomic conditions, pharmacy bargaining power is higher in areas with lower per capita income and higher rates of public assistance. CONCLUSIONS: The bargaining power of pharmacies in contract negotiations with insurers varies considerably with exogenous factors. Local area pharmacy ownership concentration enhances pharmacy bargaining. As a result, anti-trust law prohibiting the collective bargaining of independent pharmacies with insurers leaves independents at a disadvantage with respect to chains.

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