Comparative statics
Welfare loss

Drug companies often set wholesale prices much higher than doctors, clinics, and other medical providers actually pay. The medical profession then bills federal and state health programs, such as Medicare and Medicaid, for the wholesale price. For example, doctors can charge Medicare $17 for a dose of leucovorin, a cancer treatment that actually costs them $2.75. This practice attracts doctors to the companies that manufacture such drugs.

Taxpayers may be paying more than a billion dollars more than they should. The Justice Department and state attorneys general are investigating. They have asked First Databank of San Bruno, California to provide drug price information to the states based on what is actually paid for drugs. Medical providers are expected to complain. They assert that the high charges are necessary to offset the miserly payments they receive from Medicare and Medicaid in other areas.

(Updated July 1, 2000)