Drug Prices

The federal government bought nearly $1.3 billion worth of pharmaceuticals during fiscal year 1996 from a catalog of prices referred to as the federal supply schedule. Congress has sought to extend these lower prices to other government purchases by establishing a cooperative purchasing program that would allow state and local governments, Indian tribes, and Puerto Rico to buy pharmaceuticals and other items from federal supply schedules. However, the Department of Veterans Affairs is concerned that drug manufacturers might try to increase prices if a larger group of purchasers is given access to the federal supply schedule, and the General Services Administration has proposed that the pharmaceutical schedule be excluded from the cooperative purchasing program. This report discusses the factors that can affect negotiations for schedule drug prices and the potential effects of opening the pharmaceutical schedule on prices available to federal, state, and local governments.

GAO noted that: (1) the effects of opening the federal supply schedule for pharmaceuticals on schedule prices ultimately depend on the outcome of negotiations between the Department of Veterans Affairs (VA) and drug manufacturers; (2) although many factors would influence the negotiations between VA and drug manufacturers, two primary ones are VA's negotiating ability and manufacturers' pricing strategies; (3) both of these factors would be influenced by the size of the market represented by combined federal, state, and local purchasers that would have access to schedule prices; (4) moreover, the size of this market could affect the size of any resulting price changes; (5) the larger the market, the greater the economic incentive would be for a manufacturer to raise schedule prices to limit the impact of giving low prices to more purchasers; (6) at present, federal purchases from the schedule represent about 1.5 percent of the total dollar value of domestic pharmaceutical sales; (7) if eligibility is not narrowed, VA, Pharmaceutical Research and Manufacturers of America, drug manufacturers, and the Public Hospital Pharmacy Coalition agree that the size of the combined market could be significantly larger than the current federal market; (8) although the Coalition estimates that limiting eligibility as it suggests could keep state and local purchases from the schedule at between 0.5 and 4.4. percent of domestic pharmaceutical sales, this would result in a combined market about 33 to 300 percent larger than the federal market; (9) federal efforts to lower Medicaid drug prices suggest how opening the pharmaceutical schedule could put upward pressure on schedule prices; (10) in 1990, the Congress required drug manufacturers to give state Medicaid programs rebates for outpatient drugs based on the lowest prices they charged other purchasers; (11) because of the size of the Medicaid market, however, many drug manufacturers sought to minimize the impact of the rebates on their business by raising outpatient drug prices to some private sector purchasers; (12) if the pharmaceutical schedule were opened to state and local governments and drug manufacturers succeeded in raising their schedule prices in response, the impact on different government purchasers would vary; and (13) VA, the Department of Defense, the Public Health Service, and the Coast Guard would be somewhat protected from price increases because the Veterans Health Care Act of 1992 sets maximum prices for these agencies for over one-quarter of the drugs on the schedule.