Prescription Drugs
An Overview of Approaches to Negotiate Drug Prices Used by Other Countries and U.S. Private Payers and Federal Programs Gao ID: GAO-07-358T January 11, 2007Rising prescription drug spending has led the United States and other countries to seek ways to negotiate lower prices with drug manufacturers. Currently, the Medicare Part D benefit, which offers outpatient prescription drug benefits to beneficiaries including elderly and certain disabled people, comprises competing prescription drug plans overseen by the Centers for Medicare & Medicaid Services. The Medicare Prescription Drug, Improvement, and Modernization Act of 2003 prohibits the Secretary of Health and Human Services from interfering with price negotiations between Part D plan sponsors and drug manufacturers and pharmacies. Some Members of Congress have proposed amending the statute to allow the Secretary of Health and Human Services to negotiate directly with drug manufacturers on behalf of Part D beneficiaries. GAO was asked to describe how prescription drug prices are negotiated. This testimony provides an overview of such efforts (1) by governments in other countries; (2) by U.S. private payers, such as employer-based health plans; and (3) by federal programs other than Medicare Part D. This testimony is based on previous GAO reports from 2002 through 2006 on federal programs that purchase or cover prescription drugs and other relevant literature from congressional agencies and federal or international organizations.
Governments in other countries use a range of approaches to limit the amount they pay to acquire drugs. Ceiling prices establish a maximum price manufacturers may charge for their products. Purchasers may sometimes negotiate more favorable prices directly with drug manufacturers. Reference prices use local or international price comparisons of drugs classified in a group as therapeutically similar to determine a single or maximum price for all drugs in that group. Profit limits control how much profit a drug manufacturer may earn per product or within a specified period of time. Other factors--such as scope of coverage and national formularies, which are generally lists of preferred drugs--influence drug price negotiations. In the U.S. private health insurance market, health plans typically contract with pharmacy benefit managers (PBM) to help manage their prescription drug benefits. PBMs negotiate rebates or payments with drug manufacturers, encourage substitution of generic drugs for therapeutically similar brand drugs, and negotiate discounted prices with networks of retail and mail-order pharmacies, passing along at least some of the savings to health plans and enrollees. PBMs influence price negotiations with manufacturers through formulary development and management and through the large market share they often represent. Approaches for negotiating drug prices vary among federal programs in the United States. In part, these approaches depend on whether the programs purchase and distribute drugs directly or reimburse retail pharmacies or other providers for dispensing or delivering drugs. While the approaches used by federal programs in the United States reflect U.S. laws, markets, and health care delivery and financing, there are also elements common to some of the approaches used by other countries and by private payers. Some federal programs set ceiling prices, others establish prices by referencing prices negotiated by private payers in the commercial market, and still others rely on negotiations with manufacturers, directly or through private health plans. For example, the Departments of Veterans Affairs's and Defense's prices for a prescription drug may be the lowest of a ceiling price, other established price, or a price negotiated with the manufacturer. State Medicaid programs, joint federal-state programs that finance medical services for certain low-income adults and children, reimburse retail pharmacies for drugs dispensed to beneficiaries at set prices. The programs receive rebates from manufacturers that are meant to take advantage of the prices for drugs in the commercial market and are required to reflect discounts and rebates negotiated by private payers with manufacturers. For health benefits offered to federal employees, retirees, and dependents, rather than negotiating with manufacturers, the government contracts with participating health plans that typically use PBMs to negotiate drug prices and offer other pharmacy benefit, administrative, and clinical services.
GAO-07-358T, Prescription Drugs: An Overview of Approaches to Negotiate Drug Prices Used by Other Countries and U.S. Private Payers and Federal Programs
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Testimony:
Before the Committee on Finance, U.S. Senate:
United States Government Accountability Office:
GAO:
For Release on Delivery Expected at 10:00 a.m. EST:
Thursday, January 11, 2007:
Prescription Drugs:
An Overview of Approaches to Negotiate Drug Prices Used by Other
Countries and U.S. Private Payers and Federal Programs:
Statement of John E. Dicken Director, Health Care:
GAO-07-358T:
GAO Highlights:
Highlights of GAO-07-358T, a testimony before the Committee on Finance,
U.S. Senate
Why GAO Did This Study:
Rising prescription drug spending has led the United States and other
countries to seek ways to negotiate lower prices with drug
manufacturers. Currently, the Medicare Part D benefit, which offers
outpatient prescription drug benefits to beneficiaries including
elderly and certain disabled people, comprises competing prescription
drug plans overseen by the Centers for Medicare & Medicaid Services.
The Medicare Prescription Drug, Improvement, and Modernization Act of
2003 prohibits the Secretary of Health and Human Services from
interfering with price negotiations between Part D plan sponsors and
drug manufacturers and pharmacies. Some Members of Congress have
proposed amending the statute to allow the Secretary of Health and
Human Services to negotiate directly with drug manufacturers on behalf
of Part D beneficiaries.
GAO was asked to describe how prescription drug prices are negotiated.
This testimony provides an overview of such efforts (1) by governments
in other countries; (2) by U.S. private payers, such as employer-based
health plans; and (3) by federal programs other than Medicare Part D.
This testimony is based on previous GAO reports from 2002 through 2006
on federal programs that purchase or cover prescription drugs and other
relevant literature from congressional agencies and federal or
international organizations.
What GAO Found:
Governments in other countries use a range of approaches to limit the
amount they pay to acquire drugs:
* Ceiling prices establish a maximum price manufacturers may charge for
their products. Purchasers may sometimes negotiate more favorable
prices directly with drug manufacturers.
* Reference prices use local or international price comparisons of
drugs classified in a group as therapeutically similar to determine a
single or maximum price for all drugs in that group.
* Profit limits control how much profit a drug manufacturer may earn
per product or within a specified period of time. Other factors”such as
scope of coverage and national formularies, which are generally lists
of preferred drugs”influence drug price negotiations.
In the U.S. private health insurance market, health plans typically
contract with pharmacy benefit managers (PBM) to help manage their
prescription drug benefits. PBMs negotiate rebates or payments with
drug manufacturers, encourage substitution of generic drugs for
therapeutically similar brand drugs, and negotiate discounted prices
with networks of retail and mail-order pharmacies, passing along at
least some of the savings to health plans and enrollees. PBMs influence
price negotiations with manufacturers through formulary development and
management and through the large market share they often represent.
Approaches for negotiating drug prices vary among federal programs in
the United States. In part, these approaches depend on whether the
programs purchase and distribute drugs directly or reimburse retail
pharmacies or other providers for dispensing or delivering drugs. While
the approaches used by federal programs in the United States reflect
U.S. laws, markets, and health care delivery and financing, there are
also elements common to some of the approaches used by other countries
and by private payers. Some federal programs set ceiling prices, others
establish prices by referencing prices negotiated by private payers in
the commercial market, and still others rely on negotiations with
manufacturers, directly or through private health plans. For example,
the Departments of Veterans Affairs‘s and Defense‘s prices for a
prescription drug may be the lowest of a ceiling price, other
established price, or a price negotiated with the manufacturer. State
Medicaid programs, joint federal-state programs that finance medical
services for certain low-income adults and children, reimburse retail
pharmacies for drugs dispensed to beneficiaries at set prices. The
programs receive rebates from manufacturers that are meant to take
advantage of the prices for drugs in the commercial market and are
required to reflect discounts and rebates negotiated by private payers
with manufacturers. For health benefits offered to federal employees,
retirees, and dependents, rather than negotiating with manufacturers,
the government contracts with participating health plans that typically
use PBMs to negotiate drug prices and offer other pharmacy benefit,
administrative, and clinical services.
[Hyperlink, http://www.gao.gov/cgi-bin/getrpt?GAO-07-358T].
To view the full product, including the scope and methodology, click on
the link above. For more information, contact John E. Dicken at (202)
512-7119 or dickenj@gao.gov.
[End of Section]
Mr. Chairman and Members of the Committee:
I am pleased to be here today as you examine approaches for
prescription drug pricing and negotiations. In the United States and in
other countries, the rising cost of prescription drugs continues to
pose significant financial burdens on governments, private payers, and
individuals responsible for paying for drugs. This has led to a wide
range of market-based and governmental approaches to reduce drug
spending. Some of these approaches rely on negotiations between payers
for prescription drugs and drug manufacturers.
In the United States, prescription drugs are a particular focus for the
federal government as Medicare--the federal health insurance program
that serves nearly 43 million elderly and disabled individuals--begins
the second year of its voluntary outpatient prescription drug benefit.
This benefit, known as Medicare Part D, was established by the Medicare
Prescription Drug, Improvement, and Modernization Act of 2003 (MMA)
beginning January 1, 2006.[Footnote 1] Medicare beneficiaries may
choose a Part D plan from multiple plans offered by private sponsors,
largely commercial insurers, under contract with the Centers for
Medicare & Medicaid Services (CMS), the agency within the Department of
Health and Human Services (HHS) that administers Medicare. These plans
differ in the drugs they cover, the pharmacies they use, and the prices
they negotiate with drug manufacturers and pharmacies. In addition,
costs to the enrollee for the monthly premium, the annual deductible,
and copayments for covered drugs vary by plan.
While the Medicare Part D benefit is characterized by multiple
competing prescription drug plans that are overseen by CMS, MMA
prohibits the Secretary of Health and Human Services from interfering
with price negotiations between Part D plan sponsors and drug
manufacturers and pharmacies.[Footnote 2] Some Members of Congress,
contending that the combined purchasing power on behalf of all Medicare
Part D beneficiaries could be used as leverage, have proposed amending
the law to provide for the Secretary of Health and Human Services to
negotiate directly with drug manufacturers.[Footnote 3]
As Congress considers these issues for Medicare Part D, you asked that
we broadly describe the variety of approaches used to negotiate drug
prices. Specifically, my remarks today will provide an overview of the
approaches used to negotiate drug prices by governments in other
countries, by private payers in the United States, and by federal
programs other than Medicare Part D.[Footnote 4] My remarks are
primarily based on our previous reports from 2002 through 2006 on
federal programs that purchase or cover prescription drugs, which were
done in accordance with generally accepted government auditing
standards, as well as other relevant literature on approaches in the
United States and other countries prepared by congressional agencies
and international and federal organizations.[Footnote 5]
In summary, a wide range of approaches is used by other countries and
by private payers and federal programs in the United States to
negotiate drug prices. The approaches governments in other countries
use include the following:
* Ceiling prices restrict market negotiations by setting maximum prices
purchasers can pay for drugs. Ceiling prices allow purchasers to
negotiate lower prices directly with drug manufacturers.
* Reference prices use local or international price comparisons of
drugs classified in a group as therapeutically similar to determine a
single or maximum price for all drugs in that group.
* Profit limits establish controls on drug manufacturers' profits that
require manufacturers to pay rebates or lower prices if profits exceed
certain levels.
Other key factors--such as scope of coverage and national formularies,
which are generally lists of preferred drugs--influence drug price
negotiations.
Private payers in the United States, including employer-based health
plans and private insurers, typically contract with pharmacy benefit
managers (PBM). PBMs negotiate rebates or payments with manufacturers
and prices with retail pharmacies, and they provide other related
administrative and clinical services. PBMs compete in the private
market based on their ability to negotiate reduced prices and contain
costs, and PBMs may receive compensation from health plans and from
retaining some of the savings they negotiate with pharmacies or
manufacturers. PBMs influence price negotiations with manufacturers
through formulary development and management and through the large
number of health plan enrollees they typically represent.
Approaches for negotiating drug prices vary among federal programs in
the United States. Factors contributing to this variation include the
use of formularies and whether the programs purchase and distribute
drugs, reimburse retail pharmacies or other providers for drugs
dispensed and delivered, or contract with private health plans that
provide and manage pharmacy benefits. For example, the Department of
Veterans Affairs (VA) and the Department of Defense (DOD) often
purchase drugs from suppliers, then distribute drugs to beneficiaries
through internal facilities or mail-order pharmacies. State Medicaid
programs, on the other hand, reimburse retail pharmacies for drugs
dispensed to beneficiaries at set prices. While the approaches used by
federal programs in the United States reflect the laws governing them,
markets, and health care delivery and financing, there are also
elements common to some of the approaches used by other countries and
by private payers. Some federal programs set ceiling prices, others
establish prices by referencing prices negotiated by private payers in
the commercial market, and still others rely on negotiations with
manufacturers, either directly or through private health plans. For
example, VA's and DOD's prices for particular prescription drugs
included on their formularies may be the lowest of a ceiling price, a
price listed on a federal supply schedule (FSS), or the price
negotiated with a manufacturer. For health benefits offered to federal
employees, retirees, and their dependents, the federal government uses
a different approach, modeled after other large U.S. employers' health
benefits. Under this approach, rather than the government negotiating
with manufacturers, the government contracts with participating health
plans that typically use PBMs to negotiate drug prices, manage
formularies, and offer other pharmacy benefit, administrative, and
clinical services.
Background:
Prescription drug spending, paid for by a mix of public and private
payers, has outpaced total health care spending in the United States
and other countries in recent years. In the United States, federal
programs either directly purchase and distribute prescription drugs or
reimburse pharmacies or other providers for drugs dispensed or
delivered.
Prescription Drug Spending and Cost Containment Strategies in Other
Countries and the United States:
According to the Organisation for Economic Co-operation and Development
(OECD), drug spending in member countries (including the United States)
increased on average by about 6 percent a year from 1998 through
2003.[Footnote 6] On average, growth in drug spending outpaced the
growth in spending for total health expenditures. Among OECD member
countries, the share of public and private spending for prescription
drugs varies, but in 2004 public sources accounted for the bulk of
spending in most countries.
In the United States, rising prescription drug prices and increased
spending have been a concern to federal and state governments and to
private payers, including private insurers and employer-based health
plans. CMS reports that total national spending by all public and
private payers for prescription drugs from retail outlets increased on
average by about 11 percent a year from 1998 through 2005--faster than
the average 7 percent a year increase in total U.S. health expenditures
for the same period.[Footnote 7] CMS also reports that national
spending by all public and private payers for prescription drugs from
retail outlets totaled about $201 billion in 2005. Nearly three-
quarters (73 percent) of this spending came from private funds--
including private insurance and out-of-pocket payments--while the
remaining share came from public sources. The public share includes the
federal government's share of total spending for prescription drugs
from retail outlets. Federal spending for prescription drugs was about
16 percent of the total, or $33 billion, in 2005. However, these data
precede the 2006 establishment of Medicare Part D, which increased
public and federal shares of prescription drug expenditures.
In the face of rising prescription drug spending, the governments of
other countries, U.S. private payers, and federal programs have applied
both demand-and supply-side measures to contain prescription drug
spending. Demand-side measures are aimed at wholesalers, retailers,
doctors, and patients and include such strategies as prescribing
guidelines, generic substitution policies, and fixed and tiered
copayments. Supply-side measures are aimed at limiting the cost of
prescription drugs by negotiating prices and by requiring or
encouraging the use of certain drugs through formularies established by
a government, health plan, or federal program. Formularies have long
been used to control the cost and utilization of prescription drugs.
Some formularies are more restrictive than others; open formularies
provide coverage for both listed and nonlisted drugs, and closed
formularies generally provide coverage only for drugs that are included
on the list. Many other formulary approaches fall somewhere in between,
encouraging the use of listed drugs by charging higher copayments for
those not listed. Under a tiered cost-sharing approach, for example,
generic and preferred drugs require lower copayments than brand and
nonpreferred drugs. Health plans that use formularies typically have
provisions that enable enrollee access to nonformulary drugs when they
are medically necessary and allow patients to appeal coverage
decisions.
In the U.S. private market, PBMs offer health plans a variety of
prescription drug management services, including negotiating rebates
with manufacturers, negotiating price discounts with retail pharmacies,
operating mail-order prescription services, managing drug formularies,
and processing claims. PBMs also provide health plans with clinical
services, such as formulary development and management, prior
authorization and drug utilization reviews to screen prescriptions for
such issues as adverse interactions or therapy duplication, and
substitution of generic drugs for therapeutically equivalent brand
drugs.[Footnote 8] Health plans pay PBMs fees for these administrative
and clinical services as well as for retail and mail-order drug costs.
PBMs may also retain savings from or have other financial incentives to
negotiate lower drug prices and rebates. In 2004, an estimated 200
million people, or about 68 percent of the U.S. population, were
enrolled in private health plans that used PBMs.[Footnote 9]
Federal Programs:
Beyond Medicare Part D, a range of federal programs, established by
statute, in the United States offer drug benefits to individuals
meeting various eligibility criteria. These programs cover a broad and
varying array of prescription brand and generic drugs.[Footnote 10]
These drugs are made available to beneficiaries through multiple
approaches, ranging from direct purchase and provision by federal
programs to contracts with private insurers and PBMs to provide drug
coverage.
The VA pharmacy benefit is provided to eligible veterans and certain
others. In general, medications must be prescribed by a VA provider,
filled at a VA pharmacy or through a VA Consolidated Mail Outpatient
Pharmacy, and listed on the VA national drug formulary, which comprises
570 categories of drugs. In addition to the VA national drug formulary,
VA facilities can establish local formularies to cover drugs not on the
national formulary. VA may provide nonformulary drugs in cases of
medical necessity.[Footnote 11] In 2005, VA spent $4.2 billion on drugs
and medicines.
The DOD pharmacy benefit is provided to TRICARE beneficiaries,[Footnote
12] including active duty and retired uniformed service members. In
addition to maintaining a formulary, DOD provides options for obtaining
nonformulary drugs. Beneficiaries can get prescription drugs through
network retail pharmacies, nonnetwork retail pharmacies, DOD military
treatment facilities, and DOD's TRICARE Mail Order Pharmacy. In 2005,
DOD spent $5.4 billion on prescription drugs.
Medicaid is the joint federal-state program that finances medical
services for certain low-income adults and children. While some
benefits are federally required, prescription drug coverage is an
optional benefit that all states have elected to offer. State Medicaid
programs, though varying in design, cover both brand and generic drugs.
Drug coverage depends on the manufacturer's participation in the
Medicaid drug rebate program, through which manufacturers pay rebates
to state Medicaid programs for covered drugs used by Medicaid
beneficiaries. Retail pharmacies distribute drugs to Medicaid
beneficiaries, then receive reimbursements from states for the
acquisition cost of the drug and a dispensing fee. In 2004, Medicaid
outpatient drug spending peaked at $31 billion--including $19 billion
as the federal share--which was calculated after adjusting for
manufacturer rebates to states under the Medicaid drug rebate program.
Medicaid spending on outpatient prescription drugs is expected to
decrease with the transition of prescription drug coverage for dual
eligibles--those eligible for both Medicaid and Medicare--to the
Medicare Part D program.
The 340B drug pricing program gives more than 12,000 entities of
various types--community health centers, AIDS clinics, and
disproportionate share hospitals[Footnote 13] among them--access to
discounted drug prices, called 340B ceiling prices.[Footnote 14] These
entities must enroll in the program, which is administered by the
Health Resources and Services Administration. The program requires drug
manufacturers to offer covered drugs to enrolled entities at or below
340B ceiling prices.[Footnote 15] Enrolled entities establish their own
formularies and may dispense drugs through in-house pharmacies,
dispensing physicians, or contracted retail pharmacies. Enrolled
entities spent an estimated $3.4 billion on drugs in 2003.
Medicare, the federal health insurance program that serves the nation's
elderly and certain disabled people, in addition to the outpatient
prescription drug benefit offered in Part D, covers certain other drugs
through Part B.[Footnote 16] Drugs covered by Part B are typically
administered by physicians or other medical professionals rather than
by patients themselves. These drugs include, for example, those
furnished in conjunction with dialysis services or durable medical
equipment. In 2005, Medicare paid more than $9 billion for drugs
covered under Part B.
The Federal Employees Health Benefits Program (FEHBP) is the largest
employer-sponsored health insurance program in the country. Through it,
about 8 million federal employees, retirees, and their dependents
receive prescription drug coverage through participating private health
insurance plans. Most of these plans contract with PBMs to manage their
drug benefits. The drugs covered vary by plan, but are typically part
of relatively broad formularies of drugs. In general, beneficiaries
have several options for obtaining drugs, including through retail or
mail-order pharmacies. In 2005, FEHBP prescription drug spending was an
estimated $8.3 billion.
Approaches Used by Other Countries for Negotiating Drug Prices:
According to the OECD, member countries that offer subsidized drug
programs are grappling with how to manage increased drug spending given
limited budgets. These countries have three main approaches to limiting
the amount they pay to acquire drugs:
* ceiling prices,
* reference prices, and:
* profit limits.
Ceiling prices. Ceiling prices restrict market negotiations by setting
maximum prices purchasers can pay for drugs. Ceiling prices allow
purchasers to negotiate lower prices directly with drug manufacturers.
One approach is for a government to set prices for drugs and prohibit
sales at greater prices. In France and Australia, for example, a
government committee sets the prices at which drugs must be purchased
and reimbursed. Alternatively, a government may set a price ceiling and
allow purchasers to negotiate more favorable prices with manufacturers
directly. In Canada, the Patented Medicines Prices Review Board sets
the maximum price a manufacturer can charge direct purchasers. It can
impose fines on any manufacturer that attempts to sell a drug at a
price greater than the established ceiling. An additional method used
to control prices is for a government to set reimbursement rates for
new drugs at low levels; because any price above the set reimbursement
rate would be an out-of-pocket expense to the consumer, the
reimbursement rate effectively becomes the market price.
Reference prices. Reference prices use local or international price
comparisons of drugs classified in the same therapeutic group to
determine a single or maximum price for all drugs in that group. The
therapeutic group of drugs can encompass old and new drugs, including
brand or generic drugs. The lowest priced drug may then establish the
maximum price for the entire therapeutic group. Germany, for example,
sets such prices based on local price comparisons of drugs classified
in the same therapeutic group.
Profit limits. Profit limits control the amount of profit a drug
manufacturer may earn on a product or within a specified period of
time. If the established threshold is exceeded, the manufacturer is
required to accept a price cut or pay rebates to the government. In the
United Kingdom, for example, there are limits on the profits that a
drug manufacturer can earn on sales to the National Health Service.
Several other key factors can influence drug price negotiations in OECD
countries. Unlike the United States, many OECD countries, such as
Australia and France, have universal health care systems that allow a
mandated, relatively more unified approach to drug pricing. While these
countries vary in their government's respective share of drug spending,
some set national, uniform maximum prices to be paid by all purchasers,
including private payers. Many countries also establish national
formularies that define which drugs are to be covered by all
purchasers.
Approaches Used by U.S. Private Payers for Negotiating Drug Prices:
In the United States, private payers represent the largest source of
prescription drug spending. These payers, including employer-based
health plans and private health insurers, typically contract with PBMs
to help manage their prescription drug benefits. PBMs employ several
cost containment strategies for lowering drug prices for the health
plans and enrollees they represent. PBMs negotiate rebates or payments
with manufacturers and prices with networks of retail and mail-order
pharmacies, passing along at least some of the savings to health plans
and enrollees. Manufacturers and pharmacies agree to these price
concessions in exchange for both the large number of enrollees PBMs
represent and the ability of PBMs to influence enrollee choice of drugs
and pharmacies.
One of the key ways PBMs influence price negotiations with
manufacturers is through formulary development and management. PBMs may
assist health plans in developing or managing a formulary that the
health plan will cover. Health plans often provide financial
incentives, such as lower enrollee cost-sharing, to encourage use of
preferred drugs listed on the formulary.[Footnote 17] Since PBMs
represent a large number of enrollees, manufacturers have a strong
interest in having their drugs listed on plan formularies.
Manufacturers pay PBMs through rebates or other payments to be included
on plan formularies and to capture greater market shares for their
drugs. For example, many mail-order pharmacies are owned by PBMs, and
PBMs can obtain greater manufacturer rebates or payments by dispensing
a high volume of the manufacturer's drug.
The extent to which pharmacy discounts and manufacturer rebates or
payments are shared with health plans and enrollees depends on
contractual arrangements with the health plan and the plan's benefit
design. For example, PBMs negotiate contracts with health plans and
their networks of pharmacies separately, which means that health plans
may pay PBMs higher prices for drugs than the PBM negotiated between
itself and the pharmacy. Similarly, PBMs often set up contractual
arrangements with manufacturers based on manufacturers' entire line of
products rather than per drug. Further, PBMs may retain a portion of
the rebates or payments they receive associated with individual health
plans or all the health plans they represent. PBMs may also obtain
additional rebates or payments from manufacturers for administering
formularies or providing certain services, such as encouraging the use
of one therapeutically similar drug over another.
Approaches Used by U.S. Federal Programs for Negotiating Drug Prices:
Approaches for negotiating drug prices vary among federal programs in
the United States. While these approaches reflect the laws that govern
them, markets, and health care delivery and financing, there are also
elements common to some of the approaches used by other countries and
by private payers. Some federal programs set ceiling prices, others
establish prices by referencing prices negotiated by private payers in
the commercial market, and still others rely on negotiations with
manufacturers, either directly or through private health plans. For
example, VA's and DOD's prices for particular prescription drugs may be
the lowest of an FSS price, a ceiling price, or the price that each
agency can negotiate directly with the manufacturer. The FEHBP uses a
different approach, modeled after other large U.S. employers' health
benefits; health plans participating in the FEHBP typically contract
with PBMs to negotiate drug prices and offer other pharmacy benefit,
administrative, and clinical services. Further, like many of the other
OECD countries, U.S. federal programs use a mix of strategies to
contain prescription drug spending. Many federal programs have
formularies that define which drugs are to be covered. While some
federal programs' formularies are comprehensive and some are more
restrictive than others, the programs use lists of covered drugs as the
basis for negotiations with drug manufacturers.
VA and DOD:
VA and DOD have several options available to obtain favorable prices
for drugs covered on their formularies. Both agencies pay the lowest of
several prices available for a given drug, and both can negotiate with
suppliers to receive additional discounts. In addition, both have
adopted certain practices that affect negotiations, such as the use of
formularies, or that otherwise contribute to lower costs, such as the
use of mail-order pharmacies.
VA and DOD have access to a number of prices to consider when
purchasing drugs.
* FSS prices. VA's National Acquisition Center negotiates FSS prices
with drug manufacturers. These prices are available to all federal
purchasers. FSS prices are intended to be no more than the prices
manufacturers charge their most-favored nonfederal customers under
comparable terms and conditions. Under federal law, drug manufacturers
must list their brand drugs on the FSS to receive reimbursement for
drugs covered by Medicaid.[Footnote 18] All FSS prices include a fee of
0.5 percent of the price to fund VA's National Acquisition Center.
* Federal ceiling prices. Federal ceiling prices, also called Big Four
prices, are available to VA, DOD, the Public Health Service, and the
U.S. Coast Guard. These prices are mandated by law to be 24 percent
lower than nonfederal average manufacturer prices.[Footnote 19]
* Blanket purchase agreements. Blanket purchase agreements are national
contracts with drug manufacturers that allow VA and DOD--either
separately or jointly--to negotiate prices below FSS prices. The lower
prices may depend on the volume of specific drugs being purchased by
particular facilities, such as VA or military hospitals, or on being
assigned preferred status on VA's and DOD's respective national
formularies.
In a few cases, individual VA and DOD medical centers have obtained
lower prices through local agreements with suppliers than they could
have through the national contracts, FSS prices, or federal ceiling
prices.
In addition, VA's and DOD's use of formularies, pharmacies, and prime
vendors can further affect drug prices. VA and DOD formularies
encourage the substitution of lower-cost drugs determined to be as
effective or more effective than higher-cost drugs. Both VA and DOD use
prime vendors, which are preferred drug distributors, to purchase drugs
from manufacturers and deliver the drugs to VA or DOD
facilities.[Footnote 20] VA and DOD receive discounts from their prime
vendors that also reduce the prices that they pay for drugs. For DOD,
the discounts vary among prime vendors and the areas they serve. As of
June 2004, VA's prime vendor discount was 5 percent, while DOD's
discounts averaged about 2.9 percent within the United States.
Medicaid:
Unlike VA and DOD, state Medicaid programs do not negotiate drug prices
with manufacturers, but reimburse retail pharmacies for drugs dispensed
to beneficiaries at set prices. Under the Medicaid drug rebate
program,[Footnote 21] drug manufacturers provide quarterly rebates for
covered outpatient prescription drugs purchased by state Medicaid
programs. The rebates are meant to take advantage of the prices
manufacturers receive for drugs in the commercial market and are
required to reflect the results of negotiations by private payers such
as discounts and rebates.
The rebates are based on two prices per drug that manufacturers report
to CMS: best price[Footnote 22] and average manufacturer price
(AMP).[Footnote 23] The relationship between best price and AMP
determines the unit rebate amount and thus the overall size of the
rebate that states receive for a brand drug. The basic unit rebate
amount is the greater of two values: the difference between best price
and AMP or 15.1 percent of AMP. If the drug's AMP rises faster than
inflation, the manufacturer is required to provide an additional rebate
to the state Medicaid program.[Footnote 24] A state's rebate for a
brand drug is the product of the unit rebate amount plus any applicable
additional rebate amount and the number of units of the drug paid for
by the state's Medicaid program.
The 340B Drug Pricing Program:
Entities eligible for the 340B drug pricing program can purchase
covered outpatient prescription drugs from manufacturers at or below
statutorily defined prices, known as 340B ceiling prices, that take
advantage of discounts resulting from the Medicaid drug rebate program.
These prices are the maximum amount eligible entities can pay for
covered drugs, and the program allows for eligible entities to
negotiate more favorable prices directly with drug manufacturers. As
such, the 340B drug pricing program offers covered entities access to a
prime vendor with which they can contract to negotiate discounts at or
below the mandatory 340B ceiling price.
State AIDS drug assistance programs (ADAP) are examples of entities
eligible for the 340B drug pricing program. ADAPs participating in the
340B program use either the 340B direct purchase option or the 340B
rebate option. Under the direct purchase option, ADAPs purchase drugs
from drug manufacturers or through a third party, such as a drug
purchasing agent, and ADAPs receive the 340B price discount up front.
In addition, ADAPs using this option can access the prime vendor
program to assist in negotiating discounts at or below the mandatory
340B ceiling price. Under the rebate option, ADAPs typically contract
with entities such as a pharmacy network or PBM for the purchase of
covered drugs and later request a 340B rebate directly from the drug
manufacturers. ADAPs using the rebate option do not have access to the
prime vendor program.
Medicare Part B:
Like Medicaid, Medicare does not purchase drugs but rather reimburses
physicians for drugs covered under Part B. The maximum Medicare
reimbursement for covered Part B drugs is statutorily defined using the
average sales price (ASP) plus 6 percent.[Footnote 25] ASP is the
average price for a drug based on a manufacturer's sales to all
purchasers in the United States, with certain exceptions. Under this
reimbursement methodology, Medicare takes advantage of the prices
negotiated by private payers, as ASP is required to reflect the
discounts and rebates they negotiate.[Footnote 26]
FEHBP:
The FEHBP is generally modeled after other large U.S. employers' health
benefits, including that participating health plans typically rely on
PBMs to negotiate drug prices and offer other pharmacy benefit,
administrative, and clinical services. In a 2003 report[Footnote 27]
that reviewed the use of PBMs by three FEHBP plans representing about
55 percent of FEHBP enrollment, we found that the PBMs used three key
approaches to achieve savings for FEHBP participating health plans:
* passing on certain rebates negotiated with manufacturers to the
plans;
* obtaining drug price discounts from retail pharmacies and dispensing
drugs at lower costs through mail-order pharmacies; and:
* using intervention techniques that reduce utilization of certain
drugs or substitute other, less costly drugs.
The FEHBP plans we reviewed also had formularies that include most
therapeutic categories, and these formularies had few restrictions on
which drugs enrollees could obtain. Each plan also provided enrollees
access to nonformulary drugs, although sometimes with higher cost-
sharing requirements than for the preferred formulary drugs.
The PBMs were compensated through various methods, including retaining
some portion of the negotiated savings rather than passing the full
portion to the FEHBP plans. These compensation methods also included
collecting fees from FEHBP plans for administrative and clinical
services; retaining a portion of the payments from the FEHBP plans for
mail-order drugs in excess of the prices negotiated with manufacturers
to acquire the drugs; and in some cases retaining a share of the
rebates the PBMs negotiated with drug manufacturers.
Mr. Chairman, this concludes my prepared remarks. I would be happy to
answer any questions that you or other Members of the Committee may
have.
Contacts and Acknowledgments:
For future contacts regarding this testimony, please contact John E.
Dicken at (202) 512-7119 or at dickenj@gao.gov. Contact points for our
Offices of Congressional Relations and Public Affairs may be found on
the last page of this testimony. Martha Kelly, Assistant Director;
Rashmi Agarwal; and Timothy Walker made key contributions to this
statement.
[End of section]
Related GAO Products:
Medicare Part B Drugs: CMS Data Source for Setting Payments Is
Practical but Concerns Remain. GAO-06-971T. Washington, D.C.: July 13,
2006.
Ryan White CARE Act: AIDS Drug Assistance Programs, Perinatal HIV
Transmission, and Partner Notification. GAO-06-681T. Washington, D.C.:
April 26, 2006.
Ryan White CARE Act: Improved Oversight Needed to Ensure AIDS Drug
Assistance Programs Obtain Best Prices for Drugs. GAO-06-646.
Washington, D.C.: April 26, 2006.
Medicaid: States' Payments for Outpatient Prescription Drugs. GAO-06-
69R. Washington, D.C.: October 31, 2005.
Medicaid Drug Rebate Program: Inadequate Oversight Raises Concerns
about Rebates Paid to States. GAO-05-850T. Washington, D.C.: June 22,
2005.
Mail Order Pharmacies: DOD's Use of VA's Mail Pharmacy Could Produce
Savings and Other Benefits. GAO-05-555. Washington, D.C.: June 22,
2005.
Medicaid Drug Rebate Program: Inadequate Oversight Raises Concerns
about Rebates Paid to States. GAO-05-102. Washington, D.C.: February 4,
2005.
Contract Management: Further Efforts Needed to Sustain VA's Progress in
Purchasing Medical Products and Services. GAO-04-718. Washington, D.C.:
June 22, 2004.
Medicare: Observations on Program Sustainability and Strategies to
Control Spending on Any Proposed Drug Benefit. GAO-03-650T. Washington,
D.C.: April 9, 2003.
Federal Employees' Health Benefits: Effects of Using Pharmacy Benefit
Managers on Health Plans, Enrollees, and Pharmacies. GAO-03-196.
Washington, D.C.: January 10, 2003.
VA Health Care: Expanded Eligibility Has Increased Outpatient Pharmacy
Use and Expenditures. GAO-03-161. Washington, D.C.: November 8, 2002.
FOOTNOTES
[1] Pub. L. No. 108-173, § 101, 117 Stat. 2066, 2071-2152 (codified at
42 U.S.C. §§ 1395w-101 to 1395w-152). MMA redesignated the previous
part D of title XVIII of the Social Security Act as part E and inserted
a new part D after part C.
[2] Pub. L. No. 108-173, § 101, 117 Stat. 2066, 2098 (codified at 42
U.S.C. § 1395w-11(i)).
[3] For example, H.R. 4, the Medicare Prescription Drug Price
Negotiation Act of 2007, was introduced on January 5, 2007. It would
require the Secretary of Health and Human Services to negotiate Part D
drug prices on behalf of Medicare beneficiaries.
[4] For this testimony, we reviewed information summarizing approaches
used by members of the Organisation for Economic Co-operation and
Development (OECD). The OECD includes 30 member countries that "share a
commitment to democratic government and the market economy," and OECD's
work includes developing publications and statistics on economic and
social issues. http://www.oecd.org (accessed January 9, 2007). As
appropriate, we present examples of drug pricing approaches used in
five OECD member countries other than the United States.
[5] A list of related GAO products is included at the end of this
statement. For additional information on approaches used by other
countries, U.S. private payers, and federal programs, see, for example,
Congressional Budget Office, Prices for Brand-Name Drugs Under Selected
Federal Programs (Washington, D.C., 2005); Congressional Research
Service, Federal Drug Price Negotiation: Implications for Medicare Part
D (Washington, D.C., 2007); Federal Trade Commission, Pharmacy Benefit
Managers: Ownership of Mail-Order Pharmacies (Washington, D.C., 2005);
and Department of Commerce, International Trade Administration,
Pharmaceutical Price Controls in OECD Countries: Implications for U.S.
Consumers, Pricing, Research and Development, and Innovation
(Washington, D.C., 2004).
[6] Growth in drug spending for these nations includes both
prescription and over-the-counter drugs.
[7] Centers for Medicare & Medicaid Services, Trustees, National Health
Expenditure, Historical Data (Baltimore, MD: Centers for Medicare &
Medicaid Services, 2007), [Hyperlink,
http://www.cms.hhs.gov/NationalHealthExpendData/02_NationalHealthAccount
sHistorical.asp] (accessed January 9, 2007). These figures reflect
spending on prescription drugs through retail outlet sales, but do not
account for nonretail outlet sales, such as those for drugs dispensed
in inpatient hospital or nursing home facility settings.
[8] Therapeutically equivalent drug products can be substituted with
the full expectation that they will produce the same clinical effect as
the prescribed drugs.
[9] PricewaterhouseCoopers. The Value of Pharmacy Benefit Management
and the National Cost Impact of Proposed PBM Legislation. A report
prepared at the request of Pharmaceutical Care Management Association.
July 2004.
[10] Brand drugs are single-source and multisource drugs that are
marketed under a proprietary, trademark-protected name. Single-source
drugs include those brand drugs that have no generic equivalent on the
market and are generally available from only one manufacturer. Brand
multisource drugs include those brand drugs that have generic
equivalents available from multiple manufacturers and are marketed
under a proprietary name. Generic drugs include multisource drugs that
are chemically identical to their branded counterparts and are
generally marketed by multiple manufacturers under a nonproprietary
name.
[11] In a 2000 report, the Institute of Medicine characterized the VA
formulary as "not overly restrictive."
[12] DOD provides health care through TRICARE--a regionally structured
program that uses contractors to maintain provider networks to
complement health care provided at military treatment facilities.
[13] Disproportionate share hospitals are hospitals that serve a
relatively large volume of low-income patients and are eligible for
payment adjustments under Medicare's prospective payment system or
under Medicaid.
[14] The 340B drug pricing program is named for the statutory provision
that authorizes it, section 340B of the Public Health Service Act
(codified at 42 U.S.C. § 256b).
[15] Drug manufacturers must participate in the 340B drug program in
order to get their drugs covered by Medicaid.
[16] The Medicare Part B program covers a broad range of medical
services, including physician, laboratory, and hospital outpatient
department services and durable medical equipment.
[17] In some cases, a plan may charge more or may not provide coverage
for drugs not listed on the plan's formulary.
[18] See 38 U.S.C. § 8126(a)(4).
[19] See 38 U.S.C. § 8126(a)(2). The nonfederal average manufacturer
price is the weighted average price of a single form and dosage unit
paid by wholesalers to a manufacturer, taking into account cash
discounts or similar price reductions. Big Four prices, in general, do
not apply to generic drugs.
[20] As of June 2004, VA used one prime vendor, while DOD used five
prime vendors that serviced different geographic areas.
[21] See 42 U.S.C. § 1396r-8.
[22] Best price is the lowest price available from the manufacturer to
any wholesaler, retailer, provider, health maintenance organization, or
nonprofit or government entity, with some exceptions. Among other
things, sales made through the FSS, single-award contract prices of any
federal agency, federal depot prices, and prices charged to DOD, VA,
Indian Health Service, and Public Health Service are not considered in
determining best price.
[23] AMP is defined by statute as the average price paid to a
manufacturer for a drug by wholesalers for drugs distributed to the
retail pharmacy class of trade. Under the rebate agreement
manufacturers negotiate with HHS, AMP does not include prices to
government purchasers based on the FSS, prices from direct sales to
hospitals or health maintenance organizations, or prices to wholesalers
when they relabel drugs they purchase under their own label.
[24] State Medicaid programs receive an additional rebate for brand
drugs when a drug's AMP rises faster than inflation, as measured by
changes in the consumer price index.
[25] See 42 U.S.C. § 1395w-3a.
[26] The MMA also required HHS to implement a competitive acquisition
program (CAP) for certain Medicare Part B drugs. The CAP is a voluntary
program, which began in July 2006, that offers physicians the option to
acquire many drugs they use in their practice from an approved CAP
contractor.
[27] Federal Employees' Health Benefits: Effects of Using Pharmacy
Benefit Managers on Health Plans, Enrollees, and Pharmacies. GAO-03-
196. Washington, D.C.: January 10, 2003.
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