Prescription Drugs

Federal agencies, state Medicaid programs, and many nonfederal public health groups have access to prescription drugs through the federal supply schedule (FSS) at substantially lower prices than do many other purchasers. These prices are the same or lower than those drug manufacturers charge their most-favored private purchasers. Manufacturers must also sell brand-name drugs listed on the FSS to four federal purchasers--Veterans' Affairs, the Department of Defense, the Public Health Service, and the Coast Guard--at a price at least 24 percent lower than the nonfederal average manufacture price, a ceiling price that is lower than the FSS price. Mandating that federal prices for outpatient prescription drugs be extended to a large group of purchasers, such as Medicare beneficiaries, could lower the prices they pay but could raise prices for others. Because federal prices are generally based on prices paid nonfederal purchasers, manufacturers would have to raise prices to these purchasers in order to raise the federal prices. The extent to which prices would change would vary by drug and would depend on such factors as the number of Medicare beneficiaries affected, the price sensitivity of nonfederal purchasers, and the price sensitivity of private purchasers.

GAO noted that: (1) federal departments and agencies, state Medicaid programs, and numerous nonfederal public health entities have access to prescription drugs at substantially lower prices than many other purchasers; (2) federal entities can purchase drugs from the federal supply schedule at prices that are the same or lower than those drug manufacturers charge their most-favored private purchasers; (3) federal law also specifies that state Medicaid programs and certain nonfederal purchasers can receive substantial discounts on prescription drug prices; (4) under the Omnibus Budget Reconciliation Act of 1990, drug manufacturers must provide rebates to state Medicaid programs for their outpatient drugs in exchange for Medicaid coverage; (5) the Public Health Service Act also provides some nonfederal purchasers, such as community health centers and certain public hospitals, access to drug prices based on Medicaid rebates; (6) mandating that federal prices for outpatient prescription drugs be extended to a large group of purchasers, such as Medicare beneficiaries, could lower the prices they pay but raise prices for others; (7) such price changes could occur because drug manufacturers would be required to charge beneficiaries and federal purchasers the same prices; (8) to protect their revenues, manufacturers could raise prices for federal purchasers; (9) furthermore, because federal prices are generally based on prices paid by nonfederal purchasers, manufacturers would have to raise prices to these purchasers in order to raise the federal prices; (10) in particular, large private purchasers that tend to pay lower prices, such as health maintenance organizations and other insurers, could see their prices rise; (11) while it is not possible to predict the extent or timing of any changes in manufacturer pricing strategies if Medicare beneficiaries gained access to the same prices available to federal purchasers, the experience following implementation of a Medicaid rebate suggests that manufacturers would adjust prices quickly; and (12) the magnitude of these potential effects would vary by drug and would depend on a number of factors, including the relationship between the specific federal price extended to Medicare beneficiaries and the price paid by nonfederal purchasers, as well as the number of Medicare beneficiaries with access to the federal price.