Federal Drug Prices

During fiscal year 1996, the federal government bought almost $1.3 billion worth of pharmaceuticals from the federal supply schedule. Schedule prices are often substantially lower than retail prices and are available primarily to federal purchasers. The Department of Veterans Affairs (VA) used this catalog of drug prices to purchase $922 million in pharmaceuticals--about 71 percent of the government's total purchases from the schedule. This testimony discusses GAO's recent report (GAO/HEHS-97-60, June 1997) on the potential implications for VA and other government purchasers of opening the federal supply schedule for pharmaceuticals to state and local governments.

GAO noted that: (1) the effects of opening the pharmaceutical schedule on schedule prices ultimately depend on the outcome of negotiations between VA and drug manufacturers; (2) because of many uncertainties related to these negotiations, it is not possible to predict how the schedule's prices would change or what the ultimate impact on VA and other government purchasers would be; (3) although many factors would influence the negotiations between VA and drug manufacturers, two primary ones are VA's negotiating ability and manufacturers' pricing strategies; (4) 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; (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) estimates of the size of a combined federal, state, and local market, however, vary widely because of uncertainty about which state and local entities would be eligible for schedule prices; (8) if eligibility is not narrowed, VA, the Pharmaceutical Research and Manufacturers of America (PhRMA), 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; (9) 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; (10) federal efforts to lower Medicaid drug prices suggest how opening the schedule could put upward pressure on schedule prices; (11) 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; (12) 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; and (13) if the pharmaceutical schedule was 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.