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Pharmaceutical Costs: A Comparison of Department of Veterans Affairs (VA), Medicaid, and Medicare Policies

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Publication Date: January 2007

Publisher(s): Library of Congress. Congressional Research Service

Series: RL33802

Topic: Health (Pharmaceutical services)


The Medicare Prescription Drug, Improvement, and Modernization Act of 2003 (MMA) (P.L. 108-173) addressed seniors' rising out-of-pocket costs of prescription drugs by providing a mechanism for beneficiaries to obtain affordable prescription drug insurance coverage. The Medicare prescription drug benefit, otherwise known as Part D, was designed to take advantage of market competition. In accordance with market competition principles, the drug plans that administer the drug benefit are corporations who may rely on rebate negotiation and price-volume discounts as a way to affect prices.

A provision in the MMA, termed the "noninterference" provision, prevents the federal government from acting as a third party by negotiating the prices that the drugs plans would pay to pharmaceutical manufacturers. Both the new Speaker of the House and new Senate Majority Leader have reportedly expressed their support for repealing the "noninterference" provision, and regard it as a priority for consideration in the 110th Congress. Should the provision be repealed, Congress may wish to provide guidance on how it expects prices to be negotiated. In order to clarify and inform the debate, this report provides an overview of the pharmaceutical pricing policies used by the Department of Veterans Affairs (VA) and Medicaid -- the largest federal purchasers of prescription drugs, other than Medicare.

The Veterans Health Administration (VHA) operates the nation's largest integrated direct health care delivery system. Unlike Medicare, which operates as an insurer by reimbursing beneficiaries for the cost of medical care provided by doctors and other providers in private practice as well as by private and public hospitals, VHA provides care directly to veterans largely in VA clinics and VA hospitals. Currently VA utilizes four contracting mechanisms to acquire its pharmaceutical supplies: (1) the Federal Supply Schedule (FSS); (2) performance based incentive agreements (3) pricing under the Veterans Health Care Act of 1992, and (4) National Standardization Contracts.

Medicaid, a state administered program that operates under broad federal rules, directly controls drug prices by putting a federal ceiling on reimbursements for drug products available from multiple sources and by requiring drug manufacturers to pay rebates to states for drugs purchased on behalf of Medicaid enrollees. States further control overall drug costs through multiple methods, including using formularies and preferred drug lists, requiring that Medicaid enrollees make copayments, and requiring generic substitution.

Several options exist for affecting out-of-pocket and overall prescription drug costs, including 1)establishing a federal price ceiling for Medicare (like Medicaid); 2) mandating that manufacturers provide larger rebates to Part D plans (like Medicaid); or 3) establishing a Medicare pharmacy purchasing system (like the VA).