Federal Drug Price Negotiation: Implications for Medicare Part D

Publication Date: January 2007

Publisher: Library of Congress. Congressional Research Service

Author(s):

Research Area: Health

Type:

Abstract:

The Medicare Prescription Drug, Improvement, and Modernization Act (MMA) established a prescription drug benefit for Medicare beneficiaries under Part D, which began on January 1, 2006. One provision of MMA, the "noninterference" clause, expressly forbids the Secretary of Health and Human Services (HHS) from interfering with drug price negotiation between manufacturers and Medicare drug plan sponsors, and from instituting a formulary or price structure for prescription drugs. The framework created by the law emphasizes competition among the Medicare drug plans to obtain price discounts.

The incoming Speaker and the Democratic Party have included "Affordable Health Care" as one of the "Six for '06" initiatives. As part of this effort, they propose to give the Secretary of HHS the authority to negotiate prescription drug prices for Medicare beneficiaries. The majority leader has been reported as stating that the issue will come before the House for a vote on January 12, 2007.

There are a number of approaches that the federal government could adopt to affect prescription drug prices. A few rely on the power of government to dictate an outcome, such as imposing statutory mandates or establishing price ceilings. Others emphasize more market-oriented approaches, such as soliciting competitive bids from voluntary participants. A reference pricing approach combines elements of both. Some of these methods are currently employed by the Department of Veterans Affairs (VA) and the Medicaid program.

The price the VA pays for a drug is the lowest price as determined through one of four methods, less an additional 5% prime vendor discount: (1) the federal ceiling price, (2) federal supply schedule, (3) performance-based incentive agreement, or (4) national standardization contract. Drug reimbursement costs under Medicaid are calculated differently for single-source (only one Food and Drug Administrationapproved product) and multiple-source drugs (more than one FDA-approved product). However, for both types of drugs, state reimbursements are determined in aggregate based on either the federal upper limit price (FUL) -- a predetermined percentage of a defined reference price -- or the estimated acquisition cost.

There are many practical and legislative steps necessary before federal drug price negotiation for Medicare beneficiaries could take place. Initially, the noninterference clause would need to be repealed. However, repealing the noninterference clause may not, in itself, be sufficient to lead to federally negotiated prices. If the Secretary were to engage in activities that affect drug prices on behalf of Medicare Part D beneficiaries, there might be consequences that affect the price of drugs for Medicare beneficiaries as well as other public and private patients, the number and types of drugs that would be available to Part D beneficiaries, the amount of research and development and innovation by pharmaceutical companies, and other sectors of the industry.

This report will be updated.