Order Code RL33802
Pharmaceutical Costs: A Comparison of
Department of Veterans Affairs (VA),
Medicaid, and Medicare Policies
January 17, 2007
Gretchen A. Jacobson,
Sidath Viranga Panangala, and Jean Hearne
Domestic Social Policy Division

Pharmaceutical Costs: A Comparison of Department of
Veterans Affairs (VA), Medicaid, and Medicare Policies
Summary
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 Should the provision be repealed, Congress may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).

Contents
Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Drug Prices Versus Formularies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Medicare Pharmaceutical Pricing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Medicare Formularies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Negotiation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Possible Ripple Effects . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
The VA Pharmaceutical Purchasing System . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Federal Supply Schedule (FSS) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Performance-based Incentive Agreements
(Blanket Purchase Agreements) . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Pricing under the Veterans Health Care Act of 1992 . . . . . . . . . . . . . . 10
National Standardization Contracts . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Formulary Management in the VA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
Restrictiveness of VA’s National Formulary . . . . . . . . . . . . . . . . . . . . 13
Non-formulary Requests . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
Medicaid Pharmaceutical Pricing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
Federal Upper Limits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
Medicaid Rebates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
Medicaid Formularies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
Negotiating Drug Prices for Medicare . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
Option 1: Establish a Medicare ceiling price . . . . . . . . . . . . . . . . . . . 16
Option 2: Mandate that Manufacturers
Provide Rebates to Part D Plans . . . . . . . . . . . . . . . . . . . . . . . . . 17
Option 3: Establish a Medicare Pharmacy Purchasing System . . . . . . 17
List of Tables
Table 1. Comparison of Medicare, VA, and Medicaid Drug Programs . . . . . . . . 6

Pharmaceutical Costs: A Comparison of
Department of Veterans Affairs (VA),
Medicaid, and Medicare Policies
Introduction
One of the motivating factors for Congress to create Medicare Part D in the
Medicare Prescription Drug, Improvement, and Modernization Act of 2003 (MMA)
(P.L. 108-173) was seniors’ rising out-of-pocket drug costs. Prior to MMA, 38% of
Medicare beneficiaries did not have drug insurance coverage.1 People without
sufficient drug insurance were paying drug prices that were 15% higher on average
than the prices paid by insurance companies.2 Some Medicare beneficiaries who did
not have drug insurance coverage coped with these higher prices by filling fewer of
their prescriptions and taking medications less frequently than their doctors
recommended.3
Medicare Part D provides voluntary insurance coverage of drugs for
beneficiaries, albeit at a high price to the federal government.4 The federal cost of
Part D benefits is estimated to be $44.7 billion in 2007.5 Medicare 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.
1 For more statistics on drug coverage in the Medicare population from 1996-1999, see Mary
A. Laschober, Michelle Kitchman, et al., “Trends in Medicare Supplemental Insurance and
Prescription Drug Coverage, 1996-1999,” Health Affairs, February 2002, W127-138.
2 From the Report to the President: Prescription Drug Coverage, Spending, Utilization, and
Prices
(Washington: DHHS, April 2000).
3 One study found that Medicare beneficiaries with drug coverage were 6%-17% more
likely to fill their prescriptions and medicate than beneficiaries without drug coverage. For
more information on this statistic and others, see Bruce Stuart and James Grana, “Ability
to Pay and the Decision to Medicate,” Medical Care, vol. 36, no. 2 (February 1998), p. 202-
211.
4 For more information about MMA, see CRS Report RL31966 , Overview of the Medicare
Prescription Drug, Improvement, and Modernization Act of 2003,
by Jennifer O’Sullivan,
Hinda Chaikind, Jennifer L. Boulanger, Paulette C. Morgan, and Sibyl Tilson.
5 For more details, see the March 2006 Baseline Budget Projections from the U.S.
Congressional Budget Office, available at [http://www.cbo.gov/budget/factsheets/2006b/
medicare.pdf]. Last accessed December 19, 2006. Although more recent CBO budget
projections are available for aggregate Medicare spending, the March 2006 baseline contains
the most recent detailed projections for Medicare Part D.

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A provision in the MMA, termed the “noninterference” provision, prevents the
federal government from being a third party in drug price negotiations between the
Part D drug plans and pharmaceutical manufacturers. Both the new Speaker of the
House and new Senate Majority Leader have expressed their support for repealing
this “noninterference” provision, and regard it as a priority for consideration in the
110th Congress.6 Furthermore, one poll indicates that about 85% of Americans also
seem to support repealing the provision and allowing the government to negotiate
prices.7
Should the “noninterference” provision be repealed, Congress may wish to
provide guidance on how they expect the Secretary of Health and Human Services
(HHS) to negotiate prices. A debate could occur about the options and mechanisms
of a new drug pricing policy for the Medicare drug plan. 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 — two of
the largest federal purchasers of prescription drugs, other than Medicare. This report
first provides a brief background of the current U.S. pharmaceutical pricing for
Medicare, and the implications of this policy. The report then discusses the types of
pricing policies used by the VA and Medicaid to stem the rise in drug expenditures.
The report concludes by discussing the implications of negotiating drug prices and
options that may lower costs for the Medicare Part D Program and its beneficiaries.
Drug Prices Versus Formularies
Prices and formularies are often perceived to be intertwined because formularies
are the most frequently used incentive in drug price negotiations. Importantly, other
“carrots and sticks” may be available to drug price negotiators, and an open
formulary does not necessarily preclude price negotiation. A formulary is a set of
drugs for which a Part D drug plan, or other health insurer, has agreed to pay a
portion of the costs; the formulary may also specify contingencies for payment.8
Drug pricing policies do not dictate formularies. A drug pricing policy may have no
6 For more details, see press release from the Senate Democratic Communications Center,
“Reid: Congress Must Improve Medicare Part D,” December 8, 2006; See also Drew
Armstrong, “Democrats’ First 100 Hours: Big Pharma Braces for Heavier Federal Hand in
Drug Pricing Policy,” CQ Weekly, November 20, 2006; See also Rebecca Adams, “Pharma
Braces for Battle,” CQ Weekly, November 27, 2006. On January 12, 2007, the House of
Representatives passed H.R. 4 on a 255-170 vote. H.R. 4 requires the Secretary of HHS to
negotiate Medicare drug prices.
7 A poll by the Harvard School of Public Health and Kaiser Family Foundation indicates that
85% of adults (92% of Democrats, 85% of Independents, and 74% of Republicans) support
allowing the federal government to negotiate drug prices for the Medicare program. For
more information, see The Henry J. Kaiser Family Foundation, “Public Sees Health Care
Prices as Unreasonable and Wants Government to Take Steps to Lower Them,” December
8, 2006. Available at [http://www.kff.org/kaiserpolls/pomr120806nr.cfm]; accessed
December 15, 2006.
8 A drug formulary is a continually updated list of medications and related information,
representing the clinical judgement of physicians, pharmacists, and other experts in the
diagnosis and/or treatment of disease.

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bearing on which drugs will or will not be included in a formulary. Adopting a drug
pricing policy from Medicaid, the VA, or even another country does not imply that
the formulary is also adopted. In contrast, knowing the extent to which a formulary
will include or exclude pharmaceuticals may help to determine which drug pricing
policies would make the most sense. For example, if a formulary was to include
every drug on the market, a competitive bidding process would not be the most
sensible drug pricing policy, since those policies generally involve accepting the best
bid and rejecting the other bidders. In contrast, a competitive bidding process may
be a reasonable option for a formulary that only includes one drug in each drug class.9
However, simply having a competitive bidding process for pharmaceutical pricing
does not provide any information about the inclusiveness of the formulary, because
the resulting formulary may include one, two, or even five drugs in each drug class.
Medicare Pharmaceutical Pricing
Under current law, prescription drugs for Medicare beneficiaries are provided
through prescription drug plans (PDPs) and Medicare Advantage prescription drug
(MA-PD) plans. Unlike MA-PDs, which cover the costs of the entire set of Medicare
benefits (Parts A, B, and D), the PDPs only cover the costs of prescription drugs (Part
D).10 The plans have contracts with the Centers for Medicare and Medicaid Services
(CMS) to provide prescription drug coverage to Medicare beneficiaries. Individually
and with a great deal of flexibility, the plans construct benefit packages (including
the formulary, deductible, co-payments, and utilization management tools), arrange
a network of pharmacies to dispense the drugs, and negotiate prices and/or rebates
with the pharmaceutical manufacturers.11
Enrollees are required to make copayments (which is the entire price if the drug
is not covered12) and pay premiums that may be affected by the negotiated prices (i.e.,
the lower the prices paid by the plan, the lower the amounts the plan must charge in
premiums). Beneficiaries’ satisfaction or dissatisfaction with their drug plan is likely
to be related to the amount they pay for drugs, among other factors.
9 For definitions of drug classes in the Medicare Part D program, see the CMS Medicare
formulary guidelines, available at [http://www.cms.hhs.gov/PrescriptionDrugCovContra/
Downloads/FormularyGuidance.pdf], and the example formulary, which is available at
[http://www.usp.org/pdf/EN/mmg/drugListingV2.0-2006-02-06.pdf].
10 Part B also covers the cost of some drugs. For more information on Part B drugs, see CRS
Report RL31419, Medicare: Payments for Covered Part B Prescription Drugs, by Jennifer
O’Sullivan.
11 For more information on PDPs, see “The Nuts and Bolts of PDPs,” by Mary Ellen
Stahlman, George Washington University, National Health Policy Forum, Issue Brief no.
817, November 8, 2006.
12 A drug may not be covered if either the drug is not on the plan’s formulary or if a
beneficiary’s total drug spending is in the “doughnut hole” — the common term for drug
expenditures between $2,400 and $5,451 in 2007.

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Medicare Formularies
Part D plans are required to include two drugs in each therapeutic class, except
if only one drug is available. The CMS requires coverage of “all or substantially all”
drugs for some mental illnesses, including antidepressants, antipsychotics, and
anticonvulsants. Anticancer drugs, immunosuppressants, and HIV/AIDS drugs are
also included in the “all or substantially all” list of formulary drug classes. Plans can
neither change their formularies without CMS approval, nor drop coverage for
persons currently using the drug, except at the beginning of the calendar year.
These minimum requirements do not imply that beneficiaries have access to
every drug, or its chemical equivalent, that they may be prescribed. For example, the
MMA did not require Part D plans to cover the costs of any drugs in the “doughnut
hole” — the common term for beneficiaries’ drug expenditures between $2,400 and
$5,451 in 2007. While a few plans are offering coverage in the “doughnut hole” in
2007, most of this coverage is for generic drugs only.13 Moreover, any system that
grants patients the freedom to choose their own plan will have some inefficiencies,
namely that patients may not select the best plan for their needs. Nonetheless, polls
indicate that most patients are satisfied with their drug plans.14
Negotiation
A legal impediment to changing the way Medicare drugs are priced is the
“noninterference” provision in MMA. Specifically, this provision forbids the
Secretary of Health and Human Services (HHS) from negotiating the price of
prescription drugs on behalf of Medicare beneficiaries.15 The MMA states, “in order
13 For more details, see the recent study by Jack Hoadley, Elizabeth Hargrave, Katie Merrell,
Juliette Cubanski, and Tricia Neuman, “Benefit Design and Formularies of Medicare Drug
Plans: A Comparison of 2006 and 2007 Offerings,” The Henry J. Kaiser Family Foundation,
November 2006, available at [http://www.kff.org/medicare/upload/7589.pdf]. Last accessed
December 27, 2006.
14 The satisfaction rate varies among polls. A poll conducted by the Henry J. Kaiser Family
Foundation, Seniors’ Early Experiences with Their Medicare Drug Plans (conducted June
8-18, 2006), indicated that 81% of beneficiaries are “very satisfied” or “somewhat
satisfied;” poll details are available at [http://www.kff.org/kaiserpolls/upload/7546.pdf].
Last accessed December 27, 2006. A Wall Street Journal Online/Harris Interactive Health-
Care poll found that 75% of beneficiaries are “very satisfied” or “somewhat satisfied.” For
more details see Harris Interactive, Seniors Satisfied with Medicare Drug Plans; Seven in
Ten Enrollees Say their Plan has Saved them Money on Prescription Drugs
, November 20,
2006 [http://www.harrisinteractive.com/news/allnewsbydate.asp?NewsID=1123]. Last
accessed December 27, 2006.
15 In October 2001, as the anthrax attack was unfolding on Capitol Hill, then-Secretary of
Health and Human Services (HHS) Tommy Thompson sought to purchase a large amount
of the preferred antibiotic, ciprofloxacin (“Cipro”) from the manufacturer, Bayer
Corporation, at a reduced price. Thompson made headlines with his negotiating tactics,
including a threat to override the drug’s patent. The Strategic National Stockpile, the HHS
program to assure treatments for victims of bioterrorism and other emerging health threats,
was established following an appropriation in FY1999, and flowed from the Secretary’s
(continued...)

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to promote competition under this part and in carrying out this part, the Secretary -
(1) may not interfere with the negotiations between drug manufacturers and
pharmacies and PDP sponsors; and (2) may not require a particular formulary to
institute a price structure for the reimbursement of covered Part D drugs.”16 The
conference report adds that, “conferees expect PDPs to negotiate price concessions
directly with manufacturers.”17 The pharmaceutical pricing policies discussed later
in this report could not be implemented in the Medicare program without allowing
the Secretary of HHS, or some other authority, to negotiate with the pharmaceutical
manufacturers for Part D drugs.
Repealing the “noninterference” clause may lead to changing the drug pricing
policy for Medicare. If Congress repeals the provision and allows the Secretary of
HHS to negotiate drug prices, it may also wish to provide some guidance as to what
type of drug pricing policy they want the Secretary of HHS to negotiate and what the
goals of such a pricing policy would be. Since the number of different drug pricing
policies is innumerate, examining policies that have been applied in other settings
may help in exploring the options.
In theory, the federal government may be able to leverage its market share to
negotiate lower prices. The extent to which the federal government could negotiate
lower prices than the Part D drug plans is unknown. In fact, some argue that market
powers have already achieved lower prices.18 Without more knowledge about the
extent to which prices could be lowered, it is impossible to predict whether a new
pricing policy would lead to lower costs for Medicare beneficiaries, the federal
government, or other U.S. consumers.
Possible Ripple Effects. Importantly, any new drug pricing policy for
Medicare may have ripple effects on manufacturers’ research and development of
new pharmaceuticals, Part D drug plans’ role and ability to compete, pharmacies’
profits, as well as other U.S. consumers. The size of these ripples will depend upon
the type of pricing policy selected, and the extent to which the federal government
negotiates lower prices. Possible implications, including the ripple effects from
applying the VA or Medicaid drug pricing policies to Medicare, are explored in the
conclusions of this report.
15 (...continued)
general authorities to control disease. Explicit statutory authority for the stockpile was
established in 2002 (P.L. 107-188). The authority of the Secretary to negotiate prices when
procuring for the stockpile, while not explicit in law, is implicit, and derives from his
general authority to enter into contracts for goods and services under federal programs.
16 Section 1860D(11)(I) of the Social Security Act.
17 For more information, see House Conference Report 108-391, p.461.
18 For more information, see the January 10, 2007 letter from the Congressional Budget
Office to the Honorable John D. Dingell, Chairman of the House Energy and Commerce
Committee, available at [http://www.cbo.gov/ftpdocs/77xx/doc7722/hr4.pdf].

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In order to clarify some of the key differences between the Medicare, VA, and
Medicaid systems, Table 1 provides some details about the number of beneficiaries,
costs, and certain elements of these three federal programs.
Table 1. Comparison of
Medicare, VA, and Medicaid Drug Programs
Medicare
VA19
Medicaid
Number of
22.5 million in PDPs
4.4 million VA
41.7 million with
beneficiaries
or MA-PDs,
pharmacy users in
drug coverage in
15.8 million in other
2006
200421
drug insurance plans,
4.4 million did not
have drug coverage in
2006 20
Federal
$44.7 billion22
$3.4 billion
$23.5 billion23
pharmaceutical
expenditures in
2006 (est.)
Percentage of
56.5% in PDPs,
68%
53.8%
prescriptions that
65.9% in MA-PDs24
are generic
19 All VA data received directly from the Department of Veterans Affairs (VA).
20 Of the 42 million Medicare beneficiaries, approximately 22.5 million were enrolled in
Part D plans, as of June 11, 2006. The remaining 19.5 million beneficiaries either did not
have prescription drug coverage (4.4 million), had coverage from a Medicare-subsidized
retiree plan (6.9 million), had coverage from a federal retiree plan (3.5 million), or had other
creditable drug coverage (5.4 million). Press Release from the CMS — June 14, 2006.
21 This number excludes 4.9 million Medicaid beneficiaries who are over age 65 since the
elderly, beginning in 2006, no longer receive drug coverage under the Medicaid program.
CRS tabulations of data from CMS MSIS State Summary Datamart.
22 March 2006 Baseline Budget Projections from the U.S. Congressional Budget Office,
op.cit.
23 Medicare and Medicaid estimates from the Centers for Medicare and Medicaid Services,
Projected National Health Expenditures. Available at [http://www.cms.hhs.gov/
nationalhealthexpenddata/]. Last accessed December 27, 2006. PhRMA member companies
estimated $164 billion in 2005 sales. For more details, see Pharmaceutical Research and
Manufacturers of America (PhRMA), PhRMA Membership Survey, 2006. Available at
[http://www.phrma.org/files/2006%20Industry%20Profile.pdf]. Last accessed December
27, 2006.
24 Data from CMS Plan Reported Data (per 2006 Medicare Part D Plan Reporting
Requirements) for the first two quarters of 2006.

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Number of
780 million
120 million
584 million
prescriptions
(in 2006)25
(in FY2006)
(in 2005)
filled annually
Maximum
$328.20 average
$0 premium,
$0 premium,
out-of-pocket
$8 for 30-day
$1 - $5 copays
annual premium,
costs
$265 annual
supply of drugs
per prescription28
(for health
deductible,
25% for costs
conditions not
connected to
$265 - $2,400,
100% for costs $2,400
military service),
$960 annual limit,
- $5,451.25, 5% for
costs
after which the
prescription is free
$5,451.26 and up.26
for Priority Groups
2-6 veterans.27
Appeals process
Physicians submit a
Physicians submit
States are
for non-formulary
declaration stating
a request stating
required to have
drugs
that all covered Part D
that the drug is
a prior
drugs on any tier
medically
authorization
would not be as
necessary.
review process in
effective for the
place to consider
individual or would
requests for non-
have an adverse effect
preferred drugs.
on the individual or
both. Plan makes
decision on appeal.
25 Data estimated by projecting the average monthly prescriptions filled for beneficiaries in
PDPs or MA-PDs for January - August 2006. Monthly prescriptions filled for beneficiaries
available from CMS at [http://www.cms.hhs.gov/prescriptiondrugcovgenin/
02_enrollmentdata.asp?]. Last accessed December 27, 2006.
26 Cost-sharing amounts are those specified for “standard coverage.” Specific co-payments
may vary by enrollee and Part D drug plan.
27 VA provides a full prescription drug benefit including both formulary and non-formulary
drugs. For a description of priority groups see, CRS Report R.L. 33409, Veterans Medical
Care: FY2007 Appropriations,
by Sidath Viranga Panangala.
28 Amounts are for 2005. As of March of 2006, states have additional options for cost
sharing for prescription drugs that certain Medicaid beneficiaries can be charged. Those
with income above 100% of poverty can have higher copays for drugs as long as total
aggregate cost sharing for all services do not exceed 5% of family income and as long as the
copayment amounts do not exceed between 10% and 20% of the cost of the drug (depending
on family income and on whether the state is using a tiered copayment system).

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The VA Pharmaceutical Purchasing System
Among those who have been arguing for the federal government to negotiate the
prices of prescription drugs under the Medicare Part D Program, considerable
attention has been paid to the VA pharmaceutical procurement model.29 Before
discussing VA’s pharmacy procurement system, it is essential to understand that the
veterans health care system is an integrated (closed) system, where physicians and
other clinical staff are employees of the VA. Unlike Medicare, which administers
medical care through the private sector, the VA provides care directly to veterans.
The VA purchases its pharmaceutical needs directly from manufacturers and provides
prescription medications to veterans through its pharmacies and its own consolidated
mail outpatient pharmacy (CMOP) network. This closed system contributes towards
successfully implementing a national formulary, which does not exist in Medicare
or Medicaid. The section below discusses the VA’s contracting techniques used to
purchase pharmaceuticals. That is followed by an overview of VA’s formulary
management process.
Currently, the VA utilizes four contracting mechanisms to acquire its
pharmaceutical supplies: (1) the Federal Supply Schedule (FSS); (2) performance-
based incentive agreements, or Blanket Purchase Agreements (BPAs); (3) pricing
under the Veterans Health Care Act of 1992 (P.L. 102-585); and (4) national
standardization contracts.30 On a drug-by-drug basis, the VA selects the mechanism
that offers the lowest price.
Federal Supply Schedule (FSS). The FSS is a price catalog that contains
almost everything the federal government uses, from nuts and bolts, to
pharmaceuticals, to paper clips, to fire engines. The General Services Administration
(GSA) has delegated to the VA’s National Acquisition Center (NAC) the
responsibility for the FSS program for medical care related supplies, equipment,
pharmaceuticals, and professional services.31 The FSS currently contains about
17,000 pharmaceutical products.32 Of this number, about 36% are brand name drugs,
and 64% are generic drugs. The FSS is open to all federal agencies in the executive,
legislative and judicial branches — including the VA, Department of Defense
(DOD), Public Health Service (PHS), Bureau of Prisons — and several other
29 “Yes. Let the Government Bargain with Drugmakers,” The Philadelphia Inquirer
December 6, 2006, Editorial, p. A23; “Driving down Drug Prices,” The Boston Globe
November 27, 2006, Editorial, p. A8; “Lowering Medicare Drug Prices” The New York
Times
, November 14, 2006, Section A, p. 26.
30 Under its current contract with McKesson (the VA wholesale pharmaceutical distributor),
the VA obtains an additional 5% discount off the contract price for prompt payment.
31 VA NAC currently administers the following schedules: Pharmaceuticals; Medical
Equipment and Supplies; Dental Equipment and Supplies; Patient Mobility Devices; X-Ray
Film, Equipment and Supplies; Diagnostic, Reagents, Test Kits and Sets; Clinical Analyzer,
Laboratory Cost-Per-Test; and Professional and Allied Healthcare Staffing Services.
32 The total number of products listed on the FSS is greater than 17,000 because FSS may
list the same drug in different dosage amounts, different dosage forms such as tablets and
capsules, and package sizes.

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purchasers including the District of Columbia, and Indian tribal governments. VA’s
NAC Federal Supply Schedule Service is responsible for establishing, soliciting,
negotiating, awarding, and administering the FSS. In general, FSS contracts are
multi-year (minimum of five years) and multiple award contracts, which means
multiple companies supplying comparable products and services, at varying prices,
are awarded contracts.
VA’s NAC announces and posts solicitations that include all categories of
commercially marketed health care products including pharmaceuticals, grouped
under Special Item Numbers (SINs).33 A contracting officer evaluates each proposal
based on the drug manufacturer’s discounting policies. When evaluating proposals,
discounting policies of the manufacturer’s competitors are not considered. Under
GSA procurement regulations, FSS prices for brand name drugs must be no greater
than the prices manufacturers charge their Most-Favored Customers (MFC) under
comparable terms and conditions.34 In general, MFC is the customer, or class of
customers, which receives the best discount and/or price arrangement on a given item
from a manufacturer or supplier. To help VA’s contracting officers determine the
MFC pricing, pharmaceutical manufacturers are required to provide VA a
commercial price list for the proposed items, and are also required to disclose their
recent pricing granted to MFCs.35
In general, when awarding a contract to a drug manufacturer, the VA’s NAC has
to determine the following: 1) whether the government was offered a fair and
reasonable price; 2) whether the manufacturer is responsive and responsible; 3)
whether the manufacturer completed all certifications and regulatory requirements
in their entirety; 4) whether the past performance history of the manufacturer is
satisfactory; 5) whether the manufacturer is financially capable; and 6) whether
awarding the contract to the drug manufacturer is in the overall best interest of the
government.
Performance-based Incentive Agreements (Blanket Purchase
Agreements). Under each awarded FSS contract there is a Blanket Purchase
Agreement (BPA) clause, which allows the VA to further negotiate with the drug
manufacturers and receive additional discounts. The most commonly negotiated
BPAs revolve around market share agreements such as a commitment of the VA to
buy a specific volume or quantity of drugs over a specified period of time in
exchange for receiving an additional discount. In general, BPAs differ from national
33 Solicitation notices can be viewed at:[http://www.fbo.gov/spg/VA/index.html]. Vendors
can request a solicitation copy by submitting a written request or by downloading
solicitations from the VA at [http://www1.va.gov/oamm/oa/dbwva/index.cfm]. accessed
January 3, 2007.
34 See 48 C.F.R. §538.270.
35 The manufacturer must also provide a list that includes the following information for each
item offered: 1) name of the proposed item, this includes the generic name, trade/brand
name; 2) proposed FSS price; 3) proposed discount off the commercial price list; 4) either
actual or estimated commercial annual sales for each item offered; 5) either actual or
estimated annual government sales for each item offered.

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contracts (see below) because they are not competitively bid.36 The VA can also elect
to include one or more other FSS customers in a BPA. According to the VA,
performance-based incentive agreements provide an additional discount of 5%-15%
off the FSS price.
Pricing under the Veterans Health Care Act of 1992. The Omnibus
Budget Reconciliation Act of 1990 (P.L. 101-508) required that pharmaceutical
manufacturers provide rebates to state Medicaid programs on outpatient drugs based
on the lowest prices the manufacturers charged their commercial and government
customers. With the passage of this legislation, drug manufacturers stopped giving
discounts to many of their government purchasers including the VA. In response,
Congress enacted the Veterans Health Care Act of 1992 (P.L. 102-585). Section 603
of this act required pharmaceutical companies to list covered drugs on the FSS as a
condition of continued participation in the Medicaid program.37 It also required them
to roll back price increases, and created statutorily mandated ceiling prices for sales
to the four largest federal purchasers of pharmaceuticals: the VA (including state
veterans nursing homes receiving grants under Section 1741 of Title 38, United
States Code), DOD, PHS (including the Indian Health Service), and Coast Guard.38
These four agencies are commonly known as the “Big 4.” Furthermore, Section 603
of P.L.102-585 required pharmaceutical companies to adhere to the statutory
requirements by signing a master agreement and pharmaceutical pricing agreement.39
Under P.L. 102-585, pharmaceutical manufacturers agree to sell the “Big 4"
agencies each covered drug at no more than 76% of the non-federal average
manufacturers price (non-FAMP), minus any additional discounts as determined each
year.40 Furthermore, under current law, when the drug manufacturer raises the price
of a drug faster than the rate of inflation based on the Consumer Price Index (CPI),
then the manufacturer must offer an additional discount, in an amount that will
36 In some circumstances BPAs are awarded after an abbreviated competition among FSS
contractors with similar products.
37 Covered drugs are single source drugs, innovator multiple source drugs, and biological
products. A single source drug is a brand-name drug that is still under patent and thus is
usually available from only one manufacturer. Under Section 603 of P.L. 102-585, an
innovator multiple source drug is a multiple source drug that was originally marketed under
an original new drug application approved by the Food and Drug Administration. This
definition would include multiple manufacturers’ licensed versions of a single drug that was
granted a new drug application (NDA) approval. The definition does not include true
generics that were approved under an abbreviated new drug application (ADNA).
38 38 U.S.C. 8126(a).
39 The master agreement is a document that is signed by the manufacturer and the VA. The
agreement contains responsibilities of the manufacturer and the VA, and dispute resolution
processes and terms of termination. The pharmaceutical pricing agreement is an addendum
to the master agreement that contains a complete list of a manufacturer’s covered drugs and
a federal ceiling price (FCP) for each drug. By signing the document the manufacturer
certifies the accuracy of all specified FCPs.
40 Non-FAMP is the weighted average price paid by wholesalers, less any discounts,
chargebacks, or similar price reductions. These exclude prices paid by the federal
government.

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ensure that the non-FAMP price does not exceed the percentage change in the CPI.41
The federal ceiling price (FCP) is calculated using the following formula:
FCP = (annual non-FAMP x .76) — - additional discounts
Under current law, manufacturers of covered drugs who do not offer their
products on the FSS, and who do not offer products under P.L.102-585, are
prohibited from contracting with the “Big 4" agencies and Medicaid.42 As stated
before, the FCP is only available to the “Big 4"; other federal agencies must pay the
FSS price, which is higher if the manufacturer maintains a different FCP and FSS
price for the same covered drug. This is also known as “dual pricing.” Drug
companies can elect to have dual price lists, that is, to give federal ceiling prices to
VA, DOD, PHS, and Coast Guard, and provide negotiated FSS prices to all other
federal customers. If the pharmaceutical companies don’t elect to have dual prices,
all FSS eligible federal customers will receive the FCP. It should be noted that FSS
prices could be lower than the FCP, and that the FCP acts as a price ceiling and not
a price floor. At present, 3,921 pharmaceutical products on the FSS equal the FCP,
and 1,897 drugs are below the FCP.
National Standardization Contracts. The VA also uses national
standardization contracts to purchase pharmaceuticals. Depending on what drug is
purchased, other agencies such as DOD, PHS, and the Bureau of Prisons can
participate in these contracts. The Department seeks competitive bids from
manufacturers for products that are therapeutically equivalent within specific drug
classes, and contracts with those manufacturers whose products it believes provide
the best value based on medical effectiveness, safety and price, in exchange for
including their products on the VA’s national formulary and committing to use
products throughout the VA health care system.43 These contracts are also known as
“committed use contracts” because the VA commits to use a specific drug instead of
another therapeutically interchangeable drug, and to guarantee drug companies a high
volume of use in exchange for lower prices. These are one-year contracts with the
option to renegotiate the contract. In FY2005, the VA purchased $446 million worth
of pharmaceuticals through national contracts. According to the VA, national
contract prices are an additional 10%-60% lower than the FSS prices.
41 38 U.S.C. 8126 (c).
42 38 U.S.C. 8126 (a)(4).
43 Government Accountability Office, Prescription Drugs: Expanding Access to Federal
Prices Could Cause Price Changes
, GAO/HEHS-00-118, p. 15.

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Formulary Management in the VA

It is important to understand the VA’s formulary management process because
it has a direct bearing on the purchasing mechanisms. Prior to 1995, the VA’s 156
medical centers managed their pharmaceutical needs through individual formularies.
The Department’s Drug Product and Management division based in Hines, Illinois,
managed and monitored drug usage and purchasing for those facilities, but had no
utilization oversight responsibilities.44 In September 1995, the VA established a
Pharmacy Benefit Management (PBM) Health Care Strategic Group, tasked with
establishing a national formulary, managing pharmaceutical costs, and overseeing
pharmacologic guideline development for common diseases within the VA health
care system.45 In November 1995, as part of its reform efforts the VA created a
nationwide system of Veterans Integrated Service Networks (VISNs), consisting of
21 geographically defined networks, and each entity was instructed to create a
formulary. To develop their formularies each VISN generally combined their
medical center formularies, and on April 30, 1996, VISN formularies became
effective. To ensure that all veterans have access to pharmaceuticals — no matter
where they live in the U.S — the VA established a national formulary by combining
the core of drugs common in the VISN formularies. The national formulary took
effect on June 1, 1997. The standardization helped the VA lower its prescription
drug costs through bulk purchases: “from a system standpoint, this standardization
not only defined the core national pharmacy benefits package, but also provided
leverage for bulk purchasing, and with that, contracting within drug classes when
appropriate.”46 According to the VA, the overall strategy of creating a formulary
process is to create a comprehensive pharmaceutical benefit offered to all VA
patients seeking care in the VA. VA’s PBM continuously reviews formulary
decisions to ensure that patients achieve the desired outcomes.
The VA’s formulary management process involves the VA Medical Advisory
Panel (MAP), the VISN formulary leaders committee, VA’s clinical subject matter
experts, and the VA PBM staff. The MAP consists of 12 field-based practicing
physicians, one DOD physician, and six clinical pharmacists. The PBM staff’s role
is facilitative, except for clinical subject matter specialists who provide input when
selecting drugs. Based on input from the above-mentioned stakeholders, VA’s PBM
reviews pharmaceutical purchases and identifies high-usage pharmaceutical items.
The team reviews these products based on patient treatment, treatment protocol, and
patient outcome.
Currently, the VA’s national formulary consists of 1,294 dosage-specific drug
entries. Of these, 44% are brand name medications and 56% are generic drugs.
Based on the amount of drugs that are dispensed (30-day equivalent prescription
volume), VA dispenses about 68% generic drugs and 32% brand name drugs.
44 Sales, Mariscelle, et.al, “Pharmacy Benefits Management in the Veterans Health
Administration: 1995 to 2003,” The American Journal of Managed Care, Vol. 11, no. 2
(Feb. 2005), p.104.
45 Ibid, p.105.
46 Ibid, p. 106.

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Restrictiveness of VA’s National Formulary. There have been several
recently published reports stating that the VA national formulary is overly restrictive
and that applying a “VA-style formulary process to the Medicare prescription drug
program would significantly reduce physician and patient choice of drugs.”47
Furthermore, some reports have stated that the drugs used in the VA health system
are older than the drugs used in the rest of the U.S. health care system.48 However,
in a previous study the National Academy of Sciences found that the “VA national
formulary was not overly restrictive, and the limited available evidence suggests that
it has probably meaningfully reduced drug expenditures without demonstrable
adverse effects on quality.”49 Moreover, the VA has provided its clinicians
guidelines on prescribing non-formulary drugs to veterans when it is medically
necessary.
Non-formulary Requests. According to the VA guidelines, each VISN must
have in place an evidence-based and timely process for approving expeditiously the
use of non-formulary drugs by local physicians. In general, non-formulary requests
are reviewed and the requester is notified of the decision within 96 hours of the
receipt of a complete non-formulary request.50 The VA guidelines state that “as
always, the prescriber must use his or her best clinical judgment when selecting the
most appropriate pharmacotherapy for a specific patient in a specific clinical
situation.”51
Medicaid Pharmaceutical Pricing
Medicaid is composed of 50 state (and the District of Columbia) administered
programs that provide coverage of health care services, including pharmaceuticals,
to certain low-income individuals. The state programs operate independently under
broad federal guidelines. The states and the federal government, however, share in
the cost of each program based on a statutory formula. The federal share of program
expenditures, subject to both a federal floor and ceiling, ranged, in FY2006, from a
low of 50% to a high of 76%. For each $1 of state spending on Medicaid services,
a state is able to claim a federal matching payment of $1 to $1.52.
47 The Pharmaceutical Research and Manufacturers of America (PhRMA), Comparison of
Compounds on the Formularies of Medicare Prescription Drug Plans (Pdps) and the
Department of Veterans Affairs Veterans Health Administration (VA) National and Regional
Formularies,
December, 2006, p. 11, available at [http://www.phrma.org/files/VHA
WhitePaperDec2006Final.pdf] accessed January 6, 2007.
48 Frank R. Lichtenberg, “Older Drugs, Shorter Lives? An Examination of the Health Effects
of the Veterans Health Administration Formulary,” The Manhattan Institute, Medical
Progress Report,
no.2, Oct. 2005.
49 Blumenthal D, Herdman R, eds; VA Pharmacy Formulary Analysis Committee, Division
of Health Care Services, Institute of Medicine. Description and Analysis of the VA National
Formulary.
Washington, DC: National Academy Press; January 2000.
50 Department of Veterans Affairs, Veterans Health Administration, VHA DIRECTIVE
2001-044, VA NATIONAL FORMULARY PROCESS, July 24, 2001.
51 Ibid.

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Reimbursement levels for all Medicaid covered items and services, including
prescription drugs, are set by the states. Unlike many other Medicaid items and
services, however, prescription drug prices are subject to upper limits established in
federal law that restrict the amount of federal matching payments available for those
products. In addition, federal law also requires manufacturers whose drugs are made
available to Medicaid beneficiaries, to pay rebates to states. The Medicaid rebates
were established to achieve a “best price” policy — based on the philosophy that
Medicaid as a health coverage program of last resort should have access to the lowest
prices offered to other drug purchasers in the market.
In addition, states can and do aggressively negotiate for lower Medicaid drug
prices. Many states administer their own upper limit payment formulas, generally
intended to keep prices below the federal upper limits. Many states also have
negotiated supplemental rebates, over and above those required under federal law.
These rebates are often related to the state formularies. For example, under Florida’s
Medicaid supplemental rebate program, manufacturers that agree to pay the
supplemental rebates will have their products included on the states’ list of preferred
drugs. All others are subject to prior authorization.52
Federal Upper Limits. Medicaid’s federal upper payment (FUL) levels are
calculated consistent with a statutory formula and based on data submitted by
pharmaceutical manufacturers. The FULs apply separately to multiple source and to
all “other” drugs and are applied in the aggregate to each state’s spending for drugs.
The FULs for multiple source drugs, defined to include any drug for which there is
at least one other drug sold and marketed during the period that is rated as
therapeutically equivalent and bioequivalent, are calculated by the CMS and are
periodically published in the state Medicaid Manual. For these multiple source drugs,
the FUL, beginning January 1, 2007, is equal to 250% of the “average manufacturer
price” (AMP) for the product computed without regard to prompt pay discounts. The
AMP is a price reported to CMS by manufacturers, and is calculated to be the
average price at which manufacturers sell a drug product to wholesalers.
Each state must assure the Secretary that its Medicaid spending for multiple
source drugs is in accordance with the upper limits plus reasonable dispensing fees.
The effect of the FUL requirement is that, when a lower-cost “generic” equivalent
exists for a brand-name drug, a state can only claim federal matching share for a
reimbursement level that is tied to the generic price even if the brand-name drug is
actually furnished. The state has incentives, therefore, to establish policies to
encourage the substitution of lower-cost generic equivalents for the brand-name
counterparts. The upper limit for multiple source drugs does not apply if a physician
provides handwritten certification on the prescription that a specific brand is
medically necessary for a particular recipient. The brand name would then be
dispensed subject to the limits applicable to “other” drugs.
52 For more detailed information on Medicaid drug coverage, states’ payment formulas and
supplemental rebates, see CRS Report RL30726, Prescription Drug Coverage Under
Medicaid
, by Jean Hearne.

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All “other” drugs include brand-name drugs and multiple source drugs for which
a specific FUL limit has not been established. The upper limit that applies to “other”
drugs is the lower of the estimated acquisition cost (EAC) plus a reasonable
dispensing fee or the provider’s (usually a pharmacy’s) usual and customary charge
to the general public. The EAC is the state Medicaid agency’s best estimate of the
price generally paid by pharmacies to acquire the drug. States may use another
payment method as long as, in the aggregate, a state’s payments for “other” drugs are
below the payment levels determined by applying the upper limit for “other” drugs.
Medicaid Rebates. Rebates are computed and paid by pharmaceutical
manufacturers each quarter based on utilization information supplied by the state
programs. The formula for calculating Medicaid rebates is different based on which
of the two following groups the drug falls into. The first group includes single source
drugs (generally, those still under patent) and “innovator” multiple source drugs
(drugs originally marketed under a patent or original new drug application (NDA) but
for which generic competition now exists). Rebates for the drugs in the first group
are equal to the greater of 15.1% of the AMP and the difference between the AMP
and the best price. Additional rebates are required if the weighted average prices for
all of a given manufacturer’s single source and innovator multiple source drugs rise
faster than inflation, as measured by the consumer price index for all urban
consumers.
The second class includes all other “non-innovator” multiple source drugs
(generics). Rebates for non-innovator multiple source drugs are equal to 11% of the
AMP.
Medicaid Formularies. There is no federal Medicaid formulary, although
states are able to establish formularies for their Medicaid programs. However,
federal rules impede states from establishing restrictive formularies. First, federal
rebate policies essentially ensure that all drugs sold by a manufacturer are made
available to Medicaid beneficiaries if the manufacturer participates in the rebate
program. In addition, states are required to cover any non-formulary drug (with the
exception of drugs in 10 specific categories) that is specifically requested and
approved in advance through a defined process (generally referred to as prior
authorization). The 10 categories of drugs that states are allowed to exclude from
coverage include drugs used (a) to treat anorexia, weight loss or weight gain; (b) to
promote fertility; (c) for cosmetic purposes or hair growth; (d) for the relief of coughs
and colds; (e) for smoking cessation; and (f) prescription vitamins and mineral
products (except prenatal vitamins and fluoride preparations); (g) non-prescription
drugs; (h) barbiturates; (i) benzodiazepines; and (j) drugs requiring tests or
monitoring that can only be provided by the drug manufacturer.53
In 2005, 25 state agencies report having established preferred drug lists for their
Medicaid programs. States use other mechanisms as well to discourage unnecessary
drug spending. Mandatory generic substitution, dispensing limits, prior
53 By law, all of these categories (except for smoking cessation) are excluded from Medicare
Part D coverage.

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authorization, and beneficiary co-payments are all additional tools states report using
to keep control of drug spending.
Negotiating Drug Prices for Medicare
Depending on the policy outcome the Congress wishes to achieve by
establishing the authority for the Secretary to negotiate drug prices, there are a
number of alternative ways to go about doing so. Medicaid and the VA provide
models for a few of these alternatives. If, for example, Congress’ primary objective
is to lower the overall cost of the program, a set of ceiling prices may be sufficient
to achieve such an objective. If, on the other hand, the primary purpose of such
actions would be to lower overall costs, while minimizing the number of parties who
are negatively affected by policy, then mandated rebates could be appropriate.
However, none of those approaches directly impact the premiums drug plans might
charge or co-payments that beneficiaries face at the pharmacy; rather, indirect effects
are possible. If Congress’ primary objective is to impact those amounts, an explicit
policy targeted at cost sharing or premiums could ensure those objectives are met.
The following section identifies a few alternative approaches that Congress may
consider.
Option 1: Establish a Medicare ceiling price. One way in which lower
drug prices might translate into lower overall costs is through a Medicare ceiling
price.54 Ceiling prices could be established to resemble Medicaid’s federal upper
limits, or the federal supply schedule prices. There are however, both administrative,
and other complications to establishing such a system. Without combining such a
policy with a national Medicare formulary — and the threat of excluding high priced
drugs from such a formulary — CMS may not be able to negotiate adequately
favorable ceiling prices. Also, a ceiling price policy does not necessarily translate
into lower costs at the pharmacy counter for beneficiaries, nor does it translate into
lower purchasing prices for pharmacies. Other policies could be combined with
ceiling prices to ensure lower prices for beneficiaries or pharmacies.
Finally, ceiling prices that reduce reimbursements significantly could have
indirect effects on beneficiary access to future innovative drug products, and even
economic impacts on other payers and providers. For example, manufacturers may
lose profits, which may adversely affect pharmaceutical research and development,
as well as increase costs for non-Medicare consumers. Pharmaceutical manufacturers
have argued that lower profits impede their ability to research and develop new
disease treatments.55 This argument has been both supported and refuted by many
54 For more information on price ceilings, see CRS Report RL33781, Pharmaceutical Costs:
An International Comparison of Government Policies
, by Gretchen A. Jacobson.
55 For more information, see Pharmaceutical Research and Manufacturers of America
(PhRMA),What Goes Into the Cost of Prescription Drugs? ... And Other Questions About
Your Medicines
. Available at [http://www.phrma.org/files/Cost_of_Perscription_Drugs.pdf].
Last accessed December 27, 2006.

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academics.56 The manufacturers may also choose to recoup the lost profits by
increasing the drug prices for other consumers. Such a policy would need to be
carefully crafted to minimize unintended consequences.
Option 2: Mandate that Manufacturers Provide Rebates to Part D
Plans. Another way of lowering out-of-pocket payments for beneficiaries might be
to mandate larger rebates from manufacturers to Part D drug plans. This system
could resemble Medicaid’s rebate system. Larger rebates would lower Part D drug
plans’ net costs of drugs for beneficiaries. Assuming market competition works in
the Part D Program, lower net costs could be passed onto beneficiaries in the form
of lower premiums, and perhaps also lower copayments. Alternatively,
manufacturers could provide these rebates directly to the CMS. If market
competition does not fully work, Congress might need to require that Part D plans
pass lower costs onto beneficiaries through reduced premiums.
As previously discussed, lower Medicare profits for manufacturers may
adversely affect pharmaceutical research and development, and may also increase
costs for non-Medicare consumers. However, larger rebates may not adversely
affect wholesalers or pharmacists.
Option 3: Establish a Medicare Pharmacy Purchasing System. A
new Medicare pharmacy purchasing system would be another option that might help
translate lower manufacturer drug prices for Medicare Part D into lower out-of-
pocket and overall costs for beneficiaries. One example of such a system could
resemble the VA’s mail-order pharmacy system. The new Medicare pharmacy
purchasing system could negotiate drug prices and purchase drugs from
manufacturers or wholesalers, and then distribute the drugs and receive payment from
beneficiaries.
This approach is potentially the most administratively burdensome of the
options, since it would require developing a Medicare pharmacy distribution system.
Pharmacists may experience increased administrative costs if they were to be
required to track and purchase drugs separately for their Medicare customers, since
pharmacists rarely track drugs by payer under the current system. Some of the burden
could be alleviated through heavy use of a mail-order system.
If a mail-order system is established, pharmacists, and possibly wholesalers,
could lose profits because they would lose Medicare business. The Part D plans
might have a considerably reduced role in the new system. As with any price
reduction, manufacturers’ profits from Medicare might be reduced and they may
choose to recoup lost profits by increasing drug prices to other consumers. Finally,
a complete mail-order system is not a realistic option because many beneficiaries
may prefer to talk to their pharmacist directly, and may not wish to participate in a
mail-order program.
56 For examples of academic research on the subject, see John A. Vernon, “Examining The
Link Between Price Regulation and Pharmaceutical R&D Investment,” Health Economics,
January 2005; 14(1): 1-16. See also Jerry Avorn, Powerful Medicines: The Benefits, Risks,
and Costs of Prescription Drugs
(Knopf, New York, 2004).