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September 23, 2019
Negotiation of Drug Prices in Medicare Part D
The 116th Congress is considering a number of approaches
cost-based “reinsurance” payments for those with high drug
to address prescription drug prices and spending, including
spending.
proposals to allow the Secretary of Health and Human
Services (the Secretary) to negotiate prices in the Medicare
Determination of Drug Prices in Medicare Part D
Part D program. This In Focus provides an overview of
To bolster market competition and limit the federal role, the
how drug prices are established under Part D and describes
MMA included a non-interference provision (Social
elements of various proposals for Secretarial negotiation.
Security Act (SSA) §1860D-11(i)), which states that in
carrying out the requirements of the Part D program, “the
Overview of Medicare Part D
Secretary: (1) may not interfere with the negotiations
Congress created a voluntary Medicare outpatient
between drug manufacturers and pharmacies and PDP
prescription drug benefit, Part D, in the Medicare
sponsors; and (2) may not require a particular formulary or
Prescription Drug, Improvement, and Modernization Act of
institute a price structure for the reimbursement of covered
2003 (MMA; P.L. 108-173). The program started in 2006,
part D drugs.”
and about 46 million Medicare beneficiaries are currently
enrolled. In 2019, Part D spending is estimated to reach
Although there is no Part D central formulary (i.e., a list of
approximately $98 billion. Part D is also the primary source
covered drugs), plans must cover at least two drugs in each
of drug coverage for individuals enrolled in both Medicare
category or class used to treat the same medical condition
and the state-federal Medicaid program (dual eligibles).
and substantially all drugs in six protected classes: immune-
(See CRS Report R40425, Medicare Primer, and CRS
suppressant, anti-depressant, antipsychotic, anticonvulsant,
Report R40611, Medicare Part D Prescription Drug
antiretroviral, and antineoplastic (cancer). HHS has existing
Benefit.)
authority to modify these general formulary requirements,
including the six protected classes. Most Part D sponsors
Part D coverage is provided by private health payers (plan
offer alternative plans that include tiered formularies, which
sponsors) that offer drug-only plans (PDP), or by Medicare
impose different levels of copayments (flat dollar amount)
Part C (Medicare Advantage) plans with a Part D benefit
or co-insurance (percentage of drug price) for generic,
(MA-PD). Congress designed Part D as a market-oriented
brand-name, and specialty drugs. Part D specialty drugs are
program in which sponsors compete for enrollees based on
defined as those with a price of at least $670 per month.
the scope and price of benefits, such as premiums and cost-
sharing.
Part D sponsors, working with pharmacy benefit managers
(PBMs), negotiate prices with drug manufacturers and
Figure 1. 2019 Medicare Part D Standard Benefit
contract with pharmacies to dispense drugs to plan
enrollees. Negotiated price concessions mainly take the
form of rebates (after-sale reductions) from a
manufacturer’s list price for brand-name drugs. Plan
sponsors and PBMs can secure rebates by including a
manufacturer’s drug on a plan formulary or by putting it on
a low cost-sharing tier. Sponsors and PBMs have the most
leverage to negotiate rebates when there are competing
drugs on the market, and less ability to secure rebates for
sole-source drugs, or those in the protected classes. The
value of a rebate may be tied to the sales volume or market
share of a drug, and may be aggregated and paid to a plan
over time, such as quarterly.
Source: CRS analysis of CMS, 2019 Part D Payment Policies.
Note: Enrol ees also pay monthly premiums for Part D coverage.
Plan sponsors can pass on rebates and other price
concessions to enrollees in the form of lower drug prices at
Sponsors submit annual bids to offer drug plans. At a
the pharmacy, but the vast majority do not. Instead sponsors
minimum, Part D plans must offer a “standard” benefit
generally use rebate revenue to buy down, or reduce,
defined in law, or alternative coverage at least actuarially
premiums, thus spreading price concessions across all
equivalent to a standard benefit. (See Figure 1.) Medicare
enrollees.
pays plan sponsors a monthly per person amount for
standard benefit coverage. Plan sponsors may also receive
Part D Drug Spending and Prices
additional Medicare payments for low-income enrollees and
Actual Part D spending has been below initial estimates by
the Congressional Budget Office (CBO) and the HHS
https://crsreports.congress.gov
Negotiation of Drug Prices in Medicare Part D
Actuary, due to lower-than-expected enrollment and high
with relatively high prices that are needed to address a
use of cheaper generic drugs, which constitute about 90%
public health emergency, however, such negotiations may
of Part D prescriptions. However, the Medicare Trustees
have only a modest impact on federal spending.
indicate that Part D spending is growing rapidly, and
project it will double to $201 billion in CY2028. The
Key Elements of Recent Negotiation Proposals
projection is based in part on a slowing of the trend toward
Several bills have been introduced in the 116th Congress to
greater generic drug utilization, and an increase in the use
allow the Secretary to negotiate Part D drug prices. Several
and the prices of specialty drugs. Specialty drugs are about
of the proposals are designed to increase the Secretary’s
1% of Part D prescriptions but account for more than 25%
leverage by imposing penalties on manufacturers if
of spending, up from 6% in 2007. (See CRS Report
negotiations are not successful. Below is a general
R44620, Biologics and Biosimilars: Background and Key
overview of approaches to Secretarial negotiation. Because
Issues.)
CBO has not issued scores for recent legislative proposals,
the overview does not address possible impacts on drug
Plan sponsors have significantly increased negotiated
prices or Part D spending.
rebates for brand-name drugs, with rebates rising from
11.1% of Part D costs in 2008 to 25.3% in 2018. Although
Formularies—Legislative proposals regarding HHS
manufacturers have provided greater rebates, they have
formulary development differ widely. Some bills would
continued to raise or set high initial list prices for brand-
retain noninterference language barring a central Part D
name drugs. Because Part D sponsors base enrollee
formulary. Others would repeal the entire noninterference
prescription cost-sharing on list prices, the higher prices
provision without providing guidance on future formularies
have increased beneficiary out-of-pocket spending, as well
or would repeal the noninterference provision and instruct
as Medicare spending on reinsurance. In addition, studies
the Secretary to set a central formulary that includes many
by the CBO, HHS, and the Government Accountability
of the current formulary requirements.
Office (GAO) have found that Part D pays higher average
net prices (prices after rebates and other discounts) for
Scope of Negotiation—Some legislative proposals include
brand-name drugs (including specialty drugs) than
general language that would allow the Secretary to
Medicaid. Medicaid requires a 23.1% rebate on new
negotiate prices, while others would direct the Secretary to
innovator drugs, a 13% rebate on generic drugs, and a
prioritize negotiations on Part D drugs with the highest cost,
supplemental rebate if drug prices rises faster than U.S.
the largest price increase, or the least market competition.
retail inflation. (CRS Report R44832, Frequently Asked
Some proposals list criteria for determining the appropriate
Questions About Prescription Drug Pricing and Policy.)
negotiated price for a drug, including the drug’s clinical and
cost-effectiveness, budgetary impact, patient financial
Part D Drug Price Negotiation Proposals burden, and sales. While some would require annual
Proposals to repeal or modify the noninterference provision
negotiations, others would set prices for longer periods.
to give the Secretary the authority to negotiate drug prices
Some proposals would also allow plan sponsors to continue
have been introduced since the start of the Part D program.
to negotiate for lower prices than those set by the Secretary.
Supporters of Secretarial negotiation maintain that by
leveraging the combined purchasing power of tens of
Fallback Pricing/Penalties—Some legislative proposals
millions of Part D enrollees, the Secretary could secure
include fallback pricing to be triggered if the Secretary and
larger discounts and rebates than can be obtained by plan
manufacturers were unable to reach agreement. Examples
sponsors. Opponents note that Part D enrollment is
include basing Part D prices on (1) prices charged to the
concentrated in a few plans—two sponsors alone have 40%
Veterans Health Administration, which procures drugs for
of enrollees—that already have substantial bargaining
its own facilities; (2) prices in select industrialized nations;
power, and that changing the noninterference provision
or (3) Medicaid’s best price, which is the lowest price that a
could limit formulary coverage. In 2007, the House
manufacturer offers to a U.S. buyer. Under other proposals,
approved H.R. 4, the Medicare Prescription Drug Price
manufacturers that refused to negotiate could be subject to
Negotiation Act of 2007, which would have partially
financial penalties, such as special tax assessments.
repealed the noninterference provision to allow for
Secretarial negotiation. A CBO analysis said the approach
Compulsory Licensing—One proposal would give the
would have a “negligible effect” on spending and that the
Secretary authority to issue compulsory licenses to third
Secretary was not likely to have sufficient negotiating
parties to manufacture prescription drugs—including drugs
leverage unless given authority to create a central
with federal patent and exclusivity protections—in cases
formulary, set prices administratively, and/or take other
where the Secretary and manufacturers could not agree on a
actions if manufacturers failed to cut prices.
price, or where the Secretary determined that broader
market or price distortions necessitated federal
In a May 2019 letter to the Chairman of the Senate Finance
involvement. Any entity that manufactured a drug under
Committee, CBO continued to conclude that “(n)egotiation
such a compulsory license would have to provide
is likely to be effective only if it is accompanied by some
“reasonable compensation” to the original manufacturer.
source of pressure on drug manufacturers ... providing
(See CRS Report R45666, Drug Pricing and Intellectual
broad negotiating authority by itself would likely have a
Property Law: A Legal Overview for the 116th Congress.)
negligible effect on federal spending.” CBO indicated that
the Secretary might achieve savings by negotiating prices
for select drugs, such as those with no close substitutes or
https://crsreports.congress.gov
Negotiation of Drug Prices in Medicare Part D
Binding Arbitration—Another suggested approach is to set
Suzanne M. Kirchhoff, Analyst in Health Care Financing
drug prices through arbitration, a dispute resolution process
in which a neutral third party makes a binding decision.
IF11318
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