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Updated October 31, 2019
Negotiation of Drug Prices in Medicare Part D
The 116th Congress is considering a number of approaches
Determination of Drug Prices in Medicare Part D
to address prescription drug prices and spending, including
To bolster market competition and limit the federal role, the
proposals to allow the Secretary of Health and Human
MMA included a non-interference provision (Social
Services (the Secretary) to negotiate prices in the Medicare
Security Act [SSA] §1860D-11(i)), stating that in carrying
Part D program. This In Focus provides an overview of
out the requirements of the Part D program, “the Secretary:
how drug prices are established under Part D and describes
(1) may not interfere with the negotiations between drug
elements of various proposals for Secretarial negotiation.
manufacturers and pharmacies and PDP sponsors; and (2)
may not require a particular formulary or institute a price
Overview of Medicare Part D
structure for the reimbursement of covered part D drugs.”
Congress created a voluntary Medicare outpatient
prescription drug benefit, Part D, in the Medicare
Although there is no Part D central formulary (i.e., a list of
Prescription Drug, Improvement, and Modernization Act of
covered drugs), plans must cover at least two drugs in each
2003 (MMA; P.L. 108-173). The program started in 2006,
category or class used to treat the same medical condition
and about 46 million Medicare beneficiaries are currently
and substantially all drugs in six protected classes: immune-
enrolled. In 2019, Part D spending is estimated to reach
suppressant, anti-depressant, antipsychotic, anticonvulsant,
approximately $98 billion. Part D is also the primary source
antiretroviral, and antineoplastic (cancer). HHS has existing
of drug coverage for individuals enrolled in both Medicare
authority to modify these general formulary requirements,
and the state-federal Medicaid program (dual eligibles).
including the six protected classes. Most Part D sponsors
(See CRS Report R40425, Medicare Primer, and CRS
offer alternative plans that include tiered formularies, which
Report R40611, Medicare Part D Prescription Drug
impose different levels of copayments (flat dollar amount)
Benefit.)
or co-insurance (percentage of drug price) for generic,
brand-name, and specialty drugs. Part D specialty drugs are
Part D coverage is provided by private health payers (plan
defined as those with a price of at least $670 per month.
sponsors) that offer drug-only plans (PDP), or by Medicare
Part C (Medicare Advantage) plans with a Part D benefit
Part D sponsors, working with pharmacy benefit managers
(MA-PD). Congress designed Part D as a market-oriented
(PBMs), negotiate prices with drug manufacturers and
program in which sponsors compete for enrollees based on
contract with pharmacies to dispense drugs to plan
the scope and price of benefits, such as premiums and cost
enrollees. Negotiated price concessions mainly take the
sharing.
form of rebates (after-sale reductions) from a
manufacturer’s list price for brand-name drugs. Plan
Figure 1. 2019 Medicare Part D Standard Benefit
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.
Plan sponsors can pass on rebates and other price
concessions to enrollees in the form of lower drug prices at
the pharmacy, but the vast majority do not. Instead sponsors
Source: CRS analysis of CMS, 2019 Part D Payment Policies.
generally use rebate revenue to buy down, or reduce,
Note: Enrollees also pay monthly premiums for Part D coverage.
premiums, thus spreading price concessions across all
enrollees.
Sponsors submit annual bids to offer drug plans. At a
minimum, Part D plans must offer a “standard” benefit
Part D Drug Spending and Prices
defined in law, or alternative coverage at least actuarially
Actual Part D spending has been below initial estimates by
equivalent to a standard benefit. (See Figure 1.) Medicare
the Congressional Budget Office (CBO) and the HHS
pays plan sponsors a monthly per person amount for
Actuary, due to lower-than-expected enrollment and high
standard coverage. Plan sponsors also receive Medicare
use of cheaper generic drugs, which constitute about 90%
payments for low-income enrollees and cost-based
of Part D prescriptions. However, the Medicare Trustees
“reinsurance” payments for those with high drug spending.
indicate that Part D spending is growing rapidly, and
https://crsreports.congress.gov
Negotiation of Drug Prices in Medicare Part D
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
A number of bills have been introduced in the 116th
greater generic drug utilization, and an increase in the use
Congress to allow the Secretary to negotiate Part D drug
and the prices of specialty drugs. Specialty drugs are about
prices. Several of the proposals are designed to increase the
1% of Part D prescriptions but account for more than 25%
Secretary’s leverage by imposing penalties or fallback
of spending, up from 6% in 2007. (See CRS Report
prices on manufacturers if negotiations are not successful.
R44620, Biologics and Biosimilars: Background and Key
Below is an overview of Secretarial negotiation approaches.
Issues.)
Formularies. Legislative proposals regarding HHS
Plan sponsors have significantly increased negotiated
formulary development differ widely. Some bills would
rebates for brand-name drugs, with rebates rising from
retain noninterference language barring a central Part D
11.1% of Part D costs in 2008 to 25.3% in 2018. Although
formulary. Others would repeal the entire noninterference
manufacturers have provided greater rebates, they have
provision without providing guidance on future formularies
continued to raise or set high initial list prices for brand-
or would repeal the noninterference provision and instruct
name drugs. Because Part D sponsors base enrollee
the Secretary to set a central formulary that includes many
prescription cost sharing on list prices, the higher prices
of the current formulary requirements.
have increased beneficiary out-of-pocket spending, as well
as Medicare spending on reinsurance. In addition, studies
Scope of Negotiation. Some legislative proposals include
by the CBO, HHS, and the Government Accountability
general language that would allow the Secretary to
Office (GAO) have found that Part D pays higher average
negotiate prices, while others would direct the Secretary to
net prices (prices after rebates and other discounts) for
prioritize negotiations on Part D drugs with the highest cost,
brand-name drugs (including specialty drugs) than
the largest price increase, or the least market competition.
Medicaid. Medicaid requires a 23.1% rebate on new
Some proposals list criteria for determining the appropriate
innovator drugs, a 13% rebate on generic drugs, and a
negotiated price for a drug, including the drug’s clinical and
supplemental rebate if drug prices rises faster than U.S.
cost-effectiveness, budgetary impact, patient financial
retail inflation. (See CRS Report R44832, Frequently Asked
burden, and sales. While some would require annual
Questions About Prescription Drug Pricing and Policy.)
negotiations, others would set prices for longer periods.
Some proposals would also allow plan sponsors to continue
Part D Drug Price Negotiation Proposals to negotiate for lower prices than those set by the Secretary.
Proposals to repeal or modify the noninterference provision
to give the Secretary the authority to negotiate drug prices
Fallback Pricing/Penalties. Some legislative proposals
have been introduced since the start of the Part D program.
include fallback pricing and/or penalties to be triggered if
Supporters of Secretarial negotiation maintain that by
the Secretary and manufacturers could not reach agreement.
leveraging the combined purchasing power of tens of
Examples include basing Part D prices on (1) prices
millions of Part D enrollees, the Secretary could secure
charged to the Veterans Health Administration, which
larger discounts and rebates than can be obtained by plan
procures drugs for its own facilities; (2) prices in selected
sponsors. Opponents note that Part D enrollment is
industrialized nations; or (3) Medicaid’s best price, which is
concentrated in a few plans—two sponsors alone have 40%
the lowest price that a manufacturer offers to a U.S. buyer.
of enrollees—that already have substantial bargaining
One bill using fallback pricing and penalties, H.R. 3, would
power, and that changing the noninterference provision
require the Secretary to negotiate prices for certain single-
could limit formulary coverage. In 2007, the House
source drugs in Part D and commercial plans, which could
approved H.R. 4, the Medicare Prescription Drug Price
not exceed prices in six countries. Manufacturers would be
Negotiation Act of 2007, which would have partially
subject to an excise tax on drug sales if they declined to
repealed the noninterference provision to allow for
negotiate or failed to agree on a price. CBO estimated that
Secretarial negotiation. A CBO analysis said the approach
the resulting changes in drug prices would reduce federal
would have a “negligible effect” on spending and that the
spending on Part D by $303 billion over 10 years.
Secretary was not likely to have sufficient negotiating
leverage unless given authority to create a central
Compulsory Licensing. One proposal would give the
formulary, set prices administratively, and/or take other
Secretary authority to issue compulsory licenses to third
actions if manufacturers failed to cut prices.
parties to manufacture prescription drugs—including drugs
with federal patent and exclusivity protections—in cases
In a May 2019 letter to the Chairman of the Senate Finance
where the Secretary and manufacturers could not agree on a
Committee, CBO continued to conclude that “(n)egotiation
price, or where the Secretary determined that broader
is likely to be effective only if it is accompanied by some
market or price distortions necessitated federal
source of pressure on drug manufacturers ... providing
involvement. Any entity that manufactured a drug under
broad negotiating authority by itself would likely have a
such a compulsory license would have to provide
negligible effect on federal spending.” CBO indicated that
“reasonable compensation” to the original manufacturer.
the Secretary might achieve savings by negotiating prices
(See CRS Report R45666, Drug Pricing and Intellectual
for select drugs, such as those with no close substitutes or
Property Law: A Legal Overview for the 116th Congress.)
with relatively high prices that are needed to address a
public health emergency, however, such negotiations may
Suzanne M. Kirchhoff, Analyst in Health Care Financing
have only a modest impact on federal spending.
IF11318
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Negotiation of Drug Prices in Medicare Part D
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