Negotiation of Drug Prices in Medicare Part D

Negotiation of Drug Prices in Medicare Part D

link to page 1

Updated May 23, 2022
Negotiation of Drug Prices in Medicare Part D
The 117th Congress is considering a number of approaches
low-income enrollees and cost-based “reinsurance”
to address prescription drug prices and spending, including
payments for enrollees with the highest drug spending.
proposals to allow the Secretary of Health and Human
Services (HHS) to negotiate prices in the Medicare Part D
Determination of Drug Prices in Medicare Part D
program. This In Focus provides an overview of how drug
To bolster market competition and limit the federal role, the
prices are established under Part D and describes various
MMA includes a noninterference provision (Social Security
proposals for HHS secretarial negotiation.
Act [SSA] §1860D-11(i)), which states that in carrying out
the Part D program, “the Secretary: (1) may not interfere
Overview of Medicare Part D
with the negotiations between drug manufacturers and
Congress created the voluntary Medicare outpatient
pharmacies and PDP sponsors; and (2) may not require a
prescription drug benefit, Part D, in the Medicare
particular formulary or institute a price structure for the
Prescription Drug, Improvement, and Modernization Act of
reimbursement of covered part D drugs.”
2003 (MMA; P.L. 108-173). The program began operation
in 2006, and about 50 million Medicare beneficiaries are
Although there is no Part D central formulary (i.e., list of
now enrolled. In 2022, Part D spending is estimated to be
covered drugs), plans must cover at least two drugs in each
approximately $120 billion. (See CRS Report R40425,
category or class used to treat the same medical condition
Medicare Primer, and CRS Report R40611, Medicare Part
and substantially all drugs in six protected classes: immune-
D Prescription Drug Benefit.)
suppressant, antidepressant, antipsychotic, anticonvulsant,
antiretroviral, and antineoplastic (cancer). HHS has existing
Part D coverage is provided by private health payers (plan
authority to modify these general formulary requirements,
sponsors) that offer drug-only plans (PDPs) or Medicare
including the six protected classes. Most Part D sponsors
Part C (Medicare Advantage) plans with a Part D benefit
offer alternative plans that include tiered formularies, which
(MA-PDs). Congress designed Part D as a market-oriented
impose different levels of co-payments (flat dollar amount)
program where sponsors compete for enrollees based on
or coinsurance (percentage of drug price) for generic,
benefit scope and price, such as premiums and cost sharing.
brand-name, and specialty drugs. Part D specialty drugs are
defined as those with a price of at least $830 per month in
Figure 1. 2022 Medicare Part D Standard Benefit
2022. Specialty drugs (which can be defined in different
ways depending on the payer), a relatively small share of
total prescriptions in Part D and private plans, accounted for
more than 50% of U.S. retail drug spending in 2020, up
from 27% in 2010, according to industry estimates.
Part D sponsors, working with pharmacy benefit managers
(PBMs), negotiate prices with drug manufacturers and
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
Source: CRS analysis of the Centers for Medicare and Medicaid
sponsors and PBMs can secure rebates by including a drug
Studies (CMS), 2022 Part D Payment Policies.
on a plan formulary and, further, by putting the drug on a
Note: Enrol ees also pay monthly premiums. In the standard benefit,
low cost-sharing tier. Sponsors and PBMs have the most
an enrol ee pays 100% of costs in a deductible, then has average 25%
leverage to negotiate rebates when there are competing
cost sharing until accumulating enough out-of-pocket spending to
drugs on the market; they have less ability to secure rebates
reach the catastrophic threshold, where cost sharing is capped at 5%.
for sole-source drugs or those in the protected classes. A
Medicare/plan subsidies vary in different benefit stages, as seen in the
rebate’s value may be tied to the drug’s sales volume or
right portion of the graphic. Manufacturers provide a 70% discount
market share and may be aggregated and paid to a plan over
on brand drugs in the “doughnut hole.” In 2022, enrol ees enter the
time, such as quarterly. Part D plan sponsors may pass on
doughnut hole with $4,430 in total drug spending.
rebates and other price concessions to enrollees in the form
of lower drug prices at the pharmacy, but the vast majority
Sponsors submit annual bids to HHS to offer drug plans. At
a minimum, Part D plans must offer a “standard” benefit
do not, according to CMS. Instead, sponsors use rebate
revenue to buy down, or reduce, premiums, thus spreading
defined in law or alternative coverage that is at least
price concessions across all enrollees.
actuarially equivalent to a standard benefit. (See Figure 1.)
Medicare pays plan sponsors a monthly per person amount
for standard coverage, as well as monthly payments for
https://crsreports.congress.gov

Negotiation of Drug Prices in Medicare Part D
Part D Drug Spending and Prices
Later in 2019, CBO analyzed H.R. 3, a House-passed bill
Actual Part D spending was below initial estimates by the
that, among other changes, would have given the HHS
Congressional Budget Office (CBO) and the HHS Actuary
Secretary authority to negotiate prices for selected Part D
for 2006-2013. Part D drug spending growth spiked in 2014
drugs and make them available to commercial insurers. The
and 2015 due to use of new specialty hepatitis C drugs but
bill limited negotiated prices to a maximum of 120% of the
has since moderated. Still, the Medicare Trustees project
average price in a reference group of six industrialized
that from 2021 to 2030, Part D aggregate benefits will rise
nations. H.R. 3 would have modified the noninterference
about 6% a year on average, faster than other areas of
provision to allow negotiations and would have imposed an
medical spending. The increase is due partly to an expected
excise tax on drug sales if manufacturers declined to
reduction in growth in the use of generic drugs, which are
negotiate or failed to agree to a price. CBO scored this title
already about 90% of Part D prescriptions, and higher unit
of the bill as reducing Part D drug spending, because the
prices for specialty drugs.
excise tax would provide an incentive for successful
negotiations. Subsequently, in the117th Congress, CBO
Increases in manufacturer rebates and fees from
scored another House-passed bill, H.R. 5376, as producing
participating pharmacies (direct and indirect remuneration,
Part D savings by allowing the Secretary to negotiate prices
or DIR) have helped plan sponsors keep premiums low.
of a smaller set of single-source drugs covered under
DIR is estimated to be equal to 31% of Part D costs in
Medicare Parts D and B, after they had been approved or
2022, up from 12% in 2008. Although manufacturers have
licensed for a specified number of years. Manufacturers
provided larger rebates, they have continued to raise or set
would face an excise tax for noncompliance.
high initial list prices for brand-name drugs. Because Part D
sponsors generally base enrollee prescription cost sharing
Key Elements of Other Negotiation Proposals
on list prices, higher prices can increase beneficiary out-of-
Other bills in the 116th and 117th Congresses would give the
pocket costs. Studies by CBO and HHS, among others,
HHS Secretary authority to negotiate Part D prices. Below
have found Part D pays higher average net prices (prices
is an overview of negotiation approaches.
after rebates and other discounts) for brand-name drugs
(including specialty drugs) than the state-federal Medicaid
Formularies. Some bills would retain noninterference
program. Medicaid requires a 23.1% rebate on new
language barring a central Part D formulary. Others would
innovator drugs, a 13% rebate on generics, and a
repeal the entire noninterference provision without
supplemental rebate if prices rises faster than U.S. retail
providing guidance on future formularies or would repeal
inflation. (See CRS Report R44832, Frequently Asked
the noninterference provision and instruct the Secretary to
Questions About Prescription Drug Pricing and Policy.)
set a central formulary based on many current requirements.
Part D Drug Price Negotiation Proposals Scope of Negotiation. Some proposed bills include general
Since Part D was enacted, some lawmakers have introduced
language allowing the HHS Secretary to negotiate prices;
bills to repeal or modify the noninterference provision so
others would direct the Secretary to prioritize Part D drugs
the HHS Secretary could negotiate drug prices. Supporters
with the highest cost, the largest price increase, or the least
of secretarial negotiation maintain that by leveraging the
market competition. Some proposals set criteria for
combined purchasing power of tens of millions of Part D
determining the appropriate negotiated drug price, such as
enrollees, the Secretary could secure larger discounts and
the drug’s clinical and cost effectiveness. A number of bills
rebates than individual plan sponsors can obtain. Others
would allow plan sponsors and manufacturers to negotiate
note that nearly 60% of Part D enrollment is now
prices below those set via secretarial negotiation.
concentrated in three large insurers that already have
substantial bargaining power and that changing the
Fallback Pricing/Penalties. Some bills include fallback
noninterference provision could result in formulary limits.
pricing and/or penalties to be triggered if the Secretary and
manufacturers cannot reach agreement. Examples include
In 2007, the House approved H.R. 4, the Medicare
basing Part D prices on (1) prices charged to the Veterans
Prescription Drug Price Negotiation Act of 2007, which
Health Administration, which procures drugs for its own
would have repealed part of the noninterference provision
facilities; (2) prices in selected industrialized nations; or (3)
Medicaid’s best price
to allow secretarial negotiation of Part D prices. CBO
, which is the lowest price that a
analyses said the approach would have a “negligible effect”
manufacturer offers to a U.S. buyer.
on federal spending and that the Secretary was unlikely to
Compulsory Licensing. Proposed legislation in the 116th
have sufficient negotiating leverage unless also given
Congress would have given the HHS Secretary authority to
authority to create a central formulary and/or take other
issue compulsory licenses to third parties to manufacture
actions if manufacturers failed to cut prices. During the
drugs—including drugs with federal patent and exclusivity
116th Congress, in a May 2019 letter to the Senate Finance
protections—in cases where the Secretary and
Committee chair, CBO again stated that negotiation likely
manufacturers could not agree on a price or where the
would be effective only if accompanied by a source of
Secretary found broader market or price distortions
pressure on drug manufacturers. CBO indicated the
necessitated federal involvement. An entity manufacturing
Secretary might achieve savings by negotiating prices for
a drug under a compulsory license would have to provide
selected drugs, such as those with no close substitutes or
“reasonable compensation” to the original manufacturer.
those with relatively high prices needed to address a public
health emergency. Such negotiations could have a modest
Suzanne M. Kirchhoff, Analyst in Health Care Financing
budget impact.
IF11318
https://crsreports.congress.gov

Negotiation of Drug Prices in Medicare Part D

Disclaimer
This document was prepared by the Congressional Research Service (CRS). CRS serves as nonpartisan shared staff to
congressional committees and Members of Congress. It operates solely at the behest of and under the direction of Congress.
Information in a CRS Report should not be relied upon for purposes other than public understanding of information that has
been provided by CRS to Members of Congress in connection with CRS’s institutional role. CRS Reports, as a work of the
United States Government, are not subject to copyright protection in the United States. Any CRS Report may be
reproduced and distributed in its entirety without permission from CRS. However, as a CRS Report may include
copyrighted images or material from a third party, you may need to obtain the permission of the copyright holder if you
wish to copy or otherwise use copyrighted material.

https://crsreports.congress.gov | IF11318 · VERSION 4 · UPDATED