Selected Issues in Pharmaceutical Drug Pricing
December 7, 2022
Selected Issues in Pharmaceutical Drug Pricing
Many factors influence the prices consumers pay for
competition to lower drug prices for patients through an
prescription drugs. Congress has repeatedly attempted to
efficient market. Health insurers, including private plans
address high drug prices through legislation, including bills
and public programs, typically contract with pharmacy
that seek to increase generic competition, lower prices for
benefit managers (PBMs) for drug benefit management
certain health care entities that serve rural and vulnerable
services that include developing and maintaining
populations, and regulate drug price negotiations through
formularies (lists of covered drugs), negotiating prices with
the Medicare program. Congress has also proposed to cap
drug companies including discounts and rebates, and
out-of-pocket Medicare costs, increase drug price
reimbursing pharmacies for drugs dispensed to
transparency, permit more drug importation, and regulate
beneficiaries. Currently, the PBM market is dominated by
pharmacy benefit managers. This In Focus reviews several
three companies, raising questions about adequate
issues affecting drug prices of potential interest to the 118th
competition and whether the negotiated discounts and
Congress.
rebates result in lower prescription drug prices for patients.
Economics of the Pharmaceutical
Policies to mitigate the high price of sole-source drugs
Industry and the Life Cycle of Drugs
include efforts to modify the timing and degree of
In 2020, U.S. expenditures on outpatient prescription drugs
competition through changes in the length and scope of
were $348 billion, accounting for 8.4% of total healthcare
exclusivity rights, and to impose certain restrictions on drug
expenditures. Over the last 20 years, this percentage has
prices and price increases over time.
been as high as 10.5% in 2006 but has otherwise remained
between 8 to 10%. The Congressional Budget Office found
Patent Rights, Regulatory Exclusivities,
that from 2009 to 2018, the average net price of a
and Generic Competition
prescription—the price of a prescription after subtracting
Intellectual property (IP) rights play an important role in the
the discounts and rebates that manufacturers provide to
development and pricing of prescription drugs and
private insurers and federal programs—fell “in both the
biologics. Two forms of IP are particularly important for
Medicare Part D and Medicaid program,” reflecting “the
pharmaceuticals. To encourage innovation, patents grant
increased use of lower-cost generic drugs, which was
inventors the exclusive right to make and sell a novel
partially offset by rising prices for brand-name drugs.”
invention (such as a new drug), potentially enabling the
Despite these trends, concern about the price of prescription
patent holder to charge higher-than-competitive prices
drugs has drawn much attention in Congress, partly due to
during the patent term. Similarly, the Food and Drug
the high price of sole-source (brand-name) drugs and
Administration (FDA) grants regulatory exclusivities to
biological products (biologics).
pharmaceuticals meeting certain criteria. During a period of
regulatory exclusivity, FDA will not accept and/or approve
Researching, developing, obtaining approval for, and
applications for a generic or biosimilar form of the drug.
marketing pharmaceutical products has generally been a
high-risk, high-reward endeavor. The discovery,
IP rights are typically justified as necessary for
development, and testing phases can be complex and
pharmaceutical manufacturers to recoup their costs in
lengthy, with a low success rate (~1 in 10,000 candidate
research and development, including clinical trials and
molecules, according to some studies). However,
other tests necessary to obtain FDA approval and bring a
pharmaceutical companies that succeed in bringing a new
drug to market. However, IP rights are sometimes criticized
product to market benefit from exclusivity and, as sole-
as contributing to high prices for pharmaceutical products
source providers, can set a higher price for their product in
in the United States by deterring or delaying competition
the absence of competition. As the market for a
from generic drug and biosimilar manufacturers. For
pharmaceutical product grows, sales and profits typically
example, some Members of Congress have criticized
increase until competitors enter the market, either (1) as
certain pharmaceutical patenting practices as unduly
other products with similar functions and clinical
extending periods of exclusivity.
applications receive their own separate approvals and are
launched; (2) as exclusivity rights expire, permitting others
Studies show that generic competition lowers drug prices.
to produce bioequivalent versions of the original product
Generic forms often cost a fraction of the price of a brand-
(i.e., generics or biosimilars); or (3) as the market matures
name drug before generic entry. Whether and when generic
and sales decline.
or biosimilar competition is permitted, however, depends
on the IP rights in the drug and, in many cases, litigation
While pharmaceutical companies that produce sole-source
under the specialized patent dispute procedures of the
drugs benefit from a lack of competition, the buyers’
Hatch-Waxman Act (P.L. 98-417) and the Biologics Price
market for drugs (purchasers) also lacks sufficient
https://crsreports.congress.gov
Selected Issues in Pharmaceutical Drug Pricing
Competition and Innovation Act (P.L. 111-148, §§ 7001-
The IRA creates a new Drug Price Negotiation Program
7003).
requiring the Secretary of HHS to negotiate prices for
certain qualifying single-source drugs furnished to
The 340B Drug Discount Program
Medicare program beneficiaries, including those drugs and
Given the high cost of many drugs, Congress has proposed
biologics with the highest expenditures in Medicare Parts B
ways to make drugs more affordable for patients and
and D.
providers who care for rural and underserved populations.
One such program is the 340B Drug Discount Program
The first negotiated Maximum Fair Prices (MFPs) will take
(340B), which Congress created to enable healthcare
effect in 2026 for 10 eligible drugs or biologics. For 2027
providers that serve low-income and uninsured patients to
and 2028, the HHS Secretary will select and publish a list
purchase drugs at lower costs. The Health Resources and
each year of 15 negotiation-eligible drugs as selected drugs,
Services Administration (HRSA), part of the U.S.
rising to 20 for 2029 and subsequent years. A chemical
Department of Health and Human Services (HHS),
drug will have to be FDA-approved for at least seven years
administers the Program. HRSA estimates that 340B sales
before the Secretary can select it for negotiation. A biologic
constitute about 7.2% of the overall U.S. drug market; sales
will have to be licensed for 11 years before it can be
reached approximately $44 billion in 2021.
selected for negotiation. Certain types of drugs or biologics
are exempt from negotiation. For example, single-source
The program requires the Secretary of HHS to enter into
drugs manufactured by companies that meet the definition
purchase price agreements (PPAs) with drug manufacturers
of a small biotechnology firm are exempt in years 2026
that participate in the Medicaid program. PPAs require
through 2028. For 2029 and 2030, there is a special MFP
manufacturers to sell to qualifying “covered entities”
floor for qualifying single-source drugs of small biotech
certain outpatient drugs at a “ceiling price,” which is set via
firms. Manufacturers are subject to an excise tax for non-
a statutory formula. Covered entities include Federally
compliance, including failure to enter into an agreement to
Qualified Health Centers, Tribal and Urban Indian
negotiate an MFP.
organizations, Ryan White clinics, Critical Access
Hospitals, and Disproportionate Share Hospitals (DSHs),
Separately, the IRA also makes modifications to drug
which serve a disproportionate number of low-income
coverage and payment under Medicare Parts B and D to
patients. DSHs currently make about 75% of 340B sales.
lower the cost to beneficiaries. Pharmaceutical companies
are required to pay rebates to Medicare if they increase
Since its creation, Congress has significantly expanded the
prices faster than consumer inflation. The IRA reconfigures
340B Program to increase the number of eligible covered
the Medicare Part D retail prescription drug benefit to
entities. The Government Accountability Office
impose an annual enrollee out-of-pocket spending cap,
recommends that HRSA increase its oversight of covered
expand subsidies for low-income enrollees, and cap annual
entity eligibility requirements and its oversight to ensure
premium increases, among other changes. Cost-sharing for
that covered entities are not receiving duplicate discounts
certain Part D vaccines is eliminated, and the IRA sets a
from Medicaid.
$35 cap on enrollee cost-sharing for insulin covered
through Medicare Parts B and D. The IRA also changes
Drug manufacturers have recently challenged the Program’s
certain Part B drug payment formulas and delays
expansion, particularly with respect to contract pharmacies,
implementation of a Centers for Medicare & Medicaid
which provide 340B drugs to patients of covered entities
Services rule that would eliminate anti-kickback statute
outside of the provider setting. In 2020, several companies
protections (safe harbors) for manufacturer rebates in
announced pricing restrictions on covered entities that use
Medicare Part D.
contract pharmacies, making it more difficult for covered
entities to purchase drugs at or below ceiling prices. In
Considerations for Congress
2021, HRSA issued violation letters to the manufacturers,
Just as Congress authorized the programs discussed in this
notifying them that such restrictions violated the 340B
report, the 118th Congress could propose legislative changes
statute. The manufacturers have since challenged HRSA’s
to those programs or increase its oversight of them. As
authority to issue the letters in court.
Congress considers additional action to address high-priced
pharmaceuticals, it may also continue to weigh the balance
Federal district courts have analyzed the 340B statute,
between maintaining incentives for innovation and new
legislative history, and HRSA’s guidance but have arrived
drug discovery, while promoting access to pharmaceutical
at different legal conclusions. Two courts ruled that HHS
products at an affordable price.
acted within its statutory authority in issuing the violation
letters, while two others disagreed. Three of the cases were
appealed, and the appeals courts could release decisions at
any time.
Jim Hahn, Specialist in Health Care Financing
Medicare Drug Prices and the Inflation
Kevin J. Hickey, Legislative Attorney
Reduction Act
Suzanne M. Kirchhoff, Analyst in Health Care Financing
Hannah-Alise Rogers, Legislative Attorney
Congress also included several provisions in P.L. 117-169,
often referred to as the Inflation Reduction Act (IRA) of
IF12272
2022, to lower prices for patients receiving prescription
drugs covered and paid for under Medicare Parts B and D.
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Selected Issues in Pharmaceutical Drug Pricing
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