Selected Issues in Pharmaceutical Drug Pricing
March 1, 2023
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 of prescription drugs often cost a fraction of
(i.e., generics or biosimilars); or (3) as the market matures
the price of a brand-name drug before generic entry.
and sales decline.
Whether and when generic or biosimilar competition is
permitted, however, depends on the IP rights in the drug
While pharmaceutical companies that produce sole-source
and, in many cases, litigation under the specialized patent
drugs benefit from a lack of competition, the buyers’
dispute procedures of the Hatch-Waxman Act (P.L. 98-417)
market for drugs (purchasers) also lacks sufficient
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Selected Issues in Pharmaceutical Drug Pricing
and the Biologics Price Competition and Innovation Act
(IRA), to lower prices for patients receiving prescription
(P.L. 111-148, §§ 7001-7003).
drugs covered and paid for under Medicare Parts B and D.
The IRA creates a new Drug Price Negotiation Program
The 340B Drug Discount Program
requiring the Secretary of HHS to negotiate prices for
Given the high cost of many drugs, Congress has proposed
certain qualifying single-source drugs furnished to
ways to make drugs more affordable for patients and
Medicare program beneficiaries, including those drugs and
providers who care for rural and underserved populations.
biologics with the highest expenditures in Medicare Parts B
One such program is the 340B Drug Discount Program
and D.
(340B), which Congress created to enable healthcare
providers that serve low-income and uninsured patients to
The first negotiated Maximum Fair Prices (MFPs) will take
purchase drugs at lower costs. The Health Resources and
effect in 2026 for 10 eligible drugs or biologics. For 2027
Services Administration (HRSA), part of the U.S.
and 2028, the HHS Secretary will select and publish an
Department of Health and Human Services (HHS),
annual list of 15 negotiation-eligible drugs as selected
administers the Program. HRSA estimates that 340B sales
drugs, rising to 20 for 2029 and subsequent years. A
constitute about 7.2% of the overall U.S. drug market; sales
chemical drug will have to be FDA-approved for at least 7
reached approximately $44 billion in 2021.
years before the Secretary can select it for negotiation. A
biologic will have to be licensed for 11 years before it can
The Program requires the Secretary of HHS to enter into
be selected for negotiation. Certain types of drugs or
purchase price agreements (PPAs) with drug manufacturers
biologics are exempt from negotiation. For example, single-
that participate in the Medicaid program. PPAs require
source drugs manufactured by companies that meet the
manufacturers to sell to qualifying “covered entities”
definition of a small biotechnology firm are exempt in years
certain outpatient drugs at a “ceiling price,” which is set via
2026 through 2028. For 2029 and 2030, there is a special
a statutory formula. Covered entities include Federally
MFP floor for qualifying single-source drugs of small
Qualified Health Centers, Tribal and Urban Indian
biotech firms. Manufacturers are subject to an excise tax for
organizations, Ryan White clinics, Critical Access
non-compliance, including failure to enter into an
Hospitals, and Disproportionate Share Hospitals (DSHs),
agreement to negotiate an MFP.
which serve a disproportionate number of low-income
patients. DSHs currently make about 75% of 340B sales.
Separately, the IRA also makes modifications to drug
coverage and payment under Medicare Parts B and D to
Since its creation, Congress has significantly expanded the
lower the cost to beneficiaries. Pharmaceutical companies
340B Program to increase the number of eligible covered
are required to pay rebates to Medicare if they increase
entities. The Government Accountability Office
prices faster than consumer inflation. The IRA reconfigures
recommends that HRSA increase its oversight of covered
the Medicare Part D retail prescription drug benefit to
entity eligibility requirements to ensure that covered entities
impose an annual enrollee out-of-pocket spending cap,
are not receiving duplicate discounts from Medicaid.
expand subsidies for low-income enrollees, and cap annual
premium increases, among other changes. Cost-sharing for
Drug manufacturers have recently challenged the Program’s
certain Part D vaccines is eliminated, and the IRA sets a
expansion, particularly with respect to contract pharmacies,
$35 cap on enrollee cost-sharing for insulin covered
which provide 340B drugs to patients of covered entities
through Medicare Parts B and D. The IRA also changes
outside of the provider setting. In 2020, several companies
certain Part B drug payment formulas and delays
announced pricing restrictions on covered entities that use
implementation of a Centers for Medicare & Medicaid
contract pharmacies, making it more difficult for covered
Services rule that would eliminate anti-kickback statute
entities to purchase drugs at or below ceiling prices. In
protections (safe harbors) for manufacturer rebates in
2021, HRSA issued violation letters to the manufacturers,
Medicare Part D.
notifying them that such restrictions violated the 340B
statute. The manufacturers have since challenged HRSA’s
Considerations for Congress
authority to issue the letters in court.
Just as Congress authorized the programs discussed in this
report, the 118th Congress could propose legislative changes
Federal district courts have analyzed the 340B statute,
to those programs or increase its oversight of them. As
legislative history, and HRSA’s guidance but have arrived
Congress considers additional action to address high-priced
at different legal conclusions. Two courts ruled that HHS
pharmaceuticals, it may also continue to weigh the balance
acted within its statutory authority in issuing the violation
between maintaining incentives for innovation and new
letters, while two others disagreed. Three of the cases were
drug discovery, while promoting access to pharmaceutical
appealed. In February 2023, one appeals court ruled in
products at an affordable price.
favor of the drug manufacturers, holding that the 340B
statute was silent as to the role that contract pharmacies
should play in the Program, allowing manufacturers to
impose conditions on the use of such pharmacies.
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 of 2022
IF12337
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Selected Issues in Pharmaceutical Drug Pricing
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