	Introduction

The Medicare Prescription Drug, Improvement, and Modernization Act (MMA) established a prescription drug benefit for Medicare beneficiaries under Part D, which began on January 1, 2006. One provision of MMA, the "noninterference" clause, expressly forbids the Secretary of Health and Human Services (HHS) from interfering with drug price negotiation between manufacturers and Medicare drug plan sponsors, and from instituting a formulary or price structure for prescription drugs. The framework created by the law emphasizes competition among the Medicare drug plans to obtain price discounts. Conceptual Framework for Federal Involvement in Determining Drug Prices and Costs

There are a number of approaches that the federal government could adopt to affect prescription drug prices and expenditures. Others emphasize more market-oriented approaches, such as soliciting competitive bids from voluntary participants. A reference pricing approach combines elements of both by dictating some aspects of the price but also allowing market forces to work. The price the VA pays for a drug is the lowest price as determined through one of four methods, less an additional five percent prime vendor discount. The four approaches available to the VA are: (1) the federal ceiling price, (2) the federal supply schedule, (3) the blanket purchasing agreements/performance-based incentive agreements, or (4) the national standardization contracts. The VA Experience and Medicare Part D

There are many practical and legislative steps necessary before federal drug price negotiation for Medicare beneficiaries could take place. However, repealing the noninterference clause may not, in itself, be sufficient to lead to federally negotiated prices. Federal Upper Limit (FUL)

For most multiple-source drugs (where more than one FDA-approved product is available), the FULs are applied in the aggregate based on a predetermined percentage of a defined reference price. 101-508 ) requires drug manufacturers to enter into agreements with the Secretary of HHS to provide rebates to the states that reflect the lowest price that manufacturers offer to other purchasers for their drugs. Consequences of Increased Federal Involvement in the Determination of Drug Prices and Costs

If the Secretary were to engage in activities that affect drug prices on behalf of Medicare Part D beneficiaries, the implications could be wide-ranging and potentially quite significant. 4

On January 12, 2007, the House passed H.R. 4 , the Medicare Prescription Drug Price Negotiation Act of 2007. This bill would amend the Social Security Act by (1) striking section 1860D—11(i) (relating to noninterference), (2) add language that would require the Secretary of HHS to negotiate prescription drug prices, and (3) maintain the prohibition against the establishment of a formulary by the Secretary while (4) allowing prescription drug plans to obtain discounts or price reductions below those negotiated by the Secretary. CBO has scored the bill as having "a negligible effect on federal spending." Specifically, the absence of the authority to establish a formulary would limit the Secretary's ability to influence the outcome of negotiations, as bargaining leverage would be limited. S. 3 would also require the CBO to study the effect of market competition on prices for drugs under Part D. The study would (1) examine the number and extent of discounts and other price concessions received by prescription drug plans and MA-PD plans for covered Part D drugs, (2) examine the relationship between discounts and price concessions and drug utilization, (3) compare the Medicare Part D discounts and price concessions with those obtained under the Medicaid program, and (4) examine the extent to which the efforts of the Secretary of Health and Human Services would have an effect upon payers in non-Medicare markets. On April 18, 2007, the Senate did not invoke cloture on S. 3 . This report will be updated.
The Medicare Prescription Drug, Improvement, and Modernization Act (MMA) established a prescription drug benefit for Medicare beneficiaries under Part D, which began on January 1, 2006. One provision of MMA, the "noninterference" clause, expressly forbids the Secretary of Health and Human Services (HHS) from interfering with drug price negotiation between manufacturers and Medicare drug plan sponsors, and from instituting a formulary or price structure for prescription drugs. The framework created by the law emphasizes competition among the Medicare drug plans to obtain price discounts.
Approaches that the federal government could adopt to affect prescription drug prices range from dictating an outcome, such as imposing statutory mandates or establishing price ceilings, to more market-oriented approaches such as soliciting competitive bids from voluntary participants. A reference pricing approach combines elements of both. Some of these methods are currently employed by the Department of Veterans Affairs (VA) and the Medicaid program. The price the VA pays for a drug is the lowest price as determined through one of four methods, less an additional 5% prime vendor discount: (1) the federal ceiling price, (2) federal supply schedule, (3) performance-based incentive agreement, or (4) national standardization contract. Drug reimbursement costs under Medicaid are calculated differently for single-source (only one Food and Drug Administration-approved product) and multiple-source drugs (more than one FDA-approved product). However, for both types of drugs, state reimbursements are determined in aggregate based on either the federal upper limit price (FUL)—a predetermined percentage of a defined reference price—or the estimated acquisition cost. Drug manufacturers also enter into agreements with the Secretary of HHS and provide rebates to the states that reflect the lowest price that manufacturers offer to other purchasers of their drugs.
There are many practical and legislative steps necessary before federal drug price negotiation for Medicare beneficiaries could take place. Repealing the noninterference clause is a necessary first step, but may not be sufficient to lead to federally negotiated prices. If the Secretary were to engage in activities that affect drug prices on behalf of Medicare Part D beneficiaries, there might be consequences that affect the price of drugs for Medicare beneficiaries as well as other public and private patients, the number and types of drugs that would be available to Part D beneficiaries, the amount of research and development and innovation by pharmaceutical companies, and other sectors of the industry. Both H.R. 4 and S. 3 would strike the noninterference provision in MMA while maintaining the prohibition against price setting and the establishment of a formulary, but H.R. 4 would also require the Secretary of HHS to negotiate prescription drug prices. Because the absence of a formulary would limit the Secretary's bargaining leverage, CBO has scored each bill as having "a negligible effect on federal spending." On January 12, 2007, the House passed H.R. 4, the Medicare Prescription Drug Price Negotiation Act of 2007, and on April 18, 2007, the Senate did not invoke cloture on S. 3, the Medicare Fair Prescription Drug Price Act of 2007. This report will be updated.