In the United States, federal programs either  directly purchase and distribute prescription drugs or reimburse  pharmacies or other providers for drugs dispensed or delivered. In the face of rising prescription drug spending, the governments of other  countries, U.S. private payers, and federal programs have applied both  demand- and supply-side measures to contain prescription drug spending. PBMs also provide health plans with clinical  services, such as formulary development and management, prior  authorization and drug utilization reviews to screen prescriptions for such  issues as adverse interactions or therapy duplication, and substitution of  generic drugs for therapeutically equivalent brand drugs. Federal Programs

Beyond Medicare Part D, a range of federal programs, established by  statute, in the United States offer drug benefits to individuals meeting  various eligibility criteria. Medicaid is the joint federal-state program that finances medical services  for certain low-income adults and children. Medicare, the federal health insurance program that serves the nation’s  elderly and certain disabled people, in addition to the outpatient  prescription drug benefit offered in Part D, covers certain other drugs  through Part B. These countries have three main approaches to  limiting the amount they pay to acquire drugs:    profit limits. Ceiling prices allow  purchasers to negotiate lower prices directly with drug manufacturers. Alternatively, a government may set a price ceiling and allow  purchasers to negotiate more favorable prices with manufacturers  directly. Reference prices use local or international price  comparisons of drugs classified in the same therapeutic group to  determine a single or maximum price for all drugs in that group. Profit limits control the amount of profit a drug  manufacturer may earn on a product or within a specified period of time. Several other key factors can influence drug price negotiations in OECD  countries. These payers, including employer-based  health plans and private health insurers, typically contract with PBMs to  help manage their prescription drug benefits. PBMs negotiate rebates or payments with  manufacturers and prices with networks of retail and mail-order  pharmacies, passing along at least some of the savings to health plans and  enrollees. One of the key ways PBMs influence price negotiations with  manufacturers is through formulary development and management. Similarly, PBMs often set up contractual arrangements  with manufacturers based on manufacturers’ entire line of products rather  than per drug. Approaches Used by U.S. Federal Programs for Negotiating Drug Prices

Approaches for negotiating drug prices vary among federal programs in  the United States. While these approaches reflect the laws that govern  them, markets, and health care delivery and financing, there are also  elements common to some of the approaches used by other countries and  by private payers. Some federal programs set ceiling prices, others  establish prices by referencing prices negotiated by private payers in the  commercial market, and still others rely on negotiations with  manufacturers, either directly or through private health plans. For  example, VA’s and DOD’s prices for particular prescription drugs may be  the lowest of an FSS price, a ceiling price, or the price that each agency  can negotiate directly with the manufacturer. The FEHBP uses a different  approach, modeled after other large U.S. employers’ health benefits; health  plans participating in the FEHBP typically contract with PBMs to negotiate  drug prices and offer other pharmacy benefit, administrative, and clinical  services. Medicaid

Unlike VA and DOD, state Medicaid programs do not negotiate drug prices  with manufacturers, but reimburse retail pharmacies for drugs dispensed  to beneficiaries at set prices. The rebates are  meant to take advantage of the prices manufacturers receive for drugs in  the commercial market and are required to reflect the results of  negotiations by private payers such as discounts and rebates. In a 2003 report that reviewed the use of PBMs by  three FEHBP plans representing about 55 percent of FEHBP enrollment,  we found that the PBMs used three key approaches to achieve savings for  FEHBP participating health plans:    passing on certain rebates negotiated with manufacturers to the plans;    obtaining drug price discounts from retail pharmacies and dispensing  drugs at lower costs through mail-order pharmacies; and   using intervention techniques that reduce utilization of certain drugs or  substitute other, less costly drugs.
Why GAO Did This Study

Rising prescription drug spending has led the United States and other countries to seek ways to negotiate lower prices with drug manufacturers. Currently, the Medicare Part D benefit, which offers outpatient prescription drug benefits to beneficiaries including elderly and certain disabled people, comprises competing prescription drug plans overseen by the Centers for Medicare & Medicaid Services. The Medicare Prescription Drug, Improvement, and Modernization Act of 2003 prohibits the Secretary of Health and Human Services from interfering with price negotiations between Part D plan sponsors and drug manufacturers and pharmacies. Some Members of Congress have proposed amending the statute to allow the Secretary of Health and Human Services to negotiate directly with drug manufacturers on behalf of Part D beneficiaries. GAO was asked to describe how prescription drug prices are negotiated. This testimony provides an overview of such efforts (1) by governments in other countries; (2) by U.S. private payers, such as employer-based health plans; and (3) by federal programs other than Medicare Part D. This testimony is based on previous GAO reports from 2002 through 2006 on federal programs that purchase or cover prescription drugs and other relevant literature from congressional agencies and federal or international organizations.

What GAO Found

Governments in other countries use a range of approaches to limit the amount they pay to acquire drugs. Ceiling prices establish a maximum price manufacturers may charge for their products. Purchasers may sometimes negotiate more favorable prices directly with drug manufacturers. Reference prices use local or international price comparisons of drugs classified in a group as therapeutically similar to determine a single or maximum price for all drugs in that group. Profit limits control how much profit a drug manufacturer may earn per product or within a specified period of time. Other factors--such as scope of coverage and national formularies, which are generally lists of preferred drugs--influence drug price negotiations. In the U.S. private health insurance market, health plans typically contract with pharmacy benefit managers (PBM) to help manage their prescription drug benefits. PBMs negotiate rebates or payments with drug manufacturers, encourage substitution of generic drugs for therapeutically similar brand drugs, and negotiate discounted prices with networks of retail and mail-order pharmacies, passing along at least some of the savings to health plans and enrollees. PBMs influence price negotiations with manufacturers through formulary development and management and through the large market share they often represent. Approaches for negotiating drug prices vary among federal programs in the United States. In part, these approaches depend on whether the programs purchase and distribute drugs directly or reimburse retail pharmacies or other providers for dispensing or delivering drugs. While the approaches used by federal programs in the United States reflect U.S. laws, markets, and health care delivery and financing, there are also elements common to some of the approaches used by other countries and by private payers. Some federal programs set ceiling prices, others establish prices by referencing prices negotiated by private payers in the commercial market, and still others rely on negotiations with manufacturers, directly or through private health plans. For example, the Departments of Veterans Affairs's and Defense's prices for a prescription drug may be the lowest of a ceiling price, other established price, or a price negotiated with the manufacturer. State Medicaid programs, joint federal-state programs that finance medical services for certain low-income adults and children, reimburse retail pharmacies for drugs dispensed to beneficiaries at set prices. The programs receive rebates from manufacturers that are meant to take advantage of the prices for drugs in the commercial market and are required to reflect discounts and rebates negotiated by private payers with manufacturers. For health benefits offered to federal employees, retirees, and dependents, rather than negotiating with manufacturers, the government contracts with participating health plans that typically use PBMs to negotiate drug prices and offer other pharmacy benefit, administrative, and clinical services.