	Introduction

One of the motivating factors for Congress to create Medicare Part D in the Medicare Prescription Drug, Improvement, and Modernization Act of 2003 (MMA) ( P.L. 108-173 ) was seniors' rising out-of-pocket drug costs. Medicare Part D was designed to take advantage of market competition. In accordance with market competition principles, the drug plans that administer the drug benefit are corporations who may rely on rebate negotiation and price-volume discounts as a way to affect prices. A provision in the MMA, termed the "noninterference" provision, prevents the federal government from being a third party in drug price negotiations between the Part D drug plans and pharmaceutical manufacturers. Both the new Speaker of the House and new Senate Majority Leader have expressed their support for repealing this "noninterference" provision, and regard it as a priority for consideration in the 110 th Congress. Should the "noninterference" provision be repealed, Congress may wish to provide guidance on how they expect the Secretary of Health and Human Services (HHS) to negotiate prices. In order to clarify and inform the debate, this report provides an overview of the pharmaceutical pricing policies used by the Department of Veterans Affairs (VA) and Medicaid—two of the largest federal purchasers of prescription drugs, other than Medicare. Unlike Medicare, which administers medical care through the private sector, the VA provides care directly to veterans. Currently, the VA utilizes four contracting mechanisms to acquire its pharmaceutical supplies: (1) the Federal Supply Schedule (FSS); (2) performance-based incentive agreements, or Blanket Purchase Agreements (BPAs); (3) pricing under the Veterans Health Care Act of 1992 ( P.L. 102-585 ); and (4) national standardization contracts. The national formulary took effect on June 1, 1997. The state programs operate independently under broad federal guidelines. In 2005, 25 state agencies report having established preferred drug lists for their Medicaid programs. States use other mechanisms as well to discourage unnecessary drug spending. Option 2: Mandate that Manufacturers Provide Rebates to Part D Plans

Another way of lowering out-of-pocket payments for beneficiaries might be to mandate larger rebates from manufacturers to Part D drug plans. Option 3: Establish a Medicare Pharmacy Purchasing System

A new Medicare pharmacy purchasing system would be another option that might help translate lower manufacturer drug prices for Medicare Part D into lower out-of-pocket and overall costs for beneficiaries.
The Medicare Prescription Drug, Improvement, and Modernization Act of 2003 (MMA) (P.L. 108-173) addressed seniors' rising out-of-pocket costs of prescription drugs by providing a mechanism for beneficiaries to obtain affordable prescription drug insurance coverage. The Medicare prescription drug benefit, otherwise known as Part D, was designed to take advantage of market competition. In accordance with market competition principles, the drug plans that administer the drug benefit are corporations who may rely on rebate negotiation and price-volume discounts as a way to affect prices.
A provision in the MMA, termed the "noninterference" provision, prevents the federal government from acting as a third party by negotiating the prices that the drugs plans would pay to pharmaceutical manufacturers. Both the new Speaker of the House and new Senate Majority Leader have reportedly expressed their support for repealing the "noninterference" provision, and regard it as a priority for consideration in the 110th Congress. Should the provision be repealed, Congress may wish to provide guidance on how it expects prices to be negotiated. In order to clarify and inform the debate, this report provides an overview of the pharmaceutical pricing policies used by the Department of Veterans Affairs (VA) and Medicaid—the largest federal purchasers of prescription drugs, other than Medicare.
The Veterans Health Administration (VHA) operates the nation's largest integrated direct health care delivery system. Unlike Medicare, which operates as an insurer by reimbursing beneficiaries for the cost of medical care provided by doctors and other providers in private practice as well as by private and public hospitals, VHA provides care directly to veterans largely in VA clinics and VA hospitals. Currently VA utilizes four contracting mechanisms to acquire its pharmaceutical supplies: (1) the Federal Supply Schedule (FSS); (2) performance based incentive agreements; (3) pricing under the Veterans Health Care Act of 1992; and (4) National Standardization Contracts.
Medicaid, a state administered program that operates under broad federal rules, directly controls drug prices by putting a federal ceiling on reimbursements for drug products available from multiple sources and by requiring drug manufacturers to pay rebates to states for drugs purchased on behalf of Medicaid enrollees. States further control overall drug costs through multiple methods, including using formularies and preferred drug lists, requiring that Medicaid enrollees make copayments, and requiring generic substitution.
Several options exist for affecting out-of-pocket and overall prescription drug costs, including (1) establishing a federal price ceiling for Medicare (like Medicaid); (2) mandating that manufacturers provide larger rebates to Part D plans (like Medicaid); or (3) establishing a Medicare pharmacy purchasing system (like the VA).